Compensation Methods
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11-1
11
Compensation: Methods and Policies
11-2
Objectives Obj ectives
Understand how individual pay is determined. determined.
Define variable pay and discuss the various incentive programs that can be used in such a system.
Explain why merit pay may cause ca use employees employees to compete rather than cooperate.
Recognize the significant changes in these innovations and learn to differentiate among them: skill-based, knowledge-based, credential-based, feedback, and competency-based pay.
Describe issues such as secrecy, secre cy, security and compression
11-2
Objectives Obj ectives
Understand how individual pay is determined. determined.
Define variable pay and discuss the various incentive programs that can be used in such a system.
Explain why merit pay may cause ca use employees employees to compete rather than cooperate.
Recognize the significant changes in these innovations and learn to differentiate among them: skill-based, knowledge-based, credential-based, feedback, and competency-based pay.
Describe issues such as secrecy, secre cy, security and compression
11-3
Introduction
A
compensation system should be:
Secure
Balanced
Cost-effective
Acceptable to employees
Three
aspects of acceptability will be discussed:
Whether
pay should be secret
Communication to ac hieve acceptabili acce ptability ty
Employee participation participation in pay decision making
11-4
Determination
To
of Individual Pay
determine individual pay:
anagement must answer these questions:
M
How should one employee be paid relative to another when they both hold the same job in the organization?
Should we pay all employees doing t he same work at the same level the same?
If not, on what basis should distinctions be made?
Seniority, merit, merit, or some other basis?
11-5
Determination
of Individual Pay
Most
employers pay different rates to employees performing the same job based on:
Individual differences in experience, skills, and performance
Expectations that seniority, higher performance, or both deserve higher pay
11-6
Determination
of Individual Pay
Reasons to pay different rates for the same job:
Employees performing t he same job make substantially different contributions to goals
A changed emphasis on important job roles, skills, knowledge, and so on
Emphasizes the norms of enterprise without having employees change jobs (promotion)
Without differentials, the
Recognizes market changes between jobs in t he same grade without over haul the whole system
pay system violates the internal equity norms of most employees
11-7
Methods of Payment
Employees can be paid for: T
he
time they work
T
he
output they produce
Skills
Knowledge
Competencies
A combination of these factors
11-8
Variable
Global
competition and economic restructuring are requiring businesses to become more productive
Pay: Incentive Compensation
Reliance on outdated pay systems is holding American businesses back
Traditional
pay systems do not effectively link pay to performance or productivity
anagers are increasingly using variable pay plans
M
11-9
Variable
Variable
Pay: Incentive Compensation
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
11-10
Variable
Pay: Incentive Compensation
To
implement successful variable pay systems, companies must based their plans on:
Clear goals
Unambiguous measurements
Visible linkage to employees' efforts
K ey
design factors include:
Support by management
Acceptance by employees
Supportive organizational culture
T
iming
11-11
Variable
Pay: Incentive Compensation
With
variable pay, a percentage of an employee's paycheck is at risk
If business goals aren't met, t he pay rate will not rise above the base salary
Annual raises are not guaranteed individual earns all or part of the bonus by meeting objectives
T
he
Pay returns to the base level the next year and the employee must again compete for t he variable reward
11-12
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
inancial insecurity is built into the system
F
As a result, productivity may actually decline
Paying
employees on the basis of output is usually referred to as an incentive
11-13
Merit Incentives
The
most widely used plan for managing individual performance is merit pay
A reward based on how well a job was done
Traditionally,
merit pay results in a higher base salary after the annual performance evaluation
erit increases are usually spread evenly t hroughout the subsequent year
M
to 90 percent of firms offer merit raises, but little research has examined merit pay or its effects 80
11-14
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
11-15
Merit Incentives
Many
merit pay systems fail due of three problems:
Employees fail to make t he connection between pay and performance
T
he
secrecy of the reward is perceived as inequity
T
he
size of the award has little effect on performance
Merit T
he
job is well designed
performance criteria are well delineate and assessable
T
he
plans can work where:
11-16
Merit Incentives
Merit
pay systems depend on a reward to produce an
effect
A promise of increased salary in exc hange for a promise to perform satisfactory future work
any existing merit plans are not clearly linked to an individual's performance, so merit increases are not always viewed as meaningful
M
Merit
pay focuses on the individual
It is more likely to cause employees to compete with each other than to collaborate or share resources
11-17
Individual Incentives
The
oldest form of compensation is the individual incentive plan T
he
employee is paid for units produced
Individual incentive plan
takes several forms:
Piecework
Production bonuses
Commissions
11-18
Individual Incentives
Individual
incentive plans are likely to be effective if:
T
he
task is liked
T
he
task is not boring
T
he supervisor reinforces and supports t he
T
he
system
plan is acceptable to employees and managers
incentive is financially sufficient to induce increased output
T
he
Quality of work is not especially important ost work delays are under t he employees' control
M
11-19
Team Incentives
Individual
incentives can be paid to teams of individuals T
eam incentive plans can reduce administrative costs
Reasons to choose a team incentive plan
It is difficult to measure individual output
Cooperation is needed to complete a task or project anagement thinks this is a more appropriate measure on which to base incentives
M
11-20
Team Incentives
The
Japanese use team incentives to foster group cohesiveness and reduce jealousy
In the United States, there may be a clash between societal norms and group incentive systems
For
small-group incentives to be effective, management must:
efine its objectives
D
Analyze the situation
Select the most appropriate group incentive
11-21
Problems with Incentives
In
individual and group incentive systems, competition can result in:
Withholding information or
Political gamesmanship
resources
Not helping others
Sabotaging the work of others
To
minimize these problems, some organizations are using organization-wide incentive plans
11-22
Organization-wide Incentives
Organization-wide incentives are
more common than
individual or group incentives
Payments are usually based on one of two performance concepts:
Sharing profits generated by t he efforts of all employees altogether
Sharing money saved as a result of employees' efforts to reduce costs
11-23
Organizationwide Incentives
Three
approaches to incentive plans are used at the organizationwide level:
Suggestion systems
Company group incentive plans (gain-sharing)
Profit sharing
11-24
Suggestion Systems formal method of obtaining employee advice about organizational effectiveness It includes some kind of reward based on t he successful application of t he idea The key to success is employee involvement These programs are quite cost-effective
A
Suggestion
systems can: Improve employee relations Foster high-quality products Reduce costs Increase revenue
Suggestion
systems are often administered by the HR department
11-25
Suggestion Systems
A
successful suggestion system includes:
anagement commitment
M
Clear goals esignated administrator
D
Structured award system
Regular publicity
Immediate response to each suggestion
11-26
Gainsharing Incentive
Plans
Gain-sharing
plans are company-wide group incentive plans that use a financial formula to:
istribute organization-wide gains, and
D
Unite diverse organizational elements in t he common pursuit of improved organizational effectiveness
Through
cash bonuses, these systems share the benefits of:
Improved productivity
Reduced costs
Improved quality
11-27
Gain-sharing Incentive
Gain-sharing incentive systems are
exceptionally effective in enhancing teamwork in:
anufacturing organizations
M
Plans
Service organizations
Commonly
used gain-sharing plans:
incoln Electric
L
Scanlon
Rucker
ImproShare
11-28
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 ot her industrialized countries
Profit-sharing
plans are typically found in three
combinations:
Cash or current distribution plans eferred plans
D
A combination of bot h
80%
of the companies using profit sharing use the deferred option
11-29
People-Based Pay
bureaucratic job-based method of determining pay will not be used in the future The T
he
new designs will be people-based
Variants
of people-based pay:
Skill-based
Knowledge-based
Credential-based eedback
F
Competency-based
11-30
Skill-Based
Skill-based
Pay
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 ecreased absenteeism and turnover
D
a new skill is added to an existing job, the employee earns a pay increase by mastering it W hen
11-31
Skill-Based
Methods
for defining individual skills:
irect observation
D T
esting easurable results
M
Pay
11-32
Knowledge-based
Pay
K nowledge-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 tec hnical personnel
A
study compared two manufacturing plants
One used the job-centered pay design; t he other a knowledge-based design
After 10 months, the pay-for-knowledge facility had higher quality, lower absenteeism, fewer accidents
11-33
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
11-34
Feedback
Feedback
Pay
pay is based on:
Aligning pay wit h strategic business objectives
Establishing a direct connection between the jobholder and his/her part in accomplishing goals
This
design must conform to four principles:
lows directly from strategic business goals
F
irectly links employees' actions to t hese goals
D
Provides sufficient opportunity for rewards to hold employees' attention
Is timely
11-35
Issues
in Compensation Administration
Managers
must make policy decisions that involve the extent to which:
Compensation will be secret
Compensation will be secure
Pay is compressed
11-36
Pay Secrecy or Openness
There
are degrees of pay secretiveness and openness
In many organizations, pay ranges and individual pay are open to t he public and fellow employees (open system)
With
the secret system, pay is known only to the employee, her/his superior, and HR M/payroll
In some organizations, employees cannot discuss pay matters and, specifically, their own pay
11-37
Pay Secrecy or Openness
Opening
up a system has costs and benefits
o reduce the manipulative aura surrounding pay, a company must share pay information with employees
T
As firms post job openings, information on pay becomes a critical decision
When
deciding on secrecy or openness:
etermine what employees want to know about pay
D
ecide if the information will harm or help the firm
D
Weigh
performance, interdependence, and causal relationships
11-38
Pay Security
Current
compensation can motivate performance
So can the belief that there will be future compensation security
Plans
for providing this security include:
A guaranteed annual wage
Supplementary unemployment benefits
Cost of living allowances (COLAs)
Severance pay
Seniority rules
11-39
Pay Compression
Occurs
when employees perceive too narrow a difference between their pay and that of colleagues
is a narrowing gap between senior and junior employees and between supervisors and subordinates
T
here
ifferentials of 10 percent or less are not unusual
D
Junior employees are sometimes broug ht in at salaries greater than those of their superiors
resulting low morale can lead to decreasing productivity, higher absenteeism, and turnover
T
he
o identify pay compression, compare salaries and incumbents' years of experience with the company
T
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