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Chapter 9

ADMS 2600 Chapter 9 notes.docx

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York University
Administrative Studies
ADMS 2600
Sung Kwon

Chapter 9:Managing Compensation Three main components of compensation:  Direct compensation o employee wages and salaries, incentives, bonuses, and commissions  Indirect compensation o many benefits supplied by employers  Nonfinancial compensation o employee recognition programs, rewarding jobs, organizational support, work environment, and flexible work hours to accommodate personal needs Strategic Compensation - compensation of employees in ways that enhance motivation and growth while at the same time aligning their efforts with the objectives, philosophies, and culture of the organization strategic compensation planning - goes beyond determining what market rates to pay employees—to purposefully linking compensation to the organization's mission and general business objectives - serves to mesh the monetary payments made to employees with specific functions of HR o if pay rates are high, creating a large applicant pool, then organizations may choose to raise their selection standards and hire better qualified employees, which in turn can reduce employer training costs Three important aspects of strategic compensation planning:  linking compensation to organizational objectives  pay-for-performance standard  motivating employees through compensation Linking Compensation to Organizational Objectives - pressure on both private- and public-sector organizations to make their pay systems more performance based - compensation revolutionized by heightened domestic competition, globalization, increased employee skill requirements, and new technology - managers have had to change their pay philosophies from paying for a specific position or job title to also rewarding employees on the basis of their individual competencies or work contributions to organizational success - a written compensation philosophy indicates senior management understands and is committed to aligning their business strategy with pay, suggesting that alignment can have a positive impact on organizational effectiveness Common goals of a strategic compensation policy: 1. To reward employees’ past performance 2. To remain competitive in the labour market 3. To maintain salary equity among employees 4. To mesh employees’ future performance with organizational goals 5. To control the compensation budget 6. To attract new employees 7. To reduce unnecessary turnover 8 Motivating Employees through Compensation: Theoretical Explanations Equity Theory - motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve - central to the theory is the role of perception in motivation and the fact that individuals make comparisons - strength of individual’s motivation is proportional to the magnitude of the perceived inequity - managers must therefore develop strategic pay practices that are both internally and externally equitable - compensation policies are internally equitable when employees believe that the wage rates for their jobs approximate the job's worth to the organization - perceptions of external pay equity exist when the organization is paying wages that are relatively equal to what other employers are paying for similar types of work Expectancy Theory - predicts that one's level of motivation depends on the attractiveness of the rewards sought and the probability of obtaining those rewards - employees should exert greater work effort if they expect that it will result in a reward that is valued - three conditions must be met for a reward to be motivational o it must have high valence - must be valued by employees o compensation packages must have high instrumentality - employees must believe that the attainment of goals and objectives set by the organization must result in the promised rewards o employees must have an expectancy that they can do the required tasks - although goals can be challenging, they must be attainable The Bases for Compensation hourly work - work paid on an hourly basis - far more prevalent than piecework as a basis for compensating employees - hourly employees or wage earners normally paid only for the time they work piecework - work paid according to the number of units produced salaried employees - compensation computed on the basis of weekly, biweekly, or monthly pay periods - generally paid the same for each pay period, even though they occasionally may work more hours or fewer than the regular number of hours in a period - usually receive certain benefits not provided to hourly employees Employment practices - provincial jurisdiction, and each province has its own employment standards act - each employment standards act contains a provision that requires the employer to reimburse the employee at a specified rate after he or she has worked the minimum required hours - usually 1.5 times base hourly rate of pay - some acts provide for time in lieu of overtime - supervisory and management personnel are not usually paid overtime Determining Compensation—The Wage Mix Internal Factors Employer's Compensation Strategy - pay policies should reflect: o the internal wage relationship among jobs and skill levels o the external competition or an employer's pay position relative to what competitors are paying o a policy of rewarding employee performance o administrative decisions concerning elements of the pay system such as overtime premiums, payment periods, and short-term or long-term incentives Worth of a Job job evaluation - used by organizations with formal compensation programs to aid in rate determination - can assist the organization in maintaining some degree of control over its wage structure even when rates are subject to collective bargaining - jobs covered most frequently are clerical, technical, and various blue-collar groups; other jobs covered are managerial and top executive positions - job's value should be based on the total value delivered to the organization - valuing work properly not only enables organizations to price “important” jobs effectively but also provides insight into how a job relates to overall organizational success - valuing work properly serves to attract and retain the right talent to drive organizational performance Employee's Relative Worth - employee performance can be recognized and rewarded through promotion and with various incentive systems - superior performance can also be rewarded by granting merit raises on the basis of steps within a rate range established for a job class - merit raises must be determined by an effective performance appraisal system that differentiates between employees who deserve the raises and those who do not o system must provide a visible and credible relationship between performance and any raises received Employer's Ability to Pay - pay levels are limited by earned profits and other financial resources available to employers - organization's ability to pay is determined in part by the productivity of its employees - increases in capital investment, such as labour-saving equipment, reduce the number of employees required to perform the work and increase an employer's ability to provide higher pay for those it employs - competition and recessions can force prices down and reduce the income o employers reduce wages and/or lay off employees or go out of business External Factors Labour Market Conditions - labour market reflects the forces of supply and demand for qualified labour within an area - help influence the wage rates required to recruit or retain competent employees - counterforces can reduce the full impact of supply and demand on the labour market o economic power of unions may prevent employers from lowering wage rates even when unemployment is high among union members o government regulations may prevent an employer from paying at a market rate less than an established minimum set by each province Area Wage Rates - formal wage structure should provide rates that are in line with those being paid by other employers for comparable jobs within the area wage surveys - serve the important function of providing external wage equity between the surveying organization and other organizations competing for labour in the surrounding labour market - can be used to prevent job rates from drifting too far above or below those of other employers in the region - must also take into account indirect wages paid in the form of benefits Cost of Living - need to periodically adjust compensation rates upward to help employees maintain their purchasing power - monitor changes in consumer price index (CPI) as a basis for compensation decisions - CPI - measure of the average change in prices over time in a fixed “market basket” of goods and services o based on prices of food, clothing, shelter, and fuels; transportation fares; and prices of other goods and services that people buy for day-to-day living o can have important consequences for organizational morale and productivity - Cost-of-living payments, when traditionally given, may be seen by employees as “entitlements” unrelated to individual performance - employees who work under a union contract may receive wage increases through escalator clauses - provide for cost-of-living adjustments (COLAs) in wages based on changes in the CPI Collective Bargaining - one of the primary functions of a labour union is to bargain collectively over conditions of employment, the most important of which is compensation - union's goal in each new agreement is to achieve increases in real wages —wage increases larger than the increase in the CPI—thereby improving the purchasing power and standard of living of its members - agreements negotiated by unions tend to establish rate patterns within the labour market - nonunion employers must meet or exceed rates to recruit and retain competent personnel and avoid unionization - “union scale” becomes the prevailing rate all employers must pay for work performed under government contract Job Evaluation Systems - systematic process of determining the relative worth of jobs to establish which jobs should be paid more than others within the organization - helps establish internal equity between various jobs - relative worth of a job may be determined by comparing it to others within the organization or by comparing it to a scale that has been constructed for this purpose - each method of comparison may be made on the basis of the jobs as a whole or on the basis of the parts that constitute the jobs Job Ranking System - simplest and oldest system; ideal for use by smaller employers due to simplicity - arrays jobs on the basis of their relative worth - raters arrange cards listing the duties and responsibilities of each job in order of the importance of the jobs - can be done by a single individual knowledgeable about all jobs or by a committee composed of management and employee representatives Weaknesses:  does not provide a very precise measure of each job's worth  final ranking of jobs indicates the relative importance of the job, not the differences in the degree of importance that may exist between jobs  can be used only with a small number of jobs, probably no more than 15 Job Classification System - jobs are classified and grouped according to a series of predetermined grades - successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs - descriptions of each of the job classes constitute the scale against which the specifications for the various jobs are compared - managers then evaluate jobs by comparing job descriptions with the different wage grades to “slot” the job into the appropriate grade - advantage of simplicity - less precise than the point system because the job is evaluated as a whole Point System - quantitative procedure that determines a job's relative value by calculating the total points assigned to it - complicated to establish - relatively simple to understand and use - principal advantage: it provides a more refined basis for making judgments than either the ranking or classification systems and thereby can produce results that are more valid and less easy to manipulate - permits jobs to be evaluated quantitatively on the basis of factors or elements—commonly called compensable factors—that constitute the job - skills, efforts, responsibilities, and working conditions that a job usually entails are the more common major compensable factors that serve to rank one job as more or less important than another - more contemporary factors might include fiscal accountability, leadership, teamwork, and project accountability - compensable factors will be assigned weights according to their relative importance to the organization - next, each factor will be divided into a number of degrees, which represent different levels of difficulty associated with each factor The Point Manual - handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs - will indicate—usually by means of a table—the number of points allocated to each factor and to each of the degrees into which these factors are divided - point value assigned to a job represents the sum of the numerical degree values of each compensable factor that the job possesses - a statement is provided defining each degree, as well as each factor as a whole - definitions should be concise and yet distinguish the factors and each of their degrees Sample Rating Chart for Point Method Job Evaluation Job Title: _____________________ Degree Rating Factors 1 2 3 4 5 Skill Education
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