Description
The report includes topics like HR metrics for compensation, job evaluation systems, variable pay and executive compensation, common executive compensation issues.
Compensation
• Pay is a statement of an employee’s worth by an employer. • Pay is a perception of worth by an employee.
Managing Compensation
Common Strategic Compensation Goals
1. To reward employees’ past performance 2. To remain competitive in the labor market 3. To maintain salary equity among employees 4. To mesh employees’ future performance with organizational goals 5. To control the compensation budget 6. To attract new employees 7. To reduce unnecessary turnover
Strategic Compensation Policy Concerns
1. The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate. 2. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities. 3. The pay level at which employees may be recruited and the pay differential between new and more senior employees. 4. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises. 5. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.
1
Total Compensation
Strategic Compensation
Indirect
Direct Wages / Salaries Commissions Bonuses Gainsharing
• Objectives of a Strategically Supportive Compensation System:
ØLegal compliance with all appropriate laws and regulations ØCost effectiveness for the organization ØInternal, external, and individual equity for employees ØPerformance enhancement for the organization
Time Not Worked
• Vacations • Breaks • Holidays
Insurance Plans
• Medical • Dental • Life
Security Plans
• Pensions
Employee Services
• Educational assistance • Recreational programs
Market Competitiveness and Compensation
Meet the Market
Attempting to balance employer costs and the need to attract and retain employees.
Individual vs. Team Rewards
Using Team-Based Reward Systems TeamUse skill -based pay for the base. skill-
Lag the Market
Paying all that the firm can afford. Taking advantage of the abundant supply of potential employees in a loose labor market.
Make system simple and understandable. Use variable pay based on business entity performance
Lead the Market
Paying for higher qualified, more productive workers.
Distribute variable rewards at the team level Maintain a high degree of employee involvement
2
HR Metrics for Compensation
Linking Compensation to Organizational Objectives
• Value-added Compensation
Ø Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization.
“How does this compensation practice benefit the organization?” v “Does the benefit offset the administrative cost?”
v
The Pay-for-Performance Standard
• Pay-for-Performance Standard
Ø The standard by which managers tie compensation to employee effort and performance. Ø Refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and pay banding, team/ group incentives, and various gainsharing programs.
Equity Considerations in Compensation
Figure 12–8
3
Motivating Employees through Compensation
• Pay Equity (also Distributive Fairness)
Ø An employee’s perception that compensation received is equal to the value of the work performed. Ø A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
v
Perceptions of Pay Fairness
Equity
External Equity Internal Equity
The perceived fairness between what a person does (inputs) and what the person receives (outcomes).
Employee compensation viewed as equitable in relation to the compensation of employees performing similar jobs in other organizations. Employees receive compensation in relation to the knowledge, skills, and abilities they use in their jobs as well as their responsibilities and accomplishments. Perceived fairness of the process and procedures used to make decisions about employees.
Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.
Procedural Justice
Distributive Justice Perceived fairness in the distribution of outcomes. Pay Openness/ The degree of openness or secrecy that an organization Secrecy allows regarding its pay system.
Motivating Employees through Compensation
• Pay Secrecy
Ø An organizational policy prohibiting employees from revealing their compensation information to anyone.
v
Creates misperceptions and distrust of compensation fairness and pay-for-performance standards.
Ø Arguments against secrecy: Compensation Administration Process
Knowledge of base pay is the strongest predictor of pay satisfaction, which is highly associated with work engagement v Knowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees.
v
4
The Bases for Compensation
• Hourly Work
Ø Work paid on an hourly basis.
Factors Affecting the Wage Mix
• Piecework
Ø Work paid according to the number of units produced.
• Salary Workers
Ø Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.
The Wage Mix—Internal Factors
• Employer’s Compensation Strategy
Ø Setting organization compensation policy to lead, lag, or match competitors’ pay.
The Wage Mix—External Factors
• Labor Market Conditions
Ø Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.
• Worth of a Job
Ø Establishing the internal wage relationship among jobs and skill levels.
• Area Wage Rates
Ø A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.
• Employee’s Relative Worth
Ø Rewarding individual employee performance
• Employer’s Ability-to-Pay
Ø Having the resources and profits to pay employees.
5
The Wage Mix—External Factors
• Cost of Living
Ø Local housing and environmental conditions can cause wide variations in the cost of living for employees. Ø Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.
The Wage Mix—External Factors
• Collective Bargaining
Ø Escalator clauses in labor agreements provide for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power. Ø Unions bargain for real wage increases that raise the standard of living for their members. Ø Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.
Job Evaluation Systems
• Job Evaluation
Ø The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization.
Different Job Evaluation Systems
SCOPE OF COMPARISON
BASIS FOR COMPARISON
JOB AS A WHOLE
(NONQUANTITATIVE)
JOB PARTS OR FACTORS
(QUANTITATIVE)
Job vs. job Job vs. scale
Job ranking system Job classification system
Factor comparison system Point system
6
Job Evaluation Systems
• Job Ranking System
Ø Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth. Ø Disadvantages
Does not provide a precise measure of each job’s worth. v Final job rankings indicate the relative importance of jobs, not extent of differences between jobs. v Method can used to consider only a reasonably small number of jobs.
v
Figure 9–4 9–
PairedPaired -Comparison Job Ranking Table
Directions: Place an X in the cell where the value of a row job is higher than that of a column job.
Job Evaluation Systems
• Job Classification system
Ø A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades. Ø Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.
Point System
• Point System
Ø A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it. Ø Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors— that constitute the job.
• The Point Manual
Ø A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs.
7
Valuing Jobs Using Market Pricing
Point Values for Job Factors of the American Association of Industrial Management
FACTORS 1ST 2ND 3RD 4TH 5TH DEGREE DEGREE DEGREE DEGREE DEGREE 14 22 14 28 44 28 42 66 42 56 88 56 70 110 70
• Market Pricing
ØUse of pay survey data to identify the relative value of jobs based on what other employers pay for similar jobs.
Skill
1. Education 2. Experience 3. Initiative and ingenuity
Effort
4. Physical demand 5. Mental or visual demand 10 5 20 10 30 15 40 20 50 25
• Advantages of Market Pricing
ØTies organizational pay levels to what is actually occurring in the market, without being distorted by “internal” job evaluation. ØCommunicates to employees that the compensation system is “market linked,” rather than distorted by internal issues.
Responsibility
6. Equipment or process 7. Material or product 8. Safety of others 9. Work of others 5 5 5 5 10 10 10 10 15 15 15 15 20 20 20 20 25 25 25 25
Job Conditions
10. Working conditions 11. Hazards 10 5 20 10 30 15 40 20 50 25
Source: Reproduced with permission of the American Association o Industrial Management, Springfield, Mass. f
Valuing Jobs Using Market Pricing (cont’d)
• Disadvantages of Market Pricing
ØIt relies on market survey data that is limited or may not have been gathered in methodologically sound ways. ØThe responsibilities of a specific job in a company may be somewhat different from those of the “matching” job identified in the survey. ØThe market data’s scope (range of sources) is another concern. ØTying pay levels to market data can lead to wide fluctuations based on market conditions.
Characteristics of Key Jobs
• Key Jobs
Ø Jobs that are important for wage-setting purposes and are widely known in the labor market.
• Characteristics of Key Jobs
1. They are important to employees and the organization. 2. They contain a large number of positions. 3. They have relatively stable job content. 4. They have the same job content across many organizations. 5. They are acceptable to employees, management, and labor as appropriate for pay comparisons.
8
The Wage Curve
• Wage Curve
Ø A curve in a scattergram representing the relationship between relative worth of jobs and wage rates.
Figure 9–5 9–
Freehand Wage Curve
• Pay Grades
Ø Groups of jobs within a particular class that are paid the same rate.
• Rate Ranges
Ø A range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade.
• Red Circle Rates
Ø Payment rates above the maximum of the pay range.
Figure 9–6 9–
Single Rate Structure
Figure 9–7 9–
Wage Structure with Increasing Rate Ranges
9
The Wage Curve (cont’d)
Example of Pay Grades and Pay Ranges
• Competence-based Pay, (also skill-based pay or knowledge-based pay)
Ø Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category.
v
Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover,
• Broadbanding
Ø Collapses many traditional salary grades into a few wide salary bands.
Figure 12–14
Competency-Based Pay
Limitations (How many?)
Pricing Competencies
CompetencyCompetencyBased Pay Systems KBP/SBP
Maintenance of Competencies Training
Variable Pay and Executive Compensation
10
Variable Pay: Incentives for Performance
• Variable Pay
ØCompensation linked to individual, group/team, and/or organizational performance.
Developing Successful Pay-for-Performance Plans
• Reasons for Adopting Pay or Incentive Plans:
ØLink more directly strategic business goals and employee performance. ØEnhance organizational results and reward employees financially for their contributions. ØReward employees to recognize different levels of employee performance. ØAchieve HR objectives, such as increasing retention, reducing turnover, recognizing training, or rewarding safety and attendance.
• Basic assumptions:
ØSome jobs contribute more to organizational success than others. ØSome people perform better and are more productive than others. ØEmployees who perform better should receive more compensation. ØSome of employees’ total compensation should be tied directly to performance.
Pay-forPay -for-Performance and Expectancy Theory
Effective Incentive Plans
11
Metrics for Variable Pay Plans
Successes and Failures of Variable Pay Plans
• Successful incentive plans require:
ØThe development of clear, understandable plans that are continually communicated. ØThe use of realistic performance measures. ØKeeping plans current and linked to organizational objectives. ØStrong links among performance results and payouts that truly recognize performance differences. ØClear identification of variable pay incentives separately from base pay.
Types of Variable Pay Plans
Individual Incentives
Identification of Individual Performance
Independent Work
Individual Incentive Systems
Individualism Stressed in Organizational Culture Individual Competitiveness Desired
Figure 13–3
12
Why Organizations Establish Variable Pay Plans for Groups/Teams
Group/Team Incentives (cont’d)
• Distributing Rewards
ØSame-size reward for each member ØDifferent-size reward for each member
• Problems with Group/Team Incentives
ØRewards in equal amounts may be perceived as “unfair” by employees who work harder, have more capabilities, or perform more difficult jobs. ØGroup/team members may be unwilling to handle incentive decisions for co-workers. ØMany employees still expect to be paid according to individual performance.
Conditions for Successful Group/Team Incentives
Components of Executive Compensation Packages
13
Common Executive Compensation Issues
14
doc_890831954.pdf
The report includes topics like HR metrics for compensation, job evaluation systems, variable pay and executive compensation, common executive compensation issues.
Compensation
• Pay is a statement of an employee’s worth by an employer. • Pay is a perception of worth by an employee.
Managing Compensation
Common Strategic Compensation Goals
1. To reward employees’ past performance 2. To remain competitive in the labor market 3. To maintain salary equity among employees 4. To mesh employees’ future performance with organizational goals 5. To control the compensation budget 6. To attract new employees 7. To reduce unnecessary turnover
Strategic Compensation Policy Concerns
1. The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate. 2. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities. 3. The pay level at which employees may be recruited and the pay differential between new and more senior employees. 4. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises. 5. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.
1
Total Compensation
Strategic Compensation
Indirect
Direct Wages / Salaries Commissions Bonuses Gainsharing
• Objectives of a Strategically Supportive Compensation System:
ØLegal compliance with all appropriate laws and regulations ØCost effectiveness for the organization ØInternal, external, and individual equity for employees ØPerformance enhancement for the organization
Time Not Worked
• Vacations • Breaks • Holidays
Insurance Plans
• Medical • Dental • Life
Security Plans
• Pensions
Employee Services
• Educational assistance • Recreational programs
Market Competitiveness and Compensation
Meet the Market
Attempting to balance employer costs and the need to attract and retain employees.
Individual vs. Team Rewards
Using Team-Based Reward Systems TeamUse skill -based pay for the base. skill-
Lag the Market
Paying all that the firm can afford. Taking advantage of the abundant supply of potential employees in a loose labor market.
Make system simple and understandable. Use variable pay based on business entity performance
Lead the Market
Paying for higher qualified, more productive workers.
Distribute variable rewards at the team level Maintain a high degree of employee involvement
2
HR Metrics for Compensation
Linking Compensation to Organizational Objectives
• Value-added Compensation
Ø Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization.
“How does this compensation practice benefit the organization?” v “Does the benefit offset the administrative cost?”
v
The Pay-for-Performance Standard
• Pay-for-Performance Standard
Ø The standard by which managers tie compensation to employee effort and performance. Ø Refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and pay banding, team/ group incentives, and various gainsharing programs.
Equity Considerations in Compensation
Figure 12–8
3
Motivating Employees through Compensation
• Pay Equity (also Distributive Fairness)
Ø An employee’s perception that compensation received is equal to the value of the work performed. Ø A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
v
Perceptions of Pay Fairness
Equity
External Equity Internal Equity
The perceived fairness between what a person does (inputs) and what the person receives (outcomes).
Employee compensation viewed as equitable in relation to the compensation of employees performing similar jobs in other organizations. Employees receive compensation in relation to the knowledge, skills, and abilities they use in their jobs as well as their responsibilities and accomplishments. Perceived fairness of the process and procedures used to make decisions about employees.
Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.
Procedural Justice
Distributive Justice Perceived fairness in the distribution of outcomes. Pay Openness/ The degree of openness or secrecy that an organization Secrecy allows regarding its pay system.
Motivating Employees through Compensation
• Pay Secrecy
Ø An organizational policy prohibiting employees from revealing their compensation information to anyone.
v
Creates misperceptions and distrust of compensation fairness and pay-for-performance standards.
Ø Arguments against secrecy: Compensation Administration Process
Knowledge of base pay is the strongest predictor of pay satisfaction, which is highly associated with work engagement v Knowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees.
v
4
The Bases for Compensation
• Hourly Work
Ø Work paid on an hourly basis.
Factors Affecting the Wage Mix
• Piecework
Ø Work paid according to the number of units produced.
• Salary Workers
Ø Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.
The Wage Mix—Internal Factors
• Employer’s Compensation Strategy
Ø Setting organization compensation policy to lead, lag, or match competitors’ pay.
The Wage Mix—External Factors
• Labor Market Conditions
Ø Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.
• Worth of a Job
Ø Establishing the internal wage relationship among jobs and skill levels.
• Area Wage Rates
Ø A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.
• Employee’s Relative Worth
Ø Rewarding individual employee performance
• Employer’s Ability-to-Pay
Ø Having the resources and profits to pay employees.
5
The Wage Mix—External Factors
• Cost of Living
Ø Local housing and environmental conditions can cause wide variations in the cost of living for employees. Ø Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.
The Wage Mix—External Factors
• Collective Bargaining
Ø Escalator clauses in labor agreements provide for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power. Ø Unions bargain for real wage increases that raise the standard of living for their members. Ø Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.
Job Evaluation Systems
• Job Evaluation
Ø The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization.
Different Job Evaluation Systems
SCOPE OF COMPARISON
BASIS FOR COMPARISON
JOB AS A WHOLE
(NONQUANTITATIVE)
JOB PARTS OR FACTORS
(QUANTITATIVE)
Job vs. job Job vs. scale
Job ranking system Job classification system
Factor comparison system Point system
6
Job Evaluation Systems
• Job Ranking System
Ø Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth. Ø Disadvantages
Does not provide a precise measure of each job’s worth. v Final job rankings indicate the relative importance of jobs, not extent of differences between jobs. v Method can used to consider only a reasonably small number of jobs.
v
Figure 9–4 9–
PairedPaired -Comparison Job Ranking Table
Directions: Place an X in the cell where the value of a row job is higher than that of a column job.
Job Evaluation Systems
• Job Classification system
Ø A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades. Ø Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.
Point System
• Point System
Ø A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it. Ø Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors— that constitute the job.
• The Point Manual
Ø A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs.
7
Valuing Jobs Using Market Pricing
Point Values for Job Factors of the American Association of Industrial Management
FACTORS 1ST 2ND 3RD 4TH 5TH DEGREE DEGREE DEGREE DEGREE DEGREE 14 22 14 28 44 28 42 66 42 56 88 56 70 110 70
• Market Pricing
ØUse of pay survey data to identify the relative value of jobs based on what other employers pay for similar jobs.
Skill
1. Education 2. Experience 3. Initiative and ingenuity
Effort
4. Physical demand 5. Mental or visual demand 10 5 20 10 30 15 40 20 50 25
• Advantages of Market Pricing
ØTies organizational pay levels to what is actually occurring in the market, without being distorted by “internal” job evaluation. ØCommunicates to employees that the compensation system is “market linked,” rather than distorted by internal issues.
Responsibility
6. Equipment or process 7. Material or product 8. Safety of others 9. Work of others 5 5 5 5 10 10 10 10 15 15 15 15 20 20 20 20 25 25 25 25
Job Conditions
10. Working conditions 11. Hazards 10 5 20 10 30 15 40 20 50 25
Source: Reproduced with permission of the American Association o Industrial Management, Springfield, Mass. f
Valuing Jobs Using Market Pricing (cont’d)
• Disadvantages of Market Pricing
ØIt relies on market survey data that is limited or may not have been gathered in methodologically sound ways. ØThe responsibilities of a specific job in a company may be somewhat different from those of the “matching” job identified in the survey. ØThe market data’s scope (range of sources) is another concern. ØTying pay levels to market data can lead to wide fluctuations based on market conditions.
Characteristics of Key Jobs
• Key Jobs
Ø Jobs that are important for wage-setting purposes and are widely known in the labor market.
• Characteristics of Key Jobs
1. They are important to employees and the organization. 2. They contain a large number of positions. 3. They have relatively stable job content. 4. They have the same job content across many organizations. 5. They are acceptable to employees, management, and labor as appropriate for pay comparisons.
8
The Wage Curve
• Wage Curve
Ø A curve in a scattergram representing the relationship between relative worth of jobs and wage rates.
Figure 9–5 9–
Freehand Wage Curve
• Pay Grades
Ø Groups of jobs within a particular class that are paid the same rate.
• Rate Ranges
Ø A range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade.
• Red Circle Rates
Ø Payment rates above the maximum of the pay range.
Figure 9–6 9–
Single Rate Structure
Figure 9–7 9–
Wage Structure with Increasing Rate Ranges
9
The Wage Curve (cont’d)
Example of Pay Grades and Pay Ranges
• Competence-based Pay, (also skill-based pay or knowledge-based pay)
Ø Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category.
v
Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover,
• Broadbanding
Ø Collapses many traditional salary grades into a few wide salary bands.
Figure 12–14
Competency-Based Pay
Limitations (How many?)
Pricing Competencies
CompetencyCompetencyBased Pay Systems KBP/SBP
Maintenance of Competencies Training
Variable Pay and Executive Compensation
10
Variable Pay: Incentives for Performance
• Variable Pay
ØCompensation linked to individual, group/team, and/or organizational performance.
Developing Successful Pay-for-Performance Plans
• Reasons for Adopting Pay or Incentive Plans:
ØLink more directly strategic business goals and employee performance. ØEnhance organizational results and reward employees financially for their contributions. ØReward employees to recognize different levels of employee performance. ØAchieve HR objectives, such as increasing retention, reducing turnover, recognizing training, or rewarding safety and attendance.
• Basic assumptions:
ØSome jobs contribute more to organizational success than others. ØSome people perform better and are more productive than others. ØEmployees who perform better should receive more compensation. ØSome of employees’ total compensation should be tied directly to performance.
Pay-forPay -for-Performance and Expectancy Theory
Effective Incentive Plans
11
Metrics for Variable Pay Plans
Successes and Failures of Variable Pay Plans
• Successful incentive plans require:
ØThe development of clear, understandable plans that are continually communicated. ØThe use of realistic performance measures. ØKeeping plans current and linked to organizational objectives. ØStrong links among performance results and payouts that truly recognize performance differences. ØClear identification of variable pay incentives separately from base pay.
Types of Variable Pay Plans
Individual Incentives
Identification of Individual Performance
Independent Work
Individual Incentive Systems
Individualism Stressed in Organizational Culture Individual Competitiveness Desired
Figure 13–3
12
Why Organizations Establish Variable Pay Plans for Groups/Teams
Group/Team Incentives (cont’d)
• Distributing Rewards
ØSame-size reward for each member ØDifferent-size reward for each member
• Problems with Group/Team Incentives
ØRewards in equal amounts may be perceived as “unfair” by employees who work harder, have more capabilities, or perform more difficult jobs. ØGroup/team members may be unwilling to handle incentive decisions for co-workers. ØMany employees still expect to be paid according to individual performance.
Conditions for Successful Group/Team Incentives
Components of Executive Compensation Packages
13
Common Executive Compensation Issues
14
doc_890831954.pdf