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This document contains Chapters 10 to 12 CHAPTER 10 COMPENSATION: BASE PAY AND FRINGE BENEFITS Objectives After reading this chapter, you should be able to Understand the traditional model for base pay programs. Describe the basic approaches to job evaluation. Describe the contemporary trends in compensation. Explain the role of government in compensation. Know the various forms of fringe compensation, including government-mandated programs. Define the different types of retirement plans. Understand the complexities of international compensation. CHAPTER 10 – SUMMARY Overview Compensation refers to all forms of financial returns and tangible benefits received by employees in return for work performed Research on “high-performance work characteristics” indicates that characteristics of a firm’s compensation system are strongly related to corporate financial performance increase in pay inequity Compenstaion Trends include Diversity in Strategies Soaring benefits costs Pay inequity Pay used to communicate organizational change Compensation is in a state of transition as organizations experiment with different pay structures Does pay matter? Reward systems influence a company in the following ways: Motivate and direct behavior Attraction and retention of talent At 60-70% of total costs, the cost of compensation can decide success/failure for organizations Does compensation matter to individual workers? Pay is both instrumental and symbolic to workers U.S. workers prefer pay for performance systems Workers are satisfied with pay when there is equity Does compensation matter at the societal level? Higher production leads to higher standard of living Government controls potential abuse associated with pay H. 5 Objectives for Effective compensation: 1. Enables an organization to attract and retain competent workers 2. Motivates employees’ performance, fosters a feeling of equity, and provides direction to their efforts 3. Supports, communicates, and reinforces an organization’s culture, values, and competitive strategy 4. Cost structure reflects the organization’s ability to pay 5. Complies with government regulations i. FLSA, EPA, CRA ii. State and local laws I. Two parts of compensation Cash compensation- direct pay Fringe compensation – legally required & discretionary Cash Compensation: Base Pay Job evaluation provides means to systematically assign pay to jobs Figure 10-3 Traditional Approach to Compensation The Traditional Approach to Compensation What Is Internal Equity? Individuals perceive that their pay is fair relative to others within the organization Job evaluation is used to create internal equity among jobs Job analysis Job description contains the “what,” “how,” and “why” Job specifications identify the KASOCs Rating the job Review job evaluation results by arranging jobs in hierarchical order Job Evaluation Methods Job ranking places jobs in order from most valuable to least valuable Job classification compares jobs with preexisting set of job classes Point factor determines how much of a factor is required for each job Define factors Assign point total to each factor by relative weights Factor scales assign the degree the factor is present on job Point totals are added to arrive at a total value for each job Hay Plan is a popular point factor method Typically conducted within a job family to establish internal equity Job hierarchy is established within each family What Is External Equity? Pay practices that are similar to the practices of your competition Salary Surveys Plan data collection activities Benchmark positions Understand the relevant job market Collect survey information Match job content to survey information Include all elements of compensation Analyze the information Developing the Pay Structure Tie pay levels to the market Pay above the market Pay for performance Establish pay grades & salary ranges Assessing the Traditional Approach to Pay Basic nature of work is changing Shifting from manufacturing to service economy Focus on quality has influenced the way work is structured, performed and supervised Organizations are differentiating themselves from others in the marketplace Questioning employee entitlement mind-set Current Trends in Salary Administration, Figure 10-9 Market Pricing Broad banding Pay for Knowledge, Competencies or Skill Team Pay Plans Government Influence on Compensation Issues Fair Labor Standards Act (FLSA) Minimum wages Employee must be paid highest of state, city or federal minimum wage Tipped employees must meet federal standards for minimum wage Overtime Pay 40 hour work week 1.5 times pay for overtime Fair Pay Rules Child-labor Laws Restriction on age related to when and what work can be performed No “hazardous” work Hours vary by age and time of year Amended in 1963 to include Equal Pay Act Prohibition of pay differnetials based on gender e) Pay differentials are permitted when they are based on seniority, merit, quantity or quality of production, or a factor other than sex Dodd-Frank Wall Street Reform and Consumer Protection Act Applies to publicly traded companies Shareholder nomination of corporate directors Compensation Committees composed of independent directors Increased company disclosure of executive compensation Shareholders get an advisory vote on executive pay “Clawback” provision requires the return of incentive pay based on misstated financial filings Controversy over implementation Equal Pay Act Requires mean and women be paid the same when they hold substantially equal jobs Equal defined in terms of skill, effort, responsibility and working conditions Pay differentials are permitted when they are based on tenure, merit, quantity or quality of production, education, or a reasonable factor other than sex Title VII of CRA may also be used for pay claims The market is a reasonable factor Lilly Ledbetter Fair Pay Act The 180 day filing deadline begins each time a discriminatory paycheck is issued, not when the first paycheck was issued Provides protection for individuals who may have been affected, e.g. family Applies to all protected classes Prevailing wage laws 1. The Davis-Bacon Act 2. Walsh-Healey Act 3. The Service Contract Act Pay Equity or Comparable Worth Policy Pay structure based on internal assessment of job worth, not comparisons to external market Proposed as a means to eliminate gender and racial bias Pay equity studies use point-factor job evaluation Comparison across families to determine equity Male vs. female differences reduced under pay equity policy Paycheck Fairness Act Reintroduced in 2010 Amendment to the EPA Would establish “equal pay for equivalent work” Exemptions similar to EPA Some states have some form of pay equity policy www.pay-equity.org The Wage Gap Statistics indicate women earn 78 cents for every dollar men earn Warren Farrell in “Why Men Earn More,” suggests that women earn less because of the type of job and hours worked i) Farrell disputes the arguments attributing the “wage gap” to discrimination ii) Men and women with Bachelor's Degrees in 26 job categories have comparable salaries Other Compliance Issues 4 HR Audits Compliance Best Practices Strategic HR Function specific Fringe Compensation: Employee Benefits Overview Benefits focus on improving quality of life Attractive to companies because Attract, retain, motivate employees Cost advantages Favorable tax treatment Employees underestimate cost of benefits Benefits packages vary by company size and culture Trend to offer flexible, cafeteria style benefits plans Four Categories of Employee Benefits Legal Required Programs/Government-Mandated Programs Social Security Comprehensive program of retirement, survivor, disability and health benefits Employers and employees share in the cost of funding Medicare program provides health care benefits to citizens 65 and older Legislation needed to meet future obligations Unemployment Insurance Designed to encourage workforce stability Managed jointly by fed and state Tax rates based on pay trends and unemployment rates Workers’ Compensation Insurance Managed solely by states Pay for expenses related to work related illness or injury No-fault system Employers fully responsible for cost Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Temporary extension of employer group medical insurance Extends for up to 18 months Individual pays full cost Family Medical Leave Act of 1993 (FMLA) Eligible workers have 12 months service and 1250 hours 12 weeks unpaid leave per 12 months Return to same or equivalent job Three states have laws requiring paid leave Discretionary Plans: Employee Welfare programs Health Care Plans 80% of employees value their health benefits above all other benefits Patient Protection and Affordable Care Act (PPACA) Goal of Act to 1. Provide access to health care 2. Rein in costs 3. Finance the reform Trend to shift health care costs to workers or drop benefits General Dynamics Land Systems v. Cline. 540 US 581 (2004) “reverse” age discrimination is allowed in distribution of health care benefits Wellness programs save money Additional Government Regulation of Health Care Programs Employee Retirement Income Security Act of 1974 (ERISA) HIPPA iii. Mental Health Parity and Addiction Equity Act (MHPAEA) Life Insurance – one of oldest and most common benefits Discretionary Plans: Retirement Plans Long-term capital accumulation plans 2 types of Major Retirement plans Defined benefit plans, pay a specific sum for the amount of years worked and are figured at the age upon retirement Defined contribution plans, a prescribed amount of money is paid into the employee’s retirement account (e.g. 401K plans) Pension Benefit Guaranty Corporation assuming many pensions, funding deficit of $21.6 billion in 2010 Estimated defined-benefit plans fell $400 billion into red in 2009 U.S. trend is to drop or not adopt defined-benefit programs; many large companies have cut their pensions 401 (k) plans are increasing Government Role in Pension Plans PBGC ERISA Civil Rights Act ADEA Time off Programs Trend PTO banks Vacations Holidays Sick leave Personal days Days to perform civic duties (e.g., jury duty) Long-term disability 5. Employee Services Education programs Employee assistance programs & mental health care Employee recognition programs Child care C. Communicating the Benefit Program 1. Focus on improving information provided to employees 2. Explain coverage and value 3. Benefits Statements International Compensation Compensation in Offshore Operations Choice of centralized or decentralized approach Pay for performance increasing Similar process to setting pay in the US Consider regional differences and legislative issues Compensation for Offshore Managers and Key Professionals Global Management skills Going Rate Approach Balance Sheet Approach New Approach creates and international pay scale Base Salary Foreign Service Premiums Hardship premiums Danger pay Allowances Consider impact on purchasing power Housing Educational Relocation Spouse assistance Home leave allowances Expatriate Benefits Variability from country to country Question to retain parent country benefits, or enroll in host-country benefits Tax issues Resolve issue of double taxation Tax equalization approach Tax protection approach Summary Individuals are concerned with being paid fairly Organizations are concerned with the importance of compensation in terms of its effects on employee attitudes, behaviors, performance and other criteria (turnover, ability to attract job candidates) Compensation plans should be in line with the organization’s philosophy and support strategic goals Employee benefit plans must suit individual preferences in an increasingly diverse workforce The government regulation ensures fairness Compensation packages should be assessed based on ability to attract, retain and motivate the workforce while creating and sustaining competitive advantage CHAPTER 10 - IMPORTANT TERMS Above Market – setting levels of compensation higher than that paid by the average result from a salary survey Benchmarking- using well-known and strategically important jobs (e.g. many incumbents) with available external market data Benchmark jobs - Key jobs that are well known, with many incumbents that are strategically important and would be expected to be found in the general market place used as points of information in a wage and salary survey Benefits statements – periodic report customized for each employee identifying their coverage and providing specific cost information on each program Broad banding – consolidating existing pay grades into fewer, wider career bands Cash compensation – cash received as in wages and salary and/or contingent upon performance Cafeteria-Style Benefit Plans - allowing an employee to select a customized benefit package from a list of available options Comparable worth or pay equity- pay structure based on internal assessment (job evaluation) of job worth; focus on internal equity Competitive or Externally Equitable – Pay practices similar to other organizations competing for the same talent Compensation – refers to all forms of financial returns and tangible benefits that employees receive as part of an employment relationship Defined-benefit pension plans - Guarantee a specific payment based on a percentage of pre-retirement pay Defined-contribution pension plans - Employer provides specific amount (usually percent of base pay) to be deposited in employee’s account. Employee “owns” the vested portion of the account. Amount paid is the amount in the account (no guaranteed amount). Employee Assistance Programs (EAPs) - Typically provide counseling, diagnosis, and treatment for substance abuse, family and marital problems, depression, and financial and other personal difficulties Equity theory – pay satisfaction is a function of the comparison of an individual’s input to outcome ratio with their perceptions about the same ratio of referent others External equity - comparison of pay with other organizations Factor comparison method – job ratings on a number of defined compensable factors such as mental requirements, skills requirements, physical requirements, responsibilities, and working conditions Federally mandated benefits - unemployment compensation, social security, and workers' compensation Foreign service premium – monetary payments meant to encourage employees to accept expatriate assignments Fringe compensation - employee benefits that are legally required and discretionary programs HMOs - Organizations of health-care professionals who provide services on a prepaid basis Hardship premium- used to compensate expatriates for exceptionally difficult living and working conditions Hay Plan – most popular point-factor plan (see Figure 10-6, page 363) Individual equity - involves the pay of an individual employee relative to that of other employees performing the same or similar work Internal equity - employees evaluate pay for their job relative to the pay for other jobs within their company Job classification - establishes a specific number of levels, or grades, within which all jobs must be placed based on broad descriptions designed in advance to reflect the characteristics of the jobs at each level or grade Job evaluation - process of determining the relative worth of a job within the organization Job family- a group of jobs having the same basic nature of work (e.g., clerk, teacher, engineer) but requiring different levels of skill, effort, responsibility or working conditions (e.g., entry versus senior level) Job ranking – placing jobs in order from most valuable to least valuable using a single factor such as job complexity or importance of the job to the firm’s competitive advantage Labor market - hypothetical place in which all sellers of labor with certain characteristics meet with the buyers of labor to make deals Long-term capital accumulation plan- a program that seeks to systematically set aside money during one’s working lifetime, primarily for use during one’s retirement Market pricing – finding wage information in marketplace to set pay Minimum wage – the bottom limit on what an employer may pay PPOs - offer reduced rates for health care based on a contractual arrangement with the organization Pay equity or comparable worth - pay structure based on internal assessment (job evaluation) of job worth Pay for knowledge- compensation based on education based on the assumption that professional competence increases with training Pension Guaranty Benefit Corporation (PBBC) – Federal agency that assumes financial responsibility for pension obligations of bankrupt companies Point-factor plans - most frequently used method of job evaluation that uses a variety of job-related factors to determine relative worth of jobs, skill, effort, responsibility and working conditions are the most common factors (e.g., Hay Method) Policy capturing – deriving the predictive dollar value for the factors of the “point-factor” system in order to “capture” the historical policy linking job factors to the actual pay of employees Prevailing Wage Laws - Davis-Bacon, Walsh-Healey, and Services Contract Acts require employers to meet prevailing wage levels when doing business with the federal government Relevant job market – matched to where an organization can locate the best pool of job candidates, and/or the most cost-effective candidates Salary Survey – means to establish external equity by collecting and analyzing compensation data from the marketplace Skill based pay – incremental increases to compensation are based on an employee’s demonstrated knowledge, or mastery of specific additional skills Social Security- eligible employees covered by federal program of retirement, survivor, disability and health benefits (Medicare) Vesting - the retention by an employee of all or part of his or her pension rights regardless of whether or not he or she changes employers, retires early, etc. Wage Gap - according to the Bureau of Labor Statistics from 2004, women earn 78.5 cents for every dollar earned by a man Wage surveys - survey of wages paid in relevant labor market for benchmark jobs Wellness programs - includes such activities as weight control and exercise activities and antismoking assistance CHAPTER 10 - LEGISLATION & COURT CASES Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)- provides current and former employees the opportunity to pay for temporary extension of group health benefits after leaving a company Dodd-Frank Act – applies to publicly traded companies and gives shareholders a “say” related to executive compensation in addition to implementing “clawbacks”, requiring that executive return incentive compensation based on misstated financial filings Equal Pay Act of 1963 (EPA) –requires that men and women be given equal pay for equal work in the same establishment. The jobs need not be identical, but they must be substantially equal based on job content, not job titles Employee Retirement Income Security Act (ERISA) - 1974 federal act that regulates private retirement plans intended to help employees get the benefits that had been promised over their working lifetimes Family Medical Leave Act of 1993 (FMLA)- Federal law granting eligible workers up to 12 weeks unpaid leave for specified emergencies Fair Labor Standards Act (FLSA) – enacted in 1938, major provisions of act cover overtime pay requirements, minimum wage, and child labor General Dynamics Land Systems v. Cline - Supreme Court ruled that Age Discrimination in Employment Act does not prohibit an employer from practicing “reverse age discrimination” where older workers are favored over younger workers who are over 39 Health Insurance Portability and Accountability Act (HIPAA) – applies to all employers offering group health plans, significantly reduces an employer’s ability to deny coverage, or charge higher premiums based on an individual’s pre-existing conditions, it also requires the patient’s written consent prior to the release of health care information Lilly Ledbetter Fair Pay Act- 2009 act stated that the 180 day deadline for filing charges of pay discrimination begins each time an employee is issued a discriminatory paycheck Medical Health parity and Addiction Equity Act (MHPAEA) -2009 law requires that any organization with 50 or more employees with a group health plan must treat mental illness in the same way that standard medical and surgical events are covered Prevailing wage laws – includes Davis-Bacon Act of 1931, the Walsh –Healy Act of 1936, and the Services Contract Act of 1965 cover federal contracts for construction, goods, and services respectively, designed to ensure that workers employed on government contract receive fair wages relative to other local workers Pregnancy Discrimination Act of 1978 - Requires that pregnancy and pregnancy-related disabilities be treated the same as other disabilities Retirement Equity Act of 1984 - Mandates that all employees age 21 and older must be included in the plan and that employees may have breaks in service of up to 5 years before they lose credit for previous experience. Years for "vesting' must be counted starting at age 18. CHAPTER 11 Rewarding Performance Objectives: After reading this chapter, you should be able to Understand the determinants of effective reward systems. Identify the critical variables related to the selection of the most appropriate reward systems. Describe the evidence on the effectiveness of different types of reward systems. Know the relative advantages and disadvantages of the various approaches to reward effective performance. CHAPTER 11 – CHAPTER SUMMARY Overview Critical to obtain ROI on employee compensation Strong trend to implement pay for performance systems Research indicates PFP systems tied to strategic goals are HPWC PFP systems put some portion of employee pay at risk Organizations must understand potential difficulties and limitations of PFP systems Cheating is a primordial economic act Option backdating 600% rise in CEO pay largely due to PFP components of pay packages PFP plans can be a key to success Does PFP Work? What is being rewarded Short term measures must correlate with long-term measures Individual and situational contingencies need to be considered PFP can be successful when: Tailored to particular work situations Linked to long term strategic objectives What Are the Determinants of Effective PFP Systems? Figure 11-2: Determinants of Effective PFP Systems Expectancy/instrumentality theory: Probability of effort leading to reward Probability of receiving the reward Value of the outcome Unions becoming more receptive to PFP systems Consider impact on team culture Increased pay should be tied to those aspects that are critical to the organization The PFP systems should be compatible with the strategic goals Employee must be capable of controlling & increasing output/quality Reward criteria are critical Worker involvement in PFP design is important What Are the Main Problems with PFP Programs? Figure 11-4 Poor perceived connection between performance and pay Expensive to develop and maintain Lack of objective, countable results Employees perceive that performance is not accurately measured. Union resistance The performance rewarded is not related to the firm's long term objectives. Supervisors do not take it seriously What Are the Legal Implications of PFP? Subject to same redress as non-PFP compensation Title VII and EPA litigation Situational constraints can foster sense of inequity “Disparate Impact” theory can be used How Do You Select a PFP System? Who should be included in a PFP system? Systems should be developed with specific groups and conditions in mind Most companies have different systems for different jobs or departments PFP system should involve as many employees as possible American’s prefer individual PFP systems How Will Performance Be Measured? Criteria selected must be compatible with short and long-term strategic objectives Performance should be measured to maximize reliability & validity What are the rewards in an incentive system? Cash, percentage increase in base pay, and non-cash prizes most common Stock ownership, stock options 2005 requirement to expense options reduced their usage Problems with options-backdating, re-pricing A Discrepancy between Research and Practice Trend to use bonus-based PFP not permanently tied to base pay Performance-based pay should not be tied to base pay-use bonus-based system Long-term costs are more easily controlled and linked to current performance Should you use individual, group, or company-level PFP? Measure and reward individual performance if possible Cooperation and team work are encouraged by a group or unit based system When should team-based PFP be used? HRM systems focus on the results of the team High achievers may go elsewhere to have individual accomplishments recognized The pool of rewards is not fixed “Free-riders” increase with group size Individual PFP Plans: Merit Pay and Incentive Systems What are Merit Pay Plans? Merit pay plans call for distribution of pay based on appraisal of worker’s performance The most common PFP system Employees want link between performance and pay Fundamental problem is accurately measuring performance Raters can be trained to be more accurate Can lead to high turnover among best performers Avoid forced-distribution What Is Incentive Pay? Based on units produced & provides closest link between individual effort and pay Piece-rate system Standards set for level of work done in specific amount of time Set a fair rate of pay using internal or external measures Divide the base wage by the standard International Piece-Rate Pay: Complies with minimum wage requirements of respective countries Controversy due to low level of these rates Differential piece rate addresses production variability Pay only for quality pieces Can be combined with bonus pay Effective when work is repetitive, controllable and no need for cooperation Need to involve employees Standard hourly rate The production standard is based in time units Rate may vary with the output (Halsey plan) What Are Sales Incentive Plans? Sales incentive plans can increase sales over time Important to consider all performance dimensions Commission Plans pay directly on sales data Draw-plus commission sales person can borrow against commission account Commissions can be paid in rewards other than cash e.g. stock Commission plus salary Sales bonuses What Are Bonuses? One-time payments not permanently tied to salary Tend to be more effective than base-pay adjustments May be individual or group performance What Are Group Incentive Plans? Group plans are best when cooperation and teamwork are essential Require special consideration Potential for free-rider effect Strong group norms can inhibit output Need to meet FLSA requirements What Is Profit Sharing? Based on a percentage of company profits Employee payments typically linked to a ratio related to their pay Way to align goals of management and employees More likely to exert maximum effort and share information Group size impacts employee perception of fairness Perception of connection between employee effort and profitability key to success What Is Gain Sharing? Worker involvement, cooperation and trust are critical Process of sharing financial benefits, earned from reducing cost or increasing productivity, with workers Usually paid out monthly What Are the Four Approaches to Gain Sharing? Scanlon plan Most Common plan Rewards for suggestions Screening committees review suggestions Incentive for labor cost savings Rucker plan Calculation includes value of supplies, materials, services and labor Incentive to save on all inputs More difficult plan to understand and explain IMPROSHARE plan Specifies standard number of hours to produce a base production level Rewards all employees equally Gains can be seen over 3 year period before plateau Easy to administer and understand Winsharing Combines gain sharing with profit sharing Takes market demand into consideration Group performance measures used independent of profit measures Rewards are split evenly between workers and company Bottom Line on Gain Sharing? Benefits include increased productivity and quality Cooperation between unions & management, employee participation & realistic expectations essential Advantages of IMPROSHARE plan over Scanlon and Rucker plans Easier to comprehend, more control over production, and not require management to reveal sensitive information Advantages of Scanlon and Rucker plans over IMPROSHARE plan Workers share in financial risks, and Scanlon allows more integration with problem-solving process What Are Employee Stock Option Plans? Employee Stock Ownership Plans (ESOPs) Retirement plan in which the company contributes its stock to the plan for the benefit of the company’s employees, Employees never buy or hold the stock directly; this is different from employee stock option plans Employee stock Option plan Employee has the right to buy a specific number of the company’s shares at a fixed price within a certain period of time Works best when combined with employee involvement and problem solving Implications: May be perceived as more equitable than profit or gain sharing May generate less motivation because value connected to market conditions If value less than perceived performance then can result in feelings of inequity Managerial and Executive Incentive Pay Executive incentives are supposedly linked to net income, return on investment, or total dividends paid Total compensation packages rose 28% in 2010 Increase was due mainly to increases in incentive vs. base pay Tying executive compensation to earnings has coincided with dramatic increase in earnings restatements Plans continue to favor short vs. long term results Are There Documented Negative Consequence to Widening Pay Dispersion? Little research has shown a relationship between this gap and subsequent performance decrements or high turnover Maybe more acute if it occurs in high tech firms Tends to diminish communication, increase status gaps, and foster aggressive competition for the top post Should You Use Short- or Long-Term Measures of Performance? Lower-level managers typically have incentives based on short-term measures Executives have both short- and long-term performance incentives Rewards are usually in the form of lump sum bonuses Stock option reward plans Enable execs to purchase stocks over a specified time period at a fixed price Based on the notion that executives would profit when shareholders profited Provided an incentive to adjust performance goals and the price and timing of grants Not proven effective at incenting outstanding performance Stock appreciation rights (SARs) enable execs to call the option and receive the difference between the fixed and market prices of the stock in cash Restricted stock plans give shares as a bonus with some restrictions (e.g., remaining with the firm for a period of time) Performance share plans award units based on long- and short-term measures Units are later translated into stock awards Stock plans can be paid into retirement accounts Clawback provisions What about the Corporate Board Room? Rarely linked to corporate performance Boards provide very little corporate governance and oversight Research indicates that higher corporate performance results if the board of directors is paid strictly with stock Is increased shareholder power the answer How Do Companies Keep Entrepreneurs and Promote Intrapreneurs? Fund employee ventures by using innovative compensation schemes Special award programs for major accomplishments What Are the Managerial Implications for PFP programs? A well-designed PFP system should lead to: Lower costs Higher profits Higher motivation (of individuals or groups) Involve employees for better results A mix of plans often has the best results Three strategic positions for more effective PFP systems (Figure 11-7) Pay the person Translate business strategy into measure that can be used for reward system Individualize the reward system Sound measurement is key to successful plans All important work dimensions should be rewarded Measurement ambiguity results in conflict Close monitoring is required Summary The PFP system must be compatible with long-term success Plans must support the company’s values and culture Openness and trust are critical Money can be a motivator Compensation should reflect a mix of programs that support individual, group and organizational level performance CHAPTER 11 - IMPORTANT TERMS Backdating - Adjusting the dates when stock options are granted. If the stock price goes up, “backdating” can increase compensation. It can also be illegal Behavioral Encouragement Plan – payment for specific accomplishments such as safety compliance or attendance Commission plans – payments to sales staff based on a measurement of sales Differential rate - Two outcomes related to pay: one for performing below standard and other for meeting or exceeding the standard (Taylor). Draw-plus Commission system – intended to protect sales staff from highly variable commission plans, works as a loan on future commissions Employee Stock Ownership Plans (ESOPs) - Sell stock to workers to give them financial stake in company. Allocations made to employee's account based on relative base pay. Expectancy/Instrumentality Theory – probability estimates by employees concerning their effort and their performance and whether their performance will yield the desired outcomes. Gain sharing - Group incentive system based on improved performance, not profit, with rewards given out frequently rather than annually. Plans typically involve a form of employee suggestion system. Halsey Plan – divided the savings of performing a task in less than the standard time between the workers and the employer. Improshare - Uses standard hours rather than labor costs to determine incentive pay. Engineering studies or past performance data are used to specify the standard number of hours required to produce a base production level. Savings in hours result in reward allocation to workers. Incentive plans - Rely on countable results as basis for setting PFP rate. Incentive pay usually based on units produced Merit pay plan – addition to an employee’s base pay that earned thru employee performance as measured through performance appraisal Performance Appraisal Discomfort Scale (PADS) – a means to measure the extent to which a person feels uncomfortable giving negative feedback Performance share plans - award units, that are later translated into stock awards, based on short- and long-term measures Piece-rate system - Worker is paid per unit of production Production variability – can disrupt the flow of products to customers if employees forgo extra effort for piece rate pay if they are too tired, ill, etc. but work hard on days when feeling fine or need extra money. Profit sharing - Motivates cost savings by allowing workers to share in benefits of increased profits. Restricted stock plans - Bonus shares have restrictions, e.g., executive may not leave firm or sell stock for specified time. Rucker Plan - Uses economic productivity index called labor contribution to value added. The plan defines productivity ratio as the value added to production by labor divided by labor cost. Scanlon Plan - Uses a formula to determine the employee's share of cost savings (W+S/SVOP). High level of participation through labor-management committees. Standard hourly rate - Production standard used for incentive pay is expressed in time units. Stock appreciation rights - Does not involve buying stock. Having been awarded rights to a stock at a fixed price for a specified period, the executive can call the option and receive the difference between the fixed and market prices in cash. Stock Options – granting the employee the right to purchase stock at a specified price within a designated period Winsharing – group performance reward that is split evenly between workers and the company based on financial performance in excess of goals CHAPTER 12 MANAGING THE EMPLOYMENT RELATIONSHIP Objectives. After reading this chapter, you should be able to Explain the concept of organizational justice and how it relates to all aspects of relationship building with employees. Understand how actions taken at organizational entry help to build the employment relationship. Know the major laws and legal doctrines governing the employment relationship. Show familiarity with the complexities of employee handbooks, current issues, and ways to avoid lawsuits. Understand policies and procedures associated with discipline and grievances. Explain the various ways that an employee can exit an organization and the measures organizations can take to make this parting of ways a more positive experience for all involved. CHAPTER 12 - SUMMARY Overview There are internal and external forces that form an employment relationship Organizational entry and exit are the beginning and ending of the employment relationship Satisfaction, perceived engagement and trust in the firm, and organizational commitment can lead to increased repeat business, customer satisfaction, and financial performance A well managed employment relationship can be a competitive advantage Organizational Justice Justice is perception of fairness in receiving things in balance with contributions Distributive justice is perception of equity in allocation of rewards and punishments Procedural justice is perception of fair rules, laws or policies that allocate the rewards and punishments Interpersonal justice is associated with the treatment an employee receives from a supervisor or manager as decisions are being made Informational justice is the adequacy of the explanations that were provided by supervisors or managers Increased fairness believed to “trickle-down” into lower turnover and increased customer service orientation Perception of fair treatment has significant effect on worker attitudes (e.g. job satisfaction) Ethics Programs 1. Formalized program designed to ensure honest, fair, and responsible actions on the part of employees a) Respect the customs/rituals of others b) Think of yourself and organization as part of larger society c) Evaluate situations objectively and evaluate the consequences Consider the welfare of others Benefits include reduced employee misconduct and protection against lawsuits Programs with the highest likelihood of reporting were those that included a written statement, training, advice lines, and reporting systems Managerial support is an important component Organizational Entry Employment Status Employee - Right of control over work belongs to supervisor Contractor – Right of control over work belongs to self Misclassification can result in large fines Flexible Work Arrangements Telecommuting Flextime Permanent part-time work Job sharing Compressed workweeks Realistic Job Previews Provide candidates with balanced information about a job prior to hire Research shows RJP can reduce turnover Lowers expectations to realistic expectations Helps employee create coping mechanisms for stressful aspects of the job Conveys organizational honesty Allows candidates to voluntarily withdraw from process Organization may have to recruit a large number of job candidates Socialization and Orientation Socialization is process of gaining appreciation of values, abilities, behaviors, and knowledge of organization a) Explicitly in policies and procedures b) Implicitly in cultural environment c) Happens over time Orientation is formalized process of employee socialization a) Institutional orientation - each member receives i) Same information ii) In the same sequence iii) Fixed amount of information b) Individualized socialization is tailored 3. Larger organizations tend to have more formal orientation 4. Formalized orientation tends to be more successful 5. Informal socialization may be used to compliment what is learned in formal training 6. Orientation can begin once an offer has been made 7. Be mindful not to overwhelm new employees with information and allow for two-way communication The Ongoing Relationship Employee relationship is with an entity, the company, not a person External Forces: Law Employment-at-Will: right to terminate with or without cause, absent a contract Major exceptions - labor and anti-discrimination statutes Other exceptions-interpretation/adoption differs by state Public Policy-as defined by a statute, regulation or other tangible foundation Implied Contracts Tort theories- causing “emotional distress” Recommendation: employee handbooks should include stipulation that employer is an “employment-at-will” organization Whistleblowing Whistleblowing is reporting wrongdoing of the employer Can be internal or external 19 states have protection for private employees Statutes protect whistleblowers from retaliation Every state except Alabama has a whistleblower policy The Dodd-Frank Act has whistle-blower provisions Organizations should take measures to promote internal reporting Covenant of non-disclosure protects employer’s information Not protected by whistleblowing Employees have a duty to protect confidential information Protection of Employer’s Confidential Business Information Non-compete agreements restrict acceptance of employment with a competitor for a specific period of time Garden Leave Agreement provides compensation during the restricted time period Computer Fraud and Abuse Act Privacy Personal information covered Performance appraisals Disciplinary actions Formal complaints. Medical information Personal information not covered Legitimate public concern HIPAA, 2005 Legal restriction on the use of employee medical information PATRIOT Act of 2001 Records relevant to terrorism investigation are not private Allows government officials access to records Allows for surveillance in the workplace The law is being tested in the courts Monitoring Employee Communication Devices Unauthorized use of computers and internet Balance of respect for employees and protection from culpability Develop a “No Abuse of Privilege Clause” Written policy notifying employees of monitoring removes the expectation of privacy Fair Credit Reporting Act (FCRA) Offers applicant a level of protection of privacy Applies to internal investigations Company must provide information that leads to adverse employment action Off –duty behavior can be regulated Uniformed Services Employment and Reemployment Rights Act (USERRA) Applies to all employers regardless of size Right to return to work after service, Receive benefits while on duty similar to LOA No pay requirement Worker Adjustment and Retraining Notification Act (WARN) Internal Forces Employee Surveys Means to gather information from employees Reveals an organization’s strengths and weaknesses Used to facilitate planned change and team building Valuable to compare data to external standard and to analyze internal trends from year to year Effective as part of a comprehensive assessment and intervention strategy Satisfaction with supervisor most related to job performance Worker engagement defined as worker’s involvement, satisfaction and enthusiasm for work is related to revenue and sales Wal-Mart uses surveys to find stores at risk for unionizing Grass Roots survey program –“Unresolved People Index” Employee Handbooks An organization’s published policies and procedures Specifies guidelines for the employee/organization relationship Evaluate regularly for possible revisions Sexual Harassment Policies Technology Usage Policies Employee Handbooks as Implied Contracts Wrongful Termination Violations of Policy/Discipline Punishment is provision of negative consequence of undesirable behavior Discipline intention to direct toward positive behavior Progressive discipline is suited to the severity of the offence Includes potential of termination Potential exceptions based on law e.g. ADA Grievances A formal written complaint about the way the employment relationship is being carried out Can include peer review Can provide for formal mediation and/or arbitration Document understanding of policy Organizational Exit Termination Resignation/Voluntary Turnover High turnover can result in poor financial performance Turnover results in costs to the organization Organizations should understand the means to reduce involuntary turnover Exit Interviews can help assessment of reasons for turnover Downsizing and Layoffs Downsizing is the overall organization strategy Layoff is tactical elimination of redundant skills The Causes and Effects of Downsizing and Layoffs Productivity gains short lived Survivors consequences Organizational Measures Action and policy aimed at maintaining goodwill Outplacement assistance Alternatives to Downsizing Attrition Re-deployment Hiring freeze Early retirement packages Cut travel and entertainment Retirement Influenced by personal characteristics and economic concerns Organizational Actions Flexible plans to phase into retirement Part-time work Longer vacations Sabbaticals Altering content of job Demotion Second career assistance Use as volunteers or ambassadors Spouse participation is encouraged Summary All HR activities are crucial to maintaining the relationship The relationship is established with new hires, maintained with employees and must be managed as an employee exits the organization Organizational concerns for productivity need to be balance with employee need for justice Keeping the relationship in balance leads to gains in productivity and efficiency CHAPTER 12 - IMPORTANT TERMS Arbitration – grievance process in non-union organizations where disputes are settled by external arbitrators and the decisions are legally binding Compressed workweek – allows employees to work fewer days during the week with longer hours worked per day Covenant of non-disclosure - is a formal policy where employees have a duty to protect confidential information Defamation – an exception under employment at will doctrine stating that an employer cannot publish an untrue statement about an employee to a third party Discipline - points the way to more positive and productive behavior rather than to penalize the person for his or her mistakes Distributive justice - deals with perceptions of equity in the allocation of rewards or penalties given by the organization Downsizing - the overall organizational strategy to which layoff may contribute Employee Handbook – an organization’s published policies and procedures Employment-at-Will - common law standard that states that a private institution has the right to terminate its employees, with or without just cause, in the absence of a written contract Engagement – refers to a worker’s involvement, satisfaction and enthusiasm for work Ethics programs - designed primarily to ensure honest, fair, and responsible actions on the part of the employee Exit Interview – means to access the reasons why an employee voluntarily leaves an organization Flextime - means an employee can choose his or her work schedule within some limits Grievance - a formal, written complaint about the way in which the employment relationship is being carried out Hiring freeze – means to decrease the size of the workforce by limiting the inflow of employees Implied contract – can be created by an employer’s conduct and need not be specifically stated or written Independent contractor – self employed individuals who work for multiple customers and clients on a project or fee basis, distinction between employee and contractor should focus on the worker’s “right to control” the manner and means of doing the work Individualized socialization - tailored to each individual employee Informational justice – the adequacy of the explanations that were provided by a supervisor or manager Institutionalized socialization - formal; that is each member receives the san, sequential, fixed information upon organization entry Interpersonal justice – associated with the treatment an employee receives from a supervisor or manager as decision are being made Job sharing - refers to a situation where two people divide the responsibilities for a regular, full-time job Justice - or fairness is thought to exist when people receive those things they believe they deserve to receive based upon their contributions. Layoff - refers to the tactical, physical action of eliminating redundant skills in the organization. Mediation – means to settle employee/employer disputes through review by an external, neutral third party Non-compete agreements - contractual arrangements with employees that restrict their acceptance of employment with an industry competitor upon voluntarily leaving the current organization Organizational Exit - the dissolution of the employment relationship. Organizational Justice – an employee’s perception of and reaction to fairness of treatment and the exchange of rights and responsibilities between employee and employer Orientation- a term used for the organizationally sponsored, formalized activities associated with an employee’s socialization into the organization. Outplacement – activities directed at assisting discharged employees find new jobs, helping employees through a downsizing experience, minimizing legal risks for the employer, and preserving morale of “survivors” Procedural justice - a perception of fair rules, laws, or policies that allocate valued rewards and punishments. Progressive discipline – the organization’s response when an employee continues to violate policy and discipline becomes more and more severe up to and including termination Punishment - the provision of a negative consequence following undesirable behavior Realistic Job Previews (RJP) - present relevant, balanced, and unbiased information about the organization, the job, and the conditions under which the job candidate will work. Resignation - when an employee voluntarily decides to leave the organization Socialization - the process by which an individual comes to appreciate the values, abilities, expected behaviors, and social knowledge essential for assuming an organizational role and for participating as an organization member. Telecommuting - enables employees to work at home using computers, video displays, and phones to transmit letter and completed work back to the office Termination – when an employee exits the organization, originated by the employer typically due to misconduct or violation of company policy and the resulting progressive discipline Whistleblowing - reporting misconduct to persons who have the power to take action. Wrongful discharge – when an employer unfairly discharges an employee legal doctrine allows the employee to file charges against the employer CHAPTER 12 - LEGISLATION Computer Fraud and Abuse Act (CFAA) – bars individuals from accessing a computer without authorization or beyond their access authority Fair Credit Reporting Act (FCRA) - amended in 2005, a federal law that regulates how such agencies provide information about consumers Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (PATRIOT) Act of 2001 - allows government officials access to business records and transactions Uniform Trade Secret Act – prohibits acquisition, reliance, or use of trade secrets Uniformed Services Employment and Reemployment Rights Act (USERRA) - establishes the rights of reservists and the National Guard to return to work at the end of their service Worker Adjustment and Retraining Notification Act (WARN) - enacted in 1989, requires organization of employers with more than 100 full time employees to give affected employees 60 days written notice when a plant will close or when mass layoffs are expected that will last six months or more. Instructor Manual for Human Resource Management John H. Bernardin, Joyce E. A. Russell 9780078029165, 9780071326186
