Unit 4:Total Rewards

1. Unit 4:Total Rewards

2. Total Rewards: Financial & Non Financial

3. Inducements: Rewards for Work Financial Compensation Non-financial Compensation Direct Pay Wages Salary Job Content Interesting duties Responsibilities Achievement Recognition Challenge Advancement Incentives Merit Pay Piece-Rate Incentives Bonuses Group Incentives Gain Sharing Profit Sharing Executive Incentives Benefits Health Care Accident Insurance Pay for Time Not Worked Workers’ Compensation Social Security Pensions Employee Services Job Environment Comfortable Working Conditions Friendly Co-workers Considerate Supervision Status and Position Fair Company Policies Compatible Work Schedule • Inducements: • People are willing to work for the inducements or rewards they receive from working. • An employment exchange occurs when there is a balance between the inducements offered by the organization and the contributions made by the employees.

4. Strategic Relationships Between Compensation and HR Functions Compensation System Pay and benefits can attract or discourage potential employees in the recruiting, selecting, and hiring process. Staffing Availability of potential employees and labor market conditions influence pay and benefits. Pay incentives influence performance levels and wage levels can bias the evaluation process. Performance Evaluation Performance evaluation should be a significant determinant of individual compensation. Pay incentives can stimulate interest in training and reinforce the development of new skills. Training & Development Higher skill levels should lead to higher levels of pay. Inadequate or inequitable compensation systems create employee dissatisfaction, union organizing, & labor grievances. Employee Relations Pay rates and benefits may be negotiated with employee groups or a labor union.

5. Discussion Question: What are the objectives of a compensation system? What happens if all of these objectives are not considered simultaneously?

6. Cost/benefit effective Legal Secure Compensation Motivating Equitable Adequate • Objectives of Compensation: • All pay decisions should satisfy six objectives and each of these objectives is important in developing a sound compensation system. Strategic Objectives of Compensation

7. Compensation within Different Labor Markets: • Three meaningful labor markets include: (1) blue-collar and non-supervisory white-collar workers, (2) professional employees, and (3) supervisors and executives. The Determinants of Pay in Three Labor Markets

8. Determinants of Pay: • Many factors besides the job market influence pay levels, and these factors need to be considered as a whole. • What are the major factors that influence pay?

9. Three Wage Decisions: The development of a sound wage and salary system requires three basic decisions. Each decision answers a critical question regarding an organization’s compensation program: • Wage-level decision • Wage-structure decision • Individual wage decision

10. The Wage-level Decision

11. Discussion Question: What would be the consequences of a wage-level decision that pays wages that are significantly higher than the market rate?

12. Establishing the Wage Level: A sound wage-level policy is expected to achieve three objectives: • To attract an adequate supply of labor. • To keep present employees reasonably satisfied with their compensation. • To avoid costly turnover.

13. Factors Influencing the Wage Level: The most significant factors influencing wage levels are: • Organizational Size • Unionization • Productivity (Ability to Pay)

14. Wage Surveys: The major tool for making wage-level decisions is the wage survey. These surveys collect information about the compensation and benefits of other employees in similar industries or in the same geographical region. There are three primary kinds of wage surveys: • Government surveys • Private industry surveys • Company-sponsored surveys What four conditions must be met for do-it-yourself wage surveys to be useful?

15. Discussion Question: What are the major limitations of information gained from wage surveys?

16. Job Evaluation Methods

17. Job Evaluation: The basic purpose of job evaluation is to eliminate pay inequities and create a wage structure that identifies appropriate pay ranges for different jobs. What are the different methods of job evaluation?

18. Ranking Method: The simplest method of developing a wage structure is to have the job-evaluation committee rank the jobs from highest to lowest in value. What are the advantages and disadvantages of the ranking method?

19. Classification/Grading Method: The classification process includes: • Specifying a number of grades and writing broad descriptions of the types of jobs in each of the grades. • Each job description is compared with the descriptions for the grades. • The job grades range from high to low, and each grade has a verbal description and examples of the kinds of jobs that fit into it. What are the advantages and disadvantages of the classification/grading method?

20. Point Method: The point method consists of the following steps: • Identify key jobs. • Identify job factors used to determine pay levels. • Weight the factors according to their contribution to the overall worth of the job. • Divide each job into degrees that range from high to low and assign points to each degree. • Reach a consensus about degree assignments. • Develop a wage curve using key jobs. Why is the point method the most frequently used job evaluation?

21. Wage Curve: • The number of points assigned to each job determines a range of pay for that job. Illustration of a Wage Curve Using the Point Method of Job Evaluation Wage curve passes through the midpoint of each pay grade $

22. Point Assignments: • The weights assigned to the factors will reflect the values of management and society. The most heavily weighted factors tend to be responsibility, knowledge, education, experience, complexity of duties, and supervisory responsibilities. Point Assignments for Four Compensable Factors

23. Discussion Question: In developing a wage curve, why is it so important for the key jobs to be equitably paid jobs?

24. X Pay $ Y Points • Wage Curve: • The total points for each job are calculated by summing the points assigned for each factor. Once the total points and the average pay of the key jobs have been determined, the data can be plotted on a graph. Illustration of a Wage Curve Based on 15 Key Jobs

25. Factor Comparison Method: The factor-comparison method consists of the following steps: • Identify key (benchmark) jobs • Identify job factors • Rank jobs • Assign monetary amounts to each job on each factor • Compare unique jobs with key jobs

26. Factor Comparison Method: The Factor Comparison Method Using Student Jobs in a University Library

27. Guide Chart-Profile Method: The Guide Chart-Profile Method (Hay Method) uses three compensable factors: 1. Know-how 2. Problem solving 3. Accountability Because the compensable factors of the Hay Method are defined so broadly and generally, this system can be used for many different industries and many different jobs.

28. Job Pricing and Pay Rate Administration

29. When a wage structure is developed, jobs are grouped into pay grades according to the points associated with them, and a range of pay is assigned to each pay grade. Illustration of Pay Grades Constructed Along the Wage Curve Maximum Red circle rate Hourly wage Trend line Maximum for labor grade 2 Minimum limit line Starting wage for labor grade 2 Pay range

30. Illustration of Two Pay Ranges 10% $ 20% Points • Most pay grades have pay ranges that are ten to 20 percent above and below the midpoint of each grade, called the range spread.

31. Discussion Question: What are compa-ratios and how can they be used?

32. Discussion Question: What are red circle rates? What alternative methods does a company have for handling red circle rates?

33. Adjusting the Wage Curve: Two methods are used to adjust the wage curve. • fixed-rate- increase • percentage increase What are the consequences of adjusting the wage curve?

34. Individual Pay Rate Determination: • The individual wage decision concerns the relative pay of individuals who perform similar jobs in the same company. • The individual wage decision influences feelings of job satisfaction and pay equity. • Performance: Performance differences are clearly the most reasonable and well-accepted justification for paying differential amounts. • Experience: A common justification for giving some employees more money is that they have more experience. • Seniority: Pay differentials based on seniority or length of service are found in many compensation systems. • Potential: Occasionally, organizations pay higher than average wages to individuals who demonstrate outstanding potential.

35. Pay Decisions: Pay decisions are controlled by two basic processes. • The design of the wage structure • The formal budgeting process

36. Economic Factors Affecting Compensation

37. Economic Factors Affecting Compensation: • Inflation • Interest rates • Industry competition • Foreign competition • Economic growth • Demographic trends

38. Demographic Trends: The labor market is primarily influenced by five demographic forces: • birthrates • participation rates • immigration • education • unemployment How can demographic trends in the labor market impact wages?

39. Discussion Question: How does an increase or decrease in unemployment rates influence a company's compensation system?

40. Incentive Compensation Systems

41. Money and Motivation Theories: Money is a significant factor in almost every theory of motivation. How is money viewed in the following theories? • Need Theory • Self-determination Theory • Expectancy Theory • Equity Theory • Goal Setting Theory

42. Discussion Question: According to Expectancy Theory, what should a supervisor do to motivate an employee?

43. Efforts to Reduce Inequity: Inequity can exist when people are either overpaid or underpaid. Both conditions or inequity motivate individuals to establish a more equitable exchange. What methods do individuals use to reduce inequity?

44. Merit pay consists of periodically evaluating the performance of all employees and giving commensurate pay increases. Merit-Increase Guidelines: Fixed Increase or Discretionary Increase

45. Discussion Question: What conditions are necessary for these individual incentive plans to operate effectively: piecework, merit pay increase, commission sales, and the standard hour plan?

46. Straight piecework: 25 cents/unit $ Taylor’s differential piece-rate plan: 22 cents/unit if less than standard; 27 cents/unit if more than standard Standard Number of units produced Piece-Rate Incentives: Under a piece-rate incentive system workers are paid a fixed amount for each item produced. Two types of piece-rate plans are: • Straight piecework • Differential piece-rate A Comparison of Straight Piecework and F.W. Taylor’s Differential Piece-Rate Plan

47. The Standard Hour Plan: Workers are paid an hourly wage, but the hour is measured in units produced rather than in minutes. If workers perform the standard amount each hour, they receive the hourly wage, but if they produce above standard, they receive proportionately more money.

48. Discussion Question: What is "restriction of output," and why does it occur? What can be done to avoid it?

49. Units per hour 60 Standard 56 Group norm Starting date Two and one-half weeks later Restricting Productivity: Illustration of Group Norms Restricting Productivity: Individual Productivity of a New Employee

50. Skill and Knowledge Based Pay: • Skill and knowledge based pay programs reward employees for their ability to perform an array of related tasks or skills rather than for the actual work performed. • Skilled based pay and pay for knowledge programs must be designed to fit the requirements of the job and the company’s overall compensation program.