Chapter 8

Timing

Companies typically take one of two approaches in timing of pay raises: Common review date or common review period & Employee's anniversary date

Salary-Plus-Commission Plans

Commissions based on percentage of price, Spreads risks, Designed to attract quality sellers, Allows employees to do other tasks

Skill and Knowledge Blocks

-Include job descriptions: Skills and knowledge needed, Training required, Accurate evaluation process. -Organize jobs into family/group: List similar skills and tasks per job. -Group skills and knowledge into blocks EX. BLOCK SLIDE 42

Sales Compensation Plans

-Salary only -Salary plus bonus -Salary plus commission -Commission plus draw -Commission only

Compa-ratio meanings

1 = market match rate, < 1 = market lag rate, > 1 = market lead rate

Commission-Plus Draw Plans

1. Draw: Advance pay for living expenses, Charged against future commissions, Recoverable or non recoverable 2. Provides strong incentive to excel

In-House vs. Outsourced Training

1. Expertise: Needed and available 2. Timeliness: How soon and how often 3.Number of trainees 4. Proprietary nature of topic: Too sensitive to share

Merit Pay Systems

1. Pay for Performance 2. Considerations: Communicate link between pay and performance, Use effective appraisal methods, Establish increase amounts and types, Settle on base pay level.

Commission Only

1. Straight: Based on fixed percentage of sales price EX: 10% commission, service sold $100 → $10 2. Graduated: Increased percentage rates for higher sales volume EX: 5% commission, per unit for 100 units → 8% commission per unit from 101 to 500, 12% commission per unit in excess of 500 3. Multi-tiered: Increased percentage rates for meeting and exceeding sales goal EX: 8% if total sales volume < 1,000 units, 12% if total sales volume > 1000 units.

The Merit Pay Grid

Amounts are determined by two factors: 1. Performance ratings, 2. Position of employees' present base pay rates within pay ranges EX. TABLE 8-2 SLIDES (26-27)

Step 3: Define Pay Grades

Based on compensable factors, values, management philosophy & Widths: Narrow or wide, Affects hierarchy and social distance, Absolute or percentage-based job evaluation points

Pay Structure Variations

Broadbanding & Two-tier wage structures

Step 4: Calculate Pay Ranges

Build upon pay grades, Pay grades represent horizontal dimension, Pay ranges represent vertical dimension

Broadbanding

Consolidates pay grades and ranges, Flattens corporate hierarchies, Emphasizes teamwork, Broadens job duties and responsibilities, Promotes quicker decision making, More latitude in pay rate decisions EX. SLIDE 48

Increases within Budget

Determine performance categories and percentage of employees in each, Place percent in quartiles, Put percent and quartiles into cells, Estimate performance distribution, Distribute increase to each cell, Ensure total is within budget

Step 1: Decide on Pay Structures

Exempt and nonexempt: companies establish these pay structures for administrative ease, Based on job families: executive, managerial, professional, technical, clerical, and craft represent distinct job families, Based on geography: companies with multiple, geographically dispersed locations such as sales offices, manufacturing plants, service centers, and corporate offices

Exempt and Nonexempt Pay Structures

Exempt: Not subject to overtime provisions, Salaried supervisors, managers, professionals, and executives. Nonexempt: Subject to overtime provisions and Hourly, nonsupervisory

Constructing a Pay Structure

Five steps: 1. Decide how many pay structures to construct 2. Determine a market pay line 3. Define pay grades 4. Calculate pay ranges & 5. Evaluate results.

Salary-Only Plans

Fixed base compensation, From the employees' perspective → risk-free, From a company's perspective → burdensome

Transition Matters

From job-based pay to person-focused pay: Assessment of skills and knowledge (Who assesses, On what, How often) Align pay with skills and knowledge structure, Access to training ( Equal access to all)

Step 2: Determine a Market Pay Line

Market pay rates relative to company's job structure, Pay levels corresponding with pay line are market competitive, Rates promote internal consistency

How are merit pay systems designed and implemented

Merit increase amounts, timing, type of merit increase

Two-tier wage structures

New employees paid less, Temporary or permanent rewards, Mainly in unionized companies, May hinder recruiting, Can lower employees' morale EX. TABLE 8-4 SLIDES 51-52

Pay Range Overlap

Overlapping ranges and non-over lapping pay ranges

Red Circle rates

Paying above maximum pay rates. Results from: Failure to raise pay range maximums, Attempt to retain exemplary employees not ready for promotion to jobs in successive pay grade and Demotion of employee from a higher pay grade to a lower pay grade

Green Circle rates

Paying below minimum pay rates. Result from: Paying employees who do not meet the minimum requirements less than the minimum rate and Failure to raise pay range minimum and maximum rates

Merit Increase Amounts

Reflects prior job performance levels, Needs to motivate, Needs to be meaningful, Influenced by the cost of living, Indexed as a percentage of budget

Person-Focus Pay Programs

Reward employees based on learning new skills and knowledge AND Compensates on potential - the promise of future performance

Salary-Plus-Bonus Plans

Set salary coupled with a bonus AND Bonuses usually are single payment

Essentials of person-focused pay program design

Skill and Knowledge Blocks, Transition matters, In-house vs.Outsourced Training

Step 5: Evaluate the Results

The use of compa-ratios evaluates pay structures. Compa-ratios index competitiveness of internal pay rates based on midpoints. Divide pay rates by midpoint

Fixed Pay and Compensation Mix

Three main factors: 1. Salesperson's influence on decision 2. Competitive pay standards within industry 3. Amount of non sales duties

Pay Compression

When the pay spread between newly hired or less qualified individuals, and more qualified job incumbents is small, it Threatens competitive advantage & is Caused by: Failure to raise pay range minimum and maximum rates and Scarcity of qualified applicants

Non overlapping pay ranges

adjacent pay ranges do not overlap where highest rate in one range is equal to or greater than the minimum pay rate in the successive pay grade

Overlapping ranges

adjacent pay ranges overlap where the highest rate paid in one range is above the minimum pay rate, but less than the maximum rate, in the successive pay grade

Pay structures

represent: Pay rate differences for jobs of unequal worth & The framework for recognizing differences in employee contributions. Companies recognize these differences by paying individuals according to their: Credentials, Knowledge, Job performance