Chapter 11-COMPENSATION: ESTABLISHING A PAY STRUCTURE/PAY FOR PERFORMANCE

Define Executive Perquisites

benefits beyond monetary compensation that have value to the executive. They typically only represent a small proportion of total executive compensation

What is benchmarking?

compare pay practices against successful competitors

Define the point factor method

compensable factors defined and given point values. Each job assessed in terms of the compensable factors

Who conducts pay surveys and what are they used for?

conducted by organization of purchased from consulting organizations and used for gathering information about Market Pay Levels

Define Skill-based pay

pay is set according to the employees' levels of performance related skill or knowledge and what they are capable of doing. Enhances flexibility in a dynamic workplace

What is a problem with Merit Pay?

A problem with merit pay systems is that research has found that the raises given high performers and average performers are not necessarily representative of the differential in performance. For example, the raise for high performers may be only 1.5 times higher than average performers. Many employees don't believe that they will earn more if they produce more.

Define Delayering

Aka: Broad Banding Reducing the number of levels in the job structure and combining job grades into a single layer (broad bands). More flexibility in pay.

Define Davis-Bacon Act and Walsh Healy Public Contracts Act

Government pay policies of federal contractors - must pay at least the prevailing wage rate in the area of contract work (often the union hourly rate)

Define Group Bonuses

Group bonuses usually focus on smaller work groups and reward group members for attaining a specific performance goal - often measured in measurable physical output

Define the Fair Labor Standards Act and explain the 4 parts mentioned in class

(Minimum wage, Overtime, Exemption, etc.) 1. Minimum hourly wage required under federal or state law ($7.25/hr) 2. Overtime rate is 1 ½ times the regular hourly rate (implemented after 40 hrs) 3. Exempt employees (mgrs., professionals, etc) not covered by FLSA 4. Restrictions on child labor in types of work and when can work

Define Job evaluation

(key process to measure the relative internal worth of jobs) - the systematic process of arranging jobs in a hierarchy of relative worth to an organization. It provides the basis for pay differentials among jobs within a single employer.

What are the 3 factors of performance bonuses?

1. Performance bonuses are not rolled into base pay 2. The employee must re-earn them during each performance period 3. It may be a one-time reward for specific accomplishment or action

What are the 5 objectives of compensation administration

1. Attract and retain an adequate number of qualified persons 2. Give consistent signals from all pay on what is desired 3. Motivation for extra performance 4. Provide a fair wage to employees for their contributions 5. Control costs and make sure the firm gets the best return for the pay expense

What makes up direct pay? (4)

1. Base pay i. salary & Wage 2. Merit pay 3. Incentive pay i. bonus, commission, piece rate, profit sharing, stock option, and shift differential 4. Deferred Pay i. Savings Plan, stock purchase, annuity

What are the 6 elements of executive pay?

1. Base salary 2. Short term incentive pay (bonus) 3. Long term incentive pay (stock options, awards) 4. Supplemental Executive Retirement plans[SERP] (an enhance benefits package) 5. Perquisites (club memberships, autos, etc.) 6. Deferred compensation (an agreement to pay certain compensation at a later date)

What are the 3 types of currencies used to establish and maintain an employment relationship

1. Economic currency 2. socio-emotional currency 3. Ideological currency

List 6 considerations for setting up a profit-sharing plan

1. Get supervisors on board with the plan 2. Make sure employees understand how the plan works 3. Identify the behaviors and results that contribute to greater profits 4. Make sure managers understand that thy contribute to the profit-sharing goals by encouraging their employees and keeping them focused on their goals 5. Consider linking rewards to the department's or divisions performance if profits can be assigned to the group 6. Make the reward big enough to matter time the profit-sharing payment for maximum effect

List and define 4 things that organizations pay for

1. Holding a particular job i. paying for work defined by the job; based on job evaluation 2. Membership in the organization i. pay that is provided because the person is a member of the organization (e.g., seniority increases, standard benefits, profit sharing, etc.) or to keep a person as an organizational member (e.g., retention bonuses, professional stipends for availability) 3. Knowledge/skill i. pay based on acquisition of know knowledge/skill; emphasis on flexibility and multiskilling; employee is responsible for pay 4. Performance i. pay based on an assessment (evaluation or measurement ) of performance (incentive pay or merit pay)

What are the 4 steps to using compensable factors for the point-factory method

1. Identify and define these factors 2. Specify the relative importance of each factor 3. Indicate the levels or degrees of each factor 4. Examine each jobs in terms of these factors -- assign points to job for each factor and degree

List and define three types of Equity

1. Individual Equity - comparison (outputs/inputs) with others in similar jobs or circumstances 2. Internal Equity - consistency (comparison) in pay between jobs in the organization 3. External Equity - consistency (comparison) of organizational pay levels with market levels

List and define three alternatives to a formal compensation system

1. Individual bargaining i. Time and equity issues 2. Pay market price i. Control, equity and market comparison issues 3. Collective bargaining i. Control, motivation, equity issues

What are the 5 objectives of job evaluation?

1. Internal equity 2. Employees understand the basis for pay and what is valued 3. Aid in setting pay for new jobs or changes in jobs 4. Rationalize the process for setting pay - eliminate bias 5. Provide a basis for resolving disputes and grievances over pay

list the 3 advantages/benefits from the balanced scorecard

1. It combines the advantages of different incentive pay plans 2. It helps employees understand the organization's goals 3. By communicating the balanced scorecard to employees, the organization shows employees information about what its goals are and what it expects to accomplish.

List and define the 3 things that decisions about pay focus on

1. Job structure - the relative pay for different jobs within the organization 2. Pay level - the average amount the organization pays for a particular job 3. Pay structure - the pay policy resulting from job structure and pay level decisions

What are the 3 key issues in developing a pay structure?

1. Legal requirements 2. Fair labor standards Act 3. Davis-Bacon Act and Walsh Healy Public Contracts Act

List the 10 conditions necessary or gainsharing to succeed

1. Management commitment 2. Need for change or strong commitment to continuous improvement 3. Management acceptance and encouragement of employee input 4. High levels of cooperation and interaction 5. Employment security 6. Information sharing on productivity and costs 7. Goal setting 8. Commitment of all involved parties to the process of change and improvement 9. Performance standard and calculation that employees understand and consider fair and that is closely related to managerial objectives 10. Employees who value working in groups

Define Equal employment Opportunity (2)

1. No differences based on protected class characteristics (e.g., race, gender, etc.) 2. Equal pay for equal work

What are the two key processes that can increase the successful prospect of any type of incentive plan (incentive or merit)?

1. Participation in decisions 2. Communication

What are the two elements that need to be developed to finalize the pay structure? List and define them.

1. Pay Grades - grouping jobs within a specific point range into a pay grade level 2. Pay Ranges -a set of possible pay rates defined by a minimum, maximum and midpoint of pay for employees holding a particular job or job within a particular pay grade

List the 6 requirements that effective incentive pay plans must meet

1. Performance measures are linked to the organizational goals 2. Employees believe they can meet performance standards 3. The organization gives employees the resources they need to meet their goals 4. Employees value the rewards given 5. Employees believe the reward system is fair 6. The pay plan takes into account that employees may ignore any goals that are not rewarded

List the 5 most common type of "perks" for executive perquisites

1. Personal use of company aircraft for travel 2.Financial planning for taxes and estate purposes 3. Use of company automobiles 4. Club memberships 5. Tax grossups

list and define the 3 types of incentive pay

1. Piecework rates i. A wage based on the amount workers produce 2. Standard hour plans i. An incentive plan that pays workers extra for work done in less than a preset "standard time" 3. Sales commission i. An incentive calculated on total volume of sales obtained in a specific time period

What are 8 factors that impede MERIT pay-for-performance

1. Poor/inadequate evaluations of performance 2. Personal pay needs differ from organization pay form 3. Pay secrecy policy creates erroneous perceptions of pay differentials 4. Timing of pay is not consistent with performance 5. Amount of performance pay is inadequate 6. Performance differential is insufficient 7. The employee doesn't understand the calculation of pay for performance 8. There is a lack of trust in the "system" (e.g., management)

What makes up indirect pay? (3)

1. Protection Programs i. medical insurance, life insurance, pension, and social security 2. Pay for time not worked i. vacations, holidays, sick leave, jury duty 3. Services and Perquisites i. recreational facilities, automobile, financial planning, and free meals

What are the four methods of job evaluation?

1. Ranking method 2. Grade or Classification method 3. Point Factor Method 4. Factor Compensation method

Name and define the 2 types of piecework plans

1. Straight piecework plan i. incentive pay in which the employer pays the same rate per piece, no matter how much the workers produces 2. Differential piece rates i. incentive pay in which the piece rate is higher when a greater amount is produced

What are two benefits of gainsharing?

1. The broader approach addresses the challenge of identifying appropriate performance for 2. It frees employees to determine how to improve performance

What are the two key activities in managing a pay structure and ensuring it has consistency?

1. The pay distribution in a job grade - assessed by the compa-ratio 2. Dealing with individual pay outside the rate range i. (red circle rate and green circle rate)

What are the 5 factors impeding INCENTIVE pay-for-performance

1. Unrealistic production goals that must b met to obtain incentive pay 2. Pay per unit of production/output is too low to make possible incentive meaningful 3. Factors outside the employee's control affect production or accomplishment 4. Unclear/poor measures of production/output 5. Organizational or environmental changes that affect ability of employee to meet production goals

List the 4 measures/targets of a balanced scorecard

1. financial measures, 2. customer assessments [how customers see the firm] 3. internal business processes [key things to perform well] 4. learning and growth [what is needed to continue to improve and grow].

List 3 types of pay for performance at the organizational level

1. profit sharing 2. stock ownership 3. stock options or ESOPs

List the 6 key elements of the pay-for-performance concept

1. the employee is basically motivated by pay 2. the type of pay the employee needs is offered by the employer 3. the "need for pay" leads to increased effort by the employee 4. the increased effort is reflected in higher performance as measured or evaluated by the employer 5. The higher performance is rewarded with higher pay 6. Higher pay reinforces employee effort and responds to need for pay

After having done the Job Evaluation and developing a hierarchy of a job in terms of value, what are the next 4 steps in establishing a pay structure

1.Identify the KEY jobs - jobs that have relatively stable content and are common among many organizations (these are benchmark jobs that have market data for comparison) 2. Gather salary information from the market (salary surveys) 3. Plot the job/salary information (key jobs and non key jobs) 4. Define a "pay policy line" and then adjust jobs to the pay policy line

Pay/compensation policies are the guidelines to direct pay decision-making and program action in the organization. List 5 focuses of these policies

1.Position of the firm in the labor market i. Above, below, at market 2. Organizational location of pay decisions i. Centralized, decentralized 3. Basis of individual compensation changes i. Performance, seniority 4. Communication regarding pay i. Secret, open (partial, full disclosure) 5. Form of compensation i. Desired combination of salary, benefits, in-kind, perquisites, relational, etc. The degree of individual choice in defining the combination/form.

List and define two economic Influences on Pay

1.Product market influences (competitor competitive practices) 2.Labor market - competition for the available talent affects pay rates (supply & demand)

Define team awards and list the 3 performance measures used

Bonuses given to members of an operating team (like group bonuses but often use a broader range of performance measures such as (1) cost savings, (2) successful completion of a project, (3) meeting specific deadlines in project completion or production operations.

What do companies do to combat ethical concerns about executive pay given its nature and size?

Companies are increasingly transparent about pay due to Dodd-Frank and publicity about cases where ethical issues have been raised

What is the process of the point-factor evaluation?

Define the key factors that are important across all jobs and lead to value creation

What is equity in terms of compensation?

Equity refers to a perception of "fairness" in pay. Typically, it entails a comparison of one's rewards and one's contributions with the rewards & contributions of relevant others.

What is incentive pay and why is it influential?

Incentive pay is represented in the forms of pay that are linked to an employee's performance as an individual, group member or organization member. It is influential because the amount paid is linked to certain predefined behaviors or outcomes.

Define Merit Pay and explain who receives the biggest payoff

Merit pay is a system of linking pay increases to ratings on a performance scale. It can make use of a merit increase grid (examining the individual's performance rating and the individual's compa-ratio). The system gives the lowest paid best performers the biggest pay increases.

What are performance bonuses

Performance bonuses are extra pay based on some assessment of performance. This assessment may be objective (measured) or a subjective performance evaluation.

Define Red and Green Cirle rate

Red-circle rate-pay at a rate that falls above the pay range for the job Green-circle rate - pay at a rate that falls below the pay range for the job

Define pay for Group performance and list three reward types

The emphasis is on the overall performance of a team, unit or group - not individual performance. There are several types of group performance reward foci including (1) gainsharing, (2) group bonuses, (3) team awards.

What is executive compensation?

The extraordinary size and significant difference between top executive pay (especially CEO pay) and median employee pay has brought a great deal of attention to the disclosure of executive pay, the process of determining executive pay and the type of executive pay

What is the most commonly used job evaluation method?

The point factor method

What is a downfall to standard hour plans?

These are like piecework plans and the encourage employees to work as fast as they can, but not necessarily to care about quality or service. The focus is on quantity

Define the balanced scorecard

This is a combination of performance measures directed toward the company's long and short-term goals and is used as the basis for awarding incentive pay

Define Ideological currency

based on beliefs & values, the organization represents a cause or principle and the employee works to help the organization promote the cause

explain the 3 ways that Communication (in terms of making incentives work) impacts a firm

a. This demonstrates to employees that the plan is fair since they understand it b. When employees understand the requirements of the incentive pay plan, the plan is more likely to influence their behavior in a desired manner c. Communication is important when the pay plan is being changed

Define participation in decisions and what it increases

a.Employee participation in pay-related decisions can be part of a general move toward employee empowerment i.It can increase understanding and a perception of ownership

Define Executive Retirement Plans (SERPs)

agreements that key executives make with the company that provides benefits beyond regular retirement plans without current taxation to the executives. They are funded entirely by the company and they allow funds to be set aside for an executive after he has maxed out contributions to 401(k). These plans can be custom designed to meet the executive's needs.

define employee stock ownership (ESOPs)

an arrangement in which the organization distributes shares of stock to all its employees by placing it in a trust for the employees. These are held in the trust until the employee leaves the company or retires he/she then receives the value of the stock in their account

define the compa-ratio and give the formula

an index to assess how employees are paid in relation to the midpoint of thepay range established for jobs in a pay grade Compa-ratio = Individual or avg salary in a pay range Divided by Pay range midpoint

Define short term incentives

are bonuses based on the year's profits, return on investment or other measures related to the organization's goals. Payment may be delayed to gain tax advantages

Define long term incentives

include stock options and stock purchase plans. The rationale for these long-term incentives is that executive will want to do what is best for the organization because that will cause the value of their stock to grow

Define a Formal compensation system

is a set of policies and practices designed to (1) specify what the organization intends to pay for (2) specify how it intends to pay, and (3) provide consistent pay decisions at all levels

What is the Compensation system

it consists of direct and indirect pay- "total compensation"

Define the ranking method

jobs ranked in order of relative value

Define Gainsharing

measures improvements in productivity and effectiveness (typically at an organizational unit or overall organizational level) and distributes a portion of the reward to each employee who is a member of that unit.

define the grade or classification method

pay grades are defined and, using job descriptions, each job assigned to a pay grade

Define Profit Sharing

refers to payments in which employees receive a percentage of the organization's profits, but these monetary distributions do not become part of the employee's base salary (employees think like owners since they get organizational profit.

Define stock ownership

refers to rewarding employees for organizational performance with actual or potential ownership in the company (company stocks). As the company performs well and the stock value increases, the employee is rewarded for his/her efforts

Define Socio-emotional currency

relational and informal in the form of praise, recognition, prestige

Define the Factor comparison Method

relative value for each job determined by direct comparison with the values established for each factor on selected key jobs

What must an incentive system encourage working towards and what are the 4 key factors?

system encourages working towards organizational goals and must be: 1. objective 2. justifiable 3. measurable 4. universally applied

Define stock options and describe two reasons to implement

the employee is given rights to buy a certain number of shares of stock at a specified price i. Traditionally, this has been a reward practice granted to executives ii. Some companies are pushing eligibility down to the employees in the organization to increase their commitment and benefit from organizational success.

Define Total Returns/Rewards

the inclusion of "Relational Returns" (e.g., recognition & status, employment security, challenging work, learning opportunities, etc.) along with the concept of "Total Compensation".

What do executives need to have the courage to do when an organization links pay to its stock performance?

to be honest about their company's performance even when dishonesty or clever shading of the truth offers the tempting potential for large earnings.

Define economic currency

transactional & formal in form of salaries, bonuses, benefits