October 10 Compensation: Determining the worth of individuals © 2001 by Prentice Hall 10-1

© 2001 by Prentice Hall 10-2 How much are individuals in a job worth?  Input based individual pay u Ability and skills u Knowledge or education u Experience  Through-put or output based individual pay u Effort – individual performance u Output – individual or group performance u Profit – organizational performance

© 2001 by Prentice Hall 10-3 Criteria for Determining Individual Pay 1.Job versus Individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job? 2. Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis —through base salaries — or will it fluctuate depending on such pre-established criteria as performance and company profits?

© 2001 by Prentice Hall 10-4 Criteria for Determining Individual Pay (cont.) 3. Performance versus Membership Will compensation emphasize performance and tie pay to individual or group contributions, or will it emphasize membership in the organization —logging in a prescribed number of hours each week and progressing up the organizational ladder? 4. Monetary versus Nonmonetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security?

© 2001 by Prentice Hall 10-5 Pay Policies of 3 jobs in Computime HR DirectorEngineersProduction worker Internal versus external equity Fixed versus variable pay Pay dispersion Above versus below market Location of pay decisions

© 2001 by Prentice Hall 10-6 Individual-based Compensation  Individual-based compensation programs are more suitable when: u The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs u The company’s technology and organizational structure change frequently – new skills u Employee participation and teamwork are encouraged throughout the organization u Opportunities for upward mobility are limited u Opportunities to learn new skills are present u The costs of employee turnover and absenteeism in terms of lost production are high

© 2001 by Prentice Hall 10-7 Pay Structure of a Large Restaurant Developed Using a Job-Based Approach Jobs Number of Positions Pay GRADE 6 GRADE 5 GRADE 4 GRADE 3 GRADE 2 GRADE 1 Chef Manager Sous-Chef Assistant Manager Lead Cook Office Manager General Cook Short Order Cook Assistant to Lead Cook Clerk Server Hostess Cashier Kitchen Helper Dishwasher Janitor Busser Security Guard $20.00-$31.00/hr. $11.50-$21/hr. $7.50-$12.00/hr. $6.50-$8.00/hr. $6.00-$7.00/hr. $5.50-$6.25/hr.

© 2001 by Prentice Hall 10-8 Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach Skill s Create new items for menu Find different uses for leftovers (e.g., hot dishes, buffets) Coordinate and control work of all employees upon manager’s absence Cook existing menu items following recipe Supervise kitchen help Prepare payroll Ensure quality of food and adherence to standards Schedule servers and assign workstations Conduct inventory Organize work flow on restaurant floor $23.00/hr. $17.00/hr $10.50/hr PaySkill Block

© 2001 by Prentice Hall 10-9 Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach (cont.) Skill s 2121 Greet customers and organize tables Take orders from customers Bring food to tables Assist in kitchen with food preparations Perform security checks Help with delivery Use dishwashing equipment Use chemicals/disinfectants to clean premises Use vacuum cleaner, mop, waxer, and other cleaning equipment Clean and set up tables Perform routine kitchen chores (e.g., making coffee) $7.50/hr. $6.00/hr. PaySkill Block

© 2001 by Prentice Hall Total Compensation not only Pay  Base pay  Cash incentives – short term  Cash incentives – long term  Cash equivalent allowances  Benefits  Non cash incentives Different mix by different companies depending on situation and goals

© 2001 by Prentice Hall Video: Compensation in China  How does an extremely dynamic market like China influence the compensation practices of companies?  How does the mix of total compensation differ for different types of company in China?  What factors should be considered in determining the pay policies of a company?

© 2001 by Prentice Hall Thinking Questions on Compensation  What should be the % of the different components of total compensation? What factors determine the %?  Why are some companies guided more by external than internal equity? What are the consequences of low internal equity?  Why do garbage collectors make more money than teachers or nurses in some cities? How would “comparable worth” solve this problem?  Is it ethical for top executives to be making 500% more than the lowest pay employees? Why do some companies, like Ben and Jerry Ice-cream have a policies of 5% difference only?  Why do companies vary on their total compensation mix? What factors influence this and what effects would different mix have on the company’s ability to attract, motivate, and retain employees?