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Chapter 10. Managing Compensation. Chapter 10 Overview. 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

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Managing Compensation


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    1. (c) 2007 by Prentice Hall Chapter10 Managing Compensation

    2. (c) 2007 by Prentice Hall Chapter 10 Overview • 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 for the job they hold • Make compensation decisions that comply with the legal framework

    3. (c) 2007 by Prentice Hall What Is Compensation? • 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

    4. (c) 2007 by Prentice Hall Designing a Compensation System Challenge is to design a compensation system that: • Enables the firm to achieve its strategic objectives • is molded to the firm’s unique characteristics and environment

    5. (c) 2007 by Prentice Hall Designing a Compensation System (Cont.) There are nine criteria for developing compensation plans: • Internal vs. external equity: • Internal equity – The perceived fairness of the pay structure within a firm. • External equity – The perceived fairness in pay relative to what other employers are paying for the same type of labor.

    6. (c) 2007 by Prentice Hall Designing a Compensation System Two basic models for determining internal vs. external equity: • The Distributive Justice Model • Labor Market Model How to balance internal and external equity

    7. (c) 2007 by Prentice Hall Designing a Compensation System (Cont.) 2. Fixed versus Variable Pay: • Fixed Pay – most common in the USA as it reduces risk to the employee and is easy to administer • Variable Pay – 75% of companies use some type of variable pay, 10% of US workers wages consist of variable pay

    8. (c) 2007 by Prentice Hall Designing a Compensation System (Cont.) 3. Performance vs. Membership: • Performance – Substantial part of pay is tied to individual or group contributions and can vary from person to person or group to group • Membership – Same or similar wage to every employee in a given job

    9. (c) 2007 by Prentice Hall Designing a Compensation System (Cont.) 4. Job vs. Individual pay • Job based pay – assumes in setting base pay a company should evaluate the value or contributions of each job, not how well an employee performs the job • Individual pay – knowledge based-pay or skill-based pay where employees are paid on the basis of the jobs they can do or talents they have

    10. (c) 2007 by Prentice Hall Designing a Compensation System (Cont.) • Job vs. Individual pay Job-based pay is best where: • Technology is stable • Jobs do not change often • Employees do not need to cover for one another frequently • Much training is required to learn a given job • Turnover is relatively low • Employees are expected to move up through the ranks over time • Jobs are fairly standardized within the industry

    11. (c) 2007 by Prentice Hall Designing a Compensation System (Cont.) 4. Job vs. Individual Pay (Cont.) Individual-based pay is best where: • The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs • The company’s technology and organizational structure change frequently • Employee participation and teamwork are encouraged throughout the organization • Opportunities for upward mobility are limited • Opportunities to learn new skills are present • The costs of employee turnover and absenteeism in terms of lost production are high

    12. (c) 2007 by Prentice Hall Designing a Compensation System (Cont.) 5. Egalitarian vs. Elitist • Egalitarian pay system – A pay plan in which most employees are part of the same compensation systems. • Elitist pay system – A pay plan in which different compensation systems are established for employees or groups at different organizational levels.

    13. (c) 2007 by Prentice Hall Designing a Compensation System (Cont.) • Below-market vs. Above-market compensation 7. Monetary vs. Nonmonetary rewards 8. Open vs. Secret pay 9. Centralization vs. Decentralization of pay decisions

    14. (c) 2007 by Prentice Hall Compensation Tools Two broad categories depending on the unit of analysis used to make pay decisions: • Job-based compensation plans • Skills-based compensation plans

    15. (c) 2007 by Prentice Hall Compensation Tools (Cont.) 1. Job-based compensation plans • Most traditional and widely used • Assumes work gets done by people who are paid to do well-defined jobs • Objective is to allocate pay so that the most important jobs pay the most

    16. (c) 2007 by Prentice Hall Compensation Tools (Cont.) 1. Job-based compensation plans – 3 key components:

    17. (c) 2007 by Prentice Hall Compensation Tools (Cont.) 1. Job-based compensation plans • Achieving Internal Equity: Job Evaluation = process of evaluating the relative value or contribution of different jobs in an organization • The ultimate goal of job evaluation is to provide a rational, orderly & systematic judgment of how important each job is to the firm

    18. (c) 2007 by Prentice Hall Compensation Tools (Cont.) 1. Job-based compensation plans • Achieving Internal Equity – 6 steps : • Step 1: Conduct job analysis – gathering and organizing of information concerning the tasks, duties and responsibilities of specific jobs • Step 2: Write job description • Step 3: Determine job specifications – worker characteristics, that an employee must have to perform a job successfully

    19. Compensation Tools (Cont.) 1. Job-based compensation plans • Achieving Internal Equity – 6 steps (Cont.): • Step 4: Rate worth of all jobs using a predetermined system using a system such as a point factor system: • Uses compensable factors – work related criteria that an organization considers most important in assessing relative value of different jobs • Hay compensable factors – 3 compensable factors (know-how, problem solving, accountability) • Management Association of America (MAA) – 3 units (hourly blue collar, non-exempt clerical technical serviceand professional management)

    20. (c) 2007 by Prentice Hall Compensation Tools (Cont.) 1. Job-based compensation plans • Achieving Internal Equity – 6 steps (Cont.): • Step 5: Create a job hierarchy • Step 6: Classify jobs by grade levels

    21. (c) 2007 by Prentice Hall Compensation Tools (Cont.) • Job-based compensation plans • Achieving External Equity: • Market Surveys – purpose to determine pay ranges for each grade level. Most companies purchase surveys.

    22. Compensation Tools (Cont.) • Job-based compensation plans • Achieving External Equity: • 2 steps: • Step 1: Identify benchmark or key jobs – a job that is similar in content across firms • Step 2: Establish a pay policy – decision whether to pay above, below or at market rate

    23. (c) 2007 by Prentice Hall Compensation Tools • Job-based compensation plans Achieving Individual Equity: Within-Pay-Range Positioning Criteria • Individual equity – The perceived fairness of individual pay decisions.

    24. (c) 2007 by Prentice Hall Market Salary Data for Selected Benchmark Office Jobs

    25. (c) 2007 by Prentice Hall Compensation Tools 1. Job-based compensation plans • Evaluating job-based compensation plans • Suggestions for practice

    26. (c) 2007 by Prentice Hall Compensation Tools • Skill-based compensation plans • Uses skills as the basis for pay • Skills can be depth, horizontal, vertical • Advantages: • Creates flexible workforce • Promotes cross-training • Employee control over pay • Disadvantages: • Small % use it • Higher compensation and training costs • Skills may become rusty • Elaborate and time consuming process

    27. The Legal Environment andPay Systems Governance • The Fair Labor Standards Act (FLSA) • Exempt/Non-exempt employees • Minimum wages – overtime • The Equal Pay Act • Comparable worth • OFCCP • Role of the Office of Federal Contract Compliance • Internal Revenue Code