Chapter 11 Lecture Handout:
Establishing Rewards and Pay Plans
Learning Outcomes
1. Differentiate between intrinsic and extrinsic rewards.
2. Explain how the Fair Labor Standards Act (FLSA) and other federal laws regulate
compensation.
3. Identify external factors that influence compensation decisions (geography, labor
supply, competition, cost of living, collective bargaining).
4. Describe job evaluation methods and how they are used to build equitable pay
structures.
5. Explain base pay, premium pay, and types of variable pay (individual, group, and
organization-wide).
6. Summarize key elements of executive and international compensation.
Introduction
Compensation sits at the heart of the employment relationship. Organizations seek to
design reward systems that are both competitive and fair while reinforcing strategic goals.
Chapter 11 frames pay as part of a broader total rewards portfolio that includes monetary
and nonmonetary components.
Rewarding Employees
Intrinsic versus Extrinsic Rewards
Intrinsic: personal satisfaction from meaningful work, accomplishment, autonomy, and
growth.
Extrinsic: tangible rewards from the employer—pay, benefits, promotions, recognition
opportunities.
Financial versus Nonfinancial Rewards
Financial: base pay, differentials, overtime, bonuses, incentive pay, stock/share plans,
benefits value.
Nonfinancial: recognition, preferred assignments, development opportunities, flexible
work, casual dress, volunteer time, mentoring.
Performance-Based versus Membership-Based Rewards
Performance-based: rewards tied to results or behaviors (e.g., commissions, merit
increases, bonuses, gainsharing).
Membership-based: rewards for being part of the organization (e.g., cost-of-living
adjustments, seniority raises, standard benefits).
Exhibit 11-B. Structure of Rewards—Financial vs. Nonfinancial by Performance vs.
Membership.
Government Regulation of Compensation
Fair Labor Standards Act (FLSA): Core Provisions
Provision What to Teach
Minimum Wage Applies to nonexempt employees; states
may set higher minimums.
Overtime 1.5× regular rate after 40 hours in a
workweek (most roles); track hours
accurately.
Exempt vs. Nonexempt Duties tests + salary basis/level tests
dictate exemption.
Child Labor Restrictions by age and occupation; stricter
rules for hazardous work.
Recordkeeping & Enforcement Posting requirements; penalties for back
wages and willful violations.
Other Federal Laws
Walsh–Healy Public Contracts Act: prevailing wages for covered federal contractors;
overtime rules for >$100k contracts.
Civil Rights Act & Equal Pay Act: prohibit pay discrimination; Lilly Ledbetter Act extends
filing period for pay discrimination.
External Factors Affecting Compensation
Geographic differences and cost of living (local labor markets).
Labor supply/demand conditions and unemployment rates.
Competition for scarce skills (lead/match/lag market strategies).
Collective bargaining agreements and bargaining power.
The Pay Structure
Pay structures translate internal equity (job value) and external equity (market data) into
pay grades and ranges.
Job Evaluation Methods
Ranking Method: order jobs highest to lowest—simple but subjective; no distance
information.
Classification Method: define job classes/grades by compensable factors; assign jobs to
classes (e.g., GS system).
Point Method: assign points to compensable factors (e.g., skill, effort, responsibility,
conditions); total points map to grades.
Sample Point Method (Editable Template)
Factor Level 1 Level 2 Level 3 Level 4
Education/ HS/Cert (25) Associate (50) Bachelor (75) Master/Prof
Knowledge (100)
Skill/Complexity Routine (25) Moderate (50) Advanced Expert (100)
(75)
Responsibility Limited (25) Unit (50) Dept (75) Org-wide
(100)
Effort Low (10) Moderate (20) High (30) Very High (40)
Working Conditions Normal (10) Occasional Frequent Hazardous
Strain (20) Strain (30) (40)
Add weights if desired; sum points to place jobs into grades.
Compensation Surveys
Gather market pay data by occupation and geography from BLS, vendors, and industry
associations; validate methodology.
Wage Curves and Pay Grades
Fit a wage curve to map job points to market wages; identify outliers (e.g., red-circle rates)
and finalize grades and ranges.
Exhibit 11-A. Wage Curve—illustrative points with fitted line.
Exhibit 11-C. From Job Evaluation to Pay Ranges.
Types of Compensation
Base Pay
Salary (exempt roles), hourly wage (nonexempt roles), piecework (unit-based).
Broad-banding and competency-based structures as design alternatives.
Premium Pay
Shift differentials (evening/night/weekend), hazard pay, on-call pay, geographic
differentials.
Variable Pay for Individuals
Commissions (sales), bonuses (discretionary or formulaic), merit pay (performance-
based base adjustments).
Variable Pay for Groups & Organizations
Team incentives and gainsharing (e.g., Scanlon Plan, IMPROSHARE) aligned to
productivity/quality metrics.
Organization-wide incentives (profit sharing, success-sharing, stock plans).
Executive Compensation Programs
Base salary plus short-term incentives (annual bonus) and long-term incentives
(equity/stock options).
Benefits and perquisites (car, club, supplemental retirement).
Governance: board compensation committees; link pay to strategy and performance;
disclosure and risk considerations.
International Compensation
Design expatriate packages with a balance-sheet approach: maintain home-country
purchasing power while covering host-country costs.
Component Purpose Examples
Base Pay Anchor to home-country or Home salary; host-local peg
host market
Differentials Compensate differences and Cost-of-living, housing, tax
hardships equalization, hardship
premium
Incentives Motivate Foreign service premium,
mobility/performance completion bonuses
Key Terms
Total Rewards; Intrinsic/Extrinsic Rewards; Performance- vs. Membership-based
Rewards
FLSA; Exempt/Nonexempt; Tip Credit; Equal Pay Act; Walsh–Healy
Job Evaluation (Ranking, Classification, Point Method); Compensable Factors
Compensation Surveys; Wage Curve; Red-Circle Rate; Pay Grades/Ranges
Base Pay; Premium Pay; Piecework; Merit Pay; Commission; Bonus
Gainsharing (Scanlon, IMPROSHARE); Profit Sharing; Perquisites; Balance-Sheet
Approach
Ethical Issues in HRM: The Secret Paycheck (Pay Secrecy)
Debate whether limiting discussion of pay is ethical or effective. Consider the following
teaching points:
Pros sometimes cited: limits jealousy and poaching; simplifies communication.
Cons: obscures inequities; undermines trust; may conflict with employees’ rights to
discuss wages (NLRA protections for most nonsupervisory employees).
Transparency alternatives: structured pay bands, clear criteria for movement, regular
market reviews, and pay equity audits.
Compliance angle: Lilly Ledbetter Fair Pay Act broadened timeframes for filing pay
discrimination claims; secrecy can delay discovery.
Contemporary Connection: The Minimum Wage Debate
Increase advocates: improve living standards; reduce turnover; potential productivity
boosts.
Opponents: cost pressure may reduce hiring; competitive disadvantages; emphasize
role of education/skills.
Instructional activity: compare federal, state, and city wage floors; compute payroll
impacts for different staffing models; evaluate alternatives (targeted differentials,
training pathways).
The Wage Structure
Translate wage curves into grades with ranges (min–mid–max). Define range spreads by job
family and manage exceptions.
Midpoint: target market rate for fully proficient performance.
Range spread: larger for higher levels to accommodate growth; smaller for entry roles.
Red-circle and green-circle rates: above or below range; specify corrective policies
(freeze, accelerated progression).
Administration: merit matrices; compa-ratio monitoring; promotion/demotion rules.
Contemporary Connection: Compensation in a Global Environment
Minimum wages and social benefits vary widely across countries; some have no national
minimum while others mandate high floors. Global programs must reconcile tax, social
insurance, and cost-of-living differences while maintaining internal equity.
External Factors Affecting Compensation — Details
Geographic Differences
Local labor markets and commuting boundaries shift supply and demand, creating
city/county pay differences.
Labor Supply
Tight markets push wages/benefits up; slack markets depress wages; shortages in key skills
alter starting rates.
Competition
Lead/lag/match strategies to compete for talent; consider productivity, training, and
turnover tradeoffs.
Cost of Living
Use CPI and local indexes; consider geographic differentials and targeted allowances.
Collective Bargaining
Union contracts may set wages, steps, differentials, and progression rules.
Establishing the Pay Structure
Combine job evaluation results with market data to define grades/ranges, midpoints, and
administration rules.
Organization-Wide Incentives
Profit sharing or success sharing tied to financial results.
Gainsharing systems (e.g., Scanlon Plan, IMPROSHARE) based on productivity/quality
improvements.
Watch for dilution effects, long payout cycles, and expectation creep.
Salaries of Top Managers
Boards set pay to attract and retain leaders; typical mix balances salary, annual bonus, and
long-term incentives.
Executive Perquisites
Examples: supplemental retirement, car/driver, club dues, enhanced benefits; ensure
governance and disclosure.
International Compensation — Components
Base Pay
Anchor to home or host market; define exchange and progression rules.
Differentials
Provide cost-of-living, housing, education, and hardship allowances; apply tax equalization
where appropriate.
Incentives
Foreign service and mobility premiums; completion and performance bonuses.