Test 3 Compensation and Benefits Dr. B

How does variable pay affect turnover, when based on individual performance? ....on Group performance?

a. Pay based based on individual performance tends to send low performing employees walking. b. Group incentive plans can lead to higher performance leaving.

What are the FLSA implications for incentive based pay?

Incentive-based pay for non-exempt workers must be included in their regular pay. Because the bonus increases employees' regular pay, the company has to re-calculate any overtime for the period when the bonus was earned. This creates additional payroll administration burdens, making firms reluctant to use gain-sharing plans.

Why are firms increasingly implementing variable pay plans?

It typically increases individual and organizational performance. How we pay > How much

What's a balanced scorecard approach? What factors is it based on?

is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization. Doesn't just look at bottom line for performance evaluation. Factors: Customer satisfaction Employee internal growth and commitment Operational Efficiency in internal processes Financial Measures

What is "position in range" or compa-ration?

means the position of a pay rate relative to all pay rates in a range. Position-in range is normally expressed as a percentile, but may be expressed relative to control points or range zones.

What are the two types of Profit Sharing? Describe them.

o Annual incentive plan: A pay plan that rewards the accomplishment of specific results. Rewards usually are tied to expected results identified at the beginning of the performance cycle. Unlike bonuses, they are not primarily discretionary but may have a discretionary component. o Discretionary bonus plan: A plan in which management determines the size of the bonus pool and the amounts to be allocated to individuals after a performance period. This plan has no predetermined formula or promises and isn't guaranteed

What is the Free Rider problem? How to handle them?

Idea: ind. gets no team bonus if he doesn't also achieve his individual goals [GE] Have clear performance standards.

Group incentive plans should only be used for truly interdependent work because?

If every employee has to reach their goal then social loafing will not take place

When is variable pay appropriate?

Consider stability of corp. performance and measurability of employee tasks.

What is on the third arrow?

Contributions -> Seniority Based -> Performance Based -> Merit Guidelines -> Incentive programs

What are the 3 C's of variable pay design? Explain them

Control: Employee in control of the outcomes. Communicate: Clearly communicate and define goals. Complexity: Low degree of complexity

Pro and Con of Risk Sharing Plan

Employees work harder to earn all of their Base pay. Pay dis-satisfaction can occur.

What is 360 degree rater

Typically rated by all of the following: Self, Supervisor, Vendors, Customers, Peers, Subordinates is positively received by employees. There is an understanding and self awareness and promotes communication and better results. This is typically used for higher level managers.

What is Variable Pay?

pay varies with some measure of individual, team or organizational performance. It must be re-earned

What do courts emphasize about the PA process and system

• Provide specific written instructions/training to managers on how to utilize/complete appraisal • Incorporate clear criteria for evaluating performance - performance dimensions should be written, defined, and clear. • Provide a rational foundation for personnel decisions via adequately developed job descriptions • Require supervisors to provide feedback about appraisal results to employees in Face to face discussion, allowing for employees to respond. • Incorporate a review of performance ratings by higher level supervisors • Consistent treatment across raters, regardless of race, color, religion, sex, and national origin should be evident.

What is Red circle/ Green circle

• Red-circle: this person is too high in their pay range and don't need a raise (or a large one). It needs to stay steady. • Green-circle: this person has plenty of room to get a raise and they are good to go.

How should managers give constructive feedback to an employee?

(FBIREWS) -Describe your FEELINGS. "I am concerned" -Describe BEHAVIORAL observations. Specific examples of poor behavior. -Describe the IMPACT. "When team members are late, the entire group cannot proceed effectively" -Ask for a RESPONSE. "What do you think about what i'm saying here" - Clarify EXPECTATIONS. "Do you understand our firm's expectations about punctuality?" - Inform WHATS NEXT. Make changes and see if it helps the behavior. -Get agreement and SUPPORT.

What is performance management and the process? Why periodic feedback/coaching?

- Continuous process where employees and managers work together to improve performance • Process: you establish expectations, coaching and development, on-going feedback, formal performance review, rewards and recognition

Name 5 of the 10 types of wages

-Base: Fixed based pay -Merit (% or lump): Lump sum increasingly used as alternative to %. It is less expensive for the firm. It is NOT built into base pay. It is viewed as less of an entitlement by the employee. -Gain sharing: an incentive plan in which employees or customers receive benefits directly as a result of cost-saving measures that they initiate or participate in -Profit sharing: Net income/net sales=% -Success sharing (group): generic category of pay add on which is tied to a measure of group performance. Not added into base pay. -Risk-sharing plans: rare, when you temporarily reduce an employee's base pay until you see that they have meet their agreed upon goals -COLA: not a bonus, based on how your location -Individual (incentive) bonus: commission Across the board: not individual or success sharing, but everyone gets it. -LT bonus vs. ST bonus: ST: less than a year, LT: over a year

What are the motivation theories? Define them

-Equity Theory: Employees are motivated when perceived outputs are equal to perceived inputs. -Reinforcement: proposes that you can change someone's behavior by using reinforcement, punishment, and extinction. Rewards are used to reinforce the behavior you want and punishments are used to prevent the behavior you do not want. -Expectancy Theory: proposes an individual will behave or act in a certain way because they are motivated to select a specific behavior over other behaviors due to what they expect the result of that selected behavior will be. -Goal Setting Theory: refers to the effects of setting goals on subsequent performance. Better performance with harder goals. -Agency Theory: need to keep ees in line because they don't own the bus and they'll try to shirk duties; hence importance of variable pay for industry.

Types of Gainshairng

-Scanlon: Includes sales revenue and value of goods in inventory. Typically 50% to employees, 25% to company, and 25% to emergency fund. -Rucker: Incents workers to reduce materials, supplies, and utility costs -Improshare: standard is developed that identifies expected hours required to product an acceptable level of output. This plan is easy to communicate and administer. Incentivized to reduced down time, defect rates, repair time.

What types of rating mistakes can you make?

Halo: An appraised giving favorable ratings to all job duties based on impressive performance in just one job function Horn: Opposite of halo, unfavorable for just one job function. First impression: Developing a negative/ positive opinion of an employee early in the review process that influences later perceptions Recency: Opposite of first impression. The most recent performances influence entire period evaluation Leniency: Consistently rating someone higher than is deserved Severity: The opposite of leniency, rating someone lower than deserved Central Tendency: Avoiding extremes in rating Clone: Giving better ratings to individuals who are like the rater in behavior and or personality Spillover: Continuing to downgrade an employee for performance errors in prior rating periods.

Explain Halsey 50-50 method and Rowan Plan

Halsey: derives its name from the shared split between worker and employer of any savings in direct cost. Rowan: Similar to Halsey that employer and employee share savings from work completed in less than standard time. The major distinction in this plan is that the workers bonus is increased as the time required to complete the task decreases.

What is the level problem?

Loses incentive power if group is too large

Explain Merrick vs Taylor differential plans

Merrick: Sets three piecework rates 1) High for producing exceeding 100 percent of standard 2) medium for production between 83 and 100 percent of standard 3) low for production less than 83 percent Taylor: Two piecework rates. One rate when the worker exceeds the published standard. The other when they are below the standard.

What do employees think about Performance appraisals?

Negatively due to: Goals not clearly defined, didn't know how they were being evaluated, didn't believe their last performance review guided them on how to improve, didn't think reviews could differentiate among good/ average/ poor performers, didn't think doing a good job was recognized.

What are group level incentives?

Pay plans that target the group working collectively towards common goal. variety of performance measures can be used, appropriate only if the work is really interdependent, level problem (loses incentive power if group is too large), and free rider problem (independent gets no team bonus if he doesn't also achieve his individual goals)

What is pay for performance?

Pay varies with some measure of performance. It must be re-earned. It signals movement away from an entitlement mentality, a shift of risk to the employee. Competitive pressures to reduce labor costs. It is also the 3 C's: control, communication, and complexity.

Self Funded gain sharing plans

Specified pay outs only occur after a company reaches a certain profit target

What are examples of Long Term incentives? Who typically gets them? What Financial Metrics can be used to base these upon?

Stock Option. Top level managers are the most likely candidate for these type of incentives. -Income Statement

Why are variable pay plans gaining in popularity?

The ee can dictate to an extent how much they earn and this leads to better results for the employer

What is a straight Piece Rate plan?

The method rewards employees based on their output. A fixed rate of wage is paid for each unit produced, or number of operations completed or job completed.

What is the effect of variable pay (vs. pay level) on employee performance?

a. The challenge is that variable pay can lead employees to neglect other important task. They will focus exclusively on areas covered by the criteria and neglect other important tasks. b. People subject to variable pay for performance spend a lot of time and energy trying to manipulate the criteria in their favor (pleading customers to fill out customer satisfaction survey a certain way), helped by the fact that they often know the specifics of their work better than their superiors do.

What is a Risk Sharing Plan

base pay is temporarily reduced. Shifts part of risk of doing business from company to employee. The base pay is no longer "given" - employees much achieve individual goals to get full base.

What is a Merit Grid? What factors does it consider?

considers employee's performance rating and "position in the page range" Considers: Level of performance, distribution of employees withing their pay range, and merit increase percentages

Strategies to better manage job performance

define expectations; track performance throughout period; on-going feedback/no surprises; select appropriate appraisal format; select raters and train as appropriate; hold managers accountable for doing performance management well; diagnose performance problems and deal with them.

What is an Expatriate?

employees temporarily working and living in a foreign nation.

What is a third country national or (TCN)

expatriates who are citizens of neither the employer's parent country nor the foreign country where they are living and working

How did FAS 123R affect the use of stock options in Exec Comp?

firms must expense stock options

When we say it must be "re-earned" what does that mean?

i. This means that just because you got it once doesn't mean you can get it again. For example, you earn your pay based on how well you have done something this quarter. Just because you may have gotten a certain about last quarter, doesn't mean you'll get the same amount again this quarter. You have to do the same amount of work to get that pay.

What is a Local country national or (LCN)

individuals who are citizens of the foreign country where the parent employer operates

List 2 overall pros and 2 cons of individual incentive plans

o Pros: It helps raise production, yokes labor costs to outputs (helps budgetary control), and less supervision is required. o Cons: requires intensive time motion studies, quality vs. quantity of output, new technology and production methods may be resisted by employees, increased complaints about equipment, unwillingness of experienced workers to train others, and individual competition.

Key factors when designing variable pay plans.

simple objective; clear "line of sight"; for employees; controllable by employees; clear and valid measures; communicate to employees; low complexity.

What is the gender wage gap?

this is occupational segregation, but it isn't as big of an issue as much as it used to be. Women and Men also tend to choose different majors.

What are the advantages and disadvantages of group level incentives?

• Advantages: supports teamwork focus, positive impact on performance, and useful when cooperation is valued. • Disadvantages: line of sight lessened (compared to the individual level), increased turnover of top performers, and increases compensation risk for employees.

What are the 3 different types of rating approaches? Explain them.

• Graphic rating scale: this is the most popular approach because it has good time and cost. It's your typically scale that usually has the rater fill in the 1-5, good, bad or proficient areas. It has average feedback and development and administration. The validity is average. This is for employees who are your typical everyday like of employee. Entry level. • BARS: this is based on behaviors. This has good feedback/development, administration, and validity. It has average time and cost. For routine jobs like CSR where one can see process it takes to create good outcomes. Application exercise. Review Question #1 p 362, BARS (routine tasks) • MBO (Management by Objectives): this has excellent feedback/development and validity. Poor administration and a lover average side of time and cost. It is VERY time consuming. Less routine or certain jobs, where outcome is clear but process is unclear.

What are the 3 Individual Incentive plans?

• Merit Pay: which is more expensive for employers: % folded into base pay or lump sum? Which might employees prefer and why? o Lump sum increasingly used as alternative to %. It is less expensive for the firm. It is NOT built into base pay. It is viewed as less of an entitlement by the employee. • Individual Spot Award: give an example: are the effective? o Recognize special contributions as they occur for project/task, typically for exceptional performance. It is viewed as moderately effective by firms. • Piece Rate: Describe Piece rate plans based on units of production vs. time o Piece rate is when you are paid by how many pieces of something you make. If you don't make the minimum, you will receive the hourly base pay. There is also a piecework incentive, meaning if you make above the standard, you will receive an extra amount per piece.

How should a poor vs. average vs. top performer be rewarded?

• The poorest performer should be awarded ZERO as an increase. • An average performer should be kept whole, consistent with percent change in CPI for that region at least. • The top performer should have some difference that is enough to meaningful