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Mgmt 383


Vacations. Pensions. Sick Leave. Matching Compensation with Organizational Needs ... Arizona. Louisiana. Mississippi. South Carolina. Tennessee. Garnishment Laws ... – PowerPoint PPT presentation

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Title: Mgmt 383

Mgmt 383
  • Chapter 12
  • Total Rewards and Compensation
  • Spring 2009

Why Must Employers Provide Different Types of
  • Attract
  • Retain
  • Reward

Basic Forms of Compensation
  • Base Pay (Direct Compensation)
  • Wages
  • Salaries
  • Variable Pay (Direct Compensation)
  • Bonuses
  • Incentives
  • Stock Options
  • Benefits (Indirect Compensation)
  • Medical Insurance
  • Paid Time Off
  • Retirement Pensions
  • Workers Compensation

Components of a Compensation System
Base Pay ? Wages ? Salary Variable Pay ?
Bonuses ? Incentives ? Stock Options
Benefits ? Health ? Life/Disability ?
Paid Time Off ? Retirement ? Ed. Assistance
Base Pay
  • Base Pay The basic compensation an employee
    receives in exchange for work performed.
  • Wages - time-based (usually hourly) compensation
    calculated on the basis of the amount of time
  • Salaries - payments consistent from time period
    to time period regardless of the actual amount of
    time worked.

Variable Pay
  • Variable Pay - compensation linked to individual,
    team and/or organizational performance.
  • Piece-rate - productivity-based compensation paid
    for each unit of product produced or service
  • Bonuses
  • Profit-sharing
  • Gain-sharing
  • Commissions

  • Benefits - indirect compensation contingent upon
    organizational membership. 41 of total payroll
    costs or 70 of the base pay rate.
  • Health Insurance
  • Life Insurance
  • Vacations
  • Pensions
  • Sick Leave

Matching Compensation with Organizational Needs
  • New organizations in competitive environments
    (emphasis on innovation)
  • Lower base pay
  • Greater emphasis on variable pay
  • Established large organizations in stable
    environments (emphasis on cost containment)
  • Structured base pay system
  • Structured benefits programs

Two Prevailing Philosophies of Compensation
  • Entitlement Orientation
  • all employees automatically receive raises
    every cycle.
  • Seniority basis
  • Cost of living allowances (COLAs)
  • Across the board raises are due employees
    regardless of performance or competitive
  • Performance Orientation - pay is based on
    performance differences among employees.
  • Merit basis
  • Bonuses tied to performance.
  • Gaining ground against entitlement oriented
  • Market adjustments

Competency-Based Pay
  • Competency-Based Pay (a.k.a. Task-based or
    Skill-Based, Knowledge-Based Pay) rewards
    employees for the capabilities they demonstrate
    and acquire.
  • Employees are paid more in jobs requiring more
    skills and knowledge than those that do not.
  • Encourages employees to increase their human
  • Popular in those trades or professions with
    certification programs (accounting, HRM, finance,
    architecture, engineering, etc.).

Objectives of a Compensation Program
  • Equity
  • Legal Compliance
  • Cost Effectiveness

Perceptions of Pay Fairness
  • Equity - the perceived fairness of the
    relationship between a persons inputs and the
    outcomes they receive.
  • Internal Equity (equity within the organization)
    ensuring that compensation for jobs that are
    similar in terms of KSA within the organization
    are compensated the same.
  • External Equity (equity with other organizations)
    ensuring that jobs in our company are paid the
    same as the same jobs (in terms of KSA)in other

Equity Theory
  • Individual Equity (J. Stacy Adams)
  • An individual expects his/her outcomes in any
    exchange relationship to be proportional to
    his/her inputs.
  • Individuals consciously or unconsciously compare
    their outcomes and inputs to others in the
    workplace and make a value judgement as to
    whether they are fair.

J. Stacy Adams Equity Theory
  • Outcomes (On) any and all factors that an
    individual values or desires.
  • Raises
  • Promotions
  • Status
  • Job assignments
  • Recognition

J. Stacy Adams Equity Theory
  • Inputs (In) any and all factors that an
    individual believes are relevant to being
    eligible for a desired outcome.
  • Effort
  • Quality of work
  • Experience
  • Education
  • Seniority
  • Loyalty

J. Stacy Adams Equity Theory
  • Individuals consciously or unconsciously compare
    their outcomes and inputs to theirs in the
    workplace and make a value judgement as to
    whether they are fair.
  • Equity 0i 0o
  • Ii Io

J. Stacy Adams Equity Theory
  • Over payment 0i 0o .1
  • Ii Io .8

  • .125 gt .1
  • Underpayment 0i 0o
  • Ii Io
  • Individuals will always attempt to achieve equity

.1 .125
J. Stacy Adams Equity Theory
  • Methods of Reducing Perceived Inequity
    (overpayment or underpayment).
  • Change inputs - increase or decrease effort.
  • Change outcomes - request more pay, status, etc.
    or join a union today we often sue.
  • Distort perceptions - rationalize.
  • Turnover - leave the job

Factors Affecting Equity
  • Procedural Justice - the perceived fairness of
    the process and procedures used to make pay
    decisions. How the raises are determined.
  • Distributive Justice - the perceived fairness of
    the amount of compensation given for the level of

Secret v. Open Pay systems
  • Secret Pay Systems - policies that prohibit
    discussion of pay between employees.
  • Subverted by the grapevine.
  • Employees suspect that the ulterior motive is to
    hide unfair practices.
  • Open Pay Systems - employees can gain access to
    each others pay levels.
  • Works best under true merit pay systems.
  • Concerns about employee privacy.

Factors Affecting Equity
  • External Equity how the compensation in your
    organization compares to similar jobs in other

Market Competitiveness and Compensation
  • Market Positioning
  • Pay Market - match competitors
  • Lead the Market - pay more than competitors
  • Lag the Market - pay less than competitors
  • Market Pricing - basing wages on the immediate
    labor market and the industry.
  • Houston, TX v. NYC
  • 45,000 v. 109,051
  • 30,948 v. 75,000
  • Source Salary Comparison (April 2, 2009)

Market Pricing Cost of Living
  • If you move from Jackson, MS to New York
    (Manhattan) NY
  • Groceries will cost 66more.
  • Housing will cost 440more.
  • Utilities will cost 61 more.
  • Transportation will cost 22 more.
  • Healthcare will cost 32 more.

Fair Labor Standards (1938)
  • Minimum wage
  • 3 step increase is scheduled as follows
  • 5.85 July 24, 2007
  • 6.55 - July 24, 2008
  • 7.25 - July 24, 2009
  • Overtime (time one-half for each our worked in
    excess of 40 during a 168 consecutive hour work

Fair Labor Standards (1938)
  • Child labor
  • Hazardous jobs gt 18.
  • Unlimited hours gt 16.
  • 14 to 15, 3 hours limit on school days, 18 hours
    in school weeks. 8 hours and 40 hours
    respectively in nonschool weeks. No work between
    7 pm 7 am except June 1 to Labor Day-- 9pm to

Employees under FLSA
  • Classification of employees
  • Hourly (nonexempt)
  • Salaried-Nonexempt
  • Salaried-Exempt - Those not protected by the FSLA

Exempt Employees under the FLSA
  • Exempt Employees
  • Executive
  • Administrative
  • Professional
  • Computer Employees
  • Outside sales

Bona Fide Executives under FLSA
  • Bona fide executives (management)
  • Have the authority to hire and fire or make
    recommendations regarding decisions affecting the
    employment status of others and regularly
    exercise a high degree of independent judgment in
    their work.
  • No more than 20 of time spent performing
    nonexemept duties.
  • Retail service, no more than 40 of time spent
    performing nonexemept duties.
  • Supervises 2 or more employees.
  • Salary is gt 345 per week

21-Factor Control Test to Determine Independent
Contractor Status
  • The Internal Revenue Service, building on the
    common law test, has set forth a more detailed
    test for determining whether an individual is an
    independent contractor for purposes of paying
    employment tax and withholding. These factors and
    their applications are as follows
  • 1. An individual who is required to follow
    instructions is more likely to be considered an
  • 2. The greater the amount of training needed for
    the individual to complete an assigned task, the
    greater the likelihood that the individual will
    be considered an employee.
  • 3. Where an individual is integrated into the
    employers business to a great extent, the
    individual is more likely to be considered an
  • 4. The fact that an individual personally renders
    services will weigh in favor of employee status.
  • 5. The fact that the individual hires, fires, and
    pays assistants, and the employer has no right to
    do so, indicates independent contractor status.
  • 6. The existence of a continuing relationship is
    indicative of employee status.

21-Factor Control Test to Determine Independent
Contractor Status
  • 7. The establishment of a set amount of work
    hours suggests employee status.
  • 8. An individual whose time is substantially
    devoted to the job is more likely to be
    considered an employee.
  • 9. The fact that an individual works on the
    employers premises suggests employee status.
  • 10. An individual who works according to a
    sequence set by the employer will more likely be
    deemed an employee.
  • 11. The fact that an individual submits regular
    or written reports to the employer will weigh in
    favor of employee status.
  • 12. An individual who is paid by the project,
    rather than by the hours, or other period of
    time, will more likely be considered an
    independent contractor.
  • 13. An individual who is reimbursed for expenses
    is more likely an employee.

21-Factor Control Test to Determine Independent
Contractor Status
  • 14. An individual who furnishes the necessary
    tools and materials for the job is more likely an
    independent contractor.
  • 15. That an individual makes an investment in the
    facilities in which he or she works weights in
    favor of independent contractor status.
  • 16. The fact that an individuals work results in
    the possible realization of a profit or the risk
    of a loss suggests independent contractor status.
  • 17. An individual who works for more than one
    firm at a time is more likely to be an
    independent contractor.
  • 18. An individual who makes his or her services
    available to the general public is more likely to
    be considered an independent contractor.
  • 19. The fact that the employer has the right to
    discharge the individual suggests an employment
    relationship (independent contractor
    relationships are more likely to be contractual).
  • 20. The fact that the individual has the right to
    terminate the relationship also suggests an
    employment relationship because independent
    contractors are usually bound by a contract.

State Compensation Statutes
  • The governmental entity with the largest minimum
    wage always prevails.
  • Example the minimum wage in Washington is 7.93.
  • Example the minimum wage in California is 7.50.
  • Example the minimum wage in San Francisco is
    9.36. (as of July 2007)

State Minimum Wages
  • States with minimum wages higher than FLSA
  • Alaska Massachusetts
  • California Minnesota
  • Connecticut New York
  • Delaware Oregon
  • Florida Vermont
  • Illinois Washington
  • Maine
  • States with no minimum wage
  • Alabama
  • Arizona
  • Louisiana
  • Mississippi
  • South Carolina
  • Tennessee

Garnishment Laws
  • Garnishment a court action which directs that a
    portion of an employees wages are to be side
    aside to pay a debt owed by the employee to a

Davis-Bacon Act (1931)
  • Federal construction contractors with contracts
    or subcontracts in excess of 2000.
  • Enacted to encourage hiring union labor in the
    Great Depression.
  • Requires employers to pay the prevailing wage
    for the area (the union wage scale for the area).

Walsh-Healey Act (1936)
  • Federal supply and service contractors with
    contracts or subcontracts in excess of 10,000.
  • Requires employers to pay the prevailing wage
    for the area (the union wage scale for the area).

McNamara-OHara Service Contract Act (1965)
  • Employers who hold contract or subcontracts to
    provide services in excess of 2,500 to the
    United States government.
  • Must pay their employees the prevailing wage for
    the geographic area in which the work is being
  • Must provide fringe benefits to service employees
    comparable to the prevailing benefits.

Equal Pay Act (1963)
  • Equal pay for equal work.
  • Differentials are permitted for
  • Merit
  • Seniority
  • Quantity of work
  • Quality of work
  • Education
  • Level of responsibility
  • Working conditions

The Equal Pay Myth
  • The myth Women in the workplace earn only 74
    for every 1 made by men.
  • Fact Men pursue jobs that are more dangerous
    and receive higher pay for context. (92 of all
    job-related deaths involve men).
  • Fact Men are more represented in the higher
    paying professions.
  • Fact Women who never had children made 98 for
    every 1 men made.
  • Source Diana Furchtgott-Roth, et al. (1999).
    Women's Figures An Illustrated Guide to the
    Economic Progress of Women in America .

Developing a Base Pay System
  • Job Evaluation - the systematic determination of
    the relative worth of jobs within an
  • Evaluation criteria of jobs
  • Relative importance of one job to other jobs.
  • Skills required to perform TDR of one job as
    compared to other jobs.
  • Difficulty (complexity) of the job compared with
    other jobs.

Job Evaluation Methods
  • Ranking Method - jobs are ranked from highest to
    lowest in importance.
  • Very subjective.
  • Awkward with large numbers of jobs.
  • Classification Method - categories are
    established to group jobs of similar KSA.
  • U.S. Civil Service GS system, e.g.
  • Very subjective
  • Overly reliant on job titles and descriptions and
    assumes similarity between agencies and job

Job Evaluation Methods
  • Point Method - jobs are broken into compensable
    factors job dimension common across job
    categories and weights or points are assigned to
    the factors. Hay System is the most popular
  • Advantages
  • Simple enough for managers to understand.
  • Allows for comparison between jobs
  • Can be used by people who are not specialists
  • Disadvantages
  • Time consuming
  • Results in job rigidity highly delineated TDR.

Job Evaluation Methods
Hay System (1943) Know How Problem
Solving Accountability 1. Functional
Expertise 1. Environment 1. Freedom to
Act 2. Managerial Skills 2. Challenge
2. Impact of End Results 3. Human Relations
3. Magnitude
Job Evaluation Methods
  • Factor Comparison Method - sophisticated
    quantitative combination of both ranking and
    point methods.
  • (1) Benchmark jobs are identified (those
    performed by workers with similar TDR and similar
  • (2) Market rates are gathered for benchmark jobs.
  • (3) Monetary values are assigned to each factor.
  • (4) All other jobs with their corresponding
    factors are compared to the benchmark jobs.

Job Evaluation Methods
  • Factor Comparison Method -
  • Disadvantages
  • Expensive and can only be done by trained
  • Complicated and difficult for some managers to
  • May lead to employee dissatisfaction or worse
    (litigation, AFSCME v. State of Washington).

Job Evaluation Methods
  • Computerized Job Evaluation - simply the
    application of existing job evaluation methods to
    computer technology.

Pay Structure
Pay Structure - the array of pay rates for
different jobs with in a single organization
Pay Survey (external) Establish
Determine Development
Pay Grades Pay for
Scattergram and Ranges Specific
Jobs Job Evaluation (internal)
Pay Structure
  • Pay Survey - collecting compensation data from
    similar jobs in other organizations.
  • Develop Wage Curve or Scattergram - using survey
    data and the internal job evaluation a pay
    scatter gram is developed.
  • Market Line a trend line showing the
    relationship between job value (resulting from
    job evaluation) and the pay survey rates.

Scattergram Market Line
Market Line
JE Points
Pay Structure
  • Using the Wage Curve, pay grades and pay ranges
    are developed.
  • Pay Grades - grouping individual jobs having
    approximately the same worth.
  • Pay Range - establishing the maximum and minimum
    range of compensation for each job.
  • Broadbanding the practice of using fewer pay
    grades having broader ranges than a tradition
    compensation system.

Pay Range
  • Pay Range
  • Determines the maximum and minimum each job
    incumbent may earn.
  • Differentials within the range are based on
    seniority/time in grade.
  • The lower the level the job, the narrower the
    range and vice versa.

Tradition Pay Structure
. Red Circle
Market Line
. Green Circle
JE Points
Market Line
Job Evaluation Points
Pay Range
  • Red-circled employees are those employees whose
    pay goes beyond the the established range for
    their particular job (usually due to an
    inordinate amount of longevity).
  • Green-circled employees are those paid below the
    the established range for their particular job.
    (usually due to pay compression).

Pay Compression
  • Pay Compression - pay differences between persons
    with different levels of experience and
    performance are small.
  • Usually occurs when labor market pay levels rise
    faster than internal pay adjustments.
  • Example An employee with 10 years longevity
    makes 45,000/yr, a newly hired employee makes

Pay Inversion
  • Pay Inversion may sometimes occur. New hires make
    more than veteran (more experienced) employees.
  • Usually occurs when internal pay adjustments lag
    behind labor market pay levels.
  • Example An employee with 10 years longevity
    makes 45,000/yr, a newly hired employee makes

Cost Effectiveness
  • Cost Effectiveness - ideally, in a competitive
    environment, increases in productivity should be
    greater than increases in compensation.

Output Input
Labor Cost
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