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A job evaluation method that assesses jobs, on a factor-by-factor basis, using a ... Several minimum wages exist, such as for agricultural jobs. ...

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chapter eleven

Chapter Eleven

Managing Basic Compensation

chapter outline
Chapter Outline
  • Developing a Compensation Strategy
  • Determining a Wage and Salary Structure
  • Wage and Salary Administration
  • Legal Issues in Compensation
  • Evaluating Compensation Policies
chapter objectives
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.
what is compensation
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
developing a compensation strategy
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
wages versus salaries
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
determinants of compensation strategy
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.
determinants of compensation strategy cont d
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
pay surveys and compensation
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.
determining a wage and salary structure
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
determining a wage and salary structure cont d
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
determining a wage and salary structure cont d14
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
determining a wage and salary structure cont d15
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
establishing job classes
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.
establishing a pay structure
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.
pay for knowledge and skill based pay
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
wage and salary administration
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.
determining individual wages
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.
  • 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
legal issues in compensation
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.
evaluating compensation policies
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.