Chapter Summary

10.1 Identify the components of a compensation system.

Components of compensation include the following four items:

1.   Base pay, either an hourly wage or salary. Base pay is frequently a major decision factor for most employees in deciding to accept the job.

2.   Wage and salary add-ons. These include overtime pay, shift differential, premium pay for working weekends and holidays, and other add-ons.

3.   Incentive pay for performance. Incentives give workers strong reasons to perform above the standard.

4.   Benefits. This provides something of value to the employee. Benefits cost the company money even though they aren’t direct compensation.

10.2 Describe how expectancy and equity theories apply to compensation.

Expectancy theory (Motivation = Expectancy × Instrumentality × Valence) says that employees expect to put forth some form of effort at work and believe they can accomplish the task or objective (expectancy). This effort is expected to result in some level of performance resulting in some type of reward (instrumentality). The reward has to be significant (valence) to the individual, and as long as it is, the employee will continue to put out effort to get the reward.

In equity theory, people compare their inputs (the things they do in the organization) and outcomes (the things that they receive from the organization) to those of relevant others. But it’s their and others’ perceived inputs and outcomes that employees compare, not necessarily actual inputs and outcomes. If employees believe that there is inequity, they will change their work behavior to create equity.

10.3 Identify the seven basic issues that make up the organizational compensation strategy.

1.   Ability to pay. This is an honest assessment of how much we can afford, or are willing to afford, in order to compensate our employees.

2.   At, above, or below the market. What will our general pay structure look like, and why?

3. Types of compensation. This refers to the mix of the four basic components of compensation—base pay, wage add-ons, incentives, and benefits—that we employ. We must divide available funds among the components.

4.   Pay for performance or longevity. Will we pay people based on organizational loyalty/tenure, or will we pay based on performance in their jobs?

5.   Skill or competency-based pay. Competencies involve the individual’s level of knowledge in a particular area, while skills involve the ability to apply that knowledge set.

6.   Wage compression. This lowers the pay differential between long-term and newly hired employees.

7.   Pay secrecy. Will we utilize pay secrecy clauses in employment contracts? Pay secrecy may allow us to hide actual wage inequities from employees, but it has the potential to create dissatisfaction and demotivation.

10.4 Discuss the three major provisions of the Fair Labor Standards Act (FLSA).

1.   Minimum wage rates identify the lowest hourly rate of pay generally allowed under the FLSA. There are many exemptions, but if a person is nonexempt, minimum wage will apply.

2.   Overtime rates are also required for persons who are nonexempt. However, there are different exemptions for overtime than there are for minimum wage, so HR managers must check the law to determine who will have to be paid overtime.

3.   Child labor requirements within the FLSA identify the jobs and allowable working hours for individuals between 14 and 18 years old. Sixteen- and 17-year-olds can only be employed in nonhazardous jobs, but their work hours are unrestricted. However, 14- and 15-year-olds can only work outside school hours, and the jobs that they are allowed to do are limited to retail and other service positions; also, they may not work overtime.

10.5 Name the three types of job evaluations by describing whether they are more objective or subjective in form.

1.   The job ranking method is simply the process of putting jobs in order from lowest to highest or vice versa, in terms of value to the company. However, it has limited usefulness because it is subjective.

2.   The point-factor method attempts to be completely objective in form. It breaks a job down into component skills or abilities, known as factors, and then applies points to each factor based on its difficulty.

3.   The factor comparison method combines the ranking and point-factor methods to provide a more thorough form of job evaluation. It identifies benchmark jobs and then analyzes and rank-orders them. We then compare all other jobs in the organization to the benchmark jobs to determine where each one fits in the rankings.

10.6 Briefly describe the concepts of job structure, pay levels, product market competition, and labor market competition.

·         The job structure is what gives us a job hierarchy. The job hierarchy is the stacking of the jobs in the organization from the lowest (simplest) to the highest (most complex) levels.

·         A pay level (frequently called a pay grade) will be made up of several different jobs. Pay levels provide a framework for the minimum and maximum pay for a particular group of jobs in the organization. Pay levels are then laid out one next to another in order to create the entire pay structure for the company.

·         Product market competition sets the top of a pay level. We can only pay someone as much as we can recover from a customer when we sell our goods or services. We can’t pay more than the value added to the product or service by the labor. Together, product market and labor market competition identify the maximum and minimum rates of pay for a particular group of jobs in a pay level.

·         Labor market competition sets the bottom of a pay level. We have to compete with other companies to attract labor, and if we don’t pay enough, we will be unable to attract the workers we need. So we compete in the labor market for available workers.

10.7 Briefly describe the concept of a pay structure, including broadbanding and delayering.

A pay structure is created by laying out our pay levels, one next to the other. The entire group of pay levels creates the pay structure. Benchmark jobs can be plotted on the pay structure to get a market pay line—a line that shows the average pay at different levels in a particular industry. Once pay levels are set, we can actually plot employee rates of pay on the pay structure to see if any are plotted outside our pay level ranges, either high or low. Individuals who fall outside our pay range to the high side are paid red-circle rates, and those who fall outside low are paid green-circle rates. Each of these rates should be reviewed and corrected if necessary.

Broadbanding lowers the number of pay levels that a company administers by combining multiple pay levels into one. Lowering the number of pay levels makes the process simpler. It takes a long time to create, maintain, and evaluate many pay levels, but instead, we can have just a few broadbands. Because pay bands are wider and taller under broadbanding, the company also has more flexibility in pay rates for individuals who are overperforming or underperforming. Broadbanding may also cause most red- and green-circle rates to disappear. Delayering also lowers the number of pay levels, but it does so by getting rid of layers of vertical hierarchy in the organizational structure.