2 Discussions and 1 Case Study and 1 Weekly summary

Discussion 5.1

Many organizations are concerned about the rising cost of employee benefits and question their value to the organization and to the employees. In your opinion, what benefits are of greatest value to employees? To the organization? Why? What can management do to increase the value to the organization of the benefits provided to employees?

Discussion 5.2

When OSHA was enacted in 1970, it was heralded as the most important new source of protection for the U.S. worker in the second half of the twentieth century. From the information in this chapter, what is your opinion about the effectiveness or the ineffectiveness of the act? Should it be expanded, or it should businesses have more freedom to determine safety standards for their workers?

Case Study 5.1 4 pages

There are two (2) case studies per chapter. You are to respond to one (1) case from Chapter 9 and one (1) case study from Chapter 10.

Chapter 9 – Managing Compensation: (Choose one case study)

Case Study 1 – Pay Decisions at performance Sport, pg. 377 and answer the questions

Case Study 2 – An In-N-Out Pay Strategy: Costa Vida’s Decision to Boost Pay. pg. 378 and answer the questions

Chapter 10 – Pay for Performance: Incentive Rewards (Choose one case study)

Case Study 1 – United States Auto Industry Back on Top…of CEO Pay, pg. 413 and answer the questions

Case Study 2 – Team Based Incentives: Not Your Usual Office, pg. 414 and answer the questions

Weekly Summary 5.1

Write 2 pages from the chapter 9 and chapter 10 attached PPT

No Plagiarismon time

Chapter9: Managing Compensation

Case Study 1: Pay Decisions at Performance Sports

Katie Perkins’s career objective while attending Rockford State College was to obtain a degree in small

business management and to start her own business after graduation. Her ultimate desire was to

combine her love of sports and a strong interest in marketing to start a mail-order golf equipment

business aimed specifically at beginning golfers.

After extensive development of a strategic business plan and a loan in the amount of $75,000 from the

Small Business Administration, Performance Sports was begun. Based on a marketing plan that stressed

fast delivery, error-free customer service, and large discount pricing, Performance Sports grew rap- idly.

At present the company employs 16 people: eight customer service representatives earning between

$11.25 and $13.50 per hour; four shipping and receiving associates paid between $8.50 and $9.50 per

hour; two clerical employees each earning $8.25 per hour; an assistant manager earning $15.25 per

hour; and a general manager with a wage of $16.75 per hour. Both the manager and assistant manager

are former customer service representatives.

Perkins intends to create a new managerial position, purchasing agent, to handle the complex duties of

purchasing golf equipment from the company’s numerous equipment manufacturers. Also, the mail-

order catalog will be expanded to handle a complete line of tennis equipment. Since the position of

purchasing agent is new, Perkins is not sure how much to pay this person. She wants to employ an

individual with five to eight years of experience in sports equipment purchasing.

While attending an equipment manufacturers’ convention in Las Vegas, Nevada, Perkins learns that a

competitor, East Valley Sports, pays its customer service representatives on a pay-for-performance

basis. Intrigued by this compensation philosophy, Perkins asks her assistant manager, George Balkin, to

research the pros and cons of this payment strategy. This request has become a priority because only

last week two customer service representatives expressed dissatisfaction with their hourly wage. Both

complained that they felt underpaid relative to the large amount of sales revenue each generates for

the company.

Questions

1. What factors should Perkins and Balkin consider when setting the wage for the purchasing agent

position? What resources are available for them to consult when establishing this wage?

2. Suggest advantages and disadvantages of a pay- for-performance policy for Performance Sports.

3. Suggest a new payment plan for the customer service representatives.

Case Study 2: An In-N-Out Pay Strategy: Costa Vida’s Decision

to Boost Pay

For many businesses in today’s belt-tightening economy, decisions on pay need to be strategic to ensure

that employees are treated fairly and to ensure that businesses can remain viable. This requires knowing

what your competitors pay their employees and knowing your own salary budget. But knowing what

your competitors are paying can be both valuable and painful.

As a primary stakeholder and former CEO of Costa Vida, a fast-growing chain of fresh Mexican

restaurants, Nathan Gardner knew he was competing against some restaurant chains with competitive

compensation systems. Costa Vida is a fresh Mexican grill featuring Baja-inspired foods that are made

from scratch daily. Following a trip to Cabo San Lucas on the Baja Coast in Mexico, Costa Vida founders

JD and Sarah Gardner were inspired with a vision: Bring the freshly made local cuisine with the vibrant

lifestyle to the United States. They started their first restaurant in 2001, and after just 13 years, Costa

Vida has more than 50 franchises in Arizona, California, Colorado, Idaho, New Mexico, Missouri,

Oklahoma, Texas, Washington, Utah, and as of 2013 two stores in Canada. One of the main challenges

Costa Vida faces is the fierce competition for customers as well as employees. “You’d be surprised how

much of a difference having good employees in all areas of the business makes,” commented Nathan.

“For the fast-casual food industry,” remarked Nathan, “you are dependent upon your people. If you

don’t treat your people well, they won’t treat your customers well. If your customers aren’t treated

well, you have no business.” For months, Nathan agonized over how he could develop a competitive

compensation plan that matched the objectives of the organization, but that fell in line with the tight

budget of each in- dividually owned franchise unit. He stated, “We, of course, leave the final

compensation decision to the franchise owner, but we do all we can to educate and persuade our

franchisees to be competitive and fair. In the long run, this is how they can maintain a superior level of

customer satisfaction.”

Nathan pointed out that a strong benchmark for them has been In-N-Out Burger. In-N-Out started in

California and is known for its great compensation package. They start out all their new “associates”

(aka employees) at a minimum of $10 an hour. They also offer flexible schedules to accommodate

school and other activities, paid vacation, free meals, and a 401k retirement plan. For full-time

associates they provide medical, dental, vision, life, and travel insurance coverage. Their reason for

paying so high is based on a strategy that lower turnover and more committed workers will lead to

better service. “What In-N-Out does for their employees is truly amazing,” commented Nathan. “We

often see employees moving from one fast-food chain to another, but we rarely see employees coming

from In-N-Out.”

Nathan had a tough challenge ahead in trying to convince his franchise owners and managers to think

more strategically about their pay systems. He needed to help them realize that paying wages and

offering other compensation benefits that were better than their competitors may mean lower profit

margins up front, but that the returns would be greater in the long run. He also needed to offer

evidence to show that this was not just about being fair, but it was about being strategic. The restaurant

business is a fast and fierce industry and companies come and go all the time. What was it going to take

for Costa Vida to stay for the long haul?

Questions

1. Why is it important for pay to be externally fair?

2. Why is it important for pay to be internally fair?

3. What should Costa Vida’s compensation strategy look like? Hint: What are the company objectives

and how can employee pay help to achieve those objectives?

4. What should the pay structure look like? What pay mix would you recommend?

5. How should Nathan communicate a new compensation strategy to his franchisee owners and

managers?

6. What effect will paying higher wages have on Costa Vida in the short term? What effect will it have in

the long term? Explain.

Chapter 10: Pay-for-Performance: Incentive Rewards

Case Study 1: United States Auto Industry Back on Top … of

CEO Pay

During the financial crisis, many executives’ pay was stifled, reduced, or even withheld. Among the

hardest hit was the U.S. auto industry. Shareholder groups, union leaders, political officials, and the

general public all demanded change in the way auto industry executives were getting rich while their

cars were get- ting poor. For example, Ford made some major cuts for its executives and its employees.

This is why people were shocked to find out that for 2011 the CEO of Ford, Alan Mulally, was to receive

$56.5 million in stock awards. Even today, it is one of the richest pay packages ever given to a top

executive in the auto industry—and it is even after all the clamor over sky-high executive paychecks. Is it

too much?

That depends on who you ask. For most, it seems unreasonable that a boss would make more than

1,000 times the pay of the average worker. However, if you ask Ford workers who have seen Mulally

steer Ford back from the edge of bankruptcy, they probably would not complain too much. If you asked

Ford’s shareholders, it would be hard for them to overlook the fact that Ford shares have gone from

$1.56 when Mulally first took over to $14 a share. If you ask Ford dealers, they may be too busy selling

one of the strongest lineups of cars around to answer.

Of course, no one really knows if Ford would have been sitting in such a good position regardless of

Mulally. On the other hand, there are plenty of companies that would be willing to pay $50 million if

they knew their company would rebound as Ford has under Mulally.

Questions

1. Are CEOs and key corporate executives worth the large pay packages they receive? Explain.

2. Do you agree with Peter Drucker that corporate executives should receive compensation pack- ages

no larger than a certain percentage of the pay of hourly workers? Explain.

3. Will the Dodd–Frank Wall Street Reform and Consumer Protection Act giving shareholders the right to

vote on executive pay influence the size of these packages in the future? Explain.

Case Study 2: Team-Based Incentives: Not Your Usual Office

Done-Deal Paper Inc. operates throughout central Pennsylvania with offices in Scranton, Harrisburg, and

Altoona. Providing paper and paper needs to most of Central Pennsylvania, Done-Deal is one of the top

two competitors in the area.

In January 2014, Conner Carell, office manager of one of the branch offices for Done-Deal somehow

convinced company president and CEO Bailey Zucker that they needed to change the way their sales

representatives were incentivized. He argued, “putting our sales reps into teams will not only increase

cooperation, but it will increase sales … right now there are too many sales being lost that could have

been won through a team effort.” Most of the time, sales made to clients required multiple interactions

by multiple reps anyway. Bailey agreed with Conner and pointed out that teamwork can also improve

morale and synergy. Based on these assessments, Conner organized his twenty sales reps into four

teams of five reps. Sales teams would pool their commissions regard- less of who initiated and worked

on the sale. After the first year of this team-based incentive program, sales commissions across the four

groups varied dramatically. For instance, the highest paid employees in a team made, on average,

$50,000 more than the lowest paid team members.

During August 2012, Conner sent to all 20 sales reps a survey requesting feedback on the satisfaction

with teams and, specifically, the team-based incentive rewards program. While survey results were

generally positive, not everyone was happy in the office. Problems could be grouped into the following

categories:

1. Some sales representatives believed that various team members did not “buy into” the team concept

and were simply “free riding”—benefiting from the efforts of higher performing reps.

2. There was a general feeling that some teams were assigned difficult regions that prevented them

from achieving higher sales.

3. Teams did not always display the motivation and synergy expected, since “bickering” was prevalent

between stars and their lesser performing peers. Average performers complained that star reps made

them look bad.

4. At least a third of the sales staff felt the incentive rewards program was unfair and asked for a return

to individual sales incentives.

Questions

1. Do results from the survey illustrate typical com- plaints about teams and specifically about team

incentive rewards? Explain.

2. If appropriate, what changes would you recommend to improve the incentive reward program? Be

specific.

3. Would management have benefited from employee involvement in the initial design and

implementation of the program? Explain.

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Outcomes
Implement a strategic incentive program
Detect when and what types of individual incentives are appropriate
Differentiate how gains may be shared with employees under different group incentive plans like the Scanlon and Improshare gainsharing systems

Learning Outcomes
Differentiate between profit sharing plans and explain advantages and disadvantages of these programs as an alternative to individual and group incentive systems
Understand how to apply different incentive systems designed for professionals and executives

Strategic Reasons for Incentive Plans
Variable pay: Tying pay to some measure of individual, group, or organizational performance
Attached to fixed costs allowing flexibility to increase, decrease, or maintain future payments to employees as business conditions warrant
Allows the organization to align its employees’ interests and outcomes with the organization
*

Strategic Reasons for Incentive Plans
Incentive pay plans
Establish a performance threshold for employees to qualify for incentive payments
Emphasize a shared focus on organizational objectives
By broadening the opportunities for incentives to employees
Creates an operating environment supporting shared commitment
Through belief that every individual contributes to organizational performance and success
*

Figure 10.1 – Types of Incentive Plans
*

Incentive Plans as Links to Organizational Objectives
Purpose of incentive plan
Encourages employees to assume ownership of their jobs, thereby improving effort and job performance
Motivates employees to expend more effort than under hourly and/or seniority-based compensation systems
Supports a compensation strategy to attract and retain
top-performing employees
*

Advantages of Incentive Pay Programs
Focus employees on specific Performance targets
Incentive payouts are variable costs linked to the achievement of results
Base salaries are fixed costs unrelated to output
Directly related to operating performance
Encourage teamwork when payments are related to team results
*

Advantages of Incentive Pay Programs
Distribute success among those related to producing that success
Increase equity and justice
Means to reward or top performers when salary budgets are low
*

Requirements for a Successful Incentive Plan
Identify important organizational metrics encouraging employee behavior
Involve employees
Incentive programs should seem fair to employees
Find the right incentive payout
Payout formulas should be simple and understandable
Establish a clear link between performance and payout
*

Setting Performance Measures
Should distinguish between individual and group contributions
Should avoid biases based on likes and dislikes, different personalities, and political agendas
Should distinguish between one group’s contribution over another
*

Problems With Incentive Plan
Can be traced to the choice of performance measures
Overly quantitative, complex measures should be avoided
Selection of performance measure need to evaluate the extent to which employees involved can influence the measurement
Avoid intensifying performance goals continuously trying to exceed previous results
Leads to employee frustration and perception that the standards are unattainable
*

Figure 10.3 – Measurement DOs and DON’Ts
*

Administering Incentive Plans
Thorough planning must be combined with a cautious approach
Effective administration of incentive plans requires:
To motivate performance implying that poor performance must go unrewarded
Annual salary budgets to be large enough to reward and reinforce exceptional performance
Determination of overhead costs associated with plan implementation and administration
*

Individual Incentive Plans – Piecework
Straight piecework: Incentive plan under which employees receive a certain rate for each unit produced
Differential piece rate: Employees whose production exceeds the standard amount of output receive a higher rate for their work than the rate paid to those who do not exceed the standard amount
*

Individual Incentive Plans – Piecework
Benefits of piecework
Wage payment for each employee is simple to compute
Permits organizations to predict its labor costs with accuracy
Since the costs are the same for each unit of output
Computing the piece rate
Based on hourly wage rates that would otherwise be paid for the type of work being performed
*

Disadvantages of Piecework
Not an effective motivator
Desire for peer approval outweighs the desire for more money
Difficult to distinguish or measure individual contributions
Not applicable to highly mechanized work where employee has little control over output
Works against organizational culture as it can infringe on employee’s time, productivity, and total pay earned
*

Individual Incentive Plans – Standard Hour Plan
Sets rates based on the completion of a job in a predetermined standard time
Popular in service departments in automobile dealerships
Equipment maintenance and product quality can be at risk as employees strive to work faster to earn additional income
*

Individual Incentive Plans – Bonus
Supplemental to the base wage
Provides employees with more pay for exerting greater effort along with having the security of basic wage
Acts as tool to increase future performance
Spot bonus: Unplanned bonus given for employee effort unrelated to an established performance measure
Useful for retention and motivation of overburdened employees, during lean financial times
*

Individual Incentive Plans – Merit Pay
Links an increase in base pay to how successfully an employee performs his or her job
Becomes part of base pay once issued regardless of future performance
Serves as motivator to employees perceiving a raise to be related to the performance required to earn it
Merit guidelines: Used for awarding merit raises that are tied to performance objectives
*

Problems with Merit Raises
Money available for merit increases may be inadequate to satisfactorily raise all employees’ base pay
Managers may have no guidance in how to define and measure performance
Employees may not believe that compensation is tied to effort and performance
Unable to differentiate between merit pay and other types of pay increases
*

Problems with Merit Raises
Employees and managers may hold different views of the factors contributing to job success
Creates feelings of pay inequity
*

Individual Incentive Plans – Awards and Recognition
Awards
Used to recognize productivity gains, special contributions or achievements, and service to the organization
Tangible awards presented with the right message and style can make employees feel appreciated
Simultaneously underscoring a company
Recognition
Conduit that shows employees that the company appreciates their efforts, their unique gifts, and their contributions
*

Individual Incentive Plans – Sales Incentives
Unique needs of sales incentive plans
Performance standards for sales employees are difficult to develop because performance is affected by external factors
Sales volume may not be an accurate indicator of the effort salespeople have expended, hence salespeople are entitled to a degree of stability in their income
*

Types of Sales Incentive Plans
Permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume
Straight salary plan
Based on percentage of sales
Straight commission plan
Includes a straight salary and commission
Combination salary and commission plan
Pays a salary plus a bonus achieved by reaching targeted sales goals
Sales plus bonus plan
*

Group Incentive Plans – Team Compensation
Team incentive plans: All team members receive an incentive bonus payment when production or service standards are met or exceeded
Advantages
Establishes a psychological climate that fosters cooperation and a collective desire to fulfill organizational goals and objectives
Promotes a pay-for-performance philosophy
*

Group Incentive Plans – Team Compensation
Approaches in establishing team incentive payments
Set performance measures upon which incentive payments are based
Determine the size of the incentive bonus
Create a payout formula and should be explained to employees in detail
*

Group Incentive Plans – Team Compensation
Problems associated with team compensation
Individual team members may perceive that their efforts contribute little to team success or to the attainment of the incentive reward
Intergroup social problems
Complex payout formulas or insufficient payout reward
*

Group Incentive Plans – Gainsharing Incentive Plan
Programs under which both employees and the organization share financial gains by a predetermined formula
Reflects improved productivity and profitability
Increase in productivity is gained when:
Greater output is obtained with less or equal input
Equal production output is obtained with less input
*

Variations of Gainsharing Plans
Bonus incentive plan using employee and management committees to gain cost-reduction improvements
Scanlon plan
Gainsharing program where bonuses are based on the overall productivity of the work team
Improshare
*

Figure 10.4 – Scanlon Plan Suggestion Process
*

Enterprise Incentive Plan – Profit Sharing
Procedure by which an employer pays, or makes available to all regular employees, special current or deferred sums based on the organization’s profits
Advantages
Gives employees the opportunity to increase their earnings by contributing to the growth of the organization’s profits
Stimulates employees to think and feel like partners in the enterprise
Garners total commitment from employees rather than specific areas
*

Enterprise Incentive Plan – Profit Sharing
Disadvantages
Profits shared with employees may be the result of factors over which employees have no control
Decreased motivational value as profit sharing payments are made once a year or deferred until retirement may reduce their motivational value
If failed to pay off for several years in a row, has an adverse effect on productivity and employee morale
*

Enterprise Incentive Plan – Stock Options
Method of motivating and compensating hourly employees, salaried and executive personnel
Advantages
Implemented as part of an employee benefit plan or as part of a corporate culture
Links employee effort to stock performance
Boosts morale of disenfranchised employees in budget cuts and downsizing
Disadvantage
Extravagance of executive stock option plans and dubious corporate accounting procedures
*

Enterprise Incentive Plan – Employee Stock Ownership Plans (ESOPs)
Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees
Employer establishes an ESOP trust that qualifies as a tax-exempt employee trust under Section 401(a) of the Internal Revenue Code
Stock allocations are based on employee wages or seniority
*

Enterprise Incentive Plan – Employee Stock Ownership Plans (ESOPs)
Employees leaving or retiring can sell their stock back to the organization, or sell it on the open market if traded publicly
Advantages
Usage is encouraged by favorable federal income tax provisions
Provides retirement benefits for the employees
Employers can provide retirement benefits to the employees at relatively low cost
Increases employees’ pride of ownership in the organization
*

Enterprise Incentive Plan – Employee Stock Ownership Plans (ESOPs)
Disadvantages
Privately held companies are incapable to pay back the stock of employees when they retire
Pensioner becomes dependent on the price of company stock
Future retirees are vulnerable to stock market fluctuations and management mistakes
Not guaranteed by federally established Pension Benefit Guaranty Corporation
*

Incentives for Professional Employees
Professional employees
For many professions, the primary incentive system is based on an up or out model
Junior professionals are hired and are given a set amount of time to make valuable contributions to become a partner
Motivation is influenced by their increased mobility across companies
Can receive compensation beyond base pay
*

The Executive Pay Package
Components
Base salary
Short-term incentives or bonuses
Long-term incentives or stock plans
Benefits
Perks
*

The Executive Pay Package
Executive base salaries
Represents 30 or 40 percent of total annual compensation
Largest portion is received in long-term incentive rewards and bonuses
Influenced by levels of competitive salaries in the job market
*

The Executive Pay Package
Executive short-term incentives
Annual bonuses form the main element
Bonus payment in form of cash or stock and may be paid immediately, deferred for a short time, or deferred until retirement
Paid in cash, keeping with their pay-for-performance strategy
Based on:
Percentage of company’s total profits
*

The Executive Pay Package
Percentage of profits in excess of a specific return on stockholders’ investments
Annual profit plan where the amount is determined by the extent to which an agreed-upon profit level is exceeded
Executive long-term incentives
Offered in the form of stock options
Stock options serves to retain key executive personnel
Objected for the magnitude of rewards
*

The Executive Pay Package
Pay for performance option can be undermined when executives are granted additional options
Though company stock prices fall or performance indexes decline
Executive benefits
Benefits package offered to executives can be parallel to other groups of employees
Include programs for health insurance, life insurance, retirement plans, and vacations
Are broader in coverage and free of charge

The Executive Pay Package
Gives financial assistance in the form of trusts for estate planning, payment of mortgage interest, and legal help
Perks or perquisites: Special nonmonetary benefits given to executives
Means of demonstrating the executive’s importance to the organization
Cost is weighed against the added efficiency and managerial effectiveness generated as facilitates in company’s productivity

Executive Compensation: Ethics and Accountability
Justification of bonuses
Large financial incentives are a way to reward superior performance
Business competition is pressure-filled and demanding
Good executive talent is in great demand
Effective executives create shareholder value
Fact of business life, reflecting market compensation trends
*

Executive Compensation Reform
Internal Revenue Service (IRS) makes executive pay a part of every corporate audit
Securities and Exchange Commission issued pay disclosure rules requiring companies listed on the New York Stock Exchange and NASDAQ to disclose the true size of their top executive pay packages
Financial Accounting Standards Board (FASB) requires stock options to be recognized as an expense on income statements
*

Executive Compensation Reform
Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203) was signed into effect giving share holders say on pay
Voting shareholders of a company must ultimately approve of its executive salaries
*

Learning Outcomes
Distinguish a strategic compensation program from one that is non-strategic
Determine how to design pay systems
Estimate whether or not a pay system is consistent within the firm as well as comparable to industry standards and government laws
Be able to design a compensation scorecard
*

Compensation
Way to increase employee’s loyalty toward the organization
Directly linked to an employee’s livelihood
Strategic management ensures that costs are kept down keeping employees’ motivation and performance up
*

Strategic Compensation
Compensation of employees in ways that enhance motivation and growth
Aligns employee’s efforts with the objectives of the organization
Links the compensation to the organization’s mission and general business objectives
Serves to mesh the monetary payments made to employees with HR initiatives
*

Goals of Strategic Compensation Policy
To reward employees’ past performance
To remain competitive in the labor market
To maintain salary equity among employees
To mesh employees’ future performance with organizational goals
To control the compensation budget
To attract new employees
To reduce unnecessary turnover
*

Linking Compensation to
Organizational Objectives
Requires that managers be more strategic about their compensation decisions
Formalized compensation goals serve as guidelines for managers to ensure that wage and benefit policies achieve their intended purpose
Reward employees on the basis of their individual competencies or work contributions toward organizational objectives
*

Pay-for-Performance Standard
Standard by which managers tie compensation to employee effort and performance
Refers to a wide range of compensation options
Includes merit-based pay, bonuses, salary commissions, job and pay banding, team/group incentives, and gainsharing programs
*

Motivating Employees through Compensation
Pay equity: Employee’s perception that compensation received is equal to the value of the work performed
Distributive fairness – Motivation theory that explains how people respond to situations in which they feel they have received less/more than they deserve
*

Kinds of Pay Equity
*

Expectancy Theory and Pay
Expectancy theory
Predicts that one’s level of motivation depends on the attractiveness of the rewards sought and the probability of obtaining those rewards
Employees must believe that good performance is valued by their employer and will result in their receiving the expected reward
Motivational value of compensation is determined by employees’ view of compensation
*

Pay Secrecy
Generates distrust in the compensation system
Reduces employee motivation
Inhibits organizational effectiveness
Cover up inequities existing within the internal pay structure
Justified on the grounds that most employees prefer to have their own pay kept secret
*

Bases for Compensation
Hourly work: Work paid on an hourly basis
Piecework: Work paid according to the number of units produced
Hourly employees – Compensated on an hourly basis
Salaried employees – Compensation is computed on the basis of weekly, biweekly, or monthly pay periods
*

Bases for Compensation
Nonexempt employees: Covered by the overtime provisions of the Fair Labor Standards Act (FLSA)
Paid at a rate of one and a half times their regular pay rate for time worked in excess of forty hours in their workweek
Exempt employees: Not covered by the overtime provisions of the FLSA
U.S. Department of Labor (DOL) imposes a narrow definition of exempt status
*

Important Terms in Pay Mix
Consumer price index (CPI)
Measure of the average change in prices over time in a fixed market basket of goods and services
Escalator clauses
Labor agreements clauses that provide for quarterly cost-of-living adjustments in wages, basing the adjustments on changes in the CPI
Real wages
Wage increases larger than rises in the CPI, that is, the real earning power of wages
*

Job Evaluation
Systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization
Methods of comparison
Rank the value of jobs from highest to lowest
Classify jobs so they can be benchmarked internally and externally
Award points to each job based on how much they are linked to organizational objectives
*

Job Ranking System
Simplest and oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth
Disadvantages
Does not provide a very precise measure of each job’s worth
Final ranking of jobs indicates the relative importance of the job and not the differences in the degree of importance
Effective only with a small number of jobs
*

Job Classification System
System of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades
Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs
*

Point System
Quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it
Compensable factors – Used for evaluation of jobs quantitatively
Point manual
Handbook that contains a description of the compensable factors and the degrees to which
these factors may exist within the jobs
Used for comparing job descriptions and job specifications
*

Work Valuation
Job evaluation system that seeks to measure a job’s worth through its value to the organization
Work is measured through standards that come directly from business goals
Process ends with a work hierarchy that is an array of work by value to the organization
*

Hay Profile Method
Job evaluation technique to evaluate executive and managerial positions which uses
Knowledge
Mental activity
Accountability
*

Wage and Salary Surveys
Survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market
Labor market – Area from which employers obtain certain types of workers
Collecting survey data
Bureau of Labor Statistics (BLS) publishes wage and salary data
*

Wage and Salary Surveys
States conduct surveys on either a municipal or county basis and make them available to employers
Special surveys are conducted by the trade groups
Problems with published surveys
Not always compatible with the user’s jobs
User cannot specify what specific data to collect
HRIS and salary surveys
Survey Finder has a database of hundreds of compensation surveys offered by more than fifty independent vendors
*

Wage and Salary Surveys
Employer-initiated surveys
Employers have to select the jobs to be used in the survey and identify the organizations with whom they actually compete for employees
Using key jobs, survey data are tabulated and the compensation structure is completed
*

Competence-based Pay
Pay based on an employee’s skill level, variety of skills possessed, or increased job knowledge
Systems represent fundamental change in the attitude of management regarding:
How work should be organized
How employees should be paid for their work efforts
Encourages employees to acquire training when new or updated skills are needed by an organization
*

Broadbanding
Collapses many traditional salary grades into a few wide salary bands
Help eliminate the obsession with grades
Encourage employees to move to jobs in which they can develop in their careers and add value to the organization
*

Government Regulation of Compensation
Davis-Bacon Act of 1931
Walsh-Healy Act of 1936
Fair Labor Standards Act of 1938
Wage and hour provisions
Minimum wage and pay compression
Child labor provisions
Pay equity provisions
*

Minimum Wage and Pay Compression
Pay rate compression: Compression of pay between new and experienced employees caused by the higher starting salaries of new employees
Differential between hourly workers and their managers
Reasons for pay compression are market based than government based
*

Ideas for Minimizing Problems
Reward high performance and merit-worthy employees with large pay increases
Design the pay structure to allow a wide spread between hourly and supervisory employees
Prepare high-performing employees for promotions to jobs with higher salary levels
Provide equity adjustments for selected employees hardest hit by pay compression
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Child Labor Provisions and Pay Equity Provisions
Child labor provisions
Floor it imposes makes it difficult for high school students and young adults to find jobs
Pay equity provisions
The Equal Pay Act of 1963
Title VII of the Civil Rights Act of 1964
Age Discrimination Act of 1967
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Compensation Assessment
Assessing the effectiveness of compensation system is important to linking compensation with strategy
Measures
Help the company detect potential compensation problems
Make compensation decisions more transparent
Improve the alignment of compensation decisions with organizational objectives
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Compensation Assessment
Compensation scorecard: Displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units
Creates a comparative tool within the organization that can reinforce desired outcomes that are unique to the company’s strategy
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