Compensation final exam
a midpoint in a group pf measures, A measure reducing a large amount of data into a single number.
Central tendency
factors that you can be paid for
Compensable factors
compensation approach that links pay to the depth and scope of competencies, that are relevant to doing the work. Typically, used in managerial and professional work, where what us accomplished is difficult to identify.
Competency based structure
Observable behaviors that indicate competency level w/n each set, •They anchor the degree of a competency at each level of complexity of the work and sometimes include scales.
Competency indicators
•translate each core competency into action.
Competency sets
Refers to the work performed and how it gets done.
Content
The underlying knowledge, skills, and behaviors that form success at any level or job are
Core competencies
benefit of balanced scorecard
Data suggests implementing a balanced scorecard approach can have positive impacts on the bottom line and on rating accuracy.
fairness in the amount of reward distributed to employees
Distributive Justice
supply looks at potential:
Employee's
an open-ended performance appraisal format. descriptors used can range from comparisons w/ other employees to adjectives behaviors and goal accomplishment
Essay format
refers to pay comparisons with competitors and affect objectives in two ways 1. Employees must perceive their pay as competitive or they may leave 2. Controlling labor costs keeps the company's products competitive (Look at pay/wage surveys in similar industries)
External competitiveness
Match the BLANK with tasks meeting that format's assumptions.
Format
Help visualize information and may highlight anomalies, or outliers. Shapes can vary but unusual shapes may reflect problems
Frequency distributions
There are two plan types for incentivizing large groups.
Gain sharing and Profit sharing
provides for variable incentives linked to a standard expressed as a time period per unit of production. under this plan a standard time for a task is purposefully set at a level requiring high effort to complete
Gantt plan
inducement offered in advance to influence future performance (ex: sales commission)
Incentive
the systematic process of collecting information that identifies similarities and differences in the work
Job analysis
summary reports that identify, define, and describe the job as it is actually performed
Job description
comparison of jobs within an organization
Job evaluation
(pay level) X (number of employees).
Labor costs
the employment level organizations require. An increase in wage rates will reduce this, other factors constant. The curve is downward sloping.
Labor demand
links increase in base pay to how highly employees are rated on a performance evaluation
Merit pay increases
units of production per time period or time period per unit of production
Method of determination
attitudes, values, self-image
Self-concepts
•holds that employers design pay levels and mix to a signal of kinds of behaviors they seek.
Signaling
Compensation policies work through incentive and sorting effects to either achieve or not achieve company objectives T or F?
True
Competencies are becoming a collection of observable behaviors requiring no inference, assumption or interpretation T or F?
True
Competitors may match offers of higher pay, keeping supply stable T or F?
True
Core competencies are not unique for each company. T or F?
True
Employers will hire until marginal revenue equals the cost associated with employing that person. T or F?
True
Group plans can suffer from the free rider problem. T or F?
True
Group-based plans, particularly gain-sharing plans, may cause organizations to evolve into learning organizations. T or F?
True
Historically, financial measures have been used for team incentive plans T or F?
True
If unemployment is low, higher pay may not increase supply T or F?
True
The most common performance basis is a combination of corporate, unit, and individual objectives. T or F?
True
You CANT pay someone more that what their marginal revenue is T or F?
True
the marginal revenue product model oversimplifies T or F?
True
•Multiple raters maximize reliability. T or F?
True
increase reliability by:
Using multiple raters and average ratings using correlation
most common format, various scale levels are anchored w/ behavioral descriptions directly applicable to jobs being evaluated •Firms hope the BARS format makes evaluations less subjective. •Raters calculate performance as a weighted average.
behaviorally anchored rating scales (BARS)
tendency to rate people in the middle
central tendency error
•common, tendency to rate someone similar to you more positively
clone/ similarity error
•Employers offer higher wages if a job has negative characteristics.
compensating differentials
refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.
compensation
•May be surveyed, or rated by the customer service process.
customer as rater
•Employers in competitive markets are less able to raise prices.
degree of comeptition
1. internal alignment work relationships w/n the organization 2. Core competencies 3. competency sets 4. Behavioral descriptors 5. Competency-based structure
determining the internally based competency structure
Demand focuses on the actions of :
employers
When outcomes are the standard
management by objectives (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. employees performance on the absolute standards is evaluated at the end of the specified period •Each level has objectives which support organizational goals. •Performance rating depends on how well objectives were met.
management by objectives (MBO)
The level of demand that maximizes profits is that level where:
marginal revenue is equal to the wage rate for that hire.
calculate by adding each company's base wage and dividing by the number of companies. - may not accurately reflect the labor market conditions because all employers are given the same weight
mean
measures of central tendency
mean, median
minimizes distortion caused by outliers
median
Differences in individual incentive plans can be reduced to variations along two dimensions:
method of determination and the specified relationship btwn production level and wages
where the pay-policy line crosses the center of the grade
midpoint of range
The upward sloping supply assumes that as pay increases, BLANK people are willing to take a job
more
a ranking job evaluation method that involves comparing all possible pairs of jobs under study. The person who "wins" the most paired comparisons is ranked at the top of the group
paired comparison ranking
· - one of the classes, levels, or groups into which jobs of the same or similar values are grouped for compensation purposes o All jobs in a pay grade have the same pay range
pay grades
the range of pay rates from minimum to maximum set for a pay grade or class. it puts limits on the rates an employer will pay for a particular job.
pay range
Representation of the Organization pay-level policy relative to what competitors pay for similar jobs
pay-policy line
•Undistorted perspective (not always true) but may have no appraisal experience, creating group tension or yields to leniency. •Can be just as biased or more biased as other sources
peer as rater
the salary mid-way between the minimum and maximum rates of a salary range. Is usually set to correspond to the pay-policy line and represents the rate paid for satisfactory performance on the job.
range midpoint
large sd means
rates are spread out
small sd means
rates are tightly bunched at the center
type of performance appraisal format that requires that raters evaluate employees on absolute measurements scales that include varying levels of performance
rating format
weighting more recent info more heavily
recency
internal perspective of pay range
reflects the differences in performance or experince an employer wishes to recognize with pay
demonstration of expertise
skills
continuing to hold someone accountable or rate someone poorly for past performance
spillover
The most common statistical measure of variation, how tightly all the rates are clustered around the mean. -tells how similar or dissimilar market rate are from each other
standard deviation
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 these plans is set based on the completion of a task in some expected time period
standard hour plan
characterized by (1) one or more performance standards being developed and defined for the appraiser and (2) each performance measure having a measurement scale indicating varying levels of performance on that dimension. Appraisers rate appraisees by checking the point on the scale that best represents the appraisees performance level. Vary in the extent to which anchors on the scale are defined. -uses adjectives to anchor the continuum.
standard rating scales
For highly uncertain tasks
standard rating scales may work.
The biggest employee complaint about the appraisal process is that they are too:
subjective
Problem w/ subordinate ratings:
subordinates don't feel comfortable doing it especially if there is a problematic relationship, notoriously positively bias/inflated
•More than 80% of input but prone to halo and leniency errors. Can also be severity or strictness error, most common
supervisor as rater
tie wages to output on one-to-one basis (wages are constant function of production) or wages as a function of production level
the specified relationship btwn production level and wages
big problem with these comparative/ranking methods:
these don't tell us anything about the actual level of an individual's performance
general disposition to behave in a certain way
traits
(other things being equal)The higher the pay level relative to competitors, the greater the relative costs to provide similar products or services. T or F?
true
pay tied to productivity or some measure that can vary with the firms profitability
variable pay plans
calculate by adding base wages for all employees and dividing by the number of employees -gives equal weight to each individual employees wage
weighted mean
diminishing marginal productivity occurs
when each new worker has a progressively smaller share of production factors available
Format choice depends on the types of tasks performed:
•A task continuum ranges from routine to uncertain. •Different formats require assumptions about task accomplishment.
Pay level and pay mix focus on two objectives.
•Control costs and increase revenues. •Attract and retain employees.
Team performance standards are typically based on:
•Productivity improvements. •Customer satisfaction measures. •Financial performance . •Quality of goods and services.
To increase reliability is to understand and reduce differences:
•Quantitative job analysis helps. •Take care not to eliminate rich responses while eliminating differences. •Training can improve reliability.
a pay range allows a manager to:
•Recognize individual performance differences with pay. •Meet employees' expectations that their pay will increase over time. •Encourage employees to remain with the organization.
The more popular rating formats have two common elements.
•Require raters to evaluate on some absolute standard. •Each standard is measured on a scale. •Performance is described along a continuum from good to bad. •Descriptors used to anchor the continuum is the difference in rating scales. •Descriptors may be adjectives, behaviors, or outcomes
Two important differences in the Scanlon and Rucker plans.
•Rucker plans tie incentives to a variety of savings, not just labor. •Rucker plans are more linkable with individual incentive plans.
job content ranks jobs based on:
•Skills required. •Complexity of tasks. •Problem solving . •And, or, responsibility.
For less routine tasks
•an MBO strategy may be appropriate.
Pay procedures are more likely to be perceived as fair:
1. !f they are consistently applied to all employees 2. If employees participated in the process 3. If appeals procedures are included 4. If the data used are accurate
Two major components are vital to success of Scanlon and Rucker plans
1. A productivity norm requires effective measure of the base-year and employee acceptance. 2.•Effective work/productivity/bonus committees whose primary function is to evaluate suggestions for improving productivity and/or cutting costs.
Advantages of skill based plans
1. Readily accepted by employees 2. provides strong motivation to increase individual skill 3. Flexibility
job evaluation method that involves ordering the job description alternately at each extreme. all jobs are considered an agreement is reached on which is the most valuable and then the least valuable. Evaluators alternate btwn the next most and next least valued and so on until the jobs have been ordered
Alternation ranking
may provide most accurate ratings of a person's performance
peer ratings
The two key product market factors that affect the ability of an organization to change what it charges for its products are:
1. Product demand 2. degree of comeptition
Key Elements in a Gain Sharing Plan
1.Strength of reinforcement. 2. Productivity standards. 3. Sharing the gains between management and workers. 4. Scope of the formula. 5. Perceived fairness of the formula. 6. Ease of administration. 7. produciton variability
if someone's pay policy is in the 75th percentile nationally that means that:
75% of all pay rates are BELOW that point and 25% are ABOVE that point
•Most use a merit increase BLANK 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.
Grid
provides for variable incentives linked to a standard expressed as a time period per unit of production. Derive sits name from the shared split btwn worker and employer for any savings in direct cost
Halsey 50-50 method
•The theory holds that higher earnings flow to those who improve their potential productivity by investing in themselves. •It assumes people are paid at the value of their marginal product. (supply)
Human Capital
an ordering of jobs based on their content or relative value
Job structure
accumulated information
Knowledge
a measure of the consistency of results among various analysts, methods, sources of data, or over time. •A necessary, but not sufficient, condition for validity.
Reliability
•Ratings may be too lenient and unreliable.
Self as rater
basic units of knowledge employees must master, to perform the work, satisfy customers, and achieve business objectives. can be arranged by levels into a skill structure.
Skill Block
Individual incentive plans have better potential for delivering higher productivity. T or F?
True
Never attach self ratings to administrative outcomes T or F?
True
Optimal overlap between grades ought to be large enough to induce employees to seek promotion. T or F?
True
: an employee is really good at one thing, so the manager generalizes it to everything else
halo error
: an employee makes one bad mistake and it generalizes to everything else
horn error
Gain sharing identifies areas where employees have some BLANK on savings - such as reduced scrap
impact
(labor supply) the behavior model assumes potential employees:
1. are seeking jobs 2. Possess accurate information about all job openings 3. have no barriers to mobility
quantitative measures of job performance
Performance metrics
Competencies derive from BLANK beliefs about the organization and its strategic intent.
Leadership's
when incremental income generated by an additional employee equals the wage rate it is called the
Marginal revenue product
where labor demand and labor supply cross.
Market rate
a reward that recognizes outstanding past performance. it can be given in the form of lump-sum payments, or as increments to base pay. Programs are commonly designed to pay different amounts (often at different times) depending on the level of performance
Merit pay plans
quartiles are often used to set:
Pay ranges
pay that varies with some 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
Pay-for-performance plans
provides for variable incentives linked to a standard expressed as a time period per unit of production. Similar to Halsey plan, but in this plan worker's bonus increases as the time required to complete the task decreases
Rowan plan
an incentive plan (e.g. profit sharing or gainsharing) in which employee's base wage matches the market wage and variable pay adds on during successful years because pay is not reduced in bad years, employees bear little risk
Success sharing
· the degree to which pay influences individual and aggregate motivation among the employees we have at any point in time 9the effect of pay upon performance
incentive affect
BLANK incentives yield higher productivity gains, but BLANK incentives often are right when team coordination is the issue
individual, group
external perspective of pay range
it is a control device
recurrent thoughts that drive behavior
motives
•More reliable if anonymous.
subordinate as rater
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.
individual incentive plans
the additional output associated with the employment of one additional person, with other production factors held constant.
Marginal product of labor
the additional revenue generated when the firm employs one additional person, with other production factors held constant.
Marginal revenue of labor
shows external market pay survey data as a function of internal job evaluation points. Usually obtained using regression analysis. By plugging job evaluation points into the regression equation, you can get the predicted pay for each job.
Market pay line
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 piece-work rates are set (1) high-production over 100% of standard (2) medium-production btwn 83-100% of standard, and (3) low- production less than 83% of standard
Merrick System/plan
group cost-savings plan in which cost reductions due to employee efforts are shared w/ employees. has a more complex formula for determining employee incentive bonuses. •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.
Rucker plan
a incentive metric that calculates the dollar value of goods produced in inventory
Sales value of production SVOP
most frequently implemented incentive system in which rate determination is based on units of production per time period; wages vary directly as a constant function of production level. Easily comprehended by employees
Straight piecework system
performance appraisal format in which the rater compares or ranks each employee relative to each other employee
Straight ranking
factors that shape external competitiveness (decisions on pay level and pay mix)
1. competition in the labor market for poeple with various skills (labor market factors ) 2. competition in the product and service markets (product market factors) 3. Characteristics unique to each organization. (organization factors)actors that shape external competitiveness (decisions on pay level and pay mix)
manager using the marginal revenue product model must:
1. determine pay level set by market forces 2. determine the marginal revenue generated by eahc new hire
an incentive plan in which employees'[ base wages are set below a specified level (80% of market wage) and incentive earnings are used to raise wages above the base. in good years an employee's incentive plan will more than makeup for the 20% shortfall, giving the employee a pay premium. because employees assume some of the risk, risk-sharing pays more generously than success sharing plans in good years
Risk-sharing
the effect that pay can have on the compensation of the workforce; how an organization pays can result in sorting effects Different types of pay strategies may cause different types of people to apply to and stay with an organization
sorting affect
one-time award for exceptional performance. are given for exceptional performance, often on special projects or for performance exceeding expectation.
spot award/bonus
Two sources of fairness and employee acceptance
Procedural and distributive justice
concept concerned with the process used to make and implement decisions about pay. It suggests that the way pay decisions are made and implemented may be as important to employees as the results of the decisions
Procedural justice
caps the pay level an employer can set.
Product market
Measure of variation, Order all data points from lowest to highest and then convert to percentages
Quartiles and percentiles
performance appraisal format that requires that the rater compares employees, determining the relative ordering of the group on some performance measure.
Ranking formats (norm reference Methods)
job value:
Refers to the worth of the work.
Theoretical minimum wage level of a job seeker below which they will not accept a job, no matter how attractive the other attributes. - Some believe job seekers take the first job offer whose pay meets their reservation wage. -May be above or below market wage. (supply)
Reservation wage
This theory holds that high wages increase efficiency and lower labor costs if they attract high-quality applicants, lower turnover, increase worker effort, reduce shirking, and reduce the need for supervision.
efficiency wage
when interpreting survey results you must:
1. verify the data 2. determine and improve accuracy of match 3. Identify anomalies
· Grades and ranges offer flexibility to deal with pressures from external markets and differences among organizations including:
o Differences in quality (KSA's) among individuals applying for work o Differences in the productivity or value of these quality variations o Differences in the mix of pay forms competitors use
in a merit pay increase:
•hat the employee does this year is rewarded every year the employee remains with the employer.
Theories of labor markets begin with four basic assumptions:
1. Employers always seek to maximize profits 2. People are homogenous and interchangeable 3. Pay rates reflect all costs associated with employment 4. Competitive markets give no advantage in paying mom-market rate
the steps involved in developing an internal job structure:
1. Identify internal work relationships within the organization 2. Job analysis - the systematic process of collecting information that identifies similarities and differences in the work 3. Job description - summary reports that identify, define, and describe the job as it is actually performed 4. Job evaluation - comparison of jobs within an organization 5. Job structure - an ordering of jobs based on their content or relative value
Merit pay concerns:
1. Merit pay increases fixed compensation costs over time. 2. Merit pay becomes costly if too many high performance ratings are awarded.(forced distribution bad) 3. Merit pay differentials are too small to motivate performance 4. Individual performance is a deficient measure when work is interdependent and requires cooperation to obtain objectives. 5.Assumes performance will stay at that same level overtime, you are still paying them for the high level of performance they may not repeat
A good format scores well on five dimensions.
1. employee development potential 2. administrative ease 3. personnel research potential 4. cost 5. validity
individual incentive plan risks
1. not widely used 2. don't fit many jobs in the economy 3. Incentive plans can lead to unexpected, and undesired, behaviors. 4. A common problem is employees and managers end up in conflict. 5. Systems often focus on one small part of what it takes for the company to succeed, so employees only focus on that part
performance evaluation process
1.Employees should be involved in every stage of the process. 2.Raters should be trained in the use of the appraisal system. 3.Raters should be motivated to rate accurately. 4.Raters should maintain a diary of employee performance. 5.Raters should conduct a performance diagnosis in advance. 6. Feedback to employees should be timely.
factors that directly impact performance (incentive affect)
1.Organizational design(support, resources, etc.) 2.Motivation 3.Ability Pay/comp: affects motivation so it affects performance indirectly
a corporate wide, overall performance measure typically incorporating financial results, process improvements, customer service, and innovation
Balanced scorecard approach
•Merit pay increases, unlike variable pay, is added into BLANK BLANK.
Base pay
individual incentive plan that provides a variation on straight piecework and standard hour plans. instead of timing an entire task, this plan requires the 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
Bedeaux plan
work when employees are evaluated against specific performance expectations.
Behaviorally anchored rating scales
Individual incentive plan benefit:
There is strong evidence that individual incentives, on average, have substantial positive effects on performance.
payment of entire increase (typically merit-based) at one time. Because amount is not factored into base pay, any benefits tied to to base pay do not increase. Viewed less as an entitlement than merit pay.Over time, these can be considerably less expensive than merit pay.
Merit bonus (lump-sum bonus/reward)
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
Taylor plan
: 1st impression cnabe very strong especially if they are bias
first impression
hill curve) compare their performance to another (Poor average average above average outstanding)
forced distribution
incentive plans that are based on some measure of group performance, rather than individual performance. taking data on a past year as a base, group incentive plans may focus on cost savings (Scanlon and Ruckers) or on profit increases (profit-sharing) as a standard for distributing a portion of the accrued funds among relevant employees •Studies report positive results. •Can lead to the sorting effect.
gain sharing plans
differnce btwn gainsharing and profit sharing
gain sharing uses operating measures and profit sharing uses financial measures
The objective is for all jobs similar for pay purposes to be in a :
grade
•he established standard measures team performance to determine the magnitude of the incentive pay.
group incentive plans
the pay relationships among jobs or skill levels w/n an organization; focuses attention on employee and management acceptance of those relationships. It involves establishing equal pay for jobs of equal worth and acceptable pay differentials for jobs of unequal worth (refers to the comparisons among jobs or skill levels inside an organization; pay relationships affect all three compensation objectives Jobs and people's skills are compared in terms of their relative contributions to the organization's business objectives)
internal consistency/alignment
Data from product market competitors likely receive more 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. •The supply of labor is not responsive to changes in pay.
disadvantages of skill based plans
•Employers may have an average wage higher than competitors. •Unless flexibility permits a leaner staff, labor costs will be higher. •Some employers require employees to stay at a rate for a certain time. •Labor-intensive products may create a competitive disadvantage.
The purpose of the evaluation affects the rating process.
•If the purpose is to divide up merit increases, ratings are less accurate. •Required feedback to subordinates yields less accuracy than secrecy. •Accuracy improves then raters must justify scores in writing.
The greater interest in variable pay can be traced to two trends:
•Increasing competition from foreign producers forces U.S. firms to cut costs and/or increase productivity. •Today's fast-paced business environment means employees must be willing to adjust what they do and how they do it.
Some key elements in the performance evaluation total process.
•Know the culture and strategy to figure the key factors to measure. •Have up to date job descriptions so employees know expectations. •Informal, periodic discussions with employees identifies barriers. •Focus on behavior, not the person.
disadvantages of team incentive plans
•Teams come in many varieties. •The "level problem" creates difficulty equalizing when assigning rewards. •Some plans are simply too complex. •Control and fairness are key issues. •Team-based plans are simply not well communicated. -nature of teams (temporary) -hard to see how individual behavior contributes to perforamance
All group incentive plans have common features.
•The size of the group that participates in the plan. •The standard against which performance is compared. •The payout schedule.
valu based structure focuses on:
•The skills, tasks, and responsibilities of a job to the organization's goals.(external market value may be included)
For merit pay to live up to its potential, it must be managed:
•This requires a complete overhaul of the way raises are allocated. •Unless the reward difference is larger for every increment in performance, many employees will say, "Why bother?".
