1. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-1 Budgets and Administration Chapter 18

2. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-2 1. Explain how management of the pay system affects the pay objectives. 2. Discuss the importance of controlling labor costs. 3. Identify the two approaches to manage labor costs and describe the key aspects of each approach. 4. Understand how inherent controls affect managerial pay decisions. 5. Explain the importance of communication in managing the pay system. 6. Clarify the role of pay as a change agent. Learning Objectives After discussing Chapter 18, students should be able to:

3. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-3 Basic Compensation Design Decisions  Compensation’s role in HRM strategy  Competitiveness and market position  What is organization willing to pay for  Basis for rewards  Performance-based pay  Decision-making practices  Communications policy

4. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-4 Managing Labor Costs  Controlling Employment: Head Count and Hours  Controlling Direct Compensation Costs  Controlling Indirect Compensation Costs

5. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-5 Exhibit 18.1: Managing Labor Costs Labor Costs Labor Costs Employment Average cash compensation Average benefit cost + =x Core Contingent Base Pay Variable Pay

6. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-6 Exhibit 18.2: Core and Contingent Employees

7. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-7 Exhibit 18.3: Splintered Supplies: St. Luke’s Labor Cost Model

8. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-8 Control Salary Level: Top Down  Current year’s rise  Ability to pay  Competitive market  Turnover effects  Cost of living  Cost of Living  Changes in product and service markets  Changes in wages in labor markets

9. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-9 Exhibit 18.4: What Drives Level Rise? Current year’s rise Ability to pay Competitive market Turnover effects Cost of living Percentage increase in average pay in plan year

10. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-10 Employee’s cost of living Goods/service markets price changes Labor market wage changes Consumer Price Index Pay Surveys Personal Expense Budget Exhibit 18.5: Three Distinct but Related Concepts and Their Measures

11. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-11 Control Salary Level: 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 and revise forecasts and budgets with management  Conduct feedback with management  Monitor budgeted versus actual increases

12. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-12 1. Instruct managers in compensation policies and techniques 2. Distribute instructions and worksheets 3. Provide consultation to managers 4. Check data and compile reports 5. Analyze forecasts 6. Review and revise forecasts and budgets with management 7. Conduct feedback with management 8. Monitor budgeted versus actual increases Exhibit 18.6: Compensation Forecasting and Budgeting Cycle

13. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-13 Inherent Controls  Range maximums and minimums  Broad bands  Compa-ratios  Variable pay  Analyzing costs

14. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-14 Compa-ratios  Compa-ratio = salary/midpoint for range  Compa-ratio of 1.0, salary = midpoint  Below 1.0 – salary below midpoint  Above 1.0 – salary above midpoint  Can be used for average salaries in unit

15. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-15 Why Communicate Pay Information?  Devotion of considerable resources to designing a fair and equitable system intended to  Motivate effective performance  Encourage productivity  Misperception of pay system by employees  Openness about pay may  Engender goodwill  Affect perceptions of pay equity

16. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-16 Exhibit 18.10: The Compensation Communication Cycle Defining the Objectives Obtaining the Information Developing the Strategy Determining the Media Conducting the Sessions Evaluating the Program What are the goals? What is the current situation? What is the best overall approach? What “tools” are most appropriate? How should the sessions be implemented? Was the program successful?

17. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-17 Exhibit 18.11: Conducting Formal Communication Sessions for Various Audiences: 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

18. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-18 EXECUTIVESMANAGERSEMPLOYEES 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 Exhibit 18.11: Conducting Formal Communication Sessions for Various Audiences: Level of Detail and Emphasis Varies Depending on Audience

19. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-19 Pay: Change Agent in Restructuring  Pay often plays a singular role when organizations restructure  Strategic changes in business strategy mean the pay strategy must be realigned  Pay changes play two roles  Catalyst for change  Follower of change

20. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-20 Structuring the Compensation Function  Centralization versus decentralization  Flexibility within corporate-wide principles  Reengineering and outsourcing

21. McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 18-21 Summary Pay systems are tools, and like any tools, they need to be evaluated in terms of usefulness in achieving an organization’s objectives.