Module 14 (Chapter 18): Management: Making it Work

Several factors influence the decision on how much to increase the average pay level for the next period. C

c. Competitive market pressures.

Several factors influence the decision on how much to increase the average pay level for the next period. B

b. Ability to pay.

There are two reasons for communicating pay information:

1. Resources have been used to design an equitable system intended to attract and retain qualified people and motivate performance. 2. Employees seem to misunderstand the pay system.

Bottom-up budgeting approach: Step 4

Check data and compile reports.

Decentralized strategy

Gives separate business units the responsibility of designing and administering their own systems; with respect to pay design and administration, pushes responsibility closer to those affected.

Labor costs: There are three main factors to control to manage labor costs:

(1) employment (e.g., number of workers and the hours they work); (2) average cash compensation (e.g., wages, bonuses); and (3) average benefit costs.

Budgeting

A part of the organization's planning process; helps to ensure that future financial expenditures are coordinated and controlled. For pay, it involves forecasting the total expenditures required by the pay system during the next period as well as the amount of the pay increases. Bottom up and top down are the two typical approaches to the process.

Controls on manager's pay decisions come from:

A. Controls inherent in the design of the techniques. B. The formal budgeting process.

Potential drawback of decentralized strategy:

A. It may be difficult to transfer from one business unit to another. B. A pay system may support sub-unit objectives but contradict those of the firm. C. Decentralization can contribute to legal problems.

Compensation managers must learn how to implement and manage change by knowing:

A. The strategic and technical aspects of compensation. B. How to bargain and resolve disputes. C. How to empower employees and develop teams.

Compa-ratio

An index that helps assess how managers actually pay employees in relation to the midpoint of the pay range established for jobs. It estimates how well actual practices correspond to intended policy. Calculated as average rates actually paid divided by range midpoint.

Bottom-up budgeting approach: Step 5

Analyze forecasts.

Average cash compensation

Includes average salary level plus variable compensation such as bonuses, gain sharing, stock plans, and/or profit sharing.

Bottom-up budgeting approach: Step 7

Conduct feedback with management.

Steps 4 and 5:

Conduct the communication sessions with employees.

Several factors influence the decision on how much to increase the average pay level for the next period. D

D. Turnover effects (also called churn or slippage) The downward pressure on average wage that results from the replacement of high-wage earning employees with workers earning a lower wage.

Bottom-up budgeting approach: Step 2

Distribute forecasting instructions and worksheets.

Several factors influence the decision on how much to increase the average pay level for the next period. E

E. Cost of living.

Step 6:

Evaluate the success of the communication program.

Several factors influence the decision on how much to increase the average pay level for the next period. F

F. Geographic differentials Local conditions that employees in a specific geographic area encounter, such as labor shortages and differences in housing costs.

Marketing approach to pay communication

Includes consumer attitude surveys about the product, snappy advertising about the pay policies, and elaborate websites explaining policies and rationale. The objective is to manage expectations and attitudes about pay. Focuses on the strategy, values, and advantages of overall policies and may be silent on specifics.

Bottom-up budgeting approach

Individual employees' pay for the plan year is forecasted and summed to create an organization-wide salary budget. Involves 8 steps:

Bottom-up budgeting approach: Step 1

Instruct managers in compensation policies and techniques.

Centralized strategy

Keeps design and administration at company headquarters.

Bottom-up budgeting approach: Step 8

Monitor budgeted vs. actual increases.

Green circle rates

Pay rate that is below the minimum rate for a job or pay range/pay grade.

Red circle rates

Pay rates that are above the maximum rate for a job or pay range/pay grade.

Bottom-up budgeting approach: Step 3

Provide consultation to managers.

Bottom-up budgeting approach: Step 6

Review and revise forecasts and budgets with management.

Cost of living increase

Same as across-the-board increase except magnitude based on change in costs of living (e.g., as measured by the consumer price index [CPI]).

Several factors influence the decision on how much to increase the average pay level for the next period. A

a. How much the average level was increased this period

Merit increase guidelines

Specifications that tie pay increases to performance. They may take one of two forms: The simple version specifies pay increases permissible for different levels of performance. More complex guidelines tie pay not only to performance but also to a position in the pay range.

The compensation communication cycle consists of fivel steps:

Step 1: Define objectives of the communication program. Step 2: Collect information and identify the facts. Step 3: Choose communication tools and media.

Communication approach to pay communication

Tends to focus on explaining practices, details, and the way pay is determined.

Planned pay-level rise

The percentage increase in average pay for the unit that is planned to occur

Top-down budgeting approach

Top management determines the amount of money to be spent on pay and allocates it down to each subunit for the plan year.

Labor costs =

number of workers and hours worked × (average cash compensation + average benefit cost).