MGMT 365: Chapter 11 - Total Rewards and Compensation
Factors leading to success in utilizing bonuses include:
1. establishing clear, metric based reviews 2. Ensuring that employees who have not met performance criteria do not receive a payout 3. Educating managers and employees about the incentive plan details
Provisions focus on the follow major areas for FLSA:
1. minimum wages 2. Limits on the use of child labor 3. overtime provisions (exempt and nonexempt status)
Disadvantages of market pricing
1. pay survey data may be limited or may not be gathered in methodologically sound ways 2. Trying pay levels to market data can lead to wide fluctuations on the basis of market conditions
Pay for performance philosophy
Assumes that compensation decisions reflect performance differences
Entitlement philosophy
Assumes that individuals who have worked another year are entitled to pay increases, with little regard for performance differences.
Lead the market strategy
Company targets pay ranges so that 25% of other firms pay above and 75% pay below - enables a firm to attract and retain sufficient workers with the required capabilities and be more selective when hiring
Match the market strategy
Company targets pay ranges so that 50% of other firms pay above and 50% pay below - attempts to balance employer cost pressures and the need to attract and retain employees
Lag the market strategy
Company treats pay ranges so that 75% of other firms pay above and 25% pay below - used when the employer is experiencing financial difficulties and when an abundance of workers is available
Variable pay
Compensation linked directly to individual, team, or organizational performance
Garnishment
Court order that directs an employer to set aside a portion of an employee's wages to pay a debt owed to a creditor
Intangible rewards
Elements of compensation that cannot be as easily measured or quantified - Supportive work environment, challenging work, autonomy and supportive supervisor
internal equity
Employees are compensated fairly within the organization with regard to their KSAs
Independent Contractor Regulations
Employers do not have to pay social security, unemployment, or workers compensation costs - criteria for independent contractor status established by the internal revenues service of IRS. 1. Firms may control only the results of the work being contracted but not what or how it will be done 2. the IRS considers the amount of behavioral and financial control a company exercises over the worker and additional relationship factors
Cost of living adjustments (COLA)
Every employees pay is increased to compensate for inflations and rising prices
Across the board increases
Given as a percentage raise based on standard market or financial budgeting determinations
Market line
Graph line that shows the relationship between job value as determined by job evaluation points and job value as determined pay survey rates.
Administrative responsibilities
HR Specialists develop and administer the compensation system and ensure that pay practices comply with all legal requirements - managers help employees see the connections between their individual performance and the expected rewards
Payroll Administration
Handled in different ways: 1. HR professionals may or may not do the actual processing or payroll - If they do, payroll staff may report to HR or accounting function 2. payroll is outsourced - Accurate payroll processing is important for maintaining a positive workplace and complying with various laws 1. Managers are responsible for accuracy 2. record keeping is critical
Peevailing wage
Hourly wage determined by a formula that considers the rate period for a job by a majority of the employers in the appropriate geographic area
External Equity
If an employer's rewards are not viewed as equitable compared with other firms, the employer is likely to experience higher turnover
Benefit
Indirect reward given to an employee or group of employees as part of membership in the organization, regardless of performance
Using pay surveys
Involves evaluating many factors to determine if the data are relevant and valid 1. is the participant sample realistic? 2. Is the survey broad based? 3. How established is the survey, and how qualified are those who conducted it? 4. Does it include required elements of compensation to allow comparison of the reward mix? 5. Does it survey contain job summaries so that appropriate matches to job descriptions can be made? 6. Timeliness: How current are the data?
Compensable factor
Job dimension commonly present throughout a group of jobs within an organization that can be rated for each job - derived from job analysis - reflects the nature of different types of work performed in the organization - most popular approach because it is relatively simple to use and considers the components of a job rather than the total job
Point factor method
Looks at compensable factors in a group of similar jobs and assigns weights, or points, to them
Pay for internships
Many organization began to pay interns only after the institution of the six-factor tests by the DOL - December 2017: The DOL issued new guidance reversing the six-factor criteria and adopting a primary beneficiary test
Total Rewards
Monetary and non-monetary rewards provided by companies to attract, motivate, and retain employees
Bonus
One-time payment that does not become part of the employees bas pay
Instrumentality
Perceived likelihood that better sales performance will lead to higher commission pay
Ranking Method
Places jobs in order, from highest to lowest, by their value to the firm - appropriate in small firms with relatively few jobs
Broadbanding
Practice of using fewer pay grades with much broader ranges than in traditional compensation systems
Equal pay act of 1963
Prohibits companies from using different wage scales for men an women performing substantially the same job
Compensation Quartile Strategies
Reflect the overall market position where the organization sets its compensation levels 1. First quartile - lag the market strategy 2. Second Quartile - match the market strategy 3. Third quartile - lead the market strategy
Pay adjustment matrix
Reflects an employee's eligibility to pay increase factors considered: 1. employees level of performance as rated in an appraisal 2. Employees position in the pay range
Competency-Base Pay
Rewards individuals for the capabilities they demonstrate and acquire - Knowledge based pay (KBP) or skill based (SBP) systems - employees start at a base level of pay and receive increase as they learn to do other jobs or gain additional skills and knowledge and thus become more valuable to the employer
Key performance indicators (KPIs)
Scorecard measures that tell managers how well the organization is performing relative to critical success factors
Child Labor Provisions
Set the minimum age for employment with unlimited hours at 16 years - minimum age for hazardous occupations is 18 years - individuals who are 14 to 15 years old may work outside school hours with certain limitations
Expectancy Theory
States that an employee's motivation is based on the probability that his or her efforts will lead to an expected level of performance that is linked to a valued reward - rewards that are not appreciated by the employee have little power to motivate performance - managers who understand the key linkages in employee expectations can better monitor employee motivation and adjust reward systems accordingly
Equity Theory
States that individuals judge fairness (equity) in compensation by comparing their inputs and outcomes against the inputs and outcomes of referent others - employees inputs that are compared with referent others inputs 1. skills, abilities, knowledge, effort, loyalty, commitment, adaptability, tolerance, determination, enthusiasm, support of colleagues, and personal sacrifice - employees outcomes that are compared with referent others outcomes 1. wages, salary, benefits, bonus, recognition, reputation, praise, thanks, responsibility, training, sense of achievement, and advancement opportunities
Lilly Ledbetter Fair Pay Act
Statue of limitations are extended for equal pay claims, and each paycheck is treated as a new act of discrimination - pay practices resulting in disparate impact are also actionable
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. - can be created by various types or categories of jobs such as hourly, salaried, technical, sales, and management - the nature, culture, and structure of organization are considered when determining how many and which pay structure to have
Effective variable pay
The effectiveness of any variable pay program relies on its consistency with the organization's culture - many companies find that variable pay plans make performance results a higher priority for employees - variable pay systems should be tired to desired performance - establishment involves determining appropriate performance measures to evaluate performance and the resulting rewards - most firms have a number of important targets to track results related to critical success factors
After hours e-mail time
The increased use of e-mail in organizations raises questions about whether employees can claim that responding to company e-mails after hours should count toward overtime. - organizations should consider adopting e-mail curfew policies that discourage employees from reading and answering work-related emails off the clock
Travel time
Travel time must be counted as work time if it occurs during normal work hours for the benefit of the employer - Travel to and from work is not considered compensable travel time
Base pay
basic compensation that an employee receives, often wages or salary
Seniority
can be used as the basis for pay increases
Pay surveys
collection of data on compensation rates for workers performing similar jobs in other organizations - using benchmark jobs to anchor the survey data is helpful - internet based pay information is prevalent
Pay grades
groupings of individual jobs that have approximately the same value to the organization
Communicating pay philosophy
helps employees recognize the value of the total rewards package and how their work performance, tenure, and raises can affect their compensation
line of sight
idea that employees can clearly see how their actins and decisions lead to desired outcomes
Red-circled employee
incumbent who is paid above the range set for a job
Green-circled employee
incumbent who is paid below the range set for a job
Classification methods
involves writing descriptions of job classes and then putting each job into a grade according to the class it best matches - used in public sector organizations
Six Factor tests
issued by the SOL in April 2010 - narrowly permitted for-profit enterprises to utilize unpaid interns
Benchmark jobs
jobs that are found in many other organizations that can be used for the purposes fo comparison
Individual pay
may organizations use compa-ratio to determine each individual employee's standing in relationship to the midpoint
Individual incentive systems
tie personal effort to additional rewards for the individual employee - necessary conditions to be considered when using individual incentive plans 1. individual performance must be identifiable 2. Individual competitiveness must be desirable 3. Individualism must be stressed in the organizational culture 4. individuals must be in control of the pace of production
Training Time
time spent in training must be counted as time worked by nonexempt employees unless it is voluntary or not directly related to the job
Golden Handcuffs
used to refer to benefits, typically deferred payments, provided by an employer to discourage an employee from taking employment elsewhere.
Compensatory time off
"comp" hours are earned by public sector nonexempt employees in lieu of payment for extra time worked at the rate of 1.5 times the number of hours over 40 that are worked in a week - comp time is prohibited in the private sector and cannot be legally offered to employees working for private organizations
Global compensation issues
- developing and managing a global compensation system is extremely complex - the growing world economy has led to an increase in employees working internationally - laws, living cots, tax policies, currency, fluctuations, and more must be considered when designing the compensation
Determining Exempt Status under the FLSA: Categories for exempt stats
- executives - administrative - professional (learned and creative) - computer - outside sales (including pharmaceutical sales)
Executive Compensation
- handled differently from employee pay in various types of organizations - determined by the board of directors - subject to shareholders approval via a say on pay provision in the Dodd-frank act - contracts with executives include a clawback provision
A variety of pay incentives
- monetary incentives - team bonus - recognition and reward programs - perks - piece rate pay - opportunities to use personal expertise - stock options - autonomy - bonuses - professional development - service awards - trips - meaningful work - gainsharing - commissions - ESOP's - profit sharing - spot bonus - praise - merchandise
Entitlement
- pay and raises based on length of service - across the board raises - pay scales increased annually - industry comparisons of pay only - Holiday bonuses given to all employees
Performance
- pay and raises based on performance - no raises for poor performing employees - market-adjusted pay scales - no raises for length of service or job tenure - industry comparisons of total rewards
Determining Exempt Status under the FLSA: Major criteria for exempt status
- pay level per week - minimum of $455/week - paid on a salary basis - job duties and responsibilities - primary duties of managing 1. decision discretion/judgment 2. Requires advanced knowledge and/or training/education 3. Pursuit of artistic or creative endeavors
Basic assumptions that underlie the philosophical foundation of variable pay
- some people or groups contribute more to organizational success than do others - some people perform better and are more productive than are others - employees or groups who perform better or contribute more should receive greater compensation
Factors for effective variable pay plans
- variable pay effectiveness - current updated plans - results in desired behaviors - clearly separate from base pay - clearly communicated - performance results are clearly linked to payout - clear differentiation based on performance level - sufficient financial resources - consistent with organizational culture - measurable performance - plan is clear and understandable - linked to organization objectives
Deciding which quartile position to target for pay structures is a function of the following considerations;
1 available financial resources 2. Competitiveness pressures 3. Market availability of employees with different capabilities
Elements of total rewards - Tangible direct rewards
1. Base pay - wages and salary 2. Individual variable pay - piece rate, bonus, and commission 3. Team variable pay - gainsharing and team bonus 4. Organization variable pay - profit sharing and equity/stock awards
Strategic decisions can guide the design of compensation practices by
1. Compliance with all applicable laws and regulations 2. Cost-effectiveness for the organization 3. Internal and external equity for employees 4. Performance enhancement for the organization 5. Performance recognition and talent management for employees 6. Enhanced recruitment, involvement, and retention of employees
Typing pay to performance can be attractive for both employers and employees
1. Employers: More output per employee, lower fixed costs, and some risks shifted to employees 2. Employees: more pay when they do their jobs well
Continuum of compensation philosophies
1. Entitlement 2. Performance
Elements of total rewards - tangible indirect rewards
1. Health care benefits -- medical insurance, dental insurance, and health spending account 2. Paid time off - vacation, holidays, and medical leaves of absences 3. Disability benefits - short term disability, long term disability, and long term care insurance 4. Financial benefits - education assistance and financial planning 5. retirement benefits - defined benefit plan and defined contribution plan (401k) 6. Employee development and training
Special Pay/Overtime Issues:
1. compensatory time off 2. Incentives for nonexempt employees 3. Training time 4. Security inspection time 5. After Hours E-mail Time 6. Travel time 7. Donning and doffing time
Non-monetary incentives
1. performance awards - incentive rewards for performance 2. Recognition awards - recognizes individual Employees for their work 3. Service awards - recognizes and rewards longevity with the company
Advantages of market pricing
1. ties organizational pay levels to the external job market, without internal job evaluation distortion 2. Allows an employer to communicate to employees that the compensation system is truly market linked
Pay surveys and legal issues
Employers use outside sources or pay surveys to avoid charges that they are attempting to "price fix" wages - companies must safeguard employee privacy and provide only de-identified data so that specific employee pay rates and names are not shared - care must also be taken to avoid violating the NLRA provisions that apply to disclosing wage and benefit information
Important relations in expectancy theory within the context of pay:
Expectancy can lead to instrumentality, which in turn can lead to valence
Pay Secrecy
Explaining pay grades and pay decisions rules can enhance employee perceptions of fair and ethical treatment
Overtime
FLSA established overtime pay requirements at 1.5 times the regular pay rate for all hours worked over 40 in a week
Strategic Compensation Decisions
Firms need to manage their compensation philosophy to ensure that employees believe they are being treated fairly - entitlement philosophy is at one end of the continuum, and performance philosophy is at the other end
Job evaluation
Formal, systematic means to determine the relative worth of jobs within an organization
Incentives
Tangible rewards that encourage or motivate action
Golden Parachute
a prearranged contract with managers specifying that, in the event of a hostile takeover, the target firm's managers will be paid a significant severance package - an agreement between a company and an employee (usually an upper executive) specifying that the employee will receive certain significant benefits if employment is terminated.
Salary plus commission
combines the stability of a salary with the performance aspect of commission
Straight commission
compensation is computer as a percentage of the value of the sales generated
Variable pay
compensation that is tied to performance - performance may be evaluated and rewarded at individual, team, or organizational level
Salary
consistent payments made each period regardless of the number of hours worked
Tangible rewards
elements of compensation that can be quantitatively measured and compared between organizations
Valence
employee places a high vale on receiving high commission pay
Exempt employees
employees who hold positions for which they are not paid overtime
Nonexempt employees
employees who must be paid overtime
Incentives for nonexempt employees
employers must add the amount of direct work related incentives to a person's base pay and then calculate overtime pay as 2.5 times the higher rate of pay
Targeting high performance
focuses on providing to top-performing employees with significantly higher pay raises, while providing standard increases to the remaining satisfactory performers
Employee stock ownership plan (ESOP)
gives employees significant stock ownership in their organizations
Stock option plan
gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited period of time
Market bonding
grouping jobs into pay grades on similar market survey amounts
pay ranges
jobs within a point range are classified into job grades using the point factor method - market data are then used to determine the minimum and maximum pay rates for each job grade, and midpoint is computed by averaging the range of minimum and maximum pay rates - current pay of employees is compared with the proposed ranges
Free rider
member of the group who contributes little
Pay compression
occurs when the pay difference among individuals with different levels of experience and performance become small
Salary inversion
occurs when the pay given to new hires is higher than the compensation provided to more senior employees
Lump sum increases (LSI)
one-time payment of all or part of a yearly pay increase
Economic recessions
organizations address shortfalls in revenue by reducing employment related expenses - should be used sparingly because such strategies may result in employee job dissatisfaction and turnover
Compa-ratio
pay level divided by the midpoint of the pay range $/midpoint$ = # x 100 = #
Piece rate system
pay system in which wages are determined by multiplying the number of units produced by the piece rate for one unit - results inequality in pay, which can lead to dysfunction within a work group - training managers in the program specifics is helpful
Wages
payments calculated directly on the basis of time worked by employees
Expectancy
perceived likelihood that if the employee invest time in learning new product features, it will lead to better sales performance
Commission
percentage of the revenue generated by sales that is given to an agent or salesperson
Clawback provision
permits the organization to require an employee to return rewards obtained through unethical or negligent actions
Fair Labor Standard Act (FLSA)
primary federal law affecting compensation - enforced by the Wage and hour Division of the U.S. Department of Labor (DOL) - during enactment of FLSA, limited exemptions were included that permitted employers to restrict executives and others from receiving overtime pay
Challenges with team incentives
rewards distributed is equal amounts o all members may be perceived as unfair by some employees - some individuals who are performing poorly may prevent the team from meeting the goals needed to trigger the incentive payment
Minimum Wage
set by FLSA to be paid to a broad spectrum of covered employees - congressional action is the only way to change it
Gainsharing
sharing with employees greater than expected gains in profits and/or productivity
Security inspection time
some companies may have to count the time that employees spend going through security inspections after work as compensable
Donning and doffing time
some jobs require employees to spend a significant amount of time donning protective equipment before they report for duty
Other types of bonuses
spot, referral, hiring, retention, and project completion
Profit sharing
system to distribute a portion of an organizations profits to employees
Salary only
useful when an organization emphasizes serving and retaining existing accounts over generating new sales and accounts
Marketing pricing
uses market pay data to identify the relative value of jobs based on what other employers pay for similar jobs - key to market pricing is identifying relevant market pay data for jobs that are good matches with the employers: 1. Jobs 2. Geographic considerations 3. company strategies and philosophies about desired market competitiveness levels
Levels of variable pay
variable pay plans can be classified into three levels or categories: 1. individual 2. team 3. organizational
Critical success factors
variables that have a strong influence on the results of the organization
Team incentives
when employees participate in team level incentives they share more information among the team members - concerns are how and when to distribute the incentives and who will determine the incentive amounts - primary ways for distributing those rewards are as follows: 1. same size reward for each member 2. different size reward for each member
Gender pay gap
wider in some industries than others - continued monitoring or organizational pay levels and properly managing women's career progress are important
Referent others
workers whom the individuals uses as a reference point to make these comparisons