Management Chapter 9 Managing Compensation Outline What Compensation Strategic Compensation Linking Compensation Organizational

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CHAPTER 9

MANAGING COMPENSATION

CHAPTER OUTLINE

9.1 What Is Compensation?

9.2 Strategic Compensation

9.2a Linking Compensation to Organizational Objectives

9.2c The Bases for Compensation

9.3 Compensation Design—The Pay Mix

9.3a Internal Factors

9.4 Job Evaluation Systems

9.4b Job Classification System

9.4d Work Valuation

9.5 Compensation Implementation—Pay Tools

9.5b The Wage Curve

9.5d Rate Ranges

9.6 Government Regulation of Compensation

9.7 Compensation Assessment

LEARNING OUTCOMES

1. Distinguish a strategic compensation program from one that is non-strategic.

3. Estimate whether or not a pay system is consistent within the firm as well as comparable

to industry standards and government laws.

2 Part 4: Implementing Compensation and Security

GENERATING INTEREST

Ask the following questions:

1. What was the first hourly federal minimum wage rate established by the Fair Labor

Standards Act in 1938?

2. What was the minimum wage the year you were born?

Answer: See the following table.

1939

$0.30

1978

$2.65

1945

$0.40

1979

$2.90

1950

$0.75

1980

$3.10

1956

$1.00

1981

$3.35

1961

$1.15

1990

$3.80

1963

$1.25

1991

$4.25

1967

$1.40

1996

$4.75

1968

$1.60

1997

$5.15

1974

$2.00

2007

$5.85

1975

$2.10

2008

$6.55

1976

$2.30

2009

$7.25

3. Does your home state have a different minimum wage law than the federal standard?

DEALING WITH TROUBLE SPOTS

Assign Case Study 1, “Pay Decisions at Performance Sports,” to help students relate to

the challenges associated with making pay decisions. In addition to the suggested

Chapter 9: Managing Compensation 3

LECTURE OUTLINE

Discussion Starter #1: The #Fightfor15 movement on Twitter and in the streets, many Americans

advocated a minimum wage increase of $15 per hour.

ANSWER: Students’ answers will vary. Starting pay can make a difference in whether or not someone

Compensation increases employee loyalty.

9.1 What Is Compensation? Figure 9.1

Figure 9.2

Compensation has three components:

• Direct compensation: employee wages and salaries, incentives, bonuses, and

commissions

Teaching Tip: Use Figure 9.1 to discuss the different types of compensation. Ask students to give

examples of indirect and nonfinancial compensation.

Organizations tell their employees what is important based on how they align the

components of compensation.

Teaching Tip: Use Figure 9.2 to discuss compensation alignment. Ask students to describe how

compensation may be aligned at different organizations: financial services, an animal rescue

organization, and a restaurant.

9.2 Strategic Compensation Figure 9.3

Figure 9.4

Strategic compensation is the compensation of employees in ways that enhance

Chapter 9: Managing Compensation 5

Expectancy Theory and Pay

The expectancy theory of motivation predicts that a worker’s level of motivation

Teaching Tip: Use Figure 9.3 to discuss how pay-for-performance and expectancy theory are related.

Ask students what will happen over time if an employee performs well but is not well rewarded.

Pay Secrecy

Secrecy can generate distrust in the compensation system, reduce employee

motivation, and inhibit organizational effectiveness. Companies maintain secrecy

Video Highlights #1: Section 9.2b: The Pay-for-Performance Standard

VIDEO: Japan Seeks Alternatives to Its Pay System (2:28)

This news article and accompanying video discusses how many companies in Japan are abandoning

9.2c The Bases for Compensation

Work performed in most private, public, and not-for-profit organizations is

traditionally based on hourly work. Hourly work is work paid on an hourly basis.

Teaching Tip: Use Figure 9.4 to discuss the types of positions that are exempt from overtime

provisions. Ask students to suggest examples of each category around the school.

EOC Discussion Question #1: Tomax Corporation has 400 employees and wishes to develop a

compensation policy to correspond to its dynamic business strategy. The company wishes to

employ a high-quality workforce capable of responding to a competitive business environment.

Suggest different compensation objectives to match Tomax’s business goals.

9.3 Compensation Design—The Pay Mix Figure 9.5

Pay is determined by a combination of internal and external factors.

9.3a Internal Factors

Internal factors include the following:

• The organization’s compensation strategy

• The worth of a job

Compensation Strategy

Employers should set pay policies that reflect the following:

• The internal wage relationship among jobs and skill levels

• The external competition

Worth of a Job

Organizations without a formal compensation program generally base the worth

of jobs on the subjective opinions of people familiar with the jobs. Organizations

with formal compensation programs are more likely to rely on a system of job

evaluation. Today, compensation professionals believe that a job’s value should

be based on the total value delivered to the organization.

Employee’s Relative Worth

Employee performance can be recognized and rewarded through promotions and

various incentive systems. Merit raises should be determined by an effective

performance appraisal system so that only deserving employees are given merit

raises.

Employer’s Ability to Pay

Pay levels are limited by earned profits and other financial resources available to

employers. An organization’s ability to pay is determined in part by the

9.3b External Factors

Major external factors that influence pay rates include labor market conditions,

area pay rates, cost of living, collective bargaining, and legal requirements.

Chapter 9: Managing Compensation 7

Labor Market Conditions

The labor market reflects the forces of supply and demand for qualified labor

within an area.

Area Pay Rates

A formal pay structure should provide rates that are in line with those being paid

by other employers for comparable jobs within the area. Wage surveys provide

external pay equity.

Cost of Living

Because of inflation, compensation rates must be adjusted upward periodically to

help employees maintain their purchasing power. The consumer price index

Collective Bargaining

Labor unions bargain collectively over compensation. Real wages are wage

increases larger than rises in the consumer price index, that is, the real earning

power of wages.

Discussion Starter #2: Since employees may differ in terms of their job performance, would it not

be more feasible to determine the wage rate for each employee on the basis of his or her relative

worth to the organization? Explain.

EOC Discussion Question #2: Since employees may differ in terms of their job performance,

would it not be more feasible to determine the wage rate for each employee on the basis of his or

her relative worth to the organization? Explain.

9.4 Job Evaluation Systems Figure 9.6

Organizations formally determine the value of jobs through the process of job evaluation.

Job evaluation is a systematic process of determining the relative worth of jobs to

9.4a Job Ranking System

9.4b Job Classification System

9.4c Point System

The point system is a quantitative job evaluation procedure that determines the

The Point Manual

The point manual is a handbook that contains a description of the compensable

factors and the degrees to which these factors may exist within the jobs.

Using the Point Manual

9.4d Work Valuation

9.4e Job Evaluation for Management Positions

Management positions are more difficult to evaluate but point plans for executive

and managerial employees operate like those for other employees. The Hay

Teaching Tip: Use Figure 9.6 to discuss the factors in the Hay evaluation profile.

9.5 Compensation Implementation—Pay Tools Figure 9.7

Figure 9.8

9.6 Government Regulation of Compensation Figure 9.10

Compensation implementation is subject to state and federal regulations. A majority of

states have minimum wages. Most states also regulate hours of work and overtime

payments.

Wage and Hour Provisions

Minimum wage rate applies to the actual earning rate before any added overtime

Minimum Wage and Pay Compression

Pay rate compression is compression of pay between new and experienced employees

caused by the higher starting salaries of new employees; also, the differential between

hourly workers and their managers. The reasons for pay rate compression are usually

more market based than government based. The following guidelines can minimize pay

rate compression:

• Reward high-performance and merit-worthy employees with large pay increases.

Child Labor Provisions

Minimum wage makes it more difficult for high school students and young adults to find

jobs because employers do not want to pay workers without experience the same rate as

adults with experience. Age 16 is the basic minimum age required for employment.

Pay Equity Provisions

Although laws protect employees against pay discrimination, it still occurs.

Teaching Tip: Use Figure 9.10 to discuss rate and gender pay inequality. Ask students if they have

experienced inequality in pay.

Chapter 9: Managing Compensation 11

Video Highlight #2: Section 9.6: Government Regulation of Compensation

VIDEO: Apple Says It Now Pays All U.S. Employees Equally, Regardless of Sex or Race (0:40)

EOC Discussion Question #3: Describe the basic steps in conducting a wage and salary survey.

What are some factors to consider? One of the objections to granting wage increases on a

9.7 Compensation Assessment Figure 9.11

After a compensation system is up and running, its effectiveness is vitally important in

linking compensation with strategy. An effective compensation system will (1) help the

Teaching Tip: Use Figure 9.11 to review an example of a compensation scorecard. Ask students how

this example scorecard provides transparency for an organization.

Discussion Starter #3: What is a compensation scorecard and how does it help align a company’s

strategy with its compensation system?

ANSWER: 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

EOC Discussion Question #4: What is a compensation scorecard and how does it help align a

company’s strategy with its compensation system?

12 Part 4: Implementing Compensation and Security

HRM EXPERIENCE

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

2. Factors that may account for the difference among wages/salaries for the identical

occupation in the same organization include worth of the employee (e.g., an employee’s

3. An employer’s compensation strategy, worth of the job to the organization, and the

ANSWERS TO END-OF-CHAPTER DISCUSSION QUESTIONS

1. To obtain a high-quality workforce, Tomax will want to pay wages above the market

rates. This policy will also help to reduce turnover while maintaining among employees a

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