Northern Arizona University
College of Business Administration

MGT 310--Human Resource Management

Ch 9: Managing Compensation

• Strategic Compensation

  • Goals

    • Enhance motivation [?] and growth

    • Align efforts with strategic objectives

    • Using compensation to gain competitive advantage

  • Value-added compensation--create value for the employee and the organization through the compensation plan and its elements

    • Common goals

      • Reward performance

      • Compete in labor market

      • Salary equity among employees

      • Match future performance with organizational goals

      • Control the budget

      • Attract new employees

      • Reduce turnover

    • Pay-for-performance--tie compensation to effort and performance

      • Options

        • Merit-based pay

        • Bonuses

        • Commission

        • Job/pay banding

        • Team incentives

        • Gainsharing

      • Productivity increases 15-35% when introduce pay-for-performance

      • Problems

        • How measure performance ... often subjective

        • Perceived value of pay increase

        • Cost of living

  • Motivating employees through compensation

    • VIDEO--Verizon

    • Equity theory--perceived fairness (monkey story)

      • Internal

      • External

    • Expectancy theory--attractiveness of rewards and probability of obtaining them

      • Can I do it? Effort --> Performance

      • Will I get it? Trust

      • Do I want it? Value --> Satisfaction

    • Secrecy and distrust

      • Greater freedom in compensation management as do not have to defend decisions

      • May be used to cover up inequities, create dissatisfaction

      • Data available on the internet

  • Bases for compensation

    • Hours worked--hourly or salaried (annual or monthly)

    • Piece work

    • Fair Labor Standards Act (FSLA)--see below

• Wage mix

  • Internal factors

    • Compensation strategy

      • Internally fair

      • Externally competitive

      • Rewards for performance

      • Administrative decisions--overtime, payment periods, incentives

    • Worth of a job--labor market (KSAs)

    • Employee's worth--steps within a range

      • Visible, credible relationship between performance and raises

      • May depend on motivation--see Equity Theory

    • Employer's ability to pay

  • External factors

    • Labor market--supply and demand, unions, government regulations, "living wage"

    • Area wage rates--local, regional (source of employees)

    • Cost of living--Consumer Price Index (CPI) [national, regional, city]; cost-of-living adjustments (COLA)

  • Collective bargaining

    • "Real wages"--increases over CPI

    • Establish rate patterns within the labor market--"union scale" as the prevailing rate

• Job evaluation--worth of the job (not employee)

  • Job ranking--order of importance

    • Paired comparison--see Fig 9.4, p. 407

    • Not very precise; no indication of degree of difference

    • Okay for small number of jobs

  • Job classification--groups into common wage grades

    • Job responsibility, skill, knowledge, other factors

    • Eg, decision-based system

    • Common in government and education

  • Point system

    • Compensable factors--skills, efforts, responsibilities, working conditions

    • Assigned weights

    • Levels of difficulty

    • Point manual

    • Eg, HRM 2, p 410

  • Work valuation--job's value to the organization based on it's goals (fairly new)

    • Priced through salary surveys [?]

  • Management positions--more difficult to evaluate; may not be included in the "system"

    • Hay profile method

      • Factors

        • Knowledge

        • Mental activity

        • Accountability

      • Weights

      • Rank

      • Points

• Compensation structure

  • Wage and salary surveys

    • Relevant labor market

    • External equity

  • Sources of data

    • Bureau of Labor Statistics' National Compensation Survey

    • States

    • Trade groups

    • Large or specialty consulting firms

    • Problems--published data may not be directly comparable

  • Employer surveys--key jobs, 10-15 organizations

    • Key jobs:

      • Jobs important to employees and organization

      • Vary in job requirements

      • Relatively stable content

      • Used in salary surveys

  • The wage curve--comparison of point value of jobs to actual compensation (Fig. 9.5, p. 415)

  • Pay grades--groups of jobs with same pay range (Fig. 9.6, p 416)

  • Rate ranges--pay range for each grade (Fig 9.7, p. 417)

    • Performance is rewarded within the range

    • Red circle or red-line rates--pay above range frozen until range catches up through COLAs

  • Competence-based pay--based on knowledge or skill ... focus on learning

    • Some plans have caps that discourage employees

  • Broadbanding--a few wide salary bands

    • Encourages lateral skill building, job flexibility

    • May help eliminate obsessing on grades

• Government regulations

  • Davis-Bacon Act of 1931--minimum wage, prevailing rates, overtime

  • Walsh-Healy Act of 1936--Public Contracts Act--pay for companies providing government with supplies, equipment or materials

  • Fair Labor Standards Act of 1938 (and amendments)--foreign and interstate commerce ... and others

    • Wage and hour provisions

      • Minimum wage--$5.15/hr (see State chart--OH)

      • Nonexempt employees--must be paid 1 1/2 times regular rate  for hours over 40 per week

        • Some exceptions, eg, government and nonprofit organizations may use "comp time"

        • NOT based on "hourly" pay, but nature of the job (though most are paid hourly)

        • Other "compensable" situations

          • Downtime or call-in time (must be "available")

          • Required classes, meetings, training

          • Travel between job sites

          • Prep and cleanup time

          • Breaks less than 20 minutes

      • Exempt employees--are NOT covered, but may be compensated

        • NOT based on "salaried" pay, though most are paid salary

      • See information from website: http://www.dol.gov/compliance/laws/comp-flsa.htm

      • Equal Pay Act of 1963--parity for women (80% of average for all men; 91% of men same age; more equitable on job-by-job basis)

• Compensation issues

  • Comparable worth--dissimilar jobs of comparable value should be paid the same

    • No consensus on comparability

  • Wage-rate compression--too little perceived difference between jobs

    • Computer, engineering, professional and technical fields

    • Approaches

      • Increase pay at higher positions

      • Emphasize pay-for-performance

      • Limit hiring at higher rates

      • Allow a wide spread between hourly and supervisory, new and senior employees

      • Make adjustments for those hardest hit by pay compression

  • Low salary budgets--cost controls

    • Global competition

    • Use of temporary or part-time employees--lower wages, no benefits

    • Issues: turnover, productivity

  • Living-wage laws--cities--minimum pay above federal poverty level ... or higher

    • Baltimore, Santa Fe, Boston, San Francisco, Chicago

    • Reduces turnover, increases productivity, improves job performance

    • Cost for low-wage employers: hotel/restaurant

      • Some economist argue may reduce overall employment, but no evidence to support that