Human Resource Management Lecture 5 PDF

HUMAN RESOURCE MANAGEMENT LECTURE 5: Reward management  Evaluate importance of pay level from perspective of attraction, retention and motivation Describe three different approaches to developing pay structures Examine processes through which performance-related pay influen...

HUMAN RESOURCE MANAGEMENT LECTURE 5: Reward management  Evaluate importance of pay level from perspective of attraction, retention and motivation Describe three different approaches to developing pay structures Examine processes through which performance-related pay influences attraction, retention and motivation Evaluate which benefits organizations should offer in additional to those that they are legally obliged to Evaluate whether pay should be secret (or transparent) depending on individual and structural factors What are rewards? Financial and nonfinancial elements used to compensate for their time, effort and commitment Base Pay + Incentives + Benefits Incentives: o Short-term: § Individual bonuses § Group bonuses § Nonmonetary rewards o Long-term: § Profit-sharing plans § Stock options § Employee stock ownership plans Benefits: o Statutory (Employer is mandated to pay) o Organizational (Org voluntarily provides) Why should we care about reward management? Key decisions in reward management: How do we determine how much to pay our employees? Should we use financial incentives to motivate people to work harder? What benefits should we offer in addition to those we are legally obliged to? Should we encourage people to be open and transparent about their pay levels? Influences on reward decisions: Competition and market forces Organization’s philosophy  Legal responsibilities Strategy Ability to pay → Budgetary constraints Developing a pay structure: Pay structure: Hierarchical organization of jobs in terms of pay Job structure: Hierarchy of the jobs in the organization Pay level: Average pay range for a specific job in the organization Whole job ranking: What does your organization do, and which jobs are most important for this? Pro: Quick and easy Con: Subjective, unfair Point-factor Method: Creating a pay structure based on job evaluation of positions in the organization Compensable factors: Factors organizations use to evaluate jobs and choose to pay for o Allocate points to each compensable factor for each job o Allocate weight to each compensable factor o Outcome → Point value for each job Firm-general jobs are used as benchmark jobs o Tied to the market o Wages of firm-specific hobs are tied to the wages of benchmark jobs o Resulting wage compression can reduce morale Job levelling (job grading): o Organization uses compensable factors to define a series of job levels Factor-Comparison Method: Pay comparisons of the same position in the market Pay survey of benchmarking, or key jobs What is a comparable position? → Industry, type of organization, geographic location Which method is best? Using whole job ranking is a bad idea Pont-factor & factor-comparison method often used together o Context determines which one is emphasized more: § Firm-specificity: industry; employee mobility Performance-related pay (PRP): Consolidated: Added to base pay → Increases base salary based on performance Non-consolidated: One-off payments in addition to base pay Individual performance: Strategic goal is to increase individual performance Group performance: Strategic goal is to increase group performance & encourage cooperation Goals of individual PRP Attracting Motivating Retaining Base Pay High Low High Short-Term incentives High High Moderate Long-Term incentives Moderate Moderate High Benefits High Low High How does PRP work: Sorting effect: Attraction: People who want their pay differentiated by performance will be more attracted to organizations offering PRP (person-organization fit) Retention: Low performers receive lower pay… so are more likely to leave the organization (and higher performers to stay) Incentive effect: Motivation: Signals to individuals that their effort is valued and appreciated and provides direction in what they should focus effort on Characteristics of motivation: o Intensity of effort o Direction of effort o Persistence of effort Evidence: Technicians at high-tech company performing routine tasks o Bonuses manipulated over a 5-week period o Productivity was measured at 3 time points: § Before the bonus § Right after the bonus § Two days later o All incentives → Increased productivity o Productivity dropped when incentive was removed but more so for cash-based incentives Short-term incentives increased intensity did not encourage persistence Extrinsic vs intrinsic: o Some cash-bonuses can undermine the intrinsic motivation of employees Takeaways: PRP influences attraction and retention through the sorting effect and motivation through the incentive effect Individual PRP may not always have desired effects because it encourages intensity of effort but not always persistence, and may undermine intrinsic motivation Benefits of reward management: What are benefits? Have financial value but are rewarded in forms other than cash Statutory benefits → Set out by law (at national level) Organizational benefits → Specific to each organization and a source of competitive advantage Goals of benefits: Influences on organizational benefits: Strategic goals of benefits National characteristics Workforce demographics External influences Strategic goals of benefits: Netflix unlimited parental leave: o Signals that family and flexibility is important o Compensates for low US national policy AirBnB 2k a year for travel: o Linked to company’s core business and strategic goals o Signals that employees should love travel and encourages experience of AirBnB PWC student loan repayment: o Encourages retention as repayment is in installments o Helps younger workers to get greater value of other parts of reward package Workforce demographics: Preferences for benefits are likely to be influenced both by generation and life stage Generational differences: Ex → More current older workers may have built historical expectations about career development Life stages and life choices: Ex → parents and those planning to be parents are likely to prefer work-family and financial benefits Gender and benefits → Women prefer family friendly benefits External influences: Shift in traditional roles and increased rights for same sex couples Organizations likely to mimic companies within same industry or geographic region so external trends influence During times of financial crisis or recession individuals may prefer more stable financial support benefits (pension, life insurance, etc) Flexible benefits: Employees may choose among a variety of benefits or choose among varying levels of benefits Research suggests that flexible benefits increase satisfaction and awareness of benefits Opportunity for employers and organizations to adapt to these changing influences Pay secrecy: What is pay secrecy? A pay communication policy limiting employees’ access to pay-related information and discourages discussion among employees about pay issues In many countries, it is illegal to forbid employees from sharing pay information, but this type of pay secrecy is still prevalent in the private sector and there are other types of pay secrecy that are legal Benefits of transparency vs secrecy: Transparency: Removes uncertainty/asymmetrical information as abasis for perceptions of unfairness/discrimination Promotes trust and fairness in the organization Promotes motivation and performance Secrecy: Organizational control: Avoiding conflicts (while being able to use pay dispersion) Protection of privacy Decreased labor mobility (of productive workers)  Benefits of pay transparency generally outweigh benefits of pay secrecy o May be situations when pay secrecy is preferred. Also depends on multiple factors including: Type of pay secrecy Whether people have a preference for pay disclosure or not How pay levels are determined Types of pay secrecy: Distributive pay nondisclosure: Restricting the amount of information the organization shares about employee pay levels Pay communication restriction: Stopping employees from talking about their pay Procedural pay nondisclosure: Restricting the amount of information the organization shares about employee pay decisions Depends on type of pay secrecy: o Restricting pay communication and information on pay procedures is generally seen as more malevolent o When companies are more open about procedures for making pay decisions, this is seen as more benevolent Preference for disclosure: Highest levels of job satisfaction when preferences matched policy (high/high or low/low) How pay is determined: Pay secrecy is generally negatively related to performance but particularly when: o Pay is determined relative to others → Forced ranking o When performance is objectively measured → Sales or outputs Rewarding employees: Base Pay: External Based Wage-Setting → Comparisons with the market:  Websites like Salary.com or Indeed Matching to which market? → Identify relevant comparison market Market matching or market leading? o Higher pay attracts higher-quality employees who are more productive, need less supervision, and less likely to engage in company theft Internal Based Wage Setting: Comparisons Across Jobs: Market comparisons are less useful when you have firm-specific jobs unique to company The longer people stay in your organization the more they acquire firm-specific skills The more people remain in company the more difficult it becomes to use external market to estimate value of their contributions o Overcome → Job-ladders Job evaluation: o Determine relative value of dissimilar jobs o Determine worth of each job by establishing hierarchy of jobs within organization so employers can maintain internal equity in terms of how jobs are compensated o Organizations identify set of Dimensions common to all jobs o Use of point-factor method Merit Pay: Increase in base pay that a person receives based on individual performance Usually expressed as a percentage Incentives: Can boost job performance and improve quality and creativity of employees’ work Only work when employees perceive them as fair o Managers play important role in establishing and maintaining clear link between employees’ performance and their pay +90% of organizations use some kind of short-term incentives Around 50-60% of organizations use long-term incentives Short-term incentives: Individual bonuses Employees have to re-earn the bonus every time Need to deliver the right mix of secure base pay and risky performance-based pay Overall pay package must meet local legal standards and should be enough to meet employees’ basic needs Group Bonuses: Incentives based on a team’s performance Encourage members to collaborate because team members are mutually dependent on one another Gainsharing: o Financial gains a company achieves from improved productivity are shared with employees o it focuses on productivity outcomes that are under employees’ direct control  o When employee suggestions are implemented and save the company money, a portion of the cost savings they generate goes into a group bonus that periodically is paid out to employees Dysfunctional Effects of Bonus systems: Employees may be so focused on goal achievement that they neglect other parts of their work and may fixate on reaching goal at all costs Dramatic performance spike that looks too good to be true may signal an ineffective incentive system, not an effective one Poorly designed incentive system can take a toll on your employees’ health Most likely to happen with nondiscretionary bonuses → Planned Discretionary bonuses → Not promised in advance o Spot bonuses (unexpected) → Recognize employees for doing exceptionally good job Nonmonetary rewards: Personal praise Attention from leaders Opportunities to lead projects Long-term incentives: Profit-sharing plans: Employees are promised payment beyond base pay based on company profits Different to gainsharing → More about motivation o Profit-sharing → More about retention Reduce employee turnover and improve company performance Stock options: Opportunities for employees to purchase specified number of shares of company stock in future at guaranteed price Employees can only exercise them during a specified period Unvested options generally must be surrendered to the company if employee loeaves before the vesting period is over o Once options have vested, employees have limited period to exercise them o Time delay makes stock options a long-term incentive Used to be exclusively reserved for rewarding managers and executives o These senior people were the ones who made big decisions and set policies that would have most impact on stock price Employee Stock Ownership Plans (ESOP): Company contributes shares of its stock to a trust, tax free o Trust holds stock in individual employee accounts and employees earn stock based on pay and seniority o Trust distributes stock to employees when they separate from company and employees can sell their stock back to the company for a cash payment  Employee ownership has been linked to better company performance and higher employee pay Tend to be more resilient during economic crises Benefits: All inducements and services an employer gives an employee, outside direct financial compensation Some benefits are provided by law Shifting Employee Preferences: Flexible working arrangements allowing employees to vary amount, timing or location of work rank among employees’ most highly valued benefits Family care benefits Increased benefits focusing directly on employees’ health and well-being Customized benefits: Important to ensure that your benefits align with your employees’ actual needs and preferences Flexible benefit plans: o Enable individual employees to choose benefits that are best suited to their particular situations o Prevent benefits from being wasted on employees who have no need for them o Give employees options to periodically change benefits to align with changes in personal circumstances Getting your money’s work: The more employees understand the value of voluntary benefits offered by their employer the more they appreciate what is provided and the more likely they are to reciprocate with higher organizational commitment and retention Communicate, communicate, communicate: Important for employees to understand employer’s pay system Employee understanding of well-designed pay system leads to perceptions of pay fairness and pay fairness in turn affects employee performance and their intention to stay with their employer