Components of Components of CompensationCompensation

How Do We Determine How Much To Pay Employees for

Their Work?

Strategic Compensation PlanningStrategic Compensation Planning• Strategic Compensation Planning

– Links 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.

Linking Compensation to Linking Compensation to Organizational ObjectivesOrganizational Objectives

• Value-added Compensation– Evaluating 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?”

Compensation Management and Compensation Management and Other HRM FunctionsOther HRM Functions

Pay rates affect selectivityPay rates affect selectivity SelectionSelection Selection standards affect Selection standards affect level of pay requiredlevel of pay required

Pay can motivate trainingPay can motivate training Training and Training and DevelopmentDevelopment

Increased knowledge leads Increased knowledge leads to higher payto higher pay

Training and development may Training and development may lead to higher paylead to higher pay

Compensation Compensation ManagementManagement

A basis for determining A basis for determining employee’s rate of payemployee’s rate of pay

Aid or impair recruitmentAid or impair recruitment RecruitmentRecruitment Supply of applicants Supply of applicants affects wage ratesaffects wage rates

Low pay encourages Low pay encourages unionizationunionization Labor RelationsLabor Relations Pay rates determined Pay rates determined

through negotiationthrough negotiation

FunctionFunction HowHowConceptConcept

Components of Total CompensationComponents of Total Compensation

Public Protection(legally required)• Social Security•Unemployment•Disability

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 Options•Bonuses• 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 TheoryExpectancy Theory

&&Equity TheoryEquity Theory

Intrinsic RewardsIntrinsic Rewards(non-monetary)(non-monetary)

The motivation one receives from performing the work

Intrinsic RewardsIntrinsic Rewards(non-monetary)

• Joy from actually doing the job• Socializing with others at work• Pride derived from producing or

something/providing service• Security from “belonging”• Motivation Theories

– Maslow, Herzberg, McGregor, etc.

Expectancy Theory and PayExpectancy Theory and Pay• Expectancy Theory

– A 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.

ValueOf reward

PerceivedEffort Rewarded

RolePerceptions

ExtrinsicRewards

PerformanceEmployee

Effort

Abilities& Traits

IntrinsicRewards

PerceivedEquitablerewards

Satisfaction

Porter-Lawler Expectancy ModelPorter-Lawler Expectancy Model

Relationship between Pay Equity and MotivationRelationship between Pay Equity and Motivation

Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less and Receiving More

The greater the perceived disparity between my input/output ratio and the comparison person’s input/output ratio, the greater the motivation to reduce the inequity.

Pay-for-Performance and Expectancy TheoryPay-for-Performance and Expectancy Theory

Equity TheoryEquity Theory

Pay, benefits,opportunities, etc.

OUTCOMEINPUTS

OUTCOMEINPUTS

A person evaluates fairness by comparing their ratio with others.

effort, ability,experience etc. ?

the same,more or less

< = >

Three Employee Views of the Pay Three Employee Views of the Pay DecisionDecision

Pay Level- Same job in Different organizations

Pay Structure - Different jobs in Same organization

Individual Pay Differences - Different people in Same job

Market Pressures Market Pressures in Developing Pay Levelsin Developing Pay Levels

Product-market competitionupper bound on labor cost

staffing levelaverage cost per employee

Labor-market competitionlower bound on pay levels

Deciding What to Pay

• Product-market competitionupper bound on labor cost

staffing levelaverage cost per employee

• Labor-market competitionlower bound on pay levels

Total Compensation - Total Compensation - ExtrinsicExtrinsic

Direct IndirectIndirect

Bonuses

Gainsharing Security Plans• Pensions

Employee Services• Educational assistance• Recreational programs

Commissions

Wages / Salaries

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays

Direct CompensationDirect Compensation

What an employee gets $$$ for performing work

Factors Affecting the Wage MixFactors Affecting the Wage Mix

Davis-Bacon Act1931

Required minimum wage, prevailing wage Required minimum wage, prevailing wage rates, 1rates, 1½½ overtime premium payments by overtime premium payments by federal contractors.federal contractors.

Walsh-Healy Act1936

Required overtime payments after 8 daily Required overtime payments after 8 daily or 40 regular work hours for workers on or 40 regular work hours for workers on federal contracts.federal contracts.

Fair Labor Standards Act (FLSA) 1938(as Amended)

Interstate commerce clause used to Interstate commerce clause used to cover workers except agricultural and cover workers except agricultural and exempted (managerial) employees, child exempted (managerial) employees, child labor (under 16) is prohibited.labor (under 16) is prohibited.

Government Regulation of CompensationGovernment Regulation of Compensation(Federal Wage Laws)(Federal Wage Laws)

The Equal Pay Act: The Jury’s Still OutThe Equal Pay Act: The Jury’s 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 women’s 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 women’s average pay at 80.1 percent of men’s compensation. Unfortunately, the gain in women’s wages relative to men’s 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 1979–2004. Unpublished tabulations from Current Population Survey, Bureau of Labor Statistics, 2004. Data at www.bls.gov.

The Wage CurveThe Wage Curve• Wage Curve

– A curve in a scattergram representing the relationship between relative worth of jobs and wage rates.

• Pay Grades– Groups of jobs within a particular class that are paid the same

rate.

• Rate Ranges– A range of rates for each pay grade that may be the same for

each grade or proportionately greater for each successive grade.

• Red Circle Rates– Payment rates above the maximum of the pay range.

Freehand Wage CurveFreehand Wage Curve

Single Rate StructureSingle Rate Structure

Wage Structure with Increasing Rate RangesWage Structure with Increasing Rate Ranges

The Wage Curve 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,

• Broadbanding– Collapses many traditional salary grades into a few

wide salary bands.

The Wage Curve 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 output• Profit Sharing – based upon measure of

organizational performance; not a part of base salary • Ownership - • Gain Sharing

Executive CompensationExecutive Compensation

HistoryHistory

Business Leader wages expected to rise dramatically!

1940-19501940-1950

“Conservative Corporate Pay”

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

1960s1960s

“Conglomerates Emerge”

• Corporations Diversify Assets

• Stock Options Become Popular

• Foreign Competition Begins

1970s1970s “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

1980s1980s“Executive Compensation Takes Off!”

• Stock Options Overtake Salaries • Free Agency in Organizations

• Joint Ventures/Mergers/Takeovers

• U.S. Threatened by Foreign Competition

• Golden Parachutes

1990s1990s“ Dot Com Bust & Ethics Issues”

• Corporate Profits Remain High• “Accounting Scandals”

• Enron• Arthur Anderson• Deloitte & Touche• Ernst & Young• Etc.

2000s2000s“New 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 CompensationIndirect Compensation

Dealing with employee benefits

Social Insurance Social Insurance (legally required)(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 organization’s experience rating

Types of Employee BenefitsTypes of Employee BenefitsRequired By LawRequired By Law DiscretionaryDiscretionary

Health careHealth care

Unemployment InsuranceUnemployment Insurance

Workers’ CompensationWorkers’ Compensation

Payment for time not workedPayment for time not worked

SupplementalSupplementalUnemployment BenefitsUnemployment Benefits

Social SecuritySocial Security

Unpaid leave (FMLA)Unpaid leave (FMLA)Life and LT care insuranceLife and LT care insurance

Retirements and pensionsRetirements and pensions

Social Security InsuranceSocial Security Insurance

Benefits paid are determined by an Benefits paid are determined by an individual’s life-time earningsindividual’s life-time earnings

Provides long-term disability benefitsProvides long-term disability benefits

Social Security Act (1935)A payroll tax on both employees and employers

Old Age and Survivors Insurance (OASI)Old Age and Survivors Insurance (OASI)

Must work 40 quarters in an occupation Must work 40 quarters in an occupation covered by Act to qualify for benefitscovered by Act to qualify for benefits

Unemployment InsuranceUnemployment Insurance• Federal payroll tax on employer and employee

– Tax 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 employee’s recent earnings.– Unemployed workers are required to seek “suitable

employment.”

Workers’ Compensation Workers’ Compensation InsuranceInsurance

• Workers’ Compensation Insurance– Federal- 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 employer’s insurance rate:• The risk of injury or illness for an occupation

• Each state’s level of benefits for injuries sustained by employees varies.

• The company’s frequency and severity of employee injuries (the company’s experience rating).

Workers’ Compensation InsuranceWorkers’ Compensation Insurance

Covers EmployersCovers Employers Covers EmployeesCovers Employees

Cost of injuryCost of injury

Negligent co-workersNegligent co-workers

Contributory negligenceContributory negligence

Temporary, Permanent,Temporary, Permanent,Partial or Total DisabilityPartial or Total Disability

Assumed employment riskAssumed employment risk

Survivor’s InsuranceSurvivor’s Insurance

Injury is a cost of doing businessInjury is a cost of doing business

Growth of Employee BenefitsGrowth of Employee Benefits::Percentage of Wages and SalariesPercentage of Wages and Salaries

Percentage

1929 55 65 75 86 88 90 93 96

40%

30%

20%

10%

3.0

17.021.5

30.0

35.541.3

37.936.7 41.3