Compensating Employees

1. Compensating Employees Ch 11 & 12

2. When you finish studying this chapter, you should be able to: • Explain each of the five basic steps in establishing pay rates. • Discuss four basic factors determining pay rates. • Compare and contrast piecework and team or group incentive plans. • List and describe each of the basic benefits most employers might be expected to offer.

3. Introduction • Employee compensation • refers to all forms of pay or rewards going to employees and arising from their employment • direct financial payments • indirect payments

4. Employee Compensation • Direct financial payments • payments in the form of wages, salaries, incentives, commissions, and bonuses • Indirect payments • payments in the form of financial benefits like employer-paid insurance and vacations

5. Pay Factors • Legal • Union • Policy • Equity

6. Some Important Compensation Laws • Fair Labor Standards Act • contains minimum wage, maximum hours, overtime pay, equal pay, record-keeping, and child labor provisions covering the majority of U.S. workers

7. Some Important Compensation Laws (cont.) • Equal Pay Act • employees of one sex may not be paid wages at a rate lower than that paid to employees of the opposite sex for doing roughly equivalent work

8. Some Important Compensation Laws (cont.) • Title VII of the Civil Rights Act • makes it an unlawful practice for an employer to discriminate against any individual with respect to hiring, compensation, terms, conditions, or privileges of employment because of race, color, religion, sex, or national origin

9. Some Important Compensation Laws (cont.) • Age Discrimination in Employment Act • Americans with Disabilities Act • Family and Medical Leave Act

10. How Unions Influence Compensation Decisions • National Labor Relations Act (NLRA) of 1935 • granted employees the right to organize and to bargain collectively

11. Compensation Policies • A hospital might have a policy of starting nurses at a wage at least 20% above the prevailing market wage. • The average base pay for an executive secretary ranges from $37,300 in Albuquerque New Mexico to $41,900 (Tampa, Florida), $59,800 (New York, New York), and $60,100 (San Francisco, California).

12. Equity and Its Impact on Pay Rates • External equity • pay must compare favorably with rates in other companies, or an employer will find it hard to attract and retain qualified employees

13. Equity and Its Impact on Pay Rates (cont.) • Internal equity • each employee should view his or her pay as equitable given other employees’ pay in the organization

14. How Employers Establish Pay Rates • Conduct a salary survey • Employee committeedetermines the worth of each job • Group similar jobs into pay grades • Price each pay grade by using wage curves • Develop rate ranges

15. Step 1: Conduct the Salary Survey • Salary (or compensation) surveys • formal or informal surveys of what other employers are paying for similar jobs • Used to price benchmark jobs • Collect data on benefits

16. Step 2: Determine the Worth of Each Job • Job evaluation • formal and systematic comparison of jobs to determine the worth of one job relative to another • Compensable factors • factors that determine your definition of job content, establish how the jobs compare to each other, and set the compensation paid for each job

17. Job Evaluation Methods   • Ranking method • ranks each job relative to all other jobs • Job classification • manager categorizes jobs into groups based on their similarity in terms of compensable factors such as skills and responsibility

18. Ranking Method of Job Evaluation • Obtain job information • Select raters and jobs to be rated • Select compensable factors • Rank jobs • Combine ratings

19. Job Evaluation Methods   • Point method • involves identifying several compensable factors, each having several degrees, and then assigning points based on the number of degrees, to come up with an actual number of points for each job

20. Step 3: Group Similar Jobs into Pay Grades • Pay grade • comprises jobs of approximately equal difficulty or importance as determined by job evaluation

21. Step 4: Price Each Pay Grade—Wage Curves • Wage curve • shows the average pay rates currently being paid for jobs in each pay grade • Purpose of a wage curve is to show the relationship between (1) the value of the job as determined by one of the job evaluation methods and (2) the current average pay rates for the grades

22. Plotting a Wage Curve

23. Step 5: Develop Rate Ranges • May be 10 levels or steps and 10 corresponding pay rates within each pay grade • Employer may fine-tune pay rates to account for any unique circumstances

24. Pricing Managerial and Professional Jobs • Emphasize nonquantifiable factors such as judgment and problem solving • Tendency is to pay managers and professionals based on their performance

25. Executive Compensation Variance Three main factors • Job complexity • Ability to pay • Human capital

26. Pricing Managerial and Professional Jobs Four main components: • Base salary • Short-term incentives • Long-term incentives • Executive benefits and perks

27. Strategy and Executive Pay • Identify the company's strategic direction, and translate this into specific business goals • List the skills and competencies your professional employees should have to accomplish these goals

28. Strategy and Executive Pay (cont.) • Evaluate the extent to which the existing pay plan produces these skills and competencies • Design and implement the new pay plan

29. Current Trends in Compensation • Competency–Skill-based pay • employee is paid for the range, depth, and types of skills and knowledge he is capable of using rather than for the responsibilities of the job currently held • Competencies • demonstrable personal characteristics such as knowledge, skills, and behaviors

30. Current Trends in Compensation (cont.) • Skill-based pay programs • employer defines specific skills, and has a method for determining the person’s pay based on his or her skill competencies

31. Current Trends in Compensation (cont.) • Broadbanding • collapsing salary grades and ranges into just a few wide levels or bands, each of which contains a relatively wide range of jobs and salary levels

32. Board Oversight of Executive Pay • Has our compensation committee thoroughly identified its duties and processes? • Is our compensation committee being appropriately advised? • Are there particular executive compensation issues that our committee should address? • Do our procedures demonstrate diligence and independence? • Is our committee appropriately communicating its decisions?

33. Incentive Plans • Individual incentive programs • give performance-based pay to individual employees who meet their individual performance standards • Variable pay • refers to group pay plans that tie payments to productivity

34. Piecework Plans • Piecework • pay is tied directly to what the worker produces • paid a “piece rate” for each unit he or she produces

35. Team or Group Incentive Plans • Companies often want to pay groups on an incentive basis, such as when they want to encourage teamwork • Main disadvantage is that each worker’s rewards are not based just on his own efforts

36. Incentives for Managers and Executives • Stock option • the right to purchase a specific number of shares of company stock at a specific price during a period of time

37. Incentives for Salespeople • Most companies pay their salespeople a combination of salary and commissions • Typically a 70% base salary/30% incentive mix

38. Auto-dealers Compensation • Compensation for car salespeople ranges from a high of 100% commission to a small base salary with commission • Commission is generally based on the net profit on the car • It encourages the salesperson to hold firm on the retail price, and to push “after-sale products”

39. Non-Tangible and Recognized-Based Awards • Studies show that recognition has a positive impact on performance, either alone or in conjunction with financial rewards

40. Online Award Programs • Recognition programs are expensive to administer • Firms partner with online incentive firms to expedite process

41. Incentive Plans • Merit pay • any salary increase awarded to an employee based on his or her individual performance • Profit-sharing plan • most employees receive a share of the company’s annual profits

42. Incentive Plans • Employee stock ownership plan (ESOP) • a corporation contributes shares of its own stock—or cash to be used to purchase such stock—to a trust established to purchase shares of the firm’s stock for employees

43. Broad-based Stock Options • With companies now having to show stock options as an expense when awarded, some firms feel awarding stock instead of stock options is a more direct and immediate way of linking pay to performance

44. Incentive Plans • Gainsharing plans • want to encourage improved employee productivity by sharing resulting financial gains with employees

45. Scanlon Plan • Philosophy of cooperation • Identity • Competence • Involvement system • Sharing of benefits formula

46. Earnings-at-Risk Pay Plans • Earnings-at-risk pay plans • some portion of the employee's base salary is at risk

47. HRIS and Productivity • Enterprise Incentive Management (EIM) software is used to automate the planning and management of incentive plans

48. Employee Benefits • Benefits • defined as all the indirect monetary and nonmonetary payments an employee receives for continuing to work for the company

49. Pay for Time Not Worked • Supplemental pay benefits • typically one of an employer’s most expensive benefits • holidays, vacations, sick leave, and jury duty

50. Pay for Time Not Worked (cont.) • Severance pay • a one-time separation payment • Worker Adjustment and Retraining Act of 1989