1. Compensation, Transfer, Promotion and Reward Policies

2. Compensation
The HRM function that deals with reward individuals receive in exchange for performing tasks
The major cost of doing business for many organizations
The chief reason why most individuals seek employment

3. Financial compensation is either direct or indirect
Direct compensation consists of wages, salaries, bonuses, or commissions
Indirect compensation includes all financial rewards not included in direct compensation, such as insurance, vacation, and childcare services (benefits)
Non-financial rewards, such as praise, self-esteem, and recognition, affect employee:
Motivation
Productivity
Satisfaction

4. Objective of Compensation
The objective of compensation is to create a system of rewards that is equitable to both the employer and the employee
The desired outcome is an employee who is attracted to the work and motivated to do a good job

5. Compensation Decisions
Pay for a position is set relative to three groups:
Group A: employees working on similar jobs in other organizations
Group B: employees working on different jobs within the organization
Group C: employees working on the same job within the organization

6. The pay decision relative to group B is the pay-structure decision
The decision to examine pay relative to group A is called the pay-level decision
Be competitive in the marketplace
Use the pay survey to help with decisions
The pay decision relative to group B is the pay-structure decision
Use job evaluations to set a value for each job relative to all other jobs
The pay decision relative to group C is individual pay determination

7. The Pay-Level Decision
Managers compare the pay of people working inside the organization to those outside it
There are three pay-level strategies:
High
Low
Comparable
High-pay strategy:
Managers pay at higher-than-average levels to attract and hold the best employees
Companies using this strategy are called pacesetters

8. The Pay Structure Decision
The next step is to construct an internal pay hierarchy or pay structure
The traditional way was to make a systematic comparison between the worth of one job and the worth of another, using job evaluation

9. Job Evaluation
Job evaluation is a process by which the relative worth of various jobs is determined for pay purposes
It relates the amount of pay for each job to the extent to which it contributes to organizational effectiveness
It is subject to job evaluator errors
Because computing contributions to organizational effectiveness is difficult, proxies are used
Skills required to do the job
Amount and significance of responsibilities
Effort required
Working conditions

10. The first step in using job evaluation effectively is to involve employees and/or the union
After the program is off to a cooperative start, a committee evaluates the jobs

11. Select and weigh the criteria (compensable factors) used to evaluate the job
Factors most frequently used:
Education
Experience
Amount of responsibility
Job knowledge
Work hazards
Working conditions

12. Frequently used methods of job evaluation:
Job ranking
Classification
Point system
Factor comparison

13. Ranking of Jobs
Ranking is the system used primarily in smaller, simpler organizations
The evaluator rank-orders whole jobs, from the simplest to the most challenging
The ranking may not occur at equal intervals
If an organization has many jobs, this system is clumsy to use and the ratings may be unreliable
Ranking is the least frequently used method of job evaluation

14. Classification or Grading System
Classification or grading groups a set of jobs
Sets are then ranked by difficulty or sophistication
It is a job-to-standard comparison
The evaluator first decides how many classifications the job structure has to be broken into
Then, definitions are written for each class
After the classes are defined, job are compared with the definition and placed into the proper classification

15. Classification or Grading System

16. Point System
The greatest number of job evaluation plans use the point system
More sophisticated than ranking/classification systems
Relatively easy to use
Requires evaluators to assign points on the basis of:
Skill required
Physical and mental effort needed
Degree of dangerous/unpleasant working conditions
Amount of responsibility

17. Factor Comparison
Developed by Eugene Benge, it permits job evaluation to be done factor-by-factor
Jobs are compared to a “benchmark” of five key points:
Responsibilities
Skill
Physical effort
Mental effort
Working conditions

19. Factor Comparison Advantages: Disadvantages:
A step-by-step, formal method of evaluation
Shows how differences in rankings translate into dollars and cents
Is easy to explain to subordinates
Disadvantages:
Complex
Difficult to show how such a system is developed
Relies on the subjective judgments of a committee

20. Methods of Payment Employees can be paid for: The time they work
The output they produce
Skills
Knowledge
Competencies
A combination of these factors

21. Payment for Time Worked
Most employees are paid for time worked in the form of wages or salaries:
WagePay calculated at an hourly rate
SalaryPay calculated at an annual or monthly rate
Pay ranges, pay classifications, and similar tools determine individual pay
Most employees expect to get at least one raise annually

22. Pay is usually adjusted upward through four types of increases:
A general, across-the-board increase for all employees
Merit increases based on some indicator of job performance
A cost-of-living adjustment (COLA) based on the consumer price index (CPI)
Seniority

23. Variable Pay: Incentive Compensation
Variable pay is any compensation plan that:
Emphasizes a shared focus on organizational success
Opens incentives to nontraditional groups
Operates outside the base pay increase system
Included in the calculations of variable pay are:
Individual incentive awards
Individual recognition awards
Group and team awards
Scheduled lump-sum awards

24. Key design factors include:
To implement successful variable pay systems, companies must based their plans on:
Clear goals
Unambiguous measurements
Visible linkage to employees' efforts
Key design factors include:
Support by management
Acceptance by employees
Supportive organizational culture
Timing

25. Variable Pay: Incentive Compensation
Total compensation includes:
Base pay
Variable pay
Indirect pay
Variable pay helps manage labor costs, but does not guarantee equitable treatment of employees
Financial insecurity is built into the system
As a result, productivity may actually decline
Paying employees on the basis of output is usually referred to as an incentive

26. Merit Incentives
Advocates claim merit pay is the most valid type of pay increase
Awards are directly linked to performance
Rewarding the best performers with the largest pay is claimed to be a powerful motivator
This premise has two flawed assumptions:
Competence and incompetence are distributed in roughly the same percentages in a work group
Every supervisor is a competent evaluator

27. Individual Incentives
The oldest form of compensation is the individual incentive plan
The employee is paid for units produced
Individual incentive plan takes several forms:
Piecework
Production bonuses
Commissions

28. Individual Incentives: Straight Piecework
Straight piecework is an individual incentive plan
It is the most common piecework incentive plan
Pay is based on units of production per time period
Work standards are set through work measurement studies, as modified by collective bargaining
The system is easy for employees to understand, but setting work standards is difficult
The standard-hour plan bases wages on completion of a job or task in some expected period of time
Standard-hour plans are ideal for long cycle operations and highly skilled, non-repetitive jobs

29. Individual Incentives: Differential Piece Rate
Another variation of the straight piecework rate is the differential piece rate or Taylor plan
This system uses two piecework rates:
One for those who produce below or up to standard
Another for those who produce above standard
It was designed to reward the highly efficient worker and penalize the less efficient

30. Individual Incentives: Production Bonus
Production bonus systems pay an hourly rate plus a bonus when the standard is exceeded
The bonus usually equals 50 percent of labor savings
This system is not widely used in the United States
In Japan, all employees receive semiannual production bonuses in December and June

31. Individual Incentives: Commissions
A commission is compensation based on a percentage of sales in units or dollars
Straight commission is the equivalent of straight piecework and is typically a percentage of the price of the item
A variation pays the salesperson a small salary plus a commission or bonus when the sales goal is exceeded

32. Gain-sharing Incentive Plans
Gain-sharing plans are companywide group incentive plans that use a financial formula to:
Distribute organization-wide gains, and
Unite diverse organizational elements in the common pursuit of improved organizational effectiveness
Through cash bonuses, these systems share the benefits of:
Improved productivity
Reduced costs
Improved quality

33. Profit-Sharing Plans
Profit-sharing plans distribute a fixed percentage of total profit to employees in cash or deferred bonuses
Profit sharing is not dominant in other industrialized countries
Profit-sharing plans are typically found in three combinations:
Cash or current distribution plans
Deferred plans
A combination of both

34. Ownership An employee ownership plan (ESOP):
Is similar to profit sharing and is intended to increase worker commitment and performance
Is a qualified, defined contribution benefit plan that invests primarily in the stock of the company
The employer makes yearly contributions that accumulate to produce a benefit that is not predefined
An ESOP is a variation of a stock bonus or stock bonus/money purchase plan that invests primarily in employer stock.

35. People-Based Pay
The bureaucratic job-based method of determining pay will not be used in the future
The new designs will be people-based
Variants of people-based pay:
Skill-based
Knowledge-based
Credential-based
Feedback
Competency-based

36. Skill-Based Pay Skill-based pay sets pay levels on the basis of:
How many skills employees have, or
How many jobs they can do
Expected positive outcomes include:
Increased quality
Higher productivity
A more flexible workforce
Improved morale
Decreased absenteeism and turnover

37. Methods for defining individual skills:
Direct observation
Testing
Measurable results
Instead of job descriptions, "person" and "skill block" descriptions are developed

38. Skill-based pay:
Is difficult to design
Does not fit all situations
Involves a time-consuming process of constructing skill blocks, mapping pay progressions, and assigning dollar values to skills
It works best when built on a broad base of skills in a stable but expanding work environment

39. Knowledge-based Pay
Knowledge-based pay rewards employees for acquiring additional knowledge
Applies to both the current and new job
Stretches the skill-based model to professionals, managers, and some technical personnel

40. A study compared two manufacturing plants
One used the job-centered pay design; the other a knowledge-based design
After 10 months, the pay-for-knowledge facility had higher quality, lower absenteeism, fewer accidents
The traditional plant had higher productivity

41. Credential-based Pay
Credential-based pay rests on the fact that an individual must have:
A diploma or license, or
Pass one or more examinations from a third-party professional or regulatory agency
Credential-based pay is more cut-and-dried than skill-based or knowledge-based pay.

42. Feedback Pay Feedback pay is based on:
Aligning pay with strategic business objectives
Establishing a direct connection between the jobholder and his/her part in accomplishing goals

43. Executive Pay
The Enron scandals of 2001 brought attention to CEO compensation and stock option programs
Some question whether any CEO is worth the pay packages that for some total $500 million annually
The new mantra is “pay for performance”
2004 Business Week data shows CEO compensation averaged $9.6 million – a 15% increase over 2003
In spite of large increases, there is evidence that executive pay is tied more closely to performance than it was in pre-Enron years

44. Stock Options A stock option is the right to:
Purchase a specific number of shares of a firm’s stock
At a predetermined price
During a specified period of time
Stock options allow employees to share in the growing value of a company without risking money until they exercise the options to buy the shares
In many cases, the gain is substantially greater than a person’s annual compensation
Stock options are not taxed until the option is exercised and/or the stock is sold .