Compensation MGMT Ch. 6-11

pay structure

is anchored by the organization's external competitive position and reflected in its pay-policy line

Lead pay level policy

maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay

Agency theory

pay directs and motivates employee performance

What do pay for performance plans do?

pay for performance plans signal a movement away from all base pay. Pay will vary with some measure of individual, team, or organizational performance

Vroom 1964

suggests that a persons beliefs about expectancies, instrumentalities, and valences interact psychologically to create a motivational force in ways that seem most likely to bring pleasure or to avoid pain

Compensating differentials

work with negative characteristics requires higher pay to attract workers

What are the short-term specific pay-for-performance plans?

- merit pay - lump sum bonuses - Individual spot awards - Individual incentive plans

Specific pay for performance plans

- merit pay -lump-sum bonuses -individual spot awards -individual incentive plans

Employee stock ownership plans (long term incentive plan)

- the effects are generally long term - foster employee willingness to participate in the decision making process - have little impact on productivity or profit

Dissatisfaction with performance appraisals

- vague - subjective -criterion deficient (measure small part of the job -performance is more a product of work environment and management system than individual worker

What are individual spot awards

- viewed as highly or moderately effective -typically awarded for exceptional performance -should be consider to supplement merit or bonuses

Stock ownership or options (types of variable pay plans)

Award of stock shares or options

Team/group incentives (type of variable pay plans)

Awards determined based on team/group performance goals or objectives. Payout can be more frequent than annual and can also extend beyond the life of the team. Payout may be uniform for team/group members

Balanced scorecard (types of variable pay plans)

Awards that combine financial and operating measures for organization, business unit, and/or individual performance. Award pool based on achieving performance targets

Instrumentality

Belief that the behavior or performance will lead to the desired outcome, will this path and these tools work to get what is wanted; for compensations its the employee's assessment that the job performance will be rewarded by the organization

Do employees perform better on their jobs because of pay?

- team-based incentives, in contrast, are less attractive to a high individual performer -one view suggests that linking pay to performance occurs through two mechanisms, an incentive effect and a sorting effect

Understanding Regression: What jobs to include?

-Benchmark job approach (to price the entire structure) -Low-high approach (wages of lowest- and highest-paid benchmark jobs for the relevant skills in the relevant market are used as anchors for skill-based structures

What are bonuses

-Increasingly used substitute or supplement for merit pay -not built into base pay (must be re-earned each year) -viewed as less of an entitlement than merit pay -less expensive than merit pay over the long run

Causes for failures of team incentive schemes

-Varieties in teams -level problem -complexity -control -communications

What behaviors do compensation needs to reinforce?

-attractive to make recruiting and hiring good potential employees possible -make sure the good employees stay with the company -build further knowledge and skills

What three elements motivates employees?

-find a reward that is important to the person -pair the reward to the behavior -desired behavior

Organization factors

-industry and technology -employer size -peoples preferences -organization strategy

The rater

-observes the behavior of the ratee -encodes ratee behavior -stores information in memory -when evaluating a ratee: - reviews performance dimensions -retrieves stores observations to determine relevance to performance dimensions

Product market factors and ability to pay

-product demand -degree of competition -what managers say -segmented supplies of labor and going rates

Job Characteristics Model (JCM): Core Job Characteristics

-skill variety -task identity -task significance -autonomy -feedback from the job

Key elements in designing a gain-sharing plan

-strength of reinforcement -productivity standards -sharing the gains -scope of the formula -perceived fairness of the formula -ease of administration -production variability

Pay increase not tied to performance

Pay increase associated with low motivation potential provide equal increases to all employees regardless of performance - general increase - cost of living adjustments Pay increases based on a preset progression pattern based on seniority (no direct link to performance)

Methods for Assessing Performance (Results method)

Productivity measures - links what employees accomplish to results on the organization Management by objective - rates performance by employee achievement of goals set by employee and manager balanced scorecard - helps managers turn strategic goals into operational objectives

Performance standard training

Provides raters with a standard or frame of reference for making appraisals

What are the two basic types of markets?

Quoted price and Bourse

Evaluation formats are divided into what two general categories?

Ranking - the rater compare employees against each other Rating -requires evaluating employees on some absolute standard rather than relative to other employees

Aging or trending

Refers to the process of updating pay data to forecast the competitive rates for the future when pay decisions will be implemented

Cost of living

Same as across the board increase, except magnitude based on change in cost of living

Internal Alignment

internal pay structures need to be aligned with the organization, business strategy and objectives, the design of the work flow, a concern for the a concern for the fair treatment of employees, and the intent of motivating employees

What are individual incentive plans

offer a promise of pay for some objective, pre-established level of performance Common feature: an established standard against which employee performance is compared to determine magnitude of incentive pay -who can earn the incentive (what jobs?)

job structure

orders jobs on the basis of internal factors (reflected in job evaluation or skill certification)

Signaling

pay policies signal the kinds of behavior the employer seeks

Valence

perceived attractiveness of outcome: strength positive emotional charge; how much does the employee value the reward

Job-based structures

rely on the work content- tasks, behaviors, responsibilities

Person-based structures

shift the focus to the employee - skills, knowledge, or competencies the employee possesses -whether or not they are used in the particular job

What is Marginal Product of labor

the additional output associated with employment of one additional person, with other production factors held constant - diminishing marginal productivity

Marginal Revenue of labor

the additional revenue generated when the firm employs one additional person, with other production factors held constant. - a manager using the marginal revenue product model must: - determine pay level set by market forces - determine marginal revenue generated by each new hire

Variation

the distribution of rates around a measure of central tendency

Lag pay-level policy

the promise of higher future returns, fostering teamwork and commitment which may increase productivity

Individual incentive

this variable pay is sometimes an add on to a fixed base pay. The incentive component ties increments in compensation directly to extra individual production. While measures of performance are subjective with merit and lump-sum components

what are three conventional pay-level policies?

to lead to meet to follow competition

Advantages of individualized incentive plans

1. substantial impact that raises productivity, lowers production costs, and increases earnings of workers 2. Less direct supervision is required to maintain reasonable levels of output than under payment by time 3. In most cases, systems of payment by results, if accompanied by improved organizational and work measurement, enable labor costs to be estimated more accurately than under payment by time. This helps costing and budgetary control

What is merit pay?

A merit pay system links increases in base pay to how highly employees are rated on subjective performance evaluation issues: -expensive -may not achieve the desired goal: improving employee and corporate performance

Do employees perform better on their jobs because of pay?

A well-designed plan linking pay to behaviors of employees generally results in better individual and organizational performance

The purpose of a survey

Adjust pay level- how much to pay? -based on overall movement of pay rates caused by competition in the market Adjust pay mix - what forms? - base, bonus, stock, benefits Adjust pay structure? -market surveys are used to validate job evaluation results; establish internal structures

Group incentive plans

All incentive plans can be described by the common features: - the specific employee group that participates in the plan - the standard against which performance is compared -the payout schedule

Risk sharing plan (earnings at risk plans)

Base pay is reduced by some amount relative to the level that would be offered in a success sharing plan

Disadvantages of Measures of Compensation

Base pay- fails to include performance incentives and other forms, so will not give true picture if competitors offer low base but high incentives Total cash (base + bonus)- all employees may not receive incentives, so it may overstate the competitors' pay; plus, it does not include long-term incentives Total compensation: all employees may not receive all the forms. be careful; dont set base equal to competitors total compensation. Risks high fixed costs

Advantages of measures of compensation

Base pay- tells how competitors are valuing the work in similar jobs Total cash (base + bonus) - tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job Total compensation: tells the total value competitors place on this work

Adjust pay mix- what forms?

Base, bonus, stock, benefits

What are the two parts of the total pay model that have merged?

Internally aligned structure - horizontal axis External competitive data- vertical axis

Methods for Assessing performance (Behavior Method)

Critical incident - unusual event that denotes superior or inferior employee performance Behavior checklist - rater checks statements on a list that the rater believes are characteristic of the employee Behavioral anchored rating scale - rater checks specific whether the employee displays certain performance-related behaviors Behavioral observation method - rater checks how frequent certain behaviors are displayed by the employee

Two aspects of pay structure

Pay policy line Pay ranges

Quoted Price Market

Stores that label each items price

Base pay

The guaranteed portion of an employees wage package

Efficiency wage

above-market wages will improve efficiency by attracting workers who will perform better and be less willing to leave

Profit sharing

add on linked to group performance relative to exceeding some financial goal

Reservation wage

applicants wont accept jobs with pay below a certain wage

Adjust pay level- how much to pay?

based on overall movement of pay rates caused by competition in the market

Define performance

behaviors, competencies, traits

Broad banding

consolidates as many as four or five traditional grades into a single band with one minimum and one maximum

Gain sharing

differs from profit sharing in that the goal to exceed is not financial performance of organization, but some cost index

Performance plans (performance share and performance unit)

driven by financial earnings or return measures, and they pay out for meeting or exceeding specific goals

Risk sharing plans

employee not only shares in the successes but also is penalized during poor performance years. Penalty is in form of lower total compensation in poor corporate performance years. Reward though is typically higher than that for success sharing programs in high performance years

Define performance

- Behaviors (observable) - Competencies (knowledge or skills) - traits (most difficult to measure and assess)

Profit sharing plans

- Predetermined index of profitability -the trend in recent variable pay design is to combine the best of gain-sharing and profit-sharing plans

Compliance

- comply with existing laws - enhance and maintain firm's reputation

Designing a pay-for-performance plan: Equity/Fairness

- distributive justice - procedural justice -Communications

performance ratings are influenced by what?

- employee behaviors observed by raters -organization values -competition among departments -inter-departmental status differences -economic conditions

What makes for a good performance Appraisal format?

- employee development potential -administrative ease -personnel research potential -cost -validity

What makes for a good appraisal format?

- employee development potential -administrative ease -personnel research potential -cost -validity

The role of Performance Appraisals in Compensation Decisions (cont.)

- employees are often frustrated about the appraisal process - appraisals are too subjective -possibility of unfair treatment by a supervisor

Common errors in appraising performance

- errors in observation - errors in storage and recall - errors in the actual evaluation

Relevant labor market includes employers who compete for what?

- for same occupations or skills -for employees in same geographic area -with same products and services

What are the two approaches to constructing a market pay line?

- free hand approach - regression analysis

Factors that lead raters to give inaccurate appraisals

- guilt -embarrassment about giving praise -taking things for granted -not noticing good or poor performance -the halo effect -dislike of confrontation -spending too little time on preparation of the appraisal

How to manage merit pay

- improve accuracy of performance ratings -allocate enough money to truly reward performance -make sure size of merit increase differentiates across performance levels

Strategies to better understand and measure job performance

- improve appraisal formats -select the right raters -understand how raters process information -training raters to rate more accurately

2 key factors influencing a persons decision to join a firm

- level of pay - pay system characteristics

What are some factors impacting turnover?

- pay based on individual performance -group incentive plans -level of employee satisfaction with pay - changing base pay

What are ways to improve performance appraisals?

- recognize that part of performance is influenced more by the work environment and system than by employee behaviors - identify strategies for understanding and measuring job performance better

Ways to improve performance appraisals

- recognize that part of performance is influenced more by the work environment and system than by employee behaviors - identify strategies for understanding and measuring job performance better

Purpose of Skill-Based structure

- supports the strategy and objectives - supports work flow - is fair to employees - motivates behavior toward organization objectives

Disadvantages of Individualized incentive plans

1. Greater conflict may emerge between employees seeking to maximize output and managers concerned about deteriorating quality levels 2. Attempts to introduce new technology may be resisted by employees concerned about the impact on production standards 3. Reduced willingness of employees to suggest new production methods for fear of subsequent increases in production standards 4. Increased complaints that equipment is poorly maintained, hindering employee efforts to earn larger incentives 5. Increased turnover among new employees discouraged by the unwillingness of experienced workers to cooperate in on the job training 6. elevated levels of mistrust between workers and management

What shapes External Competitiveness

1. labor market factors - nature of demand -nature of supply 2. Product market factors -degree of competition -level of product demand 3. Organization factors -industry, strategy, size -individual manager

Define Competencies

1. skills 2. knowledge 3. self-concepts 4. traits 5. Motives

Promotional Increases as a Pay for Performance tool

Another method of rewarding good performance is a promotion accompanied by a salary increase- 8 - 12 % - size of increment is double a normal merit increase - represent a reward to employees for commitment and exemplary performance

Pay-policy line

Another way to translate pay-level policy into practice is to simply specify a percent above or below the regression line (market line) than an employer intends to match and then draw a new line at this higher (or lower) level

Broad based Option Plans

Are stock grants. Are versatile. Simply stock option offered to broader employee groups

lump-sum bonus

As with merit pay, granted for individual performance. Does not add into base pay, but is distributed as a one time bonus

Cash profit sharing (types of variable-pay plans)

Award based on organizational profitability. Shares a percentage of profits (typically above a target level of profitability). Usually an annual payout. Can be cash or deferred 401(K)

Productivity/ gain sharing (types of variable pay plans)

Awards that share economic benefits of improved productivity, quality, or other measurable results. Focus on group, plant department, or division results. Designed to capitalize on untapped knowledge of employees

Design a survey: which jobs to include?

Benchmark job approach- all functions levels Low high approach- identify lowest and highest paid benchmark jobs for relevant skills in the relevant market

What is incentive pay?

Bonuses, piece rate, one time pay for a specific outcome is at risk pay and is the least expensive form of pay

Designing a pay for performance plan

Efficiency - is it well aligned with org strategy Standards - what are the performance objectives -how will performance be measured -what behavior and what work are eligible -how will the incentive scheme be funded Equity/Fairness - distributive justice -procedural justice -communications Compliance - comply with existing laws -enhance and maintain firms reputation

Success sharing plan (earnings at risk plans)

Employee base pay is constant - variable pay increases in successful years -no reduction in base pay and no variable pay in poorly performing years

Equity theory

Employees are motivated when perceived outputs are equal to perceived inputs

Performance dimension training

Exposes supervisors to the performance dimensions to be used in rating

Team incentive plans

Few causes for failures of team incentive schemes - varieties in teams -level problem -complexity -control -communications

Expectancy

How likely is the desired outcome to follow performance; for compensation its the employees assessment of likelihood of meeting the required performance level to get compensated

Bourse

Like stock exchange, bidding. Example: eBay allows haggling over the terms and conditions

Adjust pay structure?

Market surveys are used to validate job evaluation results; establish internal structures

success-sharing plans

Not added into base pay. Distinguished from risk sharing plans, below, because employees share in any success- performance above standard- but are not penalized for performance below standard

What are Individual Incentive Plans?

Offer a promise of pay for some objective, pre-established level of performance Common feature- an established standard against which employee performance is compared to determine magnitude of incentive pay

What is market pricing?

Sets pay structures almost exclusively on external market rates - competitive rates for jobs for which external market data are available are calculated -remaining jobs are blended into pay hierarchy

External Competitiveness is expressed by

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

Brito v. Zia Company (1973)

The court found that Zia had no controlled appraisal scoring system. Two of the three evaluators had no firsthand contact with the employees work resulting in many evaluations being over charitable and not at all reflective of the individuals actual job performance

Across the board

Wage increase granted to all employees, regardless of performance. Size related to some subjective assessment of employer about ability to pay

Merit pay

Wage increase granted to employee as function of some assessment of employee performance. Adds on to base pay in subsequent years

What is a market line?

a market line links a company's benchmark jobs on the horizontal axis with market rates paid by competitors on the vertical axis; summarizes the distribution of going rates paid by competitors in the market

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

Explosive Interest in Long-term Incentive plans

focus on performance beyond the one year time line used as the cutoff for short term incentive plans. Recent growth in long term plans is spurred in part by a desire to motivate longer term value creation

Rater-error training

goal is to reduce psychometric errors by familiarizing raters with their existence