Compensation Exam 2

Benchmark job approach

Benchmark jobs have stable job content, are common across different employers and include many employees

How does the market drive demand and supply of human capital?

Demand side (actions of employers) determines how many new hires they seek Supply side (employees) qualifications and the pay they are willing to accept

Effectiveness of a pay model is dependent on what three concepts

Efficiency= performance plan must support corporate objective. Need to meet standards on measures, eligibility and funding Equity= distributive and procedural justice, communicate fairness and expectations Compliance= comply with all existing laws

Self-determination theory

Employees are motivated by reward systems, pay grades and extrinsic and intrinsic motivation. Highest quality of motivation comes from autonomy, competence and relatedness. In addition to compensation, employees also value empowerment, recognition, etc.

What are the two types of skill plans

Specialist = depth Generalist = breadth

How is competitive intelligence used?

To understand how competitors achieve market share and price products

What happens when pay is based on individual performance?

Turnover is higher for poor performers Too little pay triggers feelings of unfair treatment

What are fuzzy markets?

Unique jobs and structures that need unique skills and talents. Difficult to compare to others

Central Tendency

a midpoint in a group of measures

Shared Choice

an external competitiveness policy that offers employees a substantial choice among their pay forms

Competency

basic knowledge and abilities employees must acquire or demonstrate in a competency-based plan in order to successfully perform the work, satisfy customers, and achieve business objectives

Skill block

basic units of knowledge employees must master to perform that work, satisfy customers, and achieve business objectives

Agency Theory

both sides seek to make most favorable exchange possible.

Tacit work

complex work (as compared to transactional, or routine, work)

Skill requirements

composite of experience, training, and ability as measured by the performance requirements of a particular job

Reliability

different evaluations produce same results

Expectancy Theory

employees choose behaviors that yield the most satisfaction/exchange

What are the elements of employee behavior

function on the basis of motivation, ability and environment

Herzberg's two factory theory

hygiene factors are pay and basic needs while satisfiers/ motivators are motivations like recognition

Low-high approach

identify the lowest and highest paid benchmark jobs

Why would an organization choose to lag competition?

if they add the promise of high future returns (stock ownership), it may increase commitment

What are aspects that influence motivation

individual behavior, changes in cost of living, seniority, market rate

What is "word of mouse"

internet searching for salary information (salary.com)

Reservation wage

lowest wage an employee will accept

Market pricing

matches a large percentage of their jobs with market data and collect as much market data as possible. The objective is to base most of the internal pay structure on external rates

Bias in internal structures

may lead to discrimination

What are the two aspects of pay structure?

pay policy line and pay ranges

Equity theory

people are concerned about fairness- what is expected and what is received.

Maslow's needs hierarchy

people are motivate by needs, lower basic to higher order

Satisfiers

people that take the first job offer they get where the pay meets their reservation wage

benchmark conversion/survey leveling

process of matching survey jobs by applying the employers plan to the external jobs and then comparing the worth of the external job with its internal " match

Zones

ranges of pay used as controls or guidelines within pay bands that can keep the system more structurally intact. Maximums, midpoints, and minimums provide guides to appropriate pay for certain levels of work. Without zones employees may float to the maximum pay, which for many jobs in the band is higher than market value

Pay Mix

relative emphasis among compensation components such as base pay, merit incentives, and benefits

Topping out

situation in which employees in a skill-based compensation plan attain the top pay rate in a job category by accumulating and/or becoming certified for the top-paid skill block(s)

Quoted-Price Market

stores that label each item's price or ads that list a job's opening starting wage are examples of quoted-price markets

Job-based systems

systems that focus on jobs as the basic unit of analysis to determine the pay structure; hence, job analysis is required

Multiskill system

systems that link pay to the number of different jobs (breadth) an employee is certified to do regardless of the specific job he or she is doing

Ability to Pay

the ability of a firm to meet employee wage demands while remaining profitable; a frequent issue in contract negotiations with unions. A firm's ability to pay is constrained by disability to compete in its product market

Validity

the degree to which job evaluation assesses what it is supposed to

Why would an organization choose to pay with competition?

to try to ensure that wage costs are approximately equal to competitors and ability to attract applicants is equal to competitors

Why would an organization choose to lead competition?

to try to maximize the ability to attract and retain employees there is a link between higher wages and ease of attractions, reduced turnover and absenteeism

Market Pay Line

using key/ benchmark jobs, a market pay policy line can be constructed that shows external market pay survey data as a function of internal job evaluation points. In many cases, the market pay policy line is obtained by using regression analysis which yields an equation of the form "market pay= intercept + slope x job evaluation points." By plugging the job evaluation points for any job (both benchmark and non-benchmark jobs into the equation, the predicted pay for each job can be obtained

What is plotted on the x and y axis of survey data?

x axis= internal aligned structure y axis= salaries paid by relevant companies (externally competitive data)

What are organizational factors that influence compensation?

- Industry and Technology *labor-intensive industries tend to pay less than tech-intensive industries -Employer Size *large organizations tend to pay more -Organizational Strategy *pay levels that lead competition are used in jobs that directly impact organizational success. *jobs with less impact have pay levels that meet competition pay -People's preference *pay forms and amounts that employees value

The purpose of skill based structures

- support organizational strategy and objectives -support work flow -fair to employees -motivates behavior

Motivation

-What is important to a person -How to offer it in exchange for desired behavior

How/When to choose between the pay policies?

An organization may adopt a lead policy for skills critical to success, a match policy for less critical skills and a lag policy for jobs easily filled in the labor market.

Pay Level Formula

(base + bonuses + benefits + value of stock holdings)/ number of employees

Do people join a firm because of pay?

- Job candidates look for organizations with reward systems that fit their personalities. - Candidates look for a 'fit.': Materialistic= relatively more concerned with pay level Low self-esteem= want large, decentralized organization with little pay for performance Risk takers= want more pay based on performance Risk-averse= want less performance-based pay Individualist= want pay plans based on individual performance - A strong pay/performance link is attractive.

Competencies are...

-Skills that can be learned and developed -Traits that include attitudes and motivations -Focused on minimum requirements that organizations need to stay in business -Focuses on outstanding performance -Characteristics of the organization -Characteristics of the employee

What are the questions that need to be answered when designing a survey?

-Who should be involved in survey design? -How many employers should be included? -Which jobs should be included? -What information should be collected?

What is the purpose of skill-based structures

-align internally -support the strategy and objectives -support work flow -be fair to employees -motivate behavior toward organization objectives

What are factors that affect the supply of labor?

-geographic barriers -union requirements -lack of information about job openings -degree of risk -degree of unemployment

What are the two key product market factors?

-product demand -degree of competition

How to select relevant market competitors?

-same occupation or skills -employees in the same geographic area -same products and services

Examples of competencies

-skills -knowledge -self-concepts -traits -motives

What are important things to consider when conducting surveys and utilizing information?

-verifying data -beware of outliers -conduct regression analysis (straight line that best fits data -frequency distribution -central tendency (reduces a large amount of data into a single number -Mean vs weighted mean (weighted mean gives equal weight to each individual employee's wage) -variation (distribution of rates around a measure of central tendency -standard deviation

What aspects of setting pay help balance intern and external pressures?

Job structure orders jobs on the basis of internal factors Pay structure is anchored by external competitive positions

Labor Cost formula

Labor Cost= Pay level x the number of employees The higher the pay level relative to what competitors pay, the greater the relative costs to provide similar products or services

What types of environments are good for skill-based pay

Team, multiskilled and flexible (manufacturing)

Why do organizations choose to differentiate their pay strategy?

There is a need to balance internal and external pressures

What is the major strategic decision associated with external competitiveness in compensation strategy?

Whether to mirror what competitors are paying or to design a pay package that may differ from those of competitors but better fit the business strategy

Pay Satisfaction

a function of the discrepancy between employees' perception of how much pay they should receive and how much pay they do receive. If these perceptions are equal, an employee is said to experience pay satisfaction

What can be one reason for a compensation differential?

a job is dangerous and therefore gets paid more

Market Line

a line on a graph that 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

Bureau of Labor Statistics

a major source of publicly available pay data. It also calculates the consumer price index

Bourse Market

a market that allows haggling over terms and conditions until an agreement is reached

Consumer Price Index (CPI)

a measure of the changes in prices in a fixed market basket of goods and services purchased by a hypothetical average family. Not an absolute measure of living costs; rather, a measure of how fast costs are changing. Published by the Bureau of Labor Statistics, U.S. Department of Labor

Behavior Model

a model that assumes people have accurate information about jobs and that no barriers exist to an individuals ability to get the job

Skill-based pay

a pay structure in which workers are paid for the skills they are certified to have obtained

Broad Banding

collapsing a number of salary grades into a smaller number of broad grades with wide ranges -provides flexibility to define job responsibilities -fosters cross-functional growth -places emphasis on lateral movement with no pay adjustments -take advantage of flexibility without increased labor costs, turnover, or vulnerability to inconsistent or illegal practices

When administering and evaluating person-based structured compensation, what elements are important for acceptance

communication and employee involvement

Competency-based structure

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

Signaling

employers design pay levels as part of a strategy that signals to both prospective and current employees the kind of behaviors that are sought

Goal setting theory

need to identify motivation. Identify desired behaviors and the goals expected to come from these behaviors. We set goals to influence performance of employees.

Pay Grades

one of the classes, levels, or groups into which jobs of the same or similar values are grouped for compensation purposes. All jobs in a pay grade have the same pay range- maximum, minimum, and midpoint

What is the thought process behind flexible compensation

only the individual employee knowns what package of rewards would best suit their personal needs Important to make sure the dollar cost of the package an employee selects meets employer budgetary limits

Pay-with-competition policy

policy that tries to ensure that a firm's labor costs are appropriately equal to those of its competitors. It seeks to avoid placing an employer at a disadvantage in pricing products or in maintaining a qualified workforce

Job Structure

relationship among jobs inside an organization, based on work content and each job's relative contribution to achieving the organization's objectives

Pay-Policy Line

representation of the organization's pay-level policy relative to what competitors pay for similar jobs. May need to be aged halfway through the plan year Can also use %s

Extrinsic Rewards

rewards that a person receives from sources other than the job itself. They include compensation, supervision, promotions, vacations, friendships, and all other important outcomes apart from the job itself.

Transactional work

routine work

How to express external competitiveness

setting a pay level that is above, below or equal to competitors, determining the pay mix relative to those of competitors

Hit rates

the ability of a job evaluation plan to replicate a predetermined, agreed-upon job structure

Marginal Product of Labor

the additional output associated with the employment of one additional human resource unit, with other factors held constant

Marginal Revenue

the additional revenue generated when the firm employs 1 additional person

Utility Theory

the analysis of utility, the dollar value created by increasing revenues and/or decreasing costs by changing one or more human resources practices. It has most typically been used to analyze the payoff to making more valid employee hiring/selection decisions.

Pay Structure

the array of pay rates for different jobs within a single organization; they focus attention on differential compensation paid for work of unequal worth.

Equal Pay Act

the best approach may be to provide sufficient ambiguity (loosely linked internal alignment) to afford flexibility to adapt to changing conditions.

Competitive Intelligence

the collection and analysis of information about external conditions and competitors that will enable an organization to be more competitive

Total Compensation

the complete pay packages for employees, including all forms of money, bonuses, benefits, services, and stock

Sorting

the effect that pay strategy has on who is attracted and who is retained

Labor Demand

the employment level organizations require. An increase in wage rates will reduce the demand for labor, other factors constant. Thus, the labor demand curve (the relationship between employment levels and wage rates) is downward-sloping

Perquisite

the extras bestowed on top management, such as private dining rooms, company cars, and first-class airfare.

External Competitiveness

the pay relationships among organizations; focuses the attention on the competitive positions reflected in these relationships

Survey

the process of collecting and making judgments about the compensation paid by other employers they are used to provide data for policy into pay levels, pay mix and structures

Shirking Behavior

the propensity of employees to allow the marginal revenue product of their labor to be less than its marginal cost; to be lax

What are the goals of compensation

- attract employees -keep good employees -motivate employees to perform well -none of this is possible if performance rewards can't be measured

What are the factors that affect pay mix decisions/ external competitiveness?

- competition in the labor market for people with various skills - competition in the product market - characteristics unique to each organization

What are the three alternatives to choose between when collecting survey data?

-Base pay (amount of cash the competitors decided each job and each incumbent is worth) -Total Cash (base, profit sharing, bonuses) -Total Compensation (total cash + stock options) Total compensation is higher than base pay alone or base plus bonuses

What areas see consequences of pay level and pay mix decisions

-Operating expenses -Employee attitudes and work behaviors -Efficiency (little research) -Fairness (more is better in terms of pay and employee satisfaction) -Compliance (living wage, pensions, health care, avoiding antitrust violations)

What behaviors do employers care about

-Perform in ways that lead to better organizational performance -Need employees with ability (recruitment, selection, training) -HR needs to design policies and compensation that leads employees to behave in ways that support corporate goals -Pay should reinforce desired behaviors

What are the 5 areas that people thought competencies focused on?

-Skills (demonstration of expertise) -Knowledge ( accumulated information) -Self-Concepts (attitudes, values, self-image) -Traits (general disposition to behave in a certain way) -Motives(recurrent thoughts that drive behavior

What are the major skill analysis decisions

-What is the objective of the plan? -What information should be collected? -What method should be used? -Who should be involved? -How useful are the results for pay purposes?

Why develop grades for pay ranges?

-build flexibility into structure -enhance an organization's ability to move people around with no change in pay -each grade has its own pay range and all the jobs within a single grade have the same pay range

What factors go into choosing whether to on-site, off-site, or offshore?

-customer preferences -time schedules -nature of the project

What are the assumptions about labor markets

-employees seek to maximize profits -people are homogeneous and interchangeable -pay rates reflect all costs -markets are competitive, so there is no incentive to pay above or below the market rate

Steps in creating a skill analysis

-group related skills into a skill block -arrange skill blocks by level into a skill structure -create a process to describe, certify, and value the skills -build the structure

What are the three basic data types to collect in a survey?

-information about the organization -information about the total compensation system -specific pay data on each incumbent in the jobs understudy

What are other rewards a company can offer

-job satisfaction -pay and benefits -social -organizational commitment -organizational prestige

What factors are used to determine the relevant labor markets?

-occupation -geography -competitors

What elements make up the perfect structure

-pay increases by promotions to more responsible jobs -employees focus on getting promoted -controls cost -offset higher rates with higher

What are the three groups of competencies to collect

-personal characteristics (personality) -visionary (highest-level competencies, big picture) -organization specific

What the major decisions in setting external competitive pay?

-specify the employer competitive pay policy -define the purpose of the survey -select relevant market competitors -design the survey -interpret survey results and construct the market line -construct a pay policy line that reflects external pay policy -balance competitiveness with internal alignment through the use of ranges, flat rates and/or bands

What is the purpose of conducting a survey?

-to adjust pay level in response to changing rates paid by competitors -to set the mix of pay forms relative to that paid by competitors -to establish or price a pay structure -to analyze pay-related problems -to estimate the labor costs of product/service market competitors

What are the three possible pay decisions? What is the most popular?

-to lead -to meet -to follow (lag) Most common is to match competition

what are the two objectives of compensation competitiveness

1) Control Costs and Increase Revenue 2) Attract and Retain Employees

Managers using the marginal revenue product model must

1) determine the pay level set by market forces 2) determine the marginal revenue generated by each new hire

What are the two steps in banding?

1) set the number of bands 2) price the bands by referencing market rates

The difference between skill based pay and job based pay

In skill based pay people can be used in the way that best matches the flow of work and wages are attached to the person (not the job). In a job based plan, employees are paid for the job they are assigned and not their skills.

Regression

a statistical technique for relating present-pay differentials to some criterion, that is, pay rates in the external market, rates for jobs held predominantly by men, or factor weights that duplicate present rates for all jobs in the organization

Job Evaluation

a systematic procedure designed to aid in establishing pay differentials among jobs within a single company. It includes classification, comparison of the relative worth of jobs, blending internal and external market forces, measurement, negotiation, and judgment

Skill analysis

a systematic process to identify and collect information about the skills required to perform work in an organization

Efficiency Wage Theory

a theory that explains why firms are rational in offering higher-than-necessary wages

Lead Pay-Level Policy

a wage structure that is set to lead the market throughout the pan year. Its aim is to maximize a firm's ability to attract and retain quality employees and to minimize employee dissatisfaction with pay

Lag Pay-Level Policy

a wage structure that is set to match market rates at the beginning of the plan year only. The rest of the plan year, internal rates will lag behind market rates. Its objective is to offset labor costs, but it may hinder a firm's ability to attract and retain quality employee

What are the things that need to be possible no matter what the basis for the pay structure is?

a way to -collect and summarize information about the work -determine what about the work is of value to the organization -quantify that value -Translate that value into an internal structure

Employment Cost Index

allows firms to compare changes in its average costs to industry

Pay Level

an average of the array of rates paid by an employer

Compensating Differentials

an economic theory that attributes the variety of pay rates in the external labor market to differences in attractive as well as negative characteristics in jobs. Pay differences must overcome negative characteristics to attract employees

Diminishing Returns

an employer will continue to hire until the marginal revenue generated by the last hire is equal to the costs associated with employing that person

What is emphasis now placed on for competencies?

business-related behaviors, why excellent performers are doing more consistently than average employees. Competencies are becoming a collection of observable behaviors that require no inference, assumption, or interpretation

Flexible Compensation

the allocation of employee compensation in a variety of forms tailored to organization pay objectives and/or the needs of individual employees

Rent

the amount by which payment to a factor of production (capital or labor) exceeds the payment needed to keep it employed and/or its productivity. In the case of an employee (labor), economic rent would be compensation paid beyond what is necessary to retain the employee and/or beyond his/her marginal product

Job Pricing

the process of assigning pay to jobs, based on thorough job analysis and job evaluation.

Pay Ranges

the range of pay rates from minimum to maximum set for a pay grade or class. It puts limits on the rates an employer will pay for a particular job. Usually down with base pay data exists whenever two or more rates are paid to employees in the same job

Range Midpoint

the salary midway between the minimum and maximum rate of a salary range. The midpoint rate for each range is usually set to correspond to the pay-policy line and represents the rate paid for satisfactory performance on the job

Job Analysis

the systematic process of collecting information related to the nature of a specific job. It provides the knowledge needed to define jobs and conduct job evaluation

Employer of Choice

the view that a firm's external wage competitiveness is just one facet of its overall human resource policy and that competitiveness is more properly judged ob overall policies. Challenging work, great colleagues, or an organization's prestige must be factored into an overall consideration of attractiveness

Why do applicants select job opportunities?

there is perceived match between their personal dispositions and the nature of the organization

Relevant Markets

those employers with which an organization competes for skills and products/ services. Three factors commonly used to determine the relevant markets are the occupation or skills required

What questions to ask to determine if a data point is an anomaly?

-Does any one company dominate? -Do all employers show similar patterns? -Are there any outliers?

What are the outcomes of skill-based pay plans

-Generally well accepted -Learn to earn mentality -Younger employees, more educated employees with stronger growth needs, organizational commitment, and a positive attitude toward workplace innovation were more successful in acquiring new skills -people can top out so this method is sometimes abandoned -best aligned with cost-cutter strategy or in industries where labor costs are a small % of total costs

What are the benefits of higher wages?

-Higher pay satisfactions -Improved attractions and retentions of employees -Higher quality and effort of work

How have pay forms changed?

New forms of pay are less entitlement-oriented and more aligned to the uncertainties of individual, group and corporate performance. Some employees may be willing to risk higher risk in return for greater chance to earn large payouts.

Base Wage

The basic cash compensation that an employer pays for the work performed. Tends to reflect the value of the work itself and ignore differences individual contributions

What is the employee advantage of multi-skill systems

The more they learn the more they earn