Compensation-2

12*?. Pay for performance is much more than merit pay. Explain the key factors that go into determining how much pay for performance there is (how strong it is) Provide a few quantitative examples (e.g., from slides).

**? Distribution of performance rating, avg merit increase, short term incentives . How strong? Differentiation?

5. How does Lincoln Electric balance individual performance and team/organizational performance goals in paying for performance?

Pay per piece but also consider quality in product. Performance rating included: quality, collaboration, output.Incentives: Stock ownership, share company profitability

15. What are the similarities and differences between the following pay plans: merit pay, merit bonuses, profit sharing, gainsharing, stock options, stock grants?

STOCK GRANTS: A company gives employees shares of stock over a designated time period.

13. What are the fundamental ideas of agency theory? What trade-offs are central? ***What are the two generic types of contracts/performance measures used?*** When would you use one versus the other? What does agency theory say about the role of risk in compensation design?

A theory of motivation that depicts exchange relationships in terms of two parties: agents and principals. According to this theory, both sides of the exchange will seek the most favorable exchange possible and will act opportunistically if given a chance. As applied to executive compensation, agency theory would place part of the executive's pay at risk to motivate the executive (agent) to act in the best interests of the shareholders (principals) rather than in the executive's own self-interests.

4. How does Lincoln Electric avoid layoffs?

Able. to cut labor costs due to their flexible compensation.

3. What was the effect of the incentive plan in the Saari and Latham study of beaver trapping?

CONTINUOUS<VARIABLE Examined the performance of 12 mountain beaver trappers when a monetary incentive was administered on continuous and VR-4 schedules of reinforcement. On alternate weeks (over a 12-wk period), Ss received $1 for every beaver caught. On the VR-4 schedule, each S received $4 contingent on presenting the beaver to the supervisor and correctly predicting an even or odd number on a dice roll. Consistent with operant theory, the performance of Ss was higher on the VR-4 reinforcement schedule. Ss were interviewed to determine what they viewed as differentiating the 2 schedules of reinforcement. Based on the interviews, a questionnaire was developed and administered. Results indicate that the VR-4 schedule was perceived as including job enrichment variables such as recognition, task variety, task accomplishment, and feedback, whereas this was less likely to be the case when the incentive was paid on a continuous schedule.

8. Describe the logic of a merit increase grid, what the key policy decisions are in designing a grid, and what the potential consequences of such decisions are.

Considers Employee salary/midpoint of their salary range. + Performance rating. Sometimes quartiles are used instead of compa-ratio ranges for the same purpose---merit % increases based on comp/ratio or midpoint so pay stays within range. Example: employee at 110% ratio may get lower merit increase percentage since they are already above market . ( Exhibit 10.4. Consequences: Important to consider differentiation between performance ratings and other incentives, ie short term incentives

17. What rules are used to determine whether an employee is exempt or non-exempt?

Exempt: Salaried (min $684 per weeK) Non-Exempt: hourly, due overtime

14. What are the fundamental ideas of expectancy theory? How does expectancy theory help us understand how to obtain higher employee performance?

Expectancy theory argues that people behave as if they cognitively evaluate what behaviors are possible (e.g., the probability that they can complete the task) in relation to the value of rewards offered in exchange. According to this theory, we choose behaviors that yield the most satisfactory exchange.

30. What are the main laws in the area of equal employment opportunity and how do they differ (e.g., in terms of coverage)? How are these laws enforced?

Federal, State, and Local Enforcement Agencies: EEOC by complaints, federal agency. Federal Contractors agency by audits -Equal Pay Act: equal work, equal pay. Covers virtually all employers. - Title VII of Civil Rights 1964: Prohibits discrimination based on sex,class, religion, or national origin -Executive Order 11246: Prohibits discrimination by Federal Contractors -Age Discrimination in Employment Act: 40+ aged discrimination -Pregnancy Discrimination: -Americans w/Disability: Requires "essential elements" of a job to be called out, reasonable accommodation must be provided -Civil Rights Act of 1991: Increases burden of proof on employers to rebut discrimination claims - FMLA: Employer to provide up to 12 unpaid weeks off for family-medical emergencies

9. What is a green circle rate? A red circle rate? How should these situations be addressed?

Green: underpaid, Red: overpaid

16. What are the provisions of the Fair Labor Standards Act (FLSA)?

Hours of work (overtime), classification (exempt/non-exempt), min. wage, Child Labor

2. What are the two fundamental mechanisms by which compensation influences employee performance and firm performance? (Think again of Safelite.)

Incentive Effect, Sorting Effect

1. For the Safelite Auto Glass case: (a) What are the key features of the new pay plan versus the old plan, (b) how well did the new pay plan work, and (c) how/why did it work? (Provide some quantitative details.)

a.) 1. Change from hourly to pay per piece, reducing base salary by 30%. Base pay cut was not approved. b.) Some turnover. Successful. Productivity increased by 40% c.) · · Incentive Effect: employees before and after incentive implemented. Accounted for half of productivity, workers adjustment · Sorting effect: new hires come in who are better fit · Workers 10% increase in pay · Monitor/supervision or incentive to self-manage- Savings ( fewer supervisors)

19. What has been the trend in trade union membership? What percentage of U.S. workers are members of unions? Does it differ between public and private sector?

declining membership. 11% membership, Public Sector higher with 35%, Private only 6%

10. What should Citibank have done differently (to avoid the dilemma it found itself in)?

incorporated the employee´s feedback in designing the plan. Citibank was soley using financial metrics and later introduced non-financial metrics which rated successful branches lower. the non-financial metrics failed to give a valid picture. SURVEY: invalid, improve measure and feedback from people charged in achieving, get ownership no baseline was provided, some ratings were subjective. pilot/test needed

11. In the Kerr reading, "The Best Laid Incentive Plans" describing the work of chief financial officer and chief administrative officer (Hiram) at Rainbarrell Products, what went wrong with Hiram's work in reducing costs, setting goals, and using incentives?

reduce labor costs: poor performers made high performs unhappy goals: announcing targets without resources customer service: identified those who spent too much with customers put in wall of share Incentives: employees just dont open email since its being tracked, tracked only once its open the response rate, avoid difficult customers define: incentive plans, diverse definitions of items "being shipped"

24. How is SAS Institute different from other software/tech companies in the way it manages its employees?

reduced work week- 35 hours, onsite medical, etc

20. How does compensation for union members and non-union members differ?

union wages higher, especially in service industry. Seniority important w/unions

7. What are three ways that Merck strengthened the link/connection between pay and performance?

· Better communication of rating factor · · Forced distribution: have more people at the top category (5 rating) 7% from 1, majority ta 3 rating (70%) from 37, · Increase more frequently to high performers · "Modified Forced Distribution"- grid, when, separate bonus plan for business unit (temporary)

18. What rules are used to determine whether a worker is an employee or an independent contractor?

• Behavioral Control ( scheduling, how they work) • Financial Control ( no benefits, taxes)scheduling • Type of Relationship (contractor has autonomy)