Compensation Review PHR/SPHR Study Group Cindy Thomson, HR Director, Ameritas Fall, 2013

1. Compensation Review PHR/SPHR Study Group Cindy Thomson, HR Director, Ameritas Fall, 2013

2. Nature of Rewards and Compensation • Total Rewards • Monetary and non-monetary rewards provided to employees in order to attract, motivate, and retain them. • Intrinsic (intangible) and extrinsic (tangible monetary and non-monetary) rewards are other definitions. • Rewards System Strategic Objectives: • Legal compliance with all laws and regulations • Cost effectiveness for the organization • Internal, external, and individual equity for employees • Performance enhancement for the organization • Performance recognition and talent management for employees • Enhanced recruitment, involvement, and retention of employees

3. Total Rewards Components

4. Compensation Approaches Traditional Approach Total Rewards Approach • Compensation is primarily base pay • Bonuses are for executives only • Fixed benefits tied to long tenure • Pay grade progression is based on organizational promotions • One organization-wide pay plan for all employees • Variable pay used with base pay • Annual/long-term incentives provided to all employees • Flexible and portable benefits offered • Knowledge-based broadbands determine pay grades • Multiple pay plans consider job family, location, and business units

5. Continuum of Compensation Philosophies

6. HR Metrics for Compensation

7. Typical Division of Comp Responsibilities

8. Compensation System Design Issues Compensation Fairness and Equity Internal EquityProcedural JusticeDistributive Justice External Equity Pay Secrecy vs. Openness • External Equity - compares an organization’s compensation levels & practices to those in the same market (compete for same employees). • Procedural Justice – perceived fairness of decision making process. • Distributive Justice – perceived fairness in the distribution of outcomes.

9. Compensation System Design Issues (cont’d) Market Competitiveness and Compensation “Lag the Market” Strategy “Meet the Market” Strategy “Lead the Market” Strategy

10. Compensation Quartile Strategies

11. Competency-Based Pay System Design Issues Identification of the required competencies Progression and compensation of employees Competency-Based Pay SystemsKBP/SBP Limitations on who can acquire more competencies Training in the appropriate competencies Certification and maintenance of competencies

12. Compensation System Design Issues Individual versus Team Rewards Team Individual How to develop compensation programs that build on the team concept. How to compensate the individuals whose performance may also be evaluated on team achievements.

13. Legal Constraints on Pay Systems Fair Labor Standards Act (FSLA) Child LaborProvisions Exempt and Non-Exempt Statuses Minimum Wage Overtime Pay • FLSA - Enforced by DOL, covers public & private employers, but not independent contractors. If states/cities have higher minimum wage, it must be followed • Child Labor Provisions – Need a good understanding because test will likely combine elements and will have more than one question. • Exempt – excluded from overtime • Non-exempt – must be paid overtime.

14. Categories of Exempt Employees Executive Administrative Exempt Employees Outside Sales Professional Computer Employees

15. Determining Exempt Status Under the FLSA

16. Compensation for Overtime Work Common Overtime Issues Compensatory Time Off Incentives for Non-exempts Training Time Travel Time

17. Independent Contractor Regulations Identifying Criteria for Independent Contractors Financial Control Behavioral Control Relationship-Type Factors

18. Acts and Legislation Affecting Compensation Compensation and the Law Consumer Credit Protection Act Equal Pay Act of 1963 and Pay Equity Davis-Bacon ActWalsh-Healy Act Lilly Ledbetter • Davis-Bacon Act of 1931 - Federal contractors required to pay prevailing wage. • Walsh Healy Public Contracts Act – Extended prevailing wage to manufacturers & suppliers of goods for federal government contracts. • Equal Pay Act of 1963 – prohibits different wage scales for each sex performing substantially the same job (equal work). Doesn’t cover comparable worth. • Lily Ledbetter Act of 2009 - amends Civil Rights Act, ADEA, ADA & Rehabilitation Act of 73. Every “unequal” paycheck is potential discrimination. 180 day time limit restarts with every subsequent paycheck after the act of discrimination • Consumer Credit Protection Act – established limitations on amount of wages that can be garnished & restricts employers discharging employees subject to garnishment.

19. Acts and Legislation Affecting Compensation Compensation and the Law Work Opportunity Tax Credit Welfare-to-Work Tax Credit Copeland Act Portal-to-Portal ADA Dodd-Frank • Copeland Act of 1934 – “Anti-kickback” Act – applies to federal contractors. • Portal-to-Portal – defines rules for hours worked (covers on-call, prep, breaks, travel time, training time etc.) • Work Opportunity Tax Credit – federal income tax credit encouraging employers to hire people from 8 targeted groups of job seekers. • Welfare-to-Work Tax Credit – federal income tax credit encouraging employers to hire people from 8 targeted groups of job seekers. • ADA - requires employers to identify essential functions of a job • Dodd-Frank Wall Street Reform & Consumer Protection Act – calls for changes in executive compensation disclosure and has clawback provision

20. Compensation Administration Process

21. Valuing Jobs with Job Evaluation Methods • Job Evaluation • The formal systematic means used to identify the relative worth of jobs within an organization. • Compensable Factor • A job value commonly present throughout a group of jobs. • Something for which an organization will compensate an employee.

22. Examples of Compensable Factors for Job Families in a Hotel

23. Job Evaluation Methods Job Evaluation Methods Factor-Comparison Method Point Method Ranking Method Classification Method

24. Valuing Jobs Using Market Pricing Advantages Disadvantages • Ties organizational pay levels to the external job market, without “internal” job evaluation distortion. • Communicates to employees that the compensation system is “market linked.” • It relies on market survey data. • A specific job may differ from a “matching” job in the survey. • The market data’s scope (range of sources) is a concern. • Tying pay levels to market data can lead to wide fluctuations. • Market Pricing • Using market pay data to identify the relative value of jobs based on what other firms pay for similar jobs.

25. Compensation Surveys • Pay Survey • Collection of data on compensation rates for workers performing similar jobs in other organizations. • Benchmark Jobs • Jobs found in many organizations. • Internet-Based Pay Surveys • Pay survey questionnaires are distributed electronically rather than as printed copies.

26. Pay Structures • Job Family • A group of jobs having common organizational characteristics. • Common Pay Structures • Hourly and salaried • Office, plant, technical, professional, managerial • Clerical, information technology, professional, supervisory, management, and executive • Pay Grades • Groupings of individual jobs having approximately the same job worth.

27. Establishing PayStructures

28. Pay Structures (cont’d) • Market Banding • Grouping jobs into pay grades based on similar market survey amounts. • Market Line • Shows relationship between job value as determined by job evaluation points and job value as determined by pay survey rates. • Shows distribution of pay for the surveyed jobs, allowing a linear trend line to be developed by the least-squares regression method.

29. Example of Pay Grades and Pay Ranges

30. Broadbanding • The practice of using fewer pay grades having broader pay ranges that in traditional systems. • Benefits • - Encourages horizontal movement of employees • - Is consistent with trend towards flatter organizations • - Creates a more flexible organization • - Encourages competency development • - Emphasizes career development

31. Individual Pay • Rates Out of Range • Red-Circled Employees • An incumbent (current jobholder) who is paid above the range set for the job. • Green-Circled Employees • An incumbent who is paid below the range set for the job. • Pay Compression • A situation in which pay differences among individuals with different levels of experience and performance in the organization becomes small.

32. Pay Adjustment Matrix 89 • Compa-ratio • The pay level divided by the midpoint of the pay range.

33. Standardized Pay Adjustments Standardized Pay Increases Cost-of-Living Adjustments(COLA) Across-the-Board Increases Lump-Sum Increases(LSI) Seniority

34. Variable Pay: Incentives for Performance Better performing employees should receive more compensation Some people perform better and are more productive than others Variable Pay Assumptions Some jobs contribute more to organizational success than others Part of compensation should be tied directly to performance and results

35. Examples of Incentives

36. Successful Variable Pay Plans

37. Organizational conditions for effective incentive pay plans • Base pay fair and equitable • Strategic planning in place • Organization committed to the plan • Plan aligns with other organizational programs • Line of sight - reflect results that employee can control • Sunset clause with a defined end • Incorporate long and short term perspectives which overlap (want golden handcuffs effect) • Effective communication channels • Credible measurement process

38. Developing Successful Incentive Plans Enhance results and reward employees financially Link strategic goals and employee performance Reward and recognize employee performance Promote achievement of HR objectives Reasons for Pay-for-Performance Plans

39. Metric Options for Variable Pay Plans

40. Why Variable Pay Plans Fail Plan incentives are not seen as desirable Plan doesn’t reward doing a good job Employees’ View of Variable Pay Plan Plan rewards teams/groups rather than individuals Plan doesn’t motivate Plan doesn’t increase base pay

41. Developing Successful Incentive Plans Develop clear, understandable plans that are continually communicated Use realistic performance measures Successful Incentive Plans Keep plans current and linked to organizational objectives Link results to payouts that recognize differences Identify variable pay incentives separately from base pay

42. Categories of Variable Pay Plans

43. Individual Incentives Necessary Conditions For Individual Incentive Plans Individualism must be stressed in the organizational culture Individual performance must be identified Individual competitiveness must be desired

44. Individual Incentives • - Piece-Rate Systems • Straight piece-rate system • Differential piece-rate system • - Bonus (one time payment) • - “Spot” Bonuses • - Special Incentive Programs • Performance awards • Recognition awards • Service awards

45. Purposes of Special Incentives

46. Why Organizational Establish Variable Pay Plans for Groups/Teams Group/Team-Based Variable Pay Plans Improve customer service or production quality Increase employee retention Improve productivity Tie pay to team performance

47. Design of Group/Team Incentive Plans Group/Team Incentive Plan Issues Decisions About Group/Team Incentive Amounts Distribution of Group/Team Incentives Timing of Group/Team Incentives

48. Group/Team Incentives (cont’d) • Distributing Rewards • Same-size reward for each member • Different-size reward for each member • Problems with Group/Team Incentives • Rewards in equal amounts may be perceived as “unfair” by employees who work harder, have more capabilities, or perform more difficult jobs. • Group/team members may be unwilling to handle incentive decisions for co-workers. • Many employees still expect to be paid according to individual performance.

49. Conditions for Successful Team Incentives

50. Types of Group/Team Incentives • Group/Team Results • “Self-funding” pay plans for groups/teams that reward through improved organizational results on the basis of group output, cost savings, or quality improvement. • Gainsharing (Teamsharing or Goal Sharing) • The sharing with employees of greater-than-expected gains in productivity through increased discretionary efforts. • Improshare (group piece rate standards) • Scanlon Plan committees to calculate and pass on savings)