MGMT 434 Compensation

Total Compensation

All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship

Cash Compensation

Base Pay

Cost of Living

Short term incentives

Long term incentives

Components of a Pay Model

Objectives: Fairness, Efficiency, Compliance

Techniques: Internal Structure, Pay structure, Pay for performance, evaluation

Policies: Internal Alignment, External Competitiveness, Contributions (pay for performance)

How does Internal Alignment fit into the pay model?

it supports the way the work gets done, fits the business strategy and ensures fairness to all employees

Compensation Objectives

Efficiency

Fairness

Compliance

Ethics

Three Policy Choices

Internal alignment

External Competitiveness

Contributions/Pay-for-Performance

Internal Alignment vs. External Competitiveness

Internal Alignment refers to pay comparisons among jobs or skill levels inside and organization

External Competitiveness refers to pay comparisons with competitors int he same industry

What is the link between performance and compensation?

How people are paid affects their behaviors at work, which in turn affects an organizations success, strategic compensation increases motivation and performance

Are relational returns part of total compensation? TRUE OR FALSE

False

Strategy Types

Cost Leadership-Lowest cost producer and to compete on the basis of cost

ex:Walmart

Cost Leadership Focus-Strategy to compete based on a narrow scope of industry

ex:Ross (retail /clothing) Dollar General (not a full array of products but priced to move)

Differentiation-Strategy to be unique in an industry on dimensions that are valued by customers

ex:Nordstrom

Differentiation Focus-Niche market but there still must be customer needs to address

ex:Anthropologie (strategy to sell unique and pricey clothes, furniture, and accessories)

What does it mean to take a “strategic perspective” to compensation?

Focus on those compensation choices that help the organization GAIN and SUSTAIN competitive advantage

Cascade of Strategic Choices

At Corporate level- “What business should we be in”?

At the business unit level- “How do we gain and sustain competitive advantage in this business”?

At the function level- “How should total compensation help this business gain and sustain competitive advantage”

The ultimate purpose- the “so what?”

What are the tests of competitive advantage?

Align: with business strategy, externally with the economic and sociopolitical conditions, internally with the overall HR system

Differentiate: how different is it from everyone else’s

Add Value:

Internal alignment

pay relationship among different jobs/skills/competencies within a single organization

“internal equity” jobs that are moe valuable are paid more

Pay level and differentials

An internal pay structure can be defined by 1)the number of levels of work, 2)the pay differentials between the levels, 3) the criteria or bases used to determine those levels

Content

refers to the work performed in a job and how it gets done (tasks, behaviors, knowledge required, etc)

Value

refers to the worth of the work: its relative contribution to the organization objectives

What are some organizational factors that shape internal alignment?

Strategy-pay structures that are not aligned with the organization strategy may become obstacle’s to the organization’s success

Technology-

Human Capital -the greater the value added by the skills and experience, the more those skills will command

HR Policy-if an organization has more levels, it can offer more promotions, but there may be smaller pay differences between levels

Employee acceptance-employees judge the fairness of their pay through comparisons with the compensation paid to others for work related in some fashion to their own

Cost implications

Hierarchical pay structure

send the message that the organization values differenced in work content, individual skills, and contributions to organization

Egalitarian pay structure

have fewer level and smaller differentials between adjacent level and between the highest-and-lowest paid workers

sends the message that all employees are valued equally

CONS: can become a barrier for recruiting, can mean that the more knowledgeable employees feel underpaid

In terms of internal alignment, which is NOT a consequence of a well-designed pay structure?

Workers are motivated by productivity incentives

Which is not true about tournament theory?

Evidence shows it applies well to pay structures in general

What is the primary reason Lockheed has a large differences in pay?

Adds more value to the company (A)

Compensation strategy aligns with

all of the above

4 types of cash compensation include everything but..

Income protection

Which of the following within a pay system is accurate?

Compensation objectives shape pay policies

Formulating a total compensation strategy

1. Assess Total Compensation Implications

   -Business strategy and Competitive dynamics

   -HR strategy

   -Culture/values

   -Social and political context

   -Employee/union needs

   -other HR systems

2. Map a total compensation strategy

   -Objectives

   -Alignment

   -Competitiveness

   -Contributions

   -Management

3. Implement Strategy

   -design system to translate strategy into action

   -choose techniques to fit strategy

4. Reassess

   -reassess as conditions change

   -realign as strategy changes