ROBERT L.

MATHIS
JOHN H. JACKSON

Chapter 12

Compensation Strategies
and Practices
SECTION 4
Compensating
Human Resources

Copyright 2005 Thomson Business & Professional Publishing.

All rights reserved.

PowerPoint Presentation by Charlie Cook

The University of West Alabama

Learning
Learning Objectives
Objectives
After you have read this chapter, you should be
able to:
Identify the two general types of compensation and
the components of each.
Discuss four issues of strategic compensation design.
List the basic provisions of the Fair Labor Standards
Act (FLSA).
Describe the two means of valuing jobs.
Outline the process of building a base pay system.
Explain two ways individual pay increases are
determined.
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Nature
Nature of
of Compensation
Compensation
Types of Rewards
Intrinsic
Intangible,

psychological and social effects of compensation

Extrinsic
Tangible,

monetary and nonmonetary effects of compensation

Types of Compensation
Direct compensation
The

employer exchanges monetary rewards for work done.

Indirect compensation
Employer-provided

benefitslike health insurancethat are

provide employees for being a member of the organization.

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Components
Components of
of aa Compensation
Compensation System
System

Figure 121

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124

Direct
Direct Compensation
Compensation
Base
BasePay
Pay

The
Thebasic
basicmonetary
monetarycompensation
compensationthat
thatan
anemployee
employee
receives,
receives,usually
usuallyas
asaawage
wageor
orsalary.
salary.

Wages
Wages

Payments
Paymentscalculated
calculatedon
onthe
theamount
amountof
oftime
timeworked.
worked.

Salary
Salary

Consistent
Consistentpayments
paymentsmade
madeeach
eachperiod
periodregardless
regardless
of
ofthe
thenumber
numberof
ofhours
hoursworked
workedin
inthe
theperiod.
period.

Variable
VariablePay
Pay

Compensation
Compensationlinked
linkedto
toindividual,
individual,team,
team,or
or
organizational
organizationalperformance.
performance.

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Typical
Typical Division
Divisionof
of HR
HRResponsibilities:
Responsibilities: Compensation
Compensation

Figure 122

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Strategic
Strategic Compensation
Compensation
Objectives of a Strategically Supportive
Compensation System:
Legal compliance with all appropriate laws and
regulations
Cost effectiveness for the organization
Internal, external, and individual equity for employees
Performance enhancement for the organization

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Compensation
Compensation Philosophies
Philosophies
Entitlement Philosophy
Assumes that individuals who have worked another
year are entitled to pay increases, with little regard for
performance differences.

Pay-for-Performance Philosophy
Requires that compensation changes reflect individual
performance differences.

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Continuum
Continuum of
of Compensation
Compensation Philosophies
Philosophies

Figure 123

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Compensation
Compensation Approaches
Approaches

Figure 124

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HR
HR Metrics
Metrics for
for Compensation
Compensation

Figure 125

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Compensation
Compensation System
System Design
Design Issues
Issues
Host-Country
Host-Country
Nationals
Nationals

Third-Country
Third-Country
Nationals
Nationals
Global
Global
Compensation
Compensation
Issues
Issues

Expatriates
Expatriates
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Typical
Typical Components
Components of
of Expatriate
Expatriate Compensation
Compensation

Figure 126

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Global
Global Compensation
Compensation Approaches
Approaches
Balance Sheet Approach
Compensation plan that equalizes cost differences between
identical international and home-country assignments.

Global Market Approach

Compensation plan that attempts to be more comprehensive in
providing base pay, incentives, benefits, and relocation
expenses regardless of the country to which the employee is
assigned.

Tax Equalization Plan

Compensation plan used to protect expatriates from negative tax
consequences.

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Compensation
Compensation Quartile
Quartile Strategies
Strategies

Figure 127

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Market
Market Competitiveness
Competitiveness and
and Compensation
Compensation
Meet
Meetthe
the
Market
Market

Attempting
Attemptingto
tobalance
balanceemployer
employercosts
costsand
andthe
theneed
need
to
toattract
attractand
andretain
retainemployees.
employees.

Lag
Lagthe
the
Market
Market

Paying
Payingall
allthat
thatthe
thefirm
firmcan
canafford.
afford.Taking
Takingadvantage
advantage
of
the
abundant
supply
of
potential
employees
of the abundant supply of potential employeesin
inaa
loose
looselabor
labormarket.
market.

Lead
Leadthe
the
Market
Market

Paying
Payingfor
forhigher
higherqualified,
qualified,more
moreproductive
productiveworkers.
workers.

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Competency-Based
Competency-Based Pay
Pay

Limitations
Limitations
(How
(Howmany?)
many?)

Pricing
Pricing
Competencies
Competencies

CompetencyCompetencyBased
BasedPay
Pay
Systems
Systems
KBP/SBP
KBP/SBP
Maintenance
Maintenanceof
of
Competencies
Competencies

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Training
Training

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Individual
Individual vs.
vs. Team
Team Rewards
Rewards
Using
UsingTeam-Based
Team-BasedReward
RewardSystems
Systems
Use
Useskill-based
skill-basedpay
payfor
forthe
thebase.
base.
Make
Makesystem
systemsimple
simpleand
andunderstandable.
understandable.
Use
Usevariable
variablepay
paybased
basedon
onbusiness
businessentity
entityperformance
performance
Distribute
Distributevariable
variablerewards
rewardsat
atthe
theteam
teamlevel
level
Maintain
Maintainaahigh
highdegree
degreeof
ofemployee
employeeinvolvement
involvement

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Perceptions
Perceptions of
of Pay
Pay Fairness
Fairness
Equity
Equity

The
Theperceived
perceivedfairness
fairnessbetween
betweenwhat
whataaperson
persondoes
does
(inputs)
and
what
the
person
receives
(outcomes).
(inputs) and what the person receives (outcomes).

External
External
Equity
Equity

Employee
Employeecompensation
compensationviewed
viewedas
asequitable
equitableininrelation
relationto
tothe
the
compensation
of
employees
performing
similar
jobs
in
other
compensation of employees performing similar jobs in other
organizations.
organizations.

Internal
Internal
Equity
Equity

Employees
Employeesreceive
receivecompensation
compensationininrelation
relationto
tothe
theknowledge,
knowledge,
skills,
and
abilities
they
use
in
their
jobs
as
well
as
their
skills, and abilities they use in their jobs as well as their
responsibilities
responsibilitiesand
andaccomplishments.
accomplishments.
Perceived fairness of the process and procedures

Perceived fairness of the process and procedures

Procedural
ProceduralJustice
Justice used
usedto
tomake
makedecisions
decisionsabout
aboutemployees.
employees.

Distributive
Perceivedfairness
fairnessininthe
thedistribution
distributionof
ofoutcomes.
outcomes.
DistributiveJustice
Justice Perceived
Pay
PayOpenness/
Openness/
Secrecy
Secrecy

The
Thedegree
degreeof
ofopenness
opennessor
orsecrecy
secrecythat
thatan
anorganization
organization
allows
regarding
its
pay
system.
allows regarding its pay system.

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Equity
Equity Considerations
Considerations in
in Compensation
Compensation

Figure 128

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Fair
Fair Labor
Labor Standards
Standards Act
Act (FSLA)
(FSLA) of
of 1938
1938
Provisions
Provisionsof
ofthe
theAct
Act
Minimum
Minimumwage
wagerequirement
requirementsets
setswage
wagefloor
floor
Child
Childlabor
labor(under
(under14
14years
yearsold)
old)is
isprohibited
prohibited
Requires
Requiresovertime
overtimepayments
paymentsfor
fornon-exempt
non-exemptemployees
employees
Exempts
Exemptshighly-paid
highly-paidcomputer
computerworkers
workers
Requires
Requiresovertime
overtime(1
(1)
)pay
payfor
forhours
hoursover
over40
40hours
hours
Requires
Requirescompensatory
compensatorytime
timeat
atovertime
overtime(1
(1)
)pay
payrates
rates
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FLSA
FLSA Employee
Employee Classifications
Classifications
Exempt Employees
Employees to whom employers are not required to
pay overtime under the Fair Labor Standards Act.
Executives,

administrators, professional (learned or creative)

employees, computer employees, outside sales persons

Non-exempt Employees
Employees who must be paid overtime under the Fair
Labor Standards Act.
Hourly
Salaried

non-exempt

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FLSA
FLSA Wage
Wage Provisions
Provisions
Overtime
Non-exempt employees must be paid overtime pay
(one and one-half the regular pay rate) for all hours
worked over 40 regular hours in a workweek (168
hours7days x 24 hours).

Compensatory Time Off (Comp Time)

Hours off regular work time given to an employee in
lieu of payment for extra time worked.
Compensatory

hours off must be awarded at rate of one and

one-half times hours worked over 40 hours.

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IRS
IRSTest
Testfor
for Employees
Employees and
and Independent
Independent Contractors
Contractors

Source: U.S. Internal Revenue Service, www.irs.gov.

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Figure 129

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Other
Other Laws
Laws Affecting
Affecting Compensation
Compensation
Davis-Bacon Act of 1931
Required payment of prevailing wage by firms
engaged in federal construction projects.

Walsh-Healy Public Contracts Act and the

McNamara-OHara Service Contract Act
Extended the payment of prevailing wage to service
contracts
Required overtime payment for any employee hours
worked over eight hours in one day; applies only to to
federal contracts, not the private sector.

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Legislation
Legislation on
on Equal
Equal Pay
Pay and
and Pay
Pay Equity
Equity
Equal Pay Act of 1963
Requires that men and women be paid the same for
performing substantially similar jobs with limited nongender exceptions (e.g., merit and seniority).

Pay Equity (or Comparable Worth)

Similarity in pay for all jobs requiring comparable level
of knowledge, skills, and abilities, even if actual duties
and market rates differ significantly.

Garnishment
A court action in which a portion of an employees
wages is set aside to pay a debt owed a creditor.
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Compensation
Compensation
Administration
Administration
Process
Process

Figure 1210

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Development
Development of
of aa Base
Base Pay
Pay System
System
Job Evaluation
Formal, systematic means to identify the relative
worth of jobs within an organization.
Evaluating every job in the organization on:
Knowledge,

skills, and abilities required

Nature of job tasks, duties, responsibilities, and competencies
Difficulty of the job, including the physical and mental
demands

Compensable factor
Factor that identifies a job value commonly present
throughout a group of jobs.

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Examples
Examplesof
ofCompensable
CompensableFactors
Factors
for
for Different
DifferentJob
JobFamilies
Families

Figure 1211

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Job
Job Evaluation
Evaluation

Ranking
Ranking

Classification
Classification

Job
Job
Evaluation
Evaluation
Methods
Methods
Factor
Factor
Comparison
Comparison

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Point
Point
Method
Method

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Legal
Legal Issues
Issues and
and Job
Job Evaluation
Evaluation
Americans
Americans with
withDisabilities
DisabilitiesAct
Act

Job
Jobevaluations
evaluationsmay
maynot
notidentify
identifyjob
jobfunctions
functionsrelated
related
to
tophysical
physicaldemands
demandsas
asessential
essential

Job
Job Evaluation
Evaluation
Gender
GenderIssues
Issues

Traditional
Traditionaljob
jobevaluations
evaluationsplace
placeless
lessweight
weighton
on
knowledge,
knowledge,skills,
skills,and
andworking
workingconditions
conditionsfor
forfemalefemaledominated
dominatedjobs
jobs

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Valuing
Valuing Jobs
Jobs Using
Using Market
Market Pricing
Pricing
Market Pricing
Use of pay survey data to identify the relative value of
jobs based on what other employers pay for similar
jobs.

Advantages of Market Pricing

Ties organizational pay levels to what is actually
occurring in the market, without being distorted by
internal job evaluation.
Communicates to employees that the compensation
system is market linked, rather than distorted by
internal issues.

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Valuing
Valuing Jobs
Jobs Using
Using Market
Market Pricing
Pricing (contd)
(contd)
Disadvantages of Market Pricing
It relies on market survey data that is limited or may
have been gathered in methodologically sound ways.
The responsibilities of a specific job in a company
may be somewhat different from those of the
matching job identified in the survey.
The market datas scope (range of sources) is
another concern.
Tying pay levels to market data can lead to wide
fluctuations based on market conditions.

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Pay
Pay Surveys
Surveys
Pay Survey
Collection of data on compensation rates for workers
performing similar jobs in other organizations.

Benchmark Jobs
Jobs found in many organizations.

Internet-Based Pay Surveys

Pay survey questionnaires are distributed
electronically rather than as printed copies.

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Using
Using Pay
Pay Surveys
Surveys
Participants
Participants

Job
JobMatches
Matches

Broad-based
Broad-based

Survey
SurveyData
Data
Relevance
Relevance

Timeliness
Timeliness

Methodology
Methodology

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Developing
Developing Pay
Pay Surveys
Surveys
Select
Select Employers
Employerswith
with Comparable
ComparableJobs
Jobs
Determine
Determine Jobs
Jobsto
tobe
beSurveyed
Surveyed
Decide
DecideWhat
What Information
InformationIs
IsNeeded
Needed

Conduct
ConductSurvey
Survey
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Pay
Pay Structures
Structures
Job Family
A group of jobs having common organizational
characteristics.

Common Pay Structures

Hourly and salaried
Office, plant, technical, professional, managerial
Clerical, information technology, professional,
supervisory, management, and executive

Pay Grades
Groupings of individual jobs having approximately the
same job worth.
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Establishing
Establishing
Pay
Pay
Structures
Structures

Figure 1212

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Market-Banded
Market-BandedPay
PayGrades
Grades for
for Community
CommunityBank
Bank

*Computed by averaging the pay survey summary data for the jobs in each pay grade.
Figure 1213

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Pay
Pay Structures
Structures (contd)
(contd)
Market Banding
Grouping jobs into pay grades based on similar
market survey amounts.

Market Line
Graph line that shows the relationship between job
value as determined by job evaluation points and job
value as determined by pay survey rates.
Shows the distribution of pay for the surveyed jobs,
allowing a linear trend line to be developed by the
least-squares regression method.

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Pay
Pay Ranges
Ranges
Broadbanding
The practice of using fewer pay grades having
broader pay ranges that in traditional systems.
Benefits
Encourages
Is

horizontal movement of employees

consistent with trend towards flatter organizations

Creates

a more flexible organization

Encourages

competency development

Emphasizes

career development

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Example
Exampleof
of
Pay
PayGrades
Grades
and
andPay
Pay
Ranges
Ranges

Figure 1214

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Individual
Individual Pay
Pay
Rates Out of Range
Red-Circled Employees
An

incumbent (current jobholder) who is paid above the

range set for the job.

Green-Circled Employees
An

incumbent who is paid below the range set for the job.

Pay Compression
A situation in which pay differences among individuals
with different levels of experience and performance in
the organization becomes small.

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Pay
Pay Adjustment
Adjustment Matrix
Matrix
Compa-ratio
The pay level divided by the midpoint of the pay
range.
Employee R

$16.50 (current pay)

100 110 (Compa - ratio)
15.00 (midpoint)

Employee J

$13.05 (current pay)

100 87 (Compa - ratio)
15.00 (midpoint)

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Pay
Pay Adjustment
Adjustment Matrix
Matrix

Figure 1215

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Determining
Determining Pay
Pay Increases
Increases
Seniority
Time spent in an organization or on a particular job that is used
to determine eligibility for organizational rewards and benefits.

Cost-of-Living Adjustments (COLA)

A percentage increase in wages to maintain real wages in a
period of economic inflation.
Adjustments are tied to changes in an economic measure (e.g.,
the Consumer Price Index).

Lump-Sum Increases (LSI)

A one-time payment of all or part of a yearly pay increase that
does not increase base wages.

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