COMPENSATING EMPLOYEES

CHAPTER 7
When you finish studying this chapter,
you should be able to:
1. Discuss basic factors determining pay rates.
2. Explain each of the five basic steps in establishing pay
rates.
3. List and describe each of the basic benefits most
employers might be expected to offer.
 Introduction
Employee rewards
∟ Direct financial payments: wages, salaries, incentives,
commissions, and bonuses
∟ Indirect payments: employer-paid insurance and vacations
TOTAL REWARDS
 Direct financial payments
❖ Time-based pay
❖ Pay for performance
 Issues in Developing a Pay Structure
Pay structure based on:
▪ Legal requirements
▪ Market forces
▪ The organization’s policies
 Some Important Compensation Laws
❖Fair Labor Standards Act
▪ Contains minimum wage, maximum hours, overtime
pay, equal pay, record-keeping, and child labor
provisions
 Some Important Compensation Laws
❖ Equa lPay 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.
 Some Important Compensation Laws
❖ 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
 Some Important Compensation Laws
❖ Age Discrimination in Employment Act
❖ Americans with Disabilities Act
❖ Family and Medical Leave Act
 How Employers Establish
Pay Rates
1. Conduct a salary survey
2. Employee committee determines the worth of each job
3. Group similar jobs into pay grades
4. Price each pay grade by using wage curves
5. Develop rate ranges
 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 benefit
Some Pay Data Websites
Figure 8.2
 Job Evaluation Methods
❖ Ranking method: Ranks each job relative to all other jobs
✓ Obtain job information
✓ Select and group jobs
✓ Select compensable factors
✓ Rank jobs
❖ Job classification
▪ Manager categorizes jobs into groups based on their similarity
in terms of compensable factors such as skills and
responsibility
 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
▪ Typically the compensable factors include the major categories
of:
1. Skill
2. Responsibilities
3. Effort
4. Working Conditions
 Step 3: Group Similar Jobs into Pay Grades
❖ Pay grade
▪ Comprises jobs of approximately equal
difficulty or importance as determined
by job evaluation
 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.
Plotting a WageCurve:
Step 5: Develop Rate Ranges
 Pricing Managerial and
Professional Jobs
❖ Emphasize nonquantifiable factors, such as judgment
and problem solving
❖ Tendency to pay managers and professionals based on
their performance, on what competitors are paying, or on
what they can do
 Pricing Managerial and
Professional Jobs
Four main components:
❖Base salary
❖Short-term incentives
❖Long-term incentives
❖Executive benefits and perks
 Current Trends in Compensation
❖ Competency-or skill-based pay
▪ Employee is paid for the skills and knowledge he or she is
capable of using, rather than for the responsibilities of the job
currently held
❖ Competencies
• Demonstrable personal characteristics, such as
knowledge, skills, and behaviors
 Recognition-Based Awards
• Recognition has a positive impact on performance,
either alone or in conjunction with financial rewards
 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
 Profit-Sharing Plans

❖ Profit-sharing plan
▪ Aplanwherebymost employees share in the company’s
profits
▪ Current, deferred
 Employee Stock Ownership 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.
 Other Benefits
❖ Benefits
▪ Indirect financial payments given to employees
▪ May include health and life insurance, vacation,
pension, time off with pay, education plans, and
discounts on company products, for example
 Pay for Time Not Worked

❖ Supplemental pay benefits

▪ Unemployment insurance, holidays, vacations, sick
leave, military duty.
❖ A one-time separation payment when terminating
an employee
 Insurance Benefits
❖ Workers’ compensation
▪ Provides income and medical benefits to work related
accident victims or their dependents, regardless of fault
 Hospitalization, Medical,
and Disability Insurance
❖ Pregnancy Discrimination Act
▪ Parental leave
▪ Requires employers to treat women affected by
pregnancy, childbirth, or related medical conditions
the same as any employee not able to work, with
respect to all benefits, including sick leave and
disability benefits, and health and medical insurance
 Social Security

❖ Retirement benefits
❖ Death benefits
❖ Disability payments
 Pension Plans
❖ Vested
▪ The proportion of the employer’s contribution to the
employee’s pension plan that is guaranteed to the
employee, and which the employee can therefore take
when he or she leaves
 Work-Life/Family-Friendly Benefits
❖ Workplace flexibility
▪ Arming employees with the information technology
tools they need to get their jobs done, wherever the
employees are
❖ Flexible benefits plans
▪ Initially called “cafeteria plans” because employees
could spend their benefits allowances on a choice of
benefits options
 International Compensation
Expatriate Pay
✓ The most common approach to expatriate pay is the
balance sheet approach
▪ Equalizes purchasing power across countries so employees can
have the same standard of living in the foreign country as they do
at home
✓ Typical compensation packages include
▪ Base salary
▪ A foreign service premium
▪ Benefits
▪ Tax differentials
 International Compensation

❖ Balance sheet approach

▪ Focuses on four main home country groups of
expenses—income taxes, housing, goods and
services, and discretionary expenses
▪ Estimates what each of these four expenses would
be in the expatriate’s home country, and what each
will be in the host country
▪ Pays any differences—such as additional income
taxes or housing expenses
The BalanceSheet
Approach
 International Compensation

Expatriate Pay (continued)

✓ Base Salary: normallyin the samerange as the base salary
for a similar position in the home country
✓ Foreign Service Premium: extra pay the expatriate
receives for working outside his country of origin
• Offeredas an inducement to accept foreign postings
✓ Allowances:
• Hardship allowances
• Housing allowances
• Cost-of-living allowances
• Education allowances
 International Compensation

Expatriate Pay continued

✓ Benefits: many expatriates receive the same level of
medical and pension benefits abroad that they received at
home
✓ Taxation: the expatriate may have to pay income tax to
both the home country and the host-country governments
unless a host country has a reciprocal tax treaty with the
expatriate’s home country
• When are ciprocal tax treaty is not in force, the firm typically pays
the expatriate’s income tax in the host country