1. 1-1 MANA 5322 Dr. Jeanne Michalski Michalski@uta.edu

2. 1-2 Human Resource Management Planning and J ob Design Recruiting and Selection Training and Development Performance Management Compensation Employee Relations

3. 1-3 Contrasting Perspectives of Compensation Society’s Views Stockholders’ Views Employees’ Views Managers’ Views

4. 1-4 Compensation: Perspective Society Society –Pay as a measure of justice –Benefits as a reflection of justice in society –Job losses (or gains) attributed to differences in compensation –Belief that pay increases lead to price increases

5. 1-5 Exhibit 1.1: Hourly Compensation Costs for Manufacturing Workers (in U.S. Dollars)

6. 1-6 Compensation: Perspective (cont.) Stockholders Stockholders –Using stock to pay employees creates a sense of ownership –Linking executive pay to company performance creates alignment with stockholders' goals but doesn’t always result in improved company performance Managers Managers –A major expense –Used to influence employee behaviors and to improve the organization's performance

7. 1-7 Exhibit 1.2: The Relationship between Shareholder Return and Change in CEO Pay

8. 1-8 Compensation: Perspective (cont.) Employees Employees –Major source of financial security –Return in an exchange between employer and themselves –Entitlement for being an employee of the company –Reward for a job well done

9. 1-9 Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship What Is Compensation?

10. 1-10 Exhibit 1.4: Total Returns for Work

11. 1-11 Forms Of Pay Relational returns – –Psychological in nature Total compensation Total compensation –Cash Compensation/ transactional  Base wages –Difference between wage and salary  Merit pay/cost-of-living adjustments –Merit increases – given in recognition of past work behavior –Cost-of-living adjustments –same increases to everyone, regardless of performance

12. 1-12 Forms Of Pay (cont.) –Cash Compensation/ transactional (cont.)   Incentives/ Variable pay – tie pay increases directly to performance –Does not increase base wage; must be reearned each pay period –Potential size generally known beforehand –Long-term (stock options), and short-term –Benefits  Income protection  Work/life balance  Allowances

13. 1-13 Forms Of Pay (cont.) Total earnings opportunities: Present value of a stream of earnings Total earnings opportunities: Present value of a stream of earnings –Shifts comparison of today's initial offers to consideration of future bonuses, merit increases, and promotions Relational returns from work Relational returns from work –Nonfinancial returns Organization as a network of returns Organization as a network of returns –Created by different forms of pay, including total compensation and relational returns

14. 1-14 A Pay Model Three basic building blocks: Three basic building blocks: –Compensation objectives –Policies that form the foundation of the compensation system –Techniques that make up the compensation system

15. 1-15 Exhibit 1.5: The Pay Model

16. 1-16 Compensation Objectives (cont.) Efficiency Efficiency –Improving performance, increasing quality, delighting customers and stockholders –Controlling labor costs –Achieve and sustain a competitive advantage Fairness Fairness –Fundamental objective of pay systems –Fair treatment by recognizing both employee contributions, and employee needs Procedural fairness Procedural fairness

17. 1-17 Compensation Objectives (cont.) Compliance – –Conformance to Federal and State compensation laws and regulations Ethics – –Organizations care about how its results are achieved Objectives – –Guide the design of the pay system – –Serve as the standards for judging success of the pay system – –Policies and techniques are means to reach objectives

18. 1-18 Exhibit 1.6: Pay Objectives at Medtronic and Whole Foods

19. 1-19 Internal alignment Internal alignment –Focus - Comparisons among jobs or skill levels inside a single organization –Pay relationships within an organization affect employee decisions to:  Stay with the organization  Become more flexible by investing in additional training  Seek greater responsibility Four Policy Choices

20. 1-20 Four Policy Choices (cont.) External competitiveness External competitiveness –Focus - Compensation relationships external to the organization: comparison with competitors –Pay is ‘market driven’ –Effects of decisions regarding how much and what forms:  To ensure that pay is sufficient to attract and retain employees  To control labor costs to ensure competitive pricing of products/ services

21. 1-21 Four Policy Choices (cont.) Employee contributions Employee contributions –Focus - Relation emphasis placed on employee performance  Performance based pay affects fairness Management Management –Focus - Policies ensuring the right people get the right pay for achieving the right objectives in the right way  Communication of compensation is key

22. 1-22 Techniques tie the four basic policies to the pay objectives Techniques tie the four basic policies to the pay objectives Many variations exist Many variations exist Some techniques will be discussed through the book Some techniques will be discussed through the book Pay System Techniques

23. McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Milkovich/Newman: Compensation, Ninth Edition Strategy

24. 1-24 Strategic Choices Strategy refers to the fundamental directions that an organization chooses Strategy refers to the fundamental directions that an organization chooses –Corporate level: “What business should we be in?” –Business unit level: “How to gain and sustain competitive advantage?” –Functional level: “How should total compensation help gain and sustain competitive advantage?” A strategic perspective focuses on those compensation choices that help the organization gain and sustain competitive advantage A strategic perspective focuses on those compensation choices that help the organization gain and sustain competitive advantage

25. 1-25 Similarities and Differences in Strategies Different strategies within the same industry Different strategies within the same industry Different strategies within the same company Different strategies within the same company “Let the market decide our compensation” philosophy is untenable in the real world, especially in global environments “Let the market decide our compensation” philosophy is untenable in the real world, especially in global environments

26. 1-26 Exhibit 2.2: Strategic Choices

27. 1-27 Support Business Strategy Pay systems should align with the organization's business strategy Pay systems should align with the organization's business strategy –Based on contingency notions Compensation systems can be tailored to: Compensation systems can be tailored to: –Innovator business strategy –Cost cutter business strategy –Customer-focused business strategy When business strategies change, pay systems should also change When business strategies change, pay systems should also change

28. 1-28 Exhibit 2.3: Tailor the Compensation System to the Strategy

29. 1-29 Exhibit 2.4: IBM’s Strategic Principles and Priorities

30. 1-30 Objectives Objectives Internal Alignment Internal Alignment External Competitiveness External Competitiveness Employee Contributions Employee Contributions Management Management Five Strategic Guidelines for Compensation Choices

31. 1-31 The Pay Model Guides Strategic Pay Decisions Decisions based on the five strategic compensation choices of the pay model, taken together, form a pattern that becomes an organization's compensation strategy Decisions based on the five strategic compensation choices of the pay model, taken together, form a pattern that becomes an organization's compensation strategy –Stated versus unstated strategies

32. 1-32 Example: The Strategic Compensation Decisions Facing Whole Foods Objectives: How should compensation support business strategy and be adaptive to the cultural and regulatory global environment? Objectives: How should compensation support business strategy and be adaptive to the cultural and regulatory global environment? Whole Foods’ Objectives –Increase shareholder value through profits and growth –Go to extraordinary lengths to satisfy and delight customers –Seek and engage employees who are going to help the company make money

33. 1-33 Example: The Strategic Compensation Decisions Facing Whole Foods (cont.) Internal Alignment: How differently should the various types and levels of skills and work be paid within the organization? Internal Alignment: How differently should the various types and levels of skills and work be paid within the organization? Whole Foods’ Approach –Store operations are organized around eight to ten self-managed teams –Egalitarian, shared-fate philosophy – executive salaries do not exceed 14 times the average pay of full-time employees –All full-time employees qualify for stock options, and 94 percent of the company's options go to non- executive employees

34. 1-34 External competitiveness: How should total compensation be positioned against our competitors? What forms of compensation should we use? External competitiveness: How should total compensation be positioned against our competitors? What forms of compensation should we use? Whole Foods’ Approach Whole Foods’ Approach –Offer a unique deal compared to competitors –Provide health insurance for all full-time employees –20 hours of paid time a year to do volunteer work Example: The Strategic Compensation Decisions Facing Whole Foods (cont.)

35. 1-35 Employee contributions: Should pay increases be based on individual and/or team performance, on experience and/or continuous learning, on improved skills, on changes in cost of living, on personal needs, and/or on each business unit’s performance? Employee contributions: Should pay increases be based on individual and/or team performance, on experience and/or continuous learning, on improved skills, on changes in cost of living, on personal needs, and/or on each business unit’s performance? Whole Foods’ Approach –A shared fate – every four weeks, assess the performance of each team –Top teams get an extra $1.50 to $2.00 an hour in the next pay period

36. 1-36 Management: How open and transparent should pay decisions be to all employees? Who should be involved in designing and managing the system? Management: How open and transparent should pay decisions be to all employees? Who should be involved in designing and managing the system? Whole Foods’ Approach –“No-secrets” management; every store has a book listing the previous year's pay for every employee including executives – “You Decide” – employees recently voted to pick their health insurance rather than having one imposed by leadership Example: The Strategic Compensation Decisions Facing Whole Foods (cont.)

37. 1-37 Developing A Total Compensation Strategy: Four Steps Step 1: Assess total compensation implications Step 2: Map a total compensation strategy Step 2: Map a total compensation strategy Steps 3: Implement strategy Steps 3: Implement strategy Step 4: Reassess Step 4: Reassess

38. 1-38 Step 1: Assess Total Compensation Implications Understand the Business Understand the Business Culture/values Culture/values Social and political context Social and political context Employee preferences Employee preferences Choice Choice Union preferences/issues Union preferences/issues Fit with overall HR strategy Fit with overall HR strategy

39. 1-39 Step 2: Map a Total Compensation Strategy Mapping is used in marketing to clarify and communicate a product's identity Mapping is used in marketing to clarify and communicate a product's identity Offers picture of a company’s compensation strategy based on the five choices in the pay model Offers picture of a company’s compensation strategy based on the five choices in the pay model Clarifies the message the company is trying to establish with its compensation system Clarifies the message the company is trying to establish with its compensation system Maps do not tell which strategy is the “best”, providing rather framework and guidance Maps do not tell which strategy is the “best”, providing rather framework and guidance

40. 1-40 Exhibit 2.8: Contrasting Maps Of Microsoft And SAS

41. 1-41 Steps 3 and 4: Implement and Reassess Step 3 Step 3 –Involves implementing strategy through the design and execution of compensation system Step 4 Step 4 –Reassess and realign, closes the loop and recognizes that the strategy must be changing to fit changing conditions –Involves periodic reassessment

42. 1-42 Sources of Competitive Advantage: Three Tests Three tests determine if a pay strategy is a source of advantage Three tests determine if a pay strategy is a source of advantage Is it aligned? Is it aligned? Does it differentiate? Does it differentiate? Does it add value? Does it add value? –Calculate the return on investment (ROI) Which hat is unique?

43. 1-43 Best Practices” Versus “Best Fit”? Best Fit If design of pay system If design of pay system –Reflects company’s strategy and values –Is responsive to employees’ and unions’ needs –Is globally competitive  Company is more likely to achieve competitive advantage Best Practices Assumptions Assumptions –A set of best-pay practices exists –Practices can be applied universally across all situations –Results in better performance with almost any business strategy

44. 1-44 Benchmarking HR Strategies How will it work here? ContextualEvaluation CompetitorOrganization OurOrganization ConceptualEvaluation

45. 1-45 Contextual Evaluation Organizations with different strategies may use the same metrics –Wal-Mart vs. Costco Fit with HR strategy Fit with HR strategy  Hire and develop vs. recruit job-ready person Organization’s value of specific jobs Organization’s value of specific jobs –Disney sweeper vs. other amusement parks

46. 1-46 Conceptual Evaluation Works in practice will it work in theory If effective results were found were these results really a result of the reward program? If effective results were found were these results really a result of the reward program? If organizational contexts are similar and research supports how program produced results then what worked there may work here. If organizational contexts are similar and research supports how program produced results then what worked there may work here.

47. 1-47 Caveat Emptor - Be An Informed Consumer Is the Research Useful? Is the Research Useful? Does the Study Separate Correlation from Causation? Does the Study Separate Correlation from Causation? Are there Alternative Explanations? Are there Alternative Explanations?

48. 1-48 Pay Can Motivate Performance if Employees: Know how performance is defined Believe they are able to produce that performance Know the consequences of performing well or poorly Are given resources and authority to do what it takes to perform well

49. 1-49 Hay Group/Fortune Magazine Study Most admired companies (MAC) Survey of C-suite executives, directors and industry analysts Survey of C-suite executives, directors and industry analysts Focus on HOW these companies achieved better return on their investment for their reward programs Focus on HOW these companies achieved better return on their investment for their reward programs Researched how MACs design, execute, and evaluate their rewards programs Researched how MACs design, execute, and evaluate their rewards programs Found 6 areas where MACs excel Found 6 areas where MACs excel

50. 1-50 Six Areas of Excellence in Reward Program Effectiveness Focus on excellent execution Focus on excellent execution Align reward programs with organization goals, strategy and culture Align reward programs with organization goals, strategy and culture Promote a total reward view – leveraging intangible rewards Promote a total reward view – leveraging intangible rewards Develop talent from within resulting in lower base salaries Develop talent from within resulting in lower base salaries Leverage manager’s skills in implementation Leverage manager’s skills in implementation Reinforce HR’s role to help managers put reward programs in action Reinforce HR’s role to help managers put reward programs in action

51. 1-51 How important is design? Impressive design is not why rewards programs generally work well Impressive design is not why rewards programs generally work well Key is how well the reward program is put into action and sustained by the organization Key is how well the reward program is put into action and sustained by the organization Reward programs that align with business goals and are well communicated create a line of sight between pay and performance in the minds of the employee Reward programs that align with business goals and are well communicated create a line of sight between pay and performance in the minds of the employee

52. 1-52 Guidance from the Evidence Consistent research evidence that the following practices do matter to the organization's objectives –Internal alignment  Pay differences among internal jobs can affect results –External competitiveness  Paying higher than average paid by competitors can affect results –Employee contributions  Performance-based pay can affect results

53. 1-53 Guidance from the Evidence (cont.) –Managing compensation  Need to consider all dimensions of pay strategy –Compensation strategy  Embedding compensation strategy within the broader HR strategy affects results “What practices pay off best under what conditions” is an important question to be answered “What practices pay off best under what conditions” is an important question to be answered