OL 211 Southern New Hampshire University Compensation Paper Overview: This milestone focuses on the topic of this week’s lessons: compensating employees.

OL 211 Southern New Hampshire University Compensation Paper Overview: This milestone focuses on the topic of this week’s lessons: compensating employees.
Using the material on compensation provided in this week’s lesson and the case study, write a short paper in which you: Describe the compensation philosophy of Maersk and how the market influences this philosophy. Determine the value of salary surveys to an organization. Describe the advantages of discretionary benefits to Maersk. Guidelines for Submission: Your submission should be two pages in length and double-spaced using 12-point Times New Roman font. Be sure to list your references at the end of your paper. Submit journal assignment as a Word document.
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Chapter 9: Managing Compensation Chapter Contents
Book Title: Managing Human Resources
Printed By: Victoria Fleury (victoria.fleury@snhu.edu)
© 2016 Cengage Learning, Cengage Learning
Chapter 9
Managing Compensation
Chapter Introduction
9-1 What Is Compensation?
9-2 Strategic Compensation
9-2a Linking Compensation to Organizational Objectives
9-2b The Pay-for-Performance Standard
9-2c The Bases for Compensation
9-3 Compensation Design—The Pay Mix
9-3a Internal Factors
9-3b External Factors
9-4 Job Evaluation Systems
9-4a Job Ranking System
9-4b Job Classification System
9-4c Point System
9-4d Work Valuation
9-4e Job Evaluation for Management Positions
9-5 Compensation Implementation—Pay Tools
9-5a Wage and Salary Surveys
9-5b The Wage Curve
9-5c Pay Grades
9-5d Rate Ranges
9-5e Competence-Based Pay
9-6 Government Regulation of Compensation
9-6a Davis–Bacon Act of 1931
9-6b Walsh–Healy Act of 1936
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9-6c Fair Labor Standards Act of 1938 (as amended)
9-7 Compensation Assessment
9-8 Chapter Review
9-8a Summary
9-8b Key Terms
9-8c Discussion Questions
Case Study 1 Pay Decisions at Performance Sports
Case Study 2 An In-N-Out Pay Strategy: Costa Vida’s Decision to Boost Pay
Chapter 9: Managing Compensation Chapter Contents
Book Title: Managing Human Resources
Printed By: Victoria Fleury (victoria.fleury@snhu.edu)
© 2016 Cengage Learning, Cengage Learning
© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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Chapter 9: Managing Compensation Chapter Introduction
Book Title: Managing Human Resources
Printed By: Victoria Fleury (victoria.fleury@snhu.edu)
© 2016 Cengage Learning, Cengage Learning
Chapter Introduction
Managing Compensation
©Rido/ Shutterstock.com
Learning Outcome
After studying this chapter, you should be able to
LO 1 Distinguish a strategic compensation program from one that is nonstrategic.
LO 2 Determine how to design pay systems.
LO 3 Estimate whether or not a pay system is consistent within the firm as well
as comparable to industry standards and government laws.
LO 4 Be able to design a compensation scorecard.
Coming out of the economic slowdown, business executive pay is going up. Reports show
that for the first time in American history two corporate leaders earned more than $1 billion
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in the year 2013. At the top of the list is Mark Zuckerberg with a total annual compensation
of around $2.3 billion. The top nine after Zuckerberg earned well over $100 million each.
In fact, compensation for other workers in America is on the rise. For instance,
compensation for professional occupations such as doctors, accountants, HR managers,
and engineers is on the rise at around 3.7 percent for the year 2014.
Compensation is a way to increase employee loyalty. It is seen as a way to decrease the
likelihood that employees will be hired away by competitors. It reflects a strategic move on
the part of the company to show that its employees are the most important component for
success.
So why focus on compensation? Why not better select employees who will be
more loyal? Why not improve the training programs or evaluation systems? The answer is
simple. Compensation is directly linked to an employee’s livelihood. Employees can receive
stellar training, copious growth opportunities, and be completely satisfied with their work and
the environment, but they will not show up to work if there is no paycheck in return.
Chapter 9: Managing Compensation Chapter Introduction
Book Title: Managing Human Resources
Printed By: Victoria Fleury (victoria.fleury@snhu.edu)
© 2016 Cengage Learning, Cengage Learning
© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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Chapter 9: Managing Compensation: 9-2 Strategic Compensation
Book Title: Managing Human Resources
Printed By: Victoria Fleury (victoria.fleury@snhu.edu)
© 2016 Cengage Learning, Cengage Learning
9-2 Strategic Compensation
What is strategic compensation? Simply
stated, it is the compensation of
LO 1
employees in ways that enhance
Should compensation systems differ
motivation and growth, while at the
depending upon the company’s objectives?
same time aligning their efforts with the
objectives of the organization. Strategic
compensation has redefined the role
and perceived contribution of compensation. No longer merely a “cost of doing business,”
when used strategically compensation becomes a tool to secure a competitive advantage.
Developing a compensation strategy requires that the organizational objectives are first
analyzed. What does the company want to be known for? What are its growth projections?
What are its core competencies? Once you figure this out, you can then decide what types
of behaviors and skills will be rewarded. By rewarding specific skills and behaviors, you
demonstrate that you are willing to pay for performance and not just for showing up to work.
Finally, as part of your strategy you need to decide on the compensation base most
appropriate for the types of jobs in your company. For example, you might want to pay a
sales representative based more on commission and a manager more on a yearly salary.
Strategic compensation goes beyond determining the appropriate market rates to pay
employees, although market rates are one element of compensation planning. Strategic
compensation should also purposefully link compensation to the organization’s mission and
general business objectives. For example, while a company’s decision to increase base pay
for all its employees is a strategic move to be more competitive with market rates,
companies should also recognize that base pay is not everything. For example, one product
development manager stated, “I could be making much more than I’m getting at Google, but
I chose Google because of the flexibility to grow and work on exciting new products … plus,
where else can you get a chef making you breakfast, lunch, and dinner anytime you want?”
In this regard, Google has not only aligned its compensation strategy with the external
market, it has also aligned it with its desire to be a flexible and innovative company whose
core competency is found in the creativity of its people. Commenting on the importance of
strategic compensation to organizational success, Gerald Ledford and Elizabeth Hawk, two
compensation specialists, note, “Companies throughout the economy have begun to rethink
their compensation systems in search for competitive advantage.”
Additionally, strategic compensation serves to mesh the monetary payments made to
employees with other HR initiatives, such as recruitment, selection, training, retention, and
performance appraisal. For example, starting pay can make a difference in whether or not
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someone will apply for the job. A compensation specialist speaking to one of the authors
noted, “The linkage of pay levels to labor markets is a strategic policy issue because it
serves to attract or retain valued employees while affecting the organization’s relative
payroll budget.” For example, colleges such as University of Arkansas, Fayetteville;
Bridgewater State University, Monroe College; and Brown Mackie College know that they
cannot attract or retain qualified professors unless their pay strategy is linked to competitive
market rates.
Many fast-food restaurants, such as Burger King, Taco Bell, and Blimpie’s—traditionally lowwage employers—have needed to raise their starting wages to attract a sufficient number of
job applicants to meet staffing requirements. If pay rates are high, which creates a large
applicant pool, then organizations may choose to raise their selection standards and hire
better-qualified employees. This in turn can reduce employer training costs. When
employees perform at exceptional levels, their performance appraisals may justify an
increased pay rate. For these reasons and others, an organization should develop a formal
program to manage employee compensation. Step one of this program is to develop a
compensation strategy that is linked to the organization’s objectives.
Chapter 9: Managing Compensation: 9-2 Strategic Compensation
Book Title: Managing Human Resources
Printed By: Victoria Fleury (victoria.fleury@snhu.edu)
© 2016 Cengage Learning, Cengage Learning
© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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Chapter 9: Managing Compensation: 9-2a Linking Compensation to Organizational Objectives
Book Title: Managing Human Resources
Printed By: Victoria Fleury (victoria.fleury@snhu.edu)
© 2016 Cengage Learning, Cengage Learning
9-2a Linking Compensation to Organizational Objectives
The financial crisis of 2007–2010 changed the landscape for compensation. Now
shareholders, the government, and the public all heavily scrutinize companies for how much
they pay their people. For example, due to complaints of bloated federal government
salaries, exorbitant Wall Street banker bonuses, and overly generous autoworker benefits,
managers are trying to ensure that their compensation plans are in strict alignment with the
organization’s objectives.
In particular, a Bloomberg National Poll showed that more than 70 percent of Americans
thought big bonuses should be banned for Wall Street companies that took taxpayer
bailouts. A law aimed at giving shareholders more of a say in the compensation of bankers
was passed in July 2010.
Wall Street banks are now much more careful to reward
employees only when they perform in line with organizational objectives. Furthermore,
American President Obama enacted a three-year (2011–2013) freeze on federal salaries to
help the government achieve its objectives of reducing the deficit. President Obama stated
that “[the freeze] would save…$28 billion in cumulative savings over the next five years.”
Finally, due in part to poor strategic decisions, General Motors (GM) experienced high
pension, wage, and benefit costs that the company could not sustain in the financial crisis.
As a result, GM ended up laying off more than 107,000 employees during the financial
crisis.
While the United Autoworker Union (UAW) was partly to blame for its lack of
flexibility in adjusting salary and benefit plans, GM managers were also guilty for not
aligning compensation with organizational objectives to compete with foreign automakers.
The new compensation landscape requires that managers be more strategic about their
compensation decisions. Managers must first and foremost understand the strategic
objectives of the organization in relation to the industry in which it operates. Next, they need
to move away from paying for a specific position or job title to rewarding employees on the
basis of their individual competencies or work contributions to these organizational
objectives. In fact, a sample of Fortune 500 companies headquartered in America, Europe,
and Asia showed that pay for performance that is linked to organizational objectives is a
primary component of most compensation systems.
Another study showed that 91
percent of participating companies link their pay strategy with organizational performance.
The study found that a written compensation plan indicates that senior management
understands and is committed to aligning their business strategy with pay, suggesting the
alignment of pay with organizational objectives can positively impact company performance.
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GM’s failure to align compensation with the company’s objectives is partly to blame
for its massive layoffs in recent years.
Jim West/Alamy
Increasingly, compensation specialists are asking which components of the compensation
package (benefits, base pay, incentives, etc.), both separately and in combination, create
value for the organization and its employees. Managers are asking questions such as: “How
will this pay program help to retain and motivate valued employees?” and “Does the benefit
or pay practice affect the administrative cost?” Payments that fail to advance either the
employee or the organization are removed from the compensation program.
It is not
uncommon for organizations to establish very specific goals for linking their organizational
objectives to their compensation program.
Formalized compensation goals serve as
guidelines for managers to ensure that wage and benefit policies achieve their intended
purpose. The more common goals of a strategic compensation policy include the following:
1. To reward employees’ past performances
2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To mesh employees’ future performances with organizational goals
5. To control the compensation budget
6. To attract new employees
7. To reduce unnecessary turnover
To achieve these goals, policies must be established to guide management in making
decisions. Formal statements of compensation policies typically include the following:
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1. The rate of pay within the organization and whether it is to be above, below, or at the
prevailing market rate
2. The ability of the pay program to gain employee acceptance while motivating
employees to perform to the best of their abilities
3. The pay level at which employees may be recruited and the pay differential between
new and more senior employees
4. The intervals at which pay raises are to be granted and the extent to which merit
and/or seniority will influence the raises
5. The pay levels needed to facilitate the achievement of a sound financial position in
relation to the products or services offered
Chapter 9: Managing Compensation: 9-2a Linking Compensation to Organizational Objectives
Book Title: Managing Human Resources
Printed By: Victoria Fleury (victoria.fleury@snhu.edu)
© 2016 Cengage Learning, Cengage Learning
© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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Chapter 9: Managing Compensation: 9-2b The Pay-for-Performance Standard
Book Title: Managing Human Resources
Printed By: Victoria Fleury (victoria.fleury@snhu.edu)
© 2016 Cengage Learning, Cengage Learning
9-2b The Pay-for-Performance Standard
“Companies are looking for ways to pay for performance, and segmenting their workforce
helps them identify their most valuable contributors. Rewarding top performers is essential
for the ongoing success of the company,” states Stephen E. Gross, global leader for Mercer
Consulting, a Manhattan human-resource consulting company.
Why is this statement
significant? A pay-for-performance standard (A standard by which managers tie
compensation to employee effort and performance) , as discussed in Chapter 11, serves to
raise productivity and lower labor costs in today’s competitive economic environment. It is
agreed that managers must tie at least some reward to employee effort and performance.
Without this standard, motivation to perform with greater effort will be low, resulting in higher
wage costs to the organization. Additionally, most employees believe that their
compensation should be directly linked to their relative performance.
The term “pay for performance” refers to a wide range of compensation options, including
merit-based pay, bonuses, salary commissions, job and pay banding, team/group
incentives, and various gainsharing programs. (Gainsharing plans are discussed in Chapter
10.) Each of these compensation systems seeks to differentiate between the pay of average
performers and that of outstanding performers. When Plum Creek Timber Company, the
largest timberland owner in the United States, merged with The Timber Company, it
emphasized a pay-for-performance philosophy by forming new salary ranges based on each
job’s impact on the business and incentive rewards linked more directly to individual and
company performance.
Unfortunately, designing a sound pay-for-performance system is not easy. You need to
consider how employee performance will be measured. For example, measuring an
employee’s output may be relatively easy and objective on an assembly line but more
difficult (and subjective) when the employee works in a service environment. Other concerns
include the monies to be allocated for compensation increases, which employees to cover,
the payout method, and the periods when payments will be made.
A critical concern for a successful pay-for-performance system is the perceived fairness of
the pay decision. The decision to freeze federal government employee salaries until 2014
may have made sense in decreasing the deficit but at the same time may have seemed
unfair to many federal workers
Media reports showed that many federal employees
were discouraged by this decision because they saw many of their peers in the private
sector receiving substantial performance raises. For example, one worker snidely remarked,
“As a federal worker, I’m certainly looking forward to bearing a share of the bonuses and
raises that private-sector workers will no doubt enjoy during the next economic boom.”
Motivating Employees through Compensation
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Pay constitutes a quantitative measure of an employee’s relative worth. For most
employees, pay has a direct bearing not only on perceived fairness, but also on the status
and recognition they may be able to achieve both on and off the job. Because pay
represents a reward received in exchange for an employee’s contributions, it is essential,
according to the equity theory, that the pay be equitable in terms of those contributions. It is
essential also that an employee’s pay be equitable in terms of what other employees are
receiving for their contributions.
Pay Equity
Simply defined, equity embraces the concept of fairness. Equity theory, also referred to as
distributive fairness, is a m…
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