HRM501

Mohan Thapa
COMPENSATIONS
Basic Factors in Determining
Pay Rates

Employee
Compensation

Direct Financial Indirect Financial

Payments Payments
Basic Factors in Determining Pay
Rates
► Employee compensation
► All forms of pay or rewards going to employees and
arising from their employment.
► Direct financial payments
► Pay in the form of wages, salaries, incentives,
commissions, and bonuses.
► Indirect financial payments
► Pay in the form of financial benefits such as
insurance.
 Legal Considerations in Compensation

Davis-Bacon Act (1931) Equal Pay Act (1963)

Walsh-Healey Public Employee Retirement

Contract Act (1936) Income Security Act (ERISA)

Title VII of the 1964 Employee Age Discrimination in

Civil Rights Act Compensation Employment Act

Fair Labor Standards Act Americans with

(1938) Disabilities Act

The Family and Medical The Social Security Act of

Leave Act 1935 (as amended)

Workers’ Compensation
 Overview of Compensation Laws

► Davis-Bacon Act (1931)

► A law that sets wage rates for laborers employed by
contractors working for the federal government.
► Walsh-Healey Public Contract Act (1936)
► A law that requires minimum wage and working
conditions for employees working on any government
contract amounting to more than $10,000.
Overview of Compensation
Laws (cont’d)
► Title VII of the 1964 Civil Rights Act
► This act makes it unlawful for employers 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.
Overview of Compensation
Laws (cont’d)
► Fair Labor Standards Act (1938)
► This act provides for minimum wages, maximum hours,
overtime pay for nonexempt employees after 40 hours
worked per week, and child labor protection. The law has
been amended many times and covers most employees.
► Equal Pay Act (1963)
► An amendment to the Fair Labor Standards Act designed
to require equal pay for women doing the same work as
men.
Overview of Compensation
Laws (cont’d)
► Family and Medical Leave Act
► An act aims to entitle eligible employees, both men and
women, to take up to 12 weeks of unpaid, job protected
leave for the birth of a child or for the care of a child,
spouse or parent.
► Worker’s Compensation
► This aims to provide prompt, sure and reasonable income
to victims of work-related accidents.
Overview of Compensation
Laws (cont’d)

► Worker’s Compensation
►This aims to provide prompt, sure and reasonable income to
victims of work-related accidents.
►The Social Security Act of 1935
► It provides for unemployment compensation for workers
unemployed through no fault of their own for up to 26
weeks.
Overview of Compensation
Laws (cont’d)

► Age Discrimination in Employment Act

►Itprohibits age discrimination against the employees who
are 40 years of age and older in all aspects of employment,
including compensation.
►The American with Disabilities Act
► It prohibits discrimination against the qualified persons
with disabilities in all aspects of employment, including
compensation
Compensation Details Nepal Labor
Act 2074 (Minimum Wage)
How to handle Salary
Compression

►A Salary inequity problems generally caused by inflation,

resulting in long term employees in a position earning less
than workers entering the firm today.
Equity and Its Impact on Pay Rates

Forms of Equity

External Internal Individual Procedural

Equity Equity Equity Equity
 Forms of Equity
► External equity
► How a job’s pay rate in one company compares to the job’s pay rate
in other companies.
► Internal equity
► How fair the job’s pay rate is, when compared to other jobs within
the same company
► Individual equity
► How fair an individual’s pay as compared with what his or her
co-workers are earning for the same or very similar jobs within the
company.
► Procedural equity
► The perceived fairness of the process and procedures to make
decisions regarding the allocation of pay.
Addressing Equity Issues
Salary Surveys

Job Analysis and

Job Evaluation
Methods to
Address Equity
Issues Performance Appraisal
and Incentive Pay

Communications, Grievance
Mechanisms, and Employees’
Participation
Methods to Address Equity Issues

► Salary surveys
► To monitor and maintain external equity.
► Job analysis and job evaluation
► To maintain internal equity,
► Performance appraisal and incentive pay
► To maintain individual equity.
► Communications, grievance mechanisms, and
employees’ participation
► To help ensure that employees view the pay process as
transparent and fair.
 Establishing The Pay Rates

Step 1. The Wage Survey:

Uses for Salary Surveys

To price To To make
benchmark market-price decisions
jobs wages for jobs about benefits
 Establishing The Pay Rates

Step1 Continue…
Sources of Wage and
Salary Information

Employer
Consulting Professional Government The
Self-Conducte
Firms Associations Agencies Internet
d Surveys
Establishing Pay Rates (cont’d)

Skills

Effort
Step 2. Job Evaluation:
Identifying
Compensable Factors
Responsibility

Working Conditions
Establishing Pay Rates (cont’d)

Methods for
Evaluating Jobs

Job Point Factor

Ranking
Classification Method Comparison
 Job Evaluation Methods:
Ranking
► Ranking each job relative to all other jobs, usually
based on some overall factor.
► Steps in job ranking:
1. Obtain job information.
2. Select and group jobs.
3. Select compensable factors.
4. Rank jobs.
5. Combine ratings.

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 Job Evaluation Methods:
Ranking Example

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Table 11-1 Job Ranking By Olympia Health Care

Annual Pay
Ranking Order
Scale (US$)

1. Office manager 43,000

2. Chief nurse 42,500

3. Bookkeeper 34,000

4. Nurse 32,500

5. Cook 31,000

6. Nurse’s aide 28,500

7. Orderly 25,500

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 Job Evaluation Methods: Job
Classification
► Raters categorize jobs into groups or classes of jobs that are of
roughly the same value for pay purposes.
- Classes contain similar jobs.
► Example: Administrative assistants
- Grades are jobs similar in difficulty but otherwise different.
o Example: Mechanics, welders, electricians, and machinists
- Jobs are classed by the amount or level of compensable factors they
contain.

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 Job Evaluation Methods: Job
Classification Example

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 Job Evaluation Methods: Point
Method
► A quantitative technique that involves:

- Identifying the degree to which each compensable factor is

present in the job
- Awarding points for each degree of each factor
- Calculating a total point value for the job by adding up the
corresponding points for each factor

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 Job Evaluation Methods: Point
Method Example

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 Job Evaluation Methods:
Factor Comparison Method
► It is actually a refinement of the ranking method.
► A widely used method of ranking jobs according to a variety of
skill and difficulty factors, then adding up these ranking to arrive at
an overall numerical rating for each given job.
► With the factor comparison method, you rank each job several
times-once for each of several compensable factors.
► For example, you might first rank jobs in terms of the compensable
factor skill. Then rank them according to their mental requirements
and so forth.

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 Job Evaluation Methods:
Factor Comparison Method

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 Establishing Pay Rates (cont’d)
Step 3. Group Similar Jobs into Pay Grades
►Once the committee used job evaluation to determine the relative worth
of each job. It will assign pay rates to each job. However, it will usually
want to first group jobs into pay grades.
►As for large employer, a plan to assign pay rates to each individual
might be difficult to administer, since there might be hundreds or even
thousands of jobs.
►Therefore, committee will probably group similar jobs (in terms of their
ranking or number of points so that they could deal 10 or 12 instead of
hundreds of pay rates
►A pay grade is comprised of jobs of approximately equal difficulty or
importance as established by job evaluation.
 Establishing Pay Rates (cont’d)
Step 3. Group Similar Jobs into Pay Grades
►Point method:- With this method, the pay grade consists of jobs
falling within a range of points.

►Ranking method:- With this method, the grade consists of all jobs
that fall within two or three ranks

►Classification method:- It automatically categorizes jobs into classes

of grades

►Factor comparison method:- with this method, the grade consists of

a specified range of pay rates.
 Establishing Pay Rates (cont’d)
Step 4. Price Each Pay Grade--Wage Curves
The next step is to assign pay rates to your pay grades using wage curve
to help assign pay rates to each pay grade (or to each job)

The wage curve shows the pay rates currently paid for jobs in each pay
grade, relative to the points or rankings assigned to each job or grade by
the job evaluation.

The purpose of the wage curve is to show the relationships between

1.The value of the job as determined by one of the job evaluation methods
and
2.The current average pay rates for your grades.
 Establishing Pay Rates (cont’d)
Step 5. Fine-Tune Pay Rates
Fine-tuning involves
1.Developing pay ranges : A series of steps or levels within a pay grade,
usually based upon years of service. These pay ranges often appear as
vertical boxes within each grade, showing minimum, maximum and
midpoint pay rates for that grade, Specialist call this graph a wage structure.
There are several reasons to use pay ranges for each pay grade.
First, it lets the employer take a more flexible stance in the labor market.
For ex, it makes it easier to attract experienced, higher –paid
employees into a pay grade at the top of the range, since the starting
salary for the pay grade’s lowest step may be too low to attract them. Pay
ranges also let companies provide for performance differences between
employees with in the same grade or between those with different
seniorities.
 Establishing Pay Rates (cont’d)
Step 5. Fine-Tune Pay Rates
2. Correcting Out-of-line Rates : The wage rate for a particular job may
now fall well off the wage line or well outside the rate range for its grade.
This means that the average pay for that job is currently too high or low,
relative to other jobs in the firm. For underpaid jobs, the solution is clear:
raise the wages of underpaid employees to the minimum of the rate range
for their pay grade.

For the rates falling above the rate range, could be freeze the rate paid to
these employees until general salary increases bring the other jobs into the
line.
A second option is to promote or transfer employees involved to jobs for
which you can legitimately pay them their current pay rates.
Third option is to freeze the rate for six months, during which you try to
transfer or promote the overpaid employees.
Pricing Managerial and Professional
Jobs

Compensating Executives
and Managers

Executive
Base Short-term Long-Term
Benefits and
Pay Incentives Incentives
Perks
 Competency-Based Pay (cont’d)

Why Use
Competency-Based
Pay?

Support Support
Support
High-Performanc Performance
Strategic Aims
e Work Systems Management
 Motivation, Performance, and Pay

• Incentives
- Financial rewards paid to workers whose production exceeds a
predetermined standard

• Frederick Taylor
- Popularized scientific management and the use of financial incentives
in the late 1800s
○ Systematic soldiering
○ Fair day’s work

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FIGURE 11-4 Employee Preference for Non-Cash Incentives

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 Team/Group Incentive Plans

• Team (or Group) Incentive Plans

- Incentives are based on the team’s performance.

• How to Design Team Incentives

- Tie rewards to an overall standard of team
performance.

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 Organization-Wide Incentive Plans

• Profit-Sharing Plans
- Cash plans
o Employees receive cash shares of the firm’s profits at
regular intervals.
- Research indicates that the effectiveness of this is unclear.
- There is evidence that it boosts productivity and morale.
- When cost of payouts are factored in, the effect on profit
is insignificant.

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 The Benefits Picture Today
► They are indirect financial and non-financial payments employees receive for
continuing their employment.
► They include things like health and life insurance, pensions, time off with pay,
and child-care assistance.
► Employers need to design benefits packages with care.
► There are many benefits and various ways to classify them:
- Pay for time not worked (e.g. sick leave, supplemental unemployment
benefits)
- Insurance benefits (e.g. injury, medical coverage, illness)
- Retirement benefits (e.g. pension plans)
- Services (e.g. personal, employee assistance, family benefits)
- Other (educational subsidies)

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Other Compensation Trends

► Broadbanding
► Consolidating salary grades and ranges into just a few wide
levels or “bands,” each of which contains a relatively wide range
of jobs and salary levels.
► Pro and Cons
► More flexibility in assigning workers to different job grades.
► Provides support for flatter hierarchies and teams.
► Promotes skills learning and mobility.
► Lack of permanence in job responsibilities can be unsettling to new
employees.
Group Formation and Exercises