Human Resources Case Study

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11 Compensation Management

Case 11.1. Compensation Management: How Does Wage Compression and Pay Secrecy Affect Employee Motivation? Marie was the vice-president of human resources for Envelope City, which is a small manufacturing company that makes envelopes for the business market. The company has been in existence for almost 100 years. But there are some problems that can occur with being such an old business. For example, the organizational philosophy on wage compensation most likely was set many years ago when the economic, technological, and social conditions of the country were much different than they are today.

There are seven basic issues that make up the organizational philosophy on com- pensation. First, Envelope City has to make an honest assessment of how much it can afford and is willing to pay its employees. Second, Envelope has to decide what type of compensation (base pay, wage add-ons, incentives, and benefits) it wants to offer. Third, Envelope has to decide if compensation will be based on loyalty/tenure or if employees will receive raises based on the quality of their work performance. Fourth, a decision needs to be made whether compensation will be based upon a competency- based system that involves the individual’s level of knowledge in a particular area or based on the individual skills the person brings to work. Fifth, Envelope needs to decide to pay employees at, above, or below wage levels that workers are receiving at area competitors. Sixth, Envelope has to decide if it is going to allow wage compression to occur between new and long-term employees. Last, Envelope has to decide if pay secrecy (which means employees will not be aware of what each of them is actually paid) will be used within the company.

Interestingly enough, Envelope City found that the last two issues—wage compression and pay secrecy—caused some problems at the company. Wage com- pression, in particular, is a major problem. Wage compression occurs when new employees require higher starting pay than the historical norm, causing a narrow- ing of the pay gap between experienced and new employees. The result is that new employees are paid more than longtime employees who are equally talented and at the same level in the organization, regardless of their many years of experience with the company.

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Chapter 11 • Compensation Management 5 9

Marie experienced a form of wage compression as a teenager when she worked at a fast food restaurant. At the time, back in the 1980s, she had worked hard at a minimum wage of $1.60 per hour. She worked hard for 2 years to earn a dime raise. However, shortly thereafter the minimum wage was increased to $3.20 per hour. Marie lost her dime wage increase for good performance—she made only the mini- mum of $3.20 per hour.

As a young adult in her twenties, Marie went to work for an oil company and gained 5 years of experience in a human resources department. She then switched jobs to work as the vice-president of human resources at Envelope City. She negoti- ated a good contract that doubled her salary. However, her salary leap-frogged the other vice-presidents at Envelope City. If her salary was disclosed to the other vice- presidents, they would be very upset to know she was being paid as much or more than the more experienced VPs who had worked at Envelope for many years.

Marie did not intend to create a situation where wage compression was going to be a problem for her new HR department at Envelope City. She felt that the result of her new employee contract (and other similar new employee contracts) was an unin- tended consequence of Envelope City trying to be a more aggressive employer and to pay new employees a competitive salary compared to the company’s competitors.

Another disadvantage of salary compression occurs when lower-level, nonmanage- ment employees are paid as much, or more, than those in managerial positions.1 This situation can quickly demotivate key managers.

The only good news about wage compression is that employees often keep their own pay a secret. They are often afraid to compare salaries against each other in case they find that they make less salary than their colleagues.

In 2010, nearly half of all workers were contractually required or encouraged to not talk about their pay level with colleagues.2 On April 8, 2014, President Obama signed an executive order prohibiting federal contractors, subcontractors, and feder- ally assisted construction contractors from discriminating against employees or appli- cants who ask other employees about their compensation.

However, pay secrecy might also be one of the reasons that women are paid only 77 cents on the dollar that men make in the same job. Organizations might use pay secrecy to make it difficult for women to compare their salaries with men in similar positions.

Case Question

1. Why does wage compression occur in organizations?

2. How can pay secrecy affect employee motivation?

3. Have you experienced wage compression in your career?

4. Have you experienced pay secrecy?

5. Does President Obama’s executive order impact employees at private companies such as Envelope City?

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Part IV • Compensating6 0

Case 11.2. Trends and Issues in HRM: What Motivates Employees at Work? Expectations or Equity? Edwidge was thrilled to get a new job at Stubbub soon after she graduated from college with a 4-year degree in management. She was quickly thrown into the position of customer sales and service, selling tickets to sporting events and concerts. After a few months, Edwidge was still in customer service and wondered what her future looked like at Stubbub. She was concerned that she was working very hard but wasn’t receiv- ing a salary increase for all her efforts.

This was the first time in Edwidge’s life that she wondered why people go to work. Edwidge liked to compare herself to other employees and to figure out whether she was being treated equally. She noticed that all the new employees she started with were working in customer sales and service.

Edwidge decided to look at a few motivation theories to see if they could help her understand her job expectations. Victor Vroom proposed the expectancy theory in 1964 as it applies to motivation. Expectancy theory states that Edwidge’s motivation is an outcome of how much an individual wants a reward (valence). Edwidge assesses the likelihood that her effort will lead to expected performance (expectancy) and the belief that the performance will lead to reward (instrumentality). Expectancy is Edwidge’s faith that better efforts will result in better performance and rewards.3

Edwidge next looked at equity theory, which was developed by John Stacey Adams in 1963. Adams proposes that Edwidge will be demotivated if she feels her inputs are greater than the outputs she receives. If this happens, Edwidge might respond by being demotivated, reducing her effort, and becoming an unhappy employee.4

Edwidge also researched the concept of comparable worth. Comparable worth is similar pay for similar work. The concept of comparable worth holds that, if Edwidge can compare her job, skills, responsibilities, and efforts with that of another man or woman, and they are similar, then she should be paid a similar wage. This makes the concept of comparable worth much broader than just equal pay for equal work. The key to similar worth, from a legal standpoint, is to determine the value of a job while also taking into account the supply and demand for a particular job.

One factor in the compensation system at Stubbub also caught Edwidge’s attention while doing her research. She detected that pay secrecy was the normal practice at work. She really didn’t know what the other employees were getting paid since this information was heavily guarded. Edwidge thought protecting employee salaries was the correct approach for companies to take, but it did make it hard to compare her pay against other employees.

Case Questions

1. Do you think the expectancy theory is correct in explaining what makes Edwidge happy? Explain why or why not.

2. Do you think the equity theory does a better job than the expectancy theory

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Chapter 11 • Compensation Management 61

Notes

1. Kochanski, Jim, and Yelena Stiles, “Put a Lid on Salary Compression Before It Boils Over,” Society for Human Resource Management, July 19, 2013, http://www.shrm.org/hrdisciplines/ compensation/articles/pages/salary-compression-lid.aspx.

2. Women’s Bureau, “Fact Sheet,” U.S. Department of Labor Women’s Bureau, August 2014, http://www.dol.gov/wb/media/pay_secrecy.pdf.

3. http://www.yourcoach.be/en/employee-motivation-theories/vroom-expectancy-motiva tion-theory.php.

4. https://www.mindtools.com/pages/article/newLDR_96.htm.

of explaining what makes employees happy?

3. If you worked in human resources, how would you use positive reinforcement to support employee development?

4. How does pay secrecy make it hard to accept the equity theory?

5. How would Edwidge apply comparable worth to her work situation?

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