Applied Human Resource Management by Kenneth M. York

Author:Kenneth M. York
Language: eng
Format: epub
ISBN: 9781483342757
Publisher: Sage Publisher
Published: 2013-08-19T16:00:00+00:00

Compensation

and Benefits

8

Strategic Objective

* * *

One of the most important HRM functions is compensation systems. Compensation has a direct impact on recruitment, selection, and retention. If an organization is paying below what the market is paying for jobs, it will be more difficult to attract applicants to apply for job vacancies, and it will be difficult to retain satisfactory performers if they can get paid more for the same work at another organization. Paying below the market also means that the quality of the applicant pool will be less than if the organization is paying at or above the market; and with fewer applicants, the organization cannot be as selective when making hiring decisions. Creating pay scales is an ongoing process, requiring constant monitoring of what the market is paying and what the organization is paying. To track changes in the market rates for jobs, organizations may use salary survey data or share salary information with other organizations, even competitors.

Jobs that experience a sudden increase in demand relative to supply will see market rates for those jobs increase. Changes in demand for some jobs may cause the wages offered to newly hired employees to be nearly the same as the wages paid to current employees, a situation called “salary compression” (Duncan, Krall, Maxcy, & Prus, 2004). Salary compression may be the source of dissatisfaction with pay among current employees. Large changes in demand may cause the wages offered to newly hired employees to be greater than what current employees are earning, a situation called “salary inversion.” Salary compression and salary inversion, especially in academic organizations (where salary information is more commonly available), has sometimes been identified as a major contributor to higher turnover and lower productivity (Jennings & McLaughlin, 1997). When current employees see newly hired employees being paid more than they are for the same job, they may be motivated to become newly hired employees at another organization to get the higher “going rate.” The effect of this is to create even more demand, a positive feedback loop. Organizations may react to salary inversion by making market adjustments for current employees. Paying current employees more, to be more in alignment with what the market is paying, may be cheaper than losing a satisfactory performer who can find better pay elsewhere, plus the cost to fill the a vacant position.

For a compensation plan to be effective, it must be fair in a number of ways. It must meet minimum wage levels for jobs where the Fair Labor Standard’s Act or state minimum wage laws apply. According to the Equal Pay Act, men and women doing the same job should get paid the same, except for differences due to a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or some other differential based on any other factor other than sex. Organizations must make a decision to pay at, above, or below the market for jobs (external competitiveness) and pay different people differently based on

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