Managing Compensation

Herzberg’s Tw-Factor Theory (parallels Maslow’s hierarchy of needs)

Hygiene Factors: Without them I will be resentful and unproductive

Hygiene Factors: With them I AM NOT resentful. But I’m not happy either!

Motivating Factors: Without them I AM NOT resentful. But I’m not motivated either!

Motivating Factors: With them I am motivated, productive, satisfied, etc.

What is Compensation Think in terms of “Total Compensation”

Base cash compensation“Pay Incentives” or variable cash

compensationNon-cash compensation (recognition)Non-cash benefitsCash-equivalent benefits

Designing a Compensation System Step One: Determining Pay Philosophy

Internal versus External Equity Put another way, Internal Equity versus External

CompetitivenessDistributive Justice Model

We exchange our time/labor for pay Labor Market Model: set by supply and demand Balancing Equity Model: internal issues may

rule

Supply and Demand Labor is a commodity, like gasoline… Pick a gas company: what do you

pay for gas? Pick a point on that distribution: what

is fair? Say you had the time: what would

you choose to spend? What are you willing to pay: ‘low’,

‘mid’ or ‘high’?

Fixed Versus Variable Pay Is “risk sharing” a good idea? Can and should “line” employees have the

same risk as “manager” or “executives?” How do we set the risk level? Where do we pay relative to market:

Overall Base Variable Benefits

Variable Pay Plans Don’t forget: you get what you pay for. Don’t forget: you get what you pay for. Why they fail:

No link from effort to reward“Funny money” makes financials

meaninglessRewards only drive performance in the

short run (once spent, they’re forgotten)

Performance Versus Membership Performance-contingent plans:

Vary based on individual or work group achievement

Can be highly focused (team or group) Membership-contingent plans:

Pay the same to people in a job or work group regardless of individual or group performance

Distinction driven by culture and goals of the play plan

Job Versus Individual Pay “We pay the position, not the person.” Powell’s Books example:

PhD selling books is paid as a PhDCurrent labor issues:

9% versus 19% wage increase No benefits change versus increase in co-pays

and deductibles Does this make sense?????

Options Knowledge and skill-based pay:

Pay for knowledge to encourage cross training

Promotes flexibilityProvides incentive to learn more skills

Egalitarian and Elitist pay systems:Egalitarian: everyone gets the same

systemElitist: equivalent to a ‘black box’ system

Egalitarian versus Elitism Egalitarian (worldwide trending this

way):More flexibleReduce barriers (equity) between peers

through elimination of status-based perksMore common in highly competitive markets

ElitistMore stable workforce because employees

only make more by moving upMore prevalent among older companies

Pay Issues Below versus above market

Competitive strategy (and Herzberg) Blue chips have gone “above” market to create

elitism, attract/retain the “cream of the crop” and minimize turnover (golden handcuffs)

Above more common in large, established companies with ready cash and little equity

Below are more common in smaller, startup companies that can put emphasis on a ‘liquidity event’

Pay Issues Monetary versus non-monetary rewards

Monetary: Emphasize individual achievement Volatile markets and low job security Emphasis on sales versus customer service Pushing competitive internal climate

Non-monetary: Emphasize commitment to the organization Stable workforce with an emphasis on customer

service and loyalty (versus fast sales growth) Companies that want to create more cooperation

internally

Pay Issues Open versus secret pay

Public or quasi public companies and agencies publish

May be illegal to restrict people from talkingWhat do we have to hide???Secret pay creates impression that there is

something to hide (“Who’s getting rich?”Open pay eliminates perceptions driven by

suspicion and speculation

Pay Issues Centralization versus decentralization

Centralized offers efficiency and the ability to hire specialists

Centralized may not be as responsiveCentralized may not be as ‘clued in’ to

what happens in the ‘field’Centralized may promote and ‘us versus

them’ feeling

Compensation Tools Two basic approaches

Job-based compensation plans Point factor theory Looks at ‘compensable factors’ in each job

Market based compensation plans Looks at the job’s worth or value relative to

the ‘market’

Compensation Tools – Grades and Ranges

Jobs

Rate of Pay

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Mid

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Compensation Tools – Job Based Plans Conduct job analysis Write job descriptions Determine job specifications (what

people do to be successful in the work) Rate the ‘worth’ of jobs using

‘compensable factors’ Create job hierarchy Classify jobs by grade and level

Compensation Tools – Market Based Plans Identify benchmark or key jobs Establish pay policy (philosophy) Uh, then what????

Legal Considerations FLSA (1938)

Primarily impacts exempt/nonexempt decisions

Addresses minimum wage and overtime Equal Pay Act

Raises comparable worth questions Internal Revenue Code

Particularly an issue with “contractors”

Rewarding Performance “Incentive” systems are designed to

incent or drive behavior First question: what organizational

outcome are you trying to achieve? “Do only what you get paid for

syndrome” Erosion of teamwork?

Problems and Challenges Lack of control

Many things are beyond individual control – therefore, should they be excluded from consideration?

Difficulties in measuring “performance”

Psychological contractsPre-set expectations

Problems and Challenges Credibility gap

Ill defined, poorly communicated systems or systems with overrides, loopholes or a lack of accountability

The first exception kills the system! Job dissatisfaction and stress

Creates “cogs” versus “involved people” Potential reduction of intrinsic drives

Design Objectives Link pay and performance Use pay as a broad HRM system Build employee trust Promote the idea that performance

makes a difference Use multiple reward layers (KISS?) Increase employee involvement Use non-monetary incentives

Individual Based Plans Advantages

Bonuses, lump sum or spot bonus paymentsExpectancy theory: rewarded performance

is likely to be repeated AND we adjust our performance based on perceptions

Goal oriented behavior can be “shaped” over time

Looking at individuals promotes equityFits with an individualistic culture

Individual Based Plans Disadvantages

Promotes single mindednessEmployees often don’t believe that

performance impacts outcomes and in turn their pay (no performance-outcomes-pay link)

May run counter to quality goals (?)May be inflexible

Team Based Plans Advantages

Foster work group cohesionAid performance measurement

DisadvantagesMay not fit individualistic cultureFree riding effectSocial pressure to limit performanceDefining “groups” that have meaning Inter-group competition

Plantwide and Corporate Plans Look at overall performance Suffer from many of the same design

challenges Large scale and difficulty ‘seeing’

operational connections make the performance-outcome link hard to identify

Can drive tremendous focus

Studying Review advantages and disadvantages of

plantwide and corporate plans Review keys to successful implementation Look at executive and sales compensation Pay attention to variable and short versus

long term incentive plans