This document contains Chapters 1 to 4 CHAPTER 1 Strategic Compensation: A Component of Human Resource Systems VII. Discussion Questions and Suggested Answers Define compensation. Compensation represents both the intrinsic and extrinsic rewards employees receive for performing their jobs. Together, both intrinsic and extrinsic compensation describes a company’s total compensation level. Intrinsic compensation reflects an employee’s psychological mindsets that result from performing his or her job. Extrinsic compensation includes both monetary and nonmonetary rewards. Identify two companies—one that you believe pursues a lowest-cost strategy and another that pursues a differentiation strategy. Relying on personal knowledge, company annual reports, or articles in newspapers and business periodicals, discuss these companies’ competitive strategies. The cost leadership or lowest-cost strategy focuses on gaining competitive advantage by being the lowest-cost producer of a product or service within the marketplace, while selling the product or service at a price advantage relative to the industry average. Ryanair is an excellent illustration of an organization that pursues a lowest-cost strategy because its management successfully reduced operating costs. At least two noteworthy decisions have contributed to Ryanair’s goals. First, Ryanair’s training and aircraft maintenance costs are lower than similar competitor’s costs because the airline uses only Boeing 737 aircraft. Ryanair enjoys substantial cost savings because it does not need to use different curricula for training flight attendants, mechanics, and pilots to learn about procedures specific to different aircraft models. Second, newer aircraft sport seats that do not recline, have seat-back pockets, or life jackets stowed under the seat. These cost less and also allow service personnel to clean aircraft more quickly, saving on labor costs. Third, Ryanair airplanes include one toilet to make room for additional passenger seats. Fourth, passengers are required to carry their luggage to the plane, reducing the cost of baggage handling. Differentiation strategies are used to develop products or services that are unique from those of competitors. Differentiation strategies can take many forms, including design or brand image, technology, features, customer service, and price. P&G Corporation successfully pursues a differentiation strategy based on brand image and price premiums. The company offers two separate dog food lines—Iams, a super-premium line that is nutritionally well balanced for dogs and uses high quality ingredients and Eukanuba, which is an ultra-premium line that contains more chicken and vital nutrients than the Iams line, as well as additional fatty acids. Together, Iams and Eukanuba appeal to a substantial set of dog owners. The Iams Company distinguishes Eukanuba from Iams by claiming that Eukanuba is “Extraordinary Nutrition.” The Eukanuba slogan is the company’s basis for brand image. Describe your reaction to the following statement: compensation has no bearing on a company’s performance. I disagree with the statement that compensation has no bearing on a company's performance. Compensation plays a significant role in motivating employees, attracting top talent, and retaining skilled workers. When employees feel adequately compensated for their work, they are more likely to be engaged, productive, and committed to the company's goals. Moreover, competitive compensation packages can enhance a company's reputation, leading to better recruitment outcomes and employee satisfaction. Therefore, compensation is a crucial factor in driving organizational performance and success. Are the three main goals of compensation departments equally important, or do you believe that they differ in importance? Give your rationale. Compensation professionals promote effective compensation systems by meeting important goals: internal consistency, market competitiveness, and recognition of individual contributions. Internally consistent compensation systems clearly define the relative value of each job among all jobs within a company. Market competitiveness plays a significant role in attracting and retaining the most qualified employees. It entails the examination of company external and internal context factors, as well as collecting and analyzing competitive compensation data. Recognizing individual contributors requires pay structures that have pay rate differences for jobs of unequal worth and the framework for recognizing differences in employee contributions. VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Competitive Strategy at Sportsman Shoes Instructor Notes The human resource planning process follows the company’s strategic planning process. In this case, the company is shifting from a low-cost strategy to a differentiation strategy. Under the low-cost strategy, human resource practices focused on controlling costs and working to hire and retain workers focused on efficiency and productivity. The differentiation strategy will require some employees with a different skill set. Certain functions will need high levels of creativity and innovation. Human resource practices must shift to support these needs by attracting the right talent, and motivating the right behaviors to produce shoes for the new niche markets. Questions and Suggested Student Responses: Following Sportsman’s shift in competitive strategy, what are some considerations for the company’s human resource management practices? Sportsman must focus on attracting and retaining employees in functional areas such as product development and operations. The focus of employees as a whole must shift for this new competitive environment. Under the low-cost strategy, human resource management practices focused on reducing output costs per employee. In the new environment, the company must emphasized cooperation and interdependent behavior. As a result, training will be necessary to prepare employees to be successful in the new environment. Workers in all areas will need to be open to change and be willing to take risks and human resource management practices will need to be aligned with these needs. What kind of challenges will Sportsman face specifically in the area of compensation? The new hires the company will need to make will create some compensation challenges. The company will need to make compensation competitive in the market place to make sure that they are able to attract the new talent needed. However, they must also keep compensation internally consistent at the same time. The company will need to examine its entire compensation strategy (including benefits and incentive pay) to make sure it is aligned with the company’s new goals. MYLAB QUESTIONS What is merit pay? Explain the role of performance appraisals in merit pay programs. Answer: According to merit pay programs, employees' compensation should be determined by differences in job performance. Under merit pay programs, employees get permanent increases to their base pay based on their performance. Performance appraisals are key issue in merit pay programs. In order to have a successful merit pay program, employees should be able to see the link between their performance and pay increases. Merit pay systems require specific performance appraisal approaches, and choosing, designing, and implementing such plans are crucial for the success of merit pay programs. What is pay-for-knowledge plan? Explain the role of training in pay-for-knowledge plans. Answer: Pay-for-knowledge programs reward managerial, service, or professional workers for successfully learning specific curricula. This type of pay systems reward employees for the range, depth, and types of knowledge they are capable of applying to their jobs. Designing and implementing training programs are crucial in the success of pay-for-knowledge programs. Through training programs, employees learn the necessary skills and knowledge for performing their job, and this in turn increases their pay. In this type of pay systems, training is necessary rather than optional. IX. Additional Case from the MyManagementLab Website; Instructor Notes and Questions and Suggested Student Responses Case Name: Is It Time to Hire a Compensation Expert? Instructor Notes Organizations are challenged to ensure the right number of staff positions relative to line positions. As a company grows, their need for additional human resources staff will likely grow as well. Depending on the company’s goals, different types of human resources expertise may help the organization operate more effectively in order to obtain those goals. Most organizations will hire a recruiter to help acquire new talent for the organization. But, with growth, the compensation-related issues the company faces also grows. Compensation expertise can benefit a growing company by creating a pay structure and competitive benefits that allows the company to attract and retain employees to support future company growth. Questions and Suggested Student Responses: Do you think EasySpa would benefit from hiring a compensation professional? How? As the organization plans continued growth, there are many benefits that a compensation professional can provide. Having compensation expertise can help support other practices such as recruitment. By designing a compensation structure that is attractive to candidates, EasySpa may be able to better recruit talent. Further, the pay structure can help hiring managers more effectively set pay rates for new hires. A compensation professional can also help design a benefits package that is both attractive and cost efficient. How can Jay convince the CEO to hire a compensation professional? A compensation professional can better structure the company’s compensation by ensuring pay levels are appropriate through ensuring internal consistency in pay while keeping pay levels competitive in the marketplace. Further, a compensation professional may be able to design incentive pay programs to motivate certain groups of employees. By doing so, the company can ensure that funds spent on labor are used effectively. Further, the company may be able to realize savings in benefit costs by using an expert to design the benefits package. Finally, as a key stakeholder in the success of the company, the CEO benefits from the expertise of a compensation professional because they can ensure the company is complying with relevant employment laws. CHAPTER 2 Contextual Influences on Compensation Practice VI. Discussion Questions and Suggested Answers Identify the contextual influence that you believe will pose the greatest challenge to companies’ competitiveness and identify the contextual influence that will pose the least challenge to companies’ competitiveness. Explain your answer. The contextual influence that I believe will pose the greatest challenge to companies' competitiveness is rapid technological advancement. In today's fast-paced world, technology evolves at an unprecedented rate, reshaping industries, business models, and consumer behaviors. Companies must continually adapt and innovate to stay relevant in the face of emerging technologies such as artificial intelligence, automation, and the Internet of Things. Failure to keep pace with technological advancements can result in obsolescence, loss of market share, and diminished competitiveness. On the other hand, the contextual influence that will pose the least challenge to companies' competitiveness is stable regulatory environments. While regulations certainly impact business operations, a stable regulatory framework provides companies with a predictable operating environment. It allows businesses to plan, invest, and innovate with more confidence, knowing that the rules of the game are unlikely to change drastically in the near term. Compared to disruptive technological changes or volatile economic conditions, regulatory stability offers a relatively predictable landscape for companies to navigate, thus posing less of a challenge to their competitiveness. Should the government raise the minimum wage? Explain your answer. The question of whether the government should raise the minimum wage is complex and subject to debate, as it involves economic, social, and political considerations. Arguments in favor of raising the minimum wage often center around the following points: 1. Reducing poverty: Increasing the minimum wage can lift workers out of poverty and improve their standard of living, especially for low-income households. 2. Stimulating economic activity: When low-wage workers receive higher pay, they tend to spend more on goods and services, thereby boosting consumer demand and stimulating economic growth. 3. Addressing income inequality: Raising the minimum wage can help mitigate income inequality by narrowing the gap between low-wage workers and higher-income earners. 4. Fostering workforce productivity and retention: Higher wages can improve employee morale, productivity, and retention, as workers feel valued and are more motivated to perform well. However, opponents of raising the minimum wage often argue the following: 1. Potential job losses: Some economists suggest that raising the minimum wage could lead to job losses, particularly for low-skilled workers, as businesses may cut back on hiring or automation to offset higher labor costs. 2. Increased costs for businesses: Small businesses, in particular, may struggle to afford higher wages, potentially leading to higher prices for consumers, reduced profitability, or even closures. 3. Inflationary pressure: Critics argue that raising the minimum wage could contribute to inflation by increasing production costs, which could erode the purchasing power of consumers, especially if businesses pass on the higher costs to customers. 4. Regional disparities: Implementing a uniform minimum wage across regions may not account for differences in living costs and economic conditions, potentially exacerbating disparities between urban and rural areas or high-cost and low-cost regions. Ultimately, the decision to raise the minimum wage requires careful consideration of these factors, as well as empirical evidence on the potential impacts on employment, inflation, and overall economic welfare. Policymakers must strike a balance between supporting low-wage workers and ensuring the sustainability and competitiveness of businesses, taking into account the specific circumstances of each jurisdiction. Additionally, complementary policies, such as targeted assistance for small businesses or workforce development initiatives, may be necessary to mitigate any adverse effects of a minimum wage increase. Do unions make it difficult for companies to attain a competitive advantage? Explain your answer. Unions do make it difficult for companies to attain competitive advantage in some regards because companies must abide by certain rules and regulations and are prohibited from forcing their workers to do work beyond their agreed quota, and for benefits or wages that are lower than their quota. Also, competition between a company that is housed within the United States and a company in another country without a union could result in difficulties for U.S. companies. However, such policies are declining as the percentage of overall U.S. civilian worker representation in labor unions continue to fall. Although unions make it difficult, their effect does not limit the capabilities of a company to any great extent. Select one of the contextual influences presented in this chapter. Identify a company that has dealt with this influence, and conduct some research on the company’s experience. Be prepared to present a summary of the company’s experience in class. There have been many compensation issues in collective bargaining, such as the steady decline in wages after the 1980s. Delta Air Line pilots went on strike to try and increase their wages, but ended up agreeing to substantial cuts in base pay as well as in future retirement income in order to help the company avoid dissolution. This sort of agreement is called concessionary bargaining, for the company spent more heavily on job security than large pay increases. The main reason why the pilots agreed to these terms was because they did not want to lose their jobs. Some people argue that there is too much government intervention, whereas others say there is not enough. Based on the presentation of laws in this chapter, do you think there is too little or too much government intervention? Explain your answer. One could argue that the government doesn’t do enough to intervene based on the fact that although many laws, acts, and decrees protect employees and employers alike, it is difficult to focus attention on some matters. Increases in wages, for example, may be something that the government ought to look into more closely and with more severity. Wages are a great source of struggle and anguish for many people. If the government increases wages in line living costs, then all would be well, but this is not always the case. However, one could also argue that the government gets involved in such issues too readily, and that sometimes it’s best for the employees and employers to work out their differences on their own. VII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Exempt or Nonexempt? Instructor Notes The Fair Labor Standards Act (FLSA) addresses the issues of minimum wage, overtime pay and child labor. The FLSA requires employers to properly classify employees as Non-exempt (covered by the Act) or Exempt (not covered by the Act). Many companies want to classify workers as Exempt to avoid the requirement to pay overtime. While the company has the responsibility to properly classify employees, the decision needs to be made based on the responsibilities of the job. The Department of Labor (DOL) has interpreted Exemptions from the Fair Labor Standards Act (FLSA) narrowly. Students can find more details on the exemptions on the DOL’s website at http://www.dol.gov . Many companies wrongly assume that all supervisors or managers in an organization are Exempt from the FLSA. Aaron v. City of Wichita provides some guidance on classifying supervisors: Relative importance of management as opposed to other duties Frequency with which they exercised discretionary powers Relative freedom from supervision Relationship between their salaries and wages paid to other employees offer similar nonexempt workers In examining all of these factors, it is clear that Jane Swift and the other Shift Leaders should be classified as Non-exempt. Suggested Student Responses: Why did Amy classify the Shift Leaders are Exempt? Are there any advantages to Jones Department Store to having the Shift Leaders classified as Exempt? Amy most likely assumed that the Shift Leaders met the Executive exemption under the FLSA. Classifying the Shift Leaders as Exempt was advantageous to the store management, as they did not have to pay the Shift Leaders overtime pay. Further, management saved some extra administrative work because they did not need to track the hours of the Shift Leaders. Do you think that the Shift Leaders are properly classified as Exempt? Why or why not? Most likely the Shift Leaders should be Non-exempt. Under the guidance set forth by Aaron v. City of Wichita, the Shift Managers do not meet the criteria to be classified as Exempt. What are some factors that Amy should consider when determining if Shift Leaders are Exempt or Non-exempt? Amy should consider the fact that the Shift leaders spend a majority of their time working as Associates and their pay rate is closer to the Associates than the Assistant Managers. While they are involved in employment related decisions, their decision-making ability is limited. MYLAB QUESTIONS 2-9. How would the compensation system change if the minimum wage provision of the Fair Labor Standards Act of 1938 were repealed? Answer: The Fair Labor Standards Act addresses three broad issues: the minimum wage, overtime pay, and child labor provisions. Clearly, in the absence of such legislation, employers may return to the days where substandard pay was the norm. On one hand, without a minimum wage provision, employers would likely lower the wage for many of these jobs. Further, specific FLSA exemptions already allow employers to pay some workers less than the minimum wage. On the other hand, employers may have difficulty recruiting employees to fill these positions, especially in geographic areas where the cost of living is higher than the national average. 2-10. Distinguish between disparate treatment and disparate impact in a compensation context. Answer: Disparate treatment refers to intentional discrimination by employers in treating some workers less favorably than others because of their race, color, sex, religion, or national origin. Paying African Americans less than whites for the same job, other factors being equal, is an example of disparate treatment. Disparate impact refers to unintentional discrimination in which an employment practice geared toward all employees leads to unequal treatment of protected employee groups. Awarding seniority pay could lead to disparate impact if females had less seniority, on average, than men. VIII. Additional Case from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Preparing for Growth at Waxman Candles Instructor Notes In determining a company’s compensation strategy, a company must analyze both external and internal factors that may impact the strategy. Such an analysis can help support a company’s compensation tactics and ensure effective practices are in place to attract and retain the right talent. This is especially important for companies that are in the growth stage as they can ensure that compensation decisions are made deliberately and the company is positioned well for future growth. Suggested Student Responses: What are some competitive forces that human resource management consultant will consider in conducting a strategic analysis to determine compensation practices? The consultant should examine the external market environment. In searching for some experienced staff, such as marketing professionals, it is important to understand how to position the company to compete for talent. The consultant should also make an assessment of the labor market. As many of the positions require little skill, understanding the available labor pool and typical earnings ranges will help determine the compensation strategy. Internally, the consultant should examine the necessary capabilities for the different functional areas. For example, because the customization of the product is what differentiates the product from competitors, the customer service function is crucial to business success. Further, the financial condition of the company will help set the parameters of the compensation strategy. How will being in the growth stage impact the company’s compensation practices? Even though the company appears to be financial stable, as a company in the growth stage they must still be aware of cash flow concerns as they determine compensation tactics. Further, they will likely limit discretionary benefits as they have a high cost. The company may choose to emphasize incentive pay, which ties pay to the company’s profitability as they grow. CHAPTER 3 Traditional Bases for Pay: Seniority and Merit Discussion Questions and Suggested Answers Human capital theory has been advanced as a rationale underlying seniority pay. Identify two individuals you know who have performed the same job for at least two years. Ask them to describe the changes in knowledge and skills they experienced from the time they assumed their jobs to the present. Orrin B. Darl has worked at the White Plains library in New York as its head of staff for 20 years. When Orrin first started the job young people asked him many different questions about books. But as time moved on and computers became more important in society, many children stopped coming to the library all together, and when they did all they wanted to do was play on the computer. Orrin didn’t know too much about computers, but he had to learn in order to keep up his relationship with the modern youth. Francis O. Nylon has worked as a schoolteacher at Princeton Friends in Princeton New Jersey for almost 18 years. When he first began teaching his kids they would come to class everyday with their textbooks and writing utensils and be eager to learn whatever he had to teach them. Francis noticed, however, that as time moved on kids began to bring in laptops and the overall attention span of the children began to decrease. In order to keep the kids engaged, Francis had to learn many programs on the computer so that he could incorporate changing technology into the classroom. As time passed, however, Francis was forced to find another job, for his pay had reached such a substantial level that the school was unwilling to have him work there anymore. Subjective performance evaluations are subject to several rater errors, which makes objective measures seem a better alternative. Discuss when subjective performance evaluations might be better (or more feasible) than objective ratings. Subjective performance evaluations might be better than objective ratings when clear measurements are not available. Certain subjectivity may also enter in planning for succession and development as subjective characteristics such as compatibility with organizational culture are important. However, in general, objective performance evaluations support better equity and employee understanding. Consider a summer job that you have held. Write a detailed job description for that job. Then, develop a behaviorally anchored rating scale (BARS) that can be used to evaluate an individual who performs that job in the future. BARS are based on the critical incident technique. Scales are developed in the same fashion with one exception. For the CIT, a critical incident would be written as “the incumbent completed the task in a timely fashion.” A good example of applying BARS to a summer job would be that of a kitchen assistant. A kitchen assistant has to be on time and show up for work prepared with the proper clothing and sanitation. The kitchen assistant has to make sure to keep their work area and the work area of everyone else clean, so as to provide fresh food that does not cause health problems or violate any health codes. If these basic rules are not followed then food preparation could be contaminated by unwanted bacteria or would not be prepared in a timely manner, thus harming business. This chapter indicates that merit pay plans appear to be the most common form of compensation in the United States. Although widely used, these systems are not suitable for all kinds of jobs. Based on your knowledge of merit pay systems, identify at least three jobs for which merit pay is inappropriate. Be sure to provide your rationale given the information in this chapter. Temporary workers do jobs that are not well suited for merit pay because there is no long term opportunity to measure performance. Repetitive assembly line work is not well suited to merit pay because there is limited ability to vary performance (piece work pay may be appropriate). Certain sales jobs may not be suitable for merit pay if employees are paid based mostly on commissions. Select three distinct jobs of your choice. For each job, identify what you believe is the most appropriate performance appraisal method. Based on your choices, sketch a performance appraisal instrument. Discuss the rationale for your choice of performance appraisal methods. There are five basic sources for performance appraisal information: the employee, the employee’s supervisor, the employee’s coworker, the employee’s supervisees, and the employee’s customer or clients’ appraisal. The best mode of appraisal for jobs that incorporate personal rewards is “employee”. The Peace Corps would benefit most from employee appraisal where the employee appraises themselves on their performance, for the rewards of being a member of the Peace Corps is largely based on personal self- esteem at whether they did their best to help those in need. A good example of an employee’s supervisor’s appraisal be effective is in an office setting where the supervisor’s expectations are key to doing a job well done. A good example of the employee’s coworkers’ appraisal being the most useful is when the supervisor is rarely available and the employees are generally working together, such as in a shoe store after the supervisor is out for some time. A good example of the employee’s supervisees’ appraisal would also be a cubical like office setting, but only if the employee has to adhere to many different supervisees at once. A good example of the employee’s customers or clients’ appraisal is a vending job or small food distribution company when they want to judge employee performance and overall food results. VII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Appraising Performance at Precision Instructor Notes A merit pay program provides employees with an annual pay increase that is awarded based on the individual employee’s performance. In order for the program to work effectively, the company must have the ability to measure employee performance. Further, employees must know that their effort will lead to pay increases. An effective performance appraisal process must be able to recognize employee performance that is in line with the company’s productivity goals and/or business strategy. Ultimately the company must ensure that there is a strong link between pay and performance. Suggested Student Responses: What are some problems with Precision’s performance appraisal process that might cause challenges for Jackson to implement a merit pay program? There are many problems with the current appraisal process. Because the same form is used for all employees, it is clear that the performance measures used are not clearly tied to individual productivity and performance expectations. Supervisors make several errors in the process as well, such as central tendency in ratings, and failure to communicate with employees on a regular basis about their performance. What changes do you recommend Precision make to the performance appraisal process to align it with a merit pay program? The company most likely should design an entirely new process. They should start with job analysis that leads to well defined job descriptions and performance expectations for each job. Next, the company should design a rating instrument that reflects the characteristics identified through the job analysis. This most likely will result in more than one version of the form. Finally, supervisors must be provided training on how to use the process to communicate performance expectations and evaluate the performance of employees. Supervisors also need guidance in the need for ongoing communication with employees on performance. MYLAB QUESTIONS 3-8. Discuss the concept of "just-meaningful pay increase." How can it can strengthen the pay-for-performance link? The concept of a "just-meaningful pay increase" refers to a salary raise that is substantial enough to be meaningful to the employee, while also being justifiable to the employer based on the employee's performance. Implementing a just-meaningful pay increase can strengthen the pay-for-performance link in the following ways: 1. Motivation and Engagement: Offering a meaningful pay increase based on performance motivates employees to work harder and perform better in their roles. It serves as a tangible reward for their efforts and achievements. 2. Retention: Employees are more likely to stay with the company when they feel their contributions are recognized and rewarded appropriately. A just-meaningful pay increase reinforces the link between performance and compensation, which in turn, enhances employee retention. 3. Fairness and Transparency: A just-meaningful pay increase ensures that compensation decisions are fair and transparent. Employees can clearly see the link between their performance and the rewards they receive, which fosters trust and loyalty within the organization. 4. Alignment with Organizational Goals: By tying pay increases directly to performance, organizations can ensure that employees are focused on achieving the company's strategic objectives. This alignment strengthens the overall performance of the organization. 5. Cost-Effectiveness: Just-meaningful pay increases are based on merit, which means that the organization is investing in its top-performing employees. This targeted approach to compensation ensures that resources are allocated efficiently and effectively. Overall, implementing a just-meaningful pay increase strengthens the pay-for-performance link by aligning employee compensation with their contributions to the organization, motivating high performance, and driving overall business success. 3-9. A company of 15 employees has recently decided to overhaul its performance appraisal system. Which plan would be most appropriate for the company to adopt? Why? Answer: For a small company with 15 employees, a simple and straightforward performance appraisal system would be most appropriate. One option that would suit this company well is the Management by Objectives (MBO) approach. Management by Objectives (MBO): Why it is appropriate: 1. Simplicity: MBO is a simple and easy-to-understand performance appraisal system. It involves setting specific, measurable objectives for each employee, which can be reviewed and assessed regularly. 2. Alignment with Company Goals: MBO allows the company to align individual employee goals with the overall objectives of the organization. This ensures that employees are working towards the company's strategic priorities. 3. Flexibility: MBO can be easily customized to fit the needs of the organization. It allows the company to set individualized goals for each employee based on their role and responsibilities. 4. Employee Involvement: MBO encourages active participation from employees in the goal-setting process. This promotes a sense of ownership and accountability for their own performance. 5. Regular Feedback: MBO emphasizes regular communication and feedback between managers and employees. This ongoing dialogue helps to identify any issues or challenges early on and provides an opportunity for course correction if needed. Given the size of the company and the need for a simple and effective performance appraisal system, the Management by Objectives (MBO) approach would be the most appropriate choice. It provides a structured framework for setting and evaluating employee performance while also fostering employee engagement and alignment with company goals. VIII. Additional Case from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Pay Overtime or Hire More Staff? Instructor Notes Under the Fair Labor Standards Act (FLSA), employers are required to pay overtime pay to non-exempt workers for hours worked in excess of 40 hours in one workweek. Part of the original intent of the FLSA was to encourage employment by creating an incentive for employers to hire additional workers by requiring overtime pay. Often, it is more cost efficient to hire additional workers instead of consistently paying overtime pay to current workers. However, it is important to consider all of the costs associated with hiring a new employee when evaluating the need for additional staff. Suggested Student Responses: What are some factors that Heidi should consider as she determines whether or not she should hire an additional worker? Heidi needs to understand the company’s long-term workload expectations. Sometimes paying overtime is more cost efficient than hiring additional workers. Students may actually do some calculations in determining the response to this question. They may want to consider the number of employees, the average amount of overtime and the costs of paying overtime. As they consider the cost of overtime, they should consider the cost of producing a product. At $20 per hour, 40 hours of work costs $800, but $800 provides only about 26 hours of overtime work. Therefore, overtime pay adds to the overall cost of producing a product. Students should also consider the other fixed costs of hiring a new employee including benefits. Based on the information provided, do you think Heidi should hire an additional worker? If each of the twenty-five workers works just 8 hours of overtime each month, the company is paying nearly $6,000 per month in overtime pay. Hiring one additional worker would only cost about $3,200 per month. After considering the added productivity that another worker could add, even with relatively high benefit costs, it would seem logical to hire at least one additional staff member. However, Heidi should first examine demand forecasts to determine if current demand levels will be maintained over time. CHAPTER 4 Incentive Pay VII. Discussion Questions and Suggested Answers Indicate whether you agree or disagree with the following statement: “Individual incentive plans are less preferable than group incentives and companywide incentives.” Individual incentive plans reward employees whose work is performed independently. Some companies have piecework plans, typically for their production employees. Under piecework plans, an employee’s compensation depends on the number of units she or he produces over a given period. Group incentive plans promote supportive, collaborative behavior among employees. Companywide plans tie employee compensation to a company’s performance over a short time frame, usually from a three-month period to a five-year period. Individual incentive plans are actually more preferable than group incentive plans and companywide incentive plans because they influence the employee to work there hardest. The downside to group incentive plans and companywide plans is that the overall pay is reflected by how the company performs as a whole, which is not necessarily reflective of individual effort. There is currently a tendency among business professionals to endorse the use of incentive pay plans. Identify two jobs for which individual incentive pay is appropriate and two jobs for which individual incentive pay is inappropriate. Be sure to include your justification. Two jobs in which individual incentive pay is appropriate are occupations that have to do with production or sales, such as a salesman or an ice cream factory worker. Occupations such as these would benefit most from individual incentive pay because the performance of the individual would be based on how hard they worked and it is easy to determine someone’s effort by how many sales or products they produce. Two jobs in which individual incentive pay would be inappropriate are concert violinist or firefighter. A violinist is a member of a team and individual performance can not be measured. A firefighter needs to perform at the same high level no matter what and individual performance should not be measured. Critics of profit sharing plans maintain that these plans do not motivate employees to perform at higher levels. Under what conditions are profit sharing plans not likely to motivate employees? If living conditions and cost of living were increasing, yet pay is not, then certain aspects of profit sharing plans would be a problem for employees. Profit sharing plans pay a portion of company profits to employees, separate from base pay, cost-of-living adjustments, or permanent merit pay increases. Two basic kinds of profit sharing plans are used widely today; first, current profit sharing plans award cash to employees, typically on a quarterly or annual basis. Second, deferred profit sharing plans place cash awards in trust accounts for employees. These trusts are set aside on the behalf of employees as a source of retirement income. The problem with deferred profit sharing is that if an employee needs money now in order to pay for living costs or other such necessities, then he or she may not be motivated for current performance. Unlike individual incentive programs, group and companywide incentive programs reward individuals based on the group and companywide performance standards, respectively. Under group and companywide incentive programs, it is possible for poor performers to benefit without making substantial contributions to group or company goals. What can companies do to ensure that poor performers do not benefit? Companies can do several things to ensure that poor performers do not benefit from group plans. One is to have appraisal methods such as employee coworker, so as to make sure that if someone is performing well they are recognized, but if someone is not, they are noted and do not receive benefits. Other methods include manager involvement with individual employee performance throughout the working process, with special emphasis on making sure that everyone is performing well. Opponents of incentive pay programs argue that these programs manipulate employees more than seniority and merit pay programs. Discuss your views of this statement. The statement that incentive pay programs manipulate employees more than seniority and merit pay programs is open to debate. Here are some points to consider: Arguments against incentive pay programs: 1. Focus on short-term results: Incentive pay programs may encourage employees to prioritize short-term gains over long-term goals. This could lead to unethical behavior or actions that benefit the individual at the expense of the organization. 2. Pressure and stress: Employees may feel pressured to meet targets or quotas in order to receive incentives, which can lead to stress and burnout. This can have a negative impact on employee morale and well-being. 3. Unintended consequences: In some cases, incentive pay programs may incentivize behavior that is not in the best interest of the organization. For example, sales staff may focus on selling high-margin products rather than products that best meet the needs of customers. Arguments in favor of incentive pay programs: 1. Alignment with organizational goals: Incentive pay programs can align employee behavior with the goals and objectives of the organization. By tying pay to performance, employees are motivated to work towards the success of the company. 2. Increased productivity: Incentive pay programs can increase employee productivity by rewarding high performers and providing an incentive for others to improve their performance. 3. Flexibility: Incentive pay programs can be tailored to the needs of the organization, allowing for greater flexibility in rewarding employees for their contributions. Ultimately, whether or not incentive pay programs manipulate employees more than seniority and merit pay programs depends on how they are implemented and managed within the organization. When designed thoughtfully and ethically, incentive pay programs can be an effective tool for motivating and rewarding employees. However, it is important for organizations to consider the potential drawbacks and ensure that incentive programs are aligned with the overall goals and values of the organization. VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Individual or Team Reward? Instructor Notes Companies often consider incentive pay plans to reward employees for their performance. A well-designed incentive pay plan can help a company achieve objectives through improved productivity, quality and customer service. In order to accomplish this, the incentive pay plan must be appropriate for the particular objective. At Metropolitan Furniture, there is a need for high individual productivity and also a level of teamwork that allows the company to meet delivery dates for furniture sets that involve the effort of multiple workers. These differing needs create a challenge for management to determine the right approach in designing an incentive pay plan. Suggested Student Responses: What are some advantages of offering an individual piece rate pay plan to the furniture builders at Metropolitan Furniture? The individual piece rate pay plan emphasizes the link between pay and performance in the organization, providing an incentive for the furniture makers to work harder. Further, by providing such rewards, Metropolitan will be able to retain top performers, contributing to the company’s success through higher productivity and lower turnover. An individual incentive plan could eliminate concerns that one member of a team may not contribute as much as another member does. Employees may feel more comfortable with their pay if they are not relying on the performance of others. What are some advantages of offering a team-based incentive pay plan? The team-based incentive may eliminate concerns that an individual incentive program could bring such as one worker refusing to help out another worker in order to boost his or her own pay by working on his or her own pieces. Further, as on-time delivery is essential to the success of the company, a team-based plan rewards an important behavior within the organization. A team-based incentive program would also be easier to administer as rewards would be based on a few teams instead of several individuals. What do you think Sally should do? Sally should consider implementing a combination of individual and team-based incentive pay plans at Metropolitan Furniture. Individual Incentive Pay Plan: • For tasks that require high individual productivity, such as manufacturing individual furniture pieces, Sally could implement an individual incentive pay plan. This plan would reward employees based on their individual performance, such as the number of pieces produced or the quality of their work. Team-based Incentive Pay Plan: • For tasks that require teamwork and collaboration, such as meeting delivery dates for furniture sets that involve the effort of multiple workers, Sally could implement a team-based incentive pay plan. This plan would reward teams of employees based on their collective performance in meeting delivery deadlines and ensuring customer satisfaction. Benefits of Combination Approach: • By implementing a combination of individual and team-based incentive pay plans, Sally can ensure that the incentive pay plan is appropriate for the different objectives of the company. This approach will help improve productivity, quality, and customer service, as both individual and teamwork are appropriately rewarded. • This approach also promotes a balance between individual performance and teamwork, which is important for the overall success of the organization. In summary, a combination of individual and team-based incentive pay plans would be the most effective approach for Metropolitan Furniture to achieve its objectives and address the differing needs of the company. MYLAB QUESTIONS 4-9. How can incentive pay systems, when properly applied, contribute to companies meeting the goals of lowest cost and differentiation strategies? Answer: Incentive pay systems can meet the goals of both strategies. For companies pursuing a lowest cost strategy, a large concern is reducing output costs per employee. Piecework plans can tie compensation with employee output. Behavioral encouragement plans can lead to decreases in excessive absenteeism or improve safety. Group incentives also contribute to lower costs, particularly through increased employee involvement. Profit-sharing plans are probably the least likely form of incentive to support this plan. For companies pursuing a differentiation strategy, creativity is stressed, and rewards are more likely to be long-term in their delivery. Team-based incentives and gain-sharing programs can meet this imperative. They promote interaction among coworkers and autonomy in order to find a superior way to meet management objectives. But, one should use caution in making a blanket statement in support of all incentive plans to meet this strategy. Piecework plans and profit-sharing plans do little to support this approach. 4-10. Compare and contrast individual and group incentive plans. Answer: Individual incentive plans reward employees whose work is performed independently. Employees are rewarded for meeting such work-related performance standards as quality, productivity, customer satisfaction, safety, or attendance. When designed and implemented well, employees are rewarded based on results for which they are directly responsible under this incentive plan. Paying more money for employees who demonstrate higher performance helps companies to retain best performers. Group incentive plans reward employees for their collective performance and reinforce teamwork, cultivate loyalty to the company, and increase productivity. Group incentive programs may lead to turnover due to free-rider effect. It can be hard to keep the best performer under this plan. VIII. Additional Case from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Merit Increases at Diverse Prints Instructor Notes A well-designed merit pay program should recognize employee performance and adjust employee pay accordingly. If a company has an effective performance appraisal process in place, they should be able to accomplish this goal. But, if they are unable to give merit pay increases that differentiate between different levels of performance, employees may question their own efforts to achieve superior performance. This case is unique in the fact that historically the company has used their merit pay increases effectively. With an uncertain future and limited funds, the decision on how to handle pay increases is a challenging one. Suggested Student Responses: Do you think the company should offer merit pay increases? Why or why not? Yes, Diverse Prints should continue to offer merit pay increases. Reasons to offer merit pay increases: 1. Recognition of Employee Performance: Merit pay increases recognize and reward employees for their performance and contribution to the company. This helps to motivate employees and encourages them to continue performing at a high level. 2. Retention of Top Talent: Merit pay increases help to retain top-performing employees by providing them with financial incentives to stay with the company. This is especially important in a competitive labor market where retaining talent is crucial for the company's success. 3. Maintaining a Culture of Performance: Merit pay increases reinforce a culture of performance and accountability within the organization. Employees understand that their efforts are recognized and rewarded, which encourages them to continue striving for excellence. 4. Effectiveness of Past Merit Pay Increases: Historically, Diverse Prints has used merit pay increases effectively. This indicates that the company has the capability to differentiate between different levels of performance and allocate pay increases accordingly. 5. Employee Satisfaction and Morale: Offering merit pay increases can increase employee satisfaction and morale. Employees are more likely to feel valued and motivated when their hard work is acknowledged and rewarded. While the decision on how to handle pay increases is challenging given the company's uncertain future and limited funds, offering merit pay increases is still important for maintaining employee motivation, performance, and retention. However, the company may need to be strategic in how they allocate merit pay increases and consider alternative options such as non-monetary rewards or recognition programs if funds are limited. If the company chooses not to offer the merit pay increases, how should they approach explaining the decision to the employees? It is important for the company to clearly explain why the company is not offering the merit pay increases. The employees should be aware of the company’s downturn, and the temporary elimination of the merit pay increases should be emphasized as a cost-saving measure that will help the organization continue to operate. Further, the company should emphasize the value of the performance appraisals, even without the subsequent merit pay increases. While the performance appraisals do serve as a basis for merit pay decisions, they are also a tool to provide employees feedback on their performance and guidance in improving their performance. The company may also want to consider alternate awards for those with superior performance such as additional vacation days. Solution Manual for Strategic Compensation: A Human Resource Management Approach Joseph J. Martocchio 9780133457100, 9780135192146
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