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Strategic Compensation.ppt 2
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Transcript of Strategic Compensation.ppt 2
Strategic Compensation
Chapter # 4 , 5 & 6
StrategiesStrategiesAffectingAffectingCompensationCompensationDecision Decision MakingMaking
Societal
Corporate
Business
Functional
GovernmentalGovernmentalDecisionsDecisions
OrganizationalOrganizationalManagementManagementDecisionsDecisions
Function LevelFunction LevelDecisionsDecisions
Human ResourceHuman Resource
StrategiesStrategies
Total CompensationTotal CompensationTotal CompensationTotal Compensation
DirectDirectDirectDirect IndirectIndirectIndirectIndirect
BonusesBonusesBonusesBonuses
GainsharingGainsharingGainsharingGainsharingSecurity Plans• Pensions
Security Plans• Pensions
Employee Services• Educational assistance• Recreational programs
Employee Services• Educational assistance• Recreational programs
CommissionsCommissionsCommissionsCommissions
Wages / SalariesWages / SalariesWages / SalariesWages / Salaries
Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife
Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife
Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays
Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays
What Is the Strategic Compensation What Is the Strategic Compensation Perspective?Perspective?
The strategic perspectivestrategic perspective involves thinking about how pay can assist in achieving
organization success.
Strategy – A fundamental pattern of presentand past deployments and environmentalinteractions that indicates how anorganization will achieve its objectives.
Strategy – A fundamental pattern of presentand past deployments and environmentalinteractions that indicates how anorganization will achieve its objectives.
HR Strategy – Acquiring the Quantity
and Quality of human resources the possess
the necessary knowledge, skills and abilities
within relevant time constraints, to achieve
organization goals
HR Strategy – Acquiring the Quantity
and Quality of human resources the possess
the necessary knowledge, skills and abilities
within relevant time constraints, to achieve
organization goals
Compensation Strategy – Decisions
to Environmental Threats and
Opportunities and linked or at least
support the overall direction of the
organization
Compensation Strategy – Decisions
to Environmental Threats and
Opportunities and linked or at least
support the overall direction of the
organization
Compensation Goals – Attract,
Retain, Motivate and Developthe Human Resources necessary to accomplish the Organization'sgoals
Compensation Goals – Attract,
Retain, Motivate and Developthe Human Resources necessary to accomplish the Organization'sgoals
The Relationship between Business The Relationship between Business Unit Strategy to Compensation GoalsUnit Strategy to Compensation Goals
Compensation Management and Other HRM Functions
Pay rates affect selectivityPay rates affect selectivityPay rates affect selectivityPay rates affect selectivity SelectionSelectionSelectionSelection Selection standards affect Selection standards affect level of pay requiredlevel of pay required
Selection standards affect Selection standards affect level of pay requiredlevel of pay required
Pay can motivate trainingPay can motivate trainingPay can motivate trainingPay can motivate training Training and Training and DevelopmentDevelopment
Training and Training and DevelopmentDevelopment
Increased knowledge leads Increased knowledge leads to higher payto higher pay
Increased knowledge leads Increased knowledge leads to higher payto higher pay
Training and development may Training and development may lead to higher paylead to higher pay
Training and development may Training and development may lead to higher paylead to higher pay
Compensation Compensation ManagementManagement
Compensation Compensation ManagementManagement
A basis for determining A basis for determining employee’s rate of payemployee’s rate of pay
A basis for determining A basis for determining employee’s rate of payemployee’s rate of pay
Aid or impair recruitmentAid or impair recruitmentAid or impair recruitmentAid or impair recruitment RecruitmentRecruitmentRecruitmentRecruitment Supply of applicants Supply of applicants affects wage ratesaffects wage rates
Supply of applicants Supply of applicants affects wage ratesaffects wage rates
Low pay encourages Low pay encourages unionizationunionization
Low pay encourages Low pay encourages unionizationunionization Labor RelationsLabor RelationsLabor RelationsLabor Relations Pay rates determined Pay rates determined
through negotiationthrough negotiation
Pay rates determined Pay rates determined through negotiationthrough negotiation
Common Strategic Compensation Goals
1. To reward employees’ past performance
2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To mesh employees’ future performance with organizational goals
5. To control the compensation budget
6. To attract new employees
7. To reduce unnecessary turnover & motivate employees
Compensation System
Key Strategic Issues in Compensation
Determining compensation relative to market
Balance between fixed and variable compensation
Deciding whether or not to utilize team-based versus individual pay
Creating appropriate mix of financial and non-financial compensation
Developing a cost-effective compensation program resulting in high performance
Compensation Policy Issues
Pay for performance
Pay for seniority
Salary increases and promotions
Overtime and shift pay
Probationary pay
Paid and unpaid leaves
Paid holidays
Salary compression
Geographic costs of living differences
Forms of Equity
External equity
- How a job’s pay rate in one company compares to the job’s pay rate in other companies.
Internal equity
- How fair the job’s pay rate is, when compared to other jobs within the same company
Individual equity
- How fair an individual’s pay as compared with what his or her co-workers are earning for the same or very similar jobs within the company.
Procedural equity
- The perceived fairness of the process and procedures to make decisions regarding the allocation of pay.
Equity Theory
Equity and Its Impact on Pay Rates
The equity theory of motivation
- States that if a person perceives an inequity, the person will be motivated to reduce or eliminate the tension and perceived inequity.
Expectancy Theory and Pay
Expectancy Theory
- A theory of motivation that holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that they value.
- Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.
Perceived Equity of a Pay Structure
MY PAYMY PAYMy qualificationsMy qualifications
My work performedMy work performedMy product valueMy product value
MY PAYMY PAYMy qualificationsMy qualifications
My work performedMy work performedMy product valueMy product value
OTHERS’ PAYOTHERS’ PAYTheir qualificationsTheir qualifications
Their work performedTheir work performedTheir product valueTheir product value
OTHERS’ PAYOTHERS’ PAYTheir qualificationsTheir qualifications
Their work performedTheir work performedTheir product valueTheir product value
Relationship between Pay Equity and Motivation
0
5
10
15
20
25
30
35
40
45
50
Inequity Equity Inequity
My Input/ OutputRatioComparison Person'sInput/ Output Ratio
(Feeling of Being Underpaid)
(Feeling of Being Overpaid)
(Feeling of Being Paid Fairly)
Relationship between Pay Equity and MotivationRelationship between Pay Equity and Motivation
Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less and Receiving More
The greater the perceived disparity between my input/output ratio and the comparison person’s input/output ratio, the greater the motivation to reduce the inequity.
Individual Equity
Fairness about pay differentials among individuals in same job
Established by using
- Seniority-based pay systems: Reward longevity
- Merit-based pay systems: Reward employee performance
- Incentive plans: Employees receive part of compensation based on performance
- Skills-based pay systems: Compensation based on employees possessing skills that firm values
- Team-based pay plans: Encourage cooperation and flexibility
Internal Equity
Fairness of pay differentials between different jobs in organization
Established by job ranking, job classification, point systems or factor comparisons (job evaluation)
Internal alignment,Internal alignment, often called internal equity, refers to the pay relationships between the jobs / skills / competencies within a single organization. The relationships form a pay structure that can support the workflowsupport the workflow,, is fair tofair to employeesemployees,, and directs their behaviordirects their behavior toward organization objectives.
External Equity
Fairness of organizational compensation levels relative to external compensation
Assessed by collecting wage and salary survey information to guide in setting organization’s pay strategy to lead, meet, or lag labor market wages
External Equity
Lag policy
- Lower wages than competitors, compensates employees through other means
- Opportunity for advancement
- Incentive plans
- Good location
- Good working conditions
- Employment security
Market policy
- Wages equal to competitors
- Neutralizes pay as factor
Lead policy
- Higher wages than competitors to ensure organization becomes employer of choice
Methods to Address Equity Issues
Salary surveys
- To monitor and maintain external equity.
Job analysis and job evaluation
- To maintain internal equity,
Performance appraisal and incentive pay
- To maintain individual equity.
Communications, grievance mechanisms, and employees’ participation
- To help ensure that employees view the pay process as transparent and fair.
What Is Competency-based Pay?
Competency-based pay
- Where the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds.
Competencies
- Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.
Strategic Compensation Policy Concerns
1. The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate.
2. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities.
3. The pay level at which employees may be recruited and the pay differential between new and more senior employees.
4. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises.
5. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.
Compensating Teams
Management often overlooks powerful intrinsic rewards that come from
- Team participation
- Being part of corporate decision-making process
Let team decide who gets what from awards basket
The Pay-for-Performance Standard
Pay-for-Performance Standard
- The standard by which managers tie compensation to employee effort and performance.
- Refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and pay banding, team/ group incentives, and various gainsharing programs.
The Bases for Compensation
Hourly Work
- Work paid on an hourly basis.
Piecework
- Work paid according to the number of units produced.
Salary Workers
- Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.
The Wage Mix—Internal Factors
Employer’s Compensation Strategy
- Setting organization compensation policy to lead, lag, or match competitors’ pay.
Worth of a Job
- Establishing the internal wage relationship among jobs and skill levels.
Employee’s Relative Worth
- Rewarding individual employee performance
Employer’s Ability-to-Pay
- Having the resources and profits to pay employees.
The Wage Mix—External Factors
Labor Market Conditions
- Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.
Area Wage Rates
- A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.
The Wage Mix—External Factors
Cost of Living
- Local housing and environmental conditions can cause wide variations in the cost of living for employees.
- Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.
The Wage Mix—External Factors
Collective Bargaining
- Escalator clauses in labor agreements provide for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power.
- Unions bargain for real wage increases that raise the standard of living for their members.
- Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.
The Wage Curve
Wage Curve- A curve in a scattergram representing the relationship between relative worth of
jobs and wage rates.
Pay Grades- Groups of jobs within a particular class that are paid the same rate.
Rate Ranges- A range of rates for each pay grade that may be the same for each grade or
proportionately greater for each successive grade.
Red Circle Rates- Payment rates above the maximum of the pay range.
Wage Structure with Increasing Rate RangesWage Structure with Increasing Rate Ranges
The Wage Curve (cont’d)
Competence-based Pay, (also skill-based pay or knowledge-based pay)
- Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category.
- Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover,
Broadbanding
- Collapses many traditional salary grades into a few wide salary bands.
Motivating Employees through Compensation
Pay Secrecy
- An organizational policy prohibiting employees from revealing their compensation information to anyone.
- Creates misperceptions and distrust of compensation fairness and pay-for-performance standards.
- Arguments against secrecy:
- Knowledge of base pay is the strongest predictor of pay satisfaction, which is highly associated with work engagement
- Knowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees.
Virtuous and Vicious Circles
Organization Organization PerformancePerformance INCREASESINCREASES
Decreased Performance- Decreased Performance- Based PayBased Pay
Decreased Employee Decreased Employee PerformancePerformance
Risk/Return Risk/Return IMBALANCEIMBALANCE
Organization Organization PerformancePerformance DECREASESDECREASES
Increased Performance- Increased Performance- Based PayBased Pay
Increased Employee Increased Employee PerformancePerformance
Risk/Return Risk/Return BALANCEBALANCE
Virtuous CircleVirtuous Circle
Vicious CircleVicious Circle
Framework for AnalyzingDifferent Deals
HIGH PAY – LOW COMMITMENT
Hired Guns (Stockbrokers)
HIGH PAY – HIGH COMMITMENT
Cult - like (Microsoft)
LOW PAY – LOW COMMITMENT
Workers as Commodity (Employers of Migrant
Farm Workers)
LOW PAY – HIGH COMMITMENT
Family (Starbucks)
LowLow HighHighRELATIONALRELATIONAL
Lo
wL
ow
Hig
hH
igh
TR
AN
SA
CT
ION
AL
TR
AN
SA
CT
ION
AL
Pay structure,Pay structure, refers to the array of pay rates for different work or skills within a single organization. The number of levels, number of levels, differentialsdifferentials in pay between the levels, and the criteriacriteria used to determine those differences create the structure.
Consequences of an Internally Aligned Structure
Pay structurePay structurePay structurePay structure
Undertake trainingUndertake training
Increase experienceIncrease experience
Reduce turnoverReduce turnover
Facilitate career progressionFacilitate career progression
Facilitate performanceFacilitate performance
Reduce pay-related Reduce pay-related grievancesgrievances
Reduce pay-related work Reduce pay-related work stoppagesstoppages
Internal Consistency:Engineering Job Structure
Entry LevelEntry Level
Recognized Recognized AuthorityAuthority
Engineer:Engineer: Limited use of basic principles. Close supervision.Limited use of basic principles. Close supervision.
Senior Engineer:Senior Engineer: Full use of standard principles and concepts. Under Full use of standard principles and concepts. Under general supervision.general supervision.
Systems Engineer:Systems Engineer: Wide applications of principles and concepts, plus Wide applications of principles and concepts, plus working knowledge of other related disciplines. Under very general working knowledge of other related disciplines. Under very general direction.direction.
Lead Engineer:Lead Engineer: Applies extensive knowledge as a generalist or specialist. Applies extensive knowledge as a generalist or specialist. Exercises wide latitude.Exercises wide latitude.
Advisor Engineer:Advisor Engineer: Applies advanced principles, theories, and concepts. Applies advanced principles, theories, and concepts. Assignments often self-initiated.Assignments often self-initiated.
Consultant Engineer:Consultant Engineer: Exhibits an exceptional degree of ingenuity, Exhibits an exceptional degree of ingenuity, creativity, and resourcefulness. Acts independently to uncover and resolve creativity, and resourcefulness. Acts independently to uncover and resolve operational problems.operational problems.
Which Structure has the Greatest Impact on Performance? On Fairness?
Structure AStructure A
LayeredLayered
Chief Engineer
Engineering Manager
Consulting Engineer
Senior Lead Engineer
Lead Engineer
Senior Engineer
Engineer
Engineer Trainee
Structure BStructure B
De-layeredDe-layered
Chief Engineer
Consulting Engineer
Associate Engineer
Pay Mix Policy Alternatives
Base 50%
Bonus 17%
Options 16%
Benefits 17%
Performance - Driven
Base 70%Bonus 6%
Options 4%
Benefits 20%
Market Match
Base 50%
Bonus 10%
Options 10%
Benefits 30%
Work - Life Balance
Base 80%
Benefits 20%
Security (Commitment)
QUESTIONS