A Framework for Human Resource

Management,
4th ed.
Gary Dessler
2006 Prentice Hall

Compensating Employees
Ch 7

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When you finish studying this chapter,

you should be able to:

Explain each of the five basic steps in

establishing pay rates
Discuss four basic factors determining
pay rates
Compare and contrast piecework and
team or group incentive plans
List and describe each of the basic
benefits most employers might be
expected to offer
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Pay Factors
1.
2.
3.
4.

Legal
Union
Policy
Equity

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Some Important Compensation Laws

Fair Labor Standards Act - contains
minimum wage, maximum hours,
overtime pay, equal pay, record-keeping,
and child labor provisions covering the
majority of U.S. workers

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Some Important Compensation Laws

Equal Pay Act - employees of one sex
may not be paid wages at a rate lower
than that paid to employees of the
opposite sex for doing roughly equivalent
work

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Some Important Compensation Laws

Title VII of the Civil Rights Act makes it
an unlawful practice for an employer to
discriminate against any individual

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Some Important Compensation Laws

Age Discrimination in Employment
Act
Americans with Disabilities Act
Family and Medical Leave Act

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How Unions Influence Compensation

Decisions
National Labor Relations Act (NLRA) of
1935 granted employees the right to
organize and to bargain collectively

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Equity and Its Impact on Pay

Rates
External Equity - pay must compare
favorably with rates in other companies,
or an employer will find it hard to attract
and retain qualified employees

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Equity and Its Impact on Pay

Rates
Internal Equity - Each employee should
view his or her pay as equitable given
other employees pay in the organization

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How Employers Establish Pay

Rates
1.
2.
3.
4.
5.

Conduct a salary survey

Employee committee determines the
worth of each job
Group similar jobs into pay grades
Price each pay grade by using wage
curves
Develop rate ranges

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Step 1: Conduct the Salary Survey

Salary (or compensation) surveys
formal or informal surveys of what
other employers are paying for similar
jobs
Collect data on benefits

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http://stats.bls.gov

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Step 2: Determine the Worth

of Each Job
Job evaluation - formal and systematic
comparison of jobs to determine the worth of
one job relative to another
Compensable factors - factors that determine
your definition of job content, establish how the
jobs compare to each other, and set the
compensation paid for each job

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Job Evaluation Methods

Ranking method - ranks each job
relative to all other jobs
Job classification - manager
categorizes jobs into groups based on
their similarity in terms of compensable
factors such as skills and responsibility

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Ranking Method of Job Evaluation

1.
2.
3.
4.
5.

Obtain job
information
Select raters and
jobs to be rated
Select compensable
factors
Rank jobs
Combine ratings

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Job Evaluation Methods

Point method - involves identifying
several compensable factors, each
having several degrees, and then
assigning points based on the number of
degrees, to come up with an actual
number of points for each job

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Step 3: Group Similar Jobs into

Pay Grades
Pay grade comprises jobs of
approximately equal difficulty or
importance as determined by job
evaluation

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Step 4: Price Each Pay Grade

Wage Curves
Wage curve - shows the average pay
rates currently being paid for jobs in each
pay grade

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Step 5: Develop Rate Ranges

May be 10 levels
or steps and 10
corresponding
pay rates within
each pay grade

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Pricing Managerial and

Professional Jobs
Emphasize non-quantifiable factors
such as judgment and problem solving
Tendency is to pay managers and
professionals based on their
performance

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Pricing Managerial and

Professional Jobs
Four main components:
Base salary
Short-term incentives
Long-term incentives
Executive benefits and perks

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Current Trends in Compensation

CompetencySkill-Based Pay
Employee is paid for the range, depth,
and types of skills and knowledge he
is capable of

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Current Trends in Compensation

Skill-based pay programs
Employer defines specific skills, and
has a method for determining the
persons pay based on his or her skill
competencies

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Current Trends in Compensation

Broadbanding
Collapsing salary grades and ranges
into just a few wide levels or bands,
each of which contains a relatively
wide range of jobs and salary levels

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The New Pay

Employers want to ensure that their
compensation plans add value in
terms of achieving the firms strategic
goals

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Insert Figure 7.5

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Incentive Plans
Individual incentive programs give
performance-based pay to individual
employees who meet their individual
performance standards
Variable pay refers to group pay plans
that tie payments to productivity

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Incentive Plans
Piecework - Pay is tied directly to what
the worker produces

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Team or Group Incentive Plans

Tying team performance to the
companys strategic goals
Main disadvantage is that each
workers rewards are not based just
on his own efforts

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Incentive Plans
Stock option - the right to purchase a
specific number of shares of company
stock at a specific price during a
period of time

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Incentives for Salespeople

Most companies pay their salespeople
a combination of salary and
commissions
Typically a 70% base salary/30%
incentive mix

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Recognized-Based Awards
Studies show that recognition has a
positive impact on performance, either
alone or in conjunction with financial
rewards

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Online Award Programs

Recognition programs are expensive
to administer
Firms partner with online incentive
firms to expedite process

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www.bravanta.com

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Incentive Plans
Merit pay, (merit
raise) - any salary
increase awarded to
an employee based
on his or her
individual
performance

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Profit-sharing plan most employees

receive a share of
the companys
annual profits

Incentive Plans
Employee stock ownership plan (ESOP),
a corporation contributes shares of its
own stockor cash to be used to
purchase such stockto a trust
established to purchase shares of the
firms stock for employees

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Incentive Plans
Gainsharing plans - want to encourage
improved employee productivity by
sharing resulting financial gains with
employees

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Scanlon Plan
1.
2.
3.
4.
5.

Philosophy of Cooperation
Identity
Competence
Involvement System
Sharing of Benefits Formula

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Earnings-at-Risk Pay Plans

Some portion of
employees base
salary is at risk

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Technology and Incentives

Enterprise Incentive Management
(EIM) software is used to automate the
planning and management of incentive
plans

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http://www.incentivesystems.com
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Employee Benefits
Benefits - defined as all the indirect
monetary and non-monetary payments
an employee receives for continuing
to work for the company

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Pay for Time Not Worked

Supplemental Pay
Benefits
holidays,
vacations, sick
leave and jury duty

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Pay for Time Not Worked

Severance Pay a one-time separation
payment
Worker Adjustment and Retraining Act
of 1989

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Insurance Benefits
Workers Compensation aimed at
providing sure, prompt income and
medical benefits to work-related
accident victims or their dependents

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Insurance Benefits
COBRA Comprehensive Omnibus
Budget Reconciliation Act requires
most employers to make available to
terminated employees continued
health benefits for a period

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Retirement Benefits
Social Security
Retirement benefits
Death benefits
Disability payments

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Pension Plans
Defined Benefit pension plan contains a
formula for determining retirement
benefits so that the actual benefits to
be received are defined ahead of time

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Pension Plans
Defined Contribution plan specifies what
contribution the employer will make to
a retirement or savings fund set up for
the employee

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Employee Service Benefits

Employee Assistance Programs (EAPs) formal employer program for providing
employees with counseling and
advisory services

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Employee Service Benefits

Flexible benefits plans - initially called
cafeteria plans because employees
could spend their benefits allowances
on a choice of benefits options

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Employee Leasing
Leasing firm becomes the legal
employer and handles all employeerelated paperwork

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