Chapter 9: Compensation Management

Compensation is the cash and non-cash rewards employees receive in exchange for their work when properly administered, employees are satisfied and motivated to contribute to the achievement of organizational objectives Compensation programs help to maintain an organizations human resources issatisfaction arises because employee needs are affected by absolute !total amount paid to meet physiological and security needs" and relative !an employees pay compared with other workers to meet social and esteem needs" levels of pay

OBJECTIVES OF COMPENSATION ADMINISTRATION #c$uire $ualified personnel %etain present employees &nsure e$uity %eward desired behaviour Control costs Comply with legal regulations 'urther administrative efficiency - (hese objectives are not the rules- they are guidelines - )ajor *hases of Compensation )anagement !see 'ig +-, on p-,+." Phase I !identify and study jobs" /01 #2#34565 Phase II !internal e$uity" /01 &7#38#(602 Phase III !external e$uity" 9#:& #2 5#3#%4 58%7&45 Phase IV !matching internal and external worth" *%6C62: /015 JOB EVALUATION (he systematic process of assessing job content and ranking jobs according to a consistent set of job characteristics and worker traits *urpose is to identify which jobs should be paid more than others 6t is conducted by a group of subject-matter experts, usually made up of compensation specialists and representatives of line management responsible to the job!s" being evaluated (he point system is the most commonly used evaluation method as it provides, relatively, the best information regarding job values Job ranking &ach job is ranked subjectively according to its importance in comparison with other jobs 5implest and least precise 6mportant elements of some jobs may be overlooked while unimportant items are weighted too heavily oes not differentiate the relative importance of jobs and resulting pay levels may be inaccurate Job Grading #ssigns jobs to predetermined job classifications according to their relative worth to the organization 5ophisticated, but not precise )ore important jobs are paid more Point System #ssesses the relative importance of the jobs key factors in order to arrive at the relative worth of jobs )ore precise because it can handle critical factors in more detail ;

Chapter 9: Compensation Management

5tep;< etermine Compensable 'actors &x- Critical factors are responsibility, skill, effort and working conditions these can be broken down into sub-factors 5tep =< etermine 3evels !or egrees" of 'actors (hese levels help analysts to reward different degrees of responsibility, skills, and other critical factors 5tep ,< #llocate *oints to 5ubfactors 6n the point system matrix, points are assignment to each subfactor 5tep >< #llocate *oints to 3evels ! egrees" #llocate points across each row to reflect the importance of the different levels 5tep ?< evelop the *oint )anual *oint manual is a written explanation of each job element 5tep @< #pply the *oint 5ystem Compare job descriptions with the point manual for each subfactor the match reveals the level and points for each subfactor of every job *oints for each subfactor are added to find the total number of points for the job /obs are ranked WAGE AND SALARY SURVEYS Internal equit ! perceived e$uity of a pay system in an organization E"ternal equit ! perceived fairness in pay relative to what other employers are paying for the same type of work Wa#e an$ %alar %ur&e % ! discover what other employees in the same labour market are paying for specific key jobs Sources of Compensation Data 9age and salary surveys are benchmarks against which analysts compare compensation levels 0ne source is Auman %esources evelopment Canada )any consultants provide this survey service for their clientele Canada Auman %esource Centers also compile wage and salary information for distribution to employers # fourth source is an employer association, which surveys member firms &mployer association or professional associations may be the only sources of compensation data for highly specialized jobs )ajor problem with all these surveys is their varying comparability Survey Procedure 8sually only key jobs are used, then a sample of firms from the labour market is selected (hese organizations are contacted by phone or mail to learn what they are paying for the key jobs #ll jobs are ranked according to their relative worth, determined in the job evaluation process (hrough wage and salary surveys, the rate for key jobs in the labour market is known /obs are then priced PRICING JOBS Pay Levels (he appropriate pay level for any job reflects its relative and absolute worth =

Chapter 9: Compensation Management

%elative worth is determined by ranking in the job evaluation process #bsolute worth is influenced by what the labour market pays similar jobs Combine the job evaluation rankings and the survey wage rates in a scattergram, plotting the total points and wage level for each key job raw a wage-tren line as close to as many points as possible The Compensation Structure Compensation analysts find is more convenient to lump jobs together into jobs classes 6n the job grade approach, the grouping is already done, but with other methods, grouping is done by creating job grades based on the previous ranking, pay, or points (his causes the wage-trend line to be replaced with a series of ascending dashes all jobs in the same classes receive the same wage rate (oo many grades defeat the purpose of groupingB too few groupings result in workers with jobs of widely varying importance receiving the same pay *roblem is that exceptional performance cannot be rewarded to solve this use rate ranges for each class Rate ran#e ! pay range for each job class Merit rai%e ! a pay increase given to individual workers according to an evaluation of their performance !ex- C.-?. per hour for exceptional performance" 0nce the employee reaches the top of the rate range, no more wage increases will be forthcoming an across the board increase moves the entire wage-trend line upward C'ALLENGES AFFECTING COMPENSATION Prevailing Wage ates some jobs must be paid more than is indicated by their relative worth because of market forces forced to pay a premium re$()ir)le$ rate ! a rate of higher than the contractual, or formerly established, rate for the job silver-circle rate a rate higher than the maximum salary level paid to employees with a long job tenure gol -circle rate rate beyond the maximum level if an employee receives a special merit pay that does not fit into the established range green-circle rate paid less than the established minimum when salary cups !limits" are used !nion Po"er unions may be able to use their power to obtain wage rates out of proportion to their relative worth 5ometimes the union controls most or all of a particular skill, such as carpentry or plumbing this enables them to actually raise the prevailing rate for those jobs Productivity # company cannot pay workers more than they contribute back to the firm through their productivity 9hen this is a problem, redesign those jobs, train new workers, or automate Wage and Salary Policies )ay have policy to give nonunion worker the same raise as that received by unionized workers

Chapter 9: Compensation Management

*olicy of paying a premium above the prevailing wage rates to min turnover or to recruit the best workers Cost-of-living clauses that give employees automatic raises when the 5tats Canada cost-of-living index increases (hese policies move the wage-trend upward C*+,a(rati* ! an indicator of how the salary of an employee relates to the midpoint of the relevant pay grade Compa-ratio D 5alary of the employee E )idpoint of the pay grade 9hen finding this ratio for groups, use average of salaries paid in the numerator

Government Constraints Cana$a La-*ur C*$e sets re$uirements for minimum wage, overtime pay, e$ual pay, child labour, and record keeping %e$uires employers to pay at least a minimum hourly rate of pay regardless of the worth of the job, and one-and-a-half times the employees regular pay rate for all hours over >. per week &xecutive, administrative, professional, and other employees are exempt from the overtime provisions )inimum 9ages o #ll provinces have minimum wage legislation, typical for persons ;F and older Contracts with the :overnment o (he 'air 9ages and Aours of 3abour #ct applies to contracts made with the :overnment of Canada for all types of work mandatory to pay fair wages and establish an F hour work day 5taff %ecords o &very employer under federal jurisdiction must furnish information relating to wages of employees, their hours of work, general holidays, annual vacation, and conditions of employment whenever the )inistry of 3abour demands it o #ccurate records must be kept Criticisms of )inimum 9age %egulations o 6ncreased cost of production in Canada may eventually work against the workers rather than for them o 6ncreases in minimum wages are usually accompanied by increases in unemployment figures of low-skilled and young persons in the workforce PAY E.UITY Equal ,a /*r 0*r1 */ equal &alue ! the principle of e$ual pay for men and women in jobs with comparable contentB based on criteria of skill, effort, responsibility, and working conditionsB part of the Canadian Auman %ights #ct Pa equit ! jobs of comparable worth to the organization should be e$ually paid Equal ,a /*r equal 0*r1 2equal ,a 3! e$ual rates of pay for all employees in an establishment performing the same kind and amount of work, regardless of sex, race, or other characteristics of individual workers not related to ability or performance &xceptions to e$ual pay are allowed when a valid seniority or merit system exists, or when pay is determined by the employees production, such as sales commissions *ay e$uity concept makes it illegal to discriminate on the basis of job value !or content" >

Chapter 9: Compensation Management

(he gap exists because women have traditionally found work on lower-paying occupations, influenced by societys expectations and their role as a homemaker and mother 5kill, effort, responsibility, and working conditions form a composite measure (here are G reasonable factors that can justify differences in wages< different performance ratings, seniority, red-circling, rehabilitation assignment, demotion pay procedures, procedure of phased-in wage reductions, and temporary training positions o (hese justify only if applied consistently and e$uitably A% manager has to make sure that the companys pay system is in line with the provinces or the federal governments legislation< o %eview the organizations A% policies, procedures, and practicesB review recruiting and promotional decisionsB review A% planning techni$ues and proceduresB review current philosophy and rationale of the job evaluation plansB by specific positions and salary grade, examine the differential between earnings of men and womenB and review all employee benefits practices

Provincial Legislation *roactive laws in )anitoba and 0ntario by re$uiring employers to evaluate all jobs in an organization under a single, gender-neutral job evaluation scheme, and to apply the scheme to classes of work where one sex dominates %eactive laws in the remaining provinces deal with ine$uities only if brought to the attention of the A% commissions The Pay#$or#Performance %odel Per!ormance is the accomplishment of tasksB pro uctivity is the measure of output In)enti&e Pa ! directly linked to an employees performance or productivity *erformance determines a salespersons commission !income" 1enefit< better performance is reinforced on a regular basis $uick and fre$uent &mployer benefits because wages are given in proportion to performance, not for the indirect measure of time worked, and recruiting costs capital outlay costs are minimized isadvantages< administration of an incentive system is complex, standards and measures on jobs are too imprecise and costly to develop, causing ine$uities, sometimes workers make more than their supervisors, and uncontrollable forces may prevent employee from achieving the standard 8nions often resist incentive plans &ndividual &ncentive Plans *iecework compensated the worker for each unit of output oesnt always mean higher productivity because of group norms, difficulty of measuring a persons contribution, and employee may not be able to control the rate of output *roduction 1onuses incentives paid to workers for exceeding a specified level of output 8sed in conjunction with base wage rate or salary 0ne approach< employee receives a predetermined salary or wage extra effort supplements the base with a bonus #nother approach rewards the employee for saving time (hird approach combines production bonuses with piecework by hourly pay plus incentive payment for each unit produced Commissions salesperson paid a percentage of the selling price or a flat amount per unit ?

Chapter 9: Compensation Management

)aturity Curves a statistical device used to calculate compensation for workers based on their seniority and performanceB normally, such compensation plans are limited to professional and technical workers &xecutive 6ncentives executives granted stock options, have an incentive to improve the companys performance in order to enhance the value of the stock options #nother form is allowing them to design their own compensation package Team#based Pay (ends to foster group cohesion and organizational commitment Communication in teams tends to be more open, and decision-making can be more effective if a consensus approach is in the teams interest 0ften includes rewards for developing better interpersonal skills to improve cooperation and incentives for cross-training isadvantages< freeloader effect may take placeB if high performers do not receive satisfaction for their input they may cut back their contributionsB social pressure on high performers to lower their input to avoid drawing managements attention to low performersB might be too effective, resulting in competition between teams 5ee fig+-;> on p->;= for the differences between team-based and individual merit pay Team#based &ncentive Plans (eam %esults &mployee bonuses and salary increases are based on a teams overall results and are often shared e$ually *roduction 6ncentive *lans #llow groups of workers to receive bonuses for exceeding predetermined levels of output 5hort-range and related to very specific production goals )ay be offered a bonus or a per-unit incentive that results in a group piece-rate *rofit-5haring *lans 5hare company profits with the workers 3ow effectiveness because profitability is not always related to employee performanceB a recession or new competition may have a more significant impactB or because employees share of profits may be diverted into retirement plans , types of plan exist in Canada< ;- current distribution plans =- deferred payout plans !employee profit-sharing plans or deferred profit-sharing plans" ,- combination plans !combine ; and =" if companies are profitable, it is not known that the cause is the plan profitable companies with profit-sharing plans tend to have open and two-way communication between management and employees management tends to practice a participative management style &mployee 5tock 0wnership *lans !&50*s" give employees genuine ownership and voting power when it comes to major decision relating to the companys future

Chapter 9: Compensation Management

can be modeled to fit the special needs of the company< attract and retain employeesB motivate and improve productivityB rescue a failing firmB provide a source of additional financingB create something for firms to offer in lieu of wage and salary increase Cost-%eduction *lans reward employees for something they can control< labour costs tap employee effort and ideas for ways to reduce costs open new lines of communications that allow employee ideas to be heard allows greater psychological and financial preparation for the firms day-to-day operations S)anl*n Plan ! bases bonuses on improvements in labour costs, as compared with historical norms employees aim to reduce costs, and then they share in those savings 'ocus on something the employee can influence !cost", and not on something that employees may control only indirectly !profitability" 2on-)onetary %ewards Aighly motivational eg- *raise and recognition *ay 5ecrecy )anagement policy not to discuss or publish individual salaries 6f a pay policy is indefensible, disclosure may cause significant dissatisfaction among employees Aas = major effects< lowers the pay satisfaction of employees, and reduces the employees motivation to perform NEW APPROAC'ES TO PAY (raditional approach< paid for doing what their job descriptions list as job responsibilities or tasks 2ew approach< S1ill( *r 1n*0le$#e(-a%e$ ,a ! re$uires the identification of the tasks that have to be performed, the skills re$uired to complete the tasks, and the skills have to be priced so that pay rates can be determined Aut*n*+*u% 0*r1 #r*u,% 2lea$erle%% 0*r1 #r*u,%3 ! any of a verity of arrangements that allow employees to decide democratically how they will meet their groups work objectives :reatest advantage of skill-based pay is the flexibility of the workforce filling in after turnovers and covering for absenteeism #nother advantage is it may lead to leaner organizations !no extra workers" isadvantages< tends to generate higher pay rates, but if make good use of employees, total costs can be significantly lower 'ariable Pay 0bjective is the improve business performance through changed employee behaviour, to keep compensation competitive, and to control labour costs #dvantage< performance-linked able to incorporated the performance of individuals, groups, etc :reatest advantage is that the award must be re-earned each year and does not permanently increase base salary (he traditional approach has give way to a flexible, performance-driven system aimed at all or most levels of employees employers can use variable pay to provide incentives to employees to participate in workplace changes (roadbanding (he consolidation of a large number of pay grades into a few Hbroad bandsI G

Chapter 9: Compensation Management

#dvantages< assists in flattening large, hierarchical organizationsB encourages employees to broaden their skills and abilitiesB allows for a more flexible workforce and organizationB deemphasizes promotionB eases internal transfersB supports a new organizational climateB and simplifies paperwork isadvantages< doesnt have the salary control features of the traditional salary structureB maintaining pay e$uity may be more difficultB not easy to justify salary differentials between people at top of band and people at the bottom

Tailor#made Perks #llow employees to choose their rewards can be viewed as an extension of such developments as flexible work arrangements and benefit plans &nternational Pay (raditionally, when companies when international, they imposed the Hhome-country systemI on their overseas operations (he next generations strategy was to have each countrys operation choose A% policies based on local customs and values but impossible to integrate transnational organizational objectives (hird generation will preserve national cultural differences while maintaining organizational values which allow the application of a global strategy companies hire employees based on their expertise, not nationality PAY AND ORGANI4ATIONAL STRATEGY (he prere$uisite for developing a strategic pay plan is a clear corporate strategic agenda Concentrate on G areas that affect pay systems< o )otivating performance o 6dentifying valued rewards o %elating rewards to performance o 5etting performance goals o )otivation and punishment o )otivating skill and knowledge development o 'ostering attraction and retention Compensation principles originate from = sources< the overall strategy of the organization and its corporate values EMPLOYEE MOTIVATION (o be committed and productive, employees must be motivated M*ti&ati*n ! goal-directed behaviour 1ehaviour results from a felt need that a person wants to satisfy 6f the A% manager creates a job environment that allows personal needs to be satisfied, chances are that the organization will have motivated employees :oal-setting and expectancy models *ath-goal model, which says that clearly defined and realistic goals tend to increase productivity #n important factor in the expectancy model is role clarity, which affects the degree to which employees understand their job, its objectives, and their supervisors expectations (he expectancy model shows the application of all human resource functions no other motivation model offers such a complete utilization of the field of A% management F

Chapter 9: Compensation Management

MOTIVATION AND ORGANI4ATIONAL STRATEGY )anagers need to understand the managerial and organizational implications of the motivation process %ewards influence work efforts only when the rewards are values by employees (he motivational process also emphasizes the need to neutralize negative outcomes