pensation:MethodsandPolicieschapter11Apensationsystemshouldbe:(*focusofthischapter)AdequateEquitableBalanced*Cost-effective*Secure*Incentive-providingAcceptabletotheemployee*Totheindividualemployee,themostimportantpensationdecisionishowmuchheorshewillearn.DeterminationofIndividualPayThreequestionsneedtobeaddressed:Howshouldoneemployeebepaidrelativetoanotherwhentheybothholdthesamejobintheorganization?Shouldwepayallemployeesdoingthesameworkatthesamelevelthesame?Ifnot,onwhatbasisshouldwemakethedistinction?Paydifferentialsarebasedon:Individualdifferencesinexperience,skills,andperformanceExpectationsthatseniority,higherperformance(orboth)deservehigherpayReasonsforchoosingtopayemployeesatdifferentratesforthesamejob:(1of3)PaydifferentialsallowfirmstorecognizethatdifferentemployeesperformingthesamejobmakesubstantiallydifferentcontributionstomeetingorganizationalgoalsDifferentialsallowemployerstomunicateachangedemphasisonimportantjobroles,skills,knowledge,etc.Reasonsforchoosingtopayemployeesatdifferentratesforthesamejob:(2of3)Differentialsprovideorganizationswithanimportanttoolforemphasizingnormsofenterprisewithouthavingemployeeschangejobs(i.e.,promotion)PaydifferentialsallowfirmstorecognizemarketchangesbetweenjobsinthesamegradewithoutrequiringamajoroverhaulofthewholepensationsystemReasonsforchoosingtopayemployeesatdifferentratesforthesamejob:(3of3)Withoutdifferentials,thepaysystemviolatestheinternalequitynormsofmostemployees,reducingsatisfactionwithpay,andmakingattractionandretentionofemployeesmoredifficultMethodsofPaymentFlatRatesPaymentforTimeWorkedVariablePay:IncentivepensationPaymentforTimeWorkedGeneral,across-the-boardincreaseforallemployeesMeritincreasespaidtosomeemployeesbasedonsomeindicatorofjobperformanceCost-of-livingadjustment(COLA)basedontheconsumerpriceindex(CPI)SeniorityVariablePayPercentageofanemployee’spaycheckisputatriskIfbusinessgoalsarenotmet,thepayratewillnotriseabovethelowerbasesalaryAnnualraisesarenotguaranteedHelpsmanagelaborcostsDoesnotguaranteeequitabletreatmentofemployeesSupportbymanagementAcceptancebyemployeesSupportiveorganizationalcultureTimingVariablePay:KeyDesignFactorsTypesofVariablePayIndividualIncentivesGroupIncentivesOrganizationIncentivesIndividualVariablePayMeritincentivesIndividualincentivespieceworkproductionbonusesmissionsMeritPayProblemsEmployeesfailtomaketheconnectionbetweenpayandperformanceThesecrecyoftherewardisperceivedbyotheremployeesasinequityThesizeofthemeritawardhaslittleeffectonperformanceIndividualIncentivesPossibleonlyinsituationswhereperformancecanbespecifiedintermsofoutpute.g.,salesdollarsgeneratede.g.,numberofitemspletedEmployeesmustworkindependentlyofeachothersothatindividualincentivescanbeappliedequitablyConditionsforEffectiveIndividualIncentivePlansThetaskislikedThetaskisnotboringThesupervisorreinforcesandsupportsthesystemTheplanisacceptabletoemployeesandmanagersTheincentiveisfinanciallysufficienttoinduceincreasedoutputQualityofworkisnotespeciallyimportantMostdelaysinworkareundertheemployees’controlReasonstoUseTeamIncentivesWhenitisdifficulttomeasureindividualoutputWhencooperationisneededtopleteataskorprojectWhenmanagementfeelsthisisamoreappropriatemeasureonwhichtobaseincentivesOrganization-wideIncentivesUsuallybasedononeoftwoperformanceconcepts:AsharingofprofitsgeneratedbyallemployeesaltogetherAsharingofmoneysavedasaresultofemployees’effortstoreducecostsApproachestoOrganization-wideIncentivesSuggestionSystemsGainsharingProfitSharingOwnershipSuggestionSystems:EssentialElementsManagementmitmentCleargoalsDesignatedadministratorStructuredawardsystemRegularpublicityImmediateresponsetoeachsuggestionGainsharingPlansEmployeesearnbonusestiedtounit-wideperformanceasmeasuredbyapredetermined,gainsharingformulamonlyusedgainsharingplans:LincolnElectricPlanScanlonPlanRuckerPlanImproShareKeyElementsinDesigningaGainsharingPlanStrengthofreinforcementProductivitystandardsSharingthegainsScopeoftheformulaPerceivedfairnessoftheformulaProductionvariabilityNewerApproachestoGainsharingBusinessPlanGainsharingWinsharingSpotGainsharingTypicalProfitSharingPlansCashorcurrentdistributionplansprovidefullpaymenttoparticipantssoonafterprofitshavebeendeterminedDeferredplanscreditaportionofcurrentprofitstoemployees’accountswithcashpaymentsmadeatthetimeofretirement,disability,severance,ordeathAbinationofbothincorporatesaspectsofcurrentanddeferredoptionsOwnershipEmployeestockownershipplan(ESOP)–employeesreceivestockinthepanyESOPsaretaxqualifiedi.e.,inreturnformeetingcertainrulesdesignedtoprotecttheinterestsofplanparticipants,ESOPsponsorsreceivevarioustaxbenefitsESOPsaredefinedcontributionplanstheemployersmakesyearlycontributionsthataccumulatetoproduceabenefitthatisnotdefinedinadvancePeople-BasedPaySkill-BasedPayKnowledge-BasedPayCredential-BasedPayFeedbackPayExecutivePayMorelikelytobebasedonparativeperformance:pensationmitteeslinkCEO’spaytoreturnstoshareholdersVariableperformance-basedpayisemphasizedoverguaranteesCEOsareencouragedtoinvestinpanystockPerformanceyardsticksarelinkedtoactualkeyproductivityindices,tothepetition,ortobothCEOsareheldresponsibleforthecostofcapitalIssuesinpensationAdministrationPaySecrecyorOpennessPaySecurityPaypressionGuaranteedAnnualWage(GAW)SupplementaryUnemploymentBenefits(SUB)CostofLivingAdjustments(COLAS)SeverancePayPaySecurityPlansSolutionstotheProblemofPaypression(1of2)Reexamininghowmanyentry-levelpeopleareneededReassessingrecruitmentitselfFocusingon