Compensation Exam 2

Why Conduct a Salary Survey

A survey is the systematic process of collecting and making judgments about the compensation paid by other employers Adjust pay level - How much to pay? - Movement of pay rates in the market Adjust pay mix - What forms are our competitors using? - Base, bonus, stock, benefits Adjust pay structure - Validate job evaluation results - Market pricing Analyze special situations - Targeted groups - Jobs where turnover is high Benchmark against competitors' labor costs

Performance is a function of 3 factors - Ability, Motivation, Environment (Doritos Model)

Ability: - Training - Selection - Recruitment Motivation: - Performance Management - Culture - Compensation Environment: - Org. Design - Org. Development - HR Planning External Obstacles can impact all three: - Unions - Economic Conditions - Public Policy & Legislation

Team/Group Incentive Plans: Advantages and Disadvantages

Advantages: - Positive impact on org & individual performance (5-10% per year) - Easier to develop performance measure than for individual plans - Signals that cooperation is a desired behavior - Most employees enthusiastic about teamwork - Can increase employee participation in decision making process Disadvantages: - Employees can find it difficult to see how their individual performance affects payouts (lessened line-of-sight) - Can increase turnover of top performers who feel they must share will lesser contributors - Increased compensation risk due to lower income stability. Applicants may look for orgs where base pay is larger.

Advantages and Disadvantages of Individualized Incentive Plans

Advantages: - raises productivity, lowers production costs, increases worker earnings - less direct supervision is needed to get a reasonable output - Can enable labor costs to be more accurately estimated, which helps costing and budgeting control. Disadvantages: - Can cause conflict b/w employees seeking to max output and managers concerned about quality - Employees may push back against new technology - Employees less willing to suggest process changes (Kaizen) - Increased complaints about equipment - More mistrust b/w workers & management

Pay-for-Performance Plan: Individual Incentive Plans (Individual/short-term)

All or a portion of an individual's pay is tied to employee performance - Pay for some objective, pre-established level or standard of performance Vary based on: - Method of rate determination (how the standard is set) - Relationship between production level and wages (how wages are tied to output)

What happens to pay mix if stock price decreases

As stock price decreases, the value of stock options in pay mix decreases and employees may become less motivated

Motivation Theories

Content-focused theories - identify what is important to employees - Maslow's Need Theory - Alderfer's ERG theory - Herzberg's Two-factor theory Process theories - emphasize the nature of the exchange - Expectancy Theory - Equity Theory - Agency theory Reinforcement theories - focus on desired behaviors - Goal-setting - Reinforcement Theory

Relevant Labor Market

Defined by: - Occupation (jobs) - Geography -- Gets more complicated when considering outsourcing/offshoring - Competitors

Pay-for-Performance Obstacles

Difficulties in specifying and measuring job performance Problems in identifying valued rewards Difficulties in linking rewards to job performance

Pay-for-Performance Plan: Lump-Sum (Individual/short-term)

Do not get added in to base pay - essentially freezes base pay Less expensive than merit pay in the long run Viewed as less of an entitlement than merit pay

Pay-for-Performance Plan: Gain-Sharing (Team/Group)

Employees earn bonuses tied to unit-wide performance as measured by a predetermined, gainsharing formula Employees share in the gains from cost savings over which they have control - Typically lower labor costs or hours - Could be reduced scrap or reduced utility costs

Pay-for-Performance Plan: Profit-Sharing Plans (Team/Group)

Employees receive annual bonus or shares in company based upon company-wide performance in meeting predetermined index of profitability - Paid in cash or Deferred into a retirement plan However, employees may not feel their jobs directly impact profits

Process of Conducting a Salary Survey - Select Relevant Market Competitors

Employers who compete for the same occupation or skills, for employees in same geographic area, with the same products/services

Pay-for-Performance Plan: Broad-based Option (long-term)

Focus on performance beyond a 1-yr time line Company gives shares of stock over a designated time period to reinforce performance or inspire commitment and retention

Pay-for-Performance Plan: Stock Options (long-term)

Focus on performance beyond a 1-yr time line Give employees the option to buy shares later at the price they are now. - E.g., buy shares in company two years from now at today's price. Little evidence that stock ownership by management leads to better corporate performance

Pay-for-Performance Plan: Employee Stock Ownership (ESOPs) (long-term)

Focus on performance beyond a 1-yr time line can buy ownership/shares in the company for a discounted price Foster employee willingness to participate in the decision-making process Have little impact on productivity or profit

Does Compensation Motivate Behavior to join firms?

Generally, Linking pay to behaviors of employees results in better individual and organizational performance (for overall does comp motivate behaviors) YES (to joining firms) Level of pay and pay system characteristics are seen as more objective (Recall signaling) Job candidates look for organizations with reward systems that fit their personalities Materialistic - concerned about pay level Low self-esteem & Risk averse - want little pay for performance Risk takers - more pay for performance Individualists - pay based on individual not group performance Individual pay for performance systems - high performers stay. Lower performers & those with less confidence will likely move to an org with team based pay structure

Develop Pay Grades

Grades enhance an organization's ability to move people among jobs with no change in pay Each grade will have its own pay range All the jobs within a single grade will have the same pay range Grades group JE data on horizontal axis: - All jobs considered substantially equal for pay purposes are placed in same grade - Each pay grade has its own pay range and all jobs in a single grade have same pay range - Enhances ability to move people among jobs within a grade with no change in pay How many pay grades? - Based on number of jobs - Organization hierarchy - Reporting relationships

Team/Group Incentive Plans

Group incentive plans focus on an established standard against which team performance is compared Historically, financial measures have been the most widely used performance indicator Balanced Scorecard focuses on financial results, process innovations, customer service, and innovation - Forces discussions about priorities among different measures Issues/Problems: - Many varieties of teams — no one best way - "Level problem" — broad vs. small - Complexity of plan - Control of performance by team - Communication of plans - Free rider problem = individual benefits from the actions and efforts of another without paying or sharing the costs - Individual plans can potentially deliver higher productivity

Range Overlap

High degree of overlap and low midpoint differentials vs. small ranges with less overlap Size of differentials between grades should support career movement - E.g., A managerial job is usually one grade higher than the jobs it supervises (or 15% differential as a guideline) Overlap ought to be large enough to induce employees to seek promotion into a higher grade

Broadbanding

Involves collapsing salary grades into a few broad bands, each with a sizable range - One minimum and one maximum - Range midpoint often not used Purposes - Provide flexibility to define job responsibilities more broadly - Foster cross-functional growth and development -Ease mergers and acquisitions But chaos and favoritism can result from this flexibility Expand and shove all pay grades into one. Increases flexibility and can help create career paths for employees

Market Pricing

It is a business strategy (More than "follow the leader") Assumes that little value is added through internal alignment Unique or difficult-to-imitate aspects of the organization's pay structure are deemphasized Fairness is presumed to be reflected by market rates, but market rates are not always fair

Pay-for-Performance Plan: Merit (Individual/short-term)

Links increases in base pay (merit increases) to ratings on a subjective performance evaluation Can become expensive To manage merit pay: - Improve accuracy of performance ratings - Allocate enough money to truly reward performance - Make sure size of merit increase is distinguishable across performance levels (needs to be large enough to motivate workers)

Does Compensation Motivate Behavior to develop skills?

MAYBE/IT DEPENDS Evidence is unclear - May not increase productivity - More employees request training Skill-based pay may improve quality focus

Pay Increase Guidelines with Low Motivational Impact/Value

Merit, seniority, general increase, & cost of living adjustments could all be an additional percentage on your base pay Provide equal increases to all employees regardless of performance - General increase (e.g., union contract) - Cost-of-living or across-the-board adjustments Pay increases based on a preset progression pattern (steps) based on seniority

Establish Range Midpoints, Minimums, and Maximums

Midpoints correspond to competitive pay policy - Point where pay-policy line crosses center of each grade - Often represents base pay for a seasoned employee Typical range spread: - Top-level management positions - 30 to 60% above and below midpoint - Entry to midlevel professional and managerial positions - 15 to 30% above and below midpoint - Office and production positions - 5 to 15% above and below midpoint

Process of Conducting a Salary Survey - Collect Information

Nature of organization - Size, structure, etc. - Financial data and reporting relationships - Turnover and revenues - Labor costs - Competitive intelligence Total compensation system -Base pay, total cash, total compensation -- Compare most across base pay. Useful to get the other 2 information to compare across employers. There can be industry differences AND employer differences. --- If we focus only on base pay, we can be unintentionally below the market and not pay enough. Need to consider all three. --- Don't tie base pay to total compensation & total cash accidentally because they you may unintentionally lead the market Specific pay data on incumbents in jobs under study

Pay Policy Alternative - Lag

Pay less than market Lower labor costs, but problems in attracting potential employees May use in combination with other returns from work Lag pay-level policy coupled with the promise of higher future returns: - May increase employee commitment - Foster teamwork - May possibly increase productivity

Pay Policy Alternative - Lead

Pay more than market Advantages: - May offset less attractive features of work - Maximizes the ability to attract and retain quality employees and minimizes dissatisfaction with pay - Reduced vacancy rates and training time - Better-quality employees - Reduced turnover and absenteeism Disadvantages: - If used only to hire new employees, may lead to dissatisfaction of current employees - May mask negative job attributes that lead to high turnover later on

Construct a Market Line

Post interpreting results, continue to update the survey data - Aging or trending refers to the process of updating pay data A market pay line links a company's benchmark jobs on horizontal axis (internal structure) with market rates paid by competitors (market survey) on vertical axis - Freehand approach - Regression analysis (Pay = a + b * (JE pts))

Organization Factors

Product market conditions & Org factors determine what an organization can afford to pay Industry & Technology - Labor-intensive industries pay less than technology-intensive industries and professional services - New technology in an industry influences pay levels Employer size -Large organizations pay more than smaller ones Organization strategy - Higher pay levels may be well-suited to particular strategies

Product Market Factors

Product market conditions & Org factors determine what an organization can afford to pay Product demand - Puts a lid on the maximum pay level an employer can set, because additional costs may have to be passed on to the customer Degree of competition - Employers in highly competitive markets are less able to raise prices without loss of revenue. - Single sellers are able to set whatever price they choose

Develop Pay Ranges

Ranges group salary data on vertical axis: - Establish upper and lower pay limits for all jobs in each grade What size should the range be? - Based on judgment about how ranges support career paths, promotions, etc. - Some compensation managers use the actual survey rates, 75th and 25th percentiles, as maximums and minimums

Pay-for-Performance Plan: Earnings-at-Risk Plans (Team/Group)

Success-sharing plan - Employee base pay is constant - Variable pay increases in successful years - No reduction in base pay but no variable pay in poorly-performing years Risk-sharing plan - Employee base pay varies - Base pay reduced in poor performance years - Rewards typically higher than success-sharing plans in high-performance years - Shifts part of risk of doing business from company to employee

Demand Side Theories

The demand side focuses on employers - How many employees they seek - What they are able and willing to pay those employees - Why would an employer pay more than the market wage Compensating differentials - An employer must offer higher wages to compensate for negative features of jobs Efficiency wage - High wages may increase efficiency and actually lower labor costs -- Can lead to more qualified applicants, lower turnover, greater effort, less shirking, reduced supervision Signaling - An employer designs pay levels and mix as part of a strategy to signal to potential and current employees the kinds of behaviors it expects -- E.g., Low pay with high bonuses to attract risk-takers Job competition - Workers compete based on qualifications, not on how low a wage they will accept

Supply Side Theories

The supply side looks at employees - Their qualifications and the pay they are willing to accept in exchange for their services - This assumes that as pay increases, more people are willing to take a job Reservation wage - Job seekers have a reservation wage level below which they will not accept a job offer, regardless of the other job attributes -- May also exist for other pay forms (E.g., benefits) Human capital - Premise that higher earnings flow to those who improve their potential productivity by investing in themselves -- Done by acquiring additional education, training, and experience Signaling also works for the supply side - Suppliers of labor signal to potential employers -- E.g., Training, grades, work experience signal they are likely to be better performers

Pay-for-Performance Plan: Individual Spot Awards (Individual/short-term)

Usually awarded for exceptional performance - Often on special projects - Recognition is key Viewed as highly or moderately effective

Pay Forms/Mix

Various types of payments, or pay mix, that make up total compensation (made up of direct & indirect pay) Performance Driven - Higher options pay, less base pay, benefits & bonuses close to amount of options pay Market Match - High base pay, more benefits than options pay & bonuses Work/Life Balance - Less base pay for increased benefits. Less options pay & bonuses Security (Commitment) - Only base pay & benefits. High base pay.

Process of Conducting a Salary Survey - Interpret the Results

Verify Data - Check accuracy of job matches (if not exact match use survey leveling) - Check for anomalies (one dominant org., outliers, do all employers show similar patterns) Statistical Analysis - Frequency distribution = unusual shapes -- Problems with job matches -- Widely dispersed pay rates -- Employers with widely divergent pay policies - Measures of central tendency = mean, median, mode, & weighted mean - Measures of variation = SD, quartiles/percentages

Pay Policy Alternative - Match/Meet/Pay with Competition

Wage costs are approximately equal to those of its product competitors Most common May be used to discourage unionization May not provide a competitive advantage but avoids placing an employer at a disadvantage in pricing products

Process of Conducting a Salary Survey - Design the Survey

Who should be involved? - Compensation manager - Consultants How many employers? - Publicly available data - Bureau of Labor Statistics - "Word-of-mouse" - e.g., www.salary.com -- Internet data can be suspect and unreliable because the internet sux Which job to include? - Benchmark jobs = look at all benchmark jobs in the pay grade - Low-high approach = setup pay structure by getting pay for lowest job in a grade and the highest job in a grade and just focusing on those two (ignore the jobs in-between)

Does Compensation Motivate Behavior to perform better?

YES A well-designed plan linking pay to behaviors of employees generally results in better individual and organizational performance - If the incentive depends on individual performance, applicants find the company more attractive - Team-based incentives are less attractive Failure of PFP can occur because the incentive works too well ("follies")

Does Compensation Motivate Behavior to stay or leave?

YES Turnover is higher for poor performers when pay is based on individual performance Group incentive plans may lead to turnover of better performers Too little pay triggers feelings of unfair treatment which results in turnover The way an organization pays can impact turnover (pay-at-risk, group vs. individual) Other rewards also influence the decision to stay in a company (E.g., Variety, challenge, development, status, social, etc.)

Pay Policy Line

both pay policy line & pay ranges are aspects of pay structure. The pay level that a company sets its pay at compared to the market pay - In more complicated terms, "Specify a percent above or below market line an employer intends to match" -- It can be above or below the market line (lag or lead)

What is Motivation

motivation involves three elements: 1. Determining what's important to a person, and 2. Offering it in exchange for 3. A desired behavior Employees generally prefer pay systems influenced by: - Individual performance - Changes in cost of living - Seniority - Market pay rate

Pay Level

refers to the average of the array of rates paid by an employer = Σ (base + bonuses + benefits + options) / # employees Other things being equal, the higher the pay level, the higher the labor costs: - LC = average pay lv x # of employees Higher the pay level relative to what competitors pay, the greater the relative costs to provide similar products or services To attract & retain workers: - A single company may set a different pay level for different job families - Different employers set different pay levels - Different companies may offer the same total compensation but different mixes

External Competitiveness

the pay offered by a company relative to the pay offered by its direct competitors in the market Setting a pay level that is above, below, or equal to that of competitors Determining the mix of pay forms relative to those of competitors - Pay-mixes (base, benefits, bonus, options)

Pay Policy Alternative - Employer of Choice & Shared Choice

"Employer of choice" - The employer competes based on its overall reputation ("brand" or "image") as a place to work Shared choice begins with traditional options of lead, meet, or lag - Then offer employees choices (within limits) in the pay mix -- Employees will make "wrong" choices -- Offering too many choices may lead to confusion, mistakes, and dissatisfaction These newer policies emphasize flexibility among different employee groups, occupational families, business units