Total Rewards Flashcards
Perquisites
Compensation provided on an individual basis in the form of goods or services. Examples of perquisites include automobiles and mobile devices.
Incentives or premiums
Payments in return for the achievement of specific, time-limited, targeted objectives. Often they are calculated as a percentage of base salary. Payment may be made in a lump sum or as ongoing payments over a specified period of time.
Direct compensation
pay systems, cash based rewards
Indirect compensation
Benefit and recognition programs
compensation philosophy
a short (but broad) statement documenting the organization’s guiding principles and core values about employee compensation
Compensation philosophy is first step of developing total rewards strategy
Steps to create Total Rewards Strategy
Assessment
Design
Implementation
Evaluation
Creating Total Rewards Strategy
Assessment
What is most important outcome?
Examination of current policies and practices
Examination of behaviors that are implicit in the organizational culture - should they be included? (consider negative behaviors that are overlooked and compensated for)
Most important outcome is ASSESSMENT REPORT: asks questions of who/what/when/why/how for total rewards strategy
Creating Total Rewards Strategy
Design
Senior management team of HR and department reps identify different types of rewards strategies and determine what will work best in the workplace
Decisions are made about what will be rewarded and what rewards (direct and indirect compensation) will be offered to employees for those achievements
Creating Total Rewards Strategy
Implementation
HR department implements new system, and circulates materials that communicate the new strategy to employees.
Training commences for managers and employees - managers measure achievement of strategy, employees are aware of rewardable behavior.
Creating Total Rewards Strategy
Evaluation
Measure effectiveness and success of rewards program
In compliance? Compatible w/ mission and strategy? Fit with culture and appropriate for workforce? Internally equitable? Externally competitive
Entitlement-oriented approach
Organizations are more caring and protective; believe employees are entitled to benefits such as healthcare, EAP, DB insurance as condition of employment.
In general, as benefits increase, there is less emphasis on individual employee contributions and responsibility and more emphasis on the success of the organization as a whole.
Contribution-oriented approach
Puts more emphasis on performance and individual contributions
These compensation systems emphasize performance-based pay, incentives, and shared responsibility for benefits.
Internal equity
Occurs when employees feel that performance or job differences (within the organization) result in corresponding differences in rewards that are fair
Also helps ensure legal compliance
External equity
Exists when employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations.
Pay strategy: lag market competition
Controls labor costs by setting pay rates below those of other organizations
May be used because of economic necessity
May enable an organization to offset other higher costs such as purchasing, distribution, or sales expenses
Typically will offer other benefits such as learning and development, attractive roles via career paths, etc.
Pay strategy: match market competition (“externally competitive”)
Offers wage rates and benefits packages similar to that of the competition
Often referred to as being externally competitive
Most common approach
Pay strategy: lead market competition
Offers higher wages and/or better benefits in an attempt to attract and keep the best talent
Rationalizes that higher-quality employees are more productive, which makes up for the higher salaries
Steps of Compensation system design
Job analysis
Job documentation
Job evaluation
Pay structure
Job analysis
A job analysis generally gathers information about the following:
Job context—the purpose of the job, its work environment, its place in the organizational structure
Job content—the duties and responsibilities of people who hold the job
Job specifications/qualifications—KSAs required for a person to have a reasonable chance of successfully performing the job
Performance criteria—desired behaviors/results that will constitute performance in the job
What 3 deliverables from job analysis?
Job description
Job specifications: minimum qualifications necessary to perform a job
Job competencies: clusters of KSAs
Job evaluation
determines the value and price of a job in order to place and compare it within an organization as well as attract and retain employees in a competitive environment.
Job-content-based job evaluation
Quantitative
Non-quantitative
Evaluating jobs based on their content and determining relative place within the organization.
Broken into quantitative/non-quantitative
non-quantitative: try to establish a relative order of jobs, evaluate the job as a whole
quantitative: try to establish how much more one job is worth than another job by using a scaling system; evaluate “compensable” factors of a job
Nonquantitative - Job Ranking
establishing a hierarchy of jobs from lowest to highest based on each job’s overall value to the organization
Quick and inexpensive
Not easy to understand why one job is higher than another
Not feasible with large number of positions
Nonquantitative - Job Classification
writes descriptions for each class of jobs. Individual jobs are then put into the grade that best matches their class description, based on the judgment of the evaluator.
Best suited to large organizations
understandable to employees, but may be subjective; jobs could be within more than 1 grade level
Quantitative - Point factor method
Factors of job determined. Points assigned to each factor then added to come up with an overall point value for the job. Then they can compare the relative worth of jobs on the basis of their point values.
Advantage: most analytical, produces documentation/paper trail; produces objective results
Can be time consuming to come up with
Base pay systems
usually hourly/salary rate
Could be single or flat rate
Differential pay
added to base pay, may be affected by the type of work being performed or where and when the work is performed.
allows organizations to better control their labor costs and to tie performance and pay together.
Incentive pay
Added to base pay to motivate performance
Make sure incentives are based on things that employees actually have control over
time-based step-rate pay system
employee’s pay rate is based on longevity in the job. Pay increases occur on a pre-determined schedule.
Performance based pay system
individual employee’s performance on the job is the basis for the amount and timing of pay increases. A performance-based pay system is commonly called merit pay or pay for performance (P4P or PfP).
Productivity-based pay system
Examples:
Straight piece-rate
Differential piece-rate
Payment is determined by employee’s output
Straight piece-rate: employee receives a base wage rate and is awarded additional compensation for the amount of output produced.
Differential piece-rate: employee receives one piece rate up to the standard and then a higher rate once the standard has been exceeded.
Person-based pay:
Knowledge-based
Skills-based
Competency-based
employee characteristics, rather than how the job is performed, determine pay
Knowledge-based: pay is based on the level of knowledge the employee has in a field. This approach is dominant for compensating learned professions such as scientists or teachers
Skills-based: base pay on the number of different skills an employee is qualified to perform. Employees increase their pay by acquiring new skills, even if they do not use the skills in their current assignment.
Competency-based: set pay at the level at which an employee can operate in defined competencies (e.g., directing or training others). This type of system is commonly found when rewarding professional groups of employees.
Cost of living adjustment (COLA)
pay adjustment given to all eligible employees without regard to organizational profitability, to protect the employees’ purchasing power against rising inflation
General pay increase
given to all employees (or sometimes a class of employees such as office or production workers) based on local competitive market requirements. This type of increase is awarded regardless of employee performance.
Seniority increases
Employees may need to be employed for a certain period of time before they are eligible for pay increases.
Employees may receive pay increases automatically after a set time in the job.
Lump sum increase
one-time payment of all or part of a yearly pay increase. An employee’s base wage rate is typically not adjusted by this increase.
The LSI approach is an advantage to the organization because other wages and benefits linked to the base rate, such as overtime, shift premium, sick pay, and life insurance, are not impacted.
Market Based Increases
used to be competitive in attracting new talent or to keep key employees. Market-based salary increases are usually added to base pay and may also be called equity increases.
Time-based differential pay
Examples
Some employees receive time-based differential pay, or a different rate of pay based on when they work.
Shift pay. Some employees receive extra pay when they work less-desirable hours, such as a second or third shift. Shift pay may be a flat amount per hour or a percentage of the base pay.
Emergency-shift pay. Certain types of industries pay emergency-shift pay when employees work in response to an emergency.
Premium pay. Some employers pay premium pay (extra pay), or overtime at a higher rate, for working any of the following:
Holidays or vacation days or weekends
For the sixth or seventh day of straight time
After eight hours in a day
On-call or call-back pay. In some organizations employees earn pay when they are on call, even if they are not called in to work (on-call pay). Employees may also earn extra pay when they are called back for an extra shift in the same workday (call-back pay).
Reporting pay. With reporting pay, employees are paid for reporting to work as scheduled even if upon arrival no work is available.
Travel pay. Hourly employees receive travel pay for time spent traveling to work assignments, even if the travel time is outside of working hours.
Overtime pay. In various countries the minimum amount to be paid for overtime is dictated by legislation.
Geographic differential pay
Based on where an employee works. Organizations with facilities in different locations often need to tailor their compensation programs to the differences in local labor markets.
May be needed for: labor costs, attracting workers to certain locations, for foreign countries
Individual incentive pay
Intended to improve individual performance -
Examples: piece-rate, commissions, non-cash reward programs
Group incentive pay
Used when measuring individual performance is difficult or when performance requires cooperation of the group.
Gainsharing plans: an organization shares a portion of the gains from a successful group effort. For example, past production records may be used to set up base productivity standards. Any gains above that standard are shared 50/50 by the organization and its employees.
Team bonuses can also be used and are based on achieving group goals and objectives.
Organization wide incentive pay
Many organizations use organization-wide incentive plans to reward overall results.
Profit sharing and stock ownership are the most common organization-wide incentive plans.
Another example is a bonus program that is tied to organizational goals.
Differences with Executive Pay
incentives usually account for a greater share of an executive’s total direct compensation package
incentives are generally linked to the performance of the entire organization or the major units/businesses—typically to organizational profitability but possibly to nonfinancial measures
Recommended to use compensation specialist for this type of pay
Annual salary
This direct compensation is usually guaranteed, while other forms of executive compensation may be dependent on performance factors.
Stock option plans
Executives may be given the option to purchase company stock at a pre-determined price for a certain period of time, usually five to ten years.
Stock purchase plans
Broad-based plans often available to most or all of a public company’s employees, this type of plan allows executives the opportunity to purchase shares at a discount or without paying brokerage fees.
Performance grants
This stock-based compensation is tied to organizational performance.
Sales compensation - straight salary
rarely used, except when salesperson more often is servicing clients than making sales, or there is a long sales cycle
Sales compensation - Straight Commission
organization’s objectives are to increase sales volume
Sales compensation - Salary plus Commission and/or Bonus
most commonly used
allow organizations to directly reward those behaviors that best support their organizational strategy.
salespeople often receive company cars or car allowances, club memberships or allowances, or other noncash perquisites.
Red-Circle/Green-Circle Rates
Red-circle rates are employee pay rates above the range maximum.
Green-circle rates are the opposite of red-circle rates—an employee’s pay is below the minimum of the range.
Pay/Salary compression
there is only a small difference in pay between employees regardless of their experience, skills, level, or seniority.
Can occur when there is not enough difference between pay levels
Compa- ratio
Employee’s pay rate divided by pay range midpoint
Compa ratio below 1.00 mean wages are below midpoint; greater than 1 means wages exceed midpoint
Total Organization Compensation Expense
All costs associated with employment, including salaries, overtime, benefits, and bonuses
total employment costs / total operating costs
Remuneration surveys
Info on prevailing market compensation and benefits practices
Internal - more control over technique and data analysis
External - offer different options for externally published data
Data analysis -
aging
leveling
factor for geography
Age: use movement in market rates to adjust outdated salary data
Leveling: adjust salaries for when surveyed jobs are not identical to jobs in the organization
Factor for geography: consider how salaries geographically may compare with national average (ex. Rochester is about 92% of national average, NYC can be 35% above national average)
Benchmarking
Getting help understanding what the standard is in other companies, industries, roles, etc.
Can be informal (networking) or formal (working with consultant or gathering data formally)
Creating a pay structure
Establish pay grades - group jobs that have same relative internal or external worth; pay same pay rate (ex. at Paychex = “associate” is pay grade)
Set pay ranges - upper/lower bounds of possible compensation within the same pay grade
Broadbanding
combines salary grades to create larger ranges
allows people to move within job without outgrowing pay scale; avoids having too many grades with small midpoint differences
Disadvantages: reduces value of ranges, less control, reduce opportunity for promotion, difficult to maintain perception of equity
Fiduciary duty/responsibility
legal obligation of one party to act in best interest of another (employer act in best interest of employee)
Fiduciary
refers to obligated/responsible party (Ex. individual or party entrusted with care of money or property)
Examples of Perquisites
Mobile devices, professional organizations, training programs, housing, club memberships, company cars, meal allowances
Benefits costs as percentage of payroll costs
total benefit costs divided by payroll costs
ID’s proportion of benefit costs
Annual increase/decrease in healthcare costs
Alerts an organization to increasing costs; helps org assess if actions should be taken to control benefit costs
