Chapter Eleven Managing Basic Compensation
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 • 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? • 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 • 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 • 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 • 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) • 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 • 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 • 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) • 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’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’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 • 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 • 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 • Compensating employees for learning specific information • Skill-based pay • Rewarding employees for acquiring new skills
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 • 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.
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
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 • 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.