Human Resources Chapter 10 Part Four Compensation And Total Rewards Developing Compensation Plans Lecture Outline The

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PART FOUR COMPENSATION AND TOTAL REWARDS

C H A P T E R

T T e n

Developing Compensation Plans

10

Lecture Outline

I. The Basic Factors in Determining Pay Rates

A. Aligning Total Rewards with Strategy

B. Equity and Its Impact on Pay Rates

C. Legal Considerations in Compensation

D. Union Influences on Compensation Decisions

E. Pay Policies

II. Job Evaluation Methods

A. What Is Job Evaluation?

B. Salary Surveys

C. Compensable Factors

D. Preparing for the Job Evaluation

E. Job Evaluation Methods: Ranking

F. Job Evaluation Methods: Job Classification

G. Job Evaluation Methods: Point Method

H. Computerized Job Evaluations

I. Wage Curves

J. Pay Grades

K. Rate Ranges and the Wage Structure

III. Pricing Managerial and Professional Jobs

A. Compensating Executives and Managers

B. What Determines Executive Pay?

C. Compensating Professional Employees

D. Improving Performance through HRIS

IV. Contemporary Topics in Compensation

A. Competency-Based Pay

B. Broadbanding

C. Comparable Worth

D. Diversity Counts

E. Board Oversight of Executive Pay

V. Employee Engagement Guide for Managers

A. Total Rewards Programs

B. Total Rewards and Employee Engagement

In Brief: Employing carefully

selected and trained employees is

not enough; they also must be

motivated to do their jobs. We will

see here that producing that

motivation requires putting in

place HR policies and practices

that provide the employee with

equitable and motivational wages,

and pay-for-performance plans.

The chapter discusses the factors

used in determining pay rates,

evaluating jobs, creating

competitive pay plans, proper job

pricing, and contemporary

compensation issues.

Interesting Issues: There is

tension between the concept of

providing employees with a

secure, stable income (which some

feel allows them the ability to be

entrepreneurial and take

appropriate risks for the

company), and the idea of linking

pay directly to performance.

Improved employee performance

must be linked to improved

organizational performance if

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ANNOTATED OUTLINE

I. The Basic Factors in Determining Pay Rates

Employee compensation includes all forms of pay going to employees and

arising from their employment. It has two main components, direct financial

payments (wages, salaries, incentives, commissions, and bonuses) and

indirect financial payments (financial benefits like employer-paid insurance

and vacations).

A. Aligning Total Rewards with Strategy — The compensation plan should

first advance the firm’s strategic aims—management should produce an

aligned reward strategy. This means creating a total pay package that

produces the employee behaviors the firm needs to support and achieve

its competitive strategy.

B. Equity and Its Impact on Pay Rates

1. Equity Theory of Motivation — Postulates that people are

strongly motivated to maintain a balance between what they

perceive as their contributions and their rewards. Equity theory

states that if a person perceives an inequity, a tension will

develop in the person’s mind, motivating the person to reduce

the tension and perceived inequity.

a. External equity refers to how a job’s pay rate in one

company compares to the job’s pay rate in other

2. Addressing Equity Issues — Managers use salary surveys

(surveys of what other employers are paying) to monitor and

maintain external equity. They use job analysis and comparisons

of each job (“job evaluation”) to maintain internal equity. They

use performance appraisal and incentive pay to maintain

individual equity. In addition, they use communications,

grievance mechanisms, and employee participation to help

ensure that employees view the pay process as procedurally fair.

C. Legal Considerations in Compensation — The Davis-Bacon Act lets the

secretary of labor set wage rates for laborers and mechanics employed

by contractors working for the federal government. The Walsh-Healey

Public Contract Act sets basic labor standards for employees working on

any government contract that amounts to more than $10,000. Title VII of

the Civil Rights Act prohibits discrimination against protected classes in

compensation.

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ones, simply use a market-based approach. Doing so involves conducting

formal or informal salary surveys.

A. What Is Job Evaluation? — Job evaluation is a formal and systematic

B. Salary Surveys — Surveys of what others are paying play a big role in

pricing jobs. Employers use salary surveys in three ways. First, they use

survey data to price benchmark jobs. Benchmark jobs are the anchor

jobs around which they slot their other jobs. Second, managers typically

price some or all of their positions directly in the marketplace. Third,

surveys also collect data on benefits like insurance, sick leave, and

vacations for decisions regarding employee benefits.

1. Commercial, professional, and government salary surveys —

2. Using the Internet to do compensation surveys — A rapidly

expanding array of Internet-based options makes it easy for

anyone to access published compensation survey information.

C. Compensable Factors — You can use two basic approaches to compare

the worth of several jobs. First, you can take an intuitive approach. As an

D. Preparing for the Job Evaluation — Job evaluation is a judgmental

process and demands close cooperation among supervisors, HR

E. Job Evaluation Methods: Ranking — The simplest job evaluation method

ranks each job relative to all other jobs, usually based on some overall

F. Job Evaluation Methods: Job Classification — Is a simple, widely used

job evaluation method in which raters categorize jobs into groups; all the

jobs in each group are of roughly the same value for pay purposes.

G. Job Evaluation Methods: Point Method — The point method’s overall aim

is to determine the degree to which the jobs you’re evaluating contain

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D. Improving Performance through HRIS — Payroll administration is one of

IV. Contemporary Topics in Compensation

A. Competency-Based Pay — With competency- or skill-based pay, you

pay the employee for the skills and knowledge he or she is capable of

using rather than for the responsibilities or title of the job currently held.

B. Broadbanding — Most firms end up with pay plans that slot jobs into

classes or grades, each with its own vertical pay rate range.

Broadbanding means collapsing salary grades into just a few wide levels

or bands, each of which contains a relatively wide range of jobs and pay

levels.

1. Pros and Cons — The basic advantage is that broadbanding

injects greater flexibility into employee assignments. On the

C. Comparable Worth — Refers to the requirement to pay men and women

equal wages for jobs that are of comparable (rather than strictly equal)

value to the employer. Thus, comparable worth may mean comparing

quite dissimilar jobs.

D. The Pay Gap — Women in the United States earn only about 81% as

much as men.

E. Board Oversight of Executive Pay — There are various reasons for

boards clamping down on executive pay. For one thing, the Sarbanes-

Oxley Act makes executives personally liable, under certain conditions,

for corporate financial oversight lapses.

V. Employee Engagement Guide for Managers

A. Total Rewards Programs — Total rewards encompasses not only

compensation and benefits, but also personal and professional growth

opportunities and a motivating work environment.

B. Total Rewards and Employee Engagement — If employee engagement

is the aim, it makes sense to emphasize total rewards, not just base pay.

Employers must also communicate to employees the existence and

value of nonfinancial rewards.

KEY TERMS

Employee compensation All forms of pay or rewards going to employees and arising from

their employment.

10–11. Working individually or in groups, access relevant websites to determine what

equitable pay ranges are for these jobs: chemical engineer, marketing manager,

and HR manager, all with a bachelor’s degree and 5 years’ experience. Do so for

the following cities: New York, New York; San Francisco, California; Houston,

Texas; Denver, Colorado; Miami, Florida; Atlanta, Georgia; Chicago, Illinois;

Birmingham, Alabama; Detroit, Michigan; and Washington, DC. For each position

in each city, what are the pay ranges and the average pay? Does geography impact

the salaries of the different positions? If so, how? (LO 10.3: Explain how to price

10–12. Some of America’s executives have come under fire because their pay seemed to

some to be excessive, given their firms’ performances. However, big institutional

investors are no longer sitting back and not complaining. For example, pension

manager for TIAA-CREF is talking to 50 companies about executive pay. Do you

think they are right to make a fuss? Why? (LO 10.4: Explain the difference between

10–13. How do you think politicians in the United States should address the problem of

income inequality? (LO 10.4: Explain the difference between competency-based and

10–14. For this activity, you will need the documents titled (1) “HRCI PHR® and SPHR®

Certification body of Knowledge” and (2) “About the Society for Human Resource

Management (SHRM) Body of Competency and KnowledgeTM Model and

Certification Exams.” Your instructor can obtain these documents from the

Pearson Instructor Resource Center and pass them on to you. These documents

list the knowledge someone studying for the HRCI or SHRM certification exam

needs to have in each area of human resource management (such as in Strategic

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Management, and Workforce Planning). In groups of several students, do four

things: (1) review the HRCI and/or SHRM documents; (2) identify the material in

this chapter that relates to the required knowledge the appendix lists; (3) write four

multiple-choice exam questions on this material that you believe would be suitable

for inclusion in the HRCI exam; and (4) if time permits, have someone from your

team post your team’s questions in front of the class, so the students in other

Students can find the following assisted-graded writing questions at

10–15. Should the job evaluation depend on an appraisal of the jobholder’s performance?

Why? Why not? (LO 10.2: Define and give an example of how to conduct a job

10–16. Do small companies need to develop a pay plan? Why or why not? (LO 10.1: List

HR in Action Case Incident 1: Salary Inequities at AstraZeneca

10-17. Although the case with OFCCP is closed, we wonder if there are any less

discriminatory explanations possible for why our women sales reps on average

earned less than men. If so, what are they? (LO 10.4: Explain the difference between

10–18. Our company now uses a point method to evaluate jobs for pay purposes, and

each resulting job class also has a rate range associated with it. Sales associates

are now paid a salary, not based on incentive pay. List three specific things we can

do to ensure that a similar problem (inequitable pay based on gender) does not

10-19. What sort of compensation plan would you recommend for us, and why? (LO 10.1:

HR in Action Case Incident 2: Carter Cleaning Company: The New Pay Plan

APPLICATION EXERCISES

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1. We saw that the U.S. Department of Labor’s National Labor Relations Board (NLRB)

accused Starbucks of breaking the law in trying to prevent workers in some of its New

2. The Kaiser Permanente Health System is often held out as an employer with very good

labor relations. What can you discern from websites such as

http://www.kaiserpermanentejobs.org/default.aspx that might explain such a

3. What does www.seiu.org/ tell you about this union’s aims and how they intend to

achieve them? The SEIU will continue to act strategically in recruiting areas of the

1. How can a business determine if a worker should be classified as an independent

contractor? (LO 10.1: List the basic factors determining pay rates.) The business should

2. Why is “comparable worth” an important concept in determining fair pay levels for

women? (LO 10.4: Explain the difference between competency-based and traditional pay

WEB-e’s (WEB EXERCISES)

ADDITIONAL ASSIGNMENTS