Chapter 4 Reward and Compensation Systems

1
Chapter 4Reward and Compensation Systems

• Raj Srinivas
• Jenny Gurwell
• Sharmin Attaran

2
Objectives

• Understand how competitive pay levels affect the
  firm and its employees
• Understand firms 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

3
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

4
Compensation

• All forms of financial returns and tangible
  services and benefits employees receive as part
  of an employment relationship

5
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

6
Pay Level Maintaining External Competitiveness
in Compensation

• Meet
• Lag
• Lead

7
Rationale

• Meet
• 1. Employee dissatisfaction would result from
  failure to match competitors pay rates
• 2. The firms ability to attract employees would
  be limited by lower pay rates
• 3. Managers feel somehow obligated to pay
  prevailing rates

8
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

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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

10
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 -- ?
  --

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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

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Methods of Collecting Data

• Interviews
• Mail out questionnaires

13
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

14
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

15
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

16
Pay Structure Maintaining Internal Consistency
in Job Pricing

• Job pricing
• Internal Consistency
• Pay Structure Design

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Pay Structure Design

• Fair to employees
• Tied into the work performed
• Directs employees key behaviors

18
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

19
Pay Structure Design, cont.

• Ultimate success depends on
• How well the structure supports key employee
  behaviors
• Level of employee acceptance

20
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

21
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

22
Point Method, cont.

• Job evaluation manual
• Compensable factors and definitions
• Factor degree scale
• Weights

23
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

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Compensable Factors for Dental Hygienist position

• Factor
• Knowledge
• Supervision received
• Guidelines
• Complexity
• Scope and effect
• Personal contacts
• Physical demands
• Work environment
• Supervisory duties

25
Compensable Factor

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

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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.

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Compensable FactorLevels

• 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

28
Compensable FactorLevels

• 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

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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.

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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.

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Dental Hygienistposition

• Knowledge
• Supervisory controls
• Guidelines
• Complexity Level 2
• Scope and effect
• Personal contacts
• Purpose of contacts
• Physical demands
• Work environment

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Dental Hygienist Position

• Complexity Level 2
• Each procedure leads to the next, examining
• gums, scraping plaque, then cleaning teeth.

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Dental Hygienistposition

• 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

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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

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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

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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
• 
  

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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

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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

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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

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Job Structure
Revised May, 2002
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Creating a Pay Structure Blending External
Competitiveness and Internal Consistency

• Combining market pay rates and the firms
  internally consistent job structure
• 1. Market pay line
• 2. Adjustable pay policy line
• 3. Pay grades
• broadbanding

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Figure 4-1. Pay structure with pay policy line
and pay grades.
Maximum

• S
• A
• L
• A
• R
• Y
• ()
• Jobs
  (ordered by job evaluation points)

Meet the Market
Maximum
Midpoint
Maximum
Midpoint
Minimum
Maximum
Minimum
Midpoint
Maximum
Minimum
-----------------
Midpoint
Minimum
Pay Policy Line
Minimum
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Figure 4-1. Pay structure with pay policy line
and pay grades.
Maximum

• S
• A
• L
• A
• R
• Y
• ()
• Jobs
  (ordered by job evaluation points)

Lead Market
Maximum
Midpoint
Maximum
Midpoint
Minimum
Maximum
Minimum
Midpoint
Maximum
Minimum
-----------------
Midpoint
Minimum
Pay Policy Line
Minimum
44
Figure 4-1. Pay structure with pay policy line
and pay grades.
Maximum

• S
• A
• L
• A
• R
• Y
• ()
• Jobs
  (ordered by job evaluation points)

Lag Market
Maximum
Midpoint
Maximum
Midpoint
Minimum
Maximum
Minimum
Midpoint
Maximum
Minimum
-----------------
Midpoint
Minimum
Pay Policy Line
Minimum
45
Performance Contingent Pay

• Powerful tool for enhancing employee motivation
• Stimulate employees effort towards reaching goals
  such as high performance
• Creates instrumentality connection

46
Performance - Contingent Pay

• Rewards come in many forms
• Status and Recognition
• Challenging work
• Pay
• Promotion
• Opportunities for skill development
• Benefits
• Pay at risk

47
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

48
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.

49
Plant Incentive Plan PIP

• WHAT IS THE PLANT INCENTIVE PLAN PIP?
• The General Mills incentive plan.
• Rewarding high performance and maintaining the
  standards.

50
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

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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.

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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.

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Costs
54
Quality / Service
55
Safety / Environment
56
Plant / Individual Rating
57
Incentive Payout Comparison

• MAXIMUM ACTUAL
• FISCAL YEAR PAYOUT PAYOUT
• FY01 750 650
• FY02 1,150 750
• FY03 1,750 ?
• Up to the Teams Performance

58
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

59
Performance-Contingent Pay

• Stock options Long term Incentive
• Most controversial incentive in corporate world
• Linked to increasing firms stock price and long
  term profitability
• Becoming liked to corporate greed than a
  motivation tool
• Rewards and performance not aligned

60
Pay for Employee contributions

• Paying for skills
• Employees rewarded for acquiring additional
  skills
• Firms culture focused on personal growth and
  development
• Works well in firms wanting flexible relatively
  permanent workforce

61
Performance Contingent Pay

• Can be applied to the following levels
• Individual
• Group
• Organization
• Pay at risk

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Pay for Employee Contributions

• Typically used for Managers and executives
• Firms identify a set of broad competencies based
  on its strategic objectives direction
• Not as straight forward as other plans
• Geared to focus on firms core competencies and
  create competitive advantage

63
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 firms looking for company specific
  knowledge, loyalty and commitment, team oriented
  behavior

64
Employee Benefits

• Significant part of total compensation
• Significant driver for total pay in todays
  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.

65
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

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Incentive Plan Overview

• PMP

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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

68
Annual Cash Incentive - PMP

• 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

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Restricted Stock Match
Cash Award

• Cash Payout At Fiscal Year-end

• Restricted Stock Grant
• Equal To 15 Of Cash Award
• Requires 11 Deposit Of Stock
• 4 Year Cliff Vesting

Restricted Stock Match
70
Restricted Stock Award Example - PMP

• Shares Based On Incentive Award
• Share Price Established on Grant Date

71
Total Annual Incentive - PMP

• 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

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Stock Options - PMP

• 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)

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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

74
Benefits, cont.

• 2 Key issues regarding benefits
• Benefit system flexibility
• Level of benefits

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Figure 1-1. HRM System Design

• Manufacturing

External and internal pay alignments
Low cost high quality Competitive advantage
Team environment Aligned with business (gain
sharing, benefits,
Traditional manufacturing Productivity retention

HRM systems
Compliance with federal and State laws for
payroll ad benefits
Generic traditional
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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 companys business
  strategy.