MGMT 434 Final

Compensation

Why do we appraise performance?

Performance appraisals are conducted to assess employee contributions, provide feedback for improvement, inform decisions about promotions or raises, and align individual goals with organizational objectives.

Key reason: to deliver performance feedback for the purpose of improving employee performance and development and to ensure alignment with company goals.

What are the uses of performance appraisal?

Cultural-Meritocracy

Administrative-Documentation

Legal-protection

HRM-connection to other systems

Performance Management -connect to higher level goals, deliver performance feedback

What are some key challenges of performance appraisal?

Often result in decreased performance due to bias, lack of clarity, or inadequate communication. Additionally, they can create anxiety among employees and may not accurately reflect contributions.

“Achilles Heel” of HRM- Weakest point because managers believe costs outweigh benefits, time consuming

Value-Expressive Voice

“Voice for the sake of voice” The employee feels heard and listened to

*More strongly related to employee reactions*

Instrumental Voice

Decision control-employees perception that they’ve had influence on their manager and the decision that they’ve made

3 types of Due Process

1. Adequate Notice

   1. Employees are held accountable for performance standards they understand

2. Fair Hearing

   1. Employees are given a review/hearing regarding their performance rating

3. Judgement Based on Evidence

   1. Performance ratings are based on objective performance-related factors

What are some ways that organizations can improve the performance appraisal process?

Organizations can improve the performance appraisal process by providing clear criteria for evaluations, ensuring regular feedback, incorporating employee self-assessments, and utilizing multiple raters to minimize bias.

Role of Rater-Ratee relationship quality as related to performance appraisal

The quality of the relationship between the rater and ratee can significantly influence the effectiveness of performance appraisals. A positive relationship fosters open communication, trust, and constructive feedback, leading to more accurate assessments and improved employee performance.

-Time talked

-Supervisor Job Related Knowledge- as a manager, they must have done employees job or know job description very well to provide relevant feedback and set realistic performance expectations.

What is Pay-for-Performance?

• Plans signal a movement away form entitlements (base wage/benefits)

• Pay will vary w some measure of individual, team, or

  organizational performance

Why is there an increased interest in variable pay?

-Incentive effect/increase productivity

-Reduce labor costs, cause you’re not paying out cash comp until its earned

-Allows for a fast-paced environment

-Competition from foreign competitiors

What is merit pay?

Links increases in base pay to how highly employees are rated on a subjective performance evaluation

Most commonly used from of contingent pay; not as effective

has to be in form of salary increase

Is pay for performance-is not variable-does not have to be re-earned

What are the problems with merit pay?

• Expensive

• based on past performance “how much does it actually motivate people in terms of future performance”

• not a large enough budget allocated for it to be effective

• performance ratings are given in highly negatively skewed way on average

How do we solve problems with merit pay?

• Give COLA (cost of living adjustments) as needed

• improve accuracy of performance ratings

• Allocate enough money to reward performance

• Make sure size of merit increase differentiates across performance levels

What are lump-sum bonuses?

“Year- End Bonus”

• Same size across employees doing the same work

• MODERATE effect on performance

• Not expensive

• Have to re-earned

• They are motivating

What are individual incentive plans?

Offer a promise of pay for some objective, pre-established level of performance

Key Features:

1. Established standard against which employee performance is compared to determine magnitude of incentive pay

2. Reward is known in advance

3. Proportional- higher the performance, higher the incentive

Commission is most common

Advantages of Individual Incentive plans

• relationship between incentives on average and performance on average is LARGE

• Reduced supervision (employees are working harder to earn commission)

• Production costs are lower

• Labor costs are lower

Disadvantages of Individual Incentive plans

• Conflicts between employees and managers

• Complaints about system that employees are in

• Could cause higher turnover of new employees (too competitive)

What are gain-sharing plans?

Employees earn bonuses tied to unit-wide performance as measured by a predetermined, gain-sharing formula

“Business Unit Level or Assembly Plan Unit”

Very common in manufacturing settings

• ex: auto assembly

Common Features of Gain-Sharing Plans

• Scanlon Plan

  • Numerator of ratio(input)- Payroll Costs

  • Denominator of Ratio( output) - Net Sales

If goal is met, some percentage of that is shared with employees

The goal that is set is agreed upon mutually between employees and managers, employees have influence on what to change

• Rucker Plan

  • Numerator- Labor Cost

  • Denominator- Value Added

• Improshare

  • Numerator- Actual Hours Worked

  • Denominator- Total Standard value hours

Why are gain-sharing plans successful

• Widely accepted by employees, very likable

• MODERATE effect with performance

• Effective measurement and acceptance of standard for performance

• Worker committees

  • to generate ways to improve productivity and costs

  • relates to trust and openness

What are profit-sharing plans?

Predetermined level of profitability that has to be met, if level is met, some proportion is shared between executives/manager

Not a “clear line of sight” - what is being done on a day to day basis and profitability overall is not clear

Not motivating, no incentive

Used to become “employer of choice, attractive in market, attract best employees, retain”

SMALL effect between profit sharing and performance

How successful are profit sharing plans?

much more common among large firms

ex: Starbucks/Apple

Do pay-for-performance plans work?

What are employee benefits and why are they important?

What are the reasons for the establishment of legally-required benefits?

• Protect individuals of catastrophic events

• Promote worker safety and health

• Maintain family income in times of crisis

• Enable retirees to maintain subsistence income

What are three types of legally required benefits?

1. Workers Compensation

2. Social Security

   1. provides basic foundation of security for American workers and families

   2. includes Unemployment Insurance, Old age/survivor/disability insurance (OASDI), Medicare

3. FMLA

Issues with social security

• “Pay-as-you-go system” - money being put in now is not being invested for MY retirement, it is used to support current retirees

• Currently taking more money that giving

• For SS to be financially viable, increase tax rate or increase amount of money being taxed or BOTH

Unemployment Insurance

Federal-State program

• Individuals who become unemployed, no fault of their own

• States pay into central tax fund

• Applies to virtually all U.S employees

• Employer sponsored

• Up to 50% of lost wages

• For every $7,000, 6.2% is taxed

• varies between companies; companies that have recently/regularly downsized or laid off employees, they’re taxed additionally

• Must be actively looking for work

OASDI (Old age,survivor, disability insurance)

Old Age

• Applies to virtually all U.S workers EXCEPT fed. gov’t, railroad, state & local govt’s

• Old Age Benefits “Retirement Benefits/Income” - Based on how much you work

• Have worked 40 quarters (10 yrs) to become fully insured

• Can receive benefits as early as 62 (will be reduced) or avg is age 67

Survivor Benefits

• For dependents of a person who was getting social security benefits, then dies

  • dependent, unmarried children

  • spouse of deceased caring for children

  • widow/widower at least 60 who was dependent on spouse

  • deceased worker must have been fully insured

Disability Benefits

• Requirement is TOTAL disability- can’t engage in ANY gainful employment

• Almost never met

• Has to be predicted to last 1 year or until death

Medicare Part A

“Traditional Fee-for-Service Plan”

Covers basic healthcare- medical supplies, some healthcare services, inpatient hospital care, home health, hospice

Medicare Part B

Covers 80% of services after $155 deductible

Financed by federal gov’t and monthly premiums

Covers-preventative care, doctor services, outpatient care, clinical labs, ambulance

Medicare Part C

Combines Part A and Part B

“Managed Care Program”

Must see doctors in plan network

Medicare Part D

Prescription drug coverage

Covers 75% of drug costs

• After calendar year deductible of $250

• Up to $2250

• No coverage in between $2250-$5100

• 95% coverage for costs MORE than $5100

Workers Compensation

• Meant to cover people that have industrial accidents

• Employers are liable, regardless of fault

  • employers can raise prices to offset costs

• Claims:

  • Injury

  • Occupational Disease ex: lung problems, asbestos, radiation

  • Death

• Benefits:

  • Vary by state

  • There is a maximum coverage for particular procedures

  • Disability income-2/3 weekly income

  • Death- burial allowances and survivor benefits

FMLA- Who and what does it cover?

Only federal play related to work/family issue

If employee has a family/medical emergency, employee is guaranteed 12 weeks time off, but not guaranteed income

After 12 weeks, jobs is not protected

Guaranteed return to position or equivalent

Eligibility:

• Have worked for employer for 12 months w 1250 hrs of service

• employer must have 50+ employees (49 or less not bound by FMLA)

• employers may require employees to take personal/sick/vacation days first

The role of discretionary benefits in compensation

Non-mandatory perks or additional benefits that employers provide to employees, which go beyond the legally required compensation and benefits

Used for attracting talent, employee retention, motivation, work/life balance, company culture and flexibility

Services (employee assistance, family assistance, tuition reimbursement, transportation) are DISCRETIONARY

Protection Programs -Income & Health

• Can include Short-term or Long-Term

• Replaces workers come due to sickness or accidents

• Supplemental to Social Security and Workers Comp

Short-Term Disability

• Usually 6 months

• Qualification: Inability to perform any and every duty of one’s regular job

  • ex: engineer can’t do his job at all

• Pay b/w 50%-67% pretax salary on monthly basis

• Waiting periods:

  • Preeligibility: date of hire to time of eligibility

  • Elimination: min amount of time to wait after becoming disabled to receive payments

• Exclusion-not self-inflicted or mental health problems

Long-Term Disability

• Between 6 months-life

• Qualification: Inability to engage in any qualified occupation

  • ex:engineer can do other similar work

• Pay b/w 50%-70% of pre-disability earnings

• similar to FMLA, becomes active AFTER short-term and sick leave benefits

General Health Plan

• Public employees are generally covered

• Employers often require employees to share costs

Different types of general health care

• “Fee-for-Service”- Traditional Coverage

  • 80/20 plan- ins. pays 80% , you pay 20%

  • commonly on a reimbursement basis which can be expensive

  • pay deductible

  • Pro: can choose any doctor, any physician, any healthcare system, any surgeon, any hospital

  • Con: Doesn’t cover preventative care, diagnostic care, financial burden can be significant

• Managed Care

  • program has pre-negotiated rates w doctors/hospitals, employee has to go there for services

  • HMO

  • PPO

PPO Health Plan

• Based on a contract between employer and providers

• Can use PPO doctors OR choose out of network

  • Requires additional copayment/deductible

• Covers regular checkups, reventative care, tests

• DIFFERENCE: out of network PPO is higher/expensive, involve higher co-premiums, co-insurance can be higher but coverage tends to be better

HMO Health Plan

• “Pre-paid services”

• Prepayments made in exchange for guarantee health care services at specific site

• May be req’d to live in HMO service area and use HMO doctors/facilities

• covers regular check-ups, preventative care, diagostic tests, doctors and hospital bills

• Both have deductibles

Defined Benefit

• “Specified Pension Level” - Guaranteed specific amount %/$ amount

• Investment Risk: employers are @ risk (if employer runs out of $, state can impose a 10% tax on citizens to raise funds)

• Vesting(amount of time emp. has to work in order to get money out) : Longer/ 5-7 years

• Portability: No, Cannot transfer

• Pretax earnings

Better at retaining employees

Defined Contribution

• Investment Risk: Employee bears all the risk

  • employee putting $ into act (stocks, bonds..) employees not promised anything when they retire

• Vesting: Shorter/ as soon as you invest $ (avg 0-30 days)

• Portability: Yes, you can transfer

  • Ex: 401k/403b, Employee Stock Ownership Plan (ESOP), Profit Sharing)

• Pretaxed earnings (once you use $ in retirement, you are taxed then)

Retirement Plans

• Retirement/Health benefits MOST important to middle aged people

• Tax Incentives-give them to employers/employees to push/increase demand for or activity in retirement plans

• Moving away from defined benefit plans to defined contribution plans

• ALMOST ALL AMERICANS DO NOT SAVE ENOUGH FOR RETIREMENT