Corporate policies, Competitive strategy and Compensation

The compensation plan should further the firms strategic aims. The employers basic task is always to create a bundle of rewards specifically aimed at eliciting the employee behaviors the firm needs to support and achieve its competitive strategy. The management should ask the following questions when deciding on an Aligned Reward Strategy.1 1. What are the companys key success factors? What must the company do to be successful in fulfilling its mission or achieving its desired competitive position? 2.What are the employee behaviors or actions necessary to successfully implement this competitive strategy? 3. What compensation programs should it use to reinforce those behaviors? What should be the purpose of each program in reinforcing each desired behavior? 4.What measurable requirements should each compensation program meet to be deemed successful in fulfilling its purpose? 5. How well do the current compensation programs match these requirements?

Group incentive plans

Team or group incentive plans pay incentives to the team based on the teams performance.70 One approach is to set work standards for each team member then calculate each members output. Members are then paid based on one of the three formulas: 1. All members receive the pay earned by the highest producer 2. All members receive the pay earned by the lowest producer 3. All members receive pay equal to the average pay earned by the group Second approach is to set an engineered production standard based on the output of the group as a whole in which all members then receive the same pay, based on the piece rate for the groups job. Third approach is to tie rewards to goals based on some overall standard of group performance such as total labor hours per final product. Doing so avoids the need for precisely engineered piecework standard.71

Pros and cons of team incentives

Much work today is organized around teams. Performance here reflects not just individual but team effort so team incentives make sense. Team based plans reinforce team planning and problem solving and help ensure collaboration.73 In Japan, one rule is never reward only one individual. Instead, Japanese companies reward the group to reduce jealousy to make group members indebted to one another and to encourage a sense of cooperation. Team incentives also facilitate training since member has an interest in getting new members trained as fast as possible. The main disadvantage is that a workers pay may not be proportionate to his or her own efforts, which may de-motivate hard workers. Workers who share in the teams pay but dont put their hundred percent can be a problem.

Profit sharing plans

Profit sharing plans (in which all or most employees receive a share of the firms annual profits) are popular today.76 In this plan employees share in the companys profits. Ford Motor Co. introduced a profit-sharing plan for salaried employees, and General Motors increased its profit-sharing payouts when profits improved.78 The research on such plans effectiveness is sketchy. One study concludes that there is enough evidence that profit sharing plans boost productivity, but that their effect on profits is insignificant.79 There are many types of profit sharing plans; Cash plans in which the firm simply distributes a percentage of profits usually 15% to 20% as profit shares to employees at regular intervals. Then there is Lincoln incentive system and Deferred profit-sharing plans. In deferred profit sharing the firm places a predetermined portion of profits in each employees account under a trustees supervision. There is a tax advantage here, since income taxes on the distributions are deferred, often until the employee retires and the money is taxed at a lower rate.

Employee Stock Ownership Plan (ESOP)

Employee stock ownership plans are company wide plans in which a corporation contributes shares of its own stock or cash to be used to purchase such stock- to a trust established to purchase shares of the firms stock for employees. The firm generally makes these contributions annually in proportion to total employee compensation, with a limit if 15% of compensation. The trust holds the stock in individual employee accounts, and distributes it to employees upon retirement or separation from service.

Determining Pay Rates

Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment. It has two main components, direct financial payments that include wages, salaries, incentives, commissions and bonuses and indirect payments that may include financial benefits like employer paid insurance and vacations. There are basically two ways to make direct financial payments to employees: 1. Base them on increments of time. Time-based pay is still the foundation of employers pay plans. Blue color workers get hourly or daily wages and other like managers or web designers tend to be salaried and paid by the week, month or the year. 2. Base them or on performance. Piecework and sales commission are an example of Performance based pay plan.

Equity and Its Impact on Pay Rates

Equity theory states that if a person perceives an inequity , a tension or drive will develop in the persons mind, and the person will be motivated to reduce or eliminate the tension and perceived inequity. Research tends to support equity theory, particularly as it applies to people who are underpaid.2 With respect to compensation, managers should address four forms of equity: External, Internal, Individual and Procedural.17 External equity refers to how a jobs pay rate in one company compares to the jobs pay rate in other companies. Internal equity refers to how fair the jobs pay rate is, when compared to other jobs within the same organization. Individual equity refers to the fairness of an individuals pay as compared with what his or her co-workers are earning for the same similar job within the company based on each individuals performance. Procedural equity refers to the perceived fairness of the process and procedures used to make decisions regarding the allocation of pay.22 Managers use various methods to address each of the equity issues. For example the use of Salary Surveys to monitor and maintain external equity, Job analysis and Job evaluation to maintain internal equity. The use of Performance Appraisal and various types of Incentive pay to maintain individual equity. And the use of Companys pay plan

to help ensure that employees view the pay process as transparent and fair.23 The process of establishing pay rates while ensuring external, internal and procedural equity consists of five steps. 1. Conducting a salary survey of what other employers are paying for comparable jobs. 2. Determine the worth of each job in the organization through job evaluation. 3. Grouping similar jobs into pay grades. 4. Price each pay grade by using wave curves. 5. Fine tuning pay rate.

Establishing Pay rates 1.The Salary Survey

Its difficult to set pay rates if we dont know what others are paying, so salary surveys play a big role in pricing jobs. Virtually every employer conducts at least an informal telephone, newspaper, or Internet salary survey.24 Salary surveys can be formal or informal.25 Many employers use surveys published by consulting firms, professional associations or government agencies. Rapidly expanding array of Internet based options makes it easy for anyone to access published compensation survey information. Informal telephone or Internet surveys are good for checking on a relatively small number of easily identified and quickly recognized jobs. In most cases, salary survey data are used to price benchmark jobs, around which other jobs are then slotted based on the jobs relative worth.

3.Grouping similar jobs into Pay Grades

Most managers group similar jobs into wage or pay grades for pay purposes. These are comprised o approximately equal difficulty or importance as determined by job evaluation. Point Method, Ranking Method and Classification Method are different types of methods used for grouping similar jobs into pay grades.31

4.Wage Curves

Wage curve helps assign pay rates to each pay grade or to each job. The wage curve shows the pay rates currently paid for jobs in each pay grade, relative to the points or ranking assigned to each job or grade by the job evaluation. The purpose of the wage curve is to show the relationships between the (1) the value of the job as determined by one of the job evaluation methods and (2) the current average pay rates grades.32

5.Fine-Tuning Pay Rates

Fine-tuning involves developing pay ranges and correcting out of line rates. There are several reasons for employers to use pay ranges for each pay grade. First its lets the employers take a more flexible stance in the labor market pay ranges also let companies provide for performance differences between employees within the same grade or between those with seniorities.36

Competency Based Pay

Competency-based pay is where the company pays for the employees range, depth and types of skills and knowledge rather than for the job title he or she holds.50 Experts call it competence, knowledge or skill based pay. In simpler words competencies can be defined as, demonstrable characteristics of the person, including knowledge, skills and behaviors that enable performance.51 In practice, competency-based pay usually comes down to using one or both of two basic types of pay programs: pay for knowledge or skill based pay.54 Pay for knowledge pay plans reward employees for learning organizationally relevant knowledge. With skill based pay, the employee earns more after developing organizationally relevant skillsMicrosoft pays programmers more as they master the skill of writing new programs. These pay programs are generally contain four main components:57 1. A system that defines specific skills and a process for tying the persons pay to his or her skill. 2. A training system that lets employees seek an acquire skills. 3. A formal competency testing system. 4. A work design that lets employees move among jobs to permit work assignment flexibility.

Incentive Plans
Managers and HR Departments use incentives and gain sharing as tools to motivate employees to attain organizational goals and objectives because these are compensation approaches that reward specified outcomes. Incentive systems link compensation and performance by rewarding performance instead of seniority or hours worked. Though incentives maybe given to a group they are often reward individual behavior. Gain sharing matches an improvement (Gain) in performance with a distribution (sharing) of the benefits with employees. Usually gain sharing applies to a group of employees rather an individual. Employees who work under a financial incentive system find that their performance determines their pay in whole or in part. As a result, incentives reinforce performance on a regular basis. Unlike raise and promotions, the reinforcement is generally quick and frequent-usually with each paycheck. Employers benefit because payouts are in proportion to productivity. And if the system motivates employees to expand their output, recruiting expenses for additional employees and capital outlays for new workstations are minimized. Variable pay is a team or group incentive plan that ties pay to some measure of the firms overall profitablilty.16 Traditionally, all incentive plans are pay-for-performance plans. They administration of an incentive system can be complex. As with any control system, standards have to be established and results must be measured. Incentive systems exist for every type of job from manual labor to professional, managerial and executive work. The different types of Incentive Plans are as follows:

Piecework Plan
Piecework is the oldest individual incentive plan and is still the most widely used. It is system of pay based on the number of items processed by each individual worker in a unit of time such as items per hour or items per day. Piecework generally implies straight piecework, which entails a strict proportionality between results and rewards regardless of output. However, some piecework plans allow of sharing productivity gains between employer and worker, such that the worker receives extra income for some above normal production.24.1 Piecework plans have pros and cons. They are understandable, appear equitable in principle, and can be powerful incentives, since rewards are proportionate to performance. However, workers on piecework may resist attempts to revise production standards, even if the change is justified. Indeed these plans promote rigidity. Employees

concentrate on output and are less willing to concern themselves with meeting quality standards or switching from job to job (since doing so could reduce their productivity).25.1 The standard hour plan is like the piece rate plan, with one difference. Instead of getting a rate per piece, the worker gets a premium equal to the percent by which his or her performance exceeds the standard. It is similar to piecework payment but on percent premium. It eliminates the need to recomputed piece rates whenever hourly wage rates are changed.26.1

Merit Pay as an incentive

Merit pay or Merit raise is any salary increase the firm awards to an individual employee based on his or her individual performance. It is different from a bonus in that it usually becomes a part of the employees base salary, whereas a bonus is a one-time payment.

Types of Incentives for Mangers and Executives

Managers play a central role in influencing divisional and corporate profitability, and most firms therefore put considerable thought into how to reward them. Most managers get short-term bonuses and long-term incentives in addition to salary.96 Short-term incentives- The Annual Bonus Most firms have annual bonus plans aimed at motivating the short tern performance of managers and executives. Short-term bonuses can easily result in plus or minus adjustments of 25% or more to total pay. There are three basic issues to consider when awarding short-term incentives: 1. Eligibility 2. Fund size 3. Individual awards Long-term incentives Employers use long-term incentives to inject a long-term perspective into their executives decisions. Long-term incentives encourage executives to stay with the company by letting them accumulate capital (usually options to buy company stock) that can only be cashed in after a certain numbers of years. Firms dont just use stock options as long-term incentives; other long-term incentives include Cash, stock, stock appreciation rights, phantom stock, performance plans and golden parachutes.

Implementation of Effective Incentive Plans

The guidelines to implement a successful and effective incentive plans are as follows: 1. Ask: Is the effort clearly instrumental in obtaining the reward?126 2. Link the incentive with the companys strategy.127 3. Make sure effort and rewards are directly related.128 4. Set effective standards. 5. Get the employees to support the plan. 6. Emphasize long-term as well as short-term success.130 7. Use good measurement systems.129 Incentive plans work best when units of outputs are easily measured, and when employees can control output the effort-reward relationships is clear. When work delays are under employees control when quality is paramount and when the organization must know precise labor cost to stay competitive.

Supplemental Pay Benefits

Supplemental pay benefits also known as pay for time not worked, are one of an employers most costly benefits, because of the large amount of time off that many employees receive. Common time off with pay periods includes Holidays, Vacations, Funeral leave, Personal days, Sick leave, Maternity leave and unemployment insurance payments for laid-off workers.19.1

Severance Pay
Many employers provide severance pay, which is one-time payment when terminating an employee. Severance pay makes sense on several grounds. It is a humanitarian gesture, and good public relations. Avoiding litigation from disgruntled former employees is another reason for severance pay. Severance Pay plans help reassure employees who stay

on after the employer downsizes its workforce that they will receive some financial help if the employer lets them go.

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Adapted from Jack Dolmat-Connell, developing a reward strategy that delivers shareholder and employee value. Compensation and benefits review, March- April 1999,p 51
70 71 73 76 78 79 2

Robert Bretz and Stephen Thomas, perceived inequity, motivation and final offer in arbitration in major league baseball, Journal of applied psychology June 1992 pp 280
1 17

David Terpstra and Andre Honoree,

22 23 24 25 31 32 36 50 51 54 57 16

24.1 25.1 26.1 96 126 127 128 130 129 19.1