COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

COMPENSATION Third Canadian Edition Milkovich, Newman, Cole
Chapter 1 The Pay Model

Compensation Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.

Contrasting Perspectives of Compensation
Society’s Views Stockholders’ Views Global Views Views of whether employees see compensation as a return given in exchange for their work or a reward for good performance vary. Those who view compensation as a return for work suggest that an implicit contract is formed between the employee and the employer where pay is received in exchange for employee effort. Perceptions of compensation differ within countries. Society may see it as a measure of equity and justice. Social contracts include government as party to the social exchange through public policy and regulations. Compensation is not a static, one-time payment. For the employer, it is an expected cost over the period of employment. For the employee, it is a stream of expected future earnings. To stockholders, executive pay is of special interest. Employees’ Views Managers’ Views

Total Returns for Work Total Returns Total Compensation
Relational Returns Benefits Learning Opportunities Cash Compensation Recognition & Status Allowances Life, Health, and Disability Insurance Long-term Incentives Employment Security Challenging Work Base Merit/Cost of Living Work/Life Programs Short-term Incentives

Relational Returns from Work
Recognition & Status Employment Security Employee Engagement Learning Opportunities Challenging Work

THE PAY MODEL EFFICIENCY  Performance Quality
TECHNIQUES STRATEGIC POLICIES STRATEGIC OBJECTIVES EFFICIENCY  Performance Quality Customers & Stockholders  Costs FAIRNESS COMPLIANCE INTERNAL STRUCTURE ALIGNMENT PAY STRUCTURE COMPETITIVENESS See Exhibit 1.1. INCENTIVE PROGRAMS CONTRIBUTORS MANAGEMENT EVALUATION

Compensation Objectives
Efficiency Fairness See the Lawler article, PP for details on these points. Compliance

Pay System Objectives at Medtronic and Whole Foods
Support Medtronic mission and increased complexity of business Minimize increases in fixed costs Attract and engage top talent Emphasize personal, team and Medtronic performance Recognize personal and family total well-being Ensure fair treatment Whole Foods We are committed to increasing long-term shareholder value Profits are earned every day through voluntary exchange with our customers Profits are essential to create capital for growth, prosperity, opportunity, job satisfaction and job security Support team member happiness and excellence We share together in our collective fate

Pay System Policies Internal alignment
comparisons between jobs or skill levels inside a single organization External competitiveness comparisons of compensation with competitors external to the organization Employee contributions relative emphasis placed on employee performance Management policies related to managing the pay system See the Lawler article, PP for details on these points.

Conclusion the model presented in this chapter provides a structure for understanding compensation systems the three main components of the model include: the objectives of the pay system the policy decisions that provide the system’s foundation the techniques that link policies and objectives two key questions should constantly be asked: first, why do it this way? ->there is rarely one correct way to design a system or pay an individual second, so what? ->what does this technique do for us? ->how does it help achieve organizational goals?

Chapter 2 Strategy: The Totality of Decisions

Strategy A fundamental business decision that an organization has made in order to achieve its strategic objectives e.g., what business to be in, how to gain competitive advantage The greater the alignment, or fit, between the organizational strategy and the compensation system, the more effective the organization

Strategic Perspectives Toward Total Compensation (1 of 2)
Google Medtronic Objectives Emphasis on innovation Commitment to cost containment Recognize contributions Attract and reward the best Focus on customers Fully present at work and in personal lives Recognize personal accomplishment and share success Attract and engage top talent Control costs Internal Alignment Minimize hierarchy Everyone wears several hats Emphasize collaboration Reflect job responsibilities Support promotional growth opportunities Foster team culture See Exhibit 2.1, text pages 26-27

Strategic Perspectives Toward Total Compensation (2 of 2)
Google Medtronic Externally Competitive Explore novel ideas in benefits and compensation Generous, unique benefits Market value of jobs establishes overall pay parameters Choices in benefits Employee Contributions Recognize individual contributions Unrivaled stock programs Incentives directly tied to business goals Opportunity to earn above-market pay Recognition of individual and team performance Management Love employees, ant to know it Technology support Clearly understood; open Employee choice See Exhibit 2.1, text pages 26-27 2-4

Strategic Choices Business unit HR strategies strategies
Corporate objectives, strategic plans, vision, and values Strategic compensation decisions Social, competitive, and regulatory environment Compensation systems See Exhibit 2.2 in text, page 30 Employee attitudes and behaviours Competitive advantage

Strategic Compensation Decisions
Objectives Internal Alignment External Competitiveness Employee Contributions Management

Key Steps to Formulate a Compensation Strategy
1. Assess Total Compensation Implications Competitive Dynamics Core Culture / Values Social and Political Context Employee / Union Needs Other HR Systems 4. Reassess the Fit Realign as Conditions Change Realign as Strategy Changes 2. Map a Total Compensation Strategy • Objectives • Contributions • Alignment • Management • Competitiveness 3. Implement Strategy Design System to Translate Strategy into Action Choose Techniques to Fit Strategy

Competitive Advantage
Three tests to assess competitive advantage of a strategy: Does the pay strategy align with the business strategy, economic and sociopolitical conditions, and the overall HR system? Is the pay strategy different and difficult to imitate? Does the pay strategy add value by providing a return on investment in compensation?

“Best Fit” versus “Best Practices”
“Best fit” approach suggests that aligning compensation decisions with strategy will be most effective “Best practices” approach suggests that a set of practices exist that work with almost any strategy Emerging evidence suggests that a focus on “What practices pay off best under what conditions?” will be most effective

Conclusion Managing total compensation strategically means aligning compensation and business strategies The three tests for whether pay strategy provides competitive advantage are: (1) does it align?; (2) does it differentiate?; and (3) does it add value? The four-step process to develop a compensation strategy is: assess environmental conditions decide on the best strategic choices implement the strategy, and reassess the fit

Chapter 3 Defining Internal Alignment

THE PAY MODEL TECHNIQUES STRATEGIC POLICIES STRATEGIC OBJECTIVES EFFICIENCY  Performance  Quality  Customers & Stockholders  Costs FAIRNESS COMPLIANCE INTERNAL STRUCTURE ALIGNMENT PAY STRUCTURE COMPETITIVENESS See Exhibit 1.1. INCENTIVE PROGRAMS CONTRIBUTORS MANAGEMENT EVALUATION

Compensation Strategy: Internal Alignment/Equity
Supports Organization Strategy Supports Workflow Supports Work Flow. Work flow refers to the process by which goods and services are delivered to the customer. The challenge is to design a pay structure that supports the efficient flow of that work. (Text page 53) Supports Fairness. An internally consistent pay structure is more likely to be judged fair if it is based on the work and the skills required to perform the work and if people have an opportunity to be involved in some way in determining the pay structure. Two sources of fairness are important: the procedures for determining the pay structure, called procedural justice; and the actual results of those procedures, which is the pay structure itself, called distributive justice. (Text page 55) Directs Behavior Toward Organization Objectives. Internal pay structures influence employees’ behavior. The challenge is to design the structures so they direct people’s efforts toward organization objectives. The criteria or rationale on which the structure is based ought to make clear the relationship between each job and the organization’s objectives. This is an example of line-of-sight. The more employees can “see” or understand links between their work and the organization’s objectives, the more likely the structure will direct their behavior toward those objectives. Internal consistency in pay structures help create that line-of-sight. (Text page 55) Motivates Behaviour

Internal Alignment/Equity
the pay relationships between the jobs/skills/ competencies within a single organization the relationships form a pay structure that: supports organization strategy supports the workflow motivates behaviour of employees

Job Structure at an Engineering Company
Consultant Engineer: Exhibits an exceptional degree of ingenuity, creativity, and resourcefulness. Acts independently to uncover and resolve operational problems. Advisor Engineer: Applies advanced principles, theories, and concepts. Assignments often self-initiated. Lead Engineer: Applies extensive knowledge as a generalist or specialist. Exercises wide latitude. Systems Engineer: Wide applications of principles and concepts, plus working knowledge of other related disciplines. Under very general direction. Senior Engineer: Full use of standard principles and concepts. Under general supervision. Engineer: Limited use of basic principles. Close supervision. Recognized Authority Entry Level

Pay Structure refers to the array of pay rates for different work or skills within a single organization, created through the use of: the number of levels differentials in pay between the levels, and the criteria used to determine those differences. Pay structures change over time

Pay Structure at an Engineering Company
Consultant Engineer $162,000 Advisor Engineer $120,000 Lead Engineer $93,000 Systems Engineer $73,000 Senior Engineer $58,500 Engineer $48,000 Recognized Authority Entry Level

What Shapes Internal Structures?
EXTERNAL FACTORS: Economic Pressures Government Policies, Laws, Regulations Stakeholders Cultures and Customs ORGANIZATION FACTORS: Strategy HR Policy Technology Employee Acceptance Human Capital Cost Implications INTERNAL STRUCTURE: Levels, Differentials, Criteria

Illustration of an Internal Labour Market*
Consultant Engineer Hire *Internal labour markets combine both external and organizational factors Advisor Engineer Lead Engineer Systems Engineer See Exhibit 3.3, text page 68 Senior Engineer Hire Engineer Hire

Strategic Choices Among Structure Options
Tailored (well-defined jobs; small differentials) versus Loosely Coupled (jobs flexible, adaptable, changing) Egalitarian (few levels; small differentials) versus Hierarchical (many levels; large differentials) See text page 64 The basic premise underlying the strategic approach is that fit matters. So the belief is that pay structures tailored to be consistent with the organization, to support the way the fork gets done, and to fit the organization’s business strategy will be more likely to lead to success. Misaligned structures become obstacles. They may motivate employee behavior that is inconsistent with the organization’s strategy. Two strategic choices are involved: (1) how tailored to organization design and work flow to make the structure; and (2) how to distribute pay throughout the levels in the structure. Tailored versus Loosely Coupled. A low-cost, customer-focused business strategy such as followed by McDonald’s or Wal-Mart may be supported by a closely tailored structure. Jobs are well defined with detailed tasks or steps to follow. You can go into a McDonald’s in Cleveland, Prague, or Shanghai and find they are all very similar. Their pay structures are too. In contrast to McDonald’s, Microsoft’s business strategy requires constant product innovation and short product design-to-market cycle times. Companies like Microsoft need to be very agile, constantly innovating and adapting. Hence, their pay structures need to be more loosely coupled to the organization in order to facilitate constant change. Egalitarian versus Hierarchical. Pay structures can range from egalitarian at one extreme to hierarchical at the other. Egalitarian structures have fewer levels and smaller differentials between adjacent levels and between the highest and lowest paid workers.

Structures Vary in Number of Levels
Structure A Layered Chief Engineer Engineering Manager Consulting Engineer Senior Lead Engineer Lead Engineer Senior Engineer Engineer Engineer Trainee Structure B De-layered Chief Engineer Consulting Engineer Associate Engineer See Exhibit 3.6, text page 73

Strategic Choice: Hierarchical vs. Egalitarian
Levels Many Fewer Differentials Large Small Criteria Person or Job Fit Tailored Loosely Coupled Supports Individual Performers Teams Fairness Criterion Performance Equal Treatment Behaviour Rewarded Opportunities for Promotion Cooperation See Exhibit 3.7 on page 74 of text This slide clarifies the differences between egalitarian and hierarchical structures. The choice, however, is not either / or. Rather, the differences are a matter of degree. So levels can range from many to few, differentials can be large or small, and the criteria can be based on the job, the person, or some combination of the two. (text page 66)

What The Research Tells Us
Equity Theory: Fairness my pay for my inputs vs. others’ pay for their inputs MY PAY My qualifications My work performed My product value OTHERS’ PAY Their qualifications Their work performed Their product value

Tournament Theory: Motivation and Performance Players perform better where prize differentials are sizeable works best in situations where individual performance matters most

Institutional Model: Copy others Copy “best practices” of others No analysis of whether the practice fits the organizational strategy

Organizational Outcomes of an Internally Aligned Structure
Undertake training Increase experience Reduce turnover Facilitate career progression Facilitate performance Reduce pay-related grievances Reduce pay-related work stoppages Pay structure Text, Exhibit 3.9 page 78

Consequences of Structures
Efficiency Internal Structure Fairness Legal Compliance

Conclusion Internal alignment refers to the pay relationships among jobs / skill / competencies within a single organization. Pay structures – the array of pay rates for different jobs within an organization – are defined by levels, differentials, and the criteria for determining these. Acceptance by employees of the pay differentials between jobs is a key test of an equitable pay structure. The goals of the entire compensation system must be kept in mind when designing internal pay structures.

Chapter 4 Job Analysis

Many Ways to Create Internal Structure
Business and Work-Related Internal Structure Job-based Person-based PURPOSE Collect, summarize work information Job analysis Job descriptions (Chapter 4) Skill (Chapter 6) Competencies(Chapter 6) Determine what to value Job evaluation: classes or compensable factors (Chapter 5) See Exhibit 5.1, text page 121 Assess value Factor degrees and weighting (Chapter 5) Translate into structure Job-based structure (Chapter 5)

Job Analysis the systematic process of collecting information about the nature of specific jobs.

Determining the Internal Job Structure
Job descriptions Job analysis Job evaluation Job structure Collecting information about the nature of specific jobs Summary reports that identify, define, and describe the job as it is actually performed Comparison of jobs within an organization An ordering of jobs based on their content or relative value See Exhibit 4.2, text page 91 Some Major Issues in Job Analysis Why collect information? What information is needed? How to collect the information? Who should be involved? How useful are the results?

Job Analysis Job analysis involves the identification and description of what is happening on the job. Job analysis identifies: required tasks knowledge and skills working conditions Job analysis is the process of collecting information about jobs. Job analysis helps establish the equity and efficiency of a pay system. It is essential to developing job descriptions and job evaluation. Job analysis is an on-going need as the nature of work changes over time.

Job Analysis Terminology
Grouping of related jobs with broadly similar content, e.g. marketing, engineering, office support, technical. Group of tasks performed by one person that make up the total work assignment of that person, e.g. customer support representative. JOB FAMILY JOB TASK Smallest unit of analysis, a specific statement of what a person does; for example, answers the telephone. Similar tasks can be grouped into a task dimension, e.g. responsible for ensuring that accurate information is provided to customer. See Exhibit 4.3, text page 93

General Procedures for Conventional Job Analysis
Develop preliminary job information Conduct initial tour of work site Conduct interviews Conduct second tour of work site Consolidate job information Verify job description See Exhibit 4.4 pages 94 – 95 in text

Job Analysis: Data Related to Job
Job Identification Title Department in which job is located Number of people who hold job Job Content Tasks and activities Effort (physical, mental, emotional) Constraints on actions Performance criteria Critical incidents Conflicting demands Working conditions Roles (e.g., negotiator, monitor, leader) Responsibility

Job Analysis: Data Related to Employee
Employee Characteristics Professional/tech. knowledge Manual skills Verbal skills Written skills Quantitative skills Mechanical skills Conceptual skills Managerial skills Leadership skills Interpersonal skills Internal Relationships Boss & other superiors Peers Subordinates External Relationships Suppliers Customers Regulatory Professional/Industry Community Union/Employee Groups

Job Analysis: How Can the Information be Collected?
Conventional Methods Position Analysis Questionnaire Many other questionnaires Quantitative Methods Website questionnaires with statistical analysis

Who Is Involved in Job Analysis?
Job analyst collects the information Job incumbents and supervisors provide the information Discrepancies resolved by collecting more information Top management and union support is critical

Writing Job Descriptions
a written record of the duties and responsibilities of a specific job compiled through job analysis identifies and describes the job title, job summary, relationships to other jobs, essential responsibilities and tasks Job specification is the qualifications required to do the job; may be included in the job description

Judging Job Analysis Reliability Validity Acceptability Usefulness
See textbook, pages Reliability. Is a measure of the consistency of results among various analysts or various methods or various sources of data overtime. Validity. Does the analysis create an accurate portrait of the work? Validity examines convergence of results among sources of data methods. Acceptability. If jobholders and managers are dissatisfied with the initial data collected and the process, they are not likely to buy into the resulting job structure nor the pay rates that are eventually attached to that structure. Conventional job analysis is not well accepted because of its potential for subjectivity and favoritism. Practicality. Refers to the usefulness of the information collected. For pay purposes, job analysis provides work-related information to help determine how much to pay for a job - it helps determine if the job is similar or different from other jobs. If job analysis does this in a reliable (consistent), valid (accurate), and acceptable (cost effective) way, then the technique is of practical use. Acceptability Usefulness

Conclusion After deciding that job characteristics will be the basic unit of analysis supporting the pay structure, it must be decided: What data will be collected What method(s) will be used to collect them Who should be involved in the process The best way to ensure acceptance of job analysis results is to involve both employees and supervisors Job analysis can be tedious and time-consuming Job content remains the conventional criterion for pay structures

Chapter 5 Evaluating Work: Job Evaluation

Business and Work-Related Internal Structure Job-based Person-based PURPOSE Collect, summarize work information Job analysis Job descriptions (Chapter 4) Skill (Chapter 6) Competencies(Chapter 6) Determine what to value Job evaluation: classes or compensable factors (Chapter 5) See Exhibit 5.1, text page 121 Assess value Factor degrees and weighting (Chapter 5) Translate into structure Job-based structure (Chapter 5)

Job Evaluation process of systematically determining the relative worth of jobs to create a job structure for the organization a process that helps gain acceptance of pay differences between jobs job evaluation based on job content and internal job value

Determining an Internally Aligned Job Structure
Job analysis Job description Job evaluation Some Major Decisions in Job Evaluation Establish purpose of evaluation Decide whether to use single or multiple plans Choose among alternative approaches Obtain involvement of relevant stakeholders Evaluate plan’s usefulness

Major Decisions Establish purpose Single vs. multiple plans
Supports organization strategy Supports work flow Fair to employees Motivates behavior toward organization objectives Single vs. multiple plans Benchmark jobs Choose between methods

Job Evaluation Methods
Job Ranking Raters examine job description and arrange jobs according to their value to the company Job Classification Classes or grades are defined to describe a group of jobs Point Method Numerical values are assigned to specific job components; sum of values provides quantitative assessment of the job’s worth

Comparison of Job Evaluation Methods
Advantage Disadvantage Ranking Fast, simple, easy to explain. Cumbersome as number of jobs increases. Basis for comparisons is not called out. Classification Can group a wide range of work together in one system. Descriptions may leave too much room for manipulation. Point Compensable factors give basis for comparisons; communicate what is valued. Can become bureaucratic and rule-bound. See Exhibit 5.4, page 126

The Point Plan Process (1 of 2)
Step One: Conduct Job Analysis A representative sample of benchmark jobs The content of these jobs is basis for compensable factors Step Two: Determine Compensable Factors Based on the work performed (what is done) Based on strategy and values of the organization (what is valued) Acceptable to those affected by resulting pay structure (what is acceptable) See Exhibit 5.9 on page 132

The Point Plan Process (2 of 2)
Step Three: Scale the Factors Use examples to anchor Step Four: Weight the Factors Can reflect judgment of organization leaders, committee Can reflect a negotiated structure Can reflect a market-based structure Step Five: Communicate the Plan Step Six: Apply to Non-benchmark Jobs See Exhibit 5.9 on page 132

Characteristics of Benchmark Jobs
Contents are well-known and relatively stable over time Job is common across several different employers

Compensable Factors characteristics in the work that the organization values, that help it pursue its strategy and achieve its objectives Useful factors are: Based on the strategy and values of the organization Based on the work performed Acceptable to the stakeholders affected by the resulting pay structure

Categories of Factors break down the factors into three major categories: Universal Factors Sub-Factors Degrees or Levels 1. Universal Compensable Factors: are the general, relatively abstract, and complex qualities and features that relate to all kinds of jobs. To make these abstract universal factors easier to understand relative to the kinds of work employees do while performing their job assignments, a subset of factors is used to further describe each universal factor. These are called sub-factors. 2. Sub-Factors: are statements that define the specific attributes of a particular job more precisely. 3. Degrees or Levels: These degrees or levels provide a yardstick, or measurement scale, that assists in identifying the specific amount of the factor required in the performance of the job.

Universal Compensable Factors
Skill Effort Responsibility Working Conditions

Skill: the experience, training, ability, and education required to perform a job under consideration

Sub-Factors: Skill Educational levels Years of experience required
Technical knowledge Specialized knowledge Specialized training Interpersonal skills

Effort: the measurement of the physical or mental exertion needed for performance of a job

Sub-Factors: Effort Diversity of tasks Complexity of tasks
Creativity of thinking Analytical problem solving Physical application of skills Degree of assistance available

Responsibility: the extent to which an employer depends on the employee to perform the job as expected, with emphasis on the importance of job obligation

Sub-Factors: Responsibility
Decision-making authority Scope of the organization under control Scope of the organization impacted Degree of integration of work with others Impact of failure or risk of job Ability to perform tasks without supervision

Working Conditions: difficult or unhealthy aspects of the conditions in which the work is done

Sub-Factors: Working Conditions
Hazards: Exposure to dangerous chemicals Stress Physical surroundings of the job Cramped quarters Outdoor location

Degrees/Levels of Sub-factors
Description of several different degrees or levels of a sub-factor in jobs A different number of points is associated with each degree/level

Points for Different Degrees of One Sub-Factor
Factor: Problem Solving Sub-Factor: Scope for Initiative and Judgment Degree Points A some degree of judgment and initiative required B moderate degree of judgment and initiative required C significant degree of judgment and initiative required D high degree of judgment and initiative required

Factor Weights Weighting assigned to each factor to reflect differences in importance attached to each factor by the employer; for example: Skill 40% Effort 30% Responsibility 20% Working Conditions 10% 100%

Overview of the Point System
Degree of Factor Factor Weight Skill Education 20% Experience 20% Effort Physical 10% Mental 10% Responsibility For safety 15% For budget 15% Working Conditions Hazards 5% Weather 5%

Who Should Be Involved? The Design Process Matters
Attention to fairness can help achieve employee and management commitment, trust, and acceptance of the results Appeals / Review Procedures Procedural fairness Political Influence Minimize susceptibility to political influences

Resulting Internal Structures: Job, Skill, and Competency Based
Managerial Group Technical Group Manufacturing Group Administrative Group Vice Presidents Head / Chief Scientist Assembler I Inspector I Administrative Assistant High Value (points) Packer Division General Managers Senior Associate Scientist Principal Adminis- trative Secretary Materials Handler Inspector II Managers Associate Scientist Administrative Secretary Assembler II Project Leaders See Exhibit 5.15 on page 144 Scientist Drill Press Operator Rough Grinder Word Processor Low Value (points) Supervisors Technician Machinist I Coremaker Clerk / Messenger Job Evaluation Competency- Based Skill–Based Job Evaluation

Conclusion differences in the rates paid for different jobs and skills matter: affects ability of managers to achieve business objectives; influences employees’ perceptions of fair treatment job evaluation has evolved into many different forms and methods; consequently, wide variations exist in its use and how it is perceived no matter how job evaluation is designed, its ultimate use is to help design and manage work-related, business-focused, and agreed-upon pay structure

Chapter 6 Person-Based Structures

Business and Work-Related Internal Structure Person-based (Chapter 6) Job-based (Chapters 4-5) PURPOSE Skills Competencies Collect, summarize work information Job analysis Job descriptions Skill analysis Core competencies Determine what to value Job evaluation: classes or compensable factors Skill blocks Competency sets See Exhibit 5.1, text page 121 Certification process Competency indicators Assess value Factor degrees and weighting Person-based structure Person-based structure Translate into structure Job-based structure

Skill-Based Pay Structures
link pay to the depth or breadth of the skills, abilities, and knowledge a person acquires that is relevant to the work pay individuals for all the skills for which they have been certified regardless of whether the work they are doing requires all or just a few of those particular skills very different approach compared to a job-based plan, which pays employees for the job to which they are assigned, regardless of the skills they possess

Types of Skill-Based Pay Plans
Specialist: In-Depth Generalist / Multiskill-Based: Breadth

Purpose of the Skill-Based Structure
support the strategy and objectives support work flow fair to employees motivate behaviour toward organizational objectives

Skill Analysis a systematic process to identify and collect information about skills required to perform work in an organization.

Determining the Internal Skill-Based Pay Structure
Skill certification Skill-based pay structure Skill analysis Skill blocks Basic Decisions What is the objective of the plan? What information should be collected? What methods should be used to determine and certify skills? Who should be involved? How useful are the results for pay purposes? See Exhibit 6.3, page 160

Determining the Internal Competency-Based Pay Structure
Core competencies Competency sets Behavioural descriptors Competency – based pay structure Basic Decisions What is the objective of the plan? What information should be collected? What methods should be used to determine and certify competencies? Who should be involved? How useful are the results for pay purposes? See Exhibit 6.6, page 166

Competencies underlying, broadly applicable knowledge, skills, and behaviours that form the foundation for successful work performance (exhibited by excellent performers more consistently than average performers)

Competency-Based Pay Terminology
Taken from mission statement; for example, “business awareness.” CORE COMPETENCY COMPETENCY SETS Grouping of factors that translate core competency into observable behaviour; for example, cost management, business understanding. COMPETENCY INDICATORS Observable behaviours that indicate the level of competency within a competency set. For example, “identifies opportunities for savings.”

Competency Analysis a systematic process to identify and collect information about the competencies required for successful work performance collect information on: personal characteristics visionary competencies organization-specific competencies establish certification methods

Top Twenty Competencies
Achievement orientation Concern of quality Initiative Interpersonal understanding Customer service orientation Influence and impact Organization awareness Networking Directiveness Teamwork & cooperation Developing others Team leadership Technical expertise Information seeking Analytical thinking Conceptual thinking Self-control Self-confidence Business orientation Flexibility See Exhibit 6.11, page 175

Internal Alignment: Job- or Person-Based Structures
Purpose of job- or person-based pay plans Internal pay structure to help achieve organizational objectives Aligned with internal alignment policy Supports business operations Managing the plan Manual Communication to foster employee acceptance

Avoiding Bias in Pay Structures
Define the compensable factors and scales to include the content of jobs held predominantly by women. Ensure that factor weights are not consistently biased against jobs held predominantly by women. Are factors usually associated with these jobs always given less weight? Apply the plan in as bias free a manner as feasible. Ensure that the job descriptions are bias free, exclude incumbent names from the job evaluation process, and train diverse evaluators. See text pages

Contrasting Approaches (1 of 2)
Job-Based Skill-Based Competency-Based What is valued Compensable factors Skills Competencies Quantify the value Factor degree weights Skill levels Competency levels Mechanisms to translate into pay Assign points that reflect criterion pay structure Certification and price skills in external market Certification and price competencies in external market Pay structure Based on job performed/market Based on skills certified/ market Based on competency developed / market Pay increases Promotion Skill acquisition Competency development Managers’ focus Link employees to work Promotion and placement Cost control via pay for job and budget increase Utilize skills efficiently Provide training Control costs via training, certification, and work assignments Be sure competencies add value Provide competency – developing opportunities Control costs via certification, and work assignments

Contrasting Approaches (2 of 2)
Job-Based Skill-Based Competency-Based Employee focus Seek promotions to earn more pay Seek skills Seek competencies Procedures Job analysis Job evaluation Skill analysis Skill certification Competency analysis Competency certification Advantages Clear expectations Sense of progress Pay based on value of work performed Continuous learning Flexibility Reduced work force Lateral movement Limitations Potential bureaucracy Potential inflexibility Requires cost controls

Conclusion internal pay structures need to be aligned with the organization’s business strategy and values, the design of the work flow, and a concern for the treatment of employees techniques for establishing internally aligned structures include the job-based approach (job analysis and job evaluation) and person-based approaches (skill/competency-based plans) these techniques can aid in achieving the objectives of the pay system when they are properly designed and managed

Chapter 7 Defining Competitiveness

THE PAY MODEL TECHNIQUES STRATEGIC POLICIES STRATEGIC OBJECTIVES EFFICIENCY  Performance  Quality  Customers  Stockholders  Costs FAIRNESS COMPLIANCE INTERNAL STRUCTURE ALIGNMENT PAY STRUCTURE COMPETITIVENESS See Exhibit 1.1. INCENTIVE PROGRAMS CONTRIBUTORS MANAGEMENT EVALUATION

External Competitiveness
refers to the pay relationships among organizations - the organization’s pay relative to its competitors shaped by three factors: labour market (supply and demand) product/service market (competition) organizational factors (e.g., size)

( Base + Bonuses + Benefits + Options)
Pay Level and Pay Forms Pay level refers to the average of the array of pay rates paid by an employer. ( Base + Bonuses + Benefits + Options) # of Employees Pay forms refer to the mix of the various types of payments that make up total compensation.

External Competitiveness Policies
pay level that is above, below, or equal to competitors, and the mix of pay forms relative to those of competitors.

External Competitiveness Objectives
Control Labour Costs Attract and Retain Employees

Pay Level Decisions Impact Labour Costs
Number of Employees x Labour Costs = Pay Level

Labour Demand The marginal product of labour is the additional output associated with the employment of one additional human resource unit, with other production factors held constant. The marginal revenue of labour is the additional revenue generated when the firm employs one additional unit of human resources, with other production factors held constant.

Supply and Demand at the Market and Individual Employer Level
Market level Employer level $100,000 $100,000 Demand Marginal revenue product Pay for business graduates Pay for business graduates $50,000 $50,000 Supply to individual employer Supply See Exhibit 7.6, page 205 $25,000 $25,000 Number of business graduates available Number of business graduates hired

Labour Demand Theories and Implications
Theory Prediction So What? Job evaluation and compensable factors most capture these negative characteristics. Compensating differentials Work with negative characteristics requires higher pay to attract workers. Efficiency wage Above-market wages will improve efficiency by attracting workers who will perform better and be less willing to leave. Staffing programs must have the capability of selecting the best employees. Work must be structured to take advantage of employees’ greater efforts. Signaling Pay policies signal the kinds of behaviour the employer seeks. Pay practices must recognize these behaviours by better pay, larger bonuses, and other forms of compensation.

Labour Supply Theories and Implications
Theory Prediction So What? Reservation wage Job seekers won’t accept jobs whose pay is below a certain wage, no matter how attractive other job aspects. Pay level will affect ability to recruit. See Exhibit 7.7, page 209 Human capital The value of an individual’s skills and abilities is a function of the time and expense required to acquire them. Higher pay is required to induce people to train for more difficult jobs.

Product Market Factors and Ability to Pay
Two key product market factors affect ability of a firm to change price of its products or services Level of product demand – Puts a lid on maximum pay level an employer can set Degree of competition – In highly competitive markets, employers are less able to raise prices without loss of revenue

Organization Factors Industry and technology Employer size
Employee preferences Organization strategy

Competitive Pay Policy Alternatives
Pay with Competition (Match) Flexible Policies Lead Policy Lag Policy For a discussion of the competitive pay policy options, see text, pages

Pay Mix Policy Alternatives
Performance - Driven Market Match Benefits 17% Benefits 20% Options 16% Options 4% Base 50% Bonus 6% Bonus 17% Base 70% Work - Life Balance Security (Commitment) See Exhibit 7.10, page 220 Benefits 20% Benefits 30% Base 50% Options 10% Base 80% Bonus 10%

Some Consequences of Pay Levels
Contain operating expenses (labour costs) Increase pool of qualified applicants Increase quality and experience Competitiveness of total compensation Reduce voluntary turnover See Exhibit 7.13, text page 225 Increase probability of union-free status Reduce pay-related work stoppages

Conclusion there is no ‘going rate’, conscious pay decisions are made by managers both product/service market and labour market competitors impact the pay level and mix decisions alternative pay level and mix decisions have different consequences pay policies need to be designed to achieve specific pay objectives the pay level and mix must be properly positioned relative to competitors NOTE: Each integrated job structure or career path within the organization may have its own competitive position in the market.

Chapter 8 Designing Pay Levels, Mix and Pay Structures

Determining Externally Competitive Pay Levels and Structures
Draw Policy Lines Merge Internal & External Pressures Competitive Pay Levels, Mix and Structures Set Policy Define Market Conduct Survey Some Major Decisions in Pay Level Determination Determine pay level policy Define purpose of survey Define relevant labour market Design and conduct survey Interpret and apply results Design grades and ranges or bands See Exhibit 8.1, page 231 in text

Set Competitive Pay Policy
Lead the market with respect to pay Match average pay of competitors Lag behind average market pay rates

Compensation Survey the systematic process of collecting and making judgments about compensation paid by other employers provides data for translating pay policy into pay levels and structures

Purpose of Compensation Survey
Adjust Pay Level – How Much to Pay? Adjust Pay Mix – What Forms? Adjust Internal Structure? Study Special Situations Estimate Competitors’ Labour Costs

Define Relevant Market Competitors
employers who compete for the same occupations or skills required employers who compete for employees within the same geographic area employers who compete with the same products and services

Relevant Labour Markets by Geographic and Employee Groups
Geographic Scope Production Office and Clerical Technicians Scientists & Engineers Managerial Professional Executive Local: Within relatively small areas such as cities Most likely Regional: Within a particular area of the province Only if in short supply or critical Likely National: Across the country International: Across several countries Only for critical skills or those in very short supply Sometimes See Exhibit 8.2, page 235

Design the Survey Who should be involved?
compensation staff and/or consultants How many employers should be included? Can use publicly available data Can use internet data

Design the Survey Which jobs should be included? Benchmark jobs
Low-high approach (for person-based plans) Benchmark conversion approach What information to collect? Base pay Total cash Total compensation

Advantages and Disadvantages of Measures of Compensation
Base Pay Tells how competitors are valuing the work in similar jobs Fails to include performance incentives and other forms, so will not give true picture if competitors offer low base but high incentives Total Cash (base + bonus) Tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job. All employees may not receive incentives, so it may overstate the competitors’ pay; plus, it does not include long-term incentives. Total Compensation (base + bonus + stock options + benefits) Tells the total value competitors place on this work All employees may not receive all the forms. Be careful; don’t set base equal to competitors’ total compensation. Risks high fixed costs.

Job Matching the degree of match between the organization’s jobs and survey jobs must be carefully assessed on job content rather than on the basis of job title only

Analyzing Survey Data no single best approach
check accuracy of data and anomalies statistical analysis based on two pieces of data on each benchmark: Survey data - dollars Our own data - job evaluation points

Analyzing Survey Data frequency distribution organizes data
measures of central tendency averages or means weighted means medians measures of distribution, or dispersion standard deviation percentiles and quartiles range spread

Age/Trend the Market Data
Pay rates are constantly changing Survey data represents pay at the date it was collected Adjust survey data to represent pay at the current or future date when pay decisions will be implemented

Combine Job Evaluation and Market Survey Data
Each benchmark job has: Job evaluation points An average wage paid by survey companies. Scatterplots are useful to see what the data look like. Summarize the data further by fitting a line through the points  the MARKET PAY LINE Can “eyeball” data or use regression techniques

Scatterplot PAY OUR Job Evaluation Points SURVEY monthly salary ($000)
7 6 5 4 3 2 1 SURVEY monthly salary ($000) PAY 80 120 160 OUR Job Evaluation Points

Scatterplot With Regression Line
7 6 5 4 3 2 1 SURVEY monthly salary ($000) PAY Market Pay Line 80 120 160 OUR Job Evaluation Points

Adjust Market Data to Reflect Organization’s Pay Policy
Lead the Market: pay level above market for the year and equal at year end update factor will be equal to the projected market increase Match the Market: pay level above market for first half of year and below for second half update factor will be half of the projected market increase Lag the Market: pay level below the market for the entire year no adjustment will be made to account for the projected market increase

Developing a Pay Policy Line
7 6 5 4 3 2 1 lead match lag OUR monthly salary ($000) Pay Policy Line : using market-survey data (updated and aged to reflect pay policy) PAY Market pay line (beginning of year) 80 120 160 OUR Job Evaluation Points

Pay Structure two components: Pay policy line: represents an adjustment to the market pay line to reflect the organization’s external competitive position in the market Pay ranges: upper and lower limits on pay

Why Use Pay Ranges? External Pressures:
quality variations (KSAs) among market employees differences in productivity from quality variations differences in the mix of pay forms competitors use Internal Pressures recognize individual performance variations with pay employees’ expectations that their pay will increase over time encourage employee retention

Constructing Ranges: 1. Develop Grades
a pay grade is a horizontal grouping of different jobs that are considered substantially equal for pay purposes all jobs within a single grade will have the same pay range

PAY GRADE STRUCTURE PAY Our Job Evaluation Points Our monthly salary
8 7 6 5 4 3 2 1 Our monthly salary (000) PAY Pay Policy Line I II III IV V Pay Grades 100 150 Our Job Evaluation Points

Constructing Ranges: 2. Establishing Midpoint, Minimum, and Maximum
pay ranges refer to the vertical dimension of the pay structure – an upper and lower limit on pay for all jobs in a pay grade each pay grade has a pay range consisting of a midpoint and a specified minimum and maximum

PAY RANGES PAY Pay Policy Line Our Job Evaluation Points Our monthly
8 7 6 5 4 3 2 1 Pay Range Our monthly salary (000) PAY Pay Policy Line 100 150 Our Job Evaluation Points

Range Midpoint, Minimum, and Maximum

Range Spread Spread = range maximum – range minimum
e.g., $65,875 - $43,917 = $21,958 Spread percentage = spread/range minimum e.g., $21,958/$43,917 = 50%

Range Overlap

Broadbanding collapses the number of salary ranges within a traditional salary structure into a few broad bands purpose is to manage career growth and administer pay an alternative to traditional salary grade structures

From Grades to Bands

Contrasts Between Ranges and Bands
Ranges Support: some flexibility within controls relative stable organization design recognition via titles or career progression midpoint controls, comparatives controls designed into system give managers “freedom with guidelines” Up to 150 percent range spread Bands Support: emphasis on flexibility within guidelines global organizations cross-functional experience and lateral progression reference market rates, shadow ranges controls in budget, few in system give managers “freedom to manage” pay 100 – 400 percent spreads See Exhibit 8.19, page 267

Market Pricing establishing pay structure by relying almost exclusively on external market pay rates market pricing becoming more common in Canada

Conclusion most organizations survey other employers’ pay practices to determine the competitors’ rates survey results used to construct market pay line pay policy line adjusts market pay line based on the decision to lead, match or lag market pay pay grades and ranges/bands designed around pay policy line to integrate internal and external pressures increasing interest in broadbanding and market pricing

Chapter 9 Employee Benefits

Employee Benefits that part of the total compensation package, other than pay for time worked, provided to employees in whole or in part by employer payments (e.g., life insurance, pension plan, workers’ compensation, vacation)

Why the Growth in Employee Benefits?
Cost Effectiveness of Benefits Employer Impetus Unions Government Impetus

Key Issues In Benefits Planning, Design, and Administration
Establish plan objectives Integrate benefits with other compensation components Ensure external competitiveness Ensure adequacy of benefits Benefits Administration Who should be covered? How much choice for employees? How should benefits be financed? See Exhibit 12.5, page 433

Financing Benefits Plans: Alternatives
Non-contributory employer pays total costs Contributory costs shared between employer and employee Employee-financed employee pays total costs for some benefits See text page 434

Factors Influencing Choice of Benefits Package
Employer Factors Relationship to total compensation costs Costs relative to benefits Competitor offerings Role of benefits in attraction, retention, motivation Legal requirements Absolute and relative compensation costs Benefits Package See Exhibit 12.6, page 435 Employee Factors Fairness in relationship to what others receive Personal needs as linked to demographic characteristics such as age

Flexible Benefits: Advantages
employees choose packages that best satisfy their unique needs flexible benefits help firms meet the changing needs of a changing workforce increased involvement of employees and families improves understanding of benefits flexible plans make introduction of new benefits less costly cost containment - organization sets dollar maximum; employee chooses within the constraint See Exhibit 12.5, page 433

Flexible Benefits: Disadvantages
employees make bad choices and find themselves not covered for predictable emergencies administrative burdens and expenses increase adverse selection - employees pick only the benefits they will use; the subsequent high benefit utilization increases its cost See Exhibit 12.5, page 433

Administering the Benefits Program
communicating the benefits program claims processing cost containment

Cost Containment probationary periods benefit maximums coinsurance
deductibles coordination of spousal benefits administrative cost containment

Categorization of Employee Benefits
Legally required payments Retirement and savings plans Life insurance benefits Medical insurance Income security benefits Pay for time not worked Miscellaneous benefits See Exhibit 13.1, page 457

Workers’ Compensation
a mandatory, government-sponsored, employer-paid no-fault insurance plan that provides compensation for injuries and diseases that arise out of, and while in the course of, employment provides benefits for Lost earnings due to temporary disability Lost earnings due to permanent disability Health care expenses Survivor benefits after fatalities

Workers’ Compensation
completely employer funded regulated by provinces/territories compensation varies from 75 to 90 percent of net earnings (two jurisdictions provide 75 percent of gross earnings) cost control is an ongoing concern

Canada/Quebec Pension Plan
a mandatory, government-sponsored pension plan for all employed Canadians funded equally by employers and employees provides benefits upon retirement disability death

Employment Insurance a mandatory government-sponsored plan for all employed Canadians that provides workers with temporary income replacement as a result of employment interruptions due to circumstances beyond their control funded by employer and employee contributions basic benefit is 55 percent of average insurable earnings

Employer-Sponsored Pension Plans
plans that provide income to an employee at retirement as compensation for work performed now Defined benefit plans: employer agrees to provide a specific level of retirement pension, the exact cost of which is unknown Defined contribution plans: employer agrees to provide specific contributions but the final benefit is unknown

Relative Advantages of Different Pension Alternatives
DEFINED BENEFIT PLAN DEFINED CONTRIBUTION PLAN 1. Provides an explicit benefit which is easily communicated Unknown benefit level is difficult to communicate 2. Company absorbs risk associated with changes in inflation and interest rates which affect cost Employees assume these risks 3. More favourable to long service employees More favourable to short-term employees 4. Employer costs unknown Employer costs known up front See Exhibit 13.8, page 469

Life Insurance group life insurance
accidental death and dismemberment insurance dependant life insurance optional, employee-paid insurance retiree life insurance

Employer-Sponsored Medical Plans
cover expenses not payable under provincial/territorial plans prescription drug coverage considered most important benefits by employees medical cost control is biggest issue facing benefits managers today cost control through deductibles, coinsurance… preventive health care/wellness programs

Income Security Benefits
Short-term disability plans provide continuation of part or all of earnings during absence due to non-work related illness or injury Sick leave plans provide specified number of paid sick days per month or per year Long-term disability plans provide continuation of part of earnings during long-term absence due to non-work related illness or injury claims and costs rising sharply psychiatric disabilities fastest-growing

Pay for Time Not Worked Paid rest periods, coffee breaks, travel time…
vacations holidays leaves bereavement leave jury duty …

Employee Assistance Plans (EAPs)
provide confidential counselling and/or treatment programs for personal problems including addiction, stress, and mental health issues

Conclusion employee benefits are a major cost of doing business
cost savings on existing benefit packages will come from tighter administrative controls, and from benefit reductions

Chapter 10 Pay-for-Performance: Performance Appraisal and Plan Design

Employee Performance Employee performance = f (S,K,M) where:
S = Skill and ability to perform task K = Knowledge of facts, rules, principles, and procedures M = Motivation to perform

Performance Measurement Relates to Compensation Strategy
Variability in Organizational Performance Low Variability: few swings in overall corporate performance High Variability: regular and large swings in overall corporate performance. Cell A – provide wide range of rewards beyond just money. Include significant incentive component. Cell B – provide wide range of rewards beyond just money. Emphasize base pay with low incentive portion. Variability and ease of measurement in individual performance Unstable, unclear, and changing objectives See Exhibit 9.1, page 282 in the text Cell C – emphasize monetary rewards with large incentive component. Cell D – emphasize monetary rewards. Large base pay with low incentive portion. Stable and easily measured

What Behaviours Do Employers Care About?
How do we get good employment prospects to join our company? How do we retain these good employees once they join? How do we get employees to develop skills for current and future jobs? How do we get employees to perform well on their current job?

What Motivates Employees?
In the simplest sense, motivation involves three elements: 1. what is important to a person, and 2. offering it in exchange for some 3. desired behaviour

What Motivation Theories Say
Content Theories (what is important to a person) Maslow’s Need Hierarchy Herzberg’s 2-Factor Theory Process Theories (the nature of the exchange) Expectancy Theory Equity Theory Agency Theory Reinforcement Theories (desired behaviour) Goal Setting Reinforcement See Exhibit 9.2, pages 284 – 286 in the text

Does Compensation Motivate Behaviour?
Do people join a firm because of pay? Do people stay in a firm (or leave) because of pay? Do employees more readily agree to develop job skills because of pay? Do employees perform better on their jobs because of pay?

Performance Appraisal
Process of evaluating or appraising an employee’s performance on the job Often plagued by errors

Common Errors in the Appraisal Process
halo error negative halo error first impression error recency error leniency error strictness error central tendency error similar-to-me error spillover error

Strategies to Better Understand and Measure Job Performance (and reduce errors)
Improve appraisal formats Select the right raters Understand how raters process information Train raters to rate more accurately

Performance Appraisal Formats
Comparative ranking alternation ranking paired comparison Attribute graphic rating scales Behavioural BARS Results/outcomes MBO

Performance Appraisal Formats
An Evaluation of Performance Appraisal Formats CRITERIA Employee Development HR Research Format Administration Cost Validity Ranking poor poor average good average Standard Rating Scale average average average good average BARS good good good average good MBO excellent poor poor poor excellent

Select the Right Raters
supervisors peers self customers subordinates 360-degree feedback (may include all five of the above raters)

Information Processing Errors
Errors in rating process Errors in observation (attention) Errors in storage and recall Errors in actual evaluation

Training Raters to Rate More Accurately
rater-error training to reduce psychometric errors performance dimension training reviews dimensions to be used in rating performance-standard training provides frame of reference

Effective Performance Evaluation Process
Performance dimensions should be relevant to the organization’s strategy Involve employees at every stage Raters need to be trained Raters must be motivated to rate accurately Raters should maintain a diary of employee performance Raters should diagnose in advance whether problems are due to motivation, skill deficiency, or external environment

Designing a Pay-For-Performance Plan
Efficiency Strategy Structure Standards -Objectives -Measures -Eligibility -Funding Equity or Fairness Distributive justice Procedural justice Compliance Comply with existing laws Enhance and maintain firm’s reputation

Linking Pay with Performance
Merit pay grids combine 3 variables: Level of performance Distribution of employees within pay ranges Merit budget increase percentage

Merit Pay Grid Performance Position in Salary Range Unsatisfactory
Very good Excellent 4th quartile 0% 1% 2% 3% 3rd quartile 4% 2nd quartile 5% 1st quartile 6%

Conclusion employee performance depends on skill, knowledge, and motivation process of performance appraisal can be time-consuming and stressful training supervisors in performance appraisal can improve the quality of appraisals designing a pay-for-performance plan involves efficiency in setting clear standards that support strategic objectives; fairness; and legislative compliance merit guidelines and promotional increases are forms of pay for performance

Chapter 11 Pay-for-Performance Plans

Pay-for-Performance Plans
pay that varies with some measure of individual or organizational performance also called variable pay plans these plans have a positive impact on performance if they are designed well

Short Term Pay-for-Performance Plans
Merit Pay Lump-Sum Bonuses Individual Spot Awards Individual Incentives

Individual Incentive Plans
Method of Rate Determination Units of production per time period Time period per unit of production (1) (2) Pay constant function of production level Straight piecework plan Standard hour plan Relationship between production level and pay (3) (4) See Exhibit 10.4, page 313 Taylor differential piece rate system Merrick multiple piece rate system Halsey method Pay varies as function of production level

Advantages of Individualized Incentive Plans
substantial contribution to: increased productivity lower production costs increased earnings of workers less direct supervision is required to maintain output than under pay for time payment for results (if accompanied by improved organizational and work measurement) enable labour costs to be estimated more accurately than under pay for time helps costing and budgetary control

Disadvantages of Individualized Incentive Plans (1 of 2)
conflict between employees seeking to maximize output and managers concerned about deteriorating quality levels attempts to introduce new technology may be resisted by employees concerned about the impact on production standards reduced willingness of employees to suggest new production methods for fear of subsequent increases in production standards

Disadvantages of Individualized Incentive Plans (2 of 2)
increased complaints that equipment is poorly maintained, hindering employee efforts to earn larger incentives increased turnover among new employees discouraged by the unwillingness of experienced workers to cooperate in on-the-job training elevated levels of mistrust between workers and management

Team / Group Incentive Plans
Gain-Sharing Plans Profit Sharing Plans Earnings-at-Risk Plans

Sample Group/Team Performance Measures (1 of 2)
Customer-Focused Measures Time to Market Measures On time delivery Cycle time New product introductions Customer Satisfaction Measures Market share Customer satisfaction Customer growth and retention Account penetration Financially-Focused Measures Value Creation Revenue growth Resource yields Profit margins Economic value added Shareholder Return Return on invested capital Return on sales / earnings Earnings per share Growth in profitability

Sample Group/Team Performance Measures (2 of 2)
Capability-Focused Measures HR Capabilities Employee satisfaction Turnover rates Total recruitment costs Rate of progress on developmental plans Promotability index Staffing mix/head-count ratio Other Asset Capabilities Patents and copyrights Distribution systems Internal Process-Focused Measures Resource Utilization Budget-to-actual expenses Cost allocation ratios Reliability / rework Accuracy / error rates Safety rates Change Effectiveness Program implementation Teamwork effectiveness Service / quality index

Different Types of Variable Pay Plans
Cash Profit Sharing Stock Ownership or Options Balanced Scorecard Productivity / Gain- Sharing Team / Group Incentives See Exhibit 10.11, pages for discussion details

Gain-Sharing Plans under gain-sharing plans, employees share in cost-savings or productivity gains

Key Elements in Designing a Gain-Sharing Plan
strength of reinforcement productivity standards sharing the gains scope of the formula perceived fairness of the formula ease of administration production variability

Three Gain-Sharing Formulas
Scanlon Plan (single ratio volume) Rucker Plan Improshare Numerator of ratio (input factor) Payroll costs Labour cost Actual hours worked Denominator of ratio (outcome factor) Net sales (+/- inventories) Value added Total standard value hours See Exhibit 10.12, page 328

Profit-Sharing Plans variable pay plans requiring a corporate profit target to be met before any payouts occur

Earnings-at-Risk Plans
incentive plans sharing profits in successful years and reducing base pay in unsuccessful years

Advantages of Group Incentive Plans
positive impact on organization and individual performance of about 5 – 10 percent per year easier to develop performance measures than for individual plans signals that cooperation, both within and across groups, is a desired behaviour teamwork supported by most employees may increase participation of employees in decision making process

Disadvantages of Group Incentive Plans
line of sight may be lessened employees may find it more difficult to see how their individual performance affects their incentive payouts. may lead to increased turnover among top individual performers because they must share with lesser contributors increases compensation risk to employees because of lower income stability

Long-Term Incentive Plans
Employee Stock Ownership Plans (ESOPs) Stock Options Broad-Based Option Plans (BBOP)

Special Groups in Compensation Management
supervisors top management corporate directors professional employees sales staff contingent workers

Components of an Executive Compensation Package
base salary short-term (annual) incentives or bonuses long-term incentives and capital appreciation plans executive benefits executive perquisites

Examples of Long-Term Incentives for Executives
1. Appreciation-Based Plans stock options stock appreciation rights 2. Full-Share Plans restricted stock plans restricted stock units/phantom stock plans Deferred share units 3. Performance-Based Plans performance share / unit plans

Pay Components for Professional Employees
dual career ladders maturity curves performance bonuses attaining professional licenses perks flexible work schedules Campus-like environment

Key Factors in Designing a Sales Compensation Plan
the nature of the people who enter the sales profession organizational strategy competitor practices product/service being sold

Key Issues in Contingent Workforce Compensation
equity/fairness relative to permanent employees boundaryless careers

Conclusion the design and effective administration of pay-for-performance plans is key to their success special employee groups compensation must address high potential for conflict in these jobs compensation treatment differs from that for other employees

Chapter 12 The Role of Government and Unions in Compensation

Government as Part of the Employment Relationship
government is a key stakeholder in compensation decision making. governments’ usual interests are whether: procedures for determining pay are fair (pay discrimination) safety nets for the unemployed and disadvantaged are sufficient (minimum wage, employment insurance) employees are protected from exploitation (human rights, pay equity)

Employment Standards Acts
minimum wage paid vacation paid holidays standard hours of work and overtime pay pay on termination of employment minimum age of employment equal pay for equal work by men and women

Human Rights Laws based on Charter of Human Rights and Freedoms in Canadian Constitution equal treatment in employment and opportunity for employment regardless of race, colour, religion, sex… prohibit harassment in the workplace

Pay Equity issue relating to the gender wage gap
gender wage gap is the amount by which the average pay for female workers is less than the average pay for male workers

Reasons for Gender Wage Gap
differences in occupational attainment; women historically segregated in small number of occupations e.g., sales, nursing differences in number of hours worked differences in industries and firms differences in union membership presence of discrimination

Pay Equity Legislation
intended to redress the portion of the wage gap assumed to be due to discrimination, through comparison of male- and female-dominated jobs four job evaluation factors required: Skill Effort Responsibility working conditions compare male and female job classes: job to job method proportional value/wage line method proxy comparison method

The Impact of Unions in Wage Determination
impact on general wage and benefit levels impact on the structure of wage packages impact on non-union firms (spillover) impact on wage and salary policies and practices in unionized firms

Union Impact on General Wage Levels
union workers earn about 10 percent more than non-union workers size of the gap varies from year to year union impact higher during periods of higher unemployment and slow economy union impact smaller during strong economy union benefits 20 to 30 percent higher than non-union

Union Impact on Structure of Wage Packages
Division between wages and benefits Union benefits 20 to 30 percent higher than non-union Two-tier wage plans Lower wages for lower seniority workers

Union Impact: The Spillover Effect
employers seek to avoid unionization by offering workers the wages, benefits, and working conditions won in rival unionized firms e.g., Dofasco non-union management continues to enjoy the freedom from union “interference” in decision making non-union workers receive the “spillover” of rewards obtained by unionized counterparts

Role of Unions in Pay Policies and Practices
collective agreement/contract specifies: basis of pay (regular, overtime) occupation - wage differentials experience / merit differentials vacations and holidays wage adjustment provisions (COLA)

Unions and Alternative Reward Systems
some collective agreements include alternative rewards: lump sum awards piece rates gain-sharing profit sharing pay-for-knowledge (skill/competency-based pay)

Conclusion governments assess fairness and legislate employment standards, human rights, and pay equity rules that affect compensation management unions affect compensation management directly through collective agreements, and are facing the need to adjust compensation due to international competition

Chapter 13 Budgets and Administration

Managing Labour Costs Labour Costs Employment + = x Core Base Pay
Average cash compensation Average benefit cost + = x See Exhibit 18.1 page 622 Core Base Pay Variable Pay Contingent

Managing Labour Costs controlling employment: head count and hours
controlling average cash compensation costs

Controlling Salary Costs: Top Down
current year’s rise ability to pay competitive market turnover effects cost of living Top down, unit level budgeting involves estimating the pay increase budget for an entire organization unit. Once the total budget is determined, it is then allocated to each manager, who plans how to distribute it among subordinates. There are many approaches to unit level budgeting in use. A typical one, controlling the planned pay-level rise, will be considered. A planned pay-level rise is simply the percentage increase in average pay for the unit that is planned to occur.

Three Distinct but Related Concepts and Their Measures
Personal Expense Budget Employee’s cost of living Goods/service markets price changes See Exhibit 18.4 page 627 Labour market wage changes Consumer Price Index Pay Surveys

Controlling Salary Costs: Bottom Up
instruct managers in compensation policies and techniques distribute forecasting instructions and worksheets provide consultation to managers check data and compile reports analyze forecasts review/revise forecasts and budgets with management conduct feedback with management monitor budgeted versus actual increases Bottom-up budgeting requires managers to forecast the pay increases they will recommend during the upcoming plan year. The key steps are as follows:

Inherent Controls range maximums and minimums broad bands compa-ratios
variable pay analyzing costs of wage proposals

The Compensation Communication Cycle
Defining the Objectives What are the goals? Evaluating the Program Obtaining the Information Was the program successful? What is the current situation? Conducting the Sessions Developing the Strategy See Exhibit 18.9 page 637 How should the sessions be implemented? What is the best overall approach? Determining the Media What “tools” are most appropriate?

Compensation Components Communicated to All Audiences
job descriptions job evaluation market data collection and analysis pay structure development incentive plan design performance appraisal system salary management administration procedures benefit plans See Exhibit page 639 for details

Conducting Formal Communication Sessions for Various Audiences
EXECUTIVES MANAGERS EMPLOYEES Components explained in a general way Components thoroughly explained throughout the communication process Fairly detailed explanation of components Emphasis on strategic implications of the compensation system Reviewed at the formal sessions Emphasis on both process and policy information Executive compensation explained in detail in one-on-one meetings Emphasis on development and motivation of employees using salary management, performance appraisal, and incentive plan Particular attention paid to the workings of the incentive plan The level of detail and emphasis varies depending upon the audience. See Exhibit page 639 for details

Structuring the Compensation Function
centralization – decentralization flexibility within corporate-wide principles reengineering and outsourcing

Conclusion pay administration includes control of how managers decide individual employees’ pay and of overall costs of labour the salary budgeting and forecasting processes impose additional controls pay systems are tools that must be evaluated in terms of usefulness in achieving an organization’s objectives

COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

Similar presentations

Presentation on theme: "COMPENSATION Third Canadian Edition Milkovich, Newman, Cole"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

Similar presentations

Presentation on theme: "COMPENSATION Third Canadian Edition Milkovich, Newman, Cole"— Presentation transcript:

Similar presentations

About project

Feedback