Compensation 4th Canadian Edition 1of2

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F T

T T George

T Milkovich

Cornell Univeisiry

Jerry Newman Srare Universiry of

NewYork-Buffhlo

Bruce Gerhart Universiry of Visconsin-Ma&son

Nina Cole Ryerson Universiry

Margaret Yap Ryerson Universiry

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1 Chapter 2

Chapter

I Chapter 3 Chapter 4 Chapter 5 Chapter 6

The PaY

lnternal Alignment: Determining the Structure 34

Job

AnalYsis 56

Job-Based Structures and Job Person-Based Pay

107

Structures

81

t tI

:

Level 134

Defining Competitiveness 137 Designing Pay Levels, Pay Mix, and Pay Employee

lll Pay

1

60

189

Pay 215

I

for Performance: Performance Appraisal and Plan Design 217

Pay-for-Performance

lV

12 Chapter 13

Benefits

Structures

Employee Gonributions: Determining lndividual

10 Chapter 11

Chapter

Evaluation

Elcernal Competitiveness: Determining the Pay

Chapter

PART

J J

Defining lnternal Alignment 36

PART

PART

1

Strategy: The Totality of Decisions 17

PAHT

Il Chapter 7 Chapter 8 Chapter 9

Model

II II I

Plans

247

Managing the System 28O

F

The Role of Governments and Unions in Compensation 282

Compensation Budgets and Administration 301

Appendix: lnternational Pay Systems 324

Endnotes 347 Glossary 368 Name

lndex

Subject

371

lndex

373

v

I I I I

F

t t T T

I

T

The Pay

r

'Why

Model

Should

\fe

DifferentSuategieswifiin theSameCompany 19 Strategic Choices 19

1

Care about

Stated versus Unstated Strategies 23 Developing a Total Compensation Stratery: Four Sreps 23 Step 1: Assess Total Compensadon. Implications 23 Step 2: Decide on a Total Compensation Suategy 26 .Net\fonh: Nedlix Freedom and Responsibiliry

Stockholders 4 Managers 4 Employees 4

GlobalVews

5

Forms of Pay 5 Cash Compensation: Ba,se Pay 5 Cash Cornpensation: Merit Increases and Cost-

'

T

of-LivingAdjustments 6 Cash Compensation: Incentives Long-Term Incentives 7

,

in Rewards 27

6

Implement the Saategy 27 and Reassess the Source of Competitive Advantage : Three Tbsts 27 Steps 3 and 4:

Benefits: Insurance and Pensions 7 Benefits: \7ork/Life Programs 7 Benefits: Allowances 7 .Net'\florth: What Do Employees Want? 8 Toml Earnings Opponunides: Present Value

T

t

Align

The Organization

A Pay Model

as a

Four Policy Pay

Book

Choices

AddValue

Nerwork of Rerurns 9

Plan

14

T

Review Questions

l5

2

T

9

12

15

Strategy: The Totality of Decisions 17 Similarides and Differences in Strategies 17

Different Strategies within che Same

Industry vt

Case

13

T

19

28

Conclusion 30 Chapter Summary 30 KeyTerms 3l Review Questions 3l

Techniques '13

Conclusion 14 Chapcer Summary KeyTerms 15

Case

Objectives

28

"Best Fit" Versus "Best Practices" 28 Guidance from the Evidence 29 Vmrous and Vicious Circles 29

9

Srrategic Compensation

Fit

DifFerentiare 28

ofa Sueam ofEarnings 8 Relational Rerurns from'Work 9

T

T

The Pay Model Guides Strategic Pay Decisions 22

Sociery 2

I

T

Support HR Strategy 22

\flhar is Compensation? 2

T

T

Suppon Business Suategy L9

Compensation? I

31

PART I lnternal Alignment: Determining the Structure

3

B4

Defining lnternalAlignment 36 Compensation Suategy: Incernal Alignment 37 Suppons Organizacion Strategy 37

i

Concns

-

I

:S,rppottsVorkflo-n' 38 Modvates Behaviour 38 Srructurcs Vary Benreen Organizations 38

Levcls 38 Differeritals

EconorrfF[T0lisures 42

Job Descriprions Summarize the Dau. 68 lJsing Gencric Job Descriptions 68 Describing ManageriaUProfessional Jobs 68 Verify the Description 69 .Net l7onh: Nationd Occupational

GovernmentPolicies, laws, andRegulations 42

"ExternalStakeholders 42

Culturcs and Customs 43 .NetVorth: Molson Coors Executives Thlce Pay

Cut

Classiftcadon 70 Analpis and Glob,li"-rion 72 Job

43

OrganizationStrategy 44

Job Anafruis and

U

Organization's Human Capital Organizadon and rf7ork Design 44

Job

Reliabiliry 72 Validiry 73

Acceptabiliry 73

Currency AJudgment

53 Review Questions 53 Case 54

81

Multiple Plans 85 BenchmarkJobs 85

Both

Common

PerformJobAnalpis?

57

58

58

Procedures 59 \7'hat Information Should be Collectcd? Job Data: Ideffification 6L Employee Data 62 Level ofAnalysis 62

Evaluation

81

Single versus

56

Daa: Content 62

Evaluation

Esrablish the Purpose(s) 84

Structures Based onJobs, People, or

Job

Job-Based Structures and Job

Defining Job Evaluadon: Conrcnc, Valuc, and External Market Links 83 Job Content aodJob Va.lue 83 Linking Content with the Extcmal Market 83 Differenr Perspectives on Job Evaluadon 84 'How to": Major Decisions 84

KeyTerms

Job Analysis

5

Job-Bascd Suucrures: Job

Legal Compliance 52 Conclusion 52 Chaprcr Summary 52

IilZhy

75

76

Case 76

51

Job-BasedApproach: Most

74

Review Questions 76

Fairness 52

Analysis

Call

Condusion 74 Chapter Summary

KeyGrms

ConsequencesofStrucnrres 5l

Job

73

Uscfulness 73

EquityTheory:Fairness 49 ToumamentTheory: Motivation and Performance 49 Insdtutional Theory: Copy Others 50 (More) Guidance Frorn the Evidence 50

4

Borders 72

JudgingJobAnal)rsis 72

Internal Labour Markets: Combining External and Organizational Faccors 45 ErnployeeAcceptance: A KeyFactor 46 PavSuuctures Change 46 Suategic Choices in Designing Intemal Suucn:res 46 Tailored versus Loosely Coupled 47 EgalitarianversusHiirarchical 47 Guidance from the Evidence 48

Efficienry

Susceptibiliryo OGhoriog 72

Andpis Information and C-omparability across

Overdl HR Policies 44

'

65

- 65-

QuantitativeMethods 65

4l

'-'

Conventional Methods

ri7ho Collecr the Infonnation? 67 \7b.o Provides the Information? 67 \Etrat about Discrcpancies? 67

39

Crireria: Content and Vdue 39 Iilflhat Factor*,Shape Intcrnal Strucnrres?

''*'

How Can the Infornation bc Colleqed?

-

6l

Choose berween Methods 86 Job Evaluadon Methods 87 Ranking 87 Classifrcation 88

Point Metlod 89 .Net Worth: Federal Government Classiffcation System

Modernizadon 89

ITho should be involved? 97 Evaluating the Usefulness of Results 98 The Design Process Macers 98

PART

Appeals/Rwiew Procedures 98 Polidcal Influences 98 The Final Result: Job Structure 98 Balancing Chaos and Control 99

Conclusion 100 Chapter Summary KeyTerms 101

External Competitiveness: Determining

the Pay Level fi

100

Review Questions 101

/

0efining Competitiveness 137

.

Compensation Suategy: External

Competitiveness 138 Conuol Costs 138

Case 102

6

Person-Based Pay

Structures

Attract and Retain '!7hat

107

Person-Based Pay Strucnrres: Skill

TypesofSkillPlans

Plans

co

Collecr? Involve? l13

l,abour Demand 142 Marginal Product of labour 142

Iabour Supply 144

111

Modifications to rhe Demand

Establish Cerdffcation Me*rods Ll3 Ourcomes of Skill-Based Pay Plans: Guidance from Research and Experience 1 13 Person-Based PayStructures: Competencies 174

DeftningCompetencies

Compensating

I I

SigndlingTheory

I I I I

, 118

Objective i 19

.

119

Employcr Size 150 Employees'Preferences 150

to Involvel t 19 Btablish Certiffcation Methods L23

I I I

Competencies and Employee Selection andTlaining/Dwelopment 123 Guidelines from rhe Research on Competencies L23 One More Time: Internal Alignment Reflected in Suuctures 125 Managing rhe Plan L25 Evidence of rhe Usefulness of Results

t25

Reliabiliry of Job Evaluadon Techniqucs 126

Conclusion 129 Chapter Summary

Keytrms

130

130

Review Questions 13L

Case

vllt

131

Markea

150

Deffning the Reler"ent Market 150 Competitive Pay Policy Alternatives ltL

Paywith Competition (Match)

151

LeadPolicy I52

LagPolicy 152

. .

Different Policies for Different Employee

Groups 153 Pies L54

Consequences of Pay Level and Pay

Validiry/Usefirlness 126 Gender Bias in Internal Pay Strucrures

Organizarion'sStraregy 150 Relevant

Pidalls of

Mix

Decisions L56

Acceptabiliry 127 ThreeTypesofSructure 128

147

HumanCapitalTheory 147 Product Market Factors 748 A Dose of Realiry: \ftrat Managers Say 148 More Reality: Segrnented Supply of Labour 149 OrganizationFactors 149 Industry andTechnolory 149

.Net \?'onh: Global Leadership Cornpetencies I 18

Collecd

Side

Reservation'WageTheory I47

117

\7h.at Information to 'Whorn

144

146

Modifications to the Supply

ll7

lHowTo": ComperencyAnalysis

Side

DifferentidsTheory 145

Efficiency\TageTheory 145

Purpose of rhe Compercncy-Based

Structure

138

Competitiveness? 141 Iabour Market Factors I41

108

108

\iVhat Information to

Talent

Shapes External

Purpose ofthe Skill-Based Structure 110 "HowTo": Skill Andysis 1l l

I(tom

II

t27

.Net Vonh: Compensation Strategy and Market

Rates L57 Conclusion L57 Chapter Surnrnary 158

I(ryGrms Review

Case

158

Questions 159

159

t'-

F=I

Contencs

8

Governmentlrnpcrus :90

Unions

Designing Pay Levels, Pay-Mix, and-Pay Structures 160

Employer

Major Decisions Specify Competitive PaY ?olicY 161 The Purpose of a Compensation Survey 161 Adjust Pay Level-How Much rc PaY? L62 Adjust Pay Mix-lfhat Forms? 162 Adjust PaY Structurc? 162

TheVdue

Types

Interpret Survey Results and Consuuct a Marker

Childcare Serviccs

I

Rcdur@dcfid[ Jffi

I I I l I

Chapter Summar;r zLA

KeyTerms

2Il

Review Questions 211

Case 271

Vonh:

PAFT

tII

915

Employee Contributions: lndividual Pay

Detarmiilg

185

ChapuSummary KeyTerms 186

185

Review Quesdons 186 187

9*.

1

0

onfor

Design

PerformmceApl*c

217

'What

Behavious de F'.mFlo),cs GlE About? Linking Orgaaizariooal SE to Compensation and Perfolnalc

q[

Analysis I 88

Benefits

Pedormance:

and Plan

Appendix 8-A: Calculating a Market Line Using

Employee

2M

Conclusion 210

From Policy to Practice: Broadbanding t8l

Regression

t

X06

Eldercarc Services 208 Flexible Benefit Plans 208

179

184

(EAFs)

.Net'Worth: Mcnal Illncss

180

Pricing

2fi1

Pbss

Ottrer Bcneffts 206

Eseblish Raage Midpoints, Minimums,

Condusion

f 9S

Retirement Pcnsion

Employee Assistancc Plans

Ratis 176 From Policy to Practice: ttre Pay Policy Line 177 From Policy to Practice: Grades and Ranges 778 '!7hy Bother with Grades and Ranges? L79

Market

198

Medicd lnsurance 2O3 Income Securirp Disabilhf Hmc eD5 Pay forTime Not'WorL'd M

Siatisticd Analpis I73 Age/Tfend the SurveY Dara 174 Consuuct a Market Pay Line 175 Combine Internd Sructure and External Market

ReconcilingDifferences 183

ofBenefits

kg"Xy Requircd Bcocfiu Life Insurance 203

Line 169 Verify Data 170 Pay

183

I I I

Claims Processing 197 Cost Conraiameru 197

\Vhich Jobs to Include? 167

Strucrure

i$A

Employee Prefrreoces L95 Administering de Bcn.f,* kopon i96 Employee Bencfia Coo.uunicrcilo 196

\fh.at Information to Collect? 167

the Pay

:rn'*

Administrarionlssucs I92 Facors ln_fluen.i'g Bcncfir P,hln:ioE ]9 EmployerPrcfercne 193

Design the Compensation Survey 165 \lfho Should Be Involved? 165 How Many EmploYers to SurveY? 165

Second-Generation Banded Salary Sptems L83 Bdancing Internal and External Pressures: Adjusting

lm

Benefir Planairy and Dedgc

EstimateCompetitors'IabourCosts L62 Competitors 163

.Net

Plroling DedS.

andAdministratioo

Select Relevant Market and Fuzzy Markets 165

Overlap

191

Bcocfrs l9t ofEmployecBc,itr igi

Key Issues In Benefirs

" Study Special Situations 162

Maxirnums

t*p.*

Cost-Effectivencss of

161

and

191

t

Management Zl8

189

lntroduction to Employee Benefits 190 lVhy dre Growth in Employee Beneffts? 190

\7hat Does itTake to Get rhesc Bcbzrtwf W&ru TheoryandResearchSaY 2m '\il7hat Does itTake rc Get rhese Bcbeviroud S&m

'

Comperuation Practidoners SzY

W

lI !

--.-..

f

I

t

Conenrs

Total Rewerd System: Orher Reuarrds B€sidcs Money Influence Behaniour! 223 Does Compensation Motivate Behaviour? 226 Do People Join a Firm Because of Pry? 226 Do People Stay in a Firm (or Irave) Because of Pay? 227 , Do Employees More ReadilyAgree rc Develop Job Skills Because

ofPay?

Types of Group

Gain-Sharing Profit-Sharing

.

227

Incentive Plans 262 Explosive lnrerest in Long-Term Incentive Plans 264

227

StockOpdons 265 Broad-Based

(ESOPs) 265 Pay-for-Performance for Specid Employee

Groups 266 Compensation Suategy for Supervisors 267 Compensation Straregy for Corporate

Directors 267 Compensadon Suategy for Compensadon Saategr for Employees 272 Compensation Strategy for Compensation Strategy for

ChaprcrSummary 277

'KeyTerms 277 Review Questions 278

Pay-for-Performance

Case

11

278

280

KeyTerns 242

PAHT IV

Review Questions 242

Managing the System

Case 244

Pay-for-Performance

Plans

247

Salespeople 274 Contingent

\Torkers 276

Tool 24I Conclusion 24L ChaperSummary 242

Execudves 267 Professional

Conclusion 276

Perfornance 240 as a

Option Plans (BBOPs) 265

Employee Stock Ownership Plans

Fairness 240 LegisladveCompliance 240 Linking Pay with Subjectively Appraised Promotional lncreases

261

Group Incentive Plans: Advanmges and Disadvantages 262 Comparing Individual or Grogp In-cpntive i&T::is&:j:: :Plans 262"-The Choice berween Individual and Group

The Role of PerformanceAppraisds in CompensationDecisions 228 Strategies to Better Undersrand and Mcasurc Job ' Performance 228 Suateg;i One: Improve Evaluarion Formats 229 Strategy Two: Select the fught Raters 234 StrategyThree: Undersnnd How Rarers Proces Infornation 235 .Net Worth: Performance Appmisal in a Diverse \Torkforce 237 Strategy Four: Tfain Raters ro Rate More Accurarely 238 Putting it all Together: The Performance Appraisal Process 238 Designing a Pay-for-Performance Plan 239 EfficiencT 239

'

Plaru

Earnings-at-fuskPlans 261

Do Employees Perform Better on rheirJobs Bccause ofPay?

Ini€irtive Plans 258

Plans 258

l2

rn

Role

of Governments and unions

in Compensation 282

\7hat is a Pay-for-Performance Plan? 247 .Net'Wonh: Drivers of Change in Variable

Governmenr as Part of the Employment

PayPlans 249

.

Spaiftc Pay-for-Performance Plarrs: ShonTerm 249 Merit Pay 249 Lump-Sum Bonuses 252

Relationship 283

Supplyoflabour 283 Dernand for Iabour 283 Employment Snndards Acrs 283

IndividualSpotAwards 252

Minimum \ffage 284

Individual Incenrive Plans: Types 253 Individual Incentive Plaos: Advanrages ' and Disadrantages 255 Group Incentive Plans 255 Chdlenges with Group Incentive Plans 258

PaidYacation 285

'

PaidHolidap

?,85

SandardHoursofW'orkandOvenimePay 285 Pay on Termination of

Employment 285

MinimumAge of Employment 286

r

I

Concn:s

Equal Pay for Equd

Vork

bY

Human Rights Iaws 286 PayEquiry 286

Thc Gender\0'age

GaP

Conclusion 319 Chapter Summary 320

KeyGrms

287

PayEquiryLegisladon 289 .Ner

t t

Reengineering and Ouaourcing 319 Balancing Flocibility and-Control - -3 19

Men

and'Wornen 286

\fonh: A 28-Year Quest for

Pay

Equiry at

CanadaPost 290 Condusions 292

Rcview Questions 320 Case 321

Appendix

Pay Equiry

320

1

I

3-A: CompensationWebsites 323

The Impact of Unions on \7age Appendix: lnternational Pay Systems 324

Determination 293

Union Impact on General Wage lcvels 293 Thc Suucnrre of'Vages 294 Union Impacc The Spillover Effect 294 Role of Unions in \fage and Salary Policies

KeyTerms 298 Revicw Quesdons 298

The Global Context 325 The Socid Contract 325 Centralized-Localizcd Dccision 3?3 ^iakng Culture 327 Culture Maners, but So Docs Grla'-l Diversity 328 Tiade Unions and Employee Isvolvmt n9 Ownership and Financid Markca 329 ManageridAutonomy 329 Comparing Cosa 330

aorp.nsation Budgets and Administration

Cornparing Systems 333 ThcTotal Pay Model Suaagic

and Practices 294

Unions and Alternative Rewad Systems 296 Condusion 297 Chaprcr Summary 297

'Case 298

'l 3

Managing and Controlling Labour

Costs

301

Choices 333

3A2

Conuolling Employmenc Number of Employees and Hours 303 ConuollingAverage Cash Cornpensation 304

kvel Top-Down 304 Rise 305 Ability to Pay 305

Conuol Salary

Nadond Sptems: CompantircMindnt !E4 Japanese

Cornpetirive Market Rates 305 Tirrnover Effect 305 Cost ofliving 305 RollingItAllTogerher 307

Conaol Salary Level Bonom-Up 307

'

Ethics: Managing or Manipulating? 309 Embedded Conuols 309 RaageMaximumsandMinimums 309

Compa-Ratios 310

Pay 310 Ana$ngCosts 311 Variable

Communicadon: Managing the Message 314 Amount of Informadon to Communicate 315 .Net \forth: Pay Communicadon Impact on Pay

Satisfaction 317 Pn)" Change Agent in Restructuring 3L7 Suucturing the Compensation Function 318 Cenualizarion-Decenffdization 3i8 Flo