Compensation

736 Pages·2013·49.26 MB·english

by  George Milkovich

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Compensation
Eleventh Edition
George   T.   Milkovich
Cornell University
Jerry   M.   Newman
State University of New York–
Buffalo
Barry   Gerhart
University of Wisconsin–Madison
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COMPENSATION, ELEVENTH EDITION
Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the
Americas, New York, NY 10020. Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights
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Library of Congress Cataloging-in-Publication Data
Milkovich, George T.
Compensation / George Milkovich, Jerry Newman, Barry Gerhart.—11th ed.
p. cm.
ISBN 978-0-07-802949-3 (alk. paper)—ISBN 0-07-802949-X (alk. paper)
1. Compensation management. I. Newman, Jerry M. II. Gerhart, Barry A. III. Title.
HF5549.5.C67M54 2014
658.3'2—dc23
2012040180
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website
does not indicate an endorsement by the authors or McGraw-Hill, and McGraw-Hill does not guarantee the
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Table of Contents

Preface xiii Your Turn: The Role of Labor Costs in the Retail
Electronics and Airline Industries 27
PART ONE
Chapter 2
INTRODUCING THE PAY MODEL
Strategy: The Totality of Decisions 38
AND PAY STRATEGY
Similarities and Differences in Strategies 38
Chapter 1
Different Strategies within the Same Industry 41
The Pay Model 3 Different Strategies within the Same Company 41
Strategic Choices 42
Compensation: Does It Matter? (or, “So What?”) 4
Support Business Strategy 43
Compensation: Definition, Please 5
Support HR Strategy 45
Society 5
The Pay Model Guides Strategic Pay Decisions 46
Stockholders 7
Stated versus Unstated Strategies 47
Managers 9
Developing a Total Compensation Strategy:
Employees 11
Four Steps 48
Incentive and Sorting Effects of Pay on Employer’s
Step 1: Assess Total Compensation Implications 49
Behaviors 11
HR Strategy: Pay as a Supporting Player or
Global Views—Vive la Différence 12
Catalyst for Change? 49
Forms of Pay 13
Step 2: Map a Total Compensation Strategy 52
Cash Compensation: Base 14
Steps 3 and 4: Implement and Reassess 55
Cash Compensation: Merit Pay/Cost-of-Living
Source of Competitive Advantage: Three Tests 55
Adjustments 14
Align 55
Cash Compensation: Incentives 15
Differentiate 55
Long-Term Incentives 15
Add Value 56
Benefits: Income Protection 16
“Best Practices” versus “Best Fit”? 57
Benefits: Work/Life Balance 16
Guidance from the Evidence 57
Benefits: Allowances 16
Virtuous and Vicious Circles 58
Total Earnings Opportunities: Present Value of a
Your Turn: Merrill Lynch 59
Stream of Earnings 17
Still Your Turn: Mapping Compensation
Relational Returns from Work 17
Strategies 61
A Pay Model 18
Compensation Objectives 19
PART TWO
Four Policy Choices 21
INTERNAL ALIGNMENT:
Pay Techniques 23
Book Plan 24 DETERMINING THE STRUCTURE
Caveat Emptor —Be an Informed Consumer 25
1. Is the Research Useful? 25 Chapter 3
2. Does the Study Separate Correlation from Defining Internal Alignment 71
Causation? 26
3. Are There Alternative Explanations? 26 Jobs and Compensation 72
iii
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iv Table of Contents
Compensation Strategy: Internal Alignment 72 Job Analysis Procedures 104
Supports Organization Strategy 73 What Information Should Be Collected? 105
Supports Work Flow 73 Job Data: Identification 105
Motivates Behavior 74 Job Data: Content 105
Structures Vary among Organizations 74 Employee Data 107
Number of Levels 75 “Essential Elements” and the Americans With
Differentials 75 Disabilities Act 110
Criteria: Content and Value 75 Level of Analysis 111
What Shapes Internal Structures? 78 How Can the Information Be Collected? 112
Economic Pressures 78 Conventional Methods 112
Government Policies, Laws, and Regulations 79 Quantitative Methods 112
External Stakeholders 79 Who Collects the Information? 114
Cultures and Customs 80 Who Provides the Information? 114
Organization Strategy 80 What about Discrepancies? 115
Organization Human Capital 81 Job Descriptions Summarize the Data 116
Organization Work Design 81 Using Generic Job Descriptions 116
Overall HR Policies 81 Describing Managerial/Professional Jobs 116
Internal Labor Markets: Combining External and Verify the Description 117
Organization Factors 82 Job Analysis: Bedrock or Bureaucracy? 119
Employee Acceptance: A Key Factor 83 Job Analysis and Globalization 120
Pay Structures Change 83 Job Analysis and Susceptibility to
Strategic Choices in Designing Internal Offshoring 120
Structures 84 Job Analysis Information and Comparability
Tailored versus Loosely Coupled 84 across Borders 122
Hierarchical versus Egalitarian 84 Judging Job Analysis 122
Guidance from the Evidence 86 Reliability 122
Equity Theory: Fairness 86 Validity 123
Tournament Theory: Motivation and Acceptability 123
Performance 88 Currency 123
Institutional Model: Copy Others 89 Usefulness 123
(More) Guidance from the Evidence 90 A Judgment Call 124
Consequences of Structures 91 Your Turn: The Customer-Service Agent 125
Efficiency 91
Fairness 91 Chapter 5
Compliance 91
Job-Based Structures and Job
Your Turn: So You Want to Lead an
Evaluation 134
Orchestra! 92
Still Your Turn: (If You Don’t Want to Lead the Job-Based Structures: Job Evaluation 135
Orchestra . . .) 93 Defining Job Evaluation: Content, Value, and
External Market Links 136
Chapter 4 Content and Value 136
Linking Content with the External Market 136
Job Analysis 100
Technical and Process Dimensions 137
Structures Based on Jobs, People, or Both 101 “How-To”: Major Decisions 137
Job-Based Approach: Most Common 103 Establish the Purpose 138
Why Perform Job Analysis? 103 Single versus Multiple Plans 138
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Table of Contents v
Choose among Job Evaluation Methods 140 The Perfect Structure 194
Job Evaluation Methods 141 Your Turn: Climb the Legal Ladder 195
Ranking 141
Classification 142
PART THREE
Point Method 144
Who Should Be Involved? 155 EXTERNAL COMPETITIVENESS:
The Design Process Matters 156 DETERMINING THE PAY LEVEL
The Final Result: Structure 157
Balancing Chaos and Control 158 Chapter 7
Your Turn: Job Evaluation at
Defining Competitiveness 207
Whole Foods 159
Compensation Strategy: External
Chapter 6 Competitiveness 208
Control Costs and Increase Revenues 208
Person-Based Structures 167
Attract and Retain the Right Employees 210
Person-Based Structures: Skill Plans 168 What Shapes External Competitiveness? 213
Types of Skill Plans 168 Labor Market Factors 213
Purpose of the Skill-Based Structure 171 How Labor Markets Work 215
“How-To”: Skill Analysis 172 Labor Demand 216
What Information to Collect? 172 Marginal Product 216
Whom to Involve? 173 Marginal Revenue 217
Establish Certification Methods 173 Labor Supply 218
Outcomes of Skill-Based Pay Plans: Guidance from Modifications to the Demand Side 218
Research and Experience 175 Compensating Differentials 219
Person-Based Structures: Competencies 176 Efficiency Wage 220
Defining Competencies 179 Sorting and Signaling 221
Purpose of the Competency-Based Modifications to the Supply Side (Only Two
Structure 180 More Theories to Go) 222
“How-To”: Competency Analysis 181 Reservation Wage 222
Objective 182 Human Capital 223
What Information to Collect? 182 Product Market Factors and Ability
Whom to Involve? 184 to Pay 223
Establish Certification Methods 185 Product Demand 223
Resulting Structure 185 Degree of Competition 224
Competencies and Employee Selection and A Different View: What Managers Say 224
Training/Development 185 Segmented Supplies of Labor and (Different)
Guidance from the Research on Going Rates 225
Competencies 187 Organization Factors 226
One More Time: Internal Alignment Reflected in Industry and Technology 226
Structures (Person-Based or Job-Based) 187 Employer Size 226
Administering and Evaluating the Plan 189 People’s Preferences 227
Reliability of Job Evaluation Techniques 189 Organization Strategy 227
Validity 191 Relevant Markets 228
Acceptability 192 Defining the Relevant Market 228
Bias in Internal Structures 192 Globalization of Relevant Labor Markets:
Wages Criteria Bias 193 Offshoring and Outsourcing 229
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vi Table of Contents
Competitive Pay Policy Alternatives 232 From Policy to Practice: The Pay-Policy
What Difference Does the Pay-Level Policy Line 281
Make? 232 Choice of Measure 281
Pay with Competition (Match) 232 Updating 281
Lead Pay-Level Policy 234 Policy Line as Percent of Market Line 282
Lag Pay-Level Policy 234 From Policy to Practice: Grades and Ranges 282
Different Policies for Different Employee Groups 235 Why Bother with Grades and Ranges? 282
Not by Pay Level Alone: Pay-Mix Strategies 235 Develop Grades 283
Consequences of Pay-Level and -Mix Decisions: Establish Range Midpoints, Minimums, and
Guidance from the Research 240 Maximums 283
Efficiency 240 Overlap 284
Fairness 241 From Policy to Practice: Broad Banding 285
Compliance 241 Flexibility-Control 287
Your Turn: Two-Tier Wages 242 Balancing Internal and External Pressures:
Adjusting the Pay Structure 288
Appendix
Reconciling Differences 288
7-A: Utility Analysis 244
Market Pricing 288
Chapter 8 Business Strategy (More Than “Follow the
Leader”) 289
Designing Pay Levels, Mix, and Pay
Review 290
Structures 252
Your Turn: Google Evolving Pay Strategy 291
Major Decisions 253 Still Your Turn: Word-of-Mouse: Dot-Com
Specify Competitive Pay Policy 253 Comparisons 292
The Purpose of a Survey 254
Adjust Pay Level—How Much to Pay? 254 PART FOUR
Adjust Pay Mix—What Forms? 254 EMPLOYEE CONTRIBUTIONS:
Adjust Pay Structure? 254 DETERMINING INDIVIDUAL PAY
Study Special Situations 255
Estimate Competitors’ Labor Costs 255 Chapter 9
Select Relevant Market Competitors 255
Pay-for-Performance: The Evidence 302
Fuzzy Markets 259
Design the Survey 260 What Behaviors Do Employers Care About?
Who Should Be Involved? 260 Linking Organization Strategy to Compensation
How Many Employers? 260 and Performance Management 303
Which Jobs to Include? 263 What Does It Take to Get These Behaviors? What
What Information to Collect? 265 Theory Says 308
Interpret Survey Results and Construct a Market What Does It Take to Get These Behaviors?
Line 268 What Practitioners Say 312
Verify Data 269 Does Compensation Motivate Behavior? 317
Statistical Analysis 274 Do People Join a Firm Because of Pay? 317
Update the Survey Data 276 Do People Stay in a Firm (or Leave) Because
Construct a Market Pay Line 276 of Pay? 318
Setting Pay for Benchmark and Non-Benchmark Do Employees More Readily Agree to Develop Job
Jobs 278 Skills Because of Pay? 319
Combine Internal Structure and External Market Do Employees Perform Better on Their Jobs
Rates 280 Because of Pay? 319
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Table of Contents vii
Designing a Pay-for-Performance Plan 323 Chapter 11
Efficiency 323 Performance Appraisals 371
Equity/Fairness 324
Compliance 325 The Role of Performance Appraisals in
Your Turn: Burger Boy 325 Compensation Decisions 372
Performance Metrics 373
Strategies for Better Understanding and
Chapter 10
Measuring Job Performance 374
Pay-for-Performance Plans 335
The Balanced Scorecard Approach 375
What Is a Pay-for-Performance Plan? 335 Strategy 1: Improve Appraisal Formats 375
Does Variable Pay Improve Performance Results? Strategy 2: Select the Right Raters 384
The General Evidence 337 Strategy 3: Understand How Raters Process
Specific Pay-for-Performance Plans: Information 386
Short Term 337 Strategy 4: Training Raters to Rate More
Accurately 390
Merit Pay 337
Putting It All Together: The Performance
Lump-Sum Bonuses 338
Evaluation Process 391
Individual Spot Awards 340
Equal Employment Opportunity and Performance
Individual Incentive Plans 340
Evaluation 392
Individual Incentive Plans: Advantages and
Tying Pay to Subjectively Appraised
Disadvantages 343
Performance 396
Individual Incentive Plans: Examples 344
Team Incentive Plans: Types 345 Competency: Customer Care 397
Performance- and Position-Based Guidelines 398
Comparing Group and Individual Incentive
Designing Merit Guidelines 398
Plans 351
Promotional Increases as a Pay-for-Performance
Large Group Incentive Plans 352
Tool 401
Gain-Sharing Plans 352
Your Turn: Performance Appraisal at
Profit-Sharing Plans 357
Burger King 401
Earnings-at-Risk Plans 358
Group Incentive Plans: Advantages and Appendix
Disadvantages 359
11-A: Balanced Scorecard Example:
Group Incentive Plans: Examples 360
Department of Energy (Federal
Explosive Interest in Long-Term Incentive
Personal Property Management
Plans 360
Program) 405
Employee Stock Ownership Plans (ESOPs) 362
11-B: Sample Appraisal Form for Leadership
Performance Plans (Performance Share and
Dimension: Pfi zer Pharmaceutical 408
Performance Unit) 363
Broad-Based Option Plans (BBOPs) 363
Combination Plans: Mixing Individual and
PART FIVE
Group 363
EMPLOYEE BENEFITS
Your Turn: Incentives Can Be too
Powerful 364
Chapter 12
The Benefit Determination Process 428
Appendix
10-A: Profi t-Sharing (401K) at Why the Growth in Employee Benefits? 430
Walgreens 366 Wage and Price Controls 430
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viii Table of Contents
Unions 430 Dental Insurance 477
Employer Impetus 430 Vision Care 477
Cost Effectiveness of Benefits 431 Miscellaneous Benefits 478
Government Impetus 431 Paid Time Off During Working Hours 478
The Value of Employee Benefits 431 Payment for Time Not Worked 478
Key Issues in Benefit Planning, Design, and Child Care 479
Administration 433 Elder Care 479
Benefits Planning and Design Issues 433 Domestic Partner Benefits 479
Benefit Administration Issues 434 Legal Insurance 479
Components of a Benefit Plan 437 Benefits for Contingent Workers 480
Employer Preferences 437 Your Turn: Adapting Benefits to a Changing
Employee Preferences 440 Strategy 480
Administering the Benefit Program 443
Employee Benefit Communication 443 PART SIX
Claims Processing 446
EXTENDING THE SYSTEM
Cost Containment 446
Your Turn: World Measurement 447
Chapter 14
Compensation of Special Groups 487
Chapter 13
Benefit Options 455 Who Are Special Groups? 488
Compensation Strategy for Special Groups 488
Legally Required Benefits 458
Supervisors 488
Workers’ Compensation 459 Corporate Directors 489
Social Security 460 Executives 490
Unemployment Insurance 463 What’s All the Furor over Executive Compensation?
Family and Medical Leave Act What the Critics and Press Say 495
(FMLA) 465 What’s All the Furor over Executive Compensation?
Consolidated Omnibus Budget Reconciliation Act What Academics Say 499
(COBRA) 465 Scientists and Engineers in High-Technology
Health Insurance Portability and Accountability Act Industries 501
(HIPAA) 465 Sales Forces 505
Retirement and Savings Plan Payments 465
Contingent Workers 509
Defined Benefit Plans 466 Your Turn: A Sports Sales Plan 510
Defined Contribution Plans 466
Individual Retirement Accounts Chapter 15
(IRAs) 468
Union Role in Wage and Salary
Employee Retirement Income Security Act
Administration 517
(ERISA) 468
How Much Retirement Income to The Impact of Unions in Wage
Provide? 470 Determination 518
Life Insurance 471 Union Impact on General Wage Levels 519
Medical and Medically Related Payments 471 The Structure of Wage Packages 521
General Health Care 471 Union Impact: The Spillover Effect 522
Health Care: Cost Control Strategies 475 Role of Unions in Wage and Salary Policies and
Short- and Long-Term Disability 476 Practices 522
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Table of Contents ix
Unions and Alternative Reward Systems 527 Borderless World → Borderless Pay?
Lump-Sum Awards 527 Globalists 574
Employee Stock Ownership Plans (ESOPs) 527 Your Turn: IBM’s Worldwide Business and
Pay-for-Knowledge Plans 527 Employment Strategies and Compensation 574
Gain-Sharing Plans 528
Profit-Sharing Plans 528
Your Turn: Predicting a Contract’s PART SEVEN
Clauses 529 MANAGING THE SYSTEM
Chapter 16 Chapter 17
International Pay Systems 534 Government and Legal Issues in
Compensation 591
The Global Context 536
The Social Contract 538 Government as Part of the Employment
Centralized or Decentralized Relationship 593
Pay-Setting 539 Demand 593
Regulation 540 Supply 593
Culture 543 Fair Labor Standards Act of 1938 596
Culture Matters, but So Does Cultural Minimum Wage 597
Diversity 545 Overtime and Hours of Work 599
Trade Unions and Employee Involvement 547 Child Labor 604
Ownership and Financial Markets 547 Living Wage 604
Managerial Autonomy 548 Employee or Independent Contractor ? 605
Comparing Costs 549 Prevailing Wage Laws 608
Labor Costs and Productivity 549 Pay Discrimination: What Is It? 608
Cost of Living and Purchasing Power 552 The Equal Pay Act 610
Comparing Systems 555 Definition of Equal 611
The Total Pay Model: Strategic Choices 555 Definitions of Skill, Effort, Responsibility, Working
National Systems: Comparative Mind-Set 555 Conditions 611
Japanese Traditional National System 555 Factors Other Than Sex 612
German Traditional National System 559 “Reverse” Discrimination 612
Strategic Comparisons: Traditional Systems in Title VII of the Civil Rights Act of 1964 and
Japan, Germany, United States 560 Related Laws 613
Evolution and Change in the Traditional Japanese Disparate Treatment 614
and German Models 562 Disparate Impact 614
Strategic Market Mind-Set 564 Executive Order 11246 614
Localizer: “Think Global, Act Local” 564 Pay Discrimination and Dissimilar Jobs 617
Exporter: “Headquarters Knows Best” 564 Evidence of Discrimination: Use of
Globalizer: “Think and Act Globally and Market Data 617
Locally” 565 Evidence of Discrimination: Jobs of Comparable
Expatriate Pay 565 Worth 618
Elements of Expatriate Compensation 567 Earnings Gaps 618
The Balance Sheet Approach 569 Sources of the Earnings Gaps 620
Expatriate Systems → Objectives? Quel Differences in Occupations and
dommage! 573 Qualifications 620