Compensation Final

Efficiency Wage

an above-market wage that a firm pays to increase workers' productivity

The three tests for whether pay strategy provides competitive advantage are:

(1) does it align? (2) does it differentiate? (3) does it add value?

Signaling

Designing pay levels and mix as a strategy that signals to employees what is sought. Employer signals include pay level and mix. Employer signals include better training, education, and work experience.

Classification

-A series of classes covers the range of jobs. -Job descriptions are compared to class descriptions to determine class level. Greater specificity of the class definition improves the reliability of the evaluation. -It also limits the number of jobs easily classified. Jobs within each class are considered equal and will be paid equally.

Job Analysis

-Job analysis is the systematic process of collecting information about the nature of specific jobs -job analysis establishes similarities and differences in the work contents of the jobs, and helps facilitate the establishment of an internally fair and aligned job structure.

Stakeholders in the compensation system: Employees

-Pay is usually a major source of financial security -Employees see compensation as: --A return in exchange --An entitlement for being an employee of a company --An incentive to take/stay in a job and invest in performing well

Merit Pay

A merit pay system links increases in base pay to how highly employees are rated on a performance evaluation. Employee achievements are rewarded every year the employee remains on the job. Merit pay is expensive. Many argue it does not achieve the desired goal of improving employee and corporate performance. Merit pay does have a small, but significant, impact on performance.

Centralized pay system

A payment processing system in which one company in an organization manages the incoming and outgoing payments between other companies in the same organization.

How to do Competitive Pay Policy

A survey is the systematic process of collecting and making judgments about the compensation paid by other employers Surveys provide the data for translating that policy into pay levels, pay mix, and structures.

Outlier

A value much greater or much less than the others in a data set

Variable Pay

Commission

Cost Containment

Common cost containment opportunities include: -Deductibles and coinsurance -Probationary periods -Benefit limitations -Administrative cost containment -Outsourcing is a common cost containment strategy - hiring vendors to administer the benefit program.

Stakeholders in the compensation system: Managers

Compensation influences manager's success in 2 ways: 1)It is a major expense that must be managed 2)A major determinate of employee attitudes and behaviors.

line of sight

Concept that states that employees must be able to influence the attainment of a goal and see a direct result of their efforts in order for incentive pay plans to be effective.

The Pay Model Guides Strategic Pay Decisions

Five strategic compensation choices: -Objectives -Internal alignment -External competitiveness -Employee contributions -Management These decisions, taken together, form a pattern that becomes an organization's compensation strategy

Alternation Ranking

Orders job descriptions alternately at each extreme. Evaluators agree on which jobs are the most and least valuable, then the next, etc.

Simple Ranking

Orders job descriptions from highest to lowest based on relative value. Advantages: -Simple, fast, and easy to understand and explain to employees; least expensive, initially. Disadvantages: -Ranking criteria becomes subjective as evaluators must be knowledgeable on every job. -Results are difficult to defend and costly solutions may be required.

Herzberg's Two-Factor Theory

Predictions -Base must be set high enough for basic needs -Performance only based on rewards -Perf. Pay must be linked to recognition and achievement Culture is a factor

Validity and Reliability

Reliability vs validity: what's the difference? Reliability and validity are concepts used to evaluate the quality of research. They indicate how well a method, technique or test measures something. Reliability is about the consistency of a measure, and validity is about the accuracy of a measure

Stakeholders in compensation system: Society

Some people see pay as a measure of justice -Laws and regulations aim to eliminate the gap between male/female earnings differentials -Benefits may also be seen as a reflection of equality or justice in society -Pay equity can be a major issue here Job losses (or gains) in a country is partly a function of labor costs

Stakeholders in the compensation system: Stockholders

Some stockholders say using stock to pay employees creates a sense of ownership -Others argue it dilutes stockholder wealth Stockholders have a particular interest in executive pay -Linking that to company performance increases stockholder's returns

Strategy & Strategic Choices

Strategy: the fundamental business directions that an organization has made in order to achieve its strategic objectives. A strategic perspective focuses on those compensation decisions that help the organization gain and sustain competitive advantage The greater the alignment, or fit, between the organizational strategy and the compensation system, the more effective the organization

Pay Structure

The arrangement of jobs into categories based on their relative importance to the organization and its goals, level of skills, and other characteristics.

Point Method

This method allows the assignment of a numeric score to each job in an organization, through the identification of factors that are valued by the organization. This procedure results in a relative ordering of jobs based on the number of points that each job "scores". Typically used in when pay equity legislation exists.

Compa-ratio calculation

average rate actual paid \ range midpoint A ratio less than 1 means below midpoint pay. A ratio greater than 1 pays above the midpoint.

Reservation Wage Theory

The idea that job seekers have a reservation wage level below which they will not accept a job, no matter how attractive the other job attributes

Pay with Competition (Match)

The most common policy is to match rates paid by competitors. A pay-with-competition policy tries to: -match wage costs to product competitors, and -attract applicants equal to the labor market competitors.

Relational returns

These are psychological

Benefits of internal alignment

These policies will affect employee decisions with respect to -Stay with the company -Pursue training in order to get better wages/job

human capital theory

a theory that explains differences in wages as the result of differences in the individual characteristics of the workers

Equity Theory

a theory that states that people will be motivated when they perceive that they are being treated fairly

Flex Benefits: Advantages

employees choose packages that best satisfy their unique needs flexible benefits help firms meet the changing needs of a changing workforce increased involvement of employees and families improves understanding of benefits flexible plans make introduction of new benefits less costly cost containment - organization sets dollar maximum; employee chooses within the constraint

Flex Benefits: Disadvantages

employees make bad choices and find themselves not covered for predictable emergencies administrative burdens and expenses increase adverse selection - employees pick only the benefits they will use; the subsequent high benefit utilization increases its cost

compensating differentials

higher wages that compensate workers for unpleasant aspects of a job

anomaly

irregularity; Deviation from the norm Anomalies. (Think validity here) -Does any one company dominate? -Do all employers show similar patterns? -Outliers?

Lead Pay-Level Policy

maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay -minimize dissatisfaction with pay. -It may offset less attractive job features. Linked to reduced turnover, quit rates and absenteeism. Negative effects include the need to increase current employees wages and it may mask negative job attributes.

Tournament Theory

more hierarchical pay structures may increase employee motivation. The greater the pay difference between positions, the more employees will be motivated to demonstrate the behaviors necessary to achieve the position associated with the higher pay.

Decentralized Compensation System

multiple departments within a company each handle their own payrolls -Very rare

Total compensation

pay received directly as cash and indirectly as benefits

Pay levels

provide minimum to maximum pay for a group or subset of jobs in the organization

Internal Alignment

refers to the pay relationships among different jobs/skills/competencies within a single organization

Job evaluation

the process of systematically determining the relative worth of jobs to create a job structure for the organization, based on either job content, job value or both.

Expectancy Theory

the theory that people will be motivated to the extent to which they believe that their efforts will lead to good performance, that good performance will be rewarded, and that they will be offered attractive rewards