Milkovich/Newman: Compensation, Ninth Edition
Chapter 18
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

POLICIES
Exhibit 1.5: THE PAY MODEL
TECHNIQUES OBJECTIVES
ALIGNMENT
Work Descriptions Evaluation/ analysis certification
INTERNAL
STRUCTURE
COMPETITIVENESS
Market Surveys Policy PAY definitions lines STRUCTURE
CONTRIBUTORS
Seniority Performance Merit INCENTIVE based based guidelines PROGRAMS
EFFICIENCY
• Performance
• Quality
• Customers
• Stockholders
• Costs
FAIRNESS
COMPLIANCE
MANAGEMENT Costs Communication Change EVALUATION
18-2

Managing Labor Costs
 Financial planning is integral to managing compensation
– Total compensation makes up at least 50 percent of operating expenses in many orgs

But, most orgs have not tried to analyze returns from their compensation decisions (e.g., increases expected from new gainsharing plan, expected value of increasing merit increases for top performers relative to average performers)
18-3

Controlling Employment: Staffing
Levels and Hours
 Staffing Levels
– Most common approach to managing labor costs is to control number of ees a/o hours worked

Note: layoffs and plant closings often have positive shortrun effect on stock price, but loss of human capital and lowered morale may well lead to lower performance than anticipated
 Contingent workforce is a possible buffer
18-4

Control Salary Level: Top Down
 Top management determines the amount of money to be spent on pay and allocates it
“down” to each subunit for the plan year
– Current year’s rise
– Ability to pay
– Competitive market
– Turnover effects
18-5

Control Salary Level: Bottom Up
 Instruct managers in compensation policies and techniques
 Distribute forecasting instructions and worksheets
 Provide consultation to managers
 Check data and compile reports
18-6

Control Salary Level: Bottom Up (cont.)
 Analyze forecasts
 Review and revise forecasts and budgets with management
 Conduct feedback with management
 Monitor budgeted versus actual increases
18-7

Embedded Controls
 Range maximums and minimums
 Compa-ratios
 Variable pay
 Analyzing costs
 Analyzing Value Added
18-8

Exhibit 18.9: Illustration of Value-Added Analysis
18-9

Communication: Managing the Message
 Compensation communicates
 Employee’s understanding of the pay system is shaped
– Indirectly through the paychecks they receive
– Directly via formal communication about their pay, their performance, and the markets in which the organization competes
18-10

Why Communicate Pay Information?
 Devotion of considerable resources to designing a fair and equitable system intended to
– Motivate effective performance
– Encourage productivity
 Misperception of pay system by employees
 Openness about pay may
– Engender goodwill
– Affect perceptions of pay equity
18-11

Pay: Change Agent in Restructuring
 Pay often plays a singular role when organizations restructure
 Strategic changes in business strategy mean the pay strategy must be realigned
– Changing people’s pay captures their attention
 Pay changes play two roles
– Catalyst for change
– Follower of change
18-12

Structuring the Compensation Function
 Centralization versus decentralization
 Flexibility within corporate-wide principles
 Reengineering and outsourcing
18-13

Controls as Guidelines: Let (Thoughtful)
Managers Manage
 Traditional compensation plans often degenerate into bureaucratic nightmares that hinder the organization’s ability to respond to competitive pressures
– Reducing the controls and guidelines inherent in any pay plan recommended

Banding eliminates or at least reduces the impact of range maximums and minimums
 Replacing merit grids with bonuses

Replacing job evaluation with skill- or competency-based plans
18-14