Compensation Ch 7-11

Incentive systems

- Bedeaux plan - Taylor plan - Merrick plan _ Halsey 50-50 Method - Rowan plan - Gantt plan

EEO and performance appraisal standards

1. give specific written instructions on how to complete the appraisal. 2. incorporate clear criteria for evaluating performance. 3. adequately developed job descriptions 4. require supervisors to provide feedback about appraisal results to the employees affected. 5. incorporate a review of any performance rating by a higher-level supervisor. 6. consistent treatment across raters, regardless of race, color, religion, sex, or national origin. p. 407-408

2 steps in banding

1. set the number of bands; 2. price the bands: reference market rates p. 297

guidelines for market pay line

1. verify data (accuracy of match, anomolies, and outliers) 2. use statistical analysis p. 285 3. no one "right" way

Rucker plan

A gain-sharing plan similar to the Scanlon plan but more complex p. 369

Maslow's Hierarchy of Needs Theory

A motivation theory that suggests that human needs fall into a hierarchy and that as each need is met, people become motivated to meet the next-highest need in the pyramid. 1. Base pay must be set high enough to provide individuals with the economic means to meet their basic living needs. 2. flexible compensation works well because it narrows down specific employee preferences and identifies what is important to people

First impression error

Developing a negative or positive opinion of an employee early in the review period and allowing that to negatively or positively influence all later perceptions of performance. p. 402

Risk Sharing Plan

Generic category of pay add-on (variable pay) that differs from success sharing in that employee not only shares in the successes but also is penalized during poor performance years. p.327

Clone error

Giving better ratings to individuals who are like the rater in behavior and/or personality. p. 402

Strategy 1 - Understanding and Measuring Job Performance

Improving Performance Formats - Includes Ranking and Rating - e.g. Standard Rating Scale (1st, 2nd, 3rd) p. 391

Satisfiers (Motivators)

Part of the 2 factor theory. (e.g. challenging work, recognition, responsibility) that give positive satisfaction, arising from intrinsic conditions of the job itself, such as recognition, achievement, or personal growth.

pay for performance

Pay that varies with some measure of individual or organizational performance * move away from entitlement * variable pay seems to have a positive impact on performance * Merit (review) links increases in base pay with performance evaluation. It is expensive. Needs to be managed better. * Merit Bonuses (lump sum) - end of year; less expensive other time * Spot Awards * Individual Incentive Plans - promise of pay for some objective, preestablished level of performance Ch 10 ppt

Expectancy theory

People choose the behavior that leads to the greatest reward. Line of site is critical - employees must believe they can influence performance targets. p. 321

Reinforcement theory

Rewards reinforce (i.e. motivate and sustain) performance; rewards must follow directly after behaviors to be reinforcing; behaviors that are not rewarded will be discontinued. Performance-based payments must follow closely behind performance. p. 322

hygiene factors

characteristics of the workplace, such as company policies, working conditions, pay, and supervision, that can make people dissatisfied or satisfied

broad banding

consolidates as many as four or five traditional grades into a single band with one minimum and one maximum. p. 295 • deals with large sets of jobs in very few groups; • have more flexibility and freedoms compared with pay ranges; • meant for global organizations that may need regional changes and grants managers the freedoms they need for faster decision-making; • act as guidelines; • may hinder internal alignment and the sense of fairness; • may give too much flexibility to managers and may lead to favoritism

Bedeaux plan

division of task into simple actions associated with time; similar to standard hour plan ch 10 ppt

Signaling theory

employers deliberately design pay levels and pay mix as part of a strategy that signals to both prospective and current employees the kinds of behaviors that are sought. p. 229 e.g. an employer that combines lower base pay with high bonuses may be signaling that it wants employees who are risk takers.

Signaling Theory

employers deliberately design pay levels and pay mix as part of a strategy; signal to prospective and current employees

Efficiency Wage theory

high wages MAY increase efficiency and lower labor costs if they meet certain criteria such as: 1. attract higher-quality applicants 2. lower turnover 3. Increase worker effort 4. Reduce shirking 5. Reduce the need to monitor employees p. 227-228 e.g. the underlying assumption is that pay level determines effort - higher wages attract more qualified applicants, but also attract more unqualified applicants as well.

standard deviation (variation)

how tightly all the rates are clustered around the mean. A small SD means they are tightly bunched at center; a large SD means rates are more spread out p. 285

weighted mean (central tendency)

if have only company-wide measures, the rate for each company is multiplied by the number of employees in that company. Total of all rates is divided by total number of employees. Gives equal weight to each individual's wage.

Reservation wage theory

job seekers have a wage level below which they will not accept a job offer, no matter how attractive the other job attributes. e.g. I won't accept a minimum wage position after getting a college degree. p. 230

central tendency

reduces a large amount of data into a single number

Materialistic (person characteristic)

relatively more concerned about pay level (reward characteristic) p. 328 box

pay range maximum and minimum

sets the lid on what the employer is willing to pay for that work; the minimum sets the floor p. 293

Halsey 50-50 method

shared split between worker and employer of any savings in direct cost Ch 10 ppt

Gantt plan

standard time for a task is purposely set at a level requiring high effort to complete Ch 10 ppt

mean (central tendency)

sum all rates and divide that number of rates. However, if have only company data, will not accurately reflect actual labor market conditions p.285

variation

the distribution of rates around a measure of central tendency p. 285

Merrick plan

three piecework rates (high, medium, low) Ch 10 ppt

Taylor plan

two piecework rates (exceeds standard and below standard) ch 10 ppt

across-the board increase

wage increase granted to all employees, regardless of performance. Typically an add-on to base pay in subsequent years p. 326

Low self-esteem (person characteristic)

want large, decentralized organization with little pay for performance (reward characteristic) p. 328 box

risk-averse (person characteristic)

want less performance-based pay (reward characteristic) p. 328 box

risk-takers (person characteristic)

want more pay based on performance (reward characteristic) p. 328 box

individualists (person characteristic)

want pay plans based on individual performance, not group performance - "I control my destiny" p. 328 box

profit sharing

* pre-determined index of profitability * increased productivity higher in plans where payouts were that year * better for smaller companies The trend is to combine the best of gain-sharing and profit-sharing plans p.327

statistical measures to analyze survey data

mode; mean; median; weighted mean; standard deviation; quartiles and percentiles Exhibit 8.14 p. 285

gain sharing

* group oriented * scanlon plan or rucker plan * 2 components must be present - 1. productivity norm; 2. effective worker committees * tend to cause organizations to evolve into learning organizations * Improshare - easier to administer and communicate; standard is developed and any savings from increased output is shared by the firm and the workers. p.327 & 359

Earnings at Risk

- An incentive plan in which employees' base wages are set below a specified level (e.g., 80% of the market wage) and incentive earnings are used to raise wages above the base. - Any plan could be at at-risk plan - Incentive plans fall into one of two categories: 1. success sharing 2. risk sharing (shifts part of risk to employees) - e.g. insurance salesperson (Aflac) p.371-2

Common errors in the appraisal process

- halo error - horn error - first impression error - recency error - leniency error - severity error - central tendency error - clone error - spillover error p. 402

Labor Demand Theories

1. Efficiency Wage 2. Signaling 3. Reservation Wage 4. Human Capital

4 labor market assumptions

1. Employers always seek to maximize profits. 2. People are homogeneous and therefore interchangeable; a business school graduate is a business school graduate is a business school graduate. 3. The pay rates reflect all costs associated with employment (e.g., base wage, bonuses, holidays, benefits, even training). 4. The markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate. p. 221 at bottom of page

provisions of pay ranges

1. Recognize individual performance differences with pay. 2. Meet employees' expectations that their pay will increase over time, even in the same job. 3. Encourage employees to remain with the organization. p. 292

Spillover error

Continuing to downgrade an employee for performance errors in prior rating periods. p. 402

Strategy 4 - Understanding and Measuring Job Performance

Training raters to rate more accurately (3 categories) 1. rater-error training (goal is to reduce psychometric errors such as leniency, severity, and halo effect) 2. performance-dimension training (quality of work) 3. performance-standard training (what constitutes good, average, and bad) p. 404

low-high approach

Wages of lowest- and highest-paid benchmark jobs used as anchors for skill-based structures. e.g. if the entry market rate for operator A is $12 per hour and the rate for a team leader is $42 per hour, then the rate for operator B can be somewhere between $12 and $42 per hour. p. 275

Herzberg's Two-Factor Theory

proposed that work satisfaction and dissatisfaction arise from two different factors - work satisfaction from so-called motivating factors and work dissatisfaction from so-called hygiene factors. 1. flexible compensation works well because it narrows down specific employee preferences and Identifies what is important to people

cost-of-living increase

same as across-the-board increase, except magnitude based on change in cost of living p. 326

pay range

this exists whenever two or more rates are paid to employees in the same job • deals with sets of jobs in many groups; • meant for stable organization design; • act as controls on pay; • gives structure and fairness between job positions; • can hinder in external competitiveness; • may be a poor fit if a company wished to expand globally as it would limit the ability of managers to provide appropriate compensation in other nations or regions p. 292

Severity error

The opposite of leniency error. Rating individuals consistently lower than is deserved. p. 402

Halo error

An appraiser giving favorable ratings to all job duties based on impressive performance in just one job function. For example, a rater who hates tardiness rates a prompt subordinate high across all performance dimensions exclusively because of this one characteristic. p. 402

Long-term incentive

An incentive plan that rewards employees, typically executives, for organization performance over a period of longer than one year. - not necessarily linked to better performance - likely to increase internal growth - can include Employee Stock Ownership Plans (ESOP) and Performance Plans since associated with long-term results p. 373-375

Central tendency error

Avoiding extremes in ratings across employees. p. 402

Leniency error

Consistently rating someone higher than is deserved. p. 402

Strategy 2 - Understanding and Measuring Job Performance

Select the Right Raters - e.g. 360 degree feedback (this method assess employee performance from five points of view: supervisor, peer, self, customer, and subordinate) p.398

EEO (Equal Employment Opportunity)

The equal right of all citizens to the opportunity to obtain employment regardless of their gender, age, race, country of origin, religion, or disabilities. - document decisions - tie decisions to performance

base pay

The guaranteed portion of an employee's wage package. p.326

Strategy 3 - Understanding and Measuring Job Performance

Understand how raters process information - e.g. storage and recall errors - traits such as "lazy" p. 403

Scanlon plan

a gainsharing plan designed to: * lower labor costs * incentives are derived as a ratio between labor costs and sales value of production (SVOP) * e.g. company has $50,000 savings at end of year with a percentage of the savings given to employees as bonuses p.368

success-sharing plans

a generic category of pay add-on which is tied to some measure of group performance, not individual performance. Not added into base pay. Distinguished from risk-sharing palsn because employees share in any success but are not penalized for performance below standard. p. 326

Goal setting theory

a theory that says that specific and difficult goals, with feedback, lead to higher performance. Performance-based pay must be contingent upon achievement of important performance goals. The amount of the incentive reward should match the goal difficulty p. 322

individual incentive

a variable pay that depends on the OBJECTIVE performance of the individual employee p. 326

merit bonus (aka lump sum bonus)

award granted for individual performance, but does not add into base pay because distributed once. p.326

merit pay

awards pay increases in proportion to performance contributions. Adds on to base pay in subsequent years. p. 326

quartiles and percentiles (variation)

order all data points from lowest to highest, then convert to percentages. Common in salary survey; frequently used to set pay ranges or zones. p. 285

Equity theory

Employees are motivated when perceived outputs (e.g. pay) are equal to perceived inputs (e.g. effort, work, behaviors). The pay-performance link is critical: increases in performance must be match by commensurate increases in pay. p. 321

Horn error

The opposite of a halo error. Downgrading an employee across all performance dimensions exclusively because of poor performance on one dimension. p. 402

Recency error

The opposite of first impression error. Allowing performance, either good or bad, at the end of the review period to play too large a role in determining an employee's rating for the entire period. p. 402

Human Capital theory

higher earnings flow to those who improve their potential productivity by investing in themselves (through additional education, training, and experience). The theory assumes people are paid at the value of the marginal product. e.g. job that require long and expensive training (physicians) should receive higher pay than jobs that require less investment (clerical work). p. 230

Rowan plan

like Halsey but worker's bonus increases as the time required to complete the task decreases Ch 10 ppt

market pay line

links benchmark jobs on the horizontal axis with market rates on the vertical axis. It summarizes the distribution of going rates paid by competitors in the market.. Can be drawn freehand or by using regression analysis p. 278-285

mode (central tendency)

most commonly occurring rate p. 285

median (central tendency)

order all points from highest to lowest; the one in the middle is the median p. 285

Agency theory

pay directs and motivates employee performance. Employees prefer static wages (e.g. a salary) to performance-based pay p. 322