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Compensation, Transfer, Promotion and Reward Policies. Compensation. The HRM function that deals with reward individuals receive in exchange for performing tasks The major cost of doing business for many organizations The chief reason why most individuals seek employment.
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Compensation • The HRM function that deals with reward individuals receive in exchange for performing tasks • The major cost of doing business for many organizations • The chief reason why most individuals seek employment
Financial compensation is either direct or indirect • Direct compensation consists of wages, salaries, bonuses, or commissions • Indirect compensation includes all financial rewards not included in direct compensation, such as insurance, vacation, and childcare services (benefits) • Non-financial rewards, such as praise, self-esteem, and recognition, affect employee: • Motivation • Productivity • Satisfaction
Objective of Compensation • The objective of compensation is to create a system of rewards that is equitable to both the employer and the employee • The desired outcome is an employee who is attracted to the work and motivated to do a good job
Compensation Decisions • Pay for a position is set relative to three groups: • Group A: employees working on similar jobs in other organizations • Group B: employees working on different jobs within the organization • Group C: employees working on the same job within the organization
The decision to examine pay relative to group A is called the pay-level decision • Be competitive in the marketplace • Use the pay survey to help with decisions • The pay decision relative to group B is the pay-structure decision • Use job evaluations to set a value for each job relative to all other jobs • The pay decision relative to group C is individual pay determination
The Pay-Level Decision • Managers compare the pay of people working inside the organization to those outside it • There are three pay-level strategies: • High • Low • Comparable • High-pay strategy: • Managers pay at higher-than-average levels to attract and hold the best employees • Companies using this strategy are called pacesetters
The Pay Structure Decision • The next step is to construct an internal pay hierarchy or pay structure • The traditional way was to make a systematic comparison between the worth of one job and the worth of another, using job evaluation
Job Evaluation • Job evaluation is a process by which the relative worth of various jobs is determined for pay purposes • It relates the amount of pay for each job to the extent to which it contributes to organizational effectiveness • It is subject to job evaluator errors • Because computing contributions to organizational effectiveness is difficult, proxies are used • Skills required to do the job • Amount and significance of responsibilities • Effort required • Working conditions
The first step in using job evaluation effectively is to involve employees and/or the union • After the program is off to a cooperative start, a committee evaluates the jobs
Select and weigh the criteria (compensable factors) used to evaluate the job • Factors most frequently used: • Education • Experience • Amount of responsibility • Job knowledge • Work hazards • Working conditions
Frequently used methods of job evaluation: • Job ranking • Classification • Point system • Factor comparison
Ranking of Jobs • Ranking is the system used primarily in smaller, simpler organizations • The evaluator rank-orders whole jobs, from the simplest to the most challenging • The ranking may not occur at equal intervals • If an organization has many jobs, this system is clumsy to use and the ratings may be unreliable • Ranking is the least frequently used method of job evaluation
Classification or Grading System • Classification or grading groups a set of jobs • Sets are then ranked by difficulty or sophistication • It is a job-to-standard comparison • The evaluator first decides how many classifications the job structure has to be broken into • Then, definitions are written for each class • After the classes are defined, job are compared with the definition and placed into the proper classification
Point System • The greatest number of job evaluation plans use the point system • More sophisticated than ranking/classification systems • Relatively easy to use • Requires evaluators to assign points on the basis of: • Skill required • Physical and mental effort needed • Degree of dangerous/unpleasant working conditions • Amount of responsibility
Factor Comparison • Developed by Eugene Benge, it permits job evaluation to be done factor-by-factor • Jobs are compared to a “benchmark” of five key points: • Responsibilities • Skill • Physical effort • Mental effort • Working conditions
Factor Comparison • Advantages: • A step-by-step, formal method of evaluation • Shows how differences in rankings translate into dollars and cents • Is easy to explain to subordinates • Disadvantages: • Complex • Difficult to show how such a system is developed • Relies on the subjective judgments of a committee
Methods of Payment • Employees can be paid for: • The time they work • The output they produce • Skills • Knowledge • Competencies • A combination of these factors
Payment for Time Worked • Most employees are paid for time worked in the form of wages or salaries: • WagePay calculated at an hourly rate • SalaryPay calculated at an annual or monthly rate • Pay ranges, pay classifications, and similar tools determine individual pay • Most employees expect to get at least one raise annually
Pay is usually adjusted upward through four types of increases: • A general, across-the-board increase for all employees • Merit increases based on some indicator of job performance • A cost-of-living adjustment (COLA) based on the consumer price index (CPI) • Seniority
Variable Pay: Incentive Compensation • Variable pay is any compensation plan that: • Emphasizes a shared focus on organizational success • Opens incentives to nontraditional groups • Operates outside the base pay increase system • Included in the calculations of variable pay are: • Individual incentive awards • Individual recognition awards • Group and team awards • Scheduled lump-sum awards
To implement successful variable pay systems, companies must based their plans on: • Clear goals • Unambiguous measurements • Visible linkage to employees' efforts • Key design factors include: • Support by management • Acceptance by employees • Supportive organizational culture • Timing
Variable Pay: Incentive Compensation • Total compensation includes: • Base pay • Variable pay • Indirect pay • Variable pay helps manage labor costs, but does not guarantee equitable treatment of employees • Financial insecurity is built into the system • As a result, productivity may actually decline • Paying employees on the basis of output is usually referred to as an incentive
Merit Incentives • Advocates claim merit pay is the most valid type of pay increase • Awards are directly linked to performance • Rewarding the best performers with the largest pay is claimed to be a powerful motivator • This premise has two flawed assumptions: • Competence and incompetence are distributed in roughly the same percentages in a work group • Every supervisor is a competent evaluator
Individual Incentives • The oldest form of compensation is the individual incentive plan • The employee is paid for units produced • Individual incentive plan takes several forms: • Piecework • Production bonuses • Commissions
Individual Incentives: Straight Piecework • Straight pieceworkis an individual incentive plan • It is the mostcommon piecework incentive plan • Pay is based on units of production per time period • Work standards are set through work measurement studies, as modified by collective bargaining • The system is easy for employees to understand, but setting work standards is difficult • The standard-hour plan bases wages on completion of a job or task in some expected period of time • Standard-hour plans are ideal for long cycle operations and highly skilled, non-repetitive jobs
Individual Incentives: Differential Piece Rate • Another variation of the straight piecework rate is the differential piece rate or Taylor plan • This system uses two piecework rates: • One for those who produce below or up to standard • Another for those who produce above standard • It was designed to reward the highly efficient worker and penalize the less efficient
Individual Incentives: Production Bonus • Production bonus systems pay an hourly rate plus a bonus when the standardis exceeded • The bonus usually equals 50 percent of labor savings • This system is not widely used in the United States • In Japan, all employees receive semiannual production bonuses in December and June
Individual Incentives: Commissions • A commission is compensation based on a percentage of sales in units or dollars • Straight commission is the equivalent of straight piecework and is typically a percentage of the price of the item • A variation pays the salesperson a small salary plus a commission or bonus when the sales goal is exceeded
Gain-sharing Incentive Plans • Gain-sharing plans are companywide group incentive plans that use a financial formula to: • Distribute organization-wide gains, and • Unite diverse organizational elements in the common pursuit of improved organizational effectiveness • Through cash bonuses, these systems share the benefits of: • Improved productivity • Reduced costs • Improved quality
Profit-Sharing Plans • Profit-sharing plans distribute a fixed percentage of total profit to employees in cash or deferred bonuses • Profit sharing is not dominant in other industrialized countries • Profit-sharing plans are typically found in three combinations: • Cash or current distribution plans • Deferred plans • A combination of both
Ownership • An employee ownership plan (ESOP): • Is similar to profit sharing and is intended to increase worker commitment and performance • Is a qualified, defined contribution benefit plan that invests primarily in the stock of the company • The employer makes yearly contributions that accumulate to produce a benefit that is not predefined • An ESOP is a variation of a stock bonus or stock bonus/money purchase plan that invests primarily in employer stock.
People-Based Pay • The bureaucratic job-based method of determining pay will not be used in the future • The new designs will be people-based • Variants of people-based pay: • Skill-based • Knowledge-based • Credential-based • Feedback • Competency-based
Skill-Based Pay • Skill-based pay sets pay levels on the basis of: • How many skills employees have, or • How many jobs they can do • Expected positive outcomes include: • Increased quality • Higher productivity • A more flexible workforce • Improved morale • Decreased absenteeism and turnover
Methods for defining individual skills: • Direct observation • Testing • Measurable results Instead of job descriptions, "person" and "skill block" descriptions are developed
Skill-based pay: • Is difficult to design • Does not fit all situations • Involves a time-consuming process of constructing skill blocks, mapping pay progressions, and assigning dollar values to skills • It works best when built on a broad base of skills in a stable but expanding work environment
Knowledge-based Pay • Knowledge-based pay rewards employees for acquiring additional knowledge • Applies to both the current and new job • Stretches the skill-based model to professionals, managers, and some technical personnel
A study compared two manufacturing plants • One used the job-centered pay design; the other a knowledge-based design • After 10 months, the pay-for-knowledge facility had higher quality, lower absenteeism, fewer accidents • The traditional plant had higher productivity
Credential-based Pay • Credential-based payrests on the fact that an individual must have: • A diploma or license, or • Pass one or more examinations from a third-party professional or regulatory agency • Credential-based pay is more cut-and-dried than skill-based or knowledge-based pay.
Feedback Pay • Feedback pay is based on: • Aligning pay with strategic business objectives • Establishing a direct connection between the jobholder and his/her part in accomplishing goals
Executive Pay • The Enron scandals of 2001 brought attention to CEO compensation and stock option programs • Some question whether any CEO is worth the pay packages that for some total $500 million annually • The new mantra is “pay for performance” • 2004 Business Week data shows CEO compensation averaged $9.6 million – a 15% increase over 2003 • In spite of large increases, there is evidence that executive pay is tied more closely to performance than it was in pre-Enron years
Stock Options • A stock option is the right to: • Purchase a specific number of shares of a firm’s stock • At a predetermined price • During a specified period of time • Stock options allow employees to share in the growing value of a company without risking money until they exercise the options to buy the shares • In many cases, the gain is substantially greater than a person’s annual compensation • Stock options are not taxed until the option is exercised and/or the stock is sold .