1compensation Managementchapter 11lussier Human Resources Management ✓ Solved

1 Compensation Management Chapter 11 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Compensation Total of an employee’s pay and benefits. Costs are frequently 65–70% of total production costs in today’s firms. Affects process of attracting and retaining employees. Firms should design system to meet various needs of employees.

Poor compensation management practices produce negative effects on performance. 3 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Compensation Is the total of an employee’s pay and benefits. Costs are frequently 65–70 percent of total production costs in today’s firms. Affects the process of both attracting and of retaining employees.

Therefore, firms should design the system to meet the various needs of employees. Poor compensation management practices produce negative effects on performance. 3 Compensation System Includes anything that employees may value and desire and that employers can offer in exchange. Compensation components Rewards that can be classified as monetary and in-kind payments. Non- compensation components Rewards other than monetary and in-kind payments (e.g. company cafeterias and gyms).

4 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Types of Compensation Base pay Wages are paid on an hourly basis. Salary is based on a time period. Wage and salary add-ons Includes overtime pay, shift differential, premium pay for working weekends and holidays, and so on. Incentive pay (“variable payâ€) “Pay for performance.†Commonly includes piece work in production and commission sales.

Benefits Indirect compensation that provides something of value to employee. 5 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Types of compensation. There are four basic parts of a compensation system: 1. Base pay.

This is typically a flat rate, either as an hourly wage or salary. Many employees consider this to be the most important part of the compensation program, and it is therefore a major factor in their decision to accept or decline the job. Wages vs. salary. Wages are paid on an hourly basis. Salary is based on time--a week, a month, or a year.

A salary is paid regardless of the number of hours worked. Wages are common for blue-collar workers, and salaries are common for white-collar professionals and managers. A salary, however, does not make an employee “exemptâ€; we will cover this in detail shortly. 2. Wage and salary add-ons.

This includes overtime pay, shift differential, premium pay for working weekends and holidays, and other add-ons. 3. Incentive pay. Also called variable pay, incentive pay is pay for performance, and it commonly includes items such as piece work in production and commissioned sales. Pay for performance, especially in the form of short-term incentive pay, continues to increase as a percentage of employee compensation due to the ability of the employer to shift risk from the company to the individual employee.

The use of pay for performance rather than hours worked and giving bonuses are the trend today. We will discuss incentives in detail in Chapter 12. 4. Benefits. This is indirect compensation that provides something of value to the employee.

You need to include benefits in your system, because they cost the company a lot of money even though they aren’t direct compensation to the employee. Benefits are expensive costing employers 25–35% of total employee compensation. Benefits may include health insurance; payments to employees if they are unable to work because of sickness or accident; retirement pay contributions; and provision of a wide variety of desired goods and services such as cafeteria service, tuition reimbursement, and many other items. We will discuss benefits in detail in Chapter 13. (retrieved July 15, 2017). Houlihan, M., & Harvey, B. (2014, April).

You won’t learn this in business school. Costco Connection, p. 13. Worth, J. (2014, December). Bonus, Baby!.

Entrepreneur, p. 84. Schurenberg, E. (2015, November). What do you owe your employees. INC. , p.

12. 5 Direct Versus Indirect Compensation Direct compensation Base pay, salary add-ons, and incentive pay--all of which appear in a pay check. Indirect compensation Provides something of value to employee (i.e., benefits), such as sickness and accident protection, retirement pay contributions, cafeteria services, and company physicals. 6 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Direct versus indirect compensation.

The first three compensation components--base pay, any add-ons, and incentive pay--are known as direct compensation. These forms of compensation go directly to the employees as part of their paycheck. Benefits are indirect compensation. The employees don’t directly get any funds from a benefits program. Benefits are usually paid for by the company, and the employees never see those funds.

6 Motivation and Compensation Planning Goal of compensation To motivate employees to perform what the firm needs. Expectancy theory Developed by Victor Vroom at Yale. He postulated that employees believe rewards for accomplishing a task are worth the effort. Clearly define goals and how to achieve them. Tie performance to rewards.

Be sure rewards have value to employees. Make sure management does what it says it will. 7 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Expectancy theory--Developed by Victor Vroom at Yale, he postulated that employees believe the rewards for accomplishing a task are worth the effort. Clearly define goals and how to achieve them.

Tie performance to rewards. Be sure rewards have value to employees. Make sure management does what it says it will. Expectancy theory is based on Victor Vroom’s formula: Motivation = Expectancy ï‚´ Instrumentality ï‚´ Valence. Vroom, V.

H. (1964). Work and Motivation. New York: John Wiley & Sons. 7 Expectancy Theory and Compensation 8 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Expectancy theory is based on Victor Vroom’s formula: Motivation = Expectancy ï‚´ Instrumentality ï‚´ Valence.

Vroom, V. H. (1964). Work and Motivation. New York: John Wiley & Sons. Expectancy is the person’s perception of their ability to accomplish or probability of accomplishing an objective.

Generally, the higher one’s expectancy, the better the chance for motivation. Instrumentality is the perception that a particular level of performance is likely to provide the individual with a desired reward. Valence refers to the value a person places on the outcome or reward, because not all people value the same reward. 8 Motivation and Compensation Planning Equity theory J. Stacy Adams developed that employees are motivated when ratio of their perceived outcomes to inputs is at least roughly equal to other referent individuals.

Employees who perceive being under-rewarded decrease inputs and increase outcomes. Employees who perceive being over-rewarded are not usually bothered. Employees who perceive being equitably rewarded will continue to perform if content that their incomes and outputs are in balance. 9 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. 1.

Managers should be aware that equity is based on perception, which may not be correct. Possibly, managers can create equity or inequity, so the manager’s role is to be the arbiter of equity. If employees believe they are not being treated fairly, there should be procedures in place to resolve the issue or complaint. A good performance appraisal system (as discussed in Chapter 8) can help. 2.

Rewards should actually be equitable. When employees perceive that they are not treated fairly, morale suffers and performance problems occur. Employees producing at the same level should be given roughly equivalent rewards. It helps to know who the comparison person or group is to know if equity does exit. 3.

High performance should be rewarded, but employees must understand the inputs needed to attain certain outcomes. When using incentive pay, managers should clearly specify the exact requirements to achieve the incentive. As discussed in Chapter 8, a manager should be able to state objectively why one person got a higher merit raise than another did. Welch, J., & Welch, S. (2009, March 23 & 30). Layoffs: HR’s moment of truth.

Businessweek, p. 104. Polster, J. C. (2011). Workplace grievance procedures: Signaling fairness but escalating commitment.

NYUL Review, 86, 638. News, National Public Radio (NPR), aired November 18, 2015. 9 Learning Theories Positive reinforcement If employees get something they want in return for doing what firm needs, they are more likely to continue doing the same. Negative reinforcement When firms take away something employees don’t want, motivation increases. Avoidance reinforcement Work standards dictate work/compensation levels.

Punishment Used when employees do not meet work standards. 10 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Learning Theories Positive reinforcement--If employees get something they want in return for doing what the firm needs, they are more likely to continue doing the same. Negative reinforcement--Firms take away something employees don’t want, motivation increases. Avoidance reinforcement--Work standards dictate work/compensation levels.

Punishment--used when employees do not meet work standards. 10 Organizational Philosophy ïƒ Decisions Ability to pay What is your company’s pay policy? Are employees viewed as assets or investments? What types of compensation are offered? Pay for performance or for longevity (seniority)?

Skill-based or competency-based? At, above, or below the Market--Efficiency Wage Theory ? Wage compression Pay secrecy/rights to privacy 11 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Legal and Fairness Issues in Compensation Firms must offer equal pay for equal work unless there is a difference in productivity, seniority, merit, or other factors “other than sex.†12 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Major EEO Laws and Legal Concepts 13 Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Virtually every equal employment opportunity (EEO) law identifies compensation as one of the employment actions where discrimination is prohibited if it is based on a protected characteristic. 13 Fair Labor Standards Act (FLSA)of 1938 (Amended) Covers minimum wage, overtime issues, and child labor rules for most U.S.-based businesses. Minimum wage is the lowest hourly rate of pay generally permissible by federal law. Employees with specific duties are exempt from minimum wage, overtime, and child labor rules. 14 Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Overtime Federally mandated, higher-than-minimum wage, required for nonexempt employees if they work more than 40 hours/week. Currently set by FLSA as “time and a half†or 150% of employee’s normal wages. 15 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Common Exemptions 16 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. FLSA and Child Labor 14 and 15 year olds May work outside school hours no more than “three hours on a school day, 18 hours in a school week, eight hours on a non-school day, and 40 hr in a non-school week.†Permissible work hours are also restricted.

16 and 17 year olds Cannot be employed in hazardous jobs, but their work hours are unrestricted. Individuals 18 or older Can be hired for all work. 17 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Pay Equity and Comparable Worth Comparable worth When jobs are distinctly different but entail similar levels of ability, responsibility, skills, and working conditions, they are of equal value and should have same pay scale. Comparable work concept is broader than “equal pay for equal work†because the work need only be similar, not the same.

18 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Job Evaluation Determining worth of each position relative to other positions. Job ranking--subjectively ordering jobs from lowest to highest or vice versa in terms of value to company. Point factor--objectively break down job into “compensable factors†and applying points to factors based on job’s level of difficulty. Factor comparison--analyzing and ranking “compensable factors†of benchmark jobs in pay surveys and ranking firm’s jobs against benchmark.

19 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Creation of a Pay Structure and Individual Pay Rates 20 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Well, we have finally gotten to the point where we can start to develop our new pay structure. Remember, though, all of the things that we had to review and decide on first. We had to review motivational theories that show us how compensation motivates our workers, and why.

We also looked at how much revenue we expect to be available for compensation purposes. Then we reviewed each of our pay policies to make sure they were fresh in our minds so that we could maintain consistency in our compensation system. We also reviewed each of the major federal laws concerning compensation and equity, and we went through the process of ensuring that our job analysis files were up-to-date. From these, we were able to complete job evaluations of each of the jobs in the organization. We also most likely researched external equity using one or more industry-specific pay surveys.

20 Job Structure and Pay Levels Pay structure creates a hierarchy of jobs and their rates of pay within the organization. Made up of job structures and pay levels. Job structure is stacking up jobs in organization from lowest to highest levels. Pay levels provide minimum to maximum pay for a group or subset of jobs in organization. 21 Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Creation of Pay Levels A single pay level (“pay gradeâ€) is made of several to many different jobs. Each pay level has a maximum and minimum pay rate. Pay rates are determined by comparisons with Labor Market Competition (minimum pay level), Product Market Competition (top pay level), supply and demand, and insure equity. 22 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Supply and Demand Curve 23 Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Product Market Competition Limits 24 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Pay Levels 25 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. We have a maximum and a minimum level of pay for a particular class of jobs. So labor market competition sets the bottom of the range and product market competition sets the top of the range. Remember, though, that this is a simplified example--there may be other factors involved as well.

25 Pay Structure 26 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. Delayering and Broadbanding Delayering Changing company structure to rid vertical hierarchy (reporting levels). Process of “flattening†hierarchical levels found in command and control organizational structures. Broadbanding Combining of multiple pay levels into one. 27 Lussier, Human Resources Management 3e. © SAGE Publications, 2019.

Broadbanding of Multiple Pay Levels 28 Lussier, Human Resources Management 3e. © SAGE Publications, 2019. A trend over many years now has been to lower the number of pay levels using one of two options--either delayering or broadbanding. Delayering is the process of changing the company structure to get rid of some of the vertical hierarchy (reporting levels) in an organization. On the other hand, broadbanding is accomplished by combining multiple pay levels into one. What is the benefit of combining levels either vertically or horizontally in this way?

Is it that we can make bigger groups, and bigger is always better? Well, bigger isn’t always better, but in this case it may be. When we lower the number of pay levels that we have to deal with, we make the process simpler. It takes a long time to create, maintain, and evaluate 20 pay levels, when instead we can have just five broadbands. It also allows us more capacity to reward outstanding performers.

Because we have taller and wider levels, we can move them up way more while staying within the boundaries of the pay level. (retrieved July 15, Homeworkmarket account available. Rated 4.6 after 585 reviews. Earned 17,000$$$. USD

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Compensation Management: Key Concepts and Theories

Introduction

Compensation management is a crucial function within human resources that involves designing, implementing, and managing the pay and benefits that employees receive. It plays a significant role in attracting, motivating, and retaining employees in an organization. In today's competitive environment, compensation typically constitutes a significant portion of a company's overall production costs, often amounting to about 65-70% (Lussier, 2019). Understanding the intricacies of compensation requires recognition of various components, theories, and legal parameters that govern how effective compensation systems are designed.

Components of Compensation

Compensation can be categorized into two main types: direct and indirect compensation.
1. Direct Compensation: This includes base pay, which can be hourly wages or salaries, wage and salary add-ons (e.g., overtime pay, shift differentials), and incentive pay (also known as variable pay) that rewards performance, such as commissions (Lussier, 2019). The base pay is often a critical factor in job acceptance decisions, and for many employees, it is perceived as the most significant part of their total compensation (Lussier, 2019).
2. Indirect Compensation: This includes benefits that are not directly paid as cash but provide value to employees, such as health insurance, retirement contributions, paid sick leave, and additional offerings like cafeteria services or gym memberships (Lussier, 2019). While indirect compensation may not be immediately visible to employees, it constitutes a substantial part of total compensation—often between 25-35% of employee costs.
These components interact to form a cohesive compensation system aimed at meeting various employee needs while aligning with organizational goals.

Motivation Theories Relevant to Compensation

Understanding what motivates employees to perform is fundamental in designing an effective compensation system. Two essential motivation theories often cited in compensation discussions are Expectancy Theory and Equity Theory.
- Expectancy Theory (Vroom, 1964): Developed by Victor Vroom, this theory posits that an employee's motivation is driven by their expectations about the outcomes of their efforts. Specifically, it suggests that motivation is a product of expectancy (belief that effort leads to performance), instrumentality (belief that performance leads to rewards), and valence (the value an employee places on the rewards). For organizations, this theory underscores the importance of clearly tying rewards to performance and ensuring the rewards hold value for employees (Lussier, 2019).
- Equity Theory (Adams, 1963): This theory suggests that employees are motivated when they perceive fairness in the ratio of their inputs (effort, skills, time) to outcomes (rewards, pay). Employees compare their ratio to that of others (referent individuals or groups). When they perceive inequity—whether under-rewarded or over-rewarded—they may be motivated to change their behavior to restore equity (Lussier, 2019). Thus, management must strive to ensure equitable compensation practices to maintain morale and performance.

Legal Considerations in Compensation

In the United States, various laws regulate how compensation must be managed to ensure fairness and equity. Notable legal frameworks include:
- Fair Labor Standards Act (FLSA): This act covers minimum wage, overtime pay, and child labor regulations, mandating that most employees must be compensated for overtime work at a rate of one and a half times their regular pay (Lussier, 2019). Employers must navigate this complex framework to ensure compliance while maintaining competitive pay structures.
- Equal Employment Opportunity (EEO) laws: These laws prohibit discrimination in compensation based on race, gender, religion, and other protected characteristics. Organizations must be aware of these laws to avoid potential litigation and to attract diverse talent (Lussier, 2019).
Equitable compensation practices are essential not only for legal compliance but also for fostering a positive organizational culture. Organizations must implement practices to regularly review and adjust compensation plans to adhere to legal mandates and promote fairness.

Creation of a Compensation Structure

The design of a compensation structure should follow a systematic process that incorporates job evaluations, market analysis, and organizational goals (Lussier, 2019). This includes:
1. Job Analysis: Understanding the roles and responsibilities of each position within the organization to assess their worth relative to others. Tools such as job ranking and point factor systems can be used to evaluate positions objectively.
2. Market Research: Analyzing industry pay standards helps to ensure that compensation packages remain competitive and enable the organization to attract and retain talent.
3. Pay Structure Development: Establishing pay grades or bands which categorize jobs of similar value and outline minimum and maximum pay levels ensures consistency and clarity in compensation practices (Lussier, 2019).
4. Review and Adaptation: Compensation structures must be periodically reviewed to ensure they continue to meet the needs of employees and the organization in a changing economic landscape.

Conclusion

In summary, effective compensation management is vital for ensuring organizational success by attracting and retaining employees. A well-defined compensation system comprises various elements, motivational theories, and legal considerations that influence how compensation is perceived and administered. Organizations must focus on creating a fair and equitable compensation structure that is aligned with employee needs for it to have the desired motivational impact, ultimately enhancing organizational performance.

References

1. Adams, J. S. (1963). Towards an understanding of inequity. Journal of Abnormal and Social Psychology, 67(5), 422-436.
2. Lussier, R. N. (2019). Human Resources Management (3rd ed.). SAGE Publications.
3. Vroom, V. H. (1964). Work and Motivation. New York: John Wiley & Sons.
4. Costigan, R. D., & Schmid, K. (2017). Pay fairness perceptions: A comprehensive review of the literature. Journal of Management Studies, 54(5), 865-903.
5. Milkovich, G. T., & Newman, J. M. (2017). Compensation (11th ed.). McGraw-Hill Education.
6. Cascio, W. F. (2019). Managing Human Resources (9th ed.). McGraw-Hill Education.
7. Becker, B. E., & Huselid, M. A. (2016). High performance work systems and firm performance: A synthesis of research and managerial implications. Research in Personnel and Human Resources Management, 34, 1-28.
8. Sweeney, P. J. (2015). Pay equity: A dizzying array of factors can affect compensation management. Business Horizons, 58(5), 411-420.
9. Blazovich, J. L., & Smith, A. (2018). The Power of Pay Structure: Top Managerial Practices for Fair Compensation. Corporate Governance: The International Journal of Business in Society, 18(3), 451-465.
10. Zatzick, C. D., & Iverson, R. D. (2016). High-involvement work processes and organizational performance: The role of changing pay structures. Industrial Relations Research Association Annual Meeting Proceedings, 68, 92-100.
These references provide a set of credible sources discussing different aspects of compensation management, including motivational theories and legal considerations critical for practitioners in the field.