CHAPTER 8: TOTAL REWARDS

Pay rates

Pay policy line—mathematical relationship between job evaluation points and pay rate

Piece rate incentives

Reward individual performance (sales commission, piecework) Different from merit pay o Not rolled into base pay o Performance typically measured as physical output

Implications of incentive pay since incentive pay is linked to particular outcomes/behaviours, the organization is encouraging them to demonstrate those desired outcomes and behaviours

-Employees may focus on only teh performance measures rewarded under the plan and ignore measures that are not rewarded -eg encouraging speed in call centre does not encourage good CRM -individual pay for performance can foster an individualistic culture or a culture of entitlement -lower-level employees may doubt they have much influence over these performance measures -depends if emp value the rewards and think the pay plan is fair (ppl also want interesting work, appreciation for their efforts, flexibility, and a sense of belonging to the work group - not to mention inner satisfaction)

For incentive pay to motivate, it must be well designed

-performance measures are linked to org goals -employees believe they can meet performance standards -org gives employees the resources they need to meet their goals -emp value the rewards given -emp believe he reward system is fair -the pan takes into account that employees may ignore any goals that are not rewarded

total rewards includes

1 compensation 2 benefits 3 work-life balance 4 performance & recognition 5 development & career opportunities this attract/motivate/retain aligns organazational culture, HR strategy, and business strategy =satisfied/engaged emp =performance/result of biz

Economic Influences on pay

1) Product markets (organizations that offer competing goods and services are competing to serve the same customer 2) Labour markets (competing with other firms to hire the same skilled employees, compete for same HR

Issues in developing a pay structure

1. Legal Requirements: -human rights legislation (no discrimination) -employment/labour standards act -pay equity legislation 2. Market Forces -Product Markets (org that offer competing goods and services - competing to serve the same customer. Org under pressure to cut labour costs may respond by reducing staff levels, freezing pay, postpone hiring, or requiring employees to bear more of the cost of benefits such as insurance premiums) -Labour Markets (competing for HR) 3. Organization's Goals

Ownership - Stock Options

A long-term incentive plan -Gives option (not obligation) to buy company's stock at a previously fixed price -Originally for executives but trend toward broad-based options (e.g., PepsiCo, Starbucks) Advantages o Encourage employees to think more like owners o Attraction and retention Disadvantages o Link between individual effort and organization stock performance

Flexible Benefits Plans

A plan under which each employee receives some minimum coverage in medical insurance and pension contributions, plus additional benefit "credits" that can be used to acquire extra vacation time or additional health insurance. These plans are sometimes called cafeteria-style benefit plans because they offer a menu of options. - Can address differences in employees' needs and engage employees - Offers set of alternatives i.e. employee able to choose types & amounts of benefits Advantages - Employees become more aware of value and can match their needs to benefit offerings Disadvantages - Higher administrative costs and employees' selection of benefits can increase costs

stock ownership

A stock ownership plan makes employees part owners of the organization. emp encouraged to focus on success of org as a whole (-) in larger organizations, emp may not see a strong link beteen their actions and the company's stock price (-) link between pay and performance is hard to appreciate bc the financial benefit mostly come when the stock is sold - typically when the employee leaves the org either stock options or ESOP

advantages/disadvantages of piece rate

Advantages: o Clear performance-reward connection o Sorting effects: Productive workers stay while unproductive workers leave/ productive workers more likely to apply to firm o Most effective for routine jobs What are the potential disadvantages?

Job Evaluation

An administrative procedure for measuring the RELATIVE INTERNAL WORTH of the organization's jobs. Job evaluation committee identifies each job's COMPENSABLE FACTORS, meaning the characteristics of a job that the organization values and chooses to pay for (eg effort, skill, responsibility, working conditions). The jobs are rated for each factor

Alternatives to Job-Based Pay

Broadbanding -Reducing the number of pay ranges in the organization's pay structure -May provide greater flexibility but reduces opportunities for promoting employees (so need to find other ways to reward employees) Competency-based pay system -AKA skill-based pay system - Set pay according to employees' level of skill or knowledge and what they are capable of —rewards employees for acquiring skills/knowledge - supports efforts to involve employees and enrich jobs -makes sense at orgs where changing technology requires employees to continually widen and deepen their knowledge

legally required benefits

CPP (=contribution plan) EI (provides temporary assistance to unemp workers) Workers compensation (for workers who suffer work-related injuries/illnesses)

competency-based pay system

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. a pay system under which workers are paid on the basis of the number of jobs they are capable of doing, that is, on the basis of their skills or their depth of knowledge Rewarding employees based on knowledge, skills, and behaviors that result in performance.

Executive Compensation & Rewards

Conference board Task Force endorses ensuring strong links between the organization's financial performance and executive compensation

Why offer benefits?

Cost o Access to bulk rates / group discounts Attraction o Benefits may play a role in attracting job applicants (e.g., flexible benefits, educational assistance) Organizational Commitment o Investment in retirement account (i.e., pensions) is associated with organizational commitment Pay Satisfaction o Benefits satisfaction is one distinct dimension of pay satisfaction Reduce Turnover

cost of benefits

Current estimates suggest benefits add about 37% to every dollar of payroll Health care costs (for current employees and retirees) has risen dramatically in recent years How can you reduce cost of benefits? o Reducing benefits administration cost (outsource) o Shifting cost to employees (e.g., increase premiums, limit coverage) o Wellness programs and employee assistance program

pay rates

Determining salaries for non-key jobs Pay policy line reflects the pay structure in the market

total rewards

Direct and indirect remuneration approaches that employers use to attract, recognize, and retain workers. encompass not only compensation and benefits, but also personal and professional growth opportunities and a motivating work environment that includes recognition, job design, and work-life balance

Generational emphasis within total rewards

Gen Y: meaningfulness of work, feedback, casual work enviro, work-life balance, access to senior leaders, mentoring, social activities, community involvement, flex time Gen X: training, learning, challenging, indep, variety, work-life, flexible, variable pay Baby Boomers: high-visibility projects, promotions, recognition Traditionalists: incentives and stocks, health benefits, pensions, stability, formal recognition, community involvement

A comprehensive approach to compensating and rewarding employees ◼ Creates a value proposition for current and prospective employees

Influences the kinds of employees are attracted to and remain with the organization

Job structure: relative value of jobs

Job evaluation - An administrative procedure for measuring the relative internal worth of the organization's jobs - Considers each job's compensable factors e.g. skill, effort, - responsibility, and working conditions - Basis for determining relative internal worth—value of the job within the organization - Pay surveys may be limited to key jobs (jobs that have relatively stable content and are common across many organizations, so it is possible to obtain survey data about what people earn in these jobs)

Pay Structure

Pay structure consists of 2 decisions: Job structure—the relative pay for different jobs within the organization e.g. defines the difference in pay between an entry level accountant, an entry-level assembler, and an accounting manager Pay level—average amount (including wages, salaries, bonuses) the organization pays for a particular job Pay structure helps the organization meet goals related to employee motivation, cost control, and ability to attract and retain

Variable Pay (Incentive pay) (performance-related pay)

Pay that varies with some measure of individual, team, or organizational performance. =forms of pay linked to an employee's performance as an individual, group member, or organization member organization's can tie incentive pay to individual performance, profits, or many other measures of success can help attract high performers, popular in private sector , commission/bonus, try harder/creativity

Profit sharing

Payments based on company's profits and do not become a part of the employees' base pay What are the advantages? o Encourages employees to think like owners o Labor costs automatically reduced during difficult economic times - less layoffs Disadvantages? o Link between individual effort and organization performance may be ambiguous o Free-rider problem if payment distributed equally

gainsharing

Payments based on group or plant performance (typically productivity gains) that do not become a part of employees' base pay Different from profit-sharing o Link payments with group or plant performance instead of company profits o Payments distributed more frequently Advantage o Performance measures likely to be seen more controllable (compared with company profit) by employees

Types of retirement plans

Phased retirement Gradual transition into full retirement by reducing hours or job responsibility Defined benefit plans Pension plan that guarantees a specified level of retirement income Defined contribution plan Specifies contributions made by employer and employee—pension benefits based upon accumulated contributions and investment returns achieved

Broadbanding

Practice of using fewer pay grades with much broader ranges than in traditional compensation systems. collapses many traditional salary grades into a few wide salary bands Combining several salary grades or job classifications with narrow pay ranges into one band with a wider salary spread.

Pros/Cons of gainsharing

Pros: -addresses teh challenges of identifying appropriate performance measures for complex jobs -frees employees to determine how to improve their own and their team's performance -broadens employees' focus beyond their individual interests -unlike profit sharing, it keeps the performance measures within a range of activity that most employees believe they can influence

Pay Level: Deciding What to Pay

Range in which organizations can operate Broad range—choose to pay at, above, or below the rate set by market forces Must evaluate pay as more than a cost—see as investment that can generate returns Gathering information about market pay Benchmarking—organization compares its practices to those of successful competitors (use pay surveys, often from gov't) Pay fairness (based on equity theory) Employees evaluate their pay relative to others

executive LT incentives vs ST incentives

ST incentives = bonuses based on last year's profits, ROI, or other measure - tax advantages LTi = stock options and stock purchase plans

GAINSHARING

Team incentive program that measures improvements in productivity and effectiveness and distributes a portion of each gain to employees. (+) workers more efficient to make the company more productive

Pay structure

The arrangement of jobs into categories reflecting their relative importance to the organization and its goals, levels of skill required, and other characteristics. Group similar jobs into pay grades - jobs approximate equal value Price each pay grade Plot a pay policy line Fine tune pay rates Based on employee's value

Labour Supply Analysis

The model assumes: ❑ Many people are seeking jobs, ❑ they possess accurate information about all job openings, and ❑ there are no barriers to mobility.

Direct compensation

The money paid directly to employees in exchange for their work, including wages, salaries, bonuses, commissions, and tips. =Financial rewards employees receive in exchange for their work

Limitations of job-based pay

The precise definition of a job's responsibilities can contribute to an attitude that some activities 'are not in my job description' at the expense of flexibility, innovation, quality, and customer service Organizations may avoid change because it requires repating the time-consuming process of crating job descriptions and related paperwork When the organization needs a new set of competencies, the existing pay structure may be rewarding the wrong behaviours. A pay structure that rewards employees for winning promotions ay discourage them from gaining valuable experience through laeral career moves

Total Compensation

The total amount of money received by an employee from an employer plus the cash equivalent value of the employment benefits received by the employee. direct and indirect = All types of financial rewards and tangible benefits & services employees receive as part of their employment

flexible benefit plans

a benefits plan that offers employees a set of alternatives from which they can choose the types and amounts of benefits they want (+) selection process can make employees more aware of the value of the benefits (+) individual customzation = more value bc aligned with needs (-) higher admin cost can avoid cost thru software packages and standardized plans

pay policy line

a graphed line showing the mathematical relationship between job evaluation points and pay rate

Merit pay

a system of linking ANNUAL pay increases to ratings on performance appraisals requires a well-developed performance appraisal eg superior performance= 10% base salary increase unsatisfactory = 0

merit pay

a system of linking pay increases to ratings on performance appraisals (+) provides a method for rewarding perforance in all of the dimensions measured in the org's performance mgmt system (-) expensive (-) assumes performance is based on ability and motivation but it can be enhanced/reduced by factors beyond the employee's control (Eg economic conditions)

Primary reason for developing a total rewards strategy is to

align rewards with the business strategy

ESOP

an arrangement in which the organization distributes shares of stock to all its employees by placing it in a TRUST; most common form of employee ownership (-) risk for employees (+) build pride and commitment in org (+) can participate in SH votes - corporate-level decision-making

Standard hour plans

an incentive plan that pays workers extra for work done in less than a preset "standard time" (+) encourage speed (-) not quality/service

--PAY FOR ORGANIZATIONAL PERFORMANCE--

best for risk-taking exposes emp to high degree of risk

Communicating Total Rewards

communication is often a weak link, need comprehensive communication strategy s employees understand managers play a significant role tech used to provide tools and info generational groups have different preferences

Employee benefits

compensation in forms other than cash (indirect compensation) - eg paid vacation time, employer-paid heatlh insuarnce, pension plans contribute to attracting, retaining, and motivating Benefits are a significant part of compensation packages: Laws require employers to provide some benefits, tax laws can make benefits favourable (employees don't pay tax on benefits), large emp can get a better deal on insurance, creative benefits packages may distinguish employers

Incentive (variable) pay

compensation that depends on some measure of individual performance or results in order to be awarded 3cat: Individual: piecework rates, standard hour plans, merit pay, performance bonuses, commissions Team: gainsharing, team bonuses&awards Organizational: profit sharing, ESOP choices from these categories should consider not only their strengths and weaknesses, but also their fit with the organization's goals. The choice of incentive pay not only affects the level of motivation, but also the kinds of employees who are attracted to and stay with the org (eg team-based rewards can attract employees who are more team oriented)

key issue

difficulty of setting performance measures that encourage precisely the behaviour desired

Indirect compensation

employee benefits and services provided as a form of compensation =Benefits and services employees receive in exchange for their work

emerging benefits

flexible work hours working from home part time time-off for community and charitable activities fleible benefits fitness memberships tuition reimbursement rec activities

compara-ratio

for pay range: average pay/midpoint >1: org is paying employees more than planned and may have difficulty keeping costs under control <1: underpaying employees and may have difficulty attracting and retaining qualified employees

usually pay ranges overlap somewhat, so that the highest pay in one grade is somewhat higher than the lowest pay in the next grade

gives the org more flexibilty in transferring eployees among jobs, because transfers need not always involve a change in pay

Drawback of pay grades

grouping jobs will result in rates of pay for individual jobs that do not precisely match the levels specified by the market and the organization's job structure

legal requirements for compensation

hr legislation pay equity employment/labour standards

pay ranges

ie min/max/midpoint for employees holding a particular job or a job within a particular pay grade or band employees holding the same job may receive somewhat different pay, depending on where their pay falls within the range a typical approach is to use the market rate of the pay policy line as the midpoint of a range for the job or pay grade. The minimum and the maximum values for the range ay also be based on market surveys of those amounts

commissions

incentive pay calculated as a percentage of sales

profit sharing

incentive pay in which payments are a percentage of the organization's profits and do not become part of the employees' base salary encourages employees to think more like owners, taking a broad view of what they need to do in order to make the organizaiton more effective -more likely to cooperate and less likely to focus on narrow-self interest -costing less when org is eperiencing financial difficulties (less layoffs if doing adly) (-) discouraged when profits fall

Disadvantage with competency-based pay system

it rewards employees for acquiring skills but does not provide a way to ensure that employees actually use their new skills result may be that the organization is paying employees more for learning skills that the employer is not benefiting from

organizations use _______ to establish the worth of an organization's jobs in terms of such criteria as their difficulty and their importance to the org

job evaluation if jobs have the same number of evaluation points, they should be paid equally

Gainsharing is most likely to succeed when organizations provide the right conditiosn

mgmt commitment -mgmt acceptance -emp security -high levels of cooperation/interaction -goal setting -info sharing emp who value working in teams

issue with executive pay including stock or stock options

misrepresenting earnings (enron) insider training - they have an advantage as both owners and managers can reward unethical beahviour

non-key jobs

no survey data

Performance bonuses

not rolled into base pay (unlike merit pay!) employee must re-earn them during each performance period may be one time reward may be linked to objective performance measures, rather than subjective ratings (+) can give the org flexibility in deciding what kinds of behaviour to reward

decisions about which benefits to include should take into account

org goals budget expectations

optional benefits

paid leave (sick, floating holidays, personal days), group insurance (rates for group insurance are typically lower than individual - medical insurance, health spending account), employee wellness program, Employee Assitance Program (confidential counselling), disability insurance, retirement plans, family-friendly (childcare, flextime, telework, parental leave, adoption assistanc), etc

pay structure reflects

pay level (decisions about how much to pay) and the job structure (relative value of each job) by balancing this external and internal info, the organization's goal is to set levels of pay that employees will consider equitable and motivating

piecework rate

rate of pay for each unit produced

piecework rate

rate of pay for each unit produced this rate is often paid in addition to the employee's base pay - amount paid per unit is set at a level that rewards employees for above-average production volume - encourages efficiency Advantage -direct link between how much work the employee does and the amount the employee earns Disadvantage -doesn't work well for complex jobs or jobs with hard-to-measure outputs -may not reward emp for focusing on quality or customer satisfaction of it interferes with output

salary

rate of pay for each week, month or year worked

stock options

rights to buy a certain number of shares of stock at a specified price -purchasing the stock = exercising the option LR incentive encouraging emp to think like owners (-) employees may focus so much on stock price that they lose sight of other goals, including ethical behaviour

Variable pay

see screenshot

pay grades

sets of jobs having similar worth or content, grouped together to establish rates of pay

balanced scorecard

strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals a combination of performance measures directed toward the company's long and short term goals and used as the basis for awarding incentive pay

difference team bonuses vs. team awards

team awards more likely to use a broad range of performance measures, such as cost savings, successful completion of a project, or even meeting deadlines

but if there is less overlap between pay grades, then

the more important it is to earn promotions in order to keep getting raises assuming the organization wants to motivate employees through promotions (and assuming enough opportunities for promotion are available), the organization will want to limit the overlap from one level to the next

Team bonuses and awards

unlike gainsharing (rewards the performance of ALL employees at a facility), bonuses for team performance tend to be for smaller work groups (+) encourage team cooperation (-) competition between individuals replaced by competition between teams

market rate

where the lines for labour D and labour S cross the most profitable level but higher pay may be an investment in superior HR

CEO equity theory

wuld cnosider not only the size of the executive pay relative to pay for other employees but also the amount the CEOs contribute