Compensation: Methods and Policies

2. chapter 11 Compensation: Methods and Policies

3. Adequate Equitable Incentive-providing A Compensation system should be: (* focus of this chapter) Cost-effective* Acceptable to the employee* Secure* Balanced*

4. To the individual employee, the most important compensation decision is how much he or she will earn.

5. Determination of Individual Pay Three questions need to be addressed: • How should one employee be paid relative to another when they both hold the same job in the organization? • Should we pay all employees doing the same work at the same level the same? • If not, on what basis should we make the distinction?

6. Pay differentials are based on: • Individual differences in experience, skills, and performance • Expectations that seniority, higher performance (or both) deserve higher pay

7. Reasons for choosing to pay employees at different rates for the same job: (1 of 3) • Pay differentials allow firms to recognize that different employees performing the same job make substantially different contributions to meeting organizational goals • Differentials allow employers to communicate a changed emphasis on important job roles, skills, knowledge, etc.

8. Reasons for choosing to pay employees at different rates for the same job: (2 of 3) • Differentials provide organizations with an important tool for emphasizing norms of enterprise without having employees change jobs (i.e., promotion) • Pay differentials allow firms to recognize market changes between jobs in the same grade without requiring a major overhaul of the whole compensation system

9. Reasons for choosing to pay employees at different rates for the same job: (3 of 3) • Without differentials, • the pay system violates the internal equity norms of most employees, • reducing satisfaction with pay, and • making attraction and retention of employees more difficult

10. Methods of Payment Flat Rates Payment for Time Worked Variable Pay: Incentive Compensation

11. Payment for Time Worked • General, across-the-board increase for all employees • Merit increases paid to some employees • based on some indicator of job performance • Cost-of-living adjustment (COLA) • based on the consumer price index (CPI) • Seniority

12. Variable Pay • Percentage of an employee’s paycheck is put at risk • If business goals are not met, the pay rate will not rise above the lower base salary • Annual raises are not guaranteed • Helps manage labor costs • Does not guarantee equitable treatment of employees

13. Acceptance by employees Support by management Timing Supportive organizational culture Variable Pay: Key Design Factors

14. Types of Variable Pay Individual Incentives Group Incentives Organization Incentives

15. Individual Variable Pay • Merit incentives • Individual incentives • piecework • production bonuses • commissions

16. Merit Pay Problems • Employees fail to make the connection between pay and performance • The secrecy of the reward is perceived by other employees as inequity • The size of the merit award has little effect on performance

17. Individual Incentives • Possible only in situations where performance can be specified in terms of output • e.g., sales dollars generated • e.g., number of items completed • Employees must work independently of each other so that individual incentives can be applied equitably

18. Conditions for Effective Individual Incentive Plans • The task is liked • The task is not boring • The supervisor reinforces and supports the system • The plan is acceptable to employees and managers • The incentive is financially sufficient to induce increased output • Quality of work is not especially important • Most delays in work are under the employees’ control

19. Reasons to Use Team Incentives • When it is difficult to measure individual output • When cooperation is needed to complete a task or project • When management feels this is a more appropriate measure on which to base incentives

20. Organization-wide Incentives • Usually based on one of two performance concepts: • A sharing of profits generated by all employees altogether • A sharing of money saved as a result of employees’ efforts to reduce costs

21. Gainsharing Suggestion Systems Ownership Profit Sharing Approaches to Organization-wide Incentives

22. Suggestion Systems: Essential Elements • Management commitment • Clear goals • Designated administrator • Structured award system • Regular publicity • Immediate response to each suggestion

23. Gainsharing Plans • Employees earn bonuses tied to unit-wide performance as measured by a predetermined, gainsharing formula • Commonly used gainsharing plans: • Lincoln Electric Plan • Scanlon Plan • Rucker Plan • ImproShare

24. Key Elements in Designing a Gainsharing Plan • Strength of reinforcement • Productivity standards • Sharing the gains • Scope of the formula • Perceived fairness of the formula • Production variability

25. Newer Approaches to Gainsharing Business Plan Gainsharing Winsharing Spot Gainsharing

26. Typical Profit Sharing Plans • Cash or current distribution plans provide full payment to participants soon after profits have been determined • Deferred plans credit a portion of current profits to employees’ accounts with cash payments made at the time of retirement, disability, severance, or death • A combination of both incorporates aspects of current and deferred options

27. Ownership • Employee stock ownership plan (ESOP) – employees receive stock in the company • ESOPs are tax qualified • i.e., in return for meeting certain rules designed to protect the interests of plan participants, ESOP sponsors receive various tax benefits • ESOPs are defined contribution plans • the employers makes yearly contributions that accumulate to produce a benefit that is not defined in advance

28. Knowledge- Based Pay Skill-Based Pay Feedback Pay Credential- Based Pay People-Based Pay

29. Executive Pay More likely to be based on comparative performance: • Compensation committees link CEO’s pay to returns to shareholders • Variable performance-based pay is emphasized over guarantees • CEOs are encouraged to invest in company stock • Performance yardsticks are linked to actual key productivity indices, to the competition, or to both • CEOs are held responsible for the cost of capital

30. Issues in Compensation Administration Pay Secrecy or Openness Pay Security Pay Compression

31. Supplementary Unemployment Benefits (SUB) Guaranteed Annual Wage (GAW) Severance Pay Cost of Living Adjustments (COLAS) Pay Security Plans

32. Solutions to the Problem of Pay Compression (1 of 2) • Reexamining how many entry-level people are needed • Reassessing recruitment itself • Focusing on the job evaluation process, emphasizing performance instead of salary-grade assignment • Basing all salaries on longevity

33. Solutions to the Problem of Pay Compression (2 of 2) • Giving first-line supervisors and other managers the authority to recommend equity adjustments for incumbents who have been unfairly victimized by pay compression • Limiting the hiring of new employees seeking excessive salaries

34. Summary • There is a growing realization that traditional pay systems do not effectively link pay to performance • The trend is toward a total compensation approach made up of base pay, variable pay, and benefits • Flexibility is an essential ingredient in any compensation plan and can be built using a variable pay approach