L01 Introduction Flashcards
Why does compensation matter? (3 aspects)
1) Employee motivation: Money is most powerful motivator
2) Firm performance: Labor costs affect bottom line
3) Society: public interest
What is the turnover rate?
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.
What are flat rates and piece rates?
- *Flat rate**: Fixed wage per hour not depending on produced output
- *Piece rate**: Variable wage depending on output (units)
Give examples of incentives gone wrong
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
Total compensation can be divided into…
…
Cash compensation
Benefits
What are the 4 components of Cash compensation?
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3) Merit pay: Awarded for good performance in a given year, cannot be withdrawn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
What are the 3 components of benefits?
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, …)
What are the disadvantages of benefits?
Benefits are…
1) not liquid, thus the value for the employee should be lower than for cash
2) Most benefits are inflexible
Why do companies pay benefits?
Strategic opportunity: Benefits have different consumer values thus attracting different target employee groups
What can companies offer in addition to cash compensation and benefits?
Offer relational returns:
Recognition/status
Employment security
Challenging work
Learning opportunities
What are the 4 policies of the pay model?
1) Internal alignment
2) Competitiveness
3) Employee contributions
4) Management
What are the 4 objectives of the pay model? Explain shortly.
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
C&B policies: Internal alignment. How to internally align pay? (2 principles)
1) equal pay for equal work
2) higher pay for jobs with higher importance/contributions to the organization
C&B policies: Competitiveness. How to externally align pay?
+ above market pay attracts better employees
- above market pay affects bottom line
C&B policies: Employee contributions. How to reward them? (3 questions)
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)?
