HRM 380 2013 Summer Extra Lecture 02 Managing Compensation
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Transcript of HRM 380 2013 Summer Extra Lecture 02 Managing Compensation
Managing Compensation
Herzberg’s Tw-Factor Theory (parallels Maslow’s hierarchy of needs)
Hygiene Factors: Without them I will be resentful and unproductive
Hygiene Factors: With them I AM NOT resentful. But I’m not happy either!
Motivating Factors: Without them I AM NOT resentful. But I’m not motivated either!
Motivating Factors: With them I am motivated, productive, satisfied, etc.
What is Compensation Think in terms of “Total Compensation”
Base cash compensation“Pay Incentives” or variable cash
compensationNon-cash compensation (recognition)Non-cash benefitsCash-equivalent benefits
Designing a Compensation System Step One: Determining Pay Philosophy
Internal versus External Equity Put another way, Internal Equity versus External
CompetitivenessDistributive Justice Model
We exchange our time/labor for pay Labor Market Model: set by supply and demand Balancing Equity Model: internal issues may
rule
Supply and Demand Labor is a commodity, like gasoline… Pick a gas company: what do you
pay for gas? Pick a point on that distribution: what
is fair? Say you had the time: what would
you choose to spend? What are you willing to pay: ‘low’,
‘mid’ or ‘high’?
Fixed Versus Variable Pay Is “risk sharing” a good idea? Can and should “line” employees have the
same risk as “manager” or “executives?” How do we set the risk level? Where do we pay relative to market:
Overall Base Variable Benefits
Variable Pay Plans Don’t forget: you get what you pay for. Don’t forget: you get what you pay for. Why they fail:
No link from effort to reward“Funny money” makes financials
meaninglessRewards only drive performance in the
short run (once spent, they’re forgotten)
Performance Versus Membership Performance-contingent plans:
Vary based on individual or work group achievement
Can be highly focused (team or group) Membership-contingent plans:
Pay the same to people in a job or work group regardless of individual or group performance
Distinction driven by culture and goals of the play plan
Job Versus Individual Pay “We pay the position, not the person.” Powell’s Books example:
PhD selling books is paid as a PhDCurrent labor issues:
9% versus 19% wage increase No benefits change versus increase in co-pays
and deductibles Does this make sense?????
Options Knowledge and skill-based pay:
Pay for knowledge to encourage cross training
Promotes flexibilityProvides incentive to learn more skills
Egalitarian and Elitist pay systems:Egalitarian: everyone gets the same
systemElitist: equivalent to a ‘black box’ system
Egalitarian versus Elitism Egalitarian (worldwide trending this
way):More flexibleReduce barriers (equity) between peers
through elimination of status-based perksMore common in highly competitive markets
ElitistMore stable workforce because employees
only make more by moving upMore prevalent among older companies
Pay Issues Below versus above market
Competitive strategy (and Herzberg) Blue chips have gone “above” market to create
elitism, attract/retain the “cream of the crop” and minimize turnover (golden handcuffs)
Above more common in large, established companies with ready cash and little equity
Below are more common in smaller, startup companies that can put emphasis on a ‘liquidity event’
Pay Issues Monetary versus non-monetary rewards
Monetary: Emphasize individual achievement Volatile markets and low job security Emphasis on sales versus customer service Pushing competitive internal climate
Non-monetary: Emphasize commitment to the organization Stable workforce with an emphasis on customer
service and loyalty (versus fast sales growth) Companies that want to create more cooperation
internally
Pay Issues Open versus secret pay
Public or quasi public companies and agencies publish
May be illegal to restrict people from talkingWhat do we have to hide???Secret pay creates impression that there is
something to hide (“Who’s getting rich?”Open pay eliminates perceptions driven by
suspicion and speculation
Pay Issues Centralization versus decentralization
Centralized offers efficiency and the ability to hire specialists
Centralized may not be as responsiveCentralized may not be as ‘clued in’ to
what happens in the ‘field’Centralized may promote and ‘us versus
them’ feeling
Compensation Tools Two basic approaches
Job-based compensation plans Point factor theory Looks at ‘compensable factors’ in each job
Market based compensation plans Looks at the job’s worth or value relative to
the ‘market’
Compensation Tools – Grades and Ranges
Jobs
Rate of Pay
Max
Max
Mid
Rang
e Sp
read
Mid
-Poi
nt
Spre
ad
Compensation Tools – Job Based Plans Conduct job analysis Write job descriptions Determine job specifications (what
people do to be successful in the work) Rate the ‘worth’ of jobs using
‘compensable factors’ Create job hierarchy Classify jobs by grade and level
Compensation Tools – Market Based Plans Identify benchmark or key jobs Establish pay policy (philosophy) Uh, then what????
Legal Considerations FLSA (1938)
Primarily impacts exempt/nonexempt decisions
Addresses minimum wage and overtime Equal Pay Act
Raises comparable worth questions Internal Revenue Code
Particularly an issue with “contractors”
Rewarding Performance “Incentive” systems are designed to
incent or drive behavior First question: what organizational
outcome are you trying to achieve? “Do only what you get paid for
syndrome” Erosion of teamwork?
Problems and Challenges Lack of control
Many things are beyond individual control – therefore, should they be excluded from consideration?
Difficulties in measuring “performance”
Psychological contractsPre-set expectations
Problems and Challenges Credibility gap
Ill defined, poorly communicated systems or systems with overrides, loopholes or a lack of accountability
The first exception kills the system! Job dissatisfaction and stress
Creates “cogs” versus “involved people” Potential reduction of intrinsic drives
Design Objectives Link pay and performance Use pay as a broad HRM system Build employee trust Promote the idea that performance
makes a difference Use multiple reward layers (KISS?) Increase employee involvement Use non-monetary incentives
Individual Based Plans Advantages
Bonuses, lump sum or spot bonus paymentsExpectancy theory: rewarded performance
is likely to be repeated AND we adjust our performance based on perceptions
Goal oriented behavior can be “shaped” over time
Looking at individuals promotes equityFits with an individualistic culture
Individual Based Plans Disadvantages
Promotes single mindednessEmployees often don’t believe that
performance impacts outcomes and in turn their pay (no performance-outcomes-pay link)
May run counter to quality goals (?)May be inflexible
Team Based Plans Advantages
Foster work group cohesionAid performance measurement
DisadvantagesMay not fit individualistic cultureFree riding effectSocial pressure to limit performanceDefining “groups” that have meaning Inter-group competition
Plantwide and Corporate Plans Look at overall performance Suffer from many of the same design
challenges Large scale and difficulty ‘seeing’
operational connections make the performance-outcome link hard to identify
Can drive tremendous focus
Studying Review advantages and disadvantages of
plantwide and corporate plans Review keys to successful implementation Look at executive and sales compensation Pay attention to variable and short versus
long term incentive plans