Team 10

Compensation

June, 2002

Alejandra Padilla

Pauliina Saresma

Michael Sauer

Evelyn Wee

Agenda

Compensation Issues

Point System

Compensation Objectives & Policies

Country Factors: Finland

Benefits Comparison & Policies

Conclusion

Performance Based Rewards

Individual Rewards: •Piece Rate•Comissions•Merit Pay•Royalties

Team Rewards:•Gainsharing•Bonuses

Organizational Rewards:•Share Ownership•Share Options•Profit Sharing

Enterprise Incentive Plans

• Profit Sharing Plans

• Stock Options

• Employee Stock Ownership Programs.

Profit Sharing Plans

• Any procedure by which an employer pays, or makes available to all regualr employees, special current or deferred sums based on the organization´s profit.

• Intended to give employees the opportunity to increase their earnings by contributing to the growth of their organizations´profits.

• Variations in Profit Sharing Plans:: Profit distributions may be made to all emplyees on an equal basis, or may be based on regular salaries or some formula that takes into account seniority and/or merit.

Stock Options

• Prevalent method of motivating and compensating hourly employees, as well as salaried and executive personnel.

• Allowing employees to purchase stock.

• Grant employees the right to purchase a specific number of shares of the company´s stock at a guaranteed price during a designated time period.

Employee Stock Ownership Plans

Two primary forms: Stock bonus plan and a levaraged plan.

• Stock bonus plan: the organizations gives stoc to ESOP or cash to the ESOP to buy ostanding stock.

• Leveraged plan: The ESOP borrows money from the bandk or other financial institution to purchase stock.

ESOPs Pros and Cons

PROS:•Encouraged bye favorable income tax provisions.

•Tax incentives provide a portion of earnings to be excluded from taxation.

CONS:• Potential inability to pay back

the stock of employees when they retire.

• Gains are not guaranteed, unless managers are willing to involve employees in organizational decision making.

Agenda

Compensation Issues

Point System

Compensation Objectives & Policies

Country Factors: Finland

Benefits Comparison & Policies

Conclusion

Job Ranking Scheme

•System of job evaluation

•(job ranking system and paired-comparison method)

•Job classification system

-grouped according to predetermined grades

-for salary raise: increased KSAs

-predetermination: unions, TUPO, governmental regulations

-widely used at the moment in Finnish public sector and companies

Point system

Quantitative job evaluation system to be used in BP-CENTRO

•determining jobs value by counting total amount of gained points

Point system based on KSAs and job conditions

Pro’s and Con’s:

+simple to use

+simple to understand

+valid results

+difficult to manipulate

-complicated to establish

Point System in Practise

Grade 1 Grade 2 Grade 3 Grade 4 Grade 5CE FaM RM CM CEO

SKILLScommunication 30 60 90 120 150interpersonal 30 60 90 120 150language 10 20 30 40 50computer 5 10 15 20 25leadership 25 50 75 100 125contract 5 10 15 20 25teamwork 20 40 60 80 100working experience 25 50 75 100 125education 25 50 75 100 125problem solving 20 40 60 80 100stress management 15 30 45 60 75

RESPONSIBILITIESresponsibility over the entity 30 60 90 120 150planning 20 40 60 80 100implementation 20 40 60 80 100decision making 25 50 75 100 125work of others 15 30 45 60 75dealing with limitations 10 20 30 40 50

JOB CONDITIONSmobility 30 60 90 120 150hazards 10 20 30 40 50

TOTAL 370 740 1110 1480 1850

What is meant by point system compensation

•Compensation varies country by country

•costs of living etc.

•Baltics and Russia - lower salary, more benefits

•Extra benefits provided

•education, free time activities, discounts

•Point system

Agenda

Compensation Issues

Point System

Compensation Objectives & Policies

Country Factors: Finland

Benefits Comparison & Policies

Conclusion

Compensation Objectives

1. Foster corporate culture

2. Lower employee turnover and improve productivity

3. Match employees’ future performance with organizational goals

4. Reward employees past performance

5. To remain competitive in the labour market

6. Employ and retain most talented people

7. Maintain salary equity among employees

Compensation Policies

1. Rate of pay is to be above or at the prevailing industry rate

2. Pay at the rate that is fair to both the employer and the employee

3. Pay raises according to MBO and merit

4. Offer sound non-financial compensation program

5. Offer incentives on the basis of individual contributions to organizational success

6. Equal opportunities for compensation at each level

Salary schedule

FINLAND in EuroGrade Minimum Midpoint Maximum

1 13,680 16,400 19,8502 23,269 30,971 35,1103 27,277 42,707 46,2954 32,940 48,569 61,4255 72,742 106,582 125,724

Latvia in Lats

Grade Minimum Midpoint Maximum1 3,100 3,720 4,4642 5,817 9,200 10,0133 8,333 13,047 14,1434 10,592 15,618 19,752

RUSSIA in RoublesGrade Minimum Midpoint Maximum

1 300 559 6602 512 790 9703 730 1,019 1,1564 929 1,369 1,732

based on the Economist salary comparison 2002

•Grade 1: Contract Employee

•Grade 2: Facility Managers

•Grade 3: Regional Managers

•Grade 4: Country Managers

•Grade 5: CEO

Compensation Policies - Model

CEO

COUNTRYMGR

REGIONALMGR

FACILITYMGR

BASE SALARY

MERIT BONUSES STOCK OPTIONS

INDIRECTCOMPENSATION

Salary policy

• Expatriates are paid according to their home country’s salary range

• Premium paid to cover the host country’s cost of living

• Equal Salary policy as long-term objective

Agenda

Compensation Issues

Point System

Compensation Objectives & Policies

Country Factors: Finland

Benefits Comparison & Policies

Conclusion

Country Factors Finland

• Finnish Factors Influencing Real Wage Rate

-internal factors

-external factors

• Finnish Unemployment Rate Influencing

Compensation

Factors Influencing Real Wage Rate

•In Finland:–white-collar workers in BP-CENTRO Finland

-salaried employees

-exempt category•Internal factors influencing wage rates: (what the job is worth)

-compensation policy (corporate)

-worth of a job

-employee relative worth

-employer ability to pay•External factors influencing wage rates: (compared to other employees)

-labor market conditions

-area wage rates

-cost of living

-collective bargaining

-legal requirements

Internal factors

Compensation policy•compensating required skills

–training, commitment

•external competition

•rewarding performance

•overtime, incentives

Employee’s Relative Worth•promotion, incentive system

•merit raises

–determined by appraisal system

–often unclear “automatic” raises

Employer Ability to Pay•often problem in the public sector

•not a problem in BP-CENTRO

–cost-efficiency issues

Worth of a Job•subjective opinions of people familiar with job•labour market•collective bargaining•job evaluation

–degree of control

External factors

Labour market conditions•supply and demand for labour•recruiting•unemployment rates•government regulations•impact of labour unions

Collective bargaining•labour union power

•governmental, general treaties

•impact of other unions

•to meet / exceed union rates

Cost of living•adjustments due to inflation

•consumer price index

•separate indexes due to regional differences

•escalator clauses

Area wage rates•wage competition in the area

–also in competitive businesses

•wage surveys

–indirect wages, benefits

Baltics and Russia

• former practises• area rates, cost of living, competitor compensation

policies• government and legal regulations• compensation equity - policies for employees coming

from abroad

- regional differences, cost of living etc.

Finland

Factors typical to Finland•government and legal regulations •unemployment rate•powerful unions•general treaties made every two years, five years (TUPO - income policies, holistic treaty)

Finnish Laws and Regulations

Equal rights:

- women treated equally

- age, religion, background, race

Labour Law (§17, Työsopimuslaki):

- no legislation for minimum wage:

however, due to regulations employers must pay the minimum wage according to the TUPO (collective treaty)

Vacation:

- paid or compensated yearly vacation

- possibility to parental leave (also to the father)

Finnish Laws and Regulations (cont.)

Working hours:- 8 hours/day

- 40 hours/week- overtime not permitted without employee agreement

•May not exceed 138 h/4 months, 250 h/year (+80 h)

•daily +50% /first 2 hours, +100%/ over 2 hours

•weekly +50%

•may be compensated as vacation due to employee’s will

Unemployment in Finland

Labour market conditions and their impacts•inflation rate (European Union)•depression•aging population•“retirement bomb” (population demographics)

Agenda

Compensation Issues

Point System

Compensation Objectives & Policies

Country Factors: Finland

Benefits Comparison & Policies

Conclusion

Compensation & Benefits

Compensation:• Base salary• Bonus systemBenefits:• Cafeteria Plan • Country based adaption

• child care• relocation support• summer cottage• paid laptop• sportsclub membership

• discuss differences

“Indirect” Compensation: USA vs. Finland

• Indirect Compensation

USA:

•health: MD, dental, eye wear

•insurance: life, pension

•other benefits

Finland

•benefits; health, dental etc supported by government (taxes)

•pensions paid by government

•possible: housing, car, IT equipment (optional pension plan as a benefit)

Compensation Policies – Benefits

Core:

Health care

Day care

Dental care

Cellular phone

Flexible working hours

Cafeteria-Plan:

Holiday packages

Housing arrangements

Discount on goods and services

Agenda

Compensation Issues

Point System

Compensation Objectives & Policies

Country Factors: Finland

Benefits Comparison & Policies

Conclusion

Conclusion

General guidelines for compensation equal in every region

Wages adjusted based on the economic conditions

Bonus system

Flexible benefits package

Create an “ownership culture”