Chapter 1: The Pay Model Flashcards
Why should organizations care about compensation (p.3)?
- Higher pay can lead to more productive employees, a better hiring pool, be selective hiring – talent-rich strategy.
- How people are paid affects their behavior at work, which affects an organization’s success.
- Comp major part of the company’s total cost and usually the largest operating cost. Poorly structured comp strategy/ philosophy can undermine success. Well-designed can achieve and sustain competitive advantage.
Define compensation, and recognize the multiple perspectives (society, stockholders, managers, and employees) (p.5):
Compensation - All forms of financials returns and tangible services and benefits employees receive as part of an employment relationship.
Compensation does not mean the same to everyone, and it affects how you behave. Different for society, stockholder, manager, or employee.
Society: Pay is a measure of justice. Ex: woman vs. men earnings. See pay as mechanism for managing relative labor costs ( and productivity) across countries.
Stockholders:
1. Employees: Pro -> creates a sense of ownership -> improved performance -> company success. Con -> granting too much dilutes stockholder wealth.
2. Executive Pay: Pro -> stock comp. -> paying execitive on the basis of company performance (shareholder return) -> higher co. performance. Con: No link betwen co performance and exec. pay. Elevated concerns with stock options.
Managers: Measures manager’s success: 1) Major expense to manage (cost) and 2) major determinator in employee attitudes and behaviors (therefore org effectiveness and productibility)
Employees: a major source of financial security and, a big role in economic and social well-being. Return in exchange between their employer and themselves as an entitlement for being an employee, as an incentive to stay or go with a company and perform well, and as a reward for having done so. Labor unions.
Discuss two ways that pay influences employee motivation (p.11):
The incentive affect - the degree to which compensation influences individual and aggregate motivation. Applying equity and expectancy theories highlight the complex relationship between compensation and motivation (supplemental)
* Motivation + EE ability + work/organizational design = EE behavior ie behavior.
The sorting affect - (indirect affect) the degree to which different types of compensation strategies may case different types of people to apply and stay with an organization. Higher pay & performance based/variable pay structures -> attract more high quility applicants -> allowing organizations to be more sensitive. Higher performing employees have more job opportunities -> higher turnover if not being compensated right.
Be able to explain Exhibit 1.5 (Total Returns) and make sure you can define all elements (p.13):
Forms of pay: Total Compensation and Relational Returns:
Relational –intangible/psychological – learning opps., status, challenging work…
Total comp - transactional – pay merit, incentives, COLA
Total compensation: Cash Compensation (direct)
1. Cash compensation: Base – cash compensation that an employer pays for the work performed. The value of work or skill ignores the attributes of the individual. Salary and wage.
2. Cash compensation: Merit increases/Merit Bonus/COLA – Subjective. COLA: adjustment to cost of living, what other employers are paying, change in experience. Merit: increments on base pay annually. Merit bonus: lump sum one time no change to base pay.
3. Cash compensation: Incentives – Objective, do not grow base and are re-earned. Ex: Commission (short term) and stock ownership (long term).
Total compensation: Benefits (Indirect)
4. Benefits: Income protection – STD, unemployment, medical insurance retirement programs, life insurance, savings plans. Help protect employees from financial risk.
5. Benefits: Work/life balance – better integrate work and life. Vacation, jury duty, access to services and needs (EAP), flexible work arrangements
6. Benefits: Allowances – transportation, cell phones…
Discuss the three basic building blocks included in the pay model, Exhibit 1.6 (p.18). Take notes and study all textbook material relating to Exhibit 1.6 (pp.18-24).
PTO = Policies , Techniques and Objectives
Policies that form the foundation of the comp system
* Internal alignment: Comparison among jobs or skill levels inside a single organization. Jobs and people’s skills are compared in terms of their relative contribution to the organization. Pay relationships affect employee’s decision to stay with org., to become more flexible by investing in more training, or to seek great responsibility.
* External competitiveness: Pay comparison with competitors. External comp. decisions: 1) ensure the pay is sufficient to attract and retain talent. 2) to control labor cost
* Employee contributions: (or nature of pay mix), directly affects employee attitude and behavior. Decision about made jointly with external competitiveness.
* Management: Right people get the right pay for achieving the right objectives in the right way. Means answering the “so what?” Traditional view looked as a cost control, not it is more strategic – managing pay as a part of the business. Analyzing the impact of pay on behaviors and motivations of employees.
Techniques that make up the comp system
o Tie the four techniques of the pay system.
Compensation objectives: guide the design of the pay system and serve as the standard for judging the success of the pay system.
* Efficiency: improving performance, increasing quality, delighting customers, and stockholders 2) controlling cost
* Fairness: Fundamental objective, fair treatment of all employees by recognizing employee contributions. Procedural fairness refers to the process used to make pay decisions
* Compliance: Conforming to state and federal compensation laws and regulations
* Ethics: Means the org cares about how its results are achieved. Managing pay sometimes creates ethical dilemmas
