Pay Plans

1

• Pay Plans
• Rewards
• Management

2
Determining Pay Rates

• Employee compensation refers to all forms of pay
  or rewards going to employees and arising from
  their employment.
• It consists of 2 parts
• Direct financial payments
• Indirect financial payments

3
Employee Compensation

• Direct or Indirect compensation is given based
  on
• Increments of time
• Hourly
• Salaried
• Performance
• Piecework
• Commission

4
Factors Influencing Pay

• Legal considerations
• Union membership
• Company policy
• Competitive strategy
• Equity

5
Legal Considerations

• The Labour act defines the minimum wage and
  employment conditions
• Basic labor standards
• Maximum hours
• Safety/health standards

6
Corporate Policies and Competitive Strategy

• To remain competitive, compensation plans must
  reward strategy that furthers the firms strategy
  aims by asking

1. What are our key competitive success factors?
2. What actions implement this competitive strategy?
3. What compensation program reinforces those
   behaviors?
4. What requirement should each pay element meet?
5. How well do the current reward programs match
   these requirements?

7
Important Policy Issues

• In writing the pay plan, ask the following
• Will we be a pay leader or a follower?
• Will we emphasize seniority or performance?
• What pay cycle?

8
Important Policy Issues

1. How do we fix salary compression?
2. How should we compensate based on geography or
   overseas employees?
3. Is the pay rate equitable with rates in other
   organizations outside the firm?

9
Salary Inequities

• How satisfied are you with your pay?
• What criteria were used for your recent pay
  increase?
• What factors do you believe are used when your
  pay is determined?

10
Establishing Pay Plans

• The 5 step process

The salary survey
Job evaluation
Pay grade grouping
Price pay grade- wage curves
Fine tune pay rates
11
1. The Salary Survey

• The salary survey is a survey aimed at
  determining prevailing wage rates which include
• Formal
• Informal

12
Uses of Salary Surveys

• Benchmark jobs
• Employers price 20 or more of their positions
  currently in the job market
• Surveys collect data on benefits

13
2. Job Evaluation

• Job evaluation is the formal and systematic
  comparison of jobs in order to determine the
  worth of one job relative to another
• The comparison results in a wage or salary
  hierarchy
• Compensable factors are fundamental elements of a
  job

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Compensable Factors

• Two approaches in comparing jobs Intuitive or
  via compensable factors
• Intuitive based on decision that one job is more
  important than another
• Compensability determined arbitrarily but some
  metrics include

Skill
Equal Pay Act factors
Know-how
Effort
Hay Consulting
Accountability
Responsibility
Work conditions
Problem solving
15
Preparing for the Job Evaluation

• Its mostly a judgmental process which requires
  cooperation among managers
• Identify the need for the program
• Get cooperation
• Choose an evaluation committee who will do the
  evaluation

16
Job Evaluation Committees

• Performs 3 main functions
• Identifies 10-15 key benchmarks
• Selects some compensable factors
• Evaluate the worth of each job via one of the
  methods on the following slides

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Job Evaluation Method 1Ranking

• Obtain job information
• Select raters and jobs
• Select compensable factors
• Rank jobs
• Combine ratings

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Method 2 Job Classification

• Rates categories of jobs into groups
• Groups called classes if jobs are similar
• Called grades if groups contain different jobs of
  similar difficulty
• Example
• Grade 10 may deputy director and the managing
  director

19
Method 3 Point

• The point method is more quantitative
• Identifies compensable factors
• The degree to which each of these factors is
  present

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Method 4 Factor Comparison

• Factor comparison is a widely used method to rank
  jobs by a variety of skills and difficulties,
  then adding these to obtain a numerical rating
  for each job
• With this method you rank each job several
  timesonce for each of several compensable factors

21
3. Group Similar Jobs Into Pay Grades

• A pay grade is composed of equally difficult jobs
• Committee will assign pay rates to each job based
  on one of the job methods
• Ranking method grades fall in to a point range
• Point method grades fall within two-three ranks
• Factor comparison grades pay rate range
• Classification method puts into classes or grades

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4. Price Each Pay Grade -Wage Curves

• Developing a wage curve involves the following
• Find the average pay for each pay grade
• Plot the pay rates for each pay grade
• Fit the line called a wage line through the
  points just plotted
• Price the jobs

23
5. Fine Tune Pay Rates

• Pay ranges are a series of steps or levels in a
  pay grade, usually based on years of service

24
Pricing Managerial and professional Jobs

• Goal is to attract and keep
• Harder to quantify evaluation
• Paid on basis of ability
• More complex and stress incentives over evaluation

25
Compensating Managers

• Top executives compensated by
• Base pay guaranteed bonus
• Short term incentives
• Long term incentives
• Perks

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What Really Determines Executive Pay?

• Company size and performance
• Industry CEO average pay
• May emphasize 25 performance incentive
• Board sets CEO pay
• Shareholders may affect pay
• Complexity of the job

27
Compensating Professionals

• Job emphasizes creativity and problem solving
• Job evaluation is useful
• Some disciplines result in 4-6 grades with a
  broad salary range

28
Why Pay Employees by Skill Levels?

• The differentiation may bring about satisfaction
  and a basis for discriminate action

29
Skill-based Pay versus Evaluation-based Pay

• Competence testing
• Effect of job change
• Seniority and other factors
• Advancement opportunities
• SBP may increase productivity and lower labor
  costs over JBP

30
Money and Motivation

• Incentives motivate workers
• Taylor standardized a fair days work
• Which led to the scientific management movement
• Which in turn led to modern day HR practices

31
Performance and Pay

• Competition, shareholder value, and turbulence
• Businesses need an edge
• Achieving employee satisfaction
• Paying attention

32
Types of Incentive Plans

• Individual
• Group
• Profit sharing
• Employee group
• Variable pay

33
Incentives for Operations Employees

• Piecework
• Straight piecework
• Standard hour plan
• All must guarantee minimum wage
• Can create quality problems

34
Incentives for Operations Employees

• Team or group incentive plans
• All members receive the pay earned by the highest
  producer
• Members receive pay equal to the average pay
  earned by the group
• All members receive the pay earned by the lowest
  producer

35
The Annual Bonus

• A bonus is aimed at motivating short term
  performance with three issues to consider when
  awarding them
• Eligibility based on job level and salary
• Fund size use a formula
• Individual awards based on performance

36
Managers Performance Bonus

• Bonus for managers is either individual or
  corporate performance based or both
• Split it with part based on individual
  performance rest on corporate performance
• Never give outstanding performers too little
• Never give poor performers normal or average
  awards

37
Long Term Incentives

• Stock options
• Different stock option plans
• Performance plans
• Cash plans

38
Long Term Incentives (Cont.)

• Other Plans
• Stock appreciation
• Performance achievement
• Stock options
• Performance Plans
• Cash Versus Stock Options

39
Performance Plans

• Executives do not prosper unless the company does
• Executives have some skin in the game
• Value is contingent on financial performance

40
Cash Versus Stock Options

• Which do you think is a better motivator?

41
Steps to a Compensation Package

• Include external and internal issues
• What are our long term goals?
• How can compensation support them?
• What defines the work culture and how can the
  package be molded to it?
• What are our competitive challenges?
• What are our specific business objectives?

42
Steps to a Compensation Package (Cont.)

• Shape components into balanced plan
• Meet unique company and strategic needs
• Legal and tax effective
• Install a review and evaluation process

43
Incentives for Salespeople - Salaries

• Sales compensation can be salaried,
  commission-based or hybrid
• Salaries make sense when job is primarily
  prospecting or servicing clients
• Useful when relocating to new territories
• Can de-motivate very productive workers

44
Incentives for Salespeople - Commissions

• Pay only for results
• Easy to understand and compute
• Focus only on high volume items
• May ignore non-selling aspects
• Performance is a product of ability
• May result in high turnover

45
Example - Auto Dealer Commissions

• Insight into why auto salespersons behave the
  way they do
• Some are 100 commission based
• Others get commissions and small base salary
• Net profit of car

46
Professional and Non-managerial Incentives

• Merit pay or a merit raise is any salary increase
  awarded to an employee based on individual
  performance

47
Merit Pay Options

• Lump sum raises are not cumulative traditional
  raise is
• Lump sum can be a bigger motivator

48
Incentives for professionals

• Determining this type of incentive is challenging
  
• Professionals are well-paid and driven
• Keep highly motivated professionals by using
• Stock options and profit sharing
• Better vacations

49
Organization Wide Variable Pay Plans

• Variable pay plans include
• Profit sharing
• Employee Stock Ownership Program (ESOP)
• Scanlon or gain-sharing plans

50
Profit Sharing

• Employees share in some part of profits
• In cash plans
• Lincoln incentive plan
• Deferred plans

51
ESOP

• Builds a sense of commitment and ownership in
  company
• Positive tax advantages for company and employee
• Allows firm to borrow against stock held in trust

52
Scanlon Plan

• An incentive plan developed in 1937 by Joseph
  Scanlon and designed to encourage cooperation,
  involvement, and sharing of benefits

Philosophy of cooperation
Identity
Competence
Involvement system
Benefits sharing formula
53
Gainsharing

• A modern Scanlon type plan where cost savings are
  shared
• Eight basic steps

Establish plan objectives
Payout must be large enough to motivate
Choose performance measures
Choose form of payout
Use a funding formula
Decide bonus frequency
Method for distributing share of gains
Develop an involvement system
54
Making Gainsharing Work

• Use multiple measures
• Productivity cost performance, product damage,
  customer complaints, shipping errors, safety, and
  attendance
• Committed managers
• Straightforward formula
• Employee involvement

55
At Risk Plans

• Some portion of weekly pay at risk
• Exceed goals and get extra pay
• Miss goals and lose some pay
• Employees become committed partners
• Relies on trust, respect, communication and
  opportunities for advancement

56
Why Incentive Plans Can Fail

• Performance pay cant replace good management
• You get what you pay for
• Pay is not a motivator
• Rewards punish
• Rewards rupture relationships

57
Why Incentive Plans Can Fail

• Rewards can unduly restrict performance
• Rewards may undermine responsiveness
• Rewards undermine intrinsic motivation
• People work for more than money

58
Implementing Incentive Plans

• Get support
• Use accurate measurement
• Long and short view
• Consider corporate culture
• Comprehensive commitment oriented approach

• Use common sense
• Incentive linked to strategy
• Effort linked to reward
• Easily understood
• Set effective standards
• Standard is a contract