HRM 445 FINAL EXAM

Value of employee benefits

Employee Benefits: Are that part of the total compensation package, other than pay for time worked, provided to employees in whole or in part by employer payments. e.g., life insurance, pension, workers' compensation, vacation. Employee benefits can no longer realistically be called "fringe benefits" The employees care more about medical benefits Value of Employee Benefits: Companies spend trillions on benefits. • Yet a typical employee recalls only 15 percent of the benefits they received. • Unfortunately, there is evidence that employees frequently are not even aware of, or undervalue, the benefits provided by their organization Some say benefits are taken for granted. • Yet they drive job satisfaction. One study says employees don't want more benefits, rather a choice of benefits. • Perceived value rises when employers offer a flexible benefit package.

ERISA -vesting options

Employee Retirement Income Security Act (ERISA) - The early 1970s found mismanaged accounts or long vesting periods. - ERISA passed in 1974 as a response. • Does not require a pension plan. • But if there is one, it must follow ERISA rules. • Designed to achieve two goals: - to protect 100 million active participants, and - to stimulate the growth of such plans. The major requirements of ERISA are: - General requirements - Vesting and portability - Pension Benefit Guaranty Corporation - The Pension Protection Act of 2006 (PPA) General requirements. - Employees are eligible from age 21 but may require one to three years of service. Vesting and portability. - Vesting, or amount of time an employee must work before employer contributes to the plan. • There are two formulas used for vesting: (1) full vesting after 3 years (down from 5 years previously) (2) 20% after 2 years (down from 3 years) and 20% each year thereafter, resulting in full vesting after 6 years (down from 7 years) - Portability becomes an issue for employees moving to new organizations. Pension Benefit Guaranty Corporation (PBGC). - Employers must buy insurance from the PBGC who guarantee payment of vested benefits. The Pension Protection Act of 2006 (PPA). - Protects retirement income and transfers responsibility from employer to employee. - Identifies 'at risk' plans that are less than 70% funded.

Communicating benefits

Employee benefit communication. Revolves around four issues: • what is communicated, to whom, how it is communicated, and how frequently. The most common method is the employee benefit handbook. Effective communication involves repetition and consistency. • 'e-benefits' are a huge trend. Try to increase the awareness of benefits to the employees TO increase employee awareness and probably the biggest trend today in health care is to offer market-based, or customer-driven, health care Despite these and other innovate plans (intranets, e-benefits, Internet) to communicate employee benefit packages, failure to understand benefit components and their value is still one of the root causes of employee dissatisfaction with a benefit package

Reasons for growth in benefits

Why the Growth in Employee Benefits? Wage and price controls during WW II and the Korean War. • Strict limitations on wage increases led unions and employers to provide benefits. Unions flexed their new negotiation rights acquired from the Wagner Act of 1935. • Several benefits common today started here. Pension plans, unemployment, vacation plans, and guaranteed annual salary. Employer impetus. Many of today's benefits were employer initiated. • Traced to pragmatic concerns about employee satisfaction and productivity. • Benefits slowly became a costly entitlement. Cost effectiveness of benefits. • Employee benefits are not taxable. • Group-based benefits come at a lower cost. Government impetus. Three mandated employee benefits: • Worker's compensation (state). • Unemployment (federal). • Social security (federal). Most other benefits are affected by laws. • Employee Retirement Income Security Act (ERISA) is one such law. - Affects pension administration and various sections of Internal Revenue Costs • Patient Protection and Affordable Care Act is another.

Expectancy theory

o Argues that people behave as if they are cognitively evaluate what behaviors are possible (the probability that they can complete the task) in relation to the value of rewards offered in exchange o We choose behaviors that yield the most satisfactory exchange/the greatest reward o Focus on the nature of the exchange o Motivation is the product of three perceptions: expectancy, instrumentality, and valence o Expectancy is employees' assessment of their ability to perform required job tasks o Instrumentality is employees' beliefs that requisite job performance will be rewarded by the organization o Valence is the value employees attach to the organization rewards offered for satisfactory job performance o Expectancy theory argues that people behave as if they cognitively evaluate what behaviors are possible in relation to the value of rewards offered in exchange o Predictions about performance-based pay: 1. Job tasks and responsibilities should be clearly defined 2. The pay-performance link is critical 3. Performance-based pay returns must be large enough to be seen as rewards 4. People choose the behavior that leads to the greatest reward o So What? Large incentive payments are better than smaller ones Line of sight is critical - employees must believe they can influence performance targets Employee assessments of their own ability are important - organizations should be aware of training and resource needs required to perform at target levels

Balanced scorecard

o Awards that combine financial and operating measures for organization, business unit, and/or individual performance o Award pool based on achieving performance targets o Multiple performance measures may include: 1. Nonfinancial/operating: quality improvements, productivity gains, customer service improvements 2. Financial: EPS, ROE, ROA, revenues o Communicates organizational priorities

Types of Variable Pay plans and their pros/cons (3)

o Cash Profit Sharing: What is it? • 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) Advantages: • Simple, easily understood • Low administrative costs Disadvantages: • Profit influenced by many factors beyond employee control • May be viewed as an entitlement • Limited motivational impact Why? • To educate employees about business operations • To foster teamwork or "one-for-all- environment" o Stock ownership or options What is it? • Award of stock shares or options Advantages: • Option awards have minimal impact on the financial statements of the company at the time they are granted • If properly communicated, can have powerful impact on employee behavior • Tax deferral to employee Disadvantages: • Indirect pay/performance link • Employees may be required to put up money to exercise grants Why? • To recruit top-quality employees when organization has highly uncertain future (i.e., start-ups, high-tech, or biotech industries) • To address employee retention concerns o Balanced scorecard: What is it? • Awards that combine financial and operating measures for organization, business unit, and/or individual performance • Award pool based on achieving performance targets • Multiple performance measures may include: o 1. Nonfinancial/operating: quality improvements, productivity gains, customer service improvements o 2. Financial: EPS, ROE, ROA, revenues Advantages • Communicates organizational priorities Disadvantages • Performance criteria may be met, but if financial targets are not met, there may be a reduced payout or no payout at all • Can be complex Why? • To focus employees on need to increase shareholder value • To focus employees on organization, division, and/or individual goals • To link payouts to a specific financial and/or operational target

Goal setting theory

o Challenging performance goals influence greater intensity and duration in employee performance o Goals serve as feedback standards to which employees can compare their performance o Individuals are motivated to the extent that goal achievement is combined with receiving valued rewards o Goal setting theory focuses on the third element of motivation - desired behavior o Line-of-sight is important; performance targets should be communicated; feedback is important; performance-based payouts should be contingent upon goal achievement

Fairness in pay-for-performance plans

o Designing a Pay-for-Performance Plan: The pay model suggests effectiveness depends on three things: • efficiency, equity, and compliance. Efficiency involves three areas of concern: • strategy, structure, and standards. o Strategy: the plan must support corporate objectives Should link well with HR strategy/objectives How much increase makes a difference? o Structure: is organization structure decentralized, allowing flexible variations on a general plan? o Standards: the key rests on standards Concerns include objectives, measures, eligibility, and funding o There are two types of equity, or fairness: - Distributive justice - fairness in the amount that is distributed to employees. - Procedural justice - fairness of the procedures used to determine the amount of rewards. • A key element in fairness is communications. o A pay-for-performance system should comply with existing laws. Firms want a reward system that maintains and enhances their reputation.

Examples of long-term incentives and their associated risks

o Employee Stock Ownership Plans (ESOPs). - Generate long-term effects. - Foster employee willingness to participate in the decision-making process. - Have little impact on productivity or profit. o Performance plans (performance shares and performance units) - Driven by financial earnings or return measures. - Pay for meeting or exceeding specific goals.

Equity theory

o Equity theory argues that people are highly concerned about equity, or fairness of the exchange process - Relative pay is important as employees evaluate their pay-effort balance in comparison to other employees o Employees look at the exchange as a ratio between what is expected and what is received o Employees are motivated when perceived outputs (pay) are equal to perceived inputs (effort, work behaviors) o A disequilibrium in the output-to-input balance causes discomfort o If employees perceive that others are paid more for the same effort, they will react negatively (shirk) to correct the output-to-input balance

Examples of spot awards and how they should be used

o Individual Spot Awards: About 35 percent of companies use them. 74 percent reported them effective. Usually awarded for exceptional performance; often on special projects or for performance that so exceeds expectations as to be deserving of an add-on bonus Larger companies use formal mechanisms while smaller companies may be more casual.

Motivation definition

o Motivation involves three elements: (1) what's important to a person, and • Data suggests employees prefer pay systems that are influenced by individual performance, changes in cost of living, seniority, and the market rate, to name the most important factors (2) offering it in exchange for some (3) desired behavior. • Is the emphasis of a large body of goal-setting research • Employees prefer pay systems influenced by individual performance, COLA, seniority, and the market rate as the most important factors. • Flexible compensation is based on the idea that only the individual employee knows what package of rewards would best suit personal needs. • Ex: employees who hate risks could opt for more base pay and less incentive pay o Motivation Theories: Maslow's need hierarchy - focus on content - identifying what is important to people Herzberg's two factor theory - focus on content - identifying what is important to people • Theory states that success-sharing plans will be motivating, whereas at-risk plans will be demotivating Expectancy theory, equity theory, and agency theory, focus less on need states and more on the second element of motivation - companies provide rewards in exchange for desired employee behaviors

Do people join/stay firms because of compensation

o Yes, people do join a company because of pay o Do people join a firm because of pay? - Yes, perceived as more objective. - Job Candidates look for organizations with reward systems that fit their personalities - Candidates look for a 'fit.' • Materialistic - concerned about pay level. • Low self-esteem - want large, decentralized organization with little pay for performance. • Risk takes - want more pay based on performance. • Risk-averse - want less performance-based pay. • Individualist - want pay plans based on individual performance, not group performance. - A strong pay/performance link is attractive. o Do people stay in a firm (or leave) because of pay? Poor performers leave when pay is based on individual performance. Group incentive plans may lead to more turnover of better performers. Dissatisfaction with pay may cause turnover. Even the way an organization pays may impact turnover.

Taxation of benefits

Cost effectiveness of benefits. Employee benefits are not taxable. Group-based benefits come at a lower cost. Benefit Administration Issues: How should benefits be financed? • Noncontributory (employer pays total costs). • Contributory (costs are shared with employee). -this is usually better because the employee will value the benefits more • Employee financed. Are the benefits legally defensible? • Does it comply with hundreds of arcane sections of the tax code? • There are so many rules and regulations, develop a checklist and perform regular audits

Wage components

Base pay [least risky] • The guaranteed portion of an employee's wage package • Level of Risk to Employee: o As long as employment continues, this is the secure portion of wages Across-the-board increase • Wage increase granted to all employees, regardless of performance. Size related to some subjective assessment of employer about ability to pay. Typically, an add-on to base pay in subsequent years • Level of Risk to Employee: o Some risk to employee since at discretion of employer. But not tied to performance differences, so risk lower in that respect Cost-of-living increase [most risky] • Same as across-the-board increase, except magnitude based on change in cost of living (as measured by the Consumer Price Index (CPI)) • Level of Risk to Employee: o Same as-across-the-board increases Merit Pay • Wage increase granted to employee as function of some assessment of employee performance. Adds on to base pay in subsequent years • Level of Risk to Employee: o Two types of risk faced by employees. Size of total merit pool at discretion of employer (risk element), and individual portion of pool depends on performance, which also is not totally predictable Merit bonused (AKA 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 • Level of Risk to Employee: o Three types of risks faced here. o Both types mentioned under merit pay, plus not added into base - requires annually "re-earning" the added pay • Companies are moving toward compensation programs higher on the risk continuum Individual Incentive • Sometimes this variable pay is an add-on to a fixed base pay. The incentive component ties increment in compensation directly to extra individual production (commission systems, piece rate). While measures of performance are typically subjective with merit and lump-sum components, this form of variable pay differs because measures of performance are objective (sales volume) Success-sharing plans • A generic category of pay add-on (variable pay) which is tied to some measure of group performance, not individual performance. 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 Profit sharing • Add-on linked to group performance (team, division, total company) relative to exceeding some financial goal Gain Sharing • Differs from profit sharing in that goal to exceed is not financial performance of organization but some cost index (labor cost is most common, might also include scrap costs, utility costs) Risk sharing plans • Generic category of pay add-on (variable pay) that differs from success sharing in that employee not only shares in the successes but also is penalized during poor performance years. Penalty is in the 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

COBRA info

Consolidated Omnibus Budget Reconciliation Act (COBRA) 1984 Employees who resign or are laid off through no fault of their own are eligible to continue receiving health coverage under employer's plan at a cost borne by the employee

ERISA

Employee Retirement Income Security Act 1974 If an employer decides to provide a pension (it is not mandated), specific rules must be followed. Plan must vest (employee has right to both personal and company contributions into pension) after 5 years' employment. Pension Benefit Guaranty Corporation, as set up by this law, provides worker some financial coverage when a company and its pension plan go bankrupt

Health Care options

General Health Care: Underlying structure of health care delivery. • Commercial insurance plan. • Health maintenance organization (HMO). Limited group of providers at agreed upon rates. • Preferred provider organization (PPO). Lower rates for employer selected providers. • Point-of-service plan (POS). A hybrid plan combining HMO and PPO benefits.

Health Maintenance Act

Maintenance Act of 1973 Required employers to offer alternative health coverage (e.g., health maintenance organizations) options to employees Discrimination Legislation COBRA FMLA Patient Protection and Affordable Care Act

FMLA info

Mandates 12 weeks of leave for all workers at companies that employ 50 or more people

Legally required (mandated) benefits

Workers' Compensation Social Security Unemployment Compensation FMLA COBRA HIPAA Benefits are affected by statutory or common law, many imposed by tax laws

Workers' compensation

A form of no-fault insurance, covers injuries/diseases arising from employment. Benefits given for: - medical care, temporary or permanent disability payments, survivor benefits, rehabilitation and training. Costs vary over time. This cost employers $83.2 billion a year and is a major cost of doing business States vary in the size of payout for claims. - Some states provide "second-injury funds." Covered by state, not federal, laws.

FMLA

Family and Medical Leave Act Enacted in 1993 Applies if 50 or more employees in a 75 radius Up to 12 weeks of unpaid leave More state legislatures are moving toward some form of paid family and medical leave Common reasons to leave under FMLA are: Caring for a newborn or seriously ill spouse, child or parent

Cost control in health insurance

Health Care: Cost Control Strategies There are three general strategies. • Change either the design or the administration of health insurance policies. • Change the structure of the delivery systems and participate in business coalitions. Consumer driven health plans and high deductible plans shift costs onto employees. • Provide incentives for healthy behavior. This can involve deductibles, coinsurance, coordination of benefits, etc.

HIPAA

Health Insurance Portability and Accountability Act (HIPAA) Enacted in 1996 Designed to: Lessen denial for preexisting condition Prevent discrimination on the basis of health Privacy provisions cause added compliance problems Stringent new privacy provisions added considerable compliance problems for both HR people charged with enforcement and information technology people delegated the task of building secure health information systems

Consumer driven health care

High deductible health care Increases the employee awareness An employee pays all health care costs up to some pre-determined rate. The rate can be as high as $3000-$6000. After that amount the employee pays a rate of 10-35% of any additional medical services (called coinsurance). After that the employer pays the rest.

Retirement plans

Retirement and Savings Plan Payments: 64% of workers have access to pension coverage, only 49% participate. Employees rank pensions as important. Two generic pension plans are: • defined benefit plans, and an employer agrees to provide a specific level of retirement pension, which is expressed as either a fixed dollar or a percentage-of-earnings amount that may vary (increase) with years of seniority in the company (this is a dying breed) • defined contribution plans. The employer makes provisions for contributions to an account set up for each participating employee Later when employees retire, the pension is based on their contributions, employer contributions, and any gains (or losses) in stock investments Many companies shifted to 401(k) plans. • Dollar contribution is known and controllable. - Allow to defer pretax income

Issues with merit pay, does merit pay motivation/change behavior

o A merit pay system links increases in base pay to how highly employees are rated on a performance evaluation. o Employee achievements are rewarded every year the employee remains on the job. o Pros and Cons: - Merit pay is expensive. - Many argue it does not achieve the desired goal: • improving employee and corporate performance. - After a thorough review: • merit pay does have a small, but significant, impact on performance. o Managing Merit Pay: Improve accuracy of performance ratings. Allocate enough money to truly reward performance. Make sure the size of the merit increase differentiates across performance levels.

The behavior triangle

o Ability Triangle - Selection - Recruitment - Training o Environmental Obstacle Triangle - Organizational development - HR planning - Organizational Design o Motivation Triangle - Performance management • 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 - Compensation - Culture • The informal rules and expectations that are evident in any company o Behavior = f (M, A, E) - M = Motivation -A = Ability - E = Environment

Why is there an increase in the use of variable pay?

o Does Variable Pay Improve Performance Results? Pay-for-performance plans have a positive effect if they are designed well. The plans often have too small a payout for the work expected, • unattainable (or too easy) goals, • outdated or inaccurate metrics, or • too many metrics.

Examples of types of short term pay-for-performance plans

o Merit Pay o Merit Bonuses aka lump-sum bonuses o Individual Spot Awards o Individual Incentive Plans

Gainsharing plans, pros/cons

o look at cost components of the income ledger, identifying areas where employees have an impact. o Key elements of a gain-sharing plan: Strength of reinforcement - too large of incentive leads to employees only focusing on those behaviors Productivity standards - historical standards not always appropriate to use Sharing the gains split between management and workers Scope of the formula (What is rewarded?) Perceived fairness of the formula Ease of administration Production variability (consider external factors) o Examples are Scanlon Plan and Rucker Plan Scanlon plans lower labor costs without lowering the level of the firm's activity. • Incentives derived as a function of the ratio between labor costs and sales value of production (SVOP). o SVOP includes sales revenue and value of inventory. The Rucker plan is a ratio expressing the value of production for each dollar of total wage bill. o Two major components are vital for success of a Rucker or Scanlon plan. A productivity norm. • Requires effective measurement of base-year data, and • acceptance by workers and management of this standard for calculating bonuses. Effective worker committees. • Their primary function is reviewing suggestions on how to improve productivity or reduce costs.

Disability insurance

Private sources of disability income: Salary continuation plans, and Long-term disability plans. • Short-term illness is covered by PTO. • Short-term disability (STD) pays a percentage of an employee's salary for temporary disability. • Long-term disability (LTD) plans, take over when short-term plans expire. Usually underwritten by insurance, provides 60 to 70 percent of pay for two years, up to life. Medical and Medically Related Payments: Dental Insurance: • 60% of employers with 500 or more employees provide some coverage. • At the start of the century, cost was $219 but due to annual increases, costs have increased. • Expected to increase in coming years due to a shortage in dentists. Vision Insurance: • Dates back to a 1976 contract between the UAW and the big three automakers. • 78% of employers offer a vision plan. • Most plans cover partial costs.

Cost containment

Common cost containment opportunities. Probationary periods. • Excluding new employees from benefit coverage until some term of employment (e.g. three months) is completed Benefit limitations. • It is not uncommon to limit disability income payments to some maximum percentage of income and to limit medical/dental coverage for specific procedures to a certain fixed amount Copay. • Requiring that employees pay a fixed or percentage amount for coverage Administrative cost containment. • Controlling costs through policies such as seeking competitive bids for program delivery Deny service. - for preexisting conditions Outsourcing is a common cost containment strategy. • Hiring vendors to administer the benefit program. • This has helped to claim greater centralization, consistency, and control of costs and benefits

COBRA

Consolidated Omnibus Budget Reconciliation Act Enacted in 1985 Applies if 20 or more employees Extends health coverage during certain events An employer can charge individuals up to 102% of the premium Brief qualifying period of 18 months COBRA is the relatively brief qualifying period (after 18 months you are not qualified) This law is to provide current and former employees and their spouses and dependents with a temporary extension of group health insurance when coverage is lost due to qualifying events (layoffs)

Standard, cafeteria, and flexible benefits

Will employees have a choice of benefits? A standard benefit package offers no choice. The other extreme is "cafeteria-style", or flexible benefit plans. -• Employees identify the benefits of greatest value to them, and by constraining the dollars employees have to spend, benefit managers are able to control benefits costs Most companies are offering some choices. Flexible plans may increase employee recognition of benefit value The biggest trend is to offer market-based, or consumer-driven, health care. Flexible Benefit Programs: • Advantage: Employees choose packages that best satisfy their unique needs Flexible benefits help firms meet changing needs of workforce Cost containment • Disadvantage: Employees make bad choices Administrative burdens and expenses increase

Pros/cons of group incentives

o Advantages: - Positive impact on organization and individual performance - Easier to develop performance measures than it is for individual plans - Signals that cooperation is a desired behavior - Teamwork meets with enthusiastic support from most employees - May increase participation of employees in decision-making process o Disadvantages: - Line-of-sight may be lessened - May lead to increase turnover among top individual performers who are discouraged - Increases compensation risk to employees because of lower income stability

Agency theory

o Agency theory depicts employees as agents who enter an exchange with principals - the owners or their designated managers - Argues that performance-based pay is the optimal compensation choice for complex jobs where monitoring employee performance is difficult o Pay directs and motivates employee performance o Employees prefer static wages (a salary) to performance-based pay o If performance can be accurately monitored, payments should be based upon satisfactory completion of work duties o If performance cannot be monitored, pay should be aligned with achieving organizational objectives

Individual incentive plans -Examples of them -Differences in design and what behaviors are reinforced -Advantages and disadvantages and how orgs. can mitigate them

o Examples of them (1) Straight piecework plan (2) Taylor differential piece-rate (3) Standard hour and Bedeaux plans (4) Halsey 50-50 method; Rowan plan; Gantt plan • Three plans have variable incentives linked to a standard expressed as a time period per unit of production. • Halsey 50-50 method o For tasks completes in less than the standard time: o Savings are allocated 50-50 between the worker and the company • Rowan plan o A worker's bonus increases as the time required to complete the task decreases • Gantt plan o Standard time for a task is purposely set at a level requiring high effort to complete o Differences in design and what behaviors are reinforced The most frequently implemented is a straight piecework system. Two common plans set standards based on time per unit and tie incentives to level of output. The Taylor plan has two piecework rates, and The Merrick system has three piecework rates. o Advantages and disadvantages and how orgs. can mitigate them PG 356 Advantages: it works • 1. Substantial impact that raises productivity, lower 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 established more accurately than under payment by time. This helps costing and budgetary control Disadvantages: [they are working faster so making more mistakes] • Employees and managers end up in conflict because the incentive system often focuses only on one small part of what it takes for the company to be successful • 1. Greater conflict may emerge • 2. Attempts to introduce new technology may be resisted • 3. Reduced willingness of employees to suggest new production methods for fear... • 4-6 o Individual Incentive Plans: Offer a promise of pay for some objective, pre-established level of performance. All plans use an established standard for comparing worker performance to determine magnitude of the incentive pay. Differences in plans occur over two dimensions: • the method of rate determination, and • the relationship between production and wages.

Unemployment

o Financed by employers federal and state unemployment insurance tax. - Federal garners 6.2% of the first $7,000. - States impose a tax above that amount. • A company's experience rating may lower percentages. o Covered workers must meet eligibility. - States require a 'base period.' - Unemployed through no fault of their own. & meet other eligibility requirement of state laws o Historically, the maximum number of weeks for UI was 26 weeks. - Many states extended that from 1958-61. - Emergency Unemployment Compensation program extended benefits to as long as 53 weeks from 2008 - 2013. Now 26 weeks. o Weekly benefit amounts are based on earnings over the past year, up to a state maximum. o Controlling Unemployment Taxes: - Unemployment benefits are 'charged' against the most recent employer. • Raising their unemployment insurance rate. - Control these costs with a well-designed human resource planning system. • Reduce hasty hiring. • A benefit administrator should audit pre-layoff behavior and compliance with UI requirements. - Government actions may help.

Incentive/sorting effects

o Incentive effect - pay can motivate people to perform better. o Sorting effect - people sort themselves by what is important to them. - People sort themselves into or out of organizations based on a preference for being paid based on personal performance or some something else - The most obvious sorting factor is ABILITY (higher ability employees are attracted to pay for performance) - Ex: employee leaving high-paying job for one that provides work/life balance

Be able to choose between individual vs. group incentive plans

o Individual incentives yield higher productivity gains, but group incentives often are right in situations where team coordination is the issue o One study found that changing from individual incentives to gain sharing resulted in a decrease in grievances and a fairly dramatic increase in product quality o Group incentive plans. Team performance is measured against a set standard to determine incentive pay. o Gain-sharing plans. Pay offs for teams defined at the level of a strategic business unit.

What are long-term incentives, examples of them, and how they are being used

o Long-term incentives (LTIs) focus on performance beyond one-year. Recent growth in LTI plans is spurred by a desire to motivate longer-term value creation. • There is very little evidence that stock ownership leads to better corporate performance. • Some evidence that stock ownership increases internal growth. As of June 2005, companies are required to report stock options as an expense. LTIs: • Level one: Low risk/reward • Level Two: Medium risk/reward • Level three: High risk/reward o * These plans are grouped by the level or risk faced by employees having these incentives, as well as the expected rewards that might come from them.

Compare/contrast merit pay & bonuses

o Merit Pay (called merit increases): - Links increases in base pay to how highly employees are rated on a performance evaluation - It is built onto your base pay - It is expensive for employers o Merit Bonuses: - Thought to be a substitute for merit pay. - Based on employee or company performance and received as an end-of-year bonus. Not built into base pay. - Can be less expensive than merit pay over the long run. - Employees are not fond of merit bonuses. • Giving merit bonuses for several years, a company is essentially freezing base pay.

Miscellaneous benefits

o Paid time off during work hours for rest periods, lunch, etc. o Payment for time not worked includes: vacations and holidays, paid sick leave, and other payments such as jury duty. o Maternity leave. o Companies switching from traditional time-off plans (TTO) to paid-time-off plans (PTO). o Child care is becoming common. o Elder care is offered by almost half of the companies offering child care assistance. o Domestic partner benefits are voluntarily offered by employers. o Legal insurance premiums are paid by the employee so not a traditional benefit. Provides routine legal services. o Benefits for Contingent Workers: Contingent workers represent between 5 and 35% of the workforce. • 90% of employers use contingent workers. Includes: • Working through a temp agency. • Working for a contract company. • Working on call. • Working as an independent contractor.

Pay for performance vs. entitlement

o Pay for Performance Plan? Signals a movement away from entitlement toward pay that varies with performance...sometimes a very slow movement toward pay that varies with some measure of individual or organizational performance The starting point of all plans is merit pay. [merit pay is used more than 3 quarters of all exempt, clerical, and administrative employees] Variable pay can be traced to two trends: • increasing competition from foreign producers, and • a fast-paced business environment requires workers adapt quickly to change.

Types of Variable Pay Plan (2)

o Productivity/gain sharing: What is it? • 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 Advantages • Clear performance-reward links • Productivity and quality improvements • Employee's knowledge of business increases • Fosters teamwork, cooperation Disadvantages • Can be administratively complicated • Unintended effects, like drop-off in quality • Management must "open the books" • Payouts can occur even if company's financial performance is poor o Team/group incentives: What is it? • 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 Advantages • Reinforces teamwork and team identity/results • Effective in stimulating ideas and problem solving • Minimizes distinctions between team members • May better reflect how work is performed Disadvantages • May be difficult to isolate impact of team • Not all employees can be placed on a team • Can be administratively complex • May create team competition • Difficult to set equitable targets for all teams

Issues related to team compensation

o Team Incentive Plans: Five causes of failure: • Many varieties of teams (full time, PT, etc...) Different rewards are often used as well • "Level problem" o Too small or large have problems as well (hoarding) • Complexity o plan should be easy to understand and implement • Control o Metrics should be under the control of the team • Communication o "Free Riders" - team members who don't pull their weight!

Prevalence of variable pay plans

o Those that introduce variability into the level of pay you receive, seem to have a positive impact on performance if designed well o Notice that we have qualified our statement that variable-pay plans can be effective if they are designed well o Too often though the plans have too small a payout for the work expected, unattainable (or too easy) goals, outdated or inaccurate metrics, or even too many metrics making it hard to determine what is important

Life insurance

o Three-fourths of employees have paid life insurance. Typically, one to two times annual salary. Most premiums are paid by the employer. 30% include retiree coverage. Nearly all are forfeitable upon quitting. Some offer a core coverage with optional additional coverage available.

Reinforcement theory

o Essential Features: Rewards reinforce (motivate and sustain) performance Rewards must follow directly after behaviors to be reinforcing Behaviors that are not rewarded will be discontinued o Self Determination Theory (SDT) purports to integrate motivation theories under a broad umbrella o Timing of payouts is very important

Maslow

o Maslow discusses what is important to employees o Essential Features: People are motivated by inner needs Needs from a hierarchy from most basic (food and shelter) to higher order (self-esteem, love, self-actualization) Needs are never fully met; they operate cyclically Higher-order needs become motivating after lower-order needs have been met When needs are not met, they become frustrating o Predictions About Performance-Based Pay 1. Base pay must be set high enough to provide individuals with the economic means to meet their basic living needs 2. An at-risk program will not be motivating since it restricts employees' ability to meet lower-order needs 3. Success-sharing plans may be motivating to the extent they help employees pursue higher-order needs o So what? Performance-based pay may be demotivating if it impinges upon employees' capacity to meet daily living needs Incentive pay is motivating to the extent it is attached to achievement, recognition, or approval o Presumably, if employees are offered rewards that satisfy one or more needs, they will behave in desired ways

Social Security

o Nearly every American worker is covered. o Money for benefits comes from - employees, employers, and self-employed. o Money currently collected pay current beneficiaries. - Retiree's numbers rise, with no corresponding increase in contributors. o Benefits Under Social Security: Benefits fall into four categories: • old age or disability benefits, • benefits for dependents, • benefits for surviving family members, and • lump-sum death payments. Workers must qualify for these benefits by • working in covered employment, and • earning a specified amount per quarter.