UNHARMONIOUS VOICE FROM COMPENSATION MANAGEMENT

First: Coming from Employees

Why do I get less salaries than my colleague? Why do we get the different salaries? Why do we get the different benefits? Why do we get the different treatment?
The above questions would be result in employees un satisfaction, decrease their working enthusiasm, reduce job satisfaction.

UNHARMONIOUS VOICE FROM COMPENSATION MANAGEMENT

SECOND: COMING FROM SHAREHOLDER

They feel confused: How much do they pay? And the staff will feel satisfied?
Finally, they found no matter how much they pay, it seems the employee never become satisfied, why? Then the boss let HR department solve those problems occur in the company.

UNHARMONIOUS VOICE FROM COMPANSATION MANAGEMENT

THE THIRD VOICE: COMING FROM HR DEPARTMENT As for the HR department, the problem is how to satisfy both boss and the staff. How to design compensation system? How to improve employees satisfaction?

COMPENSATION MANAGEMENT IS A DILEMMA?

Why?

THE REASONS FOR DILEMMA OF COMPENSATION MANAGEMENT

The view point of company:

The compensation system never has the unified model, because

the compensation system is different when the company stays in different period, different environment, different strategy.

THE REASONS FOR DILEMMA OF COMPENSATION MANAGEMENT

The view point of employee The employee will keep high concerns of their pay. Because pay is direct related to their life quality. Meanwhile there is

no absolute fairness standard of compensation, so the

employee wont feel satisfied for ever.

Dilemma?
How to solve those problems? Can we look for the absolute fairness way to conduct the compensation management?

Basic Factors in Determining Pay Rates

Employee Compensation Components

Direct financial payments

Indirect financial payments

Corporate Policies, Competitive Strategy, and Compensation

Aligned Reward Strategy

The employers basic task:

To create a bundle of rewardsa total reward package that specifically prompts the employee behaviors that the firm needs to support and achieve its competitive strategy. The HR or compensation manager along with top management creates pay policies that are consistent with the firms strategic aims.

Equity and Its Impact on Pay Rates

Forms of Compensation Equity

External equity

Internal equity

Individual equity

Procedural equity

With respect to compensation, managers should address four forms of equity: external, internal, individual, and procedural. External equity refers to how a jobs pay rate in one company compares to the jobs pay rate in other companies. Internal equity refers to how fair the jobs pay rate is when compared to other jobs within the same company (for instance, is the sales managers pay fair, when compared to what the production manager is earning?). Individual equity refers to the fairness of an individuals pay as compared with what his or her coworkers are earning for the same or very similar jobs within the company, based on each individuals performance. Procedural equity refers to the perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay.

Addressing Equity Issues

Area wage and salary surveys

Methods to Address Equity Issues

Job analysis and job evaluation

Performance appraisal and incentive pay

Communications, grievance mechanisms, and employees participation

Managers can use various methods to address equity issues. For example, they use, Salary surveys (surveys of what other employers are paying) to monitor and maintain external equity.

They use job analysis and job evaluation comparisons of each job to maintain internal equity.
They use performance appraisal and incentive pay to maintain individual equity. And they use communications, grievance mechanisms, and employees participation in developing the companys pay plan to help ensure that employees view the pay process as transparent and procedurally fair.

Establishing Pay Rates

Steps in Establishing Pay Rates
1

Conduct a salary survey of what other employers are paying for comparable jobs.
Determine the worth of each job in your organization through job evaluation. Group similar jobs into pay grades.

3 4 5

Price each pay grade by using wave curves.

Fine-tune pay rates.

Step1: The Salary Survey

Uses for Salary Surveys

To price benchmark jobs

To market-price wages for jobs

To make decisions about benefits

Sources for Salary Surveys

Sources of Wage and Salary Information

SelfConducted Surveys

Consulting Firms

Professional Associations

Government Agencies

The Internet

Step 2: Job Evaluation

Identifying Compensable Factors

Skills

Effort

Responsibility

Working conditions

The Job Evaluation Process

Preparing for the Job Evaluation
1 2

Identifying the need for the job evaluation

Getting the cooperation of employees

Choosing an evaluation committee Performing the actual evaluation

3
4

How to Evaluate Jobs

Methods for Evaluating Jobs

Ranking

Job classification

Point method

Factor comparison

Job Evaluation Methods: Ranking

Ranking each job relative to all other jobs, usually based on some overall factor. Steps in job ranking: 1. Obtain job information.

2. Select and group jobs.

3. Select compensable factors. 4. Rank jobs. 5. Combine ratings.

Job Evaluation Methods: Job Classification

Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes. Classes contain similar jobs. Administrative assistants Grades are jobs similar in difficulty but otherwise different. Mechanics, welders, electricians, and machinists Jobs are classed by the amount or level of compensable factors they contain.

Step 3: Grouping Jobs

Point Method

Grouping Similar Jobs into Pay Grades

Ranking Method

Classification Methods

Step 4: Price Each Pay Grade

The Wage Curve
Shows the pay rates paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation.
Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades.

HR in Practice: Developing a Workable Pay Plan

Simplified Approach:
Conduct a wage survey
Conduct a job evaluation Conduct once-a-year job appraisals Compile the compensation budget for upcoming year

Pricing Managerial and Professional Jobs

Compensating Executives and Managers

Base pay

Short-term incentives

Long-term incentives

Executive benefits/perks

Pricing Managerial and Professional Jobs

What Determines Executive Pay?
CEO pay is set by the board of directors taking into account factors such as the business strategy, corporate trends, and where they want to be in the short and long term.
CEOs can have considerable influence over the boards that determine their pay. Firms pay CEOs based on the complexity of the jobs they fill. Shareholder activism and government oversight have tightened the restrictions on what companies pay top executives. Boards are reducing the relative importance of base salary while boosting the emphasis on performance-based pay.

Competency-Based Pay
Competencies
Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance

What is Competency-Based Pay?

Paying for the employees range, depth, and types of skills and knowledge, rather than for the job title he or she holds

What is a competency? An underlying characteristic of an individual which is causally related to criterion related effective or superior performance Competencies can be motives, traits, selfconcept, attitudes or values, content knowledge, or cognitive or behavioral skills -any individual characteristic that can be measured reliably and that can be shown to differentiate significantly between superior and average performers

Motive: Underlying need or thought pattern that drives, directs and selects an individuals behavior. Eg need for achievement
Trait: A general disposition to behavior responds in a certain way, for instance with self-confidence, self-control, stress resistance Self-concept: What they think they value, what they think they do or interested in doing Knowledge: Content knowledge Cognitive or behavioral skills: Either covert or overt

Cognitive or behavioral skills: Either covert or overt

Using Job Analysis and Behavioural Events Interview for Competency Mapping:

Competency model building

A detailed approach

A Detailed Approach
Info about the company Decision on the job position(s) Discussion on the CM application Basic data collection on the job responsibilities(using customized menu) Focus group
Review job description understand performance criteria Discuss specific behaviours List top ten competencies

A Detailed Approach
Critical incident technique - interviewing top performers
incidents that lead to effective performance incidents that lead to in effective performance Discuss specific behaviours List behaviours List competencies

A Detailed Approach
Content Analysis
Group behaviours Match behaviours to competencies using competency dictionary as a guideline Evolve new set of competencies if any Match behaviour indicators identified through CIT to the top 10 competencies identified by the focus group

Using Job Analysis and Behavioural Events Interview for Competency Mapping: A. Job Analysis B. Behavioral Event Interview This methodology is used to identify competencies in a person. It includes sitting through with the candidate in an interview situation carrying out a behavioral interview followed by recording of responses and identification of behavioral codes. These codes will in turn help us in identifying the competencies in a person and arriving at a form of relative ranking for each competency. know the concept of competency modeling. Can explain the methods of competency modeling

Question:
know the concept of competency modeling. Can explain the methods of competency modeling.

Why Use CompetencyBased Pay?

Competency-Based Pay Supports

High-Performance Work Systems

Strategic Aims

Performance Management

Competency-Based Pay in Practice

Main elements of skill/competency/knowledgebased pay programs: 1. A system that defines specific skills 2. A process for tying the persons pay to his or her skill 3. A training system that lets employees seek and acquire skills 4. A formal competency testing system 5. A work design that lets employees move among jobs to permit work assignment flexibility

Competency-Based Pay: Pros and Cons

Pros Higher quality Lower absenteeism Fewer accidents Cons Pay program implementation problems Costs of paying for unused knowledge, skills, and behaviors Complexity of program

Uncertainty that the program improves productivity

The Pay Gap

Factors Lowering the Earnings of Women:

1. Womens starting salaries are traditionally lower.

2. Salary increases for women in professional jobs do not reflect their above-average performance.

3. In white-collar jobs, men change jobs more frequently, enabling them to be promoted to higher-level jobs over women with more seniority.
4. In blue-collar jobs, women tend to be placed in departments with lower-paying jobs.

Compensating Professional Employees

Employers can use job evaluation for professional jobs.

Compensable factors focus on problem solving, creativity, job scope, and technical knowledge and expertise.
Firms use the point method and factor comparison methods, although job classification is most popular. Professional jobs are market-priced to establish the values for benchmark jobs.

Case discussion
P454 Salary Inequities at Acme Manufacturing

Function of compensation management

Whats the function of compensation management?

Function of compensation management

The view-points of company 1.Reduce the turnover rate, especially for turnover of key talent people 2.Attract talents, especially for key talents 3.Reduce internal conflicts, improve employees job satisfaction

Function of compensation management

The view-points of employee 1. Short-term motivation: satisfy physiological needs
2. Long-term motivation: satisfy growth needs

Question:
Which problem is the most difficult during managerial process in one company?

The core issue of HRM

1. Human being is the most complex creature in the world. 2. Regarding to the managerial problems occurred in the company, it is the most difficult problem to manage people.

True essence of HRM

1Employees ability 2Employees willingness
Do you think which one is more important?

True essence of HRM

In general, the employee wont do what the unit hope they do. In general, the employee only finish tasks what the unit will valuate, which will be related with their benefits. Why? What action should we adopt according to the above viewpoints?

True essence of HRM

Valuation points by MBO, tell your staff what does the unit concern? Concern points are your unit valuation points, through MBO, let every staff know their goal, let them know what you will assess their performance according their goal. So every staff know their goal, then they know what they will finish, what they shouldnt do.

Compensation
Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment.

The development and reform of Chinese compensation systerm

First stage: average allocation Second stageThe more you work, the more you get reward according to your work Third stage: allocate rewards according to contribution

Third stage: allocate rewards according to contribution

ProblemHow to define the contribution of employees? What are the appraisal standards Why is the general managers salary higher than others?

Question:
The general manager doesnt do more than others, but he should be rewarded more, why? How to explain this issue?

Value tendency of corporate different period

Starting stageNeed staff who like to work hard without complaining, so this type of staff would get more. Growth stageFocus on technology and market developing. So technologist and sales person with innovation abilities get more than others. Mature stageManagerial problems constrain the corporate development, so managerial talents get more. Transition stageCorporate multi-development, so compound talents get more. What is always related with value tendency according to the above statement?

Perpetual theme
Perpetual theme: Value tendency is always related to corporate strategy.

Two funtion of compensation management

1. Hygiene function 2. Motivation function

Two tendency of compensation: 1.High hygiene, low motivation 2.Low hygiene, high motivation

Question:
1. Hygiene function 2. Motivation function
Think about the advantages and disadvantages of above two types. ??

Two funtion of compensation management

Hygiene function
AdvantagesIt is easy to calculate, it is simple to management DisadvantagesRestrain talented people, discourage the talents.

Motivation function
AdvantagesDiscover the talented person, enhance potential. Disadvantagescalculation is complex, it is difficult for managing it.

Incentive Pay Terminology

Pay-for-Performance Plan Ties employees pay to the employees performance Variable Pay Plan Is an incentive plan that ties a group or teams pay to some measure of the firms (or the facilitys) overall profitability Example: profit-sharing plans May include incentive plans for individual employees

Types of Employee Incentive Plans

Individual Employee Incentive and Recognition Programs Sales Compensation Programs

Pay-for-Performance Plans

Team/Group-based Variable Pay Programs Organizationwide Incentive Programs Executive Incentive Compensation Programs

Individual Incentive Plans

Piecework Plans
The worker is paid a sum (piece rate) for each unit he or she produces.
Straight piecework Standard hour plan

Pros and Cons of Piecework

Easily understandable, equitable, and powerful incentives Employee resistance to changes in standards or work processes affecting output Quality problems caused by an overriding output focus Possibility of violating minimum wage standards Employee dissatisfaction when incentives either cannot be earned or are withdrawn

Individual Incentive Plans (contd)

Merit Pay
Is a permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance
Can detract from performance if awarded across the board

Becomes permanent ongoing reward for past performance

Merit Pay Options

Give annual lump-sum merit raises that do not make the raise part of an employees base salary. Tie merit awards to both individual and organizational performance.

Incentives for Professional Employees

Professional Employees
Are those whose work involves the application of learned knowledge to the solution of the employers problems. Lawyers, doctors, economists, and engineers

Possible Incentives
Bonuses, stock options and grants, profit sharing Better vacations, more flexible work hours Improved pension plans

Equipment for home offices

Nonfinancial and Recognition Awards

Effects of Recognition-Based Awards

Recognition has a positive impact on performance, either alone or in conjunction with financial rewards.
Day-to-day recognition from supervisors, peers, and team members is important.

Ways to Use Recognition

Social recognition Performance-based recognition Performance feedback

FIGURE 121

Social Recognition and Related Positive Reinforcement Managers Can Use

Challenging work assignments Freedom to choose own work activity Having fun built into work

Being provided with ample encouragement Being allowed to set own goals Compliments Expression of appreciation in front of others Note of thanks

More of preferred task

Role as bosss stand-in when he or she is away Role in presentations to top management Job rotation Encouragement of learning and continuous improvement

Employee-of-the-month award
Special commendation Bigger desk Bigger office or cubicle

Incentives for Salespeople

Salary Plan Straight salaries Best for: prospecting (finding new clients), account servicing, training customers sales force, or participating in national and local trade shows Commission Plan Pay is a percentage of sales results. Keeps sales costs proportionate to sales revenues May cause a neglect of nonselling duties Can create wide variation in salespersons income

Likelihood of sales success may be linked to external factors rather than to salespersons performance
Can increase turnover of salespeople

Incentives for Salespeople (contd)

Combination Plan Pay is a combination of salary and commissions, usually with a sizable salary component. Plan gives salespeople a floor (safety net) to their earnings. Salary component covers companyspecified service activities. Plans tend to become complicated, and misunderstandings can result.

Specialized Commission Plans

Commission-plus-Drawing-Account Plan Commissions are paid but a draw on future earnings helps the salesperson to get through low sales periods. Commission-plus-Bonus Plan Pay is mostly based on commissions. Small bonuses (spiffs) are paid for directed activities like selling add-ons or slow-moving items.

Maximizing Sales Force Results: Setting Sales Quotas

Should quotas be locked in for a period of time? Have quotas been communicated to the sales force within one month of the start of the period? Does the sales force know exactly how its quotas are set? Do you combine bottom-up information (like account forecasts) with top-down requirements (like the company business plan)? Do 60% to 70% of the sales force generally hit their quota? Do high performers hit their targets consistently?

Do low performers show improvement over time?

Are quotas stable through the performance period? Are returns and debookings reasonably low? Has your firm generally avoided compensation-related lawsuits? Is 10% of the sales force achieving higher performance than previously? Is 5% to 10% of the sales force achieving below-quota performance and receiving coaching?

Incentives for Managers and Executives

Executive Total Reward Package Base salary (cash) Short-term incentives (bonuses) Long-term incentives (e.g., stock options) Sarbanes-Oxley Act of 2002 Makes executives and the board of directors personally liable for violating their fiduciary responsibilities to their shareholders. Requires the CEO and CFO to repay bonuses, incentives, or equity-based compensation received following issuance of a financial statement that the firm must restate.

Short- and Long-Term Incentives

Short-Term Incentives: The Annual Bonus Plans intended to motivate short-term performance of managers and tied to company profitability. Issues in awarding bonuses Eligibility basis Fund size basis Individual performance award Long-term incentives Stock options Performance shares Indexed options Premium price options Stock appreciation rights Perks

Creating an Executive Compensation Plan

1. Define the strategic context for the executive compensation program. 2. Shape each component of the package to focus the manager on achieving the firms strategic goals. 3. Check the executive compensation plan for compliance with all legal and regulatory requirements and for tax effectiveness. 4. Install a process for reviewing and evaluating the executive compensation plan whenever a major business change occurs.

Team/Group Incentive Plans

Team (or Group) Incentive Plans Incentives are based on teams performance. How to Design Team Incentives Set individual work standards. Set work standards for each team member and then calculate each members output. Members are paid based on one of three formulas: All receive the same pay earned by the highest producer. All receive the same pay earned by the lowest producer. All receive the same pay equal to the average pay earned by the group.

Pros and Cons of Team Incentives

Pros

Reinforces team planning and problem solving

Helps ensure collaboration Encourages a sense of cooperation

Encourages rapid training of new members

Cons Pay is not proportionate to an individuals effort

Rewards free riders

Organizationwide Incentive Plans

Profit-Sharing Plans

Current profit-sharing (cash) plans

Employees receive cash shares of the firms profits at regular intervals.

Deferred profit-sharing plans

A predetermined portion of profits based on the employees contribution to the firms profits is placed in each employees retirement account under a trustees supervision. Employees income taxes on the distributions are deferred, often until the employee retires.

Organizationwide Incentive Plans (contd)

Employee Stock Ownership Plan (ESOP)

A firm annually contributes its own stock or cash (with a limit of 15% of compensation) to be used to purchase the stockto a trust established for the employees.
The trust holds the stock in individual employee accounts and distributes it to employees upon separation from the firm if the employee has worked long enough to earn ownership of the stock.

Advantages of ESOPs
For the Company
Can take a tax deduction equal to the fair market value of the shares transferred to the ESOP trustee Gets an income tax deduction for dividends paid on ESOP-owned stock Can borrow against ESOP in trust and then repay the loan in pretax rather than after-tax dollars

For the Employees

Develop a sense of ownership in and commitment to the firm. Do not pay taxes on ESOP earnings until they receive a distribution.

For the Shareholders of Closely-Held Corporations

Can place assets into an ESOP trust which will allow them to purchase other marketable securities to diversify their holdings

Direction of compensation reform

Direction of compensation reform Reduce hygiene function gradually, Raise motivation function gradually.

Question:
Managers and executives often are rewarded by their organizations for their performance and how that performance impacts the entire organizations. Firms use several forms of short-term and long-term incentives to reward their managers and executives, but do these incentives achieve the desired effects? Discuss the use of short-term and long-term incentives and express your opinion on which ones are effective and which ones are not. Be prepared to defend your answers.

Case discussion
Application case P501

Case Questions
1.Does the pay-for-performance plan seem like a good idea? Why or why not? 2.What advice would you give Regina and Sandy as they consider their decision? 3.What mistakes did they make in adopting and communicating the new salary plan? How might Sandy have approached this major compensation change a little differently? 4.Assuming the new pay plan were eventually accepted, how would you address the fact that in the new performance evaluation system, employees input affects their peers pay levels?