Compensation - Chapter 9

total compensation

the range of value that employees receive in exchange for working

• Including both monetary and non-monetary elements

• Optimal compensation strategy aligns with organizational strategy

Components that may be included in a total compensation package

Compensation, benefits, social interaction, security, status/recognition, work variety, workload, work importance, authority/autonomy/control, advacement, feedback, work conditions, development opportunities

Benefits for the company from total rewards approaches

• enjoy easier recruitment of high-quality staff

• - reduced costs because of lower turnover

• higher employee performance

• an enhanced reputation as an employer of choice

external equity

How much should orgs pay for jobs based on what their competitors are paying?

• paying workers at a rate preceived to be fair compared to what the market pays.

• one firms employees compared to what employees working for competitors are paid

internal equity

Perceived parity of a pay system across different jobs within an organization.

• pay must be related to the work of jobs within a company

• Considers: Duties, responsibilities, working conditions

• Which jobs should be paid more than others w/in org?

steps in determining base pay

1. Establish the compensation philosophy

2. Reviewing the job analysis

3. Pricing jobs

4. Matching employees to pay

compensation philosophy

guiding principle for how the organization manages compensation

types of compensation philosophies

lead, match, lag

lead strategy

a company pays rates that are higher than the relative marketplace.

match strategy

the company matches the market by paying comparable rates to the relative marketplace.

lag strategy

will pay rates lower than those of the relative marketplace.

Three approaches to pricing jobs

job evaluation, market pricing and skill-based evaluation

job evaluations

Systematic processes of assessing job content and ranking jobs according to a consistent set of job characteristics and worker traits.

methods of job evaluations

job ranking, job grading, point system

job ranking

A form of job evaluation in which jobs are ranked subjectively according to their overall worth to the organization.

• best for small organization w/ small organizational hierarchies

job grading/classification

A form of job evaluation that assigns jobs to predetermined job classifications according to their relative worth to the organization.

• assigns each job a grade

• more important jobs are paid more

objectives of effective compensation management

1. Attract the best people for the job

2. Retain people in the organization

3. Reward desired behaviour (e.g., good performance)

4. Control costs (i.e., avoid overpaying or underpaying employees)

5. Comply with legal regulations (e.g., minimum wage)

What is a downside to job ranking

The rankings do not differentiate the relative importance of jobs

point system

A form of job evaluation that assesses the relative importance of the job’s key factors in order to arrive at the relative worth of jobs.

• takes the most time to develop and is most difficult to develop, but is the most precise

• most popular approach

labour market

the area from which the employer recruits

• area could also depend on what position they are trying to fill

wages and salary surveys

Studies of the wages and salaries paid by other organizations within the employer’s labour market.

• must be aged to a common point in time

sources of compensation data

• Employment and Social Development Canada

• Employee trade and professional associations

• Consulting companies

A major challenge of market pricing

Accurately matching internal jobs to those reported in salary surveys.

• Simply matching job titles is often misleading, as identical titles may involve vastly different responsibilities across different organizations.

• ensure reliability, compensation specialists must:

  • Look at comparables beyond their specific industry (e.g., where new hires come from or where departing employees go).

  • "Age" the data:

market based pay approaches

matching the market

market leader

market lag

matching the market

Paying at the 50th percentile (the midpoint). Half of the competitors pay more, and half pay less

market based pay

A compensation strategy that uses data from wage and salary surveys to determine what other organizations in the relevant labour market are paying for specific roles.

• ensures the company remains competitive in the broader labor market.

market leader

Paying at the 75th percentile. Only 25% of competitors pay more. This is used to attract top talent, especially in tight labour markets

market lag

Paying at the 25th percentile. Only 25% of firms pay less. This is often used in loose labour markets or when an organization offers strong non-monetary benefits.

what do both job evaluation and market pricing have in common?

they focus of the job done

skills/knowledge based pay

A pay system based on the employee’s mastery of skills or knowledge (in contrast to the more common job-based pay).

In a skilled based-pay environment, pay is based on:

depth, breadth and self management

depth

gaining greater experience in existing skills

• as they go up, pay goes up

• commonly seen in skilled trades

• commonly seen in professors (assistant → associate → full professeur)

• also seen in dual career ladder positions

breadth

increases in employees ranges of skills

• as they go up, pay goes up

self management

gaining higher levels of management type skills

In what jobs might you find dual career ladders?

aerospace, pharmaceuticals and high technology

a job’s relative worth is determined by

its ranking through the job evaluation process

a job’s relative worth is influenced by

market pricing for what the labour market pays similar jobs

Why might a flat rate pay be a problem

exceptional performance is not rewarded

merit raise

A pay increase given to individual workers according to an evaluation of their performance.

rate range

A pay scale for each job

Challenges Affecting Compensation

• prevailing wage rates

• union power

• productivity

• wage and salary policies

• employment standards and labour codes

equity theory

evaluate fairness by comparing to others

Compensation

everything employees receive in exchange for their work

two components of compensation

Non monetary and monetary

examples of monetary compensation

• Salary / wages

• Bonuses

• Incentives

Examples of Non Monetary Compensation

• Benefits (health, vacation)

• Recognition / status

• Work-life balance

variable pay

Any type of financial reward provided when certain specified performance results occur

• Pay tied to performance outcomes

incentive pay

Compensation that is directly tied to an employee’s performance, productivity, or both.

Cost advantage of a variable pay plan to the organization

the award must be re-earned every year and does not permanently increase base salary.

The HR function has a significant role in the design and implementation of incentive compensation programs, including the following

• Surveying employees about the incentives they value

• Explaining how incentives work and the level of performance necessary to achieve the incentives

• Checking in with employees regularly to gauge their satisfaction with the incentive plan

• Interviewing employees who are leaving the organization to determine if the incentive plan had anything to do with their exit decision

• Keeping upper-level management aware of how the incentive plan is working

piecework

Employees receive a certain rate for each unit produced

• (pay per unit)

ex: agriculture workers, tree planters

Types of Individual Incentive Plans

1. Piecework

2. Production bonuses

3. Sales commission

4. Spot awards

5. Discretionary bonuses

production bonuses

provides employees with additional compensation when they surpass stated production goals.

• Extra pay for work that is completed in less than “standard” amount of time

ex: automechanic

Commissions

Pay as percentage of sales or a flat amount for each unit sold

ex: salesperson, real estate agent

Discretionary Bonus Plans

Bonus at the discretion of their leaders

ex: sign-on bonus for Department of National Defence

Spot awards

Recognize special contributions in the short-term

ex: project completion

Disadvantage of retention bonuses

employees may stay just for the money and not because they are committed and engaged to the company.

Types of Group/Team Incentive Plans

1. team bonuses/awards

2. production incentive plans

Types of Organizational Incentive Plans

1. profit sharing

2. employee stock ownership

Team results

Rewarding members of a team for achieving a goal or particular performance level

Advantages of Team results

team cohesion, interpersonal skills, cooperation

Disadvantages of Team Results

• If team cohesiveness is not strong → "freeloader effect" may take place.

• individual contributions to team goals vary. If these differences are significant and the high performers do not receive satisfaction for their input, they may cut back their contributions.

• Another potential drawback is social pressure on high performers to lower their input to avoid drawing management's attention to the low performers.

• team approach may be too effective, resulting in competition between teams and undesirable consequences, such as hoarding of resources or withholding of important information.

When might high performers lower their input to avoid drawing management's attention to the low performers.

In a hostile management-union environment

Production Incentive Plans

Groups receive bonuses for exceeding predetermined levels ofoutput

• tend to be short-range and related to very specific production goals

• team may be offered a bonus for exceeding predetermined production levels, or it may receive a per-unit incentive that results in a group piece rate.

Profit-Sharing Incentive Plan

A system whereby an employer pays compensation or benefits to employees, usually on an annual basis, in addition to their regular wage, on the basis of the profits of the company.

• distribute a portion of a company's profits back to its workers.

• Rather than direct cash payments, these funds are often managed by a trustee and invested on behalf of the employees

• % organizational profits given as pay or bonuses

• Not added to base pay

• Contains costs in times of low profitability

Disadvantages of Profit-Sharing Incentive Plans

• profitability is not solely based on employee performance, it is often tied to things outside an employee's control, such as economic recessions or new market competition

• Employees often struggle to see how their individual daily tasks directly impact the company's total bottom line.

• When profits are diverted into retirement accounts, the "immediate reinforcement" is lost, reducing the plan’s impact as a short-term incentive.

Advantages of Profit-Sharing Incentives

• profit-sharing plans can create a sense of trust and a feeling of common fate among workers and management.

• tend to have open two way communication between management and employees

• managers tend to have participative management styles

Employee Stock Ownership Plans (ESOPs)

allows employees to become partial owners of the company

• provides genuine ownership and voting power toward major decisions on company’s future.

• Granting shares or share options to employees

• Portion of salary as shares or share options

equal pay for work of equal value

The principle of paying the same compensation to both women and men performing jobs with comparable content, based on skill, effort, responsibility, and working conditions. Equal pay for work of equal value is mandated in the Canadian Human Rights Act.

pay equity

A policy to eliminate the gap between the income of men and women, ensuring that salary ranges correspond to value of work performed.

equal pay for equal work

The principle or policy of equal rates of pay for all employees in an establishment performing the same kind and amount of work, regardless of sex, race, or other characteristics of individual workers not related to ability or performance.

Side effects of variable pay

• Can encourage counterproductive behaviour

Pay equity stat: men vs women’s earnings

Women aged 25-54 earn about 88 cents for every dollar earned by men

Pay Equity Act (purpose, salary)

• Purpose: eliminate the gap b/w the income of men and women

• Salary ranges correspond to value of work performed

• Employers with 10+ employees must submit plan

Gender Pay Gap

Worse for those who belong to multiple marginalized groups (e.g., racialized women, Indigenous women, women with

disabilities, low-income women)

Why does the gender gap exists

because of systemic gender-based discrimination

What is the myth about why the gender gap exists

The only reason the gender pay gap exists is because of women’s personal choices

At what % is a field is considered genered

60-70 percent of the people doing the work are from one sex

What can HR / orgs do to end the gender pay gap?

• Ensure salary and performance rating systems are unbiased

• Pay transparency

• Diverse and inclusive employer → female ratio

• HR systems (e.g., flexible work arrangements)

pay secrecy

A management policy not to discuss or publish individual salaries.

• Organizations avoid having to defend pay decisions

Advantages of Pay Secrecy

• gives managers greater freedom

• Covers up inequities

Pay transparency

The practice of revealing salary information in a company.

• In some contexts, requirement in job ad

Disadvantages of Pay Secrecy

• Lowers pay satisfaction of employees

• Reduces employee motivations to perform

• May generate distrust in the pay system

• Employees may perceive there is no relationship between pay and performance