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					                                      Pay Structure and Benchmarking

Learning objectives:
    Integrate information about organizational culture and strategy with the point-factor method of
    See how differences in a company’s wage policy can have dramatic effects on their overall
       compensation bill


The pay structure of a company is a reflection of numerous factors, including the company’s desire to
minimize costs, attract the best people, target revenues towards the most important positions, and maintain
a sense of fairness among all employees. Of course, these goals are often in opposition to one another. As
such, managers must carefully consider how they are making tradeoffs between different values.


Dayton’s is a large department store chain with locations primarily in the upper Midwest. This organization
has recently restructured its operations and believes that it needs to engage in a similar restructuring of its
wages. The previous compensation package was increasingly seen as inadequate for the company’s
purposes. Specifically, wages were set from location to location by individual managers, making cost
accounting very difficult, and often resulting in extreme wage fluctuations from store to store. There is data
collected at the corporate level that summarizes individual managers’ decisions, but pay policies vary
widely from location to location. To rectify this situation, Dayton’s CEO is strongly committed to a mission of
developing a single point factor system that will cover wages in all stores. To develop this program, you
have been asked to generate a new pay system for the company’s flagship store in downtown Chicago.
This store employs approximately 150 individuals, although many are part time.

Dayton’s has achieved competitive advantage by being a premier location for designer clothing and
accessories. This distinction has been achieved by an intensive training program for sales floor
employees, who are known for their courtesy, product market knowledge, and attention to customer
concerns. Employees typically work in teams of two or three per product area. Staffing levels are adjusted
to reflect demands at different times of day.

Each store consists of eight different functional areas. The store manager runs most aspects of the day-to-
day administration of the store. There are a small number of buyers for each store who buy special order
items. A limited individual promotions group is also present at each store to facilitate sales and special
displays. There are also individuals who work on display preparation. The direct customer service staff is
lead by a department head that runs a specific area of the store, such as cosmetics, jewelry and
accessories, women’s formal wear, women’s casual wear, and so on. Each department manager
supervises the equivalent of 9 full time equivalent employees (FTE), although the actual number of
supervised employees is generally about double this number because many employees work part time
schedules. For most operating hours the store maintains at least one greeter at the main entrance who
welcomes shoppers, provides information about sales, and answers questions. Finally, the store has a
small photo shop for posed family photography. Additional support for computer operations and accounting
is provided by the central corporate offices, and janitorial work is outsourced through the malls that stores
are located in, so these positions will not be under consideration.

To assist you with this project, the company’s corporate HR office conducted a salary survey in the area to
determine wages for each position. Unfortunately, the salary survey provides no comparable wage
estimates for the greeter or computer sales representative positions, so these will have to be estimated
based on the overall system’s values. The HRIS department has also developed a spreadsheet program to
rapidly cost out any proposed system based on a small number of pieces of information you’ll fill in. The
spreadsheet is available on the course website.

In the spreadsheet, you need to determine the following pieces of information (fill in the blue cells):

    1. Conduct a brief job evaluation for the primary jobs in the store
    2. The importance for the three compensable factors: this means that you have to determine how
       much weight you want to put on mental effort, physical effort, and responsibility when setting
    3. The pay level relative to the market. This is a reflection of what your store pays, on average,
       compared to its competitors.
    4. The pay structure relative to the market. This is a reflection of how well your store pays its top
       employees relative to its bottom employees.

You have to not only develop these estimates, but you also have to be able to develop and explain your
decisions to a group of executives. In explaining your system, you’ve heard that your boss is very
interested in the concepts of internal equity, external equity, and a thorough consideration of both the
incentive effects of a system as well as its match to organizational strategy so you’d better mention them.

At home directions:

    1. Print out the results of your spreadsheet
    2. Print out the two graphs that the spreadsheet produces
    3. Compare your system’s costs to the previous system or paying employees according to the current
        system. How is the current system similar to or different from the market system? Do you think this
        is a reflection of the company’s policies and procedures, or is it likely to be due to distortions based
        on individual manager behavior?
    4. Provide an explanation for why you made the decisions you did regarding:
             a. Putting the weights on the three compensable factors
             b. Setting your pay level relative to the market
             c. Setting your pay structure relative to the market
    5. Describe how pay rates within the organization are likely to change with a new system.
             a. Describe how you will explain this system to managers who might resist corporate
             b. Are some jobs going to see major pay increases at an organization-wide level? Will some
                  jobs face potential pay cuts? How will you communicate this particularly sensitive
    Make certain that you are following your boss’ directives to take internal equity, external equity,
    incentives, and the match between the incentive system and organizational strategy into account.
In class follow up:

    1. Compare your answers for the compensation systems across the members of your group. What
       differences did you observe? What were the similarities?

    2. The Dayton’s chain has traditionally trained its employees from the entry level up, believing that
       their unique brand of customer-service driven business will be best understood and maintained by
       managers who have actually worked on the sales floor. However, the pay for managerial
       employees has not been high enough for most clerks to take on the additional responsibilities
       involved. As a result, the company has turned to outside recruiting, but these externally hired
       managers are perceived as “outsiders” by current sales clerks. The top management team has
       made it clear that the internal promotion policy needs to be restored because external hiring simply
       isn’t working. What steps might the company take in terms of its compensation plan to increase
       clerks’ desire to achieve supervisor status?

    3. Recently there has been a huge outflow of Dayton’s management employees in areas where
       Dayton’s is going head-to-head with Marshall Fields department store chain. Part of the reason for
       this outflow because Marshall Fields works hard to recruit Dayton’s managers. Marshall Field’s
       compensation system strongly emphasizes top management excellence; in other words, they tend
       to have a very steep job structure. Their compensation is heavily weighted towards decision-
       making factors. Dayton’s has historically put its faith in top-flight sales floor employees, but
       Marshall Fields success at recruiting managers, is creating real concern. One obvious option is to
       try to match Marshall Fields in terms of top management pay, but that almost certainly involves
       paying lower level employees less. How would you accomplish this goal using the point factor
       compensation system, and what concerns would you have about this change?

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