MGMT 4133 Exam 2
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.
Assumptions about behavior of potential employees
Many people are seeking jobs, they possess accurate information about all job openings, and there are no barriers to mobility.
individual incentive plans
Offer a promise of pay for some objective, pre-established level of performance. Plans should use an objective standard for comparing worker performance to determine magnitude of the incentive pay.
What difference does the pay level policy make?
The basic premise is that the competitiveness of pay will affect the organization's ability to achieve its compensation objectives, and this in turn will affect its performance
Compensation at risk
(aka risk sharing) An incentive plan in which employees base wages are set below a specified level (e.g., 80% of the market wage) and incentive earnings are used to raise wages above the base. In good years an employee's incentive pay will more than make up for the 20 percent shortfall, giving the employee a pay premium. Because employees assume some of the risk, risk-sharing plans pay more generously than success sharing plans in good years.
Purpose of a survey
-to adjust the pay level relative to competitors -to set the mix of pay forms relative to competitors -to establish or price a pay structure -to analyze pay-related problems -to estimate the labor costs of competitors
managers using the marginal revenue product model must do two things:
1. Determine the pay level set by market forces, and 2. Determine the marginal revenue generated by each new hire.
key elements of good appraisal
1. culture and strategy determine measure factors 2. involve employees in all stage of the process 3. raters should be trained and motivated 4. raters should maintain a diary 5. raters should conduct a calibration of rating to ensure consistency 6. feedback must be timely
Predictions about performance-based pay: reinforcement theory
1. performance-based payments must follow closely behind performance 2. Rewards must be tightly coupled to desired performance objectives. 3. Withholding payouts can be a way to discourage unwanted behaviors.
External competitiveness is expressed by:
1. setting a pay level that is above, below, or equal to that of competitors 2. determining the pay mix relative to those of competitors
Rucker plan
A group cost savings plan in which cost reductions due to employee efforts are shared with the employees. It involves a somewhat more complex formula than a Scanlon plan for determining employee incentive bonuses. The Rucker plan is a ratio expressing the value of production for each dollar of total wage bill.
Intrinsic motivators
Autonomy, mastery and purpose
Brito v. Zia Company
Benchmark case that interpreted performance evaluation as a test, subject to validation requirements, and used these evaluations based on a rating format to lay off employees resulting in a disproportionate number of minorities being discharged.
Method of rate determination
Decides what factors are used to determine pay rate. Ex - units produced per time period Ex - Time period per unit of production
Effectiveness is depending on 3 things:
Efficiency, equity and compliance
Performance-Dimension Training
Exposes supervisors to the performance dimensions to be used in rating (quality of work, job knowledge) thus clarifying dimensions
Standard deviation
How tightly all the rates are clustered around the mean. - Tells how similar or dissimilar the market rates are from each other. - Measure of variation
Halsey 50-50 method
Individual incentive method that provides for variable incentives as a function of a standard expressed as time period per unit of production. This plan derives its name from the shared split between worker and employer of any savings in direct costs
Incentive plans
Inducement offered in advance to influence future performance (e.g., sales commissions).
Conventional pay-level policies are to:
Lead, meet, or follow competition
Extrinsic motivators
Money, financial incentives
Expectancy theory
Motivation is the product of 3 perceptions: expectancy, instrumentality and outcome - people behave as if they cognitively evaluate what behaviors are possible in relation to the value of rewards offered in exchange. (1) Can I do the job? (2) If I do the job, would do they reward me? (3) If I do the job and they reward me, how much is the reward worth to me?
Behavior
Motivation, ability and environment
fuzzy markets
New organizations and unique jobs may fuse diverse factors making relevant markets fuzzy. Place more emphasis on external market data.
Quartiles and percentiles
Order all data points from lowest to highest, then convert to percentages - Common in salary surveys; frequently used to set pay ranges or zones - Measure of variation
Know how to compute a compa ratio
Salary/midpoint of range
Ability triangle
Selection, Recruitment, Training
Efficiency involves 3 general areas of concern:
Strategy, structure and standards
mean
Sum all rates and divide by number of rates. - Commonly understood. If using only company data will not accurately reflect market conditions - measure of central tendency
Merrick
Three piecework rates
MBO - Management by objectives (Essay question)
Uses outcomes as the standard of performance measure. Firms using MBO has indicated positive improvements in performance
Low-high approach
Wages of lowest- and highest-paid benchmark jobs used as anchors for skill-based structures.
equal employment opportunity (EEO)
a mandate that all firms make employment decisions that are "blind" to minority/gender status
central tendency
a midpoint in a group of measures
360-degree feedback
a performance appraisal process in which feedback is obtained from the supervisor, subordinates, peers, customers, and the employees themselves
Broad-Based Option Plans (BBOPs)
are stock grants (The company gives employees shares of stock over a designated time period) and versatile. (LTIs plan)
Product demand
caps maximum pay level
Broad bands
lateral progression and cross-functional experience
Safety needs:
security, safety (basic needs)
Until when an employer will hire?
until the marginal revenue equals the costs associated with the most recent hire.
Market pricing
use of market pay data to identify the relative value of jobs based on what other employers pay for similar jobs
intrinsic motivation
we do it because we want to, autonomy mastery, purpose
How a company compares to the market depends on
what competitors compares to, and what pay forms are included
profit sharing
($$) add-on linked to group performance relative to exceeding a goal. More risk to individual because of factors out of their control
4 behaviors employers care about (essay question)
1. Attracting people to join 2. Retaining good employees 3. Get employees to develop skills 4. Get employees to perform well
According to efficiency-wage theory, high wages may increase efficiency and actually lower labor costs if they:
1. Attracts higher-quality applicants 2. Lowers turnover 3. Increases worker effort 4. Reduces "shirking" 5. Reduces the need for supervision (monitoring)
Four kind of behaviors sought by organizations
1. How do we attract good employment prospects to join our company? 2. How do we retain these good employees once they join? 3. How do we get employees to develop skills for current and future jobs? 4. How do we get employees to perform well while they are here?
Pay level and pay mix decisions focus on two objectives:
1. control costs and increase revenues 2. attract and retain employees.
rating formats
A type of performance appraisal format that requires that raters evaluate employees on absolute measurement scales that indicate varying levels of performance (generally more popular than ranking systems)
Work/life balance
Base 50%, Benefits 30%, Options 10%, Bonus 10%
Performance driven
Base 50%, Bonus 17%, Benefits 17% and options 16%
Performance Rating Salary Increase Matrix
Given the same performance, someone who is higher in their salary range will receive a lower % increase than someone lower in their salary range
perform
How do we get employees to perform while they are here
bedeaux plans
Individual incentive plan that provides a variation on straight piecework and standard hour plans. Instead of timing an entire task, a Bedeaux plan requires determination of the time required to complete each simple action of a task. Workers receive a wage incentive for completing a task in less than the standard time.
Environmental obstacle triangle
Organizational design, organizational development, HR planning
Variable pay plans
Pay tied to productivity or some measure that can vary with the firm's profitability
match
Pay with competition: match wage costs to product competitors and attract applicants equal to the labor market competitors. Most common policy 50th percentile
Two key product market factors
Product demand and degree of competition Other factors include the productivity of labor, the technology employed, and the level of production relative to capacity.
Performance-Standard Training
Provides raters with a standard of comparison or frame of reference for making appraisals (what do good, average, bad mean)
advantages individualized incentive plans
Raises productivity, lowers production costs and increases earning of workers Less direct supervision Enable labor costs to be estimated more accurately --> Costing and budgeting control
reinforcement theory
Rewards reinforce (i e., motivate and sustain) performance reward soon after it happens, behaviors that are not rewarded will be discontinued
Marginal Revenue Product
The point in the graph at which the incremental income generated by an additional employee equals the wage rate
Strategy 4
Training Raters to Rate More Accurately
Behaviorally Anchored Rating Scale (BARS)
Variants on standard rating scales in which the various scale levels are anchored with behavioral descriptions directly applicable to jobs being evaluated. It seems to be the most common format using behaviors as descriptors.
Piecework
Workers get paid per unit of work that they produce
Employee Stock Ownership Plan (ESOP)
a compensation system that awards employees shares of company stock in addition to their regular compensation Generate long-term effects. Foster employee willingness to participate in the decision-making process. Have little impact on productivity or profit. (LTIs plan)
broad-based option plans
are stock grants and versatile
Product market factors
determine what an organization can afford to pay
benchmark conversion/survey leading
differences are quantified when job content does not sufficiently match survey jobs
horn error
downgrading an employee across all performance dimensions exclusively because of poor performance on one dimension, opposite of halo
Diminishing marginal productivity means:
each additional employee has a progressively smaller share of production factors to work with. e.g., office space, number of computers, telephone lines and hours of clerical support.
straight ranking
employees are ranked relative to each other - rank 1 to 10, not formal
Standard Rating Scale
ex - well above average, average, well below average. Problem - not everyone agrees on what average means
What theories focus on the nature of the exchange?
expectancy, equity, and agency theories
performance plans
feature corporate performance objectives for a time three years in the future - driven by financial earnings or return measures and they pay out for meeting or exceeding specific goals (LTIs plan)
Physiological needs
food, water, warmth, rest (basic needs)
success sharing plans
generic add on of variable pay that is tied to group performance
clone error
giving better ratings to individuals who are like the rater in behavior/personality
self-determination theory
integrates motivation theories and motivates using both extrinsic and instrinsic
Market rate
is where the lines for labor demand and labor supply cross
Group incentives do not ________.
motivate the highest performers
Motivation triangle
performance management, compensation, culture
Supply side focuses on
potential employees: their qualifications the pay they are willing to accept in exchange for their services.
Performance metrics
quantitative measures of job performance - Is the measure (metric) results-oriented or behaviorally oriented? - Does the measure focus on individual employees, teams or the whole organization?
Two categories if evaluation formats:
ranking and rating
severity error
rating individuals consistently lower than deserved
Pay grades
recognition via titles and career progression
Pay policy line
representation of the organization's pay-level policy relative to what competitors pay for similar jobs
Demand side focuses on
the actions of the employers: how many new hires they seek and what they are willing and able to pay new employees.
marginal product of labor
the additional output(value) associated with the employment of one additional person, with other production factors held constant - what value are you getting from hiring that person
marginal revenue of labor
the additional revenue generated when the firm employs one additional person, with other productions factors held constant
Pay Level
the average of the array of rates paid by an employer: (base pay + bonuses + benefits + value of stock holdings) / number of employees
method of rate determination
Plans set up a rate based either on units of production per time period or on time period per unit of production. On the surface, this distinction may appear trivial, but, in fact, the deviations arise because tasks have different cycles of operation. Short-cycle tasks, those that are completed in a relatively short period of time, typically have as a standard a designated number of units to be produced in a given time period (e.g., number of books packed) For long-cycle tasks, the standard is typically set in terms of time required to complete one unit of production. Individual incentives are based on whether or not workers complete the task in the designated time period. Auto mechanics work off a blue book that tells how long, for example, a fuel injection system should take to replace. Finish faster than the allotted time and the full pay is awarded. how long it takes you to do an oil change vs how many mouse's you can build in an hour
Organization data includes
This information reflects the similarities and differences among organizations in the survey. financial data and reporting relationships, turnover and revenues.
Combination plans: mixing individual and group plans
Variable pay depends on individual performance and company performance. A typical plan might call for a 75-25 split. Seventy-five percent of the payout is based on how well the individual worker does, the other portion is dependent on corporate performance. Self-funding plans specify that payouts only occur after the company reaches a certain profit target (LTIs plan)
Additional factors affecting labor supply
geographic barriers, union requirements, lack of information about job openings, the degree of risk involved, the degree of unemployment, and nonmonetary aspects of the job.
common problems with variable pay:
too small a payout for the work expected, unattainable (or too easy) goals, outdated or inaccurate metrics, or too many metrics.
What shapes external competitiveness?
(1) competition in the labor market for people with various skills; (2) competition in the product and service markets, which affects the financial condition of the organization; (3) characteristics unique to each organization and its employees, such as its business strategy, technology, and the productivity and experience of its workforce.
What information to collect?
(1) information about the organization, (2) information about the total compensation system, and (3) specific pay data on each incumbent in the jobs under study.
major decisions in setting externally competitive pay and designing the corresponding pay structures
(1) specify the employer's competitive pay policy, (2) define the purpose of the survey, (3) select relevant market competitors, (4) design the survey, (5) interpret survey results and construct the market line, (6) construct a pay policy line that reflects external pay policy, and (7) balance competitiveness with internal alignment through the use of ranges, flat rates, and/or bands.
Improshare
(Improved Productivity through Sharing) is a gain-sharing plan that is easy to administer and communicate. Develops standard to identify expected hours required to produce an acceptable level of output. Savings are shared by firm and workers.
self determination theory
(SDT) integrate motivation theories under a broad umbrella - motivated not only by extrinsic motivators (compensation) but intrinsic motivators (things we like to do)
Labor cost
(pay level) x (# of employees)
Perquisites
(perks) the extras bestowed on top management, such as private dining rooms, company cars, and first-class airfare.
External Competitiveness
(second pay policy) • The pay relationships among organizations - the organization's pay relative to its competitors. Comparisons with other employees that hire people with the same skills
taylor and merrick
- 2 piecework systems - 3 piecework systems
Total compensation data includes
- Base pay - Total cash -Total compensation
Approaches to selecting jobs for inclusion
- Benchmark-Job approach -Low-high approach - Benchmark conversion/survey leveling
Types of LTIs plans
- ESOPs -Performance plans - BBOPs - Combination plans
Disdvantages Group incentive plans
- Line of sight may be lessened - May lead to Increased turnover among top individual performers - Increases compensation risk to employees because of lower income stability
Advantages Group incentive plans
- Positive impact on organization and individual performance of about 5 to 10 percent per year. - Easier to develop performance measures than it is for individual plans. - Signals that cooperation both within and across groups, is a desired behavior - Teamwork meets with enthusiastic support from most employees. - increase participation of employees in decision-making process.
Performance research
- The definition of performance is expanding - identify the best appraisal format - Recent focus us is on the raters themselves - Identify how raters process information - Raters can be trained to increase accuracy
competitiveness of total compensation
- contain operating expenses (labor costs) - increase pool of qualified applicants - increase quality and experience - Reduce voluntary turnover - Increase profitability of union-free status - Reduce pay-related work stoppages
Predictions about performance-based pay: Herzberg's Two-Factor Theory
1. Base pay must be set high enough to provide individuals with economic means to meet hygiene needs but it cannot motivate performance 2. Performance is obtained through rewards - payments in excess of that required to meet basic needs 3 Performance-based pay is motivating to the extent it is connected with meeting employees' needs for recognition, pleasure attainment, achievement and the like. 4. Other factors such as interpersonal atmosphere, responsibility, type of work, and working conditions influence the efficacy of performance based pay
Predictions about performance-based pay: Maslow
1. Base pay must be set high enough to provide individuals with 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.
managers should focus on:
1. Customer satisfaction. 2. Employee internal growth and commitment. 3. Operational efficiency in internal processes. 4. Financial measures.
A good format scores well on 5 points:
1. Employee development criterion (amount of feedback about performance that the format offers) 2. Administrative criterion - ease of use. 3. Personnel research criterion - Does it validate employment tests? 4. Cost criterion - is it expensive/time consuming? 5. Validity criterion - does it improve accuracy?
Four basic assumptions of how labor markets work
1. Employers always seek to maximize profits. 2. People are homogeneous and therefore interchangeable. 3. Pay rates reflect all costs associated with employment. 4. Markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate.
Predictions about performance-based pay: Expectancy theory
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
Managers focus on three types of employees behaviors:
1. One group looks strictly at task performance how the employees perform the responsibilities of their Jobs 2. A second group looks primarily at counterproductive performance, evaluating based on the negative behaviors employees show. 3. The final group looks at both these types of behavior
What does Maslow theory says
1. Performance-based pay may be demotivating if it impinges upon employees' capacity to meet daily living needs 2. Incentive pay is motivating to the extent it is attached to achievement, recognition or approval
Key elements of a gain-sharing plan
1. Strenght of reinforcement 2. productivity standards 3. sharing the gains split between management and workers 4. Scope of the formula 5. Great care must be exercised with such alternative measures, though, to ensure that the behaviors reinforced actually affect the desired bottom-line goal 6. Perceived fairness of the formula 7. Ease of administration 8. Production variability
Five causes of team failure
1. Team variety. 2. The "level problem". 3. Complexity. 4. Control. 5. Communications.
Predictions about performance-based pay: equity theory
1. The pay-performance link is critical; increases in performance must be matched commensurate increases in pay 2. Performance inputs and expected outputs must be dearly defined and identified 3. Employees evaluate the adequacy of their pay via comparisons with other employees.
The courts stress six issued in setting up performance appraisal systems
1. instructions 2. clear criteria 3. sounds job descriptions 4. required feedback 5. higher level review 6. consistent treatment
Three elements of motivation
1. what's important to a person, and 2. offering it in exchange for some 3. desired behavior.
Scanlon plans
A group cost-savings plan designed to lower labor costs without lowering the level of a firm's activity. Incentives derived as a function of the ratio between labor costs and sales value of production (SVOP). Payroll costs/net sales
Know how to construct 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
Expectancy theory
A motivation theory that proposes that individuals will select an alternative based on how this choice relates to outcomes such as rewards. The choice made is based on the strength or value of the outcome and on the perceived probability that this choice will lead to the desired outcome.
Employee stock ownership plans
A plan in which a company borrows money from financial institution by using its stock as a collateral for the loan. Principal and interest loan repayments are tax-deductible. With each loan repayment, the lending institution releases a certain amount of stock being held as security. The stock is then placed into an employee stock ownership trust (ESOT) for distribution at no cost to all employees. The employees receive the stock upon retirement or separation from the company- TRASOPs and PAYSOPs are variants of ESOPs. generate long term effects, foster employee willingness to participate in the decision-making process, have little impact on productivity
merit pay
A reward that recognizes outstanding past performance. It can be given in the form of lump-sum payments or as increments to the base pay. Merit programs are commonly designed to pay different amounts (often at different times) depending on the level of performance. - links increases in base (called merit increases) pay to how highly employees are rated on a performance evaluation. Merit is typically awarded annually.
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.
Reservation wage
A theoretical minimum standard below which a job seeker will not accept an offer, no matter how attractive the other job attributes.
What does Herzberg's Two-Factor Theory says?
A- pay leveI is important - must meet minimum requirements before performance-based pay can operate as motivator. B. Security plans will induce minimum, but not extra, performance. Success-sharing plans will be motivating. At-risk plans will be demotivating. C.. Other conditions in the working relationship influence the effectiveness of performance-based pay.
What does the expectancy theory says?
A. Larger incentive payments are better than smaller ones B. line of sight is critical C employee assessments of their own ability are important
What does the equity theory say?
A. Performance measures must be clearly defined and employees must be able to affect them through work behaviors B. If payouts do not match expectations, employees react negatively C Fairness and consistency of performance-based pay across employees in an organization is important D. Since employees evaluate their pay-effort balance in comparison to other employees, relative pay matters
Human capital theory
An economic theory proposing that the investment one is willing to make to enter an occupation is related to the returns one expects to earn over time in the form of compensation.
Management by objective (MBO)
An employee planning, development and appraisal procedure in which a supervisor and a subordinate or group of subordinates jointly identify and establish common performance goals. Employee performance on the absolute standards is evaluated at the end of the specified period. Solely focused on the outcomes
Success sharing
An incentive plan (e.g., profit sharing or gain sharing) in which an employee's base wage matches the market wage and variable pay adds on during successful years. Because base pay is not reduced in bad years, employees bear little risk.
Standard rating scale
Appraisal system characterized by (1) one or more performance standards being developed and defined for the appraiser and (2) each performance standard having measurement scale indicating varying levels of performance on that dimension. Appraisers rate the appraise by checking the point on the scale that best represents the appraise's performance level. Rating scales vary in the extent to which anchors along the scale are defined.
Market match
Base 70%, Benefits 20%, Bonus 6%, Options 4%
Security (commitment)
Base 80%, Benefits 20%
benchmark job approach
Benchmark jobs have stable job content, are common, and include sizable numbers of employees
Types of LTI Plans - (long term incentives)
ESOPS, Performance Plans, BBOPS, Combination Plans
Herzberg's Two-Factor Theory
Employees are motivated by two types of motivators: hygiene factors and satisfiers. - Hygiene, or maintenance factors in their absence prevent behaviors but in their presence cannot motivate performance. They are related to basic living needs, security and fair treatment. - Satisfies, such as recognition promotion, and achievement, motivate performance. - Flexible compensation is driven by the issue of needs.
Disadvantages individualized incentive plans
Greater conflict may emerge b/employees and managers New technology may be resisted by employees reduced willingness of employees to suggest new production methods Increased complaints that equipment is poorly maintained Increased turnover among new employees Elevated levels of mistrust between workers and management
standard hours plan
Individual incentive plan in which rate determination is based on time period per unit of production and wages vary directly as a constant function of product level. In this context, the incentive rate in standard hour plans is set based on completion of a task in some expected time period.
straight piecework
Individual incentive plan in which rate determination is based on units of production per time period; wages vary directly as a constant function of production level). Rate determination is based on units of production per time period, and wages vary directly as a function of production level. The major advantages of this type of system are that it is easily understood by workers and, perhaps consequently, is more readily accepted than some of the other incentive systems.
The Rowan Plan
Individual incentive plan that provides for variable incentives as a function of a standard expressed as time period per unit of production. It is similar to the Halsey plan, but in this plan a worker's bonus increases as the time required to complete the task decreases.
The Gantt plan
Individual incentive plan that provides for variable incentives as a function of a standard expressed as time period per unit of production. Under this plan, a standard time for a task is purposely set at a level requiring high effort to complete.
Taylor plan
Individual incentive plan that provides for variable incentives as a function of units of production per time period. It provides two piecework rates that are established for production above and below standard, and these rates are higher and lower than the regular wage incentive level
Merrick system
Individual incentive plan that provides for variable incentives as a function of units of production per time period. It works like the Taylor plan, but three piecework rates are set: (1) high—for production exceeding 100 percent of standard; (2) medium—for production between 83 and 100 percent of standard; and (3) low—for production less than 83 percent of standard.
Long-term incentives (LTIs) plans
Inducements offered in advance to influence longer-rate (multiyear) results. Usually offered to top managers and professionals to get them to focus on long-term organization objectives 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.
Pay structure
Is anchored by the organization's external competitive position and reflected in its pay-policy line.
External competitiveness has 2 major consequences
It affects (1) operating expenses and (2) employee attitudes and work behaviors.
What is the organizational strategy?
It is the guiding force that determines what kinds of employee behaviors are needed
Criterion deficient
Just because something is quantifiable does not mean it is an objective measure of performance
What theories are focused on NEEDS?
Maslow's hierarchy of needs and Herzberg's Two-Factor Theory
Compa ratio example
Min - $35,000 Mid - $50,000 Max - $65,000 Suzy Makes - $60,000 Compa Ratio - $60,000 / midpoint (50,000) = 120%
BARS - Behaviorally Anchored Rating Scales
Most common format, using behaviors as descriptors for each rating category
Mode
Most commonly occurring rate. Must draw frequency distribution to calculate it. - measure of central tendency
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. Pros: organizations can move people around in jobs, but not have to change their pay, flexibility is built in
individual spot award
One-time award for exceptional performance; also called a spot bonus highlighting an exceptional performer, but watch out for adverse impact - 35% of companies use them, 74% reported that they were effective, larger companies use formal mechanisms while smaller companies may be more casual
median
Order all data points from highest to lowest, the one in the middle is good to use because it doesn't get skewed bc of outliers. Minimizes distortion caused by outliers - measure of central tendency
"market-driven"
Organizations pay competitively with the market or even are market leaders
merit bonus
Payment of entire increase (typically merit-based) at one time. Because amount is not factored into base pay, any benefits tied to base pay do not increase. one time increase, doesn't get added to base pay, based on performance
Pay-mix strategies may be:
Performance driven Market match Work/life balance Security
Rater-Error training
Reduce psychometric errors (leniency, severity, etc) by familiarizing raters with their existence
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 its ability to compete in its product market
flexible compensation
The allocation of employee compensation in a variety of forms tailored to organization pay objectives and/or the needs of individual employees. - based on the idea that only the individual employee knows what package of rewards would best suit personal needs
utility theory
The analysis of utility, the dollar value created by increasing revenues and/or decreasing costs by changing one or more human resource practices. It has most typically been used to analyze the payoff to making more valid employee hiring/selection decisions
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 in individual contributions.
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 package for employees, including all forms of money, bonuses, benefits, services, and stock.
Variation
The distribution of rates around a measure of central tendency
sorting
The effect that pay can have on the composition of the workforce. Different types of pay strategies may cause different types of people to apply to and stay with an organization.
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.)
relationship between production and wages
The first alternative is to tie wages to output on a one-to-one basis, so that wages are some constant function of production. In contrast, some plans vary wages as a function of production level, For example, one common alternative is to provide higher dollar rates for production above the standard than for production below the standard savings from a task being completed quicker result in a 50/50 split between worker and employer.
job pricing
The process of assigning pay to jobs, based on thorough job analysis and job evaluation.
aging and trending
The process of updating pay data to forecast the competitive rates for the future date when the pay decisions will be implemented
Economists label 2 market types:
The quoted market and the bourse market
pay ranges
The range of pay rates from minimum to maximum set for a pay grade or class. It puts limits on maximum set for a pay grade or class. It puts limits on the rates an employer will pay for a particular job.
Weighted mean
The rate for each company is multiplied by the number of employees. total of all rates is divided by total number of employees - Gives equal weight to each individual's wage. Captures size of supply and demand in the market - measure of central tendency
range midpoint
The salary midway between the minimum and maximum rates 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.
Total Compensation
This includes total cash plus stock options and benefits. Total compensation reflects the total overall value of the employee (performance, experience, skills, etc.) plus the value of the work itself.
total cash
This is base plus bonus. Total cash measures reveal competitors' use of performance-based cash payments.
Base pay
This is the amount of cash the competitors decided each job and incumbent is worth. A company might use this information for its initial observations of how "good" the data appear to fit a range of jobs.
What does the reinforcement theory says?
Timing of payouts is very important
efficiency wage theory
a theory that explains why firms are rational in offering higher-than-necessary wages The underlying assumption is that pay level determines effort and the quality of unattracted candidates
raters follow this process:
a. The rater observes the behavior of a rate. b. The rater encodes this behavior as part of a total picture of the rate (i.e., the rater forms stereotypes). c. The rater stores this information in memory, which is subject to both short- and long-term decay. Simply put raters forget things. d. When it comes time to evaluate a rate the rater reviews the performance dimensions and retrieves stored observations/impressions to determine their relevance to the performance dimensions. i. reviews the performance dimensions and retrieves from memory stored observations/impressions. ii. reconsiders and integrates with other information. e. The information is reconsidered and integrated with other available information as the rater decides on the final ratings.
self-actualization
achieving one's full potential, including creative activities (self-fulfillment needs)
profit sharing
add on to group performance relative to exceeding a financial goal, beyond employee control
recency error
allowing performance (good or bad) at the end of the review period to play too large a role in determining an employee's rating for the entire period, opposite of first impression
halo error
an appraiser giving favorable ratings to all job duties based on impressive performance in just one job function
shared choice
an external competitiveness policy that offers employees substantial choice among their pay forms
Efficiency Wage theory - ESSAY QUESTION
an organization's ability to pay means firms with greater profits than competitors can share this success with employees. Pay higher wages to increase efficiency, which will reduce labor costs in the long run (attracts higher quality applicants, lowers turnover, reduces shirking and need for supervision)
earning at risk plans
any incentive plan could be an at-risk plan. Think of incentive plans as falling into one of two categories: success sharing or risk sharing. In success-sharing plans employee base wages are constant and variable pay adds on during successful years. If the company does well, you receive a predetermined amount of variable pay. If the company does poorly, you simply forgo any variable pay—there is no reduction in your base pay, though. In a risk-sharing plan, base pay is reduced by some amount relative to the level that would be offered in a success-sharing plan.
equity theory
argues that people are concerned about fairness in the exchange process - is the compensation fair? Output equal to input? All about fairness Employees are motivated when perceived outputs (i.e., pay) are equal to perceived inputs (e.g., effort, work behaviors).
central tendency error
avoiding extremes in ratings across employees
how to construct a market line
closely match jobs to internal benchmark, which companies to include and which measures of pay to use. For each of the compensation metrics, a line is drawn according to their position (number of job evaluation points) in the internal structure. The line trends upward to create the market line
extrinsic motivation
compensation
skill requirements
composite of experience, training, and ability as measured by the performance requirements of a particular job
leniency error
consistently rating someone higher than deserved
broad bands
consolidates as many as four to five traditional grades into a single band with one minimum and one maximum - Collapses salary grades into only a few broad bands - Pros: provide flexibility to define job responsibilities more broadly, support redesigned, downsized, or boundary less organizations that have eliminated layers of managerial jobs, the foster cross functional growth and development in new org. - Steps to band: set the number of bands and then price the bands: reference market rates
spillover error
continuing to downgrade and employee for performance errors in prior rating periods
signaling
designing pay levels and mix as a strategy that signals to employees what is sought, trying to find employees who want to work for us
first impression error
developing a negative or positive opinion of an employee early in the review period and allowing that to negatively or positively influence all later perceptions of performance
compensating differentials
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
Expectancy
employees' assessment of their ability to perform required job tasks
Affirmative Action
firms with government contracts must take affirmative steps to hire women and minorities in proportion to their presence in the labor force
gain sharing
goal is to exceed some cost index - labor cost, productivity
merit increase
goes into base pay each year, based on performance
Bourse Market
haggle the price, price not set in stone - EBAY
Degree of competition
highly competitive markets are less able to raise prices
join
how do we get them to become a part of the company
retain
how do we get them to stay at the company
belongingness and love needs
intimate relationships, friends (psychological needs)
rent
is a return (profits) received from activities in excess of the minimum (pay level) needed to attract people to those activities. If an employee is paid $ 10,000 a week but would be willing to work for only a 1,000, that employee's economic rent is $9,000 a week
Instrumentality
is employees' beliefs that requisite job performance will be rewarded by the organization.
incentive effect
is pay can motivate people to perform better watch out for loose cannons
survey
is the systematic systematic process of collecting and making judgments about the compensation paid by other employers.
Valence
is the value employees attach to the organization rewards offered for satisfactory job performance
motivation
knowing how your role helps the company (compensation, culture, performance management)
Market line
links a company's benchmark jobs on the horizontal axis (internal structure) with market rates paid by competitors (market survey) on the vertical axis. It summarized the distribution of going rater paid by competitors in the market
market line
links a company's benchmark jobs 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
Balanced Scorecard Approach
looks at what contributes value in an organization. Success depends on satisfied: Customers, and employees.
Bureau of Labor Statistics (BLS)
major source of publicly available compensation (cash, bonus, and benefits but not stock ownership) data. It also calculates the consumer price index.
develop
make sure the employee keeps learning and progressing
lead
maximizes the ability to attract and retain quality employees Assumptions: minimize dissatisfaction with pay, may offset less attractive job features Most important must be able to determine what you will do in a downturn
paired comparison
method simplifies ranking by comparing pairs of people - each individual is compared separately with all others in the group
Supply and demand impact
more supply is less demand and more demand is less supply, a. Market pay line where supply and demand intersect = equilibrium
managers define relevant markets by:
occupation, geography, and competitors
job structure
orders jobs on the basis of internal factors (reflected in job evaluation or skill certification)
Determining externally competitive pay levels and structures
pay relationships among organizations --> specify policy --> select market --> design survey --> draw policy lines --> merge internal & external pressures --> competitive pay levels, mix and structures
pay for performance plan
pay that varies with some measure of individual or organizational performance, such as merit pay, lump-sum bonus plans, skill-based pay, incentive plans, variable pay plans, risk sharing, and success sharing. A movement away from entitlement toward pay that varies with performance.
Quoted Market
pay the price that is listed - Amazon
Two aspects of pay structure
pay-policy line, and pay ranges.
lag
paying below market rates may not attract employees unless coupled with higher future returns 25th percentile
Maslow's Hierarchy of Needs
people are motivated by inner needs. Needs for a hierarchy from most basic (food and shelter) to higher order (self-esteem, love, and self-actualization) - presumably, if employees are offered rewards that satisfy one or more needs they will behave in desired ways
esteem needs
prestige and feeling of accomplishment (psychological needs)
Benchmark conversion
process of matching survey jobs by applying the employer's plan to the external jobs and then comparing the worth of the external job with its internal "match"
Two major components are vital for success of a Rucker or Scanlon plan.
productivity norm and effective worker committees
alternation ranking
recognizes that raters are better at rating people at extreme ends of distribution - best and worst performers are rated first then you just fill in the rest
ranking format
requires comparing employees against each other to determine the relative ordering of the group on some performance
individual incentives
sometimes variable that is added on to fixed pay, incentive pay = normal bonus - lots of risk with this incentive, bonus, commission, piece rates
gain sharing
the goal to exceed is not financial performance of the organization but rather a cost index (labor cost, utility cost). Less risk to individual
pay increase guidelines
the mechanisms through which levels are translated into pay increases and, therefore, dictate the size and time of the pay reward for good performance
distributive justice
the outcome is perceived as fair, or the final pay is seen as fair for the work being done
procedural justice
the process that was done is perceived as fair, the deciding factors for final pay is seen as fair
shrinking
the propensity of employees to allow the marginal revenue product of their labor to be less than its marginal cost
Maslow
the pyramid of needs, needs basic human needs before the top which is self-actualization - base pay needs to be set high enough to let them live and meet needs, performance pay could be bad if it doesn't let them meet basic needs everyday
Pay Mix
the various types of payments or pay forms, that make up total compensation - base pay, bonuses, stock options
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 on overall policies. Challenging work, great colleagues, or an organization's prestige must be factored into an overall consideration of attractiveness. • Corresponds to the brand the company projects as an employer.
Relevant markets
those employers with which an organization competes for skills and products/services
What pay systems employees prefer?
those systems influenced by individual performance, COLA, seniority, and the market rate as the most important factors
pay-with-competition policy
tries to match wage costs to product competitors and attract applicants equal to the labor market competitors
