Written Assignment #5: Pay Decision
Rain Ashbell
Chapter9ManagingCompensation.pptxChapter 9 Managing Compen$ation
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Learning Objective
Distinguish a strategic compensation program from one that is non-strategic
Determine how to design pay system
Estimate whether or not a pay system is consistent within the firm as well as comparable to industry standards and government laws
Be able to design a compensation scorecard
Elements of Total Rewards
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Source: Adapted from WorldatWork
(http://www.worldatwork.org).
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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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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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Legal Constraints on Pay Systems
The Fair Labor Standards Act (FLSA) is a federal law which establishes minimum wage, overtime pay eligibility, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments.
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
Each agency’s Human Resource Office determines the overtime eligibility status for all positions (Work Period Designation-WPD) based upon criteria established by the US Department of Labor. For more information, see WAC 357-28-240.
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Fair Labor Standards Act (FLSA)
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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.
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
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 $684/week or $35,568/year (effective on January 1, 2020)
Employees must meet certain tests regarding their job duties
Salaried nonexempt positions sometimes include secretarial, clerical, and salaried blue-collar positions (like shift supervisor)
In the final rule, the Department is:
raising the “standard salary level” from the currently enforced level of $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker);
raising the total annual compensation requirement for “highly compensated employees” from the currently enforced level of $100,000 per year to $107,432 per year;
allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices; and
revising the special salary levels for workers in U.S. territories and the motion picture industry.
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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
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.
Primary duties of managing
Decision discretion/judgment
Requires advanced knowledge and/or
training/education
Pursuit of artistic or creative endeavors
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TGI Fridays’ Workers Win $19.1M In Back Wages Settlement
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Some 28,000 former workers are entitled to get a piece of the payout in the settlement
Alleged violations at TGI Friday’s included skimping on overtime wages, forcing tipped workers to share their earnings with non-tipped workers and not keeping proper wage records.
Special Pay/Overtime Issues
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Compensatory time off
: “Comp” hours are earned by public-sector nonexempt employees in lieu
of payment for extra time worked at the rate of 1.5 times the number of hours over 40 that are
worked in a week. Comp time is prohibited in the private sector and cannot be legally offered
to employees working for private organizations.
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Incentives for nonexempt employees
: Employers must add the amount of direct work-related
incentives to an employee’s base pay and then calculate overtime pay as 1.5 times the higher
(adjusted) rate of pay.
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Training time
: Time spent in training must be counted as time worked by nonexempt employees unless it is voluntary or not directly related to the job.
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Security inspection time
: Some companies may have to count the time that employees spend
going through security inspections after work as compensable.
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After-hours e-mail time
: The increased use of e-mail in organizations raises questions about
whether employees can claim that responding to company e-mails after hours should count
toward overtime. Organizations should consider adopting e-mail curfew policies that discour-
age employees from reading and answering work-related e-mails off the clock.
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Trav el time
: Travel time must be counted as work time if it occurs during normal work hours for
the benefit of the employer. Travel to and from work is not considered compensable travel time
Donning and doffing time
: Some jobs require employees to spend a significant amount of time
donning protective equipment before they report for duty. This can also include clothing that
is used for purposes of protection in a particular job.
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Regulations regarding putting on and
taking off such clothing and gear are complex. Questions regarding specific cases should be
researched with the DOL
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Compensatory Time Off
Incentives For Nonexempt Employees
Training Time
Security Inspection Time
After-hours E-mail Time
Travel Time
Donning And Doffing Time
Lilly Ledbetter Fair Pay Act of 2009
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Extended the statute of limitations for equal pay claims and essentially treats each paycheck as a new act of discrimination.
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Compensation Quartile Strategies
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Market Competitive Compensation
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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
Continuum of Compensation Philosophies
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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
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Equity theory: Individuals judge fairness (equity) in compensation by comparing their inputs and outcomes against the inputs and outcomes of referent others
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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Pay Transparency
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
California’s Salary History Ban
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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.
Job Evaluation
Job ranking system
Point factor system
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Valuing Jobs Using Market Pricing
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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
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.
or example, one organization might allocate a much higher percentage of its compensation to variable pay than its competitors do. If so, then a comparison on base pay would result in the organization being out of step with the market when, in fact, its employees might be more richly rewarded if they perform well
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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.
A pay survey is a collection of data on compensation rates for workers performing similar jobs in other organizations.
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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 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.
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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Four steps:
Choose the compensable factors
Figure out the factor scales
Assign points to degrees
Apply to jobs
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Pay Structures
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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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After job evaluations and pay survey data are gathered, pay structures can be developed.
Pay structures may be created for various types or categories of jobs such as hourly, salaried, technical, sales, and management.
Ways to Establish Pay Grade
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Setting Pay Grades Using Job Evaluation Points
Market line: Graph line that shows the relationship between: job value as determined by pay survey rates and job value as determined by job evaluation points
Using Market Banding to Set Pay Grades
Market banding: grouping jobs into pay grades based on similar market survey amounts
Pay Grades
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Pay grades (job grades): A grouping of individual jobs having approximately the same job worth.
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
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Broadbanding: Practice of using fewer pay grades with much broader ranges than in traditional compensation 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
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Rates Out of Range
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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.
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How to Pay Your Employees Fairly
https://businesstown.com/shows/pay-employees-fairly/how-pay-employees-fairly/
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