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Management 351 – Class 9. Chapters 10 and 11 Announcements/Other Items Syllabus changes Dropping chapter 9 Class 9: Ch 10 and 11 Class 10: Ch 12 and 17 Class 11: Final covering 7, 8, 10, 11, 12 and 17 Papers and Matewan Test change: dropping Question #8.

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Management 351 – Class 9

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management 351 class 9
Management 351 – Class 9
  • Chapters 10 and 11
  • Announcements/Other Items
    • Syllabus changes
      • Dropping chapter 9
      • Class 9: Ch 10 and 11
      • Class 10: Ch 12 and 17
      • Class 11: Final covering 7, 8, 10, 11, 12 and 17
    • Papers and Matewan
    • Test change: dropping Question #8
chapter 10 managing compensation
Chapter 10 – Managing Compensation
  • Herzberg’s Two-Factor Theory (parallels Maslow’s hierarchy of needs)

Motivating Factors: With them I am motivated, productive, satisfied, etc.

Motivating Factors: Without them I AM NOT resentful. But I’m not motivated either!

Hygiene Factors: With them I AM NOT resentful. But I’m not happy either!

Hygiene Factors: Without them I will be resentful and unproductive

what is compensation
What is Compensation
  • Think in terms of “Total Compensation”
    • Base cash compensation
    • “Pay Incentives” or variable cash compensation
    • Non-cash compensation (recognition)
    • Non-cash benefits
    • Cash-equivalent benefits
designing a compensation system
Designing a Compensation System
  • Step One: Determining Pay Philosophy
    • Internal versus External Equity
      • Put another way, Internal Equity versus External Competitiveness
    • Distributive Justice Model
      • We exchange our time/labor for pay
      • Labor Market Model: set by supply and demand
      • Balancing Equity Model: internal issues may rule
supply and demand
Supply and Demand
  • Labor is a commodity, like gasoline…
  • Pick a gas company: what do you pay for gas?
  • Pick a point on that distribution: what is fair?
  • Say you had the time: what would you choose to spend?
  • What are you willing to pay: ‘low’, ‘mid’ or ‘high’?
fixed versus variable pay
Fixed Versus Variable Pay
  • Is “risk sharing” a good idea?
  • Can and should “line” employees have the same risk as “manager” or “executives?”
  • How do we set the risk level?
  • Where do we pay relative to market:
    • Overall
    • Base
    • Variable
    • Benefits
variable pay plans
Variable Pay Plans
  • Don’t forget: you get what you pay for.
  • Don’t forget: you get what you pay for.
  • Why they fail:
    • No link from effort to reward
    • “Funny money” makes financials meaningless
    • Rewards only drive performance in the short run (once spent, they’re forgotten)
performance versus membership
Performance Versus Membership
  • Performance-contingent plans:
    • Vary based on individual or work group achievement
    • Can be highly focused (team or group)
  • Membership-contingent plans:
    • Pay the same to people in a job or work group regardless of individual or group performance
  • Distinction driven by culture and goals of the play plan
job versus individual pay
Job Versus Individual Pay
  • “We pay the position, not the person.”
  • Powell’s Books example:
    • PhD selling books is paid as a PhD
    • Current labor issues:
      • 9% versus 19% wage increase
      • No benefits change versus increase in co-pays and deductibles
  • Does this make sense?????
  • Knowledge and skill-based pay:
    • Pay for knowledge to encourage cross training
    • Promotes flexibility
    • Provides incentive to learn more skills
  • Egalitarian and Elitist pay systems:
    • Egalitarian: everyone gets the same system
    • Elitist: equivalent to a ‘black box’ system
egalitarian versus elitism
Egalitarian versus Elitism
  • Egalitarian (worldwide trending this way):
    • More flexible
    • Reduce barriers (equity) between peers through elimination of status-based perks
    • More common in highly competitive markets
  • Elitist
    • More stable workforce because employees only make more by moving up
    • More prevalent among older companies
pay issues
Pay Issues
  • Below versus above market
    • Competitive strategy (and Herzberg)
    • Blue chips have gone “above” market to create elitism, attract/retain the “cream of the crop” and minimize turnover (golden handcuffs)
    • Above more common in large, established companies with ready cash and little equity
    • Below are more common in smaller, startup companies that can put emphasis on a ‘liquidity event’
pay issues1
Pay Issues
  • Monetary versus non-monetary rewards
    • Monetary:
      • Emphasize individual achievement
      • Volatile markets and low job security
      • Emphasis on sales versus customer service
      • Pushing competitive internal climate
    • Non-monetary:
      • Emphasize commitment to the organization
      • Stable workforce with an emphasis on customer service and loyalty (versus fast sales growth)
      • Companies that want to create more cooperation internally
pay issues2
Pay Issues
  • Open versus secret pay
    • Public or quasi public companies and agencies publish
    • May be illegal to restrict people from talking
    • What do we have to hide???
    • Secret pay creates impression that there is something to hide (“Who’s getting rich?”
    • Open pay eliminates perceptions driven by suspicion and speculation
pay issues3
Pay Issues
  • Centralization versus decentralization
    • Centralized offers efficiency and the ability to hire specialists
    • Centralized may not be as responsive
    • Centralized may not be as ‘clued in’ to what happens in the ‘field’
    • Centralized may promote and ‘us versus them’ feeling
compensation tools
Compensation Tools
  • Two basic approaches
    • Job-based compensation plans
      • Point factor theory
      • Looks at ‘compensable factors’ in each job
    • Market based compensation plans
      • Looks at the job’s worth or value relative to the ‘market’
compensation tools grades and ranges
Compensation Tools – Grades and Ranges

Mid-Point Spread




Range Spread


Rate of Pay

compensation tools job based plans
Compensation Tools – Job Based Plans
  • Conduct job analysis
  • Write job descriptions
  • Determine job specifications (what people do to be successful in the work)
  • Rate the ‘worth’ of jobs using ‘compensable factors’
  • Create job hierarchy
  • Classify jobs by grade and level
compensation tools market based plans
Compensation Tools – Market Based Plans
  • Identify benchmark or key jobs
  • Establish pay policy (philosophy)
  • Uh, then what????
legal considerations
Legal Considerations
  • FLSA (1938)
    • Primarily impacts exempt/nonexempt decisions
    • Addresses minimum wage and overtime
  • Equal Pay Act
    • Raises comparable worth questions
  • Internal Revenue Code
    • Particularly an issue with “contractors”
chapter 11 rewarding performance
Chapter 11 – Rewarding Performance
  • “Incentive” systems are designed to incent or drive behavior
  • First question: what organizational outcome are you trying to achieve?
  • “Do only what you get paid for syndrome”
  • Erosion of teamwork?
problems and challenges
Problems and Challenges
  • Lack of control
    • Many things are beyond individual control – therefore, should they be excluded from consideration?
  • Difficulties in measuring “performance”
  • Psychological contracts
    • Pre-set expectations
problems and challenges1
Problems and Challenges
  • Credibility gap
    • Ill defined, poorly communicated systems or systems with overrides, loopholes or a lack of accountability
    • The first exception kills the system!
  • Job dissatisfaction and stress
    • Creates “cogs” versus “involved people”
  • Potential reduction of intrinsic drives
design objectives
Design Objectives
  • Link pay and performance
  • Use pay as a broad HRM system
  • Build employee trust
  • Promote the idea that performance makes a difference
  • Use multiple reward layers (KISS?)
  • Increase employee involvement
  • Use non-monetary incentives
individual based plans
Individual Based Plans
  • Advantages
    • Bonuses, lump sum or spot bonus payments
    • Expectancy theory: rewarded performance is likely to be repeated AND we adjust our performance based on perceptions
    • Goal oriented behavior can be “shaped” over time
    • Looking at individuals promotes equity
    • Fits with an individualistic culture
individual based plans1
Individual Based Plans
  • Disadvantages
    • Promotes single mindedness
    • Employees often don’t believe that performance impacts outcomes and in turn their pay (no performance-outcomes-pay link)
    • May run counter to quality goals (?)
    • May be inflexible
team based plans
Team Based Plans
  • Advantages
    • Foster work group cohesion
    • Aid performance measurement
  • Disadvantages
    • May not fit individualistic culture
    • Free riding effect
    • Social pressure to limit performance
    • Defining “groups” that have meaning
    • Inter-group competition
plantwide and corporate plans
Plantwide and Corporate Plans
  • Look at overall performance
  • Suffer from many of the same design challenges
  • Large scale and difficulty ‘seeing’ operational connections make the performance-outcome link hard to identify
  • Can drive tremendous focus
  • Review advantages and disadvantages of plantwide and corporate plans
  • Review keys to successful implementation
  • Look at executive and sales compensation
  • Pay attention to variable and short versus long term incentive plans