Employee Contributions: Paying For Contributions PDF

**Chapter 5: Employee Contributions: Paying For Contributions** **INTRODUCTION** Incentives play an important role in any pay plan. **Frederick Taylor popularized financial rewards paid to workers** whose production exceeds some predetermined standard. **TAYLOR\'S THREE CONTRIBUTIONS** 1. He sa...

**Chapter 5: Employee Contributions: Paying For Contributions** **INTRODUCTION** Incentives play an important role in any pay plan. **Frederick Taylor popularized financial rewards paid to workers** whose production exceeds some predetermined standard. **TAYLOR\'S THREE CONTRIBUTIONS** 1. He saw the need for formulating a standard of output for a job. 2. He spearheaded the scientific management movement, which emphasizes improving work methods through observation and analysis. 3. He popularized the use of incentive pay to reward employees. **MOTIVATION AND INCENTIVES** There are several know theories that company uses in designing their incentive plans. **Abraham Maslow\'s Hierarchy of Needs** This theory classified people\'s needs into 5 types: 1. **Physiological need** - the need of individuals for food, clothing, shelter and others that will make him survive. 2. **Security need** - the feeling of being safe, of having secure future, income and job. 3. **Social need** - the need for interaction, friendship, and camaraderie. 4. **Self-esteem** - the need for respect 5. **Self-actualization** - becoming what you believe you can become. According to Maslow, individuals are motivated to satisfy first the lower needs and then in sequence, each of the higher-level needs. **Frederick Herzberg\'s Motivators** He said the best way to motivate someone is to organize the job so that doing it provides the feedback and challenge that helps satisfy the person\'s \"higher level\" needs for things like accomplishment and recognition According to Herzberg, if an employee is given a challenging work, and recognition for a job well done, the employee will be satisfied in his work, and be motivated to do better. **[Herzberg classified motivators into two:]** 1. **Hygienes** - that which satisfy lower-level needs (working conditions, salary, and incentive pay; 2. **Motivators** - that which satisfy or partially satisfy higher-level needs (job content, challenges, recognition). **Victor Vroom\'s Expectancy Theory** Vroom\'s Expectancy theory states that in general, people will not pursue rewards they find unattractive or where success is very unlikely. He said that [motivation depends on 3 things:] 1. person\'s expectancy that his [effort will lead to performance;] 2. Instrumentality or the [perceived connection between successful performance] and actually obtaining the rewards; 3. Valence, which represents the [perceived value of the person] attaches to the reward. Motivation equation is: **Motivation = E x I x V** Where E is equal to **Expectancy**, I represent **Instrumentality** and V for **Valence**. If at a time, one of them is equal to 0 (zero) there will be no motivation. There are **[3 implications for how managers design incentive plans].** 1. If employees don\'t expect that effort will produce performance, no motivation will occur. 2. Vroom\'s theory suggests that employees must see the instrumentality of their efforts. 3. The reward itself must be of value to the employee. **B.F. Skinner\'s Behavior Modification and Reinforcement** [Behavior modification] - changing behavior through rewards or punishments that are contingent on performance. \- believed that behavior that appears to lead to positive consequence or rewards tends to be repeated \- negative consequence (punishment) tends not to be recurring. E.L. Thorndike\'s Law on Effect is also related to this theory. It is said that a high employee performance followed by a monetary reward will make future high performance more likely, whereas high performance not followed by a reward will make it less likely in the future. **HOW DOES PAY INFLUENCE LABOR FORCE COMPOSITION?** Traditionally, using pay to recognize employee contributions has been thought of a way to influence the behaviors and attitude of current employees. [Pay level and benefits have been seen as a way to influence so-called membership behaviors]: decisions about whether to join or remain with the organization\'s workplace. Different pay systems appear to attract people with different personality traits and values. Organizations that link pay to individual performance may be more likely to attract individualistic employees, whereas organizations relying more heavily on team rewards are more likely to attract team-oriented employees. The implication is that the design of compensation programs needs to be carefully coordinated with the organization and human resource strategy. Increasingly, employers are seeking to establish strong links between pay and performance. **[INDIVIDUAL EMPLOYEE INCENTIVE AND RECOGNITION PROGRAMS]** incentive plans best suited for use with individual employees: **Piecework Plans** In piecework plans, a worker is paid based on the quantity produced. The more units produced, the higher the pay, the better the performance. Others users of piecework plans set a standard number of units to produce for the day, and when their employee exceeded, a premium is given to them. Piecework plan is an equitable and powerful performance incentive since reward is proportionate to performance, [however workers might downplay quality just to increase quantity]. Thus, employers using the piecework plan usually have QC Supervisor to check the work of their emplovees. **Merit Pay Program** An incentive plan where a salary increase is awarded to an employee based on his performance. It is usually termed as annual increase in the industry. Merit pay becomes part of the basic salary of an employee. The term merit pay may also apply to other incentive raises given to a performing employee, however, the term is most often used for white collar jobs particularly professionals, office and clerical employees. Many merit programs work off of a Merit Increase Grid. A merit increase grid is a grid that combines an employee\'s performance rating with the employee\'s position in a pay range to determine the size and frequency of his pay increases. **[Frequency and Pay Increases]** The table above indicates that the size and frequency of pay increases are determined by two factors. First is the individual\'s performance rating, meaning, the better performing employee receives higher pay; and second is the position in range which is the individuals compa-ratio. Merit pay is still the subject to debate since advocates believe that giving pay raises without regard to individual merit pay actually backfire since employees know that they will still be given annual increases regardless of how low their performance. Another reason for debate is the dubious nature of appraisal process. Many appraisals are unfair and so too the merit pay you base them on. Similarly, supervisors often give employees the same rating and raise, and beside, every employee think he is above average, so getting a low rating can be demoralizing. The solution here is to make them more effective. Establish effective appraisal procedures and ensure that managers tie merit rewards to performance. Although merit pay is usually added to the employee\'s basic salary, there are **2 other adaptations of merit pay plans** which are popular and do not make the raise part of the employee\'s salary: 1. award merit raises in lump sum once a year and in effect are short term bonuses for lower-level workers. The percentage is multiplied to the basic salary of the employee. 2. Adaptation considers both individual and organization performance. **[Merit Award Determination Matrix]**  To determine the value of each employee\'s award: multiply the employee\'s annual salary with the maximum incentive award by management or the board and multiply the resultant product by the appropriate percentage figure from this table. **NON- FINANCIAL AWARDS AND RECOGNITION BASED** ** Recognition programs -** usually refers to formal programs, such as employee-of-the-month programs. **Social recognition program -** generally refers to informal manager-employee exchanges such as praise, approval, or expressions of appreciation for a job well done. **Performance feedback** means providing quantitative or qualitative information on task performance to change or maintain performance; showing workers a graph of how their performance is trending is an example. Studies show that recognizing the efforts of employees, either alone or with financial rewards, has a positive impact on performance. Many employers are bulking up their recognition programs, and they use this to remind employees that they are appreciated Some [examples of awards often used to motivate employees] are as follows: - Employee Recognition - Length of Service Awards - Punctuality Rewards - Gift Certificates - Special Events - Cash Rewards - Merchandise Incentives - E-mail/print communications - Training Programs - Work/life Benefits - Variable Pay - ex commission - Individual Travel The **best option for motivating the employee is also the simplest - giving a realistic goal and explaining his career direction** in the company and how he can achieve it. The manager may use social recognition as positive reinforcement on a day to day basis. **Social Recognition** **INCENTIVES FOR SALES PEOPLE** [Sales Compensation] plans normally are about sales commissions. Only recently did company\'s partnered commissions with allowances or salaries and sometimes sales people receive straight salaries. **SALARY PLAN** Some companies pay salespeople fixed salaries. This is often used to retain good salespeople since in sales there is always a high turnover. This approach makes it easier to reassign salespeople, and it can foster sales staff loyalty. The main [disadvantage is that it can demotivate potentially high-performing salespeople.] **COMMISSION PLAN** Straight commission plans pay people for results, and only for results. It motivates salespeople to perform better and make an effort to exceed quotas. Sales cost are proportionate to sales rather than fixed, and the company\'s fixed sales cost are thus lower. It\'s a plan that is easy to understand and compute. Commission plan alternatives include quota bonuses, straight commissions, management by objective programs and ranking programs. **COMBINATION PLAN** Most companies pay salespeople combination of salary and commissions, usually with sizable salary component. An incentive mix is about 70% base salary and 30% incentive seems typical, this cushions the salesperson\'s risk of earning nothing, while limiting the risk that the commissions could get out of hand from the firm\'s point of view. **INCENTIVES FOR MANAGERS AND EXECUTIVES** Managers play a crucial role in the divisional and company-wide profitability and most firms therefore put considerable thought into how to reward them. Most managers get short-term and long-term incentives in addition to salary. For firms offering [short-term incentives - provide those incentives in cash. For those offering long-term incentives - stock option is the most famous.] **SHORT TERM** **INCENTIVES** **AND** **THE** **ANNUAL BONUS** Most firms have annual bonus plans for motivating manager\'s short term performance. Usually, these incentives are management discretion. The merit pay program may also be used. Normally companies base annual bonus eligibility on job level, salary base and status. More employers are offering executives as well as employees below the executive level single annual incentive plans. **LONG TERM INCENTIVES** Employers also use long term incentives for executives. Since executives are involved in the organization\'s decision making and these decisions will affect the firm for a long time, long term incentives are also used. This motivates executives to make prudent decisions and to stay by letting them accumulate capital that they can only cash in after a period of time. Popular long term incentives include *stock options and stock appreciation rights.* *\~* **Stock options** are right to purchase a specific number of shares of company stock at a specific price during a specified period *\~* **Stock appreciation** rights on the other hand permit the recipient to exercise the stock option or to take any appreciation in the stock price in cash, stock, or a combination of these. **TEAM AND ORGANIZATION-WIDE INCENTIVE PLANS** Team incentive plans pay incentives to the team based on the team\'s performance. Some companies give rewards to the team like gift certificates, team bonus, excursions, etc. **GAIN SHARING PLANS** Gain sharing is a form of compensation based on group or plant performance that does not become part of the employee\'s salary. It offers a means of sharing gains with employees. It motivates employees to make an effort to combine their best features to achieve the broader organizations goals rather than individual-oriented goals. [One type of gain sharing is the Scanlon Plan (developed in the 1930s by Joseph Scanlon)]. It is a way of ensuring employee commitment is synchronized with the company\'s goals, in other words, to ensure that by pursuing his goals, the worker pursues the employer\'s goals as well.  **The Scanlon Plan has five features:** 1. Philosophy of Cooperation 2. Identity 3. Competence 4. Involvement system 5. Sharing the benefits formula SCANLON PLAN **GROUP INCENTIVES AND TEAM AWARDS** While gain sharing is a plant wide incentive program, group incentives and team awards typically pertain to a smaller work group. Group incentives measure performance in outputs, whereas team awards use a broader range of performance measures like completion of a product design or team project savings. Although this might be a good program to use, it also has a drawback. [Competition between groups may arise, and any plan that does not adequately recognize differences in individual performance in the group may also risk demotivating top performers] or losing them. Thus, a standard setting process must be developed and these standards must include important dimensions such as quality. **DESIGNING AN EFFECTIVE INCENTIVE PROGRAM** There are **[five building blocks for an effective incentive plan.]** 1. **Ask**: does it make sense to use incentives? It makes sense to use an incentive plan when: - Motivation is the problem - There is a clear relationship between employee effort and quantity or quality of output. - The employees can control the work you plan to incentivize. - Delays are few or consistent. 2. **Link**: the incentive with your strategy. Link the incentive to behavior that is critical for achieving strategic goals. 3. **Make sure the program is motivational**: employees must have the skills to do the job. Employers should support the incentive plan with performance feedback, as in the form of performance graph. 4. **Set complete standards**. 5. **Be scientific**: don\'t waste money on incentives that seem logical but that may not be contributing to performance. Gather evidence and analyze the effects of the incentive plans over time, to ascertain whether it is indeed influencing the measures that you intended to improve through your plan. **EMPLOYEE PARTICIPATION IN DECISION MAKING** Employee involvement in the design and implementation of pay policies gives better job satisfaction because employees have a better understanding of and greater commitment to the policy. It will encourage self monitoring and peer monitoring to ensure that work is being performed well. This kind of involvement will foster trust and cooperation, and in turn, a function of employment security, group cohesiveness, and individual rights for employees - in other words, respect for and commitment to employees. **Chapter 6 BENEFIT PROGRAM AND COMPENSATING SPECIAL GROUPS** Introduction Employee benefits play an important role in the lives of employees as well as their families. For that reason, the benefits you offer can be a deciding factor for a potential employee\'s decision to work at your business. There are two types of employee benefits must provide by law those the employer offer as an option to compensate employees. 1. **Required benefits** - includes social security and worker\'s compensation 2. **Optional benefits** - includes health care insurance coverage and retirement benefits Both required and optional benefits have legal tax implications for the employer. Although expensive, there are many intrinsic benefits to providing employees with a comprehensive benefit plan. For most, it is the ability to find and keep highly qualified staff that is the key driver. **The Advantages of Offering Benefits to Employers and Employees** **For Employers:** - By providing increased access and flexibility in employee benefits, employers can not only recruit but retain qualified employees - Providing benefits to employees is seen as managing high-risk coverage at low costs and easing the company\'s financial burden - Employee benefits have been proven to improve productivity because employees are more effective with they are assured of security for themselves and their families. - Premiums are tax deductible as corporation expense, which means savings for the organization. ***For Employees:*** - Employees can experience peace of mind which leads to increased productivity and satisfaction by being assured that their families are protected in any mishap. - Employees with personal life and disability insurance can enjoy additional protection including income replacement in the event of serious illness or disability. - Employees can feel a sense of pride in their employer if they are satisfied with the coverage they receive. **Legal Considerations** **Article 4 of the New labor code** which state that \"all doubts in the implementation and interpretation of the provisions of the Labor code including its implementing rules and regulations shall be resolved in favor of Labor\". The policy is to extend the applicability of the decree (PD No. 626) to as many employees who can avail of the benefits thereunder. This is in consonance with the avowed policy of the State to give maximum aid and protection to labor. **Basic Employee Benefits** \- critical to ensuring a conducive environment for employees to provide value. Apart from compensation, organizations offer employee perks to retain talented employees and promote a secure and balanced life. By implementing innovative employee perks, employees are more productive and organizations retain hard-to find talent. \- a critical component of the overall human resource strategy of organizations. They enable higher employee retention, employee satisfaction, and employee development. Employee perks vary with type of employment, organization to organization, industry to industry and geography to geography. **The basic employee perks listed below are typically found for full-time employees:** - Vacation time - Sick leave - Insurance - Retirement (Pension) System - Health Plans - Recruitment (Joining) Bonus - Referral Bonus - Flexi-Timings and work-from-home options - Career Employee benefits are optional, **non-wage compensation provided to employees** in addition to their normal wages or salaries. These types of benefits may include: - Group insurance (health, dental, vision, life, etc.) - Disability income protection - Retirement benefits - Daycare - Tuition reimbursement - Sick leave - Vacation (paid and non-paid) - Funding of education - Flexible and alternative work arrangements **(Art. 66 of Labor Code of the Philippines)**. The Policy of the State provides that, \"State shall promote and develop a tax-exempt employees\' compensation program whereby employees and their dependents, in the event of work connected disability or death, may promptly secure adequate income benefit, and medical or related benefits\" **Mandatory benefits and provisions for employees in the Philippines under the Labor Code and special laws:** - Minimum wage= P640 ncr - 13th month pay (after 1 month of service)= 1/12 of the total basic salary earned by an employee within a calendar year. - Overtime pay= 25% premium on hourly rate - Night shift differential if work between 10:00 pm to 6:00 am= 10% premium on hourly rate. - Special non-working day= 30% premium if worked - Regular holiday pay= 100% premium if worked, paid if unworked - Service incentive leave= 5 days paid leave for every year of service. - Maternity leave= daily maternity benefit equivalent to 100% of her average salary credit for 105 days. - Paternity leave= 7 days leave with pay (married only). - Parental leave for solo parents= 7 days leave with pay for every year of service. - Leave for victims of RA 9262 or anti-violence against women law= 10 days leave with pay. - Special leave for women= 2 months leave with pay for women who underwent surgery due to gynecological disorders. - SSS (based on salary). - PAG-IBIG contribution (based on salary) - Philhealth contribution (based on salary) **Benefits Compliance** The employer is required to observe safety standards and provide safety devices. On the part of the employee, the Implementing Rules require proper use of these safeguards and devices. (Book IV, Rule II, Sec. 6). The rules also require the setting up to a safety committee, Safety inspections are to be done annually by the Department, Specifically the Regional office. The **intention of the Legislature in enacting the Workmen\'s Compensation Act** was workmen and their dependents against becoming objects of charity, by making a compensation for such accidental calamities as are incidental to employment. Under such Act, injuries to workmen and employees are to be considered no longer as results of fault or negligence, but as the product of the industry in which the employees are concerned to secure reasonable Compensation for such injuries is, under the theory of such statute, like any other item in the cost of production transportation and ultimately charged to the customer. The law substitutes liability for negligence with an entirely new conception, that is, that if the injury arises out of man\'s inhumanity to man, the cost of compensation must be one of the elements to be liquidated and balanced in the course of consumption. In other word, the theory of the law is that if the industry produces an injury, the cost of the injury shall be included in the cost of the product of the industry. Compliance is an important part of successful plan administration. **Benefits Objectives** - Maintain company objectives and productivity - Encourage safety and prevention of injury - Provide reasonable work opportunities when possible to enable injured workers to return to a work level as close as possible to their pre injury productivity and earnings - Avoid re-injury through work assignments and effective - Employer should demonstrate concern for the injured worker and fulfill obligations to the employee - Assist the employee to return to their normal work environment in an expedient manner - Return the employee to a work level as close as possible to pre-injury earnings and productivity - Ensure that the employee\'s return to work is in compliance with all requirements of the Americans with Disabilities Act, Family Medical Leave Act, and the Texas Workers\' Compensation Act, as appropriate and necessary. **Planning Benefits Strategically** [Strategic planning is critical to success.] Different from classic business planning, the strategic variety involves vision, mission, and outside-of-the box thinking. Strategic planning describes where you want your company to go, not necessarily how you\'re going to get there. However, like all other \"travel plans\", without knowing where you want to go, creating details on how to arrive meaningless. Strategic planning defines the \"where that your company is heading. business - **Strategic planning** is the process of taking inputs (information), organizing and making sense of that information, and producing output (the plan) that covers a long period of time, and maps out the strategies, goals, and objectives for that period of time, that are expected to keep the organization focused, unified, and likely to succeed in the future, and over a long period of time. - **Strategic plans** are expressions of ownership dreams and visions of successful results. Strategic planning functions as the \"design\" just as a blueprint functions as the \"how\" to build something. - **Strategic plan** displays the finished product or goal. Usually, in smaller businesses, strategic planning is focused on the overall company, department or division. Unlike business plans, there is no one right to create effective strategic planning. It is by definition, brainstorming at its best. [The more you understand your company, your industry, and your corporate \"wish list\", the better a winning strategic plan you\'ll create.] Most successful companies utilize Business Strategic Planning to set priorities and goals for the organization\'s future. An employee benefit strategic plans employs the same approach but is specific to employee benefits planning. In an environment of consistently rising health care costs and ever changing health care regulations, it is essential for organizations to create long-terms strategies with short-term objective and have a process in place to review annually. The financial realities of uncontrolled health care costs can significantly impact your organization\'s financial performance, negatively impact shareholder value, become a drain on company performance, and reflect negatively on the Human Resource Department. Yet with all these negative impact, most companies only practice short-term tactical planning in this area. **Employee Benefit Strategic Planning includes all of the following[:]** - Management Interview - Employee surveys - Communication and education long-term planning - Benchmarking analysis - Compliance assessment/audit - Population health management/wellness planning - Key metrics baseline analysis By adopting a Strategic Benefit Planning process, companies can make decisions regarding their benefits and health care with significantly less stress. **Implementing Flexible Benefits** Flexible benefit plans allow employees to choose the benefits they want or need from package of proms offered by an employer. **Cafeteria Plans** A type of flexible benefit plan known as a cafeteria plan enables employees to choose between receiving some or all of an employer\'s nontaxable benefits, or receiving cash or other taxable benefits such as stock. These plans were established by the Revenue Act of 1978 and are regulated 125 of the Internal Revenue Code. **[Benefits offered under Cafeteria Plan:]** - Health and group life insurance as well as medical reimbursement plans for non-insured expenses - Disability, dental, and vision coverage - Day care or elder care - 401 (k) plans - Vacation days Tuition assistance and other fringe benefits are exempt from the plans, even if they are not taxable. Funding for cafeteria plans may come from the employer, employee or both. **Flexible Spending Accounts** \- (FSA) is a tax-deferred savings account established by an employer to help employees meet certain medical and dependent-care expenses that are not covered under the employer\'s insurance plan. FSAs allow employees to contribute pre-tax dollars to an account set up by their employer. They can later withdraw these funds tax-free to pay for qualified health insurance premiums, out-of-pocket medical costs, provider fees, or private pre-school and kindergarten expenses. ***3 main types of FSAs*** - **Premium-only plans** - which allow employees to set aside funds to pay medical and life insurance premiums. - **Unre-imbursed medical expense plans,** which allow employees to set aside money for projected health care expenses not covered by insurance. - **Dependent care reimbursement plans,** which allow employees to set aside money for day care of dependent children. Employees must prove they have a legitimate expense in order to be reimbursed from these accounts. Invoices from health care professionals or day care facilities would serve this purpose. However, employees must also prove that the claim has not been reimbursed by other coverage, such as a spouse\'s insurance. Funds placed in reimbursement accounts generally must be used during the calendar year in which they were contributed; otherwise, the employee forfeits the funds. For this reason, participating in a flexible spending accounts requires careful planning on the part of both employees and employers. **Set-up and Tax Implications** Employer contributions to cafeteria plans are tax deductible for the employer and are not subject to income tax for the employee. The contributions are taken before taxes, and therefore are not subject to Social Security (FICA) or federal unemployment (FUTA) taxes unless the monies are contributed to 401 (k) plans. Many states follow the same guidelines regarding state taxes but companies should check with their accountant or the state\'s tax department to be sure. **CHAPTER 7 MANAGING TOTAL COMPENSATION AND OTHER RELATED MATTERS** **Managing the System** - The financial conditions of the organization, the competitive pressures it faces, and budgeting are important factors to consider in managing total compensation. - The cost implications of actions such as updating the pay structure, increasing merit pay, or instituting gain sharing are critical for making sound decision. Consequently, budgets are important part of managing compensation. - In creating compensation budgets, employers should ensure that basic company pay policies are considered. Increase in market rates should be budgeted according to the contributions of employees to the organization's success instead of just merely giving automatic yearly increases. - Tradeoffs also occur over short term versus long-term incentives, pay increases based on performance and based on how long they stayed in the organization, and cash compensation compared to benefits. - Budgeting compensation also needs understanding of the different compensation program, how it will benefit the employees, how the organization will gain from it, and the opportunity costs for choosing one over another - Managers and executives are tasked to do budget every year. Each department gives financial runs to the Controller. And as the manager of the HR, he must decide the amount of the financial resources to be allocated toward compensation, staffing and training. **Administration & the Total Pay Model** - Every organization needs a formal pay system. Without it, the organization will have a chaotic array of rates - In the Philippines, contractualization became widely used in the 80s and 90s. However, as we embark on a new Era, outsourcing is the system currently in use. - Outsourcing means that organization secure a range of services from independent, external vendors. Payroll processing is a common process to be outsourced. - Outsourcing is also a form of decentralizing decision making, and if this will not be closely monitored, corruption and possible financial manipulation may be committed. - To help avoid this from happening, compensation should be managed to achieve the objectives of the pay model: efficiency, fairness, and compliance. **Total compensation management thus has to attend to these issues:** 1\. Managing labor costs 2\. Variable pay as a cost control 3\. value-added returns to compensation 4\. Inherent controls 5\. Communication 6\. Structuring the compensation function. **Managing Labor Costs** Labor Cost- is the cost of service rendered by an employee in completing a task for the organization. In managing labor cost, there are 3 main factors to control Labor Cost=employment x (Ave. Cash compensation + Ave. Benefit Cost) Where: Employment is equal to the no. of employees and the hrs. they work Ave. Cash Compensation is equal to the wages, bonuses, etc. Ave. Benefit Cost is equal to company benefits, health and life insurance, pension costs. **Controlling Employment** - The most common approach in managing labor costs is controlling the no. of employees hired and the hrs. worked. Paying the same wages to fewer employees is less expensive. Layoffs and plant closing became also a choice for companies experiencing hard times. - Many employers buffer themselves from layoffs by establishing different relationships with different groups of employees. **Two Groups of Employees:** 1\. Core Employees- with whom a strong and long term relationship is desired. 2\. Contingent Worker- whose employment agreements may cover only short, specific time period **Hours** - Firms often define employment in terms of hours of work rather than the head count of its employees. Our workforce spends 8 to 9 hrs. in the workplace. And if there are deadlines to meet, overtime is definitely the resulting thing to do. Hence, another approach to control labor costs is to examine paying for overtime hrs. - Overtime hrs. are paid with premiums. Thus, higher overtime hrs. means higher labor costs. It is a good way to regulate overtime hrs. and check if the overtime of employees were not for naught. **Controlling Average Cash Compensation** - Average cash compensation includes average salary level plus variable compensation payments such as bonuses, gain sharing, or profit sharing. Two approaches to help manage adjustments to average salary level are: top down and bottom up **Top Down** - a budgeting approach in which upper management determines pay and allocates it to each subunit. The top management estimates the financial resources to be allocated for human resource including pay increase budget for the entire organization. - Once the total budget has been approved and finalized, it is often allocated to each subunit manager, who plans how to distribute it among subordinates. A typical example of top down budgeting is controlling the planned level rise for a unit. - A planned level rise is simply the percentage increase in average pay for the unit that is planned to occur. Several factors influence the increase in the average pay level it includes: **Current Year's Rise** - Percentage of Level Rise= ave. pay at year end -- ave. pay at the beginning) x 100/ave. pay at the beginning of the year. - Ability to pay -- this is the employer's capability of supporting its employees. Financially healthy employers often give bonuses and share profits with their employees giving them competitive positions in the labor market. - Competitive Market Pressures -- this is determining the organization's competitive position in relation to its competitors. Normally, employers know the base pay of other organizations in the same industry and they make this as a benchmark in managing their compensation. - Turnover effects-- this recognizes the fact that when people leave, they are replaced by employees who earn a lower wage. - Cost of living- employees tend to look at their expenses in considering jobs and compare their pay increases to changes in their cost of living. **Bottom Up** - a budgeting approach in which individual employees pay for the next year as forecasted and summed to create an organization salary budget. It begins with the subunits financial runs. They will estimate their pay increase recommendations for the plan year. **Steps in Forecasting Cycle** 1\. Instruct managers in compensation policies and techniques 2\. Distribute forecasting instructions and worksheets 3\. Provide consultation to managers 4\. Check data and compile reports 5\. Analyze forecasts Steps in Forecasting Cycle 6.Review and revise forecast and budgets with management. 7\. Conduct feedback with management 8\. Monitor budgeted versus actual increases. **Inherent Controls** There are two different aspects of control on managers' pay decisions: 1\. Controls that are inherent in the design of the techniques 2\. The formal budgeting process **Some Popular Controls** **Range Maximum and Minimum** -- these ranges set the extreme amounts to be paid for specific work. **Compa-ratios** -- these are range midpoints which reflect the pay policy line of the employer in relationship to external competition. Formula: Compa-ratio=ave. rates actually paid/range midpoint - A compa-ratio lower than 1 means that employees receive less than the intended policy. - A compa-ratio greater than 1 means that rates exceed the intended policy **Variable pay**- the essence of variable pay is that it must be re-earned each period. **Analyzing cost** -- costs differ in behavior. There are value-adding costs and there are non-value adding cost. **Compensation as a Message for Communication** - Compensation communicates - signals what is important and what is not **There are two reasons why pay information should be communicated.** 1. It encourages productivity and effective performance since workers know that resources have been devoted to them. 2. Employees will not be misinformed or they will not misperceive that the compensation system is inequitable. **Six Stage Process of Communication** o 1st stage is defining the objectives o 2nd stage is to collect information o 3rd stage is developing the strategy o 4th stage is determining the media o 5th stage is conducting the sessions o 6th stage is evaluating the program **PAY: Change Agent in Restructuring** - When organization restructure, it means that business strategies are changed. And when this happens people tend to be attentive in the coming changes, especially when compensation is concerned. **Pay changes can play two roles in restructuring**. 1. Pay can be a catalyst -- meaning people will be driven to be part of the organization, workers will be encouraged to stay, and it will communicate a strong and vivid message for change. 2. Pay is a follower of change -- it follows benchmarks and competes in the market. There is a need of constant reevaluation of design and administration of pay systems by compensation managers. Some issues to be evaluated are: Centralization and decentralization Flexibility within corporate-wide principles Reengineering and outsourcing