1. Historical and Legal
Aspects of
Compensation

2. Compensation at Work
Employee compensation refers to all forms of pay or
rewards employees and arising from their
employment, and it has two components: direct
financial payments (in the form of wages, salaries.
commissions, and bonuses), and indirect payments
(in the form of benefits like employer-paid insurance
and vacations).
In turn, there are basically two ways to make direct
financial employees: on increments of time and on
performance. Time-based most popular: Blue-collar
workers get hourly or daily wages. The second
option is to pay for performance. Piecework ties
compensation to the amount of production (or
number or units a worker produces, and is popular
as an incentive plan).

4. Legal Considerations In Compensation
Various laws specify things like minimum wages,
overtime rates, and for example:
1931 Davis-Bacon Act allows the secretary of wage
rates for laborers and mechanics employed by
contractors working for the federal government.
Amendments provide for employee benefits and
required contractors and sub-contractors to make
necessary payments for these benefits.
Walsh-Healey Public Contract Act sets basic labor
standards for working on any government contract
that amounts to more than $ 10,000. The law contains
minimum wage, maximum hour, and safety and health
pro -requires time-and-a-half pay for work over 40
hours a week.

5. 1938 Fair Labor Standards Act
This law, originally passed in 1938 amended many
times, contains minimum wage, maximum hours,
overtime pay, equal pay, record-keeping, and child
labor provisions that are familiar working people. It
covers the majority of U.S. workers-virtually all those
engaged in the production and/or sale of goods for
interstate and foreign c addition, agricultural workers
and those employed by certain larger vice companies
are included.

6. One familiar provision governs overtime pay. It
says employers must: time at a rate of at least one
and a half times normal pay for any hour over 40 in
a workweek. Thus, if a worker covered by the act
works 44 week, he or she must be paid for 4 of
those hours at a rate equal to one times the hourly
or weekly base rate the person would have earned
for For example, if the person earns $8 an hour (or
$320 for a 40-hour she would be paid at the rate of
$12 per hour (8 times 1.5) for each of the time hours
worked, or a total of $48 extra.

8. 1963 Equal Pay Act
The Equal Pay Act, an amendment to the Fair Labor
Standards Act, states that employees of one sex may
not be paid wages at a rate lower than that paid to
employees of the opposite sex for doing roughly
equivalent work. Specifically, if the work requires
equal skills, effort, and responsibility and is
performed under similar working conditions,
employees of both sexes must receive equal pay,
unless the differences in pay stem from a seniority
system, a merit system, the quantity or quality of
production, or "any factor other than sex."

9. 1974 Employee Retirement Income Security Act
(ERISA)
This act provides for the creation of government-run
employer-financed corporations to protect
employees against the failure of their employer's
pension plan. In addition, it sets regulations
regarding vesting rights. (Vesting refers to the equity
or ownership the employees build up in their pension
plan should their employment be terminated before
retirement.) And it regulates portability rights (the
transfer of an employee's vested rights from one
organization to another), and contains fiduciary
standards to prevent dishonesty in pension plan
funding.

10. Other Legislation Affecting Compensation
Various other laws influence compensation decisions.
For example, the Age Discrimination in Employment Act
prohibits age discrimination against employees who are
40 years of age and older in all aspects of employment,
including compensation. The Americans with
Disabilities Act prohibits discrimination against
qualified persons with disabilities in all aspects of
employment, including compensation. The Family and
Medical Leave Act aims to entitle eligible employees,
both men and women, to take up to 12 weeks of unpaid,
job-protected leave for the birth of a child or for the care
of a child, spouse, or parent. And various executive
orders require employers that are federal government
contractors or subcontractors to not discriminate and to
take affirmative action in various employment areas,
including compensation.

12. Discussion on the Bangladesh Context

13. Union Influences on Compensation Decisions
Unions and labor relations laws also influence pay plan
design. The National Labor Relations Act of 1935 (or
Wagner Act) and associated legislation and court
decisions legitimized the labor movement. It gave
unions legal protection and granted employees the right
to organize, to bargain collectively, and to engage in
concerted activities for the purpose of collective
bargaining or other mutual aid or protection.
Historically, the wage rate has been the main issue in
collective bargaining. However, unions also negotiate
other pay-related issues, including time off with pay,
income security (for those in industries with periodic
layoffs), cost of-living adjustments, and benefits like

14. The 1935 Act created the National Labor
Relations Board (NLRB) to oversee employer
practices and ensure employees receive their
rights. Its rulings underscore the need to
involve union officials in developing the
compensation package. For example,
employers must give the union a written
explanation of the employer's "wage
curves"-the graph that relates job to pay rate.
The union is also entitled to know the salary of
each employee it is representing.

16. Corporate Policies and Competitive Strategy
The compensation plan should further the
firm's strategic aims-management should
produce an aligned reward strategy. In other
words, management should ask "how can I
construct a total portfolio of reward programs
that all link to both short and longer-term
business success, drive shareholder value,
encourage the behaviors that we need, and
deliver true value to our employees?"

17. Equity and Its Impact on Pay Rates
Last but not least, no one likes to think
they're paid less than they deserve. So equity,
both external and internal, is crucial in
determining pay. Externally, pay must
compare favorably with rates in other
organizations, or an employer will find it hard
to attract and retain good employees. Pay
rates must also be equitable internally: Each
employee should view his or her pay as
equitable given other pay rates in the
organization.

18. Some firms administer surveys to learn
employees' perceptions and feelings about their
compensation system.
Questions typically include "How satisfied are you
with your pay?" "What criteria were used for your
recent pay increase?" and "What factors do you
believe are used when your pay is determined?"

20. ESTABLISHING PAY RATES
The Salary Survey
It's difficult to set pay rates if you don't know what others are
paying, so salary surveys play a big role in pricing jobs. Virtually
every employer conducts at least an informal telephone,
newspaper, or Internet salary survey.
Employers use these surveys in three ways. First, they use survey
data to price benchmark jobs, around which the firm then slots its
other jobs, based on their relative worth to the firm. (job
evaluation, explained next, helps determine the relative worth of
each job.) Second, employers typically price 20% or more of their
positions directly in the marketplace (rather than relative to the
firm's benchmark jobs), based on a formal or informal survey of
what comparable firms are paying for comparable jobs. (A dot-com
firm might do this for jobs like Web programmer, whose salaries
fluctuate widely and often.) Third, surveys also collect data on
benefits like insurance, sick leave, and vacations to provide a

21. Salary surveys can be formal or informal. Informal
telephone or Internet surveys are good for checking
on a relatively small number of easily identified and
quickly recognized jobs, such as when a bank's HR
director wants to confirm the salary at which to
advertise a newly open cashier's job. Such informal
techniques are also good for checking discrepancies,
such as when the HR director wants to find out if
some area banks are really paying tellers on some
sort of incentive plan.

22. Perhaps 20% of large employers use their own
formal questionnaires to collect compensation
information from other employers. Most inquire
about things like number of employees, overtime
policies, starting salaries, and paid vacations. For
a survey to be useful, it must be specific; most
respondents in one study claimed the survey's job
categories were too broad or imprecise.

24. Job Evaluation
Job evaluation is aimed at determining a job's relative
worth. It is a formal and systematic comparison of
jobs to determine the worth of one job relative to
another and eventually results in a wage or salary
hierarchy. The basic principle is this: jobs that require
greater qualifications, more responsibilities, and more
complex job duties should be paid more highly than
jobs with lesser requirements.

25. The basic procedure is to compare the jobs
in relation to one another-for example, in
terms of required effort, responsibility, and
skills. Suppose you know (based on your
salary survey) how to price key benchmark
jobs, and then use job evaluation to
determine the relative worth of all the other
jobs in your firm relative to these key jobs.
You are then well on your way to being able
to price all the jobs in your organization
equitably.

26. Compensable Factors
You can use two basic approaches to compare several
jobs. First, you can take an intuitive approach. You
might decide that one job is more important than
another and not dig any deeper into why. As an
alternative, you could compare the jobs by focusing on
certain basic factors the jobs have in common.
Compensation management specialists call these
compensable factors.

27. They are the factors that establish how the jobs
compare to one another, and that set the pay for
each job. Some employers develop their own
compensable factors. However, most use factors
popularized by packaged job evaluation systems or
by federal legislation.
Identifying compensable factors plays a central role
in job evaluation. You usually compare each job
with all comparable jobs using the same
compensable factors. The compensable factors you
use depend on the job and the job evaluation
method.

29. Job Evaluation Methods: Ranking
The simplest job evaluation method
ranks each job relative to all other
jobs, usually based on some overall
factor like "job difficulty." There are
several steps in the job ranking
method.

30. 1. Obtain job information.
Job analysis is the first step: Job descriptions
for each job are prepared and are usually the
basis for ranking jobs. (Sometimes job
specifications are also prepared, but the job
ranking method usually ranks jobs accord to
the whole job, rather than a number of
compensable factors. Therefore, job
specifications-which list the job's demands in
terms of problem solving, decision making, and
skills, for instance-are not as necessary with
this method as they art for other job evaluation
methods.)

31. 2. Select jobs.
It is often not practical to make single ranking for all
jobs in an organization. The usual procedure is to
rank jobs by department or in clusters (such as
factory workers or clerical workers). This eliminates
the need for direct comparison of, say, factory jobs
and clerical jobs.
3 . Select compensable factors.
In the ranking methods, it is common to use just one
factor (such as job difficulty) and to rank jobs based
on the whole job Regardless of the number of factors
you choose, it's advisable to explain the definition of
the factor(s) to the evaluators carefully so that they
evaluate the jobs consistently.

32. 4. Rank jobs.
The simplest way is to give each rater a set of index
cards, each of which contains a brief description of a
job. Then they rank these cards from lowest to
highest. Some managers use an "alternation ranking
method" for making the procedure more accurate.
Here you take the cards, first choosing the highest
and the lowest, then the next highest and next lowest,
and so forth until you've ranked all the cards.
5. Combine ratings.
Usually several raters rank the jobs independently.
Then the rating committee (or the employer) can
simply average the rankings.

33. The usual procedure is to choose
compensable factors and then develop
class or descriptions for each class in
terms of amount or level of the
compensable r(s) in those jobs.

35. The federal classification system in the
United States, for example, employs the
following compensable factors:
1. Difficulty and variety
2. Supervision received and exercised
3. Judgment exercised
4. Originality
5. Nature and purpose of interpersonal work
relationships
6. Responsibility
7. Experience
8. Knowledge required

36. Evaluation Methods: Point Method
The point method is a more quantitative
technique. It involves identifying
(1)several compensable factors, each having
several degrees, as well as
(2) the degree to which each of these factors is
present in the job. Assume there are five
degrees of "responsibility" a job could
contain.

38. Group Similar Jobs Into Pay Grades
Once it's used job evaluation to determine the relative
worth of each job, the committee can turn to the task of
assigning pay rates to each job; however, it will usually
want to first group jobs into pay grades. If the
committee used the ranking, point, or factor
comparison methods, it could of course just assign pay
rates to each individual job. But for a large employer,
such a plan would be difficult to administer, since there
might be different pay rates for hundreds or even
thousands of jobs. And even in smaller organizations,
there's a tendency to try to simplify wage and salary
structures as much as possible. Therefore, the
committee will probably group similar jobs (in terms of
their ranking or number of points, for instance) into
grades for pay purposes. Instead of having to deal with
hundreds of pay rates, it might only have to focus on,
say, 10 or 12.

39. A pay grade is comprised of jobs of approximately
equal difficulty or importance as established by job
evaluation. If the committee used the point method.
then the pay grade consists of jobs falling within a
range of points. With the ranking method, the grade
consists of all jobs that fall within two or three ranks.
The classification method automatically categorizes
jobs into classes or grades. (With the factor
comparison method, the grade consists of a
specified range of pay rates, as the appendix to this
chapter, found on the book's Web site, explains.) Ten
to 16 grades per "job cluster" (a cluster is a logical
grouping, such as factory jobs, clerical jobs, and so
on) are common.

40. Price Each Pay Grade-Wage Curves
The next step is to assign pay rates to your
pay grades. (Of course, if you chose not slot
jobs into pay grades, you would have to
assign individual pay rates to each individual
job.) You'll typically use a wage curve to help
assign pay rates to pay grade (or to each job).