Lecture 4 Flashcards
What are the three elements comprising total compensation?
- Base compensation
- Pay incentives
- Indirect compensation/Benefits
Why design a compensation system?
- To Enable firm to achieve its strategic objective
- To Mold to the firm’s unique characteristics and
environment - Internal equity: perceived fairness internally
- External equity: perceived fairness externally
What are the nine criteria for developing a compensation plan?
- INTERNAL VS EXTERNAL EQUITY
Will the Compensation Plan be perceived as fair within the company, or will it be perceived as fair relative to what other companies are paying for the same type of work? - FIXED VS VARIABLE PAY
Will compensation be paid monthly on a fixed basis or will it fluctuate depending on pre-established criteria such as performance and company profits? - PERFOMANCE VS MEMBERSHIP: Will Compensation emphasise performance and tie pay to individual or group contributions, or will it emphasise membership in the organisation – logging in a prescribed hours each week and progressing up the organisational ladder?
- JOB VS INDIVIDUAL PAY
Will compensation be based on how much a company values a particular role or will it be based on how much skill and knowledge an employee brings to that job? - EGALITARIANISM VS ELITISM
Will the compensation plan place most employees under same CS, or will it establish different plans by organisational level and/or employee group? - BELOW-MARKET VS ABOVE-MARKET
Will employees be compensated at below market levels, at market-levels, or above-market levels? - MONETARY VS NONMONETARY AWARDS
Will the compensation plan emphasise motivating employees through monetary means such as stock and pay or will it stress non monetary awards such as interesting work and security? - OPEN VS SECRET PAY
Will employees have access to information about other workers’ compensation levels and how compensation decisions are made or will this knowledge be withheld from employees? - CENTRALISATION VS DECENTRALISATION OD PAY DECISIONS
Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firm’s units?
What are the the equity compensation systems?
- Distributive justice model
- Labour market model
- Balancing equity
What is the trend in terms of compensation entitlements?
- Shift to Variable Pay Plans Continues
- Race to the Bottom: Mexico Lowers Wages to Snare International Auto Production
- Making Wage Concessions at Airlines
- Pensions Going Up in Smoke
- Medical Doctors Being Squeezed
- Documenting Pay Cuts Around the World
What are the characteristics of Job-Based policies?
- Technology is stable
- Jobs do not change often
- Employees do not need to cover for one another frequently
- Much trainings required to learn a given job
- Turnover is relatively low
- Employees are expected to move up through the ranks over time
- Jobs are fairly standardised across the industry
What are the characteristics of Individual-based policies?
- The firm has educated workforce with the ability to learn different jobs
- The company’s technology and organisational structure change frequently
- Employee participation and teamwork are encouraged
- Opportunities for upward mobility are limited
- Opportunities to learn new skills are present.
- Costs of employee turnover and absenteeism are high
- The plans are more common in manufacturing environments
How do we achieve internal equity?
Internal Equity
Step 1: Conduct Job Analysis Step 2: Write Job Descriptions Step 3: Determine Job Specifications Step 4: Rate Worth of All Jobs Using Predetermined System Step 5: Create a Job Hierarchy Step 6: Classify Jobs by Grade Levels
How do we achieve external equity?
External Equity
Step 1: Identify Benchmark or Key Jobs
Step 2: Establish Pay Policies
How do we evaluate job based compensation plans?
- Do not take into account the nature of the business
- This plan is more subjective and arbitrary
- These plans are less appropriate at higher levels within an organization
- With job descriptions becoming more generalized, these plans are more difficult to evaluate
- These plans tend to be more bureaucratic, mechanistic, and inflexible
- The job-evaluation process tends to be biased against women
- Wage and salary data are not definitive
- Employees’ perceptions of equity are what count
- High-tech skilled employees tend to not be loyal to one firm
What are the assumptions for the pay for performance model?
- Individual employees and work teams differ in how much they contribute
- The firm’s overall performance depends on the performance of individuals and groups
- To attract, retain, and motivate high performers, rewards are given relative to performance
Incentives may cause ________
unethical behaviours
Examples of unethical behaviours caused by incentives?
- Rewarding hospitals for quality care
- Gainsharing for doctors
- Doctors paid to prescribe generic pills
- Report cards for surgeons
- What doctors aren’t disclosing
- Use of orthopedic devices
Challenges of paying for performance
- “Do only what you get paid for” syndrome
- Unethical behaviour
- Negative effects on the spirit of cooperation
- Lack of control
- Difficulties in measuring performance
- Psychological contracts
- The credibility gap
- Job dissatisfaction and stress
- Potential reduction of intrinsic drives
How do we meet the Challenges of paying for performance?
- Use intrinsic and extrinsic rewards
- Link pay and performance appropriately
- Pay for performance
- Build employee trust
- Promote belief that performance makes a difference
- Use multiple layers of rewards
- Increase employee involvement
- Stress the importance of acting ethically
- Use motivation and nonfinancial incentives
What are the types of Pay for Performance plans?
A. MICRO LEVEL INDIVIDUAL 1. Merit Pay 2. Bonuses 3. Awards 4. Piece rate
TEAM
- Bonuses
- Awards
B. MACRO LEVEL BUSINESS UNIT/PLANT 1. Gainsharing 2. Bonuses 3. Awards
ORGANISATION
- Profit sharing
- Stock plans
What are the advantages of individual based plans?
- Performance that is rewarded is likely to be repeated
- Individuals are goal oriented; financial systems can shape a person’s goals
- Rewarding individual equity
- Fit with an individualistic culture
What are the types of individual based plans?
- Merit pay
- Bonus
- Awards
What are the disadvantages of individual based plans?
Disadvantages 1. May promote single-mindedness 2. Many do not see link between performance and pay 3. Quality goals may suffer 4. May promote inflexibility
When are individual based plans most likely to succeed?
- When the contributions of individual employees can be accurately isolated
- When the job demands autonomy
- When cooperation is less critical to successful performance
What are the characteristics of team based compensation plans?
- Cash or noncash
- Provide integral support for effective team
arrangements - Members rewarded equally
- Members decide on distribution
What are the advantages and disadvantages of Team based plans?
Advantages
- Foster group cohesiveness
- Aid in performance measurement
Disadvantages
- Lack of fit with individualistic culture
- Free-riders
- Social pressures to limit performance
- Identifying meaningful groups
- Intergroup competition
What are the advantages of Team based plans?
Advantages
- Foster group cohesiveness
- Aid in performance measurement
What are the disadvantages of Team based plans?
Disadvantages
- Lack of fit with individualistic culture
- Free-riders
- Social pressures to limit performance
- Identifying meaningful groups
- Intergroup competition
When are team based plans most likely to succeed?
- Work tasks are intertwined
- Implemented with team-based incentives
- Employees are intrinsically motivated
- Group goals exists
- Team-based incentives blend diverse backgrounds
What are the advantages of Plantwide plans?
Gainsharing
- Capitalize on intrinsically motivated employees
- Cost savings earned by treating employees better
- Can elicit active employee input and improve the production process
What are the disadvantages of Plantwide plans?
- Protection of low performers
- Problems with the criteria used to trigger rewards
- Management–labor conflict
What are the conditions favouriting plant wide plans?
Conditions favoring plantwide plans
- Firm size
- Technology
- Historical performance
- Corporate culture
- Stability of the product market
What are the advantages and disadvantages of plantwide plans?
ADVANTAGES
Gainsharing
1. Capitalize on intrinsically motivated employees
2. Cost savings earned by treating employees better
3. Can elicit active employee input and improve the production process
DISADVANTAGES
- Protection of low performers
- Problems with the criteria used to trigger rewards
- Management–labor conflict
What are the types of corporate wide plans?
- Profit Sharing
2. Employee stock ownership plan (ESOP)
What are the advantages of corporate wide plans?
Advantages
- Financial flexibility for the firm
- Increased employee commitment
- Tax advantages
What are the disadvantages of corporate wide plans?
Disadvantages
- Employees may be at considerable risk
- High exposure to macroeconomic forces
- Limited effect on productivity
- Long-run financial difficulties
What are the advantages and disadvantages of corporate wide plans?
Advantages
- Financial flexibility for the firm
- Increased employee commitment
- Tax advantages
Disadvantages
- Employees may be at considerable risk
- High exposure to macroeconomic forces
- Limited effect on productivity
- Long-run financial difficulties
What are the conditions favouring corporate wide plans?
- Firm size
- Independence of different parts of the business
- Market conditions
- The presence of other incentives
What do executive plans consist of?
- salary and short term incentives
- long-term incentives
- golden parachutes
- rewards and social responsibility
- perks
Who sets top management’s pay?
Directors and shareholders
What is the case of pay for performance in small firms?
- Active participation can generate greater commitment
- It’s easier for employees to discern their contributions
- Feedback should be given more often with the goal of helping employees see their contribution
- Offers the opportunity to attract and retain talent
- Increases employee identification with the firm
