Human Resource SECTION 4

Compensating
Management Human
Resources
TENTH EDITON

Robert L. Mathis John H. Jackson

Chapter 12

Compensation Strategies
and Practices

PowerPoint Presentation
2003 Southwestern College Publishing. All rights reserved.
by Charlie Cook
 Compensation Systems

Objectives of an Effective Compensation

System:
Legal compliance with all appropriate laws and
regulations
Cost effectiveness for the organization
Internal, external, and individual equity for
employees
Performance enhancement for the organization

2002 Southwestern College Publishing. All rights reserved. 122

 Nature of Compensation

Types of Rewards
Intrinsic
Intangible, psychological and social effects of
compensation
Extrinsic
Tangible, monetary and nonmonetary effects of
compensation

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 Components of A Compensation Program

Figure 121
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 Direct Compensation

Compensation Type
Base Pay The basic monetary compensation that an
employee receives, usually as a wage or
salary.

Wages Payments calculated on the amount of time

worked.

Salary Consistent payments made each period

regardless of the number of hours worked in
the period.

Variable Pay Compensation linked to individual, team, or

organizational performance.

Benefit An indirect reward given to an employee or

group of employees as a part of
organizational membership.

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 Typical Division of HR Responsibilities:
Compensation

Figure 122
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 Continuum of Compensation Philosophies

Figure 123
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 Compensation Approaches

Figure 124
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 Compensation Quartile Strategies

Figure 125
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 Decisions About Compensation Levels

Compensation Strategies
Above-Market Paying for higher qualified, more productive
workers.

Middle-Market Attempting to balance of employer costs and

need to attract and retain employees.

Below-Market Paying all that the firm can afford

Taking advantage of the abundant supply of
potential employees in a loose labor market.

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 Competency-Based Pay

Limitations Pricing
(How many?) Competencies

Competency-
Based Pay
Systems
KBP/SBP

Maintenance of
Training
Competencies

2002 Southwestern College Publishing. All rights reserved. 1211

 Competency-Based Systems Outcomes

Figure 126
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 Individual vs. Team Rewards

Using Team-Based Reward Systems

Use skill-based pay for the base.

Make system simple and understandable.

Use variable pay based on business entity performance

Distribute variable rewards at the team level

Maintain a high degree of employee involvement

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 Perceptions of Pay Fairness

Equity The perceived fairness between what a person

does (inputs) and what the person receives
(outcomes).

Procedural Justice The perceived fairness of the process and

procedures use to make decisions about
employees

Distributive Justice The perceived fairness in the distribution of

outcomes.

Pay Openness The degree of openness or secrecy that an

organization allows regarding its pay system.

External Equity The perception that the organization provides

employees with compensation that comparable
to the compensation of employees with similar
jobs in other organizations.

2002 Southwestern College Publishing. All rights reserved. 1214

 Equity Considerations in Compensation

Figure 127
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 Fair Labor Standards Act (FSLA) of 1938

Provisions of the Act

Minimum wage requirement sets wage floor

Child labor (under 14 years old) is prohibited

Requires overtime payments for non-exempt employees

Exempts highly-paid computer workers

Requires overtime (1) pay for hours over 40 hours

Requires compensatory time at overtime (1) pay rates

2002 Southwestern College Publishing. All rights reserved. 1216

 Wage/Hour Status Under Fair Labor Standards Act

Figure 128a
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 Wage/Hour Status Under Fair Labor Standards Act

Figure 128b
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 Wage/Hour Status Under Fair Labor Standards Act

Figure 128c
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 The IRS Test for Employees and
Independent Contractors

Source: U.S. Internal Revenue Service.

Figure 129
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 Other Laws Affecting Compensation

Davis-Bacon Act of 1931

Required payment of prevailing wage by firms
engaged in federal construction projects.
Walsh-Healy Public Contracts Act and the
Service Contracts Act
Extended the payment of prevailing wage to
service contracts
Required overtime payment for any employee hours
worked over eight hours in one day; applies only to
to federal contracts, not the private sector.

2002 Southwestern College Publishing. All rights reserved. 1221

 Pay and Gender

Equal Pay Act of 1963

Requires that men and women be paid the same
for performing substantially similar jobs with limited
non-gender exceptions (e.g., merit and seniority).
Issue of Pay Equity
Similarity in pay for all jobs requiring comparable
level of knowledge, skills, and abilities, even if
actual duties and market rates differ significantly.

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 Compensation
Administration
Process

Figure 1210
2002 Southwestern College Publishing. All rights reserved. 1223
 Job Evaluation

Job Evaluation
The systematic determination of the relative worth
of jobs within an organization.
Benchmark Job
A job found in many organizations and performed
by several individuals who have similar duties that
are relatively stable and require similar KSAs.

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 Job Evaluation

Ranking Classification

Job
Evaluation
Methods
Factor Point
Comparison Method

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 Job Evaluation Point Chart

Figure 1211
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 Legal Issues and Job Evaluation

Americans with Disabilities Act

Job evaluations may not identify job functions related to
physical demands as essential

Job Evaluation

Gender Issues
Traditional job evaluations place less weight on knowledge,
skills, and working conditions for female-dominated jobs

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 Developing Pay Surveys

Select Employers with Comparable Jobs

Determine Jobs to be Surveyed

Decide What Information Is Needed

Conduct Survey

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 Pay Structures

Market Line
The line on a graph showing the relationship
between the job value, as determined by job
evaluation points, and pay survey rates.
Common Pay Structures
Hourly and salaried
Office, plant, technical, professional, managerial
Clerical, information technology, professional,
supervisory, management, and executive

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 Establishing
Pay
Structures

Figure 1212
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 Pay Structures (contd)

Pay Grades
A grouping of individual jobs having approximately
the same job worth.
Broadbanding
The practice of using fewer pay grades having
broader pay ranges that in traditional systems.
Benefits
Encourages horizontal movement of employees
Is consistent with trend towards flatter organizations
Creates a more flexible organization
Encourages competency development
Emphasizes career development

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 Traditional Pay Structure vs. Broadbanding

Figure 1213
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 Pay Scattergram

Figure 1214
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 Typical Pay Range Widths

Figure 1215
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 Example of
Pay Grades
and Pay
Ranges

Figure 1216
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 Pay Rate Issues

Rates Out of Range

Red-Circled Employees
An incumbent (current jobholder) who is paid above
the range set for the job.
Green-Circled Employees
An incumbent who is paid below the range set for the
job.
Pay Compression
A situation in which pay differences among
individuals with different levels of experience and
performance in the organization becomes small.

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 Issues Involving Pay Increases

Seniority
Time spent in an organization or on a particular job.
Used to determine eligibility for organizational
rewards and benefits.
Maturity Curve
A curve that depicts the relationship between
experience and pay rates.
Assumption is that as experience increases,
proficiency and performance increase.

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 Issues Involving Pay Increases

Cost-of-Living Adjustments (COLA)

A percentage increase in wages that allows
employees to maintain the same real wages in a
period of economic inflation.
Adjustments are tied to changes in an economic
measure (e.g., the Consumer Price Index).
Lump-Sum Increases (LSI)
A one-time payment of all or part of a yearly pay
increase.
Lump-sum payments do not increase base wages

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 Pay Adjustment Matrix

Figure 1217
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 Compa-Ratio Example

Compa-ratio
The pay level divided by the midpoint of the pay
range.

$16.50 (current pay)

Employee R 100 Compa - ratio 110
15.00 (midpoint)

$13.05 (current pay)

Employee J 100 Compa - ratio 87
15.00 (midpoint)

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