Comp. Test 2

-Comparisons regarding pay are based on:

-->Companies setting different pay-level policies for different job families -->What competitors the company compares to and what pay forms are included

Broad banding

-Consolidates salary grades into a few broad bands, each with: -->A sizable range -->One minimum and one maximum -Range midpoint often not used ex. slide 35

Employer of choice

-Corresponds to the brand the company projects as an employer

Grades and ranges offer flexibility to:

-Deal with pressures from external markets -Differences among firms regarding: -->Quality of individuals applying for work -->Productivity or value of these quality variations -->The mix of pay forms competitors use

Scanlon plan

-Designed to lower labor costs without lowering the level of a firm's activity -Incentives are derived: -->As a function of the ratio between labor costs and sales value of production (SVOP) -SVOP includes sales revenue and value of goods in inventory

Modifications to the Demand Side

-Economic theories must frequently be revised to account for reality -Issue for economists -->Why would an employer pay more than the market-determined rate?

Earnings-at-Risk Plans: Success sharing plan

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

Adjusting the Pay Structure

-Job structure: Orders jobs on the basis of internal factors: -Reflected in job evaluation or skill certification -Pay structure: Anchored by the external competitive position -Reflected in pay-policy line -Reconciling differences May entail a review of : -->Job analysis -->Evaluation of the job Market data Reconciling differences -May entail a review of : -->Job analysis -->Evaluation of the job -->Market data

Specific Pay-for-Performance Plans: Short Term

-Merit pay -Lump-sum bonuses -Individual spot awards -Individual incentive plans

Compensation should:

-Reinforce desired behaviors -Be sufficiently attractive to recruit and hire good potential employees -Make sure the good employees stay with the company (retention) -Build further knowledge and skills -Motivate employees to perform well on their jobs -Performance: Must be accurately measured to tell if compensation efforts are working

Motivation Theories and more

9-11

Labor costs

= Pay level X Number of employees -Higher the pay level, greater the labor costs Higher the pay level relative to what competitors pay: -Greater the relative costs to provide similar products or services

Rowan plan

A worker's bonus increases as the time required to complete the task decreases

Marginal product of labor

Additional output associated with the employment of one additional person: -With other production factors held constant -Diminishing marginal productivity -Each additional employee has a progressively smaller share of factors of production

Organization Factors

Industry and technology: -Labor-intensive industries tend to pay lower than technology-intensive industries -New technology within an industry influences pay levels Employer size: -Large organizations tend to pay more than small ones

Specify Competitive Pay Policy

Information on external markets: -Survey: -->Process of collecting and making judgments about the compensation paid by others -->Provides the data for translating policy into pay levels, pay mix, and structures

Org. Factors cont.

People's preferences: -Determine external competitiveness -Markets involve employers' and employees' choices Organization strategy: -Low- wage, no- services strategy -Low- wage, high-services strategy -High-wage, high-services strategy

Human Capital

Prediction: -The value of an individual's skills and abilities is a function of the time and expense required to acquire them So what?: -higher pay is required to induce people to train for more difficult jobs

Compensating Differentials

Prediction: -Work with negative characteristics requires higher pay to attract /retain workers So What?: -Job evaluation and compensable factors must capture these negative characteristics

Reservation wage

Prediction: -job seekers will not accept jobs with pay below a certain wage, no matter how attractive other job aspects So What? -pay level will affect ability to recruit, pay must meet some minimum level

Efficiency Wage

Prediction: -Above market wage/ pay level will improve efficiency by attracting higher ability workers and by discouraging shrinking because of losing high wage job . A high wage policy may substitute intense monitoring So what?: -An efficiency wage policy The pay off to a higher wage depends on employee selection systems ability to validly identify best workers. may require the use of few supervisors

Product Market Factors and Ability to Pay

Product Demand: -Limits maximum pay level an employer can set Degree of competition: -Highly competitive markets -Lesser ability to raise prices without loss of revenues -Single sellers are able to set whatever price they choose

Overlap

Promotion increases matter: -Size of differentials between grades should support career movement -Overlap ought to be large enough to induce employees to seek promotion -Skill-based plans: -->Establish single flat rates for each skill level regardless of performance or seniority ex. slide 33

Examples of Pay-Mix Alternatives

Slide 38: -Performance Driven -Market Match Work/Life Balance -Security (Commitment)

Gantt plan

Standard time for a task is purposely set at a level requiring high effort to complete

Market line

Summarizes the distribution of going rates (competitive avg. rate) paid by competitors in the market

Team Incentives Plans: Group Incentive Plan

Team performance is measured against a set standard to: -->Determine the magnitude of incentive pay

Rucker plan

Expresses the value of production required for each dollar of total wage bill

Improshare

(improved productivity through sharing) -Develops standard to: -->Identify expected hours required to produce an acceptable level of output -Savings are shared by firm and workers -Easy to administer and to communicate

Types of Variable-Pay Plans: Cash profit sharing

Advan. -Simple, easily understood -Low administrative costs Disadvan. - Profit influenced by many factors beyond employee control • May be viewed as an entitlement • Limited motivational impact

Stock ownership or options

Advan.: -Minimal impact on the financial statements -Have powerful impact on employee behavior -Tax deferral to employees Disadvan.: -Indirect pay/performance link -Employees may be required to put up money to exercise grants

How Labor Markets Work (Neoclassical Economics)

Assumptions: -Employers always seek to maximize profits -People are homogeneous and therefore interchangeable -Pay rates reflect all costs associated with employment -Markets faced by employers are competitive

Statistical Measures to Analyze Survey Data

Central Tendency: -Mode -Mean -Median -Weighted Mean Variation: -Standard Deviation -Quartiles and percentiles

Employment Cost Index

Measures quarterly changes in employer costs for compensation

regression equation

y=mx +b, -y= dollars -(x)= job eval. pts -b= y value in dollars at which x=0, y-intercept -m= slope

Labor Supply

This model assumes: -Many people are seeking jobs -People possess accurate information about all job openings -No barriers to mobility exist

Combine Internal Structure and External Market Rates

Two parts of the total pay model have merged: -Internally aligned structure - Horizontal axis -External competitive data - Vertical axis Two aspects of pay structure: -Pay-policy line -Pay ranges ex. slide 26

Labor Market Factors

Types of markets: -Quoted price: Example - Stores that label each item's price -Bourse: Example - eBay allows haggling over the terms and conditions In both markets: -Employers are the buyers and potential employees are the sellers

Interpret Survey Results and Construct a Market Line cont.

Update the survey data: -Aging or trending -->Process of updating pay data to forecast the competitive rates for the

Segmented Supplies of Labor and (Different) Going Rates cont.

Work flows to the people—on site, off-site, offshore: -Determining pay levels and mix requires: -Understanding market conditions in different locations -Managers need to know: -Jobs required to do the work -Tasks to be performed -Knowledge and behaviors required to perform them

Balance Scorecard

advan.: -Communicates organizational priorities disadvan.: -If financial targets are not met, there may be a reduced payout -Can be complex

Productivity/ gain sharing

advan.: -Performance- reward links • Productivity and quality improvements • Knowledge of business increases • Fosters teamwork, cooperation disadvan: Administratively complicated • Drop-off in quality • Management must open the books • Payouts occur even if company's financial performance is poor

Team/group incentives

advan: -Reinforces teamwork and team identity/ • Stimulates ideas and problem solving • Minimizes distinctions between team members • May better reflect how work is performed disadvan.: -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

Total Cash

base pay plus bonus

weighted mean

calculated by adding all base wage per # of employees and dividing by # of employees

Slope or (m)

change in Y/ change in X

going rates

competitive avg. rates

competitive intelligence

helps to better understand how competitors achieve their market share and price their products/services, costs, etc. against other competitors

Individual Incentive Plans ex.

slide 10

Exhibit 10.6 - The Taylor and MerrickPlans

slide 11

Components of a Total Rewards System

slide 12

Exhibit 10.7 - Advantages and Disadvantages of Individualized Incentive Plans

slide 15

A Sampling of Performance Measures

slide 18

Volatility of Stock Value Changes Total Pay Mix

slide 40

Dashboard: Total Pay Mix Breakdown vs. Competitors'

slide 41

Some Consequences of Pay Levels

slide 42

Motivation Theories

slide 5, 6, & 8 figure on slide 7

Implementation and success of Rucker or Scanlon plan requires:

-A productivity norm -->Effective measurement of base year data -->Acceptance by workers and management of this standard for calculating bonus -Effective worker committees -->Evaluate employee and management suggestions

Individual Incentive Plans

-A promise of pay for some objective, pre-established level of performance -Use established standards to: -->Compare employee performance -->Determine magnitude of incentive pay -Dimensions on which plans vary -->Method of rate determination -->Relationship between production and wages

Interpret Survey Results and Construct a Market Line: Verify Data

-Accuracy of match -->Benchmark conversion/survey leveling -Anomalies -->Does any one company dominate? -->Do all employers show similar patterns? -->Outliers?

The Purpose of a Survey

-Adjust pay level—how much to pay? -->Based on overall movement of pay rates caused by competition in the market -Adjust pay mix—what forms? -->Base, bonus, stock, and benefits -Adjust pay structure? -->Validate job evaluation results -Establish internal structures -Study special situations -->Specific pay-related problems -Estimate competitors' labor costs -->Competitive intelligence -->Employment Cost Index ----->Measures quarterly changes in employer costs for compensation

Construct a Market Pay Line

-Approaches to constructing a market pay line: -->Free hand approach -->Regression Analysis -Setting pay for benchmark and non-benchmark jobs

Shared choice

-Begins with traditional options of lead, meet, or lag -Offers employees choices in the pay mix -Risks -->Employees will make "wrong" choices -->Offering too many choices may lead to confusion, mistakes, and dissatisfaction

From Policy to Practice: The Pay Policy Line

-Choice of measure -Updating -->Aging the market data to a point halfway through the plan year is called lead/lag -Policy line as percent of market line -->Specify a percent above or below market line an employer intends to match -->Other options: --->Pay among the leaders --->Lead for some job families and lag for others

Grades

-Enhance an organization's ability to move people among jobs with no change in pay -Have their own pay range -Jobs within a single grade will have the same pay range Establish range midpoints, minimums, and maximums: -Size of the range should be based on: -->How ranges support career paths, promotions, and other organization systems

Pay range

-Exists whenever two or more rates are paid to employees in the same job -Provides managers with the opportunity to: -->Recognize individual performance differences with pay -->Meet employees' expectations that their pay will increase over time, even in the same job -->Encourage employees to remain with the organization

Compensating Differentials

-Explain the presence of various pay rates in the market Hard to document due to: -Difficulties in measuring and controlling various pay rates

Long-term incentives (LTIs)

-Focus on performance beyond the one-year time line -Growth in long term plans -->Result of desire to motivate longer-term value creation slides 34 and 35

Profit-Sharing Plans

-Focuses on a predetermined index of profitability -Company should specify the funding formula

Select Relevant Market Competitors: Relevant labor market includes employers who compete:

-For same occupations or skills -For employees in same geographic area -With same products and services ex. slide 9

Halsey 50-50 method

-For tasks completes in less than the standard time: -->Savings are allocated 50-50 between the worker and the company

Merrick system - Three piecework rates are set

-High for production exceeding 100 percent of standardMedium for production between 83 and 100 percent of standard -Low for production less than 83 percent of standard

Taylor plan - Two piecework rates

-Higher than the regular incentive, when production exceeds published standard -Lower than regular wage for production below standard

Managing Merit Pay

-Improve accuracy of performance ratings -Allocate enough money to truly reward performance -Increase in merit pay should differentiate across performance levels

Analysis of labor demand:

-Indicates how many employees will be hired by an employer

Market Pricing etc. : Business strategy

-Internal pay structure is aligned with competitors' decisions -Little value is added through internal alignment -Unique or difficult-to-imitate aspects of the pay structure are de-emphasized -Fairness is presumed to be reflected by market rates

Globalization of Relevant Labor Markets: Offshoringand Outsourcing: Factors to consider while deciding where job location

-Labor costs and productivity -->Countries with lower average labor costs tend to have lower average productivity -Agency theory -->Devote resources to systems that monitor worker effort or output -Customer reaction -How long the labor cost advantage will last

Lead Pay-Level Policy

-Maximizes the ability to attract and retain quality employee -Minimizes employee dissatisfaction with pay -May offset less attractive features of work -May lead to dissatisfaction -->If used only to hire new employees -May mask certain negative attributes

Lag Pay-Level Policy

-May hinder a firm's ability to attract potential employees -Coupled with the promise of higher future returns: --> May increase employee commitment --> Foster teamwork --> May possibly increase productivity

Select Relevant Market Competitors: Fuzzy Markets

-Organizations with unique jobs and structures find it hard to get comparable market data -Place more emphasis on external market data ex. slide 9

Attract and Retain the Right Employees

-Pay rates for similar jobs vary among employers -Companies set different pay-level policies for different job families

Interpret Survey Results and Construct a Market Line: Central tendency

-Reduces a large amount of data into a single number -Variation

Key Elements in Designing a Gain-Sharing Plan

-Strength of reinforcement -Productivity standards -Sharing the gains -Scope of the formula -Perceived fairness of the formula -Ease of administration -Production variability

Lump-Sum Bonuses

-Substitute for merit pay -Not built into base pay -Viewed as less of an entitlement than merit pay -Less expensive than merit pay over the long run

Causes for failure of Team incentive plans

-Varieties in teams -Level problem -Complexity -Control -Communications

Individual Spot Awards

-Viewed as highly or moderately effective -Awarded for exceptional performance

Design the Survey

-Who should be involved?: -->Compensation manager, managers, and employees -->Outside consulting firms -How many employers? -->No firm rules -->Publicly available data - Bureau of Labor Statistics -->Word-of-mouse - Online salary information -->Many surveys (but few that are validated)

Labor Demand Theories and Implications:

-compensating differentials -efficiency wage -sorting & signaling -job competition

negative characteristics

-if a job includes ex. necessary training is expensive, chances of success are low, bad working conditions, then the employer must offer higher wages for compensation

r2

-the variance btw pts. -the higher the r2, the more confident we are in the regression line

Market Rate:

-where the lines for labor and demand and labor supply cross refer to slide 11 for example

Ch.7: Compensation Strategy: External Competitiveness

1. Is expressed by: -Setting a pay level that is above, below, or equal to that of competitors -Determining the mix of pay forms relative to those of competitors 2. Refers to the: -Pay relationships among organizations -Organization's pay relative to its competitors

Wage Components

13-16

Marginal revenue of labor

Additional revenue generated when: -The firm employs one additional person while other production factors are constant A manager using the marginal revenue product model must determine: -Pay level set by market forces -Marginal revenue generated by each new hire ex. slide 14

Risk sharing plan

Compared to success sharing plan base pay is reduced by some amount

Consequences of Pay-Level and Mix Decisions: Guidance from the Research cont.

Compliance: -Employers must pay at or above the legal minimum wage -Prevailing wage laws and equal rights legislation must be met -Pay forms are regulated -Caution must be exercised when sharing salary information

Competitive Pay Policy Alternatives

Conventional pay-level policies: -To lead, to meet, to follow competition Newer policies: -Emphasize flexibility among: -->Policies for different employee groups -->Pay forms for individual employees -->Elements of the employee relationship that company wishes to emphasize

Relevant Markets

Data from product market competitors receives greater weight when: -Employee skills are specific to the product market -Labor costs are a large share of total costs -Product demand is responsive to price changes -Supply of labor is not responsive to changes in pay

Sorting and Signaling cont.

Designing pay levels and mix as part of a strategy that: -Signals employees kinds of behaviors sought Employer signals: -Organization decisions about: -->Pay level (lead, match, lag) -->Pay mix (higher bonuses, benefit choices) Employee signals: -Applicant characteristics (degree, grades, experience)

Relevant Markets

Determined on the basis of: -Occupation -Geography -Competitors Chosen on the basis of: -Competitors - Products, location, and size -Jobs - Required skills and knowledge

Benchmark conversion/survey leveling

Differences are quantified when job content does not sufficiently match survey jobs

Some Consequences of Pay Levels

Efficiency: -No research suggests: -->Under what circumstances managers should choose which pay-mix alternative -Pay level may not gain any competitive advantage -->Wrong pay level may be a serious disadvantage

Do Employees Perform Better on Their Jobs Because of Pay?

Employees perform better when: -A well-designed plan links pay to behaviors of employees -The incentive depends on individual performance Team-based incentives are less attractive Linking pay to performance occurs through: -Incentive effect- Pay can motivate people to perform better -Sorting effect- People sort themselves by what is important to them

Different Policies for Different Employee Groups

Employers may vary the policy for: -Different occupational families -Different forms of pay -Different business units Pay-mix strategies may be: -Performance driven -Market match -Work/life balance -Security

Do People Stay in a Firm (Or Leave) Because of Pay?

Factors impacting turnover: -Pay based on individual performance -Group incentive plans -Level of employee satisfaction with pay -Changing base pay Other rewards that influence the decision to stay: -Work variety and challenge -Development opportunity -Social -Status recognition -Work importance -Benefits

Does Compensation Motivate Behavior?

Factors influencing a person's decision to join a firm: -Level of pay -Pay system characteristics Reward systems should be designed to attract people with desired -Personalities and values

Consequences of Pay-Level and Mix Decisions: Guidance from the Research

Fairness: -Satisfaction with pay is directly related to pay level -Sense of fairness is related to how others are paid

Interpret Survey Results and Construct a Market Line: Statistical analysis

Frequency distribution- Unusual shapes may reflect: -Problems with job matches -Widely dispersed pay rates -Employers with widely divergent pay policies

Efficiency Wage cont.

Greater profits than competitors allows share success with employees by: -Leading competitors' pay levels -Bonuses that vary with profitability Rent sharing-return received from activities that are: -In excess of the minimum needed to attract people to those activities

Efficiency Wage

High wages may increase efficiency and lower labor costs if they: -Attract higher-quality applicants -Lower turnover -Increase worker effort -Reduce shirking -Reduce the need to supervise employees

What Shapes External Competitiveness?

Labor Mrkt. Factors: -->Nature of Supply -->Nature of Demand Product Market Factors: -->Degree of Competition -->Level of Product Demand Organization Factors: -Industry, Strategy, Size -Individual Manager

Merit pay

Links increases in base pay to: -How highly employees are rated on a subjective performance evaluation Issues: -Expensive -Doesn't achieve the desired goal of: -->Improving employee and corporate performance

Possible Survey Data Elements and Rationale

Nature of Org.: -Identification -Financial Performance -Size Structure Nature of Total Comp. Systems: -Cash forms used -Noncash forms used Incumbent and Job: -Date -Job -Individual -Pay HR Outcomes -Productivity -Total Labor -Attraction -Retention -Employee views

Market Pricing

Objective: -To base most of the internal pay structure on external rates -To break down the boundaries between: -->The internal organization and the external market forces -Sets pay structures almost exclusively on external market rates -Competitive rates for jobs for which external market data are available are calculated -Remaining jobs are blended into pay hierarchy

Compensation Strategy: External Competitiveness etc.

Pay level: -The average of the array of rates paid by an employer Pay forms: -Various types of payments, or pay mix, that make up total compensation Objectives: -Control costs and increase revenues Attract and retain employees

Ch. 10: Pay-for-Performance

Pay-for-performance: Signals a movement: -Away from entitlement -Towards a pay that varies with individual or organizational performance Increasing interest in variable pay -Competition from foreign competitors -Fast-paced business environment

Gain-sharing plan

Pays off for teams defined at the level of a strategic business unit

Segmented Supplies of Labor and (Different) Going Rates

People flow to the work: -A segmented labor supply involves: -->Multiple sources of employees -->From multiple locations -->With multiple employment relationships -Level and mix of cash and benefits paid depends on the source

Job Competition

Prediction: -Job requirements may be fixed. Workers compete for jobs based on qualifications and not how low wages they are willing to accept. Thus wages are sticky downward So what?: -ob requirements may be fixed. Workers compete for jobs based on qualifications and not how low wages they are willing to accept. Thus wages are sticky downward

Sorting and Signaling

Prediction: -Pay policies signal to applicants the attributes that fit the organizations. Applicants may signal their attributes by investments they have made in themselves So what?: -How much, but also how pay mix and performance will influence attraction-selection-attrition and resulting work force composition

Similarities and Contrasts BetweenScanlon and Rucker Plan

Similarities: -Differ from individual incentive plans in their primary focus Differences: -Rucker plans tie incentives to a wide variety of savings -Scanlon plans focus on labor savings -Due to greater flexibility Rucker plans can be linked with individual incentive plans

Broad Banding cont.

Steps in banding: -Set the number of bands -Price the bands: reference market rates Flexibility-control: -Take advantage of flexibility without: -->Increasing labor costs -->Leaving the organization vulnerable to charges of inconsistent or illegal practices

Pay with Competition (Match)

Wage costs: -Approximately equal to those of its product competitors Ability to attract potential employees: -Approximately equal to its labor market competitors Avoids placing an employer at a disadvantage in pricing products

Low-high approach

Wages of lowest- and highest-paid benchmark jobs for are used as anchors for skill-based structures

Design the Survey cont. cont.

What information to collect? -Organization data: -->Financial data and reporting relationships -->Turnover and revenues -Total compensation data: -->Base pay -->Total cash -->Total compensation

Elements of motivation

What is important to a person? -Employees prefer pay systems that are influenced by: -->Individual performance -->Change in cost of living -->Seniority -->Market rate -Flexible compensation: Individuals know what rewards would best suit personal needs -Offering it in exchange for some desired behavior

Design the Survey cont.

Which jobs to include? -Benchmark-job approach -Low-high approach -Benchmark conversion/survey leveling

Advantages and Disadvantages of Measures of Compensation

slide 16

Choices for Updating Survey Data Reflect Pay Policy

slide 21

The Choice Between Individual and Group Plans

slide 22

Regression Analysis

slide 23, pg. 288

Three Gain-Sharing Formulas

slide 24

Ch. 9: The Big Picture, or Compensation Can't Do It Alone!

slide 2: the point compensation can't change peoples behavior by itself

Contrasts BetweenRanges and Bands

slide 36

Merit vs. Lump Pay cost comparisons

slide 7

Bureau of Labor Stats

the major source of publicly available compensation data (cash, bonus, benefits, but not stock ownership)

Total Compensation

total cash + stock options + benefits