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Human Resource Management

Part 4: Compensating Human Resources

Chapter 9
Compensation
Management
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Chapter’ objectives
• Identify the kinds of decisions involved in establishing a pay structure.

• Summarize legal requirements for pay policies.

• Discuss how economic forces influence decisions about pay.

• Describe how employees evaluate the fairness of a pay structure.

• Explain how organizations design pay structures related to jobs.

• Describe alternatives to job-based pay.

• Summarize how to ensure that pay is actually in line with the pay structure.

• Discuss issues related to paying employees serving in the military and paying
executives.

• Discuss incentive pay

• Discuss employee benefits

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Introduction
From the employer’s point
of view:
• Pay is critical in attaining
strategic goals.
• Pay has a major impact on
employee attitudes and
behaviors.
• Employee compensation is
typically a significant
organizational cost.
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From the employee’s point
of view:
• Policies having to do with
wages, salaries, and other
earnings affect their overall
income and thus their
standard of living.
• Both level of pay and
fairness compared with
others’ pay are important.
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1. Decisions about Pay

Identify the kinds of decisions involved in establishing a pay structure.

• Pay structure refers to the relative pay of different jobs (job structure) and how much
they are paid (pay structure).

• Pay level is the average pay in organizations, including wages, salaries, and bonuses.

• Job structure is the relative pay of jobs in organizations (i.e., the range of pay often
expressed by salary grades).

• Pay policies are attached to jobs, not individuals.

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1. Decisions about Pay

Legal Requirements for Pay:
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1. Decisions about Pay

Legal Requirements for Pay

• Equal Employment Opportunity

• Minimum Wage The lowest amount that employers may pay under federal or state law,
stated as an amount of pay per hour.

• Overtime Pay

• Child Labor

• Prevailing Wages
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1. Decisions about Pay

Economic Influences on Pay

• Product Markets: the challenge to sell goods and services at a quantity and price that
will bring a return on investment.

• Labor Markets: the amount an organization must pay to compete against other
organizations that hire similar employees.

• Pay Level: Deciding What to Pay

• Gathering Information about Market Pay

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1. Decisions about Pay

Market Pay Surveys

• Benchmarking is a procedure by which an

organization compares its own practices against
those of the competition.
• The following issues must be determined before
pay surveys are used:
• Which employers should be included in the survey?
• Which jobs are included in the survey?
• If multiple surveys are used, how are all the rates of
pay weighted and combined?
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1. Decisions about Pay

Market Pay Surveys Rate ranges

• Rate ranges refer to different employees in the same job that may have different pay
rates.

• Key jobs are benchmark jobs that have relatively stable content and are common to
many organizations so that market-pay survey data can be obtained.

• Nonkey jobs are unique to organizations and cannot be directly valued or compared
through the use of market surveys.
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1. Decisions about Pay

Employee Judgments about Pay Fairness
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1. Decisions about Pay

Employee Judgments about Pay Fairness
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1. Decisions about Pay

Employees as a Resource

• A philosophy that considers employees to be an investment that will yield valuable

returns.

• Controlling costs through noncompetitive pay can result in low employee productivity
and quality.

• Pay policies and programs are one of the most important human resource tools for
encouraging desired employee behaviors and discouraging undesired behaviors.
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• Deciding pay levels is discretionary, and is based on a broad range.

• The organization has to decide whether to pay at, below, or above the market average.

• Efficiency wage theory states that wages influence worker productivity.

• The benefits of higher wages may outweigh higher costs when the organization's
technology or structure depends on highly skilled employees or when the
organization has difficulty observing and monitoring employee performance.
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2. Decisions about Pay

Explain how organizations design pay structures related to jobs.

• Two types of employee social comparisons of pay are especially relevant in making pay-
level and job structure decisions:
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2. Decisions about Pay

Explain how organizations design pay structures related to jobs.

• Job Evaluation An administrative procedure for measuring the relative internal worth of
the organization’s jobs.
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2. Decisions about Pay

Explain how organizations design pay structures related to jobs: Developing a Job Structure

• A job structure refers to the relative worth of various jobs in the organization, based on
internal comparisons.

• Job evaluation is an administrative procedure that measures a job's worth to the

organization.
• The evaluation process is composed of compensable factors, which are the
characteristics of jobs that an organization values and chooses to pay for.
• Job evaluators often apply a weighting scheme to account for the differing
importance of the compensable factors to the organization.
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3. Pay Structure: Putting It All Together

• Hourly Wage Rate of pay for each hour worked.

• Piecework Rate Rate of pay for each unit produced.

• Salary Rate of pay for each week, month, or year worked.

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3. Pay Structure: Putting It All Together

Developing a Pay Structure

• Three pay-setting approaches include:

• Market survey approach - The greatest emphasis is on external comparisons. It
bases pay on market surveys that cover as many key jobs as possible.
• Pay-policy line - A mathematical expression that describes the relationship
between a job’s pay and its job evaluation points.
• Pay grades - Grouping jobs of similar worth or content together for pay
administration purposes.
• The range spread is the distance between the minimum and maximum
amounts in a pay grade.
• Pay Differentials Adjustment to a pay rate to reflect differences in working
conditions or labor markets.
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3. Pay Structure: Putting It All Together

Developing a Pay Structure: Alternatives to Job-based pay

• Delayering Reducing the number of levels in the organization’s job structure.

• Skill-Based Pay Systems Pay structures that set pay according to the employees’
levels of skill or knowledge and what they are capable of doing.
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4. Pay Structure and Actual Pay

Summarize how to ensure that pay is actually in line with the pay structure.
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5. Current Issues Involving Pay Structure

Discuss issues related to paying employees serving in the military and paying executives.

• Pay during Military Duty

• Pay for Executives

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6. Incentive Pay
Recognizing Employee Contributions with Pay: Discuss the connection between
incentive pay and employee performance.
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6. Incentive Pay
Recognizing Employee Contributions with Pay: Discuss the connection between
incentive pay and employee performance.

• Incentive pay is pay tied to individual performance, profits, or other measures of success.

• Organizations select forms of incentive pay to energize, direct, or control employees’ behavior.

• It is influential because the amount paid is linked to predefined behaviors or outcomes.

• To be effective, incentive pay should encourage the kinds of behavior that are most needed, and
employees must believe they have the ability to meet the performance standards.

• Employees must value the rewards, have the resources they need to meet the standards, and
believe the pay plan is fair.
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7. Providing Employee Benefits

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7. Providing Employee Benefits

Describe how organizations use other benefits to match employees’ wants and needs.

• Employers have responded to work-family role conflicts by offering family-friendly benefits,

including paid family leave, child care services or referrals, college savings plans, and elder
care information and support.

• Other employee benefits have traditionally included subsidized cafeterias, on-site health
clinics, and reimbursement of moving expenses.

• Stores and manufacturers may offer discounts on their products.

• Tuition reimbursement encourages employees to continue learning.

• Recreational services and employee outings provide social interaction as well as stress relief.
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