Organisationspsychologie Philipps-Universit

1
MOS 342B Section 002 Winter 2007 Compensation
and Benefits Management Formulating the
Compensation Strategy
2
MOS 342B Strategy Formulation

• Overview
• Constraints on Compensation
• Steps in Formulating the Strategy
• Define required behaviour
• Define role of compensation
• Determine compensation mix
• Determine compensation level
• Evaluate strategy
• Specific Employee Groups

3
MOS 342B Strategy Formulation

• Constraints on Compensation Strategy
• Issues considered so far
• Strategic organizational context
• Employee behaviour and motivation
• Options of compensation mix
• Refers to where we want to arrive at
• But how far can we get?
• Legal constraints
• Labour market constraints
• Product/service market constraints
• Financial constraints of the organization

4
MOS 342B Strategy Formulation

• Legal Constraints
• Legal constraints in Canada
• Federal law (e.g., Human Rights Act, Standards of
  Labour)
• Provincial laws (e.g., Provincial Human Rights
  Acts, Employment Standards Acts)
• Types of Legislation
• Employment Standards
• Human Rights
• Trade Union
• Taxation

5
MOS 342B Strategy Formulation

• Legal Constraints
• Employment Standards Legislation that sets
  minimum standards for pay and other conditions of
  employment such as hours of work, vacation,
  statutory holiday, etc.
• Minimum pay ( 8.00/h in Ontario)
• Does not apply to contractors
• Higher for overtime work

6
MOS 342B Strategy Formulation

• Legal Constraints
• Human Rights Acts Legislation that prohibits
  discrimination in hiring or employment on the
  basis of race, ethnic origin, religion, gender,
  marital status, age
• 1987 Ontario introduced equal pay for work of
  equal value
• Companies are required to base payment on job
  evaluation

7
MOS 342B Strategy Formulation

• Legal Constraints
• Trade Union Legislation Legislation that defines
  the rights of parties involved in a collective
  bargaining relationship
• Tax Legislation
• Favours indirect pay and stock plans
• More tax deductions for contractors

8
MOS 342B Strategy Formulation

• Other Constraints
• Labour Market Constraints flowing from the
  relative levels of demand and supply for
  particular occupational groups
• How to handle in geographically dispersed
  companies?
• Product/Service Market Constraints on
  compensation strategy caused by the nature of the
  product or service market in which the firm
  operates
• Competitiveness, volatility
• Financial Constraints Profits, Cash-Flow

9
MOS 342B Strategy Formulation

• Formulating the Compensation Strategy

Define the Required Behaviour
Define the Role of Compensation
Determine the Compensation Mix
Determine the Compensation Level
Evaluate the Proposed Strategy
10
MOS 342B Strategy Formulation

• Defining Required Behaviours
• Task Behaviour Dimensions
• Simple vs. complex
• Narrow vs. broad
• Errors uncritical vs. critical
• Independent vs. interdependent output
• Impact of individual on organizational
  performance
• Off-task Behaviour
• Citizenship Importance of cooperation,
  suggestions, etc.
• Counterproductive behaviour Expected damage
• Costs of turnover (recruitment, training,
  customer and employee satisfaction)

11
MOS 342B Strategy Formulation

• Defining Required Behaviours
• Characteristics HR managers think applicants
  consider
• Career advancement opportunities
• Compensation plan/level
• Company reputation
• Management/leadership style
• Corporate culture
• Profitability
• Findings from more elaborate studies
• Job security may be more important than revealed
  in surveys
• Different applicants have different preferences,
  strategies
• Importance of perceived fit, first contact
  (interview), etc.

12
MOS 342B Strategy Formulation

• Defining the Role of Compensation
• Q How important is compensation within the mix
  of rewards to generate desired behaviours?
• Analyze impact of reward components on behaviour
  components for
• Production-line worker
• Tree planter
• Design engineer

13
MOS 342B Strategy Formulation

• Defining the Role of Compensation
• Define behavioural objectives
• Production-line Attract sufficient number of
  applicants
• Tree planter Maintain retention motivate task
  behaviour
• Design engineer Attract qualified applicants
  promote creativity, OCB, skill development
• Find and define measurable indicators for
  behavioural objectives
• Production-line 50 more applications than
  turnover
• Tree planter Turnover per season lt 10 overall
  production gt 200 trees/h
• Design engineer Acceptance rate of job offers gt
  75 of design awards, suggestions, successful
  trainings

14
MOS 342B Strategy Formulation

• Determining the Compensation Mix
• Q How can components of compensation mix be
  combined to achieve behavioural objectives?
• Example Design engineer
• Recruiting/retaining qualified engineers base
  pay, stock plans
• Promote creativity targeted bonus (group or
  individual)
• Promote OCB group performance pay, targeted
  bonus, profit sharing
• Promote learning benefits (course
  reimbursement), PKS

15
MOS 342B Strategy Formulation

• Determining the Compensation Level
• Q How much compensation should be offered
  overall?
• Two important considerations
• Legal, market, and financial constraints
• Utility of expected outcomes
• Three general policies
• Lag compensation Payment below job market level
  to safe costs
• Lead compensation Payment above market level to
  improve performance
• Match compensation Payment at market level to
  reduce effects of uncertainty about outcomes
  (best guess)

16
MOS 342B Strategy Formulation

• Determining the Compensation Level
• Utility (of Compensation) Analysis Defining the
  range of expected financial effects of changes in
  level of compensation
• Determine current revenue and personnel costs
• Identify the range and size of possible effects
  of changes (direct and indirect pay, turnover and
  replacement costs, productivity, soft criteria
  like customer and employee satisfaction, context
  factors)
• Combine criteria and individual parameters in a
  formula
• ?U (? revenue components) (? cost
  components)
• Estimate expected changes for a range of
  scenarios and time periods
• Compare and decide

17
MOS 342B Strategy Formulation

• Evaluating the Proposed Strategy
• Preliminary review of how well the strategy
  serves compensation purposes or goals (cf. LONG,
  p.9)
• Bottle-neck or no go criteria (must be met)
• Affordability
• Legality
• Minimum applicant attraction
• Desired effects
• Fit with managerial strategy and organizational
  culture
• Promote desired behaviour
• Equity
• Cost-effectiveness

18
MOS 342B Strategy Formulation

• Case Study Fit Stop Ltd.
• CEO Susan Superfit hired you to formulate a
  compensation strategy for her firm. Using the
  5-step process, formulate such a strategy and
  summarize the compensation mix by assigning
  percentages to each component. Give your
  rationale for each element of the strategy.

19
MOS 342B Strategy Formulation

• Specific Employee Groups
• Hybrid approaches Different systems for specific
  groups
• Can be considered for functional groups (e.g.,
  production, clerical, managerial, professional),
  hierarchical levels, regions, etc.
• Most common specifically compensated groups
• Contingent workers
• New employees
• Expatriates and foreign employees
• Executives

20
MOS 342B Strategy Formulation

• Contingent Workers
• Workers not employed on a permanent, (full-time)
  basis
• Proportion of new employees hired into temporary
  work doubled between 1989 and 2004 (now at 21 )
• Two different groups
• Professionals or specialists only needed for a
  specified project (-gt acquiring special
  expertise)
• Contingent workers doing similar work as regular
  employees (-gt flexibility in dealing with demand
  fluctuations)
• Other reasons for contingent work
• Screening for regular employment
• Legal constraints (employment standards) do not
  apply to contract workers, and benefits not to
  contingent workers
• Buffering core employees

21
MOS 342B Strategy Formulation

• New Employees
• Two-tier wage system Pay system in which new
  employees are subject to a different (lower) pay
  structure than existing employees
• Objective Establishing a lower overall pay level
• Problems
• May cause resistance and dissatisfaction in the
  high-tier
• New hires feel as second-class citizens
• May be illegal on a permanent basis

22
MOS 342B Strategy Formulation

• Expatriates and Foreign Employees
• Expatriates Employees sent to foreign country
  for a longer period of time
• Foreign employees Local citizens hired by an
  internationally operating company
• Compensation models for expatriates
• Balance sheet Expatriate compensation that
  attempts to provide a standard of living
  comparable with the home country
• Lump sum Payment of balance sheet components in
  home-country cash
• Localization Payment according to local market
  compensation
• Negotiation Individual agreement on acceptable
  compensation package

23
MOS 342B Strategy Formulation

• Executives
• Some Figures on Executive Payment
• In 2002, average payment of CEOs of major US
  corporations was 531 times the average pay of
  factory workers (1960 43 times)
• Among the 10 highest-paid Canadian CEOs, base pay
  (salary) made up 2.3 of annual pay, whereas
  income from stock options amounted to 74
• Payment in stock options is significantly related
  to company stock prices, but otherwise, executive
  pay components and indicators of company
  performance are unrelated
• US 2005 Fortune 500 rankings
• Highest-paid T.S. Semel (Yahoo) 230.6 Million
  -US
• Best performer (6-year) R.K. Cole (NCF) 1.3
  Million -US
• Worst performer (6-year) P. Cartwright
  (Calpine) 13 Million -US

24
MOS 342B Strategy Formulation

• Executives
• Problems with Executive Stock Options
• Dilution of equity
• Low employee morale
• Incentive for short-term orientation, and even
  white-collar crime (see Enron example, p.225)
• Alternatives to Executive Stock Options
• Restricted stocks
• Long-term incentives
• Bonuses
• Indirect pay (including golden parachute)