Chap 7

Employee Stock Purchase Plans (ESPP)

-Allow employees to set aside money over a period of time (offering period, usually 6 months). -Employees designate how much will be deducted from their pay checks. -Employees use the accumulated money to purchase stock at the end of the offering period usually at a specified discount (up to 15%).

Team Incentives

-Awards determined based on team/group performance goals or objectives. -Payout can be more frequent than annual and can also extend beyond the life of the team. -Payout may be uniform for team/group members.

Consolidated Omnibus Budget Reconciliation Act (COBRA)

-Enacted in 1985 -Applies if 20 or more employees -Extends health coverage after certain events -An employer can charge individuals up to 102% of the premium. Standard qualifying is 18 months.

Family and Medical Leave Act (FMLA)

-Enacted in 1993 -Applies if 50 or more employees -Up to 12 weeks of unpaid leave -More states legislatures are moving toward some form of paid family and medical leave.

Employee Stock Ownership Plans (ESOPs)

-Generate long-term effects. -Foster employees' participation in the decision-making process. -Have little impact on productivity or profit.

Health Insurance Portability and Accountability Act (HIPPA)

-Provides data privacy and security provisions for safeguarding medical information. -Enacted in 1996 -Lessen an employer's denial coverage for preexisting condition. -Prevent discrimination on the basis of health status.

Sorting and signaling theory

-Sorting is the effect that pay strategy has on the composition of the workforce- who is attracted and retain. - Signaling holds that 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.

Contribution Plans

-The employer sets up an investment account for each participating employee. -401k, Profit Sharing, ESOP -When the employee retires, the pension is based on: an employer contribution, employee's contribution, and any gains( or losses) in stock investment.

What is the purpose of a survey?

1. Adjust the pay level relative to competitors. 2. Set the mix of pay forms relative to competitors. 3. Establish or price a pay structure. 4. Analyze pay related problems. 5. Estimate the labor costs of product market competitors.

What are the two objectives that pay level and pay mix focus on?

1. Control costs and increase revenues. 2. Attract and retain employees.

Design the Survey

1. Who should be involved? Compensation managers or consulting firms. 2. How many employers? No firm rules on how many to include. 3. Which jobs to include? Benchmark-job approach, low-high approach, and benchmark conversion/survey leveling. 4. What information to collect? Organization and total compensation data.

Risk sharing

A base pay is reduced when the company does poorly. These plans shift part of the risk from the company to employees. May result in lower pay satisfaction and higher turnover.

Market pay line

A market line links a company's benchmark jobs on the horizontal axis with market rates paid by competitors on the vertical axis. Can be drawn freehand or by regression analysis.

Expectancy theory

A motivation theory that process that individuals will select an alternative based on how this choice relates to outcomes such as rewards. The choice made is based on the strength or value of the outcome and on the perceived probability that this choice will lead to the desired outcome.

Efficiency Wage

Above market wage/pay level will improve efficiency by attracting higher ability workers and discouraging shirking due to risk of losing high wage job. A high wage policy may substitute for intense monitoring. High wages may increase efficiency and actually lower labor costs by: attracting higher quality applicants, lower turnover, increase worker effort, reduces "shirking", and reduces the need for supervision.

Broad-Based Option Plans (BBOPs)

All employees receive stock grants when the company reaches the goal.

How is external competitiveness expressed?

By setting a pay level that is above, below, or equal to that of competitors. Determining the pay mix relative to those of competitors.

Goal Setting Theory

Challenging performance goals influence greater intensity and duration in employee performance. Goals serve as a feedback standards to which employees can compare their performance. Individuals are motivated to the extent that goal achievement is combined with received valued rewards.

Restricted stock plans

Grant of stock at a reduced price with the condition that it may not be sold before a specified date. Excess over fair market value taxed as ordinary income.

Goal setting theory

How we set goals (desired behaviors) can influence employees' performance.

Balanced Scoreboard Approach

Is a way to look at what contributes value in an organization. Acknowledges that the bottom line doesn't just happen. Success depends on: customer satisfaction, employee internal growth and commitment, operational efficiency in internal processes, and financial measures.

Marginal product of labor

Is the additional output associated with the employment of one additional person, with other production factors held constant.

Marginal revenue of labor

Is the additional revenue generated when the firm employs one additional person, with other production factors held constant.

Survey?

Is the systematic process of collecting and making judgements about the compensation paid by other employers.

Reservation wage

Job seekers won't accept jobs if pay is below a certain wage, no matter how attractive other job aspects. Reservation wage: the wage level below which job seekers will not accept a job offer, no other attributes can make up, and a reservation wage may be above or below the market rate.

Merit Pay

Links increase in base pay to how highly employees are rated on a performance evaluation. Employee achievement are rewarded every year the employee remains on the job.

Pay policies?

Match, Leap, and Lag.

Lead Pay- Level Policy

Maximizes the ability to attract and retain quality employees, and minimize dissatisfaction with pay. Linked to reduced turnover, quit rates and absenteeism. Negative effects include the needs to increase current employees wages.

Lag Pay-Level Policy

May restrict a firm's ability to attract employees. Coupled with higher future returns ( e.g., stock option) it may: increase employee commitment, foster teamwork, and increase productivity.

Pros and Cons of pay-for-performance ?

Merit pay is expensive. Many argue it does not achieve the desired goal. After a thorough review, merit pay does have a small, but significant, impact on performance.

Spot award

One time award for exceptional performance: also called a spot bonus. About 35 percent of companies use them. 74 percent reported them effective. Larger companies use formal mechanisms while smaller companies are more casual.

Pay-mix strategies

Performance driven, Market match, Work/life balance, and Security. Employer of choice which corresponds to the brand the company projects as an employer. Shared choice which offers employees choices in the pay mix, risk of wrong choices, and 24 jars of jam dilemma.

Benefit Plans

Promise a specified monthly benefit on retirement that is predetermined by a formula based on seniority and earning. Benefit amount is about a half of average earnings of last 3 to 5 years of service adjusted for seniority. A big disadvantage is funding: One solution is to hire an insurance company.

Overlap

Promotion increase matter: overlap ought to be large enough to induce employees to seek promotions.

Pros and Cons of Merit pay?

Pros ->>> After a thorough review, merit pay does have a small, but significant, impact on performance. Cons->>>Expensive and many argue it does not achieve the desired goal.

Behaviorally Anchored Rating Scales (BARS)

Seem to be the most common format using behaviors as descriptors. By anchoring scales with concrete behaviors, firms, adopting a BARS format hope to make evaluation less subjective.

Profit-sharing plans:

Share financial profits. Focus on a predetermined index of profitability. However, most employees do not feel their jobs have a direct impact on profits. The trend is to combine the best of gain-sharing and profit-sharing plans, giving employees more sense of control.

Gain-sharing plans:

Share gains resulted from saving cost. Looks at cost components regardless of profits.

What is a pay-for performance plan?

Signals a movement away from entitlement toward pay that varies with performance. 95% companies offer variable pay. Variable pay can be traced to two trends: increasing competition from foreign producers: a fast paced business environment requires workers to adapt quickly to change.

Pay Level

The average of the array of rates paid by an employer: (bases+bonuses+benefits+value of stock holdings) number of employees

Sorting effect

The effect that pay can have on the composition of the workforce. Different types of pay strategies may cause different types of people to apply to and stay with an organization.

Pay with Competition (Match)

The most common policy is to match rates paid by competitors. Tries to: match wage costs to those of product competitors and match the ability to attract applicants to those of labor market competitors.

External Competitiveness

The pay relationships among organizations - the organization's pay relative to its competitors.

What are some common issues of variable pay plans?

The plans often have: too small a payout for the work expected, unattainable ( or too easy) goals, outdated or inaccurate metrics, or too many metrics.

Pay mix

The various types of payments, or pay forms, that make up total compensation.

Compensation Differentials

Work with negative characteristics requires higher pay to attract/retain workers. If a job has negative characteristics, then employers must offer higher wages. Such compensating differentials explains the presence of various pay rates in the market.

Legally required benefits

Workers compensation Social Security Unemployment Compensation FMLA COBRA HIPPA *Benefits are affected by statutory or common law, many imposed by tax laws.

Relevant labor market

include employers who compete in one or more areas: the same occupations or skills, employees within the same geographic area, and the same products and services.

Ranking formats

require that the rater compare employees against each other to determine the relative ordering of the group on some performance measure.

Standard rating scale

when objectives are used as anchors