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Select one of the following case studies (located in your textbook.) 

  • Case 11-1: Discounting Everything but Compensation at Costco.
  • Case 11-2: Employee Red-Lining at CVS: The Have and the Have Not.
  • Case 12-1: Best Buy or Best Scam? Trying to Get Commission Results on So-Called Noncommission Pay.
  • Case 12-2: Barclays Bonus Bank: Robbing Peter to Pay Paul.

Then complete the following: 

  • Add your opinion about the choices and decisions being made—if this was your company, would you make this choice?
  • What would you do differently?

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Compensation Management

Chapter 11

Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

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Compensation

Total of an employee’s pay and benefits.

Costs are frequently 65–70% of total production costs in today’s firms.

Affects process of attracting and retaining employees.

Firms should design system to meet various needs of employees.

Poor compensation management practices produce negative effects on performance.

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Compensation 

Is the total of an employee’s pay and benefits. 

Costs are frequently 65–70 percent of total production costs in today’s firms.

Affects the process of both attracting and of retaining employees. 

Therefore, firms should design the system to meet the various needs of employees. Poor compensation management practices produce negative effects on performance. 

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Compensation System

Includes anything that employees may value and desire and that employers can offer in exchange.

Compensation components

Rewards that can be classified as monetary and in-kind payments.

Non- compensation components

Rewards other than monetary and in-kind payments (e.g. company cafeterias and gyms).

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Types of Compensation

Base pay

Wages are paid on an hourly basis. Salary is based on a time period.

Wage and salary add-ons

Includes overtime pay, shift differential, premium pay for working weekends and holidays, and so on.

Incentive pay (“variable pay”)

“Pay for performance.” Commonly includes piece work in production and commission sales.

Benefits

Indirect compensation that provides something of value to employee.

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Types of compensation. There are four basic parts of a compensation system:

1. Base pay. This is typically a flat rate, either as an hourly wage or salary. Many employees consider this to be the most important part of the compensation program, and it is therefore a major factor in their decision to accept or decline the job.

Wages vs. salary. Wages are paid on an hourly basis. Salary is based on time–a week, a month, or a year. A salary is paid regardless of the number of hours worked. Wages are common for blue-collar workers, and salaries are common for white-collar professionals and managers. A salary, however, does not make an employee “exempt”; we will cover this in detail shortly.

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

3. Incentive pay. Also called variable pay, incentive pay is pay for performance, and it commonly includes items such as piece work in production and commissioned sales. Pay for performance, especially in the form of short-term incentive pay, continues to increase as a percentage of employee compensation due to the ability of the employer to shift risk from the company to the individual employee. The use of pay for performance rather than hours worked and giving bonuses are the trend today. We will discuss incentives in detail in Chapter 12.

4. Benefits. This is indirect compensation that provides something of value to the employee. You need to include benefits in your system, because they cost the company a lot of money even though they aren’t direct compensation to the employee. Benefits are expensive costing employers 25–35% of total employee compensation. Benefits may include health insurance; payments to employees if they are unable to work because of sickness or accident; retirement pay contributions; and provision of a wide variety of desired goods and services such as cafeteria service, tuition reimbursement, and many other items. We will discuss benefits in detail in Chapter 13.

http://www.worldatwork.org/waw/adimLink?id=74763 (retrieved July 15, 2017).

Houlihan, M., & Harvey, B. (2014, April). You won’t learn this in business school. Costco Connection, p. 13.

Worth, J. (2014, December). Bonus, Baby!. Entrepreneur, p. 84.

Schurenberg, E. (2015, November). What do you owe your employees. INC. , p. 12.

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Direct Versus Indirect Compensation

Direct compensation

Base pay, salary add-ons, and incentive pay–all of which appear in a pay check.

Indirect compensation

Provides something of value to employee (i.e., benefits), such as sickness and accident protection, retirement pay contributions, cafeteria services, and company physicals.

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Direct versus indirect compensation. The first three compensation components–base pay, any add-ons, and incentive pay–are known as direct compensation. These forms of compensation go directly to the employees as part of their paycheck. Benefits are indirect compensation. The employees don’t directly get any funds from a benefits program. Benefits are usually paid for by the company, and the employees never see those funds.

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Motivation and Compensation Planning

Goal of compensation

To motivate employees to perform what the firm needs.

Expectancy theory

Developed by Victor Vroom at Yale. He postulated that employees believe rewards for accomplishing a task are worth the effort.

Clearly define goals and how to achieve them.

Tie performance to rewards.

Be sure rewards have value to employees.

Make sure management does what it says it will.

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Expectancy theory–Developed by Victor Vroom at Yale, he postulated that employees believe the rewards for accomplishing a task are worth the effort.  

Clearly define goals and how to achieve them.  

Tie performance to rewards. 

Be sure rewards have value to employees.

Make sure management does what it says it will.

Expectancy theory is based on Victor Vroom’s formula: Motivation = Expectancy  Instrumentality  Valence. Vroom, V. H. (1964). Work and Motivation. New York: John Wiley & Sons.

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Expectancy Theory and Compensation

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Expectancy theory is based on Victor Vroom’s formula: Motivation = Expectancy  Instrumentality  Valence. Vroom, V. H. (1964). Work and Motivation. New York: John Wiley & Sons.

Expectancy is the person’s perception of their ability to accomplish or probability of accomplishing an objective. Generally, the higher one’s expectancy, the better the chance for motivation. Instrumentality is the perception that a particular level of performance is likely to provide the individual with a desired reward. Valence refers to the value a person places on the outcome or reward, because not all people value the same reward.

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Motivation and Compensation Planning

Equity theory

J. Stacy Adams developed that employees are motivated when ratio of their perceived outcomes to inputs is at least roughly equal to other referent individuals.

Employees who perceive being under-rewarded decrease inputs and increase outcomes.

Employees who perceive being over-rewarded are not usually bothered.

Employees who perceive being equitably rewarded will continue to perform if content that their incomes and outputs are in balance.

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

1. Managers should be aware that equity is based on perception, which may not be correct. Possibly, managers can create equity or inequity, so the manager’s role is to be the arbiter of equity. If employees believe they are not being treated fairly, there should be procedures in place to resolve the issue or complaint. A good performance appraisal system (as discussed in Chapter 8) can help.

2. Rewards should actually be equitable. When employees perceive that they are not treated fairly, morale suffers and performance problems occur. Employees producing at the same level should be given roughly equivalent rewards. It helps to know who the comparison person or group is to know if equity does exit.

3. High performance should be rewarded, but employees must understand the inputs needed to attain certain outcomes. When using incentive pay, managers should clearly specify the exact requirements to achieve the incentive. As discussed in Chapter 8, a manager should be able to state objectively why one person got a higher merit raise than another did.

Welch, J., & Welch, S. (2009, March 23 & 30). Layoffs: HR’s moment of truth. Businessweek, p. 104.

Polster, J. C. (2011). Workplace grievance procedures: Signaling fairness but escalating commitment. NYUL Review, 86, 638.

News, National Public Radio (NPR), aired November 18, 2015.

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Learning Theories

Positive reinforcement

If employees get something they want in return for doing what firm needs, they are more likely to continue doing the same.

Negative reinforcement

When firms take away something employees don’t want, motivation increases.

Avoidance reinforcement

Work standards dictate work/compensation levels.

Punishment

Used when employees do not meet work standards.

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Learning Theories

Positive reinforcement–If employees get something they want in return for doing what the firm needs, they are more likely to continue doing the same.

Negative reinforcement–Firms take away something employees don’t want, motivation increases. 

Avoidance reinforcement–Work standards dictate  work/compensation levels.

Punishment–used when employees do not meet work standards.

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Organizational Philosophy  Decisions

Ability to pay

What is your company’s pay policy? Are employees viewed as assets or investments?

What types of compensation are offered?

Pay for performance or for longevity (seniority)?

Skill-based or competency-based?

At, above, or below the Market–Efficiency Wage Theory ?

Wage compression

Pay secrecy/rights to privacy

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Legal and Fairness Issues in Compensation

Firms must offer equal pay for equal work unless there is a difference in productivity, seniority, merit, or other factors “other than sex.”

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Major EEO Laws and Legal Concepts

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Virtually every equal employment opportunity (EEO) law identifies compensation as one of the employment actions where discrimination is prohibited if it is based on a protected characteristic.

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Fair Labor Standards Act (FLSA)of 1938 (Amended)

Covers minimum wage, overtime issues, and child labor rules for most U.S.-based businesses.

Minimum wage is the lowest hourly rate of pay generally permissible by federal law.

Employees with specific duties are exempt from minimum wage, overtime, and child labor rules.

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Overtime

Federally mandated, higher-than-minimum wage, required for nonexempt employees if they work more than 40 hours/week.

Currently set by FLSA as “time and a half” or 150% of employee’s normal wages.

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Common Exemptions

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

FLSA and Child Labor

14 and 15 year olds

May work outside school hours no more than “three hours on a school day, 18 hours in a school week, eight hours on a non-school day, and 40 hr in a non-school week.” Permissible work hours are also restricted.

16 and 17 year olds

Cannot be employed in hazardous jobs, but their work hours are unrestricted.

Individuals 18 or older

Can be hired for all work.

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Pay Equity and Comparable Worth

Comparable worth

When jobs are distinctly different but entail similar levels of ability, responsibility, skills, and working conditions, they are of equal value and should have same pay scale.

Comparable work concept is broader than “equal pay for equal work” because the work need only be similar, not the same.

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Job Evaluation

Determining worth of each position relative to other positions.

Job ranking–subjectively ordering jobs from lowest to highest or vice versa in terms of value to company.

Point factor–objectively break down job into “compensable factors” and applying points to factors based on job’s level of difficulty.

Factor comparison–analyzing and ranking “compensable factors” of benchmark jobs in pay surveys and ranking firm’s jobs against benchmark.

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Creation of a Pay Structure and Individual Pay Rates

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Well, we have finally gotten to the point where we can start to develop our new pay structure. Remember, though, all of the things that we had to review and decide on first. We had to review motivational theories that show us how compensation motivates our workers, and why. We also looked at how much revenue we expect to be available for compensation purposes. Then we reviewed each of our pay policies to make sure they were fresh in our minds so that we could maintain consistency in our compensation system.

We also reviewed each of the major federal laws concerning compensation and equity, and we went through the process of ensuring that our job analysis files were up-to-date. From these, we were able to complete job evaluations of each of the jobs in the organization. We also most likely researched external equity using one or more industry-specific pay surveys.

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Job Structure and Pay Levels

Pay structure creates a hierarchy of jobs and their rates of pay within the organization. Made up of job structures and pay levels.

Job structure is stacking up jobs in organization from lowest to highest levels.

Pay levels provide minimum to maximum pay for a group or subset of jobs in organization.

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Creation of Pay Levels

A single pay level (“pay grade”) is made of several to many different jobs.

Each pay level has a maximum and minimum pay rate.

Pay rates are determined by comparisons with Labor Market Competition (minimum pay level), Product Market Competition (top pay level), supply and demand, and insure equity.

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Supply and Demand Curve

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Product Market Competition Limits

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Pay Levels

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

We have a maximum and a minimum level of pay for a particular class of jobs. So labor market competition sets the bottom of the range and product market competition sets the top of the range. Remember, though, that this is a simplified example–there may be other factors involved as well.

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Pay Structure

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Delayering and Broadbanding

Delayering

Changing company structure to rid vertical hierarchy (reporting levels). Process of “flattening” hierarchical levels found in command and control organizational structures.

Broadbanding

Combining of multiple pay levels into one.

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Broadbanding of Multiple Pay Levels

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Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

A trend over many years now has been to lower the number of pay levels using one of two options–either delayering or broadbanding. Delayering is the process of changing the company structure to get rid of some of the vertical hierarchy (reporting levels) in an organization. On the other hand, broadbanding is accomplished by combining multiple pay levels into one. What is the benefit of combining levels either vertically or horizontally in this way? Is it that we can make bigger groups, and bigger is always better? Well, bigger isn’t always better, but in this case it may be. When we lower the number of pay levels that we have to deal with, we make the process simpler. It takes a long time to create, maintain, and evaluate 20 pay levels, when instead we can have just five broadbands. It also allows us more capacity to reward outstanding performers. Because we have taller and wider levels, we can move them up way more while staying within the boundaries of the pay level.

https://www.shrm.org/resourcesandtools/tools-and-samples/how-to-guides/pages/howtoestablishsalaryranges.aspx (retrieved July 15, 2017)

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