Compensation Midterm Notes PDF

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Compensation review: Chapter1 – The pay model 1. Compensation through society: pay is a measure of justice / economist’s factors to wage determination: human capital (experience, education), demographic characteristics (martial status, living at home), job characteristics (industry) 2. Compensation through stockholders: using stock/shares to pay employees creates a sense of ownership and better work performance 3. Compensation through managers: 2 view: as an expense competitive pressures, both global and local labour costs to high cost influence 4. Compensation through employees: source of financial security; vital role in a persons economic and social well being

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Compensation: all forms of financial returns and tangible services & benefits that employees receive as part of an employment relationship

Forms of pay: -

The relational returns (learning opportunities, recognition and status, challenging work, and so on) are the psychological returns people believe they receive in the workplace

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Total compensation is more transactional and includes pay received directly as cash (e.g., base pay, merit increases, incentives, cost-of-living adjustments) and indirectly as benefits (e.g., pensions, healthcare and life insurance, programs to help balance work and life demands).

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Base pay wage or salary — is the cash compensation an employee receives for the work performed. Base pay tends to reflect the value of the work or skills and generally ignores differences attributable to individual employees.

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Merit increases: are given as increments to the base pay in recognition of past work behaviour. Some assessment of past performance is made, with or without a formal performance evaluation program, and the size of the increase is varied according to performance. cost-of-living adjustment: gives the same percentage increase to everyone regardless of performance in order to maintain pay levels relative to increases in the cost of living.

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Incentives (or variable pay): pay increases directly to performance

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However, incentives differ from merit increases. First, incentives do not increase the base wage, and so must be reearned each pay period. Second, the potential size of the incentive payment generally will be known beforehand. Whereas merit pay programs evaluate the past performance of an individual and then decide on the size of the increase, what must happen in

order to receive the incentive payment is called out very specifically ahead of time. For example, an auto sales agent knows the commission on a BMW versus the commission on a Honda prior to making the sale. Thus, although both merits pay and incentives can influence performance, incentives do so by offering pay to influence future behaviour. Merit, on the other hand, recognizes and rewards past behaviours. The distinction is a matter of timing. -

Incentives can be tied to the performance of an individual employee, a team of employees, a total business unit, or some combination of individual, team, and unit. The performance objective may be expense reduction, volume increases, customer satisfaction, revenue growth, return on investments, or increases in total shareholder value—the possibilities are endless.

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Because incentives are one-time payments, they do not have a permanent effect on labour costs. When performance declines, incentive pay automatically declines, too. Consequently, incentives are frequently referred to as variable pay.

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incentives may be short- or long-term. Long-term incentives are intended to focus employee efforts on multiyear results. Typically, they are in the form of stock ownership or options to buy stock at specified, advantageous prices. The idea behind stock ownerships is that employees with a financial stake in the organization will focus on such long-term financial objectives as return on investment, market share, and return on net assets.

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Benefits: insurance/pensions  employee benefits, including life/health/disability insurance and pension, work/life programs, and allowances, are also part of total compensation. Some insurance programs are required by law.  health insurance, dental insurance, pensions, and life insurance are common benefits. They help protect employees from the financial risks inherent in daily life

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Work/life programs: that help employees better integrate their work and life responsibilities include time away from work (e.g., vacations, jury duty), access to services to meet specific needs (e.g., drug counselling, financial planning, referrals for child and elder care), and flexible work arrangements (e.g., telecommuting, non-traditional schedules, non-paid time off). Responding to the tight labour market for highly skilled employees and the changing demographics of the workforce (e.g., two-income families who demand employer flexibility so that family obligations can be met), many Canadian employers are giving higher priority to these forms of benefits

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Pay model: 3 building blocks for it (from left to right)  (3) the strategic compensation objectives (1) the strategic policies that form the foundation of the compensation system(2) the techniques of compensation.

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Model goes: policies, techniques, objectives

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(1) the strategic compensation objectives: pay systems are designed and managed to achieve certain strategic objectives. The basic objectives, shown at the right side of the pay model in Exhibit 1.3, include efficiency, fairness, and compliance with laws and regulations. Efficiency

can be stated more specifically: (1) improving performance, increasing quality, delighting customers and stockholders; and (2) controlling labour costs. -

Fairness is a fundamental objective of pay systems. Procedural fairness is concerned with the processes used to make decisions about pay. It suggests that the way a pay decision is made may be as important to employees as the result of the decision.

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Compliance as a pay objective involves conforming to various federal, provincial, and territorial compensation laws and regulations. As these laws and regulations change, pay systems might need to be adjusted to ensure continued compliance. As companies go global, they must also comply with the laws of all the countries in which they operate.

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So, objectives serve several purposes. First, they guide the design of the pay system. Consider the employer whose objective is to reward outstanding performance. That objective will determine the pay policy (e.g., pay for performance) as well as the elements of pay plans (e g., merit increases and/or incentives). Another employer’s objectives may be to develop a flexible, continuously learning workforce through job design, training, and team-building techniques. A pay system aligned with this employer’s objectives might have a policy of paying salaries at least equal to those of competitors and that go up with increased skills or knowledge. This system might be very different from our first example in which the focus is on performance. Thus, different objectives guide the design of different pay systems. They also serve as standards for judging the success of the pay system. If the objective is to attract and retain the best and the brightest, yet skilled employees are leaving for higher-paying jobs elsewhere, the system may not be performing effectively. Although there may be many nonpay reasons for turnover, objectives provide standards for evaluating the effectiveness of a pay system. Policies and techniques are the means to reach the objectives.

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the strategic policies that form the foundation of the compensation system: every employer must address the strategic policy decisions shown on the left side of the pay model in Exhibit 1.3: (1) internal alignment, (2) external competitiveness, (3) employee contributions, and (4) management of the pay system. These policies form the foundation on which pay systems are built. They also serve as guidelines for managing pay in ways that accomplish the system’s objectives.

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Internal Alignment: refers to pay comparisons between jobs or skill levels inside a single organization. Jobs and people’s skills are compared in terms of their relative contribution to the organization’s objectives. Internal alignment refers to the pay rates both for employees doing equal work and for those doing dissimilar work. internal alignment policies, or pay relationships within an organization, affect all three compensation objectives. They affect employee decisions to stay with the organization, to become more flexible by investing in additional training, or to seek greater responsibility. By motivating employees to choose increased training and greater responsibility in dealing with customers, pay relationships indirectly affect the capabilities of the workforce and hence the efficiency of the entire organization. Fairness is determined by employees’ comparisons of their pay to the pay of others in the organization. Compliance is affected by the basis used to make internal comparisons. Basic fairness is provided by Canadian human rights laws, which make pay decisions made based on race, gender, age, and other grounds discriminatory and illegal.

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External competitiveness: refers to compensation relationships external to the organization (i.e., compared with competitors). How should an employer position its pay relative to what competitors are paying? External competitiveness decisions—both how much, and what forms—have a twofold effect on objectives: (1) they ensure that the pay is sufficient to attract and retain employees—if employees do not perceive their pay as competitive with what other organizations are offering for similar work, they may leave—and (2) they control labour costs so that the organization remain competitive in the global economy. Thus, external competitiveness directly affects both efficiency and fairness. And the organization must respond in a way that complies with relevant legislation.

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Employee Contributions: This refers to the relative emphasis placed on performance. Should one programmer be paid more than another because of better performance or greater seniority? the degree of emphasis placed on performance is an important policy decision, because it directly affects employees’ attitudes and work behaviours. Employers with strong pay-for performance policies put greater emphasis on incentives and merit pay. Recognition of contributions also affects fairness, because employees have to understand the basis for judging performance in order to conclude that their pay is fair.

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Management: Proper management of the pay system ensures that the right people get the right pay for achieving the right objectives in the right way.

Chapter 2 – Strategy – The totality of Decisions -

strategic perspective requires a focus on compensation decisions that help the organization gain and sustain competitive advantage

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Strategy: refers to the fundamental business decisions that an organization has made in order to achieve its strategic objectives. An organization defines its strategy through the trade-offs it makes in choosing what (and what not) to do. That is, differences in a firm’s strategy should be supported by corresponding differences in its human resources strategy, including compensation. The underlying premise is that the greater the alignment, or fit, between the organization and the compensation system, the more effective the organization.

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It is also imperative that there be alignment between its compensation strategy and its overall HR strategies. HR systems will be most effective when roles are designed to allow employees to be involved in decisions and have an opportunity to make an impact, when employee ability is developed through selective hiring and training and development, and when the compensation system motivates employees to act on their abilities and take advantage of the opportunity to make a difference. Compensation is the key to attracting, retaining, and motivating employees with the abilities necessary to execute the business strategy and handle greater decision-making responsibilities.

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The four steps to developing a total compensation strategy are: 1) Asses total compensation implications 2) Map a total compensation strategy 3) Implement strategy 4) Reassess the fit Step 1: Assess total compensation implications: 1) Business Strategy and Competitive Dynamics—Understand the Business. This first step includes an understanding of the specific industry in which the organization operates and how it plans to compete. 2) HR Strategy: Does Pay Play a Supporting Role or a Catalyst for Change? Compensation or pay strategy is influenced by how it fits with the overall HR strategy. Whatever this strategy, a decision about the role of pay within it is critical. Pay can play a supporting role, as in the high-performance approach, or it can take the lead and be a catalyst for change. 3) Culture/Values A pay system reflects the values that guide an employer’s behaviour and underlie its treatment of employees. In many organizations, core values guide employer’ behaviours and are reflected in the pay systems. The pay system mirrors the company’s image and reputation. 4) Social and Political Context refers to a wide range of factors, including legal and regulatory requirements, cultural differences, changing workforce demographics, expectations, and so on 5) Employee/ Union Preferences

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Step 2: Decide on a Total Compensation Strategy: The compensation strategy is made up of the five decisions outlined in the pay model: set objectives and specify the four policy choices of internal alignment, external competitiveness, employee contributions, and management. It requires compensation decisions that fit the organization’s business and environment. As already noted, compensation decisions should support different business strategies. The organization’s objective is to make the right compensation decisions based on how the organization decides to compete Steps 3 and 4: Implement the Strategy and Reassess the Fit: step 3 is to implement the strategy through the design and execution of the compensation system. The compensation system translates strategy into practice. Employees infer the underlying strategy based on how they are treated by their employer through compensation system. Step 4, reassess and realign, closes the loop. This step recognizes that the compensation strategy must change to fit changing conditions

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Three tests determine whether a pay strategy is a source of competitive advantage: (1) Is it aligned? (2) Does it differentiate? and (3) Does it add value?

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Step 1: Align: alignment of the pay strategy includes three aspects: (1) alignment with the business strategy, (2) alignment externally with the economic and sociopolitical conditions, and (3) alignment internally with the overall HR system. Alignment is probably the easiest test to pass. Step 2: Differentiate: Some people believe that the only thing that really matters about a strategy is how it is different from everyone else’s. If a pay system is relatively simple for a competitor to copy, it cannot be a source of competitive advantage. Step 3: Value: Return of investment

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“Best fit” approach suggests that a company is more likely to achieve competitive advantage if pay practices are aligned with business and overall HR strategies. “Best practices” approach suggests that there exists a set of best-pay practices which can be applied universally across all situations. Rather than a better fit between business strategy and compensation plans that yields better performance, they say a set of best practices results in better performance with almost any business strategy. The challenge here is to select from various recommended lists that are “the” best practices. Research from the past few years is beginning to provide guidance on our “choices.”

Chapter 3 – Defining Internal Alignment -

Internal alignment (or internal equity) addresses relationships inside the organization The relationships among different jobs inside an organization form a job structure that should support the organization’s strategy, support the workflow, and motivate behaviour toward organization objectives.

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pay structure: the array of pay rates for different work or skills within a single organization; the number of levels, the differentials in pay between the levels, and the criteria used to determine these differences create the structure Job structure must:  support organization strategy work flow motivate right behaviour

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Workflow: refers to the process by which goods and services are created and delivered to the customer. The structure should support the efficient flow of that work and the design of the organization Motivation: Internal job and pay structures influence employees’ behaviour by providing pay increases for promotions, more challenging work, and greater responsibility as employees move up in the job structure. The structure should make clear the relationships between each job and the organization’s objectives. The ability for an employee to see the linkage between what he or she does, and the organization’s strategic goals is often called line-of-sight. Employees should be able to “see” or understand links between their work, the work of others, and the organization’s objectives.

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internal pay structure is defined by (1) the number of levels of work, (2) the pay differentials between the levels, and (3) the criteria used to determine those levels and differentials. These are the factors that a manager may vary to design a structure that supports the workflow and directs employee behaviours toward objectives. Levels: one feature of any pay structure is its hierarchical nature—the number of levels and reporting relationships. Because pay structures typically reflect the flow of work in the organization, some are more hierarchical with multiple levels and others are compressed with few levels Differentials: The pay differences between levels are referred to as differentials. Higher pay is usually due to work: requiring more skill/knowledge,performed in unpleasant work conditions, work that adds more value to the company. Criteria: Work content and work value are the most common bases for determining internal structures. Content refers to the work performed in a job and how it gets done (tasks, behaviours, knowledge required, and so on). Value refers to the worth of the work: its relative contribution to the organization objectives A structure based on content typically ranks jobs based on skills required, complexity of tasks, and/or responsibility. By contrast, a structure based on the value of the work focuses on the relative contribution of the skills, tasks, and responsibilities of a job to the organization’s goals. A job-based structure looks at work content—tasks, behaviours, responsibilities. A personbased structure shifts the focus to the employee: the skills, knowledge, or competencies the employee possesses, whether they are used on the job the employee is doing. The major organization factors—both external and internal—that shape internal structures are shown in exhibit 3.4. The various factors might better be represented as a web, with all factors connected and interacting

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