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Components of Total Compensation

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  • Components of CompensationHow Do We Determine How Much To Pay Employees for Their Work?

  • Strategic Compensation PlanningStrategic Compensation PlanningLinks the compensation of employees to the mission, objectives, philosophies, and culture of the organization. (strategic congruence)Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-for-performance standard.Seeks to motivate employees through compensation.

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  • Linking Compensation to Organizational ObjectivesValue-added CompensationEvaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization.How does this compensation practice benefit the organization?Does the benefit offset the administrative cost?

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  • Compensation Management and Other HRM FunctionsFunctionHowConcept

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  • Components of Total Compensation

    Public Protection(legally required) Social SecurityUnemploymentDisability

    Public Protection Pensions Savings Supplemental unemployment Insurance

    Paid leave Training Work breaks Sick days vacation Holidays Personal

    MiscellaneousBenefits Legal advice Eldercare Daycare Wellness Counseling Moving Perks

    Basic Salary basic shift premium

    Performance-Based Pay Stock OptionsBonuses Merit Incentive

    Direct CompensationIndirect Compensation (Benefits)Intrinsic Rewards (nonmonetary) job security Status symbols Social rewards Task-self rewards

    Extrinsic Rewards (monetary)Total Compensation

  • The Concepts of Expectancy Theory&Equity TheoryIntrinsic Rewards(non-monetary)The motivation one receives from performing the work

  • Intrinsic Rewards(non-monetary)Joy from actually doing the jobSocializing with others at workPride derived from producing or something/providing serviceSecurity from belongingMotivation TheoriesMaslow, Herzberg, McGregor, etc.

  • Expectancy Theory and PayExpectancy TheoryA theory of motivation that holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that they value.Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.

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  • ValueOf rewardPerceivedEffort RewardedRolePerceptionsExtrinsicRewardsPerformanceEmployeeEffortAbilities& TraitsIntrinsicRewardsPerceivedEquitablerewardsSatisfactionPorter-Lawler Expectancy Model

  • Relationship between Pay Equity and MotivationDoing More and Receiving LessDoing the Same and Receiving the SameDoing Less and Receiving MoreThe greater the perceived disparity between my input/output ratio and the comparison persons input/output ratio, the greater the motivation to reduce the inequity.

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  • Pay-for-Performance and Expectancy Theory

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  • Equity TheoryPay, benefits,opportunities, etc.OUTCOMEINPUTSOUTCOMEINPUTSA person evaluates fairness by comparing their ratio with others.effort, ability,experience etc.?the same,more or less< = >

  • Three Employee Views of the Pay DecisionPay Level- Same job in Different organizations

    Pay Structure - Different jobs in Same organization

    Individual Pay Differences - Different people in Same job

  • Market Pressures in Developing Pay LevelsProduct-market competitionupper bound on labor coststaffing levelaverage cost per employeeLabor-market competitionlower bound on pay levelsDeciding What to Pay Product-market competition

    upper bound on labor coststaffing levelaverage cost per employee Labor-market competition

    lower bound on pay levels

  • Total Compensation - ExtrinsicDirectIndirectBonusesGainsharingSecurity Plans Pensions

    Employee Services Educational assistance Recreational programs

    CommissionsWages / SalariesInsurance Plans Medical Dental Life

    Time Not Worked Vacations Breaks Holidays

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  • Direct Compensation What an employee gets $$$ for performing work

  • Factors Affecting the Wage Mix

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  • Davis-Bacon Act1931Required minimum wage, prevailing wage rates, 1 overtime premium payments by federal contractors.Walsh-Healy Act1936Required overtime payments after 8 daily or 40 regular work hours for workers on federal contracts.Fair Labor Standards Act (FLSA) 1938(as Amended)Interstate commerce clause used to cover workers except agricultural and exempted (managerial) employees, child labor (under 16) is prohibited.Government Regulation of Compensation(Federal Wage Laws)

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  • The Equal Pay Act: The Jurys Still OutHas the Equal Pay Act been effective in raising the wages of women relative to the wages of men? That depends on whom you ask and the importance you place on government statistics. Fifty-nine cents on the dollar was the rallying cry of the womens movement more than thirty years ago to illustrate the large gap between the wages of women and men. That is, for every dollar that a man made, a woman earned fifty-nine cents. Currently, government wage figures based on the usual weekly earnings of full-time wage and salary workers peg womens average pay at 80.1 percent of mens compensation. Unfortunately, the gain in womens wages relative to mens wages has not changed significantly in recent years, as the following figures show.Source: Median usual weekly earnings of full-time wage and salary workers by sex, age, race, and Hispanic or Latino ethnicity, current dollars 19792004. Unpublished tabulations from Current Population Survey, Bureau of Labor Statistics, 2004. Data at www.bls.gov.

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  • The Wage Curve

    Wage CurveA curve in a scattergram representing the relationship between relative worth of jobs and wage rates.Pay GradesGroups of jobs within a particular class that are paid the same rate.Rate RangesA range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade.Red Circle RatesPayment rates above the maximum of the pay range.

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  • Freehand Wage Curve

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  • Single Rate Structure

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  • Wage Structure with Increasing Rate Ranges

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  • The Wage Curve Competence-based Pay, (also skill-based pay or knowledge-based pay)Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category.Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover,BroadbandingCollapses many traditional salary grades into a few wide salary bands.

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  • The Wage Curve Merit Pay - annual base pay increases linked to performance appraisals (step increases)Incentive Pay - performance not linked to base pay; usually measured as physical outputProfit Sharing based upon measure of organizational performance; not a part of base salary Ownership - Gain Sharing

  • Executive Compensation

  • HistoryBusiness Leader wages expected to rise dramatically!

  • 1940-1950 Conservative Corporate Pay

    Post Depression Era Little Foreign Competition Executive Pay Rises Slower than Worker Pay Boom Period Stock Options Introduced

  • 1960s Conglomerates Emerge

    Corporations Diversify Assets

    Stock Options Become Popular

    Foreign Competition Begins

  • 1970s Decade of Change

    1970 - 1974 Recession/Stock market Declines Stock Options Lose Favor

    1975 1980 Baseball Free Agency Bull Market Begins Stock Options Regain Popularity

  • 1980sExecutive Compensation Takes Off!

    Stock Options Overtake Salaries

    Free Agency in Organizations

    Joint Ventures/Mergers/Takeovers

    U.S. Threatened by Foreign Competition

    Golden Parachutes

  • 1990s Dot Com Bust & Ethics Issues

    Corporate Profits Remain High Accounting Scandals Enron Arthur Anderson Deloitte & Touche Ernst & Young Etc.

  • 2000sNew Century of Change/Correction September 11, 2001 Corporations on Trial Sarbanes-Oxley (SOX) Performance Based Pay Do more with less ERP (Enterprise Resource Planning) associating/controlling pay via computer Financial Accounting standards Board (FASB) landmark change (2004) that required companies to expense options on financial statements

  • Indirect CompensationDealing with employee benefits

  • Social Insurance (legally required)

    Social Security About 8% employer and employee tax on wages Additional Medicaid tax of 1.45% Also includes dependent coverage and Long-term Disability

    Unemployment Compensation Tax rate on employers is based on use/environment Eligibility: work 1 year - not on strike, quit or fired for cause

    Workers Compensation Disability, medical care, death benefit & rehabilitation 2/3 of earnings are tax free Rate based on risk and organizations experience rating

  • Types of Employee BenefitsRequired By LawDiscretionaryHealth careUnemployment InsuranceWorkers CompensationPayment for time not workedSupplementalUnemployment BenefitsSocial SecurityUnpaid leave (FMLA)Life and LT care insuranceRetirements and pensions

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  • Social Security InsuranceBenefits paid are determined by an individuals life-time earningsProvides long-term disability benefitsSocial Security Act (1935)A payroll tax on both employees and employersOld Age and Survivors Insurance (OASI)Must work 40 quarters in an occupation covered by Act to qualify for benefits

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  • Unemployment InsuranceFederal payroll tax on employer and employeeTax is refunded to states which individually administer unemployment compensation programs.Unemployment benefits vary from state to state.Involuntarily unemployed workers are eligible for up to 26 weeks of unemployment benefits.Benefit is based on an employees recent earnings.Unemployed workers are required to seek suitable employment.

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  • Workers Compensation InsuranceWorkers Compensation InsuranceFederal- or state-mandated insurance (funded by an employer payroll tax) provided to workers to defray the loss of income and cost of treatment due to work-related injuries or illness.Factors influencing the employers insurance rate:The risk of injury or illness for an occupationEach states level of benefits for injuries sustained by employees varies.The companys frequency and severity of employee injuries (the companys experience rating).

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  • Workers Compensation InsuranceCovers EmployersCovers EmployeesCost of injuryNegligent co-workersContributory negligenceTemporary, Permanent,Partial or Total DisabilityAssumed employment riskSurvivors InsuranceInjury is a cost of doing business

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  • Growth of Employee Benefits:Percentage of Wages and Salaries

    Percentage1929 55 65 75 86 88 90 93 9640%30%20%10%

    3.017.021.530.035.541.337.9

    36.7

    41.3

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