CHAPTER 12/13: INCENTIVES MNGMT (PAY/COMPENSATION)

Pay Policy Line

A graphical line showing the relationship between job evaluation and rate of Pay. This reflects the pay structure in the market which may not match the organizations pay policy.

Benchmarking:

A procedure in which an organization compares its own practices against those of successful competitors. In terms of compensation, benchmarking involves the use of pay surveys

Pay Range

A set of possible pay rates defined by a minimum, maximum, and midpoint of pay for employees holding a particular job or a job within a particular pay grade

Pay Differentials

Adjustments to a pay rate to reflect differences in working conditions or labor markets (Get paid more for working in locations with higher living expenses)

What theories of motivation are relevant in a performance management context?

Expectancy (VIE) Theory: Motivation is dependent upon: Expectancy: expectation that effort will lead to achievement of objective Instrumentality: achievement of objective will result in reward Valence: value placed on rewards

Lilly Ledbetter Act of 2009

Extends the period of time in which an employee is allowed to file a lawsuit for pay-based discrimination

Performance Bonuses:

Linked to individual performance, but must be re-earned per performance period. Could be a one time reward.

Merit Pay

Linking pay increases to ratings on performance appraisals. Use a merit increase grid to make sure that its fair. Based on performance rating and compa-ratio

Stock Ownership

Makes employees part owners of the organization. Meant to encourage employees to focus on the success of the organization as a whole.

Pay for Organizational Performance:

Measure organizational performance in terms of profits(Efficiently producing products customers want at a price their willing to pay) and stock price(owner's investment in a corporation, when stock price rises, value of investment grows). Profit Sharing Stock Ownership Stock Options Employee stock ownership plans

Gainsharing:

Measures increases in productivity and effectiveness and distributes a portion of each gain to employees. Motivates employees to be more productive in helping the company in order to make a share of sales. Addresses challenge of identifying appropriate performance measures for complex jobs.

Compensation:

Monetary and non monetary rewards employees receive in exchange for work

Sales Commissions

Pay calculated as a percentage of sales. Earn commission on each product sold, or total sales over a goal. Straight Commission plan: Only earning commission and no hourly pay.

What are the different ways that we can directly and monetarily compensate employees (e.g., merit pay)?

Pay for Individual Performance -Pay for Group Performance - Pay for Organizational performance

In what ways is pay related to attraction, retention, and performance of employees?

Pay is more than a cost, it is an investment that can generate returns in attracting, retaining, and motivating high-quality workforce. Paying above going rate may be advantageous for an organization. Can use higher pay to attract and retain top candidates and motivate them to do their best to keep their jobs.

Incentive Pay

Pay specifically designed to energize, direct, or maintain employees' behavior. Forms of payments that are linked to employees performance as individual, group member, or organization.

Profit Sharing:

Payments are a percentage of the organizations profits and do not become a part of employee's base salary. Think like owners

Standard Hour Plans:

Pays workers extra for work done in less than a preset "standard time".

Pay For individual performance:

Piecework rates Standard hour plans Merit Pay Individual Bonuses Sales Commissions

What things would you consider when developing a pay structure that is externally competitive?

Product Market Competition Labor Market Competition Market Pay Surveys

Team Awards

Similar to group bonuses, but are more likely to use a broad range of performance measures (cost savings, successful completion of a project, and meeting deadlines) Competition among individuals can be replaced with competition between groups. Not good.

Job Evaluation:

Systematic process for determining the relative worth of jobs to create an organization's job structure, and ultimately its pay structure

The expectancy theory:

The amount of effort is related to the expectancy of the ability to achieve a goal. Tis would be high expectancy. Achievement of objective leads to a reward, so if you do well and are motivated you receive the reward. But the reward must have valence, aka it must be valued to motivate an employee in the first place.

Scanlon Plan:

gives employees a bonus if the ratio of labor costs to the sales value of production is below a set standard. To keep this ratio low enough to earn the bonus, workers have to keep labor costs to a minimum and produce as much as possible with that amount of labor.

Market Pay Surveys:

-A form of benchmarking -How much are our competitors paying, and is there any reason we should be different?

What are the goals of a compensation system?

-Attract & retain talent -Motivate key behaviors that determine organizational performance -Reinforce organizational culture (e.g., service, innovation)

Issues in Developing a pay structure:

-Legal Requirements -Market Forces -Organizations Goals -Pay level decision, job structure decision, and pay structure decisions.

Requirements of Pay Plans:

-Performance measures are linked to the organization's goals. -Employees believe they can meet performance standards. -The organization gives employees the resources they need to meet their goals. -Employees value the rewards given. -Employees believe the reward system is fair. -The pay plan takes into account that employees may ignore any goals that are not rewarded.

Fair Labor Standards Act of 1938(FLSA)

-Set minimum wage (at the time, $7.25) -permits lower training wage -Sets overtime pay which is defined as hours worked beyond 40 hrs/week.

Product Market Competition:

-Sets "ceiling" for pay level: The more we pay, the more our costs, the more our price, the less competitive we are -If we pay more than the ceiling, we won't be able to sell our product

Labor Market Competition

-Sets "floor" for pay level: The less we pay, the less we get good results, the less competitive we are -If we pay less than floor, we won't be able to fill our positions

What are the criteria for a "good" compensation system?

-Supportive of the corporate strategy -Based on reliable and valid evidence -Decided in a Fair and legal manner -Motivating for employees

Why (Be able to describe the elements and application of each theory to compensation, e.g., how would you describe the motivating potential of sales commissions according to Expectancy theory?)?

1. Expectancy: Effort is related to ability to achieve a goal. 2. Instrumentality: Need to see link between achievement of our goal, and a reward. E.g. achievement: A on midterm, Reward: A in class. If there isn't a clear connection between the two, it leads to low motivation. 3. Valence: Care and want the reward or will not feel motivated to do anything extra.

Employee Stock Ownership Plans (ESOPs)

An arrangement in which an organization distributes stock shares to all employees by placing it in a trust managed on employee's behalf. Common form of employee ownership. Carry significant risk for employees

Point-Factor Method:

Assign point values to jobs based on compensable factors

Pay Level

Average amount (including wages, salaries, and bonuses) the organization pays for a particular job.

Job evaluation and Internal Alignment

Basically, job evaluations provide the basis for decisions about the relative internal worth. So, if one job within the company has a worth almost twice as much as the other (according to the point manual), then the company is most likely willing to spend twice as much for the work of the job they value more.

What is external competitiveness?

Ensures that jobs in a company are valued appropriately relative to similar jobs in the external labor market

In what ways can a compensation system support the corporate strategy of a business?

Can use group of organization pay incentives to involve employees in the profit of the company. If the employees work more efficiently the corporation will do better and the employees are incentivized by that.

Compensable factors

Characteristics of a job that an organization values and thus chooses to pay for.

Alternatives to job-based pay:

Delayering: Reducing number of levels in the organizations job structure Skill-based Pay: Set pay according to level of skill or knowledge and what their capabilities are.

Exempt Employees

Don't get paid time and a half for overtime. -Depends on the employee's job responsibilities, salary level (at least $455 per week), and "salary basis," meaning that the employee is paid a given amount regardless of the number of hours worked or quality of the work

What is internal alignment?

Each job is valued appropriately relative to other jobs in terms of its ability to help the firm achieve its goals.

How is internal alignment related to pay structure?

Each job is valued at a certain level of advancement, and the pay rates increase as advancement of a job increases.

What did the Equal Pay Act of 1963 do?

Forbids wage discrimination on the basis of gender if employees perform equal work Jobs are considered equal if they require similar skill, effort, and responsibility and are performed under similar working conditions Equal pay for equal work, regardless of gender, ethnicity, etc.

Group Bonuses

Group bonuses are for smaller work groups in a company. Reward members of a group for attaining a specific goal, usually measured in terms of physical output.

Pay Structure:

Helps the organization achieve goals related to employee motivation, cost control, and the ability to attract and retain talented Human Resources.

Why might you decide to pay above going market rates?

Higher pay may be an investment in superior Human Resources. Attracts top talent and uses their knowledge to be more innovative, higher in quality, and more efficient.

What is the relationship between compensation and motivation?

Incentives are linked to particular outcomes or behaviors, so the org is encouraging employees to demonstrate these. If incentive is too high, this will be all the employee focuses on, and ignore measures that aren't rewarded. Employees must value incentive plan and think it is fair in order to be willing to work for it.

How does job analysis and job evaluation inform internal alignment?

Job analysis creates different job attributes that are then rated for each factor. This helps form a job evaluation: Job evaluation is the first step in the goal of internal alignment. Job evaluation determines the worth of each role in an industry, and then the roles are valued appropriately relative to other jobs in the industry.

What job evaluation methods could you use to develop a job structure in your organization?

Ranking Point-Factor Method

Salary

Rate of pay per month or year

Job Structure

Relative pay for different jobs within the organization Relative pay among different functions and different levels of responsibility.

Stock Options

Right to buy a specific number of shares of stock at a specific price. Purchasing stock is called exercising the option. Benefit if stock prices rise above this.

Pay Grade:

Sets of jobs having similar worth or content grouped together in order to establish a pay rate.

Pay for Group Performance:

Used to make employees cooperate and share knowledge so that entire group meets performance targets Gainsharing Group Bonuses and Team Awards

Piecework Rate

Wage based on the amount that an employee produces. Straight Piecework plan: Employer pays same rate per piece, no matter how much the worker produces Differential Piece Rates: Piece rate depends on amount produced.

Ranking Job Evaluation Method:

simply order the job descriptions from highest to lowest based on global definition of relative value/contribution to the organization's success