Effective Compensation Strategies for Employee Rewards

1. Compensation, Transfer, Promotion and Reward Policies

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Frequently used methods of job evaluation: • Job ranking • Classification • Point system • Factor comparison

13. 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

14. 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

15. Classification or Grading System

16. 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

17. 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

19. 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

20. Methods of Payment • Employees can be paid for: • The time they work • The output they produce • Skills • Knowledge • Competencies • A combination of these factors

21. Payment for Time Worked • Most employees are paid for time worked in the form of wages or salaries: • WagePay calculated at an hourly rate • SalaryPay 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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.

35. 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

36. 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

37. Methods for defining individual skills: • Direct observation • Testing • Measurable results Instead of job descriptions, "person" and "skill block" descriptions are developed

38. 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

39. 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

40. 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

41. 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.

42. 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

43. 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

44. 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 .