chapter 18 power point

Centralization - Decentralization

Balancing flexibility and control. •Balance ensures that pay decisions are directed at the organization's goals yet permit flexibility to respond to unique situations. •You need qualified people to carry out the compensation plan. Making information useful - compensation enterprise systems. •Some software supports employee self-service. •Manager self-service helps managers pay employees appropriately. •Communication portals explain policies and answer FAQs. •Other software processes transactions, standardizes forms, and generates reports. Knowledge and judgment is still required to understand analysis. •Computers bring up the issue of confidentiality.

Structuring the Compensation Function and Roles

An important issue revolves around the degree of decentralization (or centralization) in the overall organization structure. •A decentralized management strategy gives separate business units the responsibility of designing and administering their own systems. •A centralized strategy keeps design and administration at headquarters. Decentralizing certain aspects of pay design and administration has appeal by pushing responsibility closer to those affected. •However, there are some dilemmas. - It may be difficult to transfer from one business unit to another. - A pay system may support sub-unit objectives but contradict those of the firm. - Decentralization can contribute to legal problems.

Communication: Managing the Message

Compensation communicates what is important and what is not. •Employees must understand the pay system. - Understanding is shaped indirectly through their paychecks. - It is also shaped directly through formal communication. •Employee involvement in designing the system increases understanding. Two reasons for communicating pay information. •Resources have been used to designing an equitable system intended to attract and retain qualified people and motivate performance. •Employees seem to misunderstand the pay system.

Ethics: Managing or Manipulating?

Compensation ethics is not an oxymoron. •Public discussion of ethics in compensation benefits from informed voices. Managing compensation ethically is increasingly complicated for several reasons. •Pay really matters, it is important to all of us. •There is fierce pressure to achieve results. - Increased use of pay for performance increases these pressures. Employers may be tempted to misuse survey statistics, manipulate job evaluations, mask overtime and pay discrimination violations, among other things. •A starting point - "Strive to achieve both efficiency and fairness."

Managing Revenues

Compensation is central to driving future revenues and some companies are analyzing the value added of pay decisions. •This requires a shift in how compensation is viewed. •Compensation becomes an investment as well as an expense. •Decisions are based on analysis of the return on investment. The practice of analyzing returns on compensation decisions is in its early stages. •The fairness objective must not get lost in the search for ROI. Use compensation to retain, and recruit, top employees. •Top performers may be "pulled" to opportunities elsewhere. •Keep compensation current and competitive to discourage "passive job seekers."

Managing Labor Costs: Embedded (Design) Controls

Controls on manager's pay decisions come from two aspects. •Controls inherent in the design of the techniques. •The formal budgeting process. Here are other techniques with built in controls. •Job analysis and performance evaluation. •Skill- and competency-based plans. •Policy lines. •Range minimums and maximums. •Broad bands. •Gain sharing. •Salary-increase guidelines.

Fixing Decentralization Problems

Develop a set of corporate-wide principles or guidelines. •Principles may differ for each major pay technique. The pay system is one of many management systems. •So it must be congruent with other systems. Value chain analysis and Six Sigma improve quality and ensure value is added by each technique and at each process stage. Outsourcing is an alternative for activities not directly contributing to objectives. •Cost savings are the major advantage of outsourcing. •Disadvantages include being less responsive to unique problems. - Having less control over critical decisions and information leaks.

Say What? (Or, What to Say?)

If the pay system is not based on work-related or business logic, it is best to avoid formal communication and fix the system. •Employees are constantly informed through paychecks. Some employers communicate the range for an incumbent's present job and for all jobs in a career path. •Some indicate expected pay increases based on performance. •This provides factual information to offset the rumor mills. •Employee pay knowledge is often quite limited. Some advocate for sharing all financial data with employees. •At the minimum, work-related and business-related rationales on which pay systems are based should be shared.

Top Down - Distribution

Managers consider current year's rise, ability to pay, market adjustments, turnover effects, cost of living, and geographic differentials and decide the planned rise. A variety of methods exist for allocating the salary budget to each manager. •Some get a uniform percentage, others get variable percentages. Once allocated to subunit managers, they become a constraint. •A limited fund of money the manager has to allocate to subordinates. •Merit increase guidelines help managers make allocation decisions. •Merit increase grids ensure consistent increases and control costs. •Some companies use forced distribution approaches.

Budget Controls: Top Down

Once the total budget is determined, it is allocated to managers. There are many approaches to top-down budgeting. •Planned pay-level rise is the percentage increase in average pay for the unit that is planned to occur - a typical approach. Several factors influence the decision on how much to increase the average pay level for the next period. •How much the average level was increased this period. •Ability to pay. •Competitive market pressures. •Turnover effects. •Cost of living.

Embedded Controls

Range maximums are an important cost control. •If employees are paid above the maximum, it is a red circle rate. - Employers may freeze red circles until market adjustments shift the range. - Green circle rates represent employees paid below the minimum. Broad bands offer managers greater flexibility compared to grade-range designs. •Usually accompanied by market "reference rates" and "shadow ranges" that guide manager's decisions. •Bands may be more about career management than pay decisions. Promotion-based pay increases are often substantial. •Some organizations limit the number of promotions. •Another issue is if positions are filled internally or with outside hires.

Managing Labor Costs - Benefits

Recent approaches to reducing benefits costs is to suspend matching contributions to 401(k) retirement plans. •1 in 4 companies have this policy or are considering doing so. •More companies may move to a model which depends on profits. Some companies have eliminated benefits such as pension plans as part of seeking bankruptcy protection from creditors. •Includes several airlines, auto, and auto parts companies. •The PBGC provides benefits to covered employees with a maximum monthly benefit of $5,011. Other typical ways of controlling benefits costs concerns the area of health care.

Managing Pay to Support Strategy and Change

Successfully manage alignment issues to drive future revenues. •Realign during restructure or strategic changes. Pay powerfully signals change, and changing pay gets attention. •Pay changes can play two roles during restructuring. - leading catalyst for change, or a follower of change. Compensation managers must learn how to implement and manage change by knowing: •The strategic and technical aspects of compensation. •How to bargain and resolve disputes. •How to empower employees and develop teams.

Number of Employees - Reducing Headcount

Such cuts may take the form of layoffs or exit incentives. •This also reduces benefits costs, a pay cut will not. An organization can use this to re-shape its workforce, creating positive sorting effects - but there are drawbacks. •Regulatory requirements make it difficult to make targeted cuts. •It can harm employee relations, increase turnover, and is costly. •There may be few jobs to cut, or a reduced workforce make a firm poorly positioned to generate revenue if business picks up. Employers avoid layoffs by using overtime and other strategies. •Some use core employees and temporary contingent workers.

Budget Controls: Bottom Up

The bottom up budgeting process involves the following steps. •Instruct managers in compensation policies and techniques. •Distribute forecasting instructions and worksheets. •Provide consultation to managers. •Check data and compile reports. •Analyze forecasts. •Review and revise forecasts and budgets with management. •Conduct feedback with management. •Monitor budgeted versus actual increases. The result is a budget for plan year for each unit and estimated pay treatment for each employee.

Managing Labor Costs and Revenues

The cost implications of pay decisions is critical for making sound decisions. •Creating a compensation budget requires tradeoffs. Financial planning requires understanding the potential returns gained from the allocation. •Total compensation makes up at least 50% of operating expenses. •Yet, most companies have not analyzed the returns from their compensation decisions. - Returns may be productivity increases expected from a new gain-sharing or profit-sharing plan. •Analysis of expected returns is becoming more common.

Top Down Factors

The current year's rise is the percentage change in the average wage in the past year. percent pay leve; rise = 100 x (average year end pay-average new year pay)/ average new year pay Decision to increase average pay level depend on ability to pay. •Analyze pay and staffing to discover potential cost savings. •Options are to control adjustments in base pay and/or variable pay. - Raise employees' co-pays and deductibles. - A last resort is decrease base wages, along with other alternatives. Managers determine competitive position using benchmark jobs to determine the "average market wage" or "going market rate." "Churn" or "slippage" is the turnover effect when people leave. •Annual turnover multiplied by the planned average increase. •This reduces benefit costs linked to base pay, such as pensions. Unions would disagree, but there is little evidence to support cost of living increases. •Cost of living - expenditure patterns of individuals for goods/services. •Changes in prices are measured by the consumer price index. •Wage changes are measured through wage surveys. Many employers tie wages to the CPI, called indexing, but CPI measures changes in prices over time. •Employers end up paying for inflation rather than performance.

Managing Labor Costs - Hours

The four factors in the labor cost model are not independent. •The higher the fixed benefits costs, the more viable is adding overtime rather than hiring. •In addition to avoiding hiring costs, the employer gains flexibility to reduce future labor costs if demand declines. Some firms have used unpaid leave or furloughs to cut hours and labor costs. Reducing hours and pay means fewer headcount reductions. •Less disruption and better positioned to respond to demand increases.

Communication: Benefits

The six-stage process of communicating benefits. •Step 1 is defining the objectives of the communication program. •Step 2 is to collect information from executives, managers, and employees to assess current perceptions, attitudes, and understanding. •Step 3 is designing a communication program that will convey the information needed to accomplish the original objectives. - A marketing approach includes surveys, advertising, and websites. - A communication approach focuses on explaining how pay is determined. •Steps 4 and 5 determine the most effective media for the campaign. •Step 6 is evaluation of the campaign.

Average Cash Compensation

This includes average salary level plus variable compensation such as bonuses, gain sharing, stock plans, and/or profit sharing. During the recession of 2009, nearly half of firms froze salaries. •Resulting in an average salary increase of just 1.9%. Another tool to control salary cost is variable pay. •While merit increases have decreased, variable pay has increased. Adjust average cash compensation in one of two ways. •Top down - top management determines the amount of money to be spent on pay and allocates it down to each subunit for the plan year. •Bottom up - individual employees' pay for the plan year is forecasted and summed to create an organization-wide salary budget.

Compa-Ratios and Other Embedded Controls

To assess how managers actually pay employees in relation to the midpoint, an index called a compa-ratio is often calculated. compa ratio= average rate actual paid / range midpoint •A compa-ratio of less than 1 means , on average, employees in the rage are paid below the midpoint - maybe for valid reasons. •A compa-ratio greater than 1 means, on average, rates exceed the intended policy - for reverse reasons. Other examples of embedded controls include the following. •Mutual sign-offs on job descriptions, by supervisors and subordinates. •Slotting new jobs into the pay structure using job evaluations. •Using an organization-wide performance management system.

Variable Pay and Analyzing Costs

Variable pay must be re-earned each period. •Opposed to costly increases to base pay. •The greater the ratio of contingent to core workers and variable to base pay, the greater the variable component of labor costs. •While advantageous to employers, it may affect employee's finances. Costing out wage proposals is common, especially prior to recommending pay increases or collective bargaining. •Software is available to analyze nearly every aspect of compensation. •This can simulate alternate wage proposals and compare effects. •It can help evaluate survey data and simulate the cost impact of incentive and gain-sharing options.

Introduction

Why bother with a formal system at all? Why not let every manager pay whatever works best? •Such decentralization would create a chaotic array of rates. •Managers could use pay to motivate behavior for their own objectives. •Employees could be treated inconsistently and unfairly. This was the situation in the U.S. in the early 1900s. •Pay inconsistencies, and grievances, were widespread. Here, we cover managing labor costs and revenues, communication, and designing the compensation department.