Objectives

• Understand the scope of “Compensation”

• Appreciate the legal framework surrounding compensation decisions in
the U.S.
• Understand how legal compliance is an important aspect of
compensation administration
• Consider competing models of best practices in pay system design
• Understand the elements of both direct pay and indirect pay
• Learn the strategic options of designing compensation as a job-based
versus a skill-based system
• Understand the three forms of equity necessary for successful
compensation systems
• Be sensitive to the intangible elements of pay as well as the more
frequently assessed tangible elements

Copyright 2000 - South-Western College Publishing Module 16 - 1

 Compensation

“...an exchange for effort & ideas”

“...all forms of financial returns & tangible
services & benefits employees receive as part
of an employment relationship”
“...a return for services rendered”

Compensation can include both non-financial

& psychological returns

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 Forms of Pay
Base Wages
Merit
Incentives
Services & Benefits

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 Elements of Total Compensation
Total Compensation

Intrinsic Rewards System Extrinsic Rewards System

(Self Administered Psychological Rewards) (Administered by Others)
Teamwork * Challenge Financial
Empowerment * Recognition * Security

Indirect Compensation (Benefits) Direct Compensation (Paycheck Pay)

Public Protection Paid Leave--Off Job

(Legally Required) •Vacations Miscellaneous
•Social Security •Sick Day Benefits
•Unemployment •Bereavement •Legal Advice Basic Performance-Based
•Disability •Personal Leave •Eldercare Salary Pay
•Holidays •Daycare •Bonuses/Variable
Private Protection •Wellness Pay
•Pensions •Perquisites
Paid Leave--On Job •Merit Pay
•Saving •Moving
•Training Work
•Financial •Incentive Pay
•Supplemental •Breaks
unemployment Counseling
•Rest Periods
•Insurance
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 Protection Programs
Hazard Private Plans Public Plans
Retirement  Defined Benefit Pensions  Social Security old age
 Defined Contribution Pensions benefits
 Money purchase and thrift
plans (401(k)s / ESOPs)
Death  Group term life insurance (incl.  Social Security
Accidental death & travel) survivors’ benefits
 Payouts from profit-sharing,
pension, and/or thrift plans
 Dependent survivors’ benefits
Disability  Short-term accident and  Workers’
sickness insurance compensation
 Long-term disability insurance  Social Security
 Wellness programs disability benefits
 State disability
benefits
Unemployment  Supplemental unemployment  Unemployment
benefits and/or severance pay benefits

Medical/Dental  Hospital/surgical insurance  Workers’

Expenses  Other medical insurance compensation
 Dental insurance  Medicare
Module 16 - 5
 Vision insurance
Copyright 2000 - South-Western College Publishing
 Strategic Compensation
Objectives
• Reflect the organization strategy
• Mirror the organization culture and values
• Support the business strategy
• Champion the human resource management
strategy
• “Fit” environmental and regulatory
pressures
Compensation objectives need to be tied to
corporate objectives
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 Strategic Compensation
Policies
Internal consistency
External competitiveness
Employee contributions
Administration

Techniques that make up the compensation

system translate strategic policy into practice

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 Compensation
Objectives
• Efficiency
– performance driven
– total quality
– customer focus
– cost control
• Equity
• Compliance

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 Best Practices Options
The New Pay High Commitment
• External market- • High wages
sensitive-based pay • Guarantee
• Variable performance- employment security
based pay • Apply incentives;
• Risk-sharing share gains not risks
partnership • Employee ownership
• Flexible opportunities • Participation &
to contribute; not jobs empowerment
• Teams • Teams Milkovich & Newman
Copyright 2000 - South-Western College Publishing Module 16 - 9
 Internal
Consistency and
Job Analysis

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 Summary of Lecture

• Internal Consistency
• Job Analysis
– Job Descriptions

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 Internal Consistency (or Equity):
Refers to the relationship between the pay
structure and the design of the organization.

• To achieve Internal Consistency, the Pay Structure

must:
– support organization’s workflow
– ensure fairness to all employees
– direct employee behaviors towards
organizational objectives
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 Results of Internal Consistency
• Reduces turnover
• Reduces pay-related grievances
• Reduces pay-related work stoppages
• Undertake training (and increase
experience)
• Facilitates career/job progression
• Facilitates performance
Copyright 2000 - South-Western College Publishing Module 16 - 13
 Pay Structures and the Pay Model
Pay structures are the the array of pay rates
for different jobs within an organization.

• Pay structures vary upon three dimensions:

– the levels of work (i.e., Senior, Specialist)
– the pay differentials between these levels
– the criteria used to determine the levels and pay
differentials
• Job-based or Person-based
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 Factors Influencing Pay
Structures
• Nature of the Organization and its work
• Size and Age of the Organization
• Technology in the workplace
• HR Policies
• Employee Acceptance
• Economic Pressures
• Societal Customs
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 Employee Acceptance: A Key
Test
• Distributive Justice
– Pay Differences
– Number of Levels
– Structural Criteria: are decisions based on the
job or on the KSA’s of the person?
• Procedural Justice
– Fairness of Design & Administration

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 Consequences of Internal Pay
Structures
• Efficiency: Pay structure can be a
Competitive Advantage used to
attract and retain best employees
• Equity: Ensures fairness and
satisfaction amongst employees
• Compliance: Meets legal
requirements
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 Process of Building an Internal
Job Structure
Two Basic Methods:
• Job-Based Structures
• Person-Based Structures
– Skills
– Competencies

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 Job Analysis
The systematic process of collecting
relevant, work-related information
related to the nature of a specific job.

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 Many Reasons for Job Analysis
• Internal Consistency • Machine Design and
• Wage Setting Changes
• Job Evaluation • Test Development
• Standardizing Job Titles • Safety Engineering
• Transfers and Promotions
• Hiring Specifications
• Merit Rating
• Adjustment of Grievances • Training
• Legal Defense in EEO or • Skill Inventory
ADA suits
• Almost all HR decisions are
based on job information
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 What Data to Collect?
• Job Title
• Describe Job
– job content and worker characteristics
• Task Data
– describes actual work performed and
the purpose of these tasks
• Behavioral Data
– behaviors expected of workers
• Essential Job Duties
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 How can Data be Collected?

• Narrative Questionnaires
• Standardized Questionnaires
• Interviews
• Observation (Time and Motion
Studies)
• Diary/Log

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 Who is Involved?
• Who Collects the Data?
– Usually a new employee
– However, should be an
experienced employee familiar
with the company and its jobs.
• Who Provides the Data?
– Job holders, Supervisors,
Subordinates, Peers, Analyst

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 The Job Description:
The Result of Job Analysis
General Format of a Job Description
• Job Title
• Fair Labor Standards Act (FLSA) Exemption Status
• General Summary of Job
• Essential Job Duties and Responsibilities
• Knowledge, Skills, and Abilities Required
• Working Conditions
• Dates and Approvals
• Disclaimer Statement
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 Tips on Writing Job Descriptions
• Avoid jargon and “inflationary” adjectives
• Use the most descriptive verb possible to describe job
tasks and activities.
• Knowledge, skills and abilities listed must be specific,
realistic, and justifiable.
• Indicate the intensity, frequency and duration for
physical or mental effort.
• Include the FLSA Code
• All JD’s should include a disclaimer statement to
ensure flexibility in the administration of a pay
program.
• Accurate, legally defensible JD’s are a necessity!
Copyright 2000 - South-Western College Publishing Module 16 - 25