chapter 9 - compensation (10 mc, 1 sa)

Question 1

goals of compensation:

Answer 1

attraction
retention
motivation

1. To motivate people to join the organization (attraction)
2. To motivate people to stay with the organization (retention)
3. To motivate people to perform at high levels (motivation)

Question 2

goals of compensation: attraction

Answer 2

To motivate people to join the organization (attraction)

Question 3

goals of compensation: retention

Answer 3

To motivate people to stay with the organization (retention)

Question 4

goals of compensation: motivation

Answer 4

To motivate people to perform at high levels (motivation)

Question 5

pay equity and equity theory

Answer 5

Pay Equity
An employee’s perception that compensation received is equal to the value of the work performed
Fairness is a relative concept

Equity Theory - motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve
- Individuals form a ratio of their outcomes to inputs in their job and then compare the value of that ratio with the value of the ratio for other individuals (referent others

Question 6

Three components of pay equity: (list all three)

Answer 6

1. Internal equity – Pay comparisons with others inside the organization in other jobs
2. Individual equity – Comparisons with others inside the organization in the same job
3. External equity – Pay comparisons with others outside the organization

Question 7

internal equity problems: wage compression

Answer 7

Wage compression – a lower skill/level job is paid at a rate similar to a higher skill/level job

Junior Accountant -
$45,000
Senior Accountant - $46,000

Ways to reduce wage compression:
- Reward high performance and merit-worthy employees with larger pay increases
- Prepare high-performing employees for promotions to jobs with higher salary levels (fast track these employees)
- Provide equity adjustments for employees hardest hit by pay compression

Question 8

internal equity problems: wage inversion

Answer 8

Wage inversion – a higher skill job is paid less than a lower skill job

Junior Accountant - $50,000
Senior Accountant - $48,000

Question 9

internal equity problems: pay secrecy

Answer 9

Organization’s typical solution:

Pay secrecy – Can create employee misperceptions and distrust of compensation fairness
- helps organization not to have to explain the decisions that they make regarding compensation
- illegal in California to forbid employees from discussing pay

Question 10

equity perceptions and compensation goals

Answer 10

Which equity perceptions would be most critical for attraction, retention and motivation?

Internal equity → retention
External equity → attraction
Individual equity → motivation

Question 11

management tools and equity

Answer 11

Internal equity → job evaluation
formal evaluation to determine the relative worth of jobs in an organization

External equity → wage and salary surveys
monitoring what other organizations pay for similar jobs

Individual equity → performance-based pay
tying some or all of pay to level of output

Question 12

INTERNAL factors impacting the wage mix (all)

Answer 12

Compensation Strategy
- Overall organization compensation policy (lead, lag, or match market wages?)

Worth of a Job
- Establishing the internal wage relationship among jobs and skill levels (job evaluation considerations)

Relative Worth of an Employee
- Rewarding individual employee performance

Ability to Pay
- Having the resources and profits to pay employees

Question 13

INTERNAL factors impacting the wage mix (all)

Answer 13

Compensation Strategy
- Overall organization compensation policy (lead, lag, or match market wages?)

Worth of a Job
- Establishing the internal wage relationship among jobs and skill levels (job evaluation considerations)

Relative Worth of an Employee
- Rewarding individual employee performance

Ability to Pay
- Having the resources and profits to pay employees

Question 14

EXTERNAL factors impacting the wage mix (all)

Answer 14

Labor Market Conditions
Availability and quality of potential employees (supply and demand)

Product Market Competitors’ Wage Rates
How much are our direct competitors paying for their labor?

Area Wage Rates
Wage rates of local area employers for comparable jobs

Legal Requirements
Laws pertaining to compensation and benefits administration must be considered

Cost of Living
- Local housing and environmental conditions can cause wide variations in the cost of living for employees
- Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power

Question 15

determining “real wages”

Answer 15

wage mix - external

Collective Bargaining:
- Where a union is in place, the organization must negotiate the wage rates with the union (cannot unilaterally decide compensation issues on own).
- Unions bargain for real wage increases that raise the standard of living for their members.
- “Real wages” are increases larger than rises in the consumer price index; that is, the real earning power of wages.
–> If employer offers union a wage increase of 5% but inflation has increased 2% since last wage increase, what is the real wage increase in this scenario?

Question 16

factors most likely to be used by organizations to set the wage
ceiling and wage floor

Answer 16

Which factor will most likely be used to set the “floor” for wages?
*Labor market will tell you how low you can go

Which factor is most likely to be used to set the “ceiling” for the maximum wages an employer is willing to pay?
*Product market

Question 17

job evaluation methods for maintaining internal equity: job evaluation (OVERVIEW)

Answer 17

Job Evaluation
The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization.
Job Analysis – job content
Job Evaluation – job value

Job Evaluation
Determines the contribution of a job to an organization’s strategic goals (i.e., value to the org)
Note that the same job can be valued quite differently depending on the organization it is in

Question 18

three primary job evaluation methods

Answer 18

1. Job ranking – rank the value of jobs from highest to lowest
2. Job classification – Classifying jobs into categories so they can be benchmarked internally and externally
3. Point method – awarding points to each job based on the job’s contribution to organizational objectives (i.e., the morevalue the job has, the more points it is awarded)

Question 19

job evaluation methods for maintaining internal equity: job ranking

Answer 19

1. Job Ranking: Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth.

Disadvantages
- Does not provide a precise measure of each job’s worth
- Final job rankings indicate the relative importance of jobs, not extent of differences between jobs. (#2 v. #5?)
- Method can used to consider only a reasonably small number of jobs (<20)
- Doesn’t allow for jobs of equal worth
- Middle range jobs are difficult to differentiate
- OK job evaluation method for smaller organizations with small # of jobs

PAIRED COMPARISON JOB RANKING TABLE

Question 20

job evaluation methods for maintaining internal equity: job classification

Answer 20

job classification: Jobs are classified and grouped according to a series of predetermined wage grades.
- Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.

Federal Government – General Service (GS Levels)
Example of a job classification approach:
Job grade 7 Min $17/hr - Max $22/hr
ob grade 8 Min $20/hr - Max $25/hr

Advantages:
- Relatively easy to develop
- Inexpensive
- Easier for people to slot jobs into grades than to rank order them

Disadvantage:
- Grade descriptions must be broad enough to fit multiple jobs, yet have to be specific enough that jobs don’t appear to fit into more than one grade

Question 21

job evaluation methods for maintaining internal equity: point system

Answer 21

Point System
- A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it
- Permits jobs to be evaluated quantitatively on the basis of factors or elements called compensable factors that constitute the job.

Criteria for compensable factors on another card

Question 22

compensable factors (part of point system of job evaluation methods)

Answer 22

Criteria for compensable factors:
- Acceptable (to employees, management, union)
- Important to the job
- They help to distinguish among jobs (jobs must vary on the CF)
- Can be objectively measured

Where can we get ideas for CFs?:
- Organization’s mission statement
- “To exceed customer expectations of value, dependability, and convenience by focusing on innovation and teamwork.”

Equal Pay Act of 1963
Equal work = “equal skill, effort, responsibility, and working conditions”

Question 23

point system steps (picture in notes)

Answer 23

1. Develop a Point Manual
Contains a description of each of the compensable factors (CFs) and the degrees to which these factors may exist within the jobs
- Each compensable factor is defined as well as its rating scale points
- The number of points assigned to each scale point is determined

2. Rate each job relative to the CFs in the point manual

3. Add up total points across CFs to determine the job’s “worth” to the organization

4. Total points can then be used to determine the compensation for that job (in the case of the job evaluated on the next slide, number of points = 239)
- If internally equitable multiplier = .08, then the internally equitable wage rate for this job would be $19.12 / hour
- See next slide for an example compensable factors and their point ratings

Question 24

compensable factors: pay ranges (image in notes)

Answer 24

• Allow for variation in pay within grades (within max and min)
• Differences such as tenure, education, performance, when learning the job, etc.
• Range width?
  –> How long do ees stay in this pay grade? (e.g., 1 v. 5 yrs)
• Range overlap?
  –> Maximum 50% overlap
  –> Top of lower grade should be below midpoint of higher grade
  –> Red circle jobs – jobs whose base wages exceed range and are frozen until ranges shift upward
• Broadbanding
  –> Collapsing multiple grades into larger bands –more flexibility to managers who must stay within the pay budget

Question 25

compensable factors: range overlap (image in notes)

Answer 25

• Range overlap?
  –> Maximum 50% overlap
  –> Top of lower grade should be below midpoint of higher grade
  –> Red circle jobs – jobs whose base wages exceed range and are frozen until ranges shift upward

Question 26

compensable factors: pay grades (image in notes)

Answer 26

Pay Grades
Groups of jobs within a particular class that are paid the same rate.

Range width?
How long do ees stay in this pay grade? (e.g., 1 v. 5 yrs)

Question 27

compensable factors: compa-ratio (image in notes)

Answer 27

There are many measures to assess compensation systems, such as the compa-ratio:
Compa-ratio – reflects how managers pay employees in relation to range mid-points
= Average rate of pay/Range midpoint

Compa-ratio < 1…On average, ees within the range are paid below midpoint
Compa-ratio >1…On average, ees within the range a paid above the midpoint

Question 28

Compa-ratio < 1

Answer 28

Managers paying less than the intended pay policy. Valid reasons may be…

Majority of ees are new or recent hires
Most ees are poor performers
Ees are promoted so rapidly that few are in a range long enough to get to the high end

Question 29

Compa-ratio > 1

Answer 29

Managers paying more than the intended pay policy. Valid reasons may be…
Majority of ees with high seniority, high performance, low turnover, few new hires, low promotion rates

Question 30

(ON EXAM) fair labor standards act

Answer 30

Fair labor standards act (FLSA; 1938)
Law is enforced by the Dept of Labor (DOL)
Four primary provisions:

1. Minimum wage provision
Mandated a federal minimum wage
Current federal minimum wage - $7.25/hr
Federal minimum wage was most recently increased in July 2009
Why did Congress enact this provision?

2. Overtime (OT) provision
Requires that employers pay their employees time and a half their regular pay for hours worked in excess of 40 per week
Labeled employees as being either “exempt” or “nonexempt” in terms of who is eligible for overtime pay
**Exempt employee – NOT covered by the OT provision and therefore not eligible for being paid OT (generally all managers, supervisors, and white-collar professional employees)
**Non-exempt employee – IS covered by the OT provision and must be paid 1 ½ for all hours worked over 40 in a week
Why did Congress enact this provision?

3. Child labor provision
Forbids children under 16 to work except for parent among other issues
Why did Congress enact this provision?

4. Equal Rights provision
Equal Pay Act (1963)

Question 31

(ON EXAM) equal pay act

Answer 31

Equal pay act (1963):

• Amendment to the FLSA
• This law is enforced by the EEOC
• Law states that it is illegal to discriminate in terms of compensation based on gender for “equal work” where equal work is defined as work requiring the same skill, effort, responsibility, and working conditions

Question 32

(ON EXAM) california equal pay act

Answer 32

California equal pay act:

• Adds prohibition of race, or ethnicity-based, wage differences in addition to gender
• Changes language of “equal” work to “substantially similar” work
  Comparison job does not need to be located at same organization
• Retaliation against employees who seek to enforce the law is illegal
• Employers may not prohibit employees from discussing wages with co-workers or inquiring about others’ wages (pay secrecy policies illegal)
• Requires employers supply pay scales upon the request to applicants

Question 33

california pay transparency act

Answer 33

California Pay Transparency Act (2003):

• Effective January 1, 2023, CA employers with at least 15 employees, and with at least one located in CA, must share pay scales in job postings. The posting need not be for a job that is performed in California; the law applies to remote work positions, too.
• Employers must also share salary and wage information with current employees upon request. Employers are not permitted to ask for a job applicant’s salary history.
• Penalties for failing to disclose pay scales can be up to $10,000 per violation.
• Each year, California employers with at least 100 employees must submit a report to the California Civil Rights Department that details the median and mean hourly rate for each race, ethnicity, and sex for each job category for employees and contractors.
• The first reports are due on May 10, 2023. Penalties for failing to comply with these reporting requirements can be up to $200 per employee.