Components of Compensation

1
Components of Compensation

• How Do We Determine How Much To Pay Employees for
  Their Work?

2
Strategic Compensation Planning

• Strategic Compensation Planning
• Links the compensation of employees to the
  mission, objectives, philosophies, and culture of
  the organization. (strategic congruence)
• Serves to mesh the monetary payments made to
  employees with specific functions of the HR
  program in establishing a pay-for-performance
  standard.
• Seeks to motivate employees through compensation.

3
Linking Compensation to Organizational Objectives

• Value-added Compensation
• Evaluating the individual components of the
  compensation program (pay and benefits) to see if
  they advance the needs of employees and the goals
  of the organization.
• How does this compensation practice benefit the
  organization?
• Does the benefit offset the administrative cost?

4
Compensation Management and Other HRM Functions
Concept
Function
How
5
Components of Total Compensation
Total Compensation

• Intrinsic Rewards
• (nonmonetary)
• job security
• Status symbols
• Social rewards
• Task-self rewards

Extrinsic Rewards (monetary)
Direct Compensation
Indirect Compensation (Benefits)

• Public Protection
• (legally required)
• Social Security
• Unemployment
• Disability

• Paid leave
• Training
• Work breaks
• Sick days
• vacation
• Holidays
• Personal

• Miscellaneous
• Benefits
• Legal advice
• Eldercare
• Daycare
• Wellness
• Counseling
• Moving
• Perks

• Basic Salary
• basic
• shift
• premium

• Performance-Based Pay
• Stock Options
• Bonuses
• Merit
• Incentive

• Public Protection
• Pensions
• Savings
• Supplemental unemployment
• Insurance

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The Concepts of Expectancy TheoryEquity Theory
Intrinsic Rewards (non-monetary) The motivation
one receives from performing the work
7
Intrinsic Rewards(non-monetary)

• Joy from actually doing the job
• Socializing with others at work
• Pride derived from producing or
  something/providing service
• Security from belonging
• Motivation Theories
• Maslow, Herzberg, McGregor, etc.

8
Expectancy Theory and Pay

• Expectancy Theory
• A theory of motivation that holds that employees
  should exert greater work effort if they have
  reason to expect that it will result in a reward
  that they value.
• Employees also must believe that good performance
  is valued by their employer and will result in
  their receiving the expected reward.

9
Porter-Lawler Expectancy Model
Perceived Equitable rewards
Value Of reward
Abilities Traits
Intrinsic Rewards
Employee Effort
Satisfaction
Performance
Extrinsic Rewards
Role Perceptions
Perceived Effort Rewarded
10
Relationship between Pay Equity and
Motivation
Doing More and Receiving Less
Doing the Same and Receiving the Same
Doing Less and Receiving More
The greater the perceived disparity between my
input/output ratio and the comparison persons
input/output ratio, the greater the motivation to
reduce the inequity.
11
Pay-for-Performance and Expectancy Theory
12
Equity Theory
Pay, benefits, opportunities, etc.
OUTCOME INPUTS
OUTCOME INPUTS
the same, more or less
lt gt
effort, ability, experience etc.
?
A person evaluates fairness by comparing their
ratio with others.
13
Three Employee Views of the Pay Decision
Pay Level- Same job in Different
organizations Pay Structure - Different jobs in
Same organization Individual Pay Differences -
Different people in Same job
14
Market Pressures in Developing Pay Levels
Deciding What to Pay

• Product-market competition
• upper bound on labor cost
• staffing level
• average cost per employee
• Labor-market competition
• lower bound on pay levels

Product-market competition upper bound on labor
cost staffing level average cost per
employee Labor-market competition lower bound on
pay levels
15
Total Compensation - Extrinsic
Direct
Indirect

• Time Not Worked
• Vacations
• Breaks
• Holidays

Wages / Salaries
Commissions

• Insurance Plans
• Medical
• Dental
• Life

Bonuses
Gainsharing

• Security Plans
• Pensions

• Employee Services
• Educational assistance
• Recreational programs

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Direct Compensation
What an employee gets for performing work

17
Factors Affecting the Wage Mix
18
Government Regulation of Compensation(Federal
Wage Laws)
Davis-Bacon Act 1931
Required minimum wage, prevailing wage rates, 1½
overtime premium payments by federal contractors.
Walsh-Healy Act 1936
Required overtime payments after 8 daily or 40
regular work hours for workers on federal
contracts.
Fair Labor Standards Act (FLSA) 1938(as Amended)
Interstate commerce clause used to cover workers
except agricultural and exempted (managerial)
employees, child labor (under 16) is prohibited.
19
The Equal Pay Act The Jurys Still Out
Has the Equal Pay Act been effective in raising
the wages of women relative to the wages of men?
That depends on whom you ask and the importance
you place on government statistics. Fifty-nine
cents on the dollar was the rallying cry of the
womens movement more than thirty years ago to
illustrate the large gap between the wages of
women and men. That is, for every dollar that a
man made, a woman earned fifty-nine cents.
Currently, government wage figures based on the
usual weekly earnings of full-time wage and
salary workers peg womens average pay at 80.1
percent of mens compensation. Unfortunately, the
gain in womens wages relative to mens wages has
not changed significantly in recent years, as the
following figures show.
Source Median usual weekly earnings of full-time
wage and salary workers by sex, age, race, and
Hispanic or Latino ethnicity, current dollars
19792004. Unpublished tabulations from Current
Population Survey, Bureau of Labor Statistics,
2004. Data at www.bls.gov.
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The Wage Curve

• Wage Curve
• A curve in a scattergram representing the
  relationship between relative worth of jobs and
  wage rates.
• Pay Grades
• Groups of jobs within a particular class that are
  paid the same rate.
• Rate Ranges
• A range of rates for each pay grade that may be
  the same for each grade or proportionately
  greater for each successive grade.
• Red Circle Rates
• Payment rates above the maximum of the pay range.

21
Freehand Wage Curve
22
Single Rate Structure
23
Wage Structure with Increasing Rate Ranges
24
The Wage Curve

• Competence-based Pay, (also skill-based pay or
  knowledge-based pay)
• Compensation for the different skills or
  increased knowledge employees possess rather than
  for the job they hold in a designated job
  category.
• Greater productivity, increased employee learning
  and commitment to work, improved staffing
  flexibility to meet production or service
  demands, and the reduced effects of absenteeism
  and turnover,
• Broadbanding
• Collapses many traditional salary grades into a
  few wide salary bands.

25
The Wage Curve

• Merit Pay - annual base pay increases linked to
  performance appraisals (step increases)
• Incentive Pay - performance not linked to base
  pay usually measured as physical output
• Profit Sharing based upon measure of
  organizational performance not a part of base
  salary
• Ownership -
• Gain Sharing

26
Executive Compensation
27
History
Business Leader wages expected to rise
dramatically!
28
1940-1950

• Conservative Corporate Pay
• Post Depression Era
• Little Foreign Competition
• Executive Pay Rises Slower than Worker Pay
• Boom Period
• Stock Options Introduced

29
1960s

• Conglomerates Emerge
• Corporations Diversify Assets
• Stock Options Become Popular
• Foreign Competition Begins

30
1970s

• Decade of Change
• 1970 - 1974
• Recession/Stock market Declines
• Stock Options Lose Favor
• 1975 1980
• Baseball Free Agency
• Bull Market Begins
• Stock Options Regain Popularity

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1980s

• Executive Compensation Takes Off!
• Stock Options Overtake Salaries
• Free Agency in Organizations
• Joint Ventures/Mergers/Takeovers
• U.S. Threatened by Foreign Competition
• Golden Parachutes

32
1990s

• Dot Com Bust Ethics Issues
• Corporate Profits Remain High
• Accounting Scandals
• Enron
• Arthur Anderson
• Deloitte Touche
• Ernst Young
• Etc.

33
2000s

• New Century of Change/Correction
• September 11, 2001
• Corporations on Trial
• Sarbanes-Oxley (SOX)
• Performance Based Pay
• Do more with less
• ERP (Enterprise Resource Planning)
• associating/controlling pay via computer
• Financial Accounting standards Board (FASB)
• landmark change (2004) that required companies
  to expense options on financial statements

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36
Indirect CompensationDealing with employee
benefits
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Social Insurance (legally required)

• Social Security
• About 8 employer and employee tax on wages
• Additional Medicaid tax of 1.45
• Also includes dependent coverage and Long-term
  Disability
• Unemployment Compensation
• Tax rate on employers is based on
  use/environment
• Eligibility work 1 year - not on strike, quit
  or fired for cause
• Workers Compensation
• Disability, medical care, death benefit
  rehabilitation
• 2/3 of earnings are tax free
• Rate based on risk and organizations experience
  rating

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Types of Employee Benefits
Required By Law
Discretionary
Health care
Social Security
Unemployment Insurance
Payment for time not worked
Workers Compensation
Supplemental Unemployment Benefits
Unpaid leave (FMLA)
Life and LT care insurance
Retirements and pensions
39
Social Security Insurance
Social Security Act (1935)A payroll tax on both
employees and employers
Old Age and Survivors Insurance (OASI)
Provides long-term disability benefits
Must work 40 quarters in an occupation covered by
Act to qualify for benefits
Benefits paid are determined by an individuals
life-time earnings
40
Unemployment Insurance

• Federal payroll tax on employer and employee
• Tax is refunded to states which individually
  administer unemployment compensation programs.
• Unemployment benefits vary from state to state.
• Involuntarily unemployed workers are eligible for
  up to 26 weeks of unemployment benefits.
• Benefit is based on an employees recent
  earnings.
• Unemployed workers are required to seek suitable
  employment.

41
Workers Compensation Insurance

• Workers Compensation Insurance
• Federal- or state-mandated insurance (funded by
  an employer payroll tax) provided to workers to
  defray the loss of income and cost of treatment
  due to work-related injuries or illness.
• Factors influencing the employers insurance
  rate
• The risk of injury or illness for an occupation
• Each states level of benefits for injuries
  sustained by employees varies.
• The companys frequency and severity of employee
  injuries (the companys experience rating).

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Workers Compensation Insurance
Injury is a cost of doing business
Covers Employers
Covers Employees
Cost of injury
Assumed employment risk
Temporary, Permanent, Partial or Total Disability
Negligent co-workers
Contributory negligence
Survivors Insurance
43
Growth of Employee BenefitsPercentage of Wages
and Salaries
Percentage
41.3
41.3
40
37.9
36.7
35.5
30.0
30
21.5
20
17.0
10
3.0
1929
55 65 75 86 88
90 93 96