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Chapter 7

Pay Level the average of the array of rates ((base+bonuses+benefits+options)/number of employees) Pay Forms the mix of various types of payments that make up total compensation

External Competitveness
Labour Market Factors
Four Assumptions: employers always seek to maximize profits people are interchangable the pay rates reflect all the costs with employment markets are competitive (makes no sense to be above or below the market rate)

Product Market Factors Organization Factors


Degree of Competition Level of Product Demand Industry and Technology Employer Size Employees preferences Organization Strategy

Labour Demand theory (how Labour market factors are affected): Compensating Differentials work with negative characteristics requires higher pay to attract workers Efficiency Wage above market wages will improve efficiency by attracting workers who perform better Signalling pay policies signal the kinds of behaviour the employer seeks Labour Supply theory (how Labour market factors are affected): Reservation wage jobs seekers will not accept jobs when pay is below a certain wage Human Capital the value of an individuals KSAs is related to how long it took them to acquire it

Chapter 8
Externally Competitive Pay Policy: 1) Specify the employers external pay policy (lag, lead, match) 2) Define the purpose of the compensation survey a. Adjust pay level how much to pay b. Adjust pay mix what forms c. Adjust the pay structure d. Study special situations e. Estimate competitors labour costs 3) Choose relevant market competitors to survey a. Same occupation or skills required b. Same geographic area c. Same products and services

4) Design the survey a. Who should be involved (compensation staff or consultants) b. How many employers should be included (use public information for other companies or internet data) c. Which jobs should be included (benchmark or low-high approach which is looking at skills/competencies for jobs or benchmark conversion approach) d. What information to collect (base pay values work for similar jobs but does not give a big picture for high incentives since it is not included, total cash measures how work is valued but it can overstate pay since incentives may not be high, total compensation values the total work but not all employees receive the same forms) 5) Interpret survey results and construct the market pay line (verify the data, use statistical analysis, or age/trend the survey data) 6) Construct an internal pay policy line that reflects external pay policy (looking at pay grades with the ranges for the compensation the use of broadbanding if there are too many grades) 7) Balance competitiveness with internal alignment (ranges, flat rates, bands)

Chapter 9
Employee Benefits is growing because of: government involvement, unions, employer involvement, cost-effectiveness of benefits - Issues in benefits planning, design, and administration: o Establish plan objectives o Integrate benefits with other compensation components o Ensure external competitiveness o Ensure adequacy of benefits o Benefits administration (who should be benefited, how much choice should employees have, how should benefits be financed non-contributory, contributory, employeefinanced) Factors Influencing Choice of Benefits Package: Employer Factors: 1) Relationship to total compensation costs 2) Costs relative to benefits 3) Competitor offerings 4) Role of benefits in: Attraction, Retention, Motivation 5) Legal Requirements Employee Factors 1) Equity 2) Personal needs (age, sex, martial status, number of dependants) Advantages of Flex Benefits: 1) Employees choose packages that best satisfy their needs 2) Flex benefits help firms meet the changing needs of a changing workforce 3) Increased involvement of employees and families improves understanding of benefits 4) Flex plans make introduction of new benefits less costly -

5) Cost containment Disadvantages of Flex Benefits: 1) Employees make bad choices 2) Administrative burdens and expenses increase 3) Employees only pick what they need, thus, higher utilization increases costs Cost Containment is a part of administering the benefits: - Probationary periods - Benefit maximums - Coinsurance (employer pays some, employee pays rest) - Deductibles (deductible is paid by employee) - Coordination of benefits (when spouses have similar benefits) - Administrative cost containment Employee Benefit Types: - Legally Required Payments (Canada/Quebec Pension plan, Employment Insurance, Workers Compensation, Government-sponsored medical plans) - Requirement and savings plans - Life insurance and death benefits - Medical insurance - Income security (sick leave) - Payments for time not worked (breaks) - Miscellaneous benefits (parental leave, child care services) Defined Benefit Plan is a pension plan in which an employer agrees to provide a specific level of retirement pension, the exact cost of which is unknown - Provide an explicit benefit which is easily communicated - Company absorbs risk associated with changes in inflation and interest rates which affect cost - More favourable to long-service employees - Employer costs unknown - Pension fund surplus, but not deficit, must be shared with employees if plan is wound up Defined Contribution Plan is a pension plan in which an employer agrees to provide specific contributions, but the final benefit is unknown - Unknown benefit level is difficult to communicate - Employees assume these risks - More favourable to short-term employees - Employer costs known up front - No surplus or deficit in pension fund to manage

Chapter 10
Motivation Theories (based on what is important to the person, offering it in exchange for some, desired behaviour): - Maslows Need Hierarchy (content - what is important to the person) - Herzbergs 2-Factor Theory (content - what is important to the person) - Expectancy (process the nature of change)

- Equity (process the nature of change) - Reinforcement (reinforcement desired behaviour) - Goal Setting (reinforcement desired behaviour) - Agency (process the nature of change) Does Compensation motivate Behaviours: - Do people join a firm because of pay? - Do people stay in a firm because of pay? - Do employees develop job skills because of pay? - Do employees perform better because of pay? Performance Appraisal Errors: - Halo error, negative halo error, first impression error, recency error, leniency error, strictness error, central tendency error, similar-to-me error, spillover error Improve Performance Appraisal Errors: - Improve evaluation formats (rank: alternation ranking, paired comparison ranking; rate: BARS, management by objectives) - Select the right raters (use 360-degree feedback) - Understand how raters process the information (what they observe, what they remember, the actual evaluation) - Training raters to rate more accurately It Should: 1) A clear sense of direction 2) An opportunity for employees to participate in setting the goals and standards for performance 3) Prompt, honest, and meaningful feedback 4) Immediate and sincere reinforcement 5) Coaching and suggestions for improving future performance 6) Fair and respectful treatment 7) An opportunity for employees to understand and influence decisions that affect them EFC for Pay-for-performance plan: Efficiency strategy, structure, standards Fairness distributive justice, procedural justice Compliance comply with existing laws

Chapter 11
Advantages to Individualized Incentive Plans: 1) Substantial contribution to raise productivity, to lower production costs, and to increase earnings of workers 2) Less direct supervision is required to maintain reasonable levels of output than under payment by time

3) In most cases, systems of payment by results, if accompanied by improved organizational and work measurement, enable labour costs to be estimated more accurately than under payment by time Disadvantages to Individualized Incentive Plans: 1) Greater conflict may emerge between employees seeking to maximize output and managers concerned about deteriorating quality levels 2) Attempts to introduce new technology may be resisted by employees concerned about the impact on production standards 3) Reduced willingness of employees to suggest new production methods for fear of subsequent increases in production standards 4) Increased complaints that equipment is poorly maintained, hindering employee efforts to earn larger incentives 5) Increased turnover among new employees discourages by the unwillingness of experienced workers to cooperate in on-the-job training 6) Elevated levels of mistrust between workers and management Team/Group Sharing Plans: - Gain-sharing - Profit sharing - Earnings-at-risk Advantages of Group Incentive Plans: - Positive impact on organization and individual performance by about 5-10% a year - Easier to develop performance measures than for individual plan - Signals that cooperation, both within and across groups, is a desired behaviour - Teamwork supported by most employees - May increase participation of employees in decision making process Disadvantages - Line in sight may be lessened (may find it difficult to see how their performance affects the incentive payouts) - May lead to increased turnover among top individual performers who are discouraged because they must share with lesser contributors - Increases compensation risk to employees because of lower income stability may influence applicants to apply at firms where base salary is larger Components of an Executive Compensation Package: - Base salary - Short-term annual incentives or bonus - Long-term incentives and capital appreciation plans - Executive benefits - Executive perquisites

Chapter 12
The wage gap exists because of: - Difference in occupation - Differences in number of hours worked - Differences among industries and firms - Differences in union membership - The presence of discrimination

Chapter 13
Controlling Salary Costs: Top Down - Current years rise (wage changes) - Ability to pay (how much to increase or decrease pay level) - Competitive market (relative position compared to competitors) - Turnover effects (when people leave costs go down to replace them) - Cost of living (compare their living expenses to their pay) Controlling Salary Costs: Bottom Up - Instruct managers in compensation policies and techniques - Distribute forecasting instructions and worksheets - Provide consultation to managers - Check data and compile reports - Analyze forecasts - Review/revise forecasts and budgets with management - Conduct feedback with management - Monitor budgeted versus actual increases

Appendix
People get paid around the world depending on: - Economic factors - Institutional factors - Organizational factors - Employee factors Culture is rooted in beliefs, values, and assumptions of a group of people