1
Q
What is the goal of a strategic compensation system?
A
- Attract and Retain qualified employees
- Reflect the relative value of each job
- Be externally competitive and internally consistent and fair
- Motivate individual performance and employees’ contribution to organizational goals and competitive advantage achievement
- Foster employee engagement and productive work relationships
- Comply with all state and federal laws and regulations
2
Q
Compensation
A
refers to monetary and nonmonetary rewards employees receive in exchange for work they do for an organization.
3
Q
Direct financial compensation
A
- refers to compensations received in the form of salary, hourly wages, commissions, stock options or bonuses…etc.
- Fixed financial compensation: such as salaries
- Variable financial compensation: such as commissions (at stake compensation).
4
Q
Indirect financial compensation
A
refers to the benefits and services employees receive (money-equivalent) – such as free meals, vacation time, health insurance, company-paid training and other perks.
5
Q
Pay mix
A
the relative emphasis given to different compensation components
6
Q
Total rewards
A
- sum of all aspects of compensation package, which the employee perceives to be of value.
- It includes financial (direct and indirect) and nonfinancial rewards such as flexible work schedules, development opportunities, casual dress codes, and helping employees balance work with the other demands…etc.
- The idea of Total Rewards is to highlight and signal to employees that they are receiving more than the base pay.
7
Q
Compensation philosophy
A
- communicates information to employees about what is valued within the organization, enhances the consistency in pay across the organizational units and helps attract, motivate and retain employees.
- Influenced by the organizations’ financial situation, firm size, the industry, the firm strategy and objectives, salary survey information, difficulty to find talent…etc.
8
Q
Equity theory
A
the theory that employees compare their input (work effort) and outcomes (wages) levels with those of other people in similar situations to determine if they are being treated the same in terms of pay and other outcomes.
9
Q
Internal equity
A
employees perceive their pay to be fair relative to the pay of other jobs in the organization
10
Q
Employee equity
A
perceived fairness of the relative pay between employees performing similar jobs for the same organization.
11
Q
External equity
A
an organization’s employees believe that their pay is fair when compared to what other employers pay their employees who perform similar jobs
12
Q
Comparable worth
A
if two jobs have equal difficulty requirements, the pay should be the same, regardless of who fills them
13
Q
If inequity occurs, employees will:
A
- Try to resolve the issue through asking for raises or a bonus.
- Adjust their input to make the input/outcome ration more equitable
- Adjust their psychological perspective by rationalizing why there is inequity.
- Education, experience, political connection..etc.
Quit their jobs
14
Q
Internal alignment
A
- occurs when each job in a company is valued appropriately relative to every other job in terms of its ability to help the firm achieve its goals (Relative Worth or Internal Equity).
- Ultimately, the aim is to achieve a clear and fair Pay structure – hierarchy for determining salaries based on the relative worth.
15
Q
Job evaluation
A
- systematic process of establishing the relative worth of the jobs within the company.
- Job evaluation is derived from the job analysis.
- Pay rates are usually established for jobs and not for individuals.
16
Q
Types of Job Evaluation
A
- Job Ranking
- Job Classification
- Point Method
- Factor Comparison
17
Q
Job Ranking
A
- Qualitative method (based on managers’ judgment, committees or job analysis)
- A type of job evaluation that involves reviewing job descriptions and listing the jobs in order from highest to lowest worth to the company
- Easier to do with fewer jobs
- If you have many jobs to rank, it might be easier to identify the ones on the top and bottom, but hard to differentiate the worth of jobs that falls in the middle.
- Disadvantages: Subjectivity; makes it harder to explain and justify to employees, hard to implement when having many jobs
- Advantages: simple, cost-effective, less time-consuming
18
Q
Job Classification
A
- Qualitative method (based on managers’ judgment, committees or job analysis)
- A type of job evaluation that involves developing broad descriptions for groups that are similar in terms of their tasks, duties, responsibilities, and qualifications for the purpose of assigning wages.
- Disadvantages: subjective, limited usability for complex jobs that might fit in more than one category, rarely used in an industry
- Advantages: easy to understand and simple to administer, cost-effective, highly used in government jobs.
19
Q
Point Method
A
- Quantitative method
- A type of job evaluation method that involves assigning points values to jobs based on compensable factors to create the relative worth hierarchy for jobs in the company
- Compensable factors – aspects of jobs, such as skill, effort, responsibility, and working conditions, that exist across jobs in a company, that are needed by employees for the firm to achieve its objectives, and for which the company is willing to pay
- The factors need to be restricted to 4 or 5 to make it simple
20
Q
Point Manual
A
A Point Manual is used to determine the relative worth of jobs; it contains:
- General description of each compensable factor
- Description of each degree of the factor
- This will ensure high levels of reliability and validity
21
Q
Benchmark Jobs
A
jobs that are used to represent the range of jobs in a company and that can be used for comparison with jobs in other companies for the purpose of establishing pay rates.
22
Q
Advantages of the Point Method
A
- The most comprehensive and accurate method
- Human judgment and bias is minimized due to standardization
- Have high acceptability by employees
- Scales can be used for long-time
- Jobs can be easily placed in grades.
23
Q
Disadvantages of the Point Method
A
- Time-consuming and expensive to develop
- Difficult to understand by average worker
- Hard to apply to managerial jobs as work content might be more qualitative than quantitative.
24
Q
Factor Comparison
A
- Quantitative method
- A job evaluation method that involves ranking benchmark jobs in relation to each other on several factors such as mental requirements, physical requirements, skill, responsibility, working conditions and then assigning the hourly rate for each job to each factor.
- Hybrid method combining aspects of job ranking and point method
- Breaks wage rate down into small parts and assigns amount of wage to each Factor.
- Complex and challenging to explain to employees.
- Managers need to be trained to use this method.
- Requires frequent updating due to the compensation market changes.
25
Salary Surveys
- Systematic process for collecting information about wages in the external labor market.
- Salary surveys can be constructed internally or acquired from professional organizations and HR consulting firms.
- Ensure that the data is reliable and valid
26
Job Pricing
The systematic process of assigning monetary rates to jobs so that a firm’s internal wages are aligned with the external wages in the marketplace.
27
Wage Curve
market line that represents the relationship between job evaluation points and salaries paid for the jobs.
28
Company Pay Policy
- Different industries and different organizations within an industry are able to pay differently based on their profitability, resources, HR strategy, compensation philosophy and policy and organizational strategy.
- Pay at the market
Most companies follow this approach especially when talent is available.
- Pay above the market (Pay Leader)
Companies that aim to attract and retain the best talent
-Pay below the market
Companies are challenged to attract and retain talent
29
Pay Grades and Pay Ranges
- Organizations might decide to have a single-rate system; paying all employees performing the hob the same rate.
- Most organizations have pay grades; the range of possible pay for a group of jobs within a grade.
- Minimum of range (usually entry-level)
- Midpoint of range (Typical employee, fully qualified and performs within the standards)
- Maximum of range (highly qualified, long-term employee)
30
Broadbanding
- Approach used to reduce the complexity of a compensation system by consolidating large number of pay grades into a few “broad” grades (bands).
- Maximum pay range 100% - 400% higher than minimum pay
- Gives managers more flexibility in determining the starting salary and raises.
31
Setting Employee Pay
- After deciding on pay ranges, you need to decide on the pay for each employee.
- Initially for a new employee, pay is determined by education, work experience, training and negotiation skills.
- Current employee pay result of meeting performance metrics such as meeting quotas, customer satisfaction…etc.
32
Red-circled jobs
- person is paid above maximum of range
- Freeze the salary until the pay range catch up
- Reduce the salary (unfavorable)
- Re-evaluate the job or amend the job to have higher evaluation
- Promote the employee
33
Green-circled jobs
- person is paid below minimum of range
- Keep the salary (unfavorable)
- Re-evaluate the job or reclassify the job
- Give the employee a raise
34
Skill-Based and Knowledge-Based Pay
systems that require employees to acquire certain skills or knowledge in order to receive a pay increase.
35
Depth oriented plans
focus on gaining greater expertise in current skills.
36
Breadth oriented plans
focus on gaining additional skills that enable employees to perform variety of tasks.
37
Competency-Based Pay
- highly structured pay system that identifies the competencies employees need to master to be eligible for pay raises.
- Such as customer service, teamwork, problem solving, creativity…etc.
- Competencies can be identified as core for the organization or they can be identified for specific departments.
38
Market Pricing
- a method of determining pay for jobs by collecting salary information from the external labor market first rather than starting with the development of an internal structure based on the jobs within the company.
- Works well as long the data is accurate.
- This approach is useful when the jobs requirements are changing rapidly
39
Administering Compensation
- Handbook explaining the compensation plan
- Trained managers on how pay rates are set and determined, frequency of review, and what should and should not be communicated to employees.
- Communication with all employees
- Closed pay systems; individual pay is not public
- Open pay systems; individual pay is public – more transparency and might be required by law.
- What is communicated would either increase equity or inequity perception.
- Evaluation of plan success
- Continuous evaluation of the system is needed to stay competitive with the labor market.
Human Resource Management
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