Discuss the various factors that influence a company’s competitive strategies and compensation practices. Assess how a company can mitigate these factors using effective compensation practices. Respond to at least two of your fellow students’ postings.
2.2 PAY DIFFERENTIALS BASED ON OCCUPATIONAL
CHARACTERISTICS
2-2 Explain the factors that contribute to pay differentials based on occupational
characteristics.
An occupation
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss301) is a
group of jobs, found at more than one company, in which a common set of tasks are
performed or are related in terms of similar objectives, methodologies, materials, products,
worker actions, or worker characteristics.
File clerk, clerk typist,
administrative clerk, staff secretary, and administrative secretary are jobs in the office support
occupation. Compensation analyst, training and development specialist, recruiter, and
benefits counselor are jobs in the human resources management occupation. Considerable
variation in pay between occupations can be explained by the complexity of knowledge,
skills, and abilities (KSAs) that define jobs (for example, surgeons and building service
workers). Another important factor is the labor market dynamics of the supply and demand
for qualified employees.
Pay variations can also be observed within occupations, also based on the complexity of
KSAs associated with different jobs that define an occupation, and we will look at some
examples shortly. It should be noted that references to differences in KSAs or relative worth
of different jobs are based exclusively on job content and demand for individuals who
possess the required KSAs. These references do not convey value judgments about the worth
of these jobs in society or to the value placed on the people who hold different jobs. The
same applies to pay level references.
KNOWLEDGE, SKILLS, AND ABILITIES
In Chapter 6 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch06#ch06) ,
we will address the role of job analysis to provide detailed descriptions of jobs based on
differing combinations of KSAs. Typically, jobs that are based on knowledge and skills,
which are developed based on formal education (vocational education, college education) or
early job experiences such as internships or apprenticeships (for example, in the cases of
medical doctors or plumbers, respectively) are highly valued as measured by pay levels. Jobs
with less specialized or complex KSAs are typically paid much less.
Let’s consider one job from the health care practitioners and technical operations occupation
and one from the office and administrative support occupation. According to the
Occupational Outlook Handbook,
anesthesiologists focus on
the care of surgical patients and on pain relief. They also work outside of the operating room,
providing pain relief in the intensive care unit, during labor and delivery, and for those who
suffer from chronic pain. Anesthesiologists work with other physicians and surgeons to
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decide on treatments and procedures before, during, and after surgery. Preparation for
becoming an anesthesiologist requires advanced training that includes completion of medical
school, internships, residencies, and attaining medical board certification. In May 2013, the
average annual salary was $235,070.
According to the Occupational Outlook Handbook,
secretaries and
administrative assistants usually answer telephones and take messages or transfer calls,
schedule appointments and update event calendars, arrange staff meetings, handle incoming
and outgoing mail and faxes, draft routine memos, billing, or other reports, and maintain
databases and filing systems. Typically, high school graduates who have basic office and
computer skills qualify for entry-level positions. Most secretaries learn their job in several
weeks. In May 2013, the average annual salary was $34,000.
Pay differences are also evident within occupations because of different job requirements.
Let’s consider pharmacist and pharmacist technician jobs, which are part of the health care
occupation. According to the Occupational Outlook Handbook,
pharmacists possess
advanced training to give them the knowledge and skills to safely fill prescriptions, verifying
instructions from physicians on the proper amounts of medication to give to patients, check
whether the prescription will interact negatively with other drugs that a patient is taking or
any medical conditions the patient has, and instruct patients on how and when to take a
prescribed medicine and inform them about potential side effects they may experience from
taking the medicine. Pharmacy technicians support the work of pharmacists while under their
supervision. For example, technicians, take the information needed to fill a prescription from
customers or health professionals, measure amounts of medication for prescriptions, package
and label prescriptions, and organize inventory. Pharmacy technicians do not require
advanced education; most of their training takes place on the job. Average annual pay reflects
these differences. In 2013, pharmacists earned $116,500 while pharmacy technicians earned
$30,840.
SUPPLY AND DEMAND
Companies’ demand for qualified individuals for particular jobs relative to supply often
influences compensation. There are upward pressures to raise starting pay when the demand
for qualified workers in particular jobs is greater than supply. These market dynamics require
that companies compete for limited qualified workers. This appears to be the case for
information security analysts. According to the Occupational Outlook Handbook,
demand for information
security analysts is expected to be very high. Cyberattacks have grown in frequency and
sophistication over the last few years, and many organizations are behind in their ability to
detect these attacks. For instance, the retailer Target experienced a breach of their databases
that contained customers’ credit card numbers. Analysts will be needed to come up with
innovative solutions to prevent hackers from stealing critical information or creating havoc
on computer networks. Also, the federal government is expected to greatly increase its use of
information security analysts to protect the nation’s critical information technology (IT)
systems. Further, as the healthcare industry expands its use of electronic medical records,
ensuring patients’ privacy and protecting personal data are becoming more important. More
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information security analysts are likely to be needed to create the safeguards that will satisfy
patients’ concerns.
A common assumption is that high demand for workers applies only to highly skilled jobs.
But, that assumption is not correct. Recently, retailer Wal-Mart announced that it would raise
the pay for all of its U.S. employees to at least $9 per hour, which would exceed the federal
minimum wage level by $1.75 per hour (when this book went to press).
Through the middle of
2015, there were 14 states that have a minimum wage requirement that is the same as the
federal minimum wage requirement. This move would raise the pay of more than one-third
of the company’s workers. Wal-Mart made this decision, in part, because it has been more
difficult to hire well-qualified workers at lower pay rates, particularly since the
unemployment rate has declined.
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1.1 DEFINING STRATEGIC COMPENSATION
1-1 Define strategic compensation.
“What is strategic compensation? Answering this question requires that we first answer the
question, “What is compensation?”
What Is Compensation?
Compensation represents both the intrinsic and extrinsic rewards employees receive for
performing their jobs and for their membership as employees. Together, both intrinsic and
extrinsic compensation describe a company’s total compensation system, which we will look
at more closely in this chapter, and, in even greater detail throughout the remainder of this
textbook.
Intrinsic compensation
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reflects employees’ psychological mind-sets that result from performing their jobs, for
example, experiencing a great feeling from the belief that one’s work matters in the lives of
others. Perhaps it is easy to imagine that many health care providers feel this way. Extrinsic
compensation
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includes both monetary and nonmonetary rewards. Organizational development professionals
promote intrinsic compensation through effective job design. Compensation professionals are
responsible for extrinsic compensation, which is the focus of this textbook.
Compensation professionals establish monetary compensation programs to reward employees
according to their job seniority, performance levels, or for learning job-related knowledge or
skills. Some describe this exchange as a pay-effort bargain. As we will discuss shortly,
monetary compensation represents core compensation
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss82) .
Nonmonetary rewards include protection programs (e.g., medical insurance), paid time off
(e.g., vacations), and services (e.g., day care assistance). Most compensation professionals
refer to nonmonetary rewards as employee benefits
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss127) .
Employees receive some or all of these offerings as part of an employment arrangement.
Rarely do employers base employee benefits on job performance. Employee benefits are
becoming an increasingly important element of compensation packages. Since the so-called
Great Recession (2007–2009) ended, fewer companies have offered pay increases and, those
that do, are offering lower amounts (from roughly an average 3.8 percent increase to less than
2 percent).
Both monetary and nonmonetary compensation represents costs to companies. In the case of
core compensation, employers pay an hourly wage or salary. In the case of employee
benefits, employers pay some or all of the cost for employees to have health insurance
coverage rather than providing dedicated monetary payments, apart from wage or salary, to
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1.1 Defining Strategic Compensation
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pay for health care.
What Is Strategic Compensation?
Defining strategic compensation requires that we place the relevance and importance of
compensation practices in a broader context where compensation practices are linked to
competitive business strategy, as shown in Figure 1-1
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch01lev1sec1#ch01fig01) .
Competitive business strategy
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to the planned use of company resources—financial capital, equipment capital, and human
capital—to promote and sustain competitive advantage. The time horizon for strategic
decisions may span multiple years. For example, Exxon Mobil Corporation, a company in the
oil and gas exploration industry, strives to be the world’s premier petroleum and
petrochemical company by achieving superior financial and operating results while
simultaneously adhering to high ethical standards.
Eli Lilly and Company, a
manufacturer of pharmaceutical products, pursues a competitive strategy, which focuses on
creating innovative medicines that improve patient health outcomes.
FIGURE 1-1 Relationship between Strategic Decisions and
Compensation Practices
Human resource executives collaborate with company executives to develop human resource
strategies. Human resource strategies
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specify the use of multiple HR practices to reinforce competitive business strategy. These
statements are consistent with a company’s competitive strategy. For example, Eli Lilly is
well known for the innovative environment that it creates for employees to make discoveries
for pharmaceutical products that will enhance the life of people throughout the world.
Within the context of competitive business strategy and human resource strategy,
compensation professionals practice strategic compensation. Strategic compensation
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to the design and implementation of compensation systems to reinforce the objectives of both
HR strategies and competitive business strategies. Compensation and benefits executives
work with the lead HR executive and the company’s chief financial officer (CFO) to prepare
total compensation strategies. At Lilly, it is evident that the use of compensation and benefits
practices supports both human resource strategies and competitive strategies. Eli Lilly is well
known for offering a balanced compensation and benefits program which recognizes
employee contributions and embraces employees through recognition of their needs outside
the workplace.
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