Compensation and Benefits Final

Labor markets usually begin with four basic assumptions:

1. Employers always seek to maximize profit 2. People are all the same and therefore interchangeable 3. The pay rates reflect all costs associated with employment 4. The markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate

Group Incentive Plan Disadvantages

1. Line-of-sight may be lessened 2. May lead to increased turnover among top individual performers who are discouraged because they must share with lesser contributors 3. Increases compensation risk to employees because of lower income stability.

Group Incentive Plan Advantages

1. Positive impact on organization and individual performance of about 5 to 10 percent per year 2. Easier to develop performance measures than it is for individual plans 3. Signals that cooperation, both within and across groups, is a desired behavior 4. Teamwork meets with enthusiastic support from most employees 5. May increase participation of employees in decision-making process

pay-for-knowledge plans

A compensation practice whereby employees are paid for the number of different jobs they can adequately perform or the amount of knowledge they possess.

balanced scorecard

A corporatewide, overall performance measure typically incorporating financial results, process improvements, customer service, and innovation.

criterion deficiency

A criterion is deficient if it fails to include all of the dimensions relevant to job performance (e.g., excluding keyboarding skills for a secretary's job performance).

pay satisfaction

A function of the discrepancy between employees' perceptions of how much pay they should receive and how much pay they do receive. If these perceptions are equal, an employee is said to experience pay satisfaction.

Improshare (IMproved PROductivity through SHARing)

A gain-sharing plan in which a standard is developed to identify the expected hours required to produce an acceptable level of output. Any savings arising from production of agreed-upon output in fewer-than-expected hours are shared by the firm and the worker.

Scanlon plan

A group cost-savings plan designed to lower labor costs without lowering the level of a firm's activity. Incentives are derived as the ratio between labor costs and sales value of production (SVOP).

Rucker plan

A group cost-savings plan in which cost reductions due to employee efforts are shared with the employees. It involves a somewhat more complex formula than a Scanlon plan for determining employee incentive bonuses.

alternation ranking

A job evaluation method that involves ordering the job description alternately at each extreme. All the jobs are considered. Agreement is reached on which is the most valuable and then the least valuable. Evaluators alternate between the next most valued and next least valued and so on until the jobs have been ordered.

market line

A line on a graph that links a company's benchmark job evaluation points on the horizontal axis (internal structure) with market rates paid by competitors (market survey) on the vertical axis. It summarizes the distribution of going rates paid by competitors in the market.

Bureau of Labor Statistics (BLS)

A major source of publicly available pay data. It also calculates the consumer price index.

equal employment opportunity

A mandate that all firms make employment decisions that are "blind" to minority/gender status.

bourse market

A market that allows haggling over terms and conditions until an agreement is reached.

Consumer Price Index (CPI)

A measure of the changes in prices in a fixed market basket of goods and services purchased by a hypothetical average family. Not an absolute measure of living costs; rather, a measure of how fast costs are changing. Published by the Bureau of Labor Statistics, U.S. Department of Labor.

balance sheet approach

A method for compensating expatriates based upon the belief that the employee should not suffer financially for accepting a foreign-based assignment. The expatriate's pay is adjusted so that the amounts of the financial responsibilities the expatriate had prior to the assignment are kept at about the same level while on assignment—the company pays for the difference.

tax equalization

A method whereby an expatriate pays neither more nor less tax than the assumed home-country tax on base remuneration.

central tendency

A midpoint in a group of measures.

budgeting

A part of the organization's planning process; helps to ensure that future financial expenditures are coordinated and controlled. 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.

stock ownership plans

A plan that allows employees to buy or receive company stock; offered as an employee benefit.

maturity curve

A plot of the empirical relationship between current pay and years since a professional has last received a degree (YSLD), thus allowing organizations to determine a competitive wage level for specific professional employees with varying levels of experience.

reopener clause

A provision in an employment contract that specifies that wages, and sometimes such nonwage items as pension/benefits, will be renegotiated under certain conditions (changes in cost of living, organization, profitability, and so on).

paired comparison ranking

A ranking job evaluation method that involves comparing all possible pairs of jobs under study.

360-degree feedback

A rating method that assesses employee performance from five points of view: supervisor, peer, self, customer, and subordinate.

expatriate colony

A section of a large city where expatriates tend to locate and form a community that takes on some of the cultural flavor of their home country.

regression

A statistical technique for relating present-pay differentials to some criterion, that is, pay rates in the external market, rates for jobs held predominantly by men, or factor weights that duplicate present rates for all jobs in the organization.

reservation wage

A theoretical minimum standard below which a job seeker will not accept an offer, no matter how attractive the other job attributes.

efficiency wage theory

A theory that explains why firms are rational in offering higher-than-necessary wages.

straight ranking procedure

A type of performance appraisal format in which the rater compares or ranks each employee relative to each other employee.

rating format

A type of performance appraisal format that requires that raters evaluate employees on absolute measurement scales that indicate varying levels of performance.

ranking format

A type of performance appraisal format that requires that the rater compare employees against each other to determine the relative ordering of the group on some performance measure.

lead pay-level policy

A wage structure that is set to lead the market throughout the plan year. Its aim is to maximize a firm's ability to attract and retain quality employees and to minimize employee dissatisfaction with pay.

lag pay-level policy

A wage structure that is set to match market rates at the beginning of the plan year only. The rest of the plan year, internal rates will lag behind market rates. Its objective is to offset labor costs, but it may hinder a firm's ability to attract and retain quality employees.

cost-of-living adjustments (COLAs)

Across-the-board wage and salary increases or supplemental payments based on changes in some index of prices, usually the consumer price index (CPI). If included in a union contract, ___________ are designed to increase wages automatically during the life of the contract as a function of changes in the CPI.

criterion contamination

Allowing nonperformance factors to affect performance scores.

U.S. expatriates (USEs)

American citizens working for a U.S. subsidiary in a foreign country. Main compensation concerns are to "keep the expatriates whole" relative to their U.S.-based counterparts and to provide expatriates with an incentive wage for accepting the foreign assignment.

rent

Amount by which payment to a factor of production (capital or labor) exceeds the payment needed to keep it employed and/or its productivity. In the case of an employee (labor), economic rent would be compensation paid beyond what is necessary to retain the employee and/or beyond his/her marginal product.

pay level

An average of the array of rates paid by an employer.

human capital

An economic theory proposing that the investment one is willing to make to enter an occupation is related to the returns one expects to earn over time in the form of compensation.

management by objectives (MBO)

An employee planning, development, and appraisal procedure in which a supervisor and a subordinate, or group of subordinates, jointly identify and establish common performance goals. Employee performance on the absolute standards is evaluated at the end of the specified period.

Professional

An employee who has specialized training of a scientific or intellectual nature and whose major duties do not entail the supervision of people.

shared choice

An external competitiveness policy that offers employees substantial choice among their pay forms.

sales value of production (SVOP)

An incentive metric that calculates the dollar value of goods produced and in inventory.

success sharing

An incentive plan (e.g., profit sharing or gain sharing) in which an employee's base wage matches the market wage and variable pay adds on during successful years. Because base pay is not reduced in bad years, employees bear little risk.

risk sharing

An incentive plan in which employees' base wages are set below a specified level (e.g., 80% of the market wage) and incentive earnings are used to raise wages above the base. In good years, an employee's incentive pay will more than make up for the 20 percent shortfall, giving the employee a pay premium. Because employees assume some of the risk, risk-sharing plans pay more generously than success-sharing plans in good years.

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.

essay format

An open-ended performance appraisal format. The descriptors used can range from comparisons with other employees to adjectives, behaviors, and goal accomplishment.

standard rating scales

Appraisal system characterized by (1) one or more performance standards being developed and defined for the appraiser and (2) each performance standard having a measurement scale indicating varying levels of performance on that dimension. Appraisers rate the appraisee by checking the point on the scale that best represents the appraisee's performance level. Rating scales vary in the extent to which anchors along the scale are defined.

Cash Profit-Sharing Plan

Award based on organizational profitability; shares a percentage of profits. Usually an annual payout--can be deferred 401(k) or cash.

Team/group 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.

Brito v. Zia Company

Benchmark case that interpreted performance evaluation as a test, subject to validation requirements, and used these evaluations based on a rating format to lay off employees, resulting in a disproportionate number of minorities being discharged.

Goal Setting Theory

Challenging and specific performance goals generate the most employee effort. Goals serve as feedback standard to which employees can evaluate their performance. Employees must be motivated to choose and persevere in pursuing performance goals. Performance-based pay that is contingent upon continued achievement of challenging, specific performance goals increases performance. Regular and specific feedback on performance/goal attainment is important.

local country nationals (LCNs)

Citizens of a country in which a U.S. foreign subsidiary is located. LCNs' compensation is tied either to local wage rates or to the rates of U.S. expatriates performing the same job.

broad banding

Collapsing a number of salary grades into a smaller number of broad grades with wide ranges.

skill requirement

Composite of experience, training, and ability as measured by the performance requirements of a particular job.

variation

Distribution of rates around a measure of central tendency. They tell us how the rates are spread out in the market.

compensating differentials

Economic theory that attributes the variety of pay rates in the external labor market to differences in attractive as well as negative characteristics in jobs. Pay differences must overcome negative characteristics to attract employees.

Equity Theory

Employees are motivated to perform when the ratio of their perceived outputs (pay) to perceived inputs (effort, performance) is equal to the perceived outputs/inputs of a comparison person. The pay/performance link is critical; increases in performance must be matched by commensurate increases in pay to achieve equity/fairness, particularly among high performers. Perceived inequity can lead to lower effort, theft, lawsuits, and/or turnover.

expatriates

Employees assigned outside their base country for any period of time in excess of one year.

third-country nationals

Employees of a U.S. foreign subsidiary who maintain citizenship in a country other than the United States or the host country. ________ compensation is tied to comparative wages in the local country, the United States, or the country of citizenship.

social comparison

Explains the high pay of executives. In this view, executive salaries bear a consistent relative relationship to compensation of lower-level employees

affirmative action

Firms with government contracts must take affirmative steps to hire women and minorities in proportion to their presence in the labor force.

Herzberg's Two-Factor Theory

Hygiene/maintenance factors (pay) prevent dissatisfaction, but do not motivate or cause satisfaction. Hygiene factors help with basic living needs, security, and fair treatment. Satisfiers/motivators, such as recognition, promotion, and achievement, motivate performance. Base pay must be set high enough to provide individuals with the economic means to meet hygiene needs, but it alone cannot motivate performance.

tariff agreements

In some European countries, the wage rates negotiated by employer associations and trade union federations for all wage earners for all companies in an industry group.

Halsey 50-50 method

Individual incentive method that provides for variable incentives as a function of a standard expressed as time period per unit of production. This plan derives its name from the shared split between worker and employer of any savings in direct costs.

standard hour plan

Individual incentive plan in which rate determination is based on time period per unit of production and wages vary directly as a constant function of product level. In this context, the incentive rate in standard hour plans is set based on completion of a task in some expected time period.

straight piecework system

Individual incentive plan in which rate determination is based on units of production per time period; wages vary directly as a constant function of production level.

Bedeaux plan

Individual incentive plan that provides a variation on straight piecework and standard hour plans. Instead of timing an entire task, requires determination of the time required to complete each simple action of a task. Workers receive a wage incentive for completing a task in less than the standard time.

Rowan plan

Individual incentive plan that provides for variable incentives as a function of a standard expressed as time period per unit of production. It is similar to the Halsey plan, but in this plan a worker's bonus increases as the time required to complete the task decreases.

Gantt plan

Individual incentive plan that provides for variable incentives as a function of a standard expressed as time period per unit of production. Under this plan, a standard time for a task is purposely set at a level requiring high effort to complete.

Taylor plan

Individual incentive plan that provides for variable incentives as a function of units of production per time period. It provides two piecework rates that are established for production above and below standard, and these rates are higher and lower than the regular wage incentive level.

Merrick plan

Individual incentive plan that provides for variable incentives as a function of units of production per time period. It works like the Taylor plan, but three piecework rates are set: (1) high—for production exceeding 100 percent of standard; (2) medium—for production between 83 and 100 percent of standard; and (3) low—for production less than 83 percent of standard.

incentive

Inducement offered in advance to influence future performance (e.g., sales commissions).

long-term incentives

Inducements offered in advance to influence longer-rate (multiyear) results. Usually offered to top managers and professionals to get them to focus on long-term organization objectives.

What shapes external competitiveness?

Labor Market Factors Product Market Factors Organization Factors

geographic differentials

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

Pay Surveys

Measure labor market wage changes

Personal Expense Budget

Measures employee's cost of living

lifetime employment

Most prevalent in Japanese companies, the notion of employees' staying with the same company for their entire career, despite possible poor performance on the part of either an employee or the company.

Expectancy Theory

Motivation is the product of the following three perceptions: - Expectancy is employees' assessment of their ability to perform required job tasks. - Instrumentality is employees' beliefs that higher job performance will be rewarded by the organization. - Valence is the value employees attach to the organization rewards received for job performance. Job tasks and responsibilities should be clearly defined. Line of sight is critical. Pay must be clearly linked to performance and this link must be perceived as strong.

pay grade

One of the classes, levels, or groups into which jobs of the same or similar values are grouped for compensation purposes. All jobs in a pay grade have the same pay range—maximum, minimum, and midpoint.

spot award

One-time award for exceptional performance; also called a spot bonus.

Agency Theory

Pay directs and motivates employee performance. Employees are risk-averse. They prefer certain/fixed income flows (wage, salary) to variable income flows. If performance can be accurately monitored without undue cost or if risk due to variability in outcomes is large, payments should be based upon behaviors. If monitoring of behaviors is difficult or costly and if risk due to variability in outcomes is not large, pay should be based on outcomes. Performance-based pay can be used ot direct and induce employee performance. Depending on risk and monitoring challenges, a choice of efficient "contract" is made: either behavior-based or outcome-based.

seniority increases

Pay increases tied to a progression pattern based on seniority. To the extent performance improves with time on the job, this method has the rudiments of paying for performance.

Green Circle Rate

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

red circle rates

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

pay-for-performance plans

Pay that varies with some measure of individual or organizational performance, such as merit pay, lump-sum bonus plans, skill-based pay, incentive plans, variable pay plans, risk sharing, and success sharing.

variable pay

Pay tied to productivity or some measure that can vary with the firm's profitability.

lump-sum award

Payment of entire increase (typically merit-based) at one time. Because amount is not factored into base pay, any benefits tied to base pay do not increase.

Maslow's Hierarchy of Needs

People are motivated by needs. Needs from hierarchy from most lower/basic (food and shelter) to higher-order (self-esteem, love, self-actualization) Unmet needs motivate. Met needs do not. Unmet higher-order needs become motivating after lower-order needs have been met. Base pay must be set high enough to provide individuals with the economic means to meet their basic living needs.

Merit pay

Permanent wage/salary increase granted to employee as function of some employee performance.

pay-with-competition policy

Policy that tries to ensure that a firm's labor costs are approximately equal to those of its competitors. It seeks to avoid placing an employer at a disadvantage in pricing products or in maintaining a qualified workforce.

dual-career ladders

Presence of two different ways to progress in an organization, each reflecting different types of contribution to the organization's mission. The managerial ladder ascends through increasing responsibility for supervision or direction of people. The professional track ascends through increasing contributions of a professional nature that do not mainly entail the supervision of employees.

benchmark conversion

Process of matching survey jobs by applying the employer's plan to the external jobs and then comparing the worth of the external job with its internal "match."

performance metrics

Quantitative measures of job performance.

zones

Ranges of pay used as controls or guidelines within pay bands that can keep the system more structurally intact. Maximums, midpoints, and minimums provide guides to appropriate pay for certain levels of work. Without zones employees may float to the maximum pay, which for many jobs in the band is higher than market value.

Decentralized strategy

Refers to a management strategy of giving separate business units the responsibility of designing and administering their own systems

job structure

Relationship among jobs inside an organization, based on work content and each job's relative contribution to achieving the organization's objectives.

pay mix (or pay forms)

Relative emphasis among compensation components such as base pay, merit, incentives, and benefits.

pay-policy line

Representation of the organization's pay-level policy relative to what competitors pay for similar jobs.

Reinforcement Theory

Rewards reinforce performance. Rewards are most effective when they follow directly after behaviors to be reinforced. Behaviors that are not rewarded will be discontinued. Performance-based payments work best when they closely follow performance. Rewards tightly coupled to desire performance objectives generate higher effort. Withholding payouts discourages unwanted behaviors.

cost-of-living increase

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

merit increase guidelines

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

quoted-price market

Stores that label each item's price or ads that list a job's opening starting wage are examples of quoted-price markets.

global approach

Substitution of a particular skill and experience level for job descriptions in determining external market rates. Includes rates for all individuals who possess that skill.

ability to pay

The ability of a firm to meet employee wage demands while remaining profitable; a frequent issue in contract negotiations with unions. A firm's ability to pay is constrained by its ability to compete in its product market.

marginal product of labor

The additional output associated with the employment of one additional human resource unit, with other factors held constant.

marginal revenue of labor

The additional revenue generated when the firm employs one additional unit of human resources, with other factors held constant.

flexible compensation

The allocation of employee compensation in a variety of forms tailored to organization pay objectives and/or the needs of individual employees.

utility theory

The analysis of utility, the dollar value created by increasing revenues and/or decreasing costs by changing one or more human resource practices. It has most typically been used to analyze the payoff to making more valid employee hiring/selection decisions.

pay structures

The array of pay rates for different jobs within a single organization; they focus attention on differential compensation paid for work of unequal worth.

Base wage

The basic cash compensation that an employer pays for the work performed. Tends to reflect the value of the work itself and ignore differences in individual contributions.

competitive intelligence

The collection and analysis of information about external conditions and competitors that will enable an organization to be more competitive.

turnover effect

The downward pressure on average wage that results from the replacement of high-wage-earning employees with workers earning a lower wage.

labor demand

The employment level organizations require. An increase in wage rates will reduce the demand for labor, other factors constant. Thus, the _______________________________ curve (the relationship between employment levels and wage rates) is downward-sloping.

perquisites (perks)

The extras bestowed on top management, such as private dining rooms, company cars, and first-class airfare.

spillover effect

The fact that improvements obtained in unionized firms "spill over" to nonunion firms seeking ways to lessen workers' incentives for organizing a union.

range maximums

The maximum values to be paid for a job grade, representing the top value the organization places on the output of the work.

pay increase guidelines

The mechanisms through which levels are translated into pay increases and, therefore, dictate the size and time of the pay reward for good performance.

range minimums

The minimum values to be paid for a job grade, representing the minimum value the organization places on the work. Often, rates below the minimum are used for trainees.

External Competitiveness

The pay relationships among organizations; focuses attention on the competitive positions reflected in these relationships.

planned pay-level rise

The percentage increase in average pay that is planned to occur after considering such factors as anticipated rates of change in market data, changes in cost of living, the employer's ability to pay, and the efforts of turnover and promotions. This index may be used in top-down budgeting to control compensation costs.

shirking behavior

The propensity of employees to allow the marginal revenue product of their labor to be less than its marginal cost; to be lax.

pay ranges

The range of pay rates from minimum to maximum set for a pay grade or class. It puts limits on the rates an employer will pay for a particular job.

ranges

The range of pay rates from minimum to maximum set for a pay grade or class. It puts limits on the rates an employer will pay for a particular job.

range midpoint

The salary midway between the minimum and maximum rates of a salary range. The midpoint rate for each range is usually set to correspond to the pay-policy line and represents the rate paid for satisfactory performance on the job.

survey

The systematic process of collecting and making judgments about the compensation paid by other employers.

employer of choice

The view that a firm's external wage competitiveness is just one facet of its overall human resource policy and that competitiveness is more properly judged on overall policies. Challenging work, great colleagues, or an organization's prestige must be factored into an overall consideration of attractiveness.

relevant markets

Those employers with which an organization competes for skills and products/services. Three factors commonly used to determine the relevant markets are the occupation or skills required, the geography (willingness to relocate and/or commute), and employers that compete in the product market.

rater error training

Training that enables performance appraisers to identify and suppress psychometric errors such as leniency, severity, central tendency, and halo errors when evaluating employee performance.

performance-standard training

Training that gives performance appraisers a frame of reference for making ratee appraisals.

performance-dimension training

Training that gives performance appraisers an understanding of the dimensions on which to evaluate employee performance.

market pay line

Using key/benchmark jobs, a market pay policy line can be constructed that shows external market pay survey data as a function of internal job evaluation points. In many cases, the market pay policy line is obtained by using regression analysis, which yields an equation of the form "market pay = intercept + slope × job evaluation points." By plugging the job evaluation points for any job (both benchmark and non-benchmark jobs) into the equation, the predicted pay for each job can be obtained.

Gainsharing

Variable pay plan where payout depends not on company level performance such as profitability, but rather on performance at some sub-unit such as a plant/facility. Also, performance is often defined more broadly than just financial terms. Performance examples include labor cost/revenue, safety, cost of scrap, cost of utilities, customer satisfaction

Profit sharing

Variable pay plan where payout depends on company profitability. Size of payouts to individuals can be modified based on other measures such as individual performance.

behaviorally anchored rating scales (BARS)

Variants on standard rating scales in which the various scale levels are anchored with behavioral descriptions directly applicable to jobs being evaluated.

two-tier pay plans

Wage structures that differentiate pay for the same jobs based on hiring date. A contract is negotiated that specifies that employees hired after a stated day will receive lower wages than their higher-seniority peers working on the same or similar jobs.

core employees

Workers with whom a long-term, full-time work relationship is anticipated.

Balanced Scorecard

a combination of financial and operating measures for organization, business unit, and/or individual performance. Award pool based on achieving performance targets.

success-sharing plans

a generic term for variable pay plans that tie pay to measures of group/organization performance. Distinguished from risk-sharing plans because employees share in any success - any performance above standard - but are not penalized for performance below standard.

Risk sharing plans

a generic term for variable pay plans that tie pay to measures of group/organization performance. Distinguished from success-sharing plans in that failure to achieve baseline performance results in lower (total) direct pay. However, upside reward opportunity may be higher than in success-sharing plans in good years.

contingent workers

employment agreements only cover short, specific time periods

Centralized strategy

locates the design and administration responsibility at corporate headquarters. More likely to be found in smaller or single or single line of business organizations.

Consumer Price Index

measure of change in price over time of specific group of goods and services

Merit bonus

nonpermanent (variable) payment (bonus or lump sum) form of variable pay granted to employee as a function of some (typically primarily subjective) assessment of individual employee performance.

Across-the-board increase

permanent base wage/salary increase granted to all employees, regardless of performance. Size related to some subjective assessment of employer ability to pay.

Cost-of-living increase

same as across-the-board increase, except magnitude based on change in cost of living

Culture

shared mental programming which is rooted in the values, beliefs, and assumptions held in common by a group of people and which influences how information is processed.

managerial autonomy

the degree of discretion managers have to make total compensation a strategic tool

Base pay

the guaranteed portion of an employee's wage package

standard deviation

the most common statistical measure of variation; although its use in pay surveys is rare.

Individual Incentive

variable pay tied directly to objective measure of individual performance such as sales, production volume, or production quality