Chapter 11

Compensation
 Introduction

There are many work motivators, including

promotions
desirable work assignments
peer recognition
work freedom

but the focus in this chapter is pay.

they all help maintain employee commitment

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 2

 Rewards Review
Intrinsic Extrinsic
Non-financi
participation Financial
in al
decision
making assigned
Implied Explicit
Performance parking
membership-bas membership-bas
greater job based space
ed ed
freedom
preferred
cost of living protection
more bonuses assignments
increase Program
responsibility
business
labor market pay for time
opportunities piecework cards
adjustment not worked
for growth
own
services/
diversity commission profit sharing secretary
perks
of activities
impressive
incentive time-in-rank title
plans increase

merit pay
plans

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 3

 Types of Reward Plans

Intrinsic versus Extrinsic Rewards

intrinsic rewards (personal satisfactions)

come from the job itself, such as:
pride in one’s work
feelings of accomplishment
being part of a work team

extrinsic rewards come from a source outside

the job, mainly by management:

money
promotions
benefits

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 4

 Types of Reward Plans

Financial versus Nonfinancial Rewards

financial rewards:
wages
bonuses
profit sharing
pension plans
paid leaves
purchase discounts
nonfinancial rewards:
make life on the job more attractive; employees
vary greatly on what types they like

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 5

 Types of Reward Plans

Performance-based versus Membership-Based

performance-based rewards are tied to specific job

performance criteria
commissions
piecework pay plans
incentive systems
group bonuses
merit pay

membership-based rewards such as cost-of-living

increases, benefits, and salary increases are offered
to all employees

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 6

 Definition of compensation

Compensation is what employees receive in exchange

for their contribution to the organization.
Without adequate compensation, employee
dissatisfaction may arise, which may create other
problems, such as –
Poor performance
Strikes
Absenteeism
Psychological withdrawal from the workplace
Poor mental health
Etc.

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 7

 Compensation Administration

Companies derive their compensation programs

from job evaluation, which defines the appropriate
worth of each job.
An effective, fair compensation program
attracts motivates retains
competent employees.
Both employees and
employers
can research compensation
facts and issues at
[Link]
[Link]
[Link]
m/

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 8

 Compensation Administration

The Fair Labor Standards Act requires

minimum wage
overtime pay
record-keeping
child labor restrictions

exempt employees nonexempt employees

include professional and eligible for premium pay
managerial employees (time and one-half)
not covered under when they work more than
FLSA overtime provisions 40 hours in a week

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 9

 Compensation Administration

Equal Pay Act of 1963 requires that men and

women hired for the same job be paid the same.

Civil Rights Act:

broader than Equal Pay Act
prohibits discrimination on the basis of gender
used to support comparable worth concept
salaries established based on skill,
responsibility, effort, and working conditions

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 10

 Job Evaluation and the Pay Structure

Job evaluation helps set pay structure.

Job analysis information determines the relative value, or

rank, of each job in the organization.

Other pay structure factors:

labor market conditions
collective bargaining
individual skill differences Research wage
information at
the Bureau of Labor
Statistics
[Link]
[Link]

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 11

 Job Evaluation and the Pay Structure

Job Evaluation Methods

ordering classification point

method method method

A committee places Jobs placed in grades Jobs are rated and

jobs in a simple rank to compare their allocated points on
order from highest descriptions to the several criteria.
(worth highest pay) to benchmarked jobs. Jobs with similar
lowest. Look for a common point totals are
denominator (skills, placed in similar pay
knowledge, grades. Offers the
responsibility). greatest stability.

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 12

 Job Evaluation and the Pay Structure

Establishing the Pay Structure

compensation wage wage

surveys curves structure

Used to gather factual Drawn by plotting Designates pay ranges

data on pay rates for job evaluation data for jobs of similar
other organizations. (such as job points value. Results in a
or grades) against logical hierarchy of
Information is often pay rates (actual
collected on associated wages, in overlapping
or from survey
employee benefits as data). ranges.
well. Indicates whether
pay structure is
logical.

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 13

 Job Evaluation and the Pay Structure

External factors also influence pay structure.

geographic differences (local supply and demand)

labor supply (low supply = higher wages and vice versa)

competition (HR can match, lead, or lag)

cost of living as determined by the CPI

collective bargaining (unions)

employees must know how the pay structure is derived

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 14

 Special Cases of Compensation

Incentive Compensation Plans

organization-
individual
wide

group

incentives can be added to the basic pay structure to

provide rewards for performance

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 15

 Special Cases of Compensation

Individual Incentives

merit pay plans (annual increase, based

on performance)

piecework plans (pay based on number of

units produced typically in a specified
time period)

time-savings bonuses and commissions

these work best where clear objectives are set and tasks are
independent
Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 16
 Special Cases of Compensation
Group Incentives
Incentives can be offered to groups, rather than individuals, when
employees' tasks are interdependent and require cooperation.

Advantages Disadvantages

Focuses the group on specific performance Can be costly to install and administer.
targets. De-emphasizes individual performance,
Since rewards are controllable by which can result in excessive peer pressure.
individuals, the programs can be very Requires open communication with
motivational. employees on costs, profitability, etc. If the
The program can be integrated with other performance targets are not carefully
corporate initiatives and leads to improved selected, adverse results may occur.
communication and employee relations See:
[Link]

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 17

 Special Cases of Compensation

Organization-wide Incentives
direct employee efforts toward organizational goals (such as
cost reduction)

Scanlon Plan - supervisor and employee committees suggest

labor-saving improvements.
See
[Link]

IMPROSHARE - formula is used to determine bonuses based

on labor cost savings.

See [Link]

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 18

 Special Cases of Compensation

Paying for Performance

Competency-based compensation
Rewarded for skills, knowledge and behaviors
leadership
problem solving
decision making
strategic planning

Broad-banding: pre-set pay levels that determine

what people are paid based on their type and level
of competency.

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 19

 Special Cases of Compensation

Team-Based Compensation

incentives for empowered work teams to exceed

established goals and share equally in rewards

depends on:
clarity of team purpose and goals
ability of the team to obtain needed resources
effective team communication skills and trust

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 20

 Executive Compensation Programs

Salaries of Top Managers

executive pay can run 400 times higher than that of the
average worker
2008 saw a decline in exec compensation, mostly due to
economic and political forces.

See:
[Link]

competition for executive talent raises the price of hiring an

executive
high salaries can be a motivator for executives and
lower-level managers

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 21

 Executive Compensation Programs

Supplemental Financial Compensation

deferred bonuses – paid to executives over

extended time periods, to encourage them to stay
with the company

stock options – allow executives to purchase

stock in the future at a fixed price

hiring bonuses – compensate for the deferred

compensation lost when leaving a former
company

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 22

 Executive Compensation Programs
Supplemental Nonfinancial Compensation Perquisites
club
memberships paid life insurance
free financial, legal and
tax counseling
supplemental
retirement accounts

interest-fre
e loans
perks may postretirement
include consulting contracts

mortgage assistance

expense accounts

company cars supplemental

disability insurance

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 23

 Executive Compensation Programs

Supplemental Nonfinancial Compensation Perks

Golden parachutes protect executives when a

merger or hostile takeover occurs by providing
severance pay or a guaranteed position.

For the history of the golden parachute, see:

[Link]

Read about the top 10 golden parachute recipients:

[Link]

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 24

 International Compensation

International compensation packages generally

utilize the “balance-sheet approach,” using these
four factors:
base pay: the pay of employees in comparable jobs at home
differentials: compensation given to offset higher costs of
living abroad
incentives: inducements given to encourage employees to
accept overseas assignments
assistance programs: payment for expenses involved in
moving a family abroad and in providing some services
overseas

HR needs to understand the statutory requirements of each country

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 25

 Fill-in-the-blanks

1. _________ rewards come from the job itself; _________ rewards come
from outside the job.
Intrinsic; extrinsic
2. Wages, bonuses, and pension plans are examples of _________ rewards.
financial
3. The ___ _________ is the source of companies’ compensation programs.
job evaluation
4. Scanlon and IMPROSHARE are examples of ____________-____
incentives.
organization-wide
5. Using pre-set pay levels that determine what people are paid based on
their type and level of competency is called ______-_______.
Broad-banding
6. _____ _________ protect executives when a merger or hostile takeover
occurs by providing severance pay or a guaranteed position.
Golden parachutes

Fundamentals of Human Resource Management, 10/e, DeCenzo/Robbins Chapter 11, slide 26