Download Chapter 9--Managing Compensation

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9
MANAGING COMPENSATION
This chapter discusses some of the more common objectives and policies of an organization’s
compensation program. It acquaints the student with the typical components of the wage mix that
serve to determine the rate of pay employees are to receive. The chapter also explains the
methods by which the relative worth of the job within an organization can be measured to
provide the basis for developing a pay structure. Since government regulations play an important
role in the determination and administration of compensation payments, the pertinent federal
laws relating to the subject are discussed. Finally, the chapter introduces the student to current
issues relating to equal pay for comparable worth, as well as the problems of wage compression
and low organizational salary budgets.
CHAPTER LEARNING OUTCOMES
LEARNING OUTCOME 1
Explain how to formulate a strategic compensation program.
LEARNING OUTCOME 2
Indicate how pay is determined.
LEARNING OUTCOME 3
Know how to effectively perform a job evaluation.
LEARNING OUTCOME 4
Explain the purpose of a wage survey.
LEARNING OUTCOME 5
Define the wage curve, pay grades, and rate ranges as parts of the
compensation structure.
LEARNING OUTCOME 6
Understand the importance of using a compensation scorecard.
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LEARNING OUTCOME 7
Identify the major provisions of the federal laws affecting
compensation.
LECTURE OUTLINE
I.
WHAT IS COMPENSATION?
Compensation consists of three main components. Direct compensation encompasses
employee wages and salaries, incentives, bonuses, and commissions. Indirect
compensation comprises the many benefits supplied by employers, and nonfinancial
compensation includes employee recognition programs, rewarding jobs, organizational
support, work environment, and flexible work hours to accommodate personal needs.
Refer to Figure 9.1 in the textbook.
II.
STRATEGIC COMPENSATION
Simply stated, it is the compensation of employees in ways that enhance motivation and
growth, while at the same time aligning their efforts with the objectives of the
organization. Strategic compensation has redefined the role and perceived contribution of
compensation. No longer merely a “cost of doing business,” when used strategically
compensation becomes a tool to secure a competitive advantage.

Explain the importance of strategic compensation planning. Note that it is the effort of
the organization to link employee motivation and concerns for compensation to the
objectives and goals of the organization. Through strategic compensation planning the
organization seeks to attract and maintain quality employees consistent with
maximizing its compensation budget.

Compensation specialists recognize three important aspects to strategic
compensation planning: (1) linking compensation to organizational objectives, (2) the
pay-for-performance standard, and (3) the motivating value of compensation.
A.
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Linking Compensation to Organizational Objectives

Many managers believe that compensation programs have not always achieved
their intended purpose. Simply paying an employee an hourly wage for
performing a specific job may not maximize the return received on the investment
made. That is, there is not always a link between employee output and the
compensation given.

Strategic compensation planning attempts to link employee rewards to specific
organizational goals. That is, this planning should facilitate the effective use of
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employees. Therefore, compensation programs must be flexible and tailored to
meet both organizational and employee needs.
B.

Ask students what they believe should be the goals of a strategic compensation
policy.

The textbook lists seven of the more common goals of compensation policy.
These are to (1) reward employees’ past performance, (2) remain competitive in
the labor market, (3) maintain salary equity among employees, (4) mesh
employees’ future performance with organizational goals, (5) control the
compensation budget, (6) attract new employees, and (7) reduce unnecessary
turnover.

Explain to students how the goals of strategic compensation assist in decisions
affecting compensation policy.

Ask students if there are other areas that should be included in the compensation
policy.
The Pay-for-Performance Standard

A current emphasis in the compensation area is pay for performance. This term
includes a wide range of compensation options, including merit pay, cash bonuses,
and incentive pay. The pay-for-performance standard seeks to tie employee
compensation to employee effort and job performance. By stressing this
compensation policy, employers hope that employees will be motivated to perform
with greater effort, thereby lowering employer wage costs.

Ask students what potential problems can arise when an organization adopts a
pay-for-performance policy. Several considerations for an effective pay-forperformance policy are provided in the textbook.

Emphasize that pay-for-performance programs will not succeed when the
compensation given to employees does not reward high performance.
1. Motivating Employees through Compensation
The pay one receives is a measure of one’s worth to the organization. Pay also has
an effect on an employee’s standard of living and the status and recognition he or she
receives. How much a person is paid, therefore, can contribute to how hard that
person will work.
2. Pay Equity

Employees expect to be paid fairly for the value of the work they perform.
Pay equity is achieved when employees perceive that the effort, experience, and
skills they bring to the job equal the rewards they receive for successful job
completion. Whether an employee perceives pay equity or inequity can have a
dramatic effect on work outcomes.

Discuss both the positive and negative behaviors employees may exhibit when
they perceive their pay to be either equitable or inequitable.
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
To achieve pay equity, compensation policies must be both internally
equitable (wage rates for jobs approximate their value to the organization) and
externally equitable (similar jobs are paid similarly across different
organizations).

Figure 9.3 illustrates the relationship between pay equity and motivation.
3. Expectancy Theory and Pay

Figure 9.4 in the textbook illustrates the relationship between pay-forperformance and expectancy theory.

Pay expectancy predicts that an employee’s level of work motivation depends
on the attractiveness of the rewards received for job completion. When
employees value the rewards received and when they have high expectations
of receiving these rewards, their work motivation is great. Therefore,
employee perception of organizational rewards can be an important factor in
determining the motivational value of compensation.
4. Pay Secrecy
C.
III.

Normally organizations are very secretive about (1) their compensation
policies, (2) how salaries for employees are determined, or (3) what individual
employees make. While pay secrecy may protect the confidentiality of an
individual’s compensation, it tends to generate distrust toward the
compensation system, thereby reducing organizational effectiveness and
lowering employee motivation.

Pay secrecy serves to hide the inequities that arise in compensation programs.

Discuss the importance of an open compensation policy. Ask students for
their opinions.
The Bases for Compensation

Employees can be paid on an hourly, daily, monthly, yearly, or incentive (i.e.,
piecework) basis.

Explain the difference between the classifications “hourly” and “salaried”
employees.

Another basis for classifying compensation is based on whether one works in
an exempt or a nonexempt job as described under the Fair Labor Standards Act
(FLSA). Students should clearly understand the distinction between exempt and
nonexempt status under the FLSA.
COMPENSATION DESIGN—THE PAY MIX

Ask students what factors they think will affect what a job will be paid.

Internal and external factors combine to influence what jobs will be paid. The
combination of these factors is called the “pay mix.”
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A.
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Figure 9.5 in the textbook lists the internal and external factors affecting the pay
mix.
Internal Factors
Internal factors affecting wage rates include the employer’s compensation strategy,
worth of a job, the value of the employee to the organization, and the employer’s ability
to grant compensation increases.
1. Employer’s Compensation Strategy

The wages and salaries received by employees will be determined, in part, by
the employer’s compensation policy. Some employers may wish to be a wage
leader in the area or industry, while others may desire to pay average wages or
to be a wage follower. Employers should set pay policies reflecting (1) the
internal wage relationship among jobs, (2) a pay policy based on
competitors’ wages, and (3) various areas such as overtime pay, holiday pay,
or different incentives.

Highlights in HRM 1 shows the different compensation policies of Tri Star
Performance and Preventive Health Care.
2. Worth of a Job

Some jobs are worth more to the organization than other jobs. For example,
the job of marketing analyst probably has more impact on the success of the
organization than the job of a janitor. Therefore, most persons would argue
that the more important jobs should be paid more than the less important
jobs. Organizations will use the formal process of job evaluation to determine
the relative worth of jobs to the organization.

A current approach to determining the worth of a job is to judge the job’s
total value to the organization. The total value approach goes beyond the
market pricing or an internal job evaluation system of pricing jobs. Using the
total value approach to job pricing simply recognizes that some jobs are more
important to organizational success regardless of how they are internally or
externally valued.
3. Employee’s Relative Worth—Employees can improve their worth to the organization by working smarter or harder or by acquiring advanced skills or job knowledge. When this occurs, they receive merit raises based on their performance
appraisals. More and more employers are linking pay increases to the
performance of the employee.
4. Employer’s Ability to Pay

National or regional economic conditions, competition from domestic or
foreign competitors, and strong or poor managerial policies and practices can
influence the employer’s ability to grant pay increases.

Have students identify specific organizations or industries in which
employers have a large or small ability to grant pay increases.
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B.
External Factors
The following are the external factors affecting wage rates:
1. Labor Market Conditions—The forces of supply and demand for employees
having specific skills, abilities, or educational levels influence the wage rate for
the job. The wages paid to an electrical engineer will depend on how prevalent
these individuals are in the labor market. While supply and demand are factors
in determining wage rates, government regulations or union bargaining power
can serve to reduce the full impact of supply and demand considerations.
2. Area Wage Rates

The wages paid to jobs in different organizations influence an individual
organization’s wage rates. Area wage rates for comparable jobs can be
obtained from local wage surveys published by government agencies or
professional associations.

Collect several examples of local or area wage surveys for discussion
purposes. Wage survey data can be obtained from the Bureau of Labor
Statistics (BLS).
3. Cost of Living

Cost-of-living adjustments are made periodically by employers to help
employees maintain their purchasing power. Cost-of-living adjustments are
found in the escalator clauses of various union agreements. These
adjustments are made on the basis of increases in the consumer price index
(CPI).

The BLS collects on a monthly basis prices for different items such as food,
clothing, transportation fares, medical services, and other goods and
services. From these items the BLS calculates the CPI for the nation as a
whole and for different metropolitan areas—for example, Los Angeles,
Chicago, or Boston. Employers use the CPI figures as one basis for
determining the compensation paid to employees.

Gather CPI figures for various cities and the nation as a whole. These can be
used for discussion purposes.

There are various ways to grant pay increases to employees. Two of the
more common are (1) a flat dollar amount, and (2) wage increases as a
percentage of base salary. Granting wage increases based only on the CPI (a
cents-per-hour figure) rather than on a percentage basis serves to compress
pay rates within the organization’s pay structure. Unless adjustments are made
periodically in base rates, the differential between high- and low-paying jobs
will narrow.

Demonstrate this effort to students by using different examples.
4. Collective Bargaining

The effects of collective bargaining can be a major influence of the wage
mix. The high wages of some occupations (airline pilots, some construction
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trades) are attributed to the union’s power to demand high wages. As a
minimum goal in bargaining, unions will always attempt to increase the real
wages of employees (wage increases larger than the increase in the CPI).

IV.
To maintain similar contracts between employers and to prevent one employer
from obtaining favorable labor rates over another, unions will seek increases
that have become the pattern for the area or industry.
JOB EVALUATION SYSTEMS

Through the process of job evaluation, organizations determine the relative worth of
jobs. This procedure is followed to establish a hierarchy of jobs by which pay rates can
then be assigned. Although job evaluation is not an exact science, nor does it determine
an absolute worth to jobs, it does assist in establishing internal equity between
organizational jobs.

Explain that two systems (job ranking and job classification) are nonquantitative in
their approach, while the point system is a quantitative approaches to evaluating
jobs.

When evaluating jobs, managers must consider the impact of the Americans with
Disabilities Act (see Chapter 2).
A.
B.
C.
Job Ranking System

The job ranking system is the simplest and oldest of the job evaluation
techniques. All organizational jobs are simply ranked by one individual or a
committee of managers and employees into a hierarchy of jobs. Rankings are
based on some critical factor to job success (e.g., responsibility), or rankings can be
based on the total importance of the job to the organization.

Ask students to identify the weaknesses of this system. Weaknesses are given in
the textbook.
Job Classification System

The federal civil service system uses the job classification system to evaluate
jobs. With this technique, a predetermined number of grades are established. Each
grade requires more job skill, responsibility, or other factors deemed important to
the organization. Once the grades are defined, a job is slotted into a grade by
comparing the individual job description to the grade descriptions.

The textbook provides the GS-1 grade description for the federal government
job classification system.
Point System

The point system is the most frequently used quantitative method of job
evaluation. Total points are assigned to jobs based on the degree to which jobs
possess different compensable factors. The major compensable factors are skill,
effort, responsibility, and working conditions. More contemporary factors might
include fiscal responsibility, leadership, teamwork, or project accountability.
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These factors are subdivided into degrees. Degrees represent different levels of
difficulty associated with each factor.
1. The Point Manual

Organizations using the point system develop a point manual, which contains
descriptions of the compensable factors and the degrees to which these factors
may exist within the jobs. The point manual will also show the number of
points allocated to compensable factors and degrees. Refer to Highlights in
HRM 2, which shows the point values for job factors developed by the
American Association of Industrial Management.

Most organizations using the point system will develop their own point
manual. This permits the manual to be tailored to the organization and its
particular needs. A key consideration in developing the point manual is the
definition given to the degrees of a factor. Descriptions of degrees should be
concise, and descriptions should be distinguishable between degrees.
2. Using the Point Manual—Jobs are evaluated by comparing the job
requirements, factor by factor, against the factor degree descriptions in the point
manual. When a degree is chosen, the points assigned to that degree are written
down. This is done for each job requirement until a total point score is obtained.
Jobs are ranked according to their relative worth based on the points assigned to
them.
D.
E.
V.
Work Valuation

Work valuation is a job evaluation system designed to meet the demands of a
dynamic business environment.

Work evaluation is based on the concept that work should be valued based on its
contributions to important business goals. Compensation dollars are therefore
maximized by paying for what is pivotal to the organization.

Important business goals might be customer service or operational objectives
and work is measured through standards which come directly from these goals.
Job Evaluation for Management Positions

Organizations often find it more difficult to evaluate the worth of managerial
jobs because of the complexity of these jobs. Where managerial jobs are
evaluated, organizations have modified their hourly job evaluation system to meet
the complexities of managerial jobs.

One popular method for evaluating managerial jobs is the Hay profile method.
This system is based on three basic factors—knowledge, mental activity, and
accountability. The Hay system is similar to the point method discussed earlier.
COMPENSATION IMPLEMENTATION
Once organizational jobs have been evaluated, jobs must be assigned a wage rate.
Determining wage rates begins with the wage and salary survey.
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Wage and Salary Surveys
Organizations will conduct a wage survey to determine what other employers are
paying for specific jobs. Surveys allow an organization to maintain an external equity
for similar jobs in the labor market. The survey will cover employees in the
organization’s relevant labor market—local, regional, or national—depending on the
job.
1. Collecting Survey Data

Organizations can use surveys conducted by other organizations. For example,
the BLS is a major publisher of wage and salary data. These data are available in
many forms and for different geographical areas. Many state governments also
collect compensation data for use by current and prospective employers in the
state.

Refer to Highlights in HRM 2, which shows and discusses the Bureau of
Labor Statistics National Compensation Survey.

Problems with preconducted surveys are that they do not always survey
jobs of interest to the organization and they may not collect the type of
compensation data desired.
2. HRIS and Salary Surveys—Employers can obtain a variety of wage and
benefit data from both public and commercial websites. These sites are readily
available and easily accessed. Commercial websites can be found in different
human resource and compensation journals.
3. Employer-Initiated Surveys—Employers normally follow these steps when
conducting their own surveys:
a.
b.
c.
d.
B.
C.
Select jobs to be used in the survey.
Identify organizations to survey.
Decide on the information to be collected.
Tabulate the results for internal wage-setting purposes.
The Wage Curve

Once wage data are collected through the wage and salary survey, the
organization will construct a wage curve. This curve shows the relationship
between the relative worth of jobs (determined by job evaluation) and their wage
rates. The wage curve can be developed by preparing a scattergram of the wages
currently paid jobs and drawing a freehand curve through the dots of the
scattergram.

Refer to Figure 9.6 in the textbook. The wage curve will show the relationship
between the value of a job and its wage rate at any given point on the line.
Pay Grades

For pay purposes, similar jobs are normally grouped together. Then all jobs
falling within a pay grade are paid the same wage rate. This is administratively
easier than paying each individual job a different rate.
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
D.
E.
Pay grades can be determined on the basis of points (for example, all jobs having 0–
175 points would be in grade 1) or on a dollar basis.
Rate Ranges

Organizations may decide to have a single wage rate for each pay grade, as
illustrated in Figure 9.7 in the textbook. Most organizations, however, prefer to
develop rate ranges for each pay grade.

Refer to Figure 9.7 in the textbook, which shows a wage structure with increasing
rate ranges. Point out the midpoint, range steps, and range overlap for the rate
range. Explain how employees can be moved through the rate range.

Ask students what benefits rate ranges provide employees and the employer.
Competence-Based Pay

Classifying jobs in groups may fail to compensate employees for special skills or
knowledge they may possess. To overcome this problem organizations may
pay employees according to a competence-based pay plan. Under these plans, also
called skill-based pay or knowledge-based pay, employees are paid for the skills
and knowledge they possess rather than for the particular wage class their job falls
into.

When a competence-based pay plan is used, employees will receive a pay
increase when a new skill or competency is learned measured against a
predetermined standard.

Benefits associated with competence-based pay include increased productivity,
a greater willingness to learn, and flexible scheduling.

Ask students if they see any problems associated with competence-based pay
plans. The textbook lists several of these problems, including a wage cap on the
amount of salary an employee can earn, and the fact that not all employees may
qualify for competence-based pay, thereby creating friction between groups of
employees.
1. Broadbanding
VI.

Broadbands replace a multitude of salary grades with a few wide salary bands
(thus, the term “broadbands”).

Broadbands are used when organizations reward employees on a competencebased pay system. Broadbands permit a greater use of employee talents by
paying employees for increased job responsibilities or improved individual
skills or competencies.
COMPENSATION ASSESSMENT
Getting your compensation system up and running is not the end of your task as a
manager. Once it has been implemented, assessing the effectiveness of your compensation
system is vitally important to linking compensation with strategy. With the right measures,
you can (1) help the company detect potential compensation problems, (2) make
compensation decisions more transparent, and (3) improve the alignment of compensation
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decisions with organizational objectives. The compensation scorecard collects and
displays the results for all the measures that a company uses to monitor and compare
compensation among internal departments or units. While different companies will use
different measures of compensation, the scorecard creates a comparative tool within the
organization that can reinforce desired outcomes that are unique to the company’s strategy.

Refer to Figure 9.9 in the textbook for a discussion on Compensation Scorecard.
VII. GOVERNMENT REGULATION OF COMPENSATION

Compensation administration has not escaped government regulation. Most states have
minimum wage laws set by state wage boards. At the federal level, three important
laws govern the regulation of compensation. These are (1) the Davis-Bacon Act, (2) the
Walsh-Healy Act, and (3) the Fair Labor Standards Act.

Refer to Highlights in HRM 3 in the textbook to illustrate in the minimum wage laws in
the different states.
A.
B.
C.
Davis-Bacon Act of 1931

The Davis-Bacon Act covers workers employed on public works projects worth
more than $2,000. The law requires employers to pay the prevailing rates for the
area and to pay overtime at the rate of 1½ times this rate.

Ask students whether these laws are still appropriate today. Ask if they believe
these laws result in higher labor costs than what otherwise might be expected.
Walsh-Healy Act of 1936

This law covers workers employed on government contracts in excess of $10,000.
The Walsh-Healy Act requires employers to pay at least the prevailing wage for
the area, often taken to mean the union rate for the jobs in question.

The act requires covered employers to pay overtime of 1½ times the regular rate
for all work performed in excess of eight hours in one day or forty hours in one
week, depending on which payment method provides the larger premium.
Fair Labor Standards Act of 1938 (as Amended)
Passed in 1938, the FLSA covers employers engaged in interstate and foreign
commerce. Also included are retail and service employers whose sales volume exceeds
a set amount. The FLSA regulates three main areas. These are minimum wages and
overtime payment, child labor, and equal rights.
1. Wage and Hour Provisions

Federal law establishes a minimum wage for employers covered by the FLSA.
The minimum rate applies to the actual earnings rate before any overtime
premiums have been added.

Highlights in HRM 4 shows the federal minimum wage poster. The law
requires employers to display this poster where employees can readily see it.
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
Under the FLSA, covered employers must pay overtime at the rate of 1½
times the base rate for all hours worked in excess of forty hours in a given
week.

The FLSA permits employers to pay a “training wage” to unskilled workers
during their initial ninety days of employment.

The FLSA does not require employers to pay severance pay, sick leave,
vacations, or holidays.

Discuss how managers might violate the overtime provisions of the FLSA.
These are noted in the textbook.
2. Minimum Wage and Pay Compression

Pay-rate compression occurs when the pay difference between successive
wage grades narrows. This compression is frequently found between highly
paid hourly employees and their immediate supervisors.

Ask students what problems this can cause the organization. What causes
wage-rate compression?

The textbook suggests several ways for organizations to alleviate the problem
of wage-rate compression.
3. Child Labor Provisions—The FLSA prohibits employers from employing
minors between the ages of sixteen and nineteen in hazardous occupations in
industries such as mining, logging, and meat packing.
4. Exemptions from Overtime Provisions—The FLSA does permit the exemption
from overtime payments of certain employee groups. These are classified as
“exempt” employees. Five employee groups—executives, administrators,
professionals, computer and outside salespersons—are specifically excluded from
the overtime provisions. The FLSA generally employs a narrow definition of
exempt employees. Local wage-hour offices can provide exact terms and
conditions for exempt employees.

Discuss the new fair pay rules of the DOL. These are also given in the text.
5. Pay Equity Provisions

The FLSA was amended by the Equal Pay Act of 1963 (see Chapter 3). The
law prohibits paying one sex less than the other sex for jobs that are equal or
similar in nature and performed in the same organization.

Although the law provides for equal pay for equal work, women still have
not achieved wage parity with men. Women are still clustered in low-paying
jobs. Refer to Figure 9.11 in the textbook.

Studies show that women have narrowed the wage gap with their male
counterparts, but improvements have been small and slow in coming.
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ANSWERS TO END-OF-CHAPTER DISCUSSION QUESTIONS
1. To obtain a high-quality workforce, Tomax will want to pay wages above the going
market rates. This policy will also help to reduce turnover while maintaining among
employees a feeling of equity. If the company is organized into teams, it may want to pay
employees on a pay-for-knowledge or skill-based system using broadbands. Operating in a
dynamic environment, Tomax will want to obtain the most output for its compensation
dollar by rewarding employees on a pay-for-performance basis.
2. One of the main points in this question is that jobs should be organized as much as possible
to fit the needs of an organization; its employees, in turn, should be placed in those jobs that
they are most capable of performing. If employees are properly placed, the differences in
their relative worth to the organization should be consistent with the worth of their jobs.
Variation in performance among persons in a particular job can be taken care of through
performance ratings.
3. Job evaluation is the systematic analysis of jobs in order to determine the relative value of
each job in relation to all other jobs within the organization. Job evaluation seeks to establish
internal equity among various jobs.
The two nonquantitative approaches to job evaluation are the ranking method and the classification method. The ranking method compares jobs to each other to obtain a simple rank
order of jobs from lowest to highest. Jobs are compared to each other based on some
criteria (e.g., responsibility) or on the jobs as a whole. The classification method slots jobs
into predetermined grades. Written “grade descriptions” are created by identifying some
common denominator(s) (e.g., skills, knowledge, and so on). Higher grades are written as
having more of the significant denominator(s).
The quantitative job evaluation method is the point method. The point method evaluates jobs
by breaking jobs down into agreed upon compensable factors (e.g., responsibility, skill,
effort, and working conditions) and then allocating points to each of these criteria. Weights
can be assigned to these factors depending on their importance to the organization or jobs.
Jobs are evaluated by comparing their content to the compensable factors, thereby obtaining
a total point score for each job. Jobs with similar total points are grouped together into pay
grades. The work valuation system of job evaluation values the worth of jobs against
important business goals and objectives. Those jobs deemed more “valuable” to the
organization are rated higher than those not as important to organizational success. This
method is not as objective as the point system and could lead to employee discontent if not
fully accepted.
4. The employer must first decide on the jobs to be included in the survey. Next, the employer’s
relevant labor market must be determined. The labor market will depend on the jobs for
which the survey is being conducted. After completing these steps, the employer will
identify other organizations it wishes to survey. Organizations will be selected that will give
a broad view of the employer’s competitors. Finally, the employer must decide on the type
of information it wishes to collect. Although competitive wages will be the primary
information collected, data on employee benefits or organizational pay practices can also be
gathered.
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5. While the argument cited is a common one, it ignores the need to develop and preserve
adequate rate differentials with which to provide some incentive for employees to achieve
positions of greater responsibility. Additionally, senior employees, those earning higher
salaries, should be rewarded for their experience and knowledge that contribute to increased
productivity.
6. The compensation scorecard collects and displays the results for all the measures that a
company uses to monitor and compare compensation among internal departments or units.
While different companies will use different measures of compensation, the scorecard creates
a comparative tool within the organization that can reinforce desired outcomes that are
unique to the company’s strategy. Managers in companies without compensation scorecards
often struggle to know if the promotions, raises, bonuses, and pay adjustments they make are
in line with the rest of the organization and its strategy. A scorecard improves transparency
of how people are rewarded and makes managers responsible for how they spend company
money. Most compensation scorecards are completed once a year by HR. Figure 9.9
represents an example of a compensation scorecard.
7. a. The prevailing wage is often biased upward to reflect wages paid by higher-paying
employers. The prevailing wage can be, and is, often based on the union rate for jobs in
consideration. Therefore, prevailing wage laws serve to raise the cost of government
projects over what might have to be paid.
b. Employers argue that by having to pay the minimum wage they could be forced to
employ less labor or switch to laborsaving equipment to remain competitive. Employees
maintain that the minimum wage is needed to keep up with the cost of living and secure a
minimum standard of living.
HRM EXPERIENCE
Why This Salary?
1. This question can be answered by referring students to the factors affecting the
wage mix as discussed in the chapter. Some jobs are paid more because they
have more worth (e.g., they are more important) to the employer. The job of airline
pilot is worth more to an airline than the job of flight attendant. The same
reasoning could be cited for the difference in wages between a computer services
manager and a motel desk clerk. Also, some employers may have a
compensation strategy to be a wage leader in the hope of attracting and retaining
quality employees. The employer’s ability to pay can greatly affect what it pays
employees relative to similar positions in other organizations. Finally, the skill,
abilities, and knowledge of employees can significantly affect their salaries
relative to other employees doing a like job. For example, in a college faculty
some teachers may be paid more than others because of their ability to publish
articles in premier journals or because they have superior teaching records.
2. Factors that may account for the difference among wages/salaries for the
identical occupation in the same organization include (1) worth of the
employee (e.g., an employee’s skills, abilities, knowledge), (2) seniority of the
employee, (3) job knowledge gained from a different employer, and (4) the potential
of the employee as judged by the employer. Also, an employee’s “political skills”
and “likeability” can account for differences in employee wages or salary.
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3. An employer’s compensation strategy, worth of the job to the organization, the
employer’s ability to pay, and the worth of the job to the organization are factors
accounting for the differences among salaries for the identical occupation in
different organizations.
ANSWERS TO USING THE INTERNET ACTIVITIES
Internet Exercise #1, page 413
U.S. Bureau of Labor Statistics
http://www.bls.gov/
Question:
Visit the website of the U.S. Bureau of Labor Statistics and locate a resource for looking up
employment statistics by occupation. Select a current or desired occupation and locate wage or
salary information for the selected occupation. Provide a summary of your findings, including
mean and percentile wage and salary estimates.
Answer:
Student answers will vary based on current or desired occupations. A student wishing to become
a Human Resource Manager might provide wage and salary information similar to what is
presented below:
11-3121 Human Resources Manager - Plan, direct, or coordinate human resources activities and
staff of an organization.
National wage and salary estimates:
 Employment: 67,700
 Mean hourly wage: $52.21
 Mean annual wage: $108,600
Percentile wage and salary estimates:
 10 Percent: $29.59 (hourly), $61,560 (annual)
 25 Percent: $37.14 (hourly), $77,240 (annual)
 50 Percent: $47.68 (hourly), $99,180 (annual)
 75 Percent: $62.54 (hourly), $130,090 (annual)
Source:
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Part 4: Implementing Compensation and Security
http://www.bls.gov/oes/
Internet Exercise #2, page 424
National Committee on Pay Equity
http://www.pay-equity.org
Question:
Visit the website for the National Committee on Pay Equity. According to information presented
on the website, how has pay equity changed since the Equal Pay Act was signed in 1963?
Develop your position on the issue of present pay gap. What do you believe should be done to
improve the situation? Explain.
Answer:
Since the Equal Pay Act was signed in 1963, the wage gap has been closing at a very slow rate.
In 1963, women who worked full-time, year-round made 59 cents on average for every dollar
earned by men. In 2009, women earned 77 cents to men's dollar. In the last ten years, the wage
gap has decreased from 73 cents to the dollar to 77 cents to the dollar, as presented below:
Chapter 9: Managing Compensation
Year
Women's
Men's
Earnings
Earnings
127
Dollar
Percent
Difference
2009
$36,278
$47,127
$10,849
77.0%
2008
$35,745
$46,367
$10,622
77.1%
2007
$35,102
$45,113
$10,011
77.8%
2006
$32,515
$42,261
$9,476
76.9%
2005
$31,858
$41,386
$9,528
77.0%
2004* $32,285
$42,160
$9,875
76.6%
2003
$30,724
$40,668
$9,944
75.5%
2002
$30,203
$39,429
$9,226
76.6%
2001
$29,215
$38,275
$9,060
76.3%
2000
$27,355
$37,339
$9,984
73.3%
Student answers will vary to the second part of the question.
Source:
http://www.pay-equity.org/info-time.html
Part 4: Implementing Compensation and Security
128
VIDEO CASE DISCUSSION GUIDE
According to the video, the child care industry is known for low pay with few benefits, which is
why so few people stay in the industry.
Child care workers value a competitive wage with valuable benefits, such as health insurance,
paid vacations, and tuition reimbursement for further education.
There are multiple answers to this. Some students might mention that most child care workers
initially are attracted to the industry because they’re motivated for a desire to work with, care
for, and educate young children. From an HR perspective, students should also understand
that the founders of Bright Horizons recognized early on that they could attract and retain the
highest caliber child care workers if they took a different approach to compensation and
offered competitive wages and attractive benefits packages. Workers are motivated to stay in
the industry for the long term by these factors.
This is a good opportunity to discuss what other motivators HR managers can use, once the basic
expectations for wages and benefits have been met. In this case, Bright Horizons offers a
range of additional benefits as well as rewards and other incentives.
NOTES FOR END-OF-CHAPTER CASE STUDIES
Case Study 1: Pay Decisions at Performance Sports
1. The “going rate” of pay for purchasing agents is the factor most likely to influence the
compensation for these individuals. Perkins must also consider the experience she wants for
this position and factor this into her pay decision. Another consideration that could affect the
pay of the purchasing agent is whether the labor market for these individuals is tight or loose.
Finally, Perkins will need to consider the person’s current wage (if working) and how much
additional money will be needed to entice the person to change employers.
Published wage surveys available from state and federal government agencies would be
excellent sources of wage information. Professional associations may also be of some
assistance. Finally, Perkins could call other employers to see what they pay their purchasing
agents.
2. The primary advantage of a pay-for-performance program is that it ties employee effort
and performance directly to the compensation received. Studies generally show that
organizational productivity increases when employees are paid on a pay-for-performance
basis.
Drawbacks of a pay-for-performance program include establishing performance standards,
determining how employee performance should be measured, and the size of the monetary
reward to be given outstanding employees. Pay-for-performance may be unpopular with
average or below-average producers, and it can be seen as unfair when only some groups of
employees can increase their wages while other groups are denied the opportunity to work
under this payment program.
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3. Several options are available to pay the customer service representatives. New
representatives can be paid a straight wage until they completely learn the job. At that time,
they could be compensated on a straight rate, commission, or a combination of salary and sales
commission. Sales commissions could vary based on dollar volume of sales made. For
example, a lower sales commission could be paid for sales up to a certain dollar amount and
increase as sales go up.
Case Study 2: An In-N-Out Pay Strategy: Costa Vida’s Decision to Boost
Pay
1. In discussing this question with the class, turn it around and ask what would likely happen if
a firm’s pay was not externally fair? Also, ask them if there is a definition of “fair” that
everyone would recognize?
2. Again, in discussing this question with the class, turn it around and ask what would likely
happen if a firm’s pay was not internally fair?
3. There will be many answers to this question. The firm’s compensation strategy is directed
toward attracting quality employees who in turn will attract customers and toward retaining
such quality employees. To the extent that this may involve higher employee costs it is
assumed that the increase in costs will be more than offset by the increased revenues from
happier customers.
4. There will be many suggestions. There is not necessarily a right or wrong answer but
respondents should prepared to show how their suggestion would accomplish what was
discussed in the above question. Possibilities might include a modest fixed hourly wage
which would increase somewhat for those who remain with the firm and incentive pay based
on sales volume and/or profitability of each store. In that way employees would be
encouraged to work as a team to increase overall revenues for their location that would then
enable the individual to afford what is being paid. Incentive pay will be covered in more
detail in the next chapter.
5. There are many alternative ways of communicating the approach to franchise owners and
managers. However, some franchise organizations have periodic conferences (at a physical
location or online) in which they discuss common problems and opportunities. Such a
conference would not only provide for communication to the franchisees but also enable
interactive discussion among all concerned.
6. Depending on the pay mix that is used, the effect might be a short-term increase in costs
more than offset with higher profits in the long run. It is also possible that if the increased
pay is in the form of incentive pay there might be no change in short term costs and only the
potential for the higher profits.