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Chapter 9: Compensation and Benefits
Chapter 9
Compensation and Benefits
Learning Objectives
Opening Case: Unique Compensation at Wegmans
Chapter Outline
Closing Case: Holding True at Nucor Steel
Discussion Questions
Additional Resource: Skill-Based Pay: HR’s Role
Learning Objectives
After studying this chapter, the student should be able to accomplish the following objectives.
2. Discuss how organizations develop a wage and salary structure
4. Discuss the basic considerations in understanding benefit programs
6. Identify and describe nonmandated benefits
7. Discuss contemporary issues in compensation and benefits
Opening Case: Unique Compensation at Wegmans
Case Summary
For the best Parmesan cheese for one’s chicken parmigiana recipe, one might try Wegmans,
especially if one happens to live in the vicinity of Pittsford, New York. Cheese department
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Chapter 9: Compensation and Benefits
thirds of the company’s workforce of more than 37,000. At 15 to 17 percent of sales, for
example, Wegmans’ labor costs are well above the 12 percent figure for most supermarkets.
Besides, employee turnover at Wegmans is about 6 percent—a mere fraction of an industry
average that hovers around 19 percent (and can approach 100 percent for part-timers). And this is
an industry in which total turnover costs have been known to outstrip total annual profits by 40
percent. Wegmans employees tend to be knowledgeable because about 20 percent of them have
been with the company for at least years, and many have logged at least a quarter century.
Think It Over
1. Why does Wegman’s approach to compensation seem to work so well?
2. In your opinion, why don’t other grocery chains use the same compensation model as
Wegman’s?
Chapter Outline
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Chapter 9: Compensation and Benefits
Introduction
Compensation is the set of rewards that organizations provide to individuals in return for their
willingness to perform various jobs and tasks within the organization. Benefits are the various
I. Developing a Compensation Strategy
Compensation should never be a result of random decisions but instead the result of a careful and
systematic strategic process.
A. Basic Purposes of Compensation
Compensation has several fundamental purposes and objectives. First, the organization must
provide appropriate and equitable rewards to employees. Individuals who work for
organizations want to feel valued and be rewarded at a level commensurate with their skills,
abilities, and contributions to the organization. In this regard, an organization must consider
two different kinds of equity. In addition, compensation serves a “signaling” function.
Internal equity in compensation refers to comparisons made by employees to other
employees within the same organization. In making these comparisons, the employee is
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Chapter 9: Compensation and Benefits
Business Week, Fortune, and Nation’s Business routinely publish compensation levels for
various kinds of professional and executive position. In addition, the Bureau of National
Affairs and the Bureau of Labor Statistics also are important sources of government-
controlled wage and salary survey information. Figure 9.1 of the text presents a sample
section from a pay survey.
A survey such as this one is sent to other organizations in a given region. In this case, the
survey would go to organizations in various industries, but other surveys might be targeted to
a specific industry.
Contemporary Challenges in HR: Negotiating Salaries on the Web
For decades, negotiations about individual wages and salaries were typically handled in a
meeting between the employee and his or her manager. The same approach was used both for
individuals who were being offered their first job with the company and for existing
employees who felt they deserved a raise. But in both cases, the supervising manager and the
organization itself usually had the upper hand. To make things worse (for the employee),
locating this kind of information was difficult. National and regional data were sometimes
published in government reports, but the information was often dated and/or incomplete. But
the Internet has rapidly changed all that. For instance, several free websites now provide
salary information for interested parties. It seems like the Internet will be playing a major role
employee reviews of an organization, and wage scales. This information can give job
applicants a sense of norms in terms of wage scale, benefits offered, and employees’
work experiences.
2. Are there drawbacks to using the Internet to search for salary information?
Students’ answers will vary. Some websites may not be updated on a regular basis,
But when a female employee, for example, perceives internal inequity vis-à-vis a male
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Chapter 9: Compensation and Benefits
employee, this can also lead to a lawsuit. The Equal Pay Act of 1963 stipulates that men and
women who perform essentially the same job must be paid the same. If there are differences
B. Wages versus Salaries
Wages generally refer to hourly compensation paid to operating employees. Time is the basis
for wages—that is, the organization pays individuals for specific blocks of their time such as
C. Strategic Options for Compensation
Most organizations establish a formal compensation strategy that dictates how they will pay
individuals. Several decisions are embedded within such a strategy. The first relates to the
basis for pay. Traditionally, most organizations based pay on the functions performed on the
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Chapter 9: Compensation and Benefits
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be rewarded for that contribution.
In other organizations, differences in pay are based on differences in performance, regardless
of time on the job. These systems are generally seen as rewarding employees who are good
performers rather than those who simply remain longer with the organization. For such
systems to succeed, however, the organization has to be certain that it has an effective system
for measuring performance.
A third decision in developing a compensation strategy deals with the organization’s pay rates
relative to going rates in the market. As shown in Figure 9.2 of the text, the three basic
strategic options are to pay above-market compensation rates, market compensation rates, or
below-market compensation rates.
A firm that chooses to pay above-market compensation, for example, will incur additional
costs as a result. This strategic option essentially indicates that the organization pays its
employees a level of compensation that is higher than that paid by other employers competing
for the same kind of employees.
In addition to attracting high-quality employees, an above-market strategy has other benefits.
Above-market rates tend to minimize voluntary turnover among employees. Paying above-
market rates also might be beneficial by creating and fostering a culture of elitism and
competitive superiority.
The downside to above-market compensation levels, of course, is cost. The organization
simply has higher labor costs because of its decision to pay higher salaries to its employees.
On the other hand, the organization will also experience several negative side effects. Morale
and job satisfaction might not be as high as the organization would prefer. In addition,
turnover may also be higher because employees will be continually vigilant about finding
better-paying jobs. Compounding the problem even further is the fact that the higher-
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Chapter 9: Compensation and Benefits
performing employees are among the most likely to leave, and the lower-performing
employees are among the most likely to stay.
D. Determinants of Compensation Strategy
Several different factors contribute to the compensation strategy that a firm develops. One
general set of factors has to do with the overall strategy of the organization itself. In addition
to these general strategic considerations, several other specific factors determine an
organization’s compensation strategy. An organization with a healthy cash flow or substantial
cash reserves is more likely to be able to pay above-market wages and salaries.
II. Determining What to Pay
Once a compensation strategy has been chosen, it is necessary to determine exactly what
employees on a given job should be paid. The starting point in this effort has traditionally been
job evaluation.
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Chapter 9: Compensation and Benefits
A. Job-Evaluation Methods
Job evaluation is a method for determining the relative value or worth of a job to the
organization so that individuals who perform that job can be compensated adequately and
appropriately.
Classification System
An organization that uses a classification system attempts to group sets of jobs together
into classifications, often called grades. After classifying is done, each set of jobs is then
ranked at a level of importance to the organization. A third step is to determine how many
categories or classifications to use for grouping jobs.
Point System
The most commonly used method of job evaluation is the point system. The point system
requires managers to quantify, in objective terms, the value of the various elements of
specific jobs. Using job descriptions as a starting point, managers assign points to the
degree of various compensable factors that are required to perform each job—that is, any
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Chapter 9: Compensation and Benefits
© 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Factor-Comparison Method
A third method of job evaluation is the factor-comparison method. Like the point system,
the factor-comparison method allows the job evaluator to assess jobs on a factor-by-factor
Although an organization can choose to identify any number of compensable factors,
commonly used systems include five job factors for comparing jobs: responsibilities, skills,
physical effort, mental effort, and working conditions. Managers performing a job
evaluation in a factor-comparison system are typically advised to follow six specific steps:
• The comparison factors to be used are selected and defined.
The factor-comparison system is a detailed and meticulous method for formally evaluating
jobs. On the other hand, the factor-comparison method is also extremely complex, difficult
B. Pay for Knowledge and Skill-Based Pay
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Chapter 9: Compensation and Benefits
Pay for knowledge involves compensating employees (usually managerial, service, or
professional employees) for learning specific material. Pay-for-knowledge systems reward
Skill-based pay operates in much the same way as a pay-for-knowledge system, but these
plans are more likely to be associated with hourly workers. Instead of rewarding employees
III. Wage and Salary Administration
Most organizations call this process wage and salary administration or compensation
administration. Much of this administration involves making adjustments to wages and salaries
as the result of pay raises or changes in job responsibilities. In addition, certain issues related to
compensation must also be addressed as part of this administration process. Two of the most
important involve pay secrecy and pay compression.
A. Pay Secrecy
Pay secrecy refers to the extent to which the compensation of any individual in an
organization is secret or the extent to which it is formally made available to other individuals.
B. Pay Compression
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Chapter 9: Compensation and Benefits
Pay compression occurs when individuals with substantially different levels of experience or
performance abilities are being paid wages or salaries that are relatively equal. Pay
IV. The Nature of Benefits Programs
In addition to wages and salaries, most organizations provide their employees with an array of
other indirect compensations, or benefits. Although these benefits were once called fringe
benefits (and a few people still use this expression today), once managers began to fully realize
that they were spending more than one-third of wages and salaries in additional expenses on
benefits they decided that the word fringe might have been understating the true value of these
benefits.
A. The Cost of Benefits Programs
Data from the U.S. Chamber of Commerce provides some insights into the composition of the
total compensation paid to a typical employee in the United States. According to these
B. Purposes of Benefit Programs
In general, benefit programs serve several purposes for the organization. First, many experts
believe that organizations willing to spend more money on total compensation are able to
attract better-qualified people and convince employees to work harder, saving the company
money. The general concept underlying this approach is known as efficiency wage theory.
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Chapter 9: Compensation and Benefits
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Most experts also argue that money spent on benefits affects job satisfaction and subsequent
turnover. Even if employees do not work harder in response to better benefits, they are more
likely to remain with a firm that provides better benefits and are more satisfied with that firm.
As a result, the need to remain competitive with other firms in an industry is a major force
driving up the price of benefits.
In addition, various social, cultural, and political forces may promote the introduction of new
and broader benefits programs. Because of the growth in the numbers of female workers,
more and more companies offer on-site day care, dual-parent leave for the birth of a child, and
other benefits that make it easier for people to work and have productive careers. Finally,
employee expectations are a driving force in determining what benefits a firm must offer.
V. Mandated Benefits
Specifically, in the United States, several laws have been passed that require organizations to
offer certain types of benefits to their employees or that legislate the way benefit plans are
Unemployment insurance is intended to provide a basic subsistence payment to employees who
are between jobs—that is, for people who have stopped working for one organization but who
are assumed to be seeking employment with another organization. Employers pay premiums to
A. Social Security
A second mandated benefit created by the same law is Social Security itself. What most