Compensation Methods

Compensation:

Compensation:

Methods and Policies

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Define variable pay and discuss the various incentiveDefine variable pay and discuss the various incentive

programs that can be used in such a system. programs that can be used in such a system.

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Explain why merit pay may caExplain why merit pay may cause empluse employees tooyees to

compete rather than cooperate. compete rather than cooperate.



Recognize the significant changes in theseRecognize the significant changes in these

innovations and learn to

innovations and learn to differentiate among them:differentiate among them: skill-based, knowledge-based,

skill-based, knowledge-based, credential-based,credential-based, feedback, and competency-based pay.

feedback, and competency-based pay.

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Describe issues such as secreDescribe issues such as secrecy, security andcy, security and

compression compression

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Define variable pay and discuss the various incentiveDefine variable pay and discuss the various incentive

programs that can be used in such a system. programs that can be used in such a system.



Explain why merit pay may caExplain why merit pay may cause empluse employees tooyees to

compete rather than cooperate. compete rather than cooperate.



Recognize the significant changes in theseRecognize the significant changes in these

innovations and learn to

innovations and learn to differentiate among them:differentiate among them: skill-based, knowledge-based,

skill-based, knowledge-based, credential-based,credential-based, feedback, and competency-based pay.

feedback, and competency-based pay.



Describe issues such as secreDescribe issues such as secrecy, security andcy, security and

compression compression

 SecureSecure  BalancedBalanced  Cost-effectiveCost-effective 

Acceptable to employeesAcceptable to employees

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TThree aspects of acceptability will be hree aspects of acceptability will be discussed:discussed:

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WhWhetethher pay ser pay shhould be secretould be secret

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Communication to acCommunication to achhieve acceptabiliieve acceptabilityty

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MManagement must answer tanagement must answer thhese questions:ese questions:

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How sHow shhould one employee be paid relative toould one employee be paid relative to

anot

anothh_{er er ww}hh_{en ten t}hh_{ey botey bot}hh hh_{old told t}hh_{e same job in te same job in t}hh_ee

organization? organization?

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SShhould we pay ould we pay all employees doing tall employees doing thhe same work e same work 

at t

at thh_{e same level te same level t}hh_{e same?e same?}

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If not, on wIf not, on whhat basis sat basis shhould distinctions be made?ould distinctions be made?

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performing the same job based on:

Individual differences in experience, skills, and

 performance

Expectations that seniority, higher performance, or 

Employees performing the same job make

substantially different contributions to goals

A changed emphasis on important job roles, skills,

knowledge, and so on

Emphasizes the norms of enterprise without having

employees ch_{ange jobs (promotion)}

Without differentials, the pay system violates the

internal equity norms of most employees

 Recognizes market changes between jobs in the same

The time they work 

The output they produce Skills

Knowledge Competencies

requiring businesses to become more productive

Reliance on outdated pay systems is holding

American businesses back 

Traditional pay systems do not effectively link pay to

performance or productivity

Emphasizes a shared focus on organizational success Opens incentives to nontraditional groups

Operates outside the base pay increase system Included in the calculations of variable pay are:

Individual incentive awards Individual recognition awards Group and team awards

companies must based their plans on:

Clear goals

Unambiguous measurements

Visible linkage to employees' efforts K ey design factors include:

Support by management Acceptance by employees

Supportive organizational culture Timing

paycheck is at risk 

If business goals aren't met, the pay rate will not rise

above th_{e base salary}

Annual raises are not guaranteed

The individual earns all or part of the bonus by

meeting objectives

Pay returns to the base level the next year and the

Base pay

Variable pay Indirect pay

Variable pay helps manage labor costs, but does

not guarantee equitable treatment of employees

Financial insecurity is built into the system As a result, productivity may actually decline

Paying employees on the basis of output is usually

performance is merit pay

A reward based on how well a job was done

Traditionally, merit pay results in a higher base

salary after the annual performance evaluation

Merit increases are usually spread evenly throughout

th_{e subsequent year} 

80 to 90 percent of firms offer merit raises, but little

of pay increase

Awards are directly linked to performance

Rewarding the best performers with the largest

 pay is claimed to be a powerful motivator 

This premise has two flawed assumptions:

Competence and incompetence are distributed

in rough_{ly t}h_{e same percentages in a work group}

Employees fail to make the connection between pay

and performance

The secrecy of the reward is perceived as inequity

The size of the award has little effect on performance Merit plans can work where:

The job is well designed

The performance criteria are well delineate

effect

A promise of increased salary in exchange for a

 promise to perform satisfactory future work 

Many existing merit plans are not clearly linked to an

individual's performance, so merit increases are not always viewed as meaningful

Merit pay focuses on the individual

It is more likely to cause employees to compete with

incentive plan

The employee is paid for units produced Individual incentive plan

takes several forms:

Piecework 

Production bonuses Commissions

The task is liked

The task is not boring

The supervisor reinforces and supports the system The plan is acceptable to employees and managers The incentive is financially sufficient to induce

increased output

Quality of work is not especially important

individuals

Team incentive plans can reduce administrative costs Reasons to choose a team incentive plan

It is difficult to measure individual output

Cooperation is needed to complete a task or project Management thinks this is a more appropriate

cohesiveness and reduce jealousy

In the United States, there may be a clash between

societal norms and group incentive systems

For small-group incentives to be effective,

management must:

Define its objectives Analyze the situation

competition can result in:

Withholding information or resources Political gamesmanship

 Not helping others

Sabotaging the work of others

To minimize these problems, some organizations are

individual or group incentives

Payments are usually based on one of two performance

concepts:

Sharing profits generated by the efforts of all

employees altogeth_er 

Sharing money saved as a result of employees'

organizationwide level:

Suggestion systems

Company group incentive

 plans (gain-sh_aring)

organizational effectiveness

It includes some kind of reward based on the

successful application of th_{e idea}

The key to success is employee involvement These programs are quite cost-effective

Suggestion systems can:

Improve employee relations Foster high-quality products Reduce costs

Increase revenue

S_uggestion

systems are often administered by the HR department

Management commitment Clear goals

Designated administrator  Structured award system Regular publicity

incentive plans that use a financial formula to:

Distribute organization-wide gains, and

Unite diverse organizational elements in the common

 pursuit of improved organizational effectiveness

Through cash bonuses, these systems share the

benefits of:

Improved productivity Reduced costs

effective in enhancing teamwork in:

Manufacturing organizations Service organizations

Commonly used gain-sharing plans: Lincoln Electric

Scanlon Rucker 

total profit to employees in cash or deferred bonuses

Profit sharing is not dominant in other industrialized

countries

Profit-sharing plans are typically found in three

combinations:

Cash or current distribution plans Deferred plans

A combination of both

pay will not be used in the future

The new designs will be people-based  Variants of people-based pay:

Skill-based

Knowledge-based Credential-based Feedback 

How many skills employees have, or  How many jobs they can do

Expected positive outcomes include: Increased quality

Higher productivity

A more flexible workforce Improved morale

Decreased absenteeism and turnover 

When a new sk_ill

is added to an existing job, the employee earns a

pay increase by mastering it

Methods for defining individual skills: Direct observation

Testing

acquiring additional knowledge

Applies to both the current and new job

Stretches the skill-based model to professionals,

managers, and some tech_{nical personnel}

A study compared two manufacturing plants

One used the job-centered pay design; the other a

knowledge-based design

After 10 months, the pay-for-knowledge facility had

individual must have:

A diploma or license, or 

Pass one or more examinations from

a th_{ird-party professional or regulatory}

agency

Credential-based pay is more cut-and-dried than

Aligning pay with strategic business objectives Establishing a direct connection between the

 jobh_{older and} h_is/h_{er part in accomplis}h_{ing goals}

This design must conform to four principles: Flows directly from strategic business goals

Directly links employees' actions to these goals

Provides sufficient opportunity for rewards to hold

employees' attention

the extent to which:

Compensation will be secret Compensation will be secure Pay is compressed

In many organizations, pay ranges and individual

 pay are open to th_{e public and fellow employees}

(open system)

With the secret system, pay is known only to the

employee, her/his superior, and HR M_/payroll

In some organizations, employees cannot discuss

To reduce the manipulative aura surrounding pay, a

company must sh_{are pay information wit}h _employees

As firms post job openings, information on pay

 becomes a critical decision

When deciding on secrecy or openness:

Determine what employees want to know about pay Decide if the information will harm or help the firm Weigh performance, interdependence, and causal

So can the belief that there will be future

compensation security

Plans for providing this security include:

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A guaranteed annual wage

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Supplementary unemployment benefits

Cost of living allowances (CO

As)

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Severance pay

Seniority rules

difference between their pay and that of colleagues

There is a narrowing gap between senior and junior 

employees and between supervisors and subordinates

Differentials of 10 percent or less are not unusual

Junior employees are sometimes brought in at salaries

greater th_{an t}h_{ose of t}h_{eir superiors}

The resulting low morale can lead to decreasing

 productivity, h_igh_{er absenteeism, and turnover} 

To identify pay compression, compare salaries and