Chapter 8: Rewarding Employees Flashcards
What three points should well-designed compensation packages address?
- Attract high-quality job applicants
- Motivate employees to be high performers
- Encourage long-term employee retention
What are the four components of an overall compensation package?
- Base pay
- Short-term incentives
- Long-term incentives
- Benefits
When do employees consider their pay as fair?
Employees are more likely to consider their pay fair if they understand the principles on which it is based.
Which points of a well-designed compensation package does base pay adress best?
- Most effective in attracting and retaining; low in motivating
What is external based wage-setting?
managers look at what the market is paying for similar positions. Most useful when organizations are filling jobs from outside and are common in all firms (firm-general jobs)
What are firm-general jobs?
skills and responsibilities are common across organizations.
What is the problem of external based wage-setting?
defining the market you are comparing to and consideration whether you want to match market or pay differing amount.
What is internal based wage-setting?
comparing across jobs within organizations. More useful for firm-specific jobs. The longer people remain within company, the less useful external market comparison becomes.
What are firm-specific jobs?
jobs unique to your company that do not have an adequate market comparison
What are job ladders?
People from outside are hired into lower rungs of ladder and move up as they gain more firm-specific skills and move to higher salary ranges.
- Once employees are past lower rungs; managers should complement market pricing with job evaluations to determine a job’s worth to company.
What is a job evaluation and how can it be used in setting base pay?
you are trying to determine the relative value of dissimilar jobs and determine the worth of each job by establishing a hierarchy of jobs within organization. Identify a set of dimensions (compensable factors) that are common to all jobs.
What is wage compression?
Wage compression occurs when there is only a small difference in pay between employees regardless of their skills, experience, seniority, or job responsibilities. It can happen when new hires are paid more than or close to the rate of an employee who has been in the job for a long time, potentially causing rifts within the workforce.
What is the point-factor job evaluation method?
organization differentially weights dimensions to reflect strategic goals and there is a score for every job in the organization. Jobs with similar value are grouped together and ranked according to their relative value. To assign wages, companies use firm-general jobs as benchmark jobs and slot firm-specific jobs into pay hierarchy by comparing their value to the firm-general jobs.
What is the main disadvantage pf the point-factor job evaluation method?
wage compression
What is job levelling?
organization uses compensable factors to define a series of job levels and ten compare the unique job description against most relevant grade description to set wages for individual jobs.
What are short-term incentives?
Monetary rewards for performance based on a period of less than one year
What points of a well-designed compensation package are short-term incentives most effective for?
- Most effective in attracting and motivating
What are individual bonuses?
bonus is only handed out to employees if they meet performance criteria. No guarantees for next pay period. Trade-off between base pay and individual bonuses: must meet local standards (minimum wage) and suffice in meeting basic needs (living wage).
Name 3 common types of short-term incentives?
- Individual bonuses
- Group bonuses
- Gainsharing
What is gainsharing?
financial gains achieved on organizational level due to improved productivity are shared with employees.
What are group bonuses?
bonus for team based on team performance. Encourages team members to collaborate due to mutual dependency.
What is the main disadvantage of bonus systems?
excessive focus on goal achievement that employees will neglect other parts of job or solely focus on reaching the goal at all costs.
What are nondiscretionary bonuses?
organizations set specific criteria for each employee that need to be met to receive a bonus. Most likely to result in dysfunctional effects.
Promised in advance if certain criteria are met
What are discretionary bonuses?
not promised in advance (e.g. spot bonuses)
What are spot bonuses?
bonuses that highlight special contributions and situations where employees have gone above and beyond the employer’s expectations.
What are long-term incentives?
Monetary rewards for performance that spans periods of more than 1 year
What points of a well-designed compensation package are long-term incentives most effective for?
- Most effective in attracting and retaining; low in motivating
Name three common types of long-term incentives?
- Profit sharing plans
- Stock options
- Employee stock ownership plans
What are profit sharing plans?
employees receive a payment based on company’s profit next to base pay. Employees need to increase profit to earn more money themselves. Reduces turnover and improves company performance.
What are stock options?
opportunities for employees to purchase specified number of shares of a company stock in future at guaranteed price. Options cannot be exercised unless they are vested.
What are employee stock ownership plans and how do they work?
company contributes shares of stock to a trust that holds stock in individual employee accounts and employees earn stock based on pay and seniority. Trust distributes stock to leaving employees and employees can sell their stock back to company for a cash payment. Improves company performance and employee pay. More resilient during economic crises.
What are benefits?
All forms of agreed upon nonmonetary compensation
What points of a well-designed compensation package are benefits most effective for?
- Most effective in attracting and retaining; low in motivating
Name three trends in benefits offered?
- Shifting employee preferences
- Customized benefits
- Greater trend towards pay transparency
How have changes in employee preferences changed benefits offered?
flexible working arrangements are becoming more popular
What are customized benefits?
organizations allow employees to choose benefits best suited for their situation and prevents wasted benefits. Usually offered a core benefits package. Make sure employees understand the monetary value of the benefits you offer. Leads to perception of pay fairness.
What are the benefits of more pay transparency?
- enhances trust in management,
- employee engagement and
- reduces employee turnover.
What is merit pay?
Merit pay: increase in base employees can receive based on individual performance, usually expressed in %. But, merit pay increases are small, minimal threshold is 7% increase, uncommon. And merit pay usually doesn’t differentiate outstanding performance from run-of-the-mill performance.
