Compensation Systems

Compensation System

Various forms of of financial rewards (base and variable pay) and fringe benefits provided to employees in return for their service

Types of pay Systems

(1) Time-based pay systems - employee is paid for the time worked
(2) Incentivized Pay systems - pay is based on the amount of work accomplished or some other measure of performance

Base pay

the wage or salary that is paid to the employee on a regular basis (weekly/ monthly) -- usually a time based pay system

Factors that determine base pay

1. the value of the job
2. the value of the individual to the organization
3. the laws of supple and demand that operate in the local labor market

base pay progression

a series of increases within each job classification that depends on factors such as length of service to the organization and the merits of the individual

Variable pay

based on some measure of performance of either the individual worker or groups of workers (worker teams) - usually an incentivized pay system

Direct incentive system

bonus paid in direct proportion to output of worker or group, so long as the output exceeds some minimum threshold value

Indirect Incentive system

based on productivity improvements or profits company makes

Fringe Benefits

employment benefits that have monetary value to the employee and are an expense to the employer but do not affect the employee's financial pay

Time - based pay system

the employee is paid at a specified rate for his or her time

Types of time-based pay systems

1. hourly pay - employee is paid at an hourly rate for the mount of time worked
2. salary systems - employee is paid a fixed amount at regular intervals for her or her services

Conventional Hourly Pay Systems

worker is paid an hourly rate, but there is no direct measure taken of the amount of work accomplished
AKA: day work

Reasons for paying an hourly basis

- time standards are not feasible for the work performed
- the work requires interactions with people
-the work consists of active periods and nonactive periods but the worker is paid during both periods
-the job involves tending a machine that operates on an automatic cycle w/ little to no correlation between the workers effort and the resulting output

Exempt Status

employee is exempt from certain provisions of the Fair Labor Standards act of 1938 -- not paid time-and-a-half for overtime work

Factors for determining hourly rates

1. Law of supply and demand that operate in the local labor market
2. Job classification of the position
3. Quantity and quality of the work accomplished by the employee
4. Skill training and experience of the worker
5. length of service to organization
6. compensation policies of the organization

Measured Day Work

Work output is measured using time standards -- hourly pay system

Criteria for exempt employees

1. high earnings level
2. supervision of workforce
3.work requires discretion and judgement
4. work requires advanced knowledge in given

Employee's salary is determined

1. the technical or business domain involved (ex accounting, engineering)
2. knowledge and experience in the domain
3. Education level of the employee
4. level of responsibility of the employee in the organization
5. previous achievement of the employee
6. compensation policies of the organization

Individual wage incentive plan

pays each worker according to his or her individual output

Categories of individual incentive systems

1. piecework
2. standard hour plans
3. bonus-sharing plans

Piecework

the worker is paid a fixed rate per unit of work accomplished

Cons of piecework

- have to make adjustments in all of the piece rates when there is a change in wage
-does not provide a guaranteed base rate

Guaranteed Base rate

a minimum daily rate (based on an hourly rate) paid to the worker regardless of the quantity of work units produced

Standard hour plan

similar to piecework system but the rate per piece is a time rate rather than a dollar rate -- established by work measurement

bonus

an amount above and beyond the regular hourly wage

Bonus-Sharing plan

the worker receives only a portion of the bonus, the rest of it goes to either the company or supervision and/or indirect workers such as setup and maintenance employees

Sales incentive plan

a payment system designed to motivate sales personnel to achieve increased sales of the company's products

When NOT to use Sales Incentives

1. the salesperson simply takes orders
2. the selling activity involves a long sales cycle
3. the sales process requires the complex involvement of several parties and its difficult to assess the relative contributions of the parties

When to use Sales Incentives

1.the independence of action to consummate the sale
2. the selling activity involves a short sales cycle
3. a high degree pf persuasion is required

Types of Sales Incentive Plans

- Commission only: links salesperson's compensation to sales performance during designated periods
- base salary plus commission: combination of a portion that is guaranteed base salary and a portion that is commission
- Base Salary plus bonus: guarantees the salesperson a base rate plus a bonus if a defined performance quota is achieved or exceeded

Incentive mix

the ratio of base salary to incentive pay

group incentive plan

pays each member of a group or team the same bonus percentage which is based on the output of the group - direct incentive systems

Pros to group incentive plan

- easier to install and administer than individual plans
- group success requires cooperation and teamwork
-fewer supervisory personnel may be needed
- workers jockeying to get the easier jobs is minimized

Cons to group incentive plan

- no attention is paid to individual performance (at least not officially)
- it does not provide as much incentive for greater individual effort as individual incentive plans

Objectives of a direct incentive system

1. increase productivity for the organization that sponsors it
2. increase earnings for the worker who participate in it

Reasons why wage incentive plans fail

- conflicting objectives
- penalties for increasing productivity: less overtime, layoffs
- emphasis on physical effort: work harder, not smarter
- standards eroding over time: learning curve phenomenon
- mixing day work and incentive work

Reasons why incentive pay systems succeed

- clearly defined and documented incentive plan
- easy to understand plan
- plan stability
- training of workers
- link between effort and output
- Measurable output
- Accurate time standard
- Maintenance of time standards

Categories of indirect incentive plans

1. gain sharing
2. profit sharing

Gain-sharing plan

an indirect group incentive system in which employees are encouraged to make improvement that increase productivity and reduce cost -- the company shares the benefits of those improvement with the employees through periodic bonus
AKA: productivity sharing plans

Types of gain-sharing plans

- Scanlon plan
- Rucker plan
- Improshare

Profit Sharing

When a company pays its employees a share of its profits -- indirect group incentive

Types of profit sharing

1. cash plans
2. deferred plans
3. combination of cash and deferred plans

Cash plans

the profit bonus is paid to employees soon after profits are determined

Deferred Plans

the profit share is credited to an employee account that is withdrawn at retirement or some other specified circumstance, such as severance, death, or disability

Combination Plans

pay part of the profit share as cash and the remainder is deferred

Factors for the size of the share received

- annual salary
- length of company service
- proportion of total profit allocated to profit sharing
- size of the profit

Cons of profit sharing

- the motivational value toward higher individual performance is not as strong as it is with traditional direct wage incentives
-if the company does not make a profit, then there is nothing to share

Types of Fringe Benefits

-Social Security and medicare
-Worker's Compensation
-Disability insurance
-Paid vacation
-Pension Plan
-Life Insurance
-Tuition Reimbursement

Direct Wage Incentive System

wage or salary increases as output increases (individual or group incentive plans)