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Pay Plans & Rewards Management
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Page 1: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Pay Plans

& Rewards

Management

Page 2: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Determining Pay RatesEmployee compensation refers to all forms of pay or rewards going to employees and arising from their employment.

It consists of 2 parts: Direct financial payments Indirect financial payments

Page 3: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Employee CompensationDirect or Indirect compensation is given based on: Increments of time

Hourly Salaried

Performance Piecework Commission

Page 4: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Factors Influencing Pay Legal considerations Union membership Company policy Competitive strategy Equity

Page 5: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Legal Considerations The Labour act defines the minimum wage and

employment conditions

Basic labor standards Maximum hours Safety/health standards

Page 6: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Corporate Policies and Competitive Strategy

To remain competitive, compensation plans must reward strategy that furthers the firm’s strategy aims by asking:

1. What are our key competitive success factors?2. What actions implement this competitive strategy?3. What compensation program reinforces those behaviors? 4. What requirement should each pay element meet?5. How well do the current reward programs match these requirements?

Page 7: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Important Policy Issues

In writing the pay plan, ask the following:

1. Will we be a pay leader or a follower?

2. Will we emphasize seniority or performance?

3. What pay cycle?

Page 8: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Important Policy Issues

4. How do we fix salary compression?

5. How should we compensate based on geography or overseas employees?

6. Is the pay rate equitable with rates in other organizations outside the firm?

Page 9: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Salary Inequities How satisfied are you with your pay? What criteria were used for your recent pay

increase?” What factors do you believe are used when your

pay is determined?

Page 10: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Establishing Pay Plans

The 5 step process:The salary

survey

Jobevaluation

Pay gradegrouping

Price pay grade-wage curves

Fine tunepay rates

Page 11: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

1. The Salary Survey

The salary survey is a survey aimed at determining prevailing wage rates which include:

Formal Informal

Page 12: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Uses of Salary Surveys

Benchmark jobs Employers price 20% or more of their positions

currently in the job market Surveys collect data on benefits

Page 13: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

2. Job Evaluation

Job evaluation is the formal and systematic comparison of jobs in order to determine the worth of one job relative to another The comparison results in a wage or salary hierarchy

Compensable factors are fundamental elements of a job

Page 14: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Compensable Factors Two approaches in comparing jobs – Intuitive or via

compensable factors Intuitive based on decision that one job is more

important than another Compensability determined arbitrarily but some metrics

include:

Skill

Effort

Responsibility

Workconditions

Know-how

Problemsolving

Accountability

Equal PayAct factors

Hay Consulting

Page 15: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Preparing for the Job Evaluation Its mostly a judgmental process which requires

cooperation among managers Identify the need for the program Get cooperation Choose an evaluation committee who will do the

evaluation

Page 16: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Job Evaluation Committees Performs 3 main functions:

Identifies 10-15 key benchmarks Selects some compensable factors Evaluate the worth of each job via one

of the methods on the following slides

Page 17: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Job Evaluation Method 1:Ranking Obtain job information Select raters and jobs Select compensable factors Rank jobs Combine ratings

Page 18: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Method 2: Job Classification

Rates categories of jobs into groups Groups called classes if jobs are similar Called grades if groups contain different jobs of

similar difficulty Example: Grade 10 may deputy director and the managing

director

Page 19: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Method 3: Point

The point method is more quantitative Identifies compensable factors The degree to which each of these factors is

present

Page 20: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Method 4: Factor Comparison

Factor comparison is a widely used method to rank jobs by a variety of skills and difficulties, then adding these to obtain a numerical rating for each job

With this method you rank each job several times—once for each of several compensable factors

Page 21: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

3. Group Similar Jobs Into Pay Grades A pay grade is composed of equally difficult jobs Committee will assign pay rates to each job based on one

of the job methods Ranking method grades fall in to a point range Point method grades fall within two-three ranks Factor comparison grades pay rate range Classification method puts into classes or grades

Page 22: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

4. Price Each Pay Grade -Wage Curves Developing a wage curve involves the following:

Find the average pay for each pay grade Plot the pay rates for each pay grade Fit the line called a wage line through the points just

plotted Price the jobs

Page 23: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

5. Fine Tune Pay Rates

Pay ranges are a series of steps or levels in a pay grade, usually based on years of service

Page 24: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Pricing Managerial and professional Jobs

Goal is to attract and keep Harder to quantify evaluation Paid on basis of ability More complex and stress incentives over

evaluation

Page 25: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Compensating Managers Top executives compensated by: Base pay + guaranteed bonus Short term incentives Long term incentives Perks

Page 26: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

What Really Determines Executive Pay?

Company size and performance Industry CEO average pay May emphasize 25% performance incentive Board sets CEO pay Shareholders may affect pay Complexity of the job

Page 27: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Compensating Professionals

Job emphasizes creativity and problem solving Job evaluation is useful Some disciplines result in 4-6 grades with a

broad salary range

Page 28: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Why Pay Employees by Skill Levels?

The differentiation may bring about satisfaction and a basis for discriminate action

Page 29: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Skill-based Pay versus Evaluation-based Pay

Competence testing Effect of job change Seniority and other factors Advancement opportunities SBP may increase productivity and lower labor

costs over JBP

Page 30: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Money and Motivation Incentives motivate workers Taylor standardized a fair day’s work Which led to the scientific management

movement Which in turn led to modern day HR practices

Page 31: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Performance and Pay

Competition, shareholder value, and turbulence Businesses need an edge

Achieving employee satisfaction

Paying attention

Page 32: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Types of Incentive Plans Individual Group Profit sharing Employee group Variable pay

Page 33: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Incentives for Operations Employees Piecework Straight piecework Standard hour plan All must guarantee minimum

wage Can create quality problems

Page 34: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Incentives for Operations Employees

Team or group incentive plans All members receive the pay earned by the highest

producer Members receive pay equal to the average pay

earned by the group All members receive the pay earned by the lowest

producer

Page 35: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

The Annual Bonus

A bonus is aimed at motivating short term performance with three issues to consider when awarding them: Eligibility – based on job level and salary Fund size – use a formula Individual awards – based on performance

Page 36: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Manager’s Performance Bonus Bonus for managers is either individual or corporate

performance based or both Split it with part based on individual performance rest

on corporate performance Never give outstanding performers too little Never give poor performers normal or average awards

Page 37: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Long Term Incentives Stock options Different stock option plans Performance plans Cash plans

Page 38: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Long Term Incentives (Cont.) Other Plans

Stock appreciation Performance achievement Stock options

Performance Plans Cash Versus Stock Options

Page 39: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Performance Plans

Executives do not prosper unless the company does

Executives have some “skin in the game” Value is contingent on financial performance

Page 40: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Cash Versus Stock Options

Which do you think is a better motivator?

Page 41: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Steps to a Compensation Package

Include external and internal issues What are our long term goals? How can compensation support them?

What defines the work culture and how can the package be molded to it? What are our competitive challenges? What are our specific business objectives?

Page 42: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Steps to a Compensation Package (Cont.)

Shape components into balanced plan Meet unique company and strategic needs Legal and tax effective Install a review and evaluation process

Page 43: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Incentives for Salespeople - Salaries

Sales compensation can be salaried, commission-based or hybrid

Salaries make sense when job is primarily prospecting or servicing clients

Useful when relocating to new territories Can de-motivate very productive workers

Page 44: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Incentives for Salespeople - Commissions

Pay only for results Easy to understand and compute Focus only on high volume items May ignore non-selling aspects Performance is a product of ability May result in high turnover

Page 45: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Example - Auto Dealer Commissions

Insight into why auto salespersons behave the way they do: Some are 100% commission based Others get commissions and small base salary Net profit of car

Page 46: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Professional and Non-managerial Incentives

Merit pay or a merit raise is any salary increase awarded to an employee based on individual performance

Page 47: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Merit Pay Options

Lump sum raises are not cumulative; traditional raise is

Lump sum can be a bigger motivator

Page 48: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Incentives for professionals

Determining this type of incentive is challenging Professionals are well-paid and driven Keep highly motivated professionals by using:

Stock options and profit sharing Better vacations

Page 49: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Organization Wide Variable Pay Plans Variable pay plans include:

Profit sharing Employee Stock Ownership Program (ESOP) Scanlon or gain-sharing plans

Page 50: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Profit Sharing

Employees share in some part of profits In cash plans Lincoln incentive plan Deferred plans

Page 51: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

ESOP Builds a sense of commitment and ownership

in company Positive tax advantages for company and

employee Allows firm to borrow against stock held in trust

Page 52: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Scanlon Plan

An incentive plan developed in 1937 by Joseph Scanlon and designed to encourage cooperation, involvement, and sharing of benefits

Philosophy ofcooperation

Identity Competence

Involvementsystem

Benefits sharingformula

Page 53: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Gainsharing

A modern Scanlon type plan where cost savings are shared

Eight basic steps:

Establish plan objectivesChoose performance

measuresUse a fundingformulaMethod for

distributing shareof gains

Payout must belarge enough to

motivateChoose form of

payoutDecide bonusfrequency

Developan involvement

system

Page 54: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Making Gainsharing Work

Use multiple measures Productivity cost performance, product damage,

customer complaints, shipping errors, safety, and attendance

Committed managers Straightforward formula Employee involvement

Page 55: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

At Risk Plans

Some portion of weekly pay at risk Exceed goals and get extra pay Miss goals and lose some pay Employees become committed partners Relies on trust, respect, communication and

opportunities for advancement

Page 56: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Why Incentive Plans Can Fail

Performance pay can’t replace good management

You get what you pay for Pay is not a motivator Rewards punish Rewards rupture relationships

Page 57: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Why Incentive Plans Can Fail

Rewards can unduly restrict performance Rewards may undermine responsiveness Rewards undermine intrinsic motivation People work for more than money

Page 58: Pay Plans & Rewards Management. Determining Pay Rates Employee compensation refers to all forms of pay or rewards going to employees and arising from.

Implementing Incentive Plans

Use common sense Incentive linked to strategy Effort linked to reward Easily understood Set effective standards Standard is a contract

Get support Use accurate

measurement Long and short view Consider corporate

culture Comprehensive

commitment oriented approach


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