Chapter 10
Managing Compensation
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Chapter Challenges
1. Learn about the components of total
compensation
2. Learn how to design a compensation
system
3. Understand the difference between job
and individual pay options
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Chapter Challenges
4. Develop familiarity with compensation tools
5. Become familiar with the legal environment
affecting compensation and pay system
governance
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Managerial Perspective of
Designing Compensation Programs
• Who should be responsible for making salary decisions?
• Should pay be dictated by what other employers are
paying?
• What types of activities should be rewarded with higher
salaries?
• What criteria should be used to determine salaries?
• Which employee group should receive special
treatment when scarce pay resources are allocated?
• How does an employer balance ethical concerns for
employees’ welfare versus the need to save on labor
costs?
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What Is Compensation?
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Designing Compensation
Systems
• Enable firm to achieve its strategic
objective
• Mold to the firm’s unique characteristics
and environment
• Internal equity: perceived fairness
internally
• External equity: perceived fairness
externally
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Nine Criteria for Developing
a Compensation Plan
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Compensation Systems:
Equity
• Distributive Justice Model
• Labor Market Model
• Balancing Equity
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Compensation System
Design
Fixed vs. Variable Pay
Performance vs. Membership
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Compensation Entitlements Are
Going Out the Window
• Shift to Variable Pay Plans Continues
• Race to the Bottom: Mexico Lowers Wages
to Snare International Auto Production
• Making Wage Concessions at Airlines
• Pensions Going Up in Smoke
• Medical Doctors Being Squeezed
• Documenting Pay Cuts Around the World
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Job-Based Pay Policies
Technology is stable
Jobs do not change often
Employees do not need to cover for one another
frequently
Much training is required to learn a given job
Turnover is relatively low
Employees are expected to move up through the ranks
over time
Jobs are fairly standardized within the industry
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Individual-Based Pay Policies
The firm has educated workforce with ability to learn
different jobs
The company’s technology and organizational structure
change frequently
Employee participation and teamwork are encouraged
Opportunities for upward mobility are limited
Opportunities to learn new skills are present
The costs of employee turnover and absenteeism are
high
These plans are more common in manufacturing
environments
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Compensation System
Design
Elitism Pay System
Egalitarianism Pay System
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Compensation System
Design
Above- vs. Below-Market
Compensation
Monetary vs. Nonmonetary Rewards
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Compensation System
Design
Open vs. Secret Pay
Centralized vs. Decentralized Pay
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Compensation Tools
Job-Based-Approach Pay Systems
Skill-Based-Approach Pay Systems
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Key Steps in Creating JobBased Compensation Plans
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Achieving Equity
Internal Equity
Step 1: Conduct Job Analysis
Step 2: Write Job Descriptions
Step 3: Determine Job Specifications
Step 4: Rate Worth of All Jobs Using Predetermined
System
Step 5: Create a Job Hierarchy
Step 6: Classify Jobs by Grade Levels
External Equity
Step 1: Identify Benchmark or Key Jobs
Step 2: Establish Pay Policies
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Evaluating Job-Based
Compensation Plans
• Do not take into account the nature of the business
• This plan is more subjective and arbitrary
• These plans are less appropriate at higher levels within
an organization
• With job descriptions becoming more generalized, these
plans are more difficult to evaluate
• These plans tend to be more bureaucratic, mechanistic,
and inflexible
• The job-evaluation process tends to be biased against
women
• Wage and salary data are not definitive
• Employees’ perceptions of equity are what count
• High-tech skilled employees tend to not be loyal to one
firm
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The Legal Environment
• Fair Labor Standards Act
o Exempt/Nonexempt Employees
o Minimum Wage
o Overtime Pay
• The Equal Pay Act
o Comparable Worth
o OFCCP
• Internal Revenue Code
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Summary and
Conclusions
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•
•
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What Is Compensation?
Designing Compensation Systems
Compensation Tools
The Legal Environment and Pay System
Governance
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Pearson Education, Inc.
Copyright
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