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MANAGING COMPENSATION
This chapter discusses some of the more common objectives and policies of an organization’s
compensation program. It acquaints the student with the typical components of the wage mix that
serve to determine the rate of pay employees are to receive. The chapter also explains the
CHAPTER LEARNING OUTCOMES
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Explain how to formulate a strategic compensation program.
Indicate how pay is determined.
LEARNING OUTCOME 1
LEARNING OUTCOME 2
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Identify the major provisions of the federal laws affecting
compensation.
LEARNING OUTCOME 7
LECTURE OUTLINE
I. WHAT IS COMPENSATION?
Compensation consists of three main components. Direct compensation encompasses
employee wages and salaries, incentives, bonuses, and commissions. Indirect
II. STRATEGIC COMPENSATION
Simply stated, it is the compensation of employees in ways that enhance motivation and
growth, while at the same time aligning their efforts with the objectives of the
organization. Strategic compensation has redefined the role and perceived contribution of
compensation. No longer merely a “cost of doing business,” when used strategically
compensation becomes a tool to secure a competitive advantage.
A. Linking Compensation to Organizational Objectives
• Many managers believe that compensation programs have not always achieved
their intended purpose. Simply paying an employee an hourly wage for
Chapter 9: Managing Compensation 113
employees. Therefore, compensation programs must be flexible and tailored to
meet both organizational and employee needs.
• Ask students what they believe should be the goals of a strategic compensation
policy.
• The textbook lists seven of the more common goals of compensation policy.
B. The Pay-for-Performance Standard
• A current emphasis in the compensation area is pay for performance. This term
includes a wide range of compensation options, including merit pay, cash bonuses,
and incentive pay. The pay-for-performance standard seeks to tie employee
1. Motivating Employees through Compensation
The pay one receives is a measure of one’s worth to the organization. Pay also has
2. Pay Equity
• Employees expect to be paid fairly for the value of the work they perform.
Pay equity is achieved when employees perceive that the effort, experience, and
skills they bring to the job equal the rewards they receive for successful job
114 Part 4: Implementing Compensation and Security
3. Expectancy Theory and Pay
• Figure 9.4 in the textbook illustrates the relationship between pay-for-
performance and expectancy theory.
4. Pay Secrecy
• Normally organizations are very secretive about (1) their compensation
C. The Bases for Compensation
• Employees can be paid on an hourly, daily, monthly, yearly, or incentive (i.e.,
nonexempt status under the FLSA.
III. COMPENSATION DESIGN—THE PAY MIX
• Ask students what factors they think will affect what a job will be paid.
Chapter 9: Managing Compensation 115
A. Internal Factors
Internal factors affecting wage rates include the employer’s compensation strategy,
worth of a job, the value of the employee to the organization, and the employer’s ability
to grant compensation increases.
1. Employer’s Compensation Strategy
• The wages and salaries received by employees will be determined, in part, by
the employer’s compensation policy. Some employers may wish to be a wage
2. Worth of a Job
• Some jobs are worth more to the organization than other jobs. For example,
the job of marketing analyst probably has more impact on the success of the
organization than the job of a janitor. Therefore, most persons would argue
3. Employee’s Relative Worth—Employees can improve their worth to the organi–
zation by working smarter or harder or by acquiring advanced skills or job knowl–
4. Employer’s Ability to Pay
• National or regional economic conditions, competition from domestic or
foreign competitors, and strong or poor managerial policies and practices can
116 Part 4: Implementing Compensation and Security
B. External Factors
The following are the external factors affecting wage rates:
1. Labor Market Conditions—The forces of supply and demand for employees
having specific skills, abilities, or educational levels influence the wage rate for
2. Area Wage Rates
• The wages paid to jobs in different organizations influence an individual
3. Cost of Living
• Cost-of-living adjustments are made periodically by employers to help
employees maintain their purchasing power. Cost-of–living adjustments are
found in the escalator clauses of various union agreements. These
adjustments are made on the basis of increases in the consumer price index
(CPI).
• The BLS collects on a monthly basis prices for different items such as food,
clothing, transportation fares, medical services, and other goods and
4. Collective Bargaining
• The effects of collective bargaining can be a major influence of the wage
mix. The high wages of some occupations (airline pilots, some construction
Chapter 9: Managing Compensation 117
trades) are attributed to the union’s power to demand high wages. As a
IV. JOB EVALUATION SYSTEMS
• Through the process of job evaluation, organizations determine the relative worth of
jobs. This procedure is followed to establish a hierarchy of jobs by which pay rates can
A. Job Ranking System
• The job ranking system is the simplest and oldest of the job evaluation
techniques. All organizational jobs are simply ranked by one individual or a
B. Job Classification System
• The federal civil service system uses the job classification system to evaluate
jobs. With this technique, a predetermined number of grades are established. Each
C. Point System
• The point system is the most frequently used quantitative method of job
evaluation. Total points are assigned to jobs based on the degree to which jobs
118 Part 4: Implementing Compensation and Security
These factors are subdivided into degrees. Degrees represent different levels of
difficulty associated with each factor.
1. The Point Manual
• Organizations using the point system develop a point manual, which contains
descriptions of the compensable factors and the degrees to which these factors
2. Using the Point Manual—Jobs are evaluated by comparing the job
requirements, factor by factor, against the factor degree descriptions in the point
manual. When a degree is chosen, the points assigned to that degree are written
down. This is done for each job requirement until a total point score is obtained.
Jobs are ranked according to their relative worth based on the points assigned to
them.
D. Work Valuation
• Work valuation is a job evaluation system designed to meet the demands of a
dynamic business environment.
E. Job Evaluation for Management Positions
• Organizations often find it more difficult to evaluate the worth of managerial
jobs because of the complexity of these jobs. Where managerial jobs are
V. COMPENSATION IMPLEMENTATION
Once organizational jobs have been evaluated, jobs must be assigned a wage rate.
Determining wage rates begins with the wage and salary survey.
Chapter 9: Managing Compensation 119
A. Wage and Salary Surveys
Organizations will conduct a wage survey to determine what other employers are
1. Collecting Survey Data
• Organizations can use surveys conducted by other organizations. For example,
the BLS is a major publisher of wage and salary data. These data are available in
2. HRIS and Salary Surveys—Employers can obtain a variety of wage and
benefit data from both public and commercial websites. These sites are readily
3. Employer-Initiated Surveys—Employers normally follow these steps when
conducting their own surveys:
a. Select jobs to be used in the survey.
B. The Wage Curve
• Once wage data are collected through the wage and salary survey, the
organization will construct a wage curve. This curve shows the relationship
C. Pay Grades
• For pay purposes, similar jobs are normally grouped together. Then all jobs
falling within a pay grade are paid the same wage rate. This is administratively
easier than paying each individual job a different rate.
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D. Rate Ranges
• Organizations may decide to have a single wage rate for each pay grade, as
illustrated in Figure 9.7 in the textbook. Most organizations, however, prefer to
E. Competence-Based Pay
• Classifying jobs in groups may fail to compensate employees for special skills or
knowledge they may possess. To overcome this problem organizations may
pay employees according to a competence-based pay plan. Under these plans, also
1. Broadbanding
• Broadbands replace a multitude of salary grades with a few wide salary bands
(thus, the term “broadbands”).
VI. COMPENSATION ASSESSMENT
Getting your compensation system up and running is not the end of your task as a
manager. Once it has been implemented, assessing the effectiveness of your compensation
Chapter 9: Managing Compensation 121
decisions with organizational objectives. The compensation scorecard collects and
VII. GOVERNMENT REGULATION OF COMPENSATION
• Compensation administration has not escaped government regulation. Most states have
• Refer to Highlights in HRM 3 in the textbook to illustrate in the minimum wage laws in
the different states.
A. Davis-Bacon Act of 1931
• The Davis-Bacon Act covers workers employed on public works projects worth
B. Walsh-Healy Act of 1936
• This law covers workers employed on government contracts in excess of $10,000.
C. Fair Labor Standards Act of 1938 (as Amended)
Passed in 1938, the FLSA covers employers engaged in interstate and foreign
1. Wage and Hour Provisions
• Federal law establishes a minimum wage for employers covered by the FLSA.
The minimum rate applies to the actual earnings rate before any overtime
premiums have been added.
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• Under the FLSA, covered employers must pay overtime at the rate of 1½
times the base rate for all hours worked in excess of forty hours in a given
week.
2. Minimum Wage and Pay Compression
• Pay-rate compression occurs when the pay difference between successive
wage grades narrows. This compression is frequently found between highly
3. Child Labor Provisions—The FLSA prohibits employers from employing
minors between the ages of sixteen and nineteen in hazardous occupations in
industries such as mining, logging, and meat packing.
4. Exemptions from Overtime Provisions—The FLSA does permit the exemption
from overtime payments of certain employee groups. These are classified as
5. Pay Equity Provisions
• The FLSA was amended by the Equal Pay Act of 1963 (see Chapter 3). The
law prohibits paying one sex less than the other sex for jobs that are equal or
Chapter 9: Managing Compensation 123
ANSWERS TO END–OF–CHAPTER DISCUSSION QUESTIONS
1. To obtain a high-quality workforce, Tomax will want to pay wages above the going
market rates. This policy will also help to reduce turnover while maintaining among
2. One of the main points in this question is that jobs should be organized as much as possible
to fit the needs of an organization; its employees, in turn, should be placed in those jobs that
3. Job evaluation is the systematic analysis of jobs in order to determine the relative value of
each job in relation to all other jobs within the organization. Job evaluation seeks to establish
internal equity among various jobs.
The two nonquantitative approaches to job evaluation are the ranking method and the clas-
sification method. The ranking method compares jobs to each other to obtain a simple rank
4. The employer must first decide on the jobs to be included in the survey. Next, the employer’s
relevant labor market must be determined. The labor market will depend on the jobs for
which the survey is being conducted. After completing these steps, the employer will
124 Part 4: Implementing Compensation and Security
5. While the argument cited is a common one, it ignores the need to develop and preserve
adequate rate differentials with which to provide some incentive for employees to achieve
6. The compensation scorecard collects and displays the results for all the measures that a
company uses to monitor and compare compensation among internal departments or units.
While different companies will use different measures of compensation, the scorecard creates
7. a. The prevailing wage is often biased upward to reflect wages paid by higher-paying
employers. The prevailing wage can be, and is, often based on the union rate for jobs in
consideration. Therefore, prevailing wage laws serve to raise the cost of government
Why This Salary?
1. This question can be answered by referring students to the factors affecting the
wage mix as discussed in the chapter. Some jobs are paid more because they
have more worth (e.g., they are more important) to the employer. The job of airline
pilot is worth more to an airline than the job of flight attendant. The same
reasoning could be cited for the difference in wages between a computer services
manager and a motel desk clerk. Also, some employers may have a
Chapter 9: Managing Compensation 125
3. An employer’s compensation strategy, worth of the job to the organization, the
employer’s ability to pay, and the worth of the job to the organization are factors
accounting for the differences among salaries for the identical occupation in
different organizations.
ANSWERS TO USING THE INTERNET ACTIVITIES
Internet Exercise #1, page 413
Question:
Visit the website of the U.S. Bureau of Labor Statistics and locate a resource for looking up
employment statistics by occupation. Select a current or desired occupation and locate wage or
salary information for the selected occupation. Provide a summary of your findings, including
mean and percentile wage and salary estimates.
Answer:
11-3121 Human Resources Manager – Plan, direct, or coordinate human resources activities and
staff of an organization.
National wage and salary estimates:
• Employment: 67,700
• Mean hourly wage: $52.21
• Mean annual wage: $108,600
Percentile wage and salary estimates:
• 10 Percent: $29.59 (hourly), $61,560 (annual)
• 25 Percent: $37.14 (hourly), $77,240 (annual)
• 50 Percent: $47.68 (hourly), $99,180 (annual)
• 75 Percent: $62.54 (hourly), $130,090 (annual)
126 Part 4: Implementing Compensation and Security
Internet Exercise #2, page 424
Question:
Visit the website for the National Committee on Pay Equity. According to information presented
on the website, how has pay equity changed since the Equal Pay Act was signed in 1963?
Develop your position on the issue of present pay gap. What do you believe should be done to
improve the situation? Explain.
Answer:
Since the Equal Pay Act was signed in 1963, the wage gap has been closing at a very slow rate.
2002 $30,203 $39,429 $9,226 76.6%
Chapter 9: Managing Compensation 127
Year Women’s Men’s Dollar Percent
Earnings Earnings Difference
2009 $36,278 $47,127 $10,849 77.0%
2005 $31,858 $41,386 $9,528 77.0%
2004* $32,285 $42,160 $9,875 76.6%
2003 $30,724 $40,668 $9,944 75.5%
2008 $35,745 $46,367 $10,622 77.1%
2007 $35,102 $45,113 $10,011 77.8%
2006 $32,515 $42,261 $9,476 76.9%
128 Part 4: Implementing Compensation and Security
VIDEO CASE DISCUSSION GUIDE
According to the video, the child care industry is known for low pay with few benefits, which is
why so few people stay in the industry.
Child care workers value a competitive wage with valuable benefits, such as health insurance,
paid vacations, and tuition reimbursement for further education.
There are multiple answers to this. Some students might mention that most child care workers
NOTES FOR END–OF-CHAPTER CASE STUDIES
Case Study 1: Pay Decisions at Performance Sports
1. The “going rate” of pay for purchasing agents is the factor most likely to influence the
compensation for these individuals. Perkins must also consider the experience she wants for
this position and factor this into her pay decision. Another consideration that could affect the
2. The primary advantage of a pay–for-performance program is that it ties employee effort
and performance directly to the compensation received. Studies generally show that
organizational productivity increases when employees are paid on a pay-for-performance
basis.
Drawbacks of a pay-for-performance program include establishing performance standards,
Chapter 9: Managing Compensation 129
3. Several options are available to pay the customer service representatives. New
representatives can be paid a straight wage until they completely learn the job. At that time,
Case Study 2: An In-N-Out Pay Strategy: Costa Vida’s Decision to Boost
Pay
1. In discussing this question with the class, turn it around and ask what would likely happen if
a firm’s pay was not externally fair? Also, ask them if there is a definition of “fair” that
everyone would recognize?
3. There will be many answers to this question. The firm’s compensation strategy is directed
toward attracting quality employees who in turn will attract customers and toward retaining
such quality employees. To the extent that this may involve higher employee costs it is
assumed that the increase in costs will be more than offset by the increased revenues from
happier customers.
4. There will be many suggestions. There is not necessarily a right or wrong answer but
respondents should prepared to show how their suggestion would accomplish what was
5. There are many alternative ways of communicating the approach to franchise owners and
managers. However, some franchise organizations have periodic conferences (at a physical
location or online) in which they discuss common problems and opportunities. Such a