Professional Documents
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Chapter 4
Chapter 4
COMPENSATION
CONTENTS
4.1. Establish Strategic Pay Plans 4.3. Benefits and Services
4.3.1. Pay for Time not worked
4.1.1. Basic Factors in Determining Pay Rates
4.3.2. Insurance Benefits
4.1.2. Job Evaluation Methods 4.3.3. Retirement Benefits
4.1.3. How to Create a Market-Competitive Pay Plan 4.3.4. Personal Services and Family-
friendly Benefits
4.1.4. Pricing Managerial and Professional Jobs
4.3.5. Flexible Benefit Programs
4.2. Pay for Performance and Financial Incentives
4.2.1. Money’s Role in Motivation
4.2.2. Incentives for Salespeople
4.2.3. Incentives for Managers and Executives
4.2.4. Team and Organization-wide Incentives Plans
4.1. Establish Strategic Pay Plans
LEARNING OBJECTIVES
• List the basic factors determining pay rates.
• Define and give an example of how to conduct a job evaluation.
• Explain in detail how to establish a market competitive pay plan.
• Explain how to price managerial and professional jobs.
• Explain the difference between competency based and traditional pay
plans.
• Describe the importance of total rewards for improving employee
engagement.
4.1.1. Basic Factors in Determining Pay
Rates
Wages
Pay Policies
• The employer’s compensation strategy will manifest itself in pay policies.
• Managers need pay policies on a range of issues.
• One is whether to emphasize seniority or performance
• How to distinguish between high and low performers is another policy issue.
This necessitated revising the firm’s compensation policies, to differentiate more
aggressively between top performers and others.
Other pay policies cover how to award salary increases and promotions, overtime
pay, probationary pay, leaves for military service, jury duty, and holidays
4.1.2. Job Evaluation Methods
Employers use two basic approaches to setting pay rates: market-based approaches
and job evaluation methods.
• Many firms, particularly smaller ones, simply use a market-based approach.
Doing so involves conducting formal or informal salary surveys to determine what
others in the relevant labor markets are paying for particular jobs.
then use these figures to price their own jobs.
• Job evaluation methods
involve assigning values to each of the company’s jobs.
helps produce a pay plan in which each job’s pay is equitable based on what other
employers are paying for these jobs and based on each job’s value to the employer
4.1.2. Job Evaluation Methods
job evaluation
A systematic comparison done in order to determine the worth of one job relative to another.
- aims to determine a job’s relative worth.
- eventually results in a wage or salary structure or hierarchy
The basic principle of job evaluation is:
- require greater qualifications, more responsibilities, and more complex job duties should
receive more pay than jobs with lesser requirements.
- The basic job evaluation procedure is to compare jobs in relation to one another
By combining the information from the job evaluation and from the salary survey
create a market-competitive pay plan—one where your pay rates are equitable both:
- internally (based on each job’s relative value)
- externally (in other words when compared with what other employers are paying).
4.1.2. Job Evaluation Methods
Compensable Factors
Two basic approaches to compare the worth of several jobs.
- First, decide that one job is more important than another is, and not dig any
deeper.
- As an alternative, compare the jobs by focusing on certain basic factors the jobs
have in common.
Compensation management specialists call these compensable factors - establish
how the jobs compare to one another, and that determine the pay for each job.
4.1.2. Job Evaluation Methods
classes grades
Grouping jobs based on a set of A job classification system like the
rules for each group or class, such as class system, although grades often
amount of independent judgment, contain dissimilar jobs, such as secretaries,
skill, physical effort, and so forth, mechanics, and firefighters.
required. Classes usually contain Grade descriptions are written based
similar jobs. on compensable factors listed in
classification systems.
4.1.2. Job Evaluation Methods
Job Evaluation Methods: Point Method the most popular job evaluation method today
• aim is to determine the degree to which the jobs you’re evaluating contain selected compensable
factors.
• involves identifying several compensable factors for the jobs, as well as the degree to which each
factor is present in each job.
Assume there are five degrees of the compensable factor “responsibility” a job could contain.
Further, assume you assign a different number of points to each degree of each compensable factor.
Notes:
Once the evaluation committee determines the degree to which each compensable factor (like
“responsibility” and “effort”) is present in a job it can calculate a total point value for the job by
adding up the corresponding degree points for each factor. The result is a quantitative point rating
for each job.
4.1.2. Job Evaluation Methods
In a market-competitive pay plan a job’s compensation (7) Review Job Description and Job
reflects the job’s value in the company, as well as what Specifications
other employers are paying for similar jobs in the
(8) Evaluate the Jobs
marketplace.
(9) Draw the Current (Internal) Wage Curve
The 16 steps in creating a market competitive pay plan
begin with choosing benchmark jobs: (10) Conduct a Market Analysis: Salary
Surveys
(1) Choose Benchmark Jobs
(11) Draw the Market (External) Wage Curve
(2) Select Compensable Factors
(12) Compare and Adjust Current and Market
(3) Assign Weights to Compensable Factors
Wage Rates for Jobs
(4) Convert Percentages to Points for Each Factor
(13) Develop Pay Grades
(5) Define Each Factor’s Degrees
(14) Establish Rate Ranges
(6) Determine for Each Factor Its Factor Degree’s
(15) Address Remaining Jobs
Point
(16) Correct Out-of-Line Rates
4.1.4. Pricing Managerial and Professional Jobs
Compensating Executives:
• emphasizes performance more than do other employees’ pay plans
• Indeed, boards are boosting the emphasis on performance-based pay
• The big issue here is identifying the appropriate performance measures.
• Typical short-term measures include revenue growth and operating profit margin.
Long-term measures include rate of return above some predetermined basef
4.1.4. Pricing Managerial and Professional Jobs
LEARNING OBJECTIVES
• Explain how you would apply four motivation theories in formulating an incentive
plan.
• Discuss the main incentives for individual employees.
• Discuss the pros and cons of commissions versus straight pay for salespeople.
• Describe the main incentives for managers and executives.
• Name and describe the most popular organization-wide incentive plans.
• Explain how to use incentives to improve employee engagement.
4.2.1. Money’s Role in Motivation
Fact:
• Frederick Taylor popularized using financial incentives—financial rewards paid to workers whose production
exceeds some predetermined standard—in the late 1800s.
• As a supervisor at the Midvale Steel Company, Taylor was concerned with what he called “systematic
soldiering”—the tendency of employees to produce at the minimum acceptable level.
• Some workers had the energy to run home and work on their houses after a 12-hour day. Taylor knew that if
he could harness this energy at work, Midvale could achieve huge productivity gains.
• In pursuing that aim, Taylor turned to financial incentives.
At the time, primitive incentive plans were in use, but were generally ineffective (because employers
arbitrarily changed incentive rates).
Taylor made three contributions:
- saw the need for formulating a “fair day’s work,” namely precise output standards for each job.
- spearheaded the scientific management movement, which emphasized improving work through
observation and analysis.
- popularized using incentive pay to reward employees who produced over standard
4.2.1. Money’s Role in Motivation
scientific management
fair day’s work movement
Output standards devised based on Management approach based on
careful, scientific analysis. improving work methods through
variable pay observation and analysis.
Any plan that ties pay to productivity
or profitability, usually as one-time
lump payments.
4.2.1. Money’s Role in Motivation
Salary Plan
A survey also found that
“30% of respondents believe
their sales compensation
program rewarded the right Sales
behaviors ‘not well’ or ‘very Commision
Incentive in
poorly.’” Plan
Action
Salary Plan
Some firms pay salespeople fixed salaries (perhaps with occasional incentives in the
form of bonuses, sales contest prizes, and the like).
Straight salary makes sense when the main task involves prospecting (finding new
clients) or account servicing.
The straight salary approach also makes it easier to switch salespersons’ territories,
and it can foster sales staff loyalty.
The main disadvantage, of course, is that straight salary may demotivate potentially
high-performing salespeople
4.2.2. Incentives for Salespeople
Commission Plan
Straight commission plans pay salespeople for results, and only for results.
Commission plans tend to attract high-performing salespeople who see that effort clearly
produces rewards.
Sales costs are proportionate to sales rather than fixed, and the company’s fixed sales costs are
thus lower.
Commission plan alternatives include straight commissions, quota bonuses (for meeting
particular quotas), management by objectives programs (pay is based on specific metrics), and
ranking programs (these reward high achievers but pay little or no bonuses to the lowest-
performing salespeople)
Disadvantages: problems abound
4.2.2. Incentives for Salespeople
Combination Plan
Most companies pay salespeople a combination of salary and commissions, usually with a
sizable salary component.
An incentive mix of about 70% base salary/30% incentive seems typical; this cushions the
salesperson’s downside risk (of earning nothing), while limiting the risk that the commissions
could get out of hand from the firm’s point of view.
Combination plans have pros and cons.
- They give salespeople a floor to their earnings, let the company specify what services the
salary component is for (such as servicing current accounts), and still provide an incentive
for superior performance.
- However, the salary component isn’t tied to performance, so the employer trades away some
incentive value.
4.2.2. Incentives for Salespeople
Employers first decide eligibility. Second, one must determine Finally, one must decide the
Traditionally, most based annual how big the annual bonus fund actual individual awards.
bonus eligibility on job should be.
Typically, the employer sets a
level/title, base salary, and/or Most employers (33% in one target bonus (as well as
officer status. survey) traditionally use the maximum bonus, perhaps
Some simply based eligibility on sum of targets approach. double the target bonus) for
job level or job title, or salary. This means they estimate the each eligible position.
Recently, more employers are likely bonus for each eligible The actual bonus then reflects
offering a broader range of (“target”) employee, and total the manager’s performance
employee annual incentive plans these to arrive at the bonus
“… in which both executives and pool’s size
other employees participate.”
4.2.4. Team and Organization-
wide Incentives Plans
Profit-sharing plans are plans in Few would argue with the idea that one of the best ways
which all or most employees of ensuring that employees are engaged and committed is
receive a share of the firm’s annual to ensure that by pursuing his or her goals, the worker
profits. pursues the employer’s goals as well
- With current profit-sharing or The Scanlon plan, developed in 1937 by Joseph Scanlon, a
cash plans, employees share in United Steel Workers Union official.
a portion of the employer’s The Scanlon plan is remarkably progressive and have five
profits quarterly or annually basic features:
- Philosophy of cooperation
- With deferred profit-sharing - Identity
plans, the employer puts cash - Competence
awards into trust accounts for - Involvement System
the employees’ retirement - Sharing of benefits formula
4.2.4. Team and Organization-
wide Incentives Plans
Pay for time not worked—also called supplemental pay benefits—is a very costly benefit, because of the large
amount of time off most employees receive.
Common time-off-with-pay benefits include holidays, vacations, jury duty, funeral leave, military duty, personal
days, sick leave, sabbatical leave, maternity leave, and unemployment insurance payments for laid-off or
terminated employees
supplemental pay benefits Leaves and the Family and Medical Leave Act Parental leave is
Benefits for time not worked such as an important benefit
unemployment insurance, vacation and holiday
Severance pay A one-time payment some employers provide
pay, and sick pay
when terminating an employee.
unemployment insurance (or compensation)
Supplemental unemployment benefits
Provides benefits if a person is unable to work
Provide for a “guaranteed annual income” in certain
through some fault other than his or her own.
industries where employers must shut down to change
Vacations and Holidays machinery or due to reduced work.
Most firms offer vacation and holiday benefits These benefits are paid by the company and supplement
Sick leave unemployment benefits.
Provides pay to an employee when he or she is
out of work because of illness.
4.3.2. Insurance Benefits
Most employers also provide a number of required or voluntary insurance benefits, such as
workers’ compensation and health insurance
Workers’ compensation
Provides income and medical benefits to work-related accident victims or their dependents
regardless of fault.
Health insurance looms large in many people’s choice of employer
because it’s so expensive. Hospitalization, health, and disability insurance helps protect employees
against hospitalization costs and the income loss arising from off-the-job accidents or illness.
Group life insurance
Provides lower rates for the employer or employee and includes all employees, including new
employees, regardless of health or physical condition.
4.3.3. Retirement Benefits
Social Security Federal program that provides three types of benefits: retirement income at the age
of 62 and thereafter, survivor’s or death benefits payable to the employee’s dependents regardless
of age at time of death, and disability benefits payable to disabled employees and their
dependents.
pension plans
Plans that provide a fixed sum when employees reach a predetermined retirement age or when
they can no longer work due to disability.
4.3.5. Flexible Benefit Programs
Although time off, insurance, and retirement account for the lion’s share of benefits costs, most
employers also provide various services benefits.
These include personal services (such as legal and personal counseling), “family-friendly” services
(such as child-care facilities), educational subsidies, and executive perquisites (such as company
cars for its executives).
Challenging economic times mean employers are revamping their personal services benefits.
Among the most-dropped benefits have been educational assistance, long-term care insurance,
and job sharing.
“Most-added” benefits included legal counseling, lactation rooms, work-at-home policies, and paid
or subsidized off-site fitness.
family-friendly (or work–life) benefits
Benefits such as child-care and fitness facilities that make it easier for employees to balance their
work and family responsibilities.
4.3.4. Personal Services and
Family-friendly Benefits
flexible benefits plan/ cafeteria benefits plan
Individualized plans allowed by employers to accommodate employee preferences for benefits
flextime
A work schedule in which employees’ workdays are built around a core of midday hours, and
employees determine, within limits, what other hours they will work.
Compressed workweek
Schedule in which employee works fewer but longer days each week
Job sharing
Allows two or more people to share a single full-time job.
Work sharing
Refers to a temporary reduction in work hours by a group of employees during economic
downturns as a way to prevent layoffs.
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