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PowerPoint Presentation by Charlie CookThe University o !est Alaba"a
t e n t h e d i t i o n
GaryGary
DesslerDessler
Cha#terCha#ter$$$$ PartPart %% Co"#ensationCo"#ensation
Establishing Strategic Pay PlansEstablishing Strategic Pay Plans
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Determining Pay Rates
Employee compensation All forms of pay or rewards going to
employees and arising from theiremployment.
Direct financial payments Pay in the form of wages, salaries,
incentives, commissions, and bonuses.
Indirect financial payments
Pay in the form of nancial benets such asinsurance.
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Co#yright 2005 Tho"son '(siness ) ProessionalP(blishing. All rights reserved. $2&*
Components of a Compensation SystemComponents of a Compensation System
+ig(re $2&$
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Co#yright 2005 Tho"son '(siness ) ProessionalP(blishing. All rights reserved. $2&%
Direct Compensation
'ase Pay'ase Pay
,alary,alary
!ages!ages
The basic "onetary co"#ensation that an e"#loyeeThe basic "onetary co"#ensation that an e"#loyee
receives- (s(ally as a wage or salary.receives- (s(ally as a wage or salary.
Pay"ents calc(lated on the a"o(nt o ti"e worked.Pay"ents calc(lated on the a"o(nt o ti"e worked.
Consistent #ay"ents "ade each #eriod regardlessConsistent #ay"ents "ade each #eriod regardless
o the n("ber o ho(rs worked in the #eriod.o the n("ber o ho(rs worked in the #eriod.
ariable Payariable PayCo"#ensation linked to individ(al- tea"- orCo"#ensation linked to individ(al- tea"- or
organi/ational #eror"ance.organi/ational #eror"ance.
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!"A #mployee Classications
Exempt Employees #mployees to whom employers are not
re$uired to pay overtime under the air!abor "tandards Act.
Executives, administrators, professional (learned orcreative) employees, computer employees, outside sales
persons
Non-exempt Employees
#mployees who must be paid overtimeunder the air !abor "tandards Act.
Hourly
Salaried non-exempt
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%ho &s #'empt( %ho &s )ot #'empt(
+ig(re $$&$
1e"#t Proessionals
ttorneysPhysicians
!entists
Pharmacists
"ptometrists
rchitects
Engineers
#eachers
$ertified public accountants
Scientists
$omputer systems analysts
1e"#t 1ec(tives
$orporate officers
!epartment headsSuperintendents
%eneral managers
&ndividual 'ho is in sole charge of an
independent establishment or branch
1e"#t Ad"inistrators
Executive assistant to the presidentPersonnel directors
$redit managers
Purchasing agents
3onee"#t
Paralegals
*onlicensed accountants
ccounting cler+s
*e'spaper 'riters
or+ing foremanfore'oman
or+ing supervisor
.ead 'or+er
/anagement trainees
Secretaries$lerical employees
&nspectors
Statisticians
Source: 0effrey 1riedman, #he 1air .abor Standards ct #oday2 Primer,
Compensation, 0anuary1ebruary 3443, p5 675
Note: These lists are general in nature, and exceptions
exist. ny !uestiona"le allocation of exemption status
should "e re#ie$ed "y la"or legal counsel.
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Corporate Policies, Competitive
"trategy,and Compensationligned re$ard strategy*he employer+s basic tas is to create a
bundle of rewards-a total reward pacage-
specically aimed at eliciting the employeebehaviors the rm needs to support andachieve its competitive strategy.
*he R or compensation manager will write
the policies in con/unction with topmanagement, in a manner such that thepolicies are consistent with the rm+sstrategic aims.
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Developing an Aligned Reward "trategy
Table $$&$
Questions to Ask:
0. %hat are our company+s ey success factors(%hat must our company do to be successful in fullling its mission orachieving its desired competitive position(
1. %hat are the employee behaviors or actions necessary to successfully
implement this competitive strategy(
2. %hat compensation programs should we use to reinforce thosebehaviors( %hat should be the purpose of each program in reinforcingeach desired behavior(
3. %hat measurable re$uirements should each compensation programmeet to be deemed successful in fullling its purpose(
4. ow well do our current compensation programs match thesere$uirements(
Source: 0ac+ !olmat-$onnell, !eveloping a 8e'ard Strategy that !elivers Shareholder
and Employee 9alue, Compensation and %enefits &e#ie$, /arch:pril ;
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Compensation Policy &ssues
'ay for performance
'ay for seniority
The pay cycle
Salary increases and promotions
(#ertime and shift pay
'ro"ationary pay
'aid and unpaid lea#es
'aid holidays
Salary compression
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Indentifying jobs by collar
Indentiying 7obs by collar %hite6collar wor is performed in an o7ce, cubicle,or other administrative setting.
A blue6collarworer, whosejobre$uires manual
labor.
A pin6collar worer, whose labor is related tocustomer interaction, entertainment, sales, or otherservice6oriented wor.
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Compensation Policy &ssues
bl(e-collar workeris a 'or+ing class person 'hoperforms manual labour5
Blue6collarwor may involve silled or unsilledmanufacturing, mining, sanitation, custodian wor,oil eld, construction, mechanical, maintenance,warehousing, technical installation and many othertypes of physical wor.
8ost blue collarworers are paid a low hourlywage, though the pay varies greatly depending uponthe specic occupation and the worer9s level of sill.
&n contrast, white collarworers generally havehigher paying /obs that do not involve manual labor.
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Compensation Policy &ssues :cont+d;
Salary compression A salary ine$uity problem, generally caused
by in
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#$uity and &ts &mpact on Pay Rates
The e!uity theory of moti#ation "tates that if a person perceives an
ine$uity, the person will be motivated toreduce or eliminate the tension and
perceived ine$uity.
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8ethods to Address #$uity &ssues
Salary sur#eys*o monitor and maintain e'ternal e$uity.
)o" analysis and *o" e#aluation
*o maintain internal e$uity,
'erformance appraisal and incenti#e pay
*o maintain individual e$uity.
Communications, grie#ance mechanisms,
and employees+ participation*o help ensure that employees view the pay
process as transparent and fair. :Procedurale$uity;.
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#stablishing Pay Rates
Step . The salary sur#ey Aimed at determining prevailing wage rates.
good salary survey provides specific 'age rates for
specific =obs5
ormal written $uestionnaire surveys arethe most comprehensive, but telephonesurveys and newspaper ads are also sourcesof information.
'ench"ark 7ob8 =ob that is used to anchor the
employer>s pay scale and around 'hich other =obs arearranged in order of relative 'orth5
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"ources for "alary "urveys
Consulting firms
'rofessional associations
o#ernment agencies
=.". Department of !abor+s >ureau of !abor"tatistics :>!"; conducts three annualsurveys?
rea 'age surveys
&ndustry 'age surveys
Professional, administrative, technical, and clerical(P#$) surveys5
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#stablishing Pay Rates :cont+d;
Step . )o" e#aluation A systematic comparison done in order to
determine the worth of one /ob relative toanother.
Compensa"le factor A fundamental, compensable element of a/ob, such as sills, e@ort, responsibility, andworing conditions.
E?ual Pay ct focuses on these four elements Hay consulting firm focuses on +no'-ho', problem
solving and accountability
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Preparing for the ob #valuation
Identifying the need for the *o" e#aluation #mployee feedbac, high turnover, etc.
etting the cooperation of employees
*hey may fear having their pay reduced
Choosing an e#aluation committee.
"hould include employees who actually
perform the /ob
'erforming the actual e#aluation.
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ob #valuation 8ethods? Raning&an/ing each *o" relati#e to all other *o"s,
usually "ased on some o#erall factor 0i.e. *o"difficulty1.
Steps in *o" ran/ing:
Bbtain /ob information.
"elect and group /obs. Production 'or+ers vs5 clerical 'or+ers
"elect compensable factors. $ommon to use =ust one factor (=ob difficulty)
Ran /obs.
Combine ratings. :Average raters ranings;
2ost effecti#e in small companies
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ob #valuation 8ethods?
ob Classication method for categori3ing *o"s into groups. Classes:
rouping /obs based on set of rules for each group ofclass, such as amount of independent /udgment,sills, physical e@ort, and so forth, re$uired.
rades:
A /ob classication system lie class system,although grades often contain dissimilar /obs, such
as secretaries, mechanics and reghters. rade descriptions are written based on
compensable factors listed in classication system.
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ob #valuation 8ethods?
ob Classication&aters categori3e *o"s into groups or classesof *o"s that are of roughly the same #alue for
pay purposes.
Classes contain similar /obs. rades are /obs that are similar in di7culty
but otherwise di@erent.
obs are classed by the amount or level of
compensable factors they contain. S+ills, effort re?uired, 'or+ing conditions, level of
responsibility, etc5
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ob #valuation 8ethods? Point8ethod
!uantitati#e techni!ue that in#ol#es: &dentifying the degree to which each
compensable factors are present in the /ob. Example2 6 degrees of responsibility
Awarding points for each degree of eachfactor. Each responsibility degree 'ould e?ual a certain number
of points
Calculating a total point value for the /ob byadding up the corresponding points for eachfactor.
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ob #valuation 8ethods? Point8ethod
4actor comparison 2ethod: A widely used method of raning /obs
according to a variety of sills and di7cultyfactors, then adding up these ranings toarrive at an overall numerical rating foreach given /ob.
&t is actually a renement of raningmethod.
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#stablishing Pay Rates :cont+d;
Step 5. roup Similar )o"s into 'ay rades A pay grade is comprised of /obs of
appro'imately e$ual di7culty or importanceas established by /ob evaluation.
Point method2 the pay grade consists of =obs falling'ithin a range of points5
8an+ing method2 the grade consists of all =obs that fall
'ithin t'o or three ran+s5
$lassification method2 automatically categori@es =obs intoclasses or grades5
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#stablishing Pay Rates :cont+d;
Step 6. 'rice Each 'ay radessign pay rates to pay grades
7 8age Cur#e
"hows the relationships between the value
of the /ob as determined by one of the /obevaluation methods and the currentaverage pay rates for your grades.
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Plotting a %age Curve
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#stablishing Pay Rates :cont+d;
Step 9. 4ine-tune pay rates
Pay range?
series of steps or levels 'ithin a pay grade, usually based
upon years of service5
Developing pay ranges
1lexibility in meeting external =ob mar+et rates Easier for employees to move into higher pay grades
llo's for re'arding performance differences and seniority
Correcting out6of6line rates
8aising underpaid =obs to the minimum of the rate range for
their pay grade5 1ree@ing rates or cutting pay rates for overpaid (red circle)
=obs to maximum in the pay range for their pay grade5
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Pricing 8anagerial and Professionalobs
Compensating managers Base pay: 'ed salary, guaranteed bonuses.
Short-term incentives: cash or stocbonuses
Long-term incentives: stoc options #he right to purchase stoc+ at a specific price for a
specific period
Excellent retention tool
Executive benets and perks: retirementplans, life insurance, and health insurancewithout a deductible or co6insurance.
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Pricing 8anagerial and Professionalobs
8hat &eally Determines Executi#e 'ay C#B pay is set by the board of directors taing
into account factors such as the businessstrategy, corporate trends, and where theywant to be in a short and long term.
#raditional 'isdom is that the company si@e determines top
managers> salaries
irms pay, C#Bs, based on the comple'ity ofthe /obs they lled.
>oards are reducing the relative importance ofbase salary while boosting the emphasis onperformance6based pay.
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Bther Compensation *rends
%road"anding Consolidating salary grades and ranges into/ust a few wide levels or bands,E each ofwhich contains a relatively wide range of
/obs and salary levels. ide bands provide for more flexibility in assigning
'or+ers to different =ob grades5
.ac+ of permanence in =ob responsibilities can be
unsettling to ne' employees5
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"trategic Compensation
Strategic compensation =sing the compensation plan to support the
company+s strategic aims.
ocuses employees+ attention on the values ofwinning, e'ecution, and speed, and on being better,faster, and more competitive..
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"trategic Compensation
I%2+s strategic compensation plan: *he maretplace rules.
S'itched from a previous single salary structure to differentsalary structures and merit budgets
ewer /obs, evaluated di@erently, in broadbands. 7 compensable factors2 s+ills, leadership re?uirements A
scopeimpact 8anagers manage.
/anagers get a budget and are advised to pay stars more
>ig staes for staeholders.
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Comparable %orth Refers to the re$uirement to pay men and women
e$ual wages for /obs that are of comparable :ratherthan strictly e$ual; value to the employer.
"ees to address the issue that women have /obsthat are dissimilar to those of men and those /obsoften consistently valued less than men+s /obs.
%hat are some reasons women may mae less thanmen in the worplace(
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Compensation and %omen
4actors lo$ering the earnings of $omen: %omen+s starting salaries are traditionally
lower.
"alary increases for women in professional
/obs do not re