Total Strategic Compensation Human Resource Management

What is “Total Strategic Compensation”? n Intrinsic rewards u Satisfaction with the job and work u Challenge u Skill variety u Task significance u Responsibility u Pride in work n Extrinsic rewards u Financial u Nonfinancial F Positive relationships F Pleasant working conditions F Activities provided by the company TeamsTeams Social eventsSocial events CamaraderieCamaraderie

What is “Total Strategic Compensation”? n Direct compensation u All monetary compensation F Base salary F Incentives, bonuses n Indirect compensation u Benefits F Protection programs F Pay for time not worked F Employee services and perquisites u Recognition programs F Service awards F Others

Total Compensation Program Objectives n Motivate employees u Attract them to the organization u Retain competent and better performers u Encourage low performers to leave u Motivate other key behaviors that support organizational goals

Which Key Behaviors? n Individual performance n Group/team performance n Organizational performance n Creativity n Dependability n Problem solving n Flexibility n Entrepreneurism n Conformity n Cooperation n Sales n Supervision n Management n Performance of undesirable work n Others

Total Compensation Program Objectives n Support the organization u Attaining strategic goals u Supporting cultural change u Managing highly flexible environments u Supporting new management strategies u Meeting organizational needs as well as those of the individual business unit

Total Compensation Program Objectives n Administratively sound u Flexibility in rewarding diverse job and work types u Easily communicated to a variety of employees u Complies with legislation and regulations u Adaptable when components change, such as benefits

Total Compensation Program Objectives n Cost effectiveness u Trend to lower fixed costs of compensation u Tie increases in compensation to achievement of organizational goals u Tie increases to profitability u Maximize tax savings F Many benefit expenditures are tax-deductible F Section 125 and 401(k) plans allow tax savings for the employee

Pay: Direct Compensation n Base compensation u Traditional salary grades u Broadbanding u “All-salaried workforce” u “Hierarchical” versus “egalitarian” n “Nontraditional” pay plans u Individual incentives/bonuses u Group/team incentives/bonuses u Organization-wide incentives/bonuses u “Pay at risk” u Skill-based pay u Ownership plans (ESOPs) u Competency-based pay

Base Compensation Components n External competitiveness u Market analysis n Internal equity u Job evaluation n Individual equity u Well-designed incentive or merit programs n Administrative policies and procedures

External Competitiveness n Establishes the value of the job on the market n Must understand the job u Accurate job analysis u Job description n Must define the relevant labor market u “Who is the competition for incumbents for this job?” n Salary data are gathered accordingly

Internal Equity n Established through job evaluation u Measures the relative value of the job to the organization, based on its values u Measures the worth of the job, not the incumbent u Necessary when market data are not available for all jobs u Communicates management’s intention to be fair

Job Evaluation n Many different types u Slotting u Point-factor job evaluation n Currently there is a trend toward less emphasis on point-factor job evaluation u Increased emphasis on competitiveness u New management strategies de-emphasize status and hierarchy

Point Factor Job Evaluation n “Compensable factors” are identified u By top management u Based on strategy, goals, mission and climate of the organization u Older systems used 8 to 10; now more often 4 to 6 n Factors are weighted based on their relative value n A measuring device using these factors is created n Jobs are analyzed and compared to this “yardstick” n Thorough “quality control” is done n End product is an array of jobs, from the most to least important in value

Individual Equity n Am I being rewarded fairly for u The amount of job-related education I have u The number of years of job-related experience I have u My level of performance relative to others u How hard I work u The value of what I believe my services to the organization to be u Other issues that may be relevant

Individual Equity n Established through u Fair and accurate performance appraisal systems that link performance to pay u Well-designed incentive systems that link accomplishment of goals and performance to bonuses, stock options, profit sharing, etc. n Critical for motivation u To remain with the organization u To perform at high capacity

Administrative Policies n Ensure that compensation pays people for what we want them to do n Allocate resources fairly and consistently n Consist of u Salary policy stating the total compensation policy u Salary structure u Policies about how pay is changed

Salary Structures n Consider u External value (market analysis results) u Internal value (job evaluation results) n Establishes “grades” and “ranges” that jobs are placed in u Represent the organization’s policies of the value of jobs

Types of Pay Increases n Cost of living allowances (COLA’s) n Promotional increases n Pay increases within the range: u Merit pay F “Pay for performance” u Step pay F Pay for seniority

Traditional Merit Pay Program n Rewards employees for performance n Provides the mechanism to increase base salary n Usually combines performance level and position within the grade to determine the salary increase n Can be quite effective if designed and implemented properly n Very difficult to implement properly n Often the problem is measuring performance

New Ways to Pay People n Broadbanding n Skill- or knowledge- based pay n Competency-based pay n Bonuses and other incentives u Individual u Group or team u Entire organization

Broadbanding n Collapses many grades into fewer “broad bands” n Useful when there are few management levels n Useful for dual-career tracks n More flexibility in paying individuals within bands n More flexibility in matching individuals to market rates n Can be combined with a traditional system

Skill or Knowledge -Based Pay n Usually about ten skill or knowledge “units” n Encourages diversification, reduces specialization n Flexibility to change product or service emphasis n Increased work force stability, greater job security n More satisfying jobs, fewer absences, reduced labor costs (?) n More costly in compensation and training; can lead to above- market pay

Competency-Based Pay n Competencies: The set of key skills, abilities, knowledge or personal characteristics that the organization requires for it to accomplish its strategic goals. n All individuals within the organization, to at least some extent, will be successful only to the degree that they have adequate levels of these competencies n Competency performance data are used for development, pay, promotions and training decisions