Motivating Employees Through Compensation PDF

Chapter 11. Motivating Employees Through Compensation Learning Objectives After reading this chapter you should be able to:  Describe how employee compensation practices strategically align with overall HR strategy.  Use the concepts of motivation theories to explain how peo...

Chapter 11. Motivating Employees Through Compensation Learning Objectives After reading this chapter you should be able to:  Describe how employee compensation practices strategically align with overall HR strategy.  Use the concepts of motivation theories to explain how people react to compensation practices.  Describe how pay surveys are conducted and used to create compensation level strategies.  Explain job-based pay and skill-based pay approaches to compensation structure. 2 How Can Strategic Employee Compensation Make an Organization Effective? ◼ Employee compensation is the process of paying and rewarding people for the contributions they make to an organization.  Compensation practices are strategic because they encourage employees to put forth their best effort and perform in ways that help the company produce its particular goods and services.  Compensation is a broad term which includes pay and benefits such as insurance, retirement savings, and paid time off from work. 3 External Equity ◼ Employees’ perception of external equity—which concerns the fairness of what the company is paying them compared with what they could earn elsewhere—are critical in such employment relationships (based on an external labor orientation). ◼ Organizations with an external labor orientation must assess how their compensation compares with the compensation offered by other organizations. 4 Internal Equity ◼ Employees’ perceptions of internal equity are their beliefs concerning the fairness of what the organization is paying them compared with what it pays other employees. ◼ Organizations with an internal orientation spend time and effort comparing and analyzing pay differences among their own employees. ◼ Pay practices, such as how much each person makes, are usually less secretive in these organizations than in organizations with an external orientation. ◼ Internally oriented organizations also use long-term incentives to reward employees who stay with them for long periods. 5 Differentiation vs. Cost Strategy ◼ Differentiation  Compensation is used to encourage risk taking  Substantial spread between the pay of high contributors and the pay of low contributors ◼ Cost leadership  Employees are usually paid fixed salaries that do not increase as performance increases.  The value of a high performer is not substantially greater than the benefit of an average performer, so compensation is used to develop feelings of inclusion and support from the organization. 6 Aligning Compensation with HR Strategy ◼ Variable rewards: a reward system that pays some employees substantially more than others in order to emphasize difference between high and low performers. ◼ Uniform rewards: a reward system that minimizes differences among workers and offers similar compensation to all employees. ◼ Transactional commitment: A sense of obligation to an organization that is created by primarily by financial incentives. ◼ Relational commitment: a sense of loyalty to an organization that is based not only on financial incentives but also on social ties. 7 Aligning Compensation with HR Strategy 8 How Does Compensation Motivate People? ◼ Motivation can be defined as a force that causes people to engage in a particular behavior rather than other behaviors. ◼ Motivation is represented by three elements: behavioral choice, intensity, and persistence  Behavioral choice involves deciding whether or not to perform a particular action.  Intensity concerns deciding how much effort to put into the behavior.  Persistence involves deciding how long to keep working at the behavior. 9 Motivation Theory ◼ Reinforcement theory ◼ Goal-setting theory ◼ Justice theory ◼ Expectancy theory (V-I-E theory)  Valence, Instrumentality, Expectancy  Work → Performance → Reward ◼ Agency theory 10 Agency Theory ◼ Agency theory focuses on the differences in interests between principals and agents to describe reactions to compensation.  The conditions under which subordinate agents work with corporate managers may directly influence the behavior of the organization, such as taking risks pertaining to new ventures.  Issues such as remuneration and risk-taking are among the major concerns of both parties in this relationship. 11  Decisions About Pay Job Structure Pay Level Pay Structure The relative pay The average The pay policy for different amount the resulting from jobs within the organization job structure organization. pays for a and pay-level particular job. decisions. 12  Job Structure: Relative Value of Jobs Job Evaluation Compensable Factors An administrative The characteristics of a procedure for job that the measuring the relative organization values and internal worth of the chooses to pay for. organization’s jobs. – Experience – Education – Complexity – Working conditions – Responsibility 13  Job Evaluation of Three Jobs with Three Compensable Factors 14 Job Structure: Defining Key Jobs Key Jobs – jobs that have relatively stable content and are common among many organizations. Organizations can make the process of creating the job structure and the pay structure more practical by defining key jobs. Research for creating the pay structure is limited to the key jobs that play a significant role in the organization. 15 Pay-Level Strategies There are three market strategies 1. meet-the-market which establishes pay that is in the middle of the pay range for the selected group of organizations. 2. lag-the-market where an organization establishes a pay level that is lower than the average in the comparison group. 3. lead-the-market where the average pay level is higher than the average in the comparison group. 16 Pay Structure: Putting It All Together Job Job Define Key Evaluation Structure Jobs Pay Policy Pay Rates Pay Survey Line Pay Pay Grades Pay Ranges Structure 17 Issues in Developing a Pay Structure 18  Economic Influences on Pay Product Markets Labor Markets The organization’s product Organizations must market includes compete to obtain human organizations that offer resources in labor markets. competing goods and Competing for labor services. establishes the minimum an Organizations compete on organization must pay to quality, service, and price. hire an employee for a The cost of labor is a particular job. significant part of an organization’s costs. 19  Gathering Information About Market Pay Benchmarking – a Bureau of Labor Statistics procedure in which an (BLS) organization compares its own practices against those Society for Human Resource of successful competitors Management (SHRM) Pay surveys www.wage.go.kr (Korea Labor Institute - Trade and industry groups 한국노동연구원 임금정보시스템) Professional groups 20 Test Your Knowledge ◼ Mariah found out that a friend of hers with a similar job in the same town makes significantly more money than she does. Which of the following is probably not the cause of this? a. Different cost-of-living b. The companies are in different product markets with different pay strategies c. Mariah is a poor performer d. Mariah’s job is non-exempt 21 How Is Compensation Structure Determined? ◼ The pay structure focuses on how compensation differs for people working in the same organization. ◼ Job-based pay—focuses on evaluating different tasks and duties associated with various jobs in the organization. ◼ Skill-based pay focuses on the difference in skill and ability required to perform the job. 22 Job-Based Pay for Management Accountants 23 Pay Policy Lines Pay policy line: a graphed line showing the mathematical relationship between job evaluation points and pay rate. 24  Pay Rates Amount of money received per unit time Organization obtains pay survey data for its key jobs. Pay policy line is established. Pay rates for non-key jobs are then determined. 25  Sample Pay Grade Structure ▪ Pay grades: sets of jobs having similar worth or content, grouped together to establish rates of pay. ▪ Pay ranges: a set of possible pay rates defined by a minimum, maximum, and midpoint of pay for employees holding a particular job or a job within a particular pay grade. Pay differential – adjustment to a pay rate to reflect differences in working conditions or labor markets. 26  Broadbanding (=Delayering) ▪ Reducing the number of levels in the organization’s job structure. ▪ More assignments are combined into a single layer. ▪ These broader groupings are called broad bands. ▪ More emphasis on acquiring experience, rather than promotions. 27  Skill-Based Pay: Alternative to Job-Based Pay ▪ Pay structures that set pay according to the employees’ levels of skill or knowledge and what they are capable of doing. ▪ This is appropriate in organizations where changing technology requires employees to continually widen and deepen their knowledge. 28  Seniority- and Skill-based Pay ◼ Seniority- and tenure-based pay is prevalent for various reasons  Social norms  Union influence  Increasing value of an employee over the career  “repayment" for training or below-market pay earlier in employees’ careers  Turnover reduction  Fostering gift-exchange by disproportionately rewarding in the most loyal employees ◼ Pay for skill and knowledge is employed, especially in high-commitment HR systems. 29 Pay Structure and Actual Pay Pay structure represents the organization’s policy. However, what the organization actually does may be different. The HR department should compare actual pay to the pay structure, making sure that policies and practices match. Compa-ratio is the common way to do this. 30 Finding a Compa-Ratio ▪ Compa-Ratio (CR) – the ratio of average pay to the midpoint of the pay range. ▪ If the average equals the midpoint, CR is 1. ▪ If CR is greater than 1, the average pay is above the midpoint. ▪ IF CR is less than 1, the average pay is below the midpoint. 31  Legal Requirements for Pay Equal employment opportunity Minimum wages Pay for overtime Equal pay for men and women Guidelines for employing children 32  Legal Requirements for Pay: Equal Employment Opportunity ▪ Employers must not base differences in pay on an employee’s age, sex, race, or other protected status. ▪ Any differences in pay must be tied to such business-related considerations as job responsibilities or performance. ▪ The goal is for employers to provide equal pay for equal work. ▪ Two employees who do the same job cannot be paid different wages because of gender, race, or age. ▪ Only if there are differences in their experience, skills, seniority, or job performance are there legal reasons why their pay might be different 33  Legal Requirements for Pay: Minimum Wage Minimum wage – the Fair Labor Standards lowest amount that Act (FLSA) – federal law employers may pay that establishes a under law, stated as an minimum wage and amount of pay per requirements for hour. (KW 10,030 in overtime pay and child 2025) labor. (우리나라의 경우: 근로기준법) 34  Legal Requirements for Pay: Overtime Pay ▪ The overtime rate is 1½ times the employee’s usual hourly rate, including any bonuses, and piece-rate payments. (근로기준법 제4장[근로시간] 제50조[근로시간], 제53조[연장근로의 제한], 제56조[연장·야간 및 휴일 근로]) ▪ Exempt employees – managers, outside salespeople, and other employees not covered by the FLSA requirement for overtime pay. This group does not receive overtime for work over 40 hours in a week. ▪ Nonexempt employees – employees covered by the FLSA requirements for overtime pay. 35 Computing Overtime Pay 36  Legal Requirements for Pay: Child Labor in Korea  Children under 13 cannot be employed in any occupations  Children 13 and 14 may work with a special permission from the government.  Children under 18 can work with an agreement of a person with parental rights or a legal guardian.  Children under 18 cannot be employed in hazardous occupations. 37