Rewards & Compensation Exam 1

Family and Medical Leave Act

-employers with 50+ employees must allow employees to take up to 12 weeks of leave for family illness or child care -leave can be unpaid -reasonable guarantee of re-employment

Issues to Remember (Expectancy Theory)

-managers get what they reward, not what they want -pay secrecy can jeopardize P-->O beliefs (i.e., distort perceptions) -jobs can be designed to maximize intrinsic values -group rewards can maximize cooperation -motivational force should be monitored continually -individualizing organizations can have problems and benefits

Content vs. Process Theories

Content theories specify the needs or factors that motivate people (motivation theories that focus on what motivates people rather than on how people are motivated) -Maslow -Herzberg Process theories specify the mechanisms through which people are motivated to do certain things -Expectancy Theory -Equity Theory

The Elements of Expectancy Theory

E--->P (Expectancy) "what is the probability that I can perform at the required level if I try? P--->O (Expectancy/Instrumentality) "what is the probability that performance at a certain level will lead to various outcomes?" V (Valence) "how important are these outcomes to me?

Inequity Resolution

Inequity can be resolved in several ways: -person can alter his/her inputs -person can alter his/her outcomes -person can distort his/her inputs or outcomes cognitively -person can leave the field -person can attempt to do any of the above for other -person can change the object of comparison

Rewards vs. Incentives

Rewards: issued after the fact (to acknowledge employee behaviors and performance) Incentives: offered in advance to influence future performance

Centralized vs. Decentralized Pay Decisions

Will compensation decisions be made in a tightly controlled location, or will they be delegated to managers of a firm's units? -Centralization is more appropriate when it is more efficient, when there are legal challenges, and in periods of decline -Centralization improves internal equity but does not address external equity very well

Open vs. Secret Pay

Will employees have access to information about other workers' compensation levels and how compensation decisions are made (open pay) or will this information be withheld from employees (secret pay)? -Open pay systems are more effective in firms with extensive employee involvement and egalitarian cultures

Dispersion vs. Compression

Will pay be widely different across employees? -Vertically? -Horizontally? -Across groups? -Wide horizontal dispersion can promote productivity IF it is based on performance; politics if it based on politics, and so on

Comparable Worth

concerns the issue of comparable pay for work of comparable worth -men and women doing different jobs should be paid at comparable rates if the work is comparable -intended to correct effects of historical discrimination -but market differences may justify paying non-comparable rates

Expectancy Theory

motivation is the product of three perceptions: 1. Expectancy 2. Instrumentality 3. Valence Predictions of Performance-Based Pay: 1. job tasks and responsibilities should be clearly defined. 2. the pay-performance link is critical. 3. perfomance-baed pay returns must be large enough to be seen as rewards. 4. people choose the behavior that leads to the greatest reward.

Expectancy

people have expectancies about the likelihood that an action on their part will lead to the intended behavior or performance. (is employees' assessment of their ability to perform required job tasks) -refers to the question "Can I do it?" -varies theoretically from 0 (no chance) to +1 (certain)

Compensation

refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship

Managerial Implications of Expectancy theory

-determine the outcomes each employee values -determine which behaviors you desire (be EXTREMELY specific and exhaustive) -make sure performance levels can be reached -link desired outcomes to desired behaviors -people react to their perception of a system, so make sure perceptions are accurate -make sure differences in outcomes are large enough -analyze the station for conflicting expectancies -check the system for equity -remember, this is a choice theory; people do the thing with the highest MF

Fair Labor Standards Act (1938)

The FLSA's major provisions are: 1. Minimum Wage 2. Hours of Work (including overtime) 3. Child labor -an additional provision requires that records be kept of employees, their hours worked, and their pay. -minimum wage (rose to $10.10/hour for federal contractors in 2015; linked to CPI thereafter; minimum for tipped workers $4.90/hour) -overtime (requires payment at 1.5 the standard for working more than 40 hours per week) -equal pay (Equal Pay Act, 1963) -Child Labor -Record-keeping

Job vs. Individual Pay

-Will compensation be based on how the company values a particular job, or will it be based on how much skill or knowledge an employee brings to the job? *Job-based pay* works better with: -stable technologies, stable standardized jobs, stable employees, need for training, low turnover, and internal career ladders *Person-based pay* works better with: -educated employees who are willing and motivated to learn new jobs, rapid technological and structural changes, emphasis on employee participation and teamwork, limited opportunities for upward mobility, many opportunities to learn new skills, and high absenteeism and turnover costs

Fixed vs. Variable Pay

-Will compensation be paid regularly on a fixed basis--through base salary--or will it fluctuate depending on such pre-established criteria as performance and company profits? -fixed pay reduces risk -variable pay is more advantageous in newer, smaller firms with young professional work forces

Performance vs. Membership

-Will compensation emphasize performance, and tie pay to individual or group contributions, or will it emphasize membership in the organization, logging in a prescribed number of hours each week and progressing up the organizational ladder? -performance-based pay is more common in smaller, flatter firms that emphasize rapid growth, internal competition, and readily available performance indicators

Below-Market vs. Above-Market Compensation

-Will employees be compensated at below market levels, at market levels, to at above-market levels? -below-market rates are more common in smaller, younger, non-unionized firms in economically-depressed areas, with a higher proportion of women and minorities?

Monetary vs. Non-Monetary Compensation

-Will the compensation plan emphasize motivating employees through monetary rewards like pay and sock options, or will it stress non-mortary rewards such as interesting work and job security? -Monetary rewards are typically emphasized in systems that value individual achievement and responsibility -Non-monetary rewards are prevalent in systems that emphasize commitment

Egalitarianism vs. Elitism

-Will the compensation system place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)? -Elitist systems are more prevalent in older, well-established firms with mature products, relatively unchanging market share, and limited competition

Ledbetter Fair Pay Act (2009)

-attempts to correct problems created by Supreme Court decision in Ledbetter v. Goodyear, 2007 -180-day statute of limitations for filling a claim of discrimination. Resets with each new discriminatory paycheck. -specifies this for ADA, ADEA, and other acts as well as Civil Rights Act -allows recovery of back pay for up to 2 years -women earned 78 cents to the (male) dollar in 2007; 59 cents in 1963

Internal vs. External Equity

Will the compensation plan be seen as fair within the company, and/or will it be seen as fair compared to what other employers are paying for the same job? *External equity* is more important in: -newer, smaller firms in a rapidly changing environment, with a high need for innovation to stay competitive *Internal equity* is more important in: -older, larger, well-established firms

Cash Compensation: COLA's

a cost of living adjustment to base wages may be made on the basis of changes in what other employers are paying for the same work, changes in loving costs, or changes in experience or skill. -less common than in the past as employers continually try to control fixed costs and link pay increases to individual and/or company performance.

How people are paid effect their behaviors at work, which effect.....

an organization's success. -for most employers, compensation is a major part of total cost, and often it is the single largest part of operating cost. These two factors together mean that well-designed compensation systems can help an organization achieve and sustain competitive advantage. -poorly designed compensation systems can likewise play a major role in undermining organization success

A Pay Model

contains 3 basic building blocks: 1. the compensation objectives (efficiency, fairness, ethics, and compliance with laws and regulations) 2. the policies that form the foundation of the compensation system 3. the techniques that make up the compensation system.

Maslow and Herzberg state

people have certain needs, such as physiological, security, and self-esteem, that influence behavior. Although neither theory is clear on how these needs are offered and how they help deliver behavior, presumably if we offer rewards that satisfy one of more needs, employees will behave in desired ways. flexible compensation, with employees choosing from a menu of pay and benefit choices, clearly is driven by the issue of needs. Who best knows what satisfies needs? The Employee! So let employees choose, within limits, what they want in their reward package.

Instrumentality

people have expectancies or instrumentalities about the likelihood that certain outcomes will follow from that behavior. (employees' beliefs that requisite job performance will be rewarded by the organization) -refers to the question "What's in it for me?" -varies theoretically from 0 (no chance to +1 (certain)

Valence (V)

people have preferences among various outcomes available to them. (the value employees attach to the organization rewards offered for satisfactory job performance) -refers to the question "Do I want it?" -varies theoretically from -1 (really hate) through 0 (couldn't care less) to +1 (really love) -the sign represents the direction of the preference, the size represents its strength

Prevailing Wages Laws (1931, 1936)

set pay for work done to produce goods and services contracted by the federal government. -the minimum wage that must be paid for work done on covered government projects or purchases. -prevents contractors from using their size to drive down wages

Incentive Effect

the degree to which pay influences individual and aggregate motivation among the employees we have at any point in time -pay can affect the motivational intensity, direction, and persistence of current employees. -motivation, together with employee ability and work/organizational design (which can help or hinder employee performance), determines employee behaviors such as performance.

Cash Compensation: Incentives

(also tie pay increases to performance) *incentives are one-time payments, they do not permanently increase labor costs. When performance declines, incentive pay automatically declines (referred to as variable pay sometimes)* -incentives differ from merit adjustments: 1. incentives do not increase the base wage and must be reared each pay period. 2. the potential size of the incentive payment will generally be known beforehand. (Whereas merit pay programs evaluate past performance of an individual and then decide on the size of the increase, what must happen in order to receive the incentive payment is called out very specifically ahead of time.) 3. an incentive program relies on an objective measure of performance (sales), whereas a merit increase program typically relates on a subjective rating of performance. *incentives explicitly try to influence future behavior whereas merit recognizes (rewards) past behavior, which is hoped to influence future behavior. The incentive-reward distinction is a matter of timing.*

Equal Pay Act (EPA) of 1963

(which is part of the FLSA) forbids wage discrimination on the basis of gender if employees perform equal work in the same establishment. -men and women doing the same job should be paid the same, except seniority, merit, performance, or facts other than sex -same job = require equal skill, effort, and responsibility and are performed under similar working conditions

Health Benefits

*Health Care Reform (Affordable Care Act or Obamacare)* -technically, no employer mandate -employers with 50+ employees must provide health insurance or pay a fine of $2,000/employee each year if any employee recipes federal subsidies to purchase health insurance. Fines applied to entire number of employees minus some allowances. -uninsured and self-employees can purchase insurance through state-based exchanges with subsidies available to individuals with incomes between 133% and 400% of poverty level (federal poverty level for family of 4 is $22,050) *Have to work out the interactions between old laws and new law* *If health benefits are offered, some provisions of ERISA regulate what can be done* *Some issues with managed care options such as PPOs and HMOs* *Some state laws supplement federal laws*

Forms of Pay

*Total Compensation* -the complete pay package for employees, including pay received directly through cash compensation (base, merit/cost of living; short-term incentives; long-term incentives) and indirectly as benefits (pensions, medical insurance programs to help balance work and life demands, brightly colored uniforms) *Rational Returns* -recognition and status -employment security -challenging work -learning opportunities

What behaviors do employers care about?

-employers want employees to perform in ways that lead to better organizational performance. *organizational strategy* is the guiding force that determines what kinds of employee behaviors are needed. Ex: Nordstrom's stores are known for extremely good quality merchandise and high level of customer satisfaction--this is the organization strategy they use to differentiate themselves from competitors. should answer these 4 questions: 1. how do we attract good employment prospects to *join* our company? 2. how do we *retain* these good employees once they join? 3. how do we get employees to *develop skills* for current and future jobs? 4. how do we get employees to *perform well* while they are here?

COBRA (Consolidated Omnibus Budget Reconciliation Act)

-if employer offers health insurance, then it must extend coverage for a period of time after termination -applies to employee and dependents -employer may require employee to cover all of the premium costs

Which behaviors should be rewarded? Performance? Effort?

-if you reward performance, you are rewarding ability -if you reward the effort, aren't you punishing the performance of the other person for their ability to be more efficient? -you will get the behaviors that you reward (so be careful about what you're rewarding)

Exempt/Non-Exempt

-managerial, technical, and professional employees typically NOT covered by FLSA (they are referred to as exempt employees) -thus, non-exempt employees are those covered by the provision of the FLSA

Civil Rights Act

-may not discriminate in compensation decisions on the basis of sex, race, color, religion, or national origin in any employment condition, including hiring, firing, promotion, transfer, compensation, and admission to training programs.

Cash Compensation: Merit Increases/Merit Bonuses

-merit pay programs evaluate past performance of an individual and then decide on the size of the increase. *Merit Increases*: given as increments to base pay and are based on performance. -an assessment (or rating) of recent past performance is made, with or without a formal performance evaluation. *Merit Bonuses*: as with merit increases, merit bonuses are based on performance rating but, unlike merit increases, are paid in the form of a lump sum rather than becoming (a permanent) part of the base salary. -merit bonuses may now be more important than traditional merit increases.

Recent Executive Orders for Prevailing Wages Laws

-minimum wage--federal contractors must pay $10.10/hour (other than that, federal minimum wage is $7.25; Arkansas minimum wage is $8.50 in 2017 -federal contractors must offer paid sick leave--1 hour for every 30 hours worked, up to 7 days per year -federal contractors cannot prevent employees from discussing their wages

OASDI (Old Age, Survivors, and Disability Insurance)

-original provisions in 1935, several changes since then -social security -medicare (for old people) -medicaid (for poor people)

Agency theory

-pay directs and motivates employee performance -employees prefer static wages (ex: a salary) to performance-based pay -if performance can be accurately monitored, payments should be based upon satisfactory completion of work duties. -if performance cannot be monitored, pay should be aligned with achieving organizational objectives

ERISA (Employee Retirement Income Security Act)

-regulates pensions and other benefits -employer is not required to offer a pension plan, but if a pension plan is offered, employer must: (follow fiduciary standards; follow vesting rules; ensure portability; ensure funding)

Unemployment Compensation and Workers' Compensation

-state laws, not federal laws, cover specific rules -premiums generally determined by "experience rating" of employer (means that the more claims the employer has, the higher the employer's premium for this insurance)

Strategic Issues: factors to consider

-strategic goals -nature of the environment -nature of organizational structure and technology -nature of employees -managerial philosophy

Goals of Process Theories

-to explain the decision to exert effort -to explain the level of effort likely to be exerted -to explain the persistence of effort

4 Policy Decisions of a Pay Model

1. *Internal Alignment* -comparisons among jobs or skill levels inside a single organization. -jobs and people's skills are compared in terms of their relative contributions to the organization's business objectives. 2. *External Competitiveness* -pay comparisons with competitors. -"How much do we wish to pay in comparison to what other employers pay?" 3. *Employee Contributions* -comparisons among individuals doing the same job for the same organization -should one programmer be paid differently from another if one has better performance and/or greater seniority? 4. *Management* -ensuring the right people get the right pay for achieving the right objectives in the right way.

For managers, compensation influences their success in two ways:

1. it is a major expense that must be managed. 2. it is a major determinant of employee attitudes and behaviors (and thus, organization performance) -So, rather than treating pay as an expense to be minimized, a manager can also use it to influence employee behaviors and to improve the organization's performance. -high pay, as long as it can be documented that it brings high returns through its influences on employees, can be a successful strategy. (Ex: Costco has high labor costs, but successful in employee retention, customer satisfaction, and the efficiency with which it generates sales) Ex: the way people are paid effects the quality of their work and their attitude toward customers. It may also affect their willingness to be flexible, learn new skills, or suggest innovations. (Costco (high labor costs but low employee retention) vs. Walmart (low labor costs but high employee retention))

Motivation involves 3 elements:

1. what's important to a person, and 2. offering it in exchange for some 3. desired behavior to narrow down specific employee preferences... -*flexible compensation*: based on the idea that only the individual employee knows what package of rewards would best suit personal needs. (ex: employees who hate risk could opt for more base pay and less incentive pay; tradeoffs between pay and benefits could also be selected)

Sorting Effect

different types of pay strategies may cause different types of people to apply to and stay with an organization. -it is not only how much, but HOW an organization pays that can result in sorting effects. (ex: people prefer to work in an organization where their pay can be must higher (or lower) depending on how they perform. -key question: " are you using the pay policy that will attract and retain the types of employees you want? -high performers have more alternative job opportunities and also that more opportunities (ex: if they are not paid more for higher performance), translates to higher turnover.

Equity Theory

employees are motivated when perceived outputs (pay) are equal to perceived inputs (effort, work behaviors) -Inequity exists for Person (P) whenever he/she perceives that the ratio of his/her outcomes to inputs (i.e., Op/Ip) and the ratio of Other's (O's) outcomes to inputs (i.e., Oo/Io) are unequal -if employees perceive that others are paid more for the same effort, they will react negatively (e.g., shrink) to correct the output-to-input balance.

Combination of the Elements (Expectancy theory)

in any situation, the action a person chooses to take is determined by the person's expectancies and valences at the time--i.e., the action with the highest motivational force. MF = (E-->P) * Σ [(P O)(V)] -values of both the term (E-->P) and the term Σ [(P O)(V)] must be non-zero for a person to be motivated