Docstoc

Chapter 4 Reward and Compensation Systems

Document Sample
Chapter 4 Reward and Compensation Systems Powered By Docstoc
					      Chapter 4

Reward and Compensation
        Systems

                Raj Srinivas
               Jenny Gurwell
              Sharmin Attaran
            Objectives
Understand how competitive pay levels affect the
firm and its employees

Understand firm’s rational for meeting, lagging, or
leading the market in setting pay levels

Learn alternative approaches for maintaining an
internally consistent pay structure, including “job-
based” and “skill/competency-based” structures
              Objectives

Learn the process by which external competitiveness
and internal consistency are brought together to form
the pay structure and create pay levels

Examine some key approaches for performance-
contingent pay and pay at risk

See how flexible employee benefits and overall
benefit levels can help maintain a high quality
workforce
     Compensation

“All forms of financial returns and tangible
services and benefits employees receive as
part of an employment relationship”
             What can rewards and
                compensation do?


Attract and retain high-quality employees
Help maintain positive moral among
employees by maintaining perceptions of
fairness
Create an environment for producing high-
quality products, services and customer
satisfaction
 Pay Level: Maintaining External
Competitiveness in Compensation

      Meet

      Lag

      Lead
      Rationale
Meet
1. Employee dissatisfaction would result from
   failure to match competitor’s pay rates

2. The firm’s ability to attract employees would
   be limited by lower pay rates

3. Managers feel somehow obligated to pay
   prevailing rates
  Rationale
Lag

1. They provide other desirable outcomes to
   employees, such as advancement and
   training opportunities

2. They find other ways to encourage high
   levels of individual effort, such as creating
   performance-reward connections by putting
   large amounts of pay at risk
     Rationale
Lead
1. Attract the cream of the crop from the labor
   market
2. Produce high levels of employee satisfaction
3. Ability to retain outstanding employees
4. Can offset undesirable features at work, such
   as lack of opportunities for advancement,
   poor working conditions, or undesirable
   geographic location
         Effects of Pay-Level Policies
                   Compensation Objective
                    Attracting   Retaining   Controlling   Enhancing Employee
Pay Level Policy   Employees     Employees Labor Costs         Satisfaction


Lead Market            +             +             ?               +

Meet Market            =             =             =                =

Lag Market             --            ?             +                --
U.S. Bureau of Labor Statistics
Publishes pay information on a variety of
occupations for different geographic areas
Provides wage and benefit data by
occupation in particular regions
Publishes the Employment Cost Index
(ECI), which reports changes in
compensation costs
  Methods of Collecting Data
Interviews



Mail out questionnaires
         Surveys include…
A listing of benchmark jobs--
jobs well known across
companies

A job description

Spaces for the respondent to
provide information about the
total compensation for each job
in the company
 Types of Data Collected in Pay
           Surveys
Organizational data

Information about the total
compensation system

Specific pay data on each
incumbent in the jobs under
the study
  Pay Surveys Should Include
     Information About…
Bonuses
Long- and short-term incentives
Cost of living adjustments
Shift differentials
Uniforms
Subsidized parking and cafeterias
Other benefits and services
Pay Structure: Maintaining Internal
   Consistency in Job Pricing

Job pricing

Internal Consistency

Pay Structure Design
     Pay Structure Design

Fair to employees

Tied into the work performed

Directs employees’ key behaviors
 Pay Structure Design, cont.
Also includes:

– The number or pay grades or levels

– How much pay differential exists between and
  within pay levels

– Criteria used for determining pay differentials
 Pay Structure Design, cont.
Ultimate success depends on:

– How well the structure supports key employee
  behaviors

– Level of employee acceptance
    Establishing an Internally
Consistent Pay Structure Using Job
            Evaluation
 Skill- or competency-based pay

 Job-based pay
 – Unilateral approach
 – Market pricing
 – Job evaluation
     Rank
     Point method
Point Method of Job Evaluation
Compensable factors
 – Should relate to the actual work performed
 – Be linked to the strategy, culture, and values
   of the company
 – Be easy to communicate and acceptable to
   employees
Examples:
 – Level of skill, responsibility, or required
   working conditions
       Point Method, cont.
Job evaluation manual
– Compensable factors and definitions
– Factor degree scale
– Weights
  Table 4-2. Job-Based Pay: Example of
  Compensable Factors and Weights in a
     Point System of Job Evaluation
Factor                              Weight
Supervision Received:                  45
Physical Demand:                       60
Working Conditions:                    80
Experience and Training:              100
Complexity of Duties:                  75
Contact with Others:                    90
Responsibility for Equipment/Tools:   100
         Compensable Factors for
         Dental Hygienist position
Factor
  Knowledge
  Supervision received
  Guidelines
  Complexity
  Scope and effect
  Personal contacts
  Physical demands
  Work environment
  Supervisory duties
        Compensable Factor

Knowledge
Supervision received
Guidelines
Complexity
Scope and effect
Personal contacts
Physical demands
Work environment
Supervisory duties
             Complexity
General description:

Covers the nature, number, variety, and
intricacy of tasks, steps, processes, or
methods in the work performed; the
difficulty in identifying what needs to be
done; and the difficulty and originality
involved in performing the work.
        Compensable Factor
             Levels
Knowledge:                   Level 9
Supervision received:        Level 5
Guidelines:                  Level 5
Complexity:                  Level 6
Scope and effect:            Level 6
Personal contacts:           Level 4
Purpose of contacts:         Level 4
Physical demands:            Level 3
Work environment:            Level 3
        Compensable Factor
             Levels
Knowledge:                   Level 9
Supervision received:        Level 5
Guidelines:                  Level 5
Complexity:                  Level 6
Scope and effect:            Level 6
Personal contacts:           Level 4
Purpose of contacts:         Level 4
Physical demands:            Level 3
Work environment:            Level 3
                Complexity
Levels with description:
  1. The work consists of tasks that are clear-cut
  and directly related.
  2. The work consists of duties that involve
  related steps, processes, or methods.
  3. The work includes various duties involving
  different and unrelated processes and methods.
                Complexity
Levels with description:
  1. The work consists of tasks that are clear-cut
  and directly related.
  2. The work consists of duties that involve
  related steps, processes, or methods.
  3. The work includes various duties involving
  different and unrelated processes and methods.
           Dental Hygienist
              position
Knowledge:
Supervisory controls:
Guidelines:
Complexity:                   Level 2
Scope and effect:
Personal contacts:
Purpose of contacts:
Physical demands:
Work environment:
          Dental Hygienist
             Position

Complexity: Level 2

Each procedure leads to the next, examining
gums, scraping plaque, then cleaning teeth.
           Dental Hygienist
              position
Knowledge:                    Level 4
Supervisory controls:         Level 2
Guidelines:                   Level 2
Complexity:                   Level 2
Scope and effect:             Level 2
Personal contacts:            Level 2
Purpose of contacts:          Level 1
Physical demands:             Level 1
Work environment:             Level 2
 Points associated with each factor
               level
                              Levels
Factor                1     2   3    4      5

Knowledge             50   200   350   550 750
Guidelines            25   125   275   450 650
Scope & effect        25   75    150   225 325
Purpose of contacts   20   50    120   220 X
Work environment      5    20    50     X   X
Points Associated with each factor
              level
Factor                1     2     3     4   5

Knowledge             50   200   350   550 750
Guidelines            25   125   275   450 650
Scope & effect        25   75    150   225 325
Purpose of contacts   20   50    120   220 X
Work environment      5    20    50     X   X
                       Worksheet
Factor                       Level   Points
Knowledge                      4      550
Supervision received           2      125
Guidelines                     2      125
Complexity                     2       75
Scope & effect                 2       75
Personal contacts              2       25
Purpose of contacts            1       20
Physical demands               1        5
Work environment               2       20
Supervisory duties             1        0
                       Worksheet
Factor                       Level             Points
Knowledge                      4                  550
Supervision received           2                  125
Guidelines                     2                  125
Complexity                     2                   75
Scope & effect                 2                   75
Personal contacts              2                   25
Purpose of contacts            1                   20
Physical demands               1                    5
Work environment               2                   20
Supervisory duties             1                    0
                                   Total Points = 1020
  Point Ranges by Work Level
              Range of Level Points
Level          Low         High
 1              190          254
 3              455          654
 5              855        1104
  7            1355        1604
  9            1855        2104
  Point Ranges by Work Level
              Range of Level Points
Level          Low         High
 1              190          254
 3              455          654
 5              855        1104
  7            1355        1604
  9            1855        2104
            Job Structure

                Chief Nursing Officer


Administative     Clinical Director     Nursing Education
 Assistant                                   Director


                  Nurse Manager


                  Assistant Nurse
                     Manager


                                                            Revised May, 2002
Creating a Pay Structure: Blending
  External Competitiveness and
       Internal Consistency
Combining market pay rates and the firm’s
internally consistent job structure:

 – 1. Market pay line
 – 2. Adjustable pay policy line
 – 3. Pay grades
     broadbanding
  Figure 4-1. Pay structure with pay
     policy line and pay grades.
                                                                       Maximum

               Meet the Market                           Maximum        Midpoint
S
A
                                        Maximum           Midpoint
L
A                         Maximum                                      Minimum
R
                                                         Minimum
Y                          Midpoint
      Maximum
($)                                      Minimum
         Midpoint
      -----------------
                          Minimum
                                                                Pay Policy Line
       Minimum


                             Jobs (ordered by job evaluation points)
  Figure 4-1. Pay structure with pay
     policy line and pay grades.
                                                                       Maximum

               Lead Market                               Maximum        Midpoint
S
A
                                        Maximum           Midpoint
L
A                         Maximum                                      Minimum
R
                                                         Minimum
Y                          Midpoint
      Maximum
($)                                      Minimum
         Midpoint
      -----------------
                          Minimum
                                                                Pay Policy Line
       Minimum


                             Jobs (ordered by job evaluation points)
  Figure 4-1. Pay structure with pay
     policy line and pay grades.
                                                                       Maximum

                  Lag Market
S                                                        Maximum        Midpoint
A
                                        Maximum           Midpoint
L
A                         Maximum                                      Minimum
R
                                                         Minimum
Y                          Midpoint
      Maximum
($)                                      Minimum
         Midpoint
      -----------------
                          Minimum
                                                                Pay Policy Line
       Minimum


                             Jobs (ordered by job evaluation points)
Performance –Contingent
         Pay
  Powerful tool for enhancing
employee motivation
  Stimulate employees effort towards
reaching goals such as high
performance
  Creates instrumentality connection
Performance - Contingent Pay
 Rewards come in many forms
 Status and Recognition
 Challenging work
 Pay
 Promotion
 Opportunities for skill development
 Benefits
 Pay at risk
Performance –Contingent pay
                  Merit Pay
Performance is evaluated using a rating scale
& base pay is adjusted upward
No pay risk
May lose it motivational power if performance
appraisal is unfair or inaccurate
May inhibit cooperation & foster competition
among peers
Can harm self esteem, perception of equity
and passion for work
Performance – Contingent Pay
             Group Incentives
Gain sharing:
Unit wide bonus system based on
performance in comparison to some cost
index.
Profit sharing:
Add on bonus to pay, linked to division or
total company profits as compared to a
predetermined goal.
Plant Incentive Plan – “PIP”
 WHAT IS THE PLANT INCENTIVE PLAN
 – “PIP”?

 – The General Mills incentive plan.

 – Rewarding high performance and maintaining
   the standards.
            Supply Chain
Compensation Guiding Principles:

– Align, reward and leverage PERFORMANCE

– Attract and retain talent through
  COMPETITIVE PAY

– Ensure compensation costs are aligned with
  BUSINESS GOALS

– Leverage EMPLOYEE INVOLVEMENT
Plant Incentive Plan – “PIP”
  Incentive Plan is a self-funded
  savings pool.
  Funding pool must be generated
  through conversion cost savings.
  Funding pool does not begin until
  plan is exceeded.
      Incentive Principles
Business Strategy:
 – Incentive plans need to be aligned with business goals to
   create a “win/win” partnership.
Smart Goals:
       S = Specific
       M = Measurable
       A = Achievable
       R = Results – oriented
       T = Time-framed
Involvement:
 – Involvement is expected for every level in gaining employee
   acceptance, support and commitment to the business and
   the incentive process.
Leadership Championship:
 – Every team member must show clear sponsorship, active
   commitment and support of the incentive plan.
                    Costs
       GOALS          MEASUREMENT           PAYOUT
 SKU 4892            24.6 cases / wage hr    $100
 SKU 4893            27.5 cases / wage hr    $100
 VARIABLE LABOR /
                             $0.53           $100
CASE
                             $0.14
 FIXED LABOR /                               $100
                      less or equal to 4%
CASE                                         $100
 SHRINK                                      $500
       TOTAL
         Quality / Service
       GOALS           MEASUREMENT         PAYOUT
 FIRST PASS QUALITY         99.5%           $50
 CUSTOMER COMPLAINTS      1 / 30,000        $50
 PLANT AUDITS          90% OR SUPERIOR      $100
 SELF ASSESMENTS /
INSPECTIONS                  95%            $100
 NON PRODUCTIVE TIME   15 HOURS PER WEEK     $50
         TOTAL                              $350
        Safety / Environment
        GOALS             MEASUREMENT PAYOUT
 LOST TIME ACCIDENT-LTA         0      $100
 TOTAL INJURY RATE –TIR         2      $100
 ENVIRONMENTAL SCORE            5      $100
 COMMUNITY EVENTS           2 EVENTS   $100
 ENVIRONMENTAL              2 EVENTS   $100
PROJECTS                               $500
         TOTAL
        Plant / Individual Rating
        GOALS              MEASUREMENT PAYOUT
PLANT SCORECARD                 1.7        $100

INDIVIDUAL SAFETY RECORD          0        $100
INDIVIDUAL PERFORMANCE      0 occurrence   $100
SAFETY / GMP VIOLATIONS           0        $100
          TOTAL                            $400
   Incentive Payout Comparison


                  MAXIMUM          ACTUAL
FISCAL YEAR        PAYOUT         PAYOUT
   FY’01             $ 750          $ 650
   FY’02             $1,150         $ 750
   FY’03             $1,750          ? **

** Up to the Team’s Performance
Performance –Contingent Pay
   Individual Incentives/Commissions
Tied directly to employees extra output
Objective measure of performance under
this system
Low base pay and puts significant pay at
risk
Performance-Contingent Pay
  Stock options: Long term Incentive
Most controversial incentive in corporate
world
Linked to increasing firm’s stock price
and long term profitability
Becoming liked to corporate greed than a
motivation tool
Rewards and performance not aligned
Pay for Employee contributions
         Paying for skills
 Employees rewarded for
 acquiring additional skills
 Firm’s culture focused on
 personal growth and
 development
 Works well in firms wanting
 flexible & relatively permanent
 workforce
Performance –Contingent Pay
Can be applied to the following levels:
Individual
Group
Organization
Pay at risk
Pay for Employee Contributions
Typically used for Managers and
executives
Firm’s identify a set of broad
competencies based on it’s strategic
objectives & direction
Not as straight forward as other plans
Geared to focus on firm’s core
competencies and create competitive
advantage
Pay for Employee Contributions
              Seniority-Based Pay
Length of service is used for allocating rewards
including pay, promotions
Tenure helps to continue as an employee in the
face of downsizing
Unions traditionally favor seniority based
decisions during collective bargaining
Works well in firm’s looking for company specific
knowledge, loyalty and commitment, team
oriented behavior
        Employee Benefits
Significant part of total compensation
Significant driver for total pay in today’s
rising costs of benefits
Includes non financial rewards
Could be flexible or standardized
Includes vacation, private pension &
welfare plans, shift differentials, club
membership, education assistance etc.
Performance- Contingent pay
           Lump -Sum Bonuses
Increasingly used as substitute for merit
pay
One time agreement and not added to
base pay
Individual must re earn it year after year by
exceeding performance
Plan allows firm to better control wage
costs
Incentive Plan Overview

         PMP
Total Compensation Framework
Competitive + With Peer Companies:
 – Total Pay Opportunities Competitive With Peer
   Companies
 – 50th Percentile Base Salary
 – 75th Percentile Total Cash Compensation (Base
   Salary + Annual Incentive)
Strong Performance Orientation:
 – Merit Increases
 – Cash Incentive, Restricted Stock, And Stock Options
 – Top Performance Leads To Top Quartile Total Pay
   Annual Cash Incentive - PMP
                  Base
Base            Incentive       Individual       Plant          PMP
Salary           Percent          Rating         Rating       Incentive
$66,000   x       10%       x     1.20       x   1.50     =   $11,880




  Base Salary                      Amount Of Base Salary Earnings Paid
                                          During The Fiscal Year.
  Base Incentive Percent           Determined Based On Job Level
                                          (I.E. Level 15 = 10%)
  Individual Rating                Ranges From 0.0 To 1.5
  Plant Rating                     Ranges From 0.0 To 1.8
   Restricted Stock Match

Cash           Cash Payout At
Award          Fiscal Year-end



                   Restricted Stock Grant
  Restricted
                   Equal To 15% Of Cash Award
    Stock
    Match          Requires 1:1 Deposit Of Stock
                   4 Year Cliff Vesting
            Restricted Stock Award
               Example - PMP
                              Restricted          Share                  RSM
PMP/MIP          RSM            Stock             Price                 Shares
Incentive       Percent        Award           (on specific date)       Granted
$11,880     x    15%      =    $1,782      ÷        $46             =     38




   Shares Based On Incentive Award
   Share Price Established on Grant Date
  Total Annual Incentive - PMP
                                                        Total
                     Restricted         Total          Annual
     PMP/MIP           Stock           Annual         Incentive
     Incentive        Award           Incentive        Percent
      $11,880    +    $1,782      =    $13,662    =     20.7%


Performance link:
 Cash Incentive Range = $0 - $17,820
 Restricted Stock Award Value Range = $0 - $2,673
 Total Incentive Range = $0 - $20,493
 Incentive % of Salary Range = 0% - 31.1%
            Stock Options - PMP
                                                   Long-Term
                    Black-Scholes       Total       Incentive
      Number of     Stock Option    Stock Option      % of
       Options      Value (@ $46)      Value       Base Salary
        400       x     $12.48    =    $4,992    =    7.6%




Grants Made Annually (December)
Vesting & Exercising:
 – 4 Year Cliff Vesting
 – Participant Must Be Active Employee or Retiree (55 Yrs+)
 – Options Exercisable - 10 Years (If Active)
Employee Benefits: Flexibility and
           Levels
“Indirect compensations”
“Nonfinancial” rewards
Benefits:
 – Legally required
 – Private pension and welfare plans
 – Pay for time not worked
 – Premium pay
 – Miscellaneous benefits
            Benefits, cont.
2 Key issues regarding benefits:

– Benefit system flexibility
– Level of benefits
Figure 1-1. HRM System Design
Manufacturing
                                                                 External
  Low cost                                                       and
  high quality &                                                 internal pay
  Competitive                                                    alignments
  advantage

                     Traditional     Team environment                           HRM
                     manufacturing   Aligned with business                      systems
                     Productivity    (gain sharing, benefits,
                     retention



       Generic &                                                Compliance
       traditional                                              with federal
                                                                and State
                                                                laws for
                                                                payroll ad
                                                                benefits
 Conclusion / Key Thoughts
There is a wide variety of options available
in managing compensation and rewards.
The process of establishing wage, salary
and benefit plans depends heavily on
high-quality data.
Identify key employee behaviors for
aligning compensation with the company’s
business strategy.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:73
posted:7/26/2011
language:English
pages:76