Managing Compensation

Herzbergs Tw-Factor Theory (parallels Maslows hierarchy of needs)

Motivating Factors: With them I am motivated, productive, satisfied, etc. Motivating Factors: Without them I AM NOT resentful. But Im not motivated either! Hygiene Factors: With them I AM NOT resentful. But Im not happy either!

Hygiene Factors: Without them I will be resentful and unproductive

What is Compensation

Think in terms of Total Compensation

Base

cash compensation Pay Incentives or variable cash compensation Non-cash compensation (recognition) Non-cash benefits Cash-equivalent benefits

Designing a Compensation System

Step One: Determining Pay Philosophy

Internal

versus External Equity Justice Model

Put another way, Internal Equity versus External Competitiveness

Distributive

We exchange our time/labor for pay Labor Market Model: set by supply and demand Balancing Equity Model: internal issues may rule

Supply and Demand

Labor is a commodity, like gasoline Pick a gas company: what do you pay for gas? Pick a point on that distribution: what is fair? Say you had the time: what would you choose to spend? What are you willing to pay: low, mid or high?

Fixed Versus Variable Pay

Is risk sharing a good idea? Can and should line employees have the same risk as manager or executives? How do we set the risk level? Where do we pay relative to market:
Overall Base

Variable
Benefits

Variable Pay Plans

Dont forget: you get what you pay for. Dont forget: you get what you pay for. Why they fail:

No

link from effort to reward Funny money makes financials meaningless Rewards only drive performance in the short run (once spent, theyre forgotten)

Performance Versus Membership

Performance-contingent plans:
Vary

based on individual or work group achievement Can be highly focused (team or group)

Membership-contingent plans:
Pay

the same to people in a job or work group regardless of individual or group performance

Distinction driven by culture and goals of the play plan

Job Versus Individual Pay

We pay the position, not the person. Powells Books example:

PhD

selling books is paid as a PhD Current labor issues:

9% versus 19% wage increase No benefits change versus increase in co-pays and deductibles

Does this make sense?????

Options

Knowledge and skill-based pay:

Pay

for knowledge to encourage cross training Promotes flexibility Provides incentive to learn more skills

Egalitarian and Elitist pay systems:

Egalitarian:

everyone gets the same system Elitist: equivalent to a black box system

Egalitarian versus Elitism

Egalitarian (worldwide trending this way):

More

flexible Reduce barriers (equity) between peers through elimination of status-based perks More common in highly competitive markets

Elitist
More

stable workforce because employees only make more by moving up More prevalent among older companies

Pay Issues

Below versus above market

Competitive

strategy (and Herzberg) Blue chips have gone above market to create elitism, attract/retain the cream of the crop and minimize turnover (golden handcuffs) Above more common in large, established companies with ready cash and little equity Below are more common in smaller, startup companies that can put emphasis on a liquidity event

Pay Issues

Monetary versus non-monetary rewards

Monetary:

Emphasize individual achievement Volatile markets and low job security Emphasis on sales versus customer service Pushing competitive internal climate Emphasize commitment to the organization Stable workforce with an emphasis on customer service and loyalty (versus fast sales growth) Companies that want to create more cooperation internally

Non-monetary:

Pay Issues

Open versus secret pay

Public

or quasi public companies and agencies publish May be illegal to restrict people from talking What do we have to hide??? Secret pay creates impression that there is something to hide (Whos getting rich? Open pay eliminates perceptions driven by suspicion and speculation

Pay Issues

Centralization versus decentralization

Centralized

offers efficiency and the ability to hire specialists Centralized may not be as responsive Centralized may not be as clued in to what happens in the field Centralized may promote and us versus them feeling

Compensation Tools

Two basic approaches

Job-based

compensation plans

Point factor theory Looks at compensable factors in each job

Market

based compensation plans

Looks at the jobs worth or value relative to the market

Compensation Tools Grades and Ranges

Mid-Point Spread Jobs

Mid Max
Rate of Pay

Range Spread

Max

Compensation Tools Job Based Plans

Conduct job analysis Write job descriptions Determine job specifications (what people do to be successful in the work) Rate the worth of jobs using compensable factors Create job hierarchy Classify jobs by grade and level

Compensation Tools Market Based Plans

Identify benchmark or key jobs Establish pay policy (philosophy) Uh, then what????

Legal Considerations

FLSA (1938)
Primarily

impacts exempt/nonexempt decisions Addresses minimum wage and overtime

Equal Pay Act

Raises

comparable worth questions an issue with contractors

Internal Revenue Code

Particularly

Rewarding Performance
Incentive systems are designed to incent or drive behavior First question: what organizational outcome are you trying to achieve? Do only what you get paid for syndrome Erosion of teamwork?

Problems and Challenges

Lack of control
Many

things are beyond individual control therefore, should they be excluded from consideration?

Difficulties in measuring performance Psychological contracts

Pre-set

expectations

Problems and Challenges

Credibility gap
Ill

defined, poorly communicated systems or systems with overrides, loopholes or a lack of accountability The first exception kills the system!

Job dissatisfaction and stress

Creates

cogs versus involved people

Potential reduction of intrinsic drives

Design Objectives
Link pay and performance Use pay as a broad HRM system Build employee trust Promote the idea that performance makes a difference Use multiple reward layers (KISS?) Increase employee involvement Use non-monetary incentives

Individual Based Plans

Advantages
Bonuses,

lump sum or spot bonus payments Expectancy theory: rewarded performance is likely to be repeated AND we adjust our performance based on perceptions Goal oriented behavior can be shaped over time Looking at individuals promotes equity Fits with an individualistic culture

Individual Based Plans

Disadvantages
Promotes

single mindedness Employees often dont believe that performance impacts outcomes and in turn their pay (no performance-outcomes-pay link) May run counter to quality goals (?) May be inflexible

Team Based Plans

Advantages
Foster

work group cohesion Aid performance measurement

Disadvantages
May

not fit individualistic culture Free riding effect Social pressure to limit performance Defining groups that have meaning Inter-group competition

Plantwide and Corporate Plans

Look at overall performance Suffer from many of the same design challenges Large scale and difficulty seeing operational connections make the performance-outcome link hard to identify Can drive tremendous focus

Studying
Review advantages and disadvantages of plantwide and corporate plans Review keys to successful implementation Look at executive and sales compensation Pay attention to variable and short versus long term incentive plans