Chapter 11: Total Rewards and Compensation
A. Job Evaluation Methods
Job evaluation is a formal, systematic process to determine the relative worth of jobs
within an organization. Employers can adopt one of several alternate methods.
• Ranking method—it is a simple system that places jobs in order, from highest to
lowest, by their value to the organization. This is a qualitative method in which
the entire job is considered rather than individual components.
Point Factor Method
The most widely used job evaluation method, the point factor method, looks at
compensable factors in a group of similar jobs and assigns weights, or points, to
them. A compensable factor identifies a dimension that is part of every job and can
be rated for each job.
Chapter 11: Total Rewards and Compensation
B. Market Pricing
While the point factor method has served employers well for many years, the trend is
moving to a more externally focused approach. More companies are moving to market
pricing, which uses market pay data to identify the relative value of jobs based on what
other employers pay for similar jobs.
Advantages of Market Pricing
The primary advantage cited for the use of market pricing is that it closely ties
organizational pay levels to what is actually occurring in the market, without being
HR Skills and Applications: Point Factor Example
Job evaluation based on studying each position on a number of work dimensions allows
a job analyst to assess various aspects of each job and determine its relative value. Points
are assigned to each compensable factor and then added to a total for each job. Jobs with
similar point totals are considered to be relatively equal in importance.
Chapter 11: Total Rewards and Compensation
Disadvantages of Market Pricing
The biggest disadvantage of market pricing is that pay survey data may be limited or
may not be gathered in methodologically sound ways. It is also critical to understand
C. Pay Surveys
A pay survey is a report based on research of compensation rates for workers
performing similar jobs in other organizations. Pay surveys are an important element in
establishing external pay equity.
Internet-Based Pay Information
HR professionals can access a wide range of pay data online. Employment-related
website such as salary.com and glassdoor.com provide data gathered from companies
and employees. Use of these sources requires caution because their accuracy and
Using Pay Surveys
The proper use of pay surveys requires evaluating many factors to determine if the
data are relevant and valid. The following questions should be answered for each
survey:
• Participants—does the survey cover a realistic sample of the employers with
whom the organization competes for employees?
• Broad-based—does the survey include data from employers of different sizes,
industries, and locales?
Chapter 11: Total Rewards and Compensation
Pay Surveys and Legal Issues
One reason for employers to use outside sources for pay surveys is to avoid charges
that they are attempting to “price fix” wages. The concern is that employers might
collude to set wages and restrict employees from earning a true market wage.
Organizations are permitted to participate in surveys but only if they meet the
following conditions:
• The survey must be administered by a third party such as a consultant or
trade/professional association.
VII. Pay Structures
After job valuations and pay survey data are gathered, pay structures can be developed.
Pay structures may be developed for various categories of jobs such as hourly, salaried,
technical, sales, and management. Organizations may have separate pay structures for
exempt and non-exempt jobs. The nature, culture, and structure of the organization are
considerations for determining how many and which pay structures to have.
A. Pay Grades
When establishing a pay structure, organizations use pay grades to group individual
Chapter 11: Total Rewards and Compensation
Setting Pay Grades Using Job Evaluation Points
One approach to determining pay grades uses job evaluation points or other data
generated from the traditional job evaluation methods. This process ties pay survey
information to job evaluation data by plotting a market line that shows the
Setting Pay Grades Using Market Banding
Closely linked to the use of market pricing to value jobs, market banding groups
jobs into pay grades based on similar market survey amounts. The midpoint of the
survey average is used to develop pay range minimums and maximums.
B. Pay Ranges
Once pay grades are determined, the pay range for each pay grade must be established.
Using the market line as a starting point, the employer can determine minimum and
Broadbanding
The practice of using fewer pay grades with much broader ranges than in traditional
compensation systems is called broadbanding. Combining many grades into these
C. Individual Pay
Chapter 11: Total Rewards and Compensation
Red-Circled Employees
A red-circled employee is an employee who is paid above the range for the job.
Several approaches can be used to bring a red-circled employee’s pay into line.
Green-Circled Employees
An individual whose pay is below the range for a job is a green-circled employee.
Promotion is a major contributor to this situation. Green-circled problems might also
Pay Compression
One major problem many employers face is pay compression, which occurs when
pay differences among individuals with different levels of experience and
performance become small. Pay compression is frequently a result of labor market
VII. Determining Pay Increases
Decisions about pay increases are important in the relationships between employees, their
managers, and the organization. Individuals express expectations about their pay and about
how much of an increase is “fair,” especially compared with the increases received by
Chapter 11: Total Rewards and Compensation
A. Performance-Based Increases
Some employers have shifted to more pay-for-performance philosophies and strategies.
Consequently, they have adopted the following means to provide employees with
performance-based increases.
Targeting High Performers
This approach focuses on providing the top-performing employees with significantly
higher pay raises. Some organizations target the top 10% of employees for
Pay Adjustment Matrix
Integrating performance appraisal ratings with pay changes is done through the
development of a pay adjustment matrix, or merit-based performance matrix. A pay
adjustment matrix reflects an employee’s upward movement in an organization.
Chapter 11: Total Rewards and Compensation
B. Standardized Pay Adjustments
Companies that use an entitlement philosophy rely more on standardized pay
increases. Several methods can be used to provide standardized pay increases to
employees.
Seniority
Time spent in an organization or on a particular job, called seniority or tenure, can
be used as the basis for pay increases. Many employers have policies that require an
Cost-of-Living Adjustments
Another pay-raise practice is the use of a cost-of-living adjustment (COLA) whereby
every employee’s pay is increased to compensate for inflation and rising prices.
Across-the-Board Increases
Some employers give across-the-board raises and call them merit raises, which they
are not. Usually they are given as a percentage raise based on standard market or
Chapter 11: Total Rewards and Compensation
Lump-Sum Increases
Most employees who receive pay increases, either for merit or for seniority, receive
an increase in the amount of their regular monthly or weekly paycheck. In contrast, a
lump-sum increase (LSI) is a one-time payment of all or part of a yearly pay
increase. The pure LSI approach does not increase the base pay.
C. Compensation Challenges
A number of concerns for managers affect compensation planning and administration.
Circumstances within and outside the organization can create employee dissatisfaction
or turnover.
Economic Recessions
During trying economic times, many organizations address shortfalls in revenue by
reducing employment-related expenses. Layoffs and reductions in force may be one
Two-tier wage systems
As global competition has increased and low-skilled jobs have been sent offshore,
Gender Pay Gap
Chapter 11: Total Rewards and Compensation
Despite laws prohibiting pay discrimination on the basis of sex, there is a persistent
pay gap between men and women in the workplace. The wage gap is wider in some
Critical Thinking Challenges
1. Think of an organization you have worked. What were its compensation policies and
how were they communicated to employees?
Students’ responses will vary but should reflect a sound understanding of the two
basic compensation philosophies outlined in Figure 11-5—the entitlement philosophy
2. Congratulations you have recently been promoted and are the company’s new Human
Resources Manager! You have offices in several countries, how would you evaluate
different pays for employees that are located throughout the world?
Students’ responses will depend upon the following points:
Multinational companies may staff their operations with a mixture of employees from
around the world. Figure 11-11 shows the three primary types of international
assignees. Compensation practices may be designed for each type of employee to
Chapter 11: Total Rewards and Compensation
maximize employee commitment and productivity. Because of the intricacies of
devising an effective compensation plan for international assignees, companies often
use consultants knowledgeable in this field.
The two primary approaches to international compensation for expatriates are:
• Home-country-based approach—it is the most commonly used method. The
overall objective is to maintain the expatriate’s standard of living in the home
country. Housing, taxes, and discretionary spending expenses are calculated
3. Recently larger companies have been in the news because of violations of back wages.
How should your human resources department protect themselves from these
devastating claims? Brainstorm some ideas on how to prevent these issues from
occurring.
Students’ list of ideas will vary. One instance of a situation where an employee has to
4. You are the HR Director for an insurance company with regional offices in several
states. For each office, you want to be sure that the administrative assistants reporting
geographic pay survey data for this job in Hartford, Connecticut; Atlanta, Georgia;
Omaha, Nebraska; and Phoenix, Arizona. Then recommend pay ranges, identifying the
Chapter 11: Total Rewards and Compensation
low, median, and high rates for each pay range. To present the data, list each of the
offices in order from lowest median pay to highest median pay.
Case
Is the FLSA a Dinosaur?
1. Does the 40-hour workweek still make sense? Would you recommend changing to a
“pay period” calculation for overtime? For example, if a company pays workers every
two weeks, should hours over 80 in a pay period be used to determine overtime rather
than 40 in a week?
Student answers will vary. Students may answer that the 40-hour work week is
obsolete. The 40-hour workweek used to be followed in factories and industrial
2. How should nonexempt workers track their time spent away from work doing tasks
such as responding to e-mail or text messages?
Nonexempt workers can schedule a part of their normal working day for doing tasks
3. Would you recommend that private sector employers be permitted to offer nonexempt
employees compensatory time off rather than pay for overtime hours worked?
Student answers will vary. Private sector employers can be permitted to offer an
Chapter 11: Total Rewards and Compensation
Supplemental Cases
Compensation Changes at JC Penney
This case identifies how performance management systems might be redesigned. (For the
1. How do the JC Penney changes reflect a total rewards approach?
JC Penney’s changes reflect a total reward approach because it focuses on linking
2. Discuss why JC Penney’s shift to a more performance-oriented compensation system
had to be linked to market pricing.
JC Penney’s shift to a more performance-oriented compensation system had to be
linked to market pricing because it is facing a dramatically changing retail
Scientific Turmoil
This case discusses the concerns associated with having a formal base pay system, and
communication issues that occur. (For the case, go to
Questions
1. What role does equity play in this case?
Chapter 11: Total Rewards and Compensation
The equity theory states that individuals judge fairness (equity) in compensation by
comparing their inputs and outcomes against the inputs and outcomes of referent
2. Should companies demand that individuals not reveal their salaries? Why or why not?
Student answers will vary. Some students may suggest that companies should demand
3. Comment on the salary system and weaknesses you see in it.
The company has specific guidelines for raises and wide salary ranges for each job
level. The firm apparently has a salary review policy that is somewhat inflexible.
4. As the director, how would you handle Fred?
Student answers will vary. Fred should be considered for a special pay adjustment.
Otherwise he may become disenchanted enough to leave the firm. In Fred’s mind, he
Comments
Several topics discussed in the chapter are present in this case. One is the impact of pay
openness. Because of the lack of pay secrecy, Fred knew that he was receiving less pay
Chapter 11: Total Rewards and Compensation
than Bob.
From his perspective, Fred felt that he was not receiving equitable compensation,
especially in view of his longer service and experience. However, expecting that salary
information would not be shared is a somewhat naïve position because people do learn
others’ salaries via informal communication means.
Pay For Performance Enhances Employee Management at Scripps Health
This case discusses how a hospital uses pay for performance to improve employee
1. Discuss how this case illustrates how compensation can be used as a method for
improving employee satisfaction and motivation.
This case illustrates that employee discontent and turnover can be improved with a
2. Identify some of the ways that performance-based pay systems should be developed
based on the experiences at Scripps Health.
The experiences at Scripps Health show the importance of top leadership involvement,