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Chapter 11: Total Rewards and Compensation
Chapter 11: Total Rewards and Compensation
Table of Contents
Chapter Summary
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Learning Objectives
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Lecture Outline
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Critical Thinking Challenges
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Case: Should Private-Sector Employees Get Compensatory Time?
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Supplemental Cases
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Extra Teaching Video
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Chapter Summary
Chapter 11 is the first chapter in the compensation section. It addresses the total rewards
approach. It includes all monetary and nonmonetary rewards that companies provide for their
employees. The first section presents the elements of tangible direct rewards, tangible indirect
rewards, and intangible rewards. An overview of the laws governing compensation is presented
next, followed by strategic compensation decisions. Compensation designs can face issues,
Learning Objectives
After students read this chapter, they should be able to accomplish the following objectives:
• Identify the three general components of total rewards and give examples of each.
• Explain the major laws governing employee compensation.
• Outline the steps in developing a base pay system.
The chapter opens with a feature describing the current trends in total rewards and compensation.
These trends include the ethical issues related to compensation, litigation, situations requiring
payment, setting reasonable pay, and use of variable pay options.
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Chapter 11: Total Rewards and Compensation
Lecture Outline
HR Headline: GoDaddy Go!
GoDaddy, a web-services firm headquartered in Arizona, tackled its pay structure and
overhauled the entire process for its 5,000 employees. In the past, starting pay decisions
relied on the history of pay for the job (what did the previous employee earn?) when hiring
a new employee. Over time, this led to substantial inequities within the workforce, as some
employees were overpaid while others were underpaid. In general, most employers use
competitive pay data from salary surveys and try to pay at the median or 50th percentile of
the range that other companies pay for similar jobs. The company found a middle ground,
whereby they include each individual employee’s pay grade and pay range on their annual
pay statement.
• Total rewards are monetary and nonmonetary rewards provided by companies to attract,
motivate, and retain employees.
11-1. Nature of Total Rewards and Compensation
• Compensating employees is often a major cost item for employers, so top management and
HR executives must work together to align rewards with the strategic goals of the
Teaching Tip: Ask students to suggest tangible and intangible rewards that would fit in the
categories shown in Figure 11-1.
11-1a. Components of Compensation
• Tangible rewards are elements of compensation that can be quantitatively measured
and compared between different organizations.
• Intangible rewards are elements of compensation that cannot be as easily measured or
quantified.
• The perceived value of intangible rewards can differ among employees, making the
development and management of total rewards much more complex.
• Base pay and variable pay are the most common forms of direct compensation.
• The most common types of indirect compensation provided to employees are benefits.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11-2. Laws Governing Compensation
11-2a. Fair Labor Standards Act
• 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).
tipped employees that are higher than the federal minimum wage, and employers must
pay this higher wage.
• The child labor provisions of the FLSA set the minimum age for employment with
unlimited hours at 16 years.
• For hazardous occupations, the minimum is 18 years of age.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• For individuals who are nonexempt, employers must consider the following issues:
o Compensatory time off
o Incentives for nonexempt employees
o Training time
11-2b. Pay Equity Laws
11-2c. Independent Contractor Regulations
• Most federal and state entities rely on the criteria for independent contractor status
established by the Internal Revenue Service (IRS).
11-2d. Pay for Internships
• The issue of pay for interns has been changing over the past several years.
• In April, 2010, the DOL issued a “six–factor” test that narrowly permitted for-profit
enterprises to utilize unpaid interns.
o Prior to that time, many employers in the private sector did not pay their interns.
o After the six-factor test was instituted, many organizations began to pay interns.
HR Ethics: To Pay or Not to Pay?
The Department of Labor (DOL) changed its interpretation of pay laws in December 2017
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11-3a. Organizational Climate and Compensation Philosophies
• The goal is to create an organizational climate that reduces employee dissatisfaction
with their current compensation.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11-3b. Communicating Pay Philosophy
• Sharing the organization’s pay philosophy with employees helps them understand the
11-3c. Administrative Responsibilities
• HR specialists and line managers work together to administer compensation programs.
11-4. Compensation System Design Issues
• Depending on the compensation philosophies, strategies, and approaches used by an
11-4a. Motivation Theories and Compensation Philosophies
• The following two theories of motivation influence the design of compensation systems:
o Expectancy theory states that an employee’s motivation is based on the
probability that his or her efforts will lead to an expected level of performance
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Chapter 11: Total Rewards and Compensation
comparing their inputs and outcomes against the inputs and outcomes of referent
others.
11-4b. Compensation Fairness and Equity
• Most people work for monetary rewards.
• HR professionals and other business leaders need to be particularly aware of both
external and internal equity concerns if they want to effectively manage these outcomes.
• Pay secrecy is another equity issue concerning the degree of secrecy organizations have
regarding their pay systems.
HR Competencies & Applications: Is It Better to Know?
Key Competencies: Critical Evaluation (Behavioral Competency) and Organization
(Technical Competency)
Some experts on compensation support the idea of full pay transparency, whereby every
employee in a company is allowed to know what everyone else is paid. Full pay
transparency can work in two situations. First, if pay levels are based on rank and tenure
(as in many union contracts and government agencies), then pay is not determined by
performance or other factors. The second is when members of the organization can easily
see how well everyone else is performing. The organizational culture and work
environment must be appropriate for introducing full pay disclosure while maintaining
collaboration and harmony within the work group.
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Chapter 11: Total Rewards and Compensation
or willing to disclose individual worker pay levels within the organization? How
would you feel if your employer announced that they plan to open the payroll records
for everyone to see?
Students’ answers will vary. Companies can address the perception of inequity by
emphasizing the fact that the U.S. economy is built on fair competition. A worker
with valuable unique skills should be paid more than others.
2. What information should companies share with employees relative to the employee’s
personal pay determination and general policies regarding pay decisions? How
should the needs of employees be addressed in these strategies?
Students’ answers will vary. If an organization seeks to foster a truly collaborative
work environment, then it may be ill advised to disclose individual pay levels. If the
company decides to disclose individual pay levels, then it can use surveys and other
methods of data collection to keep employees informed of current pay levels so
salary offers are similar.
11-4c. Market Competitive Compensation
• Organizations face the challenge of whether to adopt practices common in an industry
or to differentiate the firm by using novel or distinct compensation practices.
• Many organizations use a quartile strategy to establish policies about where they wish
• Most compensation programs are designed to reward employees for fulfilling their
similar jobs in other organizations.
• HR professionals can access a wide range of pay data online.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11-6. Pay Structures
• Pay structures can be developed after job evaluations and pay survey data are gathered.
11-6a. Pay Grades
• Pay grades are groupings of individual jobs that have approximately the same value to
the organization.
11-6b. Pay Ranges
• Once pay grades are determined, the pay range for each pay grade must be established.
Teaching Tip: Ask students to refer to Figure 11-9 and create similar examples of pay
grades and pay ranges.
11-6c. Individual Pay
• Setting a range for each pay grade gives flexibility by allowing individuals to progress
within a grade instead of having to move to a new grade each time they receive a raise.
• To determine each individual employee’s standing in relationship to the midpoint, many
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11-7. Determining Pay Increases
11-7a. Performance-Based Increases
• This approach focuses on providing the top-performing employees with significantly
higher pay raises, while providing standard increases to the remaining satisfactory
11-7b. Standardized Pay Adjustments
• Several methods can be used to provide standardized pay increases to employees.
11-7c. Compensation Challenges
• Compensation challenges include economic recessions and gender pay gaps.
11-8. Variable Pay
• Variable pay is compensation that is tied to performance.
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Chapter 11: Total Rewards and Compensation
• Incentives are tangible rewards that encourage or motivate action.
o Tying pay to performance can be attractive for both employers and employees.
• The following three basic assumptions underlie the philosophical foundation of variable
pay:
• Figure 11-11 shows a wide variety of possible incentives for employees.
11-8a. Effective Variable Pay
• Employers adopt variable pay to better link employee efforts to strategic business goals
and to recognize different levels of employee performance and contributions.
• Variable pay plans can be considered successful if they fit the organization’s objectives,
culture, and financial resources.
• Figure 11-12 shows many elements that can affect the success of a variable pay plan.
• The effectiveness of any variable pay program relies on its consistency with the
organization’s culture.
11-8b. Three Levels of Variable Pay
• Variable pay plans can be classified into three levels or categories: individual, team, and