Elements of a Reward Strategy

Determinant of job value

Chapter 11 COMPENSATION

Desired mix of remuneration elements Components of rewards program and objective of each

Composition of the target market group Market positioning objective

Number of strategies to adopt

Role of performance

Reward Strategy

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Source: Watson Wyatt Worldwide

Compensation: An Overview
Compensation - Total of all rewards provided employees in return for services Direct financial compensation - Pay received in form of wages, salaries, bonuses, and commissions Indirect financial compensation (benefits) - All financial rewards not included in direct compensation Nonfinancial compensation - Satisfaction person receives from job itself or from psychological and/or physical environment in which person works
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Total Rewards Concept

Anything that company provides an employee is included in Total Rewards Ranges from base pay and benefits to organizations culture and environment Put together to make a coherent and integrated whole Idea of a three-legged stool
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Components of Total Compensation Program

External Environment Internal Environment

Compensation
Financial
Direct Wages Salaries Commissions Bonuses Indirect (Benefits) Legally Required Benefits Social Security Unemployment Compensation Workers Compensation Family & Medical Leave Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Disability Protection Employee Stock Option Plans Supplemental Unemployment Benefits (SUB) Employee Services Premium Pay Customized Benefit Plans

Components of Rewards Program and Objectives of Each

Guaranteed Salary
Base salary Fixed Bonus & Allowance

Nonfinancial
Job Environment Sound Policies Skill Variety Task Capable Managers Identity Task Competent Employees Significance Congenial Coworkers Autonomy Appropriate Status Feedback Symbols Working Conditions The Job Workplace Flexibility Flextime Compressed Workweek Job Sharing Telecommuting Part-time Work

Intrinsic value of job or individual

Sets basic lifestyle Basis for other programs

Variable Pay / Incentives

Annual Long-Term

Performance
Provides discretionary income Drives short and long term results Improve pay competitiveness

Benefits
Retirement Medical Insurance Perquisites Car Club Travel

Membership
Provides protection and security Provides capital accumulation Status and Recognition Enhance image and recognition Provide opportunities to further the business

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Source: Watson Wyatt Worldwide

Components of Rewards Program and Objectives of Each

Performance Management Business Alignment
Set expectations for attainment of business objectives

Desired Mix of Remuneration Elements

Corporate Culture
HIGH

Caring/ Paternalistic
Base Pay Comprehensive Benefits Company-wide incentives Work-life balance

Integrative/High Involvement
Competitive Base Pay plus Benefits Individual & team - based incentives Robust performance-management system Learning environment

Training

Employee Development
Increase productivity Improve motivation

People Focus

Apathetic
Low Base Pay, Minimal Benefits Minimal training, Limited communication

Recognition
Communication

Drive Organizational Values

Reinforce desired behavior Status and Recognition Improve organizational alignment

Exacting/ Demanding
Low base Aggressive Incentives Rigid performance management targets

LOW

Focus On Performance

HIGH

Source: Watson Wyatt Worldwide

Source: Watson Wyatt Worldwide

Desired Mix of Remuneration Elements

Very dynamic companies go through the life cycle several times as they constantly re-invent themselves.

Desired Mix of Remuneration Elements Drivers of Attraction & Retention - Reasons to Join
Rank Employees Global Asia Pacific Nature of work Job security Philippines Base Pay Global Career Development Opportunities Base pay Employers Asia Pacific Base pay Philippines Employer Reputation Base pay

Business Life Cycle Start

Guarantee d Pay Low

Short-term Incentives

Long-term Incentives

Benefits

Performance Management Short Term Goal oriented

Communicati on Informal, adhoc, personal Moving towards more structure Formal, impersonal, virtual

Nature of work Base Pay

Depends on Very high Low resources key people High

Growth

Increasing

Very high Increasin Long Term wider g Goal-oriented group Decreasin g Stable Efficiencyoriented

Career Development Opportunities Health Care Benefit

Career Development Opportunities Employer Reputation

Mature

High

High

Job security

Base pay

Employer Reputation

Career Development Opportunities

Employers overestimate the value of employer reputation Base Pay still among the top 3 attraction mechanisms both from the employer and employee perspective
Source: Watson Wyatt Worldwide
Source: Watson Wyatts 2007-2008 Global Strategic Rewards Survey

Desired Mix of Remuneration Elements Drivers of Attraction & Retention - Reasons to Leave
Rank Global 1 2 Stress levels Base pay Employees Asia Pacific Stress levels Base pay Philippines Base pay Stress levels Global Base pay Employers Asia Pacific Base pay Philippines Base pay

Equity Theory
Motivation theory that people assess their performance and attitudes by comparing both their contribution to work and benefits they derive from it to contributions and benefits of comparison others whom they select and who in reality may or may not be like them

Career Career Career Development Development Development Opportunities Opportunities Opportunities Promotion opportunity Promotion opportunity Promotion opportunity

Promotion opportunity

Promotion opportunity

Promotion opportunity

Employers underestimate the impact of stress Employers globally site the same reasons for leaving.
Source: Watson Wyatts 2007-2008 Global Strategic Rewards Survey

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Equity in Financial Compensation

Financial equity - Perception of fair pay treatment for employees External equity - Employees are paid comparably to workers who perform similar jobs in other firms Internal equity - Employees are paid according to relative value of jobs within same organization
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Equity in Financial Compensation (Cont.)

Employee equity - Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority Team equity - More productive teams are rewarded more than less productive groups
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Primary Determinants of Direct Financial Compensation

Organization
Compensation Policies Organizational Level Ability to Pay

Exempt and Nonexempt Employees

Exempt employees - Categorized as executive, administrative, professional employees, and outside salespersons Nonexempt employees - Those in jobs not conforming to above definition Most employees who earn less than $23,660 will be considered nonexempt no matter what duties are
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Employee
Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck

Job Direct Financial Compensation

Labor Market
Compensation Surveys Expediency Cost of Living Labor Unions Economy Legislation

Pricing Job
Job Analysis Job Descriptions Job Evaluation
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Job as Determinant of Direct Financial Compensation

Job itself a factor, especially in firms that have internal pay equity as primary consideration Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors, such as working conditions
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Job Analysis and Job Descriptions

Before organization can determine relative difficulty or value of jobs, must first define content Done by job analysis / job descriptions
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Job Evaluation
Firm determines relative value of one job in relation to another Ranking Classification Factor comparison Point Hay guide chart-profile method
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Ranking Method
Simplest method Raters examine description of each job Jobs arranged in order according to value
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Classification Method
Define number of classes or grades to describe group of jobs Compare job description with class description Class description that most closely agrees with job description determines job classification
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Factor Comparison Method

5 universal job factors Mental requirements, skills, physical requirements, responsibilities, and working conditions Need not keep entire job in mind; raters make decisions on separate aspects or factors of job
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Point Method
Numerical values assigned to specific job components Sum of values gives quantitative assessment of jobs relative worth Job factors selected according to nature of specific group of jobs
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Procedure for Establishing Point Method of Job Evaluation

Select Job Cluster Identify Compensable Factors Determine Degrees and Define Each Compensable Factor Determine Factor Weights Determine Factor Point Values Validate Point System
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A Point Method Example

1. Select Job Cluster - Assume we are going to develop point system for administrative job cluster 2. Identify Compensable Factors - Assume compensable factors identified are education, job knowledge, contacts, complexity of duties, and initiative

A Point Method Example (Cont.)

3. Determine Degrees and Define Each Compensable Factor - In administrative job cluster, Education, Job Knowledge, and Initiative have been determined to have five degrees; Contacts has four; and Complexity of Duties has three

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A Point Method Example (Cont.)

FACTOR: CONTACTS Level (Degrees) Points IV Usual purposes of contacts are to discuss problems and possible 90 solutions, to secure cooperation or coordination of efforts, and to get agreement and action; more than ordinary tact and persuasiveness required. III Usual purposes of contacts are to exchange information and settle 66 specific problems encountered in course of daily work. II Contacts may be repetitive but usually are brief with little or no 42 continuity. I Contacts normally extend to persons in immediate work unit only. 18

A Point Method Example (Cont.)

FACTOR: COMPLEXITY OF DUTIES III Performs work where only general methods are available. Independent 85 action and judgment are required regularly to analyze fact, evaluate situations, draw conclusions, make decision, and take or recommend action. II Performs duties working from standard procedures or generally 51 understood methods. Some independent action and judgment are required to decide what to do, determine permissible variations from standard procedures, review facts in situations, and determine action to be taken, within limits prescribed. I Little or no independent action or judgment. Duties are so standardized 17 and simple as to involve little choice as to how to do them.

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A Point Method Example (Cont.)

4. Determine Factor Weights - Assume committee believes education is very important for administrative job cluster and sets weight for education at 35%. Weights of other four factors were determined by committee to be: Job Knowledge - 25 Contacts - 18 Complexity of Duties - 17 Initiative - 5 The percent total is 100%
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A Point Method Example (Cont.)

5. Determine Factor Point Values Committee determines total number of points for plan. Number may vary, but 500 or 1,000 points may work well. Committee has determined that a 500point system will work.

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Job Evaluation Worksheet (500-Point System)

Degree of Factor Job Factor Education Job Knowledge Contacts Complexity of Duties Initiative Weight 35% 25% 18% 17% 5% 1 35 25 18 17 5 2 3 4 5

A Point Method Example (Cont.)

6. Validate Point System - Each committee member should take random sample of jobs within chosen job cluster and calculate weights for each job selected Point total for Administrative 2 job is determined to be 239 points

70 105 140 175 50 42 51 10 75 100 125 66 85 15 20 25 90

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Job Evaluation Worksheet for Administrative 2 Position

Degree of Factor Job Factor Education Job Knowledge Contacts Complexity of Duties Initiative Total Job Value
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The Hay Guide Chart-Profile Method

5

Weight 35% 25% 18% 17% 5%

1 35 25 18 17 5

70 105 140 175 50 42 51 10 75 100 125 66 85 15 20 25 239

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90

Refined version of point method Know-how Problem solving Accountability Additional compensable elements, such as working conditions
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Job Pricing
Placing dollar value on worth of job Pay grades - Grouping of similar jobs to simplify pricing jobs Wage curve - Fitting of plotted points to create smooth progression between pay grades Pay ranges - Minimum and maximum pay rate with enough variance between to allow for significant pay difference
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Job Pricing (Cont.)

Broadbanding - Collapses many pay grades into few wide bands to improve effectiveness Single rate system - Pay ranges not appropriate for some workplace conditions such as some assembly lines Adjusting pay rates - Overpaid and underpaid jobs
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Scatter Diagram of Evaluated Jobs Illustrating Wage Curve, Pay Grades, and Pay Ranges
Average Pay per Hour (Current Rates or Market Rates) $19.80 18.50 17.20 15.90 14.60 14.00 13.30 12.90 12.00 1
Summary Evaluated Points 0- 99 100-199 200-299 300-399 400-500

Broadbanding
Technique that collapses many pay grades (salary grades) into few wide bands to improve organizational effectiveness Lateral employee development Develop employee skills and encourage team focus Employee attention directed away from vertical promotional opportunities
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5 4 3 2 1 Pay Ranges for Pay Grades

100

200 300 400 500 Evaluated Points 2 3 4 5 Pay Grades

Pay Grade 1 2 3 4 5 Minimum $12.00 13.30 14.60 15.90 17.20 Midpoint $13.30 14.60 15.90 17.20 18.50 Maximum $14.60 15.90 17.20 18.50 19.80

Broadbanding and Its Relationship to Traditional Pay Grades and Ranges

Employee as Determinant of Direct Financial Compensation

Performance - Performance-based Pay Skills - Skill-based Pay Competencies - Competency-based Pay Seniority Experience Membership in the Organization Potential Political Influence Luck

Average Hourly Pay

Grade 6 Grade 5 Grade 3 Grade 2 Grade 1 Band I Low Job Worth

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Grade 4

Band III

Band II

High

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Performance-Based Pay
Merit pay - Pay increase given based on level of performance as indicated in appraisal Variable Pay - Compensation based on performance Bonus - Most common type of variable pay for performance. One-time financial award based on productivity Spot bonuses - Relatively small, gifts to employees for outstanding work or effort Piecework - Employees paid for each unit they produce
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Skill-Based Pay
Compensates on basis of job-related skills and knowledge Employees and departments benefit when employees obtain additional skills Appropriate where work tends to be routine and less varied Must provide adequate training opportunities or system becomes demotivator
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Competency-Based Pay
Rewards employees for capabilities they attain Competencies include skills but also involve other factors such as motives, values, attitudes, and self-concepts
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Seniority
Length of time employee has been associated with company, division, department, or job Labor unions tend to favor seniority

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Trends & Innovations: Are Top Executives Paid Too Much?

Peter Drucker recommends 20-to-1 salary ratio between senior executives and rank-and-file white-collar workers Ratio of chief executives compensation to pay of average production worker jumped to 431-to-1 90% of investors think executives are overpaid
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Executive Compensation

Critical factor in attracting and retaining best managers

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Determining Executive Compensation

Types of Executive Compensation

Base salary Short-term incentives or bonuses Stock option plans Performance-based pay Executive benefits (perks) Golden parachutes
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Firms typically prefer to relate salary growth for highest-level managers to overall corporate performance

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Base Salary
Factor in determining executives standard of living Salary provides basis for other forms of compensation; may determine amount of bonuses and certain benefits U.S. tax law does not allow companies to deduct more than $1 million of executives salary
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Short-Term Incentives or Bonuses

Payment of bonuses reflects a managerial belief in their incentive value 90% of executives receive bonuses
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Stock Option Plans

Manager options to buy specified amount of stock in future at or below current market price Some boards of directors require their top executives to hold some of firms stock Financial Accounting Standards Boards requires companies to expense stock options, thereby making them not as attractive
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Performance-Based Pay
Trend toward more performancebased compensation packages for executives Shareholders become increasingly disenchanted with high levels of executive compensation performance-based pay may gain in popularity
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Executive Benefits (Perks)

Special benefits provided by firm to small group of key executives and designed to give executives something extra Conveys status Personal use of corporate jet is soaring among corporate Americas elite as executive perk
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Golden Parachutes
Perquisite that protects executives in event another company acquires firm or executive is forced to leave firm for other reasons Attempts to rein in obscene golden parachute plans
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