Motivation and compensation notes
Chapter 1
Why study motivation and compensation?
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Understand employee behaviour
Graduating students and professionals will find knowledge a competitive advantage
HR practitioners need to understand compensation and impact on company success
To eventually become a part of top management, it is important for HR specialists to be able
to convey and demonstrate to senior management how compensation strategy can support the
business strategy of the organization.
1. Key Purpose of Compensation Systems
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Help achieve strategies and objectives
Help attract, retain, and motivate employees
Have philosophical and moral implications
Influences standard of living
Influence financial value of the pay system to the organization’s bottom line
Address internal and external equity issues
Reward is anything provided by the job or the organization that satisfies an employee need.
Extrinsic rewards are factors that satisfy basic human needs for survival and security, as well as
social needs and needs for recognition.
Intrinsic rewards are factors that satisfy higher-order human needs for self-esteem, achievement,
growth, and development.
Incentive is a promise that a specified reward will be provided if a specified employee behaviour is
performed.
Reward system is the mix of intrinsic and extrinsic rewards that an organization provides to its
members.
Role and Purpose of the Compensation System
Role:
How do you get organization members to do what the organization wants and needs them to do?
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Compensation is a key part of the solution
Get people to do what you want them to do
Purpose of the compensation system
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To help create a willingness among qualified persons to join the organization and to perform the
tasks the organization needs
Why Effective Compensation is so Important?
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Financial Impact
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40 to 70 % of operating budgets for business
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Often the single largest operating expenditure
Too much? Too little?
What is the organization receiving for its investment in wages, salaries, and benefits?
A compensation system is one of the most powerful tools available to an employer for shaping employee
behaviour and influencing company performance, yet any organizations waste this potential, viewing
compensation as a cost to be minimized.”
Role and Purpose of the Compensation System
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Employees must perceive that accepting a job with a given employer will help them satisfy some of
their own important needs
Includes: Economic needs for the basic necessities of life, needs for security, social interaction,
status, achievement, recognition, growth and development
Extrinsic vs. Intrinsic Rewards
Extrinsic Rewards:
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Factors that satisfy basic human needs for:
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Survival
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Security
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Social needs
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Needs for recognition
Intrinsic Rewards:
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Factors that satisfy higher-order human needs for:
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Self-esteem
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Achievement
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Growth
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Development
Reward
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Positive consequences of performing behaviours desired by the organization, and employees
normally receive these rewards:
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After performing the behaviour (extrinsic rewards)
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During performance of the behaviour (intrinsic rewards)
Incentive
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Promise that a specified reward will be provided if employee performs a specified behaviour
or achieve result
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Induce value behaviour
Reward System vs. Compensation System
Reward System
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Reward strategy:
The mix of both intrinsic and extrinsic rewards provided by an organization
May not be tangible e.g. work/life balance
(Exam questions)3 things to see if the compensation system works:
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Employees satisfaction
Cost
Competitiveness
3 main components of the Compensation System include:
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Performance pay: relates employee monetary rewards to some measure of individual, group, or
organizational performance.
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Base Pay: is the foundation pay component for most employees and is generally based on some
unit of time—an hour, a week, a month, or a year.
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Indirect Pay: sometimes known as “employee benefits,” consists of noncash items or services
that satisfy a variety of specific employee needs, such as health protection (e.g., extended
medical and dental plans) or retirement security (e.g., pension plans).
There are two key aspects of a compensation strategy.
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One aspect is the mix across the three-compensation components, and whether and how this
mix will vary for different employee groups.
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The other is the total amount of compensation to be provided to individuals and groups. In
short, “How should compensation be paid?” and “How much compensation should be paid?”
are the two key questions for compensation strategy.
The total rewards approach to compensation is the practice of looking at the total spectrum of
rewards. Which include career advancement opportunities, the intrinsic characteristics of the job,
work/life balance, employee recognition programs, and a positive workplace culture, as well as
compensation.
Optimal reward system is a reward system that adds the most value to the organization, after
considering all its costs.
Total Rewards
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Organizations must consider the total spectrum of rewards—as well as compensation—known as
total rewards approach
Reward Strategy
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A plan for the mix of rewards with the means to be provided
Must be developed before the compensation system
The reward strategy is the blueprint for creating the reward system
Compensation Strategy
Three main components:
1. Base pay: Foundation pay component for most employees, generally based on a unit of time
2. Performance pay: Employee monetary rewards to some measure of performance
3. Indirect pay: Noncash items or services that satisfy a variety of specific employee needs, such
as health protection or retirement security
Goals of the reward and compensation system:
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6.
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Promote achievement of the organization’s goals
Fit with and support the organization’s strategy and structure
Attract and retain qualified individuals
Promote desired employee behaviour
Be seen as equitable
Comply with the law
Be within the financial means of the organization.
Achieve the above goals in the most cost-effective manner.
A ROAD MAP TO EFFECTIVE COMPENSATION
STEP I: UNDERSTAND YOUR ORGANIZATION AND YOUR PEOPLE
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The reward system is just one part of the total organizational system, and each part must fit
with and support the other parts.
STEP II: FORMULATE YOUR REWARD AND COMPENSATION STRATEGY
STEP III: DETERMINE YOUR COMPENSATION VALUES
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The value of the employee’s assigned job relative to other jobs in the firm, usually determined
by a process called job evaluation.
The value of the employee’s job relative to what other firms are paying for this job, usually
determined through a process known as labour market surveys.
The value of the employee’s job performance relative to other employees performing the
same job, usually determined by a process called performance appraisal.
STEP IV: DESIGN YOUR PERFORMANCE PAY AND INDIRECT PAY PLANS
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Your compensation strategy probably contains some performance pay and some indirect pay.
STEP V: IMPLEMENT, MANAGE, EVALUATE, AND ADAPT THE COMPENSATION
SYSTEM
Chapter 2 A Strategic framework for compensation
The strategic framework provides a tool for helping to predict this, and for identifying the
compensation system that will be the best fit with the organization and its business strategy.
The organization’s strategy is to achieve its mission, vision, values, and goals.
The Business Strategy (competitive, corporate..) is the organizations plan for how it will achieve its
goals.
Organizational structure is the means through which an organization generates the behaviours
necessary to execute its business strategy.
The two main sets of variables in a Strategic Framework for Compensation are
1. Structural Variable needs to divide the total task into manage- able subtasks (a
process sometimes known as “differentiation”), and then it needs to coordinate the
completion of these subtasks so that they fit together to accomplish the organization’s
total task (a process sometimes known as “integration”).
Structural variables includes:
 Reward system
 Job design: A dimension of organization structure that describes the manner in which
the total task of an organization is divided into separate jobs.
 Coordination and departmentation: are the methods used to ensure that the work of
individual employees fits together such that the overall tasks is accomplished.
 Decision-making and leadership structure: Describe the nature of the decisionmaking and leadership processes used in an organization.
 Communication and information structure: Describe the nature of and methods for
communication in an organization.
 Control structure: Describes the nature of the processes used to control employee
behaviour in an organization.
Managerial Strategy: determines what will or will not be a successful reward system for that frim.
Is one of the three main patterns or combinations of structural variables that can be adopted by an
organization.
Three main patterns of managerial strategy are:
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The classical managerial strategy – most employees inherently dislike work but can be
induced to satisfy economic needs. Example: sweatshop, as they are only there to satisfy
economic needs
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The human relations managerial strategy- most employees inherently dislike work but can
be induced to satisfy social needs. Charity, more for the relationship
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The high-involvement managerial strategy – work can be intrinsically motivating if the
organization is structured properly. Employees are very much involved in the decisionmaking process. Contributes more, more autonomy. More overall involvement. Look forward
to coming to work.
Encouraging innovation and supporting innovation behaviours by employees refers to a vertical fit (alignment of
strategies)
Horizontal fit refers to hr strategies.
Vertical fit refers to organizational strategy.
Only vertical fit or horizontal fit. Don’t be deceived on exam with other terms regarding strategic alignment.
A Strategic Framework for Compensation
There are strong relationships between the structural variables.
Organizational Culture (Page 33.)
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the set of core values, guiding beliefs, understandings shared by members of an organization.
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Culture can supplement an organization’s structure or substitute for it.
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How does the Managerial Strategy and culture interact?
Interrelationships Among Structural Variables
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Guiding beliefs
Core Values
Understanding
Interrelationships Among Structural Variables
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Some elements are complimentary, others serve as substitutes for others
– A single managerial strategy is usually more effective than an inconsistent mix of
structural elements
2. Contextual variables
Factors in the firm’s context that indicate the most appropriate managerial strategy and organizational
structure
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Organization’s environment
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Business strategy
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Technology
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Size
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Workforce
A change in any of the contextual variables may trigger a change in the reward system (Structural)
Determinants of the Most Appropriate Managerial Strategy
Contextual Variable includes:
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Environment:
Most important of the contextual variables
1. Stable or unstable?
 An unstable (dynamic) environment exists here product or service life cycles
are short, where product or service demand is volatile, where customer needs
change quickly and unpredictable
2. Simple or complex?
These combinations determine the most effective approach
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Corporate strategy or business strategy
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Technology
Set of procedures and resources an organization uses to transform resources to usable products
and services
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Type of production processes
Routine or non-routine
Small or large batch
Implication for workforce capabilities
Organization size
Large organizations generally use classical or human relations strategies
Easier to implement high involvement in a small- to medium-sized organization
The larger the organization, the greater the need for some formal structure
Hewlett-Packard has traditionally used this approach
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Nature of the workforce
Highly skilled, well-educated, or professional employees are more suited to the highinvolvement organization
High-involvement strategy requires these characteristics because of the broad job and
decision-making responsibility expected of employees
Classical organizations are specifically designed to use employees with relatively low skill
levels, and because of their approach to motivation and control, these organizations are most
suited to workers who badly need the money the job provides
Trends in Managerial and Compensation Strategies
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All three managerial strategies can be effective if used in the right context
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How are circumstances changing in North America, and how will these changes affect the
optimal choice of managerial strategy?
The Evolution of Managerial Strategies
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Socioeconomic changes in Canada created conditions that are more suitable for highinvolvement organizations and less suitable for classical and human relations organizations
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Educational levels have increased
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Economic security and social security have improved
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Social values have become more democratic and egalitarian
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All of these conditions work against classical and human relations organizations
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Many classical firms have found developing countries are a much better fit for their preferred
managerial strategy and have moved operations there
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Human relations organizations tend to be as rigid and inflexible as classical organizations
Trends in Compensation Systems
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More complicated pay systems
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Increase in pay-for-performance (profit-sharing, employee share plans)
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Flexible benefit plans
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Gradual movement away from hourly pay to salary
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1980s and 1990s
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Wage freezes/rollbacks, cuts to benefit plans, increased use of two-tier wage systems
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Fell out of practice in late 1990s when economic conditions improved, resurged in
2008-2009 during global financial crisis and recession
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Increased use of part-time, temporary, and contract workers
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Trend towards noncash employee recognition programs
Chapter 3: A Behavioral Framework for Compensation
1. 3 types of reward problems
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Failure to produce the desired behaviour
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Production of the desired behaviour but with undesirable consequences
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Production of reward dissatisfaction: occurs when the employees believes that the reward system
are not consistent with the contributions they are making to the organization or the believe the
reward system is unfair.
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2. 3 employee behaviours desired
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Membership behaviours: occurs when employees decide to join and remain with a
firm.
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Task behaviours: occurs when employees perform the specific task that have been
assigned to them.
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Organizational citizenships behaviour: occurs when employees undertake special
behaviours beneficial to the organization that go beyond task behaviour. Such as extra
effort, high initiative, high innovativeness, extra customer service
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3. 3 key job attitudes
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Job satisfaction: defined as the attitude one holds towards one’s job and workplace,
either positive or negative.
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Work motivation: defined as the attitude one holds toward good job performance,
either positive or negative.
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Organizational identification: has three interrelated elements such as a sense of shared
goals and values with the organization, a sense of membership or belongingness, and
an intention to remain a member of the organization.
4. 3 types of behaviour
Every behaviour is a function of motivation, which includes the following:
Task performance
Organizational citizenship behaviour
Counterproductive work behaviour
Examples of f membership behaviour, organizational citizenship behaviour, and task behvaiour
Causes and Consequences of Reward Dissatisfaction
1. Violation of the psychological contract
Psychological contract
 Expectations about the rewards offered by a given job and the contributions
necessary to perform the job
2. Perceived inequity
Equity theory
 Employees’ base perceptions of equity (fairness) on a comparison of their
contributions/rewards ratio to the ratios of others perceived as being similar
3. Relative deprivation
 Crosby suggests employees experience dissatisfaction with pay when:
A) There is a discrepancy between the outcome they want and what they
receive.
B) They see that a comparison “other” receives more than they do
C) Past experience has led them to expect more than they now receive
D) Future expectancies for achieving better outcomes are low
E) They feel that they are entitled to more
F) They absolve themselves of personal responsibility for the lack of
better outcomes.
4. Lack of organization justice
 The organizational justice has two main components which includes
Distributive Justice and Procedural Justice. Need both distributive and
procedural behaviour in order to attain organizational justice.
 Distributive Justice is the perception that overall reward outcomes are fair,
which is what equity theory all about.
 Procedural Justice is the perception that the process through which rewards are
determined is fair.
The pay system must be:
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Consistent
Free of bias
Flexible
Accurate
Ethical
Representative
Attempt to Increase Rewards (dissatisfaction)
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Find more rewarding job
Acquire illicit rewards
Demand higher pay/unionize
Increase effort/ performance
Demand improved jo duties
Attempt to Reduce Contributions
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Demand reduced jo duties
Reduce effort/ performance
Increase absenteeism
Find less demanding job
Organizational commitment:
– Strength of individual attachment to the organization
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Affective commitment, attachment to an organization based on positive
feelings toward the organization
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Continuance commitment, attachment to an organization based on perceived
lack of better alternatives
– No relationship between continuance commitment and affective commitment or
between continuance commitment and job satisfaction
– Affective commitment and job satisfaction are related
Theories of Motivation
Content Theories
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Theories that focus on understanding motivation by identifying underlying human needs
Process Theories
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Theories that focus on understanding motivation by determining the process humans use to
make choices about the specific actions they will take
Understanding Task Behaviour
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Self- actualization
Esteem needs
Social needs
Safety/ security needs
Survival/ physiological needs
Two- factor theory of motivation
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Hygienes motivators
Job content
Extrinsic and intrinsic
Job Characteristics Theory of Motivation
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Task identity: the extent to which a worker performs a complete cycles of job activities
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Task significance: the perceived importance or social value of a given task
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Skill variety: the variety of skills required for task completion
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Job autonomy: the degree of freedom workers have in deciding how to preform their jobs
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Job feedback: the extent to which the job itself provides feedbacks on worker performance
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Job enrichment: the process of redesigning jobs to incorporate more of the five core
dimensions of intrinsically satisfying work.
Salience of needs includes:
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Personal characteristic
Basic needs
Personal circumstances
Salience of needs
Process Theories of Motivation includes
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Reinforcement theory
– A behaviour will be repeated if valued outcomes flow from that behaviour or if
performing the behaviour reduces undesirable outcomes
– Positive reinforcement takes place when a reward follows a valued behaviour
– Negative reinforcement takes place when an undesirable consequence occurs
whenever the valued behaviour does not occur
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Expectancy theory
– Is the task worth doing?
– Will I actually receive the rewards if I accomplish the task?
– Will I actually be able to accomplish the task if I exert the effort?
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Attribution theory:
– Humans often act without understanding their motives for their behaviour and
afterward attempt to attribute motives for their actions
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Economic theory:
– Assumes that people are motivated only by extrinsic (economic) rewards, and they
will always seek to maximize these rewards while minimizing their contributions to
the organization
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Agency theory:
– Agents (employees) will pursue their own self-interests rather than the interests of
their principals (employers) unless they are closely monitored or their interests are
aligned with the interests of their principals
Money as a Motivator
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Noncash employee recognition program:
– Provides noncash rewards to employees in recognition of accomplishments or actions
that are valued by the organization
Understanding Organizational Citizenship Behaviour
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Voluntary or discretionary behaviours that go beyond task and membership behaviour; a
“willingness to cooperate” in the pursuit of organizational goals
– Five main dimensions:
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Altruism
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General compliance
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Courtesy
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Sportsmanship
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Civic virtue
Causes of Citizenship Behaviour
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Shared organizational goals
Feelings of membership
Creating Citizenship Behaviour
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Concern
Trust
Security
Behavioural Implications for Designing Reward Systems
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Define the employee behaviour that is really needed
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Determine the employee attributes and qualifications necessary to perform the needed
behaviour
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Identify the needs that individuals possessing these qualifications
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Ensure a positive valence for needed behaviour by providing rewards that address salient
needs and by reducing the costs to the employee of performing the behaviour
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Make it clear that performance of the behaviour will lead to the promised rewards
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Provide conditions that make it likely that employee effort will actually lead to the desired
behaviour
Chapter 4 Components of Compensation Strategy
Compensation mix includes
1. Base Pay: is the portion of an individual’s compensation that is based on time worked, not on
output produced or results achieved. Base pay accounts for about 75–80% percent of the
compensation for a typical employee. Base pay includes:
 Job evaluation
 Market pricing
 Pay for knowledge
Why Use Base Pay?
– Easy to measure
– Easy to price in terms of its value to the employer
– Easy to attribute to individual employees
– Controllable by the individual employee
– Relatively stable
Advantages of Base Pay includes
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Flexible
Encourage job behaviours
Signal relative importance of jobs
Demonstrates a commitment
Support a particular managerial strategy
Simplistic
Disadvantage of Base Pay includes
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More fixed employer commitment
Does not directly motivate task behaviour, nor signal key task behaviours
Does not directly contribute to citizenship behaviour
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Not self-correcting
2. Performance Pay: is any type of financial reward provided only when certain specified
performance results occur. It is sometimes known as “performance- contingent pay,”
“variable pay,” or “at-risk pay.” Performance Pay accounts for 5–10% percent. Performance
Pay includes:
 Individual Performance: include piece rates, commissions, merit pay, and targeted
incentives.
 Group performance: include productivity gain-sharing plans, goal-sharing plans, and
other types of team-based pay.
 Organization performance: include employee profit-sharing plans, employee stock
plans, and other organizational pay plans
Advantage of performance pay are
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Properly designed can signal key behavior and motivate employees
Can reduce the need for other types of mechanisms for controlling employee behaviour
Set performance standards
Support specific managerial strategies
Make pay more variable
Disadvantage of performance pay are
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Employees prefer predictability
May require higher compensation
May cause focus only on rewarded behaviors
May cause unanticipated consequences
Usually more complex than base pay
3. Indirect Pay: is can be anything that costs the employer money, addresses some type of
employee need (thus conferring some type of “benefit” on the employee), and is not included
as part of base or performance pay. Indirect pay accounts for about 15% percent of total
compensation. Now rules around it unless its one of the mandatory regulated ones. Indirect
pay includes:
 Mandatory Benefits
 Pension Pay
 Health and life insurance include disability insurance
 Pay for Time Not Worked such as holidays and leaves
 Employee services
 Other benefits
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15% of total compensation in medium to large private-sector firms
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17% in manufacturing sector down to 10% in the accommodation/food industry, where many
employers don’t provide any benefits beyond the statutory minimum
Advantages of indirect pay
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Competitive pressure
Matches unionized firms
Favourable tax treatment
Economies of scale in purchasing
Protect financial security and peace of mind
Protect employees from adversity
Can support managerial strategy
Promote consequences that benefit the organization
Disadvantage of indirect pay
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Cost can be substantial
Rigidity
Difficult to eliminate once provided
Difficult to develop efficient benefits package
Admin and communication costly
Does not motivate task behaviour
May cause excessive employee stability
May encourage undesirable behaviour
Impact of indirect pay on performance still unclear
1) Marketing Pricing: Determining the average amount of pay other employers
are offering for a given job.
Advantages of Marketing Pricing is
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Simplicity and cost
Keeps jobs aligned with market conditions
Disadvantages of Marketing Price is
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“Going rate” not always easy to identify
Different employers define jobs differently
Getting definitive market price for a given job not always possible
Does not address internal equity
Lack of control of compensation strategy
May violate pay equity legislation
2) Job Evaluation: Establishing base pay by ranking all jobs in the firm according
to their value to that firms
Advantages of job evaluations is
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Centralized control of compensation costs
Signals importance of different jobs
Promotes internal equity
Makes calibration to the market easier
Encourages development of job descriptions
Systematic way to determine pay for new jobs
Availability of packaged plans from consultants
Fits well with classical and human relations
Disadvantages of Job Evaluation is
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Job descriptions costly to develop and maintain
May become an adversarial process
Job evaluations still substantially subjective process
Can inhibit change, flexibility and skill development
More costly to develop and maintain than
market pricing
3) Pay for knowledge: according to the total value of the skills and competencies
an employee has acquired
Base Pay Methods includes:
(Base pay is uncertain and employees prefer to have base pay as it’s a guarantee. They dislike
uncertainty about their compensation.)
Skills based pay: Based on the specific skills and capabilities of individual employees, rather than on
the specific tasks they are carrying out; usually applied to operational-level employees.
Compensation base pay: Based on the characteristics, rather than the performance, of individual
employees; usually applied to managerial or professional employees
Base Pay Methods Skill-Based Pay (SBP):
Advantages of Base Pay Methods includes
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Provides incentive to learn a variety of skills
Avoids disincentive to movement
No job descriptions needed
Broader and provides more intrinsic rewards
Allows individuals and teams to be more self-managing
Supports behaviours needed by high-involvement firms
Helps promote change to high-involvement practices
Disadvantages of Base Pay Methods includes
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Employees may be “overpaid” relative to competitors
Workers “top out”
If not rotated through jobs regularly, then skills atrophy
Increased training costs
More complex to administer
Aligning SBP systems to the market difficult
Not all employees want to learn multiple jobs
Unions may resist
May violate pay equity laws
Relatively high failure rate
Issues in Developing a SBP System
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Deciding which employees’ groups to include
Designing the skill blocks
Linking skill blocks to pay: example using High-low method
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Providing learning
opportunities
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Certifying skill achievement
Competency-Based Pay Systems
Four main issues:
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Identifying competencies that demonstrably affect performance
Devising methods to measure achievement of each competency
Compensating each competency
Providing learning opportunities
Chapter 5 Performance Pay Choices
Types of individual performance includes
1. Piece rates: A pay system under which individuals receive a specified sum of money for each
unit of output they produce or process
2. Commissions
3. Merit Pay
4. Special purpose incentives
Two types of piece rate include
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Straight piece rate: The same specified sum of money is paid for each piece produced or
processed, regardless of how many pieces are produced or processed
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Differential piece rate: A lower sum of money per piece is paid if employee production does
not meet the production standard, and then a higher sum per piece is paid once the production
standard is met
Advantages of piece rate
– Highly motivational in producing task behaviour
– Reduce the need for external control of employees
– Link compensation to output
and reduce employer risk
– Provide specific information
about the “standard” level of
output expected
Disadvantages of piece rate
– Can be applied in only a limited number of circumstances
– Needs to be recalculated each time a major change occurs
– Setting rate is not a “scientific” process
– Frequently do not motivate maximum effort
– Can decrease production in layoff environments
Advantages of sales commissions
– Relatively easy to set and measure
– Less interdependence among sales employees than production, work output is more
distinct
– Less worry about losing jobs
– Reduces the need for other types of control mechanisms
– Can serve as a source of feedback and as a self-correcting mechanism
– Reduce employer risk
– Can increase sales
Disadvantages of sales commissions
– Income may be highly variable
– Commissions may drop in poor economic conditions
– Receive little income as they develop contacts
– Salespeople may resist doing work that does not directly contribute to new sales
– May encourage overly aggressive sales behaviour; often produces intense competition
and lack of cooperation
– Apportioning responsibility for making sales can be a major problem
Individual Performance Pay: Applicability of Commissions
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Degree of independence
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Degree of persuasive skills required
Length of sales cycle
Individual Performance Pay: Applicability of Commissions includes
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Maintenance selling
– Selling established products to existing customers
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Conversion selling
– Selling established products to new customers
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Leverage selling
– Selling new products to existing customers
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New market selling
– Selling new products to new customers
Advantages of merit raise
– Focuses attention on overall performance
– Provides feedback to employees
– A means for advancement through the pay range
– Helps to retain outstanding employees
– Can foster perceptions of equity
Disadvantages of merit raise
– Very expensive since they are permanent
– Requires an effective employee appraisal system
– Need to ensure a noticeable difference in pay
– “Top out”
– Cause antagonism toward supervisor
– Inhibit collaborative behaviour
– Not suitable where work is highly interdependent
Advantages merit bonuses
– More flexible because they are not permanent
– Can be used in conjunction with a merit raise system
– Can be related to financial conditions of firm
– Can be paid out in lump sums and are more visible
Disadvantages merit bonuses
– Need valid performance measures
– Not suitable where work is highly interdependent
– Bonus amount may need to be higher
Advantages promotions
– Brings recognition and a pay raise
– Typically the promotion contains more of the elements of intrinsically motivating
work
– Recognizes contributions employees have made to the organization
Disadvantages promotions
– Lack of promotion opportunity can be demotivating
– Promotions in lieu of other rewards can result in a meaningless system if few upperlevel vacancies
– Those not promoted can become demotivated
– Promotion not always seen as a reward
– Peter principle
Promotions as Rewards




Is individual performance variable?
Is performance controllable by the individual?
Can individual performance be separated out?
Can an accurate performance appraisal system be developed?
Individual Performance Pay: Special-Purpose Incentives
An incentive designed to motivate a specific type of employee behaviour
– Incentives for creativity
• Suggestion systems
– Incentives for attendance
Advantages of special purpose incentives
– Focuses attention on key employee behaviours
– Depends on specific nature of plan
Disadvantages special incentives
– Employees may focus only on rewarded behaviours
– Depends on specific nature of plan
Group Performance Pay includes (All of the following reduces the need for supervision)
1. Gain Sharing: A group performance pay plan that shares cost savings or productivity gains
generated by a work group with all members of that group
2. Goal-Sharing: A group performance pay plan in which a work group receives a bonus when
it meets prespecified performance goals
3. Competitive Bonus: A group pay plan that rewards work groups for outperforming other
work groups
Gain Sharing
Advantages
– Self-funding if designed properly
– Can stimulate higher productivity
– May create positive group norms
– May lead to internalized worker commitment, and reduce need for external control
– Can increase employee knowledge of the business
– Can be applied to not-for-profits and government
Disadvantages
– Costs of establishing and administering plan
– Not amenable to changing circumstances
– May focus attention on group’s interests only
– May create more opportunities for labour-management conflict
– May create “free riders”
– High discontinuation rate
Goal-Sharing
Advantages
– More flexible than gain sharing
– Less costly to operate that gain-sharing plans
– Can be adjusted as circumstances require
– Powerful motivational tool for groups and individuals
– May create positive group norms
Disadvantages
– Can be arbitrary in goal levels and bonus amounts
– No established basis for judging value of meeting a goal
– Setting appropriate goals can be difficult
– Situational factors can affect goal development
– May cause frustration if efforts fall slightly short
– Can produce conflict
– High discontinuation rate
Other Group Based Reward Systems
1. Pooled performance pay: A pay plan in which the performance results of a group are pooled
and group members share equally in the performance bonus.
2. Group commissions: A performance pay plan in which the commissions of a group of sales
workers are pooled and then shared out equally among members of the group
3. Group piece rates: A performance pay plan in which group members get paid based on the
number of completed products produced by the group
Organization Performance Pay Plans includes:
1. Profit sharing: A formal pay program in which a firm provides bonus payments to
employees based on the profitability of the firm
2. Current distribution: A profit-sharing plan that distributes the profit-sharing bonus to
employees in the form of cash or shares, at least annually. Also known as a “cash
plan”
3. Deferred profit-sharing (DPSP): A profit-sharing plan in which the profit-sharing
bonuses are allocated to employee accounts but not actually paid out until a later date,
usually on termination or retirement
4. Combination profit-sharing: A plan that combines the current distribution and deferred
profit-sharing plans by paying some of the profit-sharing bonus on a current (cash)
basis and deferring the remainder
Profit sharing advantages and disadvantage
Advantages
– When interests are aligned, employees may be more motivated to improve
performance
– Can reduce need for supervision
– Profit sharing is related to company ability to pay
– Leads to higher total employee earnings
– May reduce the need for layoffs
– Greater job satisfaction
– Simpler to set up and administer than plans like gain-sharing
Disadvantages
– May not pay off for employer
– May actually reduce employee performance by causing free riding
– Unions may oppose
– Requires employers to share financial information
Types of Employee Stock Plans includes (makes employees think like owners)
1. Employee stock: Any type of plan through which employees acquire shares in the firm that
employs them
2. Employee stock bonus: A plan through which employees receive shares in their employer
firm at no cost to the employee
3. Employee share purchase: A plan through which employees may purchase shares in their
employer firm
4. Employee stock option: A plan through which employees are provided with options to
purchase shares in their employer at a fixed price within a limited time period
Employee Stock Plans advantages and disadvantages
Advantages
– Can cause employees to “think like owners”
– Can create stronger understanding and concern for overall company performance,
promote cooperation
– Can provide employees a say and sense of control
– Can improve compensation package
– Provides better job security
– May lead to improved management
– Do not require company to pay our cash
– Can serve as a catalyst for a more flexible and entrepreneurial high-involvement type
of organization
Disadvantages
– Administration carries a lot of cost
– If share price declines, employees may become demoralized/disgruntled
– Decision-making participation could cause backlash if not aligned
– Employees may not have funds to invest
– Investing in the employer may be risky
– More complicated for publicly traded companies
Other Organization Performance Pay Plans
1. Long-term incentives (LTIs): A type of performance pay in which the incentives are tied to an
organization performance horizon that ranges beyond one year, often three to five years
2. Performance unit plan: A long-term incentive in which the bonus amounts are expressed in
units for which the monetary value will fluctuate, depending on degree of goal
accomplishment
3. Performance share plan: A long-term incentive in which the bonus amounts are expressed
in company shares
Chapter 5
INDIVIDUAL PERFORMANCE PAY
Four main types, two of which may substitute for time-based pay and two are always used in conjunction
with base pay.
Output-related pay consists of piece rates and sales commission. These may not be used to substitute
base pay entirely and can be used in combination with base pay which is most common.
The other two that are used in conjunction with base pay are merit pay and special-purpose incentives.
Merit pay can be further differentiated into merit raises (which increase base pay) and merit bonuses
(which do not increase base pay) Promotions can also serve the same purpose as merit raises. In Canada,
merit raises are by far the most common form of performance pay used by about 80% of medium/large
firms.
1. PIECE RATES
A pay system under which individuals receive a specified sum of money for each unit of
output they produce or process. (Example: barbers paid per head, tree planter paid per tree
etc.)
• Straight Piece Rate – The same specified sum of money is paid for each piece
produced or processed, regardless of how many pieces are produced or processed.
• Differential Piece Rate- A lower sum of money per piece os paid if employee
production does not meet the production standard, and then a higher sum per piece
is paid once the production standard is met.
Advantages:
-
Highly motivational in producing task behaviour
Reduce the need for external control of employees
Link compensation to output and reduce employer risk
Provide specific information about the “standard” level of output expected
Disadvantages:
-
Can be applied in only a limited number of circumstances
Needs to be recalculated each time a major change occurs
Setting rate is not a “scientific” process
Frequently do not motivate maximum effort
Can decrease production in layoff environments
APPLICABILITY *Written Question* when are piece rates a viable option? When individuals control their
own production, interdependence between workers is low, each unit of production can be easily
measured and priced, individuals perform a limited number of tasks (all of which can be compensated
with piece rates), tasks do not change frequently, increased productivity will not cause layoffs, and
quality standards can be measured effectively.
2. SALES COMMISSIONS
Sales Commissions:
•
Pay that is geared to the dollar volume of sales or transactions conducted
Straight Commission:
•
Pay that is geared only to volume of sales or transactions, with NO base pay component.
Advantages:
-
Relatively easy to set and measure
Less interdependence among sales employees than production, work output is more distinct
Less worry about losing jobs
Reduces the need for other types of control mechanisms
Can serve as a source of feedback and as a self-correcting mechanism
Reduce employer risk
Can increase sales
Disadvantages:
-
Income may be highly variable
Commissions may drop in poor economic conditions
Receive little income as they develop contacts
Salespeople may resist doing work that does not directly contribute to new sales
May encourage overly aggressive sales behaviour; often produces intense competition and
lack of cooperation
Dividing responsibility for making sales can be a major problem
APPLICABILITY *Written Question*
In what circumstances are commissions appropriate? Three key dimensions. 1) degree of independence,
2) degree of persuasive skills required, and 3) length of sales cycle (the time between meeting a new
customer and closing the deal). The more that each salesperson works independently, the higher the
degree of persuasive skills required. The shorter the length of the sales cycle, the greater proportion of
commission to base pay. There are also four types of selling, based on whether the product and
customer are new or established.
1) Maintenance selling- selling established products to existing customers,
2) Conversion selling- selling established products to new customers,
3) Leverage selling- selling new products to existing customers, and
4) New Market selling- selling new products to new customers.
New market selling requires most initiative, should have high incentive opportunity. Managerial style of
firm is also important criteria when selecting commission system. Ex. The self-control that Highinvolvement generates may make extrinsic output-based controls like commissions unnecessary. In
contrast, classical firms need output-based control so they tend to use straight commissions. Human
relations must show that they value the employee with base pay but can also provide some commissions
to supplement.
3. MERIT PAY
Merit Raise: An increase to an employee’s base pay in recognition of good job performance
Merit Bonus: A cash payment, provided to recognize good employee performance, that does not
increase base pay
Merit Raise:
Advantages:
-
Focuses attention on overall performance
Provides feedback to employees
A means for advancement through the pay range
Helps to retain outstanding employees
Can foster perceptions of equity
Disadvantages:
-
Very expensive since they are permanent
Requires an effective employee appraisal system
Need to ensure a noticeable difference in pay
“top out”
Cause antagonism towards supervisor
Inhibit collaborative behaviour
Not suitable where work is highly interdependent
Merit Bonuses:
Advantages:
-
More flexible because they are not permanent
Can be used in conjunction with a merit raise system
Can be related to financial conditions of a firm
Can be paid out in lump sums and are more visible
Disadvantages:
-
Need valid performance measures
Not suitable where work is highly interdependent
Bonus amount may need to be higher
Promotions:
Advantages:
-
Brings recognition and a pay raise
-
Typically, the promotion contains more elements of intrinsically motivating work
Recognizes contributions employees have made to the organization
Disadvantages:
-
Lack of promotional opportunity can be demotivating
Promotions in lieu of other rewards can result in a meaningless system if few upper-level
vacancies
Those not promoted can become demotivated
Promotion not always seen as a reward
Peter Principle
APPLICABILITY *Written Question*
Although most companies claim to use merit pay, it rarely applies to all employees. Nor should it. How
do you decide what employee groups (if any) are suitable for the application of merit pay? Eight
questions should help guide this decision, in general all questions should be answered “yes” before merit
pay is included in the given employee group.
1. Is individual performance variable? In many jobs, performance variation may not be possible for
example routine, lower-level jobs in classical organizations. If performance is not variable, don’t
waste time and effort attempting to measure the variability.
2. Is performance controlled by the individual?
3. Can individual performance be separated out?
4. Can an accurate performance appraisal system be developed?
5. Will pay actually be linked to performance appraisals?
6. Will the merit system serve a purpose that cannot be served in some other way?
7. Are any undesirable side effects readily manageable?
8. Will the merit system fit with the firm’s culture and strategy?
4. SPECIAL PURPOSE INCENTIVES
Special-Purpose Incentive: - An incentive designed to motivate a specific type of employee behaviour
Incentives for Creativity:
Suggestion Systems- An incentive plan through which employees receive cash bonuses for submitting
money-saving suggestions. Intended to promote and reward innovative thinking by employees. Has 3
components; 1) a system through which suggestions are channelled, 2) a systematic process for
evaluating them and 3) an incentive for submitting usable ideas.
Incentives for Attendance:
Providing a bonus or reward to employees who have a perfect attendance record. Could also pay
employees for any un-used sick or vacation days. Meant to discourage discretionary absences (calling in
sick when you’re not actually sick).
Advantages of SPI:
-
Focuses attention on key employee behaviours
Depends on specific nature of plan
Disadvantages:
-
Employees may focus only on rewarded behaviours
Depends on specific nature of plan
APPLICABILITY *Written Question*
Special-Purpose Incentives may be useful in changing employee behaviour but need to be carefully
thought out. Potential problem is that where intrinsic motivation already exists, financial incentives may
serve to replace this with extrinsic motivation. Where intrinsic motivation does not exist, employees may
try to “game the system” by behaving in ways that maximize their incentive payouts while performance
suffers in other areas. Special-purpose incentives are therefore most appropriate in circumstances where
intrinsic motivation does not already exist, where both intended and unintended behaviours are easy to
observe, and where no other alternatives for inducing the desired behaviour are feasible. In general,
they don’t fit with high-involvement organizations but may fit with classical or HR under some
circumstances.
GROUP PERFORMANCE PAY
GAIN SHARING PLANS
Group performance pay plan that shares cost savings or productivity gains generated by a work group
with all members of that group.
Whenever employees can improve productivity or reduce costs, the savings are split between the
company and the work group. The key to most gain sharing plans is a mechanism (typically a committee)
for encouraging employee participation. And productivity-enhancing or cost-saving suggestions.
Advantages:
-
Self-funding if designed properly
Can stimulate higher productivity
May create positive group norms
May lead to internalized worker commitment, and reduce need for external control
Can increase employee knowledge of the business
Can be applied to not-for-profits and government
Disadvantages:
-
Costs of establishing and administering plan
Not amenable to changing circumstances
May focus attention on group’s interests only
-
May create more opportunities for labour-management conflict
May create “free riders”
High discontinuation rate
GOAL SHARING PLANS
A group performance pay plan in which a work group receives a bonus when it meets prespecified
performance goals.
Management set goals for one or more performance indicators for a work group or team, to be met
within a specific time period and if goals are met, all team members receive a bonus.
Advantages:
-
More flexible than gain-sharing
Less costly to operate than gain-sharing plans
Can be adjusted as circumstances require
Powerful motivational tool for groups and individuals
May create positive group norms
Disadvantages:
-
Can be arbitrary in goal levels and bonus amounts
No established basis for judging value of meeting a goal
Setting appropriate goals can be difficult
Situational factors can affect goal development
May cause frustration if efforts fall slightly short
Can produce conflict
High discontinuation rate
OTHER TYPES OF GROUP PP PLANS
Besides gain sharing and goal sharing, there are many other types of group bonus plans. These can be
placed into two main categories: Competitive Bonus Plans and Pooled Performance Plans.
Competitive Bonus Plan:
-
-
A group pay plan that rewards groups for outperforming other groups. Ex, real estate firms with
multi-office operations encourage competition among sales offices by providing a bonus to all
sales personnel in the highest-producing office each month.
Most suited to circumstances in which the groups do not need to work closely together. These
plans do not fit well with human relations or high-involvement organizations.
Pooled Performance Pay:
-
A pay plan in which the performance results of a group are pooled and group members share
equally in the performance bonus
o Group Commissions – a performance pay plan in which the commissions of a group of
sales workers are pooled and then shared equally among members of the group
o
Group Piece Rates – a performance pay plan in which group members get paid based on
the number of completed products produced by the group
Advantages of other GPP Plans:
-
Competition between groups can be motivational
May encourage group members to assist others
Depends on specific nature of plan
Disadvantages:
-
Can cause conflict between work groups
May encourage free riders
High discontinuation rate
Depends on specific nature of plan
ORGANIZATIONAL PERFORMANCE PAY
PROFIT SHARING
-
A firm provides bonus payments to employees based on the profitability of the firm. Profit
sharing plans may take one of three forms:
o Current Distribution Profit Sharing Plan – distributes the profit-sharing bonus to
employees in the form of cash or shares, at least annually
o Deferred Profit-Sharing Plan – Profit-sharing bonuses are allocated to employee
accounts but not actually paid out until a later date, usually on termination or
retirement
o Combination Profit Sharing Plan – Combines the current distribution and deferred profitsharing plans by paying some of the profit-sharing bonus on a current (cash) basis and
deferring the remainder
Advantages:
-
When interests are aligned, employees may be more motivated to improve performance
Can reduce need for supervision
Profit sharing is related to company ability to pay
Leads to higher total employee earnings
May reduce the need for layoffs
Greater job satisfaction
Simpler to set up and administer than plans like gain-sharing
Disadvantages:
-
May not pay off for employer
May actually reduce employee performance by causing free riding
Unions may oppose
Requires employers to share financial information
EMPLOYEE STOCK PLANS
-
Any type of plan through which employees acquire shares in the firm that employs them. Three
main types:
o Employee Stock Bonus Plan- Employees receive shares in their employer firm at no cost
to the employee
o Employee Share Purchase Plan- Employees may purchase shares in their employer firm
o Employee Stock Option Plan- Employees are provided with options to purchase shares in
their employer at a fixed price within a limited time period
Advantages:
-
Can cause employees to “think like owners”
Can create stronger understanding and concern for overall company performance, promote
cooperation
Can provide employees a sese of control
Can improve compensation package
Provides better job security
May lead to improved management
Do not require company to pay our cash
Can serve as a catalyst for a more flexible and entrepreneurial high-involvement type of
organization
Disadvantages:
-
Administration carries a lot of cost
If share price declines, employees may become demoralized/disgruntled
Decision-making participation could cause backlash if not aligned
Employees may not have funds to invest
Investing in the employer may be risky
More complicated for publicly traded companies
Chapter 7
Purpose of Job Evaluation:
-
key objectives are to ensure that all jobs in the organization are compensated equitably and are
perceived by organizational members as being compensated equitably.
Effective job evaluation should ensure that jobs are not underpaid and not overpaid.
The output of the job evaluation process is a hierarchy of jobs where all jobs are of a similar
value to the organization, however different they may be from one another, are located at the
same level on the jobs hierarchy. This hierarchy provides the foundation for the development of
pay grades and pay ranges.
Job Analysis : ** Job analysis written question **
-
Definition: The process of collecting information on which job descriptions are based.
A precondition for job evaluation, the purpose of a job analysis is to obtain job information
which is usually summarized in the form of a job description.
-
-
Job Description- A summary of the duties, responsibilities, and reporting relationships pertaining
to a particular job.
Can serve a wide variety of organizational purposes such as attracting and selecting employees,
developing training programs, providing guidance to employees and supervisors, developing
performance standards etc.
Job Specifications- Employee qualifications deemed necessary to successfully perform the duties
for a given job. (KSAO’s)
What information is needed for an effective job evaluation?
o If job descriptions are accurate and up to date, they may provide all necessary
information for evaluating the jobs, however, this is not usually the case.
Methods of Job Analysis:
-
-
-
Observation
o involves watching the employee as the job is performed and noting the kind of activities
performed, with whom they are performed, and with what tools or equipment.
o Extreme version of this is called the time-and-motion study
Interviews
o Can be conducted with a sample of employees, or their supervisors, or both
o Interviewing only one or the other has drawbacks
Questionnaires
o May vary on two dimensions, may be open-ended or close-ended, and may be firmspecific or proprietary
o Open-ended example: series of questions, such as the purpose and main duties of the
job
o Close-ended example: Select from a list the phrases that best describe the job
Functional Job Analysis:
-
FJA is an attempt to develop generic descriptions of jobs using a common set of job functions
The current system is a series of task statements that contain four elements for each job
1. Who performs what?
2. To whom or what?
3. With what tools, equipment, or processes?
4. To achieve what purpose or outcome?
Identifying Job Families:
-
For administrative purposes (recruitment, selection, training, compensation) it is convenient to
identify jobs that are related to one another and cluster them into “job families”.
The key think relating them is that the level and type of skill/knowledge required for each job in
the family is quite similar. For example, a chemical plant may have the following job families:
o Clerical (clerks, receptionists, secretaries)
o Trades (plumbers, electricians, welders)
o Technical (lab techs, instrumental techs)
-
o Maintenance (janitors, cleaners)
Many organizations will find that jobs can be slotted into 8 or less job families:
1. Executives
2. Managers
3. Professionals
4. Technical staff
5. Sales staff
6. Production/operations workers
7. Trades
8. Support staff
Pitfalls in Job Analysis:
-
-
Risk of analyzing the jobholder instead of the job
o Example- the jobholder may go above and beyond the job duties, or some jobholders
may only perform a portion of the intended duties. The analysis of the job should not be
influenced by either case.
Can be subject to gender bias
Technical jargon is an impediment to effective understanding of jobs
Avoid over simplifying job duties
Issues with jobs that are dynamic, particularly in high-involvement organizations
Job Evaluation Methods: ** Written Question **
1. RANKING/PAIRED COMPARISON
o Ranking method - the relative values of different jobs are determined by knowledgeable
individuals
o Involves asking a group of “judges” (e.g., managers, HR specialists) to examine a set of
job descriptions and to rank jobs according to overall worth, specific criteria are left up
to each judge
o Believed to cancel out individual biases
o One variant of this approach is the paired comparison method - every job is compared
with every other job, providing a basis for a ranking of jobs
Advantages:
-
Less complex than many other systems
Disadvantages:
-
May be difficult to get the judges to agree on rankings
Does not establish the relative intervals between jobs (e.g., 9th, 10th and 11th jobs may be close in
terms of importance, while the 8th ranked job may be much more important than the 9th)
Does not provide explanation why jobs are ranked the way they are
Because of subjectivity, not deemed an acceptable method for job evaluation
2. CLASSIFICATION/GRADING
o
o
o
o
The use of generic grade descriptions for various classes of jobs to assign pay grades to
specific jobs
Establishes and defines general classes of jobs (e.g., managerial, professional, technical,
clerical) and then creates series of grade descriptions for each class
Different grades possess different levels of knowledge and skill, complexity of duties,
supervision, and other key characteristics
Organizations compare jobs using these grade descriptions within the appropriate job
lass and then select the pay grade that best matches them
Advantages:
-
Straightforward and inexpensive
Flexible enough to encompass a large number of jobs
Results are easier to defend than those derived by simple ranking because the basis for a
particular job rating is spelled out clearly
Disadvantages:
-
Because this method considers the job only as a whole, no weighting is applied to different job
factors, some of which may be more important than others
3. FACTOR COMPARISON METHOD
o Assigns pay levels to jobs based on the extent to which they embody various job factors
o Used less often than other methods due to complexity
o Identifies several major factors against which all jobs in a job class can be assessed and
then rates the extent to which each factor is present in each of a large setoff “key jobs”
thought to be properly compensated at the present time
Advantages:
-
Depending on whether the factors conform to the four required factor categories, this method
may be acceptable under pay equity legal requirements
Disadvantages:
-
Too Complex
4. STATISTICAL/POLICY CAPTUING METHOD
o Combines use of statistical methods and job questionnaires to derive job values based
on prevailing external or internal pay rates
o Questionnaires are used to gather information about the task elements of each job, the
typical time spent on each task, and the relative importance of each task
o Information is also collected regarding the level of skill or education required for each
job, and possibly data on the quantity and quality of output expected for each job
Advantages:
-
Can be used to evaluate jobs that do not have good market matches
Used properly, this method is acceptable under pay equity legislation
Disadvantages:
-
Most complex method of job evaluation
5. THE POINT METHOD
o Establishes job values by the application of points to each job, based on compensable
factors
o Identifies key job characteristics (known as “compensable factors”) that differentiate the
value of various jobs, weighs these factors, and then determines how much of each
factor is present in a given job by assigning a certain number of points to each job for
that factor
Advantages:
-
Most widely used and generally most appropriate job evaluation method
Conducting and Managing the Job Evaluation Process:
-
-
THREE MAIN PURPOSES for conducting job evaluation: to control wage costs, to create an
equitable pay structure, and to create perceptions of equitable pay among those covered by the
system
Whether all 3 of these objectives are achieved depends on the processes used to conduct job
evaluations and to manage them on an ongoing basis
Organizations need to answer 5 main questions before setting p a job evaluation process
o Who conducts the job evaluations?*
o How should the process be communicated?
o How should the job evaluation results be applied?
o What appeal/review mechanisms have been (or need to be) established?
o How should job evaluations be updated?
▪ The job itself changes significantly
▪ The strategy o the organization changes
▪ Signs that the job evaluation system is no longer working effectively
▪ Legislative conditions require it
*Who conducts the job evaluations? (Committee)
-
-
Most organizations create a job evaluation committee to oversee the process
When a committee is used, it typically consists of experts in job evaluation, the compensation
manager, and a representative sample of supervisors from the departments where jobs are
being evaluated
In unionized firms, there is usually a joint union-management job evaluation committee
Employee participation is encouraged but may not be beneficial in classical organizations
-
Several conditions are necessary for a job evaluation committee to succeed
o Parameters and terms of reference for the committee, including its authority, must be
spelled out
o Technical and clerical support resources need to be made available to the committee
o Committee needs training in job evaluation, as well as in effective group functioning,
including areas such as open communication and active involvement
Conforming to Pay Equity Requirements
-
Ontario Pay Equity Act (OPEA) has succeeded in reducing (but not eliminating) the gender wage
gap in Ontario, listed below are the main steps in the Ontario process:
1. Determine what rules apply
▪ If your organization has fewer than 10 people, Ontario pay equity laws do not
apply
2. Identify female and male job classes
▪ Female job classes are those in which at least 60% of employees in the class are
women, females have traditionally dominated the job class, or most people
commonly associate the job with female employees
▪ Male job classes are the same except its 70%
▪ Pay equity process does not apply unless there are male job classes or unless the
firm is in the public sector and is allowed to use the “proxy approach” to job
comparison (discussed later in the chapter)
3. Establish a body for conducting the pay equity process
▪ If pay equity laws do apply, next step is to carry out the pay equity process
▪ Usually done through a joint union-management pay equity committee
4. Select a gender-neutral job comparison system
▪ Most commonly used system for pay equity is the point method
5. Collect job information
▪ The key is to avoid gender biases as well as the pitfalls in the job analysis that
were previously discussed
6. Compare jobs
▪ Three main approaches to comparing female and male job classes: job to job,
proportional value, or proxy (only for public sector employees)
▪ Job to job method is comparing a female job class to a male one that is
comparable in terms of job evaluation criteria
▪ Proportional value method is where no comparator male job class exists,
extrapolating a hypothetical male comparator job class
▪ Proxy method establishes pay equity in public sector organizations where
neither the job-to-job method or proportional value method can be used
7. Check for permissible differences
▪ Pay differences between female and male job classes that are not considered
inequitable because they stem from certain specified allowable circumstances,
such as seniority
8. Adjust compensation
9. Communicate the results
10. Maintain pay equity
Chapter 9
Understanding Labour Markets
How do you determine the appropriate amount to ay your employees? A key factor is understanding the
labour market.
In general, the price (wage) for a particular type of labour depends on the demand for that labour
relative to its supply, constrained by the ability of employers to pay.
In reality, how much an employer is willing to pay for a particular type of labour depends on a variety of
factors including company profitability, the importance of that labour to the organization, and the
proportion of labour costs to total costs.
Pay is also affected by what are known as compensating differentials – a higher compensation level
offered by an employer because of undesirable aspects of the employment.
-
For example, many high-paying jobs are cyclical (workers in that sector often must endure
periods of unemployment)
Can also be triggered by negative employment features such as poor working conditions and
jobs for which failure rates are high
Defining the Relevant Labour Market
-
-
Labour markets are complex but an employer does not need to understand the market as a
whole, rather only the segment that pertains to the specific jobs the employer needs to fill.
Two kinds of competitors are relevant: competitors in the same labour market, and competitors
in the same product/service market
There are also two other important dimensions of the labour market: occupational grouping and
the geographic scope – local, regional, national, or international. These two dimensions overlap
depending on how specialized the occupational grouping is. E.g., if you are looking for a
secretary, the market is usually local. But at the same time, if you are looking for a chemical
process engineer the employees may be scarce in some local labour markets so you would have
to widen your geographic scope.
Before setting out to collect data, the employer needs to identify the occupational groups, the
geographic boundaries, the industry boundaries and the specific compensation data I needs to
make an informed decision
Compensation data sources sometimes allow firms to customize information on the organizations they
are comparing themselves with. The selected comparator organizations are known as:
Market comparator firms:
-
Firms selected as comparators when constructing a sample of market data
-
The trick is to maintain a broad enough sample to be representative while focusing on firms as
similar as possible to the target firm
Relevant characteristics include: the type of product or service, geographic area, size of the firm,
and whether it is unionized or non-union
Benchmarking:
-
The practice of comparing business processes and performance metrics to industry bests and
best practices from other companies
Sources of Compensation Data
-
Once an organization has identified the type of labour market information it needs, it must then
acquire that information. All market information is based on compensation surveys but
organizations do not need to conduct their own surveys. There are three main “third party”
sources of compensation data: Government Agencies, Industry Groups, and Compensation
Consulting Firms
Third Party Surveys
-
-
-
-
Government Agencies
o A variety of government agencies survey employers to collect labour market
information.
o Federal level includes: Statistics Canada, Employment and Social Development Canada
(which maintains information on collective agreements as well as other pay information)
and the Government of Canada Labour Market Information website.
o Most provincial labour departments also publish some data on compensation levels, as
well as municipal governments
Industry Groups
o Most industries have industry associations which collect data on pay rates within their
industries
Compensation Consultants
o Firms for which collecting labour market information is an important business
o Includes large international firms, as well as smaller firms that operate on a local or
regional basis
o One concern is that the data mostly comes from their client firms and thus do not
necessarily comprise a representative sample
Free Compensation Data Websites
o There are some concerns about the validity of the data from these websites
Advantages of third-party surveys:
-
Two most obvious advantages are ease and cost
Normally, when firms are asked to participate in compensation surveys, they are promised the
results, so the only cost is the cost of the time spent responding to the survey
Much easier to use than in-house surveys
Disadvantages:
-
May not cover desired jobs, compensation characteristics, or employers
Aggregate data is provided instead of company-by-company data so it is not possible to separate
out the employers who are the most appropriate comparators for your organization
In-House Surveys
Final option is to carry out your own compensation survey
-
-
Informal Surveys
o Informal approaches range from quick review of “help wanted” ads to a question posed
to a group of colleagues at an industry function, to phone calls to other firms.
o Usually simple and quick but may have poor reliability and validity
Formal Surveys
o Can be undertaken by internal staff or can be contracted to compensation firms
o Main advantage is that the employer controls entire process thereby ensuring the
quality and appropriateness of data
o Another advantage is that employer avoids paying consulting fees
o Disadvantages are that if the survey is done by internal staff, someone with the required
expertise must be available, or employers may be reluctant to reveal their compensation
practices to their competitors. For this reason, most firms prefer to contract out the
survey to professionals in the field
Conducting Compensation Surveys *Written Question **
-
Four main steps when conducting a compensation survey:
1. Identify the Jobs to be Surveyed
▪ Essential to any compensation survey is an effective method for matching an
organization’s jobs to those being surveyed
▪ Most common approach is known as key job matching, which involves selecting
certain jobs that are well understood and numerous in the job market and
asking employers to compare their jobs with these jobs
▪ Typically, a brief job summary and title are provided, employers are asked if they
have any of these jobs, and if so, to provide their compensation data
2. Determine what Information to Collect
▪ Information about the base pay, performance pay and indirect pay, as well as
weekly hours of work must be collected for each job in the survey
▪ In addition to the formal pay ranges for each job, knowing where most
employees actually are in the pay range is also useful- this can be determined by
asking how many employees are in each quartile of the pay range
3. Determine whom to Survey
▪ Determining which employers to survey is not a simple matter
▪ In general, firms like to survey other employers that they perceive are similar to
themselves in industry type, geographic location and size
▪ But the sample generally varies depending on whether the jobs being surveyed
are filled by the local, regional, national, or international labour markets
4. Determine how to Collect Data
▪
o
Personal interviews (most costly and provides best quality of
information)
▪
▪
o
Cheapest method of data collection
Least reliable because there is no control over who is filling out the survey and
no way of knowing if it was done correctly
Telephone Interviews
▪
▪
o
is thought to be the best- quality information, in an interview you can ensure
the job being surveyed is similar to the job data reported.
Method is costly to use on a significant scale
Questionnaires
▪
▪
o
There are four ways to collect data: 1) personal interviews, 2) questionnaires, 3)
telephone interviews, and 4) the internet
Compromise method
Much cheaper than personal interview, yet produces higher quality of
information than the questionnaire and provides some control over who the
respondent is
Internet surveys
▪
▪
▪
▪
▪
Can be faster than mail surveys and facilitate the tabulation of data
Easier contact with respondents, generates quicker responses and higher
response rates
Cost less and yield data of no less quality than questionnaires
Response rates lower than personal interviews, but more valid results and at a
fraction of the cost
Produce more accurate information because there is no pressure of face-to-face
or phone interviews
Analyzing and Interpreting Survey Data
-
After conducting a compensation survey, you have a set of raw data – now what?
Analytical Procedures
-
Mean or simple average: a measure of central tendency of a set of values derived by summing
the values and dividing by the number of values
Weighted mean or weighted average: A measure of central tendency o a set of values that
adjusts the average based on the number of cases to which each value pertains
Median: The middle value in an ordered list of values
Quartiles or Deciles: Division of an ordered list of values into either four groups (quartiles) or ten
groups (deciles)
Interquartile range: A measure of pay dispersion across employers, calculated by dividing the
difference between the 25th and 75th percentile values by the value of the 25th percentile
Compa-ratio: A measure of distribution of employees within their pay range calculated by
dividing the mean base pay by the midpoint of the pay range. Ratio of greater than one means
employees are paid above the midpoint, less than one is below the midpoint.
Interpreting Survey Data
-
Inspecting the data
-
Dawing inferences from the data
Examining the pay range distribution
Applying the data
o Aging the data- The process of adjusting compensation data to bring it up to date with
the time period in which the new compensation will take effect
Chapter 10
Performance Appraisal: The process of assessing the overall performance levels of individual employees
Experience with Performance Appraisal
-
Companies have found it very hard to establish satisfactory appraisal systems
o Many companies cant seem to find a performance appraisal system that they are happy
with
o Despite their lack of success, they keep trying to make performance appraisals work
Why do Performance Appraisals?
-
-
-
-
Administrative reasons
o To identify individuals who are not performing to required standards and for whom
dismissal may be necessary
o To identify individuals who should be considered for promotion or merit increases
o To monitor the overall quality of performance in the firm
o Helps support legal arguments during unjust dismissal lawsuits
Developmental Reasons
o Helping employees grasp the employer’s expectations, the key performance dimensions
of their jobs, the strengths and weaknesses in their performance, and the ways they can
improve their performance
o The key task is to provide useful feedback that will help individuals change their
behaviours in productive ways
Supervisory reasons
o Improve the performance of the supervisors by encouraging them to think systematically
about employee performance and by encouraging communication with employees
Symbolic Reasons
o Creating the perception that management cares about good employee performance
o Performance appraisals demonstrate this concern to employees
Pitfalls in Performance Appraisal
Performance appraisals do not always accurately reflect employee performance. Two key aspects are
crucial for accuracy:
Reliability- Occurs when a performance appraisal system produces the same scores even when applied
by different appraisers
Validity- The process of assessing the overall performance levels of individual employees. Occurs when
employees who receive the highest scores in a performance appraisal system are in fact the highest
performers
Intentional Inaccuracies in Appraisals
-
-
There is considerable evidence that when supervisors start the performance appraisal process,
they often have in mind certain desired outcomes or consequences. E.g., do I want Sally to get a
raise? Do I want Mike to be promoted?
Supervisors may see performance appraisal as a tool to help them achieve their own goals or as
a useless or even potentially damaging exercise.
Unintentional Inaccuracies in Appraisals
Central Tendency Error
Halo Error
Recency Effect
Contrast Effect
Similarity Effect
Leniency Effect
Harshness Effect
Beauty Effect
Occurs when appraisers rate all employees as “average” in
everything
Occurs when appraisers rate an individual either high or low on all
characteristics because one characteristic is either high or low
Tendency of appraisers to overweight recent events when appraising
employee performance
Tendency for a set of performance appraisals to be influenced
upward by the presence of a very low performer or downward by
the presence of a very high performer
Tendency of appraisers to inflate the appraisals of appraisees they
see as similar to themselves
Tendency of many appraisers to provide unduly high performance
appraisals
Tendency of some appraisers to provide unduly low performance
appraisals
Tendency for the physical attractiveness of a ratee to affect their
performance appraisal
Methods and Instruments for Appraisal
Ranking and Forced Distribution
-
-
Paired Comparison Method: determines the rank order of all employees in a unit by comparing
each employee with each of the other employees in the unit
Forced Distribution Method: A performance appraisal method that stipulates the distribution of
employees across the performance categories. Under this approach, the rater is presented with
several categories and is required to place a certain percentage of appraisees in each category.
E.g., 10% of employees have to be “exceptional”, 70% have to be in the middle etc.
Simplest method is to rank the performance of all individuals engaged in similar jobs, from most
effective to least effective
This method does not fit well with high-involvement or human relation firms.
Advantages:
-
Does not require complicated forms and procedures
Most supervisors generally have little difficulty in determining their best and worst performers
Eliminates the problems of central tendency and leniency/harshness
Fits well with a system in which management decrees that only the top performers like 10% of
employees, will receive merit pay
Disadvantages:
-
Highly subjective, does not allow for comparisons across departments, provides little useful
feedback to the individuals being rated
Subject to numerous perceptual errors, such as recency, halo, contrast, similarity and bias, as
well as inconsistency in application across supervisors
Implies that the distances between the ranks are the same, when in fact there may be large gaps
between, say third and fourth best performers
Win-lose system, the only way a person can improve his/her ranking is to displace someone else
which can create conflict and lack of cooperation
Highly unfair across departments, some departments may be loaded with high performers while
others have very few
Too difficult to carry out- may be easy to pick best and worst performers but difficult to rank all
those in the middle
Graphic Rating Scale
-
An appraisal method in which appraisers use a numerical scale to rate employees on a series of
characteristics
Most popular and simplest technique
The organization selects several traits judged relevant to job performance- typically includes
quantity and quality of work performed, initiative, responsibility, cooperation etc. Then
supervisors rate employees on the extent to which they possess each characteristic.
Advantages:
-
Simple, low cost
“face” validity- looks as if it should be valid
Avoids certain problems in ranking systems, such as inability to make comparisons across
departments
Disadvantages:
-
Characteristics or traits are too often defined vaguely or not at all, as a result, supervisors
measure them differently
Some characteristics are hard to observe, which results in guess work
Traits being assessed are often simply someone’s opinion of what is related to job performance
and may not reflect actual job performance
Performance levels are defined in general terms like “good” or “excellent”, “poor” etc. appraisers
may differ in their standards for each level
-
Vulnerable to virtually all perceptual errors, specifically leniency
Considered one of the least reliable or valid approaches to performance evaluation
Behaviourally Anchored Rating Scales (BARS)
-
Appraisal method that provides specific descriptors for each point on the rating scale
An attempt to improve on the graphic rating scale by providing specific descriptions of
behaviours for each point on the rating scale
Advantages:
-
Some evidence that BARS provides better guidance to raters in defining degrees of effectiveness
Have the advantage of yielding a total score for purposes of pay decisions and an evaluation in
specific behavioural terms that is useful in providing feedback for departmental purposes
Disadvantages:
-
Different scales need to be developed for each job aspect for each job in the organization, which
can be expensive and time consuming
Supervisors may disagree with the ordering on the scale, or there may be two items that could
be selected for a given scale
Behavioural Observation Scales (BOS)
-
Method under which appraisers rate the frequency of occurrence of different employee
behaviours
Developed to try to improve upon BARS
Consists of developing behavioural statements that reflect examples of good behaviour for each
job, employee is then rated in frequency which each behaviour occurs (on a 1-5 scale from
“almost never” to “almost always”)
Advantages:
-
Once an item has been selected, there is no need to develop detailed definitions for each scale
point
Using frequency of behaviour as the rating scale ensures that two or more responses cannot be
selected
Disadvantages:
-
Can be hard to judge behaviour
Raters can generalize from a global evaluation of the individual, instead of first determining the
frequencies for each item
May be more subjective than other scales, such as BARS
Objectives-Based and Results-Based Systems
-
Also known as Management by Objectives (MBO): an approach to management that involves
setting employee goals and providing feedback on goal accomplishment
Involves establishing goals and objectives for each employee, usually on a joint basis, and then
measuring actual performance against these objectives
Advantages:
-
Regarded by many as highly effective approach to employee motivation because of two key
elements: participation by the employee in setting the goals, and frequent feedback
Disadvantages:
-
Not all significant goals can easily be measured
Different employees set different goal, e.g., should an individual who sets high goals but falls
slightly short be penalized, while an individual who achieves low goals is rewarded?
Field Review
-
-
Involves a short period of direct observation of the job performance of the individual being
rated, often by an individual from outside the department who is special trained to conduct such
reviews
Often used for jobs that are not normally under direct observation by the supervisor, e.g., truck
drivers, pilots
Advantages:
-
A small number of specially trained raters may be able to rate many employees, thus increasing
the consistency and reliability of the appraisals
Provides supervisors with a “second opinion” - may reduce bias and other rating errors
Disadvantages:
-
Cost of training and using specialized raters
Limited application – appropriate in only specific circumstances
Sources of Appraisals
Multisource/360 Degree Feedback
-
-
An appraisal system hat uses feed back from superiors, peers, subordinates, and possibly
customers
Because of dissatisfaction with existing appraisal systems, 360 degree feedback expanded rapidly
in the 1990’s but appears to have slowed as some of its shortcomings have become more
apparent
Multisource systems use standardized forms that provide numerical ratings of the appraisee
along numerous dimensions
Individual raters (except the superior) are assured of anonymity so that they can be candid in
their ratings
The system employs several procedures to screen out invalid data
Advantages:
-
Fair; more safeguards to prevent bias; less rating inflation
-
More accurate; encompass the perspective of many raters
Credible to recipient
More valuable for bringing about behaviour change, since work associates may be more specific
in their feedback
More motivational; peer pressure may motivate constructive behaviour changes
Disadvantages:
-
Subject to same problems of peer and subordinate ratings
Can be complicated to set up
Must be voluntary
Performance Management
-
Method for improving employee performance based on goalsetting, feedback, encouragement
and support, and reward for success
The first element of performance management is goals. These need to be SMART goals: Specific,
Measurable, Achievable, Relevant, Timely
Key elements:
o Goals are tied to the strategy and key success factors of the business
o Measures are the primary indicators of success
o Feedback is the data used to determine progress toward goals
o Reinforcement is the active encouragement and support for action
o Rewards are what the individual or team receives for achieving desired results
Linking Pay to Performance
-
From a compensation perspective, the key is to establish methods to link an employee’s
performance with pay, if and when appropriate
Merit pay grid/ Merit Pay Matrix: - a tool for allocating merit raises, based on the performance
level of the employee and the pay range quartile in which they fall
“Top-down” approach- when this is used the firm should ensure that it is making available
sufficient funds to allow a reasonable number of merit increases
In an effort to “provide something to everyone” organizations may lump merit pay and cost of
living increases together. This action dilutes the relationship between merit pay increase and
performance
Issues in Designing and Effective Merit System
1.
2.
3.
4.
5.
6.
7.
8.
What should be the objectives of the system?
What is the most appropriate measurement system?
How frequently should appraisals be conducted?
How are appraisals to be linked to pay?
How should feedback be provided?
How is procedural justice to be achieved?
How are raters to be trained and evaluated?
How is the system to be evaluated?
Chapter 12
Types of Employee Benefits and Services
Indirect pay is an important component of a firm’s compensation strategy but is the most complex of the
compensation components. There are 6 main categories of indirect pay and specific employee benefits
in each
1. Mandatory Benefits
o Canada/Quebec Pension Plan
o Employment Insurance
o Worker’s Compensation
2. Retirement Income
o Defined Benefit Plans
o Defined Contribution Plans
o Hybrid Pension Plans
3. Health Benefits
o Supplemental Health Insurance
o Disability Insurance
o Life and Accident Insurance
o Dental Insurance
o Health Care Spending Accounts
4. Pay for Time not Worked
o Vacations, holidays, breaks
o Sickness, compassionate, personal absences
o Supplemental unemployment benefits
o Parental leaves
o Educational and sabbatical leaves
o Severance pay
5. Employee Services
o Employee assistance programs
o Wellness and recreational services
o Child care/elder care
o Work/life balance
o Financial or legal services
o Food services
o Outplacement services
6. Miscellaneous Benefits
o Use of company vehicle
o Product/service discounts
o Housing/mortgage subsidies
o Employee savings plans
o Tuition reimbursements
o Work clothing/ equipment
Mandatory Benefits
-
Government-provided employee benefits, such as pensions and employment insurance, to
which employers must contribute on behalf of their employees
Employers must also provide minimum levels of holidays, rest breaks, and statutory vacation
time. In some provinces they must also pay health care taxes
Retirement Income
-
After mandatory benefits, pension and retirement plans are the costliest items in most company
benefits packages
- Two main types of private pension plans: defined benefit and defined contribution
1. Defined Benefit Plans
o Pension plans that provide retirement income based on a proportion of the employee’s
pay at the time of retirement
o Provide a specified stream of income from the time of retirement until death
o Most common type in Canada
2. Defined Contribution Plans
o Pension plans that provide retirement income based on the accrued value of employer
and employee contributions to the plan
o Employer commits to putting a certain amount of money in an investment trust on
behalf of each employee; then, at the time of retirement, the amount of the annual
pension is paid based on whatever amount of money is in that trust
o No guarantee as to what the amount of annual pension will be
o Contributions can be either a fixed sum of money or a fixed proportion of company
profits
Health Benefits
-
One of the most highly valued employee benefits
Usually provided through some type of insurance program and may include supplemental health
insurance, dental insurance, disability insurance, life and accident insurance, and health care
spending accounts
Supplemental Health Insurance:
-
Canadians enjoy many government-sponsored medical benefits under “medicare”. In the US
medical coverage does not exist and employers are expected to bear the cost of medical
insurance which can be staggering
-
Currently Canadian extended health plans average about two percent of total compensation
Disability Insurance:
-
-
Many employers purchase long-term disability insurance for their employees to cover disabilities
arising from non-work-related causes (workers comp covers work-related disabilities)
Coverage typically provides for 60-70% of normal pay and carries on until the employee is able
to return to work, reaches retirement age or dies (in which case benefits usually passed on to
spouse/children)
Historically, physical disabilities were the reason for most claims but now mental disability is
driving higher claims
1/3 of disability claims in Canada are related to mental illness
Life and Accident Insurance:
-
Usually expressed in terms of a multiple of annual salary (e.g., two times annual salary)
Employees are often given the option of increasing their coverage, either at their own expense
or on a cost-shared basis
Dental Insurance:
-
Has expanded rapidly in the past few years
Not provided under medicare and can be a major expense
Highly tax-favoured benefit
Health Care Spending Accounts:
-
A tax-favoured employee benefit that allows employees to use employer-provided health care
spending credits to purchase a wide array of health care services
Pay for Time not Worked
-
An employee benefit that covers a wide array of different types of employee absences from
work
Vacations, Holidays, and Breaks:
-
Most major employees go beyond the two or three weeks of vacation mandated by law
Most workplaces also give two paid rest breaks of 15-20 minutes (besides an unpaid lunch
break) during a seven or eight-hour day
Sickness, Compassionate, and Personal Absences:
-
Most employers provide pay continuation for short-term absences from work due to illness or
other specified reasons such as death of a family member
Supplemental Unemployment Benefits:
-
An employer-provided benefit that extends government-provided unemployment benefits
When an employee is temporarily laid off and must go on EI, many firms offer supplemental
unemployment benefits (SUBs) which hare designed to “top up” EI benefits
-
Plans must be approved and registered with EI commission
Parental Leaves:
-
Some firms offer some period of paid maternity or paternity leave, usually in conjunction with EI,
which provides coverage for up to 50 weeks of maternity or paternity leave (but not at the same
time)
Educational and Sabbatical Leaves:
-
-
Some organizations have paid educational leave plans, in which employees are compensated
while undertaking a full-time educational program
There is normally an expectation that an employee will return to the employer after completing
the educational program, and employees who don’t return are usually expected to reimburse
the employer
In some cases, firms offer unpaid sabbaticals – e.g., teachers in Toronto may set aside a fifth of
their annual income for four years and then receive this money in the fifth (sabbatical) year. This
also is beneficial for tax purposes
Severance Pay:
-
-
Federal and provincial jurisdictions have statutory requirements either for notice to be provided
when terminating employees without cause or for pay in lieu of this notice, but these
requirements are quite minimal. E.g., federal jurisdiction, the only requirement is two weeks
notice. In Ontario it is generally a weeks notice.
Unionized firms typically have a formula that goes beyond these minimums for providing a lumpsum payment
Technically, if an employee has been dismissed for cause, no notice or severance pay is required.
However, unless cause can be proven, an employer may end up with a wrongful dismissal suit
and be required to pay a substantial severance reward
Employee Services
-
Often not included in traditional surveys of employee benefits but are often of considerable
value to employees and may produce favourable spinoffs for the organization
Major advantage is that they are tax-deductible to the employer and not subject to income tax
for employees
Employee Assistance Programs (EAPs)
-
-
Employer-provided programs to help employees deal with a variety of personal problems
Example of problems covered is substance abuse and addiction
The firm may contract the services of professional counsellors or other specialists, the course of
action for dealing with them may include paid leave to attend alcohol or drug treatment centres
and coverage of the cost of these programs
Also deals with stress, workplace conflict, and marital, family, or financial problems either
through the use of in-house counselling or referrals
Wellness Programs and Recreational Services
-
-
Some organizations sponsor company sports teams or help support other recreational programs
In addition, some firms provide on-site fitness centres or exercise rooms
Use of these facilities is typically non-taxable for the employees
Helps with issues such as:
o smoking, unhealthy diets, inactivity
o Organizational health issues such as lack of job satisfaction and stress
o Physical work environment, such as ergonomics and musculoskeletal injury prevention
Can benefit the organization in a variety of ways including reduced absenteeism, reduced health
benefit costs, higher employee productivity
Child Care and Elder Care Services
-
Some employers offer on-site daycares, however, most employers that have a childcare program
use third-party services
In Canada, 8% of employers offer on-site childcare, 5% offer financial assistance for regular
childcare, and 13% offer emergency childcare
Most employers-sponsored elder care programs simply provide information and referral services
through an EAP such as outreach programs and transportation services
Work/Life Balance Programs
-
Many firms have created work/life balance programs to minimize these stresses as much as
possible
Programs typically include things we have already listed such as flexible schedules, parental and
personal leave programs, health care programs, child and elder care programs and wellness
programs
Financial or Legal Services
-
Some firms provide access to financial planners
In some companies, prepaid legal services are provided. There are two main types: access plans
(provide free phone or office consults, document review and discounts) or comprehensive plans
(covers issues such as real estate transactions, divorce cases, and civil and criminal cases)
Food Services
-
May be necessary on sites where food services are not readily available
An advantage is that employees don’t need to waste scarce break time by leaving the company
site
Outplacement Services
-
Some firms provide assistance to employees whose jobs are being terminated, beyond simply
awarding severance pay
May include advice on how to secure new employment and how to manage financial affairs until
new employment is found, as well as counselling to ease the shock of termination
Fixed VS Flexible Benefit Systems ** Written Question **
How would you like to be able to pick and choose among the benefits your firm offers, selecting only the
benefits of value to you, or possibly even forgoing some benefits and receiving the equivalent in cash?
These “flexible benefit plans” have increased in popularity over the years.
Fixed Benefit Systems
-
An employee benefit plan that provides a standard set of benefits to all those covered by the
plan
Fixed benefits, which have been the norm, are where all employees are covered by a standard
benefits package
Advantages of this approach are: simplicity, economies of scale in purchasing the benefits,
relatively low admin costs, ease in communicating the plan to employees
Key disadvantage of this approach is that it does not recognize differences among employees,
they also have a tendency to grow in cost as existing benefits grow in cost or new benefits are
added to meet the diverse needs of the workforce
Semi-Flexible Benefit Systems
-
When a benefit system is not fixed but does not meet the criteria to be considered flexible
Most common approach to make a fixed system more flexible is to start with a “core” set of
benefits, to which employees “add on” additional levels of coverage at their own expense
Another approach is the “modular plan” where employees are given the choice between two or
more fixed benefit packages, each of which is of similar cost to the company, this is rarely used
Flexible Benefit Systems
-
An employee benefit plan that allows employees to allocate employer-provided credits to
purchase the benefits of most value to them
The distinguishing feature is employee control over the disposition of benefits funds provided by
the employer, in addition to any funds that employees themselves provide
In a fully flexible approach, there is no “core” or “standard” benefits package
Employees receive a set of flexible credits that they can use to purchase the combo of benefits
that best suits them
Designing the Benefit System
- To develop an effective benefit system, organizations need to address 5 issues
1. Determine the Role of Indirect Pay in the Compensation Strategy
o Identify what compensation objectives an indirect pay system will serve beyond those
that can be served by direct pay
o The role that indirect pay will play in generating the desired employee behaviour needs
to be defined
o Examples of possible roles to be served may include encouraging membership, retaining
senior employees, satisfying lower-order needs for economic security, adding value to
the compensation package etc
2. Choose the Process for Plan Design
o Once the organization has defined the objectives for indirect pay, it now needs to
establish a process for designing a benefits plan that will achieve these objectives
o Employee participation in this process is desirable
3. Identify the Benefits System and Benefits to be Included
o Organization now needs to decide on the type of benefits system (fixed, semi-flexible,
flexible) and the specific benefits to include in it
4. Determine the Structure of Each Benefit
o For each benefit, the organization must make decisions on four main structural issues.
▪ Coverage- how much coverage will be provided, what will it be based on, how
far will it extend? Will it cover just the employee or family members as well? Will
coverage levels vary for different employees? Will coverage continue after
termination? Will it be geared to base pay or base plus performance pay?
▪ Funding- The cost of the benefit may be fully paid by the employer, or fully by
the employee, or cost-shared
▪ Eligibility- Key issue for each benefit is to define which employee groups will be
eligible. Firms typically cover full-time employees. Part-time, temp or contract
employees are more complex. In many firms, part-time (under 30 hours/week)
are offered few to no benefits.
▪ Flexibility- Will the benefit be mandatory or optional? Even flex plans often
include some benefits that all employees are required to take, such as long-term
disability. Will the benefit be included in the core area of coverage or the
optional area?
5. Develop Procedures for Administering, Communicating, Evaluating, and Adapting the System
o Once an organization has designed the benefits system, it must create a system for
administering it and communicating it to employees.
- Administration of Benefits System
o Benefits systems can be very complex to administer
o Key tasks include enrolling employees in the benefits system, updating changes to
employee records and benefits packages, dealing with employees when they terminate
and after termination, handling tax issues associated with benefits, etc
o Almost all organizations that offer benefits will outsource some of this work
o An advantage of outsourcing is that it frees the in-house HR staff to focus on the
strategic issues of indirect pay and on the communication aspects
- Communication of Benefits Information
o Employee understanding of indirect pay is generally limited even though it may account
for a much as ¼ of an employees total compensation
o If a benefit system is to shape behaviour and attitudes, employees have to understand it
and there are two situations where communication and comprehension are especially
important: when employees must make benefit selection decisions, and when they may
be eligible to receive their benefits
o Two events may help improve comprehension: the development of computer-based
technology for communicating information, and the advent of benefit systems that
require employees to make choices on their benefits, often on an annual basis
- Evaluating and Adapting the Benefits System
o Once the system has been put into place, it needs to be evaluated on a regular basis to
determine whether it is meeting its objectives in the most cost-effective way.
o
There are 3 main types of analysis:
▪ Cost Analysis examines the cost of each individual benefit and what is
being received for that cost
▪ Competitive Analysis uses data from competitors to compare benefits plans
▪ Benefits Surveys examine employee satisfaction with each benefit and its
value to them
Implementing the compensation system:
- establishing the implementation task forces
- put the infrastructure into place
- test the system
- conduct the training
- communicate information on the system
- launch and adjust the system
Impact of compensation objectives:
Initial dip: a tendency for performance to decline during the initial stages of a changes
Impact on compensation cost:
Compensation cost ratio – the ration of total compensation costs to total costs or to revenues
Average employee earnings – total compensation divided by the number of full time equivalent
employees
Impact on employee behaviour and attitude:
Membership behaviour
Task behaviour