Chapter 8 - Pay Structure Decisions Flashcards
What are the goals of compensation?
- attract
- retain
- and motivate employees
What are type of costs are the largest cost category for most firms?
Compensation costs.
- usually 50-80% of total costs
- varies by industry, highest costs in services such as universities
What was the main point made by Deaton and Kahneman (2010)?
High income improves evaluation of life but not emotional well-being.
- income and life are consistently correlated
- income correlated with lower stress
- income and happiness levels at an individual salary of 75k
What is direct vs indirect compensation?
Direct compensation is the base pay or pay incentives that an employee receives. ex. Commission
Indirect pay however is the combination of non-cash benefits that an employee receives, such as insurance or vacation time.
What does pay signal? (compensation strategy)
- pay signals what is valued by an organization, through three ways:
1) The value of the job (pay structure and variation in pay compared with other positions)
2) Value of an employee
3) Value of particular behaviours/performance
both of these relate to individual pay, the variation in pay due to performance
What are the two ways to establish a pay structure?
External equity: market pricing
Internal equity: Job evaluation
When developing a strategy based on the market, what is considered?
- what is necessary to attract qualified individuals from the labour market?
Salary surveys:
- bench marking pay against competitors
- provides salary range, median and percentiles
- Can sort by region or industry
What does a compensation strategy based on a job eval consider?
- job evaluation is the process of determining relative worth of jobs within an organization
(reflected in different pay levels) - the purpose is foster internal equity (pay levels are based on consistently applied criteria)
What is the optimal compensation strategy?
- optimal compensation strategy is one that adds the most value to the firm
What is self determination theory in a nutshell?
it states that we essentially need three things in life:
- Autonomy: the ability to do the tasks one believes in by themselves
- Relatedness: a sense of belonging; care for and being cared by others
- Competence: a sense of purpose and mastery in your environment
Is money motivational?
The “yes” view.
- people will be more willing to do certain things if doing them results in (more money)
“Money is the crucial incentive” (Locke et. al)
The “no” view
- HBR article (Pfeffer” called idea that people are primarily motivated by money a “myth”
What did Dan Pink argue in his Ted Talk, “the puzzle of motivation”?
- Creativity is greatly diminished when pay is offered for performance of a given task
- There is a difference in what science knows and what business does
- we can strengthen our businesses by creating an environment that promotes interest and personal reward
What is the bottom line when it comes to motivation?
- motivation is multifaceted
- money can motivate
- however, we don’t understand the extent to which different factors effect this ex. size of reward
- we do know that intrinsic motivation is important and influential.
- SDT states the importance of autonomy, relatedness, and competence are pivotal in motivation.
What are the 6 classes of motivation?
In order from least motivation to greatest:
Amotivation: does not pursue behaviour
External Regulation: do activity to obtain reward/avoid punishment
Introjected regulation: do activity because you should
Identified regulation: do activity because you identify with its value
Integrated regulation: do activity because it is part of your sense of self
Intrinsic motivation: doing activity because it is satisfying
What did the Lazear (1986) study of glass installation co. reveal?
After switching from salary to individual incentives:
- productivity increased by 44%
- 50% of productivity gains came from individual incentives - 50% from sorting - some people left; replaced by more productive employees.
What is a stock ownership plan?
- granting shares or share options to employees
- portion of salary as shares or share options
- ESOP (most common)
What is profit sharing?
- pay based on organizational performance
- pay is a base salary, with bonuses given to employees from the success of the org.
What is gainsharing?
- a form of compensation based on group or plant performance
- bonuses are got from productivity, cost improvements of business unit
- portion of gains are shared with employees
2 key differences from profit sharing:
- based on unit’s performance not entire organization
- more frequent payouts (monthly or quarterly)
What is equity theory?
Main idea: individuals are motivated by fairness.
- the higher a person’s perception of equity, the higher their motivation, and vice versa
What is fixed compensation?
pay remains constant regardless of performance
what is variable compensation?
pay is directly linked to quality of performance
What did Dan price do with his company’s compensation?
- decided to change his company’s pay policy
- raised minimum salary to 70k
- lowered his personal salary from over 1 million to 70k
- though living under 70k was absurd.
