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Human Resource Management 10 th Edition Chapter 9 DIRECT FINANCIAL COMPENSATION

Human Resource Management 10 th Edition Chapter 9 DIRECT FINANCIAL COMPENSATION. HRM in Action: Are Top Executives Paid Too Much? . Peter Drucker recommends 20-to-1 salary ratio between senior executives and rank-and-file white-collar workers

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Human Resource Management 10 th Edition Chapter 9 DIRECT FINANCIAL COMPENSATION

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  1. Human Resource Management 10th EditionChapter 9DIRECT FINANCIAL COMPENSATION © 2008 by Prentice Hall

  2. HRM in Action: Are Top Executives Paid Too Much? • Peter Drucker recommends 20-to-1 salary ratio between senior executives and rank-and-file white-collar workers • Ratio of chief executives’compensation to the pay of average production worker jumped to 431-to-1 • 90 percent of investors think that executives are overpaid © 2008 by Prentice Hall

  3. Compensation: An Overview • Compensation - Total of all rewards provided employees in return for services • Direct financial compensation - Pay received in form of wages, salaries, bonuses, and commissions • Indirect financial compensation (benefits) - All financial rewards not included in direct compensation • Nonfinancial compensation - Satisfaction person receives from job itself or from psychological and/or physical environment in which person works © 2008 by Prentice Hall

  4. Compensation Components of Total Compensation Program External EnvironmentInternal Environment Financial Nonfinancial Direct Wages Salaries Commissions Bonuses Indirect (Benefits) Legally Required Benefits Social Security Unemployment Compensation Workers’ Compensation Family & Medical Leave Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Disability Protection Employee Stock Option Plans Supplemental Unemployment Benefits (SUB) Employee Services Premium Pay Customized Benefit Plans The Job Skill Variety Task Identify Task Significance Autonomy Feedback Job Environment Sound Policies Capable Managers Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions Workplace Flexibility Flextime Compressed Workweek Job Sharing Customized Benefit Plans Telecommuting Part-time Work More Work, Fewer Hours © 2008 by Prentice Hall

  5. Equity Theory • Motivation theory that people assess their performance and attitudes by comparing both their contribution to work and benefits they derive from it to contributions and benefits of comparison others whom they select—and who in reality may or may not be like them © 2008 by Prentice Hall

  6. Equity in Financial Compensation • Financial equity - Perception of fair pay treatment for employees • External equity - Employees are paid comparably to workers who perform similar jobs in other firms • Internal equity - Employees are paid according to relative value of jobs within same organization © 2008 by Prentice Hall

  7. Equity in Financial Compensation (Cont.) • Employee equity - Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority • Team equity - More productive teams are rewarded more than less productive groups © 2008 by Prentice Hall

  8. Primary Determinants of Direct Financial Compensation OrganizationCompensation Policies Organizational Level Ability to Pay Employee Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck Labor MarketCompensation Surveys Expediency Cost of Living Labor Unions Economy Legislation Job Pricing Direct Financial Compensation Job Job Analysis Job Descriptions Job Evaluation © 2008 by Prentice Hall

  9. Organization as a Determinant of Direct Financial Compensation • Compensation Policies • Organizational Level • Ability to Pay © 2008 by Prentice Hall

  10. Compensation Policies • Pay leaders - Pay higher wages and salaries • Market rate, or going rate - Pay what most employers pay for same job • Pay followers - Pay below market rate because poor financial condition or believe do not require highly capable employees © 2008 by Prentice Hall

  11. Organizational Level • Upper management often makes decisions to ensure consistency • Extreme pressure to retain top performers may override desire to maintain consistency in pay structure © 2008 by Prentice Hall

  12. Ability to Pay Organization’s assessment of ability to pay is important factor in determining pay levels © 2008 by Prentice Hall

  13. Labor Market as Determinant of Direct Financial Compensation • Potential employees located within geographic area from which employees are recruited • Pay for same jobs in different labor markets may vary considerably © 2008 by Prentice Hall

  14. Compensation Surveys • What are other firms paying? • Geographic area of survey • Specific firms to contact • Jobs to include © 2008 by Prentice Hall

  15. Expediency • 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 • Need real-time information © 2008 by Prentice Hall

  16. Cost of Living • When prices rise over a period of time and pay does not, real pay is actually lowered • Some firms index pay increases to inflation rate © 2008 by Prentice Hall

  17. Labor Unions • Mandatory collective bargaining between management and unions as “wages, hours, and other terms and conditions of employment.” • Cost-of-living allowance has been disappearing © 2008 by Prentice Hall

  18. The Economy • Affects financial compensation decisions • Depressed economy generally increases labor supply • Cost of living often rises as economy expands © 2008 by Prentice Hall

  19. Compensation Legislation • Davis-Bacon Act of 1931 • Walsh-Healy Act of 1936 • Fair Labor Standards Act of 1938, as Amended © 2008 by Prentice Hall

  20. Davis-Bacon Act of 1931 • First national law to deal with minimum wages • Federal construction contractors with projects over $2000 to pay at least prevailing wages in area • Secretary of Labor sets the prevailing wage at union wage, regardless of what average wage is in affected locality © 2008 by Prentice Hall

  21. Walsh-Healy Act of 1936 • Companies with federal supply contracts exceeding $10,000 pay prevailing wages • Requires 1½ times regular pay rate for hours over 8 per day or 40 per week © 2008 by Prentice Hall

  22. Fair Labor Standards Act of 1938, as Amended • Most significant law affecting compensation • Establishes minimum wage • Requires overtime pay and record keeping • Provides standards for child labor © 2008 by Prentice Hall

  23. Exempt and Nonexempt Employees • Exempt employees - Categorized as executive, administrative, professional employees and outside salespersons • Nonexempt employees - Those in jobs not conforming to above definition • Most employees who earn less than $23,660 will be considered nonexempt no matter what their duties are © 2008 by Prentice Hall

  24. Job as Determinant of Direct Financial Compensation • Job itself continues to be factor, especially in firms that have internal pay equity as primary consideration • Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors such as working conditions © 2008 by Prentice Hall

  25. Job Analysis and Job Descriptions • Before organization can determine relative difficulty or value of jobs, must first define content • Done by job analysis/job descriptions © 2008 by Prentice Hall

  26. Job Evaluation • Firm determines relative value of one job in relation to another • Ranking • Classification • Factor comparison • Point • Hay guide chart-profile method © 2008 by Prentice Hall

  27. Ranking Method • Simplest method • Raters examine description of each job • Jobs arranged in order according to value © 2008 by Prentice Hall

  28. Classification Method • Define number of classes or grades to describe group of jobs • Compare job description with class description • Class description that most closely agrees with job description determines job classification © 2008 by Prentice Hall

  29. Factor Comparison Method • Five universal job factors - Mental requirements, skills, physical requirements, responsibilities, and working conditions • Raters need not keep entire job in mind as they evaluate; instead, they make decisions on separate aspects or factors of job © 2008 by Prentice Hall

  30. Point Method • Numerical values assigned to specific job components • Sum of values gives quantitative assessment of job’s relative worth • Job factors selected according to nature of specific group of jobs © 2008 by Prentice Hall

  31. Procedure for Establishing Point Method of Job Evaluation Select Job Cluster Identify Compensable Factors Determine Degrees and Define Each Compensable Factors Determine Factor Weights Determine Factor Point Values Validate Point System © 2008 by Prentice Hall

  32. A Point Method Example • Select Job Cluster - Assume we are going to develop point system for the administrative job cluster • Identify Compensable Factors - Assume compensable factors identified are education, job knowledge, contacts, complexity of duties, and initiative © 2008 by Prentice Hall

  33. A Point Method Example (Cont.) • Determine Degrees and Define Each Compensable Factors - In administrative job cluster, Education, Job Knowledge, and Initiative have been determined to have five degrees; Contacts has four; and Complexity of Duties has three © 2008 by Prentice Hall

  34. A Point Method Example (Cont.) FACTOR: CONTACTS Level (Degrees)Points IV Usual purposes of contacts are to discuss problems and possible 90 solutions, to secure cooperation or coordination of efforts, and to get agreement and action; more than ordinary tact and persuasiveness required. III Usual purposes of contacts are to exchange information and settle 66 specific problems encountered in course of daily work. II Contacts may be repetitive but usually are brief with little or no 42 continuity. I Contacts normally extend to persons in immediate work unit only. 18 © 2008 by Prentice Hall

  35. A Point Method Example (Cont.) FACTOR: COMPLEXITY OF DUTIES III Performs work where only general methods are available. Independent 85 action and judgment are required regularly to analyze fact, evaluate situations, draw conclusions, make decision, and take or recommend action. II Performs duties working from standard procedures or generally 51 understood methods. Some independent action and judgment are required to decide what to do, determine permissible variations from standard procedures, review facts in situations, and determine action to be taken, within limits prescribed. I Little or no independent action or judgment. Duties are so standardized 17 and simple as to involve little choice as to how to do them. © 2008 by Prentice Hall

  36. A Point Method Example (Cont.) • Determine Factor Weights - Assume the committee believes that education is quite important for administrative job cluster and sets the weight for education at 35%. The weights of other four factors were determined by the committee to be: Job Knowledge—25 Contacts—18 Complexity of Duties—17 Initiative—5 The percent total is 100% © 2008 by Prentice Hall

  37. A Point Method Example (Cont.) • Determine Factor Point Values - Committee determines total number of points for the plan. Number may vary, but 500 or 1,000 points may work well. Committee has determined that a 500 point system will work. © 2008 by Prentice Hall

  38. Job Evaluation Worksheet (500-Point System) © 2008 by Prentice Hall

  39. A Point Method Example (Cont.) • Validate Point System - Each committee member should take a random sample of jobs within chosen job cluster and calculate weights for each job selected Point total for Administrative 2 job is determined to be 239 points © 2008 by Prentice Hall

  40. Job Evaluation Worksheet for Administrative 2 Position © 2008 by Prentice Hall

  41. Illustration of Arithmetic and Geometric Progression Degree of Factor Job Factor 1 2 3 4 Experience Required 1year 3 years 5 years 7years (-------------------- Arithmetic Progression---------------------) Degree of Factor Job Factor 1 2 3 4 Experience Required 1 year 2 years 4 years 8 years (-------------------- Geometric Progression---------------------) © 2008 by Prentice Hall

  42. The Hay Guide Chart-Profile Method • Refined version of the point method • Know-how • Problem Solving • Accountability • Additional compensable elements, such as working conditions © 2008 by Prentice Hall

  43. Job Pricing • Placing dollar value on worth of job • Pay grades - Grouping of similar jobs to simplify pricing jobs • Wage curve - Fitting of plotted points to create smooth progression between pay grades • Pay ranges - Minimum and maximum pay rate with enough variance between to allow for significant pay difference © 2008 by Prentice Hall

  44. Job Pricing (Cont.) • Broadbanding - Collapses many pay grades into few wide bands to improve effectiveness • Single rate system - Pay ranges not appropriate for some workplace conditions such as some assembly lines • Adjusting pay rates - Overpaid and underpaid jobs © 2008 by Prentice Hall

  45. Scatter Diagram of Evaluated Jobs Illustrating Wage Curve, Pay Grades, and Pay Ranges Average Pay per Hour (Current Rates or Market Rates) $19.80 5 18.50 4 17.20 3 15.90 Wage Curve Pay Ranges for Pay Grades 2 14.60 14.00 1 13.30 12.90 12.00 100 200 300 400 500 Evaluated Points 1 2 3 4 5 Pay Grades Summary Evaluated Points Pay Grade Minimum Midpoint Maximum 0- 99 1 $12.00 $13.30 $14.60 100-199 2 13.30 14.60 15.90 200-299 3 14.60 15.90 17.20 300-399 4 17.20 5 17.20 18.50 19.80 © 2008 by Prentice Hall

  46. Broadbanding • Technique that collapses many pay grades (salary grades) into few wide bands to improve organizational effectiveness • Lateral employee development • Develop employee skills and encourage team focus • Employee attention directed away from vertical promotional opportunities © 2008 by Prentice Hall

  47. Broadbanding and Its Relationship to Traditional Pay Grades and Ranges Grade 5 Grade 4 Grade 3 Average Pay Per Hour Grade 2 Band B Grade 1 Band A Low High Job Worth © 2008 by Prentice Hall

  48. Employee as Determinant of Direct Financial Compensation • Performance—Performance-based Pay • Skills—Skilled-based Pay • Competencies—Competency-based Pay • Seniority • Experience • Membership in the organization • Potential • Political Influence • Luck © 2008 by Prentice Hall

  49. Performance-Based Pay • Merit pay - Pay increase given to employees based on level of performance as indicated in appraisal • Variable Pay - Compensation based on performance • Bonus - Most common type of variable pay for performance. One-time financial award based on productivity • Spot bonuses - Relatively small, gifts to employees for outstanding work or effort • Piecework - Employees paid for each unit they produce © 2008 by Prentice Hall

  50. Skill-Based Pay Compensates on basis of job-related skills and knowledge • Employees and departments benefit when employees obtain additional skills • Appropriate where work tends to be routine and less varied • Must provide adequate training opportunities or system becomes demotivator © 2008 by Prentice Hall

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