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Module 5: Overview

Module 5: Overview. Discussion: Design of payment system I Reading: Reward good performance Mini case : Harrah’s entertainment Inc.: Rewarding our people. Agenda. Lectures: Compensation objectives Components of compensation Determinants of pay levels Pay equity

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Module 5: Overview

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  1. Module 5: Overview • Discussion: Design of payment system I • Reading: Reward good performance • Mini case:Harrah’s entertainment Inc.: Rewarding our people

  2. Agenda • Lectures: Compensation objectives Components of compensation Determinants of pay levels Pay equity Competency-based pay • Case: Lincoln Electric (from the reading)

  3. Importance of Compensation • Impacts employer’s ability to attract & retain employees • Ensure optimal levels of employee performance in meeting organization’s strategic objectives • Maintain a cost structure that enable it to compete

  4. Compensation System

  5. Corporate Policies, Competitive Strategy,and Compensation • Aligned reward strategy • To create a bundle of rewards—a total reward package—specifically aimed at eliciting the employee behaviors the firm needs to support and achieve its competitive strategy. • The HR manager will write the policies in conjunction with top management, in a manner such that the policies are consistent with the firm’s strategic aims.

  6. Developing an Aligned Reward Strategy Questions to Ask: 1. What are our company’s key success factors? What must our company do to be successful in fulfilling its mission or achieving its desired competitive position? 2. What are the employee behaviors or actions necessary to successfully implement this competitive strategy? 3. What compensation programs should we use to reinforce those behaviors? What should be the purpose of each program in reinforcing each desired behavior? 4. What measurable requirements should each compensation program meet to be deemed successful in fulfilling its purpose? 5. How well do our current compensation programs match these requirements? Table 11–1

  7. Determinants of Compensation levels • Tied to a wage/salary rate that is set by a rough analysis of market compensation. • Analyzing job against its objective characteristics (through job analysis) and setting value for the job (job evaluation). • Pay for skills, knowledge, and competencies. • Seniority and tenure based pay • Dispersion & Compression

  8. Key Strategic Issues in Compensation • Determining compensation relative to market • Balance between fixed & variable compensation • Deciding whether or not to utilize team-based versus individual pay • Creating appropriate mix of financial & non-financial compensation • Developing cost-effective compensation program resulting in high performance

  9. Equity & Work-Related Outcomes

  10. Equity Theory

  11. Internal Equity • Fairness of pay differentials between different jobs in organization • Can be established by conducting careful job evaluations using techniques such as job ranking, job classification, and point systems.

  12. External Equity • Fairness of organizational compensation levels relative to external compensation • Assessed by collecting wage & salary information to guide in setting organization’s pay strategy to lead, meet or lag labor market wages

  13. Individual Equity • Fairness about pay differentials among individuals in same job • Established by using • Seniority-based pay systems • Merit-based pay systems • Incentive plans: Employees receive part of compensation based on performance • Skills-based pay systems: Compensation based on employees possessing skills that firm values • Team-based pay plans: Encourage cooperation & flexibility

  14. How much pay inequality? • Pay inequality highest when -- Culture, society stress individual -- Large variation in skills -- Performance easy to measure -- Technology: stars have high value

  15. What Is Competency-based Pay? • Competency-based pay • Where the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds. • Competencies • Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.

  16. Why Use Competency-Based Pay? • Paying for skills, knowledge, and competencies is more strategic. • Measurable skills, knowledge, and competencies are the heart of any company’s performance management process. • Competency-based pay system can be easily linked to training program and the strategic needs of the organization

  17. Basic Model of How to AlignHR Strategy and Actionswith Business Strategy Figure 3–9

  18. Competency-Based Pay in Practice • Main components of skill/competency/ knowledge–based pay programs: • A system that defines specific skills, and a process for tying the person’s pay to his or her skill • A training system that lets employees seek and acquire skills • A formal competency testing system • A work design that lets employees move among jobs to permit work assignment flexibility.

  19. Competency-Based Pay: Pros and Cons • Pros • Higher quality • Lower absenteeism and fewer accidents • Cons • Pay program implementation problems • Cost implications of paying for unused knowledge, skills and behaviors • Complexity of program • Uncertainty that the program improves productivity

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