Compensation - Exam 1

Pay affection motivation in two ways

incentive and sorting effect

incentive effect

degree to which pay influences individuals and aggregate motivation among the employees; extra effect, persistence, intensity (prospective)

sorting effect can…

affect that pay can have on the composition of the workforce; who applies, who stays and who self-select out

P = f(M+A+O)

Performance = Motivation + Ability + Opportunity

Rewards Framework - many forms of total rewards

Rewards & Recognition

1. base salary

2. short-term incentives: annual incentive

3. long-term incentives: equity

4. health & welfare benefits

5. recognition programs

6. career growth and progression

base salary or wages

cash compensation that is position and location-based and targeted to be competitive to the market benchmarks

short-term incentives (annual cash bonus)

reward for driving organizational performance; aligns near-term corporate priorities with the team and individual performance

long-term incentives: equity (stock)

aligns longer-term corporate strategy and objectives with employee performance and market/shareholder expectations

health & welfare benefits

healthcare, well-being programs, retirement savings, etc.

recognition programs

individual incentives to reward valuable contributions (e.g., THANKS program, spot awards, employee referral bonuses, safety awards)

career growth & progression are…

individual plans that take an inventory of career aspirations, skills, necessary, knowledge, experience, and personal aptitudes and create a custom plan to reach key career milestones

forms of pay adjustments

1. merit increase

2. market adjustment

3. cost-of-living adjustment (COLA)

4. incentive (variable pay)

merit increase

increase in base wage given in recognition of past work performance and/or behavior (retrospective)

market adjustment

pay increase to base wage based on market movement

cost-of-living adjustment (COLA)

pay increase to base wage or supplemental payment intended to bring pay in line with inflation in a geographical area (generally the same amount is given to everyone in a geographic area) COLAs are a thing of the past and is more reflective of the cost of goods, not the cost of labor

incentives (variable pay)

• tie pay increases directly to performance

• do not increase base pay; must be re-earned each pay period

• potential size of the payment will generally be known beforehand (unlike merit increases)

• are one-time payments, and do not permanently increase labor costs

• may be long-term (stock ptions) or short-term

incentives can be…

• Tied to individual performance, team, department, etc.

• objectives can be cost reduction, ROI, increased GMs, etc.

• influences for future performance

how do business determine their business and pay strategies?

a firm must determine its own unique way of adding value by matching its business strategy and pay strategy

there is no one way of “formula” for pay strategies

companies may have a blend of strategies

innovator, customer focus, and cost cutter

if an organization changes it business strategy, the pay systems should change

• a redesign IBM focuses on high-growth, high-value segments of IT

• to support the new business strategy, the compensation strategy:

  • cute layers of management

  • redesigned jobs to build in flexibility

  • increased incentive pay to differentiate on eprformance

  • kept a constant eye on costs

pay systems should align with the organizations business strategy

differences in the business strategy should be supported by differences in the HR strategy, including compensation

when business strategies change

it may be that pay systems should also change

the theory for supporting business strategy is

the greater alignment between compensation systems and organizational strategy, the more effective or successful the organization

internal alignment/internal equity is the

pay relationship among jobs within a single organization

internal alignment challenge

Matthew’s parable details that “pay alignment” is an age-old issues and together with external competitiveness, will be your most challenging pay concern

internal pay alignment address the relationship between

1. content of the work

2. skills and knowledge needed to do the work

3. relative value of the work within the org

content of the work is…

difficult, easy, one job, multiple responsibilities, how it’s organized, etc.

compensation strategy: internal alignment does what?

1. supports organization strategy

2. supports workflow

3. motivates behavior

workflow

the process by which good/services are delivered to customers

pay structure should support efficient flow of work & organizational design

what motivates behavior?

There should be a “line-of-sight” relationship between each job and the organization’s objectives; employees should “see” links between their work, the work of others, and the organization’s objectives

To motivate, it must be and be perceived as fair to employees

characteristics of pay structures:

• basic building blocks of a compensation program

• vary by organization

• are hierarchical in nature

pay structure are defined by

• # of levels of work & reporting relationships (it is hierarchical): varies by job & company

• differentials: pay differences between the levels

• criteria for determining those levels

what is the criteria for determining the pay structure levels

• sturcutres based on two criteria — work content and work values

work content

ranks jobs based on how work gets done; skills required, complexity of tasks, knowledge required, responsibility

work value

relative contribution to organization

differentials

the pay difference among levels

higher pay is usually due to work requiring more:;

•Skill, knowledge or experience

•Training or education

•Working conditions

•Additional mental or physical requirements

•Responsibility or impact

•Performed in unpleasant work conditions, or

•Work that adds more value to the company

what is the point of differentials

they are intended to try to motivate employees to strive to be promoted, to learn new skills, etc.

job leveling is based on

CONTENT & VALUE of the job

content of a job

refers to the work performed and how it gets done

a content based structure ranks jobs based on:

• skills required

• complexity of tasks

• problem solving

• and/or responsibility

value of a job

refers to the worth of the work

a value-based structure focuses on the relative contribution of:

• skills, task, and responsibilities of a job to the organization’s goals

• external market value may be included

steps to determine determining job worth

1. job analysis

2. job documentation

3. job evaluation

4. job worth hierarchy

= base pay structute

job analysis

systematic way to evaluate duties and responsibilities of a job to obtain information about the nature and level of the work performed

job documentation

written information about job content, typically a job description & job specification

job evaluation

process of determining the relative worth of jobs to create a job structure

job worth hierarchy

is the result of the job evaluation process; it illustrates where each job fits relative to other jobs

what is pay structure?

the framework for pay decisions, after the job worth hierarchy is built

egalitarian pay structures

fewer levels and smaller differentials — send the emssage that all employees are valued equally (Ben & Jerry’s)

Hierarchical structures

multiple levels, detailed work descriptions - send the message that the organization values the differences in work content, individual skills, and contributions to the organization and typically have many levels with larger differentials between levels

advantages and disadvantages of a egalitarian strucutre

Advantages: Fewer levels and smaller differentials between adjacent levels and between highest-and lowest-paid workers

Disadvantages: ‘Averagism’ brings to light that equal treatment can mean more knowledgeable (star) employees feel underpaid and barrier to hiring if not willing to pay market competitive pay

how do you judge the fairness of your pay?

1. Comparison to the market

2. How well employees accept their pay based on procedural justice and distributive justice

comparison to the market

1. comparing the jobs similar to their own (internal alignment)

2. comparing their job to others at the same employer (internal alignment)

3. comparing their jobs’ pay against external pay levels (external competitiveness)

how well employees accept their pay based on:

procedural justice and distributive justice

procedural justice

refers to the process by which a decision is reached (in pay, how design & administration decisions made and consistency)

distributive justice

refers to the fairness of decision/results (in pay, are pay differences acceptable)

pay procedures more likely to be perceived fair if:

• they are consistency applied to all employees

• employees participated in process (less so far low paid jobs)

• data used are accurate

job family

grouping of related jobs with broadly similar content; e.g., marketing, engineering, office support, technical

job

group of task performed by one person that make up the total work assignment of that person; e.g., customer support representative

task

smalled unit of analysis, a specific statement of what a person does; e.g., answers the telephone. similar tasks cna be grouped into a task dimension; e.g., responsible for ensuring that accurate information is provided to the customer

conventional job analysis

methods (e.g. functional job analysis) that typically involve an analyst using a questionnaire in conjunction with structured interviews of job incumbents and supervisors. the methods place considerable reliance on analysts’ ability to understand the work performed and to accurately describe it.

what two things are data related to a job?

job identification and job content

job identification

title, department in which job is located, number of people who hold the job

job content

tasks, activities, constraints on actions, performance criteria, critical incidents, conflicting demands, working conditions, roles

data related to employee

employee characteristics, internal relationships, and external relationships

employee characteristics

professional/technical knowledge, manual skills, verbal skills, written skills, quantitative skills, mechanical skills, conceptual skills, managerial skills, leadership skills, interpersonal skills

internal relationships

boss and other, superiors, peers, subordinates

external relationships

suppliers, customers, regulatory, professional industry, community, union/employee groups

position analysis questionnaire (PAQ)

a structured job analysis technique that classifies job information into seven basic factors: information input, mental processes, work output, relationships with other persons, job context, other job characteristics, and general dimensions. analyzes jobs in terms of worker-oriented data

quantitative job analysis (QJA)

job analysis method that relies on scaled questionnaires and inventories that produce job-related data that are documentable, can be statistically analyzed, and may be more objective than other analyses

job specifications

can be used as a basis for hiring are knowledge, skills, and abilities required to adequately perform the tasks