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Chapter eleven l.jpg

Chapter Eleven

Managing Basic Compensation


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Chapter Outline

  • Developing a Compensation Strategy

  • Determining a Wage and Salary Structure

  • Wage and Salary Administration

  • Legal Issues in Compensation

  • Evaluating Compensation Policies


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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.


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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


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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


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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


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Strategic Options for Compensation


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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.


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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


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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.


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Example of a Pay Survey


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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


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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


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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


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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


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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.


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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.


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A Sample Wage Structure


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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


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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.


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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.


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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


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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.


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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.


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