978-0134320540 Chapter 1 Lecture Notes

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CHAPTER 1

Strategic Compensation: A Component of Human Resource Systems

Learning Objectives

1.1. Define strategic compensation.

1.2. Summarize the role of compensation as a strategic business partner.

1.3. Explain strategic compensation decisions.

1.4. Identify and discuss the building blocks and structural elements of strategic compensation

systems.

1.5. Describe the fit of the compensation function in organizations.

1.6. Identify the stakeholders of the compensation function and summarize their stakes in the

work compensation professionals perform.

Outline

I. Overview

II. Defining Strategic Compensation

III. Compensation as a Strategic Business Partner

IV. Strategic Compensation Decisions

V. Building Blocks and Structure of Strategic Compensation Systems

VI. Fitting the Compensation Function in an Organization’s Structure

VII. Stakeholders of the Compensation System

VIII. Key Terms

IX. Discussion Questions and Suggested Answers

X. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

XI. Crunch the Numbers! Questions and Suggested Student Responses

XII. Assisted-Graded Questions

XIII. Additional Case from the MyManagementLab website; Instructor Notes and Questions

and Suggested Student Responses

Lecture Outline

I. Overview

A. Manpower planning

1. Predecessor to contemporary human resource management, focus was on

effective deployment of employees

2. Goal was to achieve maximum productivity per employee

B. Personnel management

1. Evolved due to government regulations concerning:

a. Payroll taxes

b. Minimum wage laws

c. Antidiscrimination laws

2. Competitive advantage

a. Since 1980’s recognition that employees can contribute to competitive

advantage

b. Competitive advantage describes a company’s success when the company

acquires or develops capabilities that facilitate outperforming the competition

c. HR becomes a strategic function

II. Defining Strategic Compensation

A. What Is Compensation?

1. Intrinsic and extrinsic rewards employees receive for performing their jobs

a. Intrinsic compensation: reflects employees’ psychological mindsets that result

from performing their jobs

b. Extrinsic compensation: includes both monetary and nonmonetary rewards

for:

i. Obtaining certain job performance levels

ii. Acquiring new skills and knowledge

2. Monetary compensation represents core compensation

3. Nonmonetary rewards (also known as employee benefits) include:

a. Protection programs (e.g., medical insurance)

b. Paid time off (e.g., vacations)

c. Services (e.g., daycare assistance)

B. What is Strategic Compensation?

1. Competitive business strategy refers to the planned use of company resources

2. Human resource strategies specify the use of multiple HR practices to reinforce

competitive business strategy.

3. Strategic compensation refers to the design and implementation of compensation

systems to reinforce the objectives of both HR strategies and competitive business

strategies

III. Compensation as a Strategic Business Partner

A. HR and compensation professionals today need to think like the chief executive

officer (CEO) to become a strategic partner in achieving organizational plans and

results

B. Compensation professionals can give the CEO and CFO an understanding of the roles

employees play in the organizations to expand or shrink shareholder value

C. How HR functions serve as strategic business partner

1. Capital refers to factors that enable companies to generate income, raise stock

prices, bring economic value, strong brand identity, and reputation

2. Human capital, refers to sets of collective skills, knowledge, and abilities that

employees can apply to create value for their employers

3. Compensation professionals can leverage the value of human capital in a variety

of ways such as a well-designed merit pay program to reinforce performance

IV. Strategic Compensation Decisions

A. Environmental scanning

1. Used for strategy formulation

2. Main focus is discerning threats and opportunities

B. Competitive business strategy choices

1. Lowest-cost strategy or cost leadership focuses on gaining completive advantage

by being the lowest-cost producer of a product or service within the marketplace

2. Differentiation strategies develop products or services that are unique from those

of their competitors

C. Compensation decisions that support the firm’s strategy

1. Compensation professionals use two broad elements to support strategic

initiatives

a. Basic building blocks

b. Structural design elements

2. Employee roles associated with competitive strategies

a. Compensation professionals must design and implement compensation

practices that elicit strategy-consistent employee roles

V. Building Blocks and Structure of Strategic Compensation Systems

A. Building blocks: Core compensation and Employee Benefits

1. Core compensation

a. Base pay includes hourly pay or wage or salary

b. Is governed by Fair Labor Standards Act of 1938

c. Is set according to compensable factors such as level of skill, effort, and

responsibility required to perform the job and the severity of the working

conditions

i. Compensable factors are used to determine if jobs are equal under the

Equal Pay Act of 1963

d. Is adjusted periodically for cost-of-living increases, differences in an

employee’s job performance, and increases in an employee’s skill level

or job knowledge

e. Seniority pay systems reward employees with periodic additions to base

pay according to employees’ length of service in performing their jobs

i. Designed according to the human capital theory: employees will

become more productive as they refine existing skills and acquire new

skills and knowledge through length of service

f. Merit pay is permanent base pay increases granted because of job

performance

g. Incentive pay or variable pay rewards employees for partially or

completely attaining a pre-determined work objective

h. Person-focused pay or competency-based pay rewards employee for

specifically learning new curricula

i. Pay-for-knowledge plans reward managerial, service, or professional

workers for successfully learning specific curricula

ii. Skill-based pay is used mostly for employees who perform physical

work and increases as workers master new skills

2. Employee Benefits

a. Represent nonmonetary rewards

b. Discretionary benefits include three broad categories

i. Protection programs that provide family benefits, promote health, and

guard against income loss caused by factors such as unemployment,

disability, or serious illness

ii. Paid time off such as vacation

iii. Services provide such enhancements as tuition reimbursement and day

care assistance

c. Legally-required benefits are protection programs that attempt to promote

worker safety and health and maintain family income streams

i. Social Security Act of 1935

ii. Family and Medical Leave Act of 1993

iii. Patient Protection and Affordable Care Act of 2010

B. Fundamental Compensation System Design Elements

1. Internal consistency

a. Internally consistent compensation systems clearly define the relative value

of each job among all the jobs within a company

b. Is based on the principle that employees working at jobs that require

greater qualifications, more responsibilities, and/or more complex job

duties should be paid more

c. Is achieved using job analysis and job evaluation

i. Job analysis is a systematic process for gathering, documenting, and

analyzing information in order to describe jobs

ii. Job evaluation is used to systematically recognize differences in the

relative worth among a set of jobs

2. Market competitiveness

a. Market-competitive pay systems are based on results of compensation

surveys

b. Compensation surveys collect and then analyze competitors

compensation data

3. Recognizing Individual Contributions

a. Pay structures recognize differences in employee contributions, such as

credentials, job knowledge, and job performance

b. Pay grades group jobs for pay policy application

c. Pay ranges include minimum, maximum, and midpoint pay rates

C. Alternative Pay Structure Configurations

1. Merit pay plans

2. Sales compensation plans

3. Broadband structures

4. Two-tier wage structures

5. Executive compensation

6. Contingent worker compensation

7. Expatriate compensation

8. Compensation structures in countries other than the United States

VI. Fitting the Compensation Function in an Organization’s Structure

A. How HR Professionals Fit into the Corporate Hierarchy

1. Line employees are workers who are directly involved in producing a

company’s goods or services

2. Staff employees are workers whose job it is to support the line functions-

human resource professionals are staff employees

3. HR practices include:

a. Recruitment

b. Selection

c. Performance appraisal

d. Training

e. Career development

f. Labor-management relations

g. Employment termination

h. Managing HR within the context of legislation

B. The Compensation Function

1. An executive is a top-level manager who reports directly to the corporation’s

CEO or to the head of a major division

2. A generalist, who may be an executive, performs tasks in a variety of

HR-related areas

3. A specialist may be an HR executive, manager, or non-manager who is

typically concerned with only one of the areas of compensation practice

C. How the Compensation Function Fits into HR Departments

1. Compensation, recruitment, and selection

a. Companies can spark interest by communicating the positive features of

the core compensation and employee benefits programs

b. Companies may offer inducements such as signing bonuses

2. Compensation and performance appraisal

a. Is key to effective merit pay programs

b. Employees must perceive a strong relationship between attaining

performance standards and receiving pay increases

3. Compensation and training

a. Successful pay-for-knowledge plans depend upon a company’s ability to

develop and implement systematic training programs

b. Companies implementing pay-for-knowledge plans typically increase the

amount of classroom and on-the-job training

4. Compensation and career development

a. Employees make lateral moves across a company’s hierarchy or vertical

moves up the hierarchy

b. Employees compensation changes reflect career development

5. Compensation and labor-management relations

a. Companies grant COLAs

b. Companies establish base pay on seniority pay

6. Compensation and employment termination

a. Employment terminations are either involuntary or voluntary

b. Some companies offer severance pay for involuntary terminations

c. Companies sponsor pension programs in the case of retirement

d. Companies sometimes use early retirement programs to reduce workforce

size

7. Compensation and legislation

a. Laws were enacted to establish acceptable employment practices and

protect employees’ rights

b. Are grouped on four main themes

i. Income continuity, safety, and work hours

ii. Pay discrimination

iii. Accommodation of disabilities and family needs

iv. Prevailing wage laws

c. Relevant laws include:

i. Fair Labor Standards Act of 1938

ii. Equal Pay Act of 1963

iii. Civil Rights Act of 1964

iv. Patient Protection and Affordable Care Acto of 2010

v. Pregnancy Discrimination Act of 1978

vi. Americans with Disabilities Act of 1990 (amended in 2008)

vii. Family and Medical Leave Act of 1993

viii.Davis–Bacon Act of 1931

VII. Stakeholders of the Compensation System

A. The success of HR departments depends on how they will serve various stakeholders

including:

1. Employees

2. Line managers

3. Executives

4. Unions

5. U.S. government

B. Employees

1. Must educate employees on training options and connections between training and

their pay

2. Must determine which objectives of discretionary benefits are most important to

their particular workforce

C. Line managers

1. Use their knowledge of relevant laws to help them make sound compensation

judgments

2. Advise them on establishing pay rates

E. Executives

1. Develop and manage sound compensation systems

F. Unions

1. Abide by their collective bargaining agreements

G. U.S. Government

1. Keep updated and comply with all employment legislation

2. Demonstrate that alleged discriminatory pay practices are not discriminatory

End of the Chapter

VIII. Key Terms

Competitive advantage: Describes a company’s success when the company acquires or

develops capabilities that facilitate outperforming the competition

Intrinsic compensation: Reflects employees’ psychological mind-sets that result from

performing their jobs

Extrinsic compensation: Includes both monetary and nonmonetary rewards

Core compensation: Monetary compensation

Employee benefits: Non-monetary compensation

Competitive business strategy: The planned use of company resources—financial capital,

equipment capital, and human capital— to promote and sustain competitive advantage

Human resources strategies: Specify the use of multiple HR practices to reinforce competitive

business strategy

Strategic compensation: Refers to the design and implementation of compensation systems to

reinforce the objectives of both HR strategies and competitive business strategies

Capital: Refers to the factors that enable companies to generate income, higher company stock

prices, economic value, strong positive brand identity, and reputation

Human capital: Refers to sets of collective skills, knowledge, and abilities that employees can

apply to create value for their employers

Cost leadership (lowest-cost strategy): Focuses on gaining competitive advantage by being the

lowest-cost producer of a product or service within the marketplace, while selling the product or

service at a price advantage relative to the industry average

Differentiation strategies: Companies adopt this strategy when they develop products or

services that are unique from those of their competitors

Base pay: Recurring money employees receive for doing their jobs

Hourly pay or wage: Base pay received for each hour worked

Salary: Base pay received for performing a job, regardless of the actual number of hours

worked

Compensable factors: Skill, effort, responsibility, and working condition factors

Cost-of-living adjustment: Represent periodic base pay increases that are founded on changes

in prices as recorded by the Consumer Price Index (CPI)

Seniority pay: A system to reward employees with periodic additions to base pay according to

employees’ length of service in performing their jobs

Human capital theory: Employees’ knowledge and skills (human capital) add value

Merit pay: Program that assumes that employees’ compensation over time should be

determined, at least in part, by differences in job performance as judged by supervisors or

managers

Incentive pay: Compensation (other than base wages or salaries) that fluctuates according to

employees’ attainment of some standard based on a preestablished formula, individual or group

goals, or company earnings

Variable pay: Compensation (other than base wages or salaries) that fluctuates according to

employees’ attainment of some standard based on a preestablished formula, individual or group

goals, or company earnings

Person-focused pay: Programs that reward employees for specifically learning new curricula

Competency-based pay: Programs that reward employees for specifically learning new

curricula

Pay-for-knowledge: Programs that reward managerial, service, or professional workers for

successfully learning specific curricula

Skill-based pay: Programs that increase workers’ pay as they master new skills

Discretionary benefits: Any variety of programs that provide paid time off, employee services,

and protection programs that are offered on a discretionary basis

Legally required benefits: Particular sets of benefits the U.S. government requires employers

to offer to employees

Paid time off: Provides employees with pay for time when they are not working (e.g., vacation)

Services: Provide such enhancements as tuition reimbursement and day care assistance to

employees and their families

Protection programs: Legally required benefits that attempt to promote worker safety and

health, maintain the influx of family income, and assist families in crisis

Internally consistent compensation systems: Clearly define the relative value of each job

among all jobs within a company

Job analysis: A a systematic process for gathering, documenting, and analyzing information in

order to describe jobs

Job evaluation: A process to recognize differences in the relative worth among a set of jobs and

to establish pay differentials accordingly

Market-competitive pay systems: Compensation professionals build market-competitive

compensation systems based on the results of compensation surveys

Compensation surveys: Collect and then analyze competitors’ compensation data

Pay structures: Represent pay rate differences for jobs of unequal worth and the framework for

recognizing differences in employee contributions

Pay grades: Group jobs for pay policy application

Pay ranges: Include minimum, maximum, and midpoint pay rates

Line employees: Employees that are directly involved in producing companies’ goods or

delivering their services

Staff employees: Employees that support the line functions

Severance pay: Companies may choose to award and amount, usually the equivalent of several

months’ pay following involuntary termination

Pension programs: Provide income to individuals throughout their retirement

Early retirement programs: Contain incentives designed to encourage highly paid employees

with substantial seniority to retire earlier than they had planned

Generalist: A human resource professional that may be an executive that performs tasks in a

variety of HR-related areas

Specialist An HR executive, manager, or non-manager who is typically concerned with only one

of the areas of compensation practice