HRM Term paper
Total Rewards and Compen$ation
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Learning Objective
Explain the major laws governing employee compensation
Outline strategic compensation decisions
Illustrate the steps in developing a base pay system
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Nature of Total Rewards and Compensation
Total rewards: Monetary and nonmonetary rewards provided by companies to attract, motivate, and retain employees
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Elements of Total Rewards
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Source: Adapted from WorldatWork
(http://www.worldatwork.org).
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Legal Constraints on Pay Systems
Fair Labor Standards Act (FLSA) - Primary federal law affecting compensation
Provisions focus on the areas covering:
Minimum wage
Limits on the use of child labor
Overtime provisions (exempt and nonexempt status)
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For example, Walmart was assessed almost $5 million in back wages and penalties for overtime violations resulting from improperly classifying employees as exempt from overtime, and Staples was fined $42 million to settle similar claims
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Fair Labor Standards Act (FLSA)
Minimum wage (currently $7.25 an hour )
Has to be paid to a broad spectrum of covered employees
Child labor provisions
Sixteen- and 17-year-olds may be employed for unlimited hours in any occupation other than those declared hazardous.
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The current minimum wage of $7.25 an hour was set as part of the Fair Minimum Wage Act of 2007. A lower minimum wage of $2.13 an hour is set for “tipped” employees, such as restaurant servers, but their compensation must equal or exceed the minimum wage when average tips are included.
Power-driven meat and poultry processing machines (meat slicers, meat saws, patty forming machines, meat grinders, and meat choppers), commercial mixers and certain power-driven bakery machines. Employees under 18 years of age are not permitted to operate, feed, set-up, adjust, repair, or clean any of these machines or their disassembled parts
Balers and Compactors. Minors under 18 years of age may not load, operate, or unload balers or compactors. Sixteen- and 17-year-olds may load, but not operate or unload, certain scrap paper balers and paper box compactors under certain specific circumstances. (See Fact Sheet #57, in this series, Hazardous Occupations Order No. 12. Hazardous Occupations Order No. 12, Rules for Employing Youth and the Loading, Operating, and Loading of Power-Driven Balers and Compactors under the Fair Labor Standards Act (FLSA)).
Motor Vehicles. Generally, no employee under 18 years of age may drive on the job or serve as an outside helper on a motor vehicle on a public road, but 17-year-olds who meet certain specific requirements may drive automobiles and trucks that do not exceed 6,000 pounds gross vehicle weight for limited amounts of time as part of their job. Such minors are, however, prohibited from making time sensitive deliveries (such as pizza deliveries or other trips where time is of the essence) and from driving at night. (See See Fact Sheet #34: Child Labor Provision and the Driving of Automobiles and Trucks under the Fair Labor Standard Act.)
Children under 14 years of age may not be employed in non-agricultural occupations covered by the FLSA, including food service establishments. Permissible employment for such children is limited to work that is exempt from the FLSA (such as delivering newspapers to the consumer and acting). Children may also perform work not covered by the FLSA such as completing minor chores around private homes or casual baby-sitting.
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Fair Labor Standards Act-Overtime Provisions
Overtime: 1.5 times the regular pay rate for all hours worked over 40 in a week, except for exempt employees.
Exempt and nonexempt statuses
Exempt employees: Employees who are not paid overtime
Nonexempt employees: Employees who must be paid overtime
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Employers are required to pay overtime for hourly jobs to comply with the FLSA. Employees in positions classified as salaried nonexempt are also entitled to overtime pay. Salaried nonexempt positions sometimes include secretarial, clerical, and salaried blue-collar positions (like shift supervisor)
A common mistake employers make is not paying overtime to any salaried employees, even though some may qualify for nonexempt status. Exempt status is not necessarily granted to all salaried jobs; each job must be evaluated on a case-by-case basis.
Companies should also keep job descriptions current and use performance appraisals to help justify how jobs have been classified.
There are other exceptions to the overtime requirements, such as farm workers, but these exceptions are rare.
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Exempt and Nonexempt Statuses
Under FLSA regulations, an employee is exempt from the right to overtime pay if s/he meets the following 3 requirements:
Paid on a salary basis regardless of the number of hours worked;
Receives a salary of at lease $455 /week or $23,660/year; and
Employees must meet certain tests regarding their job duties
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The final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary threshold, provided these payments are made on a quarterly or more-frequent basis.
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Exempt and Nonexempt Statuses (cont.)
Classifies exempt jobs into five categories:
• Executive
• Administrative
• Professional (learned or creative)
• Computer employees
• Outside sales
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Tests for Outside Sales Employees
Whose primary duty is making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
Who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.
Tests for Administrative Employees
Whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
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Motivation Theories- Expectancy Theory
Expectancy theory: Employee’s motivation is based on the probability that his or her efforts will lead to an expected level of performance that is linked to a valued reward(Vroom,1964).
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Motivation Theories-Equity Theory
Equity theory: Individuals judge fairness (equity) in compensation by comparing their inputs and outcomes against the inputs and outcomes of referent others
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Equity Theory
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Source: Adapted from John Stacey Adams, “Inequity in Social Exchange,” Advances in Experimental Social Psychology 62 (1965), 335–343.
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Continuum of Compensation Philosophies
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Compensation Quartile Strategies
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Market Competitive Compensation
Lag-the-Market Strategy
Used when the employer is experiencing financial difficulties
Used when an abundance of workers is available
Lead-the-Market Strategy
Aggressive approach that enables a company to be more selective when hiring
Match-the-Market Strategy
Attempts to balance employer cost pressures and the need to attract and retain employees
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Compensation Responsibilities
HR specialists and managers administer the organizational compensation programs
HR develops and administers the compensation system
HR ensures pay practices comply with all legal requirements
Line managers evaluate employee performance and participate in pay decisions
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How to Find Out the Value of A Particular Job
The two general approaches for valuing jobs are job evaluation and market pricing.
Job evaluation looks at pay levels within the company, and market pricing looks outside the company.
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Job Evaluation and Market Pricing
Job Evaluation
Job ranking system
Point factor system
Job classification system
Market Pricing
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Job Evaluation Systems-Job Ranking System
The ranking method is a simple system that places jobs in order, from highest to lowest, by their value to the organization.
Simple ranking
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| Job | Receptionist | Project Manager | Account Manager | Sales Director | Total |
| Receptionist | |||||
| Project Manager | |||||
| Account Manager | |||||
| Sales Director |
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Job Evaluation Systems-Point Factor System
Looks at compensable factors (e.g., skill, responsibilities, social interaction, and working conditions) in a group of similar jobs and assigns points to each factor.
Hay profile method uses three factors (know-how, problem-solving ability and accountability) and measures the degree that these three factors are required for each position.
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Four steps:
Choose the compensable factors
Figure out the factor scales
Assign points to degrees
Apply to jobs
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Job Evaluation Systems-Point Factor System
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From https://www.shrm.org/resourcesandtools/tools-and-samples/how-to-guides/pages/howtoestablishsalaryranges.aspx
Job Evaluation Systems-Job Classification System
Descriptions of job classes are written and then are put into the grade that best matches the class description.
Each job is put into a grade according to the class it best matches.
Classification System from Johns Hopkins University
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Tied to each job are the basic function, characteristics, and typical work of that job classification, along with pay range data.
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Valuing Jobs Using Market Pricing
Market pricing uses market pay data to identify the relative value of jobs based on what other employers pay for similar jobs.
Internet-based pay information is prevalent, such as https://www.bls.gov/bls/blswage.htm
Advantages
Disadvantages
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Advantages of Market Pricing: allows an employer to communicate to employees that the compensation system is truly “market linked”
Disadvantages of Market Pricing: pay survey data are limited or may not be gathered in methodologically sound ways.
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Pay Surveys
Pay survey: Collection of data on compensation rates for workers performing similar jobs in other organizations
Benchmark jobs: A benchmark job is one that has a scope of work and responsibilities common to other organizations or industries.
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A pay survey is a collection of data on compensation rates for workers performing similar jobs in other organizations.
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Discussion
Recommend a job evaluation system for a small family-owned business with six job titles and thirty incumbents. Recommend a system for an oil refinery with 800 employees in managerial, technical, and blue-collar jobs.
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Pay Structures
Market line: Graph line that shows the relationship between:
Job value as determined by pay survey rates
Job value as determined by job evaluation points
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A startup or small organization may have only three or four pay grades. The federal government, by contrast, uses 15 pay grades based on the level of difficulty, responsibility and qualifications required.
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Pay Grades
Pay grades (job grades): A grouping of individual jobs having approximately the same job worth.
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https://hr.harvard.edu/grade-level-listings
Using the market line as a starting point, the employer can determine minimum and maximum pay levels for each pay grade by making the market line the midpoint line of the new pay structure.
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Pay Range
For each pay grade, an organization will need to establish minimum, midpoint and maximum pay ranges.
Salary ranges allow for differences among positions within the same grade as well increasing levels of responsibility and performance within the same job.
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https://hr.harvard.edu/salary-ranges
Broadbanding
Broadbanding: Practice of using fewer pay grades with much broader ranges than in traditional compensation systems
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Benefits
Encourages horizontal movement of employees
Is consistent with trend towards flatter organizations
Creates a more flexible organization
Encourages competency development
Emphasizes career development
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Rates Out of Range
Red-Circled Rates
Rates above the maximum rate
Green-Circled Rates
Rates below the minimum rate
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Pay Compression and Salary Inversion
Pay compression
Wages for new hires are increasing faster than the wages of people already on the payroll
Salary inversion
Occurs when the pay given to new hires is higher than the compensation provided to more senior employees.
Pay Transparency Nondiscrimination Provision
the regulations prohibit federal contractors and subcontractors from discharging or otherwise discriminating against their employees and job applicants for discussing, disclosing, or inquiring about compensation
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Negotiating Salary
This video provides tips on negotiating salary from the perspective of an employee.
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