Chapter 10

Managing
Compensation

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Education, Inc. publishing
as Prentice Hall 10-1
Chapter 10 Overview

What is compensation?
Defined
Components
Designing a Compensation System
Compensation tools
Job-Based Compensation
Skill-Based Compensation
Legal Environment and Pay System
Governance
Copyright 2010 Pearson
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What Is Compensation?

Total Compensation
Sum total of quantifiable rewards
Received for an employees labor

Pay Mixproportion of each of:

Base compensation
Pay incentives
Indirect compensation (benefits)
o Perquisites perks

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 Compensation System Design

Compensation Systemwant design that:

Enables firm to achieve its strategic objectives
Is molded to unique characteristics of firm
Nine features in compensation systems

Equityperceived fairness of the design

Internalpay structure within a firm
Externalwhat other employers are paying
Individualof individual pay decisions

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Compensation 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 Design

Balancing Equity
To improve external equity
Use alternate forms of
compensation
E.g. bonuses, add-ons,
counteroffers

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Compensation System Design

Fixed vs. Variable Pay

Performance vs. Membership
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Job versus Individual Pay
Job-Based Paybest when:
Jobs and technology are stable
Much training required to learn a given job
Turnover is relatively low
Individual-Based Paybest 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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Egalitarianism vs. Elitism

Egalitarian pay systemsame pay system

For most employees
Reduces barriers between workers
Easier to deploy workers to other jobs

Elitist pay systemdifferent pay systems

For employees or groups at different
organizational levels
Result in more stable workforce
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Compensation System Design

Above vs. Below-market

Above-marketminimizes turnover
Below-marketsave money

Monetary vs. Nonmonetary rewards

Monetaryemphasis on achievement
Nonmonetaryreinforce organization
commitment
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Compensation System Design
Open vs. Secret pay
Openfosters trust and commitment
o Forces managers to be fair administering
Secretleads to dissatisfaction with pay
Centralized vs. Decentralized pay
Decisions
Centralizedmaximizes internal equity
o But doesnt handle external equity issues well
Decentralizedbetter for large, diverse
organizations
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 Compensation Tools: Job-Based Plans

Job-based compensation plansthree

parts:
Achieving internal equity
Achieving external equity
Achieving individual equity
Job evaluationto achieve internal equity
Six steps
Provide rational, orderly judgment of
importance of each job to the firm
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Steps to Achieving Internal Equity

Step 1: Conduct job analysis

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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Steps to Achieving Internal Equity

Step 5: Create a job hierarchy

Job listing by relative value
Step 6: Classify jobs by grade levels

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Achieving 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
Benchmark Office Jobs

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Achieving Individual Equity

Individual assigned pay within a range

Within-pay-range positioning criteria:
Previous experience
Seniority
Performance appraisal ratings

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Compensation Tools: Job-Based Plans

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 Plans

Skill mastery increases pay

Three types of skills:
Depth skillsspecialized area
Breadth Skillsjobs/tasks in firm
Vertical skillsself-management
Workforce is more flexible
Higher training costs
Skills can become rusty
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The Legal Environment and
Pay Systems Governance
The Fair Labor Standards Act (1938)
Exempt/Non-exempt employees
Minimum wage and Overtime

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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Summary and Conclusions
Compensation: base, incentives, and
benefits
Effective compensation systems:
Help firm to achieve strategic objectives
Suited to organizations unique
characteristics
Fits organizations environment
Dont forget:
Employee input in job evaluation process
Legal environment
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