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MODULE5-CHAPTER9.docx9.1
What Is Compensation?
Compensation consists of three main components: direct compensation encompasses employee wages and salaries, incentives, bonuses, and commissions; indirect compensation comprises the many benefits supplied by employers; and nonfinancial compensation includes employee recognition programs, rewarding jobs, organizational support, work environment, and flexible work hours to accommodate personal needs (see Figure 9.1 ).
Figure 9.1Compensation Components
In this chapter, we will help you learn how to strategically align the three aspects of compensation with an organization’s objectives, design a pay mix based on the compensation strategy, implement the mix using a series of pay tools, and assess the compensation system using a scorecard. We will also discuss how government regulation might influence these decisions about compensation (see Figure 9.2 for details). In Chapter 10 , we will review financial incentive plans for employees. Employee benefits that are part of the total compensation package are discussed in Chapter 11 .
9.2Strategic Compensation
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What is strategic compensation? Simply stated, it is the compensation of employees in ways that enhance motivation and growth, while at the same time aligning their efforts with the objectives of the organization. Strategic compensation has redefined the role and perceived contribution of compensation. No longer merely a “cost of doing business,” when used strategically, compensation becomes a tool to secure a competitive advantage.
Strategic compensation goes beyond determining the appropriate market rates to pay employees, although market rates are one element of compensation planning. Strategic compensation should also purposefully link compensation to the organization’s mission and general business objectives. For example, while a company’s decision to increase base pay for all its employees is a strategic move to be more competitive with market rates, companies should also recognize that base pay is not everything. For example, one product development manager stated, “I could be making much more than I’m getting at Google, but I chose Google because of the flexibility to grow and work on exciting new products … plus, where else can you get a chef making you breakfast, lunch, and dinner anytime you want?” In this regard, Google has not only aligned its compensation strategy with the external market, it has also aligned it with its desire to be a flexible and innovative company that capitalizes on the creativity of its people. Commenting on the importance of strategic compensation to organizational success, compensation specialists Gerald Ledford and Elizabeth Hawk note, “Companies throughout the economy have begun to rethink their compensation systems in search for competitive advantage.”
Additionally, strategic compensation serves to mesh the monetary payments made to employees with other HR initiatives, such as recruitment, selection, training, retention, and performance appraisal. For example, starting pay can make a difference in whether or not someone will apply for the job. A compensation specialist speaking to one of the authors noted, “The linkage of pay levels to labor markets is a strategic policy issue because it serves to attract or retain valued employees while affecting the organization’s relative payroll budget.” For example, colleges such as University of Arkansas, Fayetteville; Bridgewater State University, Monroe College; and Brown Mackie College know that they cannot attract or retain qualified professors unless their pay strategy is linked to competitive market rates.
Many fast-food restaurants, such as Burger King, Taco Bell, and Blimpie’s—traditionally low-wage employers—have needed to raise their starting wages to attract a sufficient number of job applicants to meet staffing requirements. If pay rates are high, it creates a large applicant pool from which organizations raise their selection standards and hire better-qualified employees. This in turn can reduce employer training costs. When employees perform at exceptional levels, their performance appraisals may justify an increased pay rate. For these reasons and others, an organization should develop a formal program to manage employee compensation. Step one of this program is to develop a compensation strategy that is linked to the organization’s objectives.
9.2aLinking Compensation to Organizational Objectives
In a radical reconsidering of compensation strategy, Zappos has moved toward paying employees based on their skills rather than their position. This move came from an ongoing transition from a traditional management structure to a holacracy, a system where work is organized around roles rather than titles and employees report to teams instead of individual supervisors. When this transition was completed, Zappos began using a system of badges to represent roles rather than job titles to determine compensation. Employees are free to earn badges as they wish, with a chance to earn more and plot a unique path in the company. The idea behind the badges is similar to leveling up in a video game—Zappos CEO Tony Hsieh is hoping the badge-based compensation system will encourage employees to focus on building skills rather than climbing a corporate latter and to explore different aspects of the company, rather than adhering to a strict hierarchy of roles. This idea is in line with some of Zappos basic cultural values, such as pursuing growth and learning; being adventurous, creative, and open-minded; and embracing and driving change.”
The new compensation landscape requires that managers be more strategic about their compensation decisions. Managers must first and foremost understand the strategic objectives of the organization in relation to the industry in which it operates. Next, they need to move away from paying for a specific position or job title to rewarding employees on the basis of their individual competencies or work contributions to the organizational objectives, similar to the Zappos emerging pay strategy. In fact, a sample of Fortune 500 companies headquartered in America, Europe, and Asia showed that pay for performance that is linked to organizational objectives is a primary component of most compensation systems.
The #Fightfor15 movement on Twitter and in the streets, many Americans advocated a minimum wage increase of $15 per hour.
FREDERIC J. BROWN/Getty Images
As part of linking compensation systems to company objectives, managers need to consider what kinds of compensation create value. Managers are asking questions such as: “How will this pay program help to retain and motivate valued employees?” and “Does the benefit or pay practice affect the administrative cost?” If a component of the compensation package—whether benefits, base pay, incentives, or other—doesn’t advance either the employee or the organization, it should be removed from the compensation program. It is not uncommon for organizations to establish very specific goals for linking their organizational objectives to their compensation program.
Formalized compensation goals serve as guidelines for managers to ensure that wage and benefit policies achieve their intended purpose.
For instance, tech companies such as Google, Oracle, Twitter, LinkedIn, and MoneyDesktop (MX) have adopted what is known as an Objectives and Key Results (OKR) system to tie compensation to objectives. The OKR system originally came from Intel and represents a simple way of linking compensation to performance. Here’s how it works:
1. Set up an objective for your team and the individuals within the team. Your objective should be definitive and measurable. For instance, don’t say, “I want my website to be faster.” Say, “I want my website to be 30 percent more efficient.”
2. Set up a number of key results that are quantifiable that your team and each member of the team must complete by a specific time period.
To be successful at the OKR system, you need to have an annual checkup with quarterly check-ins. The check-ins should be at the team level, at the manager level, and at the individual team member level. They all work together to keep the company on track toward its objectives. At Google, all OKRs are public from Larry Page on down. Posting the OKRs helps people know what everyone is working on.
While not all companies tie OKRs to compensation, if you do there are a few things you must remember:
1. Clarify expectations. If you intend to reward contributors who go above and beyond to complete their objectives, you must first identify the criteria for outstanding performance versus just completing your OKRs on time.
2. Balance aspirational with operational. Some OKRs can be big stretch goals while others can be simply operational. Once you’ve determined how many of the goals were stretch from stuff that needed to be done, you can determine a ratio and increase people’s performance based on work that they did that was a stretch.
3. Consider additional performance factors. Hitting your objectives demonstrates hard work, but they do not cover everything that should be rewarded. For example, you may want to reward people for developing their skills, attitude and professionalism, and the difficulty of the OKRs.
4. Drive collaboration, not competition. One of the biggest dangers that comes from rewarding people based on reaching their OKRs is that they may focus too much on their individual OKRs at the expense of those of a team or group. So you might want to provide bonuses or pay raises based on a combination of individual-level and group-level OKRs.
9.2bThe Pay-for-Performance Standard
In a study from the Institute for Corporate Productivity, researchers found that nearly half of the high-performing organizations surveyed recognized their long-term competitive advantage came from motivating and rewarding their top talent.
The pay-for-performance standard in these companies serves to raise productivity and lower labor costs in today’s competitive economic environment, which will be discussed in more depth in Chapter 10.
The term “pay-for-performance” refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and pay banding, team/group incentives, and various gainsharing programs. (Gainsharing plans are discussed in Chapter 10.) Each of these compensation systems seeks to differentiate between the pay of average performers and that of outstanding performers. The Bridges to Excellence program seeks to increase performance of health care professionals by switching to a pay-for-performance system. Rather than using a traditional salary-based compensation strategy, doctors are rewarded based on quality of care rather than quantity, thus increasing motivation and performance. Now, more than half of health care organizations utilize some form of pay-for-performance, and studies have even shown that doctors on pay-for-performance plans have improved performance, better patient health, and reduced cost of care.
Motivating Employees through Compensation
Pay constitutes a quantitative measure of an employee’s relative worth. For most employees, pay has a direct bearing not only on perceived fairness, but also on the status and recognition they may be able to achieve both on and off the job. Because pay represents a reward received in exchange for an employee’s contributions, it is essential, according to the equity theory, that the pay be equitable in terms of those contributions. It is essential also that an employee’s pay be equitable in terms of what other employees are receiving for their contributions.
Pay Equity
Simply defined, equity embraces the concept of fairness. Equity theory, also referred to as distributive fairness, is a motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
For employees, pay equity is achieved when the compensation received is equal to the value of the work performed. There are three kinds of pay equity:
1. External equity—people in similar jobs compare themselves to what others are making in different organizations.
2. Internal equity—people compare themselves to peers in different jobs in the same organization.
3. Individual equity—people compare themselves to others in their organization with the same job.
Research clearly demonstrates that employees’ perceptions of pay equity, or inequity, can have dramatic effects on their motivation for both work behavior and productivity. Managers must, therefore, develop strategic pay practices that are both internally and externally equitable.
Expectancy Theory and Pay
Another tool to help determine your compensation strategy is expectancy theory. The expectancy theory of motivation predicts that one’s level of motivation depends on the attractiveness of the rewards sought and the probability of obtaining those rewards. Expectancy theory holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that is valued.
To motivate this effort, the value of any monetary reward should be attractive. Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.
Figure 9.3 shows the relationship between pay-for-performance and the expectancy theory of motivation. The model predicts, first, that high effort will lead to high performance (expectancy). For example, if an employee believes she has the skills and abilities to perform her job and if she works hard (effort), then her performance will improve or be high. Second, high performance should result in rewards that are appreciated by the employee (valued). Elements of the compensation package are said to have instrumentality when an employee’s high performance leads to monetary rewards that are valued. As previously stated, pay for performance leads to a feeling of pay satisfaction, and this feeling should reinforce one’s high level of effort.
Figure 9.3Pay-for-Performance and Expectancy Theory
Thus, how employees view compensation can be an important factor in determining the motivational value of compensation. Furthermore, the effective communication of pay information together with an organizational environment that elicits employee trust in management can contribute to employees’ having more accurate perceptions of their pay. The perceptions employees develop concerning their pay are influenced by the accuracy of their knowledge and understanding of the compensation program’s strategic objectives.
Pay Secrecy
Misperceptions by employees concerning the equity of their pay and its relationship to performance can be created by secrecy about the pay that others receive. Secrecy can generate distrust in the compensation system, reduce employee motivation, and inhibit organizational effectiveness. Yet pay secrecy seems to be an accepted practice in many organizations. A U.S. survey found that about half of all workers, women and men, say they work in a place where discussions of pay are “either discouraged or prohibited and/or could lead to punishment.”
There are a few reasons why management refuses to divulge salary information. Managers may want to reduce conflict between people about their pay, especially if an employee makes less than someone they consider an inferior. Secrecy can also cover up inequalities in internal pay structure, such as in the epic employment discrimination case Ledbetter v. Goodyear Tire & Rubber Co. In the case, the plaintiff may have found out that she was being paid less than men doing the same job and remedied the problem much earlier if she had been allowed to ask about other workers’ pay.
9.2cThe Bases for Compensation
Work performed in most private, public, and not-for-profit organizations has traditionally been compensated based on hourly work . These employees are classified as hourly employees, or wage earners, and are normally paid only for the time they work. Piecework compensation, in which employees are paid according to the number of units they produce, is another kind of compensation, though it is far less prevalent than hourly work as a basis for compensating employees.
Those whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods are classified as salaried employees. Salaried employees, unlike hourly employees, are generally paid the same for each pay period, even though they occasionally may work more hours or fewer than the regular number of hours in a period. They also usually receive certain benefits not provided to hourly employees.
Another basis for compensation centers on whether employees are classified as nonexempt or exempt under the Fair Labor Standards Act (FLSA).
Nonexempt employees
are covered by the act and must be paid at a rate of one and a half times their regular pay rate for time worked in excess of 40 hours in their workweek. Most hourly workers employed in interstate commerce are considered nonexempt workers under the FLSA. Employees not covered by the overtime provision of the FLSA are classified as
exempt employees
. The U.S. Department of Labor (DOL) considers employees as exempt when their primary duty includes “the exercise of discretion and independent judgment with respect to matters of significance.”
This includes managers, supervisors, and a large number of white-collar employees. There are other classifications for exemption, so employers should check the exact terms and conditions of exemption before classifying employees as either exempt or nonexempt. (see “Exemption from Overtime Provisions” in Figure 9.4).
Figure 9.4
Six Excluded Employee Groups
|
Category |
Job Duties Required |
|
Executive |
Primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight. |
|
Administrative |
Primary duty must be 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 includes the exercise of discretion and independent judgment with respect to matters of significance. |
|
Learned |
Primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; the advanced knowledge must be in a field of science or learning; and the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. |
|
Creative |
Primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. |
|
Computer |
Must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field. The primary duty must consist of 1. the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; 2. the design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; 3. the design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or 4. a combination of the aforementioned duties, the performance of which requires the same level of skills. |
|
Outside Sales |
Primary duty must be making sales (as defined in the FLSA), 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 must be customarily and regularly engaged away from the employer’s place or places of business. |
|
Highly Compensated |
The regulations contain a special rule for “highly-compensated” workers who are paid total annual compensation of $100,000 or more. A highly-compensated employee is deemed exempt under Section 13(a)(1) if the employee earns total annual compensation of $100,000 or more, which includes at least $455 per week paid on a salary basis; the employee’s primary duty includes performing office or non-manual work; and the employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee. |
|
Other |
Teachers are exempt if their primary duty is teaching, tutoring, instructing, or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. Practice of Law or Medicine: An employee holding a valid license or certificate permitting the practice of law or medicine is exempt if the employee is actually engaged in such a practice. An employee who holds the requisite academic degree for the general practice of medicine is also exempt if he or she is engaged in an internship or resident program for the profession. |
Source: Adapted from Vicki M. Lambert, “The top three FLSA violations and how to avoid them,” ADP, 2008.
To help in these types of decisions, larger companies will often use compensation consultants. A study showed that about 86 percent of large U.S. companies use a compensation consultant to help them with their compensation strategy and pay mix.
9.3Compensation Design—The Pay Mix
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An employee may ask, “How is my pay determined?” In practice, a combination of internal and external factors can directly or indirectly influence the rates at which employees are paid. The interaction of these factors constitutes the pay mix, as shown in Figure 9.5. For example, the area pay rate for administrative assistants might be $11.50 per hour. However, one employer may elect to pay its administrative assistants $14.25 per hour because of their excellent performance. The influence of government legislation on the pay mix will be discussed later in the chapter.
9.3aInternal Factors
The internal factors that influence pay rates are the organization’s compensation strategy, the worth of a job, an employee’s relative worth in meeting job requirements, and an employer’s ability to pay.
Compensation Strategy
Highlights in HRM 1 illustrates the compensation strategies of two organizations, Tri Star Performance and Preventive Health Care. The strategy of Preventive Health Care is to be an industry pay leader, while Tri Star Performance seeks to be pay competitive. Both employers strive to promote a compensation policy that is internally fair.
Highlights in HRM 1
Comparison of Compensation Strategies
Compensation strategies and objectives can differ widely across large and small employers as well as across employers in the private and public sectors. Here are the compensation strategies at Tri Star Performance and Preventive Health Care.
|
Tri Star Performance |
Preventive Health Care |
|
· Promote pay-for-performance practices |
· Be a pay leader in the health care industry |
|
· Pay market-competitive compensation |
· Promote open and understandable pay practices |
|
· Achieve internal and external pay equity |
· Ensure fair employee treatment |
|
· Achieve simplicity in compensation programs |
· Offer benefits promoting individual employee needs |
|
· Strive for employee commitment and a collaborative work environment |
· Offer compensation rewarding employee creativity and achievements |
|
· Promote gender fairness in pay and benefits |
· Offer compensation to foster the strategic mission of the organization |
|
· Comply with all governmental compensation regulations |
· Obtain employee input when developing compensation practices |
|
· Minimize increased fixed costs |
· Emphasize performance through variable pay and stock options |
Tri Star Performance and Preventive Health Care, like other employers, will establish numerous compensation objectives that affect the pay employees receive. At a minimum, both large and small employers should set pay policies reflecting
1. the internal wage relationship among jobs and skill levels,
2. the external competition, or an employer’s pay position relative to what competitors are paying,
3. a policy of rewarding employee performance, and
4. administrative decisions concerning elements of the pay system such as overtime premiums, payment periods, and short- or long-term incentives.
Worth of a Job
Organizations without a formal compensation program generally base the worth of jobs on the subjective opinions of people familiar with the jobs. In such instances, pay rates may be influenced heavily by the labor market or, in the case of unionized employers, by collective bargaining. Organizations with formal compensation programs, however, are more likely to rely on a system of job evaluation to aid in rate determination. (This topic will be covered later in the chapter under pay structure.) Job evaluation can assist the organization in maintaining some degree of control over its pay structure, even when rates are subjected to collective bargaining. The use of job evaluation is widespread in both the public and the private sectors. The cities of Chicago and Miami use job evaluation in establishing pay structures, as do Google, Goldman Sachs, and GM. The jobs covered most frequently by job evaluation are clerical, technical, and various blue-collar groups, as well as managerial and top executive positions.
Employee’s Relative Worth
In both hourly and salary jobs, employee performance can be recognized and rewarded through promotion and with various incentive systems. (The incentive systems used most often will be discussed in Chapter 10.) Superior performance can also be rewarded by granting merit raises on the basis of steps within a rate range established for a job class. If merit raises are to have their intended value, however, they must be determined by an effective performance appraisal system that differentiates between employees who deserve the raises and those who do not. This system, moreover, must provide a visible and credible relationship between performance and any raises received. Unfortunately, too many so-called merit systems provide for raises to be granted automatically. As a result, employees tend to be rewarded more for merely being present than for being productive on the job.
Several factors should be taken into consideration when determining how much a worker like this one should be paid.
Frances Roberts/Alamy
Employer’s Ability to Pay
Furthermore, an organization’s ability to pay is determined in part by the productivity of its employees. This productivity is a result not only of employee performance, but of the amount of capital the organization has invested in labor-saving equipment. Generally, increases in capital investment reduce the number of employees required to perform the work and increase an employer’s ability to provide higher pay for employees.
9.3bExternal Factors
The major external factors that influence pay rates include labor market conditions, area pay rates, cost of living, collective bargaining if the employer is unionized, and legal requirements. The legal requirements of compensation will be discussed later in the chapter.
Labor Market Conditions
The labor market reflects the forces of supply and demand for qualified labor within an area. These forces help influence the pay rates required to recruit or retain competent employees. It must be recognized, however, that counterforces can reduce the full impact of supply and demand on the labor market. The economic power of unions, for example, may prevent employers from lowering pay rates even when unemployment is high among union members. Government regulations also may prevent an employer from paying at a market rate less than an established minimum.
Area Pay Rates
A formal pay structure should provide rates that are in line with those being paid by other employers for comparable jobs within the area. Data pertaining to area pay rates may be obtained from local wage surveys. Wage survey data may be obtained from a variety of sources, including the American Management Association, Administrative Management Society, U.S. Department of Labor, and Federal Reserve Banks. Smaller employers such as the Woodsmith Corporation and Golden State Container use government surveys to establish rates of pay for new and senior employees. Many organizations, such as the City of Atlanta, Delta Airlines, and Progress Energy, conduct their own surveys. Others engage in a cooperative exchange of wage information or rely on various professional associations for these data. A high percentage of wage data surveys are inexpensive—less than $100—and are therefore available to all employers, regardless of size.
Wage surveys (discussed fully later in the chapter) serve the important function of providing external pay equity between the surveying organization and other organizations competing for labor in the surrounding labor market. Importantly, data from area wage surveys can be used to prevent the rates for jobs from drifting too far above or below those of other employers in the region.
Small Business Application
Compensation for Small Businesses
Big business can woo job candidates by offering comprehensive compensation packages that include stock options, consistent pay raises, security, and sometimes even a Starbucks in the lobby. While small businesses cannot offer these things, they can offer more customized pay packages to deal with employees’ individual needs. For example, not having a complex and bureaucratic compensation system means a small company can more readily adjust its employees’ wages to match those of the external market. If the small business is private, there are many opportunities to attract and retain top talent by padding lower salaries with stock in the company. By offering shares of a private company as a form of compensation, small, private companies can offer the possibility for its employees to make larger sums of money in the future. Offering shares or options to buy shares as a form of compensation can be extremely attractive, as employees can make a lot of money when their young company finally goes public and is sold on the stock market. For example, when Snap, owner of Snapchat, became a public company in 2017, hundreds of the employees who were with the company early on made enough to become instant millionaires.
Following is a list of specific things small businesses can do to compete with the compensation packages of big business:
1. Tailor the pay mix to individual employee needs and wants. For example, one employee may value greater bonus opportunities than base pay, while another may want the money the company would spend on health insurance to be paid in salary.
2. Provide stock options in high-growth environments. Potential employees will find the opportunity to be part of a high-growth company as an exciting and potentially lucrative risk.
3. Provide faster promotions. Express how the smallness of your company allows people to move into new and exciting positions quickly, without the bureaucratic red tape found in big business.
4. Provide frequent contact to top management. Not being able to interact with and receive mentoring from top management is a major concern for young talent. Smaller companies are able to offer more of these types of growth opportunities than larger competitors.
5. Provide a greater sense of personal involvement. One of the advantages of a small company is that they can treat their employees like family. In an age of depersonalized billion-dollar companies, a sense of belongingness, where you know the company cares about you, can go a long way in compensating for lower pay.
Cost of Living
Because of inflation, compensation rates have to be adjusted upward periodically to help employees maintain their purchasing power. Employers make these changes with the help of the consumer price index (CPI) . The CPI is a measure of the average change in prices over time in a fixed “market basket” of goods and services. The Bureau of Labor Statistics collects price information on a monthly basis and calculates the CPI for the nation as a whole and various U.S. city averages.
CPI figures can have important consequences for organizational morale and productivity. Granting wages based largely on “cost-of-living” figures will not inspire higher employee performance because pay is unrelated to individual performance and may cause valued employees to leave the organization. Furthermore, should cost-of-living increases be discontinued, managers can expect disgruntled employees who may be less likely to receive merit raises.
Employees who work under a union contract may receive wage increases through escalator clauses found in their labor agreement. These clauses provide for cost-of-living adjustments (COLA) in wages based on changes in the CPI. The most common adjustments are 1 percent per hour for each 0.3- or 0.4-point change in the CPI. COLAs are favored by unions during particularly high periods of inflation.
Collective Bargaining
One of the primary functions of a labor union is to bargain collectively over conditions of employment, the most important of which is compensation. The union’s goal in each new agreement is to achieve increases in
real wages
—wage increases larger than the increase in the CPI—thereby improving the purchasing power and standard of living of its members.
Employee wages may be based in part on how much money people in that area need for day-to-day living.
9.4Job Evaluation Systems
As we discussed earlier, one important component of the pay mix is the worth of the job. Organizations formally determine the value of jobs through the process of job evaluation. Job evaluation is the systematic process of determining the relative worth of jobs to establish which jobs should be paid more than others within the organization and therefore helps establish internal equity between various jobs. The relative worth of a job may be determined by comparing it with others within the organization or by comparing it with a scale that has been constructed for this purpose.
Three traditional methods of comparison provide the basis for the principal systems of job evaluation:
1. Rank the value of jobs from highest to lowest.
2. Classify jobs so they can be benchmarked internally and externally.
3. Award points to each job based on its link to organizational objectives.
Such a job valuation system can prove effective not only in designing employee compensation, but in determining whether a job can be contracted to a local or offshore company—a major decision that should always take into account the value of the job. For example, Delta Airlines brought back more than 4,500 customer service jobs from overseas to the United States. They reported that “customers weren’t happy with the service they got from operators based [overseas].” We will begin by discussing the simpler nonquantitative approaches and conclude by reviewing the more popular quantitative system and work evaluation. Regardless of the methodology used, it is important to remember that all job evaluation methods require varying degrees of managerial judgment. Also, those involved in evaluating jobs must consider the impact of the Americans with Disabilities Act on the process (see Chapter 3).
9.4aJob Ranking System
The simplest and oldest system of job evaluation is the job ranking system , which ranks jobs on the basis of their relative worth. Job ranking can be done by a single individual knowledgeable about all jobs or by a committee comprising of management and employee representatives. For one technique, the ranker(s) arranges cards, one for each job with a list of their duties and responsibilities, in order of the importance of the jobs.
The basic disadvantage of the job ranking system is that it is not a very precise measure of each job’s worth, can only be used on a small number of jobs, and only indicates the relative importance of the job, not the differences in the degree of importance that may exist between jobs. Its simplicity, however, makes it ideal for use by small businesses.
9.4bJob Classification System
In the
job classification system
, jobs are classified and grouped according to a series of predetermined grades. Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs, and is widely used by municipal and state governments. For example, Grade GS-1 from the federal government grade descriptions reads as follows:
GS-1 includes those classes of positions the duties of which are to perform, under immediate supervision, with little or no latitude for the exercise of independent judgment (A) the simplest routine work in office, business, or fiscal operations; or (B) elementary work of a subordinate technical character in a professional, scientific, or technical field.
The descriptions of each of the job classes constitute the scale against which the specifications for the various jobs are compared. Managers then evaluate jobs by comparing job descriptions with the different wage grades to “slot” the job into the appropriate grade. While this system has the advantage of simplicity as well, the point system is more precise.
9.4cPoint System
The
point system
is a quantitative job evaluation procedure that determines a job’s relative value by calculating the total points assigned to it. The principal advantage of the point system is that it provides a more refined basis for making judgments than either the ranking or classification system and thereby can produce results that are more valid and less easy to manipulate. It has been successfully used by high-visibility organizations such as Digital Equipment Company, Met Life, Johnson Wax, Prudential Financial, TransAmerica, and many other public and private organizations, large and small. Although point systems are rather complicated to establish, once in place they are relatively simple to understand and use.
The point system permits jobs to be evaluated quantitatively on the basis of factors or elements—commonly called compensable factors—that constitute the job. Some compensable factors might include fiscal accountability, leadership, teamwork, and project accountability. The number of compensable factors an organization uses depends on the nature of the organization and the jobs to be evaluated. Once selected, compensable factors will be assigned weights according to their relative importance to the organization. For example, if responsibility is considered extremely important to the organization’s objectives, it could be assigned a weight of 40 percent. Next, each factor will be divided into a number of degrees. Degrees represent different levels of difficulty associated with each factor.
The Point Manual
The point system requires the use of a point manual. The point manual is, in effect, a handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs. The point value assigned to a job represents the sum of the numerical degree values of each compensable factor that the job possesses.
Using the Point Manual
9.4dWork Valuation
Work valuation is a relatively new job evaluation system championed to meet the demands of a dynamic business environment. The cornerstone for
work valuation
is that work should be valued relative to the business goals of the organization rather than by an internally applied point-factor job evaluation system. As noted by one compensation specialist, “Valuing work properly enables organizations to not only price individual jobs effectively, but provides insight into how jobs relate to overall organizational goals and objectives and how roles ultimately contribute to organizational success.”
Additionally, work valuation serves to direct compensation dollars to the type of work pivotal to organizational goals.
9.4eJob Evaluation for Management Positions
Because management positions are more difficult to evaluate and involve certain demands not found in jobs at the lower levels, some organizations do not attempt to include them in their job evaluation programs for hourly employees. Rather, they employ either a standardized (purchased) program or customize a point method to fit their particular jobs. However, regardless of the approach adopted, point plans for executive and managerial employees operate similarly to those for other groups of employees.
One of the better-known standardized job evaluation programs for evaluating executive, managerial, and professional positions is the Hay profile method , developed by Edward N. Hay.
The three puzzle pieces that constitute the evaluation in the “profile” are knowledge (or knowhow), mental activity (or problem-solving), and accountability (Figure 9.6). These factors represent the most important aspects of all executive and managerial positions. The profile for each position is developed by determining the percentage value to be assigned to each of the three factors. Jobs are then ranked on the basis of each factor, and point values that make up the profile are assigned to each job on the basis of the percentage-value level at which the job is ranked.
Figure 9.6Hay Evaluation Profile
9.5Compensation Implementation—Pay Tools
LO 3
Compensation design systems, such as job evaluations, provide for internal equity and serve as the basis for pay rate determination. They do not in themselves determine the pay rate. The evaluated worth of each job in terms of its rank, class, points, or monetary worth must be implemented into an hourly, daily, weekly, or monthly pay rate. To appropriately implement compensation, specific tools must be incorporated. The primary compensation tool used to set pay is the wage and salary survey.
9.5aWage and Salary Surveys
The wage and salary survey is a survey of the wages paid by employers in an organization’s relevant labor market—local, regional, or national—depending on the job. The labor market is frequently defined as the area from which employers obtain certain types of workers. The labor market for office personnel would be local, whereas the labor market for engineers would be national and even global. It is the wage and salary survey that permits an organization to maintain external equity—that is, to pay its employees wages equivalent to the wages similar employees earn in other establishments.
When job evaluation and wage survey data are used jointly, they link the likelihood of both internal and external equity. Although surveys are conducted primarily to gather competitive wage data, they can also collect information on employee benefits or organizational pay practices (such as overtime rates or shift differentials).
Collecting Survey Data
Conducting surveys and collecting information may take up time and resources, but survey data lets Human Resource professionals stay aware of the employment market and continue to attract and retrain top talent. Many organizations conduct their own wage and salary surveys, and a variety of “preconducted” pay surveys are available to satisfy the requirements of most public and not-for-profit or private employers. The Bureau of Labor Statistics (BLS) is the major publisher of wage and salary data. The BLS publishes the National Compensation Survey (NCS), a statistically valid and comprehensive compensation program of wage, salary, and benefit information
(see Highlights in HRM 2).
Highlights in HRM 2
Bureau of Labor Statistics National Compensation Survey
NCS data are used by managers and compensation specialists in large and small organizations to answer such questions as the following:
· How much must I pay accountants in Atlanta, Georgia?
· Is a 3-percent benefits increase comparable to that of other employers in the manufacturing industry?
· Is vision coverage a prevalent benefit among large employers in the Northeast?
· How have wage costs changed over the past year?
How the NCS Survey Works
The National Compensation Survey is an area-based survey. Wage and benefit data are collected from a predetermined set of 154 metropolitan and nonmetropolitan areas through the 50 states and the District of Columbia to represent the United States. Compensation information is collected from such diverse locations as Knoxville, Tennessee; Pittsburgh, Pennsylvania; Reno, Nevada; and Richland-Kennewick-Pasco, Washington. All areas are selected to produce regional estimates for nine broad geographic divisions and four broad regions.
Within each area, a scientific sample of establishments represents all area establishments. An “establishment” is a single physical location, such as a plant, warehouse, corporate office, or retail outlet. State and local government offices are also included in the survey.
Once an establishment has been chosen for inclusion in the survey, a BLS economist selects occupations within that establishment to represent all occupations in the establishment. The BLS limits the selection to a small number of occupations to reduce the survey burden for employers. Data are collected for all incumbents in a selected occupation.
The selected occupations are then classified based on the Census Bureau’s occupation classification system. The census classification categorizes approximately 450 individual occupations into 10 major groupings such as sales, professional specialty, technical and machine operators, assemblers, and inspectors. For the occupations selected, wage and benefit data are collected. Items included in the collection of wages are time-based payments, piece rates, commissions, hazard pay, and other items directly related to the work being performed. A variety of benefit data are collected, including paid vacations, paid holidays, paid sick leave, shift differentials, and nonproduction bonuses.
Salary Surveys
Wage and benefits survey data can be found on numerous websites. The previously mentioned National Compensation Survey is an example. Also readily available are commercial products such as those offered at Salary.com or Glassdoor. Other, less well-known places to find salary information include the Salary Wizard, Comp Analyst, and Survey Finder. Survey Finder has a database of hundreds of compensation surveys offered by more than 50 independent vendors. Managers and compensation specialists can search for applicable surveys for either purchase or participation.
Glassdoor collects salary data from employees who anonymously volunteer salary information and comments about employers in return for access to salary and company information about other companies.
Glassdoor.com
The race for free salary data is currently being won by Glassdoor. It was not originally built, however, for companies to discover how to pay their employees. Rather, Glassdoor provided a safe platform where people could anonymously share information about their pay and company in return for free information about other companies and salaries. Glassdoor now provides a platform where you can view salary information, company reviews, and job postings. You can even figure out who the top paying companies are and target your search accordingly. For example, in 2017 Glassdoor listed the 25 highest paying companies in the United States. Looks like consulting and technology companies may be the way to go… if you’re interested in high pay.
1. A.T. Kearney
· Median Total Compensation: $167,534
· Median Base Salary: $143,620
· Industry: Consulting
2. Strategy&
· Median Total Compensation: $160,000
· Median Base Salary: $147,000
· Industry: Consulting
3. Juniper Networks
· Median Total Compensation: $157,000
· Median Base Salary: $135,000
· Industry: Technology
4. McKinsey & Company
· Median Total Compensation: $155,000
· Median Base Salary: $135,000
· Industry: Consulting
5. Google
· Median Total Compensation: $153,750
· Median Base Salary: $123,331
· Industry: Technology
6. VMware
· Median Total Compensation: $152,133
· Median Base Salary: $130,000
· Industry: Technology
7. Amazon Lab126
· Median Total Compensation: $150,100
· Median Base Salary: $138,700
· Industry: Technology
8. Boston Consulting Group
· Median Total Compensation: $150,020
· Median Base Salary: $147,000
· Industry: Consulting
· Median Total Compensation: $150,020
· Median Base Salary: $135,000
· Industry: Technology
10. Cadence Design Systems
· Median Total Compensation: $150,010
· Median Base Salary: $140,000
· Industry: Technology
11. Visa
· Median Total Compensation: $150,000
· Median Base Salary: $130,000
· Industry: Finance
12. Facebook
· Median Total Compensation: $150,000
· Median Base Salary: $127,406
· Industry: Technology
13. Twitter
· Median Total Compensation: $150,000
· Median Base Salary: $133,000
· Industry: Technology
14. Box
· Median Total Compensation: $150,000
· Median Base Salary: $130,000
· Industry: Technology
15. Walmart eCommerce
· Median Total Compensation: $149,000
· Median Base Salary: $126,000
· Industry: Technology
16. SAP
· Median Total Compensation: $148,431
· Median Base Salary: $120,000
· Industry: Technology
17. Synopsys
· Median Total Compensation: $148,000
· Median Base Salary: $130,000
· Industry: Technology
18. Altera
· Median Total Compensation: $147,000
· Median Base Salary: $134,000
· Industry: Technology
19. LinkedIn
· Median Total Compensation: $145,000
· Median Base Salary: $120,000
· Industry: Technology
20. Cloudera
· Median Total Compensation: $145,000
· Median Base Salary: $129,500
· Industry: Technology
21. Salesforce
· Median Total Compensation: $143,750
· Median Base Salary: $120,000
· Industry: Technology
22. Microsoft
· Median Total Compensation: $141,000
· Median Base Salary: $125,000
· Industry: Technology
23. F5 Networks
· Median Total Compensation: $140,200
· Median Base Salary: $120,500
· Industry: Technology
24. Adobe
· Median Total Compensation: $140,000
· Median Base Salary: $125,000
· Industry: Technology
25. Broadcom
· Median Total Compensation: $140,000
· Median Base Salary: $130,000
· Industry: Technology
9.5bThe Wage Curve
The relationship between the relative worth of jobs and their pay rates can be represented by means of a wage curve . This curve may indicate the rates currently paid for jobs within an organization, new rates resulting from job evaluation, or rates for similar jobs currently being paid by other organizations within the labor market. A curve may be constructed graphically by preparing a scattergram consisting of a series of dots that represent the current pay rates. As shown in Figure 9.7, a freehand curve is then drawn through the cluster of dots in such a manner as to leave approximately an equal number of dots above and below the curve. The wage curve can be relatively straight or curved. This curve can then be used to determine the relationship between the value of a job and its pay rate at any given point on the line.
Figure 9.7Freehand Wage Curve
9.5cPay Grades
From an administrative standpoint, it is generally preferable to group jobs into pay grades and to pay all jobs within a particular grade the same rate or rate range. When the classification system of job evaluation is used, jobs are grouped into grades as part of the evaluation process. When the point system is used, however, pay grades must be established at selected intervals that represent either the point or the evaluated monetary value of these jobs. The graph in Figure 9.8 illustrates a series of pay grades designated along the horizontal axis at 50-point intervals.
Figure 9.8Single Rate Structure
9.5dRate Ranges
Although a single rate may be created for each pay grade, as shown in Figure 9.8, it is more common to provide a range of rates for each pay grade. The rate ranges may be the same for each grade or proportionately greater for each successive grade, as shown in Figure 9.9. Rate ranges constructed on the latter basis provide a greater incentive for employees to accept a promotion to a job in a higher grade.
Figure 9.9Rate Range Structure
The final step in setting up a wage structure is to determine the appropriate pay grade into which each job should be placed on the basis of its evaluated worth. Traditionally, this worth is determined on the basis of job requirements without regard to the performance of the person in that job. Under this system, the performance of those who exceed the requirements of a job may be acknowledged by merit increases within the grade range or by promotion to a job in the next higher pay grade.
Organizations may pay individuals above the maximum of the pay range when employees have high seniority or promotional opportunities are scarce. Wages paid above the range maximum are called red circle rates . Because these rates are exceptions to the pay structure, employers often “freeze” these rates until all ranges are shifted upward through market wage adjustments.
9.5eCompetence-Based Pay
The predominant approach to employee compensation is still the job-based system. Unfortunately, such a system often fails to reward employees for their skills or the knowledge they possess or to encourage them to learn a new job-related skill. Additionally, job-based pay systems may not reinforce an organizational culture stressing employee involvement or provide increased employee flexibility to meet overall production or service requirements. Therefore, organizations such as Frito-Lay, Nortel Networks, Sherwin-Williams, and Honeywell have introduced competence-based pay plans.
Competence-based pay
, also referred to as skill-based pay or knowledge-based pay, compensates employees for the different skills or increased knowledge they possess rather than for the job they hold in a designated job category. Regardless of the name, these pay plans encourage employees to earn higher base wages by learning and performing a wider variety of skills (or jobs) or displaying an array of competencies that can be applied to a variety of organizational requirements. For example, in a manufacturing setting, new tasks might include various assembly activities carried out in a particular production system or a variety of maintenance functions. Within service organizations, employees might acquire new knowledge related to advanced computer systems or accounting procedures. Organizations will grant an increase in pay after each skill or knowledge has been mastered and can be demonstrated according to a predetermined standard.
Competence-based pay systems represent a fundamental change in the attitude of management regarding how work should be organized and how employees should be paid for their work efforts. The most frequently cited benefits of competence-based pay include greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and reduced effects of absenteeism and turnover, because managers can assign employees where and when needed. Competence-based pay also encourages employees to acquire training when new or updated skills are needed by an organization.
Unfortunately, competence-based plans bring some long-term difficulties. Some plans limit the amount of compensation employees can earn, regardless of the new skills or competencies they acquire. Thus, after achieving the top wage, employees may be reluctant to continue their educational training. Perhaps the greatest challenge in paying individuals for their skills, knowledge, and competencies is developing appropriate measures. It is difficult to write specific knowledge and skill descriptions for jobs that employees perform and then establish accurate measures of acquired skills or knowledge.
Broadbanding
Organizations that adopt a competency-based or skill-based pay system frequently use broadbanding to structure their compensation payments to employees.
Broadbanding
simply collapses many traditional salary grades into a few wide salary bands. Broadbands may have midpoints and quartiles, or they may have extremely wide salary ranges or no ranges at all. Banding encourages lateral skill building while addressing the need to pay employees performing multiple jobs with different skill level requirements. Additionally, broadbands help eliminate the obsession with grades and, instead, encourage employees to move to jobs in which they can develop in their careers and add value to the organization. Paying employees through broadbands enables organizations to consider job responsibilities, individual skills and competencies, and career mobility patterns in assigning employees to bands. In all, such pay tools help more effectively implement a compensation strategy.
9.6Government Regulation of Compensation
In addition to data from salary surveys and competence-based assessments, compensation implementation is also subject to state and federal regulations. A majority of states have minimum wage laws or wage boards that fix minimum wage rates on an industry-by-industry basis. When an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages (see Highlights in HRM 3 for state minimum wage laws). Most states also regulate hours of work and overtime payments.
Highlights in HRM 3
Minimum Wage Laws in the States
Note: Where federal and state law have different minimum wage rates, the higher standard applies.
Highlights in HRM 4
Worldwide Minimum Wages
Wage and Hour Provisions
It’s important to know the difference and details between minimum wage, overtime, and compensatory time.
|
Minimum Wage Rate |
- The minimum wage prescribed by federal law has been raised many times, from an original figure of $0.25 per hour to $7.25 per hour on July 24, 2009. This is where the minimum wage stands today (see Highlights in HRM 5 for the federal minimum wage poster that employers are required to display). - Assessed every few years and adjusted for cost-of-living factors (e.g., consumer price index). - Applies to actual earning rate BEFORE any added overtime premiums. |
|
Overtime Wage Rate |
- 1.5 times the base rate must be paid for all hours worked over 40 during a given week. - Base wage rate must include incentive payments or bonuses received during that period. - Employees paid on piecework basis must receive premium for overtime work. |
|
Compensatory Time (Comp Time) |
- When employees are given time off in return for overtime work. - Granted at 1.5 times the number of hours worked as overtime. |
*The FLSA does not require severance pay, sick leave, vacation, or holidays.
Highlights in HRM 5
The Federal Wage Poster
Under the FLSA, an employer must pay an employee for whatever work the employer “suffers or permits” the employee to perform, even if the work is done away from the workplace and even if it is not specifically expected or requested. This condition could likely occur when employees work away from headquarters and are unsupervised or when they telecommute on a frequent basis.
Minimum Wage and Pay Compression
Some argue that increases in the minimum wage may lead to pay compression.
Pay rate compression
means that differences between low- and high-paying jobs decrease. It occurs when less experienced, often junior employees, earn as much or more than experienced employees due to high starting salaries for new employees. It also occurs when the minimum wage requirements push up salaries for lower tier salaries but not for higher tier. Both lower- and higher-paid jobs experience pay compression. For example, if starting hourly wages for preschool teachers is $9.00 and preschool teacher aides is $7.25, a minimum wage increase to $9.00 would bring both to essentially the same starting wage (the U.S. median salary for preschool teachers is $12.23, while the bottom 10 percent make $9.00).
Identifying pay rate compression and its causes is far simpler than implementing organizational policies to alleviate its effect. Organizations wishing to minimize the problem may incorporate the following ideas into their pay policies:
· Reward high-performance and merit-worthy employees with large pay increases.
· Design the pay structure to allow a wide spread between hourly and supervisory employees.
· Prepare high-performing employees for promotions to jobs with higher salary levels.
· Provide equity adjustments for selected employees hardest hit by pay compression.
Since pay rate compression is largely an internal pay equity concern, if not addressed fairly, it can cause low employee morale, leading to issues of reduced employee performance, hard feelings between employees, higher absenteeism and turnover, and even delinquent behavior such as employee theft.
Child Labor Provisions
Another concern with the minimum wage is that the “floor” it imposes makes it more difficult for high school students and young adults to find jobs. Many employers who might otherwise be willing to hire these individuals are unwilling to pay them the same rate as adults because of their lack of experience.
Age 16 is the basic minimum age required for employment. At age 16 youth can be employed for unlimited hours in any occupation that is not declared hazardous by the U.S. secretary of labor. For example, a 16-year-old could not work as a coal miner, but she could work at the local snow-cone shack. Children ages 14 and 15 can also be hired in specified jobs outside of school hours for limited periods of time each day and each week. Employees under 20 years old can be paid $4.25 per hour during their first 90 calendar days with an employer. Such pay is considered training pay. Finally, employers of “tipped employees” must pay at least $2.13 per hour if they claim a tip credit against their minimum wage obligations. If an employee’s tips combined with the employer’s pay of at least $2.13 do not equal the minimum hourly wage, the employer must make up the difference.
Pay Equity Provisions
Laws exist to protect employees against pay discrimination. Yet, pay discrimination is still found in many companies today. For example, in 2017 Wells Fargo paid $35.5 million as part of a settlement of a putative class-action lawsuit that alleged discrimination against African American advisors. A group of African American brokers and trainees alleged that they had been excluded from certain business opportunities and higher-up teams because of race. In addition to the monetary settlement, Wells Fargo agreed to set up resources to focus on recruiting more diverse trainees and hire from a more diverse applicant pool, along with other changes to their management training. Figure 9.10 further examines pay inequality based on race and gender.
Figure 9.10
Race and Gender Pay Inequality
|
Race and Ethnicity |
Male Weekly Income |
Female Weekly Income |
Women’s Earnings as % of Male Earnings |
|
All Races |
854 |
691 |
81.00% |
|
White Alone, not Hispanic |
879 |
710 |
81% |
|
Black or African American only |
665 |
599 |
90% |
|
Asian only |
1055 |
770 |
73% |
|
Hispanic or Latino (any race) |
592 |
521 |
88% |
9.7Compensation Assessment
LO 4
Getting your compensation system up and running is not the end of your task as a manager. Once it has been implemented, assessing the effectiveness of your compensation system is vitally important to linking compensation with strategy. With the right measures, you can
· help the company detect potential compensation problems,
· make compensation decisions more transparent, and
· improve the alignment of compensation decisions with organizational objectives.
The compensation scorecard collects and displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units. While different companies will use different measures of compensation, the scorecard creates a comparative tool within the organization that can reinforce desired outcomes that are unique to the company’s strategy.
Managers in companies without compensation scorecards often struggle to know if the promotions, raises, bonuses, and pay adjustments they make are in line with the rest of the organization and its strategy. A scorecard improves transparency of how people are rewarded and makes managers responsible for how they spend company money. Most compensation scorecards are completed once a year by HR.
For example, Figure 9.11 represents an example of a compensation scorecard. Each functional department in the company reports the average performance rating received by its employees on a scale of 1 (low) to 5 (high). This measure helps to show managers where they are in terms of evaluating their employees. Average merit increases are also gathered. The company had budgeted enough money for a 4 percent increase, on average. If the average merit increase you give your employees is above this 4 percent level, then the additional money needed to compensate employees in your function will need to be drawn from elsewhere in the company. Grade inflation is the growth or decline of the average salary grade distribution. It shows whether or not you vary in pay raises on a year-to-year basis. Compa ratio is a measure of the appropriateness of the salaries given by a function. In essence it is an internal benchmark of salaries. Functions with a compa ratio below 100 percent are considered to be paying their employees below the company norm. Finally, a measure of the percent of annual incentives in relation to organizational targets helps to assess whether a function is meeting its targets and paying its employees in accordance with those objectives.41
Figure 9.11
Sample Compensation Scorecard
|
Function |
Average Performance Rating (1–5) |
Average Merit Increase (4% Budget) |
Grade Inflation |
Compa Ratio |
Annual Incentive (% of Target) |
|
Marketing |
3.4 |
4.3% |
–3% |
101% |
100% |
|
R&D |
3.2 |
4.4% |
0% |
98% |
102% |
|
Production |
4.0 |
4.2% |
12% |
96% |
105% |
|
Sales |
4.1 |
3.4% |
8% |
99% |
100% |
|
Customer Service |
3.6 |
3.6% |
17% |
88% |
110% |
* Grade inflation is determined by calculating the percentage change in the number of employees in each grade in comparison to the year before.
** Compa ratio is actual salary divided by the midpoint of the salary range. It is a gauge of the appropriateness of the organization’s salary ranges.
*** The direct correlation between profit growth over a three-year period relative to LTI expense.
Source: Reprinted by permission of The Segal Group, Inc., parent of The Segal Company and its Sibson Consulting Division. © 2011. All rights reserved.
Chapter Review
Summary
· LO 1Establishing strategic compensation programs requires an assessment of organizational objectives in relation to specific employment goals—employee retention for continued growth, compensation distribution to ensure employees feel treated fairly, communication of compensation methods to increase employee understanding of organizational objectives, and adherence to a budget for cost efficiencies, for instance. Compensation must reward employees for past efforts (pay for performance) while motivating employees’ future performances. Internal and external equity of the pay program affects employees’ concepts of fairness. Organizations must balance each of these concerns while still remaining competitive. The ability to attract and retain qualified employees while controlling labor costs is a major factor in allowing organizations to remain viable in the domestic or international markets.
· LO 2The basis on which compensation payments are determined and the way they are administered can significantly affect employee productivity and the achievement of organizational goals. Internal influences include the employer’s compensation policy, worth of the job, performance of the employee, and employer’s ability to pay. External factors influencing pay rates include labor market conditions, area pay rates, cost of living, outcomes of collective bargaining, and legal requirements.
· LO 3Wage surveys determine the external equity of jobs. Data obtained from surveys will facilitate establishing the organization’s wage policy while ensuring that the employer does not pay more, or less, than needed for jobs in the relevant labor market. The wage structure will be determined based on wage surveys, but will vary based on job function and individual skill differences. Companies use wage curves, pay grades, and rate ranges to group jobs together and to allow for individual employee differences within each type of job. These wage structures will also depend upon the legal requirements around wage.
· LO 4The effectiveness of a compensation system can be assessed by using a compensation scorecard. The scorecard collects and displays where all departments and functions sit in terms of their relative compensation. It increases the transparency of compensation systems, the accountability of managers, and helps companies align their compensation decisions with organizational objectives.
Chapter Review
Key Terms
· pay-for-performance standard
Chapter Review
HRM Experience
HRM Experience
Why This Salary?
A question frequently asked is, “Why is that person paid more than I am when we both perform the same job?” The answer to this question lies in understanding the components of the pay mix as discussed in this chapter. While we may disapprove of the idea that someone is paid more or less than we are for similar work; nevertheless, factors both internal and external to the organization influence the final salary paid to a job or a specific person. Often we have little control over the pay mix factors. However, at other times, we can improve our wage by gaining additional job experience or seniority or by obtaining increases in job knowledge or skills. This project is designed to give you experience in understanding why jobs are paid different salaries.
Assignment
Shown here are the annual median salaries paid in some of the fastest growing occupations in America based on expected growth rates from now until 2024. Study the salaries paid to these workers and then answer the questions that follow as to why the differences in salaries exist. Relate these reasons to the internal and external factors of the pay mix that are discussed in the text.
|
Occupation |
Median Annual Salary |
|
Wind turbine service technician |
$51,050 |
|
Physical therapist |
$84,020 |
|
Statistician |
$80,110 |
|
Ambulance driver |
$23,740 |
|
Genetic counselors |
$72,090 |
|
Interpreter and translator |
$44,190 |
|
Optometrist |
$103,900 |
1. What factors may account for the wide differences among salaries for different occupations?
2. What factors may account for the differences among salaries for the identical occupation in the same organization?
3. What factors may account for the differences among salaries for the identical occupation in different organizations?
Chapter Review
Discussion Questions
· LO 1Tomax Corporation has 400 employees and wishes to develop a compensation policy to correspond to its dynamic business strategy. The company wishes to employ a high-quality workforce capable of responding to a competitive business environment. Suggest different compensation objectives to match Tomax’s business goals.
· LO 2Since employees may differ in terms of their job performance, would it not be more feasible to determine the wage rate for each employee on the basis of his or her relative worth to the organization? Explain.
· LO 3Describe the basic steps in conducting a wage and salary survey. What are some factors to consider? One of the objections to granting wage increases on a percentage basis is that the lowest-paid employees, who are having the most trouble making ends meet, get the smallest increase, while the highest-paid employees get the largest increase. Is this objection a valid one? Explain.
· LO 4What is a compensation scorecard and how does it help align a company’s strategy with its compensation system?
Chapter Review
Case Study 1
Case Study 1
Pay Decisions at Performance Sports
Katie Perkins’s career objective while attending Rockford State College was to obtain a degree in small business management and to start her own business after graduation. Her ultimate desire was to combine her love of sports and a strong interest in marketing to start a mail-order golf equipment business aimed specifically at beginning golfers.
After extensive development of a strategic business plan and a loan in the amount of $75,000 from the Small Business Administration, Performance Sports was begun. Based on a marketing plan that stressed fast delivery, error-free customer service, and large discount pricing, Performance Sports grew rapidly. At present the company employs 16 people: 8 customer service representatives earning between $11.25 and $13.50 per hour; 4 shipping and receiving associates paid between $8.50 and $9.50 per hour; 2 clerical employees each earning $8.25 per hour; an assistant manager earning $15.25 per hour; and a general manager with a wage of $16.75 per hour; an assistant manager earning $15.25 per hour; and a general manager with a wage of $16.75 per hour. Both the manager and assistant manager are former customer service representatives.
Perkins intends to create a new managerial position, purchasing agent, to handle the complex duties of purchasing golf equipment from the company’s numerous equipment manufacturers. Also, the mail-order catalog will be expanded to handle a complete line of tennis equipment. Since the position of purchasing agent is new, Perkins is not sure how much to pay this person. She wants to employ an individual with 5 to 8 years of experience in sports equipment purchasing.
While attending an equipment manufacturers’ convention in Las Vegas, Nevada, Perkins learns that a competitor, East Valley Sports, pays its customer service representatives on a pay-for-performance basis. Intrigued by this compensation philosophy, Perkins asks her assistant manager, George Balkin, to research the pros and cons of this payment strategy. This request has become a priority because only last week two customer service representatives expressed dissatisfaction with their hourly wage. Both complained that they felt underpaid relative to the large amount of sales revenue each generates for the company.
Questions
1. What factors should Perkins and Balkin consider when setting the wage for the purchasing agent position? What resources are available for them to consult when establishing this wage?
2. Suggest advantages and disadvantages of a pay-for-performance policy for Performance Sports.
3. Suggest a new payment plan for the customer service representatives.
Chapter Review
Case Study 2
Case Study 2
An In-N-Out Pay Strategy: Costa Vida’s Decision to Boost Pay
For many businesses in today’s belt-tightening economy, decisions on pay need to be strategic to ensure that employees are treated fairly and to ensure that businesses can remain viable. This requires knowing what your competitors pay their employees and knowing your own salary budget. But knowing what your competitors are paying can be both valuable and painful.
As a primary stakeholder and former CEO of Costa Vida, a fast-growing chain of fresh Mexican restaurants, Nathan Gardner knew he was competing against some restaurant chains with competitive compensation systems. Costa Vida is a fresh Mexican grill featuring Baja-inspired foods that are made from scratch daily. Following a trip to Cabo San Lucas on the Baja Coast in Mexico, Costa Vida founders JD and Sarah Gardner were inspired with a vision: Bring the freshly made local cuisine with the vibrant lifestyle to the United States. They started their first restaurant in 2001, and after just 13 years, Costa Vida has more than 50 franchises in Arizona, California, Colorado, Florida, Idaho, Illinois, Nevada, New Mexico, Missouri, Oklahoma, Oregon, Texas, Washington, Wyoming, and Utah, and as of 2017, 3 locations in Canada. One of the main challenges Costa Vida faces is the fierce competition for customers as well as employees. “You’d be surprised how much of a difference having good employees in all areas of the business makes,” commented Nathan.
“For the fast-casual food industry,” remarked Nathan, “you are dependent upon your people. If you don’t treat your people well, they won’t treat your customers well. If your customers aren’t treated well, you have no business.” For months, Nathan agonized over how he could develop a competitive compensation plan that matched the objectives of the organization, but that fell in line with the tight budget of each individually owned franchise unit. He stated, “We, of course, leave the final compensation decision to the franchise owner, but we do all we can to educate and persuade our franchisees to be competitive and fair. In the long run, this is how they can maintain a superior level of customer satisfaction.”
Nathan pointed out that a strong benchmark for them has been In-N-Out Burger. In-N-Out started in California and is known for its great compensation package. They start out all their new “associates” (aka employees) at a minimum of $10 an hour. They also offer flexible schedules to accommodate school and other activities, paid vacation, free meals, and a 401k retirement plan. For full-time associates they provide medical, dental, vision, life, and travel insurance coverage. Their reason for paying so high is based on a strategy that lower turnover and more committed workers will lead to better service. “What In-N-Out does for their employees is truly amazing,” commented Nathan. “We often see employees moving from one fast-food chain to another, but we rarely see employees coming from In-N-Out.”
Nathan had a tough challenge ahead in trying to convince his franchise owners and managers to think more strategically about their pay systems. He needed to help them realize that paying wages and offering other compensation benefits that were better than their competitors may mean lower profit margins up front, but that the returns would be greater in the long run. He also needed to offer evidence to show that this was not just about being fair, but it was about being strategic. The restaurant business is a fast and fierce industry and companies come and go all the time. What was it going to take for Costa Vida to stay for the long haul?
Questions
1. Why is it important for pay to be externally fair?
2. Why is it important for pay to be internally fair?
3. What should Costa Vida’s compensation strategy look like? Hint: What are the company objectives and how can employee pay help to achieve those objectives?
4. What should the pay structure look like? What pay mix would you recommend?
5. How should Nathan communicate a new compensation strategy to his franchisee owners and managers?
6. What effect will paying higher wages have on Costa Vida in the short term? What effect will it have in the long term? Explain.
