Strategic Compensation in HR Management

Chapter 11: Motivating Employees Through Compensation

• Employee compensation is the process of paying and rewarding employees for their contributions to an organization.
• Compensation practices are strategic because they encourage employees to perform their best and help the company produce goods and services.
• Compensation includes pay and benefits like insurance, retirement savings, and paid time off.

Learning Objectives

• Understand how employee compensation practices strategically align with overall HR strategy.
• Utilize motivation theories to explain how people react to compensation practices.
• Describe the process of conducting and using pay surveys to develop compensation strategies.
• Explain job-based pay and skill-based pay approaches for compensation structure.

External Equity

• Employee perception of external equity is crucial in employment relationships. It concerns the fairness of the compensation offered compared to what employees could earn elsewhere.
• Organizations with an external labor orientation must assess their compensation relative to other organizations' offerings.

Internal Equity

• Employee perceptions of internal equity are their beliefs about the fairness of compensation compared to other employees within the organization.
• Internally-oriented organizations dedicate time and effort to compare and analyze pay differences among their employees.
• Pay practices are typically less secretive in internally-oriented organizations.
• They often use long-term incentives to reward employees who stay with the company for extended periods.

Differentiation vs. Cost Strategy

• Differentiation Strategy: Compensation is used to encourage risk-taking and a substantial spread exists between high and low performers' pay.
• Cost Leadership Strategy: Employees are typically paid fixed salaries that don't increase with performance. The value of high performers isn't significantly different from average performers' value, so compensation focuses on inclusivity and support.

Aligning Compensation with HR Strategy

• Variable rewards: Pay some employees substantially more than others to emphasize performance differences between high and low performers.
• Uniform rewards: Minimize differences in pay among workers, offering similar compensation to all employees.
• Transactional commitment: A sense of obligation to an organization primarily based on financial incentives.
• Relational commitment: A sense of loyalty to an organization encompassing both financial incentives and social ties.

How Does Compensation Motivate People?

• Motivation is a force that causes people to engage in a particular behavior instead of others.
• Motivation involves three elements: behavioral choice, intensity, and persistence.
• Behavioural choice: deciding whether or not to perform a specific action.
• Intensity: deciding how much effort to put into the action.
• Persistence: deciding how long to continue performing the action.

Motivation Theory

• Reinforcement theory
• Goal-setting theory
• Justice theory
• Expectancy theory (V-I-E theory)
  • Valence, Instrumentality, Expectancy
  • Work → Performance → Reward
• Agency theory

Agency Theory

• Focuses on the differences in interests between principals and agents (e.g., corporate managers and subordinate agents).
• Explores the conditions under which subordinate agents work with corporate managers, influencing the organization's behavior, for instance, risk-taking in new ventures.
• Issues such as compensation and risk-taking are major concerns for both parties in this relationship.

Decisions About Pay

• Job Structure: The relative pay for different jobs within the organization.
• Pay Level: The average amount the organization pays for a particular job.
• Pay Structure: The pay policy resulting from job structure and pay-level decisions.

Job Structure

• Job Evaluation: An administrative procedure to measure the relative internal worth of organizational jobs. -Compensable factors: Job characteristics that the organization values and uses to determine pay, such as experience, education, complexity, working conditions, and responsibility.

Pay Level Strategies

• Meet-the-market: Establish pay that aligns with the midpoint of the pay range for the selected group of organizations.
• Lag-the-market: Establish a pay level below the average compensation of the comparison group.
• Lead-the-market: Establish a pay level above the average compensation of the comparison group.

Pay Structure: Putting It All Together

• Job Evaluation → Job Structure → Define Key Jobs
• Pay Rates → Pay Policy Line → Pay Survey
• Pay Grades → Pay Ranges → Pay Structure

Issues in Developing a Pay Structure

• Legal Requirements
• Market Forces
• Organization's Goals
  • High quality, cost control, equity and fairness, legal compliance

Economic Influences on Pay

• Product Markets: Organizations compete on quality, service, price, which affects labor costs.
• Labor Markets: Organizations compete for human resources by establishing a minimum pay to attract employees.

Gathering Market Pay Information

• Benchmarking: Comparing an organization's practices to successful competitors.
• Pay Surveys: Collecting data on compensation practices from organizations in similar industries.
• Trade and Industry Groups and Professional Groups: Gathering information from professional organizations and industry groups.

Test Your Knowledge: Example Question & Answer

• Question: Mariah found out that a friend of hers with a similar job in the same town makes significantly more money than she does. Which of the following is probably not the cause of this?
• Answer Choices: a. Different cost-of-living, b. Different product markets and pay strategies, c. Mariah is a poor performer, d. Mariah's job is non-exempt
• Correct Answer: Possibly 'd'.

How is Compensation Structure Determined?

• Job-based pay: Evaluating different tasks and duties associated to establish different pay grades.
• Skill-based pay: Focuses on differences in skill and abilities required to perform the job, setting pay accordingly.

Pay Policy Lines

• A graphed line displaying the mathematical relationship between job evaluation points and pay rates.

Pay Rates

• The amount of money received per unit time.
• Organizations use pay survey data for key jobs to establish the pay policy line.
• Pay rates for non-key jobs are then determined.

Sample Pay Grade Structure

• Pay grades: Sets of similar jobs of equivalent value.
• Pay ranges: Possible pay rates that include a minimum, maximum, and midpoint for employees in a specific position.
• Pay differential: Adjustments to pay rates reflecting differences in working conditions or labor markets.

Broadbanding

• Reducing the number of levels in an organization's job structure, grouping assignments into a single layer.
• The groupings are called "broad bands," emphasizing employee experience acquisition rather than promotions.

Skill-Based Pay

• Pay structures determined based on the employee skills and knowledge required for specific tasks.
• Appropriate in organizations where changing technology requires employees to constantly enhance their skills and knowledge.

Seniority- and Skill-based Pay

• Seniority- and tenure-based pay is common for various reasons (social norms, union influence, rewarding long-term employees).
• Pay for skill and knowledge matters, influencing employee performance and motivation.

Pay Structure and Actual Pay

• Pay structure represents the organization's policies, though actual pay may deviate.
• HR departments should compare actual pay structures with the structure to align policy and practice.

Compa-Ratio (CR)

• The ratio of average pay to the midpoint of a pay range.
• A CR of 1 suggests average pay aligns with the midpoint.
• A CR greater than 1 suggests average pay is above the midpoint; less than 1 suggests average pay is below.

Legal Requirements for Pay

• Equal employment opportunity: Employers cannot discriminate based on employee age, sex, race, or other protected status when setting pay, but differences may be tied to job responsibilities or performance.
• Minimum wages: Federal or national required minimum amount of pay for employees.
• Pay for overtime: Pay exceeding the standard work week rate for additional hours should be 1.5 times of the usual pay.
• Equal pay for men and women: Similar work should have similar compensation no matter the specific sex of the employee.
• Guidelines for employing children: Rules and regulations for the employment of children.

Legal Requirements for Pay: Minimum Wage

• Fair Labor Standards Act (FLSA): Federal law in the US that establishes minimum wage and overtime pay requirements.
• In certain countries, national minimum wage laws stipulate pay per hour.

Legal Requirements for Pay: Overtime Pay

• Overtime rate: 1.5 times an employee's regular hourly rate for hours worked beyond the standard work week (often 40 hours).
• Exempt employees: Managers, outside salespeople, and other employees not covered by overtime pay requirements.
• Non-exempt employees: Covered by overtime pay requirements.

Legal Requirements for Pay: Child Labor

• Laws and regulations exist to limit child labor, which differ regionally/nationally; usually, employment of children under a certain age is prohibited or may be limited to certain types of jobs and hours worked.