Compensation Management

Chapter 9Krista Uggerslev, NAIT

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 Learning Objectives
1. Define total compensation.
2. Explain the objectives of effective compensation management.
3. Describe what a compensation philosophy is and why organizations need
one.
4. Describe how direct compensation is determined through job evaluation
and market pricing methods.
5. Discuss skill-based approaches to pay.
6. Describe the various forms of individual incentive and group or team-
based variable based pay systems.
7. Explain the differences between “equal pay for equal work” and “equal
pay for work of equal value.”
8. Describe advantages and disadvantages of pay secrecy.

© 2022 McGraw-Hill Education Ltd.

 Compensation Management
Cash and non-cash rewards employee receive in exchange for their work
Direct compensation includes wages paid and variable pay such as
bonuses, commissions, and stocks
Indirect compensation includes employee benefits and services (Chapter 10)
Fair/Adequate pay - Absolute and relative pay
.

Total amount versus amount compared to others

Compensation perceived inappropriate
.

Performance, motivation, and satisfaction may decline dramatically

Turnover may occur
Dissatisfaction with absolute or relative pay

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 Total Compensation
Total compensation includes base wages,
variable pay, perks and on-site amenities,
status/recognition, and benefits
Not all have monetary value
Total reward approaches lead to:
Easier recruitment of high-quality staff
Lower turnover
Higher employee performance
Enhanced employer reputation

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 Total Reward Model
Components of a Total
Reward System
1. Compensation Wages, commissions, and bonuses
2. Benefits Vacations, health and dental insurance
3. Social interaction Friendly workplace
4. Security Stable, consistent position and rewards
5.Status/recognition Respect, prominence
6. Work variety Opportunity to experience different things
7. Workload Right amount of work (not too much, not too little)
8. Work importance Is work valued by society?
9.Authority/control Ability to influence others; control own destiny
10. Advancement Chance to get ahead
11. Feedback Receive information to improve performance
12. Work conditions Hazard free
13. Development Formal and informal training

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 Objectives of Compensation
Internal equity – pay related to relative worth of jobs
External equity – paying workers relative to market

Acquire
Personnel
Legal Retain
Compliance Effective Employees
Compensation

Control Reward
Costs Behaviour
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Determining Direct Compensation

Schwind 13th Edition, Figure 9-2

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 Phase 1: Establishing the
Compensation Philosophy

Lead
Phase I
Compensation Match
Philosophy Lag

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 Phase 2: Reviewing the Job Analysis

Understand the job and skills

needed
Job analysis information
Phase 2 Job descriptions
Job Analysis Job specifications
Performance standards

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 Phase 3: Pricing Jobs

Determine relative worth or

value of jobs
Three approaches:
Phase 3
Pricing Jobs Job evaluation
Market-pricing
Skill-based

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 Pricing Jobs: Job Evaluation
Methods
Systematic procedures to determine the
relative worth or value of jobs (internal equity)
.

Job ranking
Job grading
Point System

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 More on Job Ranking
Job ranking is the simplest job evaluation
method
Jobs are subjectively ranked by importance in
comparison to other jobs with higher ranked
jobs paid more
E.g., In retail sales, the regional manager job may be ranked
1, store manager job as 2, and sales assistant job as 3
Rankings do not differentiate the relative
importance of jobs

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 Sample Job Grading Schedule
Job Grading
Schedule
Directions: To
determine
appropriate job
grade, match job
classification
description with
job description.
Job Grade Job Classification Description Salary Range
Office Assistant 6 The Office Assistant 6 performs well defined tasks $28,500 to
primarily in one function, such as: $36,500
Pulling and filing records, preparing file folders,
filing pre-coded documents
Photocopying and routine maintenance
Sorting, recording, and distributing incoming
mail; processing outgoing mail; providing
messenger service

Office Assistant 9 The Office Assistant 9 carries out a variety of $35,500 to

clerical tasks requiring determination of
sequencing and priorities: $43,500
Schwind 13 Edition, Figure 9-3 Reception
th

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Secretarial duties
Maintaining a file system, including assigning
 Sample Points Allocation Framework
Points Allocation Framework Regional Store Sales
Manage Manager Assistant
r
Skill (50 points per category)    504050 403040 202030
1. Experience    2. Education   
3. Ability
Responsibilities (50 points per 5040 4040 2010
category)    1. Fiscal    2.
Supervisory
Effort (50 points per category) 1050 2040 3020
    1. Physical    2. Mental

Working Conditions (30 points 301010 101010 101010

per category)    1. Location   
2. Hazards    3. Extremes in
Environment

Total Points 340 280 180

Schwind 13th Edition, Figure 9-4
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 Pricing Jobs: Market-Based Pay
Structures
Market-pricing focuses on external
competitiveness
How much should organizations pay for jobs
based on what their competitors are paying
Wage and salary surveys
Same labour market comparable jobs
Matching the market, market leader, market
lag

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 Pricing Jobs: Skill-Based Pay
Pay is based on depth (gaining greater expertise in
existing skills), breadth (increases in the employee’s range of
skills), and self-management (gaining higher level
management-type skills, such as budgeting, training, planning,
and so forth)

Schwind 13th Edition, Figure 9-5

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Phase 4: Matching Employees to Pay

Establishing the pay level for each job

Combines job evaluation rankings,
Phase 4 survey wage rates, and other
considerations (e.g. organization’s pay
Matching policy)
Employees to
Pay Wage-trend line developed
Creating compensation structure
Job classes and rate ranges

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Challenges Affecting Compensation

Prevailing
wage rates

Government Challenges Union

constraints Affecting power
Compensation

Wage & salary Productivity

policies

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 Variable Pay
Incentives link pay to performance or productivity for
part of or all income
Individual incentive plans
.

Piecework
Production bonuses
Commissions
Discretionary bonuses
Spot awards
Team (or group) incentive plans
.

Team results
Production incentive plans
Profit-sharing and ownership plans

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 Incentive Systems
Benefits Problems

Performance is reinforced Administration can be

regularly complex
Reinforcement is quick and May result in inequities
frequent Employees may not achieve
Desired behaviours are likely standards due to
to continue uncontrollable forces
Wages paid in proportion Union resistance
with performance Employees may focus on only
one aspect

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 Pay Equity
Equal pay for equal work (Equal Pay)
.

Part of Canada Labour Code since 1971

Employers must pay men and women the same wage
or salary when they do the same work
Equal pay for work of equal value (Pay Equity)
.

Jobs of comparable worth to the organization should be

paid equally
Part of Canadian Human Rights Act since 1978

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 Wage Gap
Historical gap between the income of men and women
.

Women earn about 87% as much as men

Wage gap exists in part due to:
.

Women tend to work in

lower-paying occupations
e.g., teaching, retail, nursing
Career gaps - leave workforce
to care for children
5-10% due to gender-based pay discrimination
There are also differences by race (including Black and
Indigenous men and women), sexual orientation, and for
transgender people.

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 Pay Secrecy
Advantages
.

Most employees prefer to have their pay kept secret

Gives managers greater freedom
Covers up inequities
Disadvantages
.

May generate distrust in the pay system

Employees may perceive there is no relationship
between pay and performance

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 Compensation Management Summary
9 After mastering this chapter content, you should be able to:
1.

2.
Define total compensation.
Explain the objectives of effective compensation management.
3. Describe what a compensation philosophy is and why organizations need
one.
4. Describe how direct compensation is determined through job evaluation
and market pricing methods.
5. Discuss skill-based approaches to pay.
6. Describe the various forms of individual incentive and group or team-
based variable based pay systems.
7. Explain the differences between “equal pay for equal work” and “equal
pay for work of equal value.”
8. Describe advantages and disadvantages of pay secrecy.

© 2022 McGraw-Hill Education Ltd.