Compensation Management

Chapter 9

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-1

 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. Schwind 13th Edition 9-2

 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)
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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-3

 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
© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-4
 Total Reward Model
Components of a Total Reward System
1. Wages, commissions, and bonuses
Compensation
2. Benefits Vacations, health and dental insurance
3. Social Friendly workplace
interaction
4. Security Stable, consistent position and rewards
5.Status/recognition Respect, prominence
6. Work Opportunity to experience different things
variety
7. Workload Right amount of work (not too much, not too
little)
8. Work Is work valued by society?
importance
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
© 2022 McGraw-Hill Education Ltd.
Hazard free Schwind 13th Edition 9-5
 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
Reward
Control Costs
Behaviour
© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-6
 Determining Direct Compensation

Schwind 13th Edition, Figure 9-2

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-7
 Phase 1: Establishing the
Compensation Philosophy

• Lead
Phase I
Compensation • Match
Philosophy • Lag

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-8

 Phase 2: Reviewing the Job Analysis

• Understand the job and skills

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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-9

 Phase 3: Pricing Jobs

• Determine relative worth or value

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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-10

 Pricing Jobs: Job Evaluation Methods

Systematic procedures to determine the

relative worth or value of jobs (internal equity)
• Job ranking
• Job grading
• Point System

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-11

 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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-12

 Sample Job Grading Schedule
Directions: To determine appropriate job grade, match job classification description with job
description.
Job Grade
Office Assistant 6
Office Assistant 9
Schwind 13th Edition, Figure 9-3
© 2022 McGraw-Hill Education Ltd.
Job Grading Schedule
Job Classification Description Salary Range
The Office Assistant 6 performs well defined tasks
primarily in one function, such as:
•Pulling and filing records, preparing file folders,
filing pre-coded documents
$28,500 to $36,500
•Photocopying and routine maintenance
•Sorting, recording, and distributing incoming mail;
processing outgoing mail; providing messenger
service
The Office Assistant 9 carries out a variety of clerical
tasks requiring determination of sequencing and
priorities:
•Reception
•Secretarial duties $35,500 to $43,500
•Maintaining a file system, including assigning
numbers and codes, purging, arranging off-site
storage, searching for requested information
•Checking forms, compiling information packages
Schwind 13th Edition 9-13
 Sample Points Allocation Framework
Regional
Points Allocation Framework Store Manager Sales Assistant
Manager

Skill (50 points per category)

50 40
1. Experience 20
40 30
2. Education 20
50 40
3. Ability 30

Responsibilities (50 points per category)

1. Fiscal 50 40 20
2. Supervisory
40 40 10

Effort (50 points per category)

1. Physical
10 20 30
2. Mental
50 40 20

Working Conditions (30 points per

category)
1. Location 30 10 10
2. Hazards 10 10 10
3. Extremes in Environment 10 10 10

Total Points 340 280 180

Schwind 13th Edition, Figure 9-4

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-14
 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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-15

 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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-16
 Phase 4: Matching Employees to Pay

• Establishing the pay level for each job

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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-17

 Challenges Affecting Compensation

Prevailing
wage rates

Government Challenges Union

constraints Affecting power
Compensation

Wage & salary

Productivity
policies

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-18

 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
© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-19
 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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-20

 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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-21

 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.
© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-22
 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

© 2022 McGraw-Hill Education Ltd. Schwind 13th Edition 9-23

9 Compensation Management Summary
After mastering this chapter content, you should be able to:
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. Schwind 13th Edition 9-24