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    Human ResourceHuman Resource

    ManagementManagementTENTH EDITONTENTH EDITON

    2003 Southwestern College Publishing. All rights reserved. PowerPoint Presentationby Charlie CookPowerPoint Presentationby Charlie Cook

    Compensation StrategiesCompensation Strategies

    and Practicesand Practices

    Chapter 12Chapter 12

    SECTION 4Compensating

    HumanResources

    SECTION 4Compensating

    HumanResources

    Robert L. MathisRobert L. Mathis John H. JacksonJohn H. Jackson

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    2002 Southwestern College Publishing. All rights reserved. 122

    Learning ObjectivesLearning Objectives

    After you have read this chapter, you should beable to:

    Identify two general types of compensation and thecomponents of each.

    Give examples of two different compensationphilosophies in organizations.

    Discuss four strategic compensation design issues.

    Describe three considerations affecting perceptionsof pay fairness.

    Identify the basic provisions of the Fair LaborStandards Act (FLSA).

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    Learning Objectives (contd)Learning Objectives (contd)

    Define job evaluation and discuss four methods forof performing it.

    Outline the process of building a wage and salaryadministration system.

    Discuss how to establish a pay-for-performancesystem.

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    Compensation SystemsCompensation Systems

    Objectives of an Effective CompensationSystem:

    Legal compliance with all appropriate laws andregulations

    Cost effectiveness for the organization

    Internal, external, and individual equity foremployees

    Performance enhancement for the organization

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    Nature of CompensationNature of Compensation

    Types of Rewards Intrinsic

    Intangible, psychological and social effects of

    compensation

    Extrinsic Tangible, monetary and nonmonetary effects of

    compensation

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    Components of A Compensation ProgramComponents of A Compensation Program

    Figure 121

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    Typical Division of HR Responsibilities:Typical Division of HR Responsibilities:

    CompensationCompensation

    Figure 122

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    Continuum of Compensation PhilosophiesContinuum of Compensation Philosophies

    Figure 123

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    Compensation ApproachesCompensation Approaches

    Figure 124

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    Compensation Quartile StrategiesCompensation Quartile Strategies

    Figure 125

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    Decisions About Compensation LevelsDecisions About Compensation Levels

    Compensation trate ies

    Above-Market a in for i er qualifie , more pro uctiveorkers.

    Mi le-Market Attemptin to balance of emplo er costs an

    nee to attract an retain emplo ees.

    Belo -Market a in all t at t e firm can affor

    akin a vanta e of t e abun ant suppl of potential emplo ees in a loose labor market.

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    CompetencyCompetency-- ased Payased Pay

    Maintenance ofCompetencies

    Limitations

    (How many?)Pricing

    Competencies

    Training

    CompetencyCompetency--

    Based PayBased PaySystemsSystemsKBP/SBPKBP/SBP

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    CompetencyCompetency--Based Systems OutcomesBased Systems Outcomes

    Figure 126

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    Individual vs. Team RewardsIndividual vs. Team Rewards

    Distribute variable rewards at the team levelDistribute variable rewards at the team level

    a e system simple and understandable.a e system simple and understandable.

    Using TeamUsing Team-- ased Reward Systemsased Reward Systems

    Use s illUse s ill--based pay for the base.based pay for the base.

    Use variable pay based on business entity performanceUse variable pay based on business entity performance

    aintain a high degree of employee involvementaintain a high degree of employee involvement

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    Perceptions of Pay FairnessPerceptions of Pay Fairness

    E uity The perceived fairness between what a persondoes (inputs) and what the person receives(outcomes).

    Procedural Justice The perceived fairness of the process andprocedures use to ma e decisions aboutemployees

    Distributive Justice The perceived fairness in the distribution ofoutcomes.

    Pay Openness The degree of openness or secrecy that an

    organization allows regarding its pay system.

    External E uity The perception that the organization providesemployees with compensation that comparableto the compensation of employees with similar

    jobs in other organizations.

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    EquityConsiderations in CompensationEquityConsiderations in Compensation

    Figure 127

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    FairLabor Standards Act (FSLA) of 1938FairLabor Standards Act (FSLA) of 1938

    Provisionsofthe ActProvisionsofthe Act

    Minimum wage requirement sets wage floorMinimum wage requirement sets wage floor

    Childlabor (under 14 yearsold)is prohibitedChildlabor (under 14 yearsold)is prohibited

    Requiresovertime paymentsfornonRequiresovertime paymentsfornon--exempt employeesexempt employees

    Exempts highlyExempts highly--paid computer workerspaid computer workers

    Requiresovertime (1Requiresovertime (1) pay for hoursover 40 hours) pay for hoursover 40 hours

    Requires compensatory time at overtime (1Requires compensatory time at overtime (1) pay rates) pay rates

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    Wage/Hour Status Under Fair Labor Standards ActWage/Hour Status Under Fair Labor Standards Act

    Figure 128a

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    Wage/Hour Status Under Fair Labor Standards ActWage/Hour Status Under Fair Labor Standards Act

    Figure 128b

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    Wage/Hour Status Under Fair Labor Standards ActWage/Hour Status Under Fair Labor Standards Act

    Figure 128c

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    The IRSTest forEmployees andThe IRSTest forEmployees and

    Independent ContractorsIndependent Contractors

    Figure 129Source: U.S. Internal Revenue Service.

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    OtherLaws Affecting CompensationOtherLaws Affecting Compensation

    Davis-Bacon Act of 1931 Required payment of prevailing wage by firms

    engaged in federal construction projects.

    Walsh-Healy Public Contracts Act and the

    Service Contracts Act Extended the payment of prevailing wage to

    service contracts

    Required overtime payment for any employee hours

    worked over eight hours in one day; applies only toto federal contracts, not the private sector.

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    Pay and GenderPay and Gender

    Equal Pay Act of 1963 Requires that men and women be paid the same

    for performing substantially similar jobs with limitednon-gender exceptions (e.g., merit and seniority).

    Issue of Pay Equity Similarity in pay for all jobs requiring comparable

    level of knowledge, skills, and abilities, even ifactual duties and market rates differ significantly.

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    CompensationCompensation

    AdministrationAdministration

    ProcessProcess

    Figure 1210

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    Job EvaluationJob Evaluation

    Job Evaluation The systematic determination of the relative worth

    of jobs within an organization.

    Benchmark Job

    A job found in many organizations and performedby several individuals who have similar duties thatare relatively stable and require similar KSAs.

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    Job EvaluationJob Evaluation

    F

    actorF

    actorComparisonComparison

    RankingRanking ClassificationClassification

    PointPointMethodMethod

    JobJobEvaluationEvaluationMethodsMethods

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    Job Evaluation Point ChartJob Evaluation Point Chart

    Figure 1211

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    Legal Issues and Job EvaluationLegal Issues and Job Evaluation

    Americans with Disabilities ActAmericans with Disabilities ActJob evaluations may not identify job functions related toJob evaluations may not identify job functions related to

    physical demands as essentialphysical demands as essential

    Gender IssuesGender IssuesTraditional job evaluations place less weight on knowledge,Traditional job evaluations place less weight on knowledge,

    skills, and working conditions for femaleskills, and working conditions for female--dominated jobsdominated jobs

    Job EvaluationJob Evaluation

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    Developing Pay SurveysDeveloping Pay Surveys

    Select Employers with Comparable JobsSelect Employers with Comparable Jobs

    Determine Jobs to be SurveyedDetermine Jobs to be Surveyed

    Decide hat Information Is NeededDecide hat Information Is Needed

    Conduct SurveyConduct Survey

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    Pay StructuresPay Structures

    Market Line The line on a graph showing the relationship

    between the job value, as determined by jobevaluation points, and pay survey rates.

    Common Pay Structures Hourly and salaried

    Office, plant, technical, professional, managerial

    Clerical, information technology, professional,

    supervisory, management, and executive

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    Pay Structures (contd)Pay Structures (contd)

    Pay Grades A grouping of individual jobs having approximately

    the same job worth.

    Broadbanding

    The practice of using fewer pay grades havingbroader pay ranges that in traditional systems.

    Benefits Encourages horizontal movement of employees

    Is consistent with trend towards flatter organizations Creates a more flexible organization

    Encourages competency development

    Emphasizes career development

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    Traditional PayStructure vs. BroadbandingTraditional PayStructure vs. Broadbanding

    Figure 1213

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    PayScattergramPayScattergram

    Figure 1214

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    Typical PayRange WidthsTypical PayRange Widths

    Figure 1215

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    Example ofExample of

    PayGradesPayGrades

    and Payand Pay

    RangesRanges

    Figure 1216

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    Pay Rate IssuesPay Rate Issues

    Rates Out of Range Red-Circled Employees

    An incumbent (current jobholder) who is paid above

    the range set for the job.

    Green-Circled Employees An incumbent who is paid below the range set for the

    job.

    Pay Compression

    A situation in which pay differences amongindividuals with different levels of experience andperformance in the organization becomes small.

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    Issues Involving Pay IncreasesIssues Involving Pay Increases

    Seniority Time spent in an organization or on a particular job.

    Used to determine eligibility for organizationalrewards and benefits.

    Maturity Curve A curve that depicts the relationship between

    experience and pay rates.

    Assumption is that as experience increases,

    proficiency and performance increase.

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    Issues Involving Pay IncreasesIssues Involving Pay Increases

    Cost-of-Living Adjustments (COLA) A percentage increase in wages that allows

    employees to maintain the same real wages in aperiod of economic inflation.

    Adjustments are tied to changes in an economicmeasure (e.g., the Consumer Price Index).

    Lump-Sum Increases (LSI)

    A one-time payment of all or part of a yearly pay

    increase. Lump-sum payments do not increase base wages

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    PayAdjustment MatrixPayAdjustment Matrix

    Figure 1217

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    CompaCompa--Ratio ExampleRatio Example

    Compa-ratio The pay level divided by the midpoint of the pay

    range.

    110ratio-Compa100(midpoint)15.00

    pay)(current$16.50Employee !pv!R

    87ratio-Compa100(midpoint)15.00

    pay)(current$13.05Employee !pv!J