MGT 386: Exam 2

Labor costs

(pay levels) times (number of employees).

fairness (in relation to job evalutation)

-Attend to fairness in the design rather than results -review procedures to ensure fairness

Why are there different approaches to job evaluation?

-Different plans generate different pay structures

What are the different forms of short-term pay-for-performance plans?

-Merit bonuses -spot awards -individual incentive plans

What forms can employee involvement in compensation decisions take?

-can define skills -can arrange into a hierarchy -can bundle them into skill blocks -certify whether a person actually posses these skills

Why does the process used in the design of the internal pay structure matter?

-failure to do so risks bias and potentially unethical behaviors

What factors shape an organization's external competitiveness

-industry and technology -employer size -people's preference -organization strategy

Based on the research on job evaluation, what are the sources of possible gender bias in skill/competency based plans?

-looking to other wages as women are often underpaid

Motivation (in relation to job evaluation)

-show employees their work is valued -Help employees adapt to org. changes -Help create the network of rewards

4 types of desired behavior?

1. Decision to join 2. To stay 3. To develop skills 4. To perform well

What three elements make up the performance triangle?

1. Efficiency 2. Equity 3. Compliance

What are the various long-term incentive plans? (ie employee stock ownership plans, combination plans)

1. Employee stock ownership 2. Performance and broad based option plan 3. Combination plans

What factors determine the relevant market for a survey? Why is this important?

1. Employers who compete in the same occupations or skills 2. Hiring employees within the same geographic area 3. The same products and services

Three factors to determine relevant labor market

1. Occupation- skill/knowledge required 2. Geography- willingness to relocate, commute, become virtual employee 3. Competitors-other employers in the same labor markets

How to design a survey

1. Who should be involved in the design? 2. How many employees should be included? 3. Which jobs should be included? 4. What information should be collected?

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.

How does job evaluation translate internal alignment into practice?

A hierarchy of work that translates an internal alignment policy into practice (structure)

Cost containment

An attempt made my organization to contain benefit costs, such as imposing deductibles and co-insurance on health benefits or replacing defined benefit pension plans with defined contribution plans

How do managers identify compensable factors to evaluate jobs?

Characteristics in the work that the organization values, help it pursue its strategy and achieve objectives

In what way do efficiency, equity, and compliance influence the effectiveness of a pay-for-performance plan?

Efficiency: Strategy, structure, standards Equity: Distributive justice and procedural justice Compliance: with existing laws

How to get these desired behaviors?

Employees are influenced by: -Individual performance -Changes in the cost of living -Seniority -Market rate

Distinguish policies on external competitiveness from policies on internal alignment

External competitiveness refers to the pay relationships among organizations- pay relative to competitors

What pay level does the efficiency wage theory predict? Does this theory accurately predict organizational behavior?

High wages increase efficiency and lower labor costs if they attract high-quality applicants, lower turnover, increase worker effort, reduce shirking, and reduce the need for supervision. Minimal evidence to show if it works.

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.

Compensable factors

Job attributes that provide the basis for evaluating the relative work of jobs insides an organization. A compensable factor must be work-related, business-related, and acceptable to all parties involved

Distinguish between the process used to design and administer a person-based and a job-based approach

Person-based: focuses on the skills, knowledge, and abilities a person acquires relevant to work, less uniformity

Pay-policy line

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

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]).

Relative value of jobs

The relative contribution of jobs to organizational goals, to the external market rates, or to some other agreed-upon rates.

Pay satisfaction

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

Improshare

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 plans

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).

Alternation ranking

a job evaluation method that involves ordering the job descriptions alternately at each extreme. All jobs are considered. Agreement is reached on which is the most valuable and then the least valuable

Market line

a line on a graph that links a company' 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.

Bourse market

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

Central tendency

a midpoint in a group of measures (e.g., mean, median, mode)

Criterion pay structures

a pay structure to be duplicated with a point plan

Benchmark job

a prototypical job, or group of jobs, used as a reference for making internal/external pay comparisons.

Reservation wage

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

Ranking format

a type of performance appraisal format that requires that the rate compares employees against each other to determine relative ordering of the groups on some performance measurement (from highest to lowest).

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.

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 their marginal product

Shared choice

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

Broad banding

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

Policy capturing

compensable factor importance weights are inferred using statistical methods such as regression analysis.

Committee a priori judgment approach

compensable factor importance weights as assigned by a committee based on a priori (before-hand) judgment

Tacit work

complex work

Skill requirements

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

Pay discrimination

discrimination usually defined as including (1) access discrimination (limited or no access to jobs, promotion, or training opportunities), and (2) valuation discrimination (minority/protected populations paid less than others for performing substantially equal work).

Success sharing plans

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.

Efficiency wage theory

high wages may increase efficiency and actually lower labor costs if they: (1) attract higher quality employees, (2) decrease turnover, (3) increase worker effort, reduce shirking (slacking, loafing), and (5) reduce the need to supervise (monitor) employees.

What evidence do we have that demonstrates that variable pay improves performance results?

if designed well, have a positive impact

Halsey 50-50 method

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

Marginal product of labor

is the additional output associated with the employment of one additional person, with other production factors held constant.

Marginal revenue of labor

is the additional revenue generated when the firm employs one additional person, with other production factors held constant.

Non-benchmark job

jobs or groups of jobs that are unique, highly specialized for which there is no clear/easy reference for making internal/external pay comparisons.

Bureau of Labor Statistics (BLS)

major source of publicly available compensation (cash, bonus, and benefits but not stock ownership) data. The BLS publishes extensive information on various occupations.

Factor weights

measures that indicate the importance of each compensable factor in a job evaluation system. Weights can be derived through either a committee judgement or statistical analyses

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.

Spot award

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

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 play plans risk sharing, and success sharing.

Variable pay plans

pay tied to productivity or some measure than can vary with the firm's profitability.

Lag policy

paying below market rates may hinder a firm's ability to attract potential employees

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.

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.

pay level

refers to the average of the array of rates paid by an employer.

Pay mix

refers to the various types of payments, or pay forms, that make up total compensation.

Extrinsic rewards

rewards that a person receives from sources other than the job itself. They include compensation, supervision, promotions, vacations, friendships, and all other important outcomes apart from the job itself.

Transactional work

routine work

Topping out

situation in which employees in a skill-based compensation plan attain the top pay rate in a job category by accumulating and/or becoming certified for the top-paid skill block(s).

Job-based structure

structure that relies on work content - tasks, behaviors, responsibilities.

Job-based systems

systems that focus on jobs as the basic unit of analysis to determine the pay structure; hence, job analysis is required.

Ability to pay

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

Hit rates

the ability of a job evaluation plan to replicate a predetermined, agreed-upon job structure.

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.

Competitive intelligence

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

Labor demand

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

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.

Job pricing

the process of assigning pay to jobs based on thorough job analysis and job evaluation

Job evaluation

the process of systematically determining the relative worth of jobs to create a job structure for the organization. The evaluation is based on a combination of job content, skills required, value to the organization, organizational culture, and the external market.

Shirking behavior

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

Range midpoints

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.

Job analysis

the systematic process of collecting information related to the nature of a specific job. It provides the knowledge needed to define jobs and conduct job evaluation.

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.

Self-funding plans

these plans specify that payouts only occur after the company reaches a certain profit target. Then variable payouts for individual, team, and company performance are triggered.

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 in the form "market pay" = intercept + slope * job evaluation points" (i.e. y = mx + b). By plugging the job evaluation point for any job (both benchmark and non-benchmark jobs) into the equation, the predicted pay for each job can be obtained.

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 date will received lower wages than their higher-seniority peers working on the same or similar jobs.

Pay ranges and grades offer flexibility for:

-Differences in quality among applicants -Differences in productivity or value of quality variations -Differences in the mix of pay forms used by competitors

Organizational Strategy (in relation to job evaluation)

-Evaluation is based on the combo of job content, skills required, value to the org., org. culture, and external market -Potential to blend organizational forces and external market

Flow of work (in relation to job evaluation)

-Integrates the job's pay with its relative contribution to the org. -Helps set pay for new, unique, or challenging jobs

Classification

Job evaluation method that involves slotting job descriptions into a series of classes or grades that cover the entire range of jobs and that serve as a standard against which the job descriptions are compared

Success sharing

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.

Earnings at risk

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.

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.

Hierarchy

a grouping of jobs based on their job-related similarities and differences and on their value to the organization.

Point factor method

a job evaluation method that employs (1) compensable factors, (2) factor degrees numerically scaled, and (3) weights reflecting the relative importance of each factor. Once scaled degrees and weights are established for each factor, each job is measured against each compensable factor and a total score is calculated for each job. The total points assigned to a job determined the job's relative value and hence its location in the pay structure

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.

Interval scaling

a particular numerical point differences has the same meaning on all parts of the scale.

National Metal Trades Association (NMTA)

a point factor job evaluation play for production, maintenance, and service personnel

National Electrical Manufacturers Association (NEMA)

a point factor job evaluation system that evolved into the National Position Evaluation Plan sponsored by NMTA associates.

benchmark

a prototypical job, or group of jobs, used as a reference point for making pay comparisons within or without the organization. Benchmark jobs have well-known and stable contents, their current pay rates are generally acceptable, and the pay differentials among them are relatively stable

Employee stock ownership plans

a retirement plan in which the company contributes its stock to the retirement benefit.

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 resent rates for all jobs in the organization.

Skill Analysis

a systematic process to identify and collect information about the skills required to perform work in an organization.

Human capital theory

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 (people are human capital).

Sales value of production

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

Competencies

basic knowledge and abilities employees must acquire or demonstrate in a competency-based plan in order to successfully perform the work, satisfy customers, and achieve business objectives

Skill blocks

basic units of knowledge employees must master to perform the work, satisfy customers, and achieve business objectives

Competency-based structure

compensation approach that links pay to the depth and scope of competencies that are relevant to doing the work. Typically, used in managerial and professional work where what is accomplished may be difficult to identify.

Scaling

determining the intervals on a measurement instrument

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.

· The National Compensation Survey (NCS)

free and publicly available from the US Bureau of Labor and Statistics, uses as compensable factors knowledge, job controls/complexity, contacts, and physical environment, and can be applied to a wide variety of jobs.

Job evaluation committee

group that may be charged with the responsibility of (1) selecting a job evaluation system, (2) carrying out or at least supervising the process of job evaluation, and (3) evaluating the success with which the job evaluation has been conducted. Its role may vary among organizations, but its members usually represent all important constituencies within the organization

Standard hour plans

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.

Bedeaux plans

individual incentive plan that provides a variation on straight piecework and standard hour plans. Instead of timing an entire task, a Bedeaux plan 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.

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.

Content

information that describes a job, what responsibilities are assumed, what work is performed, and how it gets done

Skill based structures

link pay to the depth and breadth of the skills, abilities, and knowledge a person acquires that are relevant to the work. In structures based on skill, individuals are paid for all the skills for which they have been certified, regardless of whether the work they are doing requires all or just a few of those particular skills. The wage attaches to the person. In contrast, a job-based plan pays employees for the job to which they are assigned, regardless of the skills they possess.

What does marginal revenue product have to do with pay?

marginal revenue is the money generated by the sale of the marginal product, the additional output from one additional person

Factor scales

measures that reflect different degrees within each compensable factor. Most commonly five to seven degrees are defined. Each degree may be anchored by typical skills, tasks and behavior, or key job titles.

Appeals process

mechanisms created to handle pay disagreements. They provide a forum for employees and managers to voice their complaints and received a hearing.

Merit pay

permanent wage/salary increase granted to employee as function of some (typically primarily subjective) assessment of individual employee performance.

Pay-with-competition policy (match)

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.

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."

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.

Multi-skill system

systems that link pay to the number of different jobs (breadth) an employee is certified to do, regardless of the specific job they are doing.

Perquisites (perks)

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

· The Hay Group Guide Chart

this method considers work to be a process in which knowledge/skill/ability is applied to various issues and challenges in order to create an output that is of value to the organization. Compensable factors are: accountability, problem-solving, and know-how.

Relevant markets

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

Gain sharing plan

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 (including patient) satisfaction.

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 (including patient) satisfaction.

Profit sharing

variable pay plan where payout depends on company profitability. Can also be used at lower levels such as the division. Size of payouts to individuals can be modified based on other measures such as individual performance.

Profit-sharing plans

variable pay plan where payout depends on company profitability. Can also be used at lower levels such as the division. Size of payouts to individuals can be modified based on other measures such as individual performance.

Individual incentive

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