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108 Cards in this Set
- Front
- Back
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What are the three types of pay in the compensation mix? |
Base Pay Performance Pay Indirect Pay |
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Three types of base pay |
Job Evaluation Market Pricing Pay for Knowledge |
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Three types of performance pay |
Individual Performance Group Performance Organization Performance |
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6 types of indirect pay |
Mandatory benefits Pension plan Health & Life insurance Pay for Time not Worked Employee Services Other Benefits |
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Define base pay |
The portion of an individual's compensation that is based on a unit of time worked |
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Define wage |
Pay based on an hourly time period |
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Define salary |
Pay based on a weekly, monthly, or annual time period |
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Output-related pay is only feasible for jobs in which the output... |
1) Easy to measure 2) Easy to price in terms of its value to the employer 3) Easy to attribute to individual employees 4) Controllable by the individual employee 5) Relatively stable |
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Advantages of base pay |
Flexibility Can cover all valued job behaviours Can signal relative importance of jobs Demonstrates commitment to employee Can support managerial strategy Simplicity |
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Disadvantages of base pay |
Fixed pay commitment Does not motivate task behaviour Does not encourage citizenship behaviour Not self-correcting |
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Define performance pay |
Any type of financial reward provided only when certain specified performance results occur. These results may be based on the performance of individual employees, a group or team of employees, or the entire organization |
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Advantages of performance pay |
Signals key behaviours and motivates action Reduces need for control mechanisms Creates employee interest in performance Can support managerial strategy Relates pay to firm's ability to pay |
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Disadvantages of performance pay |
Employees prefer predictable rewards May require higher compensation May cause focus only on rewarded behaviours May cause unanticipated consequences Usually more complex than base pay |
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Define indirect pay |
Any type of employer-provided reward (or benefit) that serves an employee need but is not part of base or performance pay |
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Advantages of Indirect pay |
Can help attract employees Matches unionized firms Favourable tax treatment Economies of scale in purchasing Can provide valued rewards for no cash Provide employee peace of mind Helps employer deal humanely with problems Can help promote company products Can support managerial strategy |
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Disadvantages of Indirect pay |
Cost can be substantial Rigidity Difficult to develop efficient benefits package Administration and communication costly Does not motivate task behaviour May cause excessive employee stability May encourage undesirable behaviour |
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Define market pricing |
Establishing base pay by determining the average amount of pay other employers are offering for a given job |
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Define job evaluation |
Establishing base pay by ranking all jobs in the firm according to their value to that firm |
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Define Pay-for-knowledge system |
Establishing base pay according to the total value of the sills and competencies an employee has acquired |
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Advantages of Market Pricing |
Simplicity and cost Keeps jobs aligned with market conditions |
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Disadvantages of Market Pricing |
Going rate is not always easy to identify Job definitions may vary from the market data Does not address internal equity Lack of control of compensation strategy May violate pay equity legislation |
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Advantages of Job Evaluation |
Centralized control of compensation costs Signals importance of different jobs Promotes internal equity Makes calibration to the market easier Systematic way to determine pay for new jobs Availability of packaged plans from consultants Fits well with classical and human relations Low discontinuation rate |
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Disadvantages of Job Evaluation |
May impede high involvement More costly to develop than market pricing Need for job descriptions May become an adversarial process Costly to maintain Can inhibit flexibility and skill development |
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Advantages of Pay-for-Knowledge |
Incentive for employee skill development No disincentive to movement High workforce flexibility Does not require job descriptions Jobs are broader, with more intrinsic rewards May improve customer service Supports high-involvement management |
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Disadvantages of Pay-for-Knowledge |
May raise labour costs "Topping out" problem Resistance by senior employees to rotation Higher training costs Complex to develop and administer May also need to maintain job-based system May be difficult to calibrate system to market Not all employees may have desire or capability Unions may resist because not based on seniority High discontinuation rate |
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Two types of Pay-for-Knowledge methods |
Competency-based pay Skill-based pay |
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Define competency-based pay |
Pay that is based on the characteristics, rather than the performance, of individual employees; usually applied to managerial or professional employees |
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Define skill-based pay |
Pay that is based on the specific skills and capabilities of individual employees, rather than on the specific tasks they are carrying out; usually applied to operational-level employees |
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Five issues in developing a skill-based pay system |
1) Deciding which employee groups to include 2) Designing skill blocks 3) Linking these skill blocks to pay 4) Providing learning opportunities 5) Certifying skill achievement |
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Who should skill-based pay apply? |
Continuous process operations Other types of manufacturing firms Service sector Organizations in need of high-level and diverse employee skills and can benefit from high employee flexibility |
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Define skill block |
The basic component of a skill-based pay system, containing a bundle of skills or knowledge necessary to carry out a specific production or service delivery task Employees are usually expected to complete the horizontal row of skills before moving vertically |
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Most common method for pricing skill blocks |
High-low method |
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Define high-low method |
Determines entry-level and skill-block pay amounts by pricing comparable entry-level and top-level jobs in the market and allocating the difference to the various skill blocks |
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What pay formats suit skill-based pay? |
Gain sharing Goal sharing Profit sharing Stock ownership |
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Types of training techniques used for skill-based pay |
Classroom Interactive computer-based On-the-job |
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To reduce 'bottlenecking' during training... |
Work time is provided for training at lower skill levels but not at the top skill levels |
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Define skill certification |
The testing process that determines whether an individual has mastered a given skill block and should be granted the pay raise associated with that skill block |
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Four main issues when developing a competency-based pay system |
1) Identifying competencies that demonstrably affect performance 2) Devising methods to measure achievement of each competency 3) Compensating each competency 4) Providing learning opportunites |
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Four types of individual performance pay |
Output-related pay: Piece rates Sales commissions Always in conjunction with base pay: Merit pay Special purpose incentives |
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Define piece rates |
A pay system under which individuals receive a specified sum of money for each unit of output they produce or process |
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Define straight piece rate |
The same specified sum of money is paid for each piece produced or processed, regardless of how many pieces are produced or processed |
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Define differential piece rate |
A lower sum of money per piece is paid if employee production does not meet the production standard, and then a higher sum per piece is paid once the production standard is met |
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Advantages of piece rate pay plans |
Can be highly motivational May reduce need for external control of employees Reduces employer risk by relating pay to output Can make expected levels of performance clear |
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Disadvantages of piece rate pay plans |
Are applicable only in limited circumstances May not be as 'scientific' as they appear May pit workers against management Social forces may constrain employee effort Product/service quality may suffer May cause conflict among employees May cause abuse of equipment or tools May cause accidents |
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When are piece rates a viable option? |
Where: Individual workers control their own production Interdependence between workers is low Each unit of production can be easily measured and priced Individuals perform a limited number of tasks Tasks do not change frequently Increased productivity will not cause layoffs Quality standards can be monitored efficiently |
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Define sales commissions |
Pay that is geared to the dollar volume of sales or transactions conducted |
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Define straight commission |
Pay that is geared only to the volume of sales or transactions, with no base pay component |
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Advantages of commissions |
Relatively easy to set and measure Unlimited opportunity for sales Reduces need for employee control Can serve as source of feedback Reduces employer risk by linking pay to sales Highly motivational to increase sales |
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Disadvantages of commissions |
Uncertain employee income may cause turnover Pay may be higher due to employee risk Low earnings for new sales workers Workers may avoid tasks unrelated to sales may encourage overly aggressive sales staff May cause conflict among sales workers May cause neglect of good HR practices May focus attention on sales volume, not profitability |
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What are the three dimensions used to answer whether a commission is appropriate? |
1) Degree of independence 2) Degree of persuasive skills required 3) Length of sales cycle (the time between meeting a new customer and closing the deal) |
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Four types of selling |
Maintenance selling Conversion selling Leverage selling New market selling |
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Define maintenance selling |
Selling established products to existing customers |
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Define conversion selling |
Selling established products to new customers |
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Define leverage selling |
Selling new products to existing customers |
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Define New market selling |
Selling new products to new customers |
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Commissions are not ideal for... |
1)Sales jobs where sales cannot easily be measured 2) Jobs that involve working inside the office 3) Jobs that include important non selling tasks 4) Jobs in large organizations |
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Define Merit Raise |
An increase to an employee's base pay in recognition of good job performance |
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Define Merit Bonus |
A cash payment, provided to recognize good employee performance, that does not increase base pay |
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Advantages of Merit Raises |
Focuses attention on overall performance Provides feedback to employees A means for advancement through the pay range Helps retain outstanding employees Can foster perceptions of equity |
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Disadvantages of Merit Raises |
Very expensive since they are permanent raises Requires an effective employee appraisal system Need to ensure a noticeable difference in pay Employees will eventually 'top out' May cause antagonism toward supervisor May inhibit collaborative behaviour Not suitable where work is highly interdependent |
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Advantages of Merit Bonuses |
More flexible because they are not permanent Can be related to financial conditions of firm Can serve as solution to 'topping out' problem |
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Disadvantages of Merit Bonuses |
Need valid performance measures Not suitable where work is highly interdependent Bonus amount my need to be higher |
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8 suitable conditions for individual Merit Pay |
1. Is individual performance variable? 2. Is performance controllable by the individual? 3. Can individual performance be separated out? 4. Can an accurate performance appraisal system by developed? 5. Will pay actually be linked to performance appraisals? 6. Will the merit system serve a purpose that cannot be served in some other way? 7. Are any undesirable side effects readily manageable? 8. Will the merit system fit with the firm's culture and strategy? |
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Define special-purpose incentives |
An incentive designed to motivate a specific type of employee behaviour |
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Two most common special-purpose incentives |
Suggestion programs that encourage creativity Attendance programs to discourage absenteeism |
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Define suggestion system |
An incentive plan through which employees receive cash bonuses for submitting money-saving suggestions |
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Advantages of Special-Purpose Incentives |
Focuses attention on key employee behaviours Depends on specific nature of plan |
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Disadvantages of Special-Purpose Incentives |
Employees may focus only on rewarded behaviours Depends on specific nature of plan |
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When are special-purpose incentives useful? |
Most appropriate in circumstances where intrinsic motivation does not already exist, where both intended and unintended behaviours are easy to observe and where no other alternatives for inducing the desired behaviour are feasible. Don't fit well with high-involvement organizations but may fit with classical and human relations firms under some circumstances |
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Group Performance Pay Plans |
Gain Sharing Goal Sharing Other Group Plans (competitive bonus plan, pooled performance plan, group commission, group piece rates) |
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Define gain-sharing plan |
Group performance pay plan that shares cost savings or productivity gains generated by a work group with all members of that group |
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Define goal-sharing plan |
A group performance pay plan in which a work group receives a bonus when it meets pre specified performance goals |
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Other types of group performance pay plans |
Competitive bonus plan Pooled Performance pay Group commissions Group piece rates |
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Define competitive bonus plan |
A group pay plan that rewards work groups for outperforming other work groups |
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Define pooled performance pay |
A pay plan in which the performance results of a group are pooled and group members share equally in the performance bonus |
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Define group commissions |
A performance pay plan in which the commissions of a group of sales workers are pooled and then shared out equally among members of the group |
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Define group piece rates |
A performance pay plan in which group members get paid based on the number of completed products produced by the group |
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Advantages of Gain Sharing |
Self-funding if designed properly Can stimulate higher productivity May enhance labour-management cooperation May create positive group norms May improve employee cooperation May reduce need for external control May increase employee commitment May generate cost-saving suggestions Can increase employee knowledge of the business |
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Disadvantages of Gain Sharing |
Cost of establishing and administering plan Costs of employee and managerial time Not amenable to changing circumstances may focus attention on group's interests only May create 'free riders' may create more opportunities for conflict May become a dissatisfier High discontinuation rate |
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Where is gain sharing likely to succeed? |
Human relations may find gain sharing attractive because it aligns with their concept of group cooperation Highest success in high-involvement organizations as almost all of the conditions for its success are already in place and it already aligns with the managerial philosophy |
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Advantages of Goal Sharing |
Simple to develop More flexible than gain sharing Only rewards major productivity gains May create positive group norms May encourage cooperation May reduce need for external control |
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Disadvantages of Goal Sharing |
Can be arbitrary in goal levels and bonus amounts Less continuity than gain sharing Difficulty in establishing realistic and equitable goals May not meet criteria for good employee motivation May cause frustration if some do not contribute May cause frustration if efforts fall slightly short No incentive to surpass goal High discontinuation rate |
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What makes goal sharing successful? |
Should be designed with input from employees Should clearly communicate factors affecting goal achievement and ways that employees can influence these factors Should communicate progress toward meeting goals on an ongoing basis The key factor is trust between management and employees May not work well in highly dynamic firms (high-involvement) |
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Advantages of "other" group plans |
Competition between groups can be motivational May encourage group members to assist others Depends on specific nature of plan |
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Disadvantages of "other" group plans |
Can cause conflict between work groups May encourage free riders High discontinuation rate Depends on specific nature of plan |
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Organizational Performance Pay Plans |
Profit-sharing plans Employee stock plans Long-term incentives |
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Types of Profit-Sharing Plans |
Employee profit-sharing plan Current distribution profit-sharing plan Deferred profit-sharing plan Combination Profit-sharing plan |
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Define Employee profit-sharing plan |
A formal pay program in which a firm provides bonus payments to employees based on the profitability of the firm |
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Define Current distribution profit-sharing plan |
A profit-sharing plan that distributes the profit-sharing bonus to employees in the form of cash or shares, at least annually |
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Define Deferred profit-sharing plan |
A profit-sharing plan in which the profit-sharing bonuses are allocated to employee accounts but not actually paid out until a later date, usually on termination or retirement |
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Define Combination profit-sharing plan |
A plan that combines the current distribution and deferred profit-sharing plans by paying some of the profit-sharing bonus on a current (cash) basis and deferring the remainder |
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Advantages of Profit-Sharing Plans |
May contribute to higher employee productivity May foster increased cooperation May improve labour-management relations May increase organizational identification Can reduce need for employee supervision May help employees understand the business May result in more attractive compensation package Ties compensation to ability to pay May help employment stability May be used as a retirement plan Relatively simple to set up and administer Relatively low discontinuation rate |
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Disadvantages of Profit-Sharing Plans |
May not pay off May not motivate due to weak "line of sight" Subject to the "free rider" problem Employees like predictable rewards May be opposed by unions Administrative costs |
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For profit sharing to be a success... |
There must be some expectation of profits in at least the first one or two years of the plan Profitability level should be sufficient to afford an annual payout that is a noticeable amount (2-5% of total compensation) Good relations between management and employees |
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Define Employee Stock Plan |
Any type of plan through which employees acquire shares in the firm that employs them |
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Types of employee stock plan |
Employee Stock Bonus Plan Employee Share Purchase Plan Employee Stock Option Plan |
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Define Employee stock bonus plan |
A plan through which employees receive shares in their employer firm at no cost to the employee |
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Define Employee Share Purchase Plan |
A plan through which employees may purchase shares in their employer firm |
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Define Employee Stock Option Plan |
A plan through which employees are provided with options to purchase shares in their employer at a fixed price within a limited time period |
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Advantages of Employee Stock Plans |
Aligns interests of employers and employees May stimulate improved management May increase employee-management cooperation Fosters employee interest in firm performance Can improve perceptions of equity in firm Can be used as retirement fund Can increase employee job security Does not require firm to lay out cash |
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Disadvantages of Employee Stock Plans |
Possible dilution of shareholder equity Cost of establishing and managing plan Employee dissatisfaction if share price decline More difficult to establish in private corporations Employees may not have funds to purchase shares Employees have "all their eggs in one basket" |
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How are employee stock plans most applicable? |
Fit best with high-involvement organizations |
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Types of "other" Organizational Performance Pay Plans |
Long-term incentives Performance unit plan Performance share plan |
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Define long-term incentives |
A type of performance pay in which the incentives are tied to an organization performance horizon that ranges beyond one year, often three to five years |
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Define performance unit plan |
A long-term incentive in which the bonus amounts are expressed in units for which the monetary value will fluctuate, depending on degree of goal accomplishment |
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Define performance share plan |
A long-term incentive in which the bonus amounts are expressed in company shares |
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Advantages of Long-Term Incentives |
Encourages a long-term focus Can encourage better understanding of business |
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Disadvantages of Long-Term Incentives |
Difficulty in establishing realistic long-term goals "Line of Sight" may be weak |
