Managing Basic Compensation
Chapter Outline
• Developing a Compensation Strategy
• Determining a Wage and Salary Structure
• Wage and Salary Administration
• Legal Issues in Compensation
• Evaluating Compensation Policies
Chapter Objectives
• Describe the basic issues involved in developing a compensation strategy.
• Discuss how organizations develop a wage and salary structure.
• Identify and describe the basis issues involved in wage and salary administration.
• Identify and describe basic legal issues in compensation.
• Describe the importance to an organization of evaluating its compensation policies.
What Is Compensation?
• The set of rewards that organizations provide to individuals in return for their willingness to perform various jobs and tasks within the organization
Developing a Compensation Strategy
• Internal equity
– Refers to comparisons made by employees to other employees within the same organization
• External equity
– Refers to comparisons made by employees to others employed by different organizations performing similar jobs
Wages Versus Salaries
• Wages
– Hourly compensation paid to operating employees; the basis for wages is time
• Salary
– Income paid to an individual on the basis of performance, not on the basis of time
Strategic Options for Compensation
Determinants of Compensation Strategy
• A firm in a high-growth mode is constantly striving to attract new employees and may find itself in a position of having to pay above-market rates to do so.
• A stable firm may be more likely to pay market rates, given the relatively predictable and stable nature of its operations.
• An organization in retrenchment or decline may decide to pay below-market rates because it wants to reduce the size of its workforce.
Determinants of Compensation Strategy (cont’d)
• The organization’s ability to pay
• Ability of the organization to attract and retain employees
• Legal context
• Union influences
Pay Surveys and Compensation
• Pay surveys
– Surveys of compensation paid to employees by other employers in a particular geographic area, industry, or occupational group
• The purpose of pay surveys is to ask other organizations what they pay people to perform various jobs.
• Pay surveys provide the information organizations need to avoid problems of external equity.
Example of a Pay Survey
Determining a Wage and Salary Structure
• Job evaluation
– A method for determining the relative value or worth of a job to the organization so that individuals who perform that job can be compensated adequately and appropriately
• Job ranking
– A job evaluation method requiring the manager to rank-order jobs, based on their relative importance to the organization, from most important to least important
Determining a Wage and Salary Structure (cont’d)
• Classification system
– A job evaluation method that attempts to group sets of jobs together into clusters, often called grades
• Point system
– A job evaluation method that requires managers to quantify, in objective terms, the value of the various elements of specific jobs
Determining a Wage and Salary Structure (cont’d)
• Compensable factors
– Any aspect of a job for which an organization is willing to provide compensation
• Point manual
– In the point system, the point manual carefully and specifically defines the degrees of points from first to fifth
Determining a Wage and Salary Structure (cont’d)
• Factor comparison
– A job evaluation method that assesses jobs, on a factor-by-factor basis, using a factor comparison scale as a benchmark
• Regression-based system
– A job evaluation method that utilizes a statistical technique called multiple regression to develop an equation that establishes the relationship between different dimensions of job and compensation
Establishing Job Classes
• Job classes represent gradations of responsibility and competence regarding performance of a specific job.
• Different levels of competence can exist among different mechanics.
• Organizations differentiate among people with different competencies.
• Organizations that use this method should establish their job classes as part of the job evaluation process itself.
Establishing a Pay Structure
• A pay structure has to specify the level of pay the organization will provide to each job class.
• A pay structure must identify the pay differentials to be paid to individuals within each job class.
A Sample Wage Structure
Pay-for-Knowledge and Skill-Based Pay
• Pay-for-knowledge
– Compensating employees for learning specific information
• Skill-based pay
– Rewarding employees for acquiring new skills
Wage and Salary Administration
• The ongoing process of managing a wage and salary structure
• All managers must be sensitive to compensation costs and must be vigilant about managing them properly.
• The ongoing management of compensation and benefits is a critical part of effective wage and salary administration.
Determining Individual Wages
• For both ethical and legal reasons, the basis for differential pay should not be a non-job-related factor such as gender or race.
• It is perfectly appropriate and desirable, however, for the organization to reward people with differential compensation based on job-related qualifications.
Terminology
• Pay secrecy
– The extent to which the compensation of any individual in an organization is secret or the extent to which it is formally made available to other individuals
• Pay compression
– Occurs when individuals with substantially different levels of experience an/or performance abilities are being paid wages or salaries that are relatively equal
Legal Issues in Compensation
• The Fair Labor Standards Act includes provisions for the minimum wage, overtime, and child labor.
• Several minimum wages exist, such as for agricultural jobs.
• According to overtime pay laws, employees who work more than 40 hours a week must be paid time and a half for all hours over 40 unless they are exempt.
Evaluating Compensation Policies
• It is important that the organization provide reasonable compensation and appropriate benefits to its employees.
• It is in the best interests of the stockholders and other constituents of the organization that the firm manage its resources wisely.
• It is important to asses this topic periodically to ensure that costs are in line.