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MGT 462 COMPENSATION MIDTERM 1

Terms in this set (125)

FUTURE WORKPLACES WANT AND NEED
My Purpose
My Development
My Coach
My Ongoing Feedback
My Strengths
My Life
PAST WORKPLACES WANT AND NEED
My Paycheck
My Satisfaction
My Boss
My Annual Review
My Weaknesses
My Job
Basic theory of performance
Aptitude + Motivation + Opportunity = Performance
High Performance Workforce
A set of shared beliefs, values, attitudes, goals and actions at all levels that deliver superior execution over time
Key Compensation Goals (3)
Attract, Retain, Motivate
Most common Compensation Philosophies
Seniority-based: based on tenure; no link to performance

Egalitarian: everyone gets same/similar; no link to performance

Meritocracy: receive rewards based on measurable achievement of objectives; highly performance-based and requires ability to clearly differentiate levels of performance
Total Cash Compensation
A system of rewards that goes beyond basic cash compensation and benefits
Total Compensation?
Includes anything and everything employees value and the employer is willing and able to offer
Total Rewards?
Cash and non-cash elements used to attract, retain, motivate and reinforce desired behaviors
Forms of Total Rewards (3)
Direct: cash and equity (monetary value)
Base pay (salary or hourly rate; allowances)
Short-term incentives (formal bonus, profit sharing)
Long-term incentives (options, restricted stock)

Indirect: benefits and programs
Health and welfare benefits
Government mandates (e.g., social security)

Relational: interaction and development
Social, personal growth, "human capital appreciation"
Some rewards for performance, some by membership
Base compensation
hourly, daily, monthly pay that employees receive for their work

Salary: paid to employees who are exempt from overtime laws; typically professionals

Wages: employees paid on an hourly basis, non-exempt

Differentials: shift and/or special skills, e.g., bi-lingual or multi-lingual skills, on-call pay, holiday pay (also known as premium pay)
Variable pay (Incentives):
pay that varies based on performance, or pay "at risk"

Incentive Bonuses: Reward paid based on corporate, group/team, individual performance, or some combination of the three

Profit Sharing: Opportunity to share in the organization's profits

Equity (Stock): Shares or options to buy company stock
Benefits
Rewards based on organization membership and sometimes position held

Health - medical, dental, vision insurance

Income protection - retirement programs, life insurance, savings plans; some are statutory, like WC

Work/life balance - vacations, jury duty, referrals for child and elder care, telecommuting, nontraditional schedules, nonpaid time off

Allowances - housing, transportation, car, meals; very region-specific
Legally Required (Statutory) Benefits
Social Security

Unemployment Compensation

Worker's Compensation
Non Compensation Elements (10)
Job Satisfaction

Autonomy:

Meaningful Work:

Flexible Schedules and Work
Arrangements:

Growth Opportunities:

Relationships with Other People:

Adequate Resources:

Quality of Leadership:

Work Environment:

Recognition and Awards
Compensation Strategy
Alignment between rewards strategy and business strategy
Perspectives of Compensation (4)
Society:
Considers pay as a measure of justice
Laws and rules to reduce discrimination
Movement of jobs to low cost areas

Stockholders:
Using stock to pay employees creates a sense of ownership and improves performance - does it?
Aligning/linking executive pay to company performance supposedly increases stockholders' returns

Managers - see pay from 2 perspectives
Major expense/labor expenses
or
Major influence on:
employee behaviors
improve the organization's

Employees
Major source of financial security
Return in an exchange between employer and themselves
Entitlement for being an employee of the company
Reward for a job well done (differentiation)
Incentive effect
degree to which pay influences individual and aggregate motivation among the employees; extra effect, persistence, intensity
Sorting effect
affect that pay can have on the composition of the workforce; who applies, who stays and who self-select out
Three basic building blocks of a Pay Model
Compensation objectives

Policies that form the foundation of the compensation system

Techniques that make up the compensation system
Basic objectives of Comppensation (4)
Efficiency - improving performance, increasing quality delighting customers and shareholders and controlling labor costs
Fairness - including distributive and procedural fairness Compliance - legal and statutory requirements (vary by country)
Ethics - how, not just what is achieved; plan designs, unintended consequences (Enron)
Four Policy Choices
Serve as guidelines for managing pay:
Internal alignment

External competitiveness

. Employee contributions

Management of the pay systems
Internal alignment
Comparing jobs or skill levels inside a single organization; relative contribution to business
Pertains to the pay rates both for employees doing
equal work
dissimilar work
Pay relationships affect employee decisions to:
Stay with the organization
Become more flexible by investing in additional training
Seek greater responsibility
External competitiveness
Pay comparisons w/competitors
Pay is 'market driven'
Objective:
*To ensure that pay is sufficient to attract and retain employees
*To control labor costs to ensure competitive pricing of products/services
Employee contributions
to what extent does employee contribution or performance get reflected in pay?
Focus: "pay for performance" - discussed at length later
Directly affects employees' attitudes and work behaviors
Management of the pay systems
Management needs to understand how pay does and doesn't motivate and how it can drive results
Managing pay has become more strategic than managing labor cost
What are the best practices ?
Internal alignment
Pay differences among internal jobs can affect results, both small and large pay differences work and either works depending on the objective

External competitiveness
Paying higher than the average paid by competitors can affect results, but it isn't necessarily better

Employee contributions
Performance-based pay can affect results, but this too is dependent on how administered and what the objective is (think about SAS and their desire to reduce internal competitiveness and increase team-work and sharing)

Managing compensation
Rather than focusing on one element, all dimensions of pay strategy need to be considered together (total rewards)

Compensation strategy
Embedding compensation strategy within the broader HR strategy affects results; compensation doesn't operate alone, but instead is a part of the overall HR strategy
Strategic Approach to Compensation (aligned with and coming from the business strategy)
...
Different pay strategies
...
Four Steps in developing a compensation strategy
Step 1: Assess Total Compensation Implications

Step 2: Map a Total Compensation Strategy

Step 3: Implement

Step 4: Reassess
Best practices in pay strategies
...
Best-fit: pay strategy
The best-fit approach presumes that one size does not fit all; managing compensation strategically means fitting the compensation system to the business and environmental conditions
Best-practice: Pay Strategy
In contrast, the best-practices approach assumes a universal best way exists; focus is not on what the best compensation strategy is but on how to best implement the system and ultimately fit the compensation system to the business and environmental conditions
Total Compensation Implications: Culture/values
Pay systems reflect the values that guide an employer's behavior and underlie its treatment of employees
Do pay systems really support or are these values statements really just nice words? (e.g., Medtronic)
Total Compensation Implications: Social and political context
Legal and regulatory requirements (immigration)
Cultural differences
Changing workforce
Demographics (e.g., young - tuition reimbursement, older - benefits)
Total Compensation Implications: Employee preferences
Changing demographics of workforce makes one-size fits all difficult
Pay practices will have to become more flexible
Legal issues?
Total Compensation Implications: Giving choices in pay vehicles
Is it a good idea?
Employees say they prefer it, but they may not understand the alternatives and they may not make good choices
From a company perspective, it's challenging to design and manage - benefit of offering choices may be offset by cost of communication and simply confusing people
May be difficult with regulations and in different countries
Total Compensation Implications: Union preferences
Union preferences for different forms of pay and their concern with job security affect pay strategy
Unions' interests can differ
Compensation deals with unions can be costly to change
What % of workers in US covered by a union?
Less than 10% in the private sector
Sources of Competitive Advantage: Three Tests
Is it aligned?
With business strategy
Externally
Internally with other HR practices

Does it differentiate?
Can it be duplicated elsewhere? Maybe elements, but not in total (think of comp elements like ingredients in a recipe)
Way programs are weaved together often is the differentiator

Does it add value?
Largest controllable expense for most organizations
Return on investment (ROI) - productivity, retention, attraction, higher revenue, lower cost, etc.
Difficult to do - easy to count the cost, but what about the "value" (easier to count the bottles than describe the wine)
Pay Structure
Refers to the array of pay rates for different work or skills within a single organization. The number of levels, the differentials in pay between the levels, and the criteria used to determine those differences describe the structure.
Internal pay alignment addresses the relationships between:
Content of the work: difficult, easy, one job, multiple responsibilities, how it's organized, etc.

Skills and knowledge required to do the work

Relative value of the work within the organization
Pay Structures Defined By (3)
# of levels of work & reporting relationships

Differentials between the levels:

Criteria for determining those levels: most common is work content and value
Job-based structures
rely on the work content - tasks, behaviors, responsibilities
Person-based structures
shift the focus to the employee
Skills, knowledge, or competencies the employee possesses whether or not they are used in the particular job
Layered Structure:
many grades that overlap typical of hierarchical companies that view advancement as moving up the career ladder
Flat Structures:
fewer grades that are broader typical of more fluid organizations that might value both lateral and vertical career advancement
Types of Structures (3)
Traditional: Highly structured, many narrow bands, support traditional advancement through "promotion"; highly controls compensation

Broadband: Simplify traditional into fewer grades and wider ranges; give more flexibility

Market-based: tend to fall between traditional and broadband - flexible and control
Elements of Job Worth (5)
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: result of job evaluation process; illustrates where each job fits relative to other jobs

The outcome of this process is a base pay structure: after job worth hierarchy built, a base pay structure is created and used as the framework for pay decisions
Use Value
The value of goods/services an employee produces in a job
Exchange Value
The wage agreed upon by the employer and employee
Marginal productivity
unless the employee can produce value equal to value of pay, shouldn't hire; a job is paid more or less based on the difference in the productivity of the job or how much the consumer values the output of the job
External Factors that shape Internal Structures (6)
Economic pressures

Marginal productivity

Market

Government policies, laws and regulations

External stakeholders

Cultures and customs
Organizational Factors that shape Internal Structures (6)
Organization strategy

Organization human capital - major influence on internal structures

Organization Work Design

Overall HR policies

Internal labor markets: combine external and organization factors

Employee acceptance
Human capital
education, experience, knowledge, abilities, skills of the workforce
Procedural justice
refers to the process by which a decision is reached (in pay, how design & administration decisions made and are they consistent)
Distributive justice
refers to the fairness of decision/results (in pay, are pay differences acceptable)
Pay procedures more likely to be perceived fair if (4)
They are consistently applied to all employees

Employees participated in process (less so for low paid jobs)

Appeals procedures are included

Data used are accurate
Egalitarian structures
send the message that all employees are valued equally
Hierarchical structures
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

High performers quit less under more hierarchical systems when:
Pay is based on performance rather than seniority
When people have knowledge of the structure
Equity Theory: Fairness
Research suggests that employees judge fairness by multiple comparisons:

Comparing to jobs similar to their own (internal alignment)

Comparing their job to others at the same employer (internal alignment)

Comparing their jobs' pay against external pay levels (external competitiveness)
Definition of Job Analysis
The systematic way to determine the skills, duties and knowledge required for performing a job in an organization; the similarities and differences amongst jobs and provides input to determine value of a job
Jobs:
Consists of a group of tasks performed in an organization
Position:
Collection of tasks and responsibilities performed by one person
Job Family
Broadly similar jobs combine into a job family
Questions Job Analysis Should Answer (6)
What physical and mental tasks does the worker accomplish?

When is the job to be completed?

Where is the job to be accomplished?

How does the worker do the job?

Why is the job done?

What qualifications are needed to perform the job
Six Aspects of Jobs Collected in Job Analysis
Job Data:
Includes basic job identification information like job titles, departments and the number of people who hold the job

Job Duties & Tasks (content of the job): most important aspect (Ex 4.7 on page 114)
Elemental tasks or units of work, with emphasis on the purpose of each task
Task data reveals the actual work performed and its purpose or outcome

Requirement: minimum requirements for skills, knowledges and abilities (KSAs)

Tools & Equipment: may include things like protective clothing, types of equipment used to perform duties

Environment: physical and environmental aspects

Relationships: internal and external interfaces with the job
Why perform job analysis? (2)
Employees see where their work fits into bigger picture and can direct their behavior toward organizational objectives

Job analysis data helps substantiate and defend pay
In compensation, job analysis has three critical uses:
It establishes similarities and differences in the work contents of the jobs

It helps establish an internally fair and aligned job structure

Provides managers and employees a work-related rationale for pay differences
Elements of Job Description
Tasks

Responsibilities

Duties
Elements of Job Specifications
Knowledge

Skills

Ablilities
What areas of HR does job analysis impact?
(5)
Compensation

Recruitment

Performance

Training

Compliance
Benefits of Job Analysis
Provides valuable information to many aspects of HR


Provides objective input for compensation differences
Disadvantages Job Analysis
Subjective

Lengthy Process

Requires significant human effort

Sources of data small

Mental abilities not easily measured
Data Collection Qualitative Methods,
Advantages and disadvantages
Questionnaires, interviews, observation

Advantage:
Employee involvement increases understanding of process
May take time

Disadvantage:
They are open to bias/ favoritism because rely on employee descriptions
Limited to input of those employees interviewed
Data Collection Quantitative Methods,
Advantages and disadvantages
Position Analysis Questionnaire (PAQ)

Advantage:
Practical and cost effective
Unbiased

Disadvantage:
Important job aspects may be omitted resulting in a job description that's incorrect or incomplete
Nuances of jobs are difficult to reduce to a questionnaire
Equal Pay Act:
Similar pay must be provided if jobs are not substantially different as shown in the job description
Fair Labor Standards Act (FLSA):
Employees are categorized as exempt or non-exempt based on their job duties
Civil Rights Act:
Basis for adequate defenses against unfair discrimination charges in selection, promotion and other areas of HR
Occupational Safety & Health Act
Specify job elements that endanger health
Americans with Disabilities Act ADA):
Requires making reasonable accommodations
"Essential Job Functions" & ADA (3)
Percentage of time spent on task:

Significant percentage of time; often > 20%

Frequency of task: task performed regularly?

Importance of task: does the task affect other parts of the job? Does the task affect other jobs?
Steps to products of Job Analysis
1. Job Analysis
2.Job Description
3. Job Specification
4. Job Evaluation
5. Job Structure
Offshoring
Refers to the movement of jobs to locations beyond a country's borders
Judging Job Analysis (5)
Reliability

Validity

Acceptability

Currency

Usefulness
Reliability
a measure of the consistency of results among various analysts, various methods, various sources of data, or over time
Reliability is a necessary, but not necessarily mean the data is correct (or valid)
Validity:
accurately assesses each job's duties or content; examines the convergence of results among sources of data and methods
Acceptability
Data and process must be acceptable to job holders and managers
Currency
Job information must be up to date
Some jobs relatively stable, others change more often
How often should job analysis be completed?
Usefulness
Practicality of information collected

Can be used for multiple purposes - pay, FLSA, performance management, training, etc
Process of Developing Salary Structures?
1. Job Analysis
2. Job Documentation: Description and Specifications
3. Job Evaluation
4. Job Worth Hierarchy
5. Salary Structures
Definition of Job Evaluation: (3)
A process of systematically determining the relative worth (importance or value) of jobs within an organization in a structured, orderly & consistent manner which takes accounts of job content & organizational context

It is used to establish internal relativities and provide a basis for designing equitable (and defensible) pay grades and pay structure

A formal process to establish a job worth hierarchy (relative worth of jobs) in an (one) organization
Benchmark job (5)
One that has a standard and consistent set of responsibilities from one organization to another (and across industries)and therefore, can be compared from one organization to another

Job content is not unique to one employer and doesn't differ significantly from employer to employer

Content of job well-known & relatively stable over time

Data is widely available on the key metrics of these jobs, including salary and career path

80-95% of jobs in most companies are benchmark jobs
Compensable factor and Four Categories
determined by the organization based on skills, knowledge, abilities that the organization values and that help it pursue its strategy and achieve its objectives

Skill, Effort, Responsibility, Working Conditions
Market pricing
Looks at external data; job evaluation forms the basis for market pricing
Utilize job descriptions to compare jobs to like positions within the external marketplace
Pay data collected from published sources and the value of the position within the competitive market is determined
Considers the organization's compensation philosophy. (Where do we want to position ourselves vis-à-vis the market?)
Examines internal value against market data
Requires an overlay to see how it fits with the internal hierarchy

Used most to determine worth of a job'

Not a job evaluation method
Job worth hierarchy
...
Job evaluation process (5)
1
Start with Benchmark jobs
2
Determine Compensable Factors
3
Scale the factors
4
Weight the factors according to importance
5
Job Slotting: apply non-benchmark jobs
Three Primary Job evaluation methods
Non-Analytical
(Qualitative):
Ranking Method: Process of ranking jobs in against one another and arranging them in order of each job's perceived value in relation to the others in the organization
Does not consider market compensation rates
May work well for smaller companies
Too complex for larger organizations

Classification/Grading Method: The process of slotting jobs into grades by comparing jobs with a definition/scale that refers to job characteristics such as skills, decision-making and responsibility
Relatively simple and straightforward method
Individual jobs are compared to groups of job characteristics, then matched to specific grade classification


Analytical
(Quantitative):
Point-Factor Method/Factor Comparison: Process of identifying job factors that add value and worth to a position; job factors separated into groups (i.e., skill, responsibility, effort) and assigned a numerical or weighted point value; points for individual factors are added up to get a point value for the whole job
Points associated with different aspects of a job are difficult to assign
Generates a hierarchy but does not have an external component (may not reflect external value of a job)

Know How + Problem Solving + Accountability = Total Job Size
Hay Point Method
...
Skill-based pay
originated as a way to reward nonexempt employees for cross-training

link pay to the depth or breadth of skills, abilities and knowledge a person possess/acquires that are relevant to the work
Skill block
...
"Topping out"
encourages employees to gain skills, so often employees complete all training and wondered what was next
core competency,,
often linked to the mission statement; underlying broadly applicable knowledge, skills and behaviors that allow someone to be successful in a job are known as core competencies
competency set
translate each core competency into action, e.g., cost management, business acumen
competency indicator
the observable behaviors that indicate competency, e.g., regularly identifies cost savings; able to translate business strategy into action
Competency-based pay
Pay based on relevant skills & competencies
Advantages and disadvantages of person-based versus job-based structures?
Job-based approach (job evaluation):
Are more reliable and valid and are typically come closer to market rates
Focus on the right people in the right job and are more able to hold wages to the market because only pay for work performed

Person-based structures (job analysis):
Focuses more on behaviors and may be more aligned with the organizational values, so may encourage more line of sight
Pay employees for highest level of skill, independent of whether the skill/competency is used; high wages ideally offset by higher productivity; also higher training costs
More susceptible to bias
Advantages and disadvantages of skill-based pay?
Skill-based structures link pay to the depth or breadth of skills, abilities and knowledge a person possess/acquires that are relevant to the work

Disadvantages: Average pay higher
Labor costs may be higher if productivity doesn't offset
Requires investment in training
Advantages and disadvantages of competency-based pay?
Pay based on relevant skills & competencies

generally drives structures that have relatively few levels and wide differentials for increased flexibility

very difficult to objectively certify whether a person possesses a competency


vagueness and subjectivity make competencies a risky foundation for a pay system
o External Competitiveness
pay relationships among organizations
- Comparisons outside the company
- Pay relative to competitors
o Pay level
how much you're paid

the average of array of rates paid by an employer:

Employee satisfaction with pay and perceived fairness is directly tied to pay level (not mix)
o Pay forms (or mix)
the various types of payments that make up total compensation (e.g., base pay, bonus, benefits, equity)
o Labor costs
Pay x # of Employees
o Labor costs
Pay level x # of Employees
o Marginal revenue of labor
the additional revenue generated when the firm employs one additional person, with other production factors held constant
o Market rate
The market rate is where the lines for labor demand and labor supply cross
• Two goals of pay levels: a balancing act
...
• Two goals of pay levels: a balancing act
...Low cost
Motivate employees
• Supply and demand impact on pay
Labor demand: How many employees employers seek to hire and what they are willing to pay. If $40,000 is the market rate for business graduates, how many will a specific employer hire?

Labor supply: Qualified candidates and what pay these candidates are willing to accept
• Labor Theories - demand and supply side
Demand Theories:

Compensating Differentials: Work with negative characteristics requires higher pay to attract/ retain workers.

Efficiency Wage: Above market wage/ pay level will improve efficiency by attracting higher ability workers (sorting) and by discouraging shirking because of losing high wage job.

Sorting and Signaling: Pay policies signal to applicants attributes that fit the organization

Job Competition: Job requirements may be fixed. Workers compete for jobs based on qualifications and not how low wages they are willing to accept. Thus wages are sticky downward.

Supply Theories:

Reservation Wage: Job seekers will not accept jobs with pay below a certain wage, no matter how attractive other job aspects.

Human Capital: the value of an individuals skills and abilities is a junction of the time and expense required to acquire them.
• Product and organizational impact to labor supply and demand
...
• Competitive Pay Policies - Lead, Match, Lag
1. Lead
Pay above market/competition
2. Match
Pay at market/competition
3. Follow/Lag
Pay less than market/competition
• Non-Traditional Pay Policies
Pay-mix strategies:
Performance driven
Work/life balance
Market Match
Security
• Impact of Pay Policies - efficiency, fairness, compliance
...
Two basic types of labor markets:
Quoted price
Example: Stores that price each item (set price)
New Grads
Bourse
Example: eBay allows haggling over the terms and conditions
More experienced employees, or where demand outstrips supply
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