Chapter 9 Flashcards
What is the role of HR in Compensation Systems
Purpose of Compensation Systems: Cash and non-cash rewards employee receive in exchange for their work.
Types of compensation:
Direct compensation: includes wages paid and variable pay such as bonuses, commissions, and stocks
Indirect compensation: includes employee benefits and services
The perception of fair and adequite pay is based on absolute and relative levels of pay. (the total they are paid (absolute) vs how much others are paid (relative))
When compensation is perceived as inappropriate:
- Performance, motivation, and satisfaction may decline dramatically
- Turnover may occur
- Dissatisfaction with absolute or relative pay
What is a total compensation model?
What are the benefits and what are the components of the model?
Total compensation model: Inclusion of everything employees value in an employment relationship and includes base wages, variable pay, perks and on-site amenities, status/recognition, and benefits.
Not all value is monetary. (Hazard free environment, respect, ability to influance others and have autonomy)
Total reward leads to:
- Easier recruitment of high-quality staff
- Lower turnover
- Higher performance
- Enhanced employer reputation
Components of compensation:
- Compensation (wages, bonuses)
- Benefits (Vacation, health/dental)
- Security (stable and consistent)
- Status (respect)
- Work variety
- Workload
- Work importance
- Authority
- Advancment
- Feedback
- Work conditions
- Development opportunity
What is internal equity and external equity? and what are the objectives sought through effective compensation?
Internal equity: Perceived equity of a pay system across different jobs within an organization
(the jobs within a company should have simmilar pay when they have simmilar value)
External equity: Perceived fairness in pay relative to what other employers are paying for the same type of work. (paying workers at a rate that is percieved to be fair compared to the market)
Objectives of effective compensation:
- Acquire qualified personnel
- Retain present employees
- Reward desired behaviour
- Control costs are reasonable
- Comply with legal regulations
What are the phases of compensation management?
Phase 1: Compensation Philosophy
Phase 2: Job analysis
Phase 3: Pricing Jobs
Phase 4: Matching Employees to pay
What happens in Phase 1 Establishing the Compensation Philosophy?
Compensation philosophy: the guiding principal for how the organization manages its compensation (connecting the orgs mission and employee pay)
3 compansation philosophies:
- Lead startegy: companies pay rates are higher than the reletave market
- Matching strategy: companies pay rates are matching the reletave market
- Lag strategy: companies pay will be lower than the reletave market (controlling costs)
What happens in Phase 2 Reviewing the Job Analysis?
Understand the elements of the job and the skills that are needed to conduct the job by examining job analysis information.
Items used when conducting analysis:
- Job discription
- Job specification
- Performance standards
What happens in Phase 3 Pricing Jobs? and what are the three approaches to pricing jobs?
The phase that determines the worth of each job.
3 approaches to pricing jobs:
- Job evaluation
- Market pricing
- Skilled based evalution
What is job evaluation?
How does this approach to pricing jobs identify who should be paid more (3 things)?
Job Evaluation: Systematic procedures to determine the reletave worth/value of jobs (internal equity). Assessing job content and ranking jobs according to a consistent set of job characteristics and worker traits. (which jobs should be paid more?)
Job Ranking: A form of job evaluation in which jobs are ranked subjectively according to their overall worth to the organization best suited to small orgs. Doesnt differentiate the importance of jobs, but is the simplest method.
Job Grading: A form of job evaluation that assigns jobs to predetermined job classifications according to their relative worth to the organization.
Point System: A form of job evaluation that assesses the relative importance of the job’s key factors in order to arrive at the relative worth of jobs. (more difficult to develop but most precise of methods)
What is Market-Based Pay Strucure?
Determines the pay for jobs based on what their competitors are offering for similar work (external equity)
Firms usually use wage and salary surveys which discover what other employers in the same labour market are paying for specific jobs (importance of position to fill will widen the labour market such as local community labour vs all of canada or worldwide).
Pay percentiles:
- Matching the market: targeting the 50th percentile (pay at the middle or average of other organization)
- Market leader: paying at the 75th percentile. (75% of competitors will pay less for the same job)
- Market lag: Paying at the 25th percentile (25% of compitition pays less) this can usually be the case when the company is offering more non-monetary compensation like growth oppertunities or has loose labour market.
What is Skill-based pay? and are the two forms?
A pay system based on the employee’s mastery of skills or knowledge (in contrast to the more common job-based pay).
Pay is based on depth (gaining greater expertise in existing skills), breadth (increases in the employee’s range of skills), and self-management (gaining higher level management-type skills, such as budgeting, training, planning, and so forth)
Form 1: Pay based more on depth of skills (apprentise vs master carftsperson)
Form 2: Pay based on flexability and balance of depth, breadth and self management. (most common in factories, call centers and help desks) Greatest advantage is the flexability of workforce.
What happens in Phase 4 Matching Employees to Pay?
The final step in the compensation process that integrates the data obtained from job evaluations and market-pricing/skill-based approaches to establish the actual pay level for each job.
Based on the job evaluation ranking, survey wage rates and/or skilled based data a scattergram is created and a wage-trendline is formed for that specific job and base wage is determined.
For companies with many of the same position, higher preformance and tenure warrant a merit raise (pay increase given to individual workers according to an evaluation of their performance).
A rate range (pay range for each job) should be created to address merit raises.
What are some of the key challanges affecting compensation?
Prevailing wage rates: Market forces like short supply of specialists indicate that a job must be paid more than its reletave worth (firms that need the specalists will pay a premium) The opposite is also true, some firms pay less such as when someone is newly hiored and is paid less unitl they have leared the basics of the job.
Union power: Unions has the power to bargin for higher wages. Unions also control most skilled trades and can raise rates for all those jobs
Productivity: The long term productvity of employees directly effects the pay companies can give employees while remaning profitable.
Wage & salary policies: these policies move the wage-trendline upward. (Ex: increases in cost of living increasing pay)
Employment standards and Labour codes: Ex: minimum wage, annual vacations, holidays and hours of work
What is wage compression?
When minimum wage is increase and wages already at that level are not adjusted aong with this increase.
What is Variable pay?
Incentives link pay to performance or productivity for part of or all income.
Objectives:
1) Improve business performance
2) Keep compensation compitive
3) Enhance employees
Most common incentive plans:
- Individual: Focused on reward the accomplishment of specific results.
- Team/group: Focused on incentives that are based on the performance of a group or work team. (used when it is difficult to seperate individual contributions)
- Profit-sharing plans: Focused on incentives that share the companies profits with workers and the ownership of company stock
What are the most common types of individual incentive plans?
Piecework: A type of incentive system that compensates workers for each unit of output. (output of units * unit rate) Used as daily or weekly pay
Production Bonuses: A type of incentive system that provides employees with additional compensation when they surpass stated production goals. Used alongside wage or salary and rewards extra effort.
Comissions: Most common in selling jobs. Salesperson is paid a percent of selling price or flat amount for each unit sold. Most of the time the salesperson in the highest sales quotas will get higher comission rates.
Discretionary bonus plans: Employees are paid base wages and then are paid bonuses at the discretion of management based oon performance. Typically a bonus pool is determined then allocated at the end of a period some employees may get no bonuses.
Spot awards: recognize special contributions as they occur and rewards can range from gifts to paid time off or salary increases.
