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Human Resource ManagementCompensating EmployeesFramework for the Strategic Management of EmployeesStrategic Purposes of compensation l lAttractAttract(the right sort of)people to work for firml lRetainRetain(the right sort of)people to work for firml lControl CostsControl Costs and Maintain a budgetl lMotivateMotivate exceptional performance l lRewardReward employees for past performancelReduce unnecessary turnoverturnoverlMaintain salary equityequity among employees Also-Reinforces(or conflicts with)the Also-Reinforces(or conflicts with)the attitudes and behaviors encouraged with attitudes and behaviors encouraged with the performance management system.the performance management system.What is Compensation?To counterbalanceTo make up forTo offset(inducements)in exchange for employee contributions.Compensation refers to the monetary and nonmonetary consideration employees receive in exchange for the work they perform for an organization Must look at TOTAL compensation not just base payTotal Compensationin exchange for workTotal CompensationDirect:CashIndirect:Benefits and ServicesRelational FormsRecognition/StatusJob securityChallenging WorkLearning OpportunitiesPersonal SatisfactionGood CultureBase PayIncentives Merit/Cost of Living Short Term bonus Long term bonusServices&AllowancesTime away from workEquity theoryOutcome(self)Outcome(other)Inputs(self),or=Inputs(other)O/I(self)other Better performance,feel valued,rationalization to account for overpaymentO/I(self)otherrestore equity,seek to increase outcomes,lower inputsComparisons may be with(a)people inside the firm,(b)outside the firm,or(c)self(what it should be).Increase inputs(e.g.,time&effort)to justify higher rewards when they feel over-rewarded.Decrease inputs to compensate for lower rewards when they feel under-rewarded.Change the compensation they receive through legal or other actions(e.g.,unionization,grievance)Modify their comparisons by choosing another person to compare them-selves against.Distort reality by rationalizing that the inequities are justified.Leave the situation in inequities cannot be resolved.Consequences of inequityInternal Alignment lOccurs when each job in a company is valued appropriately relative to every other job in terms of its ability to help the firm achieve its goalslRelative worth hierarchy for determining salaries is established lPay rates are assigned to jobslProcess is done through job evaluation approaches:lJob rankinglJob classificationlPoint factorlFactor comparisonInternal Alignment(contd)(1)Job RankingReviewing job descriptions and listing jobs in order from highest to lowest worth to companylFairly hard to do in a large companylNeed to create a framework to process the information found in all the job descriptionslLargely subjectiveInternal Alignment(contd)(2)Job ClassificationDeveloping broad descriptions for groups of jobs that are similar in terms of tasks,duties,responsibilities and qualificationsWage range is attached to each classification reflecting relative worth of the job in that classification lE.g.,the federal governments prefix GSlSometimes managers want to reclassify jobs to give a particular employee a higher salaryInternal Alignment(contd)(3)Point MethodlQuantitative approach that uses a point value scheme resulting in a score for each joblBegins with identifying a set of factors for which the company is willing to pay called“compensable factors lPoint manual contains description of each factor and what each degree of the factor representsInternal Alignment(contd)(3)Point method(contd)lRepresent the range of jobs in the companylScores for these jobs enable company to compare other jobs to the benchmark jobs and determine which should be paid more or lesslJob grades are created to reflect hierarchy of jobs within the companyEstablishing the INTERNAL Value of Jobs Recap:lSelect Compensable factors Dimensions of work that the organization values,that helps it pursue its strategy and achieve its objectives.lAssign factor weights what is the relative importance of each dimension of job performance?Weights enable companies to allocate more weight to more important compensable factors than other less important compensable factors.lEstablish degrees of factors present in job scale the factors to identify the different levels for each compensable factor.Essentially,establishing anchors for different levels on a compensable factor.Example of Point ValuesFactor1st Degree2ndDegree3rdDegree4thDegree5thDegreeSkill Job knowledge Experience204060801003545556575Effort Mental demand Physical demand55707580852025303540Responsibility 7085100115130Working conditions3040506070Example:Point valuesDegree/LevelCompensable Factor123 45Job Knowledge50100150200NAProblem Solving50100150200260Working Condition103050NANAOthersIn this example:The compensable factors represent the different dimensions of job performance that are important for organizational successDegree/LevelCompensable Factor123 45Job Knowledge50100150200NAProblem Solving50100150200260Working Condition103050NANAIn this example:The compensable factors represent the different dimensions of job performance that are important for organizational successThe degrees reflect the relative level of responsibility,difficulty,etc.associated with each job for each compensable factor.Degree/LevelCompensable Factor123 45Job Knowledge50100150200NAProblem Solving50100150200260Working Condition103050NANAIn this example:The compensable factors represent the different dimensions of job performance that are important for organizational successThe degrees reflect the relative level of responsibility,difficulty,etc.associated with each job in terms of each compensable factor.The differences in the numerical values associated with each degree for each compensable factor reflects the weight or relative importance for each factor.Degree/LevelCompensable Factor123 45Job Knowledge50100150200NAProblem Solving50100150200260Working Condition103050NANAProblem Solving Degree anchor statementDegree 1 actions are performed in a set order according to instruction.Problems referred to a supervisor.Degree 3 Various problems are solved that require general knowledge of company policies and procedures within own area of responsibilityDegree 5-Complex tasks involving new or constantly changing problems or situations are planned,delegated,coordinated,and/or implemented.Internal Alignment(contd)(4)Factor ComparisonlRanking benchmark jobs in relation to each other on factors like mental or physical requirements,skill,responsibility,and working conditionslCombines job ranking and the point methodlMonetary rates are included,so as the market changes,it needs to be updated frequentlyHourly RateSkillRespons.Working ConditionsCarpenter Ast$12.00$7.00$2.00$3.00Carpenter$18.00$10.00$5.00$3.00Supervisor$30.00$15.00$10.00$5.00External CompetitivenessExternal competitiveness ensures that jobs in the company are valued appropriately relative to similar jobs in the companys external labor market.lSalary SurveyslJob PricinglCompany Pay PolicylPay Grades and RangeslBroadbandingEstablishing Market ValueConducting a Survey to assess external market rateslIdentify Relevant Labor Markets(Ex:relevant labor market for secretary(local)likely to differ than for engineer(regional)lIdentify Benchmark Jobs(Key Jobs)lThe contents are well-known,relatively stable,and agreed upon by the employees involved.lThe supply and demand for these jobs are relatively stable and not subject to recent shiftslThey represent the entire job structure under studylA majority of the workforce is employed in these jobs.lMarket Survey Data CollectionExternal Competitiveness(contd)(1)Salary SurveyslProvides a systematic way to collect information about wages in the external labor marketlCompanies can conduct their own surveys or purchase survey datalShould look at companies in the same industry and other industries that might be competing with you for employeeslShould come from appropriate geographic labor marketExternal Competitiveness(contd)(2)Job Pricing lSystematic process of assigning monetary rates to jobs so that internal wages are aligned with external wages in the marketplacel Begins with plotting results of salary survey for benchmark jobsl Market line,also know as wage curve,is drawn to represent relationship between job evaluation points and salaries paid for jobsl Plot actual salaries paid for benchmark jobs and compare them to results from marketMatching external pay and internal job evaluation points for key jobs 80120 160 200 240 280 320 360Job Evaluation points WITHIN Firm 7654321Survey Monthly Pay($000)XXXXXXXXXX=Key benchmark jobs-job evaluation point by salary data point from market surveyMatching external pay and internal job evaluation points for key jobs 80120 160 200 240 280 320 360Job Evaluation points WITHIN Firm 7654321Survey Monthly Pay($000)XXXXXXXXXX=Key benchmark jobs-job evaluation point by salary data point from market survey“Line of best fit”External Market Policy LineThe Goal What should non-key jobs be paid?80120 160 200 240 280 320 360Job Evaluation points WITHIN Firm 7654321Survey Monthly Pay($000)XXXXXXXXXO=Non-key benchmark jobs mapping other jobs onto the pay system“Line of best fit”External Market Policy LineOOOOOOOORoughly$1800Roughly$4300The Reality Where do jobs really fall?80120 160 200 240 280 320 360Job Evaluation points WITHIN Firm 7654321Survey Monthly Pay($000)XXXXXXXXXO=Non-key benchmark jobs mapping other jobs onto the pay system“Line of best fit”External Market Policy LineOOOOOOOOOOOOExternal Competitiveness(contd)(3)Company Pay PolicylIf a companys wage curve is below or above the market wage curve,decisions have to be made about whether to move wages or leave them as they arelFirms can pay at the market level(follow),above the market(lead),or below the market(lag)lCompanies paying below market will have a harder time attracting employeesExternal Competitiveness(contd)(4)Pay Grades and Pay RangeslJobs are grouped into job grades associated with a pay rangelEach range has a midpoint,a minimum,and a maximumlMidpoints represents an employee who is fully qualified and functioning at an acceptable level of performance lRanges will have overlapthe less overlap the more difference between jobs in each gradeDesigning the internal pay structure:Pay GradesA pay grade is a horizontal group of different jobs that are considered substantially equal for pay purposesGrades enhance an organizations ability to move people among jobs within a grade with no change in pay.The objective is for all the jobs that are similar for paypurposes to be placed within the same grade.Pay RangesRefer to the vertical dimension of the pay structureEach pay grade is associated with a pay range consisting of a midpoint and a specific minimum and maximumMidpoints:Correspond to competitive pay policy where the pay policy line crosses each pay grade Are the control points of the rangeRange spread judgment about how the ranges support career paths,promotions,etc.Typically range between 10 and 120%.Minimum of pay range=Midpoint/1+(1/2 range spread)Maximum=Minimum+(range of spread*minimum)Setting the pay grade structure 80120 160 200 240 280 320 360Job Evaluation points WITHIN Firm 7654321Survey Monthly Pay($000)Pay GradePay RangeMaximumMinimumMid PointDifferential RangesExternal Competitiveness(contd)(5)BroadbandinglConsolidates a large number of pay grades into a few“broad”bands,usually 3 to 10 lMaximum pay for a particular band can be as high as 100-400%above the bands minimum paylBands are usually wide enough that changes in the market dont require adjustments as oftenPay for Individual Performance lInitial pay based on the persons previous experience,education and negotiating skillslIncreases can be tied to meeting goals,providing higher levels of service or results of performance appraisallRed circled job person being paid above the maximum wage for gradelGreen circled job person being paid below minimum of gradelManager can adjust salary,reclassify or reevaluate the job External CompetitivenesslEnsures jobs are valued appropriately relative to similar jobs in the external labor marketlAffects how attractive the firm is to potential employeeslAlso affects attitude and motivation of current employeesAdditional ConsiderationsLabor Market Conditions lLabor demand theoriesCompensating Differentials work with negative characteristics requires higher pay to attract workEfficiency Wage Theory above market wages will improve efficiency by attracting workers who will perform better and be less willing to leaveSignaling pay policies signal kinds of behavior the employer seeksAdditional ConsiderationsLabor Market ConditionslLabor Supply theoriesReservation Wage job seekers wont accept jobs whose pay is below a certain wage,no matter how attractive Human Capital Theory the value of an individuals skills is a function of the time and expense required to acquire them.Alternative Compensation Approaches(1)Skill-Based Pay and Knowledge-Based PaylRequire employees to acquire certain skills or knowledge to receive an increaselMakes it clear what employees have to do to increase paylMay have more employees at higher levels of mastery than neededAlternative Compensation Approaches(contd)(2)Competency-based PaylIdentify the competencies(attitudes,behaviors,abilities)employees need to master for pay raiseslManagers need to outline a valid process to determine achievement of competencieslCan lead to higher labor costs or employee frustration if they do not use additional trainingAlternative Compensation Approaches(contd)(3)Direct Market PricinglCollecting salary information from external labor market rather than starting with internal structure based on value of jobslWorks well as long as data is accurateAdministering CompensationlAnyone making employee pay decisions needs to receive traininglHow pay rates are set and raises are determinedlHow frequently they are reviewedlWhat can and cannot be communicated to employeeslClosed system details about individual pay rates not made public except as required by law(high-ranking executives)lOpen system pay information is public(school districts with published pay scales)lCommunication will enhance employees perceptions of equity and justiceTotal Compensation in PracticeOrganizational DemandsEnvironmentalInfluencesRegulationsCompensationStrategy&CompensationlInternal value of jobs strategy will determine tasks,duties,and responsibilities a firm considers most valuable in achieving its goalslA firms strategy affects the pay mix(base pay vs.variable pay)lWays to increase employee base pay:lCost-of-living adjustments(COLAs)keep salaries from lagging behind external market and to offset rise in prices of goods and services(uses CPI)lMerit increases salary increase based on how well employee has performedlVariable pay includes bonuses,commissions,and stock optionsOrganizational DemandsCompany Characteristics&CompensationlSmall firms may pay less-than-market wageslEstablished firms have more resources to pay at or above marketlWhether a job is a core job or a support position affects pay decisionslThe size and age of a firm plays a major role in determining the type of pay it offers (e.g.,startup firms stock options,older firms more complex pay systems)Organizational DemandsCompany Culture&CompensationlCompany culture establishes the priorities for the pay policy(i.e.,if firm values teamwork,teamwork will be rewarded)lCompany culture sends an message to the employees about what rewards they can expect to receivelManagers need to communicate pay decisions and know what types of rewards are valued by employees Organizational DemandsEmployee Concerns&CompensationEquity versus EqualitylNot all jobs require equal knowledge,skills,and abilities or equal levels of responsibilitylEmployees need to understand the process and believe the outcomes of compensation decisions are fairFairness of RewardslEmployees want to understand that both the process and the outcomes are fairlEmployees perceptions of fairness in compensation is also impacted by relationship with managerlSalary compression occurs when pay for jobs in external market rise faster than pay inside the organization(affected by shortage of workers)Organizational DemandsLabor Force&CompensationlLabor supply when market is tight,companies have to pay higher wages to attract and retain employeeslLabor markets supply and demand have a huge impact on market wages how a firm decides whether to follow,lead,or lag the marketlLeading the market helps a firm attract more qualified workers lA firm may lead the market in certain critical jobslPay practices need to match employee pay preferencesEnvironmental InfluencesTechnology&CompensationlTechnology enables easier collection of salary data-access or conduct online salary surveys lSimplify job evaluation and maintain compensation recordslCollect timesheets and interface with payroll systemsEnvironmental InfluencesGlobalizationlGlobal organizations have to decide whether they want to centralize or decentralize their compensation systemslGlobal companies with centralized compensation systems are more satisfiedlEmployees see link between results and rewards and more internal and external equity lSimilarities and differences in the acceptability of various forms of compensation are found in various countrieslLaws and norms of countries will affect certain pay practicesEnvironmental InfluencesGlobalization(contd)lPaying PCNs(parent country nationals)is most complicatedlUse balance sheet approach making adjustments for hardship,dangerous,or primitive assignmentslU.S.companies have been criticized for paying low wages relative to American wageslCost of living and minimum wage laws have to be taken into consideration to do comparisonEnvironmental InfluencesEthics and Compensationl“What gets rewarded is what gets done”lSort-term goals that are easily manipulated will tempt employees to engage in unethical behaviorlLiving wage providing a fair wage so that basic living needs can be metlEmployers must pay the mandated minimum wagelComparable worth eliminating inequity in wages by ensuring that jobs that require similar levels of education and experience are paid at a similar wage regardless of genderEnvironmental InfluencesRegulations&CompensationlDavis-Bacon Act requires contractors and subcontractors with contracts in excess of$2,000 with the federal government to pay workers wages and benefits equal to local prevailing wages and benefitslWalsh-Healey Act requires contractors with contracts over$10,000 to pay the federal minimum wage for the first 40 hours and 1.5 times the minimum wage for any additional hours during the weekRegulationsRegulations&Compensation(contd)lFair Labor Standards Act(FLSA)regulates use of child labor,defines which workers must be paid the minimum wage,and stipulates pay rate for overtime worklMinimum wage Federal minimum is$6.55 per hour as of July 2019,but each state has option of setting its own minimum dol.gov/esa/minwage/americalExempt employees do not receive overtime for hours worked in excess of 40 in a workweekFairPay Overtime Initiative(2019)clarified which employees were eligible to be exempt and many jobs were reclassifiedlEmployees working overtime are entitled to receive pay at the rate of 1.5 times their regular pay for additional timeRegulationsRegulations&Compensation(contd)lFair Labor Standards Act(FLSA)(contd)lChild labor lYouth under the age of 16 can work on a restricted basislYouth over 16 cannot work in hazardous jobs including driving a motor vehicle,doing wrecking and demolition,or being exposed to radioactive substancesRegulationsRegulations&Compensation(contd)Record keeping-employers must keep certain information on nonexempt employees including:lName,address and Social Security NumberlBirth date,gender,occupationlHours workedlRate of pay and overtime earningslAdditions and deductions fro
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