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Managing Compensatio
n
Chapter 10
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What is compensation? Defined Components
Designing a Compensation System Compensation tools
Job-Based Compensation Skill-Based Compensation
Legal Environment and Pay System Governance
Chapter 10 OverviewChapter 10 Overview
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Total Compensation Sum total of quantifiable rewards Received for an employee’s labor
What Is Compensation?What Is Compensation?
Pay Mix—proportion of each of: Base compensation Pay incentives Indirect compensation (benefits)
o Perquisites— “perks”
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Compensation System—want design that: Enables firm to achieve its strategic objectives Is molded to unique characteristics of firm Nine features in compensation systems
Compensation System DesignCompensation System Design
Equity—perceived fairness of the design Internal—pay structure within a firm External—what other employers are paying Individual—of individual pay decisions
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Compensation Systems: EquityCompensation Systems: Equity
Distributive Justice Model Perceptions of fairness within the firm Compare themselves to other employees
o What they bring and what they receive
Labor Market Model Wage rate
determined by supply and demand
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Compensation System DesignCompensation System Design
Balancing Equity To improve external equity Use alternate forms of
compensation E.g. bonuses, add-ons,
counteroffers
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Compensation System DesignCompensation System Design
Fixed vs. Variable Pay Performance vs. Membership
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Job versus Individual PayJob versus Individual Pay
Job-Based Pay—best when: Jobs and technology are stable Much training required to learn a given job Turnover is relatively low
Individual-Based Pay—best when: Company and environment is dynamic Workforce is relatively educated And willing and ability to learn different
jobs Participation and teamwork are
encouraged Are opportunities to learn new skills
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Egalitarian pay system—same pay system For most employees Reduces barriers between workers Easier to deploy workers to other jobs
Egalitarianism vs. ElitismEgalitarianism vs. Elitism
Elitist pay system—different pay systems For employees or groups at different
organizational levels Result in more stable workforce
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Above vs. Below-market Above-market—minimizes turnover Below-market—save money
Compensation System DesignCompensation System Design
Monetary vs. Nonmonetary rewards Monetary—emphasis on achievement Nonmonetary—reinforce organization
commitment
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Open vs. Secret pay Open—fosters trust and commitment
o Forces managers to be fair administering Secret—leads to dissatisfaction with pay
Compensation System DesignCompensation System Design
Centralized vs. Decentralized pay Decisions Centralized—maximizes internal equity
o But doesn’t handle external equity issues well
Decentralized—better for large, diverse organizations
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Job-based compensation plans—three parts: Achieving internal equity Achieving external equity Achieving individual equity
Compensation Tools: Job-Based Compensation Tools: Job-Based PlansPlans
Job evaluation—to achieve internal equity Six steps Provide rational, orderly judgment of
importance of each job to the firm
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Step 1: Conduct job analysis
Steps to Achieving Internal EquitySteps to Achieving Internal Equity
Step 2: Write job description Step 3: Determine job specifications
Characteristics needed to perform job Step 4: Rate worth of all jobs
Point Factor System most commonly used
Uses Compensable Factors to rate jobs
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Step 5: Create a job hierarchy Job listing by relative value
Steps to Achieving Internal EquitySteps to Achieving Internal Equity
Step 6: Classify jobs by grade levels
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Achieving External EquityAchieving External Equity
Step 1: Identify benchmark or key jobs Check salary surveys
Step 2: Establish pay policy Lead, lag, or pay market
rate
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Market Salary Data for Selected Market Salary Data for Selected Benchmark Office JobsBenchmark Office Jobs
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Individual assigned pay within a range
Achieving Individual EquityAchieving Individual Equity
Within-pay-range positioning criteria: Previous experience Seniority Performance appraisal ratings
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Compensation Tools: Job-Based Compensation Tools: Job-Based PlansPlans
Advantages: Rational, objective, systematic Relatively easy to administer
Drawbacks: Do not account for nature of business Job descriptions often too general Wage and salary data not definitive Job-based plans tend to be
bureaucratic, mechanistic and inflexible
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Compensation Tools: Skill-Based Compensation Tools: Skill-Based PlansPlans
Skill mastery increases pay Three types of skills:
Depth skills—specialized area Breadth Skills—jobs/tasks in firm Vertical skills—self-management
Workforce is more flexible Higher training costs Skills can become “rusty”
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The Fair Labor Standards Act (1938) Exempt/Non-exempt employees Minimum wage and Overtime
The Legal Environment andThe Legal Environment andPay Systems GovernancePay Systems Governance
The Equal Pay Act (1963) Exemptions: seniority, job performance,
or other factors (e.g. shift differential) Comparable worth Office of Federal Contract Compliance
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Compensation: base, incentives, and benefits
Summary and ConclusionsSummary and Conclusions
Effective compensation systems: Help firm to achieve strategic objectives Suited to organization’s unique
characteristics Fits organization’s environment
Don’t forget: Employee input in job evaluation process Legal environment
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