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Compensation

Compensation is the reward that individuals receive in exchange for performing tasks A major cost of doing business The chief reason people seek employment

U.S. employers pay an average of $23.65 per hour worked $17.02 = straight-time wages and salaries $6.63 = benefits

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Compensation

Direct Indirect Non-financial

WagesSalary

BonusesCommissions

InsuranceVacationChildcare

PraiseSelf-esteemRecognition

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Objective of Compensation

Adequate

Acceptable toemployees

Providesincentive

Secure

Cost effective

Balanced

Equitable

Effectivecompensation

Effectivecompensation

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External Influences on Compensation

The EconomyThe Economy

UnionsUnions

Labor MarketLabor Market

GovernmentGovernment

External Influences

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Government Influences

The government requires employers to deduct fundsfrom employees’ wages for…

State and local income taxes

Federal income taxes

Social security taxes

If the government is the employer, it can legislate pay levels by setting statutory rates

The government may create jobs for certain categories of workers, thus reducing the supply of workers and affecting pay

rates

Other ways government influences compensation

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Union Influences

Unionized workers work longer hours and earn more than non-unionized workers

Unions exert influence on compensation programs

Unions are pacesetters in demands for pay, benefits, and improved working conditions

The Davis-Bacon Act requires employers with government contracts to pay prevailing wages

There is supportive interaction betweenunions and the government

The Wagner Act makes it illegal to change wage rates during a union organizing campaign

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The Labor Market and Compensation

Styles of managing and rewarding arechanging in response to diversity

Diversity is more than demographics; it means differing value, lifestyles,

even body types

Changing demographics require employersto offer more, and more varied,

benefits to motivate, satisfy, retain employees

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Legal Considerations

Discrimination:Must apply same decision rules to all employees eligible

for the reward or incentive.Employees protected by Title VII and Equal Pay Act.

Taxes and accounting rules:For example, those governing capital gains, deferred

compensation and stock plans.

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Pay is a powerful tool for meeting the organization’s goals. Pay has a large impact on employee attitudes and

behaviors. Pay influences the kinds of people who are attracted to (or

remain with) the organization. Employees attach great importance to pay decisions when

they evaluate their relationship with their employer.

Pay and Pay Decisions

Pay Decisions

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Factors Influencing Pay Decisions

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Legal Requirement for Pay

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Employers must not base differences in pay on an employee’s age, sex, race, or other protected status.

Any differences in pay must be tied to job responsibilities or performance.

The goal is equal pay for equal work.

Legal Requirement for Pay

Minimum wage is the lowest amount that employers may pay under federal or state law, stated as an $/hour.

The overtime rate is 1½ times the employee’s usual hourly rate; exempt employees (not covered by FSLA) do not get overtime…they are not hourly

Prevailing wage rules require federal contractors to pay their employees at rates at least equal to the typical wages in the area.

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Children aged 16 and 17 may not be employed in hazardous occupations defined by the U.S. Department of Labor.

Children aged 14 and 15 may work only outside school hours, in jobs defined as nonhazardous, and for limited time periods.

A child under age 14 may not be employed in any work associated with interstate commerce.

Exemptions include baby-sitting, acting, and delivering newspapers.

Child Labor Laws

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Product Markets The organization’s

product market includes organizations that offer competing goods and services.

Organizations compete on quality, service, and price.

The cost of labor is a significant part of an organization’s costs.

Labor Markets Organizations must

compete to obtain human resources in labor markets.

Competing for labor establishes the minimum an organization must pay to hire an employee for a particular job.

Economic Influences on Pay

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Pay Level: Deciding What to Pay

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Benchmarking – a procedure where an organization compares its own practices against those of others

Pay surveys Trade and industry groups Professional groups

Comparing Market Pay

Employees compare their pay and contributions by:

1. What they think employees in other organizations earn for doing the same job.

2. What they think other employees holding different jobs within the organization earn for doing work at the same or different levels.

3. What they think other employees in the organization earn for doing the same job as theirs.

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If employees conclude that they are under-rewarded, they are likely to make up the difference in one of three ways:

1. They might put forth less effort (reducing their inputs).2. They might find a way to increase their outcomes

(e.g., stealing).3. They might withdraw (by leaving the organization or

refusing to cooperate).Employees’ beliefs about fairness also influence their

willingness to accept transfers or promotions.

Pay Equity

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The Pay-Level Decision

Pay-level StrategiesPay-level Strategies

Attracts and holds the best

employees

High

Pacesetter

Minimum level needed to hire

enough workers

Low

All the company can pay

The going rate plus or minus

5 percent

Comparable

Most frequently used

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Pay Structure Steps

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Pay and Employees’ Satisfaction

Past expectations of receiving more rewards

Low expectations for the future

Discrepancy between comparison outcome and what they get

A feeling of deserving or being entitled to more

Not feeling personally responsible for poor results

Relative deprivation theory suggests that pay dissatisfaction is a function of six judgments…

Discrepancy between what workers want and receive

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Pay and Employees’ Productivity

Ability

Safety

Health

Goodleadership

& managers

Good workingconditions

Adequateequipment

Performancerequires

motivationplus…

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Pay and Employees’ Productivity

Some argue thatTying pay to performance destroys the intrinsic

reward of doing a job wellThe importance of money varies from person

to person

If an organization has an incentive pay system but pays for seniority, the motivation of pay is lost Be sure that compensation systems are directly

connected to expected behaviors