HRM Chap12

Human Resource SECTION
SECTION 44
Compensating
Compensating
Management Human
Human Resources
Resources
TENTH EDITON
Robert L. Mathis  John H. Jackson
Chapter 12
Compensation
CompensationStrategies
Strategies
and
andPractices
Practices
PowerPoint Presentation
© 2003 Southwestern College Publishing. All rights reserved.
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. 12–2
Learning
Learning Objectives
Objectives (cont’d)
(cont’d)
– 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-for-performance
system.

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

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

Components
Componentsof
ofAACompensation
CompensationProgram
Program
Figure 12–1
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.

Typical
Typical Division
Divisionof
ofHR
HRResponsibilities:
Responsibilities:
Compensation
Compensation
Figure 12–2
Continuum
Continuum of
of Compensation
CompensationPhilosophies
Philosophies
Figure 12–3
Compensation
CompensationApproaches
Approaches
Figure 12–4
Compensation
CompensationQuartile
QuartileStrategies
Strategies
Figure 12–5
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.

Competency-Based
Competency-Based Pay
Pay
Limitations
Limitations Pricing
Pricing
(How
(Howmany?)
many?) Competencies
Competencies
Competency-
Competency-
Based
BasedPay
Pay
Systems
Systems
KBP/SBP
KBP/SBP
Maintenance
Maintenanceof
of Training
Training
Competencies
Competencies

Competency-Based
Competency-BasedSystems
SystemsOutcomes
Outcomes
Figure 12–6
Individual
Individual vs.
vs. Team
Team Rewards
Rewards
Using
UsingTeam-Based
Team-Based Reward
Reward Systems
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

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.

Equity
EquityConsiderations
Considerationsin
inCompensation
Compensation
Figure 12–7
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
(1½)
½)pay
payfor
forhours
hoursover
over40
40hours
hours
Requires
Requirescompensatory
compensatorytime
timeat
atovertime
overtime(1
(1½)
½)pay
payrates
rates
Wage/Hour
Wage/HourStatus
Status Under
Under Fair
Fair Labor
Labor Standards
Standards Act
Act
Figure 12–8a
Wage/Hour
Wage/HourStatus
Status Under
Under Fair
Fair Labor
Labor Standards
Standards Act
Act
Figure 12–8b
Wage/Hour
Wage/HourStatus
Status Under
Under Fair
Fair Labor
Labor Standards
Standards Act
Act
Figure 12–8c
The
TheIRS
IRSTest
Test for
forEmployees
Employeesand
and
Independent
IndependentContractors
Contractors
Source: U.S. Internal Revenue Service.

Figure 12–9
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.

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.

Compensation
Compensation
Administration
Administration
Process
Process
Figure 12–10
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.

Job
Job Evaluation
Evaluation
Ranking
Ranking Classification
Classification
Job
Job
Evaluation
Evaluation
Methods
Methods
Factor
Factor Point
Point
Comparison
Comparison Method
Method

Job
JobEvaluation
EvaluationPoint
PointChart
Chart
Figure 12–11
Legal
Legal Issues
Issues and
and Job
Job Evaluation
Evaluation
Americans
Americanswith
withDisabilities
DisabilitiesAct
Act
Job
Jobevaluations
evaluationsmay
maynot
notidentify
identifyjob
jobfunctions
functionsrelated
relatedto
to
physical
physicaldemands
demandsas asessential
essential
Job
Job Evaluation
Evaluation
Gender
GenderIssues
Issues
Traditional
Traditionaljob
jobevaluations
evaluationsplace
placeless
lessweight
weighton
onknowledge,
knowledge,
skills,
skills,and
andworking
workingconditions
conditionsfor
forfemale-dominated
female-dominatedjobs
jobs

Developing
Developing Pay
Pay Surveys
Surveys
Select
Select Employers
Employerswith
with Comparable
ComparableJobs
Jobs
Determine
Determine Jobs
Jobsto
tobe
beSurveyed
Surveyed
Decide
DecideWhat
WhatInformation
Information Is
IsNeeded
Needed
Conduct
ConductSurvey
Survey

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

Establishing
Establishing
Pay
Pay
Structures
Structures
Figure 12–12
Pay
Pay Structures
Structures (cont’d)
(cont’d)
 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

Traditional
TraditionalPay
PayStructure
Structurevs.
vs.Broadbanding
Broadbanding
Figure 12–13
Pay
PayScattergram
Scattergram
Figure 12–14
Typical
TypicalPay
PayRange
RangeWidths
Widths
Figure 12–15
Example
Exampleof
of
Pay
PayGrades
Grades
and
andPay
Pay
Ranges
Ranges
Figure 12–16
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.

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.

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

Pay
PayAdjustment
AdjustmentMatrix
Matrix
Figure 12–17
Compa-Ratio
Compa-Ratio Example
Example
 Compa-ratio
– The pay level divided by the midpoint of the pay
range.
$16.50 (current pay)

Employee R   100  Compa - ratio  110
15.00 (midpoint)
$13.05 (current pay)

Employee J   100  Compa - ratio  87
15.00 (midpoint)

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Human Resource SECTION

Robert L. Mathis  John H. Jackson

After you have read this chapter, you should be

© 2002 Southwestern College Publishing. All rights reserved. 12–3

© 2002 Southwestern College Publishing. All rights reserved. 12–4

© 2002 Southwestern College Publishing. All rights reserved. 12–5

Wages Payments calculated on the amount of time

Salary Consistent payments made each period

Variable Pay Compensation linked to individual, team, or

Benefit An indirect reward given to an employee or

© 2002 Southwestern College Publishing. All rights reserved. 12–7

Middle-Market Attempting to balance of employer costs and

Below-Market Paying all that the firm can afford

© 2002 Southwestern College Publishing. All rights reserved. 12–12

© 2002 Southwestern College Publishing. All rights reserved. 12–13

© 2002 Southwestern College Publishing. All rights reserved. 12–15

Equity The perceived fairness between what a person

Procedural Justice The perceived fairness of the process and

Distributive Justice The perceived fairness in the distribution of

Pay Openness The degree of openness or secrecy that an

External Equity The perception that the organization provides

© 2002 Southwestern College Publishing. All rights reserved. 12–16

Source: U.S. Internal Revenue Service.

© 2002 Southwestern College Publishing. All rights reserved. 12–23

© 2002 Southwestern College Publishing. All rights reserved. 12–24

© 2002 Southwestern College Publishing. All rights reserved. 12–26

© 2002 Southwestern College Publishing. All rights reserved. 12–27

© 2002 Southwestern College Publishing. All rights reserved. 12–29

© 2002 Southwestern College Publishing. All rights reserved. 12–30

© 2002 Southwestern College Publishing. All rights reserved. 12–31

© 2002 Southwestern College Publishing. All rights reserved. 12–33

© 2002 Southwestern College Publishing. All rights reserved. 12–38

© 2002 Southwestern College Publishing. All rights reserved. 12–39

© 2002 Southwestern College Publishing. All rights reserved. 12–40

$16.50 (current pay)

$13.05 (current pay)

© 2002 Southwestern College Publishing. All rights reserved. 12–42

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