11

Equity in Financial Compensation

Equity - Fair pay treatment for employees

External equity - Firm's employees are paid comparably to workers who perform similar jobs in other firms

Internal equity - Exists when employees are paid according to relative value of their jobs within same organization

22

Equity in Financial Compensation (Continued)

Employee equity - Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority

Team equity - More productive teams are rewarded more than less productive groups

33

Determinants of Individual Financial Compensation

Organization Labor market Job Employee

44

Compensation Policies Pay leaders – pay higher wages and

salaries Market rate, or going rate – pay what

most employers pay for same job Pay followers – pay below market rate

because poor financial condition or believe they do not require highly capable employees

55

The Labor Market as a Determinant of Financial Compensation

Compensation surveys Expediency Cost of living Labor unions

Society Economy Legislation

66

Determining internal equity

77

The Job as a Determinant of Financial Compensation

Job itself continues to be a factor, especially in those firms that have internal pay equity as a primary consideration

Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors such as working conditions

88

Job Analysis and Job Descriptions

Before organization can determine relative difficulty or value of jobs, must first define content

This is done by analyzing jobs

99

Job Evaluation

Firm determines the relative value of one job in relation to another Point factor system most widely used

Determine compensible factors Set weights for each Assign points Decide pay classifications

1010

Job Pricing Placing a dollar value on worth of a job Pay grades - Grouping of similar jobs to

simplify pricing jobs Wage curve - Fitting of plotted points to

create a smooth progression between pay grades

Pay ranges - Minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference

1111

Job Pricing (Continued)

Broadbanding – Collapses many pay grades into a few wide bands or improve effectiveness

Single rate system - - Pay ranges are Pay ranges are not appropriate for some not appropriate for some workplace conditions such as some workplace conditions such as some assembly lineassembly line

Adjusting pay ratesAdjusting pay rates - - Overpaid Overpaid and underpaid jobsand underpaid jobs

1212

Scatter Diagram of Evaluated Jobs Illustrating the Wage Curve, Pay Grades, and Pay Ranges

100 200 300 400 500

17.20

$19.80

18.50

15.90

14.60 14.00 13.30 12.90 12.00

Average Pay per Hour (Current Rates or Market Rates)

Wage Curve

Evaluated Points1 2 3 4 5

Pay Grades

1

2

3

4

5

Pay Ranges for Pay Grades

0- 99 1 $12.00 $13.30 $14.60 100-199 2 13.30 14.60 15.90 200-299 3 14.60 15.90 17.20 300-399 4 15.90 17.20 18.50 400-500 5 17.20 18.50 19.80

Evaluated Points Pay Grade Minimum Midpoint MaximumSummary

1313

Broadbanding and Its Relationship to Traditional Pay Grades and Ranges

Ave

rage

Pay

Per

Hou

r Grade 5

Grade 4

Grade 1

Grade 2

Grade 3

Job Worth

Low High

Band A

Band B

1414

Employee as a Determinant of Financial Compensation

Performance-based Pay Skilled-based Pay

Competency-based Pay Seniority

Experience Membership in the organization

Potential Political Influence

Luck

1515

Primary Determinants of Individual Financial CompensationThe Organization Compensation Policies Organizational Politics Ability to Pay

The Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Society The Economy Legislation

The Employee Job Performance Merit Pay Variable Pay Competency-Based Pay Seniority Experience Organization Membership Potential Political Influence Luck

Job

Pricing

Individual Financial

Compensation

The Job Job Analysis Job Descriptions Job Evaluation Collective Bargaining

1616

Performance-Based Pay

Merit pay - Pay increase given to employees based on their level of performance as indicated in the appraisal

Variable pay - Compensation based on performance (bonus)

Piecework – Employees paid for each unit they produce

1717

Skill-Based PayCompensates on basis of job-related skills

and knowledge Employees and departments benefit when

employees obtain additional skills Appropriate where work tends to be

routine and less varied Must provide adequate training

opportunities or system becomes a demotivator

1818

Competency-Based Pay

Compensates on basis of demonstrated expertise

1919

Seniority

Length of time an employee has been associated with the company, division, department, or job

Labor unions tend to favor seniority

2020

Experience

Regardless of nature of job, very few factors have a more significant impact on performance than experience

2121

Membership in the Organization

Some components of individual financial compensation are given to employees regardless of particular job they perform or their level of productivity

Intended to maintain a high degree of stability in the workforce and to recognize loyalty

2222

More factors affecting individual pay

Membership in the organizationMembership in the organization PotentialPotential Political influencePolitical influence LuckLuck Compensation for special groupsCompensation for special groups Team-based payTeam-based pay

2323

Group-based pay for performance

Profit sharing – distribution of predetermined percentage of firm’s profits to employees

GainsharingGainsharing – incentive payment based upon improved company performance Scanlon plan – reward to employees for

savings in labor costs resulting from employees’ suggestions

2424

Executive Compensation

Critical factor in attracting and retaining best managers

2525

Determining Executive Compensation

Firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance

2626

Types of Executive Compensation

Base salary Short-term (annual) incentives

or bonuses Long-term incentives and

capital appreciation plans Stock option plans Indexed stock option plans Executive benefits (Perks) Golden parachutes

2727

HR’s Role in Executive Compensation

HR executives who know their company’s business must play key role in assuring reasonable and ethical behavior