REWARD SYSTEMS SHOULD ENCOURAGE WORKERS TO:

1. REWARD SYSTEMS SHOULD ENCOURAGE WORKERS TO: JOIN AND REMAIN WITH THE ORGANIZATION Attraction & Membership Loyalty & Longevity PERFORM THEIR JOBS EFFECTIVELY Attendance and Required Behavior Accomplish Specific Results Do What is Expected ENGAGE IN SPONTANEOUS, INNOVATIVE BEHAVIOR ON BEHALF OF THE FIRM Put Themselves Out by “Going the 2nd Mile” Demonstrate Committed “We Care” Behavior Doing the Unexpected, But Highly Appreciated ORGANIZATIONAL CITIZENSHIP BEHAVIOR

2. COMPENSATION ISSUES HOW TO DIVIDE THE COMPENSATION DOLLAR Base Wages Incentives Benefits PAY EQUITY (Fairness) INTERNAL Compared to other jobs within the organization EXTERNAL Compared to similar jobs outside the organization CONFIDENTIALITY OF THE PAY SYSTEM Is it secret, or are the scales and criteria public information?

3. COMPENSATION ISSUES, CONTD NUMBER OF PAY SYSTEMS SEPARATE PAY SYSTEMS FOR DIFFERENT OCCUPATIONAL GROUPS? Different factors determine the worth of these positions (clerical, professional, skilled trades) ONESINGLE PAY SYSTEM FOR THE WHOLE ORGANIZATION This approach appears “fairer” and avoids comparable worth issues ABILITY TO PAY COMPETITIVE WAGES SET PAY AT, ABOVE, ORBELOW THE GOING RATES IN THE INDUSTRY What can we afford? What other compensation do we provide? PHILOSOPHY OF EXECUTIVE COMPENSATION Wage differences between the top and bottom jobs in the firm (“multiples”) PHILOSOPHY OF WAGE PROGRESSION Number of pay grades and amount of overlap between them Number of steps within each grade? On what basis is each move (step) granted? Merit? Seniority? Experience?

4. THREE POSSIBLE BASE PAY SYSTEMS A SINGLE RATE FOR EACH JOB There is no range, this job pays $12.00/hr There are no pay increments awarded for either seniority or merit A PAY RANGE FOR EACH JOB The pay for this job ranges from $11.00 to $17.00/hr On what basis do employees progress through the range? SENIORITY? TIME-IN-GRADE? MERIT? How large should each step or increment be? $.50? $1.00? $2.00? A PAY GRADE SYSTEM Several jobs are grouped together into a single pay grade All these jobs will share a common pay range Painters, mechanics, and truck drivers are paid from $10.50 to 16.85/hr

5. INTERNAL JOB EVALUATION METHODS RANKING Manager rank-orders all jobs in descending order of importance Used in small organizations with a limited number of different jobs CLASSIFICATION SYSTEM Jobs are grouped together into clusters with similar difficulty A generic “description” is written for each cluster or grade (classification) US Postal Service…all jobs are slotted into one of 16 job grades FACTOR COMPARISONS Key jobs selected and ranked on four or five job factors (skills, effort, resp, work cond) Allocate the base wage for each key job across factors (eg, $4 for skill, $3 for effort, etc) Assemble benchmarks into a manual which can be used to set pay for other non-key jobs POINT SYSTEM Establish criteria (compensable factors) on which to evaluate all jobs Write degree descriptions which illustrate the variability of demand for each factor Assign weights to each factor; then assign points to each degree descriptor Assemble into a point manual, which can act as a standard to evaluate all jobs The more points allocated to the job, the higher the base wage should be

6. FACTOR COMPARISONS PROCEDURES SELECT KEY JOBS (well-known jobs which we believe are fairly-paid) CREATE RANK ORDERINGS OF THE KEY JOBS WITHIN EACH OF THE UNIVERSAL COMPENSABLE FACTORS Skills Effort (Physical and Mental) Responsibility Working Conditions ALLOCATE THE KEY JOB PAY ACROSS THE COMPENSABLE FACTORS How much of the total wage do you pay for “skills?” …How much for “effort?” CREATE A FACTOR COMPARISON MANUAL USING YOUR MONETARY ALLOCATIONS TO BENCHMARK THE VALUE OF EACH KEY JOB. USE THIS FACTOR COMPARISON “MANUAL” TO ASSIGN BASE PAY VALUES TO THE NON-KEY JOBS WITHIN THE ORGANIZATION. THE FACTOR COMPARISON SYSTEM COMPARES JOBS TO JOBS…THERE REALLY ISN’T ANYTHING SPECIFIC IN THE MANUAL TO PRECISELY DEFINE WHAT “SKILLS” IS.

7. FACTOR COMPARISONS KEY JOBS“Fair” Base Pay Rate Systems Programmer $ 20/hr Plumber $ 18/hr Carpenter $ 17/hr Painter $ 14/hr Office Secretary $ 13/hr BENCHMARKS SKILLEFFORTRESPONSIBWORK COND Programmer $ 10 Plumber $ 6 Programmer $ 6 Plumber $ 4.50 Secretary $ 6 Carpenter $ 5.50 Secretary $ 4.50 Painter $ 4 Carpenter $ 5 Painter $ 5 Carpenter $ 3.50 Carpenter $ 3 Plumber $ 4.50 Programmer $ 3 Plumber $ 3 Secretary $ 1.50 Painter $ 3 Secretary $ 1 Painter $ 2 Programmer $ 1

8. POINT METHOD PROCEDURES Establish criteria (more specific examples of compensable factors) on which to evaluate all jobs Write degree descriptions to illustrate the variability of demand for each factor Assign weights to each factor Assign points to each degree descriptor in harmony with the weightings Assemble these descriptions and points into a manual, which can act as a standard to evaluate all jobs Validate the manual by evaluating “KEY JOBS” on each criterion. Allocate the corresponding points, run a regression analysis on the assigned points and the “fair” base pay for each key job. If the regression is a good statistical fit, and at least 90% of the key jobs stay within 10% of the calculated regression line, the manual has been validated, and can be used to assign base pay rates to all non-key jobs in the organization. The more points allocated to the job, the higher the base wage should be.

9. STRATEGIES FOR HANDLING DEVIATIONS ABOVE AND BELOW THE RECOMMENDED BASE PAY RATE GREEN CIRCLE RATES RAISE PAY UP AS SOON AS POSSIBLE TO THE APPROPRIATE LEVEL GOLD CIRCLE RATES LEAVE RATE AS IS…DO NOT ADJUST…CONTINUE GIVING RAISES & COLAs SILVER CIRCLE RATES LEAVE RATE AS IS…DO NOT ADJUST, CONTINUE COLAs BUT NOT RAISES RED CIRCLE RATES MUST BRING RATES DOWN TO THE PROPER LEVEL

10. RED CIRCLE STRATEGIES BRING RATES IMMEDIATELY DOWN INTO LINE Give proper notification first PAY A “LUMP SUM” SETTLEMENT Bring rates into line, but pay a one-time severance settlement PROVIDE AN “ADDER” SUPPLEMENT Bring rates into line, but issue a supplemental check each pay period that is gradually reduced over time FREEZE PAY RATE IMMEDIATELY No raises given for seniority or COLA Eventually, the entire organizational pay structure will rise (due to COLAs and wage surveys) which will bring the pay rate back into range, at which time the worker will again get raises and COLAs. HELP THE WORKER TRANSFER TO A HIGHER-RATED JOB

11. COMPENSATION SURVEYS • Needed to attract and retain workers with scarce skills • Develops a sense of external equity and fairness • Helps the firm maintain an adequate pay structure DETERMINING THE SCOPE OF THE SURVEY Where are we having trouble retaining workers? Where are market rates likely to be different from internal rates? Which jobs are the most difficult to fill? Where are we adding new positions to our organization?

12. SHOULD WE USE STANDARD WAGE SURVEYS? PROS: Minimal time investment needed for the individual firm Data is based on large samples – adequate representation Surveys conducted by experts…people who know how to do it Data is summarized, categorized, easy to interpret CONS: There may be a fee (cost) for access to the data You can’t select the specific companies surveyed Can’t control the type of data reported (which jobs? benefits?) Data summaries may mask differences you want to examine

13. COLLECTING YOUR OWN WAGE SURVEY DATA PHONE INTERVIEW -- (easiest) + Quick and relatively easy to do + Job content can be clarified to ensure the jobs are comparable + Can build rapport with respondent over time. Future contacts will be easier. - Puts a burden on the responder to reply immediately (to a possible stranger) - May yield incomplete answers because the respondent didn’t anticipate your call - Long phone calls are not welcome. You can’t get much data in five minutes. MAILED QUESTIONNAIRE -- (most common) + Can collect data on many different job titles, benefits, etc + Responses aren’t rushed – allows time for careful thought before answering - Response rates may be very low - Misunderstanding or confusion about comparable jobs cannot be clarified - Only gathers responses to specific questions posed - if you forgot to ask – too bad!

14. COLLECTING WAGE SURVEY DATA, CONTD INTERVIEW – (most reliable) + Can ask questions, clarify job titles, etc + Gathers data with minimum impact on respondent + Builds relationships which can make future data exchange easier - Very time consuming to make and set appointments, conduct interviews, etc - Costly method; the expense of travel, etc CONFERENCE -- (least used, but promising) + Takes advantage of professional meetings and conferences of HR personnel + Agenda of jobs to be reviewed, etc. established ahead of time—people come prepared + Face-to-face meetings allow clarification and detailed discussion of jobs, benefits, etc - Meetings can be time consuming and tiring, after a day of conference activities - Determining when and where to gather requires coordination with several other firms

15. THE WAGE SURVEY PACKAGE • Introductory letter or contact • Explain purpose and solicit cooperation • Assure confidentiality • Offer to share a summary of results INFORMATION PROVIDED Job titles and summary of duties section INFORMATION SOUGHT Comparable job titles in the surveyed organization Base pay ranges (bottom, midpoint, top) Benefits (is the medical, pension, etc. contributory?) Incentives (how large and based on what?) ADDITIONAL CONSIDERATIONS Use of stratified samples? Will reminders be sent?

16. HOW TO ENCOURAGE EXCELLENCE? ARE WE TAKING FULL ADVANTAGE OF THE REWARDS WE CONTROL? HAVE WE THOUGHT THROUGH THE FULL IMPACT THAT OUR REWARD SYSTEM HAS ON THE ORGANIZATION? DO EMPLOYEES HIGHLY VALUE THE REWARDS WE MAKE AVAILABLE TO THEM? DO EMPLOYEES KNOW WHAT THEY MUST DO TO OBTAIN THESE REWARDS? IN SHORT, DO WE REWARD EXCELLENCE OR MEDOCRITY?

17. USE INCENTIVE PAY TO REWARD: • PRODUCTIVITY • ACHIEVEMENTS & ACCOMPLISHMENTS • ACQUISITION OF NEW SKILLS • LONGEVITY WITH THE FIRM HOW TO ADMINISTER INCENTIVE PAY A. ADD IT TO THE REGULAR PAYCHECK ONCE ACQUIRED…FOREVER PAID…NEVER IS “EARNED” AGAIN INCENTIVE PAY MIXED WITH BASE PAY…WORKERS LOSE MOTIVATION B. PAY IT ALL OUT AS A LUMP-SUM AT ONE TIME LARGE CASH OUTFLOWS ARE DIFFICULT FOR THE FIRM TO MANAGE OPPOSED BY UNIONS BECAUSE ANNUAL WAGES DON’T GROW

18. “INCENTIVE” PLANS AND PERFORMANCE-BASED REWARDS -- 1 1. SENIORITY & LONGEVITY SYSTEMS • Rewards loyalty to the firm…not productivity or performance • Workforce more likely to possess obsolete skills • Increments must be granted each year (no limit or “cap”) 2. ACQUIRED SKILLS & KNOWLEDGE INCENTIVES • The size of pay increments for each added skill • Labor costs go up…but does productivity improve? • Once all skills are mastered…what motivates the worker? • There are no rewards for work performance

19. “INCENTIVE” PLANS AND PERFORMANCE-BASED REWARDS -- 2 3. PIECE RATES & COMMISSIONS • Setting “fair” standards • Changing standards and rates • Who controls work outcomes? • Are there rewards for all the essential duties of the job? WHEN IS IT FEASIBLE TO USE PIECE RATES? 1. UNITS OF WORK ARE EASY TO DISTINGUISH AND MEASURE 2. QUALITY IS OF LESSER IMPORTANCE THAN QUANTITY 3. WORKER INVOLVEMENT IS A MAJOR DETERMINANT OF PRODUCTIVITY 4. THE WORKER CONTROLS WORK SPEED…NOT MACHINE-PACED 5. CLOSE SUPERVISION IS IMPRACTICAL 6. CHANGES IN WORK PROCESSES ARE INFREQUENT 7. YOU HAVE EXPERTS TO SET AND EVALUATE YOUR WORK STANDARDS 8. COMPETITION REQUIRES THAT UNIT LABOR COSTS BE PREDICTABLE

20. “INCENTIVE” PLANS AND PERFORMANCE-BASED REWARDS -- 3 • MERIT REVIEW PLANS WHY DO MERIT PLANS FAIL? (HAMNER, 75) • Appraisal ratings seem invalid or biased • APPROPRIATE MEASURES? • OBJECTIVITY OR RATERS? • Pay adjustments not seen as being related to performance • Supervisors more concerned about satisfaction than performance • Incentives offered (type and size) aren’t motivating • ARE THESE REWARDS HIGHLY DESIRED? • SMALL INCREMENTS DO NOT MOTIVATE • Usually added to base pay as a percentage • EARNED ONCE…KEPT FOREVER • Trust and openness about pay and merit increases is very low

21. “INCENTIVE” PLANS AND PERFORMANCE-BASED REWARDS -- 4 5. SUGGESTION SYSTEMS • Origin of the idea…who should get the credit? • Some workers can’t write their ideas down • Does management follow up on the ideas submitted? • Supervisors criticized…suggests they’re incompetent 6. COST-REDUCTION (GAINSHARING) PLANS • SCANLON, KAISER, RUCKER, IMPROSHARE • Sensitive cost data must be revealed to workers • Middle management is left out • Unions use the system to criticize management • Usually a complex formula for distributing rewards • Weakened link between rewards & individual performance

22. “INCENTIVE” PLANS AND PERFORMANCE-BASED REWARDS -- 5 7. PROFIT-SHARING PLANS • Is there a real link to worker performance? • Impact of economic decline…what happens to motivation? • Determining the formula for distribution 8. STOCK OWNERSHIP PLANS • Dilution of control over the company • Impact of changes in the tax laws and economic cycles • Any real link to worker performance? • SPECIAL CONTESTS AND AWARDS ABSENTEEISM, SALES PROMOTIONS, OUTSTANDING SERVICE AWARDS • Are the consequences of the spirit of competition anticipated? JEALOUSY, UNCOOPERATIVENESS, COMPETITION WITHIN TEAMS AND GROUPS • Only the “Best” receives a reward…what about # 2? • Awards are often seen as “rights” (I earned it!), not as gifts

23. FOR INCENTIVE SYSTEMS TO BE SUCCESSFUL • PERFORMANCE INDICATORS MUST BE CLEARLY DEFINED • STANDARDS MUST BE COMMUNICATED TO WORKERS • WORKERS MUST BE ABLE TO INFLUENCE PERFORMANCE ACHIEVEMENT • PERFORMANCE MUST BE ACCURATELY EVALUATED • REWARDS MUST BE BASED ON WORKER PERFORMANCE • REWARDS OFFERED MUST BE HIGHLY VALUED BY WORKERS • WORKERS AND MANAGEMENT MUST TRUST EACH OTHER

24. LEGALLY REQUIRED BENEFITS SOCIAL SECURITY -- 40 Quarters –Earn $500+ per qtr RETIREMENT DISABILITY SURVIVOR HEALTH INSURANCE UNEMPLOYMENT COMPENSATION – 26 wks + 13 NO-FAULT JOB LOSS WORKER’S COMPENSATION JOB-RELATED INJURIES

25. EXPECTED BENEFITS PAYMENT FOR TIME NOT WORKED HOLIDAYS VACATIONS SICK PAY FUNERAL LEAVE, ETC. INSURANCE PLANS HEALTH DENTAL VISION LIFE RETIREMENT PLANS PENSION

26. BENEFITS LEGISLATION REVIEW 1911 – WORKER’S COMPENSATION BENEFITS FOR ON-THE-JOB INJURIES 1935 – UNEMPLOYMENT COMPENSATION NO-FAULT LOSS OF JOB BENEFITS; 6.2% of first $7000, w/ 5.4% to State 1935 – SOCIAL SECURITY ACT 7.65% paid by employee, matched by employer; 13.2% for self-employed 1974 – EMPLOYEE RETIREMENT INCOME & SECURITY ACT (ERISA) EMPLOYERS MUST SET ASIDE PENSION OBLIGATIONS ANNUALLY 1985 – CONSOLIDATED OMNIBUS BUDGET RECONCILIATION ACT (COBRA) >20+ Employees; Separated workers can stay on medical insurance for 18 months 1993 – FAMILY AND MEDICAL LEAVE ACT >50+ Employees; Unpaid leave for up to 12 weeks for family/medical emergencies

27. RETIREMENT PLANS SOCIAL SECURITY – mandated by the federal government PRIVATE PENSION PLANS DEFINED BENEFIT vs DEFINED CONTRIBUTION PLANS CONTRIBUTORY vs NONCONTRIBUTORY PLANS INIDIVIDUAL RETIREMENT ACCOUNTS (IRAs) PROFIT SHARING PLANS EMPLOYEE STOCK PLANS Stock Grants Stock Options ESOPs EMPLOYEE RETIREMENT INCOME SECURITY ACT of 1974 (ERISA) ADEQUATE FUNDING OF PRIVATE PENSION PLANS VESTING REQUIREMENTS REPORTING & DISCLOSURE

28. FAMILY & MEDICAL LEAVE ACT - 1993 ORGANIZATIONS WITH 50 OR MORE EMPLOYEES EMPLOYED FOR ONE YEAR PRIOR TO LEAVE REQUEST UP TO 12 WEEKS OF UNPAID LEAVE FOR: CHILDBIRTH ADOPTION SERIOUSLY ILL FAMILY MEMBER (Child, Spouse, Parent) EMPLOYEE’S OWN ILLNESS EMPLOYERS MUST CONTINUE HEALTH COVERAGE MUST ALLOW RETURN TO SAME/COMPARABLE POSITION “KEY” EMPLOYEES EXEMPTED (Highest paid 10%)

29. NON-FINANCIAL COMPENSATION THE JOB ITSELF CHALLENGING MEANINGFUL RESPONSIBLE POTENTIAL FOR ADVANCEMENT INTRINSICALLY REWARDING THE WORK ENVIRONMENT COMPETENT SUPERVISION CONGENIAL COWORKERS APPROPRIATE STATUS SYMBOLS ENLIGHTENED MANAGERIAL PHILOSOPHY & PROGRAMS

30. ENLIGHTENED PROGRAMS WORK SCHEDULES COMPRESSED WORKWEEK FLEXTIME JOB SHARING/PART-TIME WORK TELECOMMUTING/WORK-AT-HOME INNOVATIVE COMPANY POLICIES ALL-SALARY WORKFORCE OVERTIME FOR EXEMPT EMPLOYEES SABBATICALS DAYCARE & ELDERCARE BENEFITS COMMUTER ALLOWANCES CAFETERIA BENEFIT PLANS

31. FLEXIBLE BENEFIT PLANS(CAFETERIA BENEFIT PLANS) TYPES OF FLEXIBLE PLANS CORE MODULAR ( BASE + PACKAGES) FLEXIBLE SPENDING ACCOUNTS HEALTH SAVINGS ACCOUNTS ADVANTAGES CAPS OR CONTAINS BENEFIT COSTS RAISES CONSCIOUSNESS RE: BENEFIT COSTS PROVIDES WORKERS ONLY THE BENEFITS THEY DESIRE LIMITATIONS COST OF BENEFITS FLUCTUATES (ADVERSE SELECTION) PEOPLE MAKE IRRESPONSIBLE DECISIONS IRS RULINGS & TAX LIABILITY ISSUES BOOKKEEPING & ADMINISTRATIVE ISSUES