2. PART FOUR Compensation Chapters 11-12

3. Chapter 11 Pay and Incentive Systems McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

4. Questions This Chapter Will Help Managers Answer How can we tie compensation strategy to general business strategy? What economic and legal factors should be considered in establishing pay levels for different jobs? What is the best way to develop pay systems that are understandable, workable, and acceptable to employees at all levels? How can we tie incentives to individual, team, or organization-wide performance? In implementing a pay-for-performance system, what key traps must I avoid to make the system work as planned?

5. Figure 11-1 Four Key Challenges in Planning and Administering a Pay System Understand economic and legal factors that determine pay levels Develop systematic pay structures Tie compensation strategy to general business strategy Address key policy issues Pay Planning and Administration

6. Organizational Reward System … includes anything an employee values and desires that an employer is able and willing to offer in exchange for employee contributions.

7. Figure 11-3 Organizational Reward Systems Financial and Nonfinancial Components REWARD SYSTEMS Financial Direct payments (salaries) Indirect payments (benefits) Nonfinancial Protection programs Employee involvement in decision making Effective supervision Recognition Training opportunities Supportive, nurturing company culture

8. Dimensions of Equity in Pay Systems Internal equity In terms of the relative worth of individual jobs to an organization, are pay rates fair? External equity Are the wages paid by an organization “fair” in terms of competitive market rates outside the organization? Individual equity Is each individual’s pay “fair” relative to that of other individuals doing the same or similar jobs?

9. Viewing Compensation From a Strategic Perspective (Firm’s Actions) 1.They recognize compensation as a pivotal control and incentive mechanism that can be used flexibly by management to attain business objectives 2.They make the pay system an integral part of strategy formulation 3.They integrate pay considerations into strategic decision-making processes, such as those that involve planning and control 4.They view the firm’s performance as the ultimate criterion of the success of strategic pay decisions and operational compensation programs

10. Collective Bargaining Affects two key factors 1.The level of wages 2.The behavior of workers in relevant labor markets Affects two key factors 1.The level of wages 2.The behavior of workers in relevant labor markets

11. Figure 11-4 Traditional Job-Based Compensation Model Important job characteristics Compensable factors Job evaluation to rate the relative worth of jobs Job hierarchy Pay surveys to attach pay rates to jobs Pay structures to classify jobs by grade levels Assignment of individual pay within a range for each job

12. Purposes of Job Descriptions 1.They identify important characteristics of each job so that the relative worth of jobs can be determined 2.From them we can identify, define, and weight compensable factors (common job characteristics that an organization is willing to pay for, such as skill, effort, responsibility, and working conditions)

13. Alternatives to Pay Systems Based on Job Evaluation Market-based pay Competency-based pay (skill or knowledge based)

14. Figure 11-8 Requirements of Effective Incentive Systems Effective Employee Incentive Programs Are: Simple Attainable MeasurableSpecific

15. Figure 11-9 Why Merit-Pay Systems Fail Reasons Why Merit-Pay Systems Fail Rewards are too small Merit-based pay fails to match union pay scales Supervisors resist performance appraisal Links between performance and rewards are weak Annuity feature creates problems

16. The “Annuity” Problem As past “merit payments” are incorporated into an individual’s base salary, the payments form an annuity (a sum of money received at regular intervals) and allow formerly productive individuals to slack off for several years and still earn high pay

17. Figure 11-10 Guidelines for Effective Merit-Pay Systems Merit-Pay Systems That Work Establish high standards of performance Develop accurate performance appraisal systems Teach supervisors how to do appraisals and how to give feedback Link rewards closely to performance Use a wide range of increases

18. Top Executive Compensation Types Stock options Restricted stock Common stock vests after a specified period Restricted stock units Shares awarded over time to defer taxes Performance shares Essentially stock grants awarded for meeting goals Performance accelerated shares Stocks that vest sooner if the executive meets goals ahead of schedule

19. Incentives for Lower-Level Employees Lump-sum bonus – employees receive an end-of- year bonus (based on employee or company performance) that does not build into base pay Spot bonus – if an employee’s performance has been exceptional, the employer may reward the worker with a one-time bonus of $50, or $100, or $500 shortly after the noteworthy actions

20. Reasons Why Firms Use Profit Sharing  To provide a group incentive for increased productivity  To provide retirement income for their employees  To institute a flexible reward structure that reflects a company’s actual economic position  To enhance employees’ security and identification with the company  To attract and retain workers more easily  To educate individuals about the factors that underlie business success and the capitalistic system

21. Gain Sharing Focuses on achieving savings in areas over which employees have control – for example, reduced scrap, or lower labor or utility costs

22. Elements of Gain Sharing 1.A philosophy of cooperation 2.An involvement system 3.A financial bonus

23. Gain Sharing vs. Profit Sharing Gain SharingProfit Sharing Based on a measure of productivityBased on a global profitability measure Frequent events, distributed monthly or quarterly Annual measures and rewards Current distribution plansDeferred payments

24. Key Terms Discussed in the Chapter Trust gap Organizational reward system Compensation Internal equity External equity Individual equity Balance Job descriptions Compensable factors Job evaluation Benchmark jobs Relevant labor markets Market-based pay Competency-based pay Pay compression Annuity problem Premium-price options Workload standards Motion study Time study Profit sharing Gain sharing Employee stock ownership plans