Chapter 11: Establishing Rewards and Pay Plans
Reviewing Important Concepts
1. Explain the difference between intrinsic and extrinsic rewards and explain how they
relate to a job you have held. (LO 1)
Intrinsic rewards are those things that are internally satisfying to the individual worker,
2. Summarize the ways the Fair Labor Standard Act regulates compensation. (LO 2)
The FLSA requires a minimum wage, overtime pay, record-keeping and restrictions on
3. Outline the external factors that affect compensation and explain how they apply in
your community. (LO 3)
External factors influencing wages include geographic differences, the supply of labor,
Governmental influences affect compensation administration in several ways by
mandating certain practices. For instance, the Fair Labor Standards Act sets minimum
wage and overtime pay requirements. Both federal and state governments have passed
4. Explain job evaluation and how the three different methods help to create effective
pay structures. (LO 4)
Job evaluation systematically determines the value of each job in relation to all jobs
In the ranking method, jobs in the organization are compared to each other and ranked
The point method is the most commonly used method of job evaluation. Points are
assigned to the degrees of each job element, jobs are rated on each element and the total
5. Explain the types of individual incentive plans and how they motivate performance.
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(LO 5)
Individual incentives are performance based and are used to reward good individual
performance that benefits the organization. The disadvantage is that the correct criteria to
Group incentives have the advantage of rewarding good team performance. The
disadvantage is that some team members may be slackers, and competition between
Organization–wide incentives have the advantage of making the goals and
accomplishments of the organization very visible to all employees. The disadvantage is
6. How do bonuses and stock options provide incentive pay for executives? (LO 6)
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
7. Explain how salaries are determined for workers with assignments in other
countries. (LO 7)
The balance sheet approach is often used which includes base pay, differential pay to
Evaluating Alternatives
8. Would you rather work for an organization where everyone knows what others are
earning or an organization where this information is kept secret? Why? Would it
make a difference if you suspected that you were making more than coworkers with
similar positions? Explain your answers. (LO 2, 3, 4)
Open salary system: Everyone knows how salaries are determined and who is being
rewarded the most. This may help to clarify the reward system so that individuals know
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Closed salary system: A perception of equity is not as difficult to maintain when no one
9. During a class discussion on ethics, a classmate proclaims “U.S. executives earn
every dollar of their pay. Very few people have the skills to effectively run a
multi-million dollar global enterprise. Supply and demand should set salaries and if
those skills are scarce, qualified executives should go to the highest bidder.” Another
classmate argues “Nobody is worth $100 million a year. Corporations are creating a
new class of American royalty. Executive pay should be regulated to protect
stockholders.” The professor turns to you and ask which side you agree with and
why. Prepare an informed answer to his question. (LO 3, 4, 5, 6)
For: Top company executives have tremendous organizational responsibilities. They
Against: U.S. executives make two to five times the salaries of their foreign counterparts.
They typically receive large base salaries regardless of the company’s performance.
Research and Communication Skills
These activities require students to research a topic and report the findings to the instructor or the
class. They can be assigned to either individuals or groups and are designed to develop critical
Activity Summaries
10. Students research wage surveys and wages for different job categories.
11. A pay-for-performance system for college professors is developed.
12. Violations of the FLSA are researched and reported.
13. Teams interview compensation specialists and report back to the class.
Making a Difference: Service Learning Projects
Overview: Service Learning Projects provide students with opportunities to develop and
demonstrate HR skills and build a professional network that will assist in getting a job in HR.
The activities that relate to this chapter on compensation focus on providing extrinsic rewards for
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Chapter 11: Establishing Rewards and Pay Plans
non-profit volunteers. A sample assignment with requirements and grading materials is available
at the front of the Instructor’s Manual and as a download from the text website.
Case Application 11 – A: What is Fair at Exactitude Manufacturing?
Shannon Keller spent years developing a compensation system aligned with Exactitude’s
strategic goals of high quality manufacturing. External influences on compensation from the
chapter have been considered. As with most workplace changes, employees have concerns. Some
minor, some serious. Students are required to apply chapter concepts to explain the system and
address employee concerns. This case involves compensation in manufacturing, an industry that
may be unfamiliar to students. Local industries may be able to provide context for the class.
Questions:
1. How does Exactitude utilize intrinsic and extrinsic rewards to improve employee
satisfaction and performance? (LO 1)
Intrinsic rewards are self-initiated rewards, such as, pride in one’s work, a sense of
accomplishment, or enjoying being part of a team. The new system emphasizes
employee development and training to increase skills and ability. In addition, employees
Extrinsic rewards are tangible rewards such as a promotion, money or benefits. The
2. Explain the influence of external factors that are relevant for Exactitude to consider
when establishing wages in the different manufacturing locations. What resources are
available to determine the necessary adjustments? (LO 3)
External factors that are relevant for establishing wages in different manufacturing
locations for Exactitude would include the geographic locations and the related overall
supply and demand of qualified workers that are needed by employers in that particular
The cost of living figures for each region can be obtained from the U.S. Department of
Labor’s Bureau of Labor Statistics. In addition, salary information, the presence of other
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Students may also discuss that the differences in wages might seem unfair to employees
3. How will the new compensation plan help align compensation with Exactitude’s
strategic emphasis on quality and productivity? (LO 1, 4, 5)
All of the new tiers (to a slightly lesser extent for Tier 1) require extensive training for the
employees. Employees who pursue improved skill development and training can be
4. What would you suggest that HR do to address each of the employee concerns
expressed in the case? (LO 1, 3, 4, 5)
The students’ answers may vary here, however the following points should be discussed.
It is obvious that the supervisors and senior workers believe they should be given
additional compensation for their supervisory roles (which presumably has additional
responsibilities) and their long term employment history in the organization. However,
the new focus and strategy of the organization requires that employees are compensated
for additional training and skills. Shannon Keller should look into why the more senior
Employees should be made aware of the external factors that go into determining a wage
as tied to a particular geographic area (look at question one above for a list of external
factors). It should be explained to Exactitude employees that factors such as supply and
demand, cost of living differentials and competition from other employers will impact the
wages that are paid across different geographic areas. Finally, it should be further pointed
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Chapter 11: Establishing Rewards and Pay Plans
5. Which Job Evaluation method seems to best describe the job tier system at
Exactitude?
Of the three job evaluation methods mentioned in the chapter, the classification method
seems most applicable in this case. The classification method requires that classification
grades be established and published in a general schedule, for exactitude, this is their tier
system. The classifications are created by identifying some common denominator –
6. Research: Using online sources like the Bureau of Labor Statistics, Indeed, Payscale,
Glassdoor or others, research wages for manufacturing positions in your area. Compare
Answers will certainly vary, but should include geographic differences, the supply of
labor, competition for labor, the cost of living in the area, and collective bargaining
Case Application 11 – B: Taking Care of the Employees Who Take Care of the
Guests
The hospitality industry has recently been the focus of the DOL due to widespread pay
violations. Housekeepers are at the highest risk of not receiving fair pay for the hours worked.
Common unethical employer practices are outlined and students are asked to interpret relevant
laws and other factors.
Questions:
1. Under what circumstances would hotel employees be exempt from minimum wage
and overtime requirements? (LO 2)
Employees who are professional, managerial or in sales would be exempt if they earned
2. A few hotels encourage guests to provide tips for housekeeping staff. How would
that affect minimum wage requirements? (LO 2)
For employees earning tips, employers may pay a direct wage of $2.13 and consider
those tips part of employees’ wages. Employers may claim a “tip credit” for the
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3. What external factors affect the rate of pay for low skilled workers like
housekeeping staff? (LO 3)
Governmental influences such as federal or local minimum wage laws, the supply of
labor and competition for housekeeping workers would be the most relevant. The cost of
4. Does job evaluation justify the low wages paid to housekeeping staff? (LO 4)
Probably. Housekeeping jobs may be important and difficult, but the skills and
knowledge necessary are common and easily learned. They have few supervisory
5. Research: What is the current Federal Minimum Wage? Is it different in the city or state
in which you live? What jobs in your area earn the minimum wage? What sources did
you use to find your answers? (LO2, 3)
Online Case Application 11 – C: TEAM FUN
Questions
1. Make lists of TEAM FUN! rewards: extrinsic versus intrinsic; financial versus
nonfinancial; performance-based versus membership-based. (LO 1)
2. How should job evaluation be used to establish a pay structure for TEAM FUN? How
would the organization benefit? (LO 4)
3. What external factors need to be considered in setting compensation for TEAM FUN?
(LO 3)
4. How should the organization address their practice of keeping salaries secret? (LO 2)
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