HRM Case

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Chapter 10: Compensation Management

Compensation

Total of an employee’s pay and benefits

Costs are frequently 65% to 70% of total production costs in today’s firms.

Affects process of attracting and retaining employees.

Firms should design system to meet various needs of employees.

Poor compensation management practices produce negative effects on performance.

Compensation System

Includes anything that employees may value and desire and that employers can offer in exchange.

Compensation Components

Rewards that can be classified as monetary and in-kind payments

Non-Compensation Components

Rewards other than monetary and in-kind payments (e.g., company cafeterias and gyms)

Motivation and Compensation Planning

Goal of Compensation: To motivate employees to perform what the firm needs

Expectancy Theory: Developed by Victor Vroom at Yale, who postulated that employees believe rewards for accomplishing a task are worth the effort

Clearly define goals and how to achieve them.

Tie performance to rewards.

Be sure rewards have value to employees.

Make sure management does what it says it will.

Exhibit 10-1: Expectancy Theory and Compensation

Motivation and Compensation Planning

Equity Theory – J. Stacy Adams developed that employees are motivated when the ratio of their perceived outcomes to inputs is at least roughly equal to other referent individuals.

Employees who perceive being under-rewarded decrease inputs and increase outcomes.

Employees who perceive being over-rewarded are not usually bothered.

Employees who perceive being equitably rewarded will continue to perform if content that their incomes and outputs are in balance.

Types of Compensation

Base Pay: Wages paid on an hourly basis; salary based on a time period

Wage and Salary Add-Ons: Includes overtime pay, shift differential, premium pay for working weekends and holidays, etc.

Incentive Pay (“Variable Pay”): Otherwise known as “pay for performance”; commonly includes piecework in production and commission sales

Benefits: Indirect compensation that provides something of value to employee

Direct Versus Indirect Compensation

Direct Compensation

Base pay, salary add-ons, and incentive pay—all of which appear in a pay check

Indirect Compensation

Provides something of value to employee (i.e., benefits), such as sickness and accident protection, retirement pay contributions, cafeteria services, company physicals

Organizational Philosophy  Decisions

Ability to Pay

What is your company’s pay policy?

Are employees viewed as assets or investments?

What types of compensation are offered?

Pay for performance or for longevity (seniority)?

Skill-based or competency-based?

At, above, or below the Market–Efficiency Wage Theory ?

Wage Compression

Pay Secrecy/ Rights to Privacy

Legal and Fairness Issues in Compensation

Firms must offer equal pay for equal work unless there is a difference in productivity, seniority, merit, or other factors “other than sex.”

Exhibit 10-2: Major EEO Laws and Legal Concepts

Fair Labor Standards Act (FLSA) of 1938 (Amended)

Covers minimum wage, overtime issues, and child labor rules for most U.S.-based businesses.

Minimum wage is the lowest hourly rate of pay generally permissible by federal law.

Employees with specific duties are exempt from minimum wage, overtime, and child labor rules.

Overtime

Federally mandated, higher-than-minimum wage, required for nonexempt employees if they work more than 40 hours/week

Currently set by FLSA as “time and a half,” or 150% of employee’s normal wages

See Exhibit 10-3: Duties Tests for General Employee Exemptions (p. 256)

Executive Exemption

Professional Exemption (Learned or Creative)

Administrative Exemption

Outside Sales Exemption

Computer Employee Exemption

FLSA and Child Labor

14- and 15-Year-Olds: may work outside school hours no more than “3 hours on a school day, 18 hours in a school week, 8 hours on a non-school day, and 40 hours in a non-school week”; permissible work hours also restricted

16- and 17-Year-Olds: cannot be employed in hazardous jobs, but their work hours are unrestricted

Individuals 18 or Older: can be hired for all work

Employee Misclassification Under the FLSA

Misclassification of employees as exempt from minimum wage or overtime is one of the most common areas where companies get into serious trouble.

Just paying an employee a “salary” and then working that person for unlimited hours is obviously illegal under the general exemption FLSA rules noted above.

Pay Equity and Comparable Worth

Comparable Worth

When jobs are distinctly different but entail similar levels of ability, responsibility, skills, and working conditions, they are of equal value and should have same pay scale.

The concept is broader than “equal pay for equal work” because the work need only be similar, not the same.

Other Legal Issues

Mandatory employee pension and benefits legislation also includes the following:

Social Security

Workers’ compensation

Unemployment insurance

Family and Medical Leave Act (FMLA)

Patient Protection and Affordable Care Act (ACA)

Employee Retirement Income Security Act (ERISA)

Health Insurance Portability and Accountability Act (HIPPA)

Job Evaluation

Determining worth of each position relative to other positions.

Job Ranking – Subjectively ordering jobs from lowest to highest or vice versa in terms of value to company

Point-Factor – Objectively breaking down job into “compensable factors” and applying points to factors based on job’s level of difficulty

Factor Comparison – Analyzing and ranking “compensable factors” of benchmark jobs in pay surveys and ranking firm’s jobs against benchmark

Exhibit 10-4: Creation of a Pay Structure and Individual Pay Rates

Job Structure and Pay Levels

Pay structure creates a hierarchy of jobs and their rates of pay within the organization. It is made up of job structures and pay levels.

Job structure is stacking up jobs in organization from lowest to highest levels.

Pay levels provide minimum to maximum pay for a group or subset of jobs in organization.

Creation of Pay Levels

A single pay level, or “pay grade,” applies to many different jobs.

Each pay level has a maximum and minimum pay rate.

Pay rates are determined by comparisons with Labor Market Competition (minimum pay level), Product Market Competition (top pay level), supply and demand, and insure equity.

Exhibit 10-5: Supply and Demand Curve

Exhibit 10-6: Product Market Competition Limits

Exhibit 10-7: Pay Levels

Exhibit 10-8: Pay Structure

Delayering and Broadbanding

Delayering: Changing company structure to rid vertical hierarchy (reporting levels); process of “flattening” hierarchical levels found in command and control organizational structures

Broadbanding: Combining multiple pay levels into one

Exhibit 10-9: Broadbanding of Multiple Pay Levels

Trends and Issues in HRM

A Shift From Base Pay to Variable Pay

One of the biggest reasons is to lower the risk to the company when markets fail or economies go into recession.

The Technology of Compensation

Since compensation is typically one of the largest costs in most organizations, management needs to be mindful of what it gets for its money.