Ch. 4/5 Components of Comp. Strat/Performance Pay (BUS320)

Define a goal sharing program?

o A group performance pay plan in which a work group receives a bonus when it gets predetermined performance goals...all or nothing approach

Define a gain sharing plan?

o A group performance pay plan that shares the cost savings or productivity gains generate by a work group with member of that group

Pros of indirect pay:

o Attract employees in a competitive labour market o To remove a possible incentive for unionizing o Favourable tax treatment o Economies of scale in purchasing the benefits o Employee peace of mind... less distracted o Signal that the employers care for its employees o Support employee retention and morale

Typical percentages of compensation mix:

o Base pay 75-80 % o Performance pay 5-10 % o Indirect pay approx. 15 % o Varies widely

Define performance pay and forms it can take:

o Based on outcomes/performance o Not typically a dominant form of compensation Can take many forms: • Individual performance...piece rates, commission, merit pay, targeted incentives • Group • Performance- gain sharing plans, goal sharing plans, among others • Organizational performance, employee profits sharing plans. Stock plans, among others

Types of indirect pay:

o Benefits mandated by law..cpp, ei, workers compensation o Deferred income, pension plans o Health benefits...life insurance, medical enhancements, dental, disability o Pay for time not worked o Employee services...family counselling, psychological counselling o Miscellaneous, cars, purchase discount club membership

Pros of performance pay:

o Clearly indicates the desired behaviour and provides a motivational basis for pursing the behaviour o Can act as a substitute for management and control o Performance standards are clear and measurable...performance may involve overtime o For the employer, performance pay aligns with ability to pay o For the high performing employee, performance pay may lead to sustainability better overall compensation

Tools for compensation strategy:

o Compensation components...lead to compensation o What role, of any should each of the 3 compensation components (base, performance, indirect) play in the compensation mix? o How should each component be structured? o What total level of compensation should provide? o A lot of choice

Cons of indirect pay:

o Cost can be high o A fixed cost...not tied to affordability if condition worsen o Difficult to withdraw benefits o A challenged to provide values for money in benefits...some benefits are valued, some not so much o Benefits administration and communication time consuming and costly o Benefits not directly tied to task behaviour...not tied to performance o May encourage poor performance employee to stay with the org.

Cons of performance pay:

o Employee typically prefer pay predictability instead of performance pay o They'll accept performance pay if it is an add on to base pay...total compensation package may become expensive o Employees my become focused on a narrow set of behaviour that may have negative consequences o Complex systems with a high failure rate

Define indirect pay:

o Employer provided rewards that serve employee needs but are not part of base or performance pay o Some use it as a means of competitive advantage "employer of choice" o Generally there has been growth in benefits o Employer pays or shared cost with employee

Cons of gain sharing plans:

o Extra cost, time and effort to establish and run the program o Needs a degree of stability to assesses the degree of productivity gain o May lead to conflict between management and workers o Free riding employees getting rewards may lead to resentment o Gain sharing plans often not successful...need the right situation...high involvement organizations the best place for gain sharing

Pros of gain sharing plans:

o Gain sharing plans are self-funding o Generate productivity enhancing ideas o Create positive work norms, internalized worker commitment and less need for external management control

Pros of base pay:

o Not always possible to determine output based pay... o Employees my prefer base pay o Employee attention directed do multiple jobs behaviour...ex...customer service, learning new skills o Signals relative importance of jobs in the org. o Shows employer commitment which may results in employee commitment o Simple Encourages membership behavior

Cons of base pay:

o Not related to ability o Doesn't directly encourage task motivation/performance or citizenship behaviour o Those who do not perform are less likely to leave the organization

Define base pay:

o Pay that is base on the time worked...hourly, daily, weekly, monthly, yearly o Not directly related to amount produced/achieved o Most common form of compensation

Types of organizational performance pay:

o Profit sharing o Employee stock plans o Long term incentives

Money as a motivator

o Research suggests that money is not a prime motivator, although it is important o Intrinsic motivators have a more sustained motivational impact o Money has symbolic value in a social context in the workplace, especially when financial rewards are compared among employees o Non-cash recognition programs are being used to supplement cash recognition programs

Pros of goal sharing programs:

o Simple to develop and flexible in application o Only reward major productivity gains o May create positive group norms, enhance cooperation and reduce the need for management control

Cons of goal sharing program:

o Who sets the goal...may be arbitrary...who decides if the goal met? o Reasons for success or failure may have little to do with group effort o Frustration of just falling short of the goal may negatively impact motivation o Works best if there is a high level of management-worker trust and communication

Special purpose incentives:

• An incentive intended to motivate a specific type of employee behaviour • Examples: finding insects during vegetable processing, acts of kindness award, incentive for creativity/suggestions systems, incentive for attendance, benefits of focusing on desired behaviour, focus on desired behaviour is also a weakness of these incentives, as is the focus on extrinsic attempts to motivate the behaviour

Steps of job evaluation (base pay):

• Analyze job descriptions • Identify compensable factors, then avaluate each job on the degree to which these factors are present... a scoring method • Total factor scores for each job allow the creation of a hierarchy of jobs... internal equity • Pay systems are built around this hierarchy, after an assessment of external equity

Cons of pay for knowledge:

• Compensation cost likely to creep up...what are the costs and benefits of this? • If compensation "tops out", little incentive to learn new skills • May have no opportunity to apply new skills • Direct costs and opportunity costs of training are high • Complex to administer this system • Finding market comparators may be difficult • Unions may resist because not related to seniority • High discontinuance rate

Steps in developing a skills based system:

• Deciding which employees groups to include • Designing the skills blocks • Linking the skill bocks to pay • Providing learning opportunities • Certifying skill achievement • Competency based systems are even more challenging: definition of competencies, measurement of competencies and relation of competencies to job performance

Cons of commission:

• Employees generally prefer predictable income...my make it harder to attract good employees • Employee income levels likely to fall off economy weakens • Total wage bill may be higher than it needs to be • Employees likely to focus only on sales related task • May become overly aggressive with customers • Attractiveness of commissions may lead to intra-sales force rivalries/conflict • Sales staff are loyal to the company, just the commission

Pros of piece rates:

• Found to increase worker productivity • The incentive can be a substitute for management control • More productivity...more pay...linked to employers ability to pay • Everyone knows what level of performance is expected

Promotion as a reward points...

• Highly valued by employees...extrinsic and intrinsic rewards • Employer reliance on promotions to recognize performance may be mistake... • May not be enough promotional positions for deserving employees • KSA's for the next position may not match the employee's strengths • Focuses on the individual and not on the team or collaboration, cooperation • For those not getting a promotion, may lead to sense of inequity of leaving the organization • Sensible approach: the duel track career path

Choices in skill based pay systems:

• Individual performance pay • Group performance pay • Organization performance pay

Cons of job evaluation (base pay):

• Maintaining job descriptions is hard work. That, and the job rigidity they provide, may not be useful in a dynamic organization... high involvement • Job evaluation process may become adversarial • Job evaluation process appears scientific, but it contains considerable subjectivity • May impede employee creativity and skill development • Costly to maintain the job evaluation system

Cons of stock plans:

- Below market pricing may dilute the value of the stock generally. - Declining stock prices may impact employee morale/motivation. - Employees will be disappointed if they have no input to operations. - Stock ownership plans carry risk for employees. - Stock option plans may encourage short term thinking.... An alternative is to introduce long term incentives.

Cons of profit sharing plans:

- Costly for employer, so benefits need to exceed costs, and payments need to be meaningful. - Individual employees may not see the link between their efforts and organisational success...may in fact lead to free riding behaviour. - Unions may not like it.

Types of stock plans:

- Employee stock bonus plan.... Instead of cash, the employee receives company stock for achieving performance standards. - Employee stock purchase plan...employees given an opportunity to buy company at a reduced price. - Employee stock option plan.... Employees given an option to purchase company shares at a set price.... Will be exercised if the stock value exceeds the set price.

Pros of stock plans:

- Employees think like owners...membership and citizenship behaviour. - Employee involvement and sense of control. - Potential for large employee financial gains. - No requirement for employer to pay out cash. - May support high involvement management.

Pros of profit sharing plans:

- Works best if for all employees, not just top management. - May be focused on an annual distribution to employees, or deferred until retirement or a bit of both. - Can encourage organisational identification and citizenship...stronger level of motivation. - Supports high involvement management. - Payments are related to ability to pay. - Employees are likely to enjoy higher earnings...will attract better employees. - Fairly simple to set up.

Methods of establishing base pay:

Market pricing- Determining the average amount of pay other employers are offering for a given job Job evaluation- Systematically ranking all jobs in the organization according to their value to the organization Pay for knowledge- Pay determined by the value of the skills and competencies an employee has acquired... • Typically includes skill based, and competency based pay • Amounts to person based pay as opposed to job based pay

Where is merit pay applicable?

• Merit pay has importance purpose. Helps motivate performance; ,maintains equity of reward for contribution; for salary progression for high performers so they are not taken away by other organizations • But so many merit pay systems result in problems often because the work situation does not lend itself to individual merit pay • If not much variation in performance possible in routine jobs, merit pay may not make sense • If employee performance(as measured) is not controllable by the employee then it makes no sense to have individual merit pay • If team effort is desired then individual merit pay makes no sense • Similarly, if jobs change so fast that a consistent basis for measuring performance cannot be maintained; or the organization wont/cant put aside a meaningful amount of funds to reward performance, then other approaches should be considered

Types of merit pay:

• Merit raise...an increase in an employee's based pay in recognition of good job performance • Merit bonus...a onetime cash payment to recognize good performance that does not increase base pay

Pros of merit bonuses:

• More flexible because they are not permanent...have to be earned each year • Size of bonus can be changed depending on the financial condition of the business • Can serve as a solution to the pay range top out problem

Cons of merit bonuses:

• Need valid performance measures to properly determine merit bonus • Not suitable for work involving a high level of group collaboration/interdependence • Employee perception of bonus size may impact their sense of fairness and equity and may impact motivational levels.

Piece rate points:

• Not used often...need the right situation • Originally used in manufacturing sector to encourage more units of production....now used in some service businesses • Used to encourage individual productivity by linking output to reward • Complications are establishing the best time and motion based standard of performance and then the payment rate above the standard

Cons of market pricing:

• Obtaining reliable and valid market information is not easy • Finding "apples to apples" comparisons a challenge • Getting a definitive market price for a job may not be able to determine total compensation • The external market information does not provide guidance on internal equity • Giving up some compensation policy control... other firms, perhaps competitors, are overly influential in setting pay rates • May perpetuate pay equity problems

Issues to focus on when looking at components of compensation strategy:

• Overview of compensation tools/components • Base pay • Performance pay • Indirect pay • Methods of establishing base pay...job evaluation market pricing, pay for knowledge

Types of individual performance pay:

• Piece rates • Sales commission • Merit pay...merit raises, merit bonuses • Promotions • Special purpose incentives

Pros of pay for knowledge:

• Provides an incentive to learn a variety of skills...promotes workforce flexibility and productivity • Facilitates the movement of employees among jobs when needed • Less need for job description • Promotes intrinsic rewards and self-management consistent with the direction of high involvement organizations

Pros of job evaluation

• Provides for systematic and centrally controlled determination of compensation... avoids ad hoc compensation decisions • Establishes an explicit relative value for jobs... employees will understand the "pecking order" and may be motivated to seek promotions • Standardization makes compensation decisions easier and promotes fairness • Related job descriptions provide benefits for employees and the organization • Low discontinuance rates... a widely used approach • Consultants can help

Pros of market pricing

• Simplest alternative: Can live without complexity of maintaining a job description system • Keeps job compensation related to the marketplace... make informed decisions on level of compensation... above average, average, below average

Pros of commission:

• Used in many sales situation, sometimes with base pay • Commission systems relatively easy to set up and measure • Works in sales situations because work is independent and measurable • Reduces need for external supervisory control • Commission provides feedback to salesperson about how they are doing • Commission provides motivation for extra sales

Pros of merit raises:

• With the long term costs, it signals to the employee the need for long term performance • A strong link to a well-functioning performance appraisal system Provides positive feedback to an employee an can keep good employees

Cons of piece rates:

• not applicable in many work situations...need work were individual performance is identifiable and measurable • piece rates need job stability...but jobs change, often with technological change • establishing performance standard is subjective and perhaps subject to employee game playing • social pressure within the worker group not to maximize production • focus is on production, not quality or safety

Cons of merit raises:

• very expensive because they are permanent • Appraisal systems are not always viewed as valid • Appraisal ratings often contain subjective elements • At the top of pay ranges, there are no merit raises • The immediate supervisor is seen as the "bad guy/gal" of there is no merit raise • Encourages good individual performance perhaps at the expense of team/group performance