THE MYSTICAL WORLD OF COMPENSATION (Part 2)Class 13 – Chapter 12

U.S. Laws Affecting CompensationFair Labor Standards Act of 1938

(FDR)

RECAP

• Established Minimum Wage nationwide• Established overtime at 1.5 times hourly salary• Established Exempt and Non-exempt classifications• Established work week at 40 hours • Prohibits children under 18 from doing certain dangerous jobs• Children under 16 cannot work during school hours

EXEMPT CLASSIFICATION

• Employees are not covered by the provisions of the FLSA• Generally five categories:

1. Executive – CFO, CEO, CHRO, business owners etc.2. Professional - Doctor, lawyer, artists, musicians, teacher3. Administrative – Managers, supervisors4. Outside sales – e.g. real estate, insurance

5. Certain computer-related jobs (earning >$27.63/hr)

Executive Exemption

1. Earns > $455 per week2. Paid on a salary or fee basis;3. Manages the enterprise of significant department4. Customarily directs the work of two or more people5. Authority to hire and fire employees6. Significant organizational decision making authority

ADMINISTRATION EXEMPTION

Non-office manual work

Allowed to make independent decisions and choices

Perform management and general administrative functions, e.g.Human Resources Career guidance officersFinance Customer service designSales & marketing supportData analysis

Professional Exemption

Advanced degree or qualifications

Unique, original, intellectual, creative, e.g.

Doctors Lawyers EngineersMusicians Artists Teachers/ProfessorsDeans TV producers CFO/CIO/CHRO/CEO

PAY VARIATION CONCEPTS

• Must be legal and in accordance with the FLSA

• Must not discriminate

• Must be acceptable to the I.R.S.

• Based upon the ability of the company to regularly pay

Outside Sales

Commission or salary+commission basisWork at customer convenience

e.g.

Group & individual insurance salesLarge accounts (e.g. automobile fleets)

Computer Professionals

Programmer, systems analyst, software engineer

• Problem solving capability

• Designing, developing, analyzing, testing and modifying computer programs or even prototypes, in accordance with user or system specifications.

• Designing, developing, documenting, creating, testing or customizing programs to suit the specific requirements of a client or an operating system.

PAY FOR INDIVIDUAL PERFORMANCE

• Piecework rates – Typically in manufacturing jobsA wage based upon a specific amount of product producede.g. $10.00 for 10 pieces produced = $1.00/piece

• Differential Piece RatesPiece Rate is higher when a greater amount is producede.g. $10 for 10 pieces produced = $1.00 per piece

$11 for each piece produced in excess of 10 pieces = $1.10 per piece

Performance Bonuses & Incentives

• CommissionsIncentive pay calculated as a percentage of sales Salary may not be consistent with employee needs

• Commission variationLower salary + commissions Stability of income

Pay For Group Performance

• Gainsharing –

Focus on group efficiency of a process

Measures improvements in productivity

Distributes a portion of each gain to employees

Pay For Organizational Performance

Profit sharingA variable percentage of the organizations profitsDoes not become part of the employee's salaryEach company creates its own formula for caslculations

Stock OptionsRights to buy a certain number of shares at a specifid price.

Pay For Group Performance

Employee Stock Ownership Plans - ESOPs

The organization distributes shares of stock to all of its employees by placing it in a trust

Vesting schedule required prior to cashing out- Earliest date vs. latest date

PAY FOR INDIVIDUAL PERFORMANCE

Merit Pay

• A system of linking pay increases to ratings on performance appraisals

• Based upon the company's ability to pay, i.e. how much money is available

• Consideration given to the range between lowest paid employee and highest paid employee

PAY RANGE CONCEPTS

Minimum – the least amount of wage/salary that the company will pay for regardless ofskills;

Maximum – the most that the company will pay for this position regardless of KSA possessedby the employee

Mid-point – a. The median salary of all those performing the same job in a statistical market areab. The point at which the employee is performing at 100% effectiveness

THINK ABOUT IT

From your point of view:What is the dollar value of your labor?

From the company’s point of view:What is the dollar cost of your labor?

Salary Range

Maximum $15.00

Mid-point $12.00

Minimum $8.75

Salary RangeAsst. Marketing Manager

Maximum $65,000

Mid-point $55,000

Minimum $48,000

MARKETING JOB PROGRESSION EVP

SVP VP

AVP MGR Maximum

Mid-pointMinimum

Progressive Salary Ranges

Step 6 $50,000Step 5 $48,000Mid-point $45,000Step 4 $44,000Step 3 $42,000Step 2 $40,000Step 1 $38,000

Pay Range HRM & Managerial Objectives

1. If the individual is below the mid-point, a manager’s job is to get the employee to the min-point (100% effectiveness) as fast as possible with frequent performance reviews;

2. If the employee is at or above the mid-point, the manager's objective (and the employee) is help the employee develop competencies and groom for advancement

Job Structure: Relative Value of Jobs

• Administrative procedure for measuring relative internal worth of the organization’s jobs.

• 5 common characteristics of a job that the organization values and chooses to pay for.1. Experience2. Education3. Complexity4. Working conditions5. Responsibility

Job Evaluation Compensable Factors

Sample Pay Grade Structure

Pay grades – sets of jobs having similar worth or content, grouped together to establish rates of pay.

Pay Differentials

• Pay differential – Adjustment to a pay rate to reflect differences in working conditions or labor markets.

• Many businesses in the U.S. provide pay differentials based on geographic location.

• The most common approach is to move an employee higher in the pay structure to compensate for higher living costs.

Pay Differential ExamplesAll Voluntary – Most negotiated

• New York City vs. Albany = 25%• Night shift = 10%• Holiday work = 2 – 3 times hourly rate• Overtime = 1.5 time hourly rate – up to 3 times hourly rate • Gig rate (e.g. theatre & concerts) = High hourly rate (as long as

minimum hourly rate is exceeded)

Night hours are less desirable for most workers so some companies pay a differential for night work to compensate them.

11-27

Uniformed Services Employment and Re-Employment Rights Act of 1994 USERRA - (Clinton)

• Forbids employers from taking any adverse action against employees because of their military service

• Returning veterans who otherwise meet the eligibility criteria must be promptly reinstated in the same positions in terms of status, seniority and pay rate that they would have attained had they remained employed continuously

• Issue: During their absence, has the job descriptions been materially changed in order to respond to market forces?

Pay for Executives• Contract driven with salary, bonus, & stock options factored in.• Competition for top CEO/CFO talent• Relatively short tenure in position

Issues• Fairness• Executive pay vs. average worker pay ratio• Defining extreme pay • Pay linked to corporate performance• How much impact does the TMT actually have• Global vs. domestic vs. local• Short term vs long term performance• Clawbacks