BSAD 310 Spring 2017 - CH 10

Chapter 10:Compensation Management

2Lussier and Hendon, Fundamentals of Human Resource Management. © 2017, SAGE Publications.

Compensation• Total of an employee’s pay and benefits • Costs are frequently 65% to 70% of total

production costs in today’s firms.• Affects process of attracting and

retaining employees. – Firms should design system to meet

various needs of employees. – Poor compensation management practices

produce negative effects on performance.


Compensation System• Includes anything that employees may

value and desire and that employers can offer in exchange.

• Compensation Components – Rewards that can be classified as monetary

and in-kind payments• Non-Compensation Components

– Rewards other than monetary and in-kind payments (e.g., company cafeterias and gyms)


Motivation and Compensation Planning

• Goal of Compensation: To motivate employees to perform what the firm needs

• Expectancy Theory: Developed by Victor Vroom at Yale, who postulated that employees believe rewards for accomplishing a task are worth the effort– Clearly define goals and how to achieve them. – Tie performance to rewards. – Be sure rewards have value to employees.– Make sure management does what it says it will.


Exhibit 10-1: Expectancy Theory and Compensation


Motivation and Compensation Planning

• Equity Theory – J. Stacy Adams developed that employees are motivated when the ratio of their perceived outcomes to inputs is at least roughly equal to other referent individuals.– Employees who perceive being under-rewarded

decrease inputs and increase outcomes.– Employees who perceive being over-rewarded are

not usually bothered.• Employees who perceive being equitably

rewarded will continue to perform if content that their incomes and outputs are in balance.


Types of Compensation• Base Pay: Wages paid on an hourly basis;

salary based on a time period• Wage and Salary Add-Ons: Includes overtime

pay, shift differential, premium pay for working weekends and holidays, etc.

• Incentive Pay (“Variable Pay”): Otherwise known as “pay for performance”; commonly includes piecework in production and commission sales

• Benefits: Indirect compensation that provides something of value to employee


Direct Versus Indirect Compensation

• Direct Compensation – Base pay, salary add-ons, and incentive

pay—all of which appear in a pay check• Indirect Compensation

– Provides something of value to employee (i.e., benefits), such as sickness and accident protection, retirement pay contributions, cafeteria services, company physicals


Organizational Philosophy Decisions

• Ability to Pay – What is your company’s pay policy? – Are employees viewed as assets or investments?– What types of compensation are offered?– Pay for performance or for longevity (seniority)?– Skill-based or competency-based? – At, above, or below the Market–Efficiency Wage

Theory ?• Wage Compression• Pay Secrecy/ Rights to Privacy


Legal and Fairness Issues in Compensation

• Firms must offer equal pay for equal work unless there is a difference in productivity, seniority, merit, or other factors “other than sex.”

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Exhibit 10-2: Major EEO Laws and Legal Concepts

Lussier and Hendon, Fundamentals of Human Resource Management. © 2017, SAGE Publications.


Fair Labor Standards Act (FLSA) of 1938 (Amended)

• Covers minimum wage, overtime issues, and child labor rules for most U.S.-based businesses.

• Minimum wage is the lowest hourly rate of pay generally permissible by federal law.

• Employees with specific duties are exempt from minimum wage, overtime, and child labor rules.


Overtime• Federally mandated, higher-than-

minimum wage, required for nonexempt employees if they work more than 40 hours/week

• Currently set by FLSA as “time and a half,” or 150% of employee’s normal wages


See Exhibit 10-3: Duties Tests for General Employee

Exemptions (p. 256)• Executive Exemption• Professional Exemption (Learned or

Creative)• Administrative Exemption• Outside Sales Exemption• Computer Employee Exemption


FLSA and Child Labor• 14- and 15-Year-Olds: may work outside school

hours no more than “3 hours on a school day, 18 hours in a school week, 8 hours on a non-school day, and 40 hours in a non-school week”; permissible work hours also restricted

• 16- and 17-Year-Olds: cannot be employed in hazardous jobs, but their work hours are unrestricted

• Individuals 18 or Older: can be hired for all work


Employee Misclassification Under the FLSA

• Misclassification of employees as exempt from minimum wage or overtime is one of the most common areas where companies get into serious trouble.

• Just paying an employee a “salary” and then working that person for unlimited hours is obviously illegal under the general exemption FLSA rules noted above.


Pay Equity and Comparable Worth

• Comparable Worth – When jobs are distinctly different but entail

similar levels of ability, responsibility, skills, and working conditions, they are of equal value and should have same pay scale.

– The concept is broader than “equal pay for equal work” because the work need only be similar, not the same.


Other Legal Issues• Mandatory employee pension and benefits

legislation also includes the following:– Social Security– Workers’ compensation– Unemployment insurance– Family and Medical Leave Act (FMLA)– Patient Protection and Affordable Care Act (ACA)– Employee Retirement Income Security Act (ERISA)– Health Insurance Portability and Accountability Act

(HIPPA)


Job Evaluation• Determining worth of each position relative to other

positions. • Job Ranking – Subjectively ordering jobs from

lowest to highest or vice versa in terms of value to company

• Point-Factor – Objectively breaking down job into “compensable factors” and applying points to factors based on job’s level of difficulty

• Factor Comparison – Analyzing and ranking “compensable factors” of benchmark jobs in pay surveys and ranking firm’s jobs against benchmark

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Exhibit 10-4: Creation of a

Pay Structure

and Individual Pay Rates



Job Structure and Pay Levels

• Pay structure creates a hierarchy of jobs and their rates of pay within the organization. It is made up of job structures and pay levels.

• Job structure is stacking up jobs in organization from lowest to highest levels.

• Pay levels provide minimum to maximum pay for a group or subset of jobs in organization.


Creation of Pay Levels• A single pay level, or “pay grade,” applies

to many different jobs. • Each pay level has a maximum and

minimum pay rate.• Pay rates are determined by

comparisons with Labor Market Competition (minimum pay level), Product Market Competition (top pay level), supply and demand, and insure equity.


Exhibit 10-5: Supply and Demand Curve


Exhibit 10-6: Product Market Competition Limits

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Exhibit 10-7: Pay Levels


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Exhibit 10-8: Pay Structure



Delayering and Broadbanding

• Delayering: Changing company structure to rid vertical hierarchy (reporting levels); process of “flattening” hierarchical levels found in command and control organizational structures

• Broadbanding: Combining multiple pay levels into one

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Exhibit 10-9: Broadbanding of Multiple Pay Levels



Trends and Issues in HRM• A Shift From Base Pay to Variable Pay

– One of the biggest reasons is to lower the risk to the company when markets fail or economies go into recession.

• The Technology of Compensation– Since compensation is typically one of the

largest costs in most organizations, management needs to be mindful of what it gets for its money.

BSAD 310 Spring 2017 - CH 10

Business

Transcript of BSAD 310 Spring 2017 - CH 10