MGMT 365: Chapter 11 - Total Rewards and Compensation

Factors leading to success in utilizing bonuses include:

1. establishing clear, metric based reviews 2. Ensuring that employees who have not met performance criteria do not receive a payout 3. Educating managers and employees about the incentive plan details

Provisions focus on the follow major areas for FLSA:

1. minimum wages 2. Limits on the use of child labor 3. overtime provisions (exempt and nonexempt status)

Disadvantages of market pricing

1. pay survey data may be limited or may not be gathered in methodologically sound ways 2. Trying pay levels to market data can lead to wide fluctuations on the basis of market conditions

Pay for performance philosophy

Assumes that compensation decisions reflect performance differences

Entitlement philosophy

Assumes that individuals who have worked another year are entitled to pay increases, with little regard for performance differences.

Lead the market strategy

Company targets pay ranges so that 25% of other firms pay above and 75% pay below - enables a firm to attract and retain sufficient workers with the required capabilities and be more selective when hiring

Match the market strategy

Company targets pay ranges so that 50% of other firms pay above and 50% pay below - attempts to balance employer cost pressures and the need to attract and retain employees

Lag the market strategy

Company treats pay ranges so that 75% of other firms pay above and 25% pay below - used when the employer is experiencing financial difficulties and when an abundance of workers is available

Variable pay

Compensation linked directly to individual, team, or organizational performance

Garnishment

Court order that directs an employer to set aside a portion of an employee's wages to pay a debt owed to a creditor

Intangible rewards

Elements of compensation that cannot be as easily measured or quantified - Supportive work environment, challenging work, autonomy and supportive supervisor

internal equity

Employees are compensated fairly within the organization with regard to their KSAs

Independent Contractor Regulations

Employers do not have to pay social security, unemployment, or workers compensation costs - criteria for independent contractor status established by the internal revenues service of IRS. 1. Firms may control only the results of the work being contracted but not what or how it will be done 2. the IRS considers the amount of behavioral and financial control a company exercises over the worker and additional relationship factors

Cost of living adjustments (COLA)

Every employees pay is increased to compensate for inflations and rising prices

Across the board increases

Given as a percentage raise based on standard market or financial budgeting determinations

Market line

Graph line that shows the relationship between job value as determined by job evaluation points and job value as determined pay survey rates.

Administrative responsibilities

HR Specialists develop and administer the compensation system and ensure that pay practices comply with all legal requirements - managers help employees see the connections between their individual performance and the expected rewards

Payroll Administration

Handled in different ways: 1. HR professionals may or may not do the actual processing or payroll - If they do, payroll staff may report to HR or accounting function 2. payroll is outsourced - Accurate payroll processing is important for maintaining a positive workplace and complying with various laws 1. Managers are responsible for accuracy 2. record keeping is critical

Peevailing wage

Hourly wage determined by a formula that considers the rate period for a job by a majority of the employers in the appropriate geographic area

External Equity

If an employer's rewards are not viewed as equitable compared with other firms, the employer is likely to experience higher turnover

Benefit

Indirect reward given to an employee or group of employees as part of membership in the organization, regardless of performance

Using pay surveys

Involves evaluating many factors to determine if the data are relevant and valid 1. is the participant sample realistic? 2. Is the survey broad based? 3. How established is the survey, and how qualified are those who conducted it? 4. Does it include required elements of compensation to allow comparison of the reward mix? 5. Does it survey contain job summaries so that appropriate matches to job descriptions can be made? 6. Timeliness: How current are the data?

Compensable factor

Job dimension commonly present throughout a group of jobs within an organization that can be rated for each job - derived from job analysis - reflects the nature of different types of work performed in the organization - most popular approach because it is relatively simple to use and considers the components of a job rather than the total job

Point factor method

Looks at compensable factors in a group of similar jobs and assigns weights, or points, to them

Pay for internships

Many organization began to pay interns only after the institution of the six-factor tests by the DOL - December 2017: The DOL issued new guidance reversing the six-factor criteria and adopting a primary beneficiary test

Total Rewards

Monetary and non-monetary rewards provided by companies to attract, motivate, and retain employees

Bonus

One-time payment that does not become part of the employees bas pay

Instrumentality

Perceived likelihood that better sales performance will lead to higher commission pay

Ranking Method

Places jobs in order, from highest to lowest, by their value to the firm - appropriate in small firms with relatively few jobs

Broadbanding

Practice of using fewer pay grades with much broader ranges than in traditional compensation systems

Equal pay act of 1963

Prohibits companies from using different wage scales for men an women performing substantially the same job

Compensation Quartile Strategies

Reflect the overall market position where the organization sets its compensation levels 1. First quartile - lag the market strategy 2. Second Quartile - match the market strategy 3. Third quartile - lead the market strategy

Pay adjustment matrix

Reflects an employee's eligibility to pay increase factors considered: 1. employees level of performance as rated in an appraisal 2. Employees position in the pay range

Competency-Base Pay

Rewards individuals for the capabilities they demonstrate and acquire - Knowledge based pay (KBP) or skill based (SBP) systems - employees start at a base level of pay and receive increase as they learn to do other jobs or gain additional skills and knowledge and thus become more valuable to the employer

Key performance indicators (KPIs)

Scorecard measures that tell managers how well the organization is performing relative to critical success factors

Child Labor Provisions

Set the minimum age for employment with unlimited hours at 16 years - minimum age for hazardous occupations is 18 years - individuals who are 14 to 15 years old may work outside school hours with certain limitations

Expectancy Theory

States that an employee's motivation is based on the probability that his or her efforts will lead to an expected level of performance that is linked to a valued reward - rewards that are not appreciated by the employee have little power to motivate performance - managers who understand the key linkages in employee expectations can better monitor employee motivation and adjust reward systems accordingly

Equity Theory

States that individuals judge fairness (equity) in compensation by comparing their inputs and outcomes against the inputs and outcomes of referent others - employees inputs that are compared with referent others inputs 1. skills, abilities, knowledge, effort, loyalty, commitment, adaptability, tolerance, determination, enthusiasm, support of colleagues, and personal sacrifice - employees outcomes that are compared with referent others outcomes 1. wages, salary, benefits, bonus, recognition, reputation, praise, thanks, responsibility, training, sense of achievement, and advancement opportunities

Lilly Ledbetter Fair Pay Act

Statue of limitations are extended for equal pay claims, and each paycheck is treated as a new act of discrimination - pay practices resulting in disparate impact are also actionable

Pay structure

The arrangement of jobs into categories based on their relative importance to the organization and its goals, level of skills, and other characteristics. - can be created by various types or categories of jobs such as hourly, salaried, technical, sales, and management - the nature, culture, and structure of organization are considered when determining how many and which pay structure to have

Effective variable pay

The effectiveness of any variable pay program relies on its consistency with the organization's culture - many companies find that variable pay plans make performance results a higher priority for employees - variable pay systems should be tired to desired performance - establishment involves determining appropriate performance measures to evaluate performance and the resulting rewards - most firms have a number of important targets to track results related to critical success factors

After hours e-mail time

The increased use of e-mail in organizations raises questions about whether employees can claim that responding to company e-mails after hours should count toward overtime. - organizations should consider adopting e-mail curfew policies that discourage employees from reading and answering work-related emails off the clock

Travel time

Travel time must be counted as work time if it occurs during normal work hours for the benefit of the employer - Travel to and from work is not considered compensable travel time

Base pay

basic compensation that an employee receives, often wages or salary

Seniority

can be used as the basis for pay increases

Pay surveys

collection of data on compensation rates for workers performing similar jobs in other organizations - using benchmark jobs to anchor the survey data is helpful - internet based pay information is prevalent

Pay grades

groupings of individual jobs that have approximately the same value to the organization

Communicating pay philosophy

helps employees recognize the value of the total rewards package and how their work performance, tenure, and raises can affect their compensation

line of sight

idea that employees can clearly see how their actins and decisions lead to desired outcomes

Red-circled employee

incumbent who is paid above the range set for a job

Green-circled employee

incumbent who is paid below the range set for a job

Classification methods

involves writing descriptions of job classes and then putting each job into a grade according to the class it best matches - used in public sector organizations

Six Factor tests

issued by the SOL in April 2010 - narrowly permitted for-profit enterprises to utilize unpaid interns

Benchmark jobs

jobs that are found in many other organizations that can be used for the purposes fo comparison

Individual pay

may organizations use compa-ratio to determine each individual employee's standing in relationship to the midpoint

Individual incentive systems

tie personal effort to additional rewards for the individual employee - necessary conditions to be considered when using individual incentive plans 1. individual performance must be identifiable 2. Individual competitiveness must be desirable 3. Individualism must be stressed in the organizational culture 4. individuals must be in control of the pace of production

Training Time

time spent in training must be counted as time worked by nonexempt employees unless it is voluntary or not directly related to the job

Golden Handcuffs

used to refer to benefits, typically deferred payments, provided by an employer to discourage an employee from taking employment elsewhere.

Compensatory time off

"comp" hours are earned by public sector nonexempt employees in lieu of payment for extra time worked at the rate of 1.5 times the number of hours over 40 that are worked in a week - comp time is prohibited in the private sector and cannot be legally offered to employees working for private organizations

Global compensation issues

- developing and managing a global compensation system is extremely complex - the growing world economy has led to an increase in employees working internationally - laws, living cots, tax policies, currency, fluctuations, and more must be considered when designing the compensation

Determining Exempt Status under the FLSA: Categories for exempt stats

- executives - administrative - professional (learned and creative) - computer - outside sales (including pharmaceutical sales)

Executive Compensation

- handled differently from employee pay in various types of organizations - determined by the board of directors - subject to shareholders approval via a say on pay provision in the Dodd-frank act - contracts with executives include a clawback provision

A variety of pay incentives

- monetary incentives - team bonus - recognition and reward programs - perks - piece rate pay - opportunities to use personal expertise - stock options - autonomy - bonuses - professional development - service awards - trips - meaningful work - gainsharing - commissions - ESOP's - profit sharing - spot bonus - praise - merchandise

Entitlement

- pay and raises based on length of service - across the board raises - pay scales increased annually - industry comparisons of pay only - Holiday bonuses given to all employees

Performance

- pay and raises based on performance - no raises for poor performing employees - market-adjusted pay scales - no raises for length of service or job tenure - industry comparisons of total rewards

Determining Exempt Status under the FLSA: Major criteria for exempt status

- pay level per week - minimum of $455/week - paid on a salary basis - job duties and responsibilities - primary duties of managing 1. decision discretion/judgment 2. Requires advanced knowledge and/or training/education 3. Pursuit of artistic or creative endeavors

Basic assumptions that underlie the philosophical foundation of variable pay

- some people or groups contribute more to organizational success than do others - some people perform better and are more productive than are others - employees or groups who perform better or contribute more should receive greater compensation

Factors for effective variable pay plans

- variable pay effectiveness - current updated plans - results in desired behaviors - clearly separate from base pay - clearly communicated - performance results are clearly linked to payout - clear differentiation based on performance level - sufficient financial resources - consistent with organizational culture - measurable performance - plan is clear and understandable - linked to organization objectives

Deciding which quartile position to target for pay structures is a function of the following considerations;

1 available financial resources 2. Competitiveness pressures 3. Market availability of employees with different capabilities

Elements of total rewards - Tangible direct rewards

1. Base pay - wages and salary 2. Individual variable pay - piece rate, bonus, and commission 3. Team variable pay - gainsharing and team bonus 4. Organization variable pay - profit sharing and equity/stock awards

Strategic decisions can guide the design of compensation practices by

1. Compliance with all applicable laws and regulations 2. Cost-effectiveness for the organization 3. Internal and external equity for employees 4. Performance enhancement for the organization 5. Performance recognition and talent management for employees 6. Enhanced recruitment, involvement, and retention of employees

Typing pay to performance can be attractive for both employers and employees

1. Employers: More output per employee, lower fixed costs, and some risks shifted to employees 2. Employees: more pay when they do their jobs well

Continuum of compensation philosophies

1. Entitlement 2. Performance

Elements of total rewards - tangible indirect rewards

1. Health care benefits -- medical insurance, dental insurance, and health spending account 2. Paid time off - vacation, holidays, and medical leaves of absences 3. Disability benefits - short term disability, long term disability, and long term care insurance 4. Financial benefits - education assistance and financial planning 5. retirement benefits - defined benefit plan and defined contribution plan (401k) 6. Employee development and training

Special Pay/Overtime Issues:

1. compensatory time off 2. Incentives for nonexempt employees 3. Training time 4. Security inspection time 5. After Hours E-mail Time 6. Travel time 7. Donning and doffing time

Non-monetary incentives

1. performance awards - incentive rewards for performance 2. Recognition awards - recognizes individual Employees for their work 3. Service awards - recognizes and rewards longevity with the company

Advantages of market pricing

1. ties organizational pay levels to the external job market, without internal job evaluation distortion 2. Allows an employer to communicate to employees that the compensation system is truly market linked

Pay surveys and legal issues

Employers use outside sources or pay surveys to avoid charges that they are attempting to "price fix" wages - companies must safeguard employee privacy and provide only de-identified data so that specific employee pay rates and names are not shared - care must also be taken to avoid violating the NLRA provisions that apply to disclosing wage and benefit information

Important relations in expectancy theory within the context of pay:

Expectancy can lead to instrumentality, which in turn can lead to valence

Pay Secrecy

Explaining pay grades and pay decisions rules can enhance employee perceptions of fair and ethical treatment

Overtime

FLSA established overtime pay requirements at 1.5 times the regular pay rate for all hours worked over 40 in a week

Strategic Compensation Decisions

Firms need to manage their compensation philosophy to ensure that employees believe they are being treated fairly - entitlement philosophy is at one end of the continuum, and performance philosophy is at the other end

Job evaluation

Formal, systematic means to determine the relative worth of jobs within an organization

Incentives

Tangible rewards that encourage or motivate action

Golden Parachute

a prearranged contract with managers specifying that, in the event of a hostile takeover, the target firm's managers will be paid a significant severance package - an agreement between a company and an employee (usually an upper executive) specifying that the employee will receive certain significant benefits if employment is terminated.

Salary plus commission

combines the stability of a salary with the performance aspect of commission

Straight commission

compensation is computer as a percentage of the value of the sales generated

Variable pay

compensation that is tied to performance - performance may be evaluated and rewarded at individual, team, or organizational level

Salary

consistent payments made each period regardless of the number of hours worked

Tangible rewards

elements of compensation that can be quantitatively measured and compared between organizations

Valence

employee places a high vale on receiving high commission pay

Exempt employees

employees who hold positions for which they are not paid overtime

Nonexempt employees

employees who must be paid overtime

Incentives for nonexempt employees

employers must add the amount of direct work related incentives to a person's base pay and then calculate overtime pay as 2.5 times the higher rate of pay

Targeting high performance

focuses on providing to top-performing employees with significantly higher pay raises, while providing standard increases to the remaining satisfactory performers

Employee stock ownership plan (ESOP)

gives employees significant stock ownership in their organizations

Stock option plan

gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited period of time

Market bonding

grouping jobs into pay grades on similar market survey amounts

pay ranges

jobs within a point range are classified into job grades using the point factor method - market data are then used to determine the minimum and maximum pay rates for each job grade, and midpoint is computed by averaging the range of minimum and maximum pay rates - current pay of employees is compared with the proposed ranges

Free rider

member of the group who contributes little

Pay compression

occurs when the pay difference among individuals with different levels of experience and performance become small

Salary inversion

occurs when the pay given to new hires is higher than the compensation provided to more senior employees

Lump sum increases (LSI)

one-time payment of all or part of a yearly pay increase

Economic recessions

organizations address shortfalls in revenue by reducing employment related expenses - should be used sparingly because such strategies may result in employee job dissatisfaction and turnover

Compa-ratio

pay level divided by the midpoint of the pay range $/midpoint$ = # x 100 = #

Piece rate system

pay system in which wages are determined by multiplying the number of units produced by the piece rate for one unit - results inequality in pay, which can lead to dysfunction within a work group - training managers in the program specifics is helpful

Wages

payments calculated directly on the basis of time worked by employees

Expectancy

perceived likelihood that if the employee invest time in learning new product features, it will lead to better sales performance

Commission

percentage of the revenue generated by sales that is given to an agent or salesperson

Clawback provision

permits the organization to require an employee to return rewards obtained through unethical or negligent actions

Fair Labor Standard Act (FLSA)

primary federal law affecting compensation - enforced by the Wage and hour Division of the U.S. Department of Labor (DOL) - during enactment of FLSA, limited exemptions were included that permitted employers to restrict executives and others from receiving overtime pay

Challenges with team incentives

rewards distributed is equal amounts o all members may be perceived as unfair by some employees - some individuals who are performing poorly may prevent the team from meeting the goals needed to trigger the incentive payment

Minimum Wage

set by FLSA to be paid to a broad spectrum of covered employees - congressional action is the only way to change it

Gainsharing

sharing with employees greater than expected gains in profits and/or productivity

Security inspection time

some companies may have to count the time that employees spend going through security inspections after work as compensable

Donning and doffing time

some jobs require employees to spend a significant amount of time donning protective equipment before they report for duty

Other types of bonuses

spot, referral, hiring, retention, and project completion

Profit sharing

system to distribute a portion of an organizations profits to employees

Salary only

useful when an organization emphasizes serving and retaining existing accounts over generating new sales and accounts

Marketing pricing

uses market pay data to identify the relative value of jobs based on what other employers pay for similar jobs - key to market pricing is identifying relevant market pay data for jobs that are good matches with the employers: 1. Jobs 2. Geographic considerations 3. company strategies and philosophies about desired market competitiveness levels

Levels of variable pay

variable pay plans can be classified into three levels or categories: 1. individual 2. team 3. organizational

Critical success factors

variables that have a strong influence on the results of the organization

Team incentives

when employees participate in team level incentives they share more information among the team members - concerns are how and when to distribute the incentives and who will determine the incentive amounts - primary ways for distributing those rewards are as follows: 1. same size reward for each member 2. different size reward for each member

Gender pay gap

wider in some industries than others - continued monitoring or organizational pay levels and properly managing women's career progress are important

Referent others

workers whom the individuals uses as a reference point to make these comparisons