L01 Introduction

Question 1

Why does compensation matter? (3 aspects)

Answer 1

1) Employee motivation: Money is most powerful motivator
2) Firm performance: Labor costs affect bottom line
3) Society: public interest

Question 2

What is the turnover rate?

Answer 2

Percentage of employees in a workforce that leave during a year
Example: Turnover rate of 400% (20%): The average worker remains 1/4 of a year (5 years) in the firm.

Generally, lower rates are better for the firm as employees learn on the job.

Question 3

What are flat rates and piece rates?

Answer 3

• *Flat rate**: Fixed wage per hour not depending on produced output
• *Piece rate**: Variable wage depending on output (units)

Question 4

Give examples of incentives gone wrong

Answer 4

1) Hanoi rat massacre: Reward rat’s tails instead of dead rats
- > rats without tails running on the street
- > people operated rat farms
- > Learning: „You get what you pay for”
2) Private jails in US: Owner is friends with judge who sentenced more people and for a longer time

Question 5

Total compensation can be divided into…

Answer 5

…
Cash compensation
Benefits

Question 6

What are the 4 components of Cash compensation?

Answer 6

1) Base pay
2) Incentive pay: Related to performance, can be short-term or/and long-term, thus attracting people of different ability and risk attitude
3) Merit pay: Awarded for good performance in a given year, cannot be withdrawn
3) Cost of living: Adjustment to base pay due to location

Question 7

What are the 3 components of benefits?

Answer 7

1) Income protection: contributions to social security and health insurance
2) Work/life balance: home office, parental leave, flexible holidays/working times
3) Allowances: goods and services related to work (Car, phone, …)

Question 8

What are the disadvantages of benefits?

Answer 8

Benefits are…

1) not liquid, thus the value for the employee should be lower than for cash
2) Most benefits are inflexible

Question 9

Why do companies pay benefits?

Answer 9

Strategic opportunity: Benefits have different consumer values thus attracting different target employee groups

Question 10

What can companies offer in addition to cash compensation and benefits?

Answer 10

Offer relational returns:
Recognition/status
Employment security
Challenging work
Learning opportunities

Question 11

What are the 4 policies of the pay model?

Answer 11

1) Internal alignment
2) Competitiveness
3) Employee contributions
4) Management

Question 12

What are the 4 objectives of the pay model? Explain shortly.

Answer 12

1) Efficiency: sales performance, customer satisfaction, costs, quality
2) Fairness: trade-off between rewarding talent and equality and „fair” wage for all
3) Compliance: set pay rules within the law
4) Ethics: care about the way in which results are achieved

Question 13

C&B policies: Internal alignment. How to internally align pay? (2 principles)

Answer 13

1) equal pay for equal work
2) higher pay for jobs with higher importance/contributions to the organization

Question 14

C&B policies: Competitiveness. How to externally align pay?

Answer 14

+ above market pay attracts better employees
- above market pay affects bottom line

Question 15

C&B policies: Employee contributions. How to reward them? (3 questions)

Answer 15

1) Incentives yes/no?
2) If yes, on team or individual base? Individual incentives drive inequality, group incentives enable free riding.
3) How strong should the incentives be (high-powered, weak)?

Question 16

C&B policies: Management. (3 aspects)

Answer 16

1) Have costs in mind
2) Pay affects performance, hiring, retention, employee attitudes…
3) Align C&B practices with overall HR and business strategy