Assigment For Researcher_D

1 Objective

1. Define compensation and describe the various forms of compensation.

Compensation administration is one of management’s most difficult and challenging human resource areas because it contains many elements and has a far-reaching impact on an organization’s strategic goals. Compensation is the total of all rewards provided employees in return for their services. The overall purposes of providing compensation are to attract, retain, and motivate employees. The components of a total compensation program are shown in Figure 9-1. Direct financial compensation consists of the pay that a person receives in the form of wages, salaries, commissions, and bonuses.

In a recent survey by the Society for Human Resource Management, the top driver for employee satisfaction was pay. 18Indirect financial compensation (benefits) consists of all financial rewards that are not included in direct financial compensation. This form of compensation includes a wide variety of rewards normally received indirectly by the employee. Nonfinancial compensation consists of the satisfaction that a person receives from the job itself or from the psychological and/or physical environment in which the person works. This aspect of nonfinancial compensation involves both psychological and physical factors within the firm’s working environment.

The various rewards described comprise a total compensation system. Historically, compensation practitioners focused primarily on direct financial compensation and indirect financial compensation (benefits). 19 However, this has changed over time and the expanded emphasis is reflected in the name change of compensation’s professional organization. The American Compensation Association, as noted in Chapter 2, is now WorldatWork, the Professional Association for Compensation, Benefits, and Total Rewards. With Total Rewards, the idea of a three-legged stool is used to balance workforce compensation. 20 These legs are direct financial compensation, indirect financial compensation, and nonfinancial compensation. If one leg breaks or is shorter than the others, the pieces of the compensation package will also experience problems. Such would be the case with a person attempting to sit on a stool where one or two legs were a little short.

2 Objective

1. Define financial equity and explain the concept of equity in direct financial compensation.

Equity theory is the motivation theory that people assess their performance and attitudes by comparing both their contribution to work and the benefits they derive from it to the contributions and benefits of comparison others whom they select—and who in reality may or may not be like them. It evolved from social comparison theory—the theory that individuals must assess and know their degree of performance and the correctness of their attitudes in a situation. Lacking objective measures of performance or correct attitudes, they compare their performance and attitudes to those of others. 21 Equity theory further states that a person is motivated in proportion to the perceived fairness of the rewards received for a certain amount of effort as compared to what others receive. Someone might say, “I’m going to stop working so hard. I work harder than Susan and she gets all the bonuses.” This individual has compared his effort and the rewards he received to the effort exerted and the rewards received by Susan. In fact, no actual inequity may exist, but the perception of inequity influences subsequent actions. According to equity theory, individuals are motivated to reduce any perceived inequity. They strive to make the ratios of outcomes to inputs equal. When inequity exists, the person making the comparison strives to make the ratios equal by changing either the outcomes or the inputs.

Understanding equity theory is very important as it pertains to compensations. Organizations must attract, motivate, and retain competent employees. Because a firm’s financial compensation system plays a huge role in achieving these goals, organizations ought to strive for equity. Financial equity means a perception of fair pay treatment for employees. As will be seen, firms and individuals view fairness from several perspectives. Ideally, compensation will be evenhanded to all parties concerned and employees will perceive it as such. However, this is a very elusive goal. As you read this section, remember also that nonfinancial factors can alter one’s perception of equity.

External equity exists when a firm’s employees receive pay comparable to workers who perform similar jobs in other firms. Compensation surveys help organizations determine the extent to which external equity is present. Internal equity exists when employees receive pay according to the relative value of their jobs within the same organization. Job evaluation is a primary means for determining internal equity. Most workers are concerned with both internal and external pay equity. From an employee relations perspective, internal pay equity may be more important because employees have more information about pay matters within their own organizations, and they use this information to form perceptions of equity. On the other hand, an organization must be competitive in the labor market to remain viable. In a competitive environment, and especially for high-demand employees, it becomes clear that the market is of primary importance (external equity).

Employee equity exists when individuals performing similar jobs for the same firm receive pay according to factors unique to the employee, such as performance level or seniority. Suppose that two accountants in the same firm are performing similar jobs, and one is clearly the better performer. If both workers receive equal pay increases, employee equity does not exist, and the more productive employee is likely to be unhappy. Team equity is achieved when teams are rewarded based on their group’s productivity. However, achieving equity may be a problem when it comes to team incentives. If all team members contributed equally, there would not likely be a problem. But, that is usually not the case as more enthusiastic team members may cover for loafers. Performance levels for teams, as well as individuals, may be determined through performance appraisal systems, discussed in Chapter 8.

Inequity in any category can result in morale problems. If employees feel that their compensation is unfair, they may leave the firm. Even greater damage may result for the firm if the employees choose not to leave but stay and restrict their efforts. In either event, the organization’s overall performance is damaged.

3 Objective

1. Identify the determinants of direct financial compensation.

Compensation theory has never been able to provide a completely satisfactory answer to what an individual’s service for performing a job is worth. Although no scientific approach is available, organizations typically use a number of relevant factors to determine individual pay. These determinants appear in Figure 9-2. Historically, the organization, the labor market, the job, and the employee all have influenced job pricing and the ultimate determination of an individual’s financial compensation. These factors continue to play an important role.

4 Objective

1. Describe the organization as a determinant of direct financial compensation.

Managers tend to view financial compensation as both an expense and an asset. It is an expense in the sense that it reflects the cost of labor. However, financial compensation is clearly an asset when it is instrumental in recruiting and hiring good people, encouraging them to put forth their best efforts and remain in their jobs. A firm that pays well attracts many applicants, enabling management to pick and choose the skills and traits it values. It holds on to these quality hires by equitably sharing the fruits of its financial success, not only among the management team but also with the rank-and-file. Compensation programs have top management’s attention because they have the potential to influence employee work attitudes and behavior that lead to improved organizational performance and implementation of the firm’s strategic plan.

A compensation policy provides general guidelines for making compensation decisions. Some employees may perceive their firm’s compensation policies as being fair and unbiased and others may have different opinions. The result of these perceptions may well have an effect on employees’ perceptions of fairness and result in lower productivity or turnover. An organization often, formally or informally, establishes compensation policies that determine whether it will be a pay leader, a pay follower, or strive for an average position in the labor market.

Pay leaders are organizations that pay higher wages and salaries than competing firms. Using this strategy, they feel that they will be able to attract high-quality, productive employees and thus achieve lower per-unit labor costs. Higher-paying firms usually attract more highly qualified applicants than lower-paying companies in the same labor market.

The market rate (going rate) is the average pay that most employers provide for a similar job in a particular area or industry. Many organizations have a policy that calls for paying the market rate. In such firms, management believes that it can employ qualified people and yet remain competitive by not having to raise the price of its goods or services.

Companies that choose to pay below the market rate because of poor financial conditions or a belief that they do not require highly capable employees are pay followers. When organizations follow this policy, difficulties often occur. Consider the case of Trig Ekeland.

Trig managed a large, but financially strapped farming operation in South Dakota. Although no formal policies were established, Trig had a practice of paying the lowest wage possible. One of his farmhands, Charlie Roberts, was paid minimum wage. During a period of three weeks, Charlie wrecked a tractor, severely damaged a combine, and tore out the transmission in a new pickup truck. Charlie’s actions prompted Trig to remark, “Charlie is the most expensive darned employee I’ve ever had.”

As Trig discovered, paying the lowest wage possible did not save money; actually, the practice was quite expensive. In addition to hiring unproductive workers, organizations that are pay followers may have a high turnover rate as their most qualified employees leave to join higher-paying organizations. Equally important, in situations where incompetent or disgruntled employees make contact with customers, they may not provide the kind of customer service management desires. If management does not give its employees first-class treatment, customers may also suffer, and this is not a formula for success in anyone’s business.

The organizational level in which compensation decisions are made can also have an impact on pay. Upper management often makes these decisions to ensure consistency. However, in some cases, there may be advantages to making pay decisions at lower levels where better information may exist regarding employee performance. In addition, extreme pressure to retain top performers may override the desire to maintain consistency in the pay structure. Organizations increasingly make exceptions for just this reason.

HR Web Wisdom: Wage and Salary Information

An organization’s assessment of its ability to pay is also an important factor in determining pay levels. Financially successful firms tend to provide higher-than-average compensation. However, an organization’s financial strength establishes only the upper limit of what it will pay. To arrive at a specific pay level, management must consider other factors.

5 Objective

1. Describe the labor market as a determinant of direct financial compensation.

Potential employees located within the geographic area from which employees are recruited comprise the labor market. Labor markets for some jobs extend far beyond the location of a firm’s operations. An aerospace firm in St. Louis, for example, may be concerned about the labor market for engineers in Fort Worth or Orlando, where competitive firms are located. Managerial and professional employees are often recruited from a wide geographic area. For more and more business firms, the world has become the labor market. As global economics increasingly sets the cost of labor, the global labor market grows in importance as a determinant of financial compensation for individuals.

Pay for the same jobs in different labor markets may vary considerably. Administrative assistant jobs, for example, may carry an average salary of over $40,000 per year in a large, urban community but only $18,000 or less in a smaller town. Compensation managers must be aware of these differences in order to compete successfully for employees. The market rate is an important guide in determining pay. Many employees view it as the standard for judging the fairness of their firm’s compensation practices.

A compensation survey is a means of obtaining data regarding what other firms are paying for specific jobs or job classes within a given labor market. Virtually all compensation professionals use compensation surveys either directly or indirectly. 22 The surveys may be purchased, outsourced to a consulting firm, or conducted by the organization itself. Organizations use surveys for two basic reasons: to identify their relative position with respect to the chosen competition in the labor market, and to provide input in developing a budget and compensation structure. Of all the wage criteria, market rates remain the most important standard for determining pay. In a competitive environment, the marketplace determines economic worth, and this is the critical factor.

Large organizations routinely conduct compensation surveys that typically provide the low, high, and average salaries for a given position. Sometimes the market rate, or going rate, is defined as the 25th to 75th percentile range of pay for jobs rather than a single, specific pay point. They give a sense of what other companies are paying employees in various jobs.

A primary difficulty in conducting a compensation survey involves determining comparable jobs. Surveys that utilize brief job descriptions are far less helpful than surveys that provide detailed and comprehensive descriptions. As the scope of jobs becomes broader, this difficulty grows. Increasingly, employees receive pay for skills and competencies they bring to the job, rather than for the specific work they perform. Therefore, compensation levels must be matched to these broader roles.

The geographic area in the survey is often determined from employment records. Data from this source may indicate maximum distance or time that employees are willing to travel to work. Also, the firms to be contacted in the survey may be product-line competitors or competitors for certain skilled employees. However, not all firms may be willing to share data. Because obtaining data on all jobs in the organization may not be feasible, compensation surveys often include only benchmark jobs. A benchmark job is one well known in the company and industry and one performed by a large number of employees.

In addition to surveys, there are other ways to obtain compensation data. Some professional organizations, such as WorldatWork and the Society for Human Resource Management, periodically conduct surveys, as do several industry associations. Consulting firms including Hewett Associates, Towers Perrin, Hay & Associates, and Mercer Human Resource Consulting also conduct surveys. The U.S. Bureau of Labor Statistics conducts the following four surveys that may be valuable:

· National Compensation Survey

· Employee Benefits in Small Private Establishments

· Employee Benefits in Medium and Large Private Establishments

· Employee Benefits in State and Local Governments

The National Compensation Survey contains pay and benefits information. Compensation data are presented by worker traits and by characteristics of the establishment. The survey attempts to respond to common questions from employers such as: What is the average salary for administrative assistants in my area? How have wage costs changed over the past year? How have benefit costs, and specifically health care costs changed over the past year? What is the average employer cost for a defined benefit plan as opposed to a defined contribution plan? The goal of the National Compensation Survey is to be able to answer these questions and more. 23

Although standard compensation surveys are generally useful, managers in highly technical and specialized areas occasionally need to utilize nontraditional means to determine what constitutes competitive compensation for scarce talent and niche positions. They need real-time information and must rely on recruiters and hiring managers on the front lines to let them know what is happening in the job market.

Although not a problem in recent years, the logic for using cost of living as a pay determinant is both simple and sound: when prices rise over time and pay does not, real pay is actually lowered. A pay increase must be roughly equivalent to the increased cost of living if a person is to maintain his or her previous level of real wages. For instance, if someone earns $42,000 during a year in which the average rate of inflation is 4 percent, a $140-per-month pay increase will be necessary merely to maintain the purchasing ability of that employee.

People living on fixed incomes (primarily the elderly and the poor) are hit hard by inflation, but they are not alone, as most employees also suffer financially. In recognition of this problem some firms index pay increases to the inflation rate. In fact, in a questionable practice, some organizations sacrifice merit pay to provide across-the-board increases designed to offset the results of inflation.

Inflation is not the only factor affecting cost of living; location also comes into play. For example, according to a comparative salary calculator, an income of $100,000 in Sioux Falls, South Dakota, would be equivalent to $189,962 in Chicago. 24

HR Web Wisdom: Calculates Salary Differences from City to City

The National Labor Relations Act (Wagner Act) declared legislative support, on a broad scale, for the right of employees to organize and engage in collective bargaining. Unions normally prefer to determine compensation through the process of collective bargaining, a topic covered in Chapter 12. An excerpt from the Wagner Act prescribes the areas of mandatory collective bargaining between management and unions as “wages, hours, and other terms and conditions of employment.” These broad bargaining areas obviously have great potential impact on compensation decisions. When a union uses comparable pay as a standard in making compensation demands, the employer needs accurate labor market data. When a union emphasizes cost of living, it may pressure management into including a cost-of-living allowance. A cost-of-living allowance (COLA) is an escalator clause in the labor agreement that automatically increases wages as the U.S. Bureau of Labor Statistics’ cost-of-living index rises. Cost-of-living allowances in union contracts have been disappearing because the power of the union has been reduced.

The economy definitely affects financial compensation decisions. For example, a depressed economy generally increases the labor supply and this serves to lower the market rate. A booming economy, on the other hand, results in greater competition for workers and the price of labor is driven upward. In addition, the cost of living typically rises as the economy expands.

Federal and state laws can also affect the amount of compensation a person receives. The Equal Pay Act prohibits an employer from paying an employee of one gender less money than an employee of the opposite gender, if both employees do work that is substantially the same. Equal employment legislation, including the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act, prohibits discrimination against specified groups in employment matters, including compensation. 25 The same is true for federal government contractors or subcontractors covered by Executive Order 11246 and the Rehabilitation Act. States and municipal governments also have laws that affect compensation practices. Our focus in the next section, however, is on the federal legislation that provides broad coverage and specifically deals with compensation issues.

The Davis-Bacon Act of 1931 was the first national law to deal with minimum wages. It mandates a prevailing wage for all federally financed or assisted construction projects exceeding $2,000. The Secretary of Labor sets the prevailing wage at the union wage, regardless of what the average wage is in the affected locality. 26

The Walsh-Healy Act of 1936 requires companies with federal supply contracts exceeding $10,000 to pay prevailing wages. This legislation also requires one-and-a-half times the regular pay rate for hours over eight per day or 40 per week.

The most significant law affecting compensation is the Fair Labor Standards Act of 1938. The purpose of the FLSA is to establish minimum labor standards on a national basis and to eliminate low wages and long working hours. The FLSA attempts to eliminate low wages by setting a minimum wage, and to make long hours expensive by requiring a higher pay rate, overtime, for excessive hours. It also requires record keeping, and provides standards for child labor. The Wage and Hour Division of the U.S. Department of Labor (DOL) administers this Act. The amount of the minimum wage has changed several times since it was first introduced in 1938. It also requires overtime payment at the rate of one-and-one-half times the employee’s regular rate after 40 hours of work in a 168-hour period. Although the Act covers most organizations and employees, certain classes of employees are specifically exempt from overtime provisions. Exempt employees are categorized as executive, administrative, professional, or outside salespersons.

An executive employee is essentially a manager (such as a production manager) with broad authority over subordinates. Anadministrative employee, although not a manager, occupies an important staff position in an organization and might have a title such as account executive or market researcher. A professional employee performs work requiring advanced knowledge in a field of learning, normally acquired through a prolonged course of specialized instruction. This type of employee might have a title such as company physician, legal counsel, or senior statistician. Outside salespeople sell tangible or intangible items away from the employer’s place of business. Nonexempt employees are those in jobs not conforming to the above definitions. However, nonexempt employees, many of whom are paid salaries, must receive overtime pay. Also, under new regulations, most employees who earn less than $23,660 will be considered nonexempt no matter what their duties are. 27

6 Objective

1. Explain how the job is a determinant of direct financial compensation.

The individual employee and market forces are most prominent as wage criteria. However, the job itself continues to be a factor, especially in those firms that have internal pay equity as an important consideration. These organizations pay for the value they attach to certain duties, responsibilities, and other job-related factors such as working conditions. Management techniques utilized for determining a job’s relative worth include job analysis, job descriptions, and job evaluation.

Before an organization can determine the relative difficulty or value of its jobs, it must first define their content. Normally, it does so by analyzing jobs. Recall from Chapter 4 that job analysis is the systematic process of determining the skills and knowledge required for performing jobs. Remember also that the primary by-product of job analysis is the job description, a written document that describes job duties or functions and responsibilities.

Job descriptions serve many different purposes, including data for evaluating jobs. They are essential to all job evaluationmethods that depend heavily on their accuracy and clarity for success.

7 Objective

1. Define job evaluation and describe the four traditional job evaluation methods.

Job evaluation is a process that determines the relative value of one job in relation to another. The basic purpose of job evaluation is to eliminate internal pay inequities that exist because of illogical pay structures. For example, pay inequity probably exists if the mailroom supervisor earns more money than the chief accountant. For obvious reasons, organizations prefer internal pay equity. However, when a job’s pay rate is ultimately determined to conflict with the market rate, the latter is almost sure to take precedence. Job evaluation measures job worth in an administrative rather than an economic sense. The latter can be determined only by the marketplace and revealed through compensation surveys. Nevertheless, many firms continue to use job evaluation for the following purposes:

· To identify the organization’s job structure.

· To eliminate pay inequities and bring order to the relationships among jobs.

· To develop a hierarchy of job value for creating a pay structure.

The human resource department may be responsible for administering job evaluation programs. However, committees made up of individuals familiar with the specific jobs to be evaluated often perform the actual evaluations. A typical committee might include the human resource executive and representatives from other functional areas such as finance, production, information technology, and marketing. The composition of the committee usually depends on the type and level of the jobs being evaluated. In all instances, it is important for the committee to keep personalities out of the evaluation process and to remember it is evaluating the job, not the person(s) performing the job. Some people have a difficult time making this distinction. This is understandable since some job evaluation systems are very similar to some performance appraisal methods. In addition, the duties of a job may, on an informal basis, expand, contract, or change depending on the person holding the job.

Small and medium-sized organizations often lack job evaluation expertise and may elect to use an outside consultant. When employing a qualified consultant, management should require that the consultant not only develop the job evaluation system, but also train company employees to administer it properly.

The four traditional job evaluation methods are the ranking, classification, factor comparison, and point. There are innumerable versions of these methods, and a firm may choose one and modify it to fit its particular purposes. Another option is to purchase a proprietary method such as the Hay Plan. This system, a variation of the point method, will be discussed later in this section. The ranking and classification methods are nonquantitative, whereas the factor comparison and point methods are quantitative approaches.

The ranking method is the simplest of the four job evaluation methods. In the job evaluation ranking method, the raters examine the description of each job being evaluated and arrange the jobs in order according to their value to the company. The procedure is essentially the same as that discussed in Chapter 8 regarding the ranking method for evaluating employee performance. The only difference is that you evaluate jobs, not people. The first step in this method, as with all the methods, is conducting job analysis and writing job descriptions.

The classification method involves defining a number of classes or grades to describe a group of jobs. In evaluating jobs by this method, the raters compare the job description with the class description. Class descriptions reflect the differences between groups of jobs at various difficulty levels. The class description that most closely agrees with the job description determines the classification for that job. For example, in evaluating the job of word-processing clerk, the description might include these duties:

1. Data-enter letters from prepared drafts.

2. Print envelopes.

3. Deliver completed correspondence to unit supervisor.

Assuming that the remainder of the job description includes similar routine work, this job would probably be placed in the lowest job class.

Each class is described in such a way that it captures sufficient work detail, yet is general enough to cause little difficulty in slotting a job description into its appropriate class. Probably the best-known illustration of the classification method is the federal government’s 18-class evaluation system.

The factor comparison method is somewhat more involved than the two previously discussed qualitative methods. The factor comparison method of job evaluation assumes that there are five universal factors consisting of mental requirements, skills, physical requirements, responsibilities, and working conditions, and the evaluator makes decisions on these factors independently.

The five universal job factors are:

· Mental requirements, which reflect mental traits such as intelligence, reasoning, and imagination.

· Skills, which pertain to facility in muscular coordination and training in the interpretation of sensory impressions.

· Physical requirements, which involve sitting, standing, walking, lifting, and so on.

· Responsibilities, which cover areas such as raw materials, money, records, and supervision.

· Working conditions, which reflect the environmental influences of noise, illumination, ventilation, hazards, and hours.

In this method, the evaluation committee creates a monetary scale, containing each of the five universal factors, and ranks jobs according to their value for each factor. Unlike most other job evaluation methods that produce relative job worth only, the factor comparison method determines the absolute value as well.

In the point method, raters assign numerical values to specific job factors, such as knowledge required, and the sum of these values provides a quantitative assessment of a job’s relative worth. Historically, some variation of the point plan has been the most popular option. The procedure for establishing a point method is illustrated in Figure 9-3. 28 The following tasks take place with the point method of job evaluation.

The point method requires selection of job factors according to the nature of the specific group of jobs being evaluated. Normally, organizations develop a separate plan for each group of similar jobs (job clusters) in the company. Production jobs, administrative jobs, and sales jobs are examples of job clusters. After determining the cluster to be studied, analysts (or supervisors in smaller firms) conduct job analyses and write job descriptions if current descriptions are not available. The job evaluation committee will later use these descriptions to make evaluation decisions.

We will walk through an example of how the point method works.

Let us assume that we are going to develop a point system for an administrative job cluster.

The committee next selects the factors for measuring job value. These factors become the standards used for the evaluation of jobs. Individuals who are thoroughly familiar with the content of the jobs under consideration are best qualified to identify the factors. In our example, let us assume that the compensable factors identified are education, job knowledge, contacts, complexity of duties, and initiative.

The next consideration is to determine the number of degrees for each compensable job factor. Degrees represent the number of distinct levels associated with a particular factor. The number of degrees needed for each factor depends on job requirements. If a particular cluster required virtually the same level of formal education (a high school diploma or a two-year degree, for example) fewer degrees would be appropriate than if some jobs in the cluster required advanced degrees. Evaluators must divide each factor into number of degrees. These detail definitions for each degree will ultimately permit committee members to more accurately determine the appropriate points for each factor.

In our illustration of the administrative job cluster, Education, Job Knowledge, and Initiative have been determined to have five degrees; Contacts has four; and Complexity of Duties has three. Degree 1 under Education, for example, might indicate the need for a high school education to perform the job. Degree 5 might mean that a master’s degree is required. As may be seen in Figure 9-4, the degrees for two of the compensable factors in our example, contacts and complexity of duties, are described. Notice that the factor Contacts has four degrees and that the factor of Complexity of Duties has three degrees.

The committee must then establish factor weights according to their relative importance in the jobs to be evaluated. In our example let us assume that the committee believes that education is quite important for the administrative job cluster and sets the weight for education at 35 percent. The weights of the other four factors were determined by the committee: Job Knowledge—25; Contacts—18; Complexity of Duties—17; and Initiative—5. The percent total is 100 percent.

The committee then determines the total number of points for the plan. The number may vary, but 500 or 1,000 points may work well. Our committee has determined that a 500-point system will work fine.

You can calculate the maximum points for each factor by multiplying the total points in the system by the assigned weights. In our example, the maximum points any job could receive for Education would be 175 (35 percent weight multiplied by 500 points). If the interval between factors is to be a constant number, points for the minimum degree may take the value of the percentage weight assigned to the factor. For instance, the percentage weight for education is 35 percent, so the minimum number of points would also be 35. You can figure the degree interval by subtracting the minimum number of points from the maximum number and dividing by the number of degrees used minus 1. For example, the interval for factor 1 (Education) is:

Therefore, the interval between each degree for Education is 35 (see Table 9-1). Notice that the intervals for the other factors are: Job Knowledge—25; Contacts—18; Complexity of Duties—17; and Initiative—5.

It is now time to determine the reliability of the system. Each committee member should take a random sample of jobs within the chosen job cluster and calculate the weights for each job selected. As may be seen in Table 9-2, the point total for the Administrative 2 job is determined to be 239 points. Committee members should array their jobs with the point total of each to check out the reliability of the point assignment. Only when the hierarchy arrangement appears to be logical for this job cluster is the work of the committee completed. Ultimately all jobs in the company can be evaluated in this manner.

The approach just mentioned to determine the number of points for each degree is called an arithmetic progression. An arithmetic progression is simple to understand and explain to employees. In the example, it is assumed that the intervals between the degrees are equal. However, if this is not the case, another method, such as a geometric progression where each successive factor is multiplied by a fixed number, may be more appropriate. In this example, the fixed number is two, resulting in the fourth degree being eight years (see Figure 9-5).

Point plans require time and effort to design. Historically, a redeeming feature of the method has been that, once developed, the plan was useful over a long time. In today’s environment, the shelf life may be considerably less. In any event, as new jobs are created and old jobs substantially changed, job analysis must be conducted and job descriptions rewritten on an ongoing basis. The job evaluation committee then evaluates the jobs. Only when job factors change, or for some reason the weights assigned become inappropriate, does the plan become obsolete.

The Hay guide chart-profile method (Hay plan) is a widely used refined version of the point method used by approximately 8,000 public and private-sector organizations worldwide to evaluate clerical, trade, technical, professional, managerial, and/or executive- level jobs. 29 It utilizes the compensable factors of know-how, problem solving, accountability, and additional compensable elements. Point values are assigned to these factors to determine the final point profile for any job.

Know-how is the total of all knowledge and skills needed for satisfactory job performance. It has three dimensions including the amount of practical, specialized, or scientific knowledge required; the ability to coordinate many functions; and the ability to deal with and motivate people effectively.

Problem solving is the degree of original thinking required by the job for analyzing, evaluating, creating, reasoning, and making conclusions. Problem solving has two dimensions: the thinking environment in which problems are solved (from strict routine to abstractly defined), and the thinking challenge presented by the problems (from repetitive to uncharted). Problem solving is expressed as a percentage of know-how, since people use what they know to think and make decisions.

Accountability is the responsibility for action and accompanying consequences. Accountability has three dimensions including the degree of freedom the job incumbent has to act, the job impact on results, and the extent of the monetary impact of the job.

The fourth factor, additional compensable elements, addresses exceptional conditions in the job’s environment. Because the Hay Plan is a job evaluation method used by employers worldwide, it facilitates job comparison among firms. Thus, the method serves to determine both internal and external equity.

Most job evaluation plans determine the relative value of jobs resulting in a job hierarchy. The next step is to determine the actual price of each job. Job pricing, and the details involved, is the topic of the next section.

HR Web Wisdom: The Hay Guide Chart-Profile Method

8 Objective

1. Describe job pricing.

The process of job evaluation results in a job hierarchy. It might reveal, for example, that the job of senior accountant is more valuable than the job of computer operator, which, in turn, is more valuable than the job of data entry clerk. At this point, you know the relative value of these jobs to the company, but not their absolute value. Job pricing results in placing a dollar value on the job’s worth. It takes place after evaluation of the job and the relative value of each job in the organization have been determined. Firms often use pay grades and pay ranges in the job-pricing process.

A pay grade is the grouping of similar jobs to simplify pricing jobs. For example, it is much more convenient for organizations to price 15 pay grades than 200 separate jobs. The simplicity of this approach is similar to a college or university’s practice of grouping grades of 90 to 100 into an A category, grades of 80 to 89 into a B, and so on. In following this approach, you also avoid a false implication of preciseness. Although job evaluation plans may be systematic, none is scientific.

Plotting jobs on a scatter diagram is often useful to managers in determining the appropriate number of pay grades for a company. Looking at Figure 9-6, notice that each dot on the scatter diagram represents one job. The location of the dot reflects the job’s relationship to pay and evaluated points, which reflect its worth. When this procedure is used, a certain point spread determines the width of the pay grade (100 points in this illustration). Although each dot represents one job, it may involve dozens of individuals who have positions in that one job. The large dot at the lower left represents the job of data entry clerk, evaluated at 75 points. The data entry clerk’s hourly rate of $12.90 represents either the average wage currently paid for the job or its market rate. This decision depends on how management wants to price its jobs.

A wage curve (or pay curve) is the fitting of plotted points to create a smooth progression between pay grades. The line drawn minimizes the distance between all dots and the line; a line of best fit may be straight or curved. However, when the point system is used, a straight line is often the result, as in Figure 9-6. You can draw this wage line either freehand or by using a statistical method.

After pay grades have been determined, the next decision is whether all individuals performing the same job will receive equal pay or whether you should use pay ranges. A pay range includes a minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference. Pay ranges are generally preferred over single pay rates because they allow a firm to compensate employees according to performance and length of service. Pay then serves as a positive incentive. When pay ranges are used, a firm must develop a method to advance individuals through the range. Companies typically use different range spreads for jobs that are more valuable to the company.

Referring again to Figure 9-6, note that anyone can readily determine the minimum, midpoint, and maximum pay rates per hour for each of the five pay grades. For example, for pay grade 5, the minimum rate is $17.20, the midpoint is $18.50, and the maximum is $19.80. The minimum rate may be the hiring in rate that a person receives when joining the firm, although in practice, new employees often receive pay that starts above this level. The maximum pay rate represents the maximum that an employee can receive for that job regardless of how well he or she performs the job.

A person at the top of a pay grade will have to be promoted to a job in a higher pay grade in order to receive a pay increase unless (1) an across-the-board adjustment is made or (2) the job is reevaluated and placed in a higher pay grade. This situation has caused numerous managers some anguish as they attempt to explain the pay system to an employee who is doing a tremendous job but is at the top of a pay grade. Consider this situation:

Everyone in the department realized that Beth Smithers was the best administrative assistant in the company. At times, she appeared to do the job of three people. Bob Marshall, Beth’s supervisor, was especially impressed. Recently, he had had a discussion with the human resource manager to see what he could do to get a raise for Beth. After Bob described the situation, the human resource manager’s only reply was, “Sorry, Bob. Beth is already at the top of her pay grade. There is nothing you can do except have her job upgraded or promote her to another position.”

Situations like Beth’s present managers with a perplexing problem. Many would be inclined to make an exception to the system and give Beth a salary increase. However, this action would violate a traditional principle, which holds that every job in the organization has a maximum value, regardless of how well an employee performs the job. The rationale is that making exceptions to the compensation plan would result in widespread pay inequities. Having stated this, today many organizations are challenging traditional concepts as they strive to retain top-performing employees. For example, if Beth Smithers worked for Microsoft or Southwest Airlines, she might get a raise.

The rate ranges established should be large enough to provide an incentive to do a better job. At higher levels, pay differentials may need to be greater to be meaningful. There may be logic in having the rate range become increasingly wide at each consecutive level. Consider, for example, what a $200-per-month salary increase would mean to a file clerk earning $2,000 per month (a 10 percent increase) and to a senior cost accountant earning $5,000 per month (a 4 percent increase). Assuming an inflation rate of 4 percent, the accountant’s real pay would remain unchanged.

The pressure on U.S. business firms to do things better, faster, and less expensively has caused management to scrutinize all internal systems. Compensation in particular has received attention because of its ability to affect job behavior. Responding to this need is the concept of broadbanding, a technique that collapses many pay grades (salary grades) into a few wide bands to improve organizational effectiveness.

Organizational downsizing and restructuring of jobs create broader job descriptions, with the result that employees perform more diverse tasks than they previously did. Broadbanding creates the basis for a simpler compensation system that de-emphasizes structure and control and places greater importance on judgment and flexible decision making. Broadbanding may add flexibility to the compensation system and require less time having to make fine distinctions among jobs. Bands may also promote lateral development of employees and direct attention away from vertical promotional opportunities. The decreased emphasis on job levels should encourage employees to make cross-functional moves to jobs that are on the same or even lower level because their pay rate would remain unchanged.

Broadbanding also minimizes the problem previously mentioned concerning employees at the top of their pay grade. Moving an employee’s job to a higher band would occur only when there was a significant increase in accountability. However, considerable advancement in pay is possible within each band. For example, even massive General Electric has managed to place all its exempt jobs into five bands. This is particularly important in firms with flatter organizational structures that offer fewer promotional opportunities. Figure 9-7 illustrates broadbanding as it relates to pay grades and rate ranges.

Source: Adapted from Joseph J. Martocchio, Strategic Compensation, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 2001), p. 218.

Although broadbanding is successful in some organizations, the practice is not without pitfalls. Since each band consists of a broad range of jobs, the market value of these jobs may also vary considerably. Unless carefully monitored, employees in jobs at the lower end of the band could progress to the top of the range and become overpaid.

Pay ranges are not appropriate for some workplace conditions such as assembly-line operations. For instance, when all jobs within a unit are routine, with little opportunity for employees to vary their productivity, a single-rate system (or fixed-rate system) may be more appropriate. When single rates are used, everyone in the same job receives the same base pay, regardless of productivity. This rate may correspond to the midpoint of a range determined by a compensation survey.

When pay ranges have been determined and jobs assigned to pay grades, it may become obvious that some jobs are overpaid and others underpaid. You normally bring underpaid jobs up to the minimum of the pay range as soon as possible. Referring again to Figure 9-6, you can see that a job evaluated at about 225 points and having a rate of $14.00 per hour is represented by a circled dot immediately below pay grade 3. The job was determined to be difficult enough to fall in pay grade 3 (200–299 points). However, employees working in the job are being paid 60 cents per hour less than the minimum for the pay grade ($14.60 per hour). If one or more female employees should be in this circled job, the employer might soon learn more than desired about the Equal Pay Act. Good management practice would be to correct this inequity as rapidly as possible by placing the job in the proper pay grade and increasing the pay of those in that job.

Overpaid jobs present a different problem. Figure 9-4 illustrates an overpaid job for pay grade 4 (note the circled dot above pay grade 4). Employees in this job earn $19.00 per hour, or 50 cents more than the maximum for the pay grade. This type of overpayment, as well as the kind of underpayment discussed earlier, is called a red circle rate.

An ideal solution to the problem of an overpaid job is to promote the employee to a job in a higher pay grade. This is a great idea if the employee is qualified for a higher-rated job and a job opening is available. Another possibility would be to bring the job rate and employee pay into line through a pay cut. Although this decision may appear logical, it is generally not a good management practice, as this action would punish employees for a situation they did not create. Somewhere in between these two possible solutions is a third: to freeze the rate until across-the-board pay increases bring the job into line. In an era where this type of increase is declining in popularity, it might take a long time for this to occur.

Pricing jobs is not an easy task. It requires effort that never ends. It is one of those tasks that managers may dislike but must do anyway.

9 Objective

1. Identify factors related to the employee that are essential in determining direct financial compensation.

In addition to the organization, the labor market, and the job, factors related to the employee are also essential in determining pay equity. These factors include performance, skills, competencies, seniority, experience, membership in the organization, and potential. Other factors, less controlled by the employee, are political influence and luck.

A compensation feature generally controllable by employees is their job performance. The objective of performance-based pay is to improve productivity. The typical large firm spends an average of more than $30 million a year on performance-based compensation. 30 An effective performance appraisal program is a prerequisite for any pay system tied to performance. 31Appraisal data provide input for such approaches as merit pay, bonuses, and piecework. Each of these approaches to compensation management will be discussed in the following sections.

Merit pay is a pay increase added to employees’ base pay based on their level of performance. In practice, however, it is often merely a cost-of-living increase in disguise. Past studies by compensation professionals have determined that merit pay ismarginally successful in influencing pay satisfaction and performance. Even if merit increases are small, giving them to all employees regardless of their results sends the wrong message—both to poor performers who are being rewarded for less-than-stellar achievement and to top performers who get a smaller piece of the salary-budget pie. 32

From the employer’s viewpoint, a distinct disadvantage to the typical merit pay increase is that it increases the employee’s base pay. Therefore, employees receive the added amount each year they are on the payroll regardless of later performance levels. Some firms find it difficult to justify merit pay increases based on a previous employment period but added perpetually to base pay. Although many companies continue with merit pay plans, others seek to control fixed costs by using variable pay. Actually, the two approaches are not mutually exclusive; in fact, firms often use them together. Merit pay, which increases base salary, recognizes long-term contributions of employees; variable pay, including bonuses, recognizes current accomplishments.

Companies are increasingly placing a higher percentage of their compensation budget in variable pay as more and more companies embrace the concept of pay for performance. 33 The most common type of variable pay for performance is the bonus, a one-time annual financial award, based on productivity, that is not added to base pay.

According to a recent survey, 85 percent of private-sector organizations pay bonuses, which are up from 69 percent the previous year. 34 In a recent study, all companies with double-digit growth said their variable pay programs proved beneficial and contributed to business results. 35 Leon Potgieter, principal and head of Towers Perrin’s Global Consulting Group, said, “In the last two years, the use of variable pay has grown worldwide as companies recognized the value of tying pay to performance and results. The use of variable pay has helped employers manage their cash outlay in a tough business environment while laying the foundation to share success with employees when the business results are there.” 36

Managers commonly contend that performance-based pay is a win-win situation because it boosts production and efficiency and gives employees some control over their earning power. With the bonus, there is no carryover into subsequent periods unless employees maintain their performance. According to a study of financial executives, cash bonuses are the best way to acknowledge a job well done. 37 Although they were once reserved for high-ranking executives, firms are pushing these forms of pay down through the ranks. 38

Many organizations today are providing spot bonuses for critical areas and talents. Spot bonuses are relatively small monetary gifts provided to employees for outstanding work or effort during a reasonably short period of time. If an employee’s performance has been exceptional, the employer may reward the worker with a one-time bonus of $50, $100, or $500 shortly after the noteworthy actions. 39 For example, in a recent study, 82 percent of firms reported granting spot cash rewards to IT personnel. 40

Piecework is an incentive pay plan where employees are paid for each unit they produce. For example, if a worker is paid $8 a unit and produces 10 units a day, the worker earns $80. Sometimes a guaranteed base is included in a piece-rate plan where a worker would receive this base amount no matter what the output. Piecework is especially prevalent in the production/operations area. Requirements for the plan include developing output standards for the job and being able to measure the output of a single employee. Obviously, a piecework plan would not be feasible for many jobs.

A basic question that should precede the introduction of any performance-based pay plan is this: “What effect will it have on productivity and quality?” Although advocates of incentive plans cannot guarantee success, results are often positive.

Skill-based pay is a system that compensates employees for their job-related skills and knowledge, not for their job titles. The system assumes that employees who know more are more valuable to the firm and, therefore, they deserve a reward for their efforts in acquiring new skills. When employees obtain additional job-relevant skills, both individuals and the departments they serve benefit. For example, in a department there may be six different types of machines, each requiring different skills to operate. Under a skill-based pay system, the worker would increase his or her pay as additional machines are learned. Employees may receive both tangible and intangible rewards: pay increases, job security, greater mobility, and the satisfaction of being more valuable. Acquiring additional skills also allows employees the opportunity to increase their earnings without the necessity of moving permanently to a higher-level job. This factor has additional importance in a highly competitive environment in which promotional opportunities are more limited than in the past. Employees with a broader range of skills provide organizational units with a greater degree of versatility in dealing with absenteeism and turnover.

Typically, skill pay is most appropriate in settings where the work tends to be routine and less varied, such as skills of assembly or responding to customer service questions. Skill-based pay is also popular with autonomous workgroups or other job-enrichment programs. A high commitment to human resource development is necessary to implement such a program successfully. In addition, employees involved in skill-based pay programs must have the desire to grow and increase their knowledge and skills.

Although skill-based pay appears to have advantages for both employer and employee, there are some challenges for management. The firm must provide adequate training opportunities or else the system can become a demotivator. Since research has revealed that it takes an average of only three years for a worker to reach a maximum level in a skill-based pay system, what will keep employees motivated? One answer has been coupling the plan with a pay-for-performance system. An additional challenge associated with skill-based pay is that payroll costs will escalate. It is conceivable that a firm could have, in addition to high training and development costs, a very expensive workforce possessing an excess of skills. In spite of these negative possibilities, a number of firms have achieved lower operating costs and other benefits with their pay-for-skills programs.

Competency-based pay is a compensation plan that rewards employees for the capabilities they attain. Competencies include skills but also involve other factors such as motives, values, attitudes, and self-concepts that can be linked to better performance. Often considerable time must be spent determining the specific competencies needed for the different jobs. Blocks of competencies are then priced. Often management must invest considerable time in developing, implementing, and continuing such a system. Although core competencies may be unique to each company, one service firm identified the following:

· Team-centered. Builds productive working relationships at levels within and outside the organization.

· Results-driven. Is focused on achieving key objectives.

· Client-dedicated. Works as a partner with internal and external clients.

· Innovative. Generates and implements new ideas, products, services, and solutions to problems.

· Fast cycle. Displays a bias for action and decisiveness. 41

Pay for performance focuses on end results; competency-based pay examines how an employee accomplishes the objectives. Although competencies may relate to performance, it appears that they would be more difficult to evaluate than results.

Seniority is the length of time an employee has been associated with the company, division, department, or job. Although management generally prefers performance as the primary basis for compensation changes, unions tend to favor seniority. They believe the use of seniority provides an objective and fair basis for pay increases. Many union leaders consider performance evaluation systems to be too subjective, permitting management to reward favorite employees arbitrarily.

Regardless of the nature of the task, experience has the potential for enhancing a person’s ability to perform. However, this possibility materializes only if the experience acquired is positive. Knowledge of the basics is usually a prerequisite for effective use of a person’s experience. This is true for a person starting to play golf, learn a foreign language, or manage people in organizations. People who express pride in their many years of managerial experience may be justified in their sentiments, but only if their experience has been beneficial. Those who have been autocratic managers for a number of years would likely not find their experience highly valued by a Fortune 100 firm. Nevertheless, experience is often indispensable for gaining the insights necessary for performing many tasks.

A relatively new aspect of experience relating to organizational value stems from the creation of a new economy. Today, it is possible that experience is becoming somewhat irrelevant. How do you best do things in a dot-com world as opposed to the old economy? Still, employees receive compensation for their experience and the practice is justified if the experience is positive and relevant to the work.

Employees receive some compensation components without regard to the particular job they perform or their level of productivity. They receive them because they are members of the organization. For example, an average performer occupying a job in pay grade 1 may receive the same number of vacation days, the same amount of group life insurance, and the same reimbursement for educational expenses as a superior employee working in a job classified in pay grade 10. In fact, the worker in pay grade 1 may get more vacation time if he or she has been with the firm longer. The purpose of rewards based on organizational membership is to maintain a high degree of stability in the workforce and to recognize loyalty.

Potential is useless if it is never realized. However, organizations do pay some individuals based on their potential. In order to attract talented young people to the firm, for example, the overall compensation program must appeal to those with no experience or any immediate ability to perform difficult tasks. Many young employees are paid well, perhaps not because of their ability to make an immediate contribution, but because they have the potential to add value to the firm as a professional, first-line supervisor, manager of compensation, vice president of marketing, or possibly even chief executive officer.

Firms should obviously not permit political influence to be a factor in determining financial compensation. However, to deny its existence would be unrealistic. There is an unfortunate element of truth in the statement, “It’s not what you know, it’s who you know.” To varying degrees in business, government, and not-for-profit organizations, a person’s pull or political influence may sway pay and promotion decisions. It may be natural for a manager to favor a friend or relative in granting a pay increase or promotion. Nevertheless, if the person receiving the reward is not deserving of it, the workgroup will soon know about it. The result will probably be devastating to employee morale.

You have undoubtedly heard the expression, “It helps to be in the right place at the right time.” There is more than a little truth in this statement as it relates to compensation. Opportunities are continually presenting themselves in firms. Realistically, there is no way for managers to foresee many of the changes that occur. For instance, who could have known that the purchasing agent, Joe Flynn, a seemingly healthy middle-aged man, would suddenly die of a heart attack? Although the company may have been grooming several managers for Joe’s position, none may be capable of immediately assuming the increased responsibility. The most experienced person, Tommy Loy, has been with the company only six months. Tommy had been an assistant buyer for a competitor for four years. Because of his experience, Tommy receives the promotion and the increased financial compensation. Tommy Loy was lucky; he was in the right place at the right time.

When asked to explain their most important reasons for success and effectiveness as managers, two chief executives responded candidly. One said, “Success is being at the right place at the right time and being recognized as having the ability to make timely decisions. It also depends on having good rapport with people, a good operating background, and the knowledge of how to develop people.” The other replied, “My present position was attained by being in the right place at the right time with a history of getting the job done.” Both executives recognize the significance of luck combined with the ability to perform. Their experiences lend support to the idea that luck works primarily for the efficient.

10 Objective

1. Describe team-based pay, company-wide pay plans, professional employee compensation, sales representative compensation, and contingency worker compensation.

Since team performance consists of individual efforts, individual employees should be recognized and rewarded for their contributions. However, if a team is to function effectively, firms should provide a reward based on the overall team performance as well. Changing a firm’s compensation structure from an individual-based system to one that involves team-based pay can have powerful results. By so doing, a firm can improve efficiency, productivity, and profitability.

Team incentives have both advantages and disadvantages. On the positive side, firms find it easier to develop performance standards for groups than for individuals. For one thing, there are fewer standards to determine. Also, the output of a team is more likely to reflect a complete product or service. Another advantage is that employees may be more inclined to assist others and work collaboratively if the organization bases rewards on the team’s output. A potential disadvantage for team incentives relates to exemplary performers. If individuals in this category perceive that they contribute more than other employees in the group, they may become disgruntled and leave.

Unisys provides an example of team-based pay. This firm has made dramatic changes in the way people work. In the company, there are more than 140 people organized into 10 teams at their Bismarck, North Dakota, office. These teams handle various accounting functions, such as the firm’s accounts payable and employees’ business travel reimbursements. Each team takes care of an entire process, from opening mail to issuing checks, and seeks solutions internally to any problems it encounters. All employees receive a base wage in addition to payment for the performance of their team. 42

In baseball, you do not judge the team based on its ace pitcher or great outfield. The criterion for success is overall team performance, its win–loss record. In business, company-wide plans offer a possible alternative to the incentive plans previously discussed. Organizations normally base company-wide plans on the firm’s productivity, cost savings, or profitability. To illustrate the concept of company-wide plans, profit sharing will be discussed and then, a gainsharing plan known as the Scanlon plan, will be presented.

Profit sharing is a compensation plan that results in the distribution of a predetermined percentage of the firm’s profits to employees. Many firms use this type of plan to integrate the employees’ interests with those of the company. Profit-sharing plans can aid in recruiting, motivating, and retaining employees, which usually enhances productivity.

There are several variations of profit-sharing plans, but three basic kinds of plans are used today: current profit sharing, deferred profit sharing, and combination plans. 43

· Current plans provide payment to employees in cash or stock as soon as profits have been determined.

· Deferred plans involve placing company contributions in an irrevocable trust, credited to individual employees’ accounts. The funds are normally invested in securities and become available to the employee (or his or her survivors) at retirement, termination, or death.

· Combination plans permit employees to receive payment of part of their share of profits on a current basis, while deferring payment of part of their share.

Normally, most full-time employees are included in a company’s profit-sharing plan after a specified waiting period. Vestingdetermines the amount of profit an employee owns in his or her account. Firms often determine this sum on a graduated basis. For example, an employee may become 25 percent vested after being in the plan for two years; 50 percent vested after three years; 75 percent vested after four years; and 100 percent vested after five years. This gradual approach to vesting encourages employees to remain with the firm, thereby reducing turnover.

The results of profit sharing include increased efficiency and lower costs. In recent years, however, the increased popularity of defined contribution plans (discussed in the next chapter) has slowed the growth of profit-sharing plans. Also, variations in profits may present a special problem. When employees have become accustomed to receiving added compensation from profit sharing, and then there is no profit to share, they may become disgruntled.

A basic problem with a profit-sharing plan stems from the recipients’ seldom knowing precisely how they helped generate the profits, beyond just doing their jobs. And, if employees continue to receive a payment, they will come to expect it and depend on it. If they do not know what they have done to deserve it, they may view it as an entitlement program and the intended ownershipattitude may not materialize.

Gainsharing plans are designed to bind employees to the firm’s productivity and provide an incentive payment based on improved company performance. Gainsharing programs, such as the Scanlon, Multicost Scanlon, Rucker, and Improshare plans, are the most popular company-wide plans and they have been increasingly adopted by American corporations. 44 The goal of gainsharing is to focus on improving cost-efficiency, reducing costs, improving throughput, and improving profitability. Gainsharing helps align an organization’s people strategy with its business strategy. 45 Gainsharing plans (also known as productivity incentives, team incentives, and performance sharing incentives) generally refer to incentive plans that involve many or all employees in a common effort to achieve a firm’s performance objectives.

Joseph Scanlon, after whom the Scanlon plan was named, developed the first gainsharing plan during the Great Depression, and it continues to be a successful approach to group incentive. The Scanlon plan provides a financial reward to employees for savings in labor costs resulting from their suggestions. Employee-management committees evaluate these suggestions. Participants in these plans calculate savings as a ratio of payroll costs to the sales value of what that payroll produces. If the company is able to reduce payroll costs through increased operating efficiency, it shares the savings with its employees.

Scanlon plans are not only financial incentive systems, but also systems for participative management. The Scanlon plan embodies management/labor cooperation, collaborative problem solving, teamwork, trust, gainsharing, open-book management, and servant leadership. The four basic principles emphasized are the following: 46

1. Identity. To focus on employee involvement, the firm’s mission or purpose must be clearly articulated.

2. Competence. The plan requires the highest standards of work behavior and a continual commitment to excellence.

3. Participation. The plan provides a mechanism for using the ideas of knowledgeable employees and translating these into productivity improvements.

4. Equity. Equity is achieved when three primary stakeholders, employees, customers, and investors, share financially in the productivity increases resulting from the program.

Such firms as Herman Miller, Ameritech, Martin Marietta, Donnelly Mirrors, Motorola, and Boston’s Beth Israel Hospital are realizing benefits from the Scanlon plan. They have created formal participative means for soliciting suggestions and are sharing the revenue resulting from increases in productivity. Gainsharing studies indicate that firms using these plans increase their productivity from 10 to 12 percent a year. 47 Scott Abel, plant manager at Zircoa, a manufacturer of ceramic and refractory products, said productivity is on the upswing as reflected in the company’s gainsharing program, which outlines that any increased revenues tied to operating improvements are set aside and the money is split between workers and the company. Recently, each of Zircoa’s 130 employees earned $4,700 in gainsharing money. 48

New Jersey–based NYF, a privately owned distributor of electronic hardware, found that its performance management program released the firm’s creativity and allowed it to utilize the knowledge, skills, flexibility, and drive of its employees. The centerpiece of NYF’s performance management system is gainsharing, which includes a financial measurement and feedback process, monitors company performance, and then distributes gains in the form of bonuses when appropriate. Due to the program, employees think like entrepreneurs and make daily decisions affecting company performance. They understand how their decisions affect company performance and are confident management will honor these decisions. 49

As previously mentioned, a professional employee performs work requiring advanced knowledge in a field of learning, normally acquired through a prolonged course of specialized instruction. Examples of exempt professionals often employed in industry include scientists, engineers, and accountants. Their pay, initially, is for the knowledge they bring to the organization. Gradually, however, some of this knowledge becomes obsolete, and their salaries reflect this. At times, this encourages professionals to enter management to make more money. A problem with this move is that they may not be suited for management. To deal with this potential dilemma, some organizations have created dual-career paths (discussed further in the appendix of Chapter 7). This approach provides a separate pay structure for professionals, which overlaps the managerial pay structure. With this system, high-performing professionals are not required to enter management to obtain greater pay.

The unstable nature of professional jobs and their salaries results in a heavy emphasis on market data for job pricing. This has resulted in the use of maturity curves that reflect the relationship between professional compensation and years of experience. These curves are used primarily to establish rates of pay for scientists and engineers involved in technical work at the professional level. Such maturity curves reveal a rapid increase in pay for roughly five to seven years, and then a more gradual rise as technical obsolescence erodes the value of these jobs. 50

Designing compensation programs for sales employees involves unique considerations. For this reason, this task may belong to the sales staff rather than to human resources. Nevertheless, many general compensation practices apply to sales jobs. For example, job content, relative job worth, and job market value are all relevant factors.

The straight salary approach is one extreme in sales compensation. In this method, salespersons receive a fixed salary regardless of their sales levels. Organizations use straight salary primarily to emphasize continued product service after the sale. For instance, sales representatives who deal largely with the federal government often receive this form of compensation.

At the other extreme is straight commission where the person’s pay is totally determined as a percentage of sales. If the salesperson makes no sales, the individual working on straight commission receives no pay. On the other hand, highly productive sales representatives can earn a great deal of money under this plan.

Between these extremes are the endless varieties of part-salary, part-commission combinations. The possibilities increase when a firm adds various types of bonuses to the basic compensation package. The emphasis given to either commission or salary depends on several factors, including the organization’s philosophy toward service, the nature of the product, and the amount of time required to close a sale.

In addition to salary, commissions, and bonuses, salespersons often receive other forms of compensation that are intended to serve as added incentives. Sales contests that offer products such as DVD players, notebook computers, or expense-paid vacations to exotic locations are common. If any one feature sets sales compensation apart from other programs, it is the emphasis on incentives. You can usually identify specific sales representatives as the cause for sales increases, a situation that encourages payment of incentive compensation. Experience in sales compensation practices over the years has supported the concept of directly relating rewards to performance.

Contingent workers who are employed through an employment agency or on an on-call basis often earn less than traditional employees. Contingent workers who are independent contract workers typically earn more. However, both classes of contingency workers receive fewer benefits, if they receive them at all. As discussed in Chapter 5, flexibility and lower costs for the employer are key reasons for the growth in the use of contingent workers. An inherent compensation problem relates to internal equity. You may have two employees working side by side, one a temporary employee (temp) and the other a regular employee, performing same or near identical tasks, and one makes more money than the other. In most cases, contingents earn less pay and are far less likely to receive health or retirement benefits than their permanent counterparts.

11 Objective

1. Explain the various elements of executive compensation.

Executive skill largely determines whether a firm will prosper, survive, or fail. A company’s program for compensating executives is a critical factor in attracting and retaining the best available talent. Therefore, in spite of the criticism of excessive executive pay mentioned in the HRM in Action at the beginning of this chapter, providing adequate compensation for these managers is vital. Designing an executive compensation package begins with determining the organization’s goals, its objectives, and the anticipated time for achieving them. It is advisable to obtain advice on tax and accounting implications for both the executive and the company. The executive package depends on the magnitude of the responsibility, risk, and effort shouldered by the chief executive as a function of the firm’s scale. 51 Organizations typically prefer to relate salary growth for the highest-level managers to market rates and overall corporate performance, including the firm’s market value. For the next management tier, they tend to integrate overall corporate performance with market rates and internal considerations to come up with appropriate pay. For lower-level managers, market rates, internal pay relationships, and individual performance are critical factors.

In general, the higher the managerial position, the more difficult it is to define job tasks. The descriptions focus on anticipated results rather than tasks or how the work is accomplished. Thus, market pricing may be the best general approach to use in determining executive compensation. Even though the market may support a high salary for managers, the amount may still seem extremely large. However, managers at the executive level represent a relatively small percentage of the total workforce, and the overall impact on total labor costs is small.

In using market pricing, organizations utilize compensation survey data to determine pay levels for a representative group of jobs. These data are available from such sources as William M. Mercer, WorldatWork, Towers Perrin, Hay Associates, and Hewitt Associates. Various elements of executive compensation will next be discussed.

Although it may not represent the largest portion of the executive’s compensation package, the base salary provided is obviously important. It is a factor in determining the executive’s standard of living. Salary also provides the basis for other forms of compensation; for example, it may determine the amount of bonuses and certain benefits. The U.S. tax law does not allow companies to deduct more than $1 million of an executive’s salary; therefore, most firms keep it below that amount. 52

Stock option plans give the executive the option to buy a specified amount of stock in the future at or below the current market price. The stock option is a long-term incentive designed to integrate the interests of management with those of the organization. To ensure this integration, some boards of directors require their top executives to hold some of the firm’s stock. Although the motivational value of stock ownership seems logical, research on the subject has not been conclusive. One view is that option grants do not succeed in making executives think and act like shareholders. It makes them think and act like option holders, with a shorter-term perspective than shareholders. A recommended alternative is to provide packages that include long-term cash and stock incentives tied to core organizational goals, with the options being more performance based. Also, as of 2006, the Financial Accounting Standards Board (FASB) requires companies to expense stock options, thereby making them less attractive. 53

In general, more mature companies are expected to move away from options, whereas growth companies are more likely to continue using options. 54 Stock option plans are advantageous when stock prices are rising. However, in a declining stock market, when the market price of many stocks is well below the exercise price, this form of compensation is not nearly as attractive, at least in the short run. 55 There are potential disadvantages to stock option plans. A manager may feel uncomfortable investing money in the same organization in which he or she is building a career. As with profit sharing, this method of compensation is popular when a firm is successful, but during periods of decline when stock prices fall, the participants may become disenchanted. Nevertheless, there are several bona fide reasons for including stock ownership in executive compensation plans. In addition to potentially aligning employees’ interests with those of shareholders, retention of top executives is also a factor.

Payment of bonuses reflects a managerial belief in their incentive value. The popularity of this compensation component has risen rapidly in recent years since stock options now have to be expensed. 56

There is a trend toward more performance-based compensation packages for executives. According to John Challenger, the chief executive of the Chicago outplacement firm Challenger, Gray & Christmas Inc., “There is certainly a strong long-term trend toward performance-based pay . . . and they are leading by example. It’s the way that corporate America is heading.” 57 At Bank of America, Kenneth D. Lewis, the chairman, president, and chief executive, gave up some guaranteed pay in return for compensation tied to performance measures. He receives a fixed salary but also gets cash incentives, restricted stock, and stock options if the company hits certain financial and stock performance targets. 58 Ask yourself this question: “If pay for performance is appropriate for lower-level employees, should top executives be exempt from the same practice?” The true superstars can still have huge earnings if their certain targets are met. That is precisely what happened at Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns, Morgan Stanley, Citigroup, and JPMorgan as their CEOs received substantial pay increases. 59 As shareholders become increasingly disenchanted with high levels of executive compensation, as suggested at the beginning of this chapter, performance-based pay may gain in popularity.

As another example, Mellon Financial Corporation’s new chairman, president, and chief executive, Robert P. Kelly, has a performance-based pay agreement that could earn him nearly $10 million a year in total compensation. At Mellon, he is paid a base salary of $975,000 but could earn up to $4.87 million a year in performance-based bonuses. He can earn about another $5.1 million, depending on the company’s performance. The long-term program consists of 40 percent stock options, 20 percent time-based restricted stock awards, and 40 percent performance shares. The plan takes three years to vest. Mr. Kelly also receives an initial grant of 280,000 stock options, 34,000 restricted shares, and 69,000 performance shares. 60

Executive benefits are similar to but usually more generous than benefits received by other employees because they relate to managers’ higher salaries. However, current legislation (ERISA) does restrict the value of executive benefits to a certain level above that of other workers. Perquisites (perks) are any special benefits provided by a firm to a small group of key executives and designed to give the executives something extra. In addition to conveying status, these rewards are either not considered as earned income or else the government taxes them at a lower level than ordinary income. An executive’s perks may include some of the following:

· A company-provided car

· Accessible, no-cost parking

· Limousine service; the chauffeur may also serve as a bodyguard

· Kidnapping and ransom protection

· Counseling service, including financial and legal services

· Professional meetings and conferences

· Spouse travel

· Use of company plane and yacht

· Home entertainment allowance

· Special living accommodations away from home

· Club memberships

· Special dining privileges

· Season tickets to entertainment events

· Special relocation allowances

· Use of company credit cards

· Medical expense reimbursement; coverage for all medical costs

· Reimbursement for children’s college expenses

· No- and low-interest loans. 61

Today, personal use of corporate jets is soaring among corporate America’s elite as an executive perk. Recently, more than 250 CEOs had personal flight time worth at least $50,000; more than 100 CEOs and senior managers had a flight time cost of $100,000 or more. 62 Today, when companies give perks worth more than $50,000 or 10 percent of salary and bonus, they are required to disclose the entire amount. Plans are for the threshold to be lowered to $10,000. 63 Once-hidden information regarding pay and perks must now be disclosed. 64

A golden parachute contract is a perquisite that protects executives in the event that another company acquires their firm or if the executive is forced to leave the firm for other reasons. When SunGard Data Systems Inc. of Wayne, Pennsylvania, spun off much of its business, it promised golden parachutes as large as three times their pay to 35 top executives. The golden parachute agreements would give chief executive Cristobal Conde and 13 others three times their pay if they lost their jobs as late as one year plus 30 days after SunGard Data Systems changed hands. Twenty-one others would get as much as much as 2.5 times their pay, under different terms. 65

State regulators are becoming significantly more aggressive in their attempts to rein in obscene golden parachute plans. For instance, California insurance commissioner John Garamendi recently negotiated $265 million in givebacks from Anthem Inc., the fifth-largest publicly traded health insurance company in the country, as a condition of his approval of its merger with WellPoint Health Networks Inc. 66 Some executives are giving up their rights to severance payments that are provided in case the company is bought or he or she is terminated. G. Kennedy Thompson, chairman, president, and chief executive at Wachovia Corporation gave up rights to a severance payment. Also, CEO Richard Kovacevich terminated a similar agreement with Wells Fargo & Co. 67

Trends & Innovations: Outrageous Severance Pay Examples?

Today’s severance package for CEOs is typically several times annual salary and bonus, and accelerated vesting of options. Because the competition for top executives is fierce, in many cases CEOs have to commit a serious crime to be ineligible for severance. In a recent article entitled “Good News: You’re Fired,” a list of executive firings and their severance pay was provided. Many execs walk away from troubles with big payouts, pensions, and consulting jobs. Some of these would appear to most to be excessive:

· Philip Purcell, Morgan Stanley, $113 million. In addition, the company will pay $1.9 million to provide Purcell with a secretary for the rest of his life. 68

· Stephen Crawford, Morgan Stanley, $32 million.

· Harry Stonecipher, Boeing, $600,000/year.

· Carly Fiorina, Hewlett-Packard, $21 million. However, in a suit brought by the Service Employees International Union, they claimed that HP paid Fiorina $21.4 million in severance, plus stock options and other benefits that increased her total compensation to $42 million. 69

· Franklin Raines, Fannie Mae, $1.4 million/year.

· Scott Livengood, Krispy Kreme, $46,000/month.

· James Kilts, Gillette, $100 million. 70

· Jack Welch, once a business school and GE corporate icon, now presents an example for corporate excess. His former wife revealed his $9 million annual pension plan payout, plus outrageous perks such as lifetime use of GE’s $80,000-per-month Manhattan apartment with free food and free maid service; lifetime use of the GE fleet of corporate jets, including a Boeing 737 business jet; a new Mercedes plus a limousine and driver; and assorted free sports and opera box tickets. 71

What most people may not understand is that those massive severance payments are not set up by a board of directors after a CEO has quit or been fired. In virtually every case those payments were negotiated prior to being hired. As these examples suggest, not only should CEO pay be considered but CEO pay contracts should also be examined. 72

Ethical Dilemma: Creative Accounting?

You and your best friend Sam work for the same company. You are vice president for human resources and Sam is an accountant. Sam said, “I don’t know if I should tell you this, but there’s something going on at work you should know about.” Sam then told you, in strict confidence, that the company’s chief financial officer was planning to take an aggressive stance on sales revenue reporting, that in Sam’s view, would stretch the boundaries of acceptable accounting practices. Sam’s accounting expertise and responsibilities center on the company’s real estate holdings and he does not deal with sales revenue. But he has a pretty good understanding of what’s happening in other areas of the company’s financial activities, and he was clearly concerned about what the CFO wanted to do.

The CFO’s accounting method would increase your firm’s earnings outlook and probably help its stock price. “But it could be risky,” Sam said. It could “raise questions” about the firm’s methods and even its integrity. What’s more, Sam said, he wasn’t sure the CEO clearly understands the CFO’s approach. He might just go along with the CFO since they were college buddies and the CEO personally hired him four years ago. The CEO is 48 and has been with the company for five years. He has boosted sales to double-digit rates every year, but his streak may end soon. Sales gains so far this year have been the lowest in more than six years, and there is no help in the immediate horizon. Your chairman, the son of the founder, is 64 and has been with the company for 35 years. He has spent his career keeping his company on a steady growth path, and he considers the company’s reputation and integrity a reflection of his own. 73

What would you do?

A Global Perspective: Costs of Expatriates

Employers today know that it is more expensive to send workers abroad. Tokyo, for example, ranks as the most expensive city for expatriates, followed by London, Moscow, and Osaka, Japan, according to a survey by Mercer Human Resource Consulting. In Tokyo, an expat can expect to spend $4,501 per month on a luxury two-bedroom apartment rental, $4.73 on a cup of coffee, and $5.48 on a fast-food hamburger dinner. 74

During the past few years Agilent Technologies, the world’s largest maker of scientific-testing equipment, cut 16,000 jobs during a major restructuring. It had become obvious that its multimillion-dollar expatriate program needed serious trimming. The company did not know what it was spending on its employees in foreign countries. It did know that, in general, the cost of an expatriate is three times the expat’s annual salary for every year of the assignment. But with spending spread across 21 different countries, such as Germany, Singapore, and China, and across business areas, from compensation to taxation, it was nearly impossible to determine the total cost of relocation. “If you don’t know how much you’re spending, how do you get started on how to save?” says Lin Contino, global relocation manager at Agilent, which has 28,000 employees. “We couldn’t get a grip on it. We had 422 different suppliers globally that provided relocation services. I could tell the cost for the United States, but I couldn’t tell for other countries. I couldn’t pull it all together.” 75

“A lot of companies are trying to come to grips with the fact that they don’t know what the [total] costs are for international relocation,” says Rick Schwartz, CEO of GMAC Global Relocation Services, in Oak Brook, Illinois. “It’s kind of scary. I’ve heard it so many times, from large, prestigious, well-run organizations. But the need to do business around the world is increasing significantly. The question facing many organizations is: How can I move more, but in a cost-effective way?” 76

Employers have had to face the fact that it is more expensive to send workers abroad. To rein in spending, employers are using a variety of strategies. They are sending fewer workers overseas, replacing traditional three-year stints with short-term assignments, localizing expats, offering less generous perks, and hiring third-country nationals or local talent instead of sending a U.S. employee overseas. 77 Today, the trend is toward temporary relocation in which the family remains at home. Recently, 70 percent of global assignments were scheduled for one year or less, a major change from the historical average of 13 percent. 78 The decrease in the number of long-term assignments has been accompanied by the growth in the number of short-term assignments ranging from 2 to 12 months. 79 The short-term assignment uses reimbursement-based allowances and fewer or no family allowances such as schooling. 80 Cost savings are not the only advantage for short-term assignment. Tim Runnion, CEO of Mobility Services International, said, “In recent years, companies have faced reductions in available talent, so they have to move it around on short-term assignments to bring expertise to local situations.” 81

1. Define compensation and describe the various forms of compensation.

Compensation is the total of all rewards provided employees in return for their services. Forms of compensation include direct financial compensation, indirect financial compensation (benefits), and nonfinancial compensation.

2. Define financial equity and explain the concept of equity in direct financial compensation.

Financial equity is workers’ perceptions that they are being treated fairly. Forms of compensation equity include external equity, internal equity, employee equity, and team equity.

3. Identify the determinants of direct financial compensation.

The organization, the labor market, the job, and the employee all have an impact on job pricing and the ultimate determination of an individual’s financial compensation.

4. Describe the organization as a determinant of direct financial compensation.

Compensation policies and ability to pay are organizational factors to be considered.

5. Describe the labor market as a determinant of direct financial compensation.

Factors that should be considered include compensation surveys, expediency, cost-of-living increases, labor unions, the economy, and certain federal and state legislation.

6. Explain how the job is a determinant of direct financial compensation.

Management techniques utilized for determining a job’s relative worth include job analysis, job descriptions, and job evaluation.

7. Define job evaluation and describe the four traditional job evaluation methods.

Job evaluation is a process that determines the relative value of one job in relation to another. In the job evaluation ranking method, the raters examine the description of each job being evaluated and arrange the jobs in order according to their value to the company. The classification method involves defining a number of classes or grades to describe a group of jobs. In the factor comparison method, raters need not keep the entire job in mind as they evaluate; instead, they make decisions on separate aspects or factors of the job. In the point method, raters assign numerical values to specific job factors, such as knowledge required, and the sum of these values provides a quantitative assessment of a job’s relative worth.

8. Describe job pricing.

Placing a dollar value on the worth of a job is job pricing.

9. Identify factors related to the employee that are essential in determining direct financial compensation.

The factors include pay for performance, seniority, experience, membership in the organization, potential, political influence, and luck.

10. Describe team-based pay, company-wide pay plans, professional employee compensation, sales representative compensation, and contingency worker compensation.

If a team is to function effectively, firms should provide a reward based on the overall team performance. Organizations normally base company-wide plans on the firm’s productivity, cost savings, or profitability. Compensation for professionals is for the knowledge they bring to the organization. The unstable nature of professional jobs and their salaries results in a heavy emphasis on market data for job pricing. Designing compensation programs for sales employees involves unique considerations. Contingency workers who are employed through an employment agency or on an on-call basis often earn less than traditional employees. Contingency workers who are independent contract workers typically earn more.

11. Explain the various elements of executive compensation.

In determining executive compensation, firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance. Executive compensation often has five basic elements: (1) base salary, (2) short-term incentives or bonuses, (3) stock option plans, (4) executive performance-based pay, and (5) perquisites.

· Compensation

· Direct financial compensation

· Indirect financial compensation

· Nonfinancial compensation

· Equity theory

· Financial equity

· External equity

· Internal equity

· Employee equity

· Team equity

· Compensation policy

· Pay leaders

· Market (going) rate

· Pay followers

· Labor market

· Compensation survey

· Benchmark job

· Cost-of-living allowance (COLA)

· Exempt employees

· Job evaluation

· Job evaluation ranking method

· Classification method

· Factor comparison method

· Point method

· Hay guide chart-profile method (Hay plan)

· Job pricing

· Pay grade

· Wage curve

· Pay range

· Broadbanding

· Merit pay

· Bonus

· Spot bonus

· Piecework

· Skill-based pay

· Competency-based pay

· Seniority

· Profit sharing

· Gainsharing

· Scanlon plan

· Stock option plan

· Perquisites (perks)

· Golden parachute contract

HRM Incident 1: A Motivated Worker!

Bob Rosen could hardly wait to get back to work Monday morning. He was excited about his chance of getting a large bonus. Bob is a machine operator with Ram Manufacturing Company, a Wichita, Kansas, maker of electric motors. He operates an armature-winding machine. The machine winds copper wire onto metal cores to make the rotating elements for electric motors.

Ram pays machine operators on a graduated piece-rate basis. Operators are paid a certain amount for each part made, plus a bonus. A worker who produces 10 percent above standard for a certain month receives a 10 percent additional bonus. For 20 percent above standard, the bonus is 20 percent. Bob realized that he had a good chance of earning a 20 percent bonus that month. That would be $787.

Bob had a special use for the extra money. His wife’s birthday was just three weeks away. He was hoping to get her a car. He had already saved $2,000, but the down payment on the car was $2,500. The bonus would enable him to buy the car.

Bob arrived at work at seven o’clock that morning, although his shift did not begin until eight. He went to his workstation and checked the supply of blank cores and copper wire. Finding that only one spool of wire was on hand, he asked the forklift truck driver to bring another. Then, he asked the operator who was working the graveyard shift, “Sam, do you mind if I grease the machine while you work?”

“No,” Sam said, “that won’t bother me a bit.”

After greasing the machine, Bob stood and watched Sam work. He thought of ways to simplify the motions involved in loading, winding, and unloading the armatures. As Bob took over the machine after the eight o’clock whistle, he thought, “I hope I can pull this off. I know the car will make Kathy happy. She won’t be stuck at home while I’m at work.”

Question

HRM Incident 2: The Controversial Job

David Rhine, compensation manager for Farrington Lingerie Company, was generally relaxed and good-natured. Although he was a no-nonsense, competent executive, David was one of the most popular managers in the company. This Friday morning, however, David was not his usual self. As chairperson of the company’s job evaluation committee, he had called a late-morning meeting at which several jobs were to be considered for reevaluation. The jobs had already been rated and assigned to pay grade 3. But the office manager, Ben Butler, was upset that one was not rated higher. To press the issue, Ben had taken his case to two executives who were also members of the job evaluation committee. The two executives (production manager Bill Nelson and general marketing manager Betty Anderson) then requested that the job ratings be reviewed. Bill and Betty supported Ben’s side of the dispute, and David was not looking forward to the confrontation that was almost certain to occur.

The controversial job was that of receptionist. Only one receptionist position existed in the company, and Marianne Sanders held it. Marianne had been with the firm 12 years, longer than any of the committee members. She was extremely efficient, and virtually all the executives in the company, including the president, had noticed and commented on her outstanding work. Bill Nelson and Betty Anderson were particularly pleased with Marianne because of the cordial manner in which she greeted and accommodated Farrington’s customers and vendors, who frequently visited the plant. They felt that Marianne projected a positive image of the company.

When the meeting began, David said, “Good morning. I know that you’re busy, so let’s get the show on the road. We have several jobs to evaluate this morning and I suggest we begin . . .” Before he could finish his sentence, Bill interrupted, “I suggest we start with Marianne.” Betty nodded in agreement. When David regained his composure, he quietly but firmly asserted, “Bill, we are not here today to evaluate Marianne. Her supervisor does that at performance appraisal time. We’re meeting to evaluate jobs based on job content. In order to do this fairly, with regard to other jobs in the company, we must leave personalities out of our evaluation.” David then proceeded to pass out copies of the receptionist job description to Bill and Betty, who were obviously very irritated.

Questions

1Rik Kirkland and Doris Burke, “The Real CEO Pay Problem,” Fortune 154 (July 10, 2006): 78–86.

2Peter Drucker, “Beyond Capitalism,” Across the Board 42 (November/December 2005): 14.

3“Too Many Turkeys,” Economist 337 (November 26, 2005): 75–76.

4James Krohe Jr., “The Revolution That Never Was,” Across the Board 42 (September/October 2005): 28–35.

5Ann Pomeroy, “Executive Compensation Soars,” HR Magazine 51 (July 2006): 16.

6Jesica Marquez, “Exec Pay Under Pressure from Many Quarters,” Workforce Management 85 (January 16, 2006): 8–9.

7“Too Many Turkeys.”

8Ann Pomeroy, “Are You Getting What You Pay For?” HR Magazine 50 (April 2005): 16–20.

9“Performance Leads Today’s Executive Rewards Programs,” HR Focus 82 (October 2005): S1–S4.

10Jessica Marquez, “Consultants Tapped to Review Executive Pay,” Workforce Management 84 (May 2005): 22.

11Shawn Tully, “Five Commandments for Paying the Boss,” Fortune 154 (July 10, 2006): 89–92.

12Edgar Woolard Jr., “CEOs Are Being Paid Too Much,” Across the Board 43 (January/February 2006): 28–30.

13“Compensation Expert: More Action Needed,” Financial Executive 18 (November 2002): 10.

14Jeffrey Pfeffer, “The Pay-for-Performance Fallacy,” Business 2.0 6 (July 2005): 64.

15Karen Krebsbach, “Executive Compensation & the Boardroom Dilemma,” U.S. Banker 115 (November 2005): 32–38.

16“CEO Pay Links to Performance Are Growing Stronger,” Corporate Board 26 (July/August 2005): 27–28.

17Marquez, “Exec Pay Under Pressure from Many Quarters.”

18“Pay Ranked Higher than Benefits,” Employee Benefit News 20 (August 2006): 3.

19Stacey L. Kaplan, “Total Rewards in Action: Developing a Total Rewards Strategy,” Benefits & Compensation Digest 42 (August 2005): 32–37.

20Brent M. Longnecker and Nicole Shanklin, “Total Rewards: A Three-Legged Platform Toward Improved Productivity,” Employee Benefit Plan Review 59 (July 2004): 8–10.

21R. Wayne Mondy and Shane R. Premeaux, Management: Concept, Practices, and Skills (Englewood Cliffs, NJ: Prentice Hall, 1995): 23.

22“Getting the Most Out of Salary Surveys,” HR Focus 82 (April 2005): 6–7.