Chapter 11 - Motivating Employees Through Compensation

Exempt Designation

1. The executive exemption applies to workers whose primary duties are managing a business and supervising others. 2. The administrative exemption applies to workers who perform office or non-manual work that is directly related to management. They must exercise substantial discretion and judgment in their work. 3. The professional exemption applies to employees who perform tasks that require special skills and advanced knowledge learned through specialized study. 4. Workers may also be exempt from the FLSA through the outside sales exemption, which applies to salespeople who work away from the place of business.

Reinforcement Theory

A psychological theory suggesting that people are motivated by antecedents (environmental cues) and consequents (rewards and punishments). Antecedents and consequents are linked together because the antecedent causes people to think about the consequent. In relation to compensation, the core idea is that people will engage in the behaviors for which they are rewarded. Cues in the environment can help focus attention on the rewards that come after the completion of specific behaviors.

Contingency (Reinforcement Theory)

A reinforcement principle requiring that desirable consequents only be given after the occurrence of a desirable behavior. Suggests that a reward should be given if the desired behavior occurs.

Uniform Rewards

A reward system that minimizes differences among workers and offers similar compensation to all employees. consistent compensation so employees are treated the same.

Variable Rewards

A reward system that pays some employees substantially more than others in order to emphasize differences between high and low performers. High performers paid more than lower performers.

Relational Commitment

A sense of loyalty to an organization that is based not only on financial incentives but also on social ties. Employees in this type of relationship work for an organization over time because they feel a sense of belonging. The organization uses compensation to build a sense of camaraderie and support.

Transactional Commitment

A sense of obligation to an organization that is created primarily by financial incentives. Employees are motivated by the short-term rewards they receive. Management uses compensation to encourage individuals to make outstanding contributions, but no one expects employees to develop a long-term relationship with the organization.

Salary Compression

A situation created when new employees receive higher pay than employees who have been with the organization for a long time even though they perform the same job.

Nonexempt Employees

All employees who are not explicitly exempt from the FLSA, sometimes referred to as hourly workers. Paid hourly wage (beginning and end time must be carefully recorded, keep track of their own hours, be paid on hourly basis).

Equal Pay

amendment to the FLSA. the equal pay requirement applies to executive, administrative, professional, and sales positions that are exempt from minimum wage and overtime rules. Can be paid unequal rate if it is based off of seniority or performance. There are differences in men and women compensation.

Bureau of Labor Statistics

an agency of the U.S. Department of Labor, which collects employment data. One problem is choosing the appropriate comparison group. Difficult to obtain salary information for different jobs. Obtain comparison data only for key positions. Evaluate all data critically.

Problem Solving (Hay System)

assesses the extent to which the job requires employees to identify and resolve problems. Higher points are assigned to jobs that are less routine, require more thought, and frequently call for adaptation and learning.

Accountability (Hay System)

focuses on how much freedom and responsibility a job affords. Jobs are given higher ratings when the people filling them have substantial freedom to determine how to do things and when the tasks performed have a large impact on the organization's results.

Benefit of market-based pay

greater movement of employees between chains.

Persistence

involves deciding how long to keep working at the behavior.

behavioral choice

involves deciding whether to perform a particular action

Uniform Compensation and Motivation

not as effective as variable compensation for encouraging high motivation. The goal is to create a culture of fairness and cooperation. Reduce emphasis on extreme individual performance. Loyal Soldier tend to compare themselves with employees working in the same organization. Cost reduction, use training to develop skills.

Job Based System Disadvantages

one problem is centralized control. employees at the top of the pay range can only receive higher compensation if they are promoted into a position worth more points. promotions one reason why broad banding has begun. individuals often try to get their current positions reevaluated and valued with higher points, so that they will receive higher pay, even though the tasks they are performing have not really changed. inflexibility and resistance. difficult to hire new employees who require a wage that is above the established range. little incentive for employees to learn new skills that are not part of their formal job duties.

market- based pay

A compensation approach that determines how much to pay employees by assessing how much they could make working for other organizations.

Lead-the-Market Strategy

A compensation decision to pay employees an amount above what they might earn working for another organization. Average pay level is higher than the average in the comparison group. Suggests that the organization seeks to pay most employees more than they would be able to earn in a similar position in another organization. Labor cost per employee may be higher but they expect the higher cost to be offset by higher performance and lower turnover.

Lag-the-Market Strategy

A compensation decision to pay employees an amount below what they might earn working for another organization. Lower than average in the comparison group. Adopt this strategy to reduce labor costs.

Meet-the-market Strategy

A compensation decision to pay employees an amount similar to what they can make working for other organizations. An organization that adopts this strategy seeks to attract and retain quality employees but does not necessarily use compensation as a tool for maintaining a superior workforce.

Overtime

A compensation rule requiring organizations to pay a higher hourly rate for each hour that a nonexempt employee works beyond 40 hours in a one-week period. Different for certain classes of employees. Hospital employees calculated over a 14-day period (exceeds 80 hours in a week). Public employees- compensated with additional time off during other weeks.

Minimum Wage

A compensation rule requiring organizations to pay employees at least a certain amount for each hour they work.

Job-based pay

A determination of how much to pay an employee that is based on assessments about the duties performed. With this method, it is expected that people who have more difficult jobs will be paid more.

Skill-Based Pay

A determination of how much to pay an employee that is based on skills, even if those skills are not currently used to perform duties. pays people relative to their long-term value rather than their current position. employees are paid more when they develop more skills. Primary objective is to encourage the development of skills linked to the overall strategic direction of the organization. written tests are used to assess learning. coworkers or supervisors administer tests or observe actions to certify that a skill set has been mastered. Allowing employees to learn new skills at their own pace.

Equity Theory (Form of Justice Theory)

A justice perspective suggesting that people determine the fairness of their pay by comparing what they give to and receive from the organization with what others give and receive. Employees are particularly prone to comparing themselves to others whom they perceive as being paid the most, suggesting that comparisons may be biased. Employees can feel inequality if employees believe that they work harder and contribute more to the organization than another employee who is paid the same salary. Employees who perceive inequality might try a number of things to make their pay seem fairer. On the other hand, they may decrease their inputs to the organization Ex: less time at work and putting in less effort. On the other hand, they might try to increase the outcomes they receive from the organization. Asking for and receiving a pay raise is one way to increase outcomes. Also used to explain employee theft. People who perceive inequality are more likely to steal from their employers in an attempt to increase their outcomes. People who contribute to feel inequality are likely to leave the organization and start working somewhere else.

Point System (Job-based pay)

A process of assigning numerical values to each job in order to compare the value of contributions within and across organizations. The numerical value is designed to capture the overall contribution of the job to the organization.

Goal-Setting Theory

A psychological theory suggesting that an individual's conscious choices explain motivation. Goals improve performance through four specific motivational processes: 1. Goals focus attention away from other activities toward the desired behavior 2. Goals get people energized and excited about accomplishing something worthwhile. 3. People work on tasks longer when they have specific goals. 4. Goals encourage the discovery and use of knowledge. Having a goal can improve performance by focusing attention, increasing intensity and persistence, and encouraging learning. If goals are to act as effective motivators, they must be achievable. Having a goal that is nearly impossible to reach may actually harm performance by building a sense of frustration. Goals should thus be combined with effective selection and training practices to ensure that employees develop the needed skills. Goal setting in work organizations can be combined with compensation in a number of ways. One method is to offer a difficult goal and provide a bonus only to those who achieve it. This gives employees to give it their best effort. Problem will be that when employees go for stretch goals but don't achieve it, they will become frustrated. Another method of linking goals and compensation is to provide incremental rewards for people who achieve progressively higher goals. A third method of combining goals with compensation is to establish a difficult goal and then decide on the amount of the reward after performance has occurred.

Justice Theory

A psychological theory suggesting that motivation is driven by beliefs about fairness.

Expectancy Theory

A psychological theory suggesting that people are motivated by a combination of three beliefs: valence, instrumentality, and expectancy. All three desirable beliefs must be present for motivation to occur

Agency Theory

An economic theory that uses differences in the interests of principals (owners) and agents (employees) to describe reactions to compensation. Principals and agents often don't have the same information.

Expectancy (Part of Expectancy Theory)

An individual's belief that he or she can do what is necessary to achieve high performance. This belief is based in part on people's assessment of their own skills and abilities. Motivation is higher when people believe they are capable of high performance. May also be based in part on an assessment of whether the environment will create obstacles that limit performance. Motivation is reduced when people believe that things such as lack of materials and equipment will keep them from being able to perform well.

Good Compensation Advantages

Companies offering good pay and benefits attract better employees. Paying people more when contributing more increases motivation, which leads to higher performance.

Free Agent Compensation

Compensation is the primary source of motivation for employees working in this type of organization. Provide strong monetary incentives for high performers. Must pay more than other employers. Paying top performers within the organization more than low performers also attracts more productive people to apply for jobs. Short-term salary and bonuses are emphasized more than future rewards, such as retirement savings. Top performers are paid well, and individuals who succeed at risky ventures receive substantial rewards. Employees usually have opportunities to work for many possible employers, so an individual's salary is based primarily on what he or she would be worth to other organizations. The result is highly flexible compensation practices. Often, new employees are paid much more than employees who have been working at the organization for years in a similar position (salary compensation).

Pay-for-Performance

Compensation practices that use differences in employee performance to determine differences in pay. Linking pay to performance can be particularly beneficial when it is part of an overall program of performance assessment, goal setting, and feedback.

Principles for Increasing Motivation Through Compensation

Develop pay-for-performance plans, link pay with goals that encourage stretch efforts, understand the referent groups employees use when assessing the fairness of play, follow principles of procedural fairness including accurate assessment, lack of bias, and opportunity to have input. Provide rewards that are large enough to matter. Coordinate with selection and training to ensure that employees have the skills they need to meet goals, align the interests of employees with the interest of owners, give higher rewards for employees who assume risk.

Bargain Laborer Compensation

Do not expect a long term career. Also little difference in the amount paid to high- and low- performing baggers. Developing fair processes and uniform practices that increase perceptions of fairness.

Internal Equity

Employee perceptions of fairness based on how much they are paid relative to others working in the same organization. Internally oriented organizations also use long-term incentives to reward employees who stay with them for long periods.

External Equity

Employee perceptions of fairness based on how much they are paid relative to people working in other organizations. People who seek a lack of this equity become dissatisfied and choose to work somewhere else. This means that organizations with an external labor orientation must frequently assess how their compensation compares with the compensation offered by other organizations.

Distributive Justice (Part of Justice Theory)

Equity theory is an example of distributive justice. Perceptions of fairness based on the outcomes (such as pay) received from an organization. In terms of compensation, distributive justice focuses on whether people believe the amount of pay they receive is fair.

Common Exemptions to the Fair Labor Standards Act

Executive Exemption- primarily manages a business or department, supervises two or more employees; hires and fires, exercises discretion. Professional Exemption- performs tasks that require specialized knowledge, produces original and creative work, exercises discretion. Administrative Exemption- performs office or non manual work, performs technical work, assists executives. Outside Sales- Regularly works away from place of business, spends at least 80% of time selling.

Fair Labor Standards Act (FLSA)

Federal legislation that governs compensation practices and helps ensure fair treatment of employees. passed in 1938, is designed to protect employees. The law establishes a national minimum wage, regulates overtime, requires equal pay for men and women, and establishes guidelines for employing children. Many workers are exempt from FLSA.

Linking Compensation Structure to Strategy

Free Agent(skill-based pay)- pay is used to attract people with specific skills. Loyal Soldier(skill based pay)- use uniform relational compensation to bind individuals to the organization and minimize differences between employees. Committed Expert (job-based pay)- the emphasis on long-term employment relationships makes internal equity particularly important in these organizations, and opportunity for promotion is a significant motivator. Bargain Laborer (Job-based pay)- these organizations don't usually seek to hire people who have developed specific skills. The overall objective is to minimize labor cost by paying people only for the contributions they provide and not for skills in other areas.

Pay Surveys

Gathering information to learn how much employees are being paid by other organizations. Often conducted by consulting firms, which obtain confidential information from numerous organizations and create reports that describe average pay levels without divulging information about specific companies.

Motivation

the sum of forces that cause an individual to engage in certain behaviors rather than alternative actions. Represented by three elements: behavioral choice, intensity, and persistence.

Describing External Labor Orientation

Organizations choosing this labor orientation frequently hire new employees, and these employees are not expected to form a long-term attachment to the organization. The lack of long-term commitment makes compensation particularly important. Compensation is the primary factor in these employees' decisions about where to work. Current and potential employees frequently compare the organization's compensation packages with packages offered by other employers.

Procedural Justice (Part of Justice Theory)

Perceptions of fairness based on the processes used to allocate outcomes such as pay. The focus here is on the process used to decide who gets which rewards. Employees who see the organization as more fair tend to have higher levels of satisfaction and commitment, as well as higher individual performance.

Agent (Agency Theory)

Someone who acts on behalf of a principal. A company's employees are agents of the owners of the company, who are the principals. When the company is a publicly held corporation, the owners are the shareholders. An interesting feature of the agent-principal relationship is that the interests of agents are not necessarily the same as the interests of principals. Agents or managers know a lot about the company but the managers may be afraid to share information. Sometimes the information may make the agent look incompetent, suggesting that agents may not share all the different methods available for increasing profits.

Instrumentality (Part of Expectancy Theory)

The belief in the likelihood that the reward will actually be given contingent on high performance. If employees don't believe that that they will receive the promised reward even if they perform the required actions, they will not be motivated by the reward.

Pay Level

The compensation decision concerning how much to pay employees relative to what they could earn doing the same job elsewhere.

Antecedents (Reinforcement Theory)

factors in the environment that cue someone to engage in a specific behavior.

Broadbanding (Job-Based Pay)

The practice of reducing the number of pay categories so that each pay grade contains a large set of different jobs. Here there are fewer categories and each category includes a broader range of jobs The practice of broad banding thus results in fewer pay grades, which are referred to as pay bands.

Valence (Part of Expectancy Theory)

The value that an individual places on a reward being offered. This concept is an important reminder that not everyone is motivated by the same thing.

Exempt Employees

Workers, such as executives, administrators, professionals, and sales representatives, who are not covered by the FLSA. Paid a salary (can be paid a set amount that is not directly tied to hours worked). Include amusement park employees and farm workers.

Working Conditions (Hay System)

captures the extent to which performing the job is unpleasant. The main idea is that jobs should pay more when they require employees to work in dirty, strenuous, or dangerous conditions.

Intensity

concerns deciding how much effort to put into the behavior.

Know-how (Hay System)

concerns the knowledge and skills required for the job. Jobs are given more points when they require an employee to know and use specialized techniques, when they involve a need to coordinate diverse activities, and when they involve extensive interpersonal interaction.

Pay Strategy

determines how high pay should be. One possible compensation strategy is to pay employees more than what they can earn elsewhere. "the market" refers to a selected group of organizations, such as organizations in the same industry or in the same geographical area. Data about the pay of these comparative organizations is collected through the pay survey.

Child Labor

difficult to get a job before 16. the FLSA has provisions that are designed to protect those under the age of 18 from unsafe and excessive work.

Variable Compensation and Motivation

overall level of compensation is higher for Free Agent and Committed Expert.

Principal (Agency Theory)

owners or stockholders have interests different from these of agents (employees) involves risk. The owners of a business might benefit from taking risks that grow the business at a very rapid pace. The risk associated with high growth may be undesirable for an employee who perceives that growth may create short-term problems and cause the employee to lose his or her job. Employees are not willing to share risk unless they can also share the potential for a bigger reward. A general principal of agency theory is thus that wage rates should be higher when employees bear risk. For this reason, incentive plans that pay for performance are only effective when they give employees the opportunity to earn more than they could earn with fixed wages, such as hourly pay. Owners may not be made aware of potential courses of action that might benefit them. Because owners can't always observe and effectively monitor the actions of employees, agency theory suggests that compensation practices must be structured so that employees are rewarded when they do the things that would be most desirable from the owners' perspective.

Skill-Based Pay Disadvantages

payroll costs tend to be higher. employees are paid higher wages when they acquire additional skills, even if they don't use those skills to perform their current duties. training costs can also be high if classes and other training resources are needed to develop the skills. problems arise when employees master the highest skill set and perceive that they have no more room for advancement.

Job Based System Advantages

provides a clear method for controlling and administering pay. Centralized human resource personnel conduct surveys and establish guidelines for determining how much to pay each employee. Assigning numerical values to specific factors that are summed into an overall score is thought to reduce bias. Having a value for each job makes it easier to compare vastly different jobs.

Cost Strategy

requires organizations to adopt compensation practices that reduce labor expenses. Employees usually paid fixed salaries that do not increase as performance improves. There is very little variation in pay between high and low performers. Emphasizing efficiency and tight coordination results in standardization, which is often accomplished by treating all employees the same. The value of a high performer is not substantially greater than the benefit of an average performer, so compensation is used to develop feelings of inclusion and support from the organization.

Consequents (Reinforcement Theory)

results associated with specific behaviors. Behavioral consequent can be negative.

Differentiation Strategy

seek high-performing employees who create superior goods and services. Compensation is used to encourage risk taking. Also pay some employees much more than others. Success depends a great deal on outstanding contributions from a few individuals, so these organizations reward high performance by paying excellent performers substantially more than low performers. The result is a substantial spread between the pay of high contributors and the pay of low contributors.

Describing Internal Labor Orientation

seek to retain employees for long periods of time. These organizations encourage employees to stay by providing security and good working conditions, which are emphasized more than money. Employees become attached to the organization and are less likely to compare their compensation with the compensation they believe they could earn elsewhere. Instead these employees compare their compensation with that of their coworkers.

Loyal Soldier Compensation

seeks to reduce costs, but the emphasis is on building a stable long-term workforce. Emphasizing low labor expenses and encouraging average rather than outstanding performance once again create a setting where high and low performers are treated similarly. The long-term orientation requires that compensation be used as a tool to bind employees to the organization. Pay increases are usually linked to time with the organization. Employees are rewarded for remaining loyal and not leaving to accept positions with competitors. Cooperation among employees as well as a feeling of solidarity, is enhanced through compensation structured to decrease differences between high and low performers. Procedures that allow employees to express concerns about unfairness are also important. Long-term forms of compensation other than salary, such as health insurance and retirement benefits, are particularly helpful in building the employee commitment that is necessary for success.

employee compensation

the human resource practice of rewarding employees for their contributions. Includes benefits such as insurance, retirement savings, and paid time off from work. Monetary and psychological.

Hay System

this system was developed and is marketed by the Hay Group, a worldwide compensation consulting firm. The Hay System evaluates jobs in terms of four characteristics: know-how, problem solving, accountability, and working conditions. All points from 4 dimensions are added together to create a numerical score that represents the value of the job. A category that includes jobs within a specific range is known as a pay grade. A midpoint value, which represents a target for average pay of the jobs included in the category, is established for each pay grade. A range is then created around each midpoint so that pay for everyone performing jobs worth a certain number of points falls within the range. Compensation is determined by things such as experience and performance level.

Loyal Soldier (Internal/Cost HR Strategy)

uniform relational, similar pay for all, rewards for loyalty

Bargain Laborer (External/Cost HR Strategy)

uniform transactional, low pay level, consistent processes

Committed Expert Compensation

use compensation to reward high performers, but at the same time they strive to build long term commitment. Management sets high goals for employees, and those who reach the goals are paid more than those who do not. Thus, people doing the same job are often paid very different amounts. High performing workers are paid more than low performing workers but the need for long-term inputs also necessitates compensation practices that bind employees to long-term careers. Compensation is set at a level that is high enough to attract people with the most desirable skills. Because of their relatively high levels of expertise and skill, employees working for these organizations expect to receive higher wages than people working for other organizations. As long as the organization communicates its policies clearly and fairly, paying the best employees more than others helps retain top performers. Turnover is also reduced by offering long-term incentives such as retirement benefits and stock options. Top performers need to receive immediate rewards that recognize their contributions, but they must also receive long-term incentives that bind them to the organization for a number of years.

Committed Expert (Internal/Differentiation HR Strategy)

variable relational, high performers rewarded, long-term incentives.

Free Agent (External/Differentiation HR Strategy)

variable transactional, high pay level, short-term incentives

Linking Compensation Level and Strategy

wages rise as compensation levels increases, profitability can often be increased by better employee performance. Bargain Laborer (meet-the-market strategy) tend to focus on reducing labor costs. Free Agent use compensation to attract top performers. Organizations with internal labor strategies emphasize the development of long-term relationships rather than focusing on money. Committed Expert tend to have more of a lead-the-market orientation than those pursuing Loyal Soldier.