Compensation Management: Test 1

Context: Hierarchical Structure

-More hierarchical structures are related to greater performance when the work flow depends on individual contributors -High performers quit less under more hierarchical systems when: -->Pay is based on performance rather than seniority -->When people have knowledge of the structure

Tournament theory

-Motivation and performance -->All players will play better in the first tournament, where the prize differentials are larger -->Greater the difference between an employee's salary and the boss's salary, the harder he/she will work -->Does not directly address turnover

Strategic compensation choices

-Objectives -Internal alignment -External competitiveness -Employee contributions -Management

External competitiveness

-Pay comparisons with competitors -Pay is 'market driven' Objective: -To ensure that pay is sufficient to attract and retain employees -To control labor costs to ensure competitive pricing of products/ services

Total Compensations

-Pay received directly as cash and indirectly as benefits

Egalitarian structures

-send the message that all employees are valued equally Advantages: -Fewer levels and smaller differentials between adjacent levels and between highest- and lowest-paid workers Disadvantages: -'Averagism' brings to light that equal treatment can mean more knowledgeable employees feel underpaid

Hierarchical structures

-send the message that the organization values the differences in work content, individual skills, and contributions to the organization -->Multiple levels include detailed descriptions of work done at each level -->Outlined responsibility for each

Support HR Strategy

AMO theory: -P (Performance) = f(A,M,O) -A- Ability -M- Motivation -O- Opportunity HR systems will be most effective when: -Employee ability is developed through selective hiring and training -Compensation system motivates employees -Roles allow employees to be involved in decision making

Best Fit

An organization is likely to achieve competitive advantage if the pay system: -Reflects company's strategy and values -Is responsive to employees' and unions' needs -Is globally competitive

Relational returns

Are psychological: i.e. recognition and status, employment security, challenging work, learning opportunities

Best Practices

Assumptions: -A set of best-pay practices exists -Practices can be applied universally across all situations -Results in better performance with almost any business strategy

Determining the Internal Job Structure

Ch. 4 slide 5

Contingency notion

Change in business strategies should result in change, pay systems

What criteria can we use to establish internal Alignment?

Content: Work performed in a job and how it gets done -Structure- Ranks jobs on: -Skills required -Complexity of tasks -Problem solving -Responsibility Value: Worth of the work and its contribution to the organization

Step 1 cont. cont.

Culture/Values: -Guide an employer's behavior and treatment of employees -Reflected in the pay system Social and political context -Legal and regulatory requirements -Cultural differences -Changing workforce -Demographics -Affects compensation choices

What Shapes Internal Structures?

Economic pressures; -Early advocates: Adam Smith, Karl Marx -Marginal productivity -Supply and demand for labor and products and services Government policies, laws, and regulations: -Equal Pay Act and Civil Rights Act -Living wage

Acceptability

Potential for subjectivity and favoritism

Conventional methods

Questionnaires and interviews Advantage: -Involvement increases understanding of process Disadvantage: -Open to bias and favoritism

Job-based structures

Rely on the work content

Job Analysis

Systematic method to discover and describe: -The differences and similarities amongst various jobs Constitutes of: -Job description - Tasks, duties and responsibilities that make up a job -Job specification - Knowledge, skills, and abilities, necessary to perform the job -Job-based structures:Look at what people are doing and the expected outcomes -Skill- and competency-based structures -->Look at the person

Employee contributions

Understanding the basis for judging performance, helps perceive pay as fair

Differentiation strategy

Unique and innovative product or service at a premium price

Stated strategies

Written compensation strategies

Support Business Strategy

-Aligns pay systems with organization's business strategy -Better the alignment, more effective is the organization

Compensation

-All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship

Incentives (Variable pay)`

-Are one-time payments -May be long-term (stock options) or short-term

Forms of pay: Base wage

-Cash that an employer pays in return for the work performed -A function of the skill or education an employee possesses -Salary-Pay for employees: --Who are exempt from regulations of the Fair Labor Standards Act (FLSA) --Wage-Pay for workers: -Is calculated at an annual or monthly rate

Internal alignment

-Compares jobs or skill levels inside a single organization -->Pertains to the pay rates for employees doing: ---->Equal work -Dissimilar work/Pay relationships affect employee decisions to: 1. Stay with the organization 2. Become more flexible by investing in additional training 3. Seek greater responsibility

Strategic perspective:

-Compensation choices that help the organization gain competitive advantage -Different strategies within the same industry -Different strategies within the same company

Society

-Considers pay as a measure of justice - e.g. laws to eliminate gender bias in pay -Job benefits- seen as a reflection of justice in society

Wage-Pay for workers:

-Covered by overtime and reporting provisions of the Fair Labor Standards Act -Is calculated on hourly basis

Network of returns

-Created by different forms of pay -Useful if bonuses and development opportunities work together

Importance of internal alignment

-Efficiency Pay structures imply future returns -Fairness For fair (sizable) differentials Against fair (sizable) differentials -Compliance Comply with regulation of the country

Essential elements and the Americans with Disabilities Act

-Elements of a job that cannot be reassigned to other workers must be specified -Essential functions- Fundamental job duties of the employment position -Does not provide any special benefits for people with disabilities

Quantitative methods

-Facilitate statistical analysis of results and allow more data to be collected faster Advantage: -->Practical and cost-effective Disadvantages: -->Important aspects of a job may be omitted -->Resulting job descriptions can be faulty

Job analysis information and comparability across borders

-Global firms should analyze jobs to: -->Maintain consistency in job content -->Be able to measure ways in which jobs are similar and different

Managers - Influences their Success

-Major expense - must be managed -May influence employee behaviors -May improve organizational performance

Employees

-Major source of financial security -Entitlement for being an employee of the company -Reward for a job well done

Forms of pay: Merit pay/Cost-of-living adjustments

-Pay increases are given in recognition of past work behavior -Same increases given to everyone, regardless of performance -Periodic adjustments to base wages on the basis of changes in: --What other employers are paying for same work --Overall cost of living --Experience or skill

Impact of any internal structure on organization performance is affected by other dimensions of the pay model:

-Pay levels (competitiveness) -Employee performance (contributions) -Employee knowledge of the pay structure (management)

Step 4

-Recognizes that the strategy must change to fit changing conditions -Involves periodic reassessment

Forms of pay: Incentives (Variable pay)

-Related to performance -Do not increase base wage -Potential size of the payment will generally be known beforehand

Loosely coupled

-Requires constant innovation -Pay structures are more loosely linked to the organization to provide flexibility

Equity theory: Fairness

-Research suggests that employees judge fairness by multiple comparisons -->Comparing to jobs similar to their own -->Comparing their job to others at the same employer -->Comparing their jobs' pay against external pay levels -Results from these comparisons depend in part on the accuracy of employee knowledge

Ch 1. :Perspectives of Compensation

-Society's views -Stockholder's views -Employees' views -Manager's views

What Shapes Internal Structures? cont. cont. cont.

-Temporary work suppliers: -Outsourcing specialists -->Pay for employees under both practices based on internal structure of home employer -Delayering: -->Cuts unnecessary, non-contributing work -->Adds work to other jobs, enlarges them, changes the job's value and structure Overall HR policies: -If an organization has more levels, it can offer more promotions, but there may be smaller pay differences between levels -More frequent promotions (even without significant pay increases) offer a sense of "career progress" to employees Internal labor markets: Combining external and organization Factors: -Internal labor market refers to rules and procedures that: -Determine pay for different jobs within a single organization -Allocate employees among those different jobs

internal pay structure

-The number of levels of work -The pay differentials between the levels -The criteria or base used to determine those levels and differentials -Reporting relationships

What are Differentials and How are they Determined?

-The pay differences among levels are referred to as differentials Pay is determined by: -Knowledge/ skills involved -Working conditions -Valued addition to the company -The same basic structure of percent differentials can be paired with different pay level policies

Forms of Pay

-Total Compensation -Relational Returns

Stockholders

-Using stock to pay employees creates a sense of ownership -Linking executive pay to company performance increases stockholders' returns

Institutional model: Copy others

-Very few "first movers" -Copiers have little concern for alignment and innovative pay practices

Tailored

-Well designed jobs with detailed steps or tasks -Very small pay differentials among jobs

Cost leadership strategy-

-efficiency focused, stresses doing more with less by minimizing costs, encourages productivity increases and how jobs can be better preformed

Ch. 3: internal alignment

-often called internal equity -Refers to the pay relationships among different jobs, skill, and/or competencies within a single organization

Step 1 - Assess Total Compensation Implications

1. Business strategy and competitive dynamics- Understand the business -Changing customer needs -Competitors' actions -Changing labor market conditions -Changing laws -Globalization 2. Assess global competitive dynamics

Benefits

1. Income protection -Medical insurance, retirement programs, and life insurance 2. Work/life balance -Vacations, financial planning, referrals for child and elder care, and telecommuting 3. Allowances

Sources of Competitive Advantage: Three Tests

1. Is it aligned? -With the business strategy -Externally with the economic and socio-political conditions -Internally with HR system 2. Does it differentiate? 3. Does it add value? -Calculate the return on investment (ROI)

Total earning opportunities

Comparison of today's initial offers to consideration of future

What Shapes Internal Structures? cont. cont.

Cultures and customs: -Shared mind-sets may judge what size pay differential is fair -Global competition and an aging workforce has made age-based pay an expensive affair Organization strategy: -Aligned, yet adaptable pay structures may be required Organization human capital: -Education -Experience -Knowledge -Abilities -Skills -The greater the value added by the skills and experience, the more pay those skills will command Organization work design: -Technology used in producing goods and services influences: -Organizational design -The work to be performed -The skills/knowledge required to perform the work

Incentive effect:

Degree to which pay influences individual and aggregate motivation

Sorting effect:

Effect that pay can have on the composition of the workforce -How an organization pays, can result in sorting effects -Diff. types of strategies may cause diff. types of people to apply to and stay with an org. --> i.e. higher pay levels may help an org. to attract quality candidates

What Shapes Internal Structures? cont. cont. cont. cont.

Employee acceptance : A key factor -Procedural justice refers to the process by which a decision is reached -Distributive justice refers to the fairness of the decision -Pay procedures are more likely to be perceived as fair: -If they are consistently applied to all employees -If employees participated in the process -If appeals procedures are included -If the data used are accurate

Step 1 cont. cont. cont.

Employee preferences: -How to better satisfy individual needs and preferences Choice: -May confuse employees -Challenging to design and manage -Requires meeting codes and regulations Union preferences: -Affect pay strategy -Unions' interests can differ -Compensation deals with unions can be costly to change

Validity

Examines the convergence of results among sources of data and methods

What Shapes Internal Structures? cont.

External stakeholders: -Unions seek smaller pay differences among jobs and seniority-based promotions -Stockholders are interested in pay differences between executives and others in the organization -The AFL-CIO uses information on pay differences to rally support for unions and influence public opinion

Ch. 2: Strategy:

Fundamental directions that an organization chooses

Step 1 cont.

HR strategy - Pay as a supporting player or catalyst for change? Pay strategy: -Is influenced by how it fits with other HR systems -Can be a supporting player, as in the high-performance approach -Can take the lead and be a catalyst for change

Unstated strategies

Inferred from the pay decisions

Guidance from the Evidence

Internal alignment: -Pay differences among internal jobs can affect results External competitiveness: -Paying higher than the average paid by competitors can affect results Employee contributions: -Performance-based pay can affect results

Step 3

Involves implementing the strategy through : -The design and execution of the compensation system

Job-Based Approach: Most Common

Job analysis- Is critical for determining compensation -Helps establish an internally fair and aligned job structure

Guidance from the Evidence

Managing compensation: -Consider all dimensions of the pay strategy Compensation strategy: -Should be embedded within broader HR strategy Identify what practices pay off best under what conditions - Contingency

Reliability

Measure of consistency of results among various: -->Analysts, methods, sources of data, or over time

Relational returns from work

Nonfinancial returns that substantially impact employee behavior

What Shapes Internal Structures? cont. cont. cont. cont. cont.

Pay structures change: "Change-and-congeal" process -->Pay structures established at an earlier time may be maintained for cultural or political reasons -->May take an economic jolt to overcome the resistance -->New norms form around the new structure

Research indicates that:

Research indicates that: How you pay matters as much as how much you pay Performance-based pay: -Improves performance when combined with high-performance practices -Can be the best practice under right circumstances

Management

Right people get the right pay for achieving the right objectives in the right way

Person-based structures:

Shift the focus to the employee: -Skills, knowledge, or competencies and their usage for particular job

Developing A Total Compensation Strategy: Four Steps

Step 1 - Assess total compensation implications Step 2 - Map a total compensation strategy Step 3 - Implement strategy Step 4 - Reassess

Step 2 - Map a Total Compensation Strategy

Strategic map: -Provides compensation strategy based on pay model -Clarifies the message that company is trying to establish with its compensation system -Does not tell which strategy is best but provides a framework and guidance

Customer focused business strategy

Stresses delighting customers and bases employee pay on how well they do this

egalitarian structures

are related to greater performance when close collaboration and sharing of knowledge are required

Pay affects

motivational intensity, direction, and persistence