HRM 831 Compensation Ted Mock Intro to Compensation What is compensation? Pay mix is the unique blend of base pay, incentives and indirect compensation/benefits Compensation is significant cost to firm 60% to 80% of total operating expenses Design of compensation system is crucial strategic decision for firm – must support company objectives/strategies, ability to pay, organization's culture and environment must enhance employee motivation and retention Can enhance firm's ability to attract candidates (internal fit with recruitment strategy) Can enhance firm[s ability to keep key employees (internal fit with retention strategy) Linking compensation to organizational objectives value-added compensation - "how does the compensation package benefit the organization?" If it does not add value, change it. Terms : hourly; piecework; salaried; exempt; non-exempt Factors affecting wages (the term wage mix is not in common use) Internal factors - compensation policy of firm; worth of job; employee's relative worth; employer's ability to pay External factors - conditions of labour market; area wage rates; cost of living; collective bargaining; legal requirements 1 HRM 831 Ted Mock Compensation Labour market model (economics) – wage rate for any given occupation is set at point where the supply of labour equals demand for labour in the marketplace – firm cannot stray too far from the going the ‘going rate’ for the job Labour Market Model For specific job in specific market Where supply equals demand, the market "clears" Wages High $ Supply curve Going Rate - the market clears at this rate of pay for this job Demand curve Low $ Low # workers Quantity of Workers High # workers Consumer Price Index (CPI) - you hear this term frequently - it is a measurement that is done by Statistics Canada to determine whether the cost of living in Canada is going up or down. The CPI is made up of a 'fixed basket of consumer goods and services' and StatsCan samples the cost of this fixed basket of goods and services every month. 2 HRM 831 Compensation Job Evaluation Ted Mock Job evaluation – the process of evaluating the relative value, worth or contribution of different jobs to an organization using compensable factors which are work-related criteria that an organization considers most important such as skill, effort, responsibility and working conditions The simplest qualitative methods are job ranking and paired comparison Most firms that have any kind of sophistication in their HR techniques use some form of a Point System. The following describes the Steps in Creating a Job-Based Compensation Plan using a point system of job evaluation: Establish Internal Equity 1. Job analysis –gathering and organizing information concerning the tasks and duties of specific jobs 2. Job description - create a job description for each job based on the job analysis 3. Determine job specifications – prerequisites that an employee must meet to perform a job successfully- work experience, education, certificates, etc. 4. Rate worth of all jobs using a job evaluation system – by far the most common is some form of point factor system – uses compensable factors which are work related criteria that an organization considers most important in assessing the relative worth of different jobs 5. Create a job hierarchy –list jobs in order of their importance (evaluation points) 6. Classify jobs by grade levels – for sake of administrative simplicity – broad-banding creates even wider job grades – often associated with skill based pay but can be more expensive. Note: job evaluation focuses only on the job and not the person performing the job Establish External Equity 7. Establish the rate of pay for each job grade – market salary surveys – company may perform own survey or may purchase survey conducted by consulting firms – depends upon uniqueness of jobs of likelihood of finding a good ‘match’ in a survey What jobs should be surveyed? Benchmark jobs and key jobs for different reasons – benchmark jobs are jobs that are similar across firms and therefore will provide a good 3 HRM 831 Ted Mock Compensation job match and therefore will provide valuable base information for constructing a salary range – look for benchmark jobs within each job grade. Key jobs are jobs that are strategically important to the organization or jobs that have experienced higher than acceptable turnover and there is a suspicion that the job is underpaid. 8. Based upon survey data, the firm must decide upon its ‘pay policy’ – lead, lag or at market – how the firm positions itself relative to the market depends upon business strategy, HR strategy and ability to pay – market surveys are not definitive - require considerable analysis and interpretation Establish Individual Equity 9. Position individual employees within the pay range based upon experience, performance ratings, or seniority as determined by company compensation policies and collective agreements (where applicable) Management Job Evaluation The most common job evaluation system for managers is the Hay System which uses the compensable factors of Know-how, Problem Solving and Accountability to establish a point value for the management position. Creating Pay Structures This includes establishing Pay Grades, as well as Pay Ranges or Salary Ranges. PAY FOR PERFORMANCE – incentive system · Three assumptions: · Individuals and teams differ in how much they contribute to the firm – and this difference can be measured · Firm’s overall performance depends upon performance of individuals and groups within the firm · To attract, retain and motivate and be fair to all employees, firm must reward employees based upon their relative performance 4 HRM 831 Compensation CHALLENGES OF PAY FOR PERFORMANCE: Ted Mock Most employees believe that those who work hard and produce should be rewarded – if employees see that pay is not distributed on basis of merit, they are more likely to lack commitment to the firm, decrease their level of effort and look for employment opportunities elsewhere – that said – there are many risks to individual pay for performance plans Do only what you get paid for – the more pay is tied to particular performance indicators, the more employees will focus on those indicators and neglect others Negative effect on cooperation – conflict and competition Factors beyond employees’ control eg. working conditions, support from management, poor sales territory Difficulties measuring performance – accurate measures of performance are not easy to achieve and tying pay to inaccurate measures is likely to create problems Psychological contract – set of expectations –very resistant to change – breaking contract can have negative results – hard to change the plan even when conditions change and require a change in contract Credibility gap – 75% of employees question the integrity of pay for performance plans – especially merit systems that require judgment from superior Reduced intrinsic drive – narrowed work focus and less creativity – less time in activities that will benefit the organization unless they are promised as explicit reward MEETING THE CHALLENGES OF PAY-FOR PERFORMANCE SYSTEM Link pay and performance appropriately – Piece-rate – employees paid per unit produced – employee must have control over the speed and quantity of work – less common as jobs become more technologically oriented Use pay for performance as part of broader HRM system – complementary systems – performance appraisals and supervisory training are key to success Multiple layers of rewards – all p for p systems have positive and negative features – variety of p for p systems – weaknesses are offset Increase employee involvement – the best way to increase employees’ acceptance is to have employees involved in the design of the plan – involvement will result in 5 HRM 831 Ted Mock Compensation greater understanding, commitment, match with individual needs and better design (this is not always possible) Use non-financial rewards – public and private praise, interesting work (assignment to a high profile project), award systems, recognition in newsletters, bulletins, etc. TYPES OF P FOR P PLANS INDIVIDUAL PLANS – merit pay – increase in base pay - % increase depends upon performance rating bonus program or lump-sum payment – one time payment – does not increase the base pay award – tangible prize eg. trip, dinner for two, etc piecework and commission – especially straight commission with no draw – no sales = no income, but no limit on income if sales are outstanding conditions under which individual based plans are most likely to succeed – short list – when contributions of individual employees can be accurately isolated when job demands autonomy – employees work independently when cooperation is less critical or competition is to be encouraged TEAM BASED PLANS: must be congruent with the structure, culture, goals and management priorities of the organization – normally rewards all team members equally based upon group outcomes PLANT WIDE PLANS Gainsharing – plant wide pay for performance plan where portion of company’s cost savings is returned to workers, usually in the form of bonus Most famous are Scanlon plan, Rucker plan and Improshare – p 332 both Scanlon and Rucker plans require union/management cooperation in finding ways to reduce costs or improve productivity – in Scanlon plan, workers receive 75% of cost savings – colleague of Douglas MacGregor –Theory X, Theory Y – firm will be more productive if it follows a participative approach to management if it assumes that employees are intrinsically 6 HRM 831 Ted Mock Compensation motivated and can show the company better ways of doing things given a chance – enjoy being team players CORPORATE WIDE PLANS Profit sharing and ESOP’s – Profit sharing – uses a formula to allocate a portion of declared profits to employees – typically used to fund employee pension plans No consideration of individual performance beyond minimal requirements for satisfactory performance ESOP – employee share ownership plan – rewards employees with company shares either as outright grant or at a favourable price that may below market value – employees whose retirement benefits depend upon share values are at risk due to market fluctuations or bad management – no effect on employee productivity – appear painless (on paper) but may leave future management generations with less cash, lower profits and decreased firm value. ESOP plans are associated with lower employee turnover rates. EXECUTIVE COMPENSATION Why do companies pay such high executive salaries? There is often weak or inconsistent correlation between executive earnings and firm performance SALESPEOPLE Straight commission, straight salary of combination salary and commission. Advantages and disadvantages? REWARDING EXCELLENCE IN CUSTOMER SERVICE – how do you measure an employee’s level of customer service sufficiently quickly and accurately to base a pay for performance plan on customer service? 7
