Transcript Mgmt 383 - University of Mississippi

Mgmt 383
Chapter 12
Total Rewards and Compensation
Spring 2009
Why Must Employers Provide
Different Types of Compensation?
• Attract
• Retain
• Reward
Basic Forms of Compensation
• Base Pay (Direct Compensation)
• Wages
• Salaries
• Variable Pay (Direct Compensation)
• Bonuses
• Incentives
• Stock Options
• Benefits (Indirect Compensation)
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Medical Insurance
Paid Time Off
Retirement Pensions
Worker’s Compensation
Components of a Compensation
System
Compensation
Direct
Base Pay
● Wages
● Salary
Variable Pay
● Bonuses
● Incentives
● Stock Options
Indirect
Benefits
● Health
● Life/Disability
● Paid Time Off
● Retirement
● Ed. Assistance
Base Pay
• Base Pay – The basic compensation an
employee receives in exchange for work
performed.
• Wages - time-based (usually hourly)
compensation calculated on the basis of the
amount of time worked.
• Salaries - payments consistent from time period
to time period regardless of the actual amount of
time worked.
Variable Pay
• Variable Pay - compensation linked to
individual, team and/or organizational
performance.
• Piece-rate - productivity-based compensation paid for
each unit of product produced or service provided.
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Bonuses
Profit-sharing
Gain-sharing
Commissions
Benefits
• Benefits - indirect compensation contingent upon
organizational membership. [41% of total payroll
costs or 70% of the base pay rate].
• Health Insurance
• Life Insurance
• Vacations
• Pensions
• Sick Leave
Matching Compensation with
Organizational Needs
• New organizations in competitive environments
(emphasis on innovation)
• Lower base pay
• Greater emphasis on variable pay
• Established large organizations in stable
environments (emphasis on cost containment)
• Structured base pay system
• Structured benefits programs
Two Prevailing Philosophies of
Compensation
• Entitlement Orientation
all employees automatically
receive raises every cycle.
• Seniority basis
• Cost of living allowances
(COLAs)
• “Across the board” raises are
“due” employees regardless
of performance or
competitive pressure.
• Performance Orientation pay is based on performance
differences among
employees.
• Merit basis
• Bonuses tied to performance.
• Gaining ground against
entitlement oriented systems.
• Market adjustments
Competency-Based Pay
• Competency-Based Pay (a.k.a. Task-based
or Skill-Based, Knowledge-Based Pay) –
rewards employees for the capabilities they
demonstrate and acquire.
• Employees are paid more in jobs requiring
more skills and knowledge than those that do
not.
• Encourages employees to increase their human
capital.
• Popular in those trades or professions with
certification programs (accounting, HRM,
finance, architecture, engineering, etc.).
Objectives of a Compensation
Program
• Equity
• Legal Compliance
• Cost Effectiveness
Perceptions of Pay Fairness
• Equity - the perceived fairness of the
relationship between a person’s inputs and the
outcomes they receive.
• Internal Equity (equity within the
organization) ensuring that compensation for jobs
that are similar in terms of KSA within the
organization are compensated the same.
• External Equity (equity with other
organizations) ensuring that jobs in our company
are paid the same as the same jobs (in terms of
KSA)in other companies.
Equity Theory
• Individual Equity (J. Stacy Adams)
• An individual expects his/her outcomes in any
exchange relationship to be proportional to his/her
inputs.
• Individuals consciously or unconsciously compare
their outcomes and inputs to others in the workplace
and make a value judgement as to whether they are
“fair.”
J. Stacy Adams’ Equity Theory
• Outcomes (On) any and all factors that an
individual values or desires.
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Raises
Promotions
Status
Job assignments
Recognition
J. Stacy Adams’ Equity Theory
• Inputs (In) any and all factors that an individual
believes are relevant to being eligible for a
desired outcome.
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Effort
Quality of work
Experience
Education
Seniority
Loyalty
J. Stacy Adams’ Equity Theory
• Individuals consciously or unconsciously
compare their outcomes and inputs to theirs in
the workplace and make a value judgement as to
whether they are “fair.”
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J. Stacy Adams’ Equity Theory
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J. Stacy Adams’ Equity Theory
• Methods of Reducing Perceived Inequity
(overpayment or underpayment).
• Change inputs - increase or decrease effort.
• Change outcomes - request more pay,
status, etc. or join a union [today we often
sue].
• Distort perceptions - rationalize.
• Turnover - leave the job
Factors Affecting Equity
• Procedural Justice - the perceived fairness
of the process and procedures used to make
pay decisions. How the raises are
determined.
• Distributive Justice - the perceived
fairness of the amount of compensation
given for the level of performance.
Secret v. Open Pay systems
• Secret Pay Systems - policies that prohibit
discussion of pay between employees.
• Subverted by the grapevine.
• Employees suspect that the ulterior motive is to hide
unfair practices.
• Open Pay Systems - employees can gain
access to each others pay levels.
• Works best under true merit pay systems.
• Concerns about employee privacy.
Factors Affecting Equity
• External Equity – how the compensation in
your organization compares to similar jobs in
other organizations
Market Competitiveness and
Compensation
• Market Positioning
• Pay Market - match competitors
• Lead the Market - pay more than competitors
• Lag the Market - pay less than competitors
• Market Pricing - basing wages on the immediate
labor market and the industry.
• Houston, TX v. NYC
• $45,000 v. $109,051
• $30,948 v. $75,000
Source: Salary Comparison (April 2, 2009) http://cgi.money.cnn.com/tools/costofliving/costofliving.html
Market Pricing & Cost of Living
• If you move from Jackson, MS to New
York (Manhattan) NY:
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Groceries will cost 66%more.
Housing will cost 440%more.
Utilities will cost 61% more.
Transportation will cost 22% more.
Healthcare will cost 32% more.
Fair Labor Standards (1938)
• Minimum wage
• 3 step increase is scheduled as follows:
• $5.85 – July 24, 2007
• $6.55 - July 24, 2008
• $7.25 - July 24, 2009
• Overtime (time & one-half for each our worked
in excess of 40 during a 168 consecutive hour
work week).
Fair Labor Standards (1938)
• Child labor
• Hazardous jobs > 18.
• Unlimited hours > 16.
• 14 to 15, 3 hours limit on school days, 18 hours in
school weeks. 8 hours and 40 hours respectively in
nonschool weeks. No work between 7 pm & 7 am
except June 1 to Labor Day-- 9pm to 7am.
Employees under FLSA
• Classification of employees:
• Hourly (nonexempt)
• Salaried-Nonexempt
• Salaried-Exempt - Those not protected
by the FSLA
Exempt Employees under the
FLSA
• Exempt Employees
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Executive
Administrative
Professional
Computer Employees
Outside sales
Bona Fide Executives under
FLSA
• Bona fide executives (management)
• Have the authority to hire and fire or make
recommendations regarding decisions affecting the
employment status of others; and regularly exercise
a high degree of independent judgment in their
work.
• No more than 20% of time spent performing
nonexemept duties.
• Retail & service, no more than 40% of time spent
performing nonexemept duties.
• Supervises 2 or more employees.
• Salary is > $345 per week
21-Factor Control Test to Determine
Independent Contractor Status
• The Internal Revenue Service, building on the common law test, has set
forth a more detailed test for determining whether an individual is an
independent contractor for purposes of paying employment tax and
withholding. These factors and their applications are as follows:
1. An individual who is required to follow instructions is more likely to be
considered an employee.
2. The greater the amount of training needed for the individual to complete an
assigned task, the greater the likelihood that the individual will be
considered an employee.
3. Where an individual is integrated into the employer’s business to a great
extent, the individual is more likely to be considered an employee.
4. The fact that an individual personally renders services will weigh in favor of
employee status.
5. The fact that the individual hires, fires, and pays assistants, and the
employer has no right to do so, indicates independent contractor status.
6. The existence of a continuing relationship is indicative of employee status.
21-Factor Control Test to Determine
Independent Contractor Status
7. The establishment of a set amount of work hours suggests employee status.
8. An individual whose time is substantially devoted to the job is more likely
to be considered an employee.
9. The fact that an individual works on the employer’s premises suggests
employee status.
10. An individual who works according to a sequence set by the employer
will more likely be deemed an employee.
11. The fact that an individual submits regular or written reports to the
employer will weigh in favor of employee status.
12. An individual who is paid by the project, rather than by the hours, or
other period of time, will more likely be considered an independent
contractor.
13. An individual who is reimbursed for expenses is more likely an
employee.
21-Factor Control Test to Determine
Independent Contractor Status
14. An individual who furnishes the necessary tools and materials for the job
is more likely an independent contractor.
15. That an individual makes an investment in the facilities in which he or
she works weights in favor of independent contractor status.
16. The fact that an individual’s work results in the possible realization of a
profit or the risk of a loss suggests independent contractor status.
17. An individual who works for more than one firm at a time is more likely
to be an independent contractor.
18. An individual who makes his or her services available to the general
public is more likely to be considered an independent contractor.
19. The fact that the employer has the right to discharge the individual
suggests an employment relationship (independent contractor
relationships are more likely to be contractual).
20. The fact that the individual has the right to terminate the relationship also
suggests an employment relationship because independent contractors are
usually bound by a contract.
State Compensation Statutes
• The governmental entity with the largest
minimum wage always prevails.
• Example: the minimum wage in Washington is
$7.93.
• Example: the minimum wage in California is
$7.50.
• Example: the minimum wage in San Francisco
is $9.36.
(as of July 2007)
State Minimum Wages
• States with minimum
wages higher than FLSA:
Alaska
Massachusetts
California Minnesota
Connecticut New York
Delaware Oregon
Florida
Vermont
Illinois
Washington
Maine
• States with no
minimum wage:
Alabama
Arizona
Louisiana
Mississippi
South Carolina
Tennessee
Garnishment Laws
• Garnishment – a court action which directs
that a portion of an employee’s wages are to
be side aside to pay a debt owed by the
employee to a creditor.
Davis-Bacon Act (1931)
• Federal construction contractors with
contracts or subcontracts in excess of
$2000.
• Enacted to encourage hiring union labor in the
Great Depression.
• Requires employers to pay the “prevailing
wage” for the area (the union wage scale for the
area).
Walsh-Healey Act (1936)
• Federal supply and service contractors with
contracts or subcontracts in excess of
$10,000.
• Requires employers to pay the “prevailing
wage” for the area (the union wage scale for the
area).
McNamara-O’Hara Service
Contract Act (1965)
• Employers who hold contract or subcontracts to
provide services in excess of $2,500 to the United
States government.
• Must pay their employees the prevailing wage for
the geographic area in which the work is being
performed.
• Must provide fringe benefits to service employees
comparable to the prevailing benefits.
Equal Pay Act (1963)
• Equal pay for equal work.
• Differentials are permitted for:
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Merit
Seniority
Quantity of work
Quality of work
Education
Level of responsibility
Working conditions
The Equal Pay Myth
• The myth: Women in the workplace earn only
74¢ for every $1 made by men.
• Fact: Men pursue jobs that are more
dangerous and receive higher pay for context.
(92% of all job-related deaths involve men).
• Fact: Men are more represented in the higher
paying professions.
• Fact: Women who never had children made
98¢ for every $1 men made.
Source: Diana Furchtgott-Roth, et al. (1999). Women's Figures: An Illustrated
Guide to the Economic Progress of Women in America .
Developing a Base Pay System
• Job Evaluation - the systematic determination
of the relative worth of jobs within an
organization.
• Evaluation criteria of jobs:
• Relative importance of one job to other jobs.
• Skills required to perform TDR of one job as
compared to other jobs.
• Difficulty (complexity) of the job compared with
other jobs.
Job Evaluation Methods
• Ranking Method - jobs are ranked from highest to
lowest in importance.
• Very subjective.
• Awkward with large numbers of jobs.
• Classification Method - categories are established to
group jobs of similar KSA.
• U.S. Civil Service GS system, e.g.
• Very subjective
• Overly reliant on job titles and descriptions and assumes
similarity between agencies and job context.
Job Evaluation Methods
• Point Method - jobs are broken into compensable factors
[job dimension common across job categories] and
weights or points are assigned to the factors. Hay System
is the most popular (60%).
• Advantages:
• Simple enough for managers to understand.
• Allows for comparison between jobs
• Can be used by people who are not specialists
• Disadvantages
• Time consuming
• Results in job rigidity [highly delineated TDR].
Job Evaluation Methods
Hay System (1943)
Know How
Problem Solving
Accountability
1. Functional Expertise
1. Environment
1. Freedom to Act
2. Managerial Skills
2. Challenge
2. Impact of End Results
3. Human Relations
3. Magnitude
Job Evaluation Methods
• Factor Comparison Method - sophisticated
quantitative combination of both ranking and
point methods.
• (1) Benchmark jobs are identified (those performed by
workers with similar TDR and similar KSA).
• (2) Market rates are gathered for benchmark jobs.
• (3) Monetary values are assigned to each factor.
• (4) All other jobs [with their corresponding factors] are
compared to the benchmark jobs.
Job Evaluation Methods
• Factor Comparison Method • Disadvantages
• Expensive and can only be done by trained specialists.
• Complicated and difficult for some managers to
understand.
• May lead to employee dissatisfaction or worse (litigation,
AFSCME v. State of Washington).
Job Evaluation Methods
• Computerized Job Evaluation - simply the
application of existing job evaluation methods
to computer technology.
Pay Structure
Pay Structure - the array of pay rates for
different jobs with in a single organization
Pay Survey
(external)
Development
Scattergram
Job
Evaluation
(internal)
Establish
Pay Grades
and Ranges
Determine
Pay for
Specific Jobs
Pay Structure
• Pay Survey - collecting compensation data from
similar jobs in other organizations.
• Develop Wage Curve or Scattergram - using
survey data and the internal job evaluation a pay
scatter gram is developed.
• Market Line – a trend line showing the
relationship between job value (resulting from job
evaluation) and the pay survey rates.
Scattergram & Market Line
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Wages
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JE Points
Market Line
Pay Structure
• Using the Wage Curve, pay grades and pay
ranges are developed.
• Pay Grades - grouping individual jobs having
approximately the same worth.
• Pay Range - establishing the maximum and
minimum range of compensation for each job.
• Broadbanding – the practice of using fewer pay
grades having broader ranges than a tradition
compensation system.
Pay Range
• Pay Range
• Determines the maximum and minimum each job
incumbent may earn.
• Differentials within the range are based on
seniority/time in grade.
• The lower the level the job, the narrower the range
and vice versa.
Tradition Pay Structure
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$68,000
Red Circle
$58,000
Wages
Market Line
$48,000
$45,000
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$35,000
Green Circle
$25,000
JE Points
Broadbanding
$68,000
Max.
Market Line
Wages
Min.
$25,000
Job Evaluation Points
Pay Range
• Red-circled employees are those employees
whose pay goes beyond the the established range
for their particular job (usually due to an
inordinate amount of longevity).
• Green-circled employees are those paid below
the the established range for their particular job.
(usually due to pay compression).
Pay Compression
• Pay Compression - pay differences between
persons with different levels of experience and
performance are small.
• Usually occurs when labor market pay
levels rise faster than internal pay
adjustments.
• Example: An employee with 10 years
longevity makes $45,000/yr, a newly hired
employee makes $43,000.
Pay Inversion
• Pay Inversion may sometimes occur. New
hires make more than veteran (more
experienced) employees.
• Usually occurs when internal pay
adjustments lag behind labor market pay
levels.
• Example: An employee with 10 years
longevity makes $45,000/yr, a newly hired
employee makes $50,000.
Cost Effectiveness
• Cost Effectiveness - ideally, in a
competitive environment, increases in
productivity should be greater than
increases in compensation.
Labor Cost =
Output
Input