Chapter 12

Compensation Strategies and Practices

Learning Objectives
After you have read this chapter, you should be able to:
Identify two general types of compensation and the components of each. Give examples of two different compensation philosophies in organizations. Discuss four strategic compensation design issues. Describe three considerations affecting perceptions of pay fairness.

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Learning Objectives (contd)

Define job evaluation and discuss four methods for of performing it.

Outline the process of building a wage and salary administration system.

Discuss how to establish a pay-for-performance system.

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Compensation Systems

Objectives of an Effective Compensation System:

Legal compliance with all appropriate laws and regulations Cost effectiveness for the organization Internal, external, and individual equity for employees Performance enhancement for the organization

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Nature of Compensation

Types of Rewards
Intrinsic
Intangible, psychological and social effects of compensation

Extrinsic
Tangible, monetary and nonmonetary effects of compensation

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Components of A Compensation Program

Figure 121
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Direct Compensation
Compensation Type
Base Pay The basic monetary compensation that an employee receives, usually as a wage or salary. Payments calculated on the amount of time worked. Consistent payments made each period regardless of the number of hours worked in the period. Compensation linked to individual, team, or organizational performance. An indirect reward given to an employee or group of employees as a part of organizational membership.
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Wages Salary

Variable Pay Benefit

Typical Division of HR Responsibilities: Compensation

Figure 122
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Continuum of Compensation Philosophies

Figure 123
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Compensation Approaches

Figure 124
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Compensation Quartile Strategies

Figure 125
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Decisions About Compensation Levels

Compensation Strategies
Above-Market Middle-Market Below-Market Paying for higher qualified, more productive workers. Attempting to balance of employer costs and need to attract and retain employees. Paying all that the firm can afford Taking advantage of the abundant supply of potential employees in a loose labor market.

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Competency-Based Pay

Limitations (How many?)

Pricing Competencies

CompetencyBased Pay Systems KBP/SBP

Maintenance of Competencies

Training

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Competency-Based Systems Outcomes

Figure 126
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Individual vs. Team Rewards

Using Team-Based Reward Systems
Use skill-based pay for the base.

Make system simple and understandable.

Use variable pay based on business entity performance

Distribute variable rewards at the team level

Maintain a high degree of employee involvement

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Perceptions of Pay Fairness

Equity The perceived fairness between what a person does (inputs) and what the person receives (outcomes). The perceived fairness of the process and procedures use to make decisions about employees The perceived fairness in the distribution of outcomes. The degree of openness or secrecy that an organization allows regarding its pay system. The perception that the organization provides employees with compensation that comparable to the compensation of employees with similar jobs in other organizations.
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Procedural Justice

Distributive Justice Pay Openness External Equity

Equity Considerations in Compensation

Figure 127
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The IRS Test for Employees and Independent Contractors

Source: U.S. Internal Revenue Service.

Figure 129
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Compensation Administration Process

Figure 1210
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Job Evaluation

Job Evaluation
The systematic determination of the relative worth of jobs within an organization.

Benchmark Job
A job found in many organizations and performed by several individuals who have similar duties that are relatively stable and require similar KSAs.

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Job Evaluation

Ranking

Classification

Job Evaluation Methods

Factor Comparison Point Method

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Developing Pay Surveys

Select Employers with Comparable Jobs

Determine Jobs to be Surveyed

Decide What Information Is Needed

Conduct Survey

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Pay Structures

Market Line
The line on a graph showing the relationship between the job value, as determined by job evaluation points, and pay survey rates.

Common Pay Structures

Hourly and salaried Office, plant, technical, professional, managerial Clerical, information technology, professional, supervisory, management, and executive

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Establishing Pay Structures

Figure 1212
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Pay Structures (contd)

Pay Grades
A grouping of individual jobs having approximately the same job worth.

Broadbanding
The practice of using fewer pay grades having broader pay ranges that in traditional systems. Benefits
Encourages horizontal movement of employees Is consistent with trend towards flatter organizations Creates a more flexible organization Encourages competency development Emphasizes career development
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Pay Scattergram

Figure 1214
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Typical Pay Range Widths

Figure 1215
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Example of Pay Grades and Pay Ranges

Figure 1216
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Pay Rate Issues

Rates Out of Range

Red-Circled Employees
An incumbent (current jobholder) who is paid above the range set for the job.

Green-Circled Employees
An incumbent who is paid below the range set for the job.

Pay Compression
A situation in which pay differences among individuals with different levels of experience and performance in the organization becomes small.

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Issues Involving Pay Increases

Seniority
Time spent in an organization or on a particular job. Used to determine eligibility for organizational rewards and benefits.

Maturity Curve
A curve that depicts the relationship between experience and pay rates. Assumption is that as experience increases, proficiency and performance increase.

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Issues Involving Pay Increases

Cost-of-Living Adjustments (COLA)

A percentage increase in wages that allows employees to maintain the same real wages in a period of economic inflation. Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index).

Lump-Sum Increases (LSI)

A one-time payment of all or part of a yearly pay increase. Lump-sum payments do not increase base wages

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Pay Adjustment Matrix

Figure 1217
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Compa-Ratio Example

Compa-ratio
The pay level divided by the midpoint of the pay range.
Employee R $16.50 (current pay) 100 Compa - ratio 110 15.00 (midpoint)

Employee J

$13.05 (current pay) 100 Compa - ratio 87 15.00 (midpoint)

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