Chapter 13 Flashcards
What is integral to managing compensation?
> financial planning
The cost implications of decisions such as updating the pay structure, merit increases, or gain-sharing proposals are critical for making sound decisions. But what accounts for these costs?
> budgets
Creating a compensation budget involves what?
> involves tradeoffs, such as how much of an increase should be allocated according to employee contributions to the organization’s success versus automatic across-the-board increases.
What do tradeoffs occur over?
> Tradeoffs also occur over short- versus long-term incentives, over pay increases contingent on performance versus seniority, and over cash compensation compared to benefits.
What does financial planning also require?
> Financial planning also requires understanding the potential returns gained from its allocation.2
Total compensation makes up at least what % of operating expenses in many organizations?
> 50%
As noted in Chapter 2, compensation strategy affects effectiveness not only by its influence on labour costs, but also by its influence in helping increase returns. What might returns be?
> Returns might be the productivity increases expected from a new gain-sharing or profit-sharing plan, or the expected value added by boosting merit increases to the top performers
In the past, financial planning in compensation was only about what?
> costs, not returns
returns generated by compensation strategy may often be intangible and harder to quantify.
Under the simple labour cost model, what are main factors to control to manage labour costs?
> number of employees and the hours they worked,
> average cash compensation (e.g., wages, bonuses),
> and average benefit costs (e.g., vacation, medical, and pensions).
As is apparent from following the business news during any recession, organizations often do what to reduce labour costs?
> organizations often reduce their workforce to cut labour costs.
What are some problems with workforce reductions?
1) if exit incentives cannot be effectively targeted and all employees are eligible, those who are most employable and most able to find another good job may be most likely to leave, with the result that the company has paid its top performers to leave.
2) workforce reductions can harm employee relations, particularly if they are perceived as unfair.
3) Third, organizations that make large workforce cuts also experience greater voluntary turnover.
4) Fourth, workforce reductions are expensive in terms of administrative costs, disruption of work processes and customer service, severance pay, and exit incentives (if used).
5) Fifth, some companies are so “lean” in their staffing that there may be little room to cut the workforce without reducing production or service levels.
6) Finally, if cuts are made too deep, the organization will be poorly positioned to increase revenue when business picks up again.
Announcements of layoffs and plant closings often have what effects? how about the long-term?
> often have favourable short-term effects on stock prices, as investors anticipate improved cash flow and lower costs.
> However, in the longer term, adverse effects such as loss of trained employees and lowered morale often translate into lower financial gains than anticipated.
Many employers attempt to buffer themselves from getting into a position in which layoffs are necessary by doing what?
> <by establishing different relationships with different groups of employees.
> The two commonly-referred to groups are core employees, with whom a strong and long-term relationship is desired, and contingent workers, whose employment agreements may cover only short, specific time periods.
Rather than defining employment in terms of the number of employees, what other measure is defined?
> the measure “hours of work” is often used. For non-management employees, hours over the prescribed work hours (usually 37.5 to 40 per week) are more expensive (1.5 × regular wage).
Under the measure “hours of work” what three factors are not independent?
> three factors—employment (number of employees, hours worked), cash compensation, and benefits costs—are not independent.
controlling the average cash compensation includes what?
> includes managing average salary level and variable compensation payments such as bonuses, gain sharing, or profit sharing.
> Base pay (the fixed component) is typically paid regardless of business performance.
> Variable pay, on the other hand, does not become a permanent part of the pay package.
The two approaches to managing adjustments to average compensation are what?
(1) top-down, in which upper management determines the amount to be spent on pay and allocates it “down” to each subunit for the plan year, and
(2) bottom-up, in which individual employees’ pay for the next plan year is forecast and summed to create an organization salary budget.
Top-down budgeting requires what of top management?
> requires top management of each organizational unit to estimate the pay increase budget for that unit.
> Once the total budget is determined, it is then allocated to each manager, who plans how to distribute it among their employees.
What is an example of typical unit-level budget?
> A typical one, controlling the planned pay level rise, is simply the percentage increase in average pay that is planned to occur for the unit.
Several factors influence the decision about how much to increase the average pay level for the next period: what are the main 5?
(1) how much the average level was increased this period,
(2) ability to pay,
(3) competitive market pressures,
(4) turnover effects, and
(5) cost of living.
The current year’s rise is what percentage?
> The current year’s rise is the percentage by which the average wage changed in the past yea
The decision regarding how much to increase the average pay level is in part a function of what? (therefore, what do financially healthy and unhealthy employers do?)
> is in part a function of financial circumstances.
> Financially healthy employers may wish to maintain their competitive position in the labour market or even to share outstanding financial success through bonuses and profit sharing.
> Conversely, financially troubled employers may not be able to maintain competitive market positions.
What is the turnover effect?
> The turnover effect recognizes the fact that when people leave (through layoffs, quitting, or retiring), they are typically replaced by workers earning a lower wage.
Although there is little research to support this conclusion, employees undoubtedly compare their pay increases to what?
> the cost of living
changes in wages in labour markets are measured by what?
> pay surveys
goods/service market price changes are measured by what?
> are measured by several government indices, one of which is the consumer price index (CPI).
Employees cost of living is measured by what?
> personal expense budgets
The cost of living is more difficult to measure because employees’ expenditures depend on many things: marital status, number and ages of dependents, personal preferences, location, and so on.
The cost of living is more difficult to measure because employees’ expenditures depend on many things: marital status, number and ages of dependents, personal preferences, location, and so on.
How are the changes in wages, goods/service market prices, and cost of living all interrelated?
> The three concepts are interrelated.
> Wages in the labour market are part of the cost of producing goods and services, and changes in wages create pressures on prices.
> Similarly, changes in the prices of goods and services create needs for increased wages to maintain the same lifestyle.
the CPI does not necessarily reflect an individual employee’s cost of living. Instead, it measures what?
> it measures changes in prices over time. Changes in the CPI indicate only whether prices have increased more or less rapidly in an area since the base period.
The CPI is of public interest because of what?
> The CPI is of public interest because changes in it trigger changes in labour contracts, Old Age Security payments, federal and military pensions, and social assistance, as well as employers’ pay budgets.
Tying wages/or budget to CPI is called what?
> indexing
What are merit grids used for and why do we use them?
> merit grids are often used to decide how to distribute that merit budget in a way that accomplishes management’s objectives for the pay system and meets the organization’s goals.
> Merit increase grids help ensure that different managers grant consistent increases to employees with similar performance ratings and in the same position in their pay ranges.
> Additionally, merit grids also help control costs.
Bottom-up budgeting requires managers to do what?
> Bottom-up budgeting requires managers to forecast the pay increases they will recommend during the upcoming plan year.
In bottom-up budgeting, what are the 8 components that are required?
1) Instruct managers in compensation policies and techniques.
2) Distribute forecasting instructions and worksheets.
3) Provide consultation to managers.
4) Check data and compile reports.
5) Analyze forecasts.
6) Review and revise forecasts and budgets with management.
7) Conduct feedback with management
8) Monitor budgeted versus actual increases.
What responsibility falls under the bottom-up form of budgeting?
> This approach to pay budgeting requires managers to plan the pay treatment for each of their employees. It puts responsibility for pay management on the managers. The compensation manager takes on the role of adviser to operating management’s use of the system
One of the most common approaches to reducing benefits costs recently has been the switch from what two plans? What is one other way?
> has been the switch from defined benefit pension plans to defined contribution pension plans.
> Adopting a flexible benefits plan or raising the employees’ share of healthcare costs (e.g., coinsurance and deductibles) will also help control the average benefit costs.
Managing compensation ethically is increasingly complicated, for several reasons. List 2 and what is the main point?
1) pay really matters; it is important to all of us.
2) there is fierce pressure to get results.
> The point is that measures of financial performance do not provide an immutable “gold standard.” They can be “managed.
Performance-based pay is not the only area that presents ethical dilemmas. what other compensation tasks pose these?
> Misusing and even failing to understand survey statistics, manipulating job evaluations, masking overtime and pay discrimination violations, and recommending pay programs without addressing their expected costs and returns should force compensation professionals to take a hard look at what they are doing.
Pay systems have two basic processes that serve to control pay decision making:
(1) controls that are inherent in the design of the techniques, and
(2) the formal budgeting process discussed above.
Pay ranges set what?
> Pay ranges set the maximum and minimum dollars to be paid for specific work.
Under pay ranges, what can be said about the maximum?
> The maximum is an important cost control. Ideally, it represents the highest value the organization puts on the output of the work.
> range maximum represents the maximum worth of the work produced in a particular job to the organization.
Pressures to pay above the range maximum occur for a number of reasons:
> when employees with high seniority reach the maximum or when promotion opportunities are scarce.
What happens when an employee is paid above the maximum? what do employers do in this instance?
> when employees with high seniority reach the maximum or when promotion opportunities are scarce.
> Most employers “freeze” red circle rates until the ranges are shifted upward by market update adjustments so that the rate is back within the range again
What can be said about pay range minimums?
> Range minimums are just that: the minimum value put on the work. Rates below the minimum are often used for trainees.
Can rates below the minimum happen?
> Rates below minimum may also occur if outstanding employees receive a number of rapid promotions and rate adjustments have not kept up.
What are green circle rates?
> Green circle rates refer to the situations where employees are paid below the range minimum. Where these occur, they are usually swiftly increased to the range minimum.
If red and/or green circle rates become common throughout an organization, what should happen?
> the design of the ranges and the evaluation of the jobs should be reexamined.
What are broad rate bands accompanied by?
> the design of the ranges and the evaluation of the jobs should be reexamined.
Range midpoints reflect what?
> Range midpoints reflect the pay policy line of the employer in relation to external competition.
To assess how managers actually pay employees in relation to the midpoint, what is used?
> To assess how managers actually pay employees in relation to the midpoint
A compa-ratio of less than 1 means what?
> means that, on average, employees in that range are paid below the midpoint. This means that managers are paying less than the intended policy.
> There may be several valid reasons for such a situation. The majority of employees may be new or recent hires, they may be poor performers, or promotion may be so rapid that few employees stay in the job long enough to get to the higher end of the pay range.
A compa-ratio greater than 1 means what?
> A compa-ratio greater than 1 means that, on average, the rates exceed the intended policy. The reasons for this are the reverse of those mentioned above: a majority of workers with high seniority, high performance, low turnover, few new hires, or low promotion rates
Another control designed into pay techniques is what in relation to job descriptions? What two systems are also used?
> Another control designed into pay techniques is the mutual sign-off on job descriptions required of supervisors and subordinates.
> Another is slotting new jobs into the pay structure via job evaluation, which helps ensure that jobs are compared on the same factors.
> Similarly, an organization-wide performance management system is intended to ensure that all employees are evaluated on similar factors.
What is the essence of variable pay? How does it compare to merit pay?
> Another is slotting new jobs into the pay structure via job evaluation, which helps ensure that jobs are compared on the same factors. Similarly, an organization-wide performance management system is intended to ensure that all employees are evaluated on similar factors.
What kind of cost effects does merit pay have?
> compounding effects
The general labour cost model shows that the greater the ratio of contingent to core workers, and variable pay to base pay, the greater the variable component of what costs and what associated with those costs?
> the greater the variable component of labour costs, and hence, the greater the options available to managers to control these costs.
What is done prior to recommending pay increases? When is this process also used?
> Costing out wage proposals is commonly done prior to recommending pay increases. It is also used in preparation for collective bargaining.
handful of companies, supported by consultants and researchers, are beginning to analyze what about pay decisions? what does this analysis require?
> are beginning to analyze the value added (or return on investments) of pay decisions
> This analysis requires a shift in how compensation is viewed (Compensation becomes an investment as well as an expense and therefore decisions are based on analysis of the return on this investment)
Treating compensation as an investment and employees as human capital risks what?
> risks losing sight of them as people.
> The fairness objective must not get lost in the search for return on investment.
Compensation communicates. What does this mean?
> It signals what is important and what is not.
Employees’ understanding of the pay system is shaped through what?
> is shaped through the paycheques they receive and through formal communication about their pay, their performance, and the market conditions in which their organization competes.
Two reasons are usually given for communicating pay information. What are they?
1) The first is that considerable resources have been devoted to designing a fair and equitable system that is intended to attract and retain qualified people and motivate performance.
2) The second reason is that, according to some research, employees typically misunderstand the pay system.
In the case of benefits as well, communication plays a potentially important role - why?
> because employees usually undervalue them!
WorldatWork, an international association of compensation and human resources professionals, recommends a six-stage process of communication, what are those six steps?
1) define the objectives (what are the goals - this step is important as it’s often overlooked)
2) obtaining the info (what is the current situation - collect information from executives, managers, and employees concerning their current perceptions, attitudes, and understanding of the compensation system)
3) Developing the strategy (What is the best overall approach - specifically a communication strategy)
4) Determining the media (What tools are most appropriate for the campaign)
5) Conducting the sessions (How should session be implemented for the campaign)
6) Evaluating the program (was the program successful and what were the unintended consequences)
If the pay system is not based on work-related or business-related logic, then the wisest course is to do what in communicating the pay system?
> the wisest course is probably to avoid formal communication until the system is put in order.
Many employers communicate what aspects to employees about their compensation?
> Many employers communicate the range for an incumbent’s present job and for all the jobs in a typical career path or progression to which employees can reasonably aspire.
> Some also communicate the typical pay increases that can be expected for poor, satisfactory, and top performance. The rationale is that employees exchange data (not always factual) and/or guess at normal treatment, and the rumour mills are probably incorrect.
Devotees of opening the books and financial training believe what?
> believe that these methods will improve attitudes and performance.
At minimum, perhaps the most important information to be communicated is what about pay systems?
> is the work-related and business-related rationale on which pay systems are based.
What role does compensation play when an organization restructures?
> Compensation often plays a singular role when organizations restructure
Pay changes can play two roles in any restructuring:
> pay can be a leading catalyst for change or a follower of the change.
> Shifts from conventional across-the-board annual increases to profit sharing or from narrow job descriptions and ranges to broad roles and bands signal major change to employees.
> As a catalyst, it communicates change more strongly and vividly than any rhetoric could. It helps drive recruiting and retention.
Whether pay is a leading catalyst for change or a follower of change, compensation managers need to learn what?
> need to learn how to implement and manage change.
> Not only do they need to know the strategic and technical aspects of compensation, but they need to learn how to bargain, resolve disputes, empower employees, and develop teams.
An important issue related to structuring the function revolves around the degree of what in a pay structure?
> revolves around the degree of decentralization (or centralization) in the overall organization structure.
> Decentralized refers to a management strategy of giving separate organization units the responsibility to design and administer their own systems.
What is a centralized pay structure? when does it work best?
> locates the design and administration responsibility at corporate headquarters.
> A centralized function is more likely to be found in smaller organizations and/or single-line-of-business organizations. This “one size fits all” approach is more likely to make sense when the entire company mostly competes in a single product market. This approach makes it easier to ensure accurate and timely delivery of pay and to ensure that pay records are accurate and complete.
When are decentralized pay structures used?
> However, in larger organizations and/or those compete in several product (or geographic) markets (e.g., IBM), compensation strategies need to be tailored to fit the different local market conditions. In such situations, the compensation function is likely to be decentralized and compensation professionals are embedded in each business unit.
Decentralizing certain aspects of pay design and administration has considerable appeal - how so?
> Pushing the responsibilities close to the local business units, managers and employees affected by them may help ensure that the decisions are business-related
What are some problems with decentralized firms?
> it might be difficult to transfer employees from one business unit to another.
> Problems crop up as a result of designing pay systems that support a subunit’s objectives but run counter to the overall corporate objectives.
> So, too, does the potential for pay discrimination.
The answer to issues arising from decentralization can be found in developing what?
> can be found in developing a set of corporate-wide principles or guidelines that all must meet.
Re-engineering the compensation function involves what?
> involves changing the process of paying people. It means reshaping the compensation function to make it more client- or customer-focused.
What activities is outsourcing good for?
> Outsourcing is a viable alternative in the compensation (and benefits) field as organizations struggle to cease doing activities that do not directly contribute to strategic objectives.
> These are often referred to as transactional activities, which are not unique to the organization and might be performed more effectively and at lower cost by an outside provider.
What activities are least likely to be outsourced?
> On the other hand, more transformational or strategic activities, such as deciding which pay-for-performance strategy would best align with the business strategy, are less likely to be outsourced
What are the advantages and disadvantages to outsourcing?
> Cost savings is the apparent major short-term advantage of outsourcing. Compensation experts can be laid off or retrained.
> Major disadvantages of outsourcing include less responsiveness to unique and specific employee–manager problems, less control over decisions that are often critical to all employees (i.e., their pay), and information leaks to rivals and competitors.
One of the major attacks on traditional compensation plans is what?
> is that they often degenerate into bureaucratic nightmares that interfere with the organization’s ability to respond to competitive pressures.
What are recommendations to help the traditional compensation plan?
> Some recommendations for reducing the controls and guidelines inherent in any pay plan are broadbanding to eliminate or at least reduce the impact of range maximums and minimums;
> replacing merit grids with bonuses to eliminate the link between the pay increase and the employees’ salary position in the pay range and performance rating;
> and replacing job evaluation with skill-based or competency-based plans to open up managers’ flexibility to assign employees to a wider variety of work, regardless of their pay.
Yet, permitting managers to be free to pay employees as they judge best rests on a basic premise - what is it?
> managers will use pay to achieve the organization’s objectives—efficiency, fairness, and compliance—rather than their own objectives.
A final issue related to pay design and management is what in terms of their key accountabilities?
> is the skills and competencies required in compensation managers.
Compensation software can transform data into useful information and guies decision making. Many software packages that serve a variety of purposes are available. What are 2?
> Some of them support employee self-service (ESS) and manager self-service (MSS).
