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Commerce 2KA3 Chapter 10: Compensation Strategies and Practices Total rewards: Monetary and non-monetary rewards provided to employees in order to attract, motivate, and retain them Nature of Compensation - An important factor affecting how and why people choose to work at one organization versus others - Must user reasonably competitive with several types of compensation - Because so many organizational funds are spent on employees, it is critical for top management and HR executives to match total rewards systems and practices with what the organization is trying to accomplish - A number of important decisions must be made to achieve the following objectives: Legal compliance with all appropriate laws and regulations Cost-effectiveness for the organization Internal, external, and individual equity of employees Performance enhancement for the organization Performance recognition and talent management for employees - Must balance their costs at a level that rewards employees sufficiently for their KSAs and performance accomplishments Types of Compensation - Can be explained in 2 ways: intrinsic and extrinsic ways Intrinsic rewards: Are those rewards that are derived from the working environment such as personal growth, and job satisfaction, etc. Extrinsic rewards: Are tangible and take both monetary and non-monetary forms - Direct compensation, whereby the employer exchanges monetary rewards for work done and performance results achieved - Base pay and variable pay are the most common forms of direct compensation - Indirect compensation, like extended health compensation, to everyone simply for being members of the organization - Commonly consists of health benefits Base Pay - Basic compensation that an employee receives, usually as a wage or a salary - Many organizations use 2 base pay categories, hourly and salaried, which are identified according to the way pay is distributed and the nature of the jobs Wages (paid hourly): Payments directly calculated on the amount of time worked Salaries: Consistent payments made each period regardless of the number of hours worked Carry higher status Variable Pay - Compensation linked directly to individual, team, or organizational performance - The most common types of variable pay for most employees are bonuses and incentive program payments Executives often receive longer-term rewards, such as stock options Benefits - Provide extrinsic rewards in an indirect manner - With indirect compensation, employees receive the tangible value of the rewards without receiving actual cash Benefit: Indirect reward given to an employee or a group of employees for organizational membership Compensation Responsibilities - HR specialists and operating managers must work together - HR specialists assume responsibility for developing base pay programs and salary structures and policies - Operating managers evaluate the performance of employees and consider their performance when deciding compensation increases within the policies and guidelines established by the HR unit and upper management Compensation Philosophies - 2 basic compensation philosophies lie on opposite ends of a continuum - Most compensation systems fall somewhere in between, although there is growing emphasis being placed on performance Entitlement Philosophy - Assumes that individuals who have worked another year are entitled to pay increases, with little regard for performance differences - Commonly, base pay increases are referred to as cost-of-living raises, even if they are not tied specifically to economic indicators - Market comparisons of compensation tend to be made within an industry, rather than more broadly among firms of all types - Bonuses in many-oriented organizations are determined in a paternalistic manner that often fails to reflect operating results Performance Philosophy Pay-for-performance philosophy: Requires that compensation changes reflect individual performance differences - Organizations operating under this philosophy do not guarantee additional or increased compensation simply for completing another year of organizational service - They structure pay and incentives to reflect performance differences among employees - Employees who will perform well will receive larger increases in compensation - Few organizations use this, however it is growing - The total rewards approach reflects a more performance-oriented philosophy because it tries to place more value on individuals and their performance rather than just on paying for having a job - Managers should factor in elements such as how much an employee knows or the employees level of competency - Widespread use of various incentive plans, team bonuses, organizational gain sharing programs, and other designs links growth in compensation and variable pay to results - Regularly communicating to employees and mangers the compensation philosophy helps reinforce the organizational commitment to it HR Metrics and Total Compensation - Compensation should be evaluated to determine their effectiveness - Employee turnover/retention is one metric widely used Assumes that how well compensation systems operate affects employees decisions about staying or leaving the organization - The adoption of the new IFRS will affect how organizations calculate earnings, earnings per share, and financial position - To be even more useful, these compensation metrics should be computed each year, and then compared with metrics from past years to show how the rate of compensation changes compares with the rate of changes in the organization overall Compensation System Design Issues Global Compensation Issues - Organizations with employees in different countries face some special design issues for compensation - Variations in laws, living costs, tax policies, and other factors must be considered in establishing the compensation for local employees and managers, as well as for managers and professionals brought in from other countries Compensating Host-country nationals - The local wage scales vary significantly - These large compensation differences have led to significant international outsourcing of jobs to lower-wages countries - An organization must decide whether local wages are to be paid to host-country nationals, or more global wage levels are to be considered - Some accused of paying slave wages even though the host-country employees have jobs in countries with high unemployment rates and are often significantly more than if they worked for local employers Compensating Third-Country Nationals - Is often a function of the originating country of the employees Compensating Expatriates - 2 approaches Balance Sheet approach: Compensation plans that equalizes cost differences between identical international and home-country assignments Global market approach: Compensation plan that attempts to be more comprehensive in providing base pay, incentives, benefits, and relocation expenses regardless of the country to which the employee is assigned - The reactions of host-country nationals to the pay practices for expatriates must be considered - The global market approach to compensation requires greater flexibility, more detailed analyses, and significant administrative effort Tax equalization plan: Compensation plan used to protect expatriates from negative tax consequences - A company adjusts an employees base income downward by the amount of estimated home-country tax to be paid for the year - The employee pays only for the foreign country tax - Tax equalization is very hard to calculate Market Competitiveness and Compensation - Has a significant impact on how equitably employees view compensation - Providing compensation to employees, whether globally, domestically, or locally, is a concern for all employers Meet the Market Strategy - Second quartile - Choosing this level attempts to balance employer cost pressures and the need to attract and retain employees, by providing mid-level compensation scales that meet the market for the employers jobs Lag the Market Strategy- First quartile - May choose to lag the market by below market levels, for several reasons - If the employer is experiencing a shortage of funds, it may be unable to pay more - Downside: it increases the likelihood of higher worker turnover, thus increasing costs with lower productivity and potential quality issues Lead the market strategy - Third Quartile - Uses an aggressive approach to lead the market - Generally enables a company to attract and retain sufficient workers with the required capabilities and to be more selective when hiring - It is a higher-cost approach; organizations often look for ways to increase the productivity of employees receiving above-market wages Quartiles Strategy First Below market: Employer positions pay scales so that 75% of other firms pay above and 25% pay beow Second Middle-market: Employer positions pay scales so that 50% of other firms pay above and 50% pay below Third Above market: Employer positions pay scales so that 25% of other firms pay above and 75%pay below Lead/Lag the market strategy - Its goal is to balance salary costs with competitiveness - Favored by many organizations because of its middle ground position - This position ensures that the company is still able to compete, while at the same time not generating higher costs Mix of strategies for different employees - Companies will have to adopt different strategies for each of its respective employee groups - Market match or market lead poli
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