Chapter 9 Determining Pay and Benefits LEARNING OBJECTIVES After reading this chapter, students should be able to: • Explain how effective compensation systems enhance competitive advantage. • Understand how people form perceptions about a pay system’s equity. • Describe how organizations can build an equitable pay system. • Define the legal constraints imposed on organizational pay practices. • Understand the various benefit options and their administration. CHAPTER OUTLINE AND LECTURE 9-1 Gaining Competitive Advantage Organizations can attract a higher or lower level of employees based on the pay and benefits structure offered. They can play a major role in the strategic plan for gaining competitive advantage. 9-1a Opening Case: Gaining Competitive Advantage at Old Country Buffet Old Country Buffet Restaurant faced manager turnover rates of about 40 percent. As managers leave, the restaurant operations and performances slip, costing the company nearly 160 managers and $3 million annually. In order to increase sales and encourage retention, Old Country Buffet initiated a new incentive program with two parts. One part was the implementation of the Founder’s Club, a membership for the managers who qualified by beating challenging sales goals. The second part was a $20,000 bonus for top managers who signed a three year commitment letter. Since the implementation of the incentive program, manager turnover rates have dropped to 14 percent. Working hard to meet their goals, 272 managers are now qualified for the Founder’s Club. Restaurants managed by Founder’s Club members have noticed an increase in sales by 7 percent and guest counts by 4 percent, which have resulted in a $43 million dollar increase in company profit. 9-1b Linking Pay and Benefits to Competitive Advantage An organization’s compensation practices can have far-reaching effects on competitive advantage. They can improve cost efficiency, ensure legal compliance, enhance recruitment efforts, and reduce morale and turnover problems. • Cost efficiency can be improved by lowering labor costs. Service and other labor-intensive firms’ labor costs greatly impact competitive advantage. The traditional way of offsetting rising costs was to pass higher compensation costs to customers in the form of higher prices. Today, we must contain these costs or possibly enforce pay freezes or massive layoffs. • Legal compliance can be achieved by understanding and fully following the laws that regulate compensation to avoid lawsuits or fines. • The success of recruitment efforts can be enhanced by offering a package that attracts more qualified employees. An adequate package of pay and benefits tends to retain more employees longer and encourage them to be more motivated, helpful, or cooperative. Let students debate this issue. One side will explain why a company cannot take the time or spend the money to improve cost efficiency, ensure legal compliance, enhance recruitment efforts, and reduce morale and turnover problems or at least not fully comply with them. The other side will provide evidence why a company should practice them fully. 9-2 HRM Issues and Practices We now take a look at the influence of compensation on attitudes and behavior and some tips on establishing pay rates. Managers must be aware of the legal constraints in this area and some options they can offer employees. Effective administration of benefits can truly improve competitive advantage. 9-2a Influence of Compensation on Attitudes and Behavior Compensation must be viewed by applicants and employees in a favorable light. Their perceptions of compensation and their resulting behaviors must be understood. Management and HR professionals must be aware that an individual’s satisfaction with compensation is not the amount of compensation received, but its perceived fairness or equity. Equity theory helps to develop a compensation system that works. People form equity beliefs based on two factors: inputs and outcomes. Inputs (I) refer to the perceptions that people have concerning what they contribute to the job. Outcomes (O) refer to the perceptions that people have regarding the returns they get for the work they perform. People judge the equity of their pay by comparing their outcome-to-input ratio with another person’s ratio. They will either be happy or not happy about it. When employees see the O/I ratios as less than expected, they may take negative actions such as decreasing outputs or escaping the situation. Managers can find out what employee attitudes are and attempt to reach a solution. Ask students to think of other things employees do when they think compensation is not equitable? Ask them to mention acts or behaviors without mentioning names. Ask students if they would do these kinds of things to “even things up?” Why or why not. What might be the consequences of their actions? 9-2b Establishing Pay Rates within an Organization Employees believe their pay is fair if it is relative to coworkers or workers in similar jobs in other organizations or reflects their inputs to the organization. A firm can achieve these aims in several ways. • When a firm’s employees believe that all workers are being paid what they are “worth,” internal consistency will be achieved. • The systematic process for determining the worth of a job is called job evaluation. Job evaluation judgments must be accurate and fair and are generally determined by a job evaluation committee. Job evaluators should be provided with adequate information and training. Job evaluation ratings focus on the requirements of the job and may be determined by the point-factor method. • The development of the point-factor rating scale consists of: (1) select criteria called compensable factors, (2) determine the number of levels or degrees for each factor, (3) carefully define each degree level, (4) weigh each factor in terms of its relative importance for determining job worth, and (5) assign point values to the degrees associated with each compensable factor. Each job is rated one factor at a time until all jobs have been evaluated on all factors. The total is determined by summing the points earned on each compensable factor. This approach is difficult and time-consuming; however, most firms believe it is well worth it. • When job evaluations have been completed, jobs are grouped into pay grades based on the total number of points received. The company must decide how many pay grades to establish. • A firm achieves external competitiveness when employees perceive that their pay is fair in relation to what their counterparts in other organizations earn. HRM professionals and managers conduct research to find these answers and make decisions based on their findings. • A salary survey provides information on pay rates offered by competitors for certain benchmark jobs and serves as a basis for making meaningful comparisons. • Next, companies establish a pay policy stipulating how well it will pay its workers relative to the market. This crucial step must be approached carefully. Most firms pay at the market rate. Those paying above market do so because they have the ability due to higher profits or they desire to attract and retain topnotch employees. Those paying below are unable to pay market rates but may provide incentives by tying production to extra pay or profits. A company’s pay policy must correlate with the strategic plan. • Now the firms must price each of its jobs. Non benchmark jobs’ pay is set by using a pay policy line. This is determined by drawing a statistical relationship between job evaluation points and prevailing market rates. • To achieve employee contributions equity, an organization must first establish a pay range for each pay grade. A pay range specifies the minimum and maximum pay rates for all jobs within a grade. Most firms set the market rate at the midpoint of the range. New employees are usually paid at the bottom of the pay range unless qualifications exceed the minimum. Existing employees are usually recognized in the form of pay raises based on seniority or performance. • Some firms are now using a new concept that does not pay on seniority or work performance. This skill-based pay assumes that workers who acquire additional skills can make greater contributions to the organization, and should therefore be paid more. Tasks and skills needed to perform the tasks are identified. Tests or measures are developed to ascertain whether workers have learned the skills. Each skill is priced based on its value. Let employees know the skills they can learn and how much they will be paid for learning them. Skill-based pay systems have both strengths and weaknesses. Such systems provide workers with a financial incentive to increase their skill levels. Limitations include additional labor cost, inequity perceptions, employment discrimination, and administrative burden. These programs do not work equally well in all organizational settings. . Create a case scenario where students are provided with a job. Group them into teams and ask them to establish a pay rate by going through the process. Provide assistance and clarification where needed. Let them reflect on why this is a difficult assignment. 9-2c Legal Constraints on Pay Practices Federal and state laws impose constraints on organizational pay practices in two major areas: (1) minimum wage and overtime and (2) pay discrimination. The Fair Labor Standards Act (FLSA) of 1938 is the primary law regulating minimum wage and overtime pay practices. Some jobs and employees are exempt from these laws and employees who hold such jobs are exempt employees. The FLSA specifies that when state minimum wage levels differ from that imposed by the FLSA, the employer must pay employees the higher of the two rates. It states that all nonexempt employees must be paid at a higher than usual rate for any overtime worked. Specifically, the overtime pay rate must be paid no less than one and one-half times the regular rate for all work done over 40 hours in any given week. The Department of Labor estimates that as many as 70 percent of employers violate the FLSA’s provisions each year. The most common violation is the misclassification of exempt and nonexempt employees. These claims usually arise out of the employer’s ignorance of the laws. EEO laws prohibit discrimination in pay based on protected group membership. Most litigated cases claim sex discrimination. The Equal Pay Act (EPA) of 1963 prohibits sex discrimination in pay. Despite the fact that the EPA is in effect a significant pay gap still exists between the sexes. Eighty percent of the pay gap has been attributed to facts like part-time work, seniority, and negotiation skills. The remaining 20 percent is due largely to the arbitrary undervaluing of jobs traditionally held by women. Equal pay for equal worth is called comparable worth, meaning that even if jobs are dissimilar employees should receive equal ways if their overall worth is comparable. The Supreme Court has ruled that pay discrimination lawsuits can be brought under Title VII. Although the legal status of comparable worth remains unclear, the following conclusions seem warranted: To win a comparable worth case, plaintiffs must prove disparate impact caused by intentional discrimination. How can companies get away with paying women less money than men for the same jobs? Provide some specific examples and what can be done to correct them. 9-2d Employee Benefit Options Workers today want fair pay and a good benefits package. We will examine the common benefit options here. • Each state has workers’ compensation laws that are designed to provide financial protection for workers injured on the job. This law helps with job-related injuries or illness by compensating for medical expenses, lost wages, death, dismemberment, or permanent disability. Much fraud exists in claim filing. The fastest growing category of claims is mental stress. Firms can attempt to keep this under control by formulating a preventative strategy to reduce stress and teach workers how to handle stress. This is provided at no cost to the employee. • Unemployment compensation provides an income for individuals who have lost a job through no fault of their own. The specific amount of stipend varies from state to state. Workers cannot receive this benefit for quitting a job without good cause, being discharged for misconduct connected with work, or refusing suitable work while unemployed. This is provided at no cost to the employee. • Social Security provides monthly benefits to retired workers at least aged 62, disabled workers and their eligible spouses and dependents; it also provides Medicare coverage for anyone entitled to retirement benefits. • The continuation of health benefits is possible through COBRA. Employees may continue their health insurance coverage for up to three years when they leave a job at no fault of their own. Employees pay the group rate premium themselves. • Insurance is often provided in three forms. ○ Health care plans in their various forms are generally available. See Taking a Closer Look 9-3 for more details. Workers pay at least part of the premiums. ○ Long-term disability provides a replacement income to employees who cannot return to work for an extended time due to illness or injury. The benefits paid to employees are customarily set between 50 and 67 percent of the current income. ○ Life insurance plans cover 94 percent of all full-time employees. The premiums are usually paid by the employer. Employees are often given the opportunity to expand their coverage by purchasing additional insurance. • Pensions or retirement incomes become vested after meeting certain age time requirements. Once vested, employees can keep the accumulation even if they leave the associated employment. Defined benefit plans specify the amount of pension a worker will receive. Defined contribution plans specify the rate of employer and employee contributions. Most employers have adopted defined contribution plans to avoid committing to unknown costs. Pension plans are established voluntarily, but once begun must meet Employee Retirement Income Security Act (ERISA) regulations. • Perquisites and services may be offered to attract and retain employees. Additional ones may be offered to attract and motivate managers. See Exhibit 9-5 for common examples. Generate a discussion on whether the employer should decide on what should be included in the benefits package or employees should be allowed to choose which specific benefits they prefer (cafeteria plan). Include as many reasons for each of the two as possible, including cost. 9-2e Benefits Administration Two issues that must be addressed in benefits administration include flexible benefit plans and cost containment. Under a flexible benefit plan or cafeteria plan, employees can choose among various benefits and levels of coverage or cash instead of benefits. Such plans allow workers to choose benefits that fit their needs. Employees become more aware of the cost of benefits. Employers can lower costs by not having to pay for unwanted benefits. Both employers and employees can save on taxes. With the spiraling costs involved, the challenge for employers is to contain these costs while maintaining an attractive array of benefits for workers. Workers’ compensation costs must be scrutinized and accident prevention must be practiced. Many firms implement utilization review programs to determine if medical services are necessary and they are reasonably priced. Employers also closely examine their firm’s health insurance carriers periodically to audit their services and costs. 9-3 The Manager’s Guide Managers provide valuable input into pay and benefit systems. A closer look now follows. 9-3a Compensation and the Manager’s Job The line manager can take actions to help ensure that the company’s compensation system has a positive impact on competitive advantage. A manager’s responsibilities regarding pay take several forms. Here’s how: • Managers can determine the worth of jobs through proper job evaluations. • Managers can negotiate starting salaries when they hire new workers. • Managers can recommend pay raises and promotions based on performance. • Managers can also ensure FLSA compliance. • Managers can notify the HRM department of job changes—content or duties. Managers also have responsibilities regarding communicating and administering benefits to applicants and employees in this way: • Managers must successfully deal with worker’s compensation claims to represent both the employee and the company. • Managers can also help the organization contain the cost of unemployment compensation claims. 9-3b How the HRM Department Can Help Although managers play an important role, the development and administration of a company’s compensation system is primarily the responsibility of the HRM department. The HRM people establish the rates of pay, oversee the job evaluation process, conduct salary surveys, and establish procedures for administering pay plans and complying with antidiscrimination laws. HRM departments also select and administer benefit options and communicate benefits-related information to employees. Employees must recognize and appreciate the value of the benefits provided by the organization. Effective ways to communicate this information should be applied. 9-3c HRM Skill-Building for Managers Managers assign overtime work and must understand the overtime provisions of the FLSA. Overtime must be calculated on a weekly basis. An employee may be entitled to overtime even if a manager has not specifically authorized it. Managers also may be given discretion in negotiating starting salaries, usually within a fixed pay range, during the hiring process. Most applicants will wait for the managers to make the first offer. The initial salary offer is based on candidate qualifications and salary histories. When an applicant asks for too much, the manager can interview another applicant. The salary offer should match the applicant’s skill level. The maximum offered should be the midpoint of the salary range. A good rule of thumb is to offer 10 to 30 percent more than the applicant’s previous salary to entice the most qualified candidates to accept the offer. Stage a mock-up job interview where the applicant and manager are negotiating a starting salary. Allow students to take part in creating current and past jobs for the applicant including pay. Let them construct a make-believe job the applicant is applying for. While the two chosen students are in front of the class acting out the parts, the rest of the class will critique and offer suggestions after completion. KEY TERMS Comparable worth: A standard for judging pay discrimination that calls for equal pay for equal worth. Compensable factor: Criteria representing the most important determinants of a job’s worth. Consolidated Omnibus Budget Reconciliation Act (COBRA): A law that provides a continuation of health insurance coverage for employees who leave a company through no fault of their own. Defined benefit plan: A type of pension plan that specifies the amount of pension a worker will receive upon retirement. Defined contribution plan: A type of pension plan that specifies the rate of employer and employee monthly contributions. Employee contributions: Occurs when employees’ pay fairly reflects their input to the organization. Employee Retirement Income Security Act (ERISA): A law requiring employers to follow certain rules to ensure that employees will receive the pension benefits due to them. Equal Pay Act (EPA): An amendment to the FLSA that prohibits sex discrimination in pay. Equity: Fairness. Equity theory: A pay fairness theory that states that people form equity beliefs by comparing their outcome/input ratio to that of a referent other. Exempt employees: Employees whose pay and overtime are not regulated by the Fair Labor Standards Act. External competitiveness: Occurs when each employee’s pay is fair relative to the pay received by workers in other organizations who hold similar positions. Fair Labor Standards Act (FLSA): A 1938 federal stature that regulates minimum wage and overtime pay. Flexible benefit (cafeteria) plans: Benefit programs that allow employees to choose among various benefits and levels of coverage. Inputs: The perceptions that people have concerning what they contribute to the job. Internal consistency: Occurs when each employee’s pay is fair relative to the pay coworkers in the same organization receive. Job evaluation: A systematic process for determining the worth of a job. Job evaluation committee: A committee of individuals convened for the purpose of making job evaluations. Nonexempt employees: Employees whose pay and overtime are regulated by the Fair Labor Standards Act. Outcomes: The perceptions that people have regarding the returns they get for the work they perform. Pay grades: Job groupings in which all jobs assigned to the same group are subject to the same range of pay. Pay policy: A company policy stipulating how well it will pay its employees relative to the market. Pay policy line: A regression line that shows the statistical relationship between job evaluation points and prevailing market rates. Pay range: The minimum and maximum pay rates for all jobs within a pay grade. Point-factor method: A job evaluation method in which each job is assigned points for compensable factors. Salary survey: A survey that seeks information on pay rates offered by a firm’s competitors. Skill-based pay: A compensation approach that grants employees pay increases for acquiring new, job-related skills. Social Security Act: A law that provides eligible workers with retirement and disability incomes and Medicare coverage. Unemployment compensation: A system designed to provide income to individuals who have lost a job through no fault of their own. Utilization review programs: Programs designed to minimize health care costs through the use of preauthorization and auditing procedures. Workers’ compensation: A state-run, no-fault insurance system that provides income protection for workers experiencing job-related injuries or illnesses. REVIEW QUESTIONS 1. __________ is established by setting the organization’s pay level in comparison with what the competition pays for similar work. a. Internal consistency b. External competitiveness c. Employee contributions d. Administration Answer: b Rationale: A firm achieves external competitiveness when employees perceive that their pay is fair in relation to what their counterparts in other organizations earn. 2. According to the equity theory, which of the following conditions would produce the greatest feeling of equity for Person A? (Assume Person B is the “referent other.”) a. Person A’s O/I > Person B’s O/I b. Person A’s O/I < Person B’s O/I c. Person A’s O/I = Person B’s O/I d. a., b., and c. would all produce the same feeling of equity. Answer: c Rationale: People feel equity when the O/I ratios of the individual and his or her referent other are perceived as being equal. 3. The major problem associated with using only five or six pay grades is a. administrative difficulties. b. perceived inequity. c. going over budget. d. all of the above. Answer: b Rationale: The practice of limiting the number of pay grades eases the firm’s administrative burdens. However, using a limited number of grades creates a situation in which jobs of significantly different worth fall into the same grade and receive the same pay. This outcome would lead to equity problems. 4. Pay rates for benchmark jobs are set on the basis of a. employee contributions. b. the overall worth of each job. c. the statistical relationship between job evaluation points and current pay rates. d. the statistical relationship between job evaluation points and prevailing market rates. Answer: d Rationale: Using data collected on the benchmark jobs, an organization would determine the statistical relationship (i.e., simple linear regression) between job evaluation points and prevailing market rates. 5. Which of the following categories is exempted from the FLSA? a. executive b. administrative c. professional d. all of the above Answer: d Rationale: The FLSA exempts certain types of employees from its minimum wage and overtime requirements, namely those holding executive, administrative, professional, and outside sales jobs. 6. Pay differences between men and women performing the same job may be legally justified under certain circumstances, such as when the discrepancy is due to __________ differences. a. seniority b. productivity c. merit d. all of the above Answer: d Rationale: Unequal pay for equal work is allowable if the pay disparity between the sexes is based on differences in seniority, productivity, merit, or any factor other than sex. 7. In order to collect workers’ compensation for an injury, a. the injury must be the worker’s fault. b. the worker must have health insurance. c. the injury or illness must be job-related. d. all of the above. Answer: c Rationale: When workers suffer job-related injuries or illnesses, the insurance system provides compensation. 8. COBRA provides continued __________ coverage for employees who leave their jobs through no fault of their own. a. life insurance b. health insurance c. pension d. all of the above Answer: b Rationale: The Consolidated Omnibus Budget Reconciliation Act of 1984 (COBRA) provides for a continuation of health insurance coverage for a period of up to three years for employees who leave a company through no fault of their own. 9. Today, most organizations offer __________ pension plans. a. defined benefit b. defined contribution c. variable benefit d. variable contribution Answer: b Rationale: Defined contribution plans specify the rate of employer and employee contributions. Most employers in recent years have adopted defined contribution plans. 10. The purpose of implementing a utilization review program is to a. improve the quality of medical treatment. b. cut the employer’s health care costs. c. replace traditional health insurance programs. d. encourage the use of HMOs. Answer: b Rationale: Many companies implement utilization review programs in order to cut health care costs by (1) ensuring that each medical treatment is necessary before authorizing payment and (2) ensuring that the medical services have been rendered appropriately at a reasonable cost. DISCUSSION QUESTIONS 1. Define the term compensation. Compensation—the pay and benefits employees receive from the company. 2. Describe the impact of compensation practices on an organization’s cost efficiency. • Labor costs greatly affect competitive advantage because they represent a large portion of a company’s operating budget. By effectively cutting these costs, a firm can achieve cost leadership. • Compensation costs have risen sharply in recent years primarily due to the escalating costs of benefits. Organizations must contain these spiraling costs if they are to get a proper return on their human resource investments and thus gain competitive advantage. 3. Describe the major principles of equity theory. People form equity beliefs based on two factors: inputs and outcomes. Inputs (I) refer to the perceptions that people have concerning what they contribute to the job (e.g., skill and effort). Outcomes (O) refer to the perceptions that people have regarding the returns they get (e.g., pay) for the work they perform. People judge the equity of their pay by comparing their outcome-to-input ratio (O/I) with another person’s ratio. This comparison person is referred to as one’s “referent other.” People feel equity when the O/I ratios of the individual and his or her referent other are perceived as being equal. A feeling of inequity occurs when the two ratios are perceived as being unequal. 4. Define the terms internal consistency, external competitiveness, and employee contributions. Briefly describe how each of these states can be achieved through the pay-setting evaluation. • Internal Consistency ○ Occurs when each employee’s pay is fair relative to the pay coworkers in the same organization receive. ○ It is achieved through the use of job evaluations and assigning jobs to pay grades. • External Competitiveness ○ Occurs when each employee’s pay is fair relative to the pay received by workers in other organizations who hold similar positions. ○ It is achieved by collecting salary survey information, which helps organizations set pay policies and pay rates for specific jobs. • Employee Contributions ○ Occurs when employees’ pay fairly reflects their input to the organization. ○ To achieve this aim, an organization must first establish a pay range for each pay grade; it must then place each employee within that range based on his or her contribution to the organization. 5. Define job evaluation. Briefly describe the point-factor method of job evaluation. • Job evaluation—a systematic process for determining the worth of a job. • The point-factor method is a job evaluation method in which each job is assigned points for compensable factors. • When completing the job evaluation ratings, the evaluators rate each job, one factor at a time, until all jobs have been evaluated on all factors. They then calculate a total point value for a job by summing the points earned on each compensable factor. 6. What is pay policy? What factors must a firm consider when setting its pay policy? • Pay policy—a company policy stipulating how well it will pay its employees relative to the market. • When setting its pay policy, a company must consider its strategic plan. 7. What is a pay policy line? How is this line used when setting pay rates? • Pay policy line—a regression line that shows the statistical relationship between job evaluation points and prevailing market rates. • An HR professional could determine the market rate for jobs by first finding the job evaluation point value falling at the midpoint of the pay grade. One then moves up vertically from that point until reaching the pay policy line. The market rate for that pay grade is the value on the y-axis that corresponds to that point on the pay policy line. The firm then adjusts its pay scale to reflect its pay policy. 8. Describe the main provisions of the FLSA. The FLSA regulates minimum wage and overtime pay practices. Currently the minimum wage rate is $5.15 an hour, to be increased to $7.25, effective July 24, 2009. The FLSA specifies that when state minimum wage levels differ from that imposed by the FLSA, the employer must pay employees the higher of the two rates. The overtime pay rate must be no less than one and one-half times the employee’s regular rate. 9. Compare and contract the doctrines of “equal pay for equal work” and “equal pay for equal worth.” • “Equal pay for equal work” bars employers from paying lower wages to one sex where the work of the two sexes is substantially equal (i.e., the jobs require an equal level of skill, effort, and responsibility and are performed under similar working conditions). • “Equal pay for worth” states that even if jobs are dissimilar, employees should receive equal wages if their overall worth to the employer is comparable. 10. Under what conditions would a worker become disqualified from obtaining unemployment compensation? Unemployment compensation laws in most states disqualify benefits under the following conditions: ○ Quitting one’s job without good cause ○ Being discharged for misconduct connected with work ○ Refusing suitable work while unemployed 11. Distinguish between a defined benefit and a defined contribution pension plan. • Defined benefit plan—a type of pension plan that specifies the amount of pension a worker will receive upon retirement. • Defined contribution plan—a type of pension plan that specifies the rate of employer and employee monthly contributions. 12. Describe three of the manager’s roles with regard to pay and benefits. • Evaluating the worth of jobs. • Negotiating starting salaries. • Recommending pay raises and promotions. • Compliance with the FLSA. • Notifying the HRM Department of job changes. • Dealing with employees on workers’ compensation leave. • Helping to contain unemployment compensation costs. 13. Why is it so important for the HRM department to inform employees about all aspects of their benefit plans? How should this communication take place? • Employees often fail to appreciate the value of the attractive benefits package because they are ignorant of the benefits’ market value and cost. • The information should be conveyed in several ways: ○ Prepare an easy-to-understand handbook to describe the cost and coverage of each benefit option. ○ Draft periodic supplements to the handbook to keep it up to date. ○ Appoint an HR professional to be available for answering questions. ○ Conduct regularly scheduled training classes. Go over only one or two benefit areas per session to avoid information overload. ○ Use the company newsletter to get the word out on new benefits or for updates on existing programs. 14. What provisions does the FLSA make for overtime work? • The act specifies that overtime must be calculated on a weekly basis. The workweek need not coincide with the calendar week, but may begin at any time. • When calculating overtime, a worker’s hours cannot be averaged over two or more weeks. • To avoid liability for overtime pay, the company should schedule the make-up time for the same week in which time off was granted. • All nonexempt employees must be paid at a higher than usual rate for any overtime worked. • The overtime pay rate must be no less than one and one-half times the employee’s regular rate. EXPERIENTIAL EXERCISES Evaluating the Job of Instructor Overview: You will be divided into teams for the purpose of evaluating the worth of a college instructor’s job. Steps 1. Divide into groups of five. Each group will serve as a job evaluation committee and work independently of other groups. The task is to evaluate the worth of the job of college instructor of management using the point-factor method of job evaluation. The rating form is located in the appendix. 2. The students are required to read the job description provided below: This job entails teaching four undergraduate management courses per semester. The instructor must ensure the courses taught cover the essential subject matter areas specified by the Department of Management. How the courses are taught is entirely up to the instructor. 3. Begin the rating process by independently rating the job on Factor 1, Physical and Mental Effort. 4. Each group member must now disclose his or her rating to the other group members. If all Factor 1 ratings are the same, record that rating on a separate sheet of paper. If there is any disagreement, group members must discuss their ratings and arrive at a consensus. Record the consensus rating. 5. Now repeat the rating process, one factor at a time. Be sure to record your group’s ratings for each factor. 6. Each group will now report its factor ratings to the instructor, who will record them on the blackboard. 7. As a class, discuss the similarities and differences found in the ratings among the various groups. Where disagreements occurred, identify the possible reasons. 8. Discuss the advantages and pitfalls associated with the use of the point-factor method of job evaluation. Evaluating General Mills’ Skill-Based Pay System Suggested approach: After being divided into groups, the students are required to participate in the exercise as mentioned in the following steps. Understanding General Mills’ Skill-Based Pay System described in On the Road to Competitive Advantage 9-1 will help students evaluate the above system. The instructor will hold a class discussion for the purpose of discussing the answers given by each group. 1. Divide into groups of five and discuss the skill-based pay system used by General Mills (described in On the Road to Competitive Advantage 9-1). 2. Address the following questions: a. What are the advantages of using this approach to pay compared to using a traditional approach? What are the disadvantages? b. What practical difficulties do you think General Mills ran into when trying to implement this program? 3. The instructor will hold a class discussion for the purpose of discussing the answers given by each group. CASE Resolving a Pay Inequity Dilemma Objective: Have students apply their knowledge to solve a frequently encountered compensation problem. What to do: Cover this case after discussing how companies set pay rates. 1. Do you agree with Paul that a reclassification of the job to Pay Grade 10 would cause a morale problem? Student answers may vary. It is difficult to predict if there would be a morale problem and what the employees’ reaction would be. If there is an aura of distrust among the organization, such a reclassification would cause a negative response. 2. Can you think of a better solution to the problem? Explain. • Ask students if they can think of a better solution to the problem. • One possible solution would be to add additional duties to the physical therapist position, thus boosting its ratings to Pay Grade 10. This may have a negative impact though because the physical therapists at Ridgeway may still perceive inequity. Compared to their counterparts at Langley they would be doing more work for the same reward. • Another option for Ridgeway would be to take the position of physical therapist out of the job evaluation system and say that it is a “market driven” job. In order for this option to work Ridgeway would have to identify other “market driven” jobs and reclassify them as well. Ridgeway would inform its employees that some jobs are “market driven” and will thus be paid according to the market rate. CRITICAL THINKING EXERCISES 1. Let students debate the issue of linking pay and benefits to competitive advantage. One side will explain why a company cannot take the time or spend the money to improve cost efficiency, ensure legal compliance, enhance recruitment efforts, and reduce morale and turnover problems or at least not fully comply with them. The other side will provide evidence why a company should practice them fully. 2. Ask students to think of other things that employees do when they think compensation is not equitable? Ask them to mention acts or behaviors without mentioning names. Ask your students if they would do these kinds of things to “even things up?” Why or why not? What might be the consequences of their actions? 3. Create a case scenario where students are provided with a job. Group them into teams and ask them to establish a pay rate by going through the process. Provide assistance and clarification where needed. Let them reflect on why this is a difficult assignment. 4. How can companies get away with paying women less money than men for the same jobs? Provide some specific examples and what can be done to correct them. 5. Generate a discussion on whether the employer should decide on what should be included in the benefits package or employees should be allowed to choose which specific benefits they prefer (cafeteria plan). Include as many reasons for each of the two as possible, including cost. 6. Stage a mock-up job interview where the applicant and manager are negotiating a starting salary. Allow students to take part in creating current and past jobs for the applicant including pay. Let them construct a make-believe job the applicant is applying for. While the two chosen students are in front of the class acting out the parts, the rest of the class will critique and offer suggestions after completion. ESSAY QUESTIONS 1. Why are benefit packages so important to employees? To employers? Benefit packages are crucial for employees because they enhance overall job satisfaction, support work-life balance, and provide financial security through health insurance, retirement plans, and other perks. For employers, offering competitive benefits helps attract and retain top talent, boosts employee morale and productivity, and can reduce turnover costs. Overall, a strong benefits package aligns employee needs with organizational goals, fostering a more committed workforce. 2. Provide some solid ways to link pay and benefits to competitive advantage. To link pay and benefits to competitive advantage, companies can: 1. Benchmark Compensation: Regularly compare pay and benefits to industry standards to ensure competitiveness. 2. Tailor Benefits: Customize packages to meet the specific needs of the workforce, enhancing employee satisfaction and loyalty. 3. Performance Incentives: Implement performance-based bonuses and incentives that align employee goals with company objectives. 4. Flexible Options: Offer flexible benefits (e.g., remote work, wellness programs) to attract diverse talent. 5. Clear Communication: Clearly communicate the value of benefits to employees, reinforcing their importance in total compensation. 6. Continuous Improvement: Regularly review and update pay and benefits to stay ahead of market trends and employee expectations. These strategies can help attract top talent, reduce turnover, and enhance overall organizational performance. 3. Does compensation influence employee attitudes and behaviors? Explain as many ways as possible that you can think of. Yes, compensation significantly influences employee attitudes and behaviors in several ways: 1. Motivation: Competitive pay motivates employees to perform better and achieve goals. 2. Job Satisfaction: Fair compensation increases job satisfaction, leading to higher morale and engagement. 3. Retention: Attractive pay reduces turnover, as employees are less likely to seek better opportunities elsewhere. 4. Productivity: Higher compensation can drive increased productivity, as employees feel their efforts are valued. 5. Commitment: Fair and equitable pay fosters loyalty, encouraging employees to remain committed to the organization. 6. Work Ethic: Competitive pay can enhance work ethic, prompting employees to take initiative and responsibility. 7. Perceived Value: Adequate compensation reinforces the perception that the employer values their contributions, boosting trust and respect. 8. Team Dynamics: Disparities in pay can lead to resentment and conflict, while equitable compensation promotes collaboration. 9. Attracting Talent: Competitive salaries attract skilled candidates, improving the overall talent pool. 10. Job Performance: Performance-based pay can directly link compensation to results, encouraging high achievement. By influencing these areas, compensation plays a vital role in shaping overall workplace culture and effectiveness. 4. You are assigned to establish pay rates for your organization. What will you do? To establish pay rates for the organization, I would: 1. Conduct Market Research: Analyze industry salary surveys and competitor pay structures to benchmark rates. 2. Define Job Roles: Clearly outline job descriptions, responsibilities, and required skills for each position. 3. Evaluate Internal Equity: Ensure pay rates are fair and consistent across similar roles within the organization. 4. Consider Pay Structure: Develop a structured pay scale that includes ranges for each position based on experience and performance. 5. Incorporate Benefits: Factor in the total compensation package, including benefits, bonuses, and non-monetary perks. 6. Engage Stakeholders: Involve management and HR teams to gather insights and ensure alignment with organizational goals. 7. Review Legal Compliance: Ensure compliance with labor laws and regulations regarding minimum wage and pay equity. 8. Communicate Transparently: Clearly communicate the pay structure and rationale to employees to foster trust and understanding. 9. Regularly Review: Establish a process for periodic reviews and adjustments based on market changes and organizational needs. This comprehensive approach helps ensure competitive, fair, and effective pay rates. 5. Outline the steps in job evaluation. Briefly describe each one. Here are the steps in job evaluation: 1. Job Analysis: Gather detailed information about job responsibilities, required skills, and working conditions through interviews, surveys, and observations. 2. Job Documentation: Create job descriptions that clearly outline tasks, qualifications, and expectations for each position. 3. Choose Evaluation Method: Select a job evaluation method (e.g., point-factor, job ranking, or classification) that aligns with organizational goals. 4. Define Criteria: Establish criteria for evaluating jobs, such as skills, effort, responsibility, and working conditions. 5. Evaluate Jobs: Assess each job against the defined criteria, assigning scores or ranks based on its relative value within the organization. 6. Establish Pay Structure: Use the evaluation results to develop a pay structure that reflects the relative worth of each job. 7. Review and Adjust: Regularly review the evaluation process and pay structure to ensure they remain aligned with market trends and organizational changes. 8. Communicate Results: Share the outcomes of the job evaluation with employees to foster transparency and understanding. Following these steps ensures a systematic and fair approach to evaluating job worth within the organization. 6. What is the purpose of a salary survey? How would you conduct one? Purpose of a Salary Survey: A salary survey aims to gather data on compensation levels within a specific industry or geographic area to help organizations: 1. Benchmark Salaries: Understand competitive pay rates for similar positions. 2. Attract Talent: Ensure competitive compensation to attract skilled candidates. 3. Retain Employees: Maintain fair pay to reduce turnover and enhance job satisfaction. 4. Inform Pay Structures: Develop or adjust internal salary structures based on market data. How to Conduct a Salary Survey: 1. Define Objectives: Identify the specific roles and information needed for comparison. 2. Select Participants: Choose comparable organizations or industry groups to gather data. 3. Develop Questionnaire: Create a survey tool that includes questions about job titles, responsibilities, compensation, and benefits. 4. Distribute Survey: Send the survey to selected organizations, ensuring confidentiality and encouraging participation. 5. Collect Data: Gather responses and compile the data for analysis. 6. Analyze Results: Evaluate the data to identify average salaries, pay ranges, and trends. 7. Report Findings: Summarize the results and present them to stakeholders for informed decision-making. 8. Review Regularly: Schedule periodic surveys to keep compensation data up to date with market changes. This systematic approach ensures accurate and relevant salary information. 7. What advice would you give on establishing a pay raise and skill-based pay? Establishing a Pay Raise: 1. Set Clear Criteria: Define performance metrics, tenure, and market comparisons for eligibility. 2. Communicate Expectations: Ensure employees understand what is needed to qualify for raises. 3. Budget Considerations: Align pay raises with the organization’s financial health and budget constraints. 4. Regular Reviews: Implement a structured schedule for performance evaluations to assess raise eligibility. Skill-Based Pay: 1. Identify Key Skills: Determine the skills that add value to the organization and align with strategic goals. 2. Develop a Skills Matrix: Create a framework that outlines required skills and corresponding pay adjustments. 3. Encourage Development: Provide training and development opportunities to help employees acquire skills. 4. Communicate Benefits: Clearly explain how skill-based pay works and its benefits to employees to foster motivation. By following these guidelines, organizations can establish fair and effective pay raise and skill-based pay systems that encourage performance and skill development. 8. List and briefly explain the government-required benefits offered to employees. Are all employees in all industries covered by them? Now explain the benefits offered as options by companies, including perks and services. Government-Required Benefits: 1. Social Security: Provides retirement, disability, and survivor benefits; funded through payroll taxes. 2. Unemployment Insurance: Offers temporary financial assistance to eligible workers who lose their jobs through no fault of their own. 3. Workers' Compensation: Provides wage replacement and medical benefits to employees injured on the job. 4. Family and Medical Leave Act (FMLA): Guarantees eligible employees up to 12 weeks of unpaid leave for specific family and medical reasons. 5. Health Insurance (Affordable Care Act): Requires larger employers to offer health insurance to eligible employees or face penalties. Not all employees in all industries are covered by these benefits; eligibility can depend on factors like company size, employee status, and state regulations. Optional Benefits Offered by Companies: 1. Health and Wellness Programs: Includes gym memberships, wellness challenges, and mental health support. 2. Retirement Plans: Options like 401(k) plans with employer matching contributions to encourage saving. 3. Flexible Work Arrangements: Remote work options, flexible hours, or compressed workweeks to improve work-life balance. 4. Paid Time Off (PTO): Additional vacation days, sick leave, or personal days beyond legal requirements. 5. Professional Development: Funding for courses, certifications, and conferences to enhance employee skills. 6. Employee Assistance Programs (EAPs): Confidential counseling services for personal and work-related issues. 7. Stock Options or Equity: Offering employees a stake in the company’s success through stock options or shares. These optional benefits and perks can enhance job satisfaction and attract talent, allowing companies to differentiate themselves in the competitive job market. 9. Which benefits do you think that young, single adults would think are the most valuable in a cafeteria style plan? Young adults with children? Middle-aged families with teenagers? Older workers whose children are grown and moved out of the household? Young, Single Adults: • Health and Wellness Programs: Gym memberships and mental health support. • Flexible Work Arrangements: Remote work options and flexible hours. • Career Development: Funding for courses and certifications to advance skills. Young Adults with Children: • Childcare Assistance: Subsidized daycare or backup childcare services. • Health Insurance: Comprehensive family health plans with pediatric coverage. • Paid Time Off (PTO): Generous vacation days and sick leave for family responsibilities. Middle-Aged Families with Teenagers: • Education Benefits: Tuition assistance or scholarships for college-bound teens. • Comprehensive Health Plans: Robust health coverage for a growing family’s needs. • Work-Life Balance: Flexibility to manage family schedules and extracurricular activities. Older Workers (Empty Nesters): • Retirement Plans: Strong 401(k) matching and retirement planning resources. • Health and Wellness Programs: Preventative care and wellness initiatives tailored to older adults. • Travel and Leisure Benefits: Discounts for travel, leisure activities, or volunteer opportunities. By tailoring benefits to the specific needs of each demographic, organizations can enhance employee satisfaction and retention. 10. Suppose you are a business consultant specializing in pay and benefits solutions. Compose a four-page report of your best advice for determining pay and benefits for Amaron Company. (Can be used as a chapter test.) Pay and Benefits Solutions for Amaron Company Introduction Effective compensation and benefits strategies are crucial for attracting talent and enhancing employee satisfaction. This report outlines best practices for Amaron Company. 1. Conduct Market Research • Benchmarking: Analyze salary data from industry reports and competitors to ensure competitive pay. • Role Analysis: Create detailed job descriptions to align responsibilities with market standards. 2. Establish Pay Structure • Pay Grades: Develop a structured pay grade system with defined salary ranges based on job complexity. • Performance-Based Pay: Implement bonuses for meeting goals and conduct annual performance reviews. 3. Offer Comprehensive Benefits Package • Mandatory Benefits: Ensure compliance with government-required benefits like Social Security and workers’ compensation. • Optional Benefits: Provide diverse health insurance options, a competitive 401(k) plan, and flexible work arrangements. • Wellness Programs: Introduce health initiatives and mental health resources. 4. Tailor Benefits to Employee Demographics • Young, Single Adults: Focus on career development funding. • Employees with Children: Offer childcare support and family health coverage. • Middle-Aged Families: Provide education assistance for children. • Older Workers: Include retirement planning resources. 5. Communicate and Evaluate • Transparent Communication: Educate employees on benefits and usage. • Continuous Feedback: Conduct regular surveys to gather input on pay and benefits. • Market Reevaluation: Regularly review pay and benefits to remain competitive. Conclusion By implementing these strategies, Amaron Company can create a competitive pay and benefits system that meets employee needs and drives organizational success. OTHER RESOURCES I. Websites www.PersonnelToday.com. This is a website for HR professionals (anyone can use it). Provides news and advice on many HR topics, including pay and benefits. II. Articles “Voluntary Benefits,” C. Scott, Workforce Magazine, April 30, 2002. Companies search for benefits that workers deem valuable. “Doubt Over the Benefits,” Personnel Today, May 27, 2003. A discussion of current employee attitudes toward pay and benefits. III. Books Pay People Right!, P. Zingheim and J. Schuster, Wiley Company, January 2000. Pay for Performance, G. Milkovich, National Academy Press, August 1991. IV. Forums Topic: Benefits and Compensation www.workforce.com. Solution Manual for Human Resource Management: A Managerial Tool for Competitive Advantage Lawrence S. Kleiman 9781426649189
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