Chapter 9

Determining Pay & Benefits

Gaining Competitive Advantage

• Problem: wanted to become “one of the great service organizations of the world”– Turnover problem—customers had to continually deal

with new ees

Problem: wanted to become “one of the

• Solution: retirement and health care benefit plans were too expensive for lower paid ees– Lower paid ees paid less for their benefits than the

highly paid employees

Gaining Competitive Advantage

• What did Manor Care do?– Contribute more to lower salaried retirement accounts

(ees with lowest incomes would receive a contribution equal to 3% of salary

– Vary out-of-pockets and deductibles based on salary

• How was it communicated?– Via bulletins, newsletters, letters sent to ee’s homes,

and videotaped presentation at each site

Gaining Competitive Advantage

• What were the results?– Enrollments in the benefit plans increased

dramatically among frontline ees– Turnover rates dropped by 56% by the end of

the first year– Dramatic improvement in customer service– Gained a strong recruiting advantage in the

marketplace

Linking Pay & Benefits to Competitive Advantage

• EEs receive compensation in return for work performed

• Compensation is more than salary it is “all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship”– “Financial returns’ refers to pay– “Services and benefits” refers to insurance,

paid vacation, sick days, pension plans, and ee discounts

Linking Pay & Benefits to Competitive Advantage

• Compensation expert—Richard Henderson states—”Probably no one cost of business is more controllable and has a greater influence on profits than labor costs”

• Firm’s compensation system can:– Improve cost efficiency– Ensure legal compliance– Enhance recruitment efforts– Reduce morale and turnover problems

Improving Cost Efficiency

• Labor costs greatly affect competitive advantage because they represent a large portion of a company’s operating budget—cutting costs company can achieve cost leadership (labor is between 40 and 80 cents of each revenue dollar on such costs)

• Benefits have risen in the past 25 years from $250 billion to $740 billion– Health insurance premiums will continue to grow at

double digit percentages and will affect the bottom line (pay freezes and layoffs)

Achieving Legal Compliance

• Discrimination, minimum wages, and overtime pay

• Benefits, pensions, compensation for unemployment, and workers’ compensation for work-related injuries

Pay and benefits is directly tied to success of recruitment efforts and reducing morale and turnover problems

Pay Satisfaction: The Importance of Equity

• Amount of pay has been found to be less important than its perceived fairness or equity– $9 million--$10 million—ballplayers—stems

from perceptions of inequity not from need or greed. Maybe someone less capable as a ballplayer is earning more money

Equity Theory

• Equity theory—a pay fairness theory that states that people form equity beliefs by comparing their outcome/imput ratio to that of a referent other

• Imputs—the perceptions that people have concerning what they contribute to the job

• Outcomes—the perceptions that people have regarding the returns they get for the work they perform

• People feel equity when the O/I ratios of the individual and his or her referent other are perceived as being equal (You feel you contribute the same to the referent other but earn less money

Equity Theory

• A person’s referent other could be any one of several people. People may compare themselves to others:– Doing the same job within the same organization– In the same organization, but performing different jobs– Doing the same job in other organizationsPeople do not limit their comparisons to just one

person—they have several referent others. Perceived fairness is achieved only when each comparison is viewed as equitable.

Equity Theory

• When ee’s O/I ratios are less than that of their referent others, they feel they are being underpaid; when greater, they feel they are being overpaid (both conditions produce feelings of tension

• When underpaid:– Decrease their imputs by reducing their effort or

performance– Escape the situation—this response may be

manifested by a variety of behaviors, such as absenteeism, tardiness, excessive work breaks, or quitting

Little issue with overpaid ees

Establishing Pay Rates within an Organization

• EEs feel pay is equitable when they perceive these circumstances:– It is fair relative to the pay coworkers in the

same org receive (called internal consistency)– It is fair relative to the pay received by

workers in other organizations who hold similar positions (called external competitiveness)

– It fairly reflects their input to the organization (called employee contributions)

Establishing Pay Rates within an Organization

• To achieve internal consistency, a firm’s ees must believe that all workers are being paid what they are “worth”; company pay rates reflect the overall contribution of each person’s job to the organization (level of contribution, nurse vs. orderly

• For pay rates to be internally consistent, then, an org must first determine the overall importance of worth of each job

• Job worth is based on skill and effort—systematic process of determining this is called job evaluation

Job Evaluation

• Discuss Taking a Closer Look 9-1 page 269 (ensuring the accuracy and fairness of job evaluations

• Job Evaluations Committees—a committee of individuals convened for the purpose of making job evaluations (from various levels and job functions)—some subjectivity—need rating scales used to evaluate jobs must be clearly defined, and evaluators thoroughly trained.

Job Evaluation

• Job Evaluation process is analogous to performance appraisal in that evaluators are asked to provide certain ratings on a form

• Job evaluation ratings focus on the requirements of the job and not on the performance of the individual jobholder

Point Factor Approach

• Jobs are evaluated separately on several criteria—compensable factors (Discuss Exhibit 9-1 on page 270 and Exhibit 9-2 on page 271)

• Development of point factor rating scale:– Select and define compensable factors used to

determine job worth– Determine the number of levels or degrees for each

factor– Carefully define each degree level. Each adjacent

level must be clearly distinguishable

Point Factor Approach

• Development of point factor rating scale:– Weigh each compensable factor in terms of its

relative importance for determining job worth– Assign point values to the degrees associated

with each compensable factor

• Rate each job one factor at a time, until all jobs rated on all factors (very difficult and time consuming)

Assigning Jobs to Pay Grades

• When job evaluations have been completed, jobs are grouped into pay grades based on the total number of points received. (Discuss Exhibit 9-3 page 272)

• Decide on the number of grades—College we have 12 grades—some orgs have as many as 20 to 25

Achieving External Competitiveness

• Firm achieves external competitiveness when ees perceive that their pay is fair in relation to what their counterparts make in other organizations (what do our competitors make?)

• Collect survey information for benchmark jobs (Surveys from BLS/Mercer/Towers Perrin (Take a Closer Look 9-2 page 274)

• Pay Policy—a company policy stipulating how well it will pay its ees relative to the market (majority of firms pay at the market rate)

• Once benchmark jobs have been evaluated then we would evaluate non-benchmark jobs (Figure 9-2)

• Statistical relationship between job evaluation points and prevailing market rates

Establishing a Pay Range

• Pay range stipulates the minimum and maximum for pay rates for all jobs within a grade (market rate is set at the midpoint)– Range spread—10 to 255 for office and production

work, 35 to 60% for professional and lower-level management positions, and 60 to 120% for top level management positions

– New ees paid at the bottom of the range—move through the range based upon performance

Skill-Based Pay

• Skill-based pay is based on the assumption that workers who acquire additional skills can make a greater contribution to the organization and, consequently; should be paid more (ees are acquiring new job skills)– Teachers earn a Master’s degree they have additional

skills– General Mills production environments—broaden

worker’s skills so company gains greater flexibility in work scheduling

Advantages of Skill-Based Pay

• Additional skills permits workers to perform all portions of the production process

• EEs have broadened skills no longer be limited to the perspective that comes from doing just one step of the process—So—– Communicate more effectively with ees doing other

parts of production– Solve problems more effectively due to broader

understanding of the organization– More committed to see that the organization operates

effectively—due to their overview of the entire organization

Disadvantages of Skill-Based Pay

• Added labor costs due to ees being paid more• May lead to pay inequity perception if two people are

doing the same job, yet one is receiving greater pay for acquiring the additional skill

• Not cost effective if org cannot make effective use of ee skills

• Problem in determining when one ee has more skills than another (could be made subjectively)

• Develop additional training programs and certification programs can become an administrative burden

Legal Constraints on Pay Practices

• FLSA- Fair Labor Standards Act established in 1938—federal statute covering all employers engaged in interstate commerce– Exempt and non-exempt ees (Discuss Exhibit

9-4 page 279)– Minimum wage– Overtime—non compliance with provision is

the most frequent violation (California more than 8 hours in a day)

Pay & Discrimination

• Equal Pay Act—amendment passed to the FLSA in 1963 prohibits sex discrimination in pay– Prohibits employers from paying lower wages

to one sex where the work of the two sexes is substantially equal (jobs require equal skill, effort, and responsibility)

• Comparable worth—a standard for judging pay discrimination that calls for equal pay for equal worth

Employee Benefit Options

• Worker’s Compensation—a state run, no-fault insurance system that provides income protection for workers experiencing job-related injuries or illnesses

• Unemployment Compensation—a system designed to provide income to individuals who have lost a job through no fault of their own-Quitting one’s job without good cause-being discharge for misconduct connected with work-refusing suitable work while unemployed

Employee Benefit Options

• Social Security—a law that provides eligible workers with retirement and disability incomes and Medicare coverage– Monthly benefits to those at least 62 years of

age– Ee and employer make contributions—these

are for current retireesCOBRA—continued health insurance for a

period of up to 3 years (18 months for those who loose their jobs)

Insurance

• Health Insurance—cover hospitalization, physician care, and surgery (Discuss Take a Closer Look 9-3 page 284)

• LTD—Long term disability• Life Insurance—premiums usually paid by

employer• Pension Plans—defined contribution—

401k (portable); defined benefit—monthly benefit for life

Insurance

• Flexible benefit plans—cafeteria plans– Ees may choose to receive cash or purchase

benefits from among the options provided under the plan (American Airlines—on the Road to Competitive Advantage)

– Discuss Exhibit 9-5 page 286

Cost Containment

• Benefit costs have been spiraling due to:– General increases in health costs– Drastic escalation of prescription drug costs– Continued development of expensive life-saving

technology, such as MRIs– Aging workforce. Older people require more health

care, and the health care they receive is typically more expensive than that needed by younger workers

– Increase in the usage of mental health professionals following the September 11, 2001, terrorist attacks

Choose the Right Health Insurance Carrier

• Is the program tailored to company needs?• Are the prices competitive?• Will there be a good provider/vendor

relationship?• Will payouts be accurate?• How good is the customer service?• Is the insurance carrier financially secure?

Goal is to increase the attractiveness of the benefits package while holding the cost down