Econ 490 Incentive compensation final

fair labor standards act of 1938 (FLSA)

covers all employees of companies engaged in interstate commerce or in the production of goods for interstate commerce major provisions include -minimum wage -hours worked -child labor records must be kept of employees, their hours worked, and their pay

employee retirement income security act (ERISA)

defined benefit plan funding requirement does not require that employers offer a pension plan - if they have one it has to comply with ERISA -employees are eligible for pension plans from age 21 -employers may require one to three years of service vesting: requirement for employee contributions and employer contributions portability: ERISA does not require mandatory portability of private pensions Pension Benefit Guaranty Corporation -employers must buy insurance from PBGC who guarantee payment of vested benefits Pension Protection Act of 2006 -allows employees in publicly traded companies to sell off any employer stock purchased through deferrals or after tax contributions -identifies 'at risk' plans that are less than 70% funded

skill

experience, training, education, ability as measured by job performance requirements

cost leadership vs differentiation

focus on efficiencies and cost reductions vs providing something unique at a premium price companies can use both strategies at the same time -amazon

long term incentive plan definition

focus on performance beyond 1 year recent growth in LTI plans is spurred by a desire to motivate longer-term value creation -little evidence that stock ownership leads to better corporate performance -some evidence that stock ownership increases internal growth June 2005 companies required to report stock options as an expense example: stock option

medical and medically related payments

general health care short and long term disability salary continuation plans/long germ disability plans dental insurance and vision care flexible spending account

employee stock ownership plans

generate long term effects foster employee willingness to participate in decision making process have little impact on productivity or profit DISADVANTAGES -cannot affect stock price -no link between their activitiy and stock price electrix inc is an electrical appliances manufacturing company. it distributes shares of sock to its employees by placing the stock in a trust managed on the employees behalf. which pay for performance plan has been implemented

clone error

giving better ratings to individuals who are like the rater in behavior and/or personality

types of benefits

legally required benefits retirement savings plan payments life insurance medical and medically related payments payments for time not worked miscellaneous benefits

three branches of gov

legislative judicial executive

disadvantages of group incentive plans

line of sight may be lessened, that is employees may find it more difficult to see how their individual performance affects their incentive payouts may lead to increased turnover among top individual performers who are discouraged because they must share with lesser contributors increase compensation risk to employees because of lower income stability; may influence some applicants to apply for jobs where base pay is larger compensation component

under 16 labor law exemptions

non hazard jobs for a business entirely owned by the child's parents or guardian, babysitting, acting, and delivering newspapers

improshare

numerator: actual hours worked denominator: total standard value hours develops standard to identify expected hours required to produce an acceptable level of output savings are shared by firms and workers

rucker plan

numerator: labor cost denominator: value added ratio expressing the value of production for each dollar of total wage bill

recency error

opposite of first impression error allowing good or bad performance at the end of the review period to play too large a role in determining entire period employee rating

horn error

opposite of halo downgrading employee across all performance dimensions because of poor performance in one dimension

severity error

opposite of leniency error rating individuals consistently lower than is deserved

internal processes balanced score card

optimizing internal processes and improving performance

standard hour plan

paid per hour

payments for time not worked

paid time off during work hours for rest periods, lunch, etc. payment for time not worked -vacations/holidays -paid sick leave -jury duty maternity leave

employee benefits

part of the total compensation package, other than pay for time worked, provided to employees in whole or in part by employer payments

reactor

passive, react, no clear strategy

lag the market pay policy

paying below market rates may not attract employees unless coupled with higher future returns -stock ownership in a high tech start up firm

defined benefit

pension plan that guarantees a specified level of retirement income employer sets up a pension fund to invest contributions such plans must meet funding requirements of employee retirement income security act (ERISA) of 1974 employer must contribute enough for the plan to cover all benefits to be paid out to retirees employer promises the employee a monthly benefit after retirement focused on income (usually for life) employer is responsible for funding and bears the funding risk

compa ratio

percent of merit pay can depend on compa ratio employee's salary divided by the midpoint of his or her salary range

performance plans

performance shares and performance units -driven by financial earnings or return measures -pay for meeting or exceeding specific goals

working conditions

physical surroundings and hazards of a job inside/outside; heat/cold; poor ventilation

individual incentive plans

piecework rate standard hour plan jeff owns and manages a small electronics repair store. he determines the time required by his employees to complete each task assigned by him. when employees complete the repairs in less time they receive an amount of pay equal to that time determined by him. in this scenario what pay for performance plan is jeff using? standard hour plan --> individual incentive plan

advantages of group incentive plans

positive impact on organization and individual performance of about 5 to 10% per year easier to develop performance measures than it is for individual plans signals that cooperation, both within and across groups, is a desired behavior teamwork meets with enthusiastic support from most employees may increase participation of employees in decision making process

analyzer

protect and create

defender

protect, maintain, stable

performance appraisal methods

rankings rating management by objectives (MBO) balanced score cared

sources of evaluation information - various rater errors

recognizing and understanding errors is the first step to communicating and building a more effective appraisal process halo error horn error first impression error recency error leniency error severity error central tendency error clone error spillover error

performance metrics

results-oriented or behaviorally oriented quantifiable =/ objective most companies use multiple measures

difference between scanlon/rucker plans from individual incentive plans

rucker plans tie incentives to a variety of savings scanlon plan focuses on labor savings rucker plans are more closely related to linkages with individual incentive plans

sources of evaluation 360 degree performance evaluation

self customers managers peers subordinates

prevailing wage laws

set pay for work done to produce goods and services contracted by the federal government -minimum wage that must be paid for work done on covered government projects or purchases

salary continuation plans and long term disability plans

short term illness is covered by paid time off short term disability pays a percentage of an employee's salary for temporary disability long term disability plans take over when short term plans expire: usually underwritten by insurance -provides 60-70% of pay for two years, up to life

sources of evaluation information (pros and cons) SUBORDINATE as rater

should be administered anonymously grade inflation otherwise

compensation strategy

should be aligned with a firm's business strategy and HR strategy -what should the compensation strategy focus on if a firm has a low-cost strategy? -what if the firm has a differentiation strategy

scanlon plan

single ratio volume numerator: payroll costs denominator: net sales lower labor costs without lowering the level of the firm's activity -incentives derived as a function of the ratio between labor costs and sales value of production (SVOP -sales rev and value of inventory)

employers must pay employees or independent contractors

social security, unemployment and workers comp, taxes on wages and salaries, unless the worker is an independent contractor

rating

standard rating behaviorally anchored rating scales (BARS) require raters to evaluate employees against a standard rather than against each other each performance standard is measured on a scale so variation falls along a continuum -descriptors (adjectives/behaviors/outcomes) anchoring the continuum provide the major difference in rating scale

broad based option plans

stock grants and they are versatile create a culture of ownership shareholder pushback

piecework rate

straight piecework plan differential piece rates -taylor play: 2 piecework rates -merrick plan: 3 piecework rates

rankings

straight ranking alternation ranking paired comparison

advantages of pay for individual performance

substantial impact that raises productivity, lowers production costs, and increases earnings of workers less direct supervision is required to maintain reasonable levels of output than under payment by time in most cases, systems of payments by results, if accompanied by improved organizational and work measurement, enable labor costs to be estimated more accurately than under payment by time - helps costing and budgetary control

definition of: equal, skill, effort, responsibility, working conditions

supreme court ruled that the equal work standard required only that jobs be substantially equal, not identical when job descriptions differed from actual employee duties, the courts held that the actual work performed must be used to decide whether jobs are substantially equal for an employer to support a claim of unequal work 1. the effort/skill/responsibility must be substantially greater in one of the jobs compared 2. tasks with the extra effort/skill/responsibility must consume a significant amount of time for all employees wages in question 3. extra effort/skill/responsiblity must have a value commensurate with the pay differential

sources of evaluation information (pros and cons) CUSTOMER as rater

survey and mystery shoppers rate performance

how to classify employee or independent contractor employees or independent contractors

tax law (IRS) and ERISA are relevant two general criteria 1. how much control the firm exercises 2. the type and permanency of the relationship TO DETERMINE IF IT IS AN EMPLOYEE OR NOT 1. INDEPENDENCE? 2. HOW LONG ?

equal employment opportunity (EEO)

the condition in which all individuals have an equal chance for employment, regardless of their race, color, religion, sex, age, disability, or national origin enforcement agency: EEOC

access discrimination

the denial of particular jobs, promotions on training opportunities to qualified women or minorities

pay discrimination and dissimilar jobs

the supreme court determined that pay differences for dissimilar jobs may reflect discrimination -courts uphold the use of market data to justify pay differences in different jobs -find a standard to compare the value of jobs (jobs of comparable worth) -it must permit dissimilar to be declared equal -it must permit pay differences for dissimilar jobs that are not comparable -job evaluation has become that standard

sources of evaluation information (pros and cons) SUPERVISORS as raters

they have experience rating employees and know the job requirements they are not likely to observe employees on a daily basis

forced distribution (pros and cons) forced ranking

top grading stack ranking initiated at GE: vitality curve (20-70-10) employees are ranked in groups

retirement and savings plan payments

two generic pension plans -defined benefit -defined contribution employee retirement income security act many companies shifted to 401k plans - dollar contribution is known and controllable

management by objectives (MBO)

uses outcomes as the standard of performance measure -performance objective -results did you achieve the results yes or no?

individual spot awards

usually awarded for exceptional performance awarded on the spot larger companies use formal mechanisms for recognition and guidelines on the size of the award smaller companies may be more casual about recognition and more subjective about deciding the size of the award

other EEO laws

-1967 age discrimination in employment act (ADEA) -1990 americans with disability act (ADA) -the lilly ledbetter fair pay act

minimum wage

-FLSA establishes a minimum wage of $7.25 per hour as of July 2014 (since 2009) - FLSA permits lower "training wage" paid to workers under age of 20 for up to 90 days; ~85% minimum wage -tipped wages

overtime

-FLSA requires overtime rate at 1.5 times employees' usual hourly rate for time spent on work above 40 hr/week -usual hourly rate includes regular bonuses, and piece-rate payments -overtime pay is required, whether or not the employer specifically asked or expected the employee to work more than 40 hours -if the employer knows the employee is working overtime but does not pay overtime rate, the employer may be violating FLSA -stock plan income is exempt -gifts/special-occasion bonuses are not included

types of pay discrimination

-access discrimination -valuation discrimination

merit bonuses

-based on performance and received as an end-of-year bonus -not built into base pay ADVANTAGE Can be less expensive than merit pay over the long run. DISADVANTAGE Employees are not fond of merit bonuses. -essentially freezing base pay

merit pay cons

-can be expensive some evidence shows that merit pay does not have a small, but significant, impact on performance managing merit pay -improve accuracy of performance rating -allocate enough money to truly reward performance -make sure the size of the merit increase differentiates across performance levels employees need to value the merit increase so that the motivation effect comes into play

generic strategies

-cost leadership vs differentiation -defender, prospector, analyzer, reactor

key elements in a good performance evaluation process

-culture and strategy determine key factors to measure -involve employees in all stages of the process -raters should be trained and employee understand the system -raters are motivated to rate accurately -raters should maintain a diary of employee performance -feedback must be timely

unemployment

-do not have a job -have actively looked for work in the prior 4 weeks -are currently available for work -persons who were not working and were waiting to be recalled to a job from which they had been temporarily laid off -receiving benefits from the unemployment insurance program has no bearing on whether a person is classified as unemployed

learning and growth (innovation) balanced score card

education of personnel, growth strategies

miscellaneous benefits

employee continuous education child care elder care domestic partner benefits legal insurance

nonexempt employees

employees covered by FLSA requirements for overtime pay manual laborers or other blue collar workers police, firefighters, paramedics, other first responders NONEXEMPT GETS OVERTIME

benefits planning and design issues

employees ranking of benefits decide the role of benefits and integrate them into the overall compensation package -external competitiveness and adequacy of benefits -weighing between benefit adequacy and cost effectiveness

defined contribution

employer sets up an investment account for each participating employee and specifies the size of the investment into that account when the employee retires, the pension is based on their contribution, employer contributions, gains/losses in stock investments contribution, not the ultimate benefit, that is funded focused on saving/accumulation individual typically has choice over how to invest, how much to save, but bears investment risk

profit sharing plans

-focus on predetermined index of profitability -most employees do not feel their jobs have a direct impact on profits -the trend is to combine the best of gain-sharing and profit-sharing plans type of incentive pay in which payments are a percentage of an organization's profits and do not become part of its employees' base salary it costs less when the organization is experiencing financial difficulties DISADVANTAGE -employees cannot see how their productivity impacts company productivity/impacts company stock price/link with company profits -- brendan, the HR manager at Baretta and co is trying to implement an effective group incentive plan which measures increases in productivity and effectiveness and distributes a portion of its earnings to all employees. in this case brendan should aplpy the incentive scheme of profit sharing plans QVO financial, an auditing form, distributes a portion of the profits resulting from improvements in productivity and efficiency among its employees. if the company enjoys an improvement of $45,000, 60% of the improvement might be the company's share. the other 40% would be distributed among the employees in the company. Which incentive plan is being exemplified in this scenario?

equal pay act of 1963 (FLSA)

-forbids wage discrimination on the basis of gender if employees perform equal work in the same firm -jobs are considered equal if requiring equal skill, effort, and responsibility performed under similar working conditions -pay differences legal if affirmative defense seniority merit or quality of performance quality or quantity of production factors other than sex

pay for group performance

-group incentive plans -gain sharing plans -profit sharing plans

tipped wages

-if the employees' tips combined with the employers' direct wages of at least $2.13 per hour do not equal the federal minimum hourly wage, the employer must make up the difference -employee engages in an occupation in which they customarily and regularly receive more than $30 per month in tips -many states require higher direct wage amounts for tipped employees

Title VII of the civil rights act of 1964

-major law regulating employment opportunity in the US -prohibits employers from discriminating based on race, color, religion, sex, age, disability, or national origin -applies to organizations that employ 15 or more -employers may not retaliate

legally required benefits

-social security -unemployment insurance -workers' compensation -family and medical leave -health care

child labor

-under 18 cannot work hazardous occupations defined by DOL - under 16 cannot work in jobs involving interstate commerce, except for a parent or a guardian

long term incentive plans

1. employee stock ownership plans 2. performance plans 3. broad based option plans

benefit administration issues: four major issues in setting up benefit package

1. which groups of employees are covered 2. how much choice should employees have among an array of benefits -advantages and disadvantages of flexible benefit programs 3. how should benefits be financed 4. does the company fully comply with tax codes and legal requirements

life insurance

3/4 of employees have paid life insurance typically one to two times annual salary most premiums are paid by the employer nearly all are forfeitable upon quitting some offer a basic life coverage with optional additional coverage available

cost of employee benefits

Employer cost for employee compensation averaged $35.87 per hour worked in December 2017. Wages and salaries averaged $24.49 per hour worked and accounted for 68.3 percent of these costs, while benefit costs averaged $11.38 and accounted for the remaining 31.7% employee comp: $35.87 wages/salaries: $24.49 (68.3%) benefit costs: $11.38 (31.7%)

merit pay

a merit pay system links increases in base pay (merit increases) to how highly employees are rated on a performance evaluation employee achievements are rewarded every year the employee remains on the job compa ratio julianna, the HR manager at hudson corp, is facing criticism from the company's high performing employees for the lack of an effective incentive scheme that rewards them with the necessary pay. the company has avoided paying out incentives in addition to employees' monthly salary in an attempt to minimize costs. but after the last annual meeting, it has been decided to pay employees an incentive amount based on their performance ratings and their compa ratio. in this scenario what pay for performance plan is julianna applying for

proactive approach to compliance

a proactive compensation manager can -join professional associations to stay informed on emerging issues/act in concert to inform and influence public and legislative opinion -constantly review compensation practices and their results - consult with legal counsel fair treatment of all employees is the goal of a good pay system and legislation

standard rating

adjectives are used as anchors communication skills -1 well above average -2 above average -3 average -4 below average -5 well below average

financial balanced score card

all indicators related to profitability and financial goals

halo error

appraiser gives favorable ratings to all job duties based on impressive performance in just one job function ex. someone who hates tardiness rates a prompt subordinate high across all dimensions because they are on time

customer balanced score card

attraction of new customers, improving relations with customers, improving customer image

central tendency error

avoiding extremes in ratings across employees

behaviorally anchored rating scales (BARS)

behaviors are used as descriptors teamwork -exceeds standards (explanation 1, 2) -meets standards (explanation 3, 4) -does not meet standards (explanation 6, 7) less categories than standard rating meeting standards

straight ranking

best next best next best

alternation ranking

best performer worst performer next best next worst next best next worst

combining plans

combination plans - mixing individual and group plans variable pay may depend on individual, group, and company performance self funding plans

differentiation strategy

committed to agile, risk taking, innovative people market based pay reward innovation in products/processes or services broad job specifications Google Amazon Microsoft

group incentive plans

common features -size of the group that participates in the plan -standard against which performance is compared -payout schedule

paired comparison

comparing two people against each other everyone is compared against everyone

sources of evaluation information (pros and cons) SELF as rater

complete knowledge of their own performance the most lenient *used for development rather than administration

disparate impact

condition in which employment practices are seemingly neutral yet disproportionately exclude a protected group from employment opportunities IMPACT - SEEMS FAIR/NEUTRAL BUT SOMEONE IS EXCLUDED

leniency error

consistently rating someone higher than is deserved

spillover error

continuing to downgrade an employee for performance errors in prior rating periods

social security

definition: flat payroll tax on employees and employers -federal old age, survivors, disability and health insurance (OASDHI) program (Social Security) funding source: payroll tax -shared by employers and employees -current: 6.2% for employer and 6.2% for employee -medicare rate: 1.45% for employer and 1.45% for employee workers' eligibility: -old age (retirement insurance) -survivor's insurance -disability insurance -health insurance -qualify for benefits by working in covered employment -earning a specified amount per quarter (2018: $1320) other important features: -most US employees are covered (90%) -maximum of 4 credits for any year -retirement benefits: required number of credits is 40 (max credits = 10 years of work)

health care

definition: for employers with at least 50 employees, payment of a fee to the federal government if the employer does not meet conditions for providing health insurance benefits -Patient Protection and Affordable Care Act -medium/large companies choose between offering health insurance that meets its standards or paying a penalty funding source workers' eligibility other important features

unemployment insurance

definition: payroll tax on employers that depends on state requirements and experience rating -federally mandated program administered by states to minimize unemployment hardships funding source: -payroll tax -federal and state tax on employers workers' eligibility: -state requirement for wages earned or time worked during an established period of time ("base period" -deemed unemployed through no fault of your own other important features -size of unemployment tax imposed depends on employer's experience rating number of employees the company has laid off in the past and cost of providing them unemployment benefits careful workforce planning can minimize layoffs and keep their experience rating favorable

workers' compensation

definition: provide coverage according to state requirements, premiums depend on experience rating -state programs that provide benefits to workers who suffer work-related injuries or illness, or to their survivors -medical care -temporary or permanent disability payments -survivor death benefits -rehabilitation and training services funding source: -some states have a single state fund -most states allow employers to purchase coverage from private insurance companies -most also permit self-funding by employers workers' eligibility: no fault liability -employee does not need to show that the employer was grossly negligent in order to receive compensation -employer is protected from lawsuits other important features: cost of workers' compensation insurance depend on -kinds of occupations involved: low risk occupations have low premiums -state where company is located -employer's experience rating: unfavorable experience ratings lead to higher insurance premiums

family and medical leave

definition: up to 12 weeks of unpaid leave for childbirth, adoption, or serious illness -requires organization with 50+ employees to provide up to 12 weeks of unpaid leave funding source: unpaid workers' eligibility: -after childbirth/adoption -take care of a seriously ill family member -personal serious illness other important features: -employers must guarantee these employees the same or comparable job upon return -when employees experience pregnancy and childbirth employers must also comply with the pregnancy discrimination act treat her in same way as any other disabled employee if employee is temporarily unable to perform her job due to pregnancy

responsibility

degree of accountability required in the job performance

first impression error

developing negative or positive opinion of an employee early in the review period and allowing that to negatively or positively influence all later performance perception

companies commonly vary the pay policies for

different job families different forms of pay different business units

different mix at

different organization levels

disparate treatment

differing treatment of individuals based on their race, color, religion, sex, national origin, age, or disability status TREATMENT - BAD TREATMENT OF MINORITY GROUP

Four fifth rule

disparate impact evidence of discrimination if the hiring rate for a minority group is less than four-fifths the hiring rate for the majority group

evidence of discrimination

disparate treatment and disparate impact four fifths rule

low cost strategy

do more with less cost control productivity and efficiency variable pay (pay for perf) narrow work specifications McDonalds

disadvantages of pay for individual performance

greater conflict may emerge between employees seeking to maximize output and managers concerned about deteriorating QUALITY levels attempts to introduce new technology may be resisted by employees concerned about the impact on production standards reduced willingness of employees to suggest new production methods for fear of subsequent increase in production standards increased complaints that equipment is poorly maintained, hindering employee efforts to earn larger incentives increased turnover among new employees discouraged by the unwillingness of experienced workers to cooperate in on the job training elevated levels of mistrust between workers and management

prospector

growth, new opportunities, innovation, risk taking

legislative branch

headed by congress has a number of laws governing HR activity creates laws

executive branch

headed by the president responsible for enforcing the laws

judicial brach

headed by the supreme court interprets the law supreme court is the court of final appeal trials

employee benefit inclusions

health insurance paid leave pension workers' comp etc.

pay mix strategies

how managers position their organization's pay against competitors is changing performance driven market watch work life balance security (commitment) volatility of stock value changes total pay mix

conventional pay level policies pay policy

lead the market lag the market match the market newer policies emphasize flexibility pay level policy affects performance

gain-sharing plans

look at cost components of the income ledger, identifying areas where employees have an impact -reduced scrap -lower labor costs -reduced utility costs three gain sharing formulas -scanlon plans -rucker plan -improshare a multi-national organization uses a gainsharing program in which employees receive a bonus if the ratio of labor costs to the sales value of production is below a set standard. This incentive plan is referred to as the gain sharing plan --> scanlon plan jeff owns and manages a small electronics repair store. he determines the time required by his employees to complete each task assigned by him. when employees complete the repairs in less time they receive an amount of pay equal to that time determined by him. in this scenario what pay for performance plan is jeff using? gain sharing plan: improshare

valuation discriminiation

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 valuation discrimination does not define correctly: -can occur when men and women hold different jobs with the same comparable worth -equal pay for comparable worth -also called pay equity or gender pay equity -not supported by federal law but several state laws require a comparable worth standard

balanced score card

looks at what contributes value to an organization -customer (time, quality, performance, service, cost) -internal business processes (processes that influence customer satisfaction) -innovation and learning (operating efficiency, employee satisfaction, continuous improvement) -financial (profitability, growth, shareholder value)

exempt employees

managers, outside salespeople, other employees not covered by FLSA requirement for overtime pay not covered by overtime legislation/companies do not need to pay overtime salary test 913/week

lead the market pay policy

maximize the ability to attract and retain quality employees -minimize dissatisfaction with pay -may offset less attractive job features linked to reduced turnover, quit rates and absenteeism negative effects include -the need to increase current employees wages -may mask negative job attributes

sources of evaluation information (pros and cons) PEERS as raters

may have more interaction with the employee and can provide important performance information they may not have rating experience and could be lenient

effort

mental or physical the degree of effort actually performed on the job

pay for individual performance

merit pay merit bonus individual spot awards individual incentive plans

living wage

minimum wage tailored to living costs at local levels -narrower coverage than minimum wage laws -cover only city (or state) employees, or state/city contractors -cover only base wages not part of FLSA LIVING WAGE IS NOT PART OF FAIR LABOR STANDARD ACT

match the market pay policy

most common policy match rates paid by competitors pay with competition policy -match wage costs to product competitors -attract applicants equal to the labor market competitors