COMPENSATION AND BENEFITS

COMPENSATION AND BENEFITS GERALD WILLIAM C. PARAGAS 14 APRIL 2012

MANAGING COMPENSATION • According to Sherman (1996), the compensation program must be tailored to the needs of an organization and its employees. Below are the common goals of compensation policy: • To reward employees’ past performance. • To remain competitive in the labor market. • To maintain salary equity among employees

MANAGING COMPENSATION • To motivate employees’ future performance. • To maintain the budget. • To attract new employees. • To reduce unnecessary turnover.

MANAGING COMPENSATION • To actualize these goals stated above, Sherman (1996) enumerated sample policies of compensation: • The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate. • The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities.

MANAGING COMPENSATION • The pay level at which employees may be recruited and the pay differential between new and more senior employees.

MANAGING COMPENSATION

MANAGING COMPENSATION • The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.

MANAGING COMPENSATION • The Pay-For-Performance Standard: • This standard refers to the manager’s role to tie at least some reward to employee effort and performance. Without this standard, motivation to perform with greater effort will be low, resulting in higher wage costs to the organization. (Sherman, 1996)

MANAGING COMPENSATION • This standard is exhibited through merit pay, cash bonuses, incentive pay and gain sharing. Sherman (1996)

MANAGING COMPENSATION • The Motivating Value of Compensation: • Sherman (1996) notes that pay is based on the equity theory wherein pay should be equitable to the contributions of the employee.

MANAGING COMPENSATION • Pay Equity: • This refers to the employee’s perception that compensation received is equal to the value of the work performed. Sherman (1996)

MANAGING COMPENSATION Example: • Sherman (1996) notes that E.A. Savinelli, CEO of Aquatec Chemical International Inc., states that, “An important part of creating an environment in which teamwork is effective, is a pay policy that reflects the true value of work to the overall organization, and helps all members of the team respect one another’s contribution and role.”

MANAGING COMPENSATION • Sherman (1996) also notes that pay equity must be both internally and externally equitable: • Employees must believe that wage rates for jobs within the organization approximate the job’s worth to the organization. • The employer’s wage rates must correspond closely to prevailing market rates for the employee’s occupation.

MANAGING COMPENSATION • Pay Expectancy: • Sherman (1996) based its pay expectancy on the expectancy theory of motivation wherein one’s level of motivation is based on the attractiveness of the reward sought.

MANAGING COMPENSATION PAY EXPECTANCY CONCEPT

MANAGING COMPENSATION • In this regard, the high effort will lead to high performance (expectancy) and high performance will lead to monetary rewards that are appreciated (valued).

MANAGING COMPENSATION • Pay Secrecy: • Sherman (1996) notes that pay schedule can be created in the organization in secrecy. There are various effects of pay secrecy. To wit: • Generates distrust in the compensation system. • Reduces employee motivation. • Inhibits organizational effectiveness.

MANAGING COMPENSATION • Reasons for pay secrecy: • Managers are given greater freedom on compensation management. • Avoid grievances about one’s pay. • Covers up inequities existing within the pay structure. • Misleads employees to believe that there is no direct relationship between pay and performance.

MANAGING COMPENSATION • The concept of pay for Noe (2010): • Pay has a large impact on employee attitudes and behaviors. It influences the kind of employees who are attracted to the organization, and it can be a powerful tool for aligning current employees’ interests with those of the broader organization.

MANAGING COMPENSATION • Second, pay or employee compensation is a significant cost which shows the following table that constitutes 22 percent of the revenues of various industries:

MANAGING COMPENSATION • Pay is considered a sign of status and success. Employees attach great importance to pay decisions when they evaluate their relationship with the organization. Therefore, pay decisions must be carefully managed and communicated.

MANAGING COMPENSATION • Key components of pay structure: • Pay structure is the relative pay of different jobs (job structure) and how much they are paid (pay level). • Pay level is the average pay, including wages, salaries and bonuses of jobs in an organization. • Job structure is the relative pay of jobs in an organization.

MANAGING COMPENSATION • Equity Theory and Fairness: • Noe (2010) states that equity theory’s main implication for managing employee compensation is that employees evaluate their pay by comparing with what others get paid, and their work attitudes and behaviors are influenced by such comparisons.

MANAGING COMPENSATION • Example: A scenario of being well paid in relative terms (as compared to others): • Alex Rodriguez signed a contract with the Texas Rangers baseball team. A provision in that contract for the 2001 to 2004 season states that his base compensation must be at least US$2 Million higher than that of other major league players. However, a second provision states that Alex Rodriguez can void a contract after 2008 season unless his base compensation is again US$1 Million higher than that of his other co-players.

MANAGING COMPENSATION • Another scenario is the employees’ perceptions wherein employees may have different information or make different comparisons than management. Example: • Toyota set a goal of transferring the rates of its wages from the U.S. auto industry to the prevailing wages in the state where each plant is located. This goal has a different interpretation for the employees and the management.

MANAGING COMPENSATION • Developing pay levels: • Noe (2010) has two competitions to which pay to employees are based. To wit: • Product market competition – An organization that has higher labor costs than its product market competitors will need to charge higher average prices for products of similar qualities.

MANAGING COMPENSATION • Example: If labor costs 30 percent of revenues at Company A and B, but company A has labor costs that are 20 percent higher than Company B, we would expect that company A will charge the following: • 0.30 X 0.20 = 0.06 or 6% • Hence, company A will charge product prices 6 percent higher than company B.

MANAGING COMPENSATION • Labor market competition – is the amount an organization needs to pay to compete against other companies to hire similar employees. • Example: Even if a computer company offers the newly graduated electrical engineers the same pay as other computer manufacturers, if automobile manufacturers and other labor market competitors offer salaries of US$5,000 higher, then that computer company will not be able to hire qualified electrical engineers.

MANAGING COMPENSATION • Employees as a Resource: • Organizations should consider their employees not just as cost but as resource in which the organization has invested and from which it expects valuable returns.

MANAGING COMPENSATION • Although controlling costs directly affects an organization’s ability to compete in the product market, the organization’s competitive position can be compromised if costs are kept low at the expense of employee productivity and quality.

MANAGING COMPENSATION • Justification: Having high labor costs than your competitors is not necessarily bad if you also have the best and most effective workforce, one that produces more products of better quality.

MANAGING COMPENSATION • Deciding What to Pay: • Noe (2010) states that there is a strategic decision of whether to pay above or below the market average. • The advantage of paying above the market average is the ability to attract and retain the top talent available, which can translate into a highly effective and productive workforce.

MANAGING COMPENSATION • Justification: Based on the Efficiency Wage Theory which states that wages influence worker productivity.

MANAGING COMPENSATION • Example: Organizations that emphasize decentralized decision making may need higher caliber employees. • Example: Higher pay may also be warranted if the organization has difficulties observing and monitoring its employees’ performance. • Hence, the theory is that employees who are paid more than they would be paid elsewhere will be reluctant to shirk because they wish to retain their good jobs.

MANAGING COMPENSATION • Market Pay Surveys: • Benchmarking is comparing an organization’s practices against those of the competition. • There are several points to be answered: • Who are the key labor market and product market competitors? • Which jobs are included in the survey? The job content must be sufficiently similar.

MANAGING COMPENSATION • Key Jobs and Non Key Jobs: • Key Jobs refer to benchmark jobs, used in pay surveys, that have relatively stable content and are common to many organizations. • Example: Engineering jobs. • Non Key Jobs refer to jobs that are unique to organizations and that cannot be directly valued or compared through the use of market surveys. • Example: Fung Shui consultancies.

MANAGING COMPENSATION • Job Evaluation: • Refers to an administrative procedure used to measure internal job worth. • A job evaluation system composed of compensable factors. These factors are the characteristics of jobs that an organization values and chooses to pay for. To wit:

MANAGING COMPENSATION • Job complexity • Working conditions • Required education • Required experience • Responsibility

MANAGING COMPENSATION • The Point - Factor System: • Job evaluators often apply a weighting scheme to account for the differing importance of the compensable factors to the organization, Noe (2010). The author picked three compensable factors stated below and provided weights for each factor.

MANAGING COMPENSATION • Sherman (1996) created a table called Wage Apportionment for Each Factor by multiplying the weights indicated in the abovementioned table of the Three - Factor Job Evaluation System with the respective monetary values. To wit:

MANAGING COMPENSATION • Developing a Pay Structure: • Job-Based Method is the traditional approach for classifying jobs based on their worth in the organization. Under this method, there are 5 steps in developing a compensation based structure as shown here:

MANAGING COMPENSATION • Job Analysis: • Specific activities performed • Responsibilities and accountabilities • Expected results or outcome of the activities • Reporting relationships • Nature and extent of supervision over the incumbent • Physical conditions of the work area where the job is performed • Physical demands of the job • Work location • Relationships of this job to other jobs in the unit

MANAGING COMPENSATION • A job description usually consists of the following: • Job title • Statement of duties and responsibilities to be performed by the incumbent • Description of the relation of the job to the other jobs in the unit or department • Reporting relationships • Summary of skills, knowledge and abilities, experience, education or training required to successfully perform the job also known as job specifications • Working conditions • Other data unique to this job (job number, salary grade, position number, department number etc.)

MANAGING COMPENSATION • Job Evaluation: • The main objective of the job evaluation process is to establish pay differentials among jobs in an organization. This process will help HR establish the value or worth of the job in the organization, its position in the hierarchy of jobs, and its appropriate pay level.

MANAGING COMPENSATION • Job Evaluation Methods: • Non-quantitative methods, wherein a job as a whole is compared to other jobs to determine its worth in the organization. The non-quantitative methods are: • Ranking Method • Position Classification Method

MANAGING COMPENSATION • Job Evaluation Methods: • Quantitative Methods, wherein a job is broken down into two distinct factors, assigned values and weights and evaluated in a previously set standard rating scale. The quantitative methods are: • Point system • Factor comparison system

COMPENSATION AND BENEFITS