CH-5-7 Training and Talent Management – Human Resource Management: Essential Perspectives : Chapter Notes

This Document Contains Chapters 5 to 7 Chapter 5 Training and Talent Management Chapter Outline and Instructor Notes Suggested Content Coverage As organizations compete and change, employees and managers must be trained and developed continually in order to update their capabilities and deliver the needed results to the organization. Talent management is concerned with enhancing the attraction, development, and retention of key human resources. I. NATURE OF TRAINING Training is a process whereby people acquire capabilities to perform jobs. Training provides employees with specific, identifiable knowledge and skills for use in their present jobs. Training represents a significant HR expenditure for most employers and more employers have recognized that training must be increased for organizations to be successful. A. Strategic Training –Strategic training is linked to how the organization accomplishes its organizational goals. Strategic training allows HR and operating managers to work together to solve problems and significantly contribute to organizational results. Also, with a strategic focus the organization will understand that training alone cannot solve most organizational problems. The organization will be more likely to determine what training and or non-training approaches might address the most important performance problems. B. Organizational Competitiveness and Training – For the average employers, training expenditures average almost 2% of payroll expenses, and run over $800 per eligible employee. Many organizations are finding training vital to organizational competitiveness, and for the retention of employees. Figure 5-1 shows how training may help accomplish certain organizational strategies. C. Integration of Performance and Training – Job performance, training, and employee learning must be integrated to be effective, and HR plays a crucial role in this integration. Organizations are seeking more authentic (and hence more effective) training by using real business problems to advance employee learning. Trainers should incorporate everyday business issues as learning examples. D. Training Components – Training plans allow organizations to identify what is needed for employee performance before training begins and ensure the fit with strategic issues. 1. Training Process - Effective training requires the use of a systematic training process with four phases: assessment, design, delivery, and evaluation. II. TRAINING NEEDS ASSESSMENT Assessing organizational training needs represents the diagnostic phase of a training plan. Needs assessment measures the competencies of a company, a group, or an individual as they relate to what is required in the strategic plan, and then determines if training is actually needed. A. Organizational Analyses – Training needs can be diagnosed by analyzing organizational outcomes and looking at future organizational needs. A part of this analysis is the identification of KSAs that will be needed now and in the future as both jobs and the organization change. Organizational analyses come from various operational measures of organizational performance. B. Job/Task Analyses – The second way of doing training needs analysis is to review the jobs involved and the tasks performed. By comparing the requirements of the jobs with the KSAs of the employees, training needs can be identified. C. Individual Analyses – The third means of diagnosing training needs focuses on individuals and how they perform their jobs. The following sources are examples: performance appraisals, skill tests, individual assessment tests, records of critical incidents, assessment center exercises, questionnaires/surveys, job knowledge tools, and internet input. III. TRAINING DESIGN Once training objectives have been determined, training design can start. Effective training design considers learner readiness, learning styles, and transfer of training. A. Learner Readiness - Learner readiness means having the basic skills necessary for learning, the motivation to learn, and self-efficacy, or a person’s belief that he or she can successfully learn the training program content. These things are necessary for the success of the training. 1. Ability to Learn – Learners must possess basic skills such as reading, math, and cognitive abilities. If employees lack the basic skills then employers might: 1) offer remedial training to current employees, 2) hire workers who are deficient and then implement specific workplace training, and/or 3) work with local schools to help better educate potential hires for jobs. 2. Motivation to Learn – is influenced by multiple factors. Differences in gender and ethnicity and the resulting experiences may affect the motivation of adult learners. Motivation may also be influenced by the instructor’s motivation and ability, friends’ encouragement to do well, classmates’ motivation levels, the physical classroom environment, and the training methods used. 3. Self-Efficacy – is a person’s belief that he or she can successfully learn the training program content. B. Learning Styles – When designing training, trainers should consider using multiple training methods to accommodate individual learning styles. Auditory learners learn best by listening; tactile learners must “get their hands on” the training resources and use them; visual learners think in pictures and figures. 1. Adult Learning - Five principles for designing for adults suggest that adults: •Have the need to know why they are learning something •Have a need to be self-directed •Bring more work-related experiences into the learning process •Enter into a learning experience with a problem-centered approach to learning •Are motivated to learn by both extrinsic and intrinsic factors 2. Behavior Modeling - The most elementary way in which people learn – and one of the best – is behavior modeling, or copying someone else’s behavior. Behavior modeling is used extensively as the primary means for training supervisors and managers in interpersonal skills. Many supervisors and managers end up modeling the behavior they see their bosses use. 3. Reinforcement and Immediate Confirmation – Reinforcement is based on the law of effect, which states that people tend to repeat responses that give them some type of positive reward and to avoid actions associated with negative consequences. Immediate confirmation is based on the idea that people learn best if reinforcement and feedback are given as soon as possible after training. C. Transfer of Training – Effective transfer of training onto the job includes the trainee both applying the learned material to the work, as well as maintaining the use of the learned material over time. IV. TRAINING DELIVERY Once training has been designed, then the actual delivery of training can begin. A number of approaches and methods can be used to deliver it. The growth of technology continues to expand the available choices, as Figure 5-2 shows. The common variables considered when selecting the training delivery methods are as follows: Nature of training, Subject matter, Number of trainees, Individual vs. team, Self-paced vs. guided, Training resources/costs, E-learning vs. traditional learning, Geographic locations, Time allotted, Completion timeline. A. Internal Training – is popular because it saves the cost of sending employees away for training and often avoids the cost of outside trainers. Skills-based technical training is conducted inside organizations. Basic technical skills training is also being mandated by various government agencies such as OSHA and the EPA. 1. Informal training – Informal training occurs through interactions and feedback among employees. Most of what employees know about their jobs they learn informally from asking questions and getting advice from others. 2. On-the-Job Training (OJT) – The most common types of training at all levels in an organization is on-the-job training (OJT) because it is flexible and relevant to what employees do. OJT should be planned. Problems with OJT include: 1) Trainers with no experience in training, no time, and no desire to train; 2) Disruption of regular work; 3) Bad habits or incorrect information can be transferred to the trainee. 3. Cross Training – Cross training occurs when people are trained to do more than one job – theirs and someone else’s. For the employers it provides flexibility and development. However, some employees feel that it requires them to do more work for the same pay. To counteract such responses, learning “bonuses” can be awarded. B. External Training – occurs because it may be less expensive for an employer to use an outside trainer when internal training resources are limited, and/or because the organization may have insufficient time or expertise to develop internal training materials. Also, there are advantages to having employees interact with peers in other companies. 1. Outsourcing of Training – Approximately 25-30% of training expenditures go to outside training sources, but has not increased dramatically over the last three years. Employers may be concerned about cost, or want to place a greater emphasis on internal linking of training to organizational strategies. 2. Educational Assistance Programs – Some employers pay for additional education for their employees, typically through a tuition reimbursement program. The amounts paid by the employer are considered non-taxable income for the employee up to certain limits. But one concern is that the employee might leave after completing the education. C. Orientation: On-Boarding for New Employees – Orientation is the planned introduction of new employees to their jobs, coworkers, and the organization, and is one of the most important and widely conducted types of regular training. It requires cooperation between HR and operating managers. Unfortunately, many new employee orientation sessions come across as boring, irrelevant, and a waste of time to both new employees and their department supervisors and managers. The term on-boarding is sometimes being used to describe orientation. Effective orientation achieves several key purposes: •Establishes a favorable employee impression of the organization and the job. •Provides organization and job information. •Enhances interpersonal acceptance by co-workers. •Accelerates socialization and integration of the new employee into the organization. •Ensures that employee performance and productivity begin more quickly. D. E-Learning: On-line Training – E-learning is use of the Internet or an organizational intranet to conduct training online. 1. Advantages and Disadvantages of E-Learning - The major advantages are cost savings and access to more employees. Concerns around e-learning include employee access to it; desire to use it, and the extent to which employees will retain the learnings. Some of the biggest obstacles to using it will continue to be keeping up with the rapid change in technological innovation, knowing when and how much to invest, and designing e-courses appropriately. V. TRAINING EVALUATION Evaluation of training compares the post-training results to the pre-training objectives. Because training is both time-consuming and costly, evaluation should be done. A. Training Evaluation Metrics – Training is expensive, and requires measurement and monitoring. 1. Cost-Benefit Analysis - A cost-benefit analysis is a comparison of costs and benefits associated with training. There are four stages in calculating training costs and benefits: 1) Determine training costs, 2) Identify potential savings results, 3) Compute potential savings, and 4) Conduct costs and savings benefits comparisons. 2. Return on Investment (ROI) Analysis – In organizations, training is often expected to produce an ROI. However, in too many circumstances, training is justified because someone liked it, rather on the basis of resource accountability. Studies have revealed that training can produce significant financial results for employers. 3. Benchmarking – Some organizations use benchmark measures to compare training with training done in other organizations. Comparison data are available through ASTD and the American Productivity &Quality Center and the Saratoga Institute. B. Training Evaluation Design - Internal evaluations of training programs can be designed in a number of ways. 1. Post-Measure - The most obvious way to evaluate training effectiveness is to determine after training whether the individuals can perform the way management wants them to perform. Tests after training do not always clearly indicate whether a performance is a result of training or could have been achieved without the training. 2. Pre-/Post-Measure – If the manager had measured the skill level before training and then after training, the manager can know whether the training made a difference. However, a question still remains whether the employees performed better when they knew they were being tested. 3. Pre-/Post-Measure with a Control Group – In addition to testing the employees who will be trained, the manager can also test another group of employees who will not receive the training, to see if they do as well as those who are to be trained. This second group is called a control group. VI. TALENT MANAGEMENT Talent management can be seen as a bridge as shown in Figure 5-3. Talent management activities include training, individual career planning, HR development efforts, succession planning, and performance management. A. Targeting Jobs - The first issue is to identify the types of jobs that will be the focus of talent management. The groups and individuals seen as “talent” are senior leaders, mid-managers, and key technical and other contributors. However, these groups only represent about one-third of the total workforce of many employers. B. Targeting High-Potential Individuals – Some organizations focus talent management efforts primarily on “high-potential” individuals, often referred to as “high-pos.” Attracting, retaining, and developing high-pos have become emphases of senior managers and HR efforts. VII. CAREERS AND CAREER PLANNING A career is the series of work-related positions a person occupies throughout life. People pursue careers to satisfy deeply individual needs. A. Changing Nature of Careers – The old model of a career in which a person worked for one organization and worked their way up a career ladder has become rare. In a few industries, changing jobs and companies every year or two is becoming common. The average 30- to 35- year-old in the US typically may have already worked for up to seven different firms. 1. Careers and Work-Life Balance – Patterns of jobs are also changing with more freelancing, more working at home, more frequent job changes, more job opportunities but less security. However, for dual-career couples and working women, balancing work demands with personal and family responsibilities is a growing challenge. Employers must focus on retaining and developing talented workers by providing coaching, mentoring, and appropriate assignments. B. Organization-Centered Career Planning – Figure 5.4 summarizes the perspectives and interaction between the organizational and individual approaches to career planning. Organization-centered career planning focuses on jobs and on identifying career paths that provide for the logical progression of people between jobs in an organization. 1. Career Paths - Employees discover their strengths and weaknesses through company-sponsored assessments. Then career paths are developed to fine-tune the strengths and develop the weak areas. Career paths represent employees’ movements through opportunities over time. Most career paths are thought of s leading upward, but good opportunities also exist in cross-functional or horizontal directions. 2. Employer Websites and Career Planning – Many employers have careers sections on their Websites. Such sections can list open jobs for current employees and also be used for career assessment, information, and instruction. C. Individual-Centered Career Planning – Individual-centered career planning focuses on an individual’s career rather than organizational needs. 1. Individual Career Planning Components – The three key activities for individuals to successfully manage their own careers are self-assessment, feedback on reality, and setting of career goals. D. Career Progression – In the second half of life the need for competence and acquisition changes to the need for integrity, values, and well-being. Career-ending concerns, such as life after retirement, reflect additional shifts. 1. Late-Career/Retirement Issues – To help address concerns over retirement issues, some employers offer pre-retirement planning seminars for employees. U.S. companies will face a severe shortage of badly needed skills in the coming decades unless they act now to convince top-performing older employees to delay or phase in their retirement. Phased-in retirement, consulting arrangements, and callback of some retirees as needed all act as means for gradual disengagement between the organization and the individual. Forced early retirement often occurs due to downsizings. To be successful with early retirement, management must avoid several legal issues, such as forced early retirement and pressuring older workers to resign. 2. Career Plateaus – An increasing number of employees are finding themselves at career plateaus where future promotions are limited. One strategy for individuals to get off career plateaus is to take seminars and university courses. Rotating workers to other departments is another way to deal with plateaus. Some plateaued individuals change careers and go into other lines of work altogether. E. Career Transitions and HR – Three career transitions are of special interest to HR: organizational entry and socialization, transfers and promotions, and job loss. “Entry Shock” is especially difficult for younger new hires who find the work world very different from school. Transfers and promotions offer opportunities for employees to develop, but are often expected to perform well immediately, which may not be realistic. Job loss has been most associated with downsizing, mergers, and acquisitions, all of which may cause emotional and financial stress for the employee. VIII. SPECIAL INDIVIDUAL CAREER ISSUES A. Technical and Professional Workers -- Many technical and professional workers prefer to stay in their technical areas rather than enter management. A dual-career ladder, now used by many firms, is a system that allows a person to advance up either a management ladder or a corresponding ladder on the technical/professional side of a career. B. Women and Careers – The number of women in the workforce will reach almost 50% by 2010. Women are found in most occupations and jobs, but their careers have a different element than those of men since they give birth to children and often have the primary responsibility for child care. 1. Work, Family, and Careers - A frequent career approach for women, called sequencing, is to work hard before children arrive, stay at home with the kids when they are young, and go back to work with a job that allows flexibility when they are older. Employers can tap into the female labor market to a greater extent with child care, flexible work policies, and a general willingness to be accommodative. C. Dual-Career Couples – It is estimated that over 80% of all couples are dual-career couples. Marriages where both mates are managers, professionals, or technicians have doubled over the past two decades. 1. Family-Career Issues - For dual-career couples with children, family issues may conflict with career progression. One partner’s flexibility may depend on what is “best” for the family. Whenever possible, having both partners involved in planning, even when one is not employed by the company, may enhance the success of such efforts. 2. Relocation of Dual-Career Couples – For some dual-career couples, the mobility required because of one partner’s transfer often interferes with the other’s career. Also, dual-career couples often have established support networks of co-workers, friends, and business contacts to cope with both their careers and their personal lives. Relocating one partner may mean upsetting this network for the other person or creating a “commuting” relationship. IX. DEVELOPING HUMAN RESOURCES Development represents efforts to improve employees’ ability to handle a variety of assignments and to cultivate capabilities beyond those required by the current job. As a key part of talent management, a planned system of development experiences for all employees, not just managers, can help expand the overall level of capabilities in an organization. A. Lifelong Learning –For many professionals, lifelong learning may mean meeting continuing education requirements to retain certificates or to keep their licenses to practice. For other employees, learning and development may involve training to expand existing skills and to prepare for different jobs, for promotions, or even for new jobs after retirement. B. Re-Development – Whether due to a desire for career change or because the employer needs different capabilities, people may shift jobs in mid-life or mid-career. Redeveloping or retraining people in the capabilities they need is logical and important. C. HR Development Approaches – The most common development approaches can be categorized under three major headings as shown in Figure 5-5. These are job-site approaches (coaching, committees, job rotation, and “assistant-to” position), off-site approaches (classroom courses, seminars, outdoor training, and sabbatical/leaves), and the learning organization (corporate universities, career development centers, and E-developments). Investing in human intellectual capital becomes imperative as “knowledge work,” such as research skills and specialized technology expertise, increases for almost all employers. D. Management Development – Effective management development imparts the knowledge and judgment needed by managers. Experience plays a central role in management development. However, in some organizations it is difficult to find managers for mid-level jobs. To help employees consider moving to a supervisory role a number of employers conduct pre-supervisor training to provide realistic job previews of what supervisors will face. 1. Executive Education - In an effort to decrease turnover and increase management development capabilities, organizations are using specialized education for executives. This training often includes strategy formulation, financial models, logistics, alliances, and global issues. Enrollment in Executive MBAs is also popular. E. Problems with Management Development Efforts – Many of the management development problems have resulted from inadequate HR planning and a lack of coordination of HR development efforts. Common problems include the following: 1) failing to conduct adequate needs analysis, 2) trying out fad programs or training methods, 3) substituting training instead of selecting qualified individuals. Another common management problem is encapsulated development, which occurs when an individual learns new methods and ideas, but returns to a work unit that is still bound by old attitudes and methods. X. SUCCESSION PLANNING Succession planning is the process of identifying a longer-term plan for the orderly replacement of key employees, and should include more than just top management. A. Succession Planning Process – Succession planning should be linked to strategic HR planning. Two coordinated activities begin the actual process of succession planning. First, the development of preliminary replacement charts ensures that the right individuals with sufficient capabilities and experience to perform the jobs are available at the right time. Second, assessment of the capabilities and interests of current employees provides information that can be placed into the preliminary replacement charts. 1. Succession in Small and Closely Held Organizations - Succession planning can be especially important in small and medium-sized firms, but studies show that few of these firms formalize succession plans. In closely held family firms, multiple family members often are involved. 2. “Make or Buy” Talent? – To some extent employers face a choice to either develop competitive human resources or hire them already developed from somewhere else. Current trends show that technical and professional people usually are hired from other places because of the amount of skill development already achieved. However, hiring rather than developing internal human resource capabilities may not fit certain industry competitive environments. B. Value of Succession Planning – Key benefits include the following: •Having an adequate supply of employees to fill future key openings •Providing career paths for employees, which aids in retention and performance •Continually reviewing the need for individuals as organizational changes occur more frequently •Enhancing the organizational “brand” and reputation as a desirable place to work C. Common Succession Planning Mistakes – Focusing only on CEO and top management succession is one of the most common mistakes made. Other mistakes include: •Starting too late, when openings are occurring •Not linking well to strategic plans •Allowing the CEO to direct the planning and make all succession decisions •Looking only internally for succession candidates CASE 1 – TRAINING CRUCIAL FOR HOTELS In the United States and worldwide, there are many different hotels for guests to select. Some are part of high-end, luxury hotel chains such as Ritz-Carlton and Four Seasons. Other chains have multiple levels such as Starwood with Sheraton, Four Points, and others, and Marriott Corporation with a range of brands from Marriott resorts to Fairfield Inns. One common characteristic that all of these hotels have identified is how crucial training is. Hotel executives have learned that high-quality service is usually what determines if guests will return to their facilities, even more so than price. Consequently, having a well-trained hotel staff is crucial to delivering the high-quality customer service guests expect. The focus of much of the training is on creating positive organizational cultures through all facilities and with all managers and employees. Many of these chains have expanded their training commitments by hiring more full-time trainers to work throughout all locations and areas. Several different types of training illustrate these efforts. The Starwood collection of hotels (St. Regis, Westin, Sheraton, Four Points, W Hotels) sees a specific focus on training as a contributor to competitive success. Over a recent six-month period, Starwood trained its 185,000 workers on areas such as social skills, handling worker emotions, and conflict/problem solving. These elements are seen as crucial to providing successful customer service. The focus of the training is for employees to know more about the types of guests in the hotels and how to respond to different situations that occur. Managers and others at hotels are trained on such factors as ensuring eye contact, evaluating customer and employee body language signals, and flexibility in resolving problems. Choice Hotels and other chains use role-playing as part of their training for hotel staff members. Handling families with kids, tired business travelers, and other types of individuals enhances the customer services culture in a facility. Another side benefit is that employees become less frustrated and stressed, which has reduced turnover and increased employee satisfaction. The upscale Ritz-Carlton group has established the Mystique technology program. Individual guests’ preferences can be entered and accessed by employees. This system can track what individual clients’ preferences are for types of rooms, service that they have experienced, and even personal allergies. To implement this system and its use, the firm held train-the-trainer conferences. Then those trainers spread out and conducted training for hotel managers, local HR and training managers, and marketing/guest relations managers. However, training just existing employees can be too limited. So Ritz-Carlton and other chains have revised their new employee orientation training. Integrating job-related details and how to use the Mystique system with customers is now part of the on-boarding process for employees at all levels, including housekeepers, desk clerks, restaurant servers, supervisors, and managers. From these examples, it is evident that many hotels are investing significantly in training. The payoffs of the training are likely to be seen in more satisfied guests, better-performing employees, and increased organizational revenues and profits.* Questions 1. Discuss how these hotels are using a strategic and performance consulting approach to developing training efforts. 2. Identify how the effectiveness of Ritz-Carlton’s Mystique program might be measured several years later. ______ * Based on Jacqueline Dunett, “Ritz-Carlton: Plug In and Perform,” Training, March 2006, 30– 34; and Barbara DeLollis, “Hotels Train Employees to Think Fast,” USA Today, November 29, 2006, 1B. Suggested Answers to Case 1 Questions 1. Discuss how these hotels are using strategic and performance consulting approach to developing training efforts? The framework for developing a strategic training plan contains four major stages which are strategizing, planning, organizing, and justifying. The primary focus is to make the training efforts support the business strategy. One way to perform an organizational analysis is to determine what knowledge, skills, and abilities (KSA’s) are required to support the strategy, train based on these needs, and then use performance evaluation data to verify results. Training is often modified or updated to continually improve the results. For example, upscale, luxury hotels have discovered that repeat business is more heavily tied to customer service than to price. As a result, training is provided in an attempt to provide high quality service. Training is often performed at orientation, but it typically remains continuous in some form or fashion. The Starwood collection of hotels uses a training program on areas such as social skills, handling worker emotions, and conflict/problem solving. These elements are seen as crucial to providing successful customer service. Choice Hotels use role-playing to train staff in handling families with kids, tired business travelers, and other types of individuals to enhance customer services culture in a facility. The Ritz-Carlton group established the Mystique technology program where individual guests’ preferences can be entered and accessed by employees. 2. Identify how the effectiveness of Ritz-Carlton’s Mystique program might be measured several years later. It is important to measure effectiveness of training so that there is always continuous improvement of it. Content as well as delivery method and frequency are all areas that should be reviewed. In addition, if performance evaluations do not fully match or somehow contradict what is being trained, then it is unrealistic to expect full compliance with training. There are not perfect ways to evaluate training success because other factors may influence results. For example, a booming economy or a depressed economy might influence hotel stays more than customer service. Random customer surveys either through a written card or phone call may be a way to collect data on service and compare the results over the years. Pretend customers, who are often called shoppers, could visit various hotels and provide feedback on customer service at certain times during the year. Finally, direct discrete observation by managers may point out immediately problems with customer service quality. CASE 2 – EQUIPPING FOR THE FUTURE Many employers facing industry job shifts also are confronted by workforce changes due to retirement of key executives and employees. One firm that has “drilled” well in the oil equipment and services industry is National Oilwell Varco (NOV). Based in Houston, Texas, the firm has over 20,000 employees working in manufacturing, selling, and servicing oil and gas equipment. Several years ago the CEO at NOV, Pete Miller, recognized that all of the senior management executives were baby boomers. The CEO realized that many of these executives would be retiring about the same time, so NOV would face a significant vacuum of talent to be replaced. Two senior executives were given the assignment to prepare for the changes, resulting in a plan labeled “Next Generation.” To generate a supply of potential leaders, technical professionals, and others, NOV had to broaden its recruiting process beyond the normal oil-based states, such as Texas, Louisiana, and Oklahoma. Miller also demanded that foreign candidates be considered, because of the expanding global oil market. A specific focus of NOV recruiting efforts included foreign students at U.S. universities who had high English communication skills and other relevant capabilities. Up to 40 individuals at 10 universities were interviewed, and then the primary candidates went through two more interviews by NOV middle managers. Those candidates who “passed” this phase spent two days in Houston going through additional interviews and selection means. Finally, the individuals selected were offered jobs at NOV. This process has continued during the past several years. Once the selected individuals go to work at NOV, they spend one year in job rotation, with four assignments of three months each in different business areas. This rotation provides the individuals with a broader view of NOV and its operations. During the rotation, candidates participate in various efforts, including development programs and mentoring by various division managers. A unique part of NOV’s talent management process is that after the individuals complete their one-year job rotation, they become “draft candidates.” Modeled after the National Football League draft, each business unit identifies which individuals they want on their “team.” After completing the draft, individuals get jobs in the different business units. NOV’s “Next Generation” program has been successful. The retention rate for the drafted candidates is over 90%, higher than normal in the industry. Also, its recruiting costs have declined. So there has been a payoff for both NOV and its employees.* Questions 1 Discuss how NOV’s efforts combine different phases of talent management to reach a successful result. 2. What are some of the possible advantages and disadvantages of the “draft approach”to placing candidates in business units? _________ *Based on Bridget Mintz Testa, “Building a Strong Bench,” Workforce Management, June 12, 2006, 24– 31. Suggested Answers to Case 2 Questions 1. Discuss how NOV’s efforts combine different phases of talent management to reach a successful result. NOV starts with focusing on recruitment and selection with its broadening recruiting process beyond oil-based states and to foreign candidates, especially foreign students at U.S. universities. The selection process also involved multiple interviews and spent two days in Houston with NOV managers. Once the selected individuals go to work at NOV the management development efforts include job rotations, special business area assignments, and mentoring by various division managers. After their one-year rotation they become “draft candidates” and each business unit identifies which individuals they want on their “team.” 2. What are some of the possible advantages and disadvantages of the “draft approach” to placing candidates in business units? An advantage to the “draft approach” to placing candidates is that candidates know they have a choice of business units to work for and they would be highly motivated to work hard to impress the business unit managers. They would also have a feeling of being “chosen” by the business unit that they work for. The disadvantage might be that every business unit wants the same candidates or no business unit wants a candidate. Also, a candidate might not be selected by the business unit that they really wanted to work for so they might leave the organization. Chapter 6 Performance Management and Appraisal Chapter Outline and Instructor Notes Suggested Content Coverage Performance management is used to identify, communicate, measure, and reward employees who perform their jobs well. I. NATURE OF PERFORMANCE MANAGEMENT Performance management should originate with what the organization needs to accomplish to meet its strategic objectives. Performance management is a series of activities designed to ensure that the organization gets the performance it needs from its employees. Performance appraisal is the process of evaluating how well employees perform their jobs and then communicating that information to the employees. A. Effective Performance Management - A performance management system should do the following: •Clarify what the organization expects. •Provide performance information to employees. •Identify areas of success and needed development. •Document performance for personnel records. As shown in Figure 6.1, performance management links organizational strategy to results. II. IDENTIFYING AND MEASURING EMPLOYEE PERFORMANCE Common employee performance measures include quantity of output, quality of output, timeliness of output, and presence at work. However, each job has specific job duties that identify the most important elements in a given job. Individual performance on job duties should be measured and compared against standards, and then communicated to the employee. III. TYPES OF PERFORMANCE INFORMATION As shown in Figure 6-2, managers can use three types of information about how employees are performing their jobs. Trait-based information is a character trait of the employee – such as attitude, initiative, or creativity – and may or may not be job related. Behavior-based information focuses on specific behaviors that lead to job success. Results-based information considers employee accomplishments. Performance measures can also be viewed as objective (measures are observed directly) or subjective (measures requiring judgment on the part of the evaluator). Measuring performance requires the use of relevant criteria that focus on the most important aspects of employees’ jobs. A. Performance Standards – Performance standards define the expected levels of performance and are labeled benchmarks or goals or targets. Realistic, measurable, clearly understood performance standards benefit both organizations and employees. Both numerical and nonnumerical standards can be established. Once managers have determined appropriate measures of the variance in their company, they can deal with waste and service delivery. Performance that is measured can be managed. IV. PERFORMANCE APPRAISALS Performance appraisals are used to assess an employee’s performance and to communicate that performance to the employee. Performance appraisal is also called employee rating, employee evaluation, performance review, performance evaluation, or results appraisal. A. Uses of Performance Appraisals – As shown in Figure 6-3, organizations generally use performance appraisals in two potentially conflicting ways. One use is for administrative uses such as pay and other administrative decisions about employees. The other use focuses on the development of individuals. In this role the manager acts more as counselor and coach than as a judge. 1. Administrative Uses of Appraisals – Three administrative uses of appraisals impact managers and employees the most. They are: (1) determining pay adjustments, (2) making job placement decisions on promotions, transfers, and demotions, and (3) choosing employee disciplinary actions up to and including termination of employment. A performance appraisal system is often the link between additional pay and other rewards that employees receive, and their job performance. Performance-based compensation affirms the idea that pay raises are given for performance accomplishments rather than based on seniority or granted automatically to all employees. Promotions and demotions based on performance must also be documented through performance appraisals; otherwise, legal problems can result. 2. Developmental Uses of Appraisals – Performance appraisals tend to serve as a primary source of information and feedback for employees that are often key to future employee development. The purpose of the feedback is both to reinforce satisfactory performance and to address performance deficiencies. 3. Informal versus Systematic Appraisal Processes – Performance appraisals can occur informally and/or systematically. A supervisor conducts an informal appraisal whenever necessary as part of the ongoing day-to-day evaluation of their work. A systematic appraisal is a formal system put in place with regular time intervals to report managerial impressions and observations on employee performance. 4. Timing of Appraisal – Employees commonly receive an appraisal 60-90 days after hiring, again at six months, and annually thereafter. Some employers separate the administrative and developmental uses of appraisals and may have three separate discussions: one on the administrative, one of developmental, and a third one dealing just with the compensation issues. B. Legal Concerns and Performance Appraisals – Courts have ruled in numerous cases that performance appraisals were discriminatory and not job related. Legal concerns have also arisen with the use of forced distribution rating systems where a certain percentage of employees must be assigned certain ratings. The uniform guidelines issued by the Equal Employment Opportunity Commission (EEOC) and various court decisions make it clear that performance appraisals must be job related, nondiscriminatory, and documented. V. WHO CONDUCTS APPRAISALS? Performance appraisals can be conducted by anyone familiar with the performance of individual employees, which may include: •Supervisors rating their employees •Employees rating their supervisors •Team members rating each other •Employee self-appraisal •Outside sources •Multisource (360°) feedback A. Supervisory Rating of Subordinates – The most widely used method assumes that the immediate supervisor is the person most qualified to evaluate an employee’s performance realistically and fairly. Figure 6.4 shows the traditional review process supervisors use to conduct performance appraisals on employees. B. Employee Rating of Managers – A number of organizations today ask employees or group members to rate the performance of supervisors and managers, and there are advantages to doing so. First, in critical manager/employee relationships, employee ratings can be useful for identifying competent managers. Second, managers may become more responsive to employees, but a disadvantage may occur if the manager focuses on being “nice” rather than on managing. Finally, employee appraisals can contribute to career development efforts for managers by identifying areas for growth. Disadvantages may include the negative reaction many supervisors have to being evaluated by employees, and the employees’ fear of reprisal. C. Team/Peer Rating – Peer and team ratings are especially useful when supervisors do not have the opportunity to observe each employee’s performance, but other work group members do. Some believe that team/peer ratings can negatively affect teamwork. Also, although team members have good information on one another’s performance, they may not choose to share it. D. Self-Rating – Self-appraisal forces employees to think about their strengths and weaknesses and set goals for improvement. However, employees may not rate themselves as supervisors would rate them; they may use quite different standards. E. Outsider Rating – People outside the immediate work group may be called in to conduct performance reviews. A disadvantage of this approach is that outsiders may not know the important demands within the work group or organization. F. Multisource/360° Feedback – Growing in popularity, multisource feedback recognizes that for a growing number of jobs, employee performance is multidimensional and crosses departmental, organizational, and even global boundaries. Its major purpose is to capture evaluations of the individual employee’s different roles. Significant administrative time and paperwork are required to request, obtain, and summarize feedback from multiple raters. VI. METHODS FOR APPRAISING PERFORMANCE A. Category Scaling Methods – require a manager to mark an employee’s level of performance on a specific form divided into categories of performance. A checklist uses a list of statements or words from which raters check statements most representative of the characteristics and performance of employees. 1. Graphic Rating Scales – The graphic rating scale allows the rater to mark an employee’s performance on a continuum and appraises three areas of performance: descriptive categories, job duties, and behavioral dimensions. As Figure 6-5 shows, the number of skill points can be defined differently for each standard. However, graphic rating scales may encourage errors on the part of the raters, who may depend too heavily on the form to define performance. Also, their usefulness tends to be limited if the performance scale does not fit the job and person well. 2. Behavioral Rating Scales – are designed to assess an employee’s behaviors instead of other characteristics. In a behaviorally anchored rating scale (BARS), behaviors are “anchored” or measured against a scale of performance levels. However, development and maintenance of the rating scales require extensive time and effort. In addition, various appraisal forms are needed to accommodate different types of jobs in the organization. B. Comparative Methods – compare the performance levels of their employees against one another. 1. Ranking – the ranking method lists all employees from highest to lowest in performance. Unfortunately, the sizes of the differences between individuals are not well defined. 2. Forced Distribution – When forced distribution is used, the ratings of employees’ performance are distributed along a bell-shaped curve. This means that a certain percentage of persons are required to fall into the lowest category, thus attempting to prevent “rater inflation.” However, some managers may resist putting employees in the lowest or highest group, they may have a difficult time explaining why the employee was put into a certain group, and the assumptions of a bell-shaped curve distribution for small groups is faulty. As a result, forced distribution systems have been challenged legally. A number of actions are recommended if a forced distribution system is to be used: •Use specific, objective criteria and standards. •Involve employees in planning and designing the programs. •Ensure that sufficient numbers of people are rated, so that statistically rankings are relevant. •Train managers, and review their ratings to ensure that they are job related, not based on favoritism. C. Narrative Methods – are entirely written. In the critical incident method, the manager keeps a written record of both highly favorable and unfavorable actions performed by the employee. This method can be used with others to adequately document support for the rating. The essay method requires a manager to write a short essay describing the employee’s performance. The essay method allows the rater more flexibility than other methods do and it is often combined with other methods. D. Management by Objectives – Management by objectives (MBO) specifies the performance goals that an individual and manager mutually identify. Other names for MBO include appraisal by results, target coaching, work planning and review, performance objective setting, and mutual goal setting. Implementing a self-guided self-appraisal system using MBA is a four-stage process: 1) Job review and agreement, 2) Development of performance standards, 3) Setting of objectives, and 4) Continuing performance discussions. E. Combination of Methods – No single appraisal method is best for all situations. Using combinations may offset some of the advantages and disadvantages of individual methods. When managers can articulate what they want a performance appraisal system to accomplish, they can choose and mix methods to realize those advantages. VII. PERFORMANCE APPRAISAL TRAINING FOR MANAGERS AND EMPLOYEES Court decisions on the legality of performance appraisals and research on appraisal effectiveness both stress the importance of training managers and employees on performance management and conducting performance appraisals. Some topics covered in appraisal training often include: •Appraisal process and timing •Performance criteria and job standards that should be considered •How to communicate positive and negative feedback •When and how to discuss training and development goals •Conducting and discussing the compensation review •How to avoid common rating errors A. Rater Errors – One of the major mistakes in the performance appraisal process is made by raters. Some common rater errors include applying different standards and expectations for employees performing similar jobs, the recency effect where the rater gives greater weight to recent events when appraising an individual’s performance, and the primary effect when a rater gives greater weight to information received first. 1. Rater Patterns and Biases – Rating patterns may exhibit leniency or strictness. Rater bias occurs when a rater’s values or prejudices distort the rating, whether unconsciously or intentionally. 2. Performance Criteria Errors – The halo effect occurs when a rater scores an employee high on all job criteria because of performance in one area. The opposite is the horns effect, occurring when a low rating on one characteristic leads to an overall low rating. Another problem is the contrast error, which is the tendency to rate people relative to others rather than against performance standards. VIII. APPRAISAL FEEDBACK After completing appraisals, managers need to communicate the results in order to give employees a clear understanding of how they stand in the eyes of their supervisor. The emphasis of this appraisal feedback interview should be on coaching and development. A. Appraisal Interview – The appraisal interview can be an emotional experience for the manager and the employee because the manager must communicate both praise and constructive criticism. Figure 6-6 summarizes hints for an effective appraisal interview. B. Feedback as a System – The three components of a feedback system are data, evaluation of that data, and some action based on the evaluation. Data are factual pieces of information regarding observed actions or consequences. Evaluation of data requires performance standards and can be done by the person supplying the data, by a supervisor, or by a group. For feedback to cause change, some decision must be made regarding subsequent action. C. Reactions of Managers – Playing the dual role of coach and counselor may cause internal conflict and confusion for many managers. Managers may be tempted to avoid negative feedback for many reasons, but avoidance helps no one. A manager owes an employee a well-done appraisal. D. Reactions of Appraised Employees – Employees may view the appraisal process as a win/lose situation where they can only receive a higher rating if someone else receives a lower rating. As such, the appraisal should focus on self-improvement and development. E. Effective Performance Management – Managers must understand that performance management is used to develop employees as resources, not to “punish” them. Done well, performance management can lead to higher employee motivation and satisfaction. CASE – PERFORMANCE MANAGEMENT IMPROVEMENTS FOR BRISTOL-MYERS SQUIBB Bristol-Myers Squibb (BMS) is one of the world’s largest pharmaceutical firms and is widely known for its innovative research. But the firm has not limited its innovations to products. Several years ago, BMS leaders decided that the company’s performance management system needed to be re-invented. Specifically, they determined that the existing performance appraisal process was not working. Managers were “form focused,” meaning that they were so concentrated on filling out the performance review forms; the content of the forms was not being used for employee coaching and based on development. Also, most of the attention of managers and employees was historical and based on what employees had done in the past. Little attention was being given to how employees could develop and improve in the future. The most radical steps taken were to totally eliminate the appraisal forms and their rating scales and to request that managers not discuss pay increases during performance review sessions. Instead, a new “performance partnership” became the focus. At all levels of BMS, managers were trained to hold regular meetings with their employees. At these meetings managers and employees review performance goals expectations. Together they set expectations and timelines for accomplishing the goals. Rather than meeting just once a year, the performance partnership update occurs throughout the year. The changes in the performance management system have led to several positive results. First, employees are more active participants, rather than just getting their ratings on forms and then passively listening to the managers. Also, a greater amount of time is spent on coaching because managers were trained on use of a guided feedback approach. This approach has led to more discussions in which employees and managers emphasize joint problem solving and goal achievements. Although the system takes more managerial and employee time, the coaching and employee involvement have created a more positive relationship and improved individual and managerial performance.* Questions 1. Discuss how this case illustrates the contrasts between the administrative use and developmental use of appraisals. 2. Identify some of the advantages and disadvantages of eliminating the use of appraisal forms and ratings. ____ *Based on “Adding New Life to Performance Reviews Keeps Employees, Managers Rejuvenated,” Bulletin to Management, February 7, 2002, 41– 42. Suggested Answers to Case Questions 1. Discuss how this case illustrates the conflict between the administrative use and developmental use of appraisals. At Bristol-Myers Squibb (BMS), the old system focused on the administrative use of performance appraisals. Managers were focused on completing the form and most of the attention was historical and what employees had done in the past. The new system is definitely focused on the developmental use of appraisals. The appraisal form was eliminated and managers did not discuss pay increases during the performance review sessions. Instead, a new “performance partnership” became the focus. Managers and employees jointly agreed on expectations and timelines for accomplishing the goals. 2. Identify some of the advantages and disadvantages of eliminating the use of appraisal forms and ratings? The advantages of eliminating the use of appraisal forms and ratings are that the managers can focus more on the development of employees and goals and expectations for the future. Also, the process and the goals can be more individualized to the particular employee rather than being forced to use a particular form and particular ratings. Without using appraisal forms and ratings employees are also more likely to play a more active role and engage in joint problem solving and goal setting. Also, the timing of the appraisal discussion can more easily occur when it is appropriate to the situation rather than a time being dictated that is the same for all employees. The disadvantages of eliminating the appraisal forms and ratings are the lack of control and the variability of the process without standardized forms and ratings. Since performance appraisal information in important organizational information for personnel decision making, it is important that HR be able to collect performance information is a systematic way. If the forms and ratings are eliminated there must be another type of system that provides the organizational information that is needed for HR decisions such as promotions, layoffs, terminations, etc. BMS replaced the appraisal forms and ratings with a new “performance partnership” system that was supported with training for all managers on topics such as guided feedback. Training becomes especially important when there are changes in the performance management system. The overall purpose of performance appraisal is to provide an orderly, systematic method of evaluating the present and potential usefulness of employees to their organization. In this light, performance appraisal becomes useful in correcting, improving, and, in general, raising the level of a worker’s job performance. This can be accomplished without appraisal forms and ratings, but there must be a system that takes the place of the forms and ratings and still meets the overall purpose of performance appraisal. Chapter 7 Compensation Strategies and Practices Chapter Outline and Instructor Notes Suggested Content Coverage Total rewards are the monetary and non-monetary rewards provided to employees in order to attract, motivate, and retain them. Critical to an effective total rewards approach is the need to balance the interests and costs of the employers with the needs and expectations of the employees. I. NATURE OF TOTAL REWARDS AND COMPENSATION Because so many organizational funds are spent on total reward systems for employees, a number of important decisions must be made to achieve the following objectives: •Legal compliance with all appropriate laws and regulations •Cost effectiveness for the organization •Internal, external, and individual equity for employees •Performance enhancement for the organization •Performance recognition and talent management for employees A. Types of Compensation - Rewards can be both intrinsic and extrinsic. Intrinsic rewards may include praise and other psychological and social forms of compensation. Tangible or extrinsic rewards are of two general types: direct compensation (monetary rewards for work done) and indirect compensation (provided simply for being members of the organization). Base pay and variable pay are forms of direct compensation while employee benefits are the primary form of indirect compensation. 1. Base Pay – Base pay is the basic compensation that an employee receives, usually as a wage or salary. Two types of base pay are hourly and salaried. Wages are payments directly calculated on the amount of time worked. Salaries are consistent payments each period regardless of the number of hours worked. 2. Variable Pay – Variable pay is a form of direct pay linked to performance, such as bonuses, incentives, and stock options. 3. Benefits – A benefit is an indirect reward given to an employee or group of employees for organizational membership. Common examples are health insurance, vacation pay, and retirement pensions. B. Compensation Philosophies - Two basic compensation philosophies which lie on opposite ends of a continuum are: entitlement philosophy and performance philosophy, as shown in Figure 7.1. 1. Entitlement Philosophy – The entitlement philosophy assumes that individuals who have worked another year are entitled to pay increases, with little regard for performance differences. Base pay increases under this philosophy are referred to as cost-of-living raises, even if they are not tied to specific economic indicators. 2. Performance Philosophy – The pay-for-performance philosophy requires that compensation changes reflect individual performance differences. Employees who perform well receive larger increases in compensation than those who do not perform satisfactorily. Also, bonuses and incentives are based on individual, group, and/or organizational performance. Few organizations totally follow performance-oriented compensation practices, but the overall trend is toward greater use of pay-for-performance. C. HR Metrics and Compensation – Compensation expenditures should be evaluated to determine their effectiveness just like any other area of expenditures for an organization. One widely used metric is employee turnover/retention. This factor assumes that how well compensation systems operate affects the employees’ decisions to stay or leave the organization. Ideally, compensation metrics should be calculated each year and compared to past years to compare with the rate of changes in the organization overall. II. COMPENSATION SYSTEM DESIGN ISSUES The design of the compensation system is dependent upon the compensation philosophies, strategies, and approaches. A. Compensation Fairness and Equity - Most employees work to gain rewards for their efforts. The extent to which they perceive their compensation to be fair often affects their performance, how they view their jobs, and their employers. 1. Equity - Equity is the perceived fairness between what a person does (inputs) and what the person receives (outcomes). These comparisons are personal and are based on individual perceptions, not just facts. 2. External Equity – If an employer does not provide compensation the employees view as equitable in relation to what other employees performing similar jobs in other organizations are receiving, the employer is likely to experience high turnover and will have a harder time recruiting qualified employees. Organizations track external equity by using pay surveys. 3. Internal Equity in Compensation – Internal equity means that employees receive compensation in relation to the KSAs they use in their jobs, as well as their responsibilities and accomplishments. Procedural justice is the perceived fairness of the process and procedures used to make decisions about employees, including their pay. Distributive justice is the perceived fairness in the distribution of outcomes and essentially examines how pay relates to performance. B. Market Competitiveness and Compensation – Some organizations establish specific policies about where they wish to be positioned in the labor market, using a quartile strategy. 1. “Meet the Market” Strategy – Most employers choose to position themselves in the second quartile (median), in the middle of the market. 2. “Lag the Market” Strategy – An employer using a first-quartile strategy may choose to “lag the market” by paying below market levels due to a shortage of funds, or because an abundance of workers is available. The downside of this strategy is that it can increase turnover if the labor market tightens. 3. “Lead the Market” Strategy – A third-quartile strategy uses an aggressive approach to “lead the market,” enabling a company to attract and retain an adequate number and quality of workers and to be more selective when hiring. 4. Selecting a Quartile – requires the consideration of financial resources available, competitiveness pressures, and the market availability of necessary employees. III. LEGAL CONSTRAINTS ON PAY SYSTEMS Compensation systems comply with a myriad of governmental constraints. Important areas addressed by the laws include minimum wage standards and hours of work. A. Fair Labor Standards Act (FLSA) – Passed in 1938, this act is the major federal law affecting compensation. It is enforced by the Wage and Hour Division of the U.S. Department of Labor. Employers must keep accurate time records and maintain them for three years. The provisions of the act and subsequent revisions focus on three major areas: establishing a minimum wage, discouraging oppressive use of child labor, and encouraging limits on the number of hours worked per week through overtime provisions. 1. Minimum Wage - The FLSA sets a minimum wage to be paid to covered employees. A lower wage level is set for "tipped" employees such as restaurant workers but their pay plus tips must equal the minimum level. A living wage, on the other hand, is supposed to meet the basic needs of a worker’s family. There is a debate about the use of a living wage versus the minimum wage, since the living wage is significantly higher than the current minimum wage. Without waiting for U.S. federal laws to change, over 80 cities have passed local living-wage laws. 2. Child Labor Provisions – The child labor provisions of the FLSA set the minimum age for employment with unlimited hours at 16 years. For hazardous occupations, the minimum is 18 years of age. Individuals 14 to 15 years old may work outside school hours with certain limitations. 3. Exempt and Nonexempt Statuses – The FLSA also classifies exempt employees, who are not entitled to overtime, and nonexempt employees, who must be paid overtime. Figure 7-2 indicates the factors related to salaried pay levels per week, duties and responsibilities, and other criteria that must exist for jobs to be categorized as exempt. The categories of exempt status are executive, administrative, professional (learned or creative), computer employees, and outside sales. Employers are required to pay overtime for hourly jobs and salaried non-exempt jobs. The FLSA does not require employers to pay overtime for salaried exempt jobs, although some organizations may pay overtime, especially for first-time supervisors. One common mistake made by employers is to classify employees as exempt when they are actually non-exempt. 4. Overtime – The FLSA established that overtime be paid to nonexempt employees at one and one-half times the regular pay rate for all hours over 40 a week. Hospitals and nursing homes may use a 14-day, 80-hour period as a basis for the determination of overtime if they wish to do so. 5. Common Overtime Issues – For non-exempt employees, there are a number of issues that employers must consider: 1) Compensatory time off, or “comp” time, is given in lieu of payment for extra time worked. It is illegal in the private sector unless given to non-exempt employees at one and one-half times the number of hours over 40 that are worked in a week. Comp time cannot be carried over from one pay period to another. The only major exception is for public-sector employees such as fire and police officers. 2) Incentives for non-exempt employees must be added to a non-exempt employee’s pay for the calculation of overtime. 3) Training time must be counted as time worked by non-exempt employees unless it is outside regular work hours, not directly job related, etc. 4) Travel time must be counted as work time if it occurs during normal work hours, even on non-working days, unless the non-exempt employee is a passenger in a car, bus, train, airplane, etc. B. Acts Affecting Government Contractors – There are several compensation-related acts that apply only to firms having contracts with the U.S. Government. The Davis-Bacon Act of 1931 requires firms engaged in federal construction projects valued at over $2000 to pay the prevailing wage. This wage is determined by a formula that considers the rate paid by a majority of the employers in the same geographic area. Two other acts (the Walsh-Healy Public Contracts Act and the McNamara-O’Hara Service Contract Act) require firms with federal supply or service contracts exceeding $10,000 to pay the prevailing wage. C. Garnishment Laws - Garnishment occurs when a creditor obtains a court order that directs an employer to set aside a portion of an employee's wages to pay a debt owed a creditor. Federal and state regulations have placed restrictions on the amount of wages that can be withheld and upon the right of employers to discharge employees whose pay is subject to a single garnishment order. IV. DEVELOPMENT OF A BASE PAY SYSTEM Job descriptions and job specifications are used when valuing jobs and analyzing pay surveys. The data compiled in these two activities are used to design pay structures, including pay grades and pay ranges. After pay structures are established, individual jobs can be placed in the appropriate pay grades and individual employee pay can be adjusted according to factors such as performance and seniority. Finally, pay systems must be monitored and updated. A. Valuing Jobs with Job Evaluation Methods – Job evaluation is a formal, systematic means to identify the relative worth of jobs within an organization. 1. Point Method – is the most widely used job evaluation method. It breaks jobs down into compensable factors and places weights, or points, on them. A compensable factor identifies a job value commonly present throughout a group of jobs. A special type of point method, the Hay system, uses know-how, problem-solving ability, and accountability as compensable factors. The point method is relatively simple to use, but has been criticized for reinforcing traditional organizational structures. 2. Legal Issues and Job Evaluation - Critics have charged that traditional job evaluation programs place more weight on factors normally included in male-dominated jobs and put less weight or value on factors normally included in female-dominated jobs. Employers counter that they base their pay rates on external equity comparisons in the labor market and do not discriminate on the basis of gender. B. Valuing Jobs Using Market Pricing – Market pricing uses market pay data to identify the relative value of a job based on what other employers pay for similar jobs. The accuracy of market pricing rests on the ability to match comparison data appropriately, considering job duties, geography, company strategy, and market competitiveness. 1. Advantages of Market Pricing – The primary advantage is that it closely ties organizational pay levels to what is actually occurring in the market. An additional advantage is that is allows an employer to communicate to employees that the compensation system is truly “market linked.” 2. Disadvantages of Market Pricing – The foremost disadvantage is that pay survey data may be limited for some jobs or may not be gathered in methodologically sound ways. A closely related problem is that the responsibilities of jobs may be different than the “matching” job in the survey. Finally, tying pay levels to market data can lead to wide fluctuations based on market conditions. C. Pay Surveys – A pay survey is a collection of data on compensation rates for workers performing similar jobs in other organizations. Because jobs may vary widely in an organization, it is particularly important to identify benchmark jobs – ones that are found in many other organizations. 1. Using Pay Surveys – The proper use of pay surveys requires evaluating a number of factors to determine if the data are relevant and valid. The following factors should be considered: participants, broad-based, timeliness, methodology, and job matches. 2. Pay Surveys and Legal Issues – Some employers have been found guilty of “price fixing” wages when they determined wages based on shared wage data with a small group of employers in the same industry. It is recommended to participate in surveys conducted by independent third-party firms only if privacy safeguards are met. V. PAY STRUCTURES Once job valuations and pay survey data are gathered, pay structures can be developed using the process identified in Figure 7-3. A job family is a group of jobs having common organizational characteristics. There can be a number of different job families in one organization, depending on the nature, culture, and structure of the organization. A. Pay Grades – Pay grades are groupings of individual jobs having approximately the same job worth. Small- and medium-sized companies generally use 11-17 grades. 1. Setting Pay Grades Using Job Evaluation Points - This process ties pay survey information to job evaluation data by plotting a market line that shows the relationship between job value as determined by job evaluation points and job value as determined by pay survey rates. A market line uses data to group jobs having similar point values into pay grades. Pay ranges can then be computed for each pay grade. 2. Setting Pay Grades Using Market Banding – This process groups jobs into pay grades based on similar market survey amounts. The midpoint of the survey average is used to develop pay range minimums and maximums. B. Pay Ranges – Using the market line as a starting point, the employer can determine minimum and maximum pay ranges for each pay grade by making the market line the midpoint line of the new pay structure (see Figure 7-4) 1. Broadbanding – is the practice of using fewer pay grades with much broader ranges than in traditional compensation systems. The primary reasons for using broadbanding are: (1) to create more flexible organizations, (2) to encourage competency development, and (3) to emphasize career development. Problems with broadbanding include a reduction in perceived promotion opportunities and there can be a significant impact on salary levels and costs. C. Individual Pay - Individual pay is set within a pay grade range which allows individuals to progress within a grade over time. There are usually a few individuals that are paid lower than the minimum or higher than the maximum. 1. Red-Circled Employees – A red-circled employee is paid above the range set for the job. Management might try to bring the employee’s rate into grade by freezing the employee’s pay until the pay range is adjusted to include their pay. Also, the employer may give the employee a small lump-sum payment but not adjust the employee’s base pay when others are given raises. 2. Green-Circled Employees – A green-circled employee is paid below the range set for the job. It is generally recommended that the green-circled employee receive fairly rapid pay increases to reach the pay grade minimum. Also, more frequent increases may be used. 3. Pay Compression – Pay compression occurs when the pay differences among individuals with different levels of experience and performance become small. The major reason pay compression occurs involves situations in which labor market pay levels increase more rapidly than current employees’ pay performance. One possible solution to pay compression is to have employees follow a step progression based on length of service, assuming performance is satisfactory or better. VI. DETERMINING PAY INCREASES There are several methods for determining pay increases, including performance, seniority, cost-of-living adjustments, across-the-board increases, and lump-sum increases, which can be used separately or in combination. A. Performance-Based Increases – A growing number of employers have shifted to more performance-based increases. 1. Targeting High Performers – This approach focuses on providing the top performing employees with significantly higher pay raises. Key to rewarding exceptional performers is identifying what their accomplishments have been above the normal work expectations. 2. Pay Adjustment Matrix – A pay adjustment matrix, or salary guide chart integrates appraisals with pay changes. Pay adjustments are made in part on individual performance, and in part on a person’s compa-ratio, which is the pay level divided by the mid-point of the pay range. As illustrated in Figure 7.5, lower performing employees receive small to no raises. Also, as employees move up the pay range they must also increase their performance level to obtain the same percentage increase. B. Standardized Pay Adjustments – There are several different methods to provide standardized pay increases to employees. 1. Seniority - Seniority, or time spent in the organization or on a particular job, can be used as the basis for pay increases. Employees with satisfactory performance sometimes receive automatic pay adjustments after being employed a certain length of time. 2. Cost-of-Living Adjustments - Cost-of-living adjustments (COLA) are often tied to changes in the Consumer Price Index (CPI) or some other general economic measure. 3. Across-the-Board Increases – Unfortunately, some employers give across-the-board raises and call them merit raises, which they are not. If all employees get the same increase, it is not seen as based on performance. 4. Lump-Sum Increases - A lump-sum increase (LSI) is a one-time payment of all or part of a yearly pay increase, and does not increase the base pay. VII. EXECUTIVE COMPENSATION Many organizations administer executive compensation differently from compensation for lower-level employees. The idea is that executives should be rewarded for increases in profitability and value. A. Elements of Executive Compensation – Because executives are in higher tax brackets, many executive compensation packages are designed to offer significant tax savings. 1. Executive Salaries and Benefits – vary by type of job, size of organization, industry, and other factors. Executive salaries make up a significant portion of total compensation in non-profits, but significantly less in large corporations. Many executives are covered by regular benefits plans available to nonexecutive employees, including traditional retirement, health insurance, and vacation plans. They may also receive supplemental benefits not available to other employees. Examples may be enhanced health plans, life insurance, financial planning, and deferred compensation. 2. Executive Perquisites (Perks) – Perquisites (perks) are special benefits for executives, and are usually non-cash items. Perks often enhance an executive’s “status,” and they may offer substantial tax savings because some are not taxed as income. 3. Annual Executive Incentives and Bonuses – can be determined using a discretionary system whereby the CEO and the Board of Directors decide bonuses; or they may be tied to specific performance measures. Whatever method is used, executives must understand it; otherwise, the incentive effect will be diminished. 4. Performance Incentives: Long Term vs. Short Term – Executive performance-based incentives try to tie into long-term growth and success of the organization. Short-term rewards may not result in the kind of decisions necessary for the company’s long-term success. The most widely used long-term incentives are stock option plans. However, the numerous corporate scandals involving executives has caused more publicly traded firms to use means such as restricted stock, phantom stock, performance shares, and others. The Sarbanes-Oxley Act enacted numerous provisions that have affected the accounting and financial reporting requirements of executive compensation as well. Also, the Financial Accounting Standards Board (FASB) has adopted rules regarding the expensing of stock options. B. “Reasonableness” of Executive Compensation – The astronomical amounts of some executive compensation packages has fueled debate about whether executive compensation in the U.S. is truly linked to performance. Various questions have been suggested for determining if executive pay is reasonable: Would another company hire this person as an executive? How does the executive’s compensation compare with others in similar companies in the industry? Is the executive’s pay consistent with pay for other employees within the company? What would an investor pay for the level of performance of the executive? 1. Linkage between Executive Compensation and Corporate Performance – A frequent question is whether or not executive compensation is sufficiently linked to organizational performance. Financial measures are often used to measure performance, but a number of firms also incorporate nonfinancial indicators when determining executive bonuses and incentives. One key controversial issue is that some executives seem to get large awards for negative actions such as layoffs or benefit cuts. While unpleasant, cost-cutting measures are sometimes necessary. A sense of reasonableness should be used when awarding large payouts. Figure 7-6 highlights the criticisms and counter-arguments of some common points of contention regarding executive compensation. 2. Executive Compensation and Boards of Directors – In most organizations, the Board of Directors must approve executive compensation packages. The compensation committee is a subgroup of the Board, and generally recommends compensation decisions to the Board of Directors. Increasingly, the independence of these committees has been criticized. One major concern by critics is that the CEO’s pay is set by members of the compensation committee, many of whom are CEOs of other companies. CASE – Compensation Changes at JC Penney Having been in business for over 100 years, JC Penney has experienced highs and lows in organizational performance. In the past decade the firm has faced a dramatically changing retail environment from competitors such as Target, Wal-Mart, the Gap, and others. As a result, JC Penney was increasingly viewed by customers and analysts of the retail industry as lagging in its merchandising strategies. Even the compensation system at JC Penney was viewed as traditional and paternalistic in nature because it emphasized rewarding employees primarily for their length of service. Also, most promotions were made internally, which created a more static organizational culture. The traditional pay structure at the firm contained many pay grades and was based on job evaluations to establish those grades. Its performance review system emphasized employee tenure and effort to a greater degree than performance results. To respond to the competitive environment, the firm’s executives decided that JC Penney had to become more dynamic and able to change more quickly. One of the changes identified was that a new compensation system was needed. The restructured compensation system that was developed and implemented focused heavily on market value, using pay survey data that specifically matched job responsibilities. The greatest change was the development of “career bands.” These career bands grouped jobs together based on survey data and job responsibilities and resulted in fewer grades with wider ranges. The career bands represented a broadbanding approach that was based on benchmark jobs for which market pricing data were available. Jobs for which market data could not be found were analyzed using a job evaluation system. Use of the career bands was designed to identify career paths for employees throughout the company and to better link compensation to all of the jobs. By having career bands, greater flexibility was provided for employees to be rewarded for both current performance and continuing career growth. To support this new compensation system, a revised performance management system was developed. This system used performance goals and measures more closely tied to business strategies and objectives. Important to implementing the new performance management system was managerial training. This training was needed so that the managers could use the new system effectively and to describe to employees the importance of performance and its link to compensation. Implementation of the new compensation system required extensive communication. Newsletters were prepared for all managers explaining the new compensation system. Then departmental and store meetings were held with managers and employees to describe the new system. A number of printed materials and videos discussing the importance of the new compensation plan were prepared and utilized. A final part of communications was to prepare letters for individual employees that informed them about their job band and market pay range.* Questions 1. How do the JC Penney changes reflect a total rewards approach? 2. Discuss why JC Penney’s shift to a more performance-oriented compensation system had to be linked to market pricing. ___ *Based on Donna R. Graebner and Kevin A. Seward, “Bringing It All Inside,” Workspan, August 2004, 30– 35. Suggested Answers to Case Questions 1. How do the JC Penney changes reflect a total rewards approach? JC Penney’s changes reflect a total reward approach because it focuses on linking compensation and performance and talent management. The “career bands” tie into the talent management component of a total reward system. By having career bands, greater flexibility was provided for employees to be rewarded for both current performance and continuing career growth. 2. Discuss why JC Penney’s shift to a more performance-oriented compensation system had to be linked to market pricing. JC Penney’s shift to a more performance-oriented compensation system had to be linked to market pricing because it is facing a dramatically changing retail environment from competitors such as Target, Wal-Mart, the Gap, and others. JC Penney’s had to pay competitive salaries to keep good people. Also, the market pricing matches with the firm’s executive’s decision that JC Penney had to become more dynamic and able to change more quickly. Market pricing and a performance-oriented compensation system matches the new business strategy better than a traditional job evaluation pricing system. Instructor Manual for Management of Human Resources: The Essentials Robert L. Mathis, John Jackson, Sean Valentine 9780324592412, 9781305115248