978-1305115248 Chapter 7 Solution Manual Part 1

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Chapter 7

Total Rewards and Compensation

Chapter Overview

Total rewards including compensation systems in organizations must be linked to organizational

strategies. Compensation remunerates employees for their knowledge, skills, and abilities

through:

Base pay

Variable pay

Benefits

The chapter opens with a discussion of the nature of total rewards and compensation regarding

the components of compensation, compensation philosophies, and compensation responsibilities.

Then the legal constraints on pay systems are explored. Particular attention is given to the Fair

Labor Standards Act (FLSA) with its coverage of minimum wage, child labor provisions, exempt

and nonexempt statuses, overtime, and common overtime issues for employees in the private and

public sectors. Other issues addressed include Equal Pay Act, Lilly Ledbetter Fair Pay Act,

independent contractor regulations, and garnishment laws.

Next, the chapter discusses the strategic compensation decisions including compensation

philosophies, communicating pay philosophy, compensation responsibilities, HR resource

metrics and compensation. Then, compensation system design issues are explored including

motivation theories and compensation philosophies, compensation fairness and equity (external

equity, internal equity, and pay secrecy), and market competitive compensation (lag-the-market,

lead-the-market, and match-the-market strategy).

Next, the chapter discusses the global compensation issues and the compensation plan for

international assignees. The chapter continues with a discussion on development of a base pay

system using the compensation philosophy and job analysis. The process incorporates

information gathered while valuing jobs and analyzing pay surveys—activities designed to

ensure that the pay system is both internally and externally equitable and in line with the

organizational philosophy. The two general approaches for valuing jobs are job evaluation and

market pricing. A description of the various types of job evaluation methods (ranking method,

classification method, factor-comparison method, and point factor method), market pricing, pay

surveys (internet-based pay information, using pay surveys, pay surveys and legal issues) are

also explored.

The importance of combining data from pay surveys and job evaluations to develop pay

structures is then detailed. The establishment of pay grades, pay ranges, and individual pay issues

(red-circled employees, green-circled employees, and pay compression) are discussed. The

chapter ends with a discussion on determining pay increases and describes performance-based

increases and standardized pay adjustments such as seniority, cost-of-living adjustments

(COLA), across-the-board increases, and lump-sum increases (LSIs).

Chapter Outline

Companies address pay and benefits with a total rewards philosophy. The total rewards package

includes all forms of compensation which are the monetary and nonmonetary rewards provided

by a company to attract, motivate, and retain employees.

I. Nature of Total Rewards and Compensation

Several strategic decisions guide the design of compensation practices:

Legal compliance with all applicable laws and regulations

Cost-effectiveness for the organization

Internal and external equity for employees

Figure 7-1 identifies elements of three primary components of the total rewards package.

A. Components of Compensation

Tangible rewards can be measured and it is possible to calculate the monetary value of each

reward. However, intangible rewards cannot be as easily measured or quantified. The

One tangible component of a compensation program is direct compensation, the monetary

rewards for work done and performance results achieved. Base pay and variable pay are the

Base Pay

The basic compensation that an employee receives, usually provided as an hourly wage or

a salary, is called base pay. Many organizations use two base pay categories, hourly and

Variable Pay

Another type of direct pay is variable pay, which is compensation linked directly to

Benefits

A benefit is an indirect reward—for instance, health insurance, vacation pay, and

II. Laws Governing Compensation

Pay practices are regulated by several key laws that address issues such as overtime pay,

A. Fair Labor Standards Act (FLSA)

The primary federal law affecting compensation is the Fair Labor Standards Act (FLSA),

which was passed in 1938. Compliance with FLSA provisions is enforced by the Wage and

Hour Division of the U.S. Department of Labor (DoL). Penalties for wage and hour violations

Minimum Wage

The FLSA sets a minimum wage to be paid to a broad spectrum of covered employees. A

lower minimum wage is set for “tipped” employees, such as restaurant servers, but their

Child Labor Provisions

The child labor provisions of the FLSA set the minimum age for employment with

Exempt and Non-exempt Statuses

Under the FLSA, employees are classified as exempt or nonexempt. Exempt employees

hold positions for which employers are not required to pay overtime. Nonexempt

employees must be paid overtime. The current FLSA regulations used to establish whether

When designing base pay, employers often categorize jobs into groupings that tie the FLSA

status with the method of payment. Employers are required to pay overtime for hourly jobs

Overtime

The FLSA established overtime pay requirements at one and one-half times the regular pay

The workweek is defined as a consecutive period of 168 hours (24 hours × 7 days), which

does not have to be a calendar week. Hospitals and nursing homes are allowed a special

Common Overtime Issues

For individuals who are nonexempt, employers must consider the following issues:

Compensatory time off—“comp” hours are earned by public-sector nonexempt

employees in lieu of payment for extra time worked at the rate of one and one-half

Incentives for non-exempt employees—employers must add the amount of direct

Training time—time spent in training must be counted as time worked by non-

Travel time—travel time must be counted as work time if it occurs during normal



Donning and doffing time—some jobs require employees to change clothes or to

spend a significant amount of time donning protective equipment before they report

The FLSA does not require employers to provide breaks, lunch periods, or to pay double-

B. Pay Equity Laws

Title VII of the Civil Rights Act of 1964 prohibits discrimination based on race, color, sex,

Equal Pay Act of 1963

The act prohibits companies from using different wage scales for men and women

performing substantially the same jobs. Pay differences can be justified on the basis of

Lilly Ledbetter Fair Pay Act

This law was enacted in 2008 in response to a Supreme Court decision restricting the

statute of limitations allowed under the Equal Pay Act for claiming pay discrimination

based on sex. Under the Equal Pay Act, an employee alleging discrimination had up to 300

C. Independent Contractor Regulations

The growing use of contingent workers by many organizations has drawn the attention of

several enforcement agencies such as the Internal Revenue Service (IRS), DoL, U.S. Treasury

For an employer, classifying someone as an independent contractor rather than an employee

Most federal and state entities rely on the criteria for independent contractor status established

D. Additional Laws Affecting Compensation

Several compensation-related laws apply to firms that have contracts with the U.S.

government. These laws require that federal contractors pay the prevailing wage, which is

Garnishment occurs when a creditor obtains a court order that directs an employer to set

aside a portion of an employee’s wages to pay a debt owed to the creditor. Regulations passed

III. Strategic Compensation Decisions

A. Compensation Philosophies

There are two basic compensation philosophies that are situated at opposite ends of a

continuum (Figure 7-3). At one end of the continuum is the entitlement philosophy; at the

Entitlement Philosophy

The entitlement philosophy assumes that individuals who have worked another year are

entitled to pay increases with little regard for performance differences. When organizations

Performance Philosophy

A pay-for-performance philosophy assumes that compensation decisions reflect

performance differences. Organizations using this philosophy do not guarantee additional

B. Communicating Pay Philosophy

Sharing the organizational pay philosophy helps employees to recognize the value of the total

reward package provided and shows how their job performance might affect their

C. Compensation Responsibilities

HR specialists and line managers work together to administer compensation expenditures. HR

specialists develop and administer the organizational compensation system and ensure that

Payroll Administration

Calculating pay and ensuring timely, accurate payroll processing is particularly important

D. Human Resource Metrics and Compensation

Employers spend a substantial amount of money on employee compensation. Just like any

The raw data needed to calculate various measures may be found in many organizational

functions. Wage rates, total payroll costs, and overtime information can be obtained from the

payroll staff or vendor. Productivity numbers may be logged by the Operations Department.

IV. Compensation System Design Issues

Depending on the compensation philosophies, strategies, and approaches used by an

organization, many decisions are made that affect the design of the compensation system.

A. Motivation Theories and/or Compensation Philosophies

Two theories of motivation in particular influence the design of compensation systems.

Expectancy Theory

According to expectancy theory, an employee’s motivation is based on several linked

concepts. This theory emphasizes the importance of finding rewards that are valued by the

Equity Theory

The equity theory of motivation states that individuals judge fairness (equity) in

compensation by comparing their inputs and outcomes against the inputs and outcomes of

B. Compensation Fairness and Equity

Most people work for monetary rewards. Whether they receive base pay or variable pay, the

extent to which employees perceive their compensation to be fair often affects their

performance and how they view their jobs and their employers.

External Equity

If an employer’s rewards are not viewed as equitable compared to other organizations, the

Internal Equity

Internal equity means that employees are compensated fairly with regard to the knowledge,

skills, and abilities (KSAs) they use in their jobs, as well as their responsibilities,

accomplishments, and job performance. Two key issues are important to internal equity

are:

Procedural justice—it is the perceived fairness of the process and procedures used

Distributive justice—it is the perceived fairness in how rewards are distributed.

To address concerns about both types of justice, some organizations establish

compensation appeals procedures.

Pay Secrecy

Another equity issue concerns the degree of secrecy organizations have regarding their pay

systems. Individual pay information may be kept secret in “closed” systems and might

C. Market Competitive Compensation

Whether an organization’s total reward practices are competitive has a significant impact on

employees’ views of compensation fairness. Providing competitive compensation to

Many organizations establish policies about where they wish to be positioned in the labor

Lag-the-Market Strategy

An employer using a first-quartile strategy chooses to “lag the market” by paying below

market levels for several reasons. If the employer is experiencing financial difficulties it

may be unable to pay more. Also, when an abundance of workers is available, particularly

Lead-the-Market Strategy

A third-quartile strategy uses an aggressive approach to “lead the market” in pay. This

Match-the-Market Strategy

Most employers position themselves in the second quartile (median), the middle of the

market, as determined by pay data from surveys of other employers’ compensation plans.