Compensation - Chapters 7,8 ,9

Steps in building flexibility in to the pay structure

1.Building flexibility into the pay structure is to group different jobs that are considered substantially equal for pay purposes into a grade 2. Establish Range midpoints, minimums, and maximums

Employer of Choice/ Shared Choice

Companies compete based on their overall reputation as a place to work Shared choice begins with traditional options of lead, meet, or lag ◦Adds a second part - offers employees choices (within limits) in the pay mix Similar to employer of choice in recognizing importance of both pay level and mix Employees have more say in forms of pay received

What behaviors does compensation need to reinforce?

First, compensation should be sufficiently attractive to make it possible to recruit and hire good potential employees (attraction).6 Second, we need to make sure the good employees stay with the company (retention). If we can succeed at these first two things, we can then concentrate on building further knowledge and skills (develop skills). And, finally, we need to find ways to motivate employees to perform well in their jobs—to take their knowledge and abilities and apply them in ways that contribute to organizational performance.

What size should pay ranges be?

The size of the range is based on some judgment about how the ranges support career paths, promotions, and other organization systems.

Survey

A survey is the systematic process of collecting and making judgments about the compensation paid by other employers.

Efficiency Wage

According to efficiency-wage theory, high wages may increase efficiency and actually lower labor costs if they: ◦Attract higher-quality applicants ◦Lower turnover ◦Increase worker effort ◦Reduce "shirking" ◦Reduce the need to supervise employees

Approaches on which jobs should be included when designing a survey

Benchmark-Job Approach Low-High Approach

Product Market Factors and Ability to Pay

Employers deliberately design pay levels and mix as part of a strategy that signals to both prospective and current employees kinds of behaviors sought ◦Policy of paying below the market for base pay yet offering generous bonuses or training opportunities On the supply side of the model: ◦Suppliers of labor signal to potential employers ◦Characteristics of applicants, and organization decisions about pay level and mix act as signals that help communicate

Benchmark-Job Approach

If the purpose of the survey is to price the entire structure, then benchmark jobs can be selected to include the entire job structure—all key functions and all levels, just as in job evaluation.

Benchmark Conversion/Survey Leveling

In cases where the content (e.g., job description) of an organization's jobs does not sufficiently match that of jobs in the salary survey, an effort can be made to quantify the difference via benchmark conversion. If an organization uses job evaluation, then its job evaluation system can be applied to the survey jobs. The magnitude of difference between job evaluation points for internal jobs and survey jobs provides an estimate of their relative value and thus guidance for adjusting the market data. (Again, a judgment.)

Combine Internal Structure and External Market Rates

These two components—internal alignment and external competitiveness—come together in the pay structure. The pay structure has two aspects: the pay-policy line and pay ranges.

Relevant Markets

Three factors determine relevant labor markets ◦Occupation ◦Geography ◦Competitors Employers choose their relevant markets based on ◦Competitors - Products, location, and size ◦Jobs - Skills and knowledge required and their importance to organizational success

Broad Banding

consolidates as many as four or five traditional grades into a single band with one minimum and one maximum. Because the band encompasses so many jobs of differing values, a range midpoint is usually not used. Banding takes two steps: Set the number of bands Price the bands: reference market rates

Marginal revenue of labor

◦Additional revenue generated when firm employs one additional unit of human resources, with other production factors held constant

Pay level and pay mix decisions focus on:

◦Controlling costs ◦Attracting and retaining employees

External Competitiveness is expressed in practice by

◦Setting a pay level that is above, below, or equal to that of competitors ◦Determining mix of pay forms relative to those of competitors

Flexible compensation

Flexible compensation is based on the idea that only the individual employee knows what package of rewards would best suit personal needs. Employees who hate risk could opt for more base pay and less incentive pay.

Low-High Approach

If an organization is using skill-competency-based structures or generic job descriptions, it may not have benchmark jobs to match with jobs at competitors who use a traditional job-based approach. Market data must be converted to fit the skill or competency structure. The simplest way to do this is to identify the lowest- and highestpaid benchmark jobs for the relevant skills in the relevant market and to use the wages for these jobs as anchors for the skill-based structures.

MARKET PRICING

Some organizations adopt pay strategies that emphasize external competitiveness and deemphasize internal alignment. In fact, we saw in Chapter 5 that this approach is now quite common. Indeed, it has been said that "the core change" in compensation from the past "is the diminished concern with internal salary relationships."42 Called market pricing, this approach sets pay structures almost exclusively on external market rates.43 Market pricers match a large percentage of their jobs with market data and collect as much market data as possible. The competitive rates for jobs for which external market data are available are calculated; then the remaining (nonbenchmark) jobs are blended into the pay hierarchy created by the external rates ("rank to market").

Major Decisions in setting externally competitive pay and designing the corresponding pay structures

They include (1) specify the employer's competitive pay policy, (2) define the purpose of the survey, (3) select relevant market competitors, (4) design the survey, (5) interpret survey results and construct the market line, (6) construct a pay policy line that reflects external pay policy, and (7) balance competitiveness with internal alignment through the use of ranges, flat rates, and/or bands.

Competitive Pay Policy Alternatives

Three conventional pay-level policies: ◦To lead ◦To meet ◦To follow competition Newer policies emphasize flexibility among: ◦Policies for different employee groups ◦Pay forms for individual employees ◦Elements of the employee relationship that company wishes to emphasize in its external competitiveness policy

Relevant Market

To make decisions about pay level, mix, and structures, a relevant labor market must be defined that includes employers who compete in one or more of the following areas: 1. The same occupations or skills 2. Employees within the same geographic area 3. The same products and services5

HR is responsible for

controlling costs Attract and retain employees

Market Line

links a company's benchmark job evaluation points on the horizontal axis (internal structure) with market rates paid by competitors (market survey) on the vertical axis. It summarizes the distribution of going rates paid by competitors in the market.

External Competitiveness

refers to pay relationships among organizations - an organization's pay relative to its competitors.

What information to collect for job survey?

(1) information about the organization, -reflects similarities and differences among orgs in the survey -Survey of executive and upper-level position including financial and reporting relationship data (2) information about the total compensation system, and -Information on all types of pay forms is required to assess the total pay package and competitors' practices. Base pay, total cash (base, profit sharing, bonuses), and total compensation (total cash plus benefits and perquisites)—are the most commonly used measures of compensation. (3) specific pay data on each incumbent in the jobs under study.

Motivation involves

(1) what's important to a person, and (2) offering it in exchange for some (3) desired behavior.

Marginal product of labor

Additional output associated with employment of one additional human resources unit, with other production factors held constant

INTERPRET SURVEY RESULTS AND CONSTRUCT A MARKET LINE

After the survey data are all collected, the next step is to analyze the results and use statistics to construct a market pay line. Verify Data - Accuracy of the job matches and checking for anomalies (an employers information is significantly out of line) Statistical Analysis Update Survey Data Construct a Market Pay Line Setting Pay for Benchmark and Non-Benchmark jobs Combine Internal Structure and External Market Rates

Purpose of a Survey

An employer conducts or participates in a survey for a number of reasons: (1) to adjust the pay level in response to changing rates paid by competitors, (2) to set the mix of pay forms relative to that paid by competitors, (3) to establish or price a pay structure, (4) to analyze pay-related problems, or (5) to estimate the labor costs of product/service market competitors.

Designing a survey requires answering the following questions:

(1) Who should be involved in the survey design? (2) How many employers should be included? (3) Which jobs should be included? and (4) What information should be collected?

Why bother with Grades and Ranges

1. Differences in quality (skills, abilities, experience) among individuals applying for work (e.g., Microsoft may have stricter hiring requirements for engineers than does FastCat, even though job descriptions appear identical). 2. Differences in the productivity or value of these quality variations (e.g., the value of the results from a software engineer at Microsoft probably differs from that of the results of a software engineer at Best Buy). 3. Differences in the mix of pay forms competitors use (e.g., Oracle uses more stock options and lower base compared to IBM). In addition to offering flexibility to deal with these external differences, an organization may use differences in rates paid to employees on the same job. A pay range exists whenever two or more rates are paid to employees in the same job. Hence, ranges provide managers the opportunity to: 1. Recognize individual performance differences with pay. 2. Meet employees' expectations that their pay will increase over time, even in the same job. 3. Encourage employees to remain with the organization. Milkovich, George. Compensation (p. 287). McGraw-Hill Higher Education. Kindle Edition.

Overlap in Pay Ranges

The high degree of overlap and low midpoint differentials in Exhibit 8.20(a) indicate small differences in the value of jobs in the adjoining grades. Being promoted from one grade to another may include a title change but not much change in pay. The smaller ranges in Exhibit 8.20(b) create less overlap, which permits the manager to reinforce a promotion into a new grade with a larger pay increase. The downside is that there may be fewer opportunities for promotion.

What is the optimal relationship between grades?

The midpoint progression (differential between midpoints of adjacent grades) ought to be large enough to induce employees to seek promotion into a higher grade (and the grade/range overlap should not be too large, again to induce interest in promotion to a higher grade/range). However, there is virtually no research to indicate how much of a differential or midpoint progression is necessary to influence employees to do so.

BALANCING INTERNAL AND EXTERNAL PRESSURES: ADJUSTING THE PAY STRUCTURE

A job structure orders jobs on the basis of internal factors (reflected in job evaluation or skill certification). The pay structure, on the other hand, is anchored by the organization's external competitive position and reflected in its pay-policy line. The problem with using two standards (internal and external) to create a structure is that they are likely to result in two different structures. The order in which jobs are ranked on internal versus external factors may not agree. Differences between market structures and rates and job evaluation rankings warrant a review of the basic decisions in evaluating and pricing a particular job. This may entail a review of the job analysis, the evaluation of the job, or the market data for the job in question. Often this reanalysis solves the problem. Sometimes, however, discrepancies persist. Survey data may be discarded, or benchmark-job matches may be changed.

Behavior = f(AMO)

Wanting to succeed isn't enough. Having the ability but not the motivation also isn't enough. Many a player with lots of talent doesn't have the motivation to endure thousands of hours of repetitive drills, or to endure weight training and general physical conditioning. Even with both ability and motivation, a player's work environment (both physical and political) must be free of obstacles. A home run hitter drafted by a team with an enormous ball park (home run fences set back much farther from home plate) might never have the opportunity to reach his full potential. The same thing is true in more traditional jobs. Success depends on finding people with ability—that's the primary job of recruitment, selection, and training.Once people are hired, they need to be motivated to behave in ways that help the organization.This is where compensation enters the picture. Pay and other rewards should reinforce desired behaviors. But so, too, should performance management, by making sure that what is expected of employees, and what is measured in regular performance reviews, is consistent with what the compensation practices are doing. And perhaps most important of all, the culture of the organization (the informal rules and expectations that are evident in any company) should point in the same direction. Finally, HR needs to establish policies and practices that minimize the chances that outside "distractors" hinder performance.

Motivation Theroies

Identifying what is important to people. Maslow's and Herzberg's theories, for example, both fall in this category. People have certain needs—such as physiological, security, and self-esteem needs— 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 or more needs, employees will behave in desired ways. These theories often drive compensation decisions about the breadth and depth of compensation offerings. Theories of a second sort, best exemplified by expectancy theory, equity theory, and agency theory, focus less on need states and what rewards best satisfy those needs and focus more on motivational processes, including how perceptions of needs and other factors (equity/fairness, risk, linkages between effort, performance, and pay) are processed cognitively to determine motivation and behavior.18 At least one of the theories summarized in Exhibit 9.4 focuses on the third element of motivation: desired behavior. Identifying desired behaviors—and goals expected to flow from these behaviors—is the emphasis of a large body of goal-setting research. Most of this research says that how we set goals (the process of goal setting, the level and difficulty of goals, etc.) can influence the performance levels of employees.21 For example, workers assigned "hard" goals consistently do better than workers told to "do your best."22 A final theory we will mention (not shown in Exhibit 9.4) purports to integrate motivation theories under a broad umbrella. Called self-determination theory (SDT), this approach believes that employees are motivated not only by monetary rewards (referred to as extrinsic motivation), but also by intrinsic motivation, which is enjoyment or satisfaction that comes from performing the work itself and produces a sense of autonomy.