Hrmn dq # 2

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Module 2: Core Elements of Monetary Rewards

Topics

Topic 1: What are Monetary Rewards?
Topic 2: Key Elements of Analysis and Documentation

Topic 3: Assessing and Rewarding Performance
Topic 4: Regulatory Aspects of Monetary Rewards

Topic 5: Philosophy of Market Positioning and Link to Total Rewards
Topic 6: Conclusions

Topic 1: What are Monetary Rewards?

The total rewards approach to compensation management is strategically planning a
targeted reward package to successfully attract, retain, and motivate segmented
populations of employees who possess the requisite knowledge, skills, and abilities (KSAs)
needed to achieve the organization’s objectives. Table 1.2 in module 1 illustrates the
interdependent relationship of the components of the total rewards approach to
compensation. The table shares the three major components of total rewards, including
the monetary, non-monetary, and other elements of the work experience, which combine
strategically for the total rewards philosophy for the organization. Column 1 in Table 2.1
below shares many of the monetary rewards organizations offer today and will be
described in this module.

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Table 2.1 Three Elements of the Total Rewards Model

 

Monetary
Rewards

Non-
monetary
Rewards

Work Experience

Base Pay
Income
Protection
Benefits

Values of the
Organization

Variable Pay
Medical
Insurance

Community
(Individual and
Organizational)

Merit and
Cost of Living
Increases

Vision and
Dental

Recognition

Retirement
Savings

Disability
Training and
Development

Performance
Feedback

Life
Insurance

Promotions

Deferred
Compensation

Paid Time
Off

Sense of
Accomplishment

 

Day Care
Employee

Assistance
Program

Health
Related
Programs

Tuition
Assistance

 

Monetary Rewards

Monetary rewards are, unmistakably, a vital element of total rewards. Christofferson &
King (2006, p. 27) describe mometary rewards as “the pay provided by an employer to an
employee for services rendered (i.e. time, effort, and skill).” Monetary rewards include, but
are not limited to, the list of rewards in column 1 of table 2.1 above. As the largest

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expenditure of most organizations’ rewards budget, monetary rewards help to satisfy
several of the need areas described on Maslow’s Hierarchy of Needs (Maslow, 1954); for
example, short- and long-term survival and self-esteem.

An important psychological view of the perception of pay is vital to the discussion of
monetary rewards. Lawler (1971, 2000) states that in order for pay to not become a
dissatisfier it must be viewed as being fair. Fairness is defined as being paid an equitable
amount of salary as compared to others performing relatively the same job. And the
fairness necessity extends to both internal and external comparisons. Therefore,
organizations must take steps to ensure that the pay and rewards for the work performed
are based on objective criteria from research. This is done through the job evaluation,
which examines the internal worth of the position, and the competitive and market
evaluation that determined the pay for the position against outside positions. These
evaluations are important for many reasons, including that the perception of fairness by
the incumbent employees is mandatory for both pay and performance rewards to be
effective. Organizations realize that “in addition to being strategically aligned,
performance measures and standards need to be sufficiently objective and credible so that
employees feel they are being measured fairly. In absence of the perception of fair and
valid measurements, there is little chance the employee will see the link between
individual performance and their rewards” (Lawler, 2000, p. 152). Therefore, steps must
be taken to assess and document not only each job’s responsibilities and requisite
knowledge, skills, and abilities, but also a pay comparison for similar work. Monetary
rewards are not restricted to base pay, but also include variable pay and, in many
positions, compensation paid long after the employee has completed the work.

Designation of Employee Types

Although there are many types of employees in an organization in the United States,
distinctions are typically made among three major categories for compensation purposes.
These three are hourly, salaried, and executive employees. Hourly employees are also
known as nonexempt employees because they are paid by the hour and are subject to
overtime pay as regulated by the Fair Labor Standards Act (FLSA). Salaried employees are
exempt from overtime; most managers and professionals fit into this category. The pay of
salaried employees is calculated on an annual, monthly, or some other periodic means
rather than on an hourly basis. Executives are also salaried employees, but they are
designated as a separate category in this discussion due to the amount of variable pay
generally at risk in their roles. For some top-level executives, the variable pay can be as
much as 95 percent (Mathis & Jackson, 2008).

Types of Pay

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There are several basic terms prevalent in the discussion of types of pay, including base
pay, variable pay, merit pay, cost of living adjustments, retirement, and deferred
compensation. A definition of each term follows:

Base pay is considered “the cash compensation that an employer pays for the work
performed” (Milkovich & Newman, 2008, p. 10). Whether an hourly, salaried, or executive
employee, base pay is one of the key elements that organizations benchmark for
competitive or market positioning purposes. This base pay “reflects the value of the work
or skills and generally ignores differences attributable to individual employees” (Milkovich
& Newman, 2008, p. 10). Differences attributable to the level of responsibility and/or the
size of the organization are not ignored, however, and are taken into consideration when
compensation is compared for competitive comparisons. For example, an administrative
assistant to the chief executive of an organization may have a base rate of 25 dollars per
hour if the organization has revenues less than a million dollars, but if the organization is
one with revenues of more than $100 million, the base rate will likely be higher. Also, the
length of service of the employee enters into the equation. An administrative assistant
with 10 years of experience will likely have a higher per-hour rate than one with less than
two years of experience.

Variable pay is “compensation linked directly to individual, team, or organizational
performance” (Mathis & Jackson, 2008, p. 361). While there are other forms and
combinations, examples of variable pay include bonuses, incentives, stock options, and
stock grants. Also known as incentives, variable pay is tied to performance and can be
paid daily, weekly, monthly, quarterly, or annually. Incentives are paid in addition to base
pay and are at risk. In other words, they are not guaranteed. Incentives are earned based
upon what is agreed on before the performance period begins. The performance
objectives that variable pay is based on are linked to the strategic goals of the
organization or support of those goals. For example, the goal may be to provide
incentives toward increased revenues, employee satisfaction, customer satisfaction, cost
reduction, innovation, or any other key element for the success of the organization. If the
variable pay is considered in the competitive or market positioning purposes, an average
or norm payout of the variable payout is used. Variable pay is renegotiated each
performance period and is not rolled into the base pay, unlike merit or cost of living
adjustments. Variable pay for executives often takes the form of pay or stock (options or
grants) either as a portion of or the entire incentive.

Most organizations reward with both short- and long-term variable or incentive pay.
Longer-term incentives are to help focus the employee on future performance goals,
usually beyond the year in which the performance occurred. Real estate developers, for
example, may have short-term variable pay tied to locating and developing a property,

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and long-term variable pay tied to the occupancy of the property in future years. Most
executives will also have short- and long-term variable pay tied to the current and
longer-term objectives of the organization.

Merit and Cost of Living Adjustments: After being hired into a position, an employee
typically receives an increase in base pay periodically (intervals of 12 or 18 months, for
example) based on their performance against a set of expectations for their set of
responsibilities. A merit increase is an increment to the base pay in recognition of past
work (Mathis & Newman, 2008, p. 10). The range of merit increase is dependent upon the
budget for the merit increases and the employee’s level of performance. Typically, the
merit increase is higher and the time cycle shorter for those employees who are evaluated
as higher performing. Thus, an outstanding performer may receive a merit increase of 7
percent after an eight-month period of time, while an average performer may receive a
merit increase of 5 percent after a year.

Cost-of-living adjustments increase an employee’s pay in line with inflation and are not
based upon performance. Cost-of-living adjustments are not given by all organizations
across the board to all employees, but rather may adjust only the lower-paid employees
who are most affected by inflation. Some organizations will adjust their wage and salary
scales every few years and adjust only those employees who fall under the new minimum
of the scale. Other organizations combine their merit increases with the cost-of-living
adjustments, which allows for a differentiation for the level of performance while also
providing an adjustment for inflation.

Retirement and Deferred Compensation: In addition to the base and variable pay, many
organizations also provide for the future retirement compensation of their employees.
This reward is discussed as monetary rewards because, although it is not rewarded until
after retirement, it is a monetary reward that is earned while the employee is working and
the organization funds the future rewards as the employee works. This reward can be a
very important portion of the total rewards strategy because it satisfies the need for
future financial security, satisfying one of the need levels on Maslow’s hierarchy of needs.

One type of retirement funding is a defined contribution plan, of which there are various
forms, including 401Ks and profit sharing whereby the employer contributes an amount,
typically a percentage of the employee’s income, with the employee contributing as well.
Another type of retirement benefit (increasingly rare) is the defined benefit plan. In this
plan the employee receives a set amount of money during their retirement years, as in a
traditional pension.

In addition to savings and earnings for retirement, many organizations also offer the
opportunity for salaried employees (mostly executives) to defer their compensation to

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future years. This deferred compensation helps the executive prepare for their future
years while also equalizing their income better for tax purposes.

Topic 2: Key Elements of Analysis and Documentation

While the total rewards approach to compensation management is a holistic approach to
the work experience (recognizing the importance of monetary, non-monetary, and other
elements of the work experience), it is the monetary element of the entire employment
experience that has traditionally been viewed as imperative to be perceived as fair both
internally and externally (Lawler, 2000). This perception is important whether it is an
hourly, salaried, or executive-level position. Analysis, research, and documentation helps
an organization ensure this perception of fairness.

Figure 2.1 below illustrates the key elements. The first step is the work flow analysis,
which reviews the entire system of bringing in raw materials (human resources or
materials) and transforming them into goods or services. The internal and external
assessment for equity and competitiveness begins with a job analysis. Through the job
analysis, the core elements of the job are determined, which then leads to the creation of
a job specification. The job specification is a listing of the core KSAs; the KSAs from the
job specification are used to design a job description. The job evaluation is an internal
comparison of the value of the job, while the market evaluation is a comparison for similar
jobs in other organizations. The job evaluation measures the internal equity, while the
market evaluation measures the competitiveness of the pay for the position. Because a job
can have a variety of names, depending on the organization or the industry, it is the core
job specification (KSAs) that are compared when setting a price or value on a position (the
rate of pay). For example, a position with responsibility for cleaning a guest room may be
titled housekeeper, room attendant, or guest service representative, depending on the
hotel company. Without knowing the core elements of the job, one could not know if they
are comparing the same positions.

Figure 2.1
Key Elements of Analysis and Documentation

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Figure 2.1 illustrates the key elements of analysis and documentation comprising the key
steps leading to the decisions for market positioning of compensation and other monetary
rewards. The first step is the overall work flow analysis, how work flows through the
organization. Job analysis is the step of collecting information that identifies the KSAs of
the position. From the information obtained through the job analysis, job specifications
and job descriptions can be designed. The job specifications and job descriptions are used
for most of the HR activities; for example, hiring, promoting, determining of exempt or
nonexempt status, and structuring of pay. The job evaluation and market evaluation are
conducted in order to access internal and external positioning. With the steps from the
broad work flow through job and market evaluation conducted, the organization has the
data needed to decide its market positioning, what they need to pay for specific jobs in
relation to what the competition is paying.

Work Flow Analysis: “Work flow refers to the process by which goods and services are
delivered to the customer” (Milkovich & Newman, 2008, p. 60). The analysis of the work
flow, therefore, is a study of that flow, and may begin at the end of the process with the
desired or actual outputs (the goods and services). The activities (the tasks and jobs) that
lead to the outputs are studied to see if they are achieving the desired outputs. Lastly, the
inputs (the people, material, information, data, equipment, etc.) must be assessed to
determine if they make the outputs and activities more efficient or better (Mathis &
Jackson, 2008).

Figure 2.2
Work Flow: A Systems Approach

The work flow analysis is a broad look at the whole system of the organization and is
essential to determine the throughput activities (the tasks and jobs) needed to produce
the output (the goods and services). The analysis shows how much labor is required to
achieve the organization’s business goals and can also show if there are gaps in the
needed labor. A simple example is automobile production. The raw materials of steel,
computer parts, tires, leather, and other materials for various car parts, the design of the
car, and the desires of the customers are the inputs. The throughput are the tasks and
jobs performed by the employees and machines to assemble the car, which is the final
output that is sold to customers. At times, a problem in the end result (the output) will
trigger the need to conduct a work flow analysis. For example, when automobiles have
been recalled for technical or performance difficulties, the company will look at both the

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throughput and the inputs to see where the problems lie. It may be found that certain jobs
have to be redesigned in order to ensure the that gap in the system is corrected.

Job Analysis: Mathis & Jackson (2008) define job analysis as “a systematic way of gathering
and analyzing information about the content, context, and human requirements of jobs”
(p. 174). While there are various methods of collecting information on the characteristics
of a job, the end result is the same. The various methods of questionnaires, interviews,
observations, and logs/diaries collect information on the characteristics of a job that
differentiates it from other jobs. This information is used for the design of both a job
description and the job specifications. The work flow analysis, a broad look at the entire
organization, yields some basic information about the level of labor needed, while the job
analysis provides more specific details about the job. The job analysis further defines the
specific tasks required of each position. It defines what each job is required to entail in
order for the entire work flow process to work properly.

The job analysis is one of the core activities that provides the basis for the standard
employment functions performed by human resources professionals. The information
gained clarifies hiring criteria, defines the Bona Fide Occupational Qualifications (BFOQs)
promotional standards/ criteria, and identifies training needs and performance evaluation
criteria. The information is also used for meeting the FLSA regulations for the
classification of jobs for exempt and nonexempt determination. In addition, the data
allows compliance with the Americans with Disabilities Act (ADA), requiring that
organizations must identify job activities for essential versus marginal job functions and
also document the steps taken to identify the job responsibilities.

Job Specifications: Job specifications are a list of the qualifications (the knowledge, skills,
and abilities) an individual needs to perform a job satisfactorily. The job specification
takes the broader job analysis to an additional level of specification. The KSAs include
education, experience, work skill requirements, personal abilities, and mental and
physical requirements. The job specification is used as a basis for hiring. It is important to
note that the job specifications are what a person needs to do the job, and therefore a
crucial element of the process of designing a total rewards package that will attract the
KSAs for the organization to achieve its business objectives. The job specifications supply
essential data for decisions that are made about market positioning as well as other
decisions that will be made in order to determine what total rewards will be offered.

Job Descriptions: Job specifications are a summary version of the more definitive job
description, which further describes the outcomes and responsibilities of the job (Mathis &
Jackson, 2008, p. 186). The job description provides a “word picture” of the outcomes of
the job. Portions of performance standards (those indicators of what the job accomplishes

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and how performance is measured in key areas of the job description) are generally drawn
from the job description. Descriptions of the salaried and executive-level positions often
include more detailed information on the nature of the job, its scope and accountability.
Many of the salaried and executive-level job descriptions capture the relationships among
the job, the person performing it, and the organizational objectives; how the job fits into
the organization; the results expected; and what the person performing it brings to the
job (Milkovich & Newman, 2008, p. 103). The strategic alignment of the organization’s
objectives and monetary rewards is very evident when the specific responsibilities of the
employee are clearly related to the objectives of the organization and are documented in
the job description and included as an outcome in the performance appraisal process.
This allows the employee to be compensated and given incentives for accomplishing work,
service, or projects that relate directly to the organization’s objectives.

Job Evaluation: Job evaluation is a formal, systematic means to identify the relative worth
of jobs within an organization (Mathis & Jackson, 2008). It identifies a job’s comparative
worth within the organization and shows how valuable the organization deems the job to
be. The evaluation is based on a combination of job content, skills required, value to the
organization, organizational culture, and the external market (Milkovich & Newman, 2008,
p. 115). Some methods of comparison include the point method, such as the long-popular
Hay system. Point plans are the most commonly used job evaluation approach in both the
United States and Europe (Bernardin, 2003; Mathis & Jackson, 2008; WorldatWork, 2007).
The point plan differs from ranking and classification methods in that it makes explicit the
criteria for evaluating jobs, known as the compensable factors.

Point methods have three common characteristics:

compensable factors

factors with degrees numerically scaled

weights reflecting the relative importance of each factor

Each job’s relative value, and hence its location in the pay structure, is determined by the
total points assigned to it (Milkovich & Newman, 2008, p. 125). Other methods for job
evaluation include the ranking method, classification, and factor comparison method. The
internal job evaluations allow organizations to equate the worth of a position to the pay
structure. The higher the worth of the position, the higher the pay.

The internal job evaluation helps to define the relationship of jobs inside the organization,
the internal worth of a job, and how each job is aligned with others. In addition to
determining the location within the pay structure, this knowledge helps individual
employees plan their careers. For example, a computer software organization may have a

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series of escalating internal worth positions beginning with an entry-level position of a
computer programmer, a senior programmer, a lead programmer who supervises other
programmers, and a division director. If the internal worth of jobs is clearly defined and
communicated, the information can be used to define career paths and to help the
individual employee understand their position’s relative worth in the hierarchy of jobs
within the organization. Thinking back to Maslow’s hierarchy of needs, this understanding
of relative worth can lead to satisfaction in the need areas of self-esteem and self-
actualization.

Competitive Evaluation, Market Evaluation, and Market Positioning: While job evaluation is
a focus of comparative worth within the organization, the competitive and market
evaluation is identifying the relative value of jobs based on what other employers are
paying for similar work performed outside the organization. With the knowledge gained
through a competitive or market evaluation, the organization can then decide its market
positioning, whether it will match the market, lead it, or lag behind. The decisions for
market positioning are significant decisions for the overall total rewards approach to
compensation management. Although it is only one of the decisions to be made, it is one
of the very important major decisions and will affect the other two elements of non-
monetary rewards and other elements of the work environment.

External competitiveness is information gained through the competitive and market
evaluation and refers to the pay relationships among organizations. This is the value of a
job as measured by pay relative to its competition (Milkovich & Newman, 2008). The
factors that shape the external competitiveness include the labor market, the individual
product or service markets, and organizational factors. The organizational factors are
those related to the business strategy, the experience of the workforce, and the size and
profitability of the organization. The market competitiveness of compensation has a
significant impact on how equitably employees view their compensation. Providing
competitive compensation to employees is a necessity for all employers for recruitment,
retention, and motivation (Mathis & Jackson, 2008). Most organizations establish specific
policies about where they want to be positioned in the labor market; this is called market
positioning and is a key element of the organization’s compensation philosophy.

The three competitive pay policy alternatives generally attributed to the decisions that
organizations make for market positioning are to:

match: paying with the competition

lead: paying more than the competition

lag: paying below-market rates

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Organizations do not base their decisions about market position on base pay alone.
Rather, they also include the variable forms of compensation that are awarded for the
position. The basic premise is that the competitiveness of pay will affect the
organization’s ability to achieve its compensation objectives, and this in turn will affect its
performance. Today it is realized, in the total rewards approach to compensation
management, that the monetary element of the reward package has to be evaluated along
with all the other important elements of non-monetary rewards and the other important
elements of the work experience. Rather than focusing on just one aspect of the
compensation strategy, all dimensions but be considered together. In module 4, the
design of the total rewards philosophy of the organization will be discussed and it is
revealed then how organizations make their decisions on the monetary element not in
isolation but in conjunction with other elements. In their book, The Workforce Scorecard,
Huselid, Becker, and Beatty (2005) concur by stating that embedding compensation
strategy within the broader HR strategy affects results. They share that compensation
does not operate alone, but as a part of the overall HR perspective.

Eventually, however, organizations will have to make the decisions as to what their market
position will be regarding compensation. “Given the choice to match, lead, or lag, the
most common policy is to match rates paid by competitors” (Milkovich & Newman, 2008,
p. 201). Organizations justify this policy by saying that failure to match competitors rates
would make the existing employees unhappy and limit the organization’s ability to recruit.
Many non-union organizations tend to match or even lead the competition in order to
discourage the formation of unions. However, while the compensation being viewed as fair
brings some advantages, it may not necessarily lead to the ability to recruit, retain, and
motivate unless other important aspects of the reward package are offered to satisfy the
employees’ wants, needs, and desires.

Just as a company would attempt to “position” its products or services in terms of price
(similar to how Wal-Mart positions itself as a low cost leader), or geographically (as
McDonald’s does by offering grits in southern states), an organization can position itself
to attract the segment or segments of the population it requires in order to meet its
business objectives. Organizations decide how they will position their pay structure
relative to the competition. Marriott’s philosophy is to pay equal to (match) or better than
(lead) the competition, but to never pay less than (lag) the competition, whereas a
nonprofit organization may pay equal to (match) or less than (lag) corporations outside
the nonprofit arena but offer a more generous benefit package, or rely on the admirable
mission of the organization to attract employees.

These strategies address different needs on Maslow’s hierarchy of needs. The nonprofit
organization may be meeting the higher-level needs of self-actualization in contrast to

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the higher pay addressing the survival needs. The decision an organization makes about
its market positioning is a major strategic decision, whether to mirror what competitors
are paying or to design a pay package that may differ from competitors but better fit the
business strategy. This is not decided in isolation of the other elements of the total
rewards philosophy but is a very important component that must be decided in
conjunction with the other elements of non-monetary and other work experiences
(Milkovich & Newman, 2008).

Company Spotlight: Costco and Wal-Mart

Costco and Wal-Mart follow different compensation strategies due to varying business
strategies. Costco’s business strategy stresses customer service and selling higher
margin products to somewhat more affluent customers. Costco has adopted an
average hourly pay rate of $15.97 and offers broad-based health and retirement
benefits. More than 80 percent of Costco employees participate in the benefits plans.
Wal-Mart, on the other hand, uses a different compensation strategy that is
consistent with its business strategy of keeping prices low and constantly reducing
costs. This strategy has been successful in reducing the prices of goods sold to Wal-
Mart customers. However, the average wage for Wal-Mart employees is just $9.47 an
hour. Sam’s Club (a division of Wal-Mart) pays $11.52 per hour (excluding the lower-
paid, part-time employees.) Wal-Mart employees also pay for more of their benefit
costs than do Costco employees, which has resulted in a significantly less employee
participation rate in the benefit plans. While these differences between the
compensation philosophies of Costco and Wal-Mart do not necessarily mean that one
is more appropriate than the other, they do demonstrate how organizations can make
strategic decisions about their pay practices aligning with the organization’s
objectives (Mathis & Jackson, 2006, p. 363).

Topic 3: Assessing and Rewarding Performance

Lawler states that “performance appraisal has been one of the most praised, criticized,
and debated management practices for a number of decades” (2000, p. 166). It is,
however, one of the most important segments of the performance management process in
an organization. It is a key method of linking individual performance to the business
strategy and objectives of the organization. Employers want employees at all levels to
perform in ways that lead to better organizational performance. It is through the
performance appraisal that feedback and rewards are given to the individual employee,
related directly to their contributions (Milkovich & Newman, 2008). There are a variety of
approaches to assessing and rewarding performance, including three highlighted here:

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pay for performance, individual contributor assessments, and team-based assessments.
Some of the formats used in assessing performance include ranking, rating, and
management by objectives (MBOs).

Methods for Assessing and Rewarding Performance

Of the many approaches to assessing and rewarding performance, three will be reviewed
here. Pay for performance is mentioned because it is one of the leading approaches for
measuring performance today. Two units of performance are reviewed, that of the
individual and that of a team. Of course, some combination of these can also be applied.
For example, individuals may be rewarded for their own contributions as well as their
contributions to a team.

Pay for performance is the performance management system that rewards employees for
performing work and allows that compensation differs for various levels of performance.
Organizations operating under this philosophy do not guarantee additional or increased
compensation simply for completing another year of service (Mathis & Jackson, 2008, p.
362). The overall trend is toward greater use of a pay-for-performance system, with most
organizations, including federal government agencies, using it or moving toward it at
least partially. A survey of Fortune 1000 firms found that more than 80 percent of them
use some type of performance-based compensation plans (Mathis & Jackson, 2008, p.
362).

The total rewards approach reflects a more performance-oriented philosophy because it
tries to place more value on individuals and their performance rather than simply holding
the job (Mathis & Jackson, 2008, p. 362). The pay for performance method of assessing
performance is therefore a popular approach in the total rewards model.

The two units of measurement used most often are team-based or individual
assessments. Team-based compensation gained popularity in the 1990s. A survey by the
Hay Group showed 3 percent of the organizations surveyed using some type of team-
based compensation prior to 1992 and 9 percent after 1992, with an additional 39
percent considering it (Flannery, Hofrichter & Platten, 1986, p. 117). Lawler (2002)
reported that virtually all United States corporations use some type of team in some
segment of their organization. Teams come in a variety of shapes and sizes, from two-
person work groups to entire organizations (for example, the well-publicized Team
Xerox). Just a few types of teams include work teams, project teams, parallel teams, and
partnership teams. Each team requires a different type of compensation architecture and
performance appraisal approach. For example, a work team would likely use a peer

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evaluation and skill-based approach whereas the parallel team would use a predefined
incentive for the accomplishment of goals.

Executive-level appraisals often include several levels of assessment. For example, a
division head of a large corporation may be assessed on his or her own separate MBOs, on
the performance of the division they lead, and on the performance of the entire
corporation. The compensation will also likely be a combination of rewards, including, for
example, base pay, cash bonus, stock awards and/or stock options, and possibly deferred
stock awards.

Formats: Ranking, Rating, and MBOs

Before feedback is given to an employee, some format of evaluating the employee
compared to certain criteria must be conducted. Two formats that are commonly used
today are described. Because Management by Objectives (MBOs) is still a useful element
included in many appraisal processes, a description is included.

Ranking compares employees with each other to determine the relative ordering of the
group on some performance measure (usually a measure of overall performance). There
are three methods common for ranking employees:

the straight ranking procedure

the alternative ranking, which ranks people first at extreme ends of the distribution
(best and worse) and then works toward the middle of the scale

the third method is the paired-comparison ranking that forces raters to make ranking
judgments about discrete pairs of people

Company Spotlight: General Electric

Jack Welch, former CEO of General Electric, had a view of what was known within the
company as “rank and yank.” Rank and yank required managers to force-rank
employees according to some determined distribution; for example, 20 percent as the
top tier of performers, 70 percent as the middle tier, and 10 percent as the bottom
tier. Employees in the bottom 10 percent are given a chance to improve but are
terminated if they do not improve into the 70 percent middle tier. In addition, the
merit increase differs for the three groups, with the 10 percent group most likely
receiving no increase in pay (Milkovich & Newman, 2008, p. 351).

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The rating format evaluates employees on some absolute standard rather than relative to
other employees. Each performance standard is measured on a scale whereby appraisees
can check the point that best represents the employee’s performance, on a continuum
from good to bad. Anchors may be adjectives, behaviors, or outcome. One popular
example of the outcome rating is management by objectives (MBOs). MBOs are both a
planning and an appraisal tool, with different variations across firms.

Whether the decision is to use pay for performance, or individual- or team-based
appraisals, the assessment must be aligned with the culture of the organization. For
example, some organizations value specific criteria for performance, others prefer
individual performance over teams, and still others prefer a team-based approach and see
the full organization as their preferred approach to accomplishing goals. In addition, the
objectives of the organization must be clearly identified so that both individual and team
performance can be linked to organizational objectives.

Topic 4: Regulatory Aspects of Monetary Rewards

Monetary rewards (base and variable pay) must comply with many governmental
regulations. In addition, retirement plans are subject to federal regulations. Some of the
federal regulations will be briefly described, including the Fair Labor Standards Act (FLSA),
Employee Retirement Income Security Act (ERISA), the Davis-Bacon Act, the Equal Pay Act
of 1963, the McNamara-O’Hara Service Contract Act, Americans with Disabilities Act
(ADA), and the Walsh-Healy Public Contracts Act.

One of the major federal laws affecting compensation is the Fair Labor Standards Act
(FLSA). To meet FLSA requirements, employers must keep accurate time records and
maintain those records for three years. In addition, FLSA established a minimum wage,
discourages the oppressive use of child labor, and encourages limits on the number of
hours employees work per week through overtime (if nonexempt from overtime). The
exempt and nonexempt status of employees is also defined by FLSA.

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Table 2.2 Key Provisions of FLSA

determination of a minimum wage and a regular rate of pay to be used in the
calculation of overtime

the determination of which activities shall constitute hours worked

who is classified as exempt

child labor restrictions

record keeping requirements

(Source: WorldatWork, 2007, page 113)

The Employee Retirement Income Security Act (ERISA) of 1974 influences the retirement
reward in that if an employer decides to provide a pension, specific rules must be
followed. The plan must vest after five years of employment.

Various legislative efforts have addressed the issue of wage discrimination on the basis of
gender. The Equal Pay Act of 1963, which applies to both men and women, prohibits
using different wage scales for men and women performing essentially the same job. Pay
differences can be justified on the basis of merit, quantity or quality of work, experience,
or other factors besides gender.

Many states and municipalities have enacted modified versions of federal compensation
laws. If a state has a higher minimum wage than that set under the FLSA, the higher of the
two becomes the required minimum wage in that state or municipality.

The Americans with Disabilities Act (ADA) requires that organizations identify the
essential job functions that are the fundamental duties of a position. These do not include
the marginal functions of the positions. Marginal job functions are those duties that are
part of a job but are incidental or ancillary to the purpose and nature of the job. An
important part of job analysis is obtaining information about what duties are being
performed and what percentage of the employee’s work time is devoted to each duty. This
information is used in determining actions as a business necessity.

Federal contractors have specific compliance requirements. Several compensation-related
acts apply to firms with contracts with the United States government. The Davis-Bacon Act
of 1931 affects compensation paid by firms engaged in any federal construction projects
valued at more than $2,000. It deals only with federal construction projects and requires

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that the “prevailing” wage be paid. The prevailing wage is determined by a formula that
considers the rate paid for a job by a majority of the employers in the appropriate
geographic area. Two other acts require firms with federal supply or service contracts
exceeding $10,000 to pay a prevailing wage. Both the Walsh-Healy Public Contracts
Act and the McNamara-O’Hara Service Contract Act apply only to those who are working
directly on a federal government contract or who substantially affect its performance
(Mathis & Jackson, 2008, p. 373).

Topic 5: Compensation Philosophy of Market Positioning and Link to Total Rewards

The decision of the market positioning (if the organization will match, lag, or lead the
market in compensation) depends on several factors. Some of the leading factors are the
ability of the organization to pay, the culture of the organization, the need to recruit, the
need to retain employees, competition in the market place, the risk of union involvement
and the desires of the organization toward unionization, and what factors motivate the
employees who hold the requisite knowledge, skills, and abilities. Of course, in addition to
these leading factors, the organization must be in compliance with all federal, state, and
local laws and must be viewed as fair by the current or potential employees. All of these
considerations are taken into account when the decision is made on how to position the
compensation for jobs performed in relation to the competition.

The link of the market positioning of compensation in total rewards is that the decision
about compensation is only one, albeit very important, decision and cannot be made in
isolation. The other two important elements of total rewards of non-monetary and other
elements of the work experience must be considered interdependently. Prior to an
organization making these decisions, management must know what is important to those
individuals who hold the needed KSAs required for the organization to produce its
products or to provide its services. In module 3 the other important elements will be
discussed. In module 4, we will come back to the decisions that will be made in all three
elements as we look at how to design and communicate a total rewards approach to
compensation management.

Topic 6: Conclusions

In this module, one of three core elements of total rewards, that of monetary rewards, was
discussed in some depth. Monetary rewards must be viewed internally and externally by
employees as being fair. If not, the ability to attract, retain, and motivate them is at risk.
Therefore, many tasks to ensure fairness are performed within organizations. These
include the work flow analysis, job analysis, job specification, job description, and internal
and external evaluation, all leading to a determination of market positioning. The pay and

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pay practices must be viewed not only as being equitable, but must also comply with
many federal regulations.

There are three major categories of employees in organizations: hourly, salaried, and
executive. Both the pay and the appraisal process are tailored for each of these categories.
The appraisal process is one of the most obvious methods to align the employees’ work
outcomes and the way they achieve the outcomes. Therefore, performance appraisals are
an important component of the total rewards approach to compensation management,
and to an organization reinforcing behavior that links to the organization’s objectives.

While many of the topics discussed in this module are task or administrative in nature, the
tasks and data are an essential element in establishing the compensation philosophy of
the organization. The data also forms a foundation for the philosophy of the total rewards
approach to compensation. The activities described in this module are the determination
of what KSAs will be required to achieve the organization’s objectives. The data from the
activities highlighted in this module contribute greatly to the strategic decisions for the
design of total rewards, to be discussed in module 4.

Be prepared to discuss in the classroom, if your professor requests, what the key factors
are when deciding the market positioning of compensation. Also, be prepared to share
why the market positioning decision is not done in isolation, but rather is made
interdependently with the non-monetary rewards and the other elements of the work
experience.

References

Bernardin, H. J. (2003). Human resource management: An experiential approach. McGraw
Hill.

Christofferson, J.; and King, B. (2006). “The ‘IT’ factor: A new total rewards model leads
the way.” Workspan, http://www.worldatwork.org.

Flannery, Hofrichter, and Platten. (1996). “People, performance, and pay: Dynamic
compensation for changing organizations.” The Free Press.

Huselid, M.; Becker, B.; and Beatty, R. (2005). The Workforce Scorecard. Boston: Harvard
Business School Press.

Lawler, E. E. III (1971). Pay and Organizational Effectiveness: A Psychological View. U.S.:
McGraw-Hill.

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Lawler, E. E. III (2000). Rewarding excellence: Pay strategies for the new economy. San
Francisco: Jossey-Bass.

Maslow, A. H. (1954). Motivation and personality. New York: Harper.

Mathis, R. L.; and Jackson, J. H. (2006). Human resource management. South-Western:
Thompson.

Mathis, R. L.; and Jackson, J. H. (2008). Human resource management. South-Western:
Thompson.

Milkovich G. T.; and Newman, J. M. (2008). Compensation. McGraw-Hill Irwin.

The WorldatWork (2007). The WorldatWork handbook of compensation, benefits & total
rewards: A comprehensive guide for HR professionals. New Jersey: John Wiley and Sons.

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