session 15,16,17- managing compensation
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managing compensationTRANSCRIPT
By- Prof Sachin Batra
Managing Compensation
By- Prof Sachin Batra
Compensation• Pay is a statement of an employee’s worth
by an employer.• Pay is a perception of worth by an
employee.
By- Prof Sachin Batra
Total CompensationTotal Compensation
DirectDirect IndirectIndirect
BonusesBonuses
GainsharingGainsharingSecurity Plans• Pensions
Security Plans• Pensions
Employee Services• Educational assistance• Recreational programs
Employee Services• Educational assistance• Recreational programs
CommissionsCommissions
Wages / SalariesWages / Salaries
Insurance Plans• Medical• Dental• Life
Insurance Plans• Medical• Dental• Life
Time Not Worked• Vacations• Breaks• Holidays
Time Not Worked• Vacations• Breaks• Holidays
By- Prof Sachin Batra
Strategic Compensation Planning
• Strategic Compensation Planning– Links the compensation of employees to the
mission, objectives, philosophies, and culture of the organization.
– Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-for-performance standard.
– Seeks to motivate employees through compensation.
By- Prof Sachin Batra
Linking Compensation to Organizational Objectives
• Value-added Compensation– Evaluating the individual components of the
compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization.
• “How does this compensation practice benefit the organization?”
• “Does the benefit offset the administrative cost?”
By- Prof Sachin Batra
Common Strategic Compensation Goals
1. To reward employees’ past performance
2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To mesh employees’ future performance with organizational goals
5. To control the compensation budget
6. To attract new employees
7. To reduce unnecessary turnover
By- Prof Sachin Batra
Strategic Compensation Policy Concerns
1. The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate.
2. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities.
3. The pay level at which employees may be recruited and the pay differential between new and more senior employees.
4. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises.
5. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.
By- Prof Sachin Batra
The Pay-for-Performance Standard
• Pay-for-Performance Standard– The standard by which managers tie
compensation to employee effort and performance.
– Refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and pay banding, team/ group incentives, and various gainsharing programs.
By- Prof Sachin Batra
Designing a Pay-for-Performance System
• How will performance be measured?• How will monies to be allocated for
compensation increases.• Which employees will be eligible?• How will payouts be made?• How often will payouts occur?• How large will the payouts be?• Will employees perceive the rewards as
valued?
By- Prof Sachin Batra
Motivating Employees through Compensation
• Pay Equity (also Distributive Fairness)– An employee’s perception that compensation
received is equal to the value of the work performed.
– A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
• Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.
By- Prof Sachin Batra
Figure 9–1 Relationship between Pay Equity and Motivation
Doing More and Receiving LessDoing the Same and Receiving the SameDoing Less and Receiving More
The greater the perceived disparity between my input/output ratio and the comparison person’s input/output ratio, the greater the motivation to reduce the inequity.
By- Prof Sachin Batra
Expectancy Theory and Pay
• Expectancy Theory– A theory of motivation that holds that employees
should exert greater work effort if they have reason to expect that it will result in a reward that they value.
– Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.
By- Prof Sachin Batra
Figure 9–2 Pay-for-Performance and Expectancy Theory
By- Prof Sachin Batra
Motivating Employees through Compensation
• Pay Secrecy– An organizational policy prohibiting employees
from revealing their compensation information to anyone.
• Creates misperceptions and distrust of compensation fairness and pay-for-performance standards.
– Arguments against secrecy:• Knowledge of base pay is the strongest predictor of
pay satisfaction, which is highly associated with work engagement
• Knowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees.
By- Prof Sachin Batra
The Bases for Compensation
• Hourly Work– Work paid on an hourly basis.
• Piecework– Work paid according to the number of units
produced.• Salary Workers
– Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.
By- Prof Sachin Batra
The Bases for Compensation (cont’d)
• Nonexempt Employees– Employees covered by the overtime provisions of
the Fair Labor Standards Act.– They must be paid time and one-half their regular
pay for all work performed after forty regular hours of work in a workweek.
By- Prof Sachin Batra
The Bases for Compensation (cont’d)
• Exempt employees– Employees who not covered in the overtime
provisions of the Fair Labor Standards Act.– Managers, supervisors, and white-collar
professional employees are exempted on the basis of their exercise of independent judgment and other criteria.
By- Prof Sachin Batra
Figure 9–3 Factors Affecting the Wage Mix
By- Prof Sachin Batra
The Wage Mix—Internal Factors• Employer’s Compensation Strategy
– Setting organization compensation policy to lead, lag, or match competitors’ pay.
• Worth of a Job– Establishing the internal wage relationship among
jobs and skill levels.• Employee’s Relative Worth
– Rewarding individual employee performance• Employer’s Ability-to-Pay
– Having the resources and profits to pay employees.
By- Prof Sachin Batra
Highlights in HRM 1
Comparison of Compensation Strategies
By- Prof Sachin Batra
The Wage Mix—External Factors• Labor Market Conditions
– Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.
• Area Wage Rates– A firm’s formal wage structure of rates is
influenced by those being paid by other area employers for comparable jobs.
By- Prof Sachin Batra
The Wage Mix—External Factors• Cost of Living
– Local housing and environmental conditions can cause wide variations in the cost of living for employees.
– Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.
By- Prof Sachin Batra
The Wage Mix—External Factors• Collective Bargaining
– Escalator clauses in labor agreements provide for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power.
– Unions bargain for real wage increases that raise the standard of living for their members.
– Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.
By- Prof Sachin Batra
Consumer Price Index (CPI)• A measure of the average change in prices over time in a fixed
“market basket” of goods and services
By- Prof Sachin Batra
Job Evaluation Systems
• Job Evaluation– The systematic process of determining the relative
worth of jobs in order to establish which jobs should be paid more than others within an organization.
By- Prof Sachin Batra
Different Job Evaluation Systems
JOB AS JOB PARTSBASIS FOR A WHOLE OR FACTORSCOMPARISON (NONQUANTITATIVE) (QUANTITATIVE)
Job vs. job Job ranking Factor comparison system system
Job vs. scale Job classification Point system system
SCOPE OF COMPARISON
By- Prof Sachin Batra
Job Evaluation Systems• Job Ranking System
– Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth.
– Disadvantages • Does not provide a precise measure of each job’s
worth.• Final job rankings indicate the relative importance of
jobs, not extent of differences between jobs.• Method can used to consider only a reasonably small
number of jobs.
By- Prof Sachin Batra
Figure 9–4 Paired-Comparison Job Ranking Table
Directions: Place an X in the cell where the value of a row job is higher than that of a column job.
By- Prof Sachin Batra
Job Evaluation Systems
• Job Classification system– A system of job evaluation in which jobs are
classified and grouped according to a series of predetermined wage grades.
– Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.
By- Prof Sachin Batra
Point System
• Point System– A quantitative job evaluation procedure that
determines the relative value of a job by the total points assigned to it.
– Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job.
• The Point Manual– A handbook that contains a description of the
compensable factors and the degrees to which these factors may exist within the jobs.
By- Prof Sachin Batra
Highlights in HRM 2
Point Values for Job Factors of the American Association of Industrial Management
Source: Reproduced with permission of the American Association of Industrial Management, Springfield, Mass.
1ST 2ND 3RD 4TH 5THFACTORS DEGREE DEGREE DEGREE DEGREE DEGREESkill
1. Education 14 28 42 56 702. Experience 22 44 66 88 1103. Initiative and ingenuity 14 28 42 56 70
Effort4. Physical demand 10 20 30 40 505. Mental or visual demand 5 10 15 20 25
Responsibility6. Equipment or process 5 10 15 20 257. Material or product 5 10 15 20 258. Safety of others 5 10 15 20 259. Work of others 5 10 15 20 25
Job Conditions10. Working conditions 10 20 30 40 5011. Hazards 5 10 15 20 25
By- Prof Sachin Batra
Work Valuation Methods
• Work Valuation– A job evaluation system that seeks to measure a
job’s worth through its value to the organization.
– Jobs are be valued relative to financial, operational, or customer service objectives of the organization.
• Considers that work should be valued relative to the business goals of the organization rather than by an internally applied point-factor job evaluation system.
– Work valuation serves to direct compensation dollars to the type of work pivotal to organizational goals.
By- Prof Sachin Batra
Job Evaluation for Management Positions
• Hay Profile Method– Job evaluation technique using three factors—
knowledge, mental activity, and accountability—to evaluate executive and managerial positions.
By- Prof Sachin Batra
The Compensation Structure
• Wage and Salary survey– A survey of the wages paid to employees of other
employers in the surveying organization’s relevant labor market.
– Helps maintain internal and external pay equity for employees.
• Labor Market– The area from which employers obtain certain
types of workers.
By- Prof Sachin Batra
Collecting Survey Data
• Outside Sources of Data– Bureau of Labor Statistics (BLS)
• National Compensation Survey
– State and local wage surveys– Online survey data
• Problems with Surveys– They are not always compatible
with the user’s jobs– The user cannot specify what
specific data to collect.
By- Prof Sachin Batra
Collecting Survey Data (cont’d)
• Conducting Employer-initiated Surveys– Select key jobs.
– Determine relevant labor market.
– Select organizations.
– Decide on information to collect: wages/ benefits/ pay policies.
– Compile data received.
– Determine wage structure and benefits to pay.
By- Prof Sachin Batra
Characteristics of Key Jobs
• Key Jobs– Jobs that are important for wage-setting
purposes and are widely known in the labor market.
• Characteristics of Key Jobs1. They are important to employees and the organization.
2. They contain a large number of positions.
3. They have relatively stable job content.
4. They have the same job content across many organizations.
5. They are acceptable to employees, management, and labor as appropriate for pay comparisons.
By- Prof Sachin Batra
The Wage Curve
• Wage Curve– A curve in a scattergram representing the relationship between
relative worth of jobs and wage rates.
• Pay Grades– Groups of jobs within a particular class that are paid the same rate.
• Rate Ranges– A range of rates for each pay grade that may be the same for each
grade or proportionately greater for each successive grade.
• Red Circle Rates– Payment rates above the maximum of the pay range.
By- Prof Sachin Batra
Figure 9–5 Freehand Wage Curve
By- Prof Sachin Batra
Figure 9–6 Single Rate Structure
By- Prof Sachin Batra
Figure 9–7 Wage Structure with Increasing Rate Ranges
By- Prof Sachin Batra
The Wage Curve (cont’d)
• Competence-based Pay, (also skill-based pay or knowledge-based pay)– Compensation for the different skills or increased
knowledge employees possess rather than for the job they hold in a designated job category.
• Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover,
• Broadbanding– Collapses many traditional salary grades into a few
wide salary bands.
By- Prof Sachin Batra
Davis-Bacon Act1931
Davis-Bacon Act1931
Required minimum wage, prevailing wage rates, 1½ overtime premium payments by federal contractors.
Required minimum wage, prevailing wage rates, 1½ overtime premium payments by federal contractors.
Walsh-Healy Act1936
Walsh-Healy Act1936
Required overtime payments after 8 daily or 40 regular work hours for workers on federal contracts.
Required overtime payments after 8 daily or 40 regular work hours for workers on federal contracts.
Fair Labor Standards Act (FLSA) 1938(as Amended)
Fair Labor Standards Act (FLSA) 1938(as Amended)
Interstate commerce clause used to cover workers except agricultural and exempted (managerial) employees, child labor (under 16) is prohibited.
Interstate commerce clause used to cover workers except agricultural and exempted (managerial) employees, child labor (under 16) is prohibited.
Government Regulation of Compensation(Federal Wage Laws)
By- Prof Sachin Batra
Highlights in HRM 5
The Federal Minimum Wage Poster
By- Prof Sachin Batra
Exemption from FLSA Overtime Provisions
• Fair Pay Rules (2004)–Were implemented to strengthen overtime
protections and redefine the job requirements for exempt groups of employees.
Overtime must be paid to employees earning less than $455 a week, or $26,660 annually.
A new “standards test” is used to determine whether employees who earn between $26,660 and $100,000 annually are excluded from overtime requirements.
Administrative personnel to be exempt must have primary duties that include the exercise of discretion and independent judgment with respect to matters of significance.
By- Prof Sachin Batra
Significant Compensation Issues
• Equal Pay for Comparable Worth– The concept that male and female jobs that are
dissimilar, but equal in terms of value or worth to the employer, should be paid the same.
• Wage-Rate Compression– Compression of pay differentials between job
classes, particularly the pay differentials between hourly workers and their managers.
• Low-Salary Budgets– Current wage budgets reflect the general trend
toward tight compensation cost controls.
By- Prof Sachin Batra
Figure 9–8 The Equal Pay Act: The Jury’s Still Out
Has the Equal Pay Act been effective in raising the wages of women relative to the wages of men? That depends on whom you ask and the importance you place on government statistics. “Fifty-nine cents on the dollar” was the rallying cry of the women’s movement more than thirty years ago to illustrate the large gap between the wages of women and men. That is, for every dollar that a man made, a woman earned fifty-nine cents. Currently, government wage figures based on the usual weekly earnings of full-time wage and salary workers peg women’s average pay at 80.1 percent of men’s compensation. Unfortunately, the gain in women’s wages relative to men’s wages has not changed significantly in recent years, as the following figures show.
Source: Median usual weekly earnings of full-time wage and salary workers by sex, age, race, and Hispanic or Latino ethnicity, current dollars 1979–2004. Unpublished tabulations from Current Population Survey, Bureau of Labor Statistics, 2004. Data at www.bls.gov.
By- Prof Sachin Batra
Reducing Wage-Rate Compression
• Give larger compensation increases to more-senior employees.
• Emphasize pay-for-performance and reward meritworthy employees.
• Limit the hiring of new applicants seeking exorbitant salaries.
• Design the pay structure to allow a wide spread between hourly and supervisory jobs or between new hires and senior employees.
• Provide equity adjustments for selected employees hardest hit by pay compression.
By- Prof Sachin Batra
Figure 9–9 Salary Budgets by Type of Employee, 1994–2005
Source: Reprinted from 2004–2005 Total Salary Increase Budget Survey with permission from WorldatWork, 14040 N. Northsight Blvd., Scottsdale, AZ 85260; phone (877) 951-9191; fax (480) 483-8352; http://www.worldatwork.org. © 2002 WorldatWork. Unauthorized reproduction or distribution is strictly prohibited.
By- Prof Sachin Batra
Key Terms• comparable worth• competence-based pay• consumer price index (CPI)• escalator clauses• exempt employees• Hay profile method• hourly work• job classification system• job evaluation• job ranking system• nonexempt employees
• pay equity• pay-for-performance standard• pay grades• piecework• point system• real wages• red circle rates• value-added compensation• wage and salary survey• wage curve• wage-rate compression• work valuation