Chapter 9 - Managing Compensation Flashcards
What is the importance of an organization’s pay system?
-Helps attract and retain top talent and motivate employees
-Drives employees’ behaviours that are pivotal to achieving strategic objectives
-Send important signals on its values
-Increases employee loyalty
What are the three main components of compensation?
-Direct Compensation: Employee wages, salaries, incentives, bonuses, and commissions
-Indirect Compensation: Benefits supplied by employers
-Non-financial Compensation: Employee recognition programs, rewarding jobs, organizational support, work environment, and flexible work hours
What is strategic compensation?
-Compensation of employees in ways that enhance motivation and growth, while aligning these efforts with the objectives, philosophies, and culture of the organization
-Links compensation to the organization’s mission and general business objectives
-Serves to mesh the monetary payments made to employees with specific functions of the HR program (ex. rate of pay increases/limits the supply of applicants)
What are the common goals of a strategic compensation policy?
-Reward employees’ past performance
-Remain competitive in the labour market
-Maintain salary equity among employees
-Mesh employees’ future performance with organizational goals
-Control the compensation budget
-Attract new employees
-Reduce unnecessary turnover
-Motivate employees
What does the equity theory say about the motivating effects of an organization’s compensation system?
-An employee’s pay must be equitable to their contributions
-An employee’s pay must be equitable to what other employees are receiving for their contributions
-The strength of an employee’s motivation is proportional to the magnitude of perceived inequity
-Equity is achieved when an employee’s perceived input/output ratio = input/output ratio of referent others
-Internally equitable compensation policies exist when employees believe the wage rates for their jobs approximate the job’s worth to the organization
-Externally equitable compensation policies exist when the organization pays wages relatively equal to what other employers pay for similar types of work
What does the expectancy theory say about the motivating effects of an organization’s compensation system?
-Employees should exert greater work effort if they have reason to expect that this will result in a reward that is valued –> Attractive monetary reward
-Employees must believe that good performance is valued and results in receiving the expected reward
-For the reward to be motivational, it must have high:
(a) Valence: Reward is valued by the employee
(b) Instrumentality: Belief that the attainment of goals/objectives will result in the promised rewards
(c) Expectancy: Belief that the goals are challenging, but attainable
How can management contribute to employees’ accurate perception of pay?
-Effective communication of pay information (knowledge and understanding of the compensation program’s strategic objectives)
-Organizational environment eliciting trust in management
What is hourly work compensation?
Work paid on an hourly basis
What is piecework compensation?
Work paid according to the number of units produced
What are the differences between hourly and salaried employees?
-Hourly employees are compensated on an hourly basis, while salaried employees’ compensation is computed on the basis of weekly, biweekly, or monthly periods;
-Hourly employees are paid only for the time they work, while salaried employees may work fewer/more hours but receive the same pay;
-Salaried employees receive certain benefits.
Are employment practices federally-regulated, or provincially-regulated?
Employment practices are a provincial jurisdiction. Every province has its own employment standards act.
How does overtime pay work?
Each provincial employment standards act contains a provision requiring the employer to reimburse the employee at a specific rate, after working the minimum required hours (eg. 1.5x base hourly rate of pay, or time-off equivalent).
Who usually receives overtime pay?
Supervisory and management personnel are not usually paid overtime (“exempt roles”).
What are the internal factors that influence wage rate?
-Employer’s compensation strategy
-Worth of a job
-Employee’s relative worth in meeting job requirements
-Employer’s ability to pay
What are the external factors that influence wage rate?
-Conditions of the labour market
-Area wage rates
-Cost of living
-Collective bargaining
-Legal requirements
At a minimum, what should pay policies reflect?
- The internal wage relationship among jobs and skill levels
- The external competition or an employer’s pay position, relative to what competitors are paying
- A policy of rewarding employee performance
- Administrative decisions concerning elements of the pay system (eg. overtime premiums, payment periods, short- or long-term incentives)
How should be the worth of a job be evaluated, in an organization without a formal compensation program?
On the subjective opinions of people familiar with the jobs (eg. labour market, collective bargaining)
How should be the worth of a job be evaluated, in an organization with a formal compensation program?
Based on a system of job evaluation to aid in rate determination
What should be the worth of a job based on?
More than just market prices, or an internally driven job evaluation program!
A job’s value should be based on the total value delivered to the organization.
Why is it important to value work properly?
-Enables organizations to price “important” jobs effectively
-Provides insight into how a job relates to overall organizational success
-Attracts and retains the right talent to drive organizational performance
How can employee performance be recognized and rewarded?
-Promotion
-Various incentive systems, such as merit raises
What makes for ineffective merit systems?
-Many of them provide for raises to be granted automatically
-When organizational salary budgets are low, may lack motivational value
What are pay levels limited by?
-Earned profits and other financial resources available to employers;
-Productivity of its employees: Performance and investments in labour-saving equipment
-Economic conditions, competition
How can increases in capital investment provide higher employee pay?
Increases in capital investment reduce the number of employees required to perform work, such that those who are employed receive higher pay
What does the labour market reflect?
The forces of supply and demand for qualified labour within an area, which influence the wage rates required to recruit or retain competent employees
What counterforces reduce the impact of supply and demand on the labour market?
-The economic power of unions;
-Government regulations
What are area wage rates?
The principle whereby a formal wage structure should provide rates in line with those being paid by other employers for comparable jobs within the area
Where is data pertaining to area wage rates obtained?
-Local wage surveys
-Compensation consulting firms
-Conference Board of Canada
-Professional associations
Why are wage surveys important?
-They provide external wage equity between the surveying organization, and other organizations competing for labour in the surrounding labour market;
-They prevent rates from drifting too far above/below those of other employees
What additional consideration do wage surveys data need?
Account for indirect wages paid in the form of benefits.
What is the consumer price index (CPI)?
A measure of the average change in prices over time in a fixed ‘market basket’ of goods and service, that adjusts compensation rates accordingly
What are the important consequences of CPI figures in an organization?
They determine organizational morale and productivity, by enticing employers to grant wages based on “cost-of-living” figures, and to give “cost-of-living” paymnets as “entitlments”
What are escalator clauses?
Clauses in collective agreements that provide for quarterly cost-of-living adjustments in wage, basing the adjustments on changes in the consumer price index.
What are real wages?
Wage increases larger than rises in the CPI, that is, the real earning power of wages.
How does collective bargaining play a role in wages?
Wages are generally higher in areas where organized labour is strong, as non-union employers will need to meet or exceed the unionized rate to recruit and retain competent personnel.
What is job evaluation?
A systematic process of determining the relative worth of jobs, to establish which jobs should be paid more than others.
What does job evaluation help establish?
Internal equity between various jobs, by comparing the relative worth of a job to others in the organization, or by comparing it to a scale constructed for this purpose
What are the three methods for job evaluation?
-Job ranking system
-Job classification system
-Point system
What is a job ranking system?
The simplest and oldest system of job evaluation, by which jobs are arrayed on the basis of their relative worth
How is job ranking undertaken?
Raters arrange cards listing the duties and responsibilities of each job, in order of the importance of the jobs
Who undertakes job ranking?
-A single individual knowledgeable about all jobs; or
-A committee composed of management and employee representatives
What are the disadvantages to a job ranking system?
-Does not provide a very precise measure of each job’s worth
-The final ranking of jobs indicate the relative importance of jobs, not the differences in the degree of importance between jobs
-Can be used only for a small number of jobs
What is a job classification system?
A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades.
Why is a job classification system less effective than the point system?
It is less precise, as the job is evaluated as a whole.
What is the point system?
A quantitative job evaluation procedure that determines the relative value by the total points assigned to it.
What are the advantages of the point system?
-Provides a more refined basis for making judgments, hence results that are more valid and less easy to manipulate.
What are jobs evaluated quantitatively against, in the point system?
Compensable factors, such as the skills, efforts, responsibilities, and working conditions that a job entails.
In the point system, are all compensable factors equally valued?
No, they are assigned weights according to their relative importance to the organization, and then divided into a number of degrees (different levels of difficulty associated with each factor).
