FINAL EXAM – MGT 352
Thursday, December 12th, 10:30 a.m. – 12:30
CHAPTER 9: COMPENSATION (9MC, 1SA)
Total Compensation =
Salary +
Benefits +
Incentives +
Nonmonetary rewards
What % on average do benefits make up in terms of total compensation? About 30%
- GOALS OF COMPENSATION:
1. Attraction: motivation to join the organization
2. Retention: motivation to stay with the organization
3. Motivation: motivation to perform at high levels
Which one of these goals do you think organizations do the best at achieving? Retention and motivation
- Pay Equity
An employee's perception that compensation received is equal to the value of the work performed.
Fairness is a relative concept
- EQUITY PERCEPTIONS:
1. Internal Equity: Pay comparisons with others inside the organization in other jobs
2. Individual Equity: Comparisons with others inside the organization in the same job
3. External Equity: Pay comparisons with others outside the organization
Linking the goals of compensation to the equity perceptions:
1. Internal equity ?? Retention
2. External equity ?? Attraction
3. Individual equity ?? Motivation
Internal equity problems: wage compression
- Wage Compression: a lower skill/level job is paid at a rate similar to a higher skill/level job
Junior Accountant - $45,000
Senior Accountant - $46,000
Ways to reduce Wage Compression:
-Reward high performance and merit-worthy employees with large pay increases
-Prepare high-performing employees for promotions to jobs with higher salary levels
-Provide equity adjustments for employees hardest hit by pay compression
Example internal equity problems: wage inversion (more extreme compensation problem)
- Wage inversion: a higher skill job is paid less than a lower skill job
Junior Accountant - $50,000
Senior Accountant - $48,000
Organization’s typical solution:
Pay secrecy -- Can create employee misperceptions and distrust of compensation fairness
- helps organization not to have to explain the decisions that they make regarding compensation
- illegal in California to forbid employees from discussing pay
- INTERNAL AND EXTERNAL FACTORS IN DETERMINING WAGE MIX:
Internal factors
- compensation strategy: overall organization compensation policy (lead, lag, or match market wages?)
- worth of job: establishing the internal wage relationship among jobs and skill levels (job evaluation considerations)
- employee's relative worth: rewarding individual employee performance
- employer's ability to pay: having the resources and profits to pay employees
External factors
- conditions of labor market: availability and quality of potential employees (supply and demand)
- market competitors’ wage rates: How much are our direct competitors paying for their labor?
- area wage rates: wage rates of local area employers for comparable jobs
- legal requirements: laws pertaining to compensation and benefits administration must be considered
- cost of living: local housing and environmental conditions. Inflation can require that compensation rates be adjusted upward periodically to help
employees maintain their purchasing power
- collective bargaining: unions bargain for real wage increases that raise the standard of living for their members.
, - "Real" wages: increases larger than rises in the consumer price index; that is, the real earning power of wages.
If employer offers union a wage increase of 4% but inflation has increased 2% since last wage increase, what is the "real wage" increase in this
scenario?
2% (4% wage increase minus the 2% reduction in buying power as a result of inflation)
Which factor will most likely set the "floor" for wages? External Labor market Conditions
Which factor is most likely to be used to set the “ceiling” for the maximum wages an employer is willing to pay? Product Market Competitors' Rates
Which factor will would set the absolute maximum wage that an employer could pay? Ability to Pay
- JOB EVALUATION METHODS FOR MAINTAINING INTERNAL EQUITY
1. Job ranking
Rank the value of jobs from highest to lowest (on the basis of relative worth). Oldest system of job evaluation.
Pros
OK job evaluation method for smaller organizations with small # of jobs
Cons
- Does not provide a precise measure of each job's worth
- Final job rankings indicate the relative importance of jobs, not extent of differences between jobs. (#2 v. #5?)
- Method can used to consider only a reasonably small number of jobs (<20)
- Doesn't allow for jobs of equal worth
- Middle range jobs are difficult to differentiate
2. Job classification
- Classifying jobs into categories so they can be benchmarked internally and externally
- Jobs are classified and grouped according to a series of predetermined wage grades.
Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.
Federal Government – General Service (GS Levels)
Example:
Job grade 7 Min $12/hr Max $17/hr
Job grade 8 Min $15/hr Max $20/hr
Pros
- Relatively easy to develop
- Inexpensive
- Easier for people to slot jobs into grades than to rank order them
Cons
- Grade descriptions must be broad enough to fit multiple jobs, yet they have to be specific enough that jobs don't appear to fit into more than one
grade
3. Point Method
- Awarding points to each job based on the job's contribution to organizational objectives (i.e., the more value the job has, the more points it is
awarded)
- Quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it
- Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job.
Pros:
- valid and not easily manipulated ranking system
Point method process:
1. develop a point manual
2. rate each job relative to the CFs in the point manual
3. add the total ponts across CFs to determine the job's worth
4. Total points can then be used to determine the compensation for that job
- CRITERIA FOR COMPENSABLE POINT METHOD FACTORS:
- Acceptable (to employees, management, union)
- Important to the job
- They help to distinguish among jobs (jobs must vary on the CF)
- Objectively measured
- No overlap between factors (e.g., innovation & creativity)
Get ideas for compensable factors by looking at the organization's mission statement or Equal Pay Act
- Pay ranges: allow for variation in pay within grades (within max and min). Differences such as tenure, education, performance, when learning the job,
Thursday, December 12th, 10:30 a.m. – 12:30
CHAPTER 9: COMPENSATION (9MC, 1SA)
Total Compensation =
Salary +
Benefits +
Incentives +
Nonmonetary rewards
What % on average do benefits make up in terms of total compensation? About 30%
- GOALS OF COMPENSATION:
1. Attraction: motivation to join the organization
2. Retention: motivation to stay with the organization
3. Motivation: motivation to perform at high levels
Which one of these goals do you think organizations do the best at achieving? Retention and motivation
- Pay Equity
An employee's perception that compensation received is equal to the value of the work performed.
Fairness is a relative concept
- EQUITY PERCEPTIONS:
1. Internal Equity: Pay comparisons with others inside the organization in other jobs
2. Individual Equity: Comparisons with others inside the organization in the same job
3. External Equity: Pay comparisons with others outside the organization
Linking the goals of compensation to the equity perceptions:
1. Internal equity ?? Retention
2. External equity ?? Attraction
3. Individual equity ?? Motivation
Internal equity problems: wage compression
- Wage Compression: a lower skill/level job is paid at a rate similar to a higher skill/level job
Junior Accountant - $45,000
Senior Accountant - $46,000
Ways to reduce Wage Compression:
-Reward high performance and merit-worthy employees with large pay increases
-Prepare high-performing employees for promotions to jobs with higher salary levels
-Provide equity adjustments for employees hardest hit by pay compression
Example internal equity problems: wage inversion (more extreme compensation problem)
- Wage inversion: a higher skill job is paid less than a lower skill job
Junior Accountant - $50,000
Senior Accountant - $48,000
Organization’s typical solution:
Pay secrecy -- Can create employee misperceptions and distrust of compensation fairness
- helps organization not to have to explain the decisions that they make regarding compensation
- illegal in California to forbid employees from discussing pay
- INTERNAL AND EXTERNAL FACTORS IN DETERMINING WAGE MIX:
Internal factors
- compensation strategy: overall organization compensation policy (lead, lag, or match market wages?)
- worth of job: establishing the internal wage relationship among jobs and skill levels (job evaluation considerations)
- employee's relative worth: rewarding individual employee performance
- employer's ability to pay: having the resources and profits to pay employees
External factors
- conditions of labor market: availability and quality of potential employees (supply and demand)
- market competitors’ wage rates: How much are our direct competitors paying for their labor?
- area wage rates: wage rates of local area employers for comparable jobs
- legal requirements: laws pertaining to compensation and benefits administration must be considered
- cost of living: local housing and environmental conditions. Inflation can require that compensation rates be adjusted upward periodically to help
employees maintain their purchasing power
- collective bargaining: unions bargain for real wage increases that raise the standard of living for their members.
, - "Real" wages: increases larger than rises in the consumer price index; that is, the real earning power of wages.
If employer offers union a wage increase of 4% but inflation has increased 2% since last wage increase, what is the "real wage" increase in this
scenario?
2% (4% wage increase minus the 2% reduction in buying power as a result of inflation)
Which factor will most likely set the "floor" for wages? External Labor market Conditions
Which factor is most likely to be used to set the “ceiling” for the maximum wages an employer is willing to pay? Product Market Competitors' Rates
Which factor will would set the absolute maximum wage that an employer could pay? Ability to Pay
- JOB EVALUATION METHODS FOR MAINTAINING INTERNAL EQUITY
1. Job ranking
Rank the value of jobs from highest to lowest (on the basis of relative worth). Oldest system of job evaluation.
Pros
OK job evaluation method for smaller organizations with small # of jobs
Cons
- Does not provide a precise measure of each job's worth
- Final job rankings indicate the relative importance of jobs, not extent of differences between jobs. (#2 v. #5?)
- Method can used to consider only a reasonably small number of jobs (<20)
- Doesn't allow for jobs of equal worth
- Middle range jobs are difficult to differentiate
2. Job classification
- Classifying jobs into categories so they can be benchmarked internally and externally
- Jobs are classified and grouped according to a series of predetermined wage grades.
Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.
Federal Government – General Service (GS Levels)
Example:
Job grade 7 Min $12/hr Max $17/hr
Job grade 8 Min $15/hr Max $20/hr
Pros
- Relatively easy to develop
- Inexpensive
- Easier for people to slot jobs into grades than to rank order them
Cons
- Grade descriptions must be broad enough to fit multiple jobs, yet they have to be specific enough that jobs don't appear to fit into more than one
grade
3. Point Method
- Awarding points to each job based on the job's contribution to organizational objectives (i.e., the more value the job has, the more points it is
awarded)
- Quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it
- Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job.
Pros:
- valid and not easily manipulated ranking system
Point method process:
1. develop a point manual
2. rate each job relative to the CFs in the point manual
3. add the total ponts across CFs to determine the job's worth
4. Total points can then be used to determine the compensation for that job
- CRITERIA FOR COMPENSABLE POINT METHOD FACTORS:
- Acceptable (to employees, management, union)
- Important to the job
- They help to distinguish among jobs (jobs must vary on the CF)
- Objectively measured
- No overlap between factors (e.g., innovation & creativity)
Get ideas for compensable factors by looking at the organization's mission statement or Equal Pay Act
- Pay ranges: allow for variation in pay within grades (within max and min). Differences such as tenure, education, performance, when learning the job,
