Milkovich/Newman: Compensation, Ninth EditionMilkovich/Newman: Compensation, Ninth Edition

McGraw-Hill/IrwinMcGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 18Chapter 18Budgets and Budgets and

AdministrationAdministration

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POLICIESPOLICIES TECHNIQUESTECHNIQUES OBJECTIVESOBJECTIVES

EFFICIENCYEFFICIENCY• PerformancPerformancee• QualityQuality• CustomersCustomers• StockholderStockholderss• CostsCosts

FAIRNESSFAIRNESS

COMPLIANCECOMPLIANCE

COMPETITIVENESSCOMPETITIVENESSMarket Surveys Policy PAY Market Surveys Policy PAY definitions lines STRUCTUREdefinitions lines STRUCTURE

CONTRIBUTORSCONTRIBUTORS Seniority Performance Merit INCENTIVE Seniority Performance Merit INCENTIVE based based guidelines PROGRAMSbased based guidelines PROGRAMS

MANAGEMENTMANAGEMENT Costs Communication Change EVALUATIONCosts Communication Change EVALUATION

Exhibit 1.5: THE PAY MODELExhibit 1.5: THE PAY MODEL

ALIGNMENTALIGNMENTWork Descriptions Evaluation/Work Descriptions Evaluation/analysis certificationanalysis certification

INTERNALINTERNALSTRUCTURESTRUCTURE

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Managing Labor CostsManaging Labor Costs Financial planning is integral to managing Financial planning is integral to managing

compensationcompensation– Total compensation makes up at least 50 percent of Total compensation makes up at least 50 percent of

operating expenses in many orgsoperating expenses in many orgs But, most orgs have not tried to analyze returns from their But, most orgs have not tried to analyze returns from their

compensation decisions (e.g., increases expected from compensation decisions (e.g., increases expected from new gainsharing plan, expected value of increasing merit new gainsharing plan, expected value of increasing merit increases for top performers relative to average increases for top performers relative to average performers)performers)

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Controlling Employment: Staffing Controlling Employment: Staffing Levels and HoursLevels and Hours

Staffing LevelsStaffing Levels– Most common approach to managing labor costs is Most common approach to managing labor costs is

to control number of ees a/o hours workedto control number of ees a/o hours worked Note: layoffs and plant closings often have positive short-Note: layoffs and plant closings often have positive short-

run effect on stock price, but loss of human capital and run effect on stock price, but loss of human capital and lowered morale may well lead to lower performance than lowered morale may well lead to lower performance than anticipated anticipated

Contingent workforce is a possible bufferContingent workforce is a possible buffer

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Control Salary Level: Top DownControl Salary Level: Top Down Top management determines the amount of Top management determines the amount of

money to be spent on pay and allocates it money to be spent on pay and allocates it “down” to each subunit for the plan year“down” to each subunit for the plan year– Current year’s riseCurrent year’s rise

– Ability to payAbility to pay

– Competitive marketCompetitive market

– Turnover effectsTurnover effects

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Control Salary Level: Bottom UpControl Salary Level: Bottom UpInstruct managers in compensation policies and Instruct managers in compensation policies and

techniquestechniquesDistribute forecasting instructions and Distribute forecasting instructions and

worksheetsworksheetsProvide consultation to managersProvide consultation to managersCheck data and compile reportsCheck data and compile reports

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Control Salary Level: Bottom Up (cont.)Control Salary Level: Bottom Up (cont.)Analyze forecastsAnalyze forecastsReview and revise forecasts and budgets with Review and revise forecasts and budgets with

managementmanagementConduct feedback with managementConduct feedback with managementMonitor budgeted versus actual increasesMonitor budgeted versus actual increases

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Embedded ControlsEmbedded Controls

Range maximums and minimumsRange maximums and minimums Compa-ratiosCompa-ratios Variable payVariable pay Analyzing costsAnalyzing costs Analyzing Value AddedAnalyzing Value Added

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Exhibit 18.9: Illustration of Value-Added AnalysisExhibit 18.9: Illustration of Value-Added Analysis

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Communication: Managing the MessageCommunication: Managing the Message Compensation communicatesCompensation communicates Employee’s understanding of the pay system is Employee’s understanding of the pay system is

shapedshaped– Indirectly through the paychecks they receiveIndirectly through the paychecks they receive

– Directly via formal communication about their pay, Directly via formal communication about their pay, their performance, and the markets in which the their performance, and the markets in which the organization competesorganization competes

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Why Communicate Pay Information?Why Communicate Pay Information? Devotion of considerable resources to designing a fair Devotion of considerable resources to designing a fair

and equitable system intended toand equitable system intended to

– Motivate effective performanceMotivate effective performance

– Encourage productivityEncourage productivity

Misperception of pay system by employeesMisperception of pay system by employees

Openness about pay mayOpenness about pay may

– Engender goodwillEngender goodwill

– Affect perceptions of pay equityAffect perceptions of pay equity

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Pay: Change Agent in RestructuringPay: Change Agent in Restructuring Pay often plays a singular role when organizations Pay often plays a singular role when organizations

restructurerestructure

Strategic changes in business strategy mean the pay Strategic changes in business strategy mean the pay strategy must be realignedstrategy must be realigned

– Changing people’s pay captures their attentionChanging people’s pay captures their attention

Pay changes play two rolesPay changes play two roles

– Catalyst for changeCatalyst for change

– Follower of changeFollower of change

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Structuring the Compensation FunctionStructuring the Compensation Function

Centralization versus decentralizationCentralization versus decentralization

Flexibility within corporate-wideFlexibility within corporate-wideprinciplesprinciples

Reengineering and outsourcingReengineering and outsourcing

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Controls as Guidelines: Let (Thoughtful)Controls as Guidelines: Let (Thoughtful)Managers Manage Managers Manage

Traditional compensation plans often degenerate Traditional compensation plans often degenerate into bureaucratic nightmares that hinder the into bureaucratic nightmares that hinder the organization’s ability to respond to competitive organization’s ability to respond to competitive pressurespressures– Reducing the controls and guidelines inherent in any Reducing the controls and guidelines inherent in any

pay plan recommendedpay plan recommended Banding eliminates or at least reduces the impact of range Banding eliminates or at least reduces the impact of range

maximums and minimumsmaximums and minimums Replacing merit grids with bonusesReplacing merit grids with bonuses Replacing job evaluation with skill- or competency-based Replacing job evaluation with skill- or competency-based

plansplans