E-553
                                                                                                                          RM8-5.0
                                                                                                                            04-09
                 Risk Management
                 Human Resource Management:
                 Employee Compensation Guide
                                                                                  Sarah L. Fogleman and Dean McCorkle*
                    Most managers think in terms of: “What do I                pay an employee receives, such as profit-
                 have to pay to . . .?” That is not an easy question           sharing bonuses. 
                 to answer. A better question might be: “What do             •	Indirect compensation is far more varied. 
                 I want my compensation package to say?” It is al-             It includes everything from legally required 
                 ready saying a lot, whether you realize it or not.            public protection programs such as Social 
                    Compensation can be linked to business                     Security to health insurance, retirement 
                 structure and to employee recruitment, reten-                 programs, paid leave, child care or moving 
                 tion, motivation, performance, feedback and                   expenses.  
                 satisfaction. It is typically among the first things        All types of compensation are important. 
                 potential employees consider. For employees,             Employers have a wide variety of compensation 
                 compensation signifies not so much how they              elements to choose from and are limited as much 
                 are paid, but how they are valued.                       by their own preconceptions about compensation 
                 What is a Compensation Package?                          packages as they are by budget restraints. By com-
                    It’s easy to think “dollars per hour” when            bining many of these compensation alternatives, 
                 thinking about compensation. However, suc-               progressive managers can create packages that are 
                 cessful compensation packages go a lot further           as individual as the employees who receive them. 
                 and can be considered total rewards systems                 The general consensus of recent studies is that 
                 that contain non-monetary, direct and indirect           pay should be tied to performance to be effec-
                 elements.                                                tive. However, with agricultural jobs, that is not 
                    •	Non-monetary compensation is any benefit            easily done. A manufacturing company may offer 
                      an employee receives from an employer or            a bonus for meeting a performance objective, but 
                      job that does not involve tangible value. This      farm performance is affected by many factors 
                      includes career and social rewards such             over which employees have no influence. Suc-
                      as job security, flexible hours, opportunity        cessful managers must then search for areas the 
                      for growth, praise and recognition, task            employees do influence and base performance 
                      enjoyment, and friendships.                         objectives on these areas. Your farm may benefit 
                    •	Direct compensation is an employee’s base           from offering tenure bonuses for long-time em-
                      wage, which can be an annual salary or              ployees, equipment repair incentives to encour-
                      hourly wage, plus any performance-based             age good equipment maintenance, or bonuses for 
                                                                          arriving at work on time. 
                                                      *Extension Agricultural Economist, Kansas State University Agricultural Experiment Station 
                                                      and Cooperative Extension Service; and Extension Program Specialist III–Economic 
                                                      Accountability, The Texas A&M System.
                               Direct Compensation Alternatives                        hours so that she can be home when her children 
                 Base pay:           Cash wage paid to the employee                    get home from school. A recent graduate may be 
                                     Because paying a wage is a standard               looking for stable work and also an affordable 
                                     practice, the competitive advantage can come      place to live. Both of these individuals have differ-
                                     only by paying a higher amount.                   ent needs and, therefore, would appreciate differ-
                 Incentive pay:      A bonus paid when specified                       ent compensation elements. 
                                     performance objectives are met                    Determining the Cash Wage 
                                     Incentives may inspire employees to achieve          Ask ten different people what a fair wage is and 
                                     higher performance levels and motivate them       you’ll get ten different answers. While there are 
                                     to accomplish farm goals.                         no hard and fast rules for determining a fair wage, 
                 Stock options:      A right to buy a piece of the business,           the importance of the task is obvious. Research 
                                     which may be given to an employee to 
                                     reward excellent service                          indicates that employees expect wages to: 1) cover 
                                     An employee who owns a share of the               basic living expenses; 2) keep up with inflation; 3) 
                                     business is far more likely to go the extra       provide some funds for savings or recreation; and 
                                     mile for the farm.                                4) increase over time. Discussing wage expecta-
                 Bonuses:            A gift given occasionally to reward               tions with employees can help determine what 
                                     exceptional performance or for special            your compensation package should look like. 
                                     occasions                                            The first thing employers should consider when 
                                     Bonuses can show that an employer                 developing compensation packages is fairness. 
                                     appreciates his or her employees; they ensure     It is vital that businesses maintain internal and 
                                     that good performance is rewarded.                external equity. Internal equity refers to fairness 
                                                                                       between employees in the same business, while 
                                                                                       external equity refers to wage fairness as com-
                           Indirect Compensation Alternatives                          pared to other farms or businesses. No matter the 
                 Flexible working schedules            Elder care                      compensation level, if either internal or external 
                 Retirement programs                   Moving expenses                 equity is violated employees may become dissatis-
                                                                                       fied. This becomes apparent through decreased 
                 Insurance (health, dental, eye)       Subsidized housing              productivity, absenteeism, or employees leaving 
                 Paid leave (sick, holiday,            Subsidized utilities            the business. 
                 personal days)                                                           So, what constitutes a fair wage? One approach 
                 Tickets to events (ball games,        Magazine subscription           to determining a fair wage is a market survey. 
                 concerts)                                                             This is a fast and easy way to establish compensa-
                 Boots and clothing                    Laundry service                 tion guidelines for many businesses. A few phone 
                 Wellness programs                     Use of farm trucks or           calls to other employers in similar businesses can 
                                                       machinery                       determine the “market” value for a specific job. 
                 Farm produce, foods, meals            Cellular phones, pagers         Unfortunately, this technique is not necessarily 
                 Child care                            Use of farm pastures            well suited for agricultural producers. An agricul-
                                                       and gardens                     tural manager can do informal surveys of other 
                                                                                       agricultural producers to determine the “going 
                                                                                       rate” for labor, or modify existing studies of non-
                    The perks farm employers provide give them                         agricultural businesses to compare employees 
                 a competitive edge over other employers. Some                         by skill sets rather than job titles. For example, 
                 kinds of indirect compensation are required by                        operating a forklift in a factory and driving a trac-
                 law, such as social security, unemployment and                        tor may require similar skills and therefore can be 
                 disability payments. Other indirect elements                          compensated similarly. 
                 are up to the employer. For example, a working                           Job evaluation is another technique that can 
                 mother may take a lower paying job with flexible                      be used to establish an equitable wage rate. This 
                                                                                   2
             method is a more systematic and rational ap-          Conclusions 
             proach to internal equity because it evaluates           Farm managers face many decisions every day. 
             workers according to factors such as education,       Finding the time to build and implement an eq-
             skill, experience and responsibility.                 uitable wage structure can be difficult. Using the 
                Skill-based pay is an approach that bases the      following checklist can make the process easier. 
             wage rate on the qualifications of the individual        1.  Decide what you want your compensation 
             doing the job, rather than on the job itself. Em-          package to do: 
             ployees with similar skills are grouped together,           -  Recruit new employees 
             regardless of job title, to form skill classes or           -  Motivate current employees 
             grades. These classes determine pay level. This             -  Reward employees for good performance 
             technique can be applied to agricultural enter-
             prises rather easily.                                       -  Minimize risk of violating federal laws 
                Broadbanding was used in a Cornell University            -  Build employee loyalty 
             study. Five competency levels were developed to             -  Any combination of the above 
             classify employees according to their decision-          2. Pick your compensation philosophy, either: 
             making authority, skill level, and supervisory              -  Job evaluation 
             capacity. Every employee was classified as being 
             in one of the following five competency levels:             -  Employee evaluation 
                •	Level one: Employees who are either very               -  Combination of both (like the Cornell 
                  new to the farm or have no advanced skills.             Study) 
                •	Level two: Very specialized individuals who         3.  Determine your internal wage structure, 
                  perform from one to many specific tasks that          either: 
                  require training.                                      -  Evaluate the jobs 
                •	Level three: Employees who are very skilled            -  Evaluate the employees 
                  in at least one specified area and have                -  Create competency groupings 
                  supervisory capacity and decision-making            4. Talk to your employees about their indirect 
                  authority over a very limited portion of the          compensation needs: 
                  business.                                              -  Health insurance 
                •	Level four: Employees with exceptional skill           -  Paid vacation 
                  levels, who make decisions that affect entire 
                  areas of the operation. These people have              -  Housing 
                  potential for broad supervisory and decision-          -  Child care 
                  making authority.                                      -  Retirement planning 
                •	Level	five:	These are the most skilled and          5.  Structure your total rewards system, 
                  qualified full-time employees. They have              including: 
                  complete supervisory authority and the most            -  Indirect compensation (based on your 
                  decision-making authority given to any full-            employee’s needs and your compensation 
                  time employee.                                          objectives) 
                By using a competency scale, each employee               -  Direct compensation (based on labor 
             can be cross-referenced by job title and competen-           market information and your compensation 
             cy level or studied solely within either category.           objectives) 
             Employees with similar skill levels, or competen-        6. Implement your new system, remembering to: 
             cy, are taken together in compensation “bands,”             -  Communicate with your employees about 
             regardless of job title. These bands then compen-            their needs 
             sate similar employees at similar rates across the 
             entire organization and maintain both internal              -  Review your compensation package 
             and external equity.                                         regularly to make sure it is fair, equitable 
                                                                          and competitive
                                                                3
                      -  Be flexible and innovative to maintain a       References 
                        competitive advantage                           Billikopf, Gregory. “Labor Management in 
                      -  Maintain both internal and external               Ag: Cultivating Personnel Productivity.” 
                        equity                                             California Cooperative Extension Service. 
                   Successful agricultural producers rely heav-         Doane’s Agricultural Report. Risk Management 
                 ily on common sense when it comes to manage-              Education Summit. Volume 60, Number 39-6. 
                 ment decisions. The area of employee compen-              September 1997. 
                 sation should be no different. If you want your        Fogleman et al. “Employee Compensation 
                 employees to be innovative, reward them for               and Job Satisfaction on Dairy Farms in the 
                 new ideas. If you want your employees to stay             Northeast.” April 1999. Cornell University, 
                 with you for a long time instead of having to             RB99-02. 
                 train new employees every season, offer bo-            Kansas Department of Human Resources. 
                 nuses or tie their wages to their tenure. If you          Kansas Wage Survey, 1996 Edition. 
                 need employees who show up on time, work               Rosenberg, Howard. “Labor Management 
                 hard, and can be trusted with the most chal-              Decisions.” University of California APMP 
                 lenging of tasks, recruit those people; reward            Research Papers, Volume 8, Number 1, Winter-
                 those people; promote those people. The future            Spring 1999. 
                 of your business could depend on it.                   Schuler, R. 1998. Managing Human Resources. 
                                                                           Cincinnati, Ohio: South-Western College 
                                                                           Publishing. 
                                                Partial funding support has been provided by the
                                                Texas Corn Producers, Texas Farm Bureau, and
                                                  Cotton Inc.–Texas State Support Committee. 
                                             Produced by AgriLife Communications, The Texas A&M System
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                                         Visit Texas AgriLife Extension Service at http://AgriLifeExtension.tamu.edu.
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                 Issued in furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of Congress of May 8, 1914, 
                 as amended, and June 30, 1914, in cooperation with the United States Department of Agriculture. Edward G. Smith, Director, 
                 Texas AgriLife Extension Service, The Texas A&M System.