Compensation Exam 1 Study Guide PDF

Compensation Review for Exam #1 Before the exam, I should be able to answer/complete the following questions/tasks… Chapter 1 and Compensation: An Introduction Slides Why is compensation important to individuals?...

Compensation Review for Exam #1 Before the exam, I should be able to answer/complete the following questions/tasks… Chapter 1 and Compensation: An Introduction Slides Why is compensation important to individuals? o Need certain amount of money to survive Why is compensation important to organizations? o Gm went bankrupt in part due to having labor costs higher than the competition but not having superior customer servie, efficiency or quality Why is compensation important to society? o Can incentives lead to behavior that can harm society How do the following view compensation? o Society ▪ People see pay or benefits as a measure of justice, men making more than women led to laws to reduce disparity o Stockholders ▪ Particularly concerned about executive pay. If interests of the executives are aligned with those of shareholders, company performance will be higher. So they may want to pay executives on the basis of company performance measures such as shareholder return o Managers ▪ Compensations influences their success in two ways. It is a major expense and a mean to influence employee behavior and improve org performance o Employees ▪ View as a return in an exchange between employer and themselves, as an entitlement for being an employee of the company, reward for a good job o People in other countries ▪ Example: in China, compensation is viewed as entitlement but now its seen as how a company is treating its employees o Incentive effect: degree to which we pay influences individual and aggregate motivation among the employees we have at any point o Sorting effect: different types of pay strategies may cause different types of people to apply and stay with the organization What are the components of total compensation? o All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship Describe the different types of cash compensation. o Base wage: cash compensation that an employer pays for the work performed ▪ Reflects value of the work rather than the skills or individual differences o Salary: refers to pay for employees who are exempt from the regulations of the FLSA o Wage: pay for employees who are non-exempt  o Merit-Pay: increments to the base pay in recognition of past work behavior o Cost of living: made on the basis of changes in what other employers are paying or change in how much it costs to get by (same increase to everyone) o Incentives: tied to performance but they do not increase the base wage so they must be earned each pay period, generally know the size of the payment beforehand with and incentive, what you need to do to ear it is called out ahead of time also often referred to as variable pay o Long term incentives: intended to focus on employee efforts on multiyear results, often in form of stock ownership or options to buy stock at specified, advantageous prices; stock options are often the largest component in an executive pay package Describe the different categories of benefits. o Income protection: some legally required in US (workers comp) others not (medical insurance) o Work/life balance: vacations, jury duty, access to services to meet specific needs (financial planning, referrals for child care) and flexible work arrangements o Allowances: housing and transportation Describe the different types of relational returns. o Relational Returns: recognition, status, employment security, challenging work, opportunities to work, Describe the different compensation objectives. o Efficiency ▪ Improving performance, increasing quality, delighting customers and stockholders and controlling labor costs ▪ Research shows that an aligned structure can lead to better org performances o Fairness ▪ Fair treatment for all employees by recognizing both employee contributions and employee needs ▪ Writers have long agreed that departures from an acceptable wage structure will lead to turnover, grievances, and diminished motivation o Ethics ▪ Means the organization cares about how its results are achieved o Compliance ▪ Conforming to federal and state compensation laws and regulations ▪ Internal pay structures msut comply with the regualtions of the countries in which the org operates Describe the different policy choices. o Internal alignment ▪ Comparisons among jobs or skill levels inside a single organization o External competitiveness ▪ Pay comparisons with competitors o Employee contributions ▪ Emphasis to place an employee contributions (or nature of pay mix) should we pay for performance? How much? External competiveness and employee contribution decisions should be made jointly  o Management of the pay system ▪ Ensuring the right people get the right pay for achieving the right objectives in the right way. Do the decisions help the organization achieve its objectives? Which of the policy choices should be made together? How do the policy choices influence the compensation objectives? Chapter 2 and Strategic Compensation Slides What is strategy? o Fundamental directions that an organization chooses What is strategic compensation? o Focuses on those compensation choices that help the organization gain and sustain competitive advantage Compensation should… o Support business strategy o Support HR strategy o Use the pay model as a guide to make pay decisions What is involved in assessing total compensation implications? o Understanding the business ▪ What business should we be in? ▪ How do we win at that business? ▪ How should the compensation system support the strategy? ▪ What are the competitive conditions locally and globally? o HR Strategy ▪ Pay should support or align with culture/values ▪ Context matters ▪ Employee preferences ▪ Choice is not always good (too many can create confusion or cost more) ▪ Union preferences How do you map a total compensation strategy (e.g., Assignment #1)? o What are the factors associated with… ▪ Objectives ▪ Internal alignment ▪ Competitiveness ▪ Employee contributions ▪ Management How do you tell if a strategy is a source of competitive advantage? o Is it aligned? ▪ Align with the business strategy, align externally with the economic and political conditions, and align internally within the overall HR system o Does it differentiate? ▪ Should be hard for competitors to copy; it is the way programs fit together and fit the overall org that is hard to copy o Does it add value? ▪ Hard to determine if it adds value What is the best practice perspective? What is the best fit perspective?  o Best practice: o What does research suggest about which of the two is correct? ▪ Depends on context Chapter 3 and Defining Internal Alignment Slides What is internal alignment? o Aka internal equity o Pay relationships among different jobs/skills/competencies within a signle org o Addresses relationships inside the org o Specifically the logic underlying these relationships o Relationships form a pay structure that should support the orgs strategy, the workflow and motivate behavior toward organization objectives What is pay structure? o Array of pay rates for different work or skills within a single org o Number of levels, the differentials in pay between the levels and the criteria used to determine those differentials describe the structure What should a pay structure do? What is work flow? o Refers to the process by which goods and services are delivered to the customer What is line-of-sight? o Employees should be able to see the links between their work, the work of others and the orgs objectives What are pay differentials? o Pay differences among levels o Work that requires more knowledge or skills, is performed under unpleasant working conditions, or adds more value is usually paid more What criteria are used to determine internal structures? Which are most common? o Work content and its value are the most common bases for determining internal structures What is use-value? o Value of goods and services and employee produces in a job What is exchange value? o Whatever wage the employer and employee agree on for a job What are the differences between job-based and person-based internal structures? o job based: relies on work content (tasks, bahviors, responsibilities) o person based: focuses on employee (skills, knowledge or competencies the employee has whether or not they are used in the job) What things determine internal structure? Explain each. o Economic pressure: supply and demand for labor influence internal structure as well as supply and demand for products and services (think of the change in preferences related to coffee…rise of single brew); if you have unpredictable external conditions a pay structure will need to support an agile organization and flexible people o Government policies, laws, regulations: example, equal pay act and civil rights act require “equal pay for equal work”  o External stakeholders: unions, stockholders and even political groups have a stake in how internal pay structures are determined; unions gernally prefer smaller pay differences among jobs; stockholders are also interested in the differences between what executives make compared to others within an org o Culture and customs: in 14th century westen Europe, Christian church endorsed a “just wage” doctrine which supported the existing class structure. Doctrine was an effort to end economic and oscial chaors resulting form the death of 1/3 of the population from the plague. The resulting shortage of workers gave ordinary people power to demand higher wages, much to the dismay of the church and state o Organization human capital: human capital is education, experience, knowledge, abilities and skills required to perform the work. The greater the value added by skills and experience, the more pay those skills will command o Organization work design: delatering entire levels of work have disappeared. They removed several levels of management to try to speed customer response times. Delayering can cut unnecessary non-contributing work. It can also add work to other jobs. This will change a jobs value and the job structure o Overall HR Policies: if an org has more levels is can offer more pormotions, but there may be smaller pay differences between levels. This may give employees a sense of progress. o Internal labor markets: combine both external and organization factors. These refer to the rules and procedures that determine the pay for the different jobs within a single org and allocate employees among those different jobs o Employee acceptance: procedural and distributive justive; pay is more likely to be accepted if they believe the pay procedures are fair. Pay procedures are more likely to be perceived as fair if they are consistently applied, if employees participate in the process, if appeals procedures are included, and if the date used are accurate o Pay structure changes: pay structure change in response to external factors such as skill shortages, over time distorted pay differences may become accepted as equitable What is a tailored and loosely coupled pay structure? When would you go with a more tailored structure? When would you go with a more loosely coupled structure? o Tailored: jobs well defined with detailed tasks or steps to follow like Applebees o Loosely: working at a tech firm… apple a place that calls for constanat product innovation is going to make things somewhat more chaotic. You probably would go with loosely coupled strategy What is a hierarchical pay structure? Egalitarian? What are some advantages and disadvantages of each? When should you use each? o Egalitarian: fewer levels, smaller differentials between adjacent levels and between lower and higher paid workers ▪ Stars feel underpaid, they quit or refuse to do things that are not required of them ▪ A message is sent that all employees are valued equally. The assumption that more equal treatment will improve employee  satisfaction, support cooperation and therefor affect workers performance ▪ Example: firefighting, rescue squads, manufacturing teams, global software design team s o Hierarchical: related to greater performance when work flow depends on individual contributors, high performers quit less when pay is based on performance rather than seniority and when people know the structure ▪ Example: consulting, law practices, surgical units, stockbrokers What is equity theory? o Fairness o Could support egalitarian or hierarchical structures depending on comparisons and the accuracy of information about them What is tournament theory? What does this theory predict and does research support these predictions? o People will work harder if there is a bigger cash prize up for grabs…the greater the differential between salary and your boss’ salary the harder you (and everyone but your boss) will work o Predictions pan out when individual performance matters most, you don’t need much cooperation. Does not directly address turnover, but there is some research to suggest that higher pay differentials at the top are linked with more turnover at the top What is the Institutional Model suggest? Chapter 4 and Job Analysis Slides What is a task? o Smallest unit of analysis, a specific statement of what a person does (phone screen), narrow o Similar tasks can be grouped into task dimension What is a position? o Tasks performed by one person What is a job? o Group of tasks performed by one person that make up the total work assignment (lab technician) What is a job family? o Grouping of related jobs with broadly similar content (engineering) What is job analysis? o Systematic process of collecting information that identifies similarities and differences in work What is a job description? o Summary reports that identify, define and describe the job as it is actually performed Why is job analysis important in general and in compensation specifically? o In general: defend decision when challenged , so people know what to do and can do good and propel org forward o Compensation: work related rationales for pay differences, helps insure fair and aligned job structure  What types of information need to be collected in a job analysis? o Be able to describe each of the different types of information. o Which types are particularly important for job analyses done for compensation purposes? ▪ Job data: identification: job titles, departments, number of people who hold the job, exemption from FLSA ▪ Job data: content: tasks (narrow), outcomes (just care its don’t not how its done and outcomes have better ADA compliance), duties (broader, summarize, imply task) responsibilities (broader) ▪ Employee data: KSAOs Declarative knowledge (g Washington first pres) Procedural knowledge (I can outline the steps to make a grilled cheese) Skill: make a good grilled cheese Ability: I can only do so well (jumping) Other characteristics: personality traits Describe all of the different methods for collecting job information described in class or in the text. o Existing job info ▪ Pros: easy and quick ▪ Cons: old, not accurate for job at hand o Interviews ▪ Pros: dept of info, easy to ask follow-ups and clarify ▪ Cons: breadth of info, time consuming o Surveys ▪ Pros: breadth of info, ease of getting info ▪ Cons: lask of depth, people don’t take seriously o Focus groups ▪ Pros: dept of info more efficient ▪ Cons: group think o Obervations ▪ Pros: great for work hard to verbally describe ▪ Cons: don’t know if its accurate, time consuming, cant capture abnormalities, may not work for all jobs o Diaries ▪ Pros: detailed info that don’t get from other methods ▪ Cons: time consuming and arduous work for employees, not taken seriously Describe all the different sources of information described in class or in the text. o Job analysts ▪ Pros: more objective, less biased ▪ Cons: may have less knowledge on day to day o Incumbents ▪ Pros: knowledge of day to day ▪ Cons: may be bias o Supervisors  ▪ Pros: solid knowledge on day to day, should know how things are done ▪ Cons: bias o SMEs ▪ Pros: less bias ▪ Cons: intricate knowledge of the job may be more limited What is the difference between a job description and job specifications? o Job description provides word picture of job o Job summary provides overview of job o Essential responsivities elaborate summary o Job specifications lists qualifications necessary in order to be hired How do you judge the quality of a job analysis? o Describe the following in the context of compensation. ▪ Reliability Measures consistency ▪ Validity Accuracy ▪ Acceptability Is the info good ▪ Currency Valid, acceptable and useful ▪ Usefulness Practicality of the information collected If you had to conduct a job analysis to assist with job evaluation, how would you do it? Chapter 5 and Job-Based Structures & Job Evaluation Slides What is job evaluation? o Process of systematically determining the relative worth of jobes to create a job structure for the org What is a job-based structure? o Pay structure based on work content (tasks, behaviors, responsibilities) What is relative value? o The relative contribution of jobs to organizational goals, to their external market rates, or to some other agreed-upon rates What are the steps in the job evaluation process? o Establish the purpose: if the purpose of evaluation isn’t called out, it becomes too easy to get lost in the complex procedures, negotiations and bureaucracy ▪ Example. Want to change the workflow, grievances over pay differences, seems to be evidence that employees are not being motivated by their pay o Single vs. Multiple plans: rarely do you evaluate all the jobs in an org at the same time. Often use different plans for different types of jobs. May be some tasks and skills that are highly relevant to manufacturing jobs that are not for office jobs. There are some plans that have been successfully applied across a wide variety of types of work (hay plan and the PAQ) o To be sure that all relevant aspects of the work are included in the evaluationan org often starts with a sample of benchmarks jobs. A benchmark job has the following characteristics  ▪ Its contents are well known and relatively stable over time ▪ The job is common across a number of different employers. Its not unique to a particular employer ▪ A reasonable proportion of the work force is employed in the job What might be the purpose of conducting a job evaluation? Why is it important to establish the purpose in advance? o Developed using benchmark jobs and then the plan is applied to the remaining non-benchmark jobs. Selecting benchmark job from each level ensures coverage of the entire work domain. This helps ensure accuracy for the decision based on the job evaluation o The number of the job evaluation plans used hinges on how detailed an evaluation is required to make pay decisions and how much it will cost Describe each of the different types of job evaluation methods. Be able to give advantages and disadvantages for all of them. Be able to give the steps in using the different methods. o Market Pricing: Not really job eval, directly matching as many of your own orgs as possible to the jobs described in the external pay surveys you use o Ranking ▪ Alternation ranking ▪ Paired comparisons ▪ Cons: Don’t know why they evaluated the way they did ▪ Pros: quick, easy o Classification ▪ Job descriptions and create classes for jobs ▪ Cons: could have misclassification, want to be descriptive to put into the right classification but too many descriptors, lump all or one big o Point Method ▪ Compensable factors: what were paying for and charasteristics we think should be tied to money ▪ Factors degrees numerically scaled: create scale ▪ Weights reflecting relative importance of each factor: develop weights and give points ▪ Representative sample of jobs (benchmark jobs) are drawn for analysis. The content of these jobs is basis for defining, scaling and weighting compensable factors. ▪ What is it about the work that adds value? Responsibility? Customer relations? Responsibility for innovation? (skills required, effort required, responsibility, and working conditions) ▪ Compensable factors should be: ▪ Based on strategy and values of the organization ▪ Based on the work performed ▪ Acceptable to the stake holders affected by the resulting pay structure ▪ The Hay Guide Chart-Profile Method used by thousands of employers worldwide… perhaps the most widely used. The three Hay factors are  know-how, problem solving, and accountability. Working conditions is used when applied to nonmanagerial work. ▪ How many factors? If even one job has a factor there is a tendency to apply it to all jobs which is not necessarily appropriate. You can then get people claiming that their jobs have it when they may really not. ▪ Very often a lot of factors are not needed, but ultimately these factor plans are used because they are deemed acceptable by stakeholders. ▪ 3. Scale the factors: Once the factors are determined, scales reflecting the different degrees within each factor are constructed. Each degree may also be anchored by the typical skills, tasks, and behaviors taken from the benchmark jobs that illustrate each factor degree. Most consist of 4-8 degrees. Is each degree equidistant from the adjacent degrees (interval scaling). Difference between 1st and 2nd same as between 5th and 6th. It is best to anchor degree definitions with benchmark-job titles and/or work behaviors and make it apparent how the degree applies to the job. ▪ 4. Once the degrees have been assigned, the factor weights can be determined. Factor weights reflect the relative importance of each factor to the overall value of the job. Weights are often determined through an advisory committee that allocates 100% of the value among the factors. ▪ Contemporary job evaluation often supplements committee judgment for determining weights with statistical analysis. The committee members recommend the criterion pay structure, that is, a pay structure they wish to duplicate with the point plan. Could be based on market rates for benchmark jobs for instance. Once this is agreed on, statistical modeling techniques are used to determine the weight for each factor and the factor scales that will reproduce the chosen structure. This is often labeled policy capturing. ▪ This is done so others can apply the plan. An appeals process is also often included. Should communicate to employees whose jobs are part of the process to try to build acceptance. ▪ Compensable factors and weights were derived using a sample of benchmark jobs. The final step is to apply the plan to the remaining jobs. This can be done by people who were not necessarily involved in the design of the process. Hence the need for training. ▪ Be able to recognize examples of each of the different job evaluation methods. What is the most commonly used job evaluation approach in the US and Europe? o Point method What is a compensable factor? o Based on strategic direction of the business and how the work contributes to these objectives and strategy Who should be involved in job evaluation? o Committees, task forces and teams o Advisory, design the evaluation approach, choose compensable factors, and approve all major changes, review appeals  What is the end result of job evaluation? o A hierarchy of work…translates the employers internal alignment policy into practice o Organizations usually have multiple structures derived through multiple approaches that apply to different functional groups or units Chapter 6 and Person-Based Structures Slides What is skill-based pay? o employees are paid for the number of different jobs they can ADEQUATELY perform or the amount of knowledge they possess What is a skill-based structure? o Link pay to the depth or breadth of skills, abilities and knowledge a person acquires that are relevant to the work. o Structures based on skill pay individuals for all the skills for which they have been certified regardless of whether the work they are doing requires all or just a few of them o The wage attaches to the person o A job based plan pays employees for the job they are assigned regardless of skills Differentiate between specialist and generalist skill-based structures. o Specialists: skills plans can focus on depth. K12 teachers used to have plans focused on depth of skill o Generalists: also called multiskill, based plans focus on breadth of skill ▪ Manufacturing when you take entry level job and then get pay increases by aquiring new knowledge which is specific to a range of related jobs ▪ Pay increases come with a certification of new skills not a change in job assignment How does a skill-based structure do with respect to supporting work flow? o Matches people to changing work flow How might issues with fairness manifest when using a skill-based structure? o Ex. Who gets training first that is necessary for pay increase ▪ In job based, the concern is who gets the job tied to a pay increase Are there any legal concerns associated with using a skill-based structure? o No know legal precedent for what happens when a person questions the fact that they are doing the same task for differeny pay What type of behavior might a skill-based structure motivate? What often happens as a result? o often linked with reduction in number of managers o Less management is often neededbecause skill based plans enourage employees to take responsibility for the complete work process and its results therefor requiring less direction from a manager or supervisor How do you create a skill-based structure? o Skill analysis, skill block, skill certification, skill based structure What is skill analysis? o Systematic process of identifying and collecting information about skills required to perform work in an organization o In job based they have job analysis  How do you complete a skill analysis? o What should be considered? o What information should be collected? o What methods should be used? o Who should be involved? ▪ Employees and managers are source of information on defining skills, arranging them into a hierarchy, bundling them into skill blocks and certifying whether a person has the skills How are skills certified? o Peer review o On the job demonstrations o Tests o Formal course completion What are some trends in certification? o Replacing one-time certification systems with ongoing recertification to help ensure skills are kept fresh What do we know about how skill-based structures perform and in what situations they might be best? o Manufacturing What is a competency? o Basic knowledge and abilities employees must acquire or demonstrate in a competency-based plan in order to successfully perform the work, satisfy customers, and achieve objectives What is a competency-based structure? o Compensation approach that links pay to the depth and scope of competenices that are relevant to doing that work o Typically used in managerial and professional work where what is accomplished may be difficult to identify o Try to abstract the underlying, broadly applicable knowledge, skills and behaviors that form the foundation for success at any level or job in the org (core competencies) ▪ Core competencies are often linked to mission statements that express an orgs philosophy, values, business strategies, and plans What is competency modeling? o Combination of several competencies deemed necessary for a particular job or role What is a competency indicator? o Observable behaviors that indicate the level of competency within each set o Can be used for pay purposes Why did some companies decide to focus on competencies and develop competency models for their organizations? o Direct link to the orgs strategy o Skill based are tightly coupled to todays work and competencies more loosely apply to work requiring more complex knowledge such as in managerial and professional work Contrast how skill-based and competency-based structures support work flow.  What are some fairness concerns associated with the use of competency-based structures? o Some proponents suggest that these structures empower employees to take charge of their own development How do competency-based structures motivate behavior? How do you create a competency-based structure? o Core competencies o Competency sets o Behavioral descriptors o Competency based structure What is competency analysis? o Systematic process to identify and collect information about the compentencies required for the person and the organization to be successful How do you complete competency analysis? o What should be considered? o What information should be collected? ▪ Competencies may have value for personal development and communicating organization direction but; vagueness and subjectivity make competencies a risky foundation for a pay system but there are a large number of successful companies who are and have been paying for competencies o What methods should be used? ▪ Number of schemes for classifying competencies ▪ Example: using three groups: personal characteristics, visionary, and organization specific o Who should be involved? ▪ Competencies are derived from the executive leaderships beliefs about the organization and its strategic intent ▪ Not all employees understand the connection, some employees will argue there are many more competencies than leaders have selected ▪ Are there any differences in who should be involved in competency analysis than skill and job analysis? How are competencies certified? o Unclear. o Skill based plans assume possessing these skills will make it easier to match work flow with staffing levels, so whether or not an individual is using a particular day is not an issue o Unlcear what competency-based plans assume What do competency-based structures typically look like? o Designed with relatively few levels-four to six- and relatively wide differentials for increased flexibility What do we know about how competency-based structures perform and in what situations they might be best?