Human Resource

Management

SECTION 4

Compensating
Human
Resources

TENTH EDITON

Robert L. Mathis

John H. Jackson

Chapter 12

Compensation
Compensation Strategies
Strategies
and
andPractices
Practices

2003 Southwestern College Publishing. All rights reserved.

PowerPoint
Presentation
by Charlie Cook

Learning
Learning Objectives
Objectives
After you have read this chapter, you should
be able to:
Identify two general types of compensation and
the components of each.
Give examples of two different compensation
philosophies in organizations.
Discuss four strategic compensation design
issues.
Describe three considerations affecting
perceptions of pay fairness.
Identify the basic provisions of the Fair Labor
Standards Act (FLSA).
2002 Southwestern College Publishing. All rights reserved.

122

Learning
Learning Objectives
Objectives (contd)
(contd)
Define job evaluation and discuss four
methods for of performing it.
Outline the process of building a wage and
salary administration system.
Discuss how to establish a pay-forperformance system.

2002 Southwestern College Publishing. All rights reserved.

123

Introduction
Introduction
Compensation

is a systematic
approach to providing monetary &
non monetary value to employees
in exchange for work performed.
Compensation may be defined as
money received in performance of
work and many kinds of benefits
that an organization provides to
their employees.

Compensation
Compensation Systems
Systems

Objectives of an Effective Compensation

System:
Legal compliance with all appropriate laws and
regulations
Cost effectiveness for the organization
Internal, external, and individual equity for
employees
Performance enhancement for the organization
To recruit & retain qualified employees.
To increase or maintain morale.
To determine basic wage & salary.
To reward for job performance.

2002 Southwestern College Publishing. All rights reserved.

125

Nature
Nature of
of Compensation
Compensation

Types of Rewards
Intrinsic
Intangible, psychological and social effects of
compensation

Extrinsic
Tangible, monetary and nonmonetary effects of
compensation

2002 Southwestern College Publishing. All rights reserved.

126

Components
Componentsof
ofAACompensation
CompensationProgram
Program

Figure 121
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127

Direct
Direct Compensation
Compensation
Compensation Type
Base Pay

The basic monetary compensation that an

employee receives, usually as a wage or
salary.

Wages

Payments calculated on the amount of time

worked.

Salary

Consistent payments made each period

regardless of the number of hours worked in
the period.

Variable Pay

Compensation linked to individual, team, or

organizational performance.

Benefit

An indirect reward given to an employee or

group of employees as a part of
organizational membership.

2002 Southwestern College Publishing. All rights reserved.

128

Factor
Factor affecting
affecting
External

Internal

Demand

Compensation

&
supply of labour
Cost of living
Society
Labour unions
The economy

policy
The org. ability to
pay
Job analysis &
description
Employee

Typical
Typical Division
Division of
of HR
HRResponsibilities:
Responsibilities:
Compensation
Compensation

Figure 122
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1210

Continuum
Continuum of
of Compensation
CompensationPhilosophies
Philosophies

Figure 123
2002 Southwestern College Publishing. All rights reserved.

1211

Compensation
CompensationApproaches
Approaches

Figure 124
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1212

Compensation
CompensationQuartile
QuartileStrategies
Strategies

Figure 125
2002 Southwestern College Publishing. All rights reserved.

1213

Decisions
Decisions About
About Compensation
Compensation Levels
Levels
Compensation Strategies
Above-Market

Paying for higher qualified, more productive

workers.

Middle-Market

Attempting to balance of employer costs and

need to attract and retain employees.

Below-Market

Paying all that the firm can afford

Taking advantage of the abundant supply of
potential employees in a loose labor market.

2002 Southwestern College Publishing. All rights reserved.

1214

Competency-Based
Competency-Based Pay
Pay

Limitations
Limitations
(How
(Howmany?)
many?)

Pricing
Pricing
Competencies
Competencies

CompetencyCompetencyBased
Based Pay
Pay
Systems
Systems
KBP/SBP
KBP/SBP
Maintenance
Maintenanceof
of
Competencies
Competencies

2002 Southwestern College Publishing. All rights reserved.

Training
Training

1215

Competency-Based
Competency-Based Systems
SystemsOutcomes
Outcomes

Figure 126
2002 Southwestern College Publishing. All rights reserved.

1216

Individual
Individual vs.
vs. Team
Team Rewards
Rewards
Using
UsingTeam-Based
Team-BasedReward
RewardSystems
Systems
Use
Useskill-based
skill-basedpay
payfor
forthe
thebase.
base.
Make
Makesystem
systemsimple
simpleand
andunderstandable.
understandable.
Use
Usevariable
variablepay
paybased
basedon
onbusiness
businessentity
entityperformance
performance
Distribute
Distributevariable
variablerewards
rewardsat
atthe
theteam
teamlevel
level
Maintain
Maintainaahigh
highdegree
degreeof
ofemployee
employeeinvolvement
involvement

2002 Southwestern College Publishing. All rights reserved.

1217

Perceptions
Perceptions of
of Pay
Pay Fairness
Fairness
Equity

The perceived fairness between what a person

does (inputs) and what the person receives
(outcomes).

Procedural Justice

The perceived fairness of the process and

procedures use to make decisions about
employees

Distributive Justice

The perceived fairness in the distribution of

outcomes.

Pay Openness

The degree of openness or secrecy that an

organization allows regarding its pay system.

External Equity

The perception that the organization provides

employees with compensation that comparable
to the compensation of employees with similar
jobs in other organizations.

2002 Southwestern College Publishing. All rights reserved.

1218

Equity
EquityConsiderations
Considerationsin
inCompensation
Compensation

Figure 127
2002 Southwestern College Publishing. All rights reserved.

1219

Fair
Fair Labor
Labor Standards
Standards Act
Act (FSLA)
(FSLA) of
of 1938
1938
Provisions
Provisionsof
ofthe
theAct
Act
Minimum
Minimumwage
wagerequirement
requirementsets
setswage
wagefloor
floor
Child
Childlabor
labor(under
(under14
14years
yearsold)
old)isisprohibited
prohibited
Requires
Requiresovertime
overtimepayments
paymentsfor
fornon-exempt
non-exemptemployees
employees
Exempts
Exemptshighly-paid
highly-paidcomputer
computerworkers
workers
Requires
Requiresovertime
overtime(1
(1)
)pay
payfor
forhours
hoursover
over40
40hours
hours
Requires
Requirescompensatory
compensatorytime
timeat
atovertime
overtime(1
(1)
)pay
payrates
rates
2002 Southwestern College Publishing. All rights reserved.

1220

Wage/Hour
Wage/HourStatus
StatusUnder
UnderFair
FairLabor
LaborStandards
StandardsAct
Act

Figure 128a
2002 Southwestern College Publishing. All rights reserved.

1221

Wage/Hour
Wage/HourStatus
StatusUnder
UnderFair
FairLabor
LaborStandards
StandardsAct
Act

Figure 128b
2002 Southwestern College Publishing. All rights reserved.

1222

Wage/Hour
Wage/HourStatus
StatusUnder
UnderFair
FairLabor
LaborStandards
StandardsAct
Act

Figure 128c
2002 Southwestern College Publishing. All rights reserved.

1223

The
TheIRS
IRSTest
Test for
forEmployees
Employees and
and
Independent
IndependentContractors
Contractors

Source: U.S. Internal Revenue Service.

2002 Southwestern College Publishing. All rights reserved.

Figure 129
1224

Other
Other Laws
Laws Affecting
Affecting Compensation
Compensation

Davis-Bacon Act of 1931

Required payment of prevailing wage by
firms engaged in federal construction
projects.

Walsh-Healy Public Contracts Act and the

Service Contracts Act
Extended the payment of prevailing wage
to service contracts
Required overtime payment for any
employee hours worked over eight hours in
one day; applies only to to federal contracts,
not the private sector.

2002 Southwestern College Publishing. All rights reserved.

1225

Pay
Pay and
and Gender
Gender

Equal Pay Act of 1963

Requires that men and women be paid the
same for performing substantially similar jobs
with limited non-gender exceptions (e.g.,
merit and seniority).

Issue of Pay Equity

Similarity in pay for all jobs requiring
comparable level of knowledge, skills, and
abilities, even if actual duties and market
rates differ significantly.

2002 Southwestern College Publishing. All rights reserved.

1226

Compensation
Compensation
Administration
Administration
Process
Process
Figure 1210
2002 Southwestern College Publishing. All rights reserved.

1227

Job
Job Evaluation
Evaluation

Job Evaluation
The systematic determination of the relative
worth of jobs within an organization.

Benchmark Job
A job found in many organizations and
performed by several individuals who have
similar duties that are relatively stable and
require similar KSAs.

2002 Southwestern College Publishing. All rights reserved.

1228

Job
Job Evaluation
Evaluation

Ranking
Ranking

Classification
Classification

Job
Job
Evaluation
Evaluation
Methods
Methods
Factor
Factor
Comparison
Comparison

2002 Southwestern College Publishing. All rights reserved.

Point
Point
Method
Method

1229

Job
JobEvaluation
EvaluationPoint
PointChart
Chart

Figure 1211
2002 Southwestern College Publishing. All rights reserved.

1230

Legal
Legal Issues
Issues and
and Job
Job Evaluation
Evaluation
Americans
Americans with
withDisabilities
DisabilitiesAct
Act

Job
Jobevaluations
evaluationsmay
maynot
notidentify
identifyjob
jobfunctions
functionsrelated
related
to
tophysical
physicaldemands
demandsas
asessential
essential

Job
Job Evaluation
Evaluation
Gender
GenderIssues
Issues

Traditional
Traditionaljob
jobevaluations
evaluationsplace
placeless
lessweight
weighton
on
knowledge,
knowledge,skills,
skills,and
andworking
workingconditions
conditionsfor
forfemalefemaledominated
dominatedjobs
jobs

2002 Southwestern College Publishing. All rights reserved.

1231

Developing
Developing Pay
Pay Surveys
Surveys
Select
Select Employers
Employerswith
with Comparable
ComparableJobs
Jobs
Determine
Determine Jobs
Jobsto
tobe
beSurveyed
Surveyed
Decide
DecideWhat
What Information
InformationIs
IsNeeded
Needed

Conduct
ConductSurvey
Survey
2002 Southwestern College Publishing. All rights reserved.

1232

Pay
Pay Structures
Structures

Market Line
The line on a graph showing the relationship
between the job value, as determined by job
evaluation points, and pay survey rates.

Common Pay Structures

Hourly and salaried
Office, plant, technical, professional,
managerial
Clerical, information technology, professional,
supervisory, management, and executive

2002 Southwestern College Publishing. All rights reserved.

1233

Establishing
Establishing
Pay
Pay
Structures
Structures

Figure 1212
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1234

Pay
Pay Structures
Structures (contd)
(contd)

Pay Grades
A grouping of individual jobs having
approximately the same job worth.

Broadbanding
The practice of using fewer pay grades having
broader pay ranges that in traditional systems.
Benefits

Encourages horizontal movement of employees

Is consistent with trend towards flatter organizations
Creates a more flexible organization
Encourages competency development
Emphasizes career development

2002 Southwestern College Publishing. All rights reserved.

1235

Traditional
Traditional Pay
PayStructure
Structurevs.
vs.Broadbanding
Broadbanding

Figure 1213
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1236

Pay
PayScattergram
Scattergram

Figure 1214
2002 Southwestern College Publishing. All rights reserved.

1237

Typical
TypicalPay
PayRange
RangeWidths
Widths

Figure 1215
2002 Southwestern College Publishing. All rights reserved.

1238

Example
Exampleof
of
Pay
PayGrades
Grades
and
andPay
Pay
Ranges
Ranges

Figure 1216
2002 Southwestern College Publishing. All rights reserved.

1239

Pay
Pay Rate
Rate Issues
Issues

Rates Out of Range

Red-Circled Employees
An incumbent (current jobholder) who is paid above the
range set for the job.

Green-Circled Employees
An incumbent who is paid below the range set for the job.

Pay Compression
A situation in which pay differences among
individuals with different levels of experience
and performance in the organization becomes
small.

2002 Southwestern College Publishing. All rights reserved.

1240

Issues
Issues Involving
Involving Pay
Pay Increases
Increases

Seniority
Time spent in an organization or on a
particular job.
Used to determine eligibility for
organizational rewards and benefits.

Maturity Curve
A curve that depicts the relationship between
experience and pay rates.
Assumption is that as experience increases,
proficiency and performance increase.

2002 Southwestern College Publishing. All rights reserved.

1241

Issues
Issues Involving
Involving Pay
Pay Increases
Increases

Cost-of-Living Adjustments (COLA)

A percentage increase in wages that allows
employees to maintain the same real wages
in a period of economic inflation.
Adjustments are tied to changes in an
economic measure (e.g., the Consumer Price
Index).

Lump-Sum Increases (LSI)

A one-time payment of all or part of a yearly
pay increase.
Lump-sum payments do not increase base
wages

2002 Southwestern College Publishing. All rights reserved.

1242

Pay
PayAdjustment
Adjustment Matrix
Matrix

Figure 1217
2002 Southwestern College Publishing. All rights reserved.

1243

Compa-Ratio
Compa-Ratio Example
Example

Compa-ratio
The pay level divided by the midpoint of the
pay range.
Employee R

$16.50 (current pay)

100 Compa - ratio 110
15.00 (midpoint)

Employee J

$13.05 (current pay)

100 Compa - ratio 87
15.00 (midpoint)

2002 Southwestern College Publishing. All rights reserved.

1244