Compensation #2

List the advantages and disadvantages of group incentive systems.

Advantages Companies can more easily develop performance measures for group incentive plans than they can for individual incentive plans. Greater Cohesive groups Disadvantages Employee Turnover due to the free rider effect - Some employees may make fewer contributions to the group goals because they possess lower ability, skills, or experience than other group members.

Compare and contrast the job-point accrual model with the cross-departmental model.

Job-Point Accrual Model - Encourages employees to develop skills and learn to perform jobs from different job families. Cross-departmental Models - Promote staffing flexibility by training employees in one department with critical skills they would need to perform effectively in other departments.

Explain which types of companies are most likely to use person-based pay.

Many companies known to be using person-based pay systems employ approximately 150 to 2,000 employees, the majority operate in the manufacturing industry.

Explain two ways to determine the market pay line. (lecture for one)

Pay Surveys ?

List the three factors that affect the mix in the commission pay system.

Straight Commission Graduated Commissions Multiple-Tiered Commissions

List the advantages person-focused pay programs for employers.

When properly designed and implemented, these programs can lead to enhance job performance, reduce staffing, and greater flexibility.

Describe three ways of choosing which jobs to include in a pay structure.

Exempt or nonexempt pay structure Pay structure based on job families Pay structure based on geography

Explain why gain sharing plans were developed.

Gain sharing was developed so that all employees could benefit financially from productivity improvements resulting from the suggestion system.

Distinguish between red circle and green circle rates.

Green Circle Rates - Pay rates below minimum wage rates Red Circle Rates - On occasion, companies must pay certain employees greater than maximum rates for their pay ranges. These higher rates help retain valued employees who have lucrative job offers from competitors.

Explain the differences between vertical and horizontal knowledge or skill.

Horizontal Skills - refers to similar skills or knowledge. Example: clerical employees of a retail store might be trained to perform several kinds of record keeping tasks. Vertical Skills - Those skills traditionally considered supervisory

List sales objectives that can provide the basis for commission pay systems.

Improve sales productivity Improve sales coverage of current customers Grow sales overall

Describe the incentive effect and the sorting effect.

Incentive Effect - refers to a worker's willingness to work diligently to produce more quality output than simply attending work without putting in the effort. Sorting Effect - addresses an employee's choice to stay versus leave his or her employer for another job, presumably one without an incentive pay contingency.

Describe the purposes of each of the three categories of incentive pay plans and list the performance measures used in each.

Individual Incentive Plans - These plans reward employees whose work is performed independently. Some companies have piecework plans, typically for their production employees. Under piecework plans, an employee's compensation depends on the number of units she or he produces over a given period. Performance measures - Quantity of work output, Quality of work output, Monthly sales, Work safety record, Work attendance Group Incentive Plans - These plans promote supportive, collaborative behavior among employees Performance measures - Customer satisfaction, Labor cost savings (through gain sharing plans), Materials cost savings, Services cost savings Company-wide Incentive Plans - These plans tie employee compensation to a company's performance over a short time frame, usually from a one-month period to a five-year period. Performance measures - Operational Measures - Customer satisfaction, Operational efficiency, Service/quality, Safety/occupational injury. Financial Measures - Revenue, Earnings per company stock share, Operating income, Revenue growth

List the advantages and limitations of a two-tiered system.

Limitations The lower pay scale applied to newly hired workers may restrict a company's ability to recruit and retain the most highly qualified individuals.

Define pay compression and explain how compression can threaten a company's competitive advantage.

Pay Compression - occurs whenever a company's pay spread between newly hired or less qualified employees, and more qualified job incumbents is small. Dysfunctional employee turnover is a likely consequence of pay compression. High-performing employees will probably perceive their pay inequitable because they are receiving lower pay relative to their contributions than newly hired employees who are receiving similar pay.

Distinguish between pay-for-knowledge and skill-based pay systems.

Pay-for-Knowledge - reward managerial, service, or professional workers for successfully learning specific curricula. Skilled-based pay - a term used mostly for employees who do physical work, increases the workers' pay as they master new skills

List the five factors managers should consider when designing incentive pay plans.

Whether the plan should be based on group or individual employee performance The level of risk employees will be willing to accept in their overall compensation package Whether incentive pay should replace or compliment traditional pay The criteria by which performance should be judged The time horizon for goals - long term, short term, or a combination of both

Describe each of the steps in calculating merit pay budgets and be prepared to make these calculations.

1. Compensation professionals ask managers and supervisors to indicate the percentage of employees who they expect will fall in each of the performance categories in the performance appraisal instrument. Excellent: 10% Above Average: 20% Average: 40% Below Average: 25% Poor: 5% 2. Compensation professionals rely on position in the pay range to determine the percentage of employees whose pay falls into each quartile. Q4: 20% Q3: 25% Q2: 40% Q1: 15% 3. Compensation professionals combine both sets of information to determine the percentage of employees who fall in each cell. The percentage of employees whose performance rating is excellent and whose base pay falls in the 4th quartile equals 2% (10x 20=2). 4. Next, compensation professionals calculate the expected number of employees who fall into each cell. For example lets assume the company employs 350 people. (350 x 2% = 7) 5. Compensation professionals now distribute the merit increase budget amount ($500,000) to each cell based on the following formula: Expected # of employees in a cell * Desired pay increase for cell % * Current median pay level for the current quartile 6. Compensation professionals check whether the expected merit increase total fits within the actual budgeted amount

Explain options for determining the number of job evaluation points in a pay grade. (lecture)

? Task and responsibilities

List the advantages and disadvantages of individual incentive pay programs.

Advantages Individual incentive plans can promote the relationship between pay and performance. Individual incentive plans promote an equitable distribution of compensation within companies ( better they perform the more they earn) Compatibility with such individualistic cultures as the United States Disadvantages Individual incentive plans possess the potential to promote inflexibility. With merit pay systems, supervisors must develop and maintain comprehensive performance measures to properly grant incentive awards. Individual incentive programs pose measurement problems when management implements improved work methods or equipment. When changes occur, it will take time for employees to adapt. Individual incentive plans may encourage undesirable workplace behavior when these plans reward only one or a subset of dimensions that constitute employees' total job performance.

Explain the advantages and the limitations of broadbanding.

Advantages Broadbanding shifts greater responsibility to supervisors and managers for administering each employee's compensation within the confines of the broadbands Limitations Broadbanding is not a cure-all for all compensation-related dysfunction within companies. Broadbanding also necessitates a trade-off between the flexibility to reward employees for their unique contributions and a perception among employees that fewer promotional opportunities are available.

Explain the three conditions for incentive pay plans.

Employees' performance can be measure objectively Individual incentive plans are appropriate when employees have sufficient control over work outcomes. Individual incentive plans are appropriate when they do not create a level of unhealthy competition among workers that ultimately leads to poor quality.

Explain three research findings with regard to merit pay.

Boosting the merit increase amount will not necessarily improve productivity because each additional merit increase amount was associated with a smaller increase in production. Employees' perceptions of just-meaningful differences in merit increases depend on their cost of living, their attitudes toward the job, and their expectations of rewards from the job. For the pay increase to be considered meaningful, the employee must see the size of the increase as substantive in a relative sense as well as in absolute sense.

11. List the disadvantages of person-focused pay.

Employers feel that the main drawback of person-focused pay systems is that hourly labor costs, training costs, and overhead costs can all increase. Person-focused pay systems may not mesh well with existing incentive pay systems. Effective person-focused pay programs depend, in large part, on well-designed training programs. Companies struggle with determining the monetary value of skill and knowledge sets.

Define compa-ratios and be prepared to calculate compa-ratios.

Compa-ratios - index the relative competitiveness of internal pay rates based on pay range midpoints. Employee's pay rate / Pay range midpoint

Describe three ways profit sharing can be distributed among employees and be prepared to calculate these payments.

Equal payments to all employees Proportional payments to employees based on their annual salaries Proportional payments to employees based on their contributions to profits

Describe the steps in developing pay structures.

Deciding on the Number of Pay Structures - Common pay structures include exempt and nonexempt structures, pay structures based on job families, and pay structure based on geography. Determining a Market Pay Line - Pay levels that correspond with the market pay line are market-competitive pay rates. Defining Pay Grades - Pay grades group jobs for pay policy application. HR professionals usually group jobs into pay grades based on similar compensable factors and value. Calculating Pay Ranges for Each Pay Grade - Pay ranges build upon pay grades. Pay grades represent the horizontal dimension of pay structure. Pay Range represent the vertical dimension (Pay Rates). Pay ranges include midpoint, maximum and minimum pay rates. Evaluating the Results - Analyze significant differences between the company's internal values for jobs and the market's values for the same job.

Explain the phrase, "pay is at risk."

Employees could have inconsistent paychecks. "Pay is at risk" compensation plans are dependent on how well the company is doing.

Describe the three formula used to calculate profit sharing awards and be prepared to calculate these awards.

Fixed first-dollar-of-profits - uses a specific percentage of annual profits, contingent upon the successful attainment of a company goal. Graduated first-dollar-of-profits - Example: A company may choose to share 3% of the first $8 million of profits and 6% of the profits in excess of that level. Profitable Threshold - Fund profit sharing pools only if profit exceed a predetermined minimum level but fall below some established maximum level. Companies establish minimums to guarantee a return to shareholders before they distribute profits to employees. They establish maximums because they attribute any profits beyond this level to factors other than employee productivity or creativity.

List the three assumptions upon which effective incentive pay systems are based.

Individual employees and work teams differ in how much they contribute to the company, both in what they do as well as how they do it. The company's overall performance depends to a large degree on the performance of individuals and groups within the company. To attract, retain, and motivate high performers and to be fair to all employees, a company needs to reward employees based on their relative performance.

Identify pitfalls to be avoided when using merit pay.

Ineffective performance appraisals methods and poor communication regarding the link between pay and performance.

Interpret a merit pay increase grid and calculate individual employee's pay based on performance appraisal score and pay quartile.

Refer to Book Ch. 8

Know how to calculate the minimum and maximum from the midpoint; know how to calculate the range spread for pay grades.

Review Class Worksheet

Describe each of the five alternative sales compensation plans describe in the text.

Salary-only plans - sales professional receive fixed base compensation Salary-Plus-Bonus plans - offer a set of salary coupled with a bonus Salary-Plus-Commissions plan - Spread the risk of selling between the company and the sales professional Commission-Plus-Draw plans - award sales professionals with subsistence pay or draws - money to cover basic living expense - yet provide them with a strong incentive to excel Commission-Only plans

Explain the differences between person-focused pay and job-based pay (Table 5-2).

See study Guide for chart Job-Based Pay - compensates employees for jobs they currently perform, which include a seniority pay, merit pay, and incentive pay. Person-Focused Pay - compensates employees for developing the flexibility and skills to perform a number of jobs effectively.

Describe the stair-step model of person-based pay and be prepared to determine an employee's rate of pay using this system.

The steps represent jobs from a particular job family that differ in terms of complexity. Jobs that require more skills are more complex than jobs with fewer skills.

List the advantages person-focused pay programs for employees.

They can provide employees with both job enrichment and job security. Because person-focused pay programs create more flexible workers, these programs can actually represent better job security for employees

Explain what a two-tier pay structure is and why companies use a two-tiered system.

Two-tier pay structure reward newly hired employees less than established employees. Companies use this structure because these plans represent a departure from unions traditional stance of single base-pay rates for all employees within job classification. Also enables companies to reward long-service employees while keeping costs down by paying lower rates to newly hired employees.

Explain why companies are using group incentives.

Well-designed group incentive plans ultimately reinforce teamwork, cultivate loyalty to the company, and increase productivity.

List the advantages and disadvantages of profit sharing plans.

Advantages Profit sharing plans enable employees to share in the companies' fortunes. Companies that use profit sharing plans gain greater financial flexibility Disadvantage Profit sharing may undermine the economic security of employees, particularly if profit sharing represents a sizable portion of direct compensation. Company's profits vary year to year, so does employees' earnings. Profit sharing plans may fail to motivate employees because they do not seek a direct link between their efforts and corporate profits.

Explain the timing options for granting merit increases

Companies may establish a common review date/period so that all employees' performances are evaluated on the same date or during the same period. On other hand, companies may review employee performance and award merit increases on the employees' anniversary date. (day the employee began working for company)

Explain the differences between current profit sharing and deferred profit sharing.

Current Profit Sharing - awards cash to employees, typically on a quarterly or annually basis. Current profit sharing represents a form of short-term incentive because of the frequent payout potential. Deferred Profit Sharing - Place cash awards in trust accounts for employees. These trust are set aside on employees' behalf as a source of retirement income, and can also be considered a long-term incentive.

Describe the skill blocks model of person-based pay and be prepared to determine an employee's rate of pay using this system.

Employees progress to increasingly complex jobs as in the stair-step model, however, in a skill blocks program, skills do not necessarily build on each other. Thus, an employee may progress two or more steps, earning the pay that corresponds with each step. Emphasizes both horizontal and vertical skills.

Describe three ways that rewards can be allocated among team members.

Scanlon Plan - Emphasizes employee involvement. Monetary rewards to employees for productivity improvements. Suggestion systems that route cost-saving ideas from the workforce through labor-management committee that evaluates and acts on accepted suggestions. Rucker Plan - Emphasizes employee involvement and provides monetary incentives to encourage employee participation. The main difference from Scanlon lies in the formula used to measure productivity. Value added formula - difference between the value of the sales price of a product and the value of materials purchased to make the product. Improshare - Improved Productivity through Sharing, measure productivity physically rather than in terms of dollar savings like those used in the Scanlon and Rucker plans. These programs aim to produce more products with fewer labor hours. Emphasis is on providing employees an incentive to finish products. The Improshare bonus is based on a labor hour ratio formula. A standard is determined by analyzing historical accounting data to find the number of labor hours needed to complete a product. Productivity is then measured as a ratio of standard labor hours and actual labor hours. Unlike Rucker or Scanlon plans, employee participation is not a feature, and workers receives bonuses on a weekly basis.

Explain how companies can minimize pay compression.

Setting maximum pay rates similar to those of other companies.

Describe the two reasons to adopt person-focused pay.

Technological innovation - Jobs require new and different worker skills. Leads to the automation of more tasks, employers combine jobs and confer broader responsibilities on workers. These technological changes have fostered increased autonomy and team-oriented workplaces, which also demand different job-related skills than employees needed previously. Increased Global Competition - has forced companies in the United States to become more productive. To sustain competitive advantage, companies must provide their employees with leading-edge skills and encourage employees to apply their skills proficiently. First, employers in both the European Common Market and some Pacific Rim economies emphasize learning. Second, both Western Europe and some Pacific Rim cultures provide better academic preparation and continuing workplace instruction for the non-college-bound portions of the workforce. To establish and maintain competitive advantage, companies should carefully consider person-focused pay systems.

Explain why more companies are using incentive pay systems.

To control payroll costs or to motivate employee productivity. Companies can control costs by replacing annual merit or seniority increases or fixed salaries with incentive plans that award pay raises only when the company enjoys an offsetting rise in productivity, profits, or some other measure of business success