Compensation Exam 1

Team incentive plans

compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded

Cash Compensation: Base

Base wage is the cash compensation an employer pays for work performed. •Base pay reflects the value of work or skills and ignores differences in individuals. •In the U.S., salary refers to annual or monthly pay for employees exempt from overtime pay. •Nonexempts are paid on an hourly wage.

Total Compensation

Compensation are transactional returns and include pay received directly as cash and indirectly as benefits. •Cash payment includes base pay, merit pay, cost-of living adjustments, and incentives. •Benefits include pensions, medical insurance, and programs to help balance work and life demands.

Compliance: A Proactive Approach

Compliance with laws and regulations can be a constraint and/or an opportunity for a compensation manager. •A proactive compensation manager can influence the nature of regulations and their interpretation. A compensation manager can do the following to be proactive. •Join professional associations to stay informed on emerging issues. •And to act in concert to inform and influence legislative opinion. •Constantly review compensation practices and their results. •Consult with legal counsel in doing so. The fair treatment of all employees is the goal of a good pay system, the same goal of legislation.

Challenges in Estimating Discrimination

Disagreement remains over what constitutes discrimination. •A statistical approach is to try to relate pay differences to the factors of occupation, type of work, experience, education, etc. •Statistical studies are not sufficient evidence of discrimination. Even if legitimate factors fully explain pay gaps, discrimination still could have occurred. •The factors themselves may be tainted by discrimination. •Measurable factors may underestimate the effects of pay discrimination. Statistical analysis needs to be treated as a pattern of evidence and needs to reflect the wage behaviors of specific firms.

Employee or Independent Contractor

Employers must pay Social Security, unemployment, and workers' compensation taxes on wages and salaries. •However, employers are not so obliged for independent contractors. •Independent contractors do not typically receive other benefits. Classification requires careful attention to compliance issues. •Both the IRS and ERISA are relevant. Two general criteria involve behavioral and financial control. •The more control the firm has, the more likely the IRS considers the person an employee. •The IRS also considers the relationship, including permanence.

Cash Compensation: Merit Pay

Merit increases are given as performance-based increments to the base pay. Merit bonuses are also based on performance rating but are paid in one lump sum rather than a permanent change to base pay.

Concerns about Merit Pay

Merit pay increases fixed compensation costs over time. •One response is to use merit bonuses or other variable pay plans. Merit pay becomes costly if too many high performance ratings are awarded. •Control the number of high ratings and/or improve the accuracy and credibility of performance ratings. Merit pay differentials are too small to motivate performance. •Use larger differentials and include the role of promotions to strengthen merit pay differentials. Individual performance is a deficient measure when work is interdependent and requires cooperation to obtain objectives. Broaden criteria to include cooperation and other factors.

Performance Based Pay is successful when...

It is not only how much you pay but how you pay. Performance-based pay works best when there is shared success. •Shared success improves employee attitudes, behaviors, and performance when coupled with other "high performance" practices. •When organizational performance declines, performance-based pay plans do not pay off - with potentially negative effects. •Unless increased risks are offset by larger returns, the risk-return imbalance will reinforce declining employee attitudes and speed the downward spiral.

Maximizing Motivational Impact of Extrinsic Rewards

Make pay for performance an integral part of the organization's basic strategy. Base incentive determinations on objective performance data. Have all employees actively participate in the development, implementation, and revision of the performance-pay formulas. Encourage two-way communication so problems with the pay-for-performance plan will be detected early.

Minimum Wage

Minimum-wage legislation is intended to provide an income floor for worker's in society's least productive jobs. •Enacted in 1938 at a rate of 25 cents per hour, now at $7.25. •The decline of purchasing power allows some to argue the minimum wage should be changed to reflect the consumer price index. 2.2 million workers are estimated to be paid at minimum wage. Changes create direct effects and indirect, spillover effects. •Some states set their own minimum wage. Opposition to minimum wage argue it cause higher labor costs. •Law effectiveness is also questioned. •Employers try to influence the rate but must comply.

Strategic Perspectives

Strategy - the fundamental directions an organization chooses. At the corporate level, the fundamental strategic choice is: •What business should we be in? At the business unit level, the choice shifts to: •How do we gain and sustain competitive advantage in this business? At the functional level the strategic choice is: •How should total compensation help this business gain and sustain competitive advantage? A strategic perspective focuses on compensation choices that help the organization gain and sustain competitive advantage.

Equal Pay Act

The Equal Pay Act (EPA) of 1963, part of FLSA, forbids wage discrimination on the basis of gender for equal work. •Jobs are equal if they require equal skill, effort, and responsibility and are performed under similar working conditions.

Gaps are Global

The gender wage gap is fairly universal though in many countries the size of the gap is smaller than in the U.S. •European countries have a narrower pay structure. Negotiated rates through federations, unions, and government agencies produces a narrower range of pay rates for each job. •And smaller differences between jobs. Multinational companies face wide differences in how wages are influenced by varying social policies and regulations.

Total Earnings and Relational Returns

Total earnings opportunities is a present-value perspective which considers future bonuses, merit increases, and promotions. Non-financial returns from work affect employees' behavior. •Forms include recognition and status, employment security, challenging work, and opportunities to learn. •Other forms include personal satisfaction from facing new challenges, teaming with great co-workers, and receiving new uniforms. •Such factors are part of the total return, broader than total compensation. It is useful to view an organization as a network of returns created by different forms of pay, including total compensation and relational returns.

Virtuous and Vicious Circles

Virtuous Cycle - organization performance increasing - risk return balance - pay for performance up UPWARD MOMENTUM, CONTINUOUS IMPROVEMENTS Vicious Cycle - Organization Performance decreasing - risk return imbalance - pay for performance down DOWNWARD MOMENTUM, CONTINUOUS DIFFICULTIES

Factors of Overtime and Hours of Work... Time Covered? Income covered? Compensatory Time Off?

What time is covered? •OSHA specifies the number of breaks to provide in an 8-hour workday. •The Portal-to-Portal Act provides that time spent on activities before beginning the "principal activity" is not compensable. What income is covered? •The Worker Economic Opportunity Act allows stock options and bonuses to be exempt from inclusion in overtime pay calculations. Compensatory time off. •There is proposed legislation to allow trading overtime pay for time off. •Employee has scheduling flexibility and the employer saves money.

Differences in Occupations and Qualifications

Women of all ethnic groups are more likely than men to seek part-time, flexible work and to interrupt careers for family. •Today, the number of women in managerial jobs is at parity with men. One notable concern remains: the "Glass Ceiling." •This is the lack of representation of women in executive and director level positions in organizations. •Increased levels of attainment does not mean the wage gap closes. A small wage gap among young workers increases as they age. •Pay differences set in place ages ago still influence today's pay. Level of schooling and work experience are primary sources of pay gaps among both black and Hispanic men and women.

Earning Gaps

Women's median annual earnings compared to men's has changed from 60.2% to 80.5% from 1980 to 2016. •The wage gap varies according to wage level, being larger at very high or very low wages. Asian men's earnings have risen over time to now be 25% higher than those of white men. •Black to white men's earnings varied from 68% to 79% and the ratio of Hispanic to white men's earnings varied from 55% to 72%. •There is a similar pattern with Asian women having higher earnings. •The gap between black and white women is less than the men's gap.

Good Feedback

performance, key results, specifics, accurate and credible, clear expectations

5 Strategic Compensation choices facing Whole Foods

•Objectives - increase shareholder value, satisfy and delight customers, and seek employees who will help the company make money. •Internal alignment - store is organized into self-managed teams, executive salaries capped at 19X average full-time employee pay, and all full-time employees qualify for stock options. •External competitiveness - offers a unique total compensation package compared to competitors. •Employee contributions - uses a shared fate technique and monthly performance affects team pay. •Management - uses a "no-secrets" management technique making salaries known to all and a "you decide" technique allowing employees to chose their health insurance.

Incentive and Sorting Effects

•The incentive effect is the degree to which pay influences individual and aggregate motivation. •The sorting effect is the effect that pay can have on the composition of the workforce. •How an organization pays can result in sorting effects. Compensation policies work through incentive and sorting effects to either achieve or not achieve company objectives.

A Pay Model

Basic Building Blocks: Objectives, Policies, Techniques The basic objectives include: •Efficiency - improving performance, increasing quality, delighting customers and stockholders, and controlling labor costs. •Fairness - recognizes both employee contributions and needs. •Procedural fairness is the process used to make pay decisions. •Compliance - means following federal and state regulations and laws. •Ethics - means the organization cares about how it achieves results. Pay objectives guide the design of the pay system and serve as the standards for judging success of the pay system.

The Equal Pay Act- Other Factors

Factors other than sex include the following. •Shift differentials. •Temporary assignments •Bona fide training programs. •Differences based on ability, training, or experience. •Other reasons of "business necessity." "Reverse" discrimination when adjusting women's pay. •Viewed collectively, the courts have provided reasonable interpretations of the Equal Pay Act. •However, 58% of all women are in jobs not equal to jobs of men. •So, they are not covered by the Equal Pay Act.

Performance Management

•Continuous cycle of improving job performance with goal setting, feedback and coaching, and rewards and positive reinforcement.

Steps for Effective Goal Settings

1. set goals 2. promote goal commitment 3. provide support and feedback

Spot awards or individual incentive plans

Spot awards are given for exceptional performance, often on special projects or for performance exceeding expectation. Individual incentive plans offer a promise of pay for some objective or pre-established level of performance. •All plans have one common feature: an established standard. •These plans do not work for every job.

Support HR Strategy

"AMO theory." Performance (P) is a function (f) of three factors: ability (A), motivation (M), and opportunity (O). Compensation is key to attracting, retaining, and motivating employees with the abilities necessary to execute the business strategy. Compensation strategy and HR strategy are central to successful business strategy execution.

Functions of Feedback

instructional and motivational

Line of SIght

knowledge of the organization's strategic goals and how they need to contribute

5 strategic compensation choices

objectives, internal alignment, external competitiveness, employee contributions, management

Scanlon Pan

•Incentives derived as a function of the ratio between labor costs and sales value of production (SVOP). •25% of wage savings goes back to the company and 75% of the remainder is distributed as employee bonuses. •With the remaining 25% placed in an emergency fund.

6 Trouble signs for organizational feedback systems

1.Feedback is used to punish, embarrass, or put down employees 2.Those receiving the feedback see it as irrelevant to their work. 3.Feedback information is provided too late to do any good. 4.People receiving feedback believe it relates to matters beyond their control. 5.Employees complain about wasting too much time collecting and recording feedback data. 6.Feedback recipients complain about feedback being too complex or difficult to understand.

Union Development and Comparable-Worth

Union support is related to its effect on union membership. •AFSCME and CWA support comparable worth. •The public sector faces little competition and can better absorb a wage increase. •Unions in industries facing stiff international competition are reluctant to support comparable worth. "Equity adjustments" are a separate budget item and do not appear at the expense of pay increases for all union members. •Collective bargaining has produced more comparable worth pay increases than any other approach.

Management means...

Ensuring the right people get the right pay for achieving the right objectives in the right way.

Total COmpensation Stratagy: Step 2

Step two is to map a total compensation strategy using the five elements of the pay model. •Assign descriptors to each element and rate from high to low the level of importance of each descriptor. The profile on the strategy map reflects a company's "pay brand." •At Microsoft, total compensation is prominent. •At SAS, total compensation supports a work / life balance. Strategic maps are a visual reference but do not tell which strategy is "best." Decisions in the pay model work in concert and the totality of decisions form the compensation strategy.

Differences in pay are legal if differences are based on any of four criteria...

called an affirmative defense. •Seniority. •Merit or quality of performance. •Quality or quantity of production. •Some factor other than sex.

Positive Reinforcement: Law of Effect

•Behavior with favorable consequences is repeated, behavior with unfavorable consequences disappears.

Compliance issues fall into two areas

Employment discrimination and wage/hours issues

Overtime and Hours of Work

FLSA requires time-and-a-half for over 40 hours per week. •Meant to share available work but times have changed. •Skilled workforce means higher training costs per employee. •Higher benefits costs, the bulk of which are fixed per employee. •State laws sometimes go beyond FLSA. Some employees are exempt and must make at least $455/week. •Employers may bypass the law by classifying workers as "executives." •Another challenge is the expectation of availability after work hours. The impact of FLSA depends on the degree of enforcement.

Similar and Differences in Strategies

Google, Nucor, and Merrill Lynch are all industry innovators. •All three have pay strategies that support their business strategies. Google positions itself as a feisty startup. Nucor emphasizes high productivity, high quality, and low cost. Merrill Lynch pay objectives are to attract, motivate, and retain the best talent.

Best Practices versus Best Fit

In contrast to the notion of strategic fit, some believe that: •A set of best-pay practices exists and these practices can be universally applied across situations. Guidance from the evidence. •Both smaller and larger internal pay differences can be a "best practice." •Paying higher than competitor's average can affect results. •Performance-based pay can affect results. •Consider all dimensions of the pay strategy together. •Embedding compensation strategy into HR strategy affects results. A more useful question is: "What practices pay off best under what conditions?"

Disparate Impact

Practices having a differential effect are illegal. •Unless work-related differences. •Griggs v. Duke Power Co. Intent to discriminate is irrelevant. •Employer's must demonstrate a personnel decision is work-related.

Extrinsic Rewards Fail to Motivate

Too much emphasis on monetary rewards Rewards lack an "appreciation effect" Extensive benefits become entitlements Counterproductive behavior is rewarded Too long a delay between performance and rewards Too many one-size-fits-all rewards Use of one-shot rewards with a short-lived motivational impact Continued use of demotivating practices such as layoffs, across-the-board raises and cuts, and excessive executive compensation

Rucker Plan

•A ratio is calculated expressing the value of production required for each dollar of the total wage bill. •Production savings are split similarly to the Scanlon plan, including the emergency fund.

Compensation: Why does it matter?

A well-designed compensation system can help achieve and sustain competitive advantage. Poorly designed compensation systems can undermine organizational success. Incentive plans led to risky behavior in the financial industry.

Mechanics of a Comparable-Worth Plan

Adopt a single "gender neutral" point job evaluation plan for all jobs within a unit. •The key is a single job evaluation plan for dissimilar job content. All jobs with equal job evaluation results should be paid the same. •If total points are equal, wage rates must also be equal. Identify the percent of male/female employees in each job group. •A group of positions with similar duties, requiring similar qualifications, filled by similar recruiting practices, and paid under the same schedule. The wage-to-job evaluation point ratio should be based on the wages paid for male-dominated jobs.

Disparate Treatment

Applies different standards to different employees. •Asking women but not men if they plan to have children. Unequal treatment may prove intention to discriminate. If a woman must have higher performance to be promoted, that is disparate treatment.

Types of Individual Incentive Plans

Differences can be reduced to variations along two dimensions. •The way the standard is set and the way wages are tied to output. There are four general categories of plans. •The most frequently implemented is a straight piecework system. •Two common plans set standards based on time per unit and tie incentives directly to level of output. •Standard hour plans and Bedeaux plans. •Two plans provide variable incentives as a function of units of production per time period. •Taylor plans and the Merrick system. •Three plans provide for variable incentives linked to a standard expressed as a time period per unit of production. The Halsey 50-50 method, the Rowan plan, and the Gantt plan.

FLSA

Major Provisions: minimum wage, hours of work including overtime, child labor In addition, FLSA requires that records be kept of employees, their hours worked, and their pay. •Employers have paid billions of dollars resulting from FLSA lawsuits and enforcement activity by the DOL Wage and Hour Division.

Types of Pay Discrimination

•Access discrimination - the denial of jobs, promotions, or training opportunities to qualified women or minorities. •Valuation discrimination - looks at the pay women and minorities receive for the jobs they perform. •Hinges on the standard of equal pay for equal work. •Many believe it should include comparable worth. •The standard should be equal pay for work of comparable worth. •Also called pay equality or gender equality. •Existing federal laws do not support this standard. Several states have enacted laws that require comparable-worth standards for state and local government employees.

Definition of skill, effort, responsibility, working conditions....

•Skill - experience, training, education, and ability as measured by the performance requirements of a particular job. •Effort - mental or physical - the degree, not type, expended on the job. •Responsibility - degree of accountability required of the job. •Working conditions - the physical surroundings and hazards of the job.

Define Compensation: Shareholder's Perspective

•Some stockholders say using stock to pay employees creates a sense of ownership while others say it dilutes shareholder wealth. •Stockholders have an interest in linking executive pay to performance.

Cash Compensation: COLA

Cost of living adjustments (COLA) to base wages may be based on: •Changes in what other employers are paying for the same work. •Changes in living costs. •Changes in experience or skill.

Define Compensation: Society's Perspective

•Some see pay (and benefits in general) as a measure of justice, such as pay inequalities between men and women. •Job losses (or gains) in a country is partly a function of labor costs.

Definition of equal - shultz v wheaton glass

•There were two job classifications for the same job - male and female. •The female job paid 10% less than the male job. •The court ruled jobs need only be substantially equal, not identical. •The actual work performed must be used to decide job equality.

Gain Sharing Plan

Strength of reinforcement. •What role should base pay assume relative to incentive pay? Productivity standards. •Most plans use a historical standard. •Changing conditions can render a standard ineffective. Sharing the gains between management and workers. Emergency reserve? Scope of the formula. •Performance measures have moved beyond financial. Ensure reinforced behaviors affect the desired goal. Perceived fairness of the formula. •Increase employee and union participation. Ease of administration. Production variability.

Living Wage

A "living wage" at local levels provides a minimum wage tailored to living costs in an area. •It may only cover city employees or those who do business with the city. •It may only cover base wages, but may require health insurance, vacations, sick pay, job security, and incentives to unionize. Maryland was the first to adopt this ordinance, in 2009. •A Los Angeles law covers contractors and subcontractors with city agreements. Increasingly popular - supported by churches and unions. •Due to narrow tailoring, their real intention may be to reduce any cost savings from outsourcing. •Reduced outsourcing means more local jobs.

Matching Business Strategy and Pay Strategy

A firm must fashion its own unique way of adding value by matching its business strategy and pay strategy. •Companies may have a blend of strategies - innovator, customer focus, and cost cutter. If an organization changes it business strategy, the pay systems should change. •A redesigned IBM focuses on high-growth, high-value segments of IT. •To support the new business strategy, the compensation strategy: •Cut layers of management. •Redesigned jobs to build in flexibility. •Increased incentive pay to differentiate on performance. •Kept a constant eye on costs.

Benefits

Benefits, including income protection, work/life services, and allowances, are also part of total compensation. •Some programs are legally required in the U.S. - unemployment and Social Security. Programs that help employees integrate their work and life responsibilities include: •Time away from work, access to services to meet specific needs, and flexible work arrangements. Allowances often grow out of whatever is in short supply. •Housing and transportation allowances are frequent in China.

Intrinsic vs. Extrinsic Rewards

Intrinsic rewards include things such as: personal achievement, professional growth, sense of pleasure and accomplishment. Extrinsic motivation is based on tangible rewards, is external to the individual and is typically offered by a supervisor or manager.

Source of Competitive Advantage: Three Tests

Is it aligned? Does it differentiate? Does it add value?

Improshare

Improshare (Improved Productivity through Sharing) is easier to administer and to communicate. First, a standard is developed identifying the expected hours required to produce an acceptable level of output. •The standard comes either a time-and-motion study or from a base-period measurement of the performance factor. Any savings arising from production of the output in fewer than expected hours is shared by the firm and the workers. Gains are split 50-50 between employees and management.

Global Views of Compensation

In China, the contemporary meaning of compensation includes returns as well as entitlement. "Compensation" in Japanese means "giving something." •Today, the word hou-syu, meaning "reward," is used. •Teate, meaning "taking care of something," is regarded as compensation that takes care of employees' financial needs. Includes the many allowances still used in many Japanese companies

Cash Compensation: Incentives

Incentives also tie pay increases to performance but differ from merit adjustments. •Incentive programs use objective measures of performance. •Incentives do not increase base wage and must be re-earned. •Incentive payment is known beforehand - such as a commission. •Incentives try to influence future behavior and merit rewards past behavior - a matter of timing. Because incentives are a one-time payment, they are frequently referred to as variable pay. Incentives may be short- or long-term. •Long-term incentives are in the form of stock ownership or options.

Employee Contributions

Or nature of the pay mix is a key decision. •Make the external competitiveness and employee contribution decision jointly.

Pay Discrimination and Dissimilar Jobs

Pay differences for dissimilar jobs may reflect discrimination. •The courts continue to uphold use of market data to justify pay differences for different jobs. •Spaulding v. University of Washington developed the argument in detail. •A second approach to determining pay discrimination on dissimilar jobs hinges on finding a standard to compare the value of jobs. •It must permit jobs with dissimilar content to be declared equal. •It must permit pay differences for dissimilar jobs that are not comparable. Job evaluation has become that standard. •If an employer's own job evaluation study shows that jobs of dissimilar content are of equal value, isn't unequal pay proof of discrimination? •Comparable worth proponents lobby for new laws or voluntary compliance of comparable worth standards.

Gov as Part of the Employment Relationship

People differ in their view of what role government should play in the workplace. •All countries in the world must address these issues. These are government's usual interests in compensation. •Procedures for determining pay are fair (pay discrimination). •Safety nets for unemployed and disadvantaged are sufficient. •Employees are protected from exploitation. Governments are also employers and purchasers. •In addition, they influence economic policy and affect labor supply.

Child Labor and FLSA

Persons under 18 cannot work in hazardous jobs. •Those under 16 cannot be involved in interstate commerce. •Unless working for a parent or guardian. •Other exceptions and limitations exist. Unions publicize the use of child labor outside the U.S. •Government guidelines help importers monitor their subcontractors. A recent labor study found child labor is declining globally. •The steepest decline was those younger than 14 in hazardous conditions.

Prevailing Wage Laws

Prevailing wage laws set pay for work done to produce goods and services contracted by the federal government. •Prevents contractors from using their size to drive down wages. The law was passed in response to conditions on projects such as construction of the Hoover Dam during the Depression. •To comply, contractors must determine the "going rate" for construction labor in the area - the union rate is the "going rate." •It distorts market wages and drives up cost of government projects. New laws extend prevailing-wage coverage to immigrants working in the U.S. under special provisions. •But much of the legislation was passed in the 1930s and 1940s. •Along with The Equal Pay Act and the Civil Rights Act of the 1960s.

Total Compensation Strategy: Steps 3 and 4

Step three is to implement the strategy through the design and execution of the compensation system. •The compensation system translates strategy into practice. Step four, reassess and realign, closes the loop. •This step recognizes that compensation strategy must change to fit changing conditions. •Periodic reassessment is needed to continuously learn, adapt, and improve.

Internal Alignment

Refers to comparisons among jobs or skill levels inside an organization. •Pay relationships affect all three compensation objectives.

External Competitiveness

Refers to pay comparisons with competitors and affect objectives in two ways. •Employees must perceive their pay as competitive or they may leave. •Controlling labor costs keeps the company's products competitive.

Executive Order 11246

Requires affirmative action in hiring women and minorities Compliance steps as it applies to compensation. •Select contractors based on the Federal Contractor Selection System. •Perform a desk audit and get compliance data within 30 days. •If found in compliance, they receive a closure letter. New standards, Directive 307, provides more "flexibility." To protect compliance, do not discriminate and collect and analyze data to document that you do not discriminate.

SMART GOALS

Specific, Measurable, Attainable, Realistic, Timely

Total Compensation Strategy: Step One

Step one is to assess total compensation implications. •Business strategy and competitive dynamics - understand the business. •HR strategy - pay as a supporting player or a catalyst for change? •Culture / Values - pay systems mirror image and reputation. •Social and political context affects compensation choices. •Employee preferences are easily overlooked. •Choice is good, up to a point. •Employees do not always choose well. •Unlimited choice is near impossible to design or manage and may conflict with IRS regulations. •Union preferences - adapt pay strategies to the union-management relationship.

Merit Pay Performance Plans

links increases in base pay to how highly employees are rated on a performance evaluation. •Most use a merit increase grid to determine merit pay on the basis of performance and also position in the salary range, or grade. •Captured by the compa-ratio - employee salary divided by range midpoint. •Ratios are plugged into the grid to determine size of merit increase.

Relational Returns

psychological •Recognition and status, employment security, learning opportunities, challenging work, and so on.

Antitrust Issues

•Apple, Google, Intel, and Adobe agreed not to poach each others employees. •Employees argue this resulted in lost pay. •The two sides settled for $435 million in back pay and legal fees. •A similar case concerning Animation Workers resulted in settlements totaling $168.95 million involving Lucusfilm, Disney, and DreamWorks.

Define Compensation: Manager's Perspective

•Compensation is a major expense that must be managed. •It is also a major determinant of employee attitudes and behaviors.