Management 351 – Class 9

Management 351 – Class 9 • Chapters 10 and 11 • Announcements/Other Items • Syllabus changes • Dropping chapter 9 • Class 9: Ch 10 and 11 • Class 10: Ch 12 and 17 • Class 11: Final covering 7, 8, 10, 11, 12 and 17 • Papers and Matewan • Test change: dropping Question #8

Chapter 10 – Managing Compensation • Herzberg’s Two-Factor Theory (parallels Maslow’s hierarchy of needs) Motivating Factors: With them I am motivated, productive, satisfied, etc. Motivating Factors: Without them I AM NOT resentful. But I’m not motivated either! Hygiene Factors: With them I AM NOT resentful. But I’m not happy either! Hygiene Factors: Without them I will be resentful and unproductive

What is Compensation • Think in terms of “Total Compensation” • Base cash compensation • “Pay Incentives” or variable cash compensation • Non-cash compensation (recognition) • Non-cash benefits • Cash-equivalent benefits

Designing a Compensation System • Step One: Determining Pay Philosophy • Internal versus External Equity • Put another way, Internal Equity versus External Competitiveness • Distributive Justice Model • We exchange our time/labor for pay • Labor Market Model: set by supply and demand • Balancing Equity Model: internal issues may rule

Supply and Demand • Labor is a commodity, like gasoline… • Pick a gas company: what do you pay for gas? • Pick a point on that distribution: what is fair? • Say you had the time: what would you choose to spend? • What are you willing to pay: ‘low’, ‘mid’ or ‘high’?

Fixed Versus Variable Pay • Is “risk sharing” a good idea? • Can and should “line” employees have the same risk as “manager” or “executives?” • How do we set the risk level? • Where do we pay relative to market: • Overall • Base • Variable • Benefits

Variable Pay Plans • Don’t forget: you get what you pay for. • Don’t forget: you get what you pay for. • Why they fail: • No link from effort to reward • “Funny money” makes financials meaningless • Rewards only drive performance in the short run (once spent, they’re forgotten)

Performance Versus Membership • Performance-contingent plans: • Vary based on individual or work group achievement • Can be highly focused (team or group) • Membership-contingent plans: • Pay the same to people in a job or work group regardless of individual or group performance • Distinction driven by culture and goals of the play plan

Job Versus Individual Pay • “We pay the position, not the person.” • Powell’s Books example: • PhD selling books is paid as a PhD • Current labor issues: • 9% versus 19% wage increase • No benefits change versus increase in co-pays and deductibles • Does this make sense?????

Options • Knowledge and skill-based pay: • Pay for knowledge to encourage cross training • Promotes flexibility • Provides incentive to learn more skills • Egalitarian and Elitist pay systems: • Egalitarian: everyone gets the same system • Elitist: equivalent to a ‘black box’ system

Egalitarian versus Elitism • Egalitarian (worldwide trending this way): • More flexible • Reduce barriers (equity) between peers through elimination of status-based perks • More common in highly competitive markets • Elitist • More stable workforce because employees only make more by moving up • More prevalent among older companies

Pay Issues • Below versus above market • Competitive strategy (and Herzberg) • Blue chips have gone “above” market to create elitism, attract/retain the “cream of the crop” and minimize turnover (golden handcuffs) • Above more common in large, established companies with ready cash and little equity • Below are more common in smaller, startup companies that can put emphasis on a ‘liquidity event’

Pay Issues • Monetary versus non-monetary rewards • Monetary: • Emphasize individual achievement • Volatile markets and low job security • Emphasis on sales versus customer service • Pushing competitive internal climate • Non-monetary: • Emphasize commitment to the organization • Stable workforce with an emphasis on customer service and loyalty (versus fast sales growth) • Companies that want to create more cooperation internally

Pay Issues • Open versus secret pay • Public or quasi public companies and agencies publish • May be illegal to restrict people from talking • What do we have to hide??? • Secret pay creates impression that there is something to hide (“Who’s getting rich?” • Open pay eliminates perceptions driven by suspicion and speculation

Pay Issues • Centralization versus decentralization • Centralized offers efficiency and the ability to hire specialists • Centralized may not be as responsive • Centralized may not be as ‘clued in’ to what happens in the ‘field’ • Centralized may promote and ‘us versus them’ feeling

Compensation Tools • Two basic approaches • Job-based compensation plans • Point factor theory • Looks at ‘compensable factors’ in each job • Market based compensation plans • Looks at the job’s worth or value relative to the ‘market’

Compensation Tools – Grades and Ranges Mid-Point Spread Jobs Max Mid Range Spread Max Rate of Pay

Compensation Tools – Job Based Plans • Conduct job analysis • Write job descriptions • Determine job specifications (what people do to be successful in the work) • Rate the ‘worth’ of jobs using ‘compensable factors’ • Create job hierarchy • Classify jobs by grade and level

Compensation Tools – Market Based Plans • Identify benchmark or key jobs • Establish pay policy (philosophy) • Uh, then what????

Legal Considerations • FLSA (1938) • Primarily impacts exempt/nonexempt decisions • Addresses minimum wage and overtime • Equal Pay Act • Raises comparable worth questions • Internal Revenue Code • Particularly an issue with “contractors”

Chapter 11 – Rewarding Performance • “Incentive” systems are designed to incent or drive behavior • First question: what organizational outcome are you trying to achieve? • “Do only what you get paid for syndrome” • Erosion of teamwork?

Problems and Challenges • Lack of control • Many things are beyond individual control – therefore, should they be excluded from consideration? • Difficulties in measuring “performance” • Psychological contracts • Pre-set expectations

Problems and Challenges • Credibility gap • Ill defined, poorly communicated systems or systems with overrides, loopholes or a lack of accountability • The first exception kills the system! • Job dissatisfaction and stress • Creates “cogs” versus “involved people” • Potential reduction of intrinsic drives

Design Objectives • Link pay and performance • Use pay as a broad HRM system • Build employee trust • Promote the idea that performance makes a difference • Use multiple reward layers (KISS?) • Increase employee involvement • Use non-monetary incentives

Individual Based Plans • Advantages • Bonuses, lump sum or spot bonus payments • Expectancy theory: rewarded performance is likely to be repeated AND we adjust our performance based on perceptions • Goal oriented behavior can be “shaped” over time • Looking at individuals promotes equity • Fits with an individualistic culture

Individual Based Plans • Disadvantages • Promotes single mindedness • Employees often don’t believe that performance impacts outcomes and in turn their pay (no performance-outcomes-pay link) • May run counter to quality goals (?) • May be inflexible

Team Based Plans • Advantages • Foster work group cohesion • Aid performance measurement • Disadvantages • May not fit individualistic culture • Free riding effect • Social pressure to limit performance • Defining “groups” that have meaning • Inter-group competition

Plantwide and Corporate Plans • Look at overall performance • Suffer from many of the same design challenges • Large scale and difficulty ‘seeing’ operational connections make the performance-outcome link hard to identify • Can drive tremendous focus

Studying • Review advantages and disadvantages of plantwide and corporate plans • Review keys to successful implementation • Look at executive and sales compensation • Pay attention to variable and short versus long term incentive plans

Management 351 – Class 9