1. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 18 Management: Making It Work © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2. Learning Objectives Managing, controlling labor costs Control salary level: Top down Control salary level: Bottom up Ethics: Managing or manipulating? Embedded controls 18-2

3. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Learning Objectives Communication: Managing the message Pay as change Agent Structuring the compensation function 18-3

4. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Managing, Controlling Labor Costs Financial planning is integral to managing compensation and requires: Creating a compensation budget Understanding the potential returns gained from the allocation 18-4

5. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 18.1- Managing Labor Costs 18-5

6. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 18.2 - Staffing Analysis Identifies Reasons for Pay Variances 18-6

7. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 18.2 - Staffing Analysis Identifies Reasons for Pay Variances 18-7

8. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Reducing Headcount Organizations cut labor costs by means of layoffs or exit incentives Advantages of reduction in force (RIF) Reduces benefit costs Opportunity to re-shape workforce and create positive sorting effects 18-8

9. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Reducing Headcount Potential problems of headcount reductions Regulatory requirements Employee relations Voluntary turnover Costs Little room for reduction in headcount in lean companies Adverse long-term effects 18-9

10. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Reducing Headcount Core employees Employees with whom a long term relationship is desired Contingent workers Employment agreements may cover only short, specific time periods 18-10

11. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 18.3 - Core and Contingent Employees 18-11

12. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 18.4 - Segmented Supplies: St. Luke’s Labor Cost Model Source: © George T. Milkovich. 18-12

13. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Hours Pertaining to work are used to define employment Firms examine overtime costs versus hiring costs to manage labor costs Factors in the labor cost model are not independent Number of employees Hours worked Cash compensation Benefit costs 18-13

14. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Controlling Benefits Suspending matching contributions to 401(k) retirement plans in recent times Matching contributions depending on profits Eliminating defined benefit (pension) plans Reducing benefit costs by reducing health care benefits 18-14

15. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Controlling Average Cash Compensation Adjustments to average cash compensation level can be made in two ways Top down Bottom up 18-15

16. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Control Salary Level: Top Down Top-down budgeting Begins with an estimate from top management of the: Pay increase budget for the entire organization Total budget is then allocated to each manager, who in turn: Distribute it among subordinates Planned pay-level rise Percentage increase in average pay for the unit that is planned to occur 18-16

17. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Control Salary Level: Top Down Factors influencing decision on the increase of the average pay level for the next period: Current year’s rise Ability to pay Competitive market pressures Turnover effects Recognize the fact that when people leave they are replaced by employees who earn a lower wage Cost of living The consumer price index (CPI) 18-17

18. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 18.7 - Three Distinct but Related Concepts and Their Measures 18-18

19. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 18.8 - Compensation Forecasting and Budgeting Cycle 18-19

20. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Ethics: Managing or Manipulating? Managing compensation ethically is complicated because: Pay really matters There is fierce pressure to achieve results 18-20

21. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Embedded Controls Controls on managers’ pay decisions come from: Controls that are inherent in the design of the techniques The formal budgeting process 18-21

22. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Embedded Controls Range maximums and minimums Red circle rates - Employees are paid above the range maximum Pay below minimum: Is used for trainees May occur if outstanding employees receive a number of rapid promotions and pay increases have not kept up Broad bands - Offer managers greater flexibility compared to a grade-range design 18-22

23. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Embedded Controls Compa-ratios Assess how managers actually pay employees in relation to the midpoint Variable pay Analyzing costs Analyzing value added Compensation becomes an investment as well as an expense Decisions are based on analysis of the return on this investment 18-23

24. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Making Information Useful-Compensation Enterprise Systems Compensation software Transforms data into useful information and guides decision making Purpose of software packages Support employee and manager self-service Act as communication portals Processes transactions 18-24

25. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Communication: Managing the Message Employee’s understanding of the pay system is shaped: Indirectly through the paychecks they receive Directly via formal communication Reasons for communicating pay information Considerable resources are used in designing a fair and equitable system Employees seem to misperceive the pay system 18-25

26. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 18.12 - The Compensation Communication Cycle Source: Reprinted from ACA Building Block 4, “Communicating Compensation Programs: An Approach to Providing Information to Employees,” by John A. Robino, CCP, with permission from the American Compensation Association © ACA. 18-26

27. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Source: Reprinted from ACA Building Block 4, “Communicating Compensation Programs: An Approach to Providing Information to Employees,” by John A. Robino, CCP, with permission from the American Compensation Association© ACA. Exhibit 18.13 - Conducting Formal Communication Sessions for Various Audiences 18-27

28. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 18.14 - Guidance from the Research on Pay Communication 18-28

29. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Pay as Change Agent Pay plays a singular role when organizations restructure Pay changes play two roles in restructuring Leading catalyst for change Follower of change 18-29

30. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Structuring the Compensation Function Decentralization Separate business units are responsible for designing and administering their own systems Centralization Locates the design and administration responsibility at corporate headquarters Compensation strategy Centralized for smaller organization Tailored to fit different contexts 18-30

31. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Structuring the Compensation Function Flexibility within corporate-wide principles Reengineering and outsourcing Balancing flexibility and control 18-31