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Fundamentals of

Human Resource
Management
2e

Gary Dessler
Compensating Employees

Chapter 8

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Introduction

Employee compensation
All forms of pay or rewards going to employees
and arising from their employment
Direct financial payments
Indirect payments

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Employee Compensation

Direct financial Indirect payments


payments Payments in the form
Payments in the form of financial benefits
of wages, salaries, like employer-paid
incentives, insurance and
commissions, and vacations
bonuses

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Some Important Compensation Laws

Fair Labor Standards Act


Contains minimum wage, maximum hours,
overtime pay, equal pay, record-keeping, and
child labor provisions covering the majority of
U.S. workers
Romanian Work Code

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Romanian legislation: Work Code -
2011
ART. 5 Equal treatment
(1) In the labor relations, the principle of equal
treatment for all employees and employers is
functional.
(2) Any direct or indirect discrimination against an
employee based on gender, sexual orientation,
genetic characteristics, age, nationality, race, color,
religion, political option, social origin, disability,
family status or responsibilities, membership or
union activity is prohibited.

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Some Important Compensation Laws

Equal Pay Act


Employees of one sex may not be paid wages at a
rate lower than that paid to employees of the
opposite sex for doing roughly equivalent work.

Romanian Constitution / Article 41 / Labor and social protection of


labor
(4) On equal work, women have equal pay with men.

Romanian Work Code / ART. 6 Protection of employees


(3) For equal work or equal value, discrimination based on gender
on all the pay and conditions is prohibited.
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Some Important Compensation Laws

Title VII of the Civil Rights Act (USA)


Makes it an unlawful practice for an employer to
discriminate against any individual with respect
to hiring, compensation, terms, conditions, or
privileges of employment because of race, color,
religion, sex, or national origin

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Some Important Compensation Laws

Age Discrimination in
Employment Act
Americans with
Disabilities Act
Family and Medical
Leave Act

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How Unions Influence Compensation
Decisions
National Labor Relations Act (NLRA) of 1935
Granted employees the right to organize, to
bargain collectively, and to engage in concerted
activities for the purpose of collective bargaining

Romania: Legea nr. 130/1996 bargaining the


Colective Work Contract

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1st of May Celebration

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Compensation Policies

The compensation plan should support the


employers strategic aims.

Ex: A hospital might have a policy of starting


nurses at a wage at least 10% above the
prevailing market wage.

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Equity and its Impact on Pay Rates

External equity Internal equity


Pay must compare Each employee should
favorably with rates in view his or her pay as
other companies, or equitable, given other
an employer will find it employees pay in the
hard to attract and organization.
retain qualified
employees.

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Medical Leave: Romanian Doctors Fleeing Poor Pay, Corruption For Western Europe
By Palash Ghosh, on February 21 2014 11:39 AM (http://www.ibtimes.com/)

According to a report in BBC, no less than 10,000 Romanian doctors and


nurses (mostly young people commencing their careers) have left the
country in the past seven years since the country joined the EU. A report
in the Financial Times indicates that over just the past two years, 30
percent of doctors have left Romania, and that only about 14,000 remain
in the country.

One of the factors behind this mass exodus relates to poor pay starting
salaries for physicians in Romania are as low as 250 euros ($343) per
month in state hospitals. Specialists earn about 1,200 euros monthly from
the state, and double that in private practice. In contrast, nurses in the
United Kingdom can earn 12-14 ($20-$23.30) per hour, doctors in the
Republic of Ireland can make 50,000 euros annually, while medical
specialists in Denmark can rake in as much as 83,000 euros per year.

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How Employers Establish Pay Rates

1. Conduct a salary survey


2. Employee committee determines the worth
of each job
3. Group similar jobs into pay grades
4. Price each pay grade by using wage curves
5. Develop rate ranges

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Step 1: Conduct the Salary Survey

Salary (or compensation) surveys


Formal or informal surveys of what other
employers are paying for similar jobs
Used to price benchmark jobs
Usually price 20% or more of their positions
directly in the marketplace
Collect data on benefits

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Salary databases

Eurostat
INSSE (Romania)
Independent studies

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Step 2: Determine the Worth of Each
JobJob Evaluation
Job evaluation Compensable factors
Formal and systematic Factors that determine
comparison of jobs to the definition of job
determine the worth content, establish how
of one job relative to the jobs compare to
another each other, and set the
compensation paid for
each job

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Compensable factors (exemple)

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Job Evaluation Methods

Ranking method
Ranks each job relative to all other jobs
Job classification
Manager categorizes jobs into groups based on
their similarity in terms of compensable factors
such as skills and responsibility

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Paired comparison method
(ranking method)

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Ranking Method of Job Evaluation

Obtain job
information
Select raters and
jobs to be rated
Select compensable
factors
Rank jobs

Combine ratings

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Job Evaluation Methods

Point method
Involves identifying several compensable factors,
each having several degrees, and then assigning
points based on the number of degrees, to come
up with an actual number of points for each job

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Step 3: Group Similar Jobs into Pay
Grades
Pay grade
Comprises jobs of
approximately equal
difficulty or
importance as
determined by job
evaluation

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Point method results (example)

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Step 4: Price Each Pay GradeWage
Curves
Wage curve
Shows the average pay rates currently being paid
for jobs in each pay grade
Purpose of a wage curve is to show the
relationship between (1) the value of the job
as determined by one of the job evaluation
methods, and (2) the current average pay
rates for the grades.

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Plotting a Wage Curve: Figure 8.3

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Step 5: Develop Rate Ranges

May be 10 levels or steps and 10


corresponding pay rates within each pay
grade
Employer may fine-tune pay rates to account
for any unique circumstances

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Rate ranges

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Pricing Managerial and
Professional Jobs
Four main components:
Base salary
Short-term incentives
Long-term incentives
Executive benefits and perks

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Incentive Plans

Individual incentive Variable pay


programs Group pay plans that
Give performance- tie payments to
based pay to individual productivity
employees who meet
their individual
performance
standards

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Piecework Plans

Piecework
Pay is tied directly to what
the worker produces
Paid a piece rate for
each unit he or she
produces

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Incentives for Salespeople

Most companies pay their salespeople a


combination of salary and commissions.
Typically a 70% base salary/30% incentive
mix.

Why?

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Auto Dealers Compensation

Compensation for car salespeople ranges from a


high of 100% commission to a small base salary
with commission.
Commission is generally based on the net profit
on the car.
This encourages the salesperson to hold firm on
the retail price, and to push after-sale
products.

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Recognition-Based Awards

Recognition has a Employee recognition


positive impact on Gift certificates
performance, either Cash rewards
alone or in
conjunction with Merchandise
financial rewards incentives
Training programs
Work/life benefits
Individual travel
Sweepstakes
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Incentive Plans

Merit pay
Any salary increase awarded to an employee
based on his or her individual performance

Merit pay bonus


Merit pay = becomes part of the employees base
salary, temporarily

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Team or Group Incentive Plans

Businesses increasingly organize their efforts


around teams, and therefore want to
incentivize the team to meet its goals.
Main disadvantage is that each workers
rewards are not based just on his or her own
efforts.

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Incentives for Managers and
Executives
Stock option
The right to purchase a specific number of shares
of company stock at a specific price during a
period of time

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Profit-Sharing Plans

Profit-sharing plan
A plan whereby most employees share in the
companys profits
Current, deferred

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Employee Stock Ownership Plans

Employee stock ownership plan (ESOP)


A corporation contributes shares of its own
stockor cash to be used to purchase such
stockto a trust established to purchase shares
of the firms stock for employees.

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Incentive Plans

Gainsharing plans
An incentive plan that engages employees in a
common effort to achieve productivity objectives
and share the gains

Ex: Scanlon Plan - Cost saving productivity-incentive plan any saving


compared with an agreed upon standard labor cost is shared equally
between the workers and the firm.

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Scanlon Plan (gainsharing)

1. Philosophy of cooperation
2. Identity
3. Competence
4. Involvement system : productivity-improving
suggestions
5. Sharing of benefits formula : assumes that all
employees share directly in any extra profits
resulting from their cost-cutting suggestions.
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Earnings-at-Risk Pay Plans

Earnings-at-risk pay plans


Some portion of employees base salary is at risk
(e.g. -5%) if they dont meet their goals, in return
for the possibility of obtaining a much larger
bonus (e.g. +10%) if they exceed their goals.

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Employee Benefits
Benefits
Indirect financial payments given to employees
May include health and life insurance, vacation,
pension, education plans, and discounts on
company products

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Pay for Time Not Worked

Supplemental pay benefits


Typically one of an employers most expensive
benefits
Holidays, vacations, sick leave, military duty, and
jury duty

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Pay for Time Not Worked

Severance pay
A one-time separation payment when
terminating an employee
Worker Adjustment and Retraining Act of
1989
Requires covered employers to give employees
60 days written notice of plant closures or mass
layoffs

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Insurance Benefits

Workers compensation
Provides income and medical benefits to work-
related accident victims or their dependents,
regardless of fault

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Hospitalization, Medical, and Disability
Insurance
Pregnancy Discrimination Act
Requires employers to treat women affected by
pregnancy, childbirth, or related medical
conditions the same as any employee not able to
work, with respect to all benefits, including sick
leave and disability benefits, and health and
medical insurance

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Retirement Benefits

Social Security
Retirement benefits
Death benefits
Disability payments

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Pension Plans

Defined benefit pension plan


Contains a formula for determining retirement
benefits so that the actual benefits to be received
are defined ahead of time

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Pension Plans

Defined contribution plan


A plan that specifies the employers contribution
to employees retirement or savings funds
401(k) - is a retirement savings plan sponsored by
an employer. It lets workers save and invest a
piece of their paycheck before taxes are taken
out. Taxes arent paid until the money is
withdrawn from the account. (defined in subsection 401(k) of
the Internal Revenue Code.)

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Pension Plans

Vested
The proportion of the employers contribution to
the employees pension plan that is guaranteed
to the employee, and which the employee can
therefore take when he or she leaves

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Personal Services Benefits

Employee Assistance Programs (EAPs)


A formal employer program for providing
employees with counseling and/or treatment
programs for problems such as alcoholism,
gambling, or stress

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Popular Family-Friendly Benefits:
Figure 8.6

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Popular Family-Friendly Benefits:
Figure 8.6

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Perverse incentive

A perverse incentive is an incentive that has


an unintended and undesirable result which
is contrary to the interests of the incentive
makers.

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Perverse incentive - exemples
Funding fire departments by the number of fire calls made is intended to
reward the fire departments that do the most work. However, it may
discourage them from fire-prevention activities, which reduce the
number of fires (Wikipedia)
In Hanoi, under French colonial rule, a program paying people a bounty
for each rat pelt handed in was intended to exterminate rats. Instead, it
led to the farming of rats. (Wikipedia)
The dogcatcher paradox : reducing the number of street dogs at zero
leads to the reduction of funding for the dogcatcher organization and
threatens her existence.
The Romanian HE funding system, based on alowance per student.

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Copyright

All rights reserved. No part of this publication may be reproduced, stored in a


retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

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