Mgmt 383

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Mgmt 383

• Chapter 12
• Total Rewards and Compensation
• Spring 2009

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Why Must Employers Provide Different Types of
Compensation?

• Attract
• Retain
• Reward

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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

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Components of a Compensation System
Compensation
Direct
Indirect
Base Pay ? Wages ? Salary Variable Pay ?
Bonuses ? Incentives ? Stock Options
Benefits ? Health ? Life/Disability ?
Paid Time Off ? Retirement ? Ed. Assistance
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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
  worked.
• Salaries - payments consistent from time period
  to time period regardless of the actual amount of
  time worked.

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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
  provided.
• Bonuses
• Profit-sharing
• Gain-sharing
• Commissions

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Benefits

• 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

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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

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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
  pressure.

• Performance Orientation - pay is based on
  performance differences among employees.
• Merit basis
• Bonuses tied to performance.
• Gaining ground against entitlement oriented
  systems.
• Market adjustments

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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
  capital.
• Popular in those trades or professions with
  certification programs (accounting, HRM, finance,
  architecture, engineering, etc.).

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Objectives of a Compensation Program

• Equity
• Legal Compliance
• Cost Effectiveness

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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
  companies.

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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.

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J. Stacy Adams Equity Theory

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

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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

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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

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J. Stacy Adams Equity Theory

• Over payment 0i 0o .1
  .1
• Ii Io .8
  1.0
• 
  .125 gt .1
• Underpayment 0i 0o
  
• Ii Io
• Individuals will always attempt to achieve equity

gt
gt
.1 .125
lt
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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

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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
  performance.

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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.

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Factors Affecting Equity

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

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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)
  http//cgi.money.cnn.com/tools/costofliving/costof
  living.html

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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.

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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
  week).

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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
  7am.

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Employees under FLSA

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

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Exempt Employees under the FLSA

• Exempt Employees
• Executive
• Administrative
• Professional
• Computer Employees
• Outside sales

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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

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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
  employee.
• 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
  employee.
• 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.

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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.

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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.

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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)

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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

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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
  creditor.

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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).

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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).

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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
  performed.
• Must provide fringe benefits to service employees
  comparable to the prevailing benefits.

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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

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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 .

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Developing a Base Pay System

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

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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
  context.

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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
  (60).
• 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.

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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
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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
  KSA).
• (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.

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Job Evaluation Methods

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

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Job Evaluation Methods

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

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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)
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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.

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Scattergram Market Line
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Market Line
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Wages
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JE Points
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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.

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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.

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Tradition Pay Structure
. Red Circle
68,000
58,000
Market Line
Wages
48,000
45,000
35,000
. Green Circle
25,000
JE Points
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Broadbanding
68,000
Max.
Market Line
Wages
Min.
25,000
Job Evaluation Points
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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).

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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
  43,000.

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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
  50,000.

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Cost Effectiveness

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

Output Input
Labor Cost