Compensation:MethodsandPolicieschapter11ACompensationsystemshouldbe:(*focusofthischapter)AdequateEquitableBalanced*Cost-effective*Secure*Incentive-providingAcceptabletotheemployee*Totheindividualemployee,themostimportantcompensationdecisionishowmuchheorshewillearn.DeterminationofIndividualPayThreequestionsneedtobeaddressed:Howshouldoneemployeebepaidrelativetoanotherwhentheybothholdthesamejobintheorganization?Shouldwepayallemployeesdoingthesameworkatthesamelevelthesame?Ifnot,onwhatbasisshouldwemakethedistinction?Paydifferentialsarebasedon:Individualdifferencesinexperience,skills,andperformanceExpectationsthatseniority,higherperformance(orboth)deservehigherpayReasonsforchoosingtopayemployeesatdifferentratesforthesamejob:(1of3)PaydifferentialsallowfirmstorecognizethatdifferentemployeesperformingthesamejobmakesubstantiallydifferentcontributionstomeetingorganizationalgoalsDifferentialsallowemployerstocommunicateachangedemphasisonimportantjobroles,skills,knowledge,etc.Reasonsforchoosingtopayemployeesatdifferentratesforthesamejob:(2of3)Differentialsprovideorganizationswithanimportanttoolforemphasizingnormsofenterprisewithouthavingemployeeschangejobs(i.e.,promotion)PaydifferentialsallowfirmstorecognizemarketchangesbetweenjobsinthesamegradewithoutrequiringamajoroverhaulofthewholecompensationsystemReasonsforchoosingtopayemployeesatdifferentratesforthesamejob:(3of3)Withoutdifferentials,thepaysystemviolatestheinternalequitynormsofmostemployees,reducingsatisfactionwithpay,andmakingattractionandretentionofemployeesmoredifficultMethodsofPaymentFlatRatesPaymentforTimeWorkedVariablePay:IncentiveCompensationPaymentforTimeWorkedGeneral,across-the-boardincreaseforallemployeesMeritincreasespaidtosomeemployeesbasedonsomeindicatorofjobperformanceCost-of-livingadjustment(COLA)basedontheconsumerpriceindex(CPI)SeniorityVariablePayPercentageofanemployee’spaycheckisputatriskIfbusinessgoalsarenotmet,thepayratewillnotriseabovethelowerbasesalaryAnnualraisesarenotguaranteedHelpsmanagelaborcostsDoesnotguaranteeequitabletreatmentofemployeesSupportbymanagementAcceptancebyemployeesSupportiveorganizationalcultureTimingVariablePay:KeyDesignFactorsTypesofVariablePayIndividualIncentivesGroupIncentivesOrganizationIncentivesIndividualVariablePayMeritincentivesIndividualincentivespieceworkproductionbonusescommissionsMeritPayProblemsEmployeesfailtomaketheconnectionbetweenpayandperformanceThesecrecyoftherewardisperceivedbyotheremployeesasinequityThesizeofthemeritawardhaslittleeffectonperformanceIndividualIncentivesPossibleonlyinsituationswhereperformancecanbespecifiedintermsofoutpute.g.,salesdollarsgeneratede.g.,numberofitemscompletedEmployeesmustworkindependentlyofeachothersothatindividualincentivescanbeappliedequitablyConditionsforEffectiveIndividualIncentivePlansThetaskislikedThetaskisnotboringThesupervisorreinforcesandsupportsthesystemTheplanisacceptabletoemployeesandmanagersTheincentiveisfinanciallysufficienttoinduceincreasedoutputQualityofworkisnotespeciallyimportantMostdelaysinworkareundertheemployees’controlReasonstoUseTeamIncentivesWhenitisdifficulttomeasureindividualoutputWhencooperationisneededtocompleteataskorprojectWhenmanagementfeelsthisisamoreappropriatemeasureonwhichtobaseincentivesOrganization-wideIncentivesUsuallybasedononeoftwoperformanceconcepts:AsharingofprofitsgeneratedbyallemployeesaltogetherAsharingofmoneysavedasaresultofemployees’effortstoreducecostsApproachestoOrganization-wideIncentivesSuggestionSystemsGainsharingProfitSharingOwnershipSuggestionSystems:EssentialElementsManagementcommitmentCleargoalsDesignatedadministratorStructuredawardsystemRegularpublicityImmediateresponsetoeachsuggestionGainsharingPlansEmployeesearnbonusestiedtounit-wideperformanceasmeasuredbyapredetermined,gainsharingformulaCommonlyusedgainsharingplans:LincolnElectricPlanScanlonPlanRuckerPlanImproShareKeyElementsinDesigningaGainsharingPlanStrengthofreinforcementProductivitystandardsSharingthegainsScopeoftheformulaPerceivedfairnessoftheformulaProductionvariabilityNewerApproachestoGainsharingBusinessPlanGainsharingWinsharingSpotGainsharingTypicalProfitSharingPlansCashorcurrentdistributionplansprovidefullpaymenttoparticipantssoonafterprofitshavebeendeterminedDeferredplanscreditaportionofcurrentprofitstoemployees’accountswithcashpaymentsmadeatthetimeofretirement,disability,severance,ordeathAcombinationofbothincorporatesaspectsofcurrentanddeferredoptionsOwnershipEmployeestockownershipplan(ESOP)–employeesreceivestockinthecompanyESOPsaretaxqualifiedi.e.,inreturnformeetingcertainrulesdesignedtoprotecttheinterestsofplanparticipants,ESOPsponsorsreceivevarioustaxbenefitsESOPsaredefinedcontributionplanstheemployersmakesyearlycontributionsthataccumulatetoproduceabenefitthatisnotdefinedinadvancePeople-BasedPaySkill-BasedPayKnowledge-BasedPayCredential-BasedPayFeedbackPayExecutivePayMorelikelytobebasedoncomparativeperformance:CompensationcommitteeslinkCEO’spaytoreturnstoshareholdersVariableperformance-basedpayisemphasizedoverguaranteesCEOsareencouragedtoinvestincompanystockPerformanceyardsticksarelinkedtoactualkeyproductivityindices,tothecompetition,ortobothCEOsareheldresponsibleforthecostofcapitalIssuesinCompensationAdministrationPaySecrecyorOpennessPaySecurityPayCompressionGuaranteedAnnualWage(GAW)SupplementaryUnemploymentBenefits(SUB)CostofLivingAdjustments(COLAS)SeverancePayPaySecurityPlansSolutionstotheProblemofPayCompression(1of2)Reexamininghowmanyentry-levelpeopleareneededReassessingrecruitmentitselfFocusingonthejobev