HR SPRING Managing Compensation 10 -1 Objectives

HR SPRING Managing Compensation 10 -1

Objectives: § Identify the compensation policies and practices that are most appropriate for a particular firm. § Weigh the strategic advantages and disadvantages of the different compensation options. § Establish a job-based compensation scheme that is internally consistent and linked to the labor market. § Understand the difference between a compensation system in which employees are paid for the skills they use and one in which they are paid of the job they hold. § Make compensation decisions that comply with the legal framework. 10 -2

Total Compensation The package of quantifiable rewards an employee receives for his or her labors. Includes three components: base compensation, pay incentives, and indirect compensation/benefits 10 -3

The Elements of Total Compensation Base Compensation Pay Incentives Indirect Compensation/ Benefits 10 -4

TOTAL COMPENSATION Direct financial compensation ÊWages ÊSalaries ÊBonuses ÊCommissi Indirect financial compensation ÊBenefit s ÊService s Nonfinancial compensation ÊPraise ÊSelfesteem ÊRecogni 10 -5

Compensation Policies: Criteria for Effectiveness Adequate Equitable Balanced Cost-effective Secure Incentive-providing Acceptable to the employee 10 -6

External Influences on Compensation: Government Influences (Wage and Hour Regulations) Fair Labor Standards Act (FLSA) of 1938 PROVISIONS INCLUDE: § Minimum wage l. Child Labor § Overtime (Exhibit 10 -3) l. Equal Pay Act of 1963 ÊSalaried or exempt (from overtime pay) employees ÊHourly or nonexempt employees 10 -7

External Influences on Compensation: Government Influences EQUAL PAY ACT OF 1963 An effort to close the earnings gap between men and women. Four exceptions: l. Merit l. Seniority l. Quality or quantity of production l. Or any other fact other than sex Earnings gap reduction u. Nearly 3/4 ths of reduction due to men’s earnings decline u. Comparable worth (pay equity) 10 -8

External Influences on Compensation: Labor Markets DOMESTIC LABOR FORCE ISSUES u. Supply & demand conditions create differential pay levels u. Increasing labor force diversity INTERNATIONAL LABOR FORCE ISSUES u. Global supply and demand conditions u. Global wage differentials ÊAmerican employees working abroad 10 -9

The Nine Criteria for Developing a Compensation Plan 1. Internal versus External Equity Will the compensation plan be perceived as fair within the company, or will it be perceived as fair relative to what other employers are paying for the same type of labor? 2. Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis —through base salaries —or will it fluctuate depending on such preestablished criteria as performance and company profits? 3. Performance versus Membership Will compensation emphasize performance and tie pay to individual or group contributions, or will it emphasize membership in the organization —logging in a prescribed number of hours each week and progressing up the organizational ladder? 10 -10

The Nine Criteria for Developing a Compensation Plan (cont. ) 4. Job versus Individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job? 5. Egalitarianism versus Elitism Will the compensation place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)? 6. Below-Market versus Above-Market Compensation Will employees be compensated at below-market levels, at market levels, or at above-market levels? 10 -11

The Nine Criteria for Developing a Compensation Plan (cont. ) 7. Monetary versus Nonmonetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security? 8. Open versus Secret Pay Will employees have access to information about other workers’ compensation levels and how compensation decisions are made (open pay) or will this knowledge be withheld from employees (secret pay)? 9. Centralization versus Decentralization of Pay Decisions Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firm’s units? 10 -12

The Labor Market Model Wage Supply of Qualified Employees W 1 Demand for Employees 0 N 1 Number of Qualified Workers 10 -13

External Influences on Compensation: Labor Unions §Pacesetters in demands for pay and benefits §Can help determine wages even for non-unionized employees §Collective bargaining agreements can set wage and benefit levels §Tend to support seniority over 10 -14

Percent of Base Salary Percent of Salary in the Form of Bonus and Longterm Income for Various Pay Salary Brackets 10 -15

When to Use a Job-based Pay Policy § A job-based pay policy tends to work best in situations where: u Technology is stable u Jobs do not change often u Employees do not need to cover for one another frequently u Much training is required to learn a given job u Turnover is relatively low u Employees are expected to move up through the ranks over time u Jobs are fairly standardized within the industry 10 -16

Individual-based Compensation § Individual-based compensation programs are more suitable when: u The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs u The company’s technology and organizational structure change frequently u Employee participation and teamwork are encouraged throughout the organization u Opportunities for upward mobility are limited u Opportunities to learn new skills are present u The costs of employee turnover and absenteeism in terms of lost production are high 10 -17

Compensation Decisions: Relative to Three Groups Similar jobs in other organizations (Pay-level) Different jobs within the organization (Pay-structure) Same or similar jobs within the organization (Individual pay determination) 10 -18

Compensation Decisions: Pay Surveys §Techniques used to collect local, regional, national or international compensation data §Sources for competitive data range from existing surveys to conducting your own §Pay survey issues include: ÊUsefulness of surveys ÊWho will be surveyed ÊThe method used 10 -19

Compensation Decisions: Job Evaluation § Formal process for determining the relative worth of various jobs § Essential steps include ÊInvolving employees ÊSelecting and weighing criteria (compensable factors) § Frequently used methods include ÊJob ranking ÊClassification or grading systems (See exhibit 10 -7) 10 -20

Compensation Decisions: Job Evaluation § Formal process for determining the relative worth of various jobs § Essential steps include ÊInvolving employees ÊSelecting and weighing criteria (compensable factors) § Frequently used methods include ÊJob ranking ÊClassification or grading systems (See exhibit 10 -7) 10 -21

Contemporary Pay Classifications DELAYERING § Reduction of the number of job levels § Can result in fewer pay grades and greater worker flexibility BROADBANDING § Reduction in the number of salary ranges § Creates a smaller number of broad salary ranges § More emphasis on basing salary 10 -22

Pay Structure of a Large Restaurant Developed Using a Job-Based Approach Jobs GRADE 6 GRADE 5 GRADE 4 GRADE 3 GRADE 2 GRADE 1 Chef Manager Sous-Chef Assistant Manager Lead Cook Office Manager General Cook Short Order Cook Assistant to Lead Cook Clerk Server Hostess Cashier Kitchen Helper Dishwasher Janitor Busser Security Guard Number of Positions 2 1 1 2 2 1 5 2 2 1 45 4 4 2 3 2 6 2 Pay $20. 00 -$31. 00/hr. $11. 50 -$21/hr. $7. 50 -$12. 00/hr. $6. 50 -$8. 00/hr. $6. 00 -$7. 00/hr. $5. 50 -$6. 25/hr. 10 -23

Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach Skill Block 5 4 3 Skills Pay • Create new items for menu $23. 00/hr. • Find different uses for leftovers (e. g. , hot dishes, buffets) • Coordinate and control work of all employees upon manager’s absence • Cook existing menu items following recipe $17. 00/hr • Supervise kitchen help • Prepare payroll • Ensure quality of food and adherence to standards • Schedule servers and assign workstations $10. 50/hr • Conduct inventory • Organize work flow on restaurant floor 10 -24

Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach (cont. ) Skill Block 2 1 Skills • Greet customers and organize tables • Take orders from customers • Bring food to tables • Assist in kitchen with food preparations • Perform security checks • Help with delivery • Use dishwashing equipment • Use chemicals/disinfectants to clean premises • Use vacuum cleaner, mop, waxer, and other cleaning equipment • Clean and set up tables • Perform routine kitchen chores (e. g. , making coffee) Pay $7. 50/hr. $6. 00/hr. 10 -25

The Key Steps in Creating Job-Based Compensation Plans Job Evaluation for Internal Equity 1. Job Analysis 2. Job Descriptions Identify Compensable Factors 3. Job Specifications 4. Rate Worth of All Jobs Using a Predetermined System 5. Job Hierarchy Market Surveys for External Equity Within-Pay-Range Positioning Criteria for Individual Equity © 2001 by Prentice Hall 6. Classify Jobs by Grade Levels 1. Check Market Value Using Benchmark or Key Jobs 7. Establish Final Pay Policy Criteria for Pay Positioning Within Range for Each Job • Experience • Seniority • Performance © 1998 by Prentice Hall Individual Pay Assignment 10 -26

MAA National Position Evaluation Plan Points Assigned to Factor Degrees Factor 1 st 2 nd 3 rd 4 th 5 th Degree Degree Skill 1. Knowledge 2. Experience 3. Initiative and Ingenuity Effort 4. Physical Demand 5. Mental or Visual Demand Responsibility 6. Equipment or Process 7. Material or Product 8. Safety of Others 9. Work of Others Job Conditions 10. Working Conditions 11. Hazards 14 22 14 28 42 66 42 56 88 56 70 110 70 10 5 20 10 30 15 40 20 50 25 5 5 10 10 15 15 20 20 25 25 10 5 20 10 30 15 40 20 50 25 10 -27

Hierarchy of Clerical Jobs, Pay Grades, and Weekly Pay Range for a Hypothetical Office 1 Points Customer Service Rep. Executive Secretary/Admin. Asst. Senior Secretary Senior General Clerk Credit and Collection Accounting Clerk General Clerk Legal Secretary/Assistant Senior Word Processing Operator Work Processing Operator Purchasing Clerk Payroll Clerk-Typist File Clerk Mail Clerk Personnel Clerk Receptionist 300 298 290 230 225 220 175 170 165 160 125 120 115 95 80 80 60 2 Grade 3 Weekly Pay Range 5 $500 -$650 4 $450 -$550 3 $425 -$475 2 $390 -$430 1 $350 -$400 10 -28

Market Salary Data for Selected Benchmark Office Jobs Benchmark Jobs 1. Customer Service Rep. 2. Credit and Collection Clerk 3. Accounting Clerk 4. Word Processing Operator 5. Clerk-Typist Weekly Pay Percentile 25 th 50 th 75 th $400 $370 $380 $330 $500 $450 $425 $390 $350 $650 $550 $475 $430 $400 Weekly Pay Average $495 $455 $423 $394 $343 10 -29

Drawbacks of Job-based Compensation Programs § § § § Job-based compensation plans do not take into account the nature of the business and its unique problems. The process of establishing job-based compensation plans is much more subjective and arbitrary than its proponents suggest. Job-based systems are less appropriate at higher levels of an organization. As the economy has become more service oriented and the manufacturing sector has continued to shrink, jobs have become more broadly defined. Job-based compensation plans tend to be bureaucratic, mechanistic, and inflexible. The job-evaluation process is biased against those occupations traditionally filled by women. Wage and salary data obtained from market surveys are not definitive. In determining internal and external equity, it is the employees’ perceptions of equity that count, not the assessments of job-evaluation committees. 10 -30

Suggestions for Implementing Jobbased Compensation Plans § Think strategically in making policy decisions concerning pay. § Secure employee input. § Increase each job’s range of pay while expanding its scope of responsibility. § Expand the proportion of employees’ pay that is variable (bonuses, stock plans, and so forth). § Establish dual-career ladders for different types of employees so that moving into management ranks or up the organizational hierarchy is not the only way to receive a substantial increase in pay. 10 -31

Example of a Dual-Career Ladder Band 13 12 11 10 9 8 7 6 5 4 3 2 1 Managerial President Executive Vice President Assistant Vice President Director Senior Manager Individual Contributor Executive Consultant Senior Adviser Senior Specialist Senior Technician Senior Administrative Support, Technician Administrative Support, Senior Manufacturing Associate Clerical Support, Manufacturing Associate 10 -32