Management 351 – Class 9 Chapters 10 and 11 Announcements/Other Items  Syllabus changes Dropping chapter 9 Class 9: Ch 10 and 11 Class 10: Ch 12 and 17 Class 11: Final covering 7, 8, 10, 11, 12 and 17  Papers and Matewan  Test change: dropping Question #8

Chapter 10 – Managing Compensation Herzberg’s Two-Factor Theory (parallels Maslow’s hierarchy of needs) Hygiene Factors: Without them I will be resentful and unproductive Hygiene Factors: With them I AM NOT resentful. But I’m not happy either! Motivating Factors: Without them I AM NOT resentful. But I’m not motivated either! Motivating Factors: With them I am motivated, productive, satisfied, etc.

What is Compensation Think in terms of “Total Compensation”  Base cash compensation  “Pay Incentives” or variable cash compensation  Non-cash compensation (recognition)  Non-cash benefits  Cash-equivalent benefits

Designing a Compensation System Step One: Determining Pay Philosophy  Internal versus External Equity Put another way, Internal Equity versus External Competitiveness  Distributive Justice Model We exchange our time/labor for pay Labor Market Model: set by supply and demand Balancing Equity Model: internal issues may rule

Supply and Demand Labor is a commodity, like gasoline… Pick a gas company: what do you pay for gas? Pick a point on that distribution: what is fair? Say you had the time: what would you choose to spend? What are you willing to pay: ‘low’, ‘mid’ or ‘high’?

Fixed Versus Variable Pay Is “risk sharing” a good idea? Can and should “line” employees have the same risk as “manager” or “executives?” How do we set the risk level? Where do we pay relative to market:  Overall  Base  Variable  Benefits

Variable Pay Plans Don’t forget: you get what you pay for. Why they fail:  No link from effort to reward  “Funny money” makes financials meaningless  Rewards only drive performance in the short run (once spent, they’re forgotten)

Performance Versus Membership Performance-contingent plans:  Vary based on individual or work group achievement  Can be highly focused (team or group) Membership-contingent plans:  Pay the same to people in a job or work group regardless of individual or group performance Distinction driven by culture and goals of the play plan

Job Versus Individual Pay “We pay the position, not the person.” Powell’s Books example:  PhD selling books is paid as a PhD  Current labor issues: 9% versus 19% wage increase No benefits change versus increase in co-pays and deductibles Does this make sense?????

Options Knowledge and skill-based pay:  Pay for knowledge to encourage cross training  Promotes flexibility  Provides incentive to learn more skills Egalitarian and Elitist pay systems:  Egalitarian: everyone gets the same system  Elitist: equivalent to a ‘black box’ system

Egalitarian versus Elitism Egalitarian (worldwide trending this way):  More flexible  Reduce barriers (equity) between peers through elimination of status-based perks  More common in highly competitive markets Elitist  More stable workforce because employees only make more by moving up  More prevalent among older companies

Pay Issues Below versus above market  Competitive strategy (and Herzberg)  Blue chips have gone “above” market to create elitism, attract/retain the “cream of the crop” and minimize turnover (golden handcuffs)  Above more common in large, established companies with ready cash and little equity  Below are more common in smaller, startup companies that can put emphasis on a ‘liquidity event’

Pay Issues Monetary versus non-monetary rewards  Monetary: Emphasize individual achievement Volatile markets and low job security Emphasis on sales versus customer service Pushing competitive internal climate  Non-monetary: Emphasize commitment to the organization Stable workforce with an emphasis on customer service and loyalty (versus fast sales growth) Companies that want to create more cooperation internally

Pay Issues Open versus secret pay  Public or quasi public companies and agencies publish  May be illegal to restrict people from talking  What do we have to hide???  Secret pay creates impression that there is something to hide (“Who’s getting rich?”  Open pay eliminates perceptions driven by suspicion and speculation

Pay Issues Centralization versus decentralization  Centralized offers efficiency and the ability to hire specialists  Centralized may not be as responsive  Centralized may not be as ‘clued in’ to what happens in the ‘field’  Centralized may promote and ‘us versus them’ feeling

Compensation Tools Two basic approaches  Job-based compensation plans Point factor theory Looks at ‘compensable factors’ in each job  Market based compensation plans Looks at the job’s worth or value relative to the ‘market’

Compensation Tools – Grades and Ranges Jobs Rate of Pay Max Mid Range Spread Mid-Point Spread

Compensation Tools – Job Based Plans Conduct job analysis Write job descriptions Determine job specifications (what people do to be successful in the work) Rate the ‘worth’ of jobs using ‘compensable factors’ Create job hierarchy Classify jobs by grade and level

Compensation Tools – Market Based Plans Identify benchmark or key jobs Establish pay policy (philosophy) Uh, then what????

Legal Considerations FLSA (1938)  Primarily impacts exempt/nonexempt decisions  Addresses minimum wage and overtime Equal Pay Act  Raises comparable worth questions Internal Revenue Code  Particularly an issue with “contractors”

Chapter 11 – Rewarding Performance “Incentive” systems are designed to incent or drive behavior First question: what organizational outcome are you trying to achieve? “Do only what you get paid for syndrome” Erosion of teamwork?

Problems and Challenges Lack of control  Many things are beyond individual control – therefore, should they be excluded from consideration? Difficulties in measuring “performance” Psychological contracts  Pre-set expectations

Problems and Challenges Credibility gap  Ill defined, poorly communicated systems or systems with overrides, loopholes or a lack of accountability  The first exception kills the system! Job dissatisfaction and stress  Creates “cogs” versus “involved people” Potential reduction of intrinsic drives

Design Objectives Link pay and performance Use pay as a broad HRM system Build employee trust Promote the idea that performance makes a difference Use multiple reward layers (KISS?) Increase employee involvement Use non-monetary incentives

Individual Based Plans Advantages  Bonuses, lump sum or spot bonus payments  Expectancy theory: rewarded performance is likely to be repeated AND we adjust our performance based on perceptions  Goal oriented behavior can be “shaped” over time  Looking at individuals promotes equity  Fits with an individualistic culture

Individual Based Plans Disadvantages  Promotes single mindedness  Employees often don’t believe that performance impacts outcomes and in turn their pay (no performance-outcomes-pay link)  May run counter to quality goals (?)  May be inflexible

Team Based Plans Advantages  Foster work group cohesion  Aid performance measurement Disadvantages  May not fit individualistic culture  Free riding effect  Social pressure to limit performance  Defining “groups” that have meaning  Inter-group competition

Plantwide and Corporate Plans Look at overall performance Suffer from many of the same design challenges Large scale and difficulty ‘seeing’ operational connections make the performance-outcome link hard to identify Can drive tremendous focus

Studying Review advantages and disadvantages of plantwide and corporate plans Review keys to successful implementation Look at executive and sales compensation Pay attention to variable and short versus long term incentive plans