Compensation 1

1. Compensation 1

2. Compensation • Pay is a statement of an employee’s worth by an employer. • Pay is a perception of worth by an employee.

3. Total Compensation Direct Indirect • Time Not Worked • Vacations • Breaks • Holidays Wages / Salaries Incentives • Insurance Plans • Medical • Dental • Life Bonuses/Commissions Gainsharing/Stock Plans • Security Plans • Pensions • Employee Services • Educational assistance • Recreational programs

4. Strategic Compensation Planning • Strategic Compensation Planning • Links compensation to the mission, objectives, philosophies, and culture of the organization. • Serves to establish a pay-for-performance standard. • Seeks to motivate employees through compensation.

5. Why This Salary? • Break into teams of 4 – 5 and discuss the exercise Why This Salary on page 446 and answer the questions.

6. What Determines Pay? • Company Factors • Strategy • Value of a job • Employee’s relative worth • Ability to pay • External Factors • Labor market conditions (unemployment) • Cost of living and local wage rates • Unions • Legal requirements

7. Process to Determine Worth of a Job

8. Job Evaluation • Formal process used to create a job-worth hierarchy within an organization • Job Content • Quantitative • Nonquantitative

9. Job Evaluation Systems - Nonquantitative • Job Ranking System • Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth. • Disadvantages • Does not provide a precise measure of each job’s worth. • Final job rankings indicate the relative importance of jobs, not the extent of differences between jobs. • Method can used to consider only a reasonably small number of jobs.

10. Paired-Comparison Directions: Place an X in the cell where the value of a row job is higher than that of a column job.

11. Paired-Comparison Directions: Place an X in the cell where the value of a row job is higher than that of a column job.

12. Compensable Factors • Compensable factors are the key to quantitative methods • The elements used to measure a job’s worth • The elements in jobs that add value to the organization and for which the organization wants to pay it’s employees

13. Point System • Point System • A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it. • Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job. • The Point Manual • A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs.

14. The job evaluation technique that uses compensable factors scaled according to the degree present in the job? • ranking • classification • point method • factor comparison • content validity

15. Hay Point Factor • Know-how • Technical • Managerial • Human relations • Problem Solving • Thinking environment • Thinking challenge • Accountability • Freedom to act • Magnitude • Impact

16. Compensable factors need to tie to the organizational strategy • Job analysis can help in deciding compensable factors • Determines what factors important for each work group • Include enough factors to establish a value difference, too few factors difficult to gauge different value of job, too many administratively burdensome

17. Compensable Factors as Defined by Equal Pay Act 1963 • Established generic factors as key criteria for determining whether jobs are substantially equal and serve as generic compensable factors • Skill • Effort • Responsibility • Working conditions

18. Elements Included Under Skill Factor • Experience – performance of job • Knowledge – education or minimum knowledge needed to perform job • Manual dexterity – specific movements • Analytical abilities – analyze, decipher or explore other possibilities • Creativity • Communications – Verbal or Written • Complexity of job –overall use of specific skills to perform the job

19. Case Study 2 • Read case study 2 on pages 448-449 and discuss the answers to the questions in groups of 4 - 5.

20. Theory Behind Compensation • Equity Theory • Comparing inputs and outputs of a similar co-worker • Perceived inequity affects employee effort • Expectancy Theory • People are motivated by intrinsic and extrinsic outcomes they desire. • People will only be motivated if outcome is possible. • People will only be motivated if outcome is contingent.

21. Relationship between Pay Equity and Motivation Relationship between Pay Equity and Motivation

22. Pay-for-Performance and Expectancy Theory

23. Common Strategic Compensation Goals • Reward employees’ past performance • Remain competitive in the labor market • Maintain salary equity among employees • Mesh employees’ future performance with organizational goals • Control compensation budget • Attract new employees • Reduce unnecessary turnover

24. External Factors for Pricing Jobs

25. What Determines Pay? • Company Factors • Strategy • Value of a job • Employee’s relative worth • Ability to pay • External Factors • Labor market conditions (unemployment) • Cost of living and local wage rates • Unions • Legal requirements

26. Foundation for defining your market and competitive position. • Compensation philosophy: • We use an external market-referenced approach to attracting and retaining top candidates in Southeast Michigan. We pursue all avenues to get what we want; no company is safe from our recruiting efforts. We strive to lead the market and pay more than the going rate to our employees based on demonstrated skill and performance– our money grows on trees. • What is the hiring and retention strategy? • What is the labor market? • What is the market position? Compensation Philosophy

27. Market-Pricing • Market Pricing – the process of analyzing external salary survey data to establish the worth of jobs as represented by the data. • Some form of market pricing is used by more than 80 percent of companies

28. How do you Learn Market Price? • Outside Sources of Data • Bureau of Labor Statistics (BLS) • National Compensation Survey • State and local wage surveys • Online survey data • Purchase data • Problems with Surveys • They are not always compatible with the user’s jobs • The user cannot specify what specific data to collect.

29. Collecting Survey Data • Conducting Employer-initiated Surveys • Select key jobs. • Determine relevant labor market. • Select organizations. • Decide on information to collect: wages/ benefits/ pay policies. • Compile data received. • Determine wage structure and benefits to pay.

30. Characteristics of Key Jobs • Key (Benchmark) Jobs • Jobs that are important for wage-setting purposes and are widely known in the labor market. • Characteristics of Key Jobs

31. Characteristics of Key Jobs • Key (Benchmark) Jobs • Jobs that are important for wage-setting purposes and are widely known in the labor market. • Characteristics of Key Jobs • They are important to both the employees and the organization. • They contain a large number of positions. • They have relatively stable job content. • They have the same job content across many organizations. • They are acceptable to employees, management, and labor as appropriate for pay comparisons.

32. Data Analysis Taking accurate measurements based on the foundation created • Target - Pay more than the going rate • The Median or 50th percentile is generally considered to be the going rate of pay for the position • Paying more than the going rate might could mean using the 75th percentile for competitive positioning

33. Salary Ranges/Bands • Some Basics • Salary ranges have a minimum, midpoint, and maximum (some companies use quartiles or thirds) • Difference between minimum and the maximum is the “spread” • Minimum often reflects starting salary • Reviewed and updated annually • Typically midpoint is geared to the market • Employees above maximum “overpaid”, below minimum “underpaid” • Decide on Ranges versus Bands (broader)

34. Broad Bands • Designed with wide range spreads (some even more than 100%) • Midpoint differentials of 20-25 percent • Provides flexibility to place group of jobs within same band and eliminate the focus of the job grade to promote lateral movement – focus of career movement on development and skill breadth not job grade

35. Narrow Pay Ranges versus Broader Pay Grades/Bands • Narrow pay ranges and more grades allow for more frequent promotions-and a greater perception of growth and advancement-than wider ranges and fewer grades. (WorldatWork)

36. Narrow Pay Ranges versus Broader Pay Grades/Bands • Narrow pay ranges and more grades allow for more frequent promotions-and a greater perception of growth and advancement-than wider ranges and fewer grades. (WorldatWork)

37. Skill Based Pay • Skill breadth – learning all the different positions in a team • Skill depth – increasing expertise as in an apprenticeship ladder • Vertical skills – management skills and knowledge of the business

38. Common Applications • Base-pay systems • Non-exempt employees • Manufacturing sector • Enhances employee involvement (such as self-managed teams)

39. Results Skill Based Pay Plans • Study of 97 skill based pay plans found 66% were successful • Increased workforce flexibility • Reduced staffing requirements • Increased productivity (58% improvement in productivity in one plant) • Longitudinal study 61% firms continued using SBP • Impressive results when using SBP but other factors play a part: • extensive training • engagement of employees in business • high level of communication

40. Example of Career Progression

41. Additional Information

42. The Bases for Compensation • Hourly Work • Work paid on an hourly basis. • Piecework • Work paid according to the number of units produced. • Salary Workers • Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.

43. Legal Issues Fair Labor Standards Act (FLSA) of 1939 • Exempt vs. non-exempt • Minimum wage • Overtime

44. Legal Issues • Nonexempt Employees • Employees covered by the overtime provisions of the Fair Labor Standards Act. • They must be paid time and one-half their regular pay for all work performed after forty regular hours of work in a workweek.

45. Exempt Employees • Employees who not covered in the overtime provisions of the Fair Labor Standards Act. • Managers, supervisors, and white-collar professional employees are exempted on the basis of their exercise of independent judgment and other criteria.

46. Fair Labor Standards Act (FSLA) Passed in 1938 and amended many times Nonexempt workers earn a minimum wage of not less than $5.85 an hour, effective July 24, 2007. ($6.55 per hour effective July 24, 2008; and $7.25 per hour effective July 24, 2009) Overtime pay at not less than one and one-half times regular pay is required after 40 hours a workweek. An employee must be at least 16years old to work in most non-farm jobs and at least18to work in non-farm jobs declared hazardous by the Secretary of Labor. Youths 14and 15years old may work outside school hours in various non-manufacturing, non-mining, non-hazardous jobs under certain conditions

47. FSLA – Special Cases Tipped employees Domestic service workers Teachers and administrative personnel in elementary and secondary schools Outside sales employees Employees in certain computer-related occupations Employees of certain seasonal amusement or recreational establishments Employees engaged in fishing operations Employees engaged in newspaper delivery Farm workers Casual babysitters Certain commissioned employees of retail or service establishments Employees of railroads and air carriers Taxi drivers Nurses Announcers of certain non-metropolitan broadcasting stations Employees of motion picture theaters Employees of certain bulk petroleum distributors Many others….

48. To be exempt from FLSA: Salary Basis Test Be paid a salary Salary Level Test Earn a minimum of $23,660/yr (old $8060/yr) White collar workers who earn more than $100k are exempt Blue collar workers “skilled trades” “Duties” Test “Administrative” “Professional” “Executive” “Outside Sales” “An employee who leads a team of other employees assigned to complete major projects”

49. “Administrative Duties” Whose primary duty (50%) is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

50. The Federal Wage Poster