Chapter 11: Establishing Rewards and Pay Plans
Chapter 11:
Establishing Rewards and Pay Plans
Learning Outcomes
After reading this chapter, students should be able to:
1. Differentiate between intrinsic and extrinsic rewards.
2. Discuss how the Fair Labor Standards Act and other federal laws regulate compensation.
3. Identify external factors influencing compensation.
4. Discuss job evaluation and how it is used to create pay structures.
5. Explain base pay, premium pay and types of variable pay as parts of a compensation
program.
6. Discuss the elements of executive compensation and why they can be significantly higher
than those of other employees.
7. List the considerations in creating an international compensation program.
Chapter Overview
Unpaid internships are pretty common and rarely legal. The chapter opener and the chapter
address the six key criteria that must be met in order for an internship to be classified as unpaid
by employers.
Chapter content includes complying with laws, evaluating the relative worth of jobs, and
comparing pay to current labor market data are HRM activities that contribute to effective
compensation administration. Pay is presented as one type of organizational reward which can be
used to motivate performance if administered correctly. Today’s incorporation of incentives,
competency-based pay and team-based pay are discussed, as well as issues relevant to executive
and international compensation.
Additional features of this chapter:
Exhibits:
11 – 1: Structure of Rewards
11 – 2: The “Slight Promotion”
11 – 3: Federal Minimum Wage
11 – 4: A Wage Curve
11 – 5: A Sample Wage Structure
11 – 6: Supervisory Competencies
11 – 7: Executive Pay
Boxed Features
These features are located within the text and address current issues in HRM within the context
of the relevant learning objectives. They are short and thought provoking with thought questions
at the end providing a great opportunity to provide a break in class lecture to check student
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Chapter 11: Establishing Rewards and Pay Plans
understanding. Questions may be posed to students individually, in small groups, as quick
cooperative learning assignments or as large group discussions.
Ethical Issues in HRM: The Secret Paycheck on page 242 discusses pay and the Lilly
Ledbetter Pay Act, which allows employees more time to discover pay discrepancies that
may be discriminatory.
Contemporary Connection – The Minimum Wage Debate on page 246 presents the
pros and cons of raising the minimum wage for workers.
Contemporary Connection – Compensation in a Global Environment on page 258
compares the minimum wage rates of various countries.
Making Concepts Relevant in Your Classroom
In addition to the activities provided in the lecture notes, these suggested activities help students
apply chapter 11 concepts:
Several controversial current issues make this a good topic area for scheduling a formal
in-class debate. Executive pay, comparable worth, team-based incentives, and
competency-based pay, for example, are excellent topics for students to research and
present the pros and cons.
Students often confuse job evaluation with performance evaluation. Clarify by
explaining that the purpose of job evaluation is to compare the relative worth to the
company of different jobs, or having different types of work done. A job’s evaluation
should remain the same regardless of who is hired to do the job. Performance evaluation,
on the other hand, is based on the accomplishments of an individual employee within the
job. New, competency-based systems recognize the difficulties of separating the value of
a person’s skills from the value of the work performed.
The concept of pay structures can seem complex, especially the procedures used to tie
together salary survey information and job evaluation points using benchmark jobs. It’s
helpful to use the concepts of internal equity (determined through job evaluation);
external equity (determined using salary surveys); and individual equity (determined by
fairly evaluating an individual to place him/her within a pay range). It’s also beneficial to
take students step-by-step through the process of designing a simple pay structure. They
can be given a simplified point rating system to evaluate some jobs they are familiar with.
Then, you can provide salary survey information on some “benchmark” jobs, which they
should also evaluate. The pay curve determined using the benchmark jobs can be used to
determine the “fair” pay for the other jobs they have rated.
Chapter Outline And Lecture Suggestions
Introduction Slide 3
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Chapter 11: Establishing Rewards and Pay Plans
People do what they do to satisfy some need and they look for a payoff or reward.
The most obvious reward is pay, but there are many others, including promotions,
desirable work assignments, peer recognition, and work freedom.
Rewarding Employees Slides 4 – 5
Learning Outcome 1: Differentiate between intrinsic and extrinsic rewards.
Compensation decisions are often strategic in nature, balancing employee expectations
and the best way to accomplish organizational goals.
Total rewards is a comprehensive view of compensation that includes pay, training,
health and wellness benefits, PTO with work-life balance, interesting work, culture and
motivational aspects of work.
Intrinsic Versus Extrinsic Rewards Slides 6 -7
Intrinsic rewards (personal satisfactions) come from the job itself:
Pride in one’s work
Feelings of accomplishment
Being part of a work team.
Extrinsic rewards come from a source outside the job; they include rewards
offered mainly by management:
Money
Promotions
Bonuses
Benefits
Financial Versus Nonfinancial Rewards Slide 8
Financial rewards include wages, bonuses, profit sharing, pension plans, paid
leaves, and purchase discounts.
Nonfinancial rewards emphasize making life on the job more attractive;
employees vary greatly on what types they find desirable.
Performance-Based Versus Membership-Based Rewards Slide 9
Performance-based rewards, such as commissions, piecework pay plans,
incentive systems, group bonuses, and merit pay, are tied to specific job
performance criteria.
Membership-based rewards such as cost-of-living increases, benefits, and salary
increases are offered to all employees
Exhibit 11 – 1 Structure of Rewards page 241 shows several examples of intrinsic and
extrinsic rewards.
Exhibit 11 – 2 The Slight Promotion page 241 provides a comic example of extrinsic
rewards gone wrong.
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Chapter 11: Establishing Rewards and Pay Plans
Class Activity: Ethical Issues In HRM – the Secret Paycheck page 242 Although pay
secrecy policies are difficult to defend legally, they are still common. Take this
opportunity to reinforce the ethical issues with the questions listed in this short feature.
Government Regulation of Compensation Slide 10
Learning Outcome 2: Discuss how the Fair Labor Standards Act and other federal laws
regulate compensation.
A variety of federal and state regulations shape compensation.
HR professionals need to stay current with changing laws, regulations, Executive Orders
and court cases.
Fair Labor Standards Act (FLSA) Slide 11
This 1938 act requires minimum wage, overtime pay, record-keeping, and
establishes child labor restrictions.
According to the U.S. Department of Labor, seven in ten U.S. employers are
violating wage and hour regulations, such as Starbucks and Wal-Mart.
Exempt employees
Include professional and managerial employees, are not covered under
FLSA overtime provisions.
White collar exemption allows employees paid at least $455 weekly to be
classified as exempt if employed in an administrative, executive or
professional capacity.
That amount was last updated in 2004.
DOL is seeking an increase in the amount.
Several states already have higher minimum and tougher
standards.
Nonexempt employees
Eligible for premium pay (time and one-half) when they work more than
40 hours in a week.
Minimum wage set at $7.25 in 2009.
Tipped employees may earn direct wages as low as $2.13 (higher in many
states).
If tips and direct wage do not equal minimum wage, employer must make
up the difference.
Unpaid Internships Slide 12
FLSA doesn’t recognize internships, but allows exceptions to minimum
wage for training.
Child Labor
FLSA restricts hours and activities for workers under 18
Under 14 may do limited work with parental consent.
14 -15 year olds can work in some jobs outside of school hours for
limited hours.
16 – 17 year olds can work in non-hazardous jobs (no driving or
power equipment) unlimited hours.
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Chapter 11: Establishing Rewards and Pay Plans
Exhibit 11 – 3 Federal Minimum Wage Poster page 244. Always check DOL
website or your state for updates.
Class Activity: Contemporary Connection – Minimum Wage Debate page
246. Increases in the minimum wage are always controversial. Students who have
taken economics classes may be able to explain the economic pros and cons.
Questions in this feature encourage students to examine the minimum wage in
your area.
Walsh – Healy Act Slide 13
Businesses with government contracts $10,000 and over must pay prevailing
wage set by DOL.
Civil Rights Act
Prohibits discrimination in pay on the basis of race, color, creed, age, or sex.
Equal Pay Act
This 1963 act requires that men and women hired for the same job be paid the
same.
Salaries should be established on the basis of skill, responsibility, effort, and
working conditions.
External Factors Affecting Compensation Slide 14
Learning Outcome 3: Identify external factors influencing compensation
External factors are often more influential in establishing wages than federal laws.
Geographic Differences
When the local supply of labor is less than the demand, wages will increase.
When the local supply of labor is greater than the demand, wages will decrease.
Labor Supply
With low unemployment rates, employers often need to raise wages to tempt
employees to leave their current employment and apply.
High unemployment rates allow employers to pay less due to a plentiful supply of
workers.
Competition Slide 15 – 16
Competition for workers influences wages.
Employers can react to competitors by
Matching the competition by paying the market or going rate for labor.
Lead the competition by paying higher wages than competing employers.
Lag the market by paying slightly less than the prevailing levels in the
marketplace.
Cost of Living
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Chapter 11: Establishing Rewards and Pay Plans
As the Consumer Price Index (CPI) increases, wages must also increase to allow
workers to maintain their standard of living.
Cost of living varies according to location.
Collective Bargaining
A labor union negotiates for the wages of its members.
Spillover effect may require non-union employers in the same area to raise wages.
The Pay Structure Slide 17
Learning Outcome 4: Discuss job evaluation and how it is used to create pay structures.
Compensation Administration
Designs cost-effective pay structures that attract, motivate and retain competent
employees.
Job Evaluation Slide 18 – 19
Job analysis is used to determine the relative value of each job in relation to
all jobs within the organization.
The ranking of jobs within an organization is only one type of information
considered in designing a pay structure. Labor market conditions, collective
bargaining, and individual skill differences are others.
Judgment is involved in defining what factors should be used to compare jobs.
Typical criteria are mental requirements; supervisory control; complexity;
physical demands; and personal contacts.
Typically jobs are grouped according to type and compared within their
group; for example, clerical jobs; sales jobs; professional jobs.
Methods include:
Ordering method
A committee places jobs in a simple rank order from highest (worth
highest pay) to lowest.
Classification method
Jobs are placed in classification grades by comparing their
descriptions to the classification description and benchmarked jobs and
looking for a common denominator such as skills, knowledge, or
responsibility.
Point method
Jobs are rated and allocated points on several identifiable criteria,
using clearly defined rating scales. Jobs with similar point totals are
placed in similar pay grades. The point method offers the greatest
stability.
Establishing the Pay Structure Slide 20
When job evaluation is complete, the data is used to create a pay structure. This
process includes:
Compensation surveys
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Chapter 11: Establishing Rewards and Pay Plans
Gather factual data on pay rates for other organizations or areas where you
are competing for employees. Information is often collected on associated
employee benefits as well.
Wage curves
Plots job evaluation data (such as job points or grades) against pay rates
(actual or from survey data). These graphs indicate whether the pay
structure is logical, and can be used to determine the pay rates for jobs
where good external comparisons are not available.
Developing a Wage Structure
Designates pay ranges for groups of jobs which are similar in value to the
organization and which are grouped by their classifications, grades or
points. This should result in a logical hierarchy of wages, consisting of
ranges that overlap.
Types of Compensation Slide 21
Learning Outcome 5: Explain base pay, premium pay and types of variable pay as parts
of a compensation program
The building blocks available for creating a compensation plan that supports
organizational strategy and talent management include base pay, premium pay and
variable pay.
Base Pay Slide 22
Determined by job evaluation process.
May be paid as:
Salary
Hourly wage
Piecework
Premium Pay Slide 23
Overtime
Differential for hazardous, inconvenient or undesirable assignments or shifts.
On-call pay
Special skills
Variable Pay Slide 24
Designed to focus performance on organizational objectives such as productivity
and sales.
Variable pay for individuals includes: Slide 25 – 26
Commissions
Incentives for sales workers.
May be combined with salary.
Percentages vary with occupations and employers.
Bonuses
Incentives for specific performance.
Year-end bonuses are common.
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Chapter 11: Establishing Rewards and Pay Plans
Spot bonuses are effective immediate rewards.
Merit Pay
Reward for performance.
Added to base pay.
Can be difficult to create and administer for some occupations
where results are hard to evaluate or compare. Teaching is a great
example.
Competency–based
Rewards skills, knowledge of behaviors relevant to position.
Exhibit 11 – 6 Supervisory Competencies page 263 lists competencies
that may be required of supervisors to receive competency-based pay.
Broad-banding
Pay and career advancement are tied to competencies that promote
organizational goals and objectives.
Variable Pay for Groups Slide 27
Incentives can be offered to groups, rather than individuals, when employees’
tasks are interdependent and require cooperation.
Organizations today use team-based rewards as incentives for empowered
work teams to exceed established goals and share equally in rewards.
Effectiveness of team-based compensation depends on clarity of team purpose
and goals, ability of the team to obtain needed resources, and effective team
communication skills and trust.
Organization-Wide Incentives Slide 28
These direct employee efforts toward organizational goals (such as cost reduction)
and include:
Scanlon Plan (supervisor and employee committees suggest labor-saving
improvements)
IMPROSHARE (formula is used to determine bonuses based on labor
cost savings).
Executive Compensation Programs Slide 29
Learning Outcome 6: Discuss the elements of executive compensation and why they
can be significantly higher than those of other employees.
Executives in the private sector receive considerably higher compensation than those in
the public sector, 24 times those of the average employee.
Salaries of Top Managers
Set by board of directors and designed to attract the best talent.
Board of directors are often criticized as being too close to CEOs to
objectively set or negotiate salary.
Shareholders are becoming more critical and challenge salaries.
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Chapter 11: Establishing Rewards and Pay Plans
Deferred bonuses are paid to executives over extended time periods, to
encourage them to stay with the company.
Some executives are offered hiring bonuses to compensate for the deferred
compensation they lose when leaving their former company.
Stock options allow executives to purchase stock in the future at a fixed price,
which can serve as a performance-based incentive to improve profitability.
Exhibit 11 – 7 Executive Pay page 256 illustrates that incentives make up a larger
percent of executive pay than employee pay and asks students to examine the reasoning
for this. Focus on strategic goals is the answer.
Executive Perquisites Slide 30
Perquisites or perks are offered to attract, retain, and motivate good managers and
may include:
Paid life insurance
Club memberships
Company cars
Expense accounts
Interest-free loans
Consulting contracts
Free financial, legal and tax counseling, mortgage assistance, and so forth.
Golden parachutes protect executives when a merger or hostile takeover occurs
by providing severance pay or a guaranteed position.
International Compensation Slide 31
Learning Outcome 7: List the considerations in creating an international compensation
program
It is important to understand the statutory requirements of each country. International
compensation packages generally utilize the “balance-sheet approach,” using the four
factors below:
Base Pay
The pay of employees in comparable jobs at home. (Complexities include
narrow pay ranges in foreign countries, foreign laws & currencies, taxation).
Differentials
Compensation given to offset higher costs of living abroad.
“Hardship differential” compensation given if living conditions abroad are
especially difficult.
Incentives
Inducements given to encourage employees to accept overseas assignments.
Assistance Programs
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Chapter 11: Establishing Rewards and Pay Plans
Payment for expenses involved in moving a family abroad and in providing
some services overseas.
Class Activity: Contemporary Connection – Compensation in a Global Environment
page 258 Students may not realize that some countries have no minimum wage at all.
After examining this table, see if there are any second thoughts on raising the minimum
wage in the U. S.
HRM Workshop
The HRM Workshop includes several different types of activities requiring students to apply
chapter concepts aligned with the learning objectives. Suggested answers are provided.
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