Compensation

1
Compensation

• Compensation All financial and non-financial
  (direct and indirect) returns employee receive in
  exchange for their labor services.
• Direct Pay
• Pay (wages), salaries, incentives, bonuses,
  commissions related to performing the job
• Indirect Pay
• Benefits health insurance, vacation, retirement
  plans, etc.

2
Pay Mix

• Fixed or Base Pay (Direct)
• Job or Individual Focus
• Variable Pay (Direct)
• Incentives, bonus, merit pay
• Benefits (Indirect)
• health insurance, vacation, pension, etc.
• Non-monetary and Psychological Rewards
• - office location, job security, job design

3
Myths About Pay

• There is a Going Rate There is NO Going
  Rate
• Labor Rates and Labor Costs are the Same Thing?
• You Can Lower Labor Costs by Cutting Labor Rates?
• Labor Costs Constitute a Significant Part of
  Total Costs? (This is true in the Service
  Industry)
• Low Labor Costs are a Potent and Sustainable?
  Competitive Advantage?
• People Work for Money?

4
Dispelling the Myths

• Link pay to performance
• Design Pay Plans that Support the Organizational
  Goals and HRM strategies
• Build employee trust through Equity
• Use multiple rewards
• Increase employee involvement
• Use motivation and non-financial incentives

5
Fair Exchange Laws

• Fair Labor Standards Act (FLSA)
• Minimum Pay
• Overtime
• Exempt vs. Nonexempt
• Age requirements
• Equal Pay Act
• Comparable Worth (Value) v. Equal Pay (Similar
  pay for similar work)

6
Compensation and Government Protection

• Income Continuity Protection
• Workers Compensation
• Unemployment Comp.
• Retirement Security Protection
• Social Security

7
GOALS OF AN EQUITABLE PAY PLAN

• Support VSCC Strategic Goals
• Achieve Employee Acceptance
• External Equity
• Internal Equity
• Employee Equity
• Develop Employee Acceptance
• Fair and Equitable Administration

8
KEY PHASES OF THE IMPLEMENTATION PROCESS

• Job Analysis
• Relevant Market Survey External Analysis
• Pay Market Structure Point Value v Market
• The Ability to Pay (Financial Feasibility)
• Fair and Consistent Administrations of the Pay
  Plan
• IT IS NOT A MECHANISM TO
• GAIN PAY ADJUSTMENTS
• (INCREASES) FOR EMPLOYEES

9
External Equity

• The perceived fairness of pay received relative
  to pay for the same job in other companies
• Secretary in Company A compares their pay to pay
  of Secretary in Company B.
• Pay Procedure to Assess/Maintain External Equity
  Pay Surveys

10
Establishing External Equity

• Pay Survey Decisions
• Job comparisons (Key/Benchmark jobs)
• Highly recognized (job requirements) by employees
• Relatively stable job requirements, supply
  demand, pay range and represent a large number of
  employees
• Labor Market global, national, regional, local
• Pay Philosophy Decisions
• Lag (pay below the relative labor market)
• Match (the relevant labor market)
• Lead (pay above the relevant labor market)

11
Internal Equity

• The perceived fairness of pay received relative
  to pay of other jobs in the same company.
• Secretary in Company A compares their pay rate to
  pay of Electrician in Company A
• Pay Procedure to Determine/Maintain Internal
  equity Job Evaluation

12
Establishing Internal Equity

• Establish Job Hierarchy
• Job Evaluation Determines relative value or
  importance of the job to a specific organization
  without consideration of the relevant labor
  market or the person(s) performing the job.
• Results in a Job Hierarchy the ordering of jobs
  based on relative worth or value to the company

13
Employee Equity

• The perceived fairness of pay received relative
  to pay received by coworkers performing the same
  job in the same company.
• Secretary 1 in Company A compares pay to the pay
  of Secretary 2 in Company A.
• Pay Procedure Performance Appraisals or Pay for
  performance and seniority systems

14
Establishing Employee Equity

• Pay differences among individuals performing same
  job in same company may be based on
• Individual Performance Appraisal
• Piece Rate, Merit Pay, Bonus Plans, Commission,
  Awards, Perks
• Loyalty to Company
• Tenure or a Seniority Based Pay System
• Combination

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Justice and Employee Acceptance

• Three Type of Justice
• Distributive the actual determination of the
  outcome (amount of adjustment to be awarded)
• Procedural process used to determine outcomes
  (the amount of the pay adjustment to be received
  by an employee.
• Interactional interpersonal nature of how
  outcomes are implemented (should be explained
  well, respectfully and with consideration to the
  employee)

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Job Evaluation Methods

• Ranking
• Classification (FSES)
• Factor Comparison
• Ranks jobs relative to their degree of similarity
  on Compensable Factors
• No defined degrees for the compensable factors or
  assigned points
• Point Factor
• Defined compensable factors and associated
  degrees
• Predetermined numeric value for each factors
  degree
• Results in a total point value for each job in a
  company

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Job Pricing Decisions

• Pay Structure Ordering of pay rates or ranges
  for organizational jobs.
• Pricing Approach
• Direct market pricing or
• Integrated pricing (market job evaluation)
• Grades
• Width (Amount of dollar between min and max)
• Number of grades (How many pay grades/levels)
• Single Rate or Ranges

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PAY GRADE STRUCTURE
8 7 6 5 4 3 2 1
Monthly Pay Rate (000)
V
IV
III
Pay Policy Line
II
I
100
150
200 250 300 350
Pay Grade/Levels (Job Evaluation Results)
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Individual Pay Adjustments

• Adjustments to an employees base pay to
  differentiate the contributions of individuals
  (teams) performing the same jobs in the
  organization.
• Performance and/or Seniority Based
• Key Tool Compa-ratio
• Employee Salary/Midpoint

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Assumptions of Individual Pay Adjustments

• People differ in their contributions to the
  organization
• Firms overall performance depends on the
  performance of individuals and groups in the
  organization
• Required to be fair
• Required to attract, retain and motivate high
  performers

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Challenges to Individual Pay Adjustments

• Do only what gets you rewards (money)
• Negative impact on cooperation
• Difficult to measure performance
• Psychological contracts/Credibility gap
• Job dissatisfaction and stress
• Reduction of intrinsic drives

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Types of Individual Pay Plans

• Incentive Plans
• Standard Hourly Pay Plan, Piece Rate
• Merit Pay Pay Adjustments to Base Salary
• Lump Sum Bonuses
• Alternative to merit pay
• Reduced costs associated with compounding
• One Time Awards
• Vacation trips, Appliances/Gifts, Dinners

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Obstacles to a "True" Merit Pay Plan

• Due to internal equity concerns, jobs are priced
  to the value of the job rather than individual
  performance
• Pay adjustments are intended to meet multiple
  objectives
• Equity Pay Adjustments, COLA, Competitive Market
  Movements, Attract high demand Jobs (employees),
  Resolve Pay Compression
• Performance is not normally distributed
• Performance Appraisals often have low Validity

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Group Incentive Plans

• Advantage
• Foster group cohesiveness
• Facilitate performance measurement
• Disadvantage
• Free riders
• Hard to identify group performance measures
• Inter-group competition (competition v.
  cooperation)

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Plant or Corporation-Wide Plans

• Gainsharing
• Split between management and workers of any
  defined cost savings generated
• Profit Sharing
• Organizational profits are distributed among
  employees
• Employee Stock Ownership Plans (ESOPS)
• Special stock purchase plans or bonus
  distributions

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Compensating Special Groups

• Outside Sales Staff
• Performance Based measures should be related to
  strategic goals, objective and obtainable (Sales,
  Revenue, Market share, Number of orders, New
  accounts, etc..)
• Technical Jobs (Scientist, Engineers, etc.)
• Dual Career Ladders (General v. Technical)
• Maturity Curve (type and level of degree and time
  since earning highest degree)

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Executive Pay Plans

• Five Primary Components
• Base Salary
• Short-term Incentives/Bonuses/Options
• Long-term Incentives/Bonuses/Options
• Benefits
• Perks (Tax Issue)

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Global Pay Issues

• Home Balance Sheet Approach
• Base Salary v. Perks
• Issue of Taxation
• Cultural Influences (Pay distribution)
• Global Staffing Classifications
• Expatriate
• Local (Host) Country National
• Third Country National