Chap 1 SRS With Intro

8/3/2019 Chap 1 SRS With Intro

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Strategic Reward SystemStrategic Reward System

IntroductionIntroduction


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IntroductionIntroduction Course Description:Course Description:

This course focuses on the design and management of strategic rewardThis course focuses on the design and management of strategic rewardsystems. Students will be able to assess the effectiveness and equality ofsystems. Students will be able to assess the effectiveness and equality of

reward systems within the organizationreward systems within the organization as well as design an effective and fairas well as design an effective and fairSRS.SRS.

Time:Time: Fridays and Saturdays every other week from 2:00 p.m. until 6:00Fridays and Saturdays every other week from 2:00 p.m. until 6:00p.m. Alexandriap.m. Alexandria

Instructor:Instructor: Dr. MohamedDr. Mohamed TaherTaher

Phone: 01223163654 Email: [email protected]: 01223163654 Email: [email protected]

Course Materials:Course Materials:

(1)Class PowerPoint presentations (Primary material)(1)Class PowerPoint presentations (Primary material)

(2)Textbook "Compensation", by(2)Textbook "Compensation", by MilkovichMilkovich and Newman (9th edition),and Newman (9th edition),


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Strategic Reward SystemsStrategic Reward SystemsPay for PerformancePay for Performance

Reward Systems in most cases should beReward Systems in most cases should beconsistent with other HRsystems.consistent with other HRsystems.

The Reward System is a key driver of:The Reward System is a key driver of:

HR StrategyHR Strategy

Business StrategyBusiness Strategy

Organization CultureOrganization Culture


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Strategic Reward SystemsStrategic Reward SystemsNeed for Consistency with OtherHR SystemsNeed for Consistency with OtherHR Systems

CultureCulture

PerformancePerformanceManagementManagement

EmploymentEmployment

TrainingTraining

LaborLaborRelationsRelations

RewardsRewards

OvertimeOvertime

pay rulespay rulesinincontractcontract

SignSign--on Bonuson BonusMerit PayMerit Pay

Merit pay reinforcesMerit pay reinforcesperformance cultureperformance culture

SkillSkill--based paybased pay


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Strategic Reward SystemStrategic Reward SystemIntroductionIntroduction

Compensation is such a broad and compelling topic thatCompensation is such a broad and compelling topic thatseveral books could be devoted to it. The focus of thisseveral books could be devoted to it. The focus of thiscourse will be on the design and management of strategiccourse will be on the design and management of strategicreward systems.reward systems. Chapter 1Chapter 1 will aid in understanding howwill aid in understanding how

and wh

y pay systems work, our pay model, wh

ich

and wh

y pay systems work, our pay model, wh

ich

emphasizes the key strategic objectives, policies, andemphasizes the key strategic objectives, policies, andtechniques, also provides the structure for much of thetechniques, also provides the structure for much of thecourse. The pay model plays a central role in formulatingcourse. The pay model plays a central role in formulatingand implementing an organizations pay strategy. The payand implementing an organizations pay strategy. The paymodel identifies four basic policy decisions that are themodel identifies four basic policy decisions that are the

core of the pay strategy.core of the pay strategy. Chapter 2Chapter 2 discusses how to formulate and implement adiscusses how to formulate and implement a

compensation strategy. We analyze what it means to becompensation strategy. We analyze what it means to bestrategic about how people are paid and how compensationstrategic about how people are paid and how compensationcan help achieve and sustain an organizations competitivecan help achieve and sustain an organizations competitive

advantage.advantage. 55


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IntroductionIntroduction After we discuss strategy, the next sections of the course willAfter we discuss strategy, the next sections of the course will

examine each of the four basic policy decisions in detail.examine each of the four basic policy decisions in detail. TheThefirst,first, internal alignmentinternal alignment(Chapters 3 through 6),(Chapters 3 through 6), examines payexamines payrelationships within a single organization.relationships within a single organization.

The next section (Chapters 7 and 8)The next section (Chapters 7 and 8) examinesexamines externalexternalcompetitivenesscompetitivenessthe pay relationships among competingthe pay relationships among competingorganizationsorganizationsand analyzes the influence of marketand analyzes the influence of market--drivendrivenforces.forces.

Once the compensation rates and structures are established, otherOnce the compensation rates and structures are established, otherissues emerge. How much should we pay each individualissues emerge. How much should we pay each individualemployee?How much and how often should a persons pay beemployee?How much and how often should a persons pay beincreased, and on what basisincreased, and on what basisexperience, seniority, orexperience, seniority, or

performance? Should pay increases be contingent on theperformance? Should pay increases be contingent on theorganizations and/or the employees performance?How shouldorganizations and/or the employees performance?How should

the organization share its success (or failure) with employees?the organization share its success (or failure) with employees?Stock awards, profit sharing, bonuses, merit pay?Stock awards, profit sharing, bonuses, merit pay?


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IntroductionIntroduction These are examplesThese are examples of employee contributions, the third building block in theof employee contributions, the third building block in the

model (Chapters 9 and 10)model (Chapters 9 and 10). After that, we cover employee services and. After that, we cover employee services andbenefitsbenefits (Chapter 11).(Chapter 11). The role of governments in compensation is examinedThe role of governments in compensation is examinedinin Chapter 12Chapter 12. We conclude with managing the compensation system. We conclude with managing the compensation system(Chapter 13),(Chapter 13), which includes planning, budgeting, evaluating, andwhich includes planning, budgeting, evaluating, and

communicating. More detail on global compensation systems will also becommunicating. More detail on global compensation systems will also beprovidedprovided

Even though the course is divided into sections that reflect the pay model, thatEven though the course is divided into sections that reflect the pay model, thatdoes not mean that pay policies and decisions are discrete. All policydoes not mean that pay policies and decisions are discrete. All policydecisions are interrelated. Together, they influence employee behaviors anddecisions are interrelated. Together, they influence employee behaviors andorganization performance, and can be a source of competitive advantage.organization performance, and can be a source of competitive advantage.

The intention throughout the course is to examine alternative approaches.The intention throughout the course is to examine alternative approaches.The main idea is to believe and act based on that there rarely is a singleThe main idea is to believe and act based on that there rarely is a singlecorrect approach; rather, alternative approaches exist or can be designed.correct approach; rather, alternative approaches exist or can be designed.

The one most likely to be effective depends on the circumstances. We need toThe one most likely to be effective depends on the circumstances. We need tobe as an employee, a manager, or an interested member of society able tobe as an employee, a manager, or an interested member of society able toassess effectiveness and fairness of pay systems or as a professional to designassess effectiveness and fairness of pay systems or as a professional to design

an effective and a fair one.an effective and a fair one.


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McGrawMcGraw--Hill/IrwinHill/IrwinCopyright 2008 by The McGrawCopyright 2008 by The McGraw--HillCompanies, Inc. All rights reserved.HillCompanies, Inc. All rights reserved.

Milkovich/Newman: Compensation, Ninth EditionMilkovich/Newman: Compensation, Ninth Edition

Chapter 1Chapter 1The Pay ModelThe Pay Model


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Contrasting Perspectives ofContrasting Perspectives of

CompensationCompensationSocietys

ViewsStockholders

Views

Employees

Views

Managers

Views


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Contrasting Perspectives ofContrasting Perspectives ofCompensationCompensation

1. Compensation is used by1. Compensation is used by societysociety as a measure ofas a measure ofjustice, a cause of increased taxes and price increases.justice, a cause of increased taxes and price increases.

2.2.StockholdersStockholders are concerned with executive payare concerned with executive pay

relative to company performance.relative to company performance. 3.3.ManagersManagers see compensation as a major expense and asee compensation as a major expense and a

means to influence employee behavior.means to influence employee behavior.

4.4.EmployeesEmployees see compensation as a return in ansee compensation as a return in an

exchange with their employer, an entitlement, or aexchange with their employer, an entitlement, or areward. In other countries, compensation relates toreward. In other countries, compensation relates tobeing taken care of.being taken care of.


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Compensation: DefinitionCompensation: Definition

EmployeesEmployees

Major source of financial securityMajor source of financial security

Return in an exchangeReturn in an exchange between employer and themselvesbetween employer and themselves

EntitlementEntitlement for being an employee of the companyfor being an employee of the company RewardReward for a job well donefor a job well done


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Compensation: Definition (cont.)Compensation: Definition (cont.)

SocietySociety Pay as a measure of justicePay as a measure of justice

Gender pay gap in U.S., after adjusting for differences inGender pay gap in U.S., after adjusting for differences ineducation, experience, occupation, has narrowed from 36education, experience, occupation, has narrowed from 36

percent in 1980 to 13 percent in 2006percent in 1980 to 13 percent in 2006 Benefits as a reflection of justice in societyBenefits as a reflection of justice in society

~46m Americans do not have health insurance (16% of~46m Americans do not have health insurance (16% ofpopulation)population)

Proportion of Americans w/ private insurance 67.5% in 2007Proportion of Americans w/ private insurance 67.5% in 2007

Job losses (or gains) attributed to differences inJob losses (or gains) attributed to differences incompensation (Ex. 1.1)compensation (Ex. 1.1)

Belief that pay increases lead to price increasesBelief that pay increases lead to price increases


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Exhibit 1.1 update: Hourly CompensationExhibit 1.1 update: Hourly Compensation

Costs for Production Workers (2007 data)Costs for Production Workers (2007 data)United StatesUnited States $24.59$24.59BrazilBrazil 5.965.96

CanadaCanada 28.9128.91

MexicoMexico 2.922.92

AustraliaAustralia 30.1730.17

Hong KongHong Kong 5.785.78

JapanJapan 19.7519.75

South KoreaSouth Korea 16.0216.02

($8.23 in 2000)($8.23 in 2000)

SingaporeSingapore 8.358.35

Sri LankaSri Lanka 0.61*0.61*

(comparable to China?)(comparable to China?)

TaiwanTaiwan 6.586.58

Source: U.S. Department of Labor, Bureau of LaborSource: U.S. Department of Labor, Bureau of LaborStatistics, January 2009.Statistics, January 2009.

AustriaAustria 35.3335.33

BelgiumBelgium 35.4535.45

Czech RepublicCzech Republic 8.208.20

($2.83 in 2000)($2.83 in 2000)

DenmarkDenmark 42.2942.29

FinlandFinland 34.1834.18

FranceFrance 28.5728.57

GermanyGermany 37.6637.66

HungaryHungary 7.917.91

($2.79 in 2000)($2.79 in 2000)

IrelandIreland 29.0429.04

ItalyItaly 28.2328.23

NetherlandsNetherlands 34.0734.07

Norway Norway 48.56PolandPoland 6.176.17

PortugalPortugal 8.278.27

SpainSpain 20.9820.98

SwedenSweden 36.0336.03

SwitzerlandSwitzerland 32.8832.88

United KingdomUnited Kingdom 29.7329.73

Hourly compensation costs include (1) hourly direct pay and (2)Hourly compensation costs include (1) hourly direct pay and (2)employer social insurance expenditures and other laboremployer social insurance expenditures and other labortaxes.taxes.


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Compensation: Definition (cont.)Compensation: Definition (cont.)

StockholdersStockholders

Linking executive pay to company performance theoreticallyLinking executive pay to company performance theoreticallyincreases stockholders' returns (see Ex. 1.2)increases stockholders' returns (see Ex. 1.2)

ManagersManagers

A major expense (labor expense can account for 50+% ofA major expense (labor expense can account for 50+% oftotal costs)total costs)

Used to influence employee behaviors and to improve theUsed to influence employee behaviors and to improve theorganization's performanceorganization's performance Grocery store clerk pay (2005):Grocery store clerk pay (2005):

Industry average: $12.28/hrIndustry average: $12.28/hr Costco:Costco: $16$16

Whole FoodsWhole Foods $12.50$12.50

Sams ClubSams Club $12$12

WalWal--MartMart $9.68$9.68

Labor costs as % of total costs for grocery stores historically 15Labor costs as % of total costs for grocery stores historically 15--18%;18%;today norm is 9today norm is 9--12%; warehouse stores 412%; warehouse stores 4--6%; Whole Foods 25%6%; Whole Foods 25%


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Labor Costs as a Percentage of Revenues,Labor Costs as a Percentage of Revenues,

Airline IndustryAirline Industry(8e)(8e)


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Compensation refers to allforms of financial returns

and tangible services and

benefits employees

receive as part of an

employment relationship

What Is Compensation?What Is Compensation?


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The two major components of total returnsfor work are total compensation and

relational returns. Total compensation iscomposed of cash compensation (base payand incentives) and benefits. Relationalreturns include psychological aspects of work

such as recognition and status, challengingwork, and learning opportunities.

Total Returns for WorkTotal Returns for Work


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Exhibit 1.4: Total Returns for WorkExhibit 1.4: Total Returns for Work


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Forms Of PayForms Of Pay

Relational returns (Intangible)

Psychological in nature

Total compensationTotal compensation

Cash Compensation/ transactionalCash Compensation/ transactional

Base wagesBase wages

Difference between wage and salary: Salaries usually refers to aDifference between wage and salary: Salaries usually refers to aset amount of money that is paid to someone regardless of theset amount of money that is paid to someone regardless of the

amount ofhours heamount ofhours he\\she actually works.she actually works.W

ageW

age : a pay rate per: a pay rate perhour, multiplied by the number ofhours worked.hour, multiplied by the number ofhours worked.

Merit pay/costMerit pay/cost--ofof--living adjustmentsliving adjustments

Merit increasesMerit increases given in recognition of past work behaviorgiven in recognition of past work behavior adjustments to baseadjustments to base

CostCost--ofof--living adjustmentsliving adjustments same increases to everyone,same increases to everyone,

regardless of performanceregardless of performance


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Forms Of Pay (cont.)Forms Of Pay (cont.)

Cash Compensation/ transactional (cont.)Cash Compensation/ transactional (cont.)

Incentives/ Variable pay tie pay increases directly toperformance

Does not increase base wage; must be reDoes not increase base wage; must be re--earned each pay periodearned each pay period Potential size generally known beforehandPotential size generally known beforehand

LongLong--term (stock options), and shortterm (stock options), and short--termterm

BenefitsBenefits

Income protection (some are legally required)Income protection (some are legally required) Work/life balance (includes pay for time not worked)Work/life balance (includes pay for time not worked)

Allowances (e.g., expatriates)Allowances (e.g., expatriates)


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POLICIESPOLICIES TECHNIQUESTECHNIQUES OBJECTIVESOBJECTIVES

EFFICIENCYEFFICIENCY

PerformancePerformance

QualityQuality CustomersCustomers

StockholdersStockholders

CostsCosts

FAIRNESSFAIRNESS

COMPLIANCECOMPLIANCE

COMPETITIVENESSCOMPETITIVENESSMarket Surveys Policy PAYMarket Surveys Policy PAY

definitions lines STRUCTUREdefinitions lines STRUCTURE

CONTRIBUTORSCONTRIBUTORSSeniority Performance Merit INCENTIVESeniority Performance Merit INCENTIVE

basedbased basedbased guidelines PROGRAMSguidelines PROGRAMS

MANAGEMENTMANAGEMENT Costs Communication Change EVALUATIONCosts Communication Change EVALUATION

Exhibit 1.5: THE PAY MODELExhibit 1.5: THE PAY MODEL

ALIGNMENTALIGNMENTWork Descriptions Evaluation/Work Descriptions Evaluation/

analysis certificationanalysis certificationINTERNALINTERNAL

STRUCTURESTRUCTURE


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. The four strategic policies in the pay model are internalalignment, external competitiveness, employee contributions,and administration. The internal structure techniquesassociated with alignment are work analysis, descriptions, andevaluation/certification. The pay structure techniquesassociated with competitiveness are market definitions,surveys, and pay policy lines. The incentive programtechniques associated with contributions are seniority based,performance-based, and merit guidelines. The evaluation

techniques associated with administration are planning,budgeting, and communication.

THE PAY MODELTHE PAY MODEL


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The strategic objectives of compensation are(1) efficiency in performance and quality,

satisfying customers and stockholders, andcontrolling costs, (2) fairness, and (3)compliance with laws and regulations.

THE PAY MODELTHE PAY MODEL


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Exhibit 1.6: Pay Objectives at MedtronicExhibit 1.6: Pay Objectives at Medtronic

and Whole Foodsand Whole Foods


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Internal alignmentInternal alignmentFocusFocus -- Comparisons among jobs or skill levels insideComparisons among jobs or skill levels inside

a single organizationa single organizationPay relationships within an organization affectPay relationships within an organization affect

employee decisions to:employee decisions to: Stay with the organizationStay with the organization

Become more flexible by investing in additional trainingBecome more flexible by investing in additional training

Seek greater responsibilitySeek greater responsibility

External competitivenessExternal competitivenessFocusFocus -- Compensation relationships external to theCompensation relationships external to theorganization: comparison with competitorsorganization: comparison with competitors

Pay is market drivenPay is market driven

Four Policy ChoicesFour Policy Choices


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Four Policy Choices (cont.)Four Policy Choices (cont.)

External competitiveness (cont.)External competitiveness (cont.) Effects of decisions regarding how much and what forms:Effects of decisions regarding how much and what forms:

To ensure that pay is sufficient to attract and retain employeesTo ensure that pay is sufficient to attract and retain employees To control labor costs to ensure competitive pricing of products/To control labor costs to ensure competitive pricing of products/

servicesservices Employee contributionsEmployee contributions

FocusFocus -- Relative emphasis placed on employee performanceRelative emphasis placed on employee performance Performance based pay affects fairnessPerformance based pay affects fairness

ManagementManagement

FocusFocus -- Policies ensuring the right people get the right payPolicies ensuring the right people get the right payfor achieving the right objectives in the right wayfor achieving the right objectives in the right way

Chap 1 SRS With Intro

Documents

Transcript of Chap 1 SRS With Intro