HRM_Session 7

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Published on February 23, 2009

Author: shengvn

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Human Resource Management Session 7DIRECT FINANCIAL COMPENSATION : 1 Human Resource Management Session 7DIRECT FINANCIAL COMPENSATION HRM in Action: Are Top Executives Paid Too Much? : 2 HRM in Action: Are Top Executives Paid Too Much? Peter Drucker recommends 20-to-1 salary ratio between senior executives and rank-and-file white-collar workers Ratio of chief executives’ compensation to the pay of average production worker jumped to 431-to-1 90 percent of investors think that executives are overpaid Compensation: An Overview : 3 Compensation: An Overview Compensation - Total of all rewards provided employees in return for services Direct financial compensation - Pay received in form of wages, salaries, bonuses, and commissions Indirect financial compensation (benefits) - All financial rewards not included in direct compensation Nonfinancial compensation - Satisfaction person receives from job itself or from psychological and/or physical environment in which person works Components of Total Compensation Program External EnvironmentInternal Environment : 4 Components of Total Compensation Program External EnvironmentInternal Environment Compensation Direct Wages Salaries Commissions Bonuses Indirect (Benefits) Legally Required Benefits Social Security Unemployment Compensation Workers’ Compensation Family & Medical Leave Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Disability Protection Employee Stock Option Plans Supplemental Unemployment Benefits (SUB) Employee Services Premium Pay Customized Benefit Plans The Job Skill Variety Task Identify Task Significance Autonomy Feedback Job Environment Sound Policies Capable Managers Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions Workplace Flexibility Flextime Compressed Workweek Job Sharing Customized Benefit Plans Telecommuting Part-time Work More Work, Fewer Hours Financial Nonfinancial Equity Theory : 5 Equity Theory Motivation theory that people assess their performance and attitudes by comparing both their contribution to work and benefits they derive from it to contributions and benefits of comparison others whom they select—and who in reality may or may not be like them Equity in Financial Compensation : 6 Equity in Financial Compensation Financial equity - Perception of fair pay treatment for employees External equity - Employees are paid comparably to workers who perform similar jobs in other firms Internal equity - Employees are paid according to relative value of jobs within same organization Equity in Financial Compensation (Cont.) : 7 Equity in Financial Compensation (Cont.) Employee equity - Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority Team equity - More productive teams are rewarded more than less productive groups Primary Determinants of Direct Financial Compensation : 8 Primary Determinants of Direct Financial Compensation Organization Compensation Policies Organizational Level Ability to Pay Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Economy Legislation Employee Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck Job Pricing Direct Financial Compensation Job Job Analysis Job Descriptions Job Evaluation Organization as a Determinant of Direct Financial Compensation : 9 Organization as a Determinant of Direct Financial Compensation Compensation Policies Organizational Level Ability to Pay Compensation Policies : 10 Compensation Policies Pay leaders - Pay higher wages and salaries Market rate, or going rate - Pay what most employers pay for same job Pay followers - Pay below market rate because poor financial condition or believe do not require highly capable employees Organizational Level : 11 Organizational Level Upper management often makes decisions to ensure consistency Extreme pressure to retain top performers may override desire to maintain consistency in pay structure Ability to Pay : 12 Ability to Pay Organization’s assessment of ability to pay is important factor in determining pay levels Labor Market as Determinant of Direct Financial Compensation : 13 Labor Market as Determinant of Direct Financial Compensation Potential employees located within geographic area from which employees are recruited Pay for same jobs in different labor markets may vary considerably Compensation Surveys : 14 Compensation Surveys What are other firms paying? Geographic area of survey Specific firms to contact Jobs to include Expediency : 15 Expediency Managers in highly technical and specialized areas occasionally need to utilize nontraditional means to determine what constitutes competitive compensation for scarce talent and niche positions Need real-time information Cost of Living : 16 Cost of Living When prices rise over a period of time and pay does not, real pay is actually lowered Some firms index pay increases to inflation rate Labor Unions : 17 Labor Unions Mandatory collective bargaining between management and unions as “wages, hours, and other terms and conditions of employment.” Cost-of-living allowance has been disappearing The Economy : 18 The Economy Affects financial compensation decisions Depressed economy generally increases labor supply Cost of living often rises as economy expands Compensation Legislation : 19 Compensation Legislation Davis-Bacon Act of 1931 Walsh-Healy Act of 1936 Fair Labor Standards Act of 1938, as Amended Davis-Bacon Act of 1931 : 20 Davis-Bacon Act of 1931 First national law to deal with minimum wages Federal construction contractors with projects over $2000 to pay at least prevailing wages in area Secretary of Labor sets the prevailing wage at union wage, regardless of what average wage is in affected locality Walsh-Healy Act of 1936 : 21 Walsh-Healy Act of 1936 Companies with federal supply contracts exceeding $10,000 pay prevailing wages Requires 1½ times regular pay rate for hours over 8 per day or 40 per week Fair Labor Standards Act of 1938, as Amended : 22 Fair Labor Standards Act of 1938, as Amended Most significant law affecting compensation Establishes minimum wage Requires overtime pay and record keeping Provides standards for child labor Exempt and Nonexempt Employees : 23 Exempt and Nonexempt Employees Exempt employees - Categorized as executive, administrative, professional employees and outside salespersons Nonexempt employees - Those in jobs not conforming to above definition Most employees who earn less than $23,660 will be considered nonexempt no matter what their duties are Job as Determinant of Direct Financial Compensation : 24 Job as Determinant of Direct Financial Compensation Job itself continues to be factor, especially in firms that have internal pay equity as primary consideration Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors such as working conditions Job Analysis and Job Descriptions : 25 Job Analysis and Job Descriptions Before organization can determine relative difficulty or value of jobs, must first define content Done by job analysis/job descriptions Job Evaluation : 26 Job Evaluation Firm determines relative value of one job in relation to another Ranking Classification Factor comparison Point Hay guide chart-profile method Ranking Method : 27 Ranking Method Simplest method Raters examine description of each job Jobs arranged in order according to value Classification Method : 28 Classification Method Define number of classes or grades to describe group of jobs Compare job description with class description Class description that most closely agrees with job description determines job classification Factor Comparison Method : 29 Factor Comparison Method Five universal job factors - Mental requirements, skills, physical requirements, responsibilities, and working conditions Raters need not keep entire job in mind as they evaluate; instead, they make decisions on separate aspects or factors of job Point Method : 30 Point Method Numerical values assigned to specific job components Sum of values gives quantitative assessment of job’s relative worth Job factors selected according to nature of specific group of jobs Procedure for Establishing Point Method of Job Evaluation : 31 Procedure for Establishing Point Method of Job Evaluation Select Job Cluster Identify Compensable Factors Determine Degrees and Define Each Compensable Factors Determine Factor Weights Determine Factor Point Values Validate Point System A Point Method Example : 32 A Point Method Example Select Job Cluster - Assume we are going to develop point system for the administrative job cluster Identify Compensable Factors - Assume compensable factors identified are education, job knowledge, contacts, complexity of duties, and initiative A Point Method Example (Cont.) : 33 A Point Method Example (Cont.) Determine Degrees and Define Each Compensable Factors - In administrative job cluster, Education, Job Knowledge, and Initiative have been determined to have five degrees; Contacts has four; and Complexity of Duties has three A Point Method Example (Cont.) : 34 A Point Method Example (Cont.) FACTOR: CONTACTS Level (Degrees) Points IV Usual purposes of contacts are to discuss problems and possible 90 solutions, to secure cooperation or coordination of efforts, and to get agreement and action; more than ordinary tact and persuasiveness required. III Usual purposes of contacts are to exchange information and settle 66 specific problems encountered in course of daily work. II Contacts may be repetitive but usually are brief with little or no 42 continuity. I Contacts normally extend to persons in immediate work unit only. 18 A Point Method Example (Cont.) : 35 A Point Method Example (Cont.) FACTOR: COMPLEXITY OF DUTIES III Performs work where only general methods are available. Independent 85 action and judgment are required regularly to analyze fact, evaluate situations, draw conclusions, make decision, and take or recommend action. II Performs duties working from standard procedures or generally 51 understood methods. Some independent action and judgment are required to decide what to do, determine permissible variations from standard procedures, review facts in situations, and determine action to be taken, within limits prescribed. I Little or no independent action or judgment. Duties are so standardized 17 and simple as to involve little choice as to how to do them. A Point Method Example (Cont.) : 36 A Point Method Example (Cont.) Determine Factor Weights - Assume the committee believes that education is quite important for administrative job cluster and sets the weight for education at 35%. The weights of other four factors were determined by the committee to be: Job Knowledge—25 Contacts—18 Complexity of Duties—17 Initiative—5 The percent total is 100% A Point Method Example (Cont.) : 37 A Point Method Example (Cont.) Determine Factor Point Values - Committee determines total number of points for the plan. Number may vary, but 500 or 1,000 points may work well. Committee has determined that a 500 point system will work. Job Evaluation Worksheet (500-Point System) : 38 Job Evaluation Worksheet (500-Point System) A Point Method Example (Cont.) : 39 A Point Method Example (Cont.) Validate Point System - Each committee member should take a random sample of jobs within chosen job cluster and calculate weights for each job selected Point total for Administrative 2 job is determined to be 239 points Job Evaluation Worksheet for Administrative 2 Position : 40 Job Evaluation Worksheet for Administrative 2 Position Illustration of Arithmetic and Geometric Progression : 41 Illustration of Arithmetic and Geometric Progression Job Factor 1 2 3 4 Experience Required 1 year 3 years 5 years 7 years Degree of Factor (-------------------- Arithmetic Progression---------------------) Degree of Factor Job Factor 1 2 3 4 Experience Required 1 year 2 years 4 years 8 years (-------------------- Geometric Progression---------------------) The Hay Guide Chart-Profile Method : 42 The Hay Guide Chart-Profile Method Refined version of the point method Know-how Problem Solving Accountability Additional compensable elements, such as working conditions Job Pricing : 43 Job Pricing Placing dollar value on worth of job Pay grades - Grouping of similar jobs to simplify pricing jobs Wage curve - Fitting of plotted points to create smooth progression between pay grades Pay ranges - Minimum and maximum pay rate with enough variance between to allow for significant pay difference Job Pricing (Cont.) : 44 Job Pricing (Cont.) Broadbanding - Collapses many pay grades into few wide bands to improve effectiveness Single rate system - Pay ranges not appropriate for some workplace conditions such as some assembly lines Adjusting pay rates - Overpaid and underpaid jobs Scatter Diagram of Evaluated Jobs Illustrating Wage Curve, Pay Grades, and Pay Ranges : 45 Scatter Diagram of Evaluated Jobs Illustrating Wage Curve, Pay Grades, and Pay Ranges 100 200 300 400 500 17.20 $19.80 18.50 15.90 14.60 14.00 13.30 12.90 12.00 Average Pay per Hour (Current Rates or Market Rates) Wage Curve Evaluated Points 1 2 3 4 5 Pay Grades 1 2 3 4 5 Pay Ranges for Pay Grades 0- 99 1 $12.00 $13.30 $14.60 100-199 2 13.30 14.60 15.90 200-299 3 14.60 15.90 17.20 300-399 4 17.20 5 17.20 18.50 19.80 Evaluated Points Pay Grade Minimum Midpoint Maximum Summary Broadbanding : 46 Broadbanding Technique that collapses many pay grades (salary grades) into few wide bands to improve organizational effectiveness Lateral employee development Develop employee skills and encourage team focus Employee attention directed away from vertical promotional opportunities Broadbanding and Its Relationship to Traditional Pay Grades and Ranges : 47 Broadbanding and Its Relationship to Traditional Pay Grades and Ranges Average Pay Per Hour Grade 5 Grade 4 Grade 1 Grade 2 Grade 3 Job Worth Low High Band A Band B Employee as Determinant of Direct Financial Compensation : 48 Employee as Determinant of Direct Financial Compensation Performance—Performance-based Pay Skills—Skilled-based Pay Competencies—Competency-based Pay Seniority Experience Membership in the organization Potential Political Influence Luck Performance-Based Pay : 49 Performance-Based Pay Merit pay - Pay increase given to employees based on level of performance as indicated in appraisal Variable Pay - Compensation based on performance Bonus - Most common type of variable pay for performance. One-time financial award based on productivity Spot bonuses - Relatively small, gifts to employees for outstanding work or effort Piecework - Employees paid for each unit they produce Skill-Based Pay : 50 Skill-Based Pay Compensates on basis of job-related skills and knowledge Employees and departments benefit when employees obtain additional skills Appropriate where work tends to be routine and less varied Must provide adequate training opportunities or system becomes demotivator Competency-Based Pay : 51 Competency-Based Pay Rewards employees for capabilities they attain Competencies include skills but also involve other factors such as motives, values, attitudes, and self-concepts Seniority : 52 Seniority Length of time employee has been associated with company, division, department, or job Labor unions tend to favor seniority Experience : 53 Experience Regardless of nature of job, very few factors have a more significant impact on performance than experience Dot-com world has changed attitude with regard to experience Membership in Organization : 54 Membership in Organization Components of individual financial compensation are given to employees regardless of particular job they perform or level of productivity Maintains high degree of stability in workforce and recognizes loyalty Potential : 55 Potential Organizations do pay some individuals based on potential Many young employees are paid well because of their potential Political Influence : 56 Political Influence Should not be used to determine financial compensation To deny its existence would be unrealistic Person's pull or political influence may sway pay and promotion decisions Luck : 57 Luck “It certainly helps to be in the right place at the right time.” Team-Based Pay : 58 Team-Based Pay If team is to function effectively, firms should provide reward based on overall team performance Company-Wide Pay : 59 Company-Wide Pay Profit sharing - Distribution of predetermined percentage of firm’s profits to employees Gainsharing - Bind employees to firm’s productivity and provide incentive payment based on improved company performance Scanlon plan - Reward to employees for savings in labor costs resulting from employees’ suggestions Professionals Compensation : 60 Professionals Compensation Initially compensated for knowledge they bring to organization Maturity curves reflect relationship between professional compensation and years of experience Sales Representative Compensation : 61 Sales Representative Compensation Straight salary Straight commission Endless variety of part-salary, part-commission combinations Contingent Workers Compensation : 62 Contingent Workers Compensation In most cases, contingency workers earn less pay than permanent counterparts Far less likely to receive health or retirement benefits Executive Compensation : 63 Executive Compensation Critical factor in attracting and retaining best managers Determining Executive Compensation : 64 Determining Executive Compensation Firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance Types of Executive Compensation : 65 Types of Executive Compensation Base salary Short-Term Incentives or Bonuses Stock option plans Performance-Based Pay Executive benefits (Perks) Golden parachutes Base Salary : 66 Base Salary Factor in determining the executive’s standard of living Salary provides basis for other forms of compensation; it may determine amount of bonuses and certain benefits U.S. tax law does not allow companies to deduct more than $1 million of an executive’s salary Short-Term Incentives or Bonuses : 67 Short-Term Incentives or Bonuses Payment of bonuses reflects a managerial belief in their incentive value 90% of executives receive bonuses Stock Option Plans : 68 Stock Option Plans Gives manager option to buy a specified amount of stock in the future at or below current market price Some boards of directors require their top executives to hold some of firm’s stock Financial Accounting Standards Boards requires companies to expense stock options thereby making them not as attractive Performance-Based Pay : 69 Performance-Based Pay Trend toward more performance-based compensation packages for executives Shareholders become increasingly disenchanted with high levels of executive compensation - performance-based pay may gain in popularity Executive Benefits (Perks) : 70 Executive Benefits (Perks) Any special benefits provided by a firm to small group of key executives and designed to give executives something extra Conveys status Personal use of corporate jet is soaring among Corporate America’s elite as an executive perk Golden Parachutes : 71 Golden Parachutes Perquisite that protects executives in event another company acquires firm or executive is forced to leave firm for other reasons Attempts to rein in obscene golden parachute plans Trends & Innovations: Outrageous Severance Pay Examples? : 72 Trends & Innovations: Outrageous Severance Pay Examples? Philip Purcell, Morgan Stanley, $113 million Stephen Crawford, Morgan Stanley, $32 million Harry Stonecipher, Boeing $600,000/year Carly Fiorina, Hewlett-Packard, $21 million Franklin Raines, Fannie Mae, $1.4 million/year Scott Livengood, Krispy Kreme, $46,000/month James Kilts, Gillette, $100 million Jack Welch, GE corporate $9 million annual pension plan payout, plus perks such as lifetime use of GE’s $80,000-per-month Manhattan apartment with free food and free maid service; lifetime use of GE fleet of corporate jets, including Boeing 737 jet; new Mercedes plus limousine and driver; and assorted free sports and opera box tickets A Global Perspective: Costs of Expatriates : 73 A Global Perspective: Costs of Expatriates Employers today know that it is more expensive to send workers abroad Tokyo ranks as most expensive city for expatriates, followed by London, Moscow and Osaka, Japan

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