Chapter 11 Pay-For-Performance Plans REVIEW QUESTIONS 1. How is an earnings-at-risk plan different from an ordinary gain-sharing or profit-sharing plan? How might earnings-at-risk plans affect attraction and retention of employees? Earnings at risk require a “buy-in” by employees in the form of returned based pay or foregone increases. When performance objectives are met, the payout is greater than would occur under a traditional gain-sharing plan. For example, Saturn pay workers receive a base way 7% below market. That 7% is the buy in. When performance objectives are met, workers get 7% to compensate for being below market base wages, 7% for a standard gain-sharing payout, and another 7% to compensate for taking the risk (as an example). Employees who have an aversion to risk, or who need to have a stable wage across time for whatever family reasons will shy away from such employment or seek new employment without such variability. 2. When might you choose to use a group incentive plan rather than an individual plan? If it is very clear how an individual leads to higher performance for the organization, and the person works on his own, then an individual plan would be acceptable. Given that most jobs are interdependent, it is not often easy to determine whose effort is responsible for higher performance. In these circumstances, the best plan to use is a group incentive plan. 3. For each of the special groups discussed in this chapter, explain how the issue of equity is especially important. Who are the comparison groups to which special group members might compare themselves to determine if compensation is fair? Special groups tend to have much more frequent and sustained contacts with employees outside their firm. The nature of their jobs demands this, for example, professional employees attend professional conventions as a major source of current information about changes in the field. Sales people, in calling on clients, interact regularly with competitors. Contingent workers move more frequently among firms and have more information about wages in different settings. The very fact of this exposure highlights the level of external wages and makes them that much more salient. EXPERIENTIAL EXERCISES 1. As VP of HR at Senior Sam’s Bakery (a regional baker of wraps and pitas), you are experiencing turnover problems with the employees who package the products after coming from the bakery. Plant Manager Gail Foy has asked you to fix the problem. While your primary emphasis might be on having a competitive base pay, you need to decide if there is anything you can do in the incentive department. Before you can make this decision, what information would you like about base pay and incentives at major competitors, and about the reasons for the turnover? Most incentive plans focus on short term results and, therefore have little positive impact on retention. Long term incentive plans, however, are sometimes designed specifically to cut turnover of top executives. Any incentive plan that pays off relative high percentages relative to base salary, for performance on objectives set into the future three or more years, is a candidate here. Falling in this category would be long-term stock options with terms beyond ten years and vesting beyond three years. Career grants also would help to retain employees, with final payout of stock grants not occurring until retirement. 2. Your boss had lunch yesterday with a CEO in the same town who just implemented a gain-sharing plan. You guessed it….he wants to see if it would work in your company. What conditions would you like to see exist before you would be comfortable making a positive recommendation? An ideal environment would include an employee base that trusted management, probably non-union. It would help to have good performance measures that tap important strategic directions the company is headed. These measures should have accurate historical data to gauge stability and to identify uncontrollable events that influence performance. If the performance measures are easy to understand and communicate, so much the better. 3. You own Higgins Tool Coating Company, a high-tech firm specializing in coating of cutting tools (e.g., drill bits, cutting blades) that provide longer life before resharpening methods and new applications of this coating in different industries. If you wanted to create a work environment where employees offered more new product suggestions and suggested new industries where these suggestions might be applied, what type of compensation plan might you recommend? What are some of the problems you need to be aware of? The compensation plan recommended is derived from management setting the objectives that would be fair and consistent with employee needs. This type of compensation should be based on employee suggestions that would meet the objectives set forth by management. To encourage this type of organization culture, management would require employee suggestions to induce motivation and correlate it to rewards. This would entail an incentive system based on suggested new product ideas, services, and/or any other means of developing a competitive edge. An incentive plan such as the Scanlon Plan and the Rucker Plan could be developed as a result of any new idea or savings created. A percentage of the savings would be returned to the employees. Another incentive would be an annual bonus given to employees. Finally, employees could receive a deferred profit sharing based on the profits as a result of their new product suggestions and/or cost saving applications. Some of the problems management must be aware of are the incentives created fair and consistent to meet employee needs. There must be a cooperative spirit where employees will commit to an incentive program that will induce their participation. Acceptance theory is important for employees to be a part of new product ideas and development. CASE: Allocating Merit Increases Summary of the Case At Lighthouse University, there is $14 220 to allocate for merit increases. Table 1 summarizes the performance reviews for five faculty members. The students should determine which faculty members should receive which portion of the total. Remember that merit pay is added directly to base pay. Since there are no questions for this case, the instructor should work through various alternatives with the students. Chapter 12 The Role of Government and Unions in Compensation REVIEW QUESTIONS 1. Consider compensation practices such as skill/competency-based pay, broadbanding, market pricing, and pay-for-performance plans. What are some of the issues related to pay equity that arise when using these practices? How can these issues be resolved? Many of these practices may make it harder to document any discrimination because the definitions are vague. For example, competencies are less specific than job duties in a job description. Where tasks are routine, pay differences are difficult to justify on a work-related basis. But fewer and fewer routine tasks exist. 2. Could the pay objective of regulatory compliance ever conflict with other pay objectives such as consistency, competitiveness, or employee perceptions of fairness? If so, how would you deal with such situations. Regulatory compliance may conflict with controlled labour costs if legislation requires paying higher wages. It may affect motivation if present employees interpret the required employer behaviour as favouritism, for example, too-rapid promotion or favoured hiring of legally protected groups. Different employees may have differing opinions of a system’s equity. For example, females may believe specific practices discriminate against them on the basis of gender and are therefore illegal. Protected employees may have differing interpretations of legislative requirement and may defend specific practices that others find objectionable. If there is a conflict between regulatory compliance and other objectives, an employer may seek to minimize such conflict by seeking clarification of interpretation of regulations and attempting to change may influence legislation. However, while interpretation of legislation may vary, compliance is mandatory. 3. What factors help account for the male-female wage gap? The biggest factor is differentials in occupations. Unfortunately, even when women choose similar occupations to males, the pay gap does appear. 4. Most union contracts do not include provisions for merit pay. Given what you have learned here and in Chapter 10, explain why unions oppose merit pay. Merit pay is traditionally based on individual performance. Unions prefer administrative rules that apply to the entire union membership equally. Further, unions are very distrustful of many performance measures used to decide whether merit increases will be given. Unless the measure is objective, i.e., some easily calculated quantitative measure, there is always concern that human error or bias will enter into the decision making process. In Chapter 10, we discussed a variety of different errors that raters make in the normal course of deciding who will get merit awards. Even beyond this, though, unions fear reprisals against particularly vocal union members. By placing the power to decide who gets merit increases in management hands and making the performance criteria relatively subjective, unions fear that unfair treatment will be the outcome. EXPERIENTAL EXERCISES 1. Assume that, as local union president, you have just received valid information that the grocery chain employing your workers is close to bankruptcy. What types of wage concessions might your union be able to make? Which of these are likely to have the least negative impact on your union workers’ wages in the short run (one year)? Which is most likely to create internal dissension between different factions of the union? A two-tier pay plan has significant short term cost saving potential and, at least in the short run is highly attractive to union leadership. Any new hire is put on a lower pay scale. Cost savings are immediate. Because the majority of union members- hence the majority of votes stay at the higher wage tier, there are few short run expressions of dissatisfaction. As more people are hired under the lower tier wage, the number of dissatisfied members increases. In the long run, many unions find the friction between the two tiers a very real threat to union solidarity. A more long-term strategy might be to build a gain-sharing plan that pays off equally to the membership when productivity improvements occur. This is a particularly viable approach if the plan causes real change in the relationship between union and management. Greater openness and trust combined with advances in empowerment can act as powerful sources of competitive advantage over the long run. CASE: Garfield Technology Summary of Case The information of this dispute between the union and management is concerned with a grievance over job classifications. One must consider the unions’ position of adding the job task performance of systems tests. However, this was phased out and a new task of ISO 9000 was added to the tier 3 and tier 4- job classification. The new tasks required extensive training of 150 hours. Due to the complexity of the task the union contends this is a tier 4 classification. The union argued this job task should be in a higher grade because the practice throughout the industry as well as the old job grade of 310 is now classified as a job tier 4 position. Management counters traditionally jobs classified as 308 and 309 are now classified as tier 3. Also management argues the duties in performing the ISO 9000 certification is no more complex than tasks previously performed and classified as a tier 3- position. As an arbitrator, evidence must be considered as well as the testimony of the parties involved. The unions’ position is ISO 9000 audit is more complex and requires additional training of 150 hours. It is agreed by the parties of the job evaluation as a tier 4- job classification before adding ISO certification. It is further added the company expert W.P. Salkrist in support of argument that the audit job with ISO 9000 responsibilities should be classified as a tier 4-job. Based on these contentions as an arbitrator one should rule in favour of the union of a tier-4 job classification. Learning Outcome The learning outcome is to increase understanding of the kinds of disputes that can occur between organizations and unions, and to better understand the grievance and arbitration process. Discussion 1. It would be useful for the neutral third party to examine the job description information and both the old and new job evaluation results since the arguments of both sides rest on the duties, their difficulty, and their importance to the organization. 2. Management’s point that the union did not object to the previous job evaluation results of the tier 3 and tier 4 jobs is not relevant since union and management agreed on the difficulty and value of the old systems test, but did not agree on the difficulty or importance of the new ISO 9000 audit. 3. Since the case is largely based on internal job requirements and internal consistency, management’s use of external comparisons might not carry much weight, especially if management’s historical position had been to argue against the comparability of external jobs to the organization. Chapter 13 Compensation Budgets and Administration REVIEW QUESTIONS 1. What are some of the approaches used to control labour costs, based on Exhibit 13.1? Based on budgeting methods? Based on the design of the pay system? The emphasis on managing and controlling compensation costs enables managers to foresee the financial impact of pay expenditures on organization performance and to use those expenditures where they will have a maximum effect on organization objectives. If an organization does not effectively manage all costs, it will be less able to be competitive in its product/service market. Budgets reflect what an organization has deemed important to carry out its objectives. Costs can be managed by controlling all aspects of compensation, including benefits and services, and controlling headcount, including hours worked and skills used. 2. Which activities in administering the pay system are likely candidates to be outsourced? Why? Benefits management is the prime candidate due to the complexity of regulations plus the amount of clerical work involved. 3. How do employee communication and participation influence the effectiveness of the pay system? Some organizations “sell” the pay system to manage expectations. Communicating pay information gives employees an accurate view and influences their attitudes. Pay communicates, whether or not it communicates what its designers want it to. Experiential Exercises 1. Find a news article or information about the impact of layoff some time after the cuts were made. Was the layoff successful in reducing costs? In achieving corporate objectives? Basically, if students can find accurate information they will find that the cost savings that were predicted prior to a layoff will be understated because they will not be fully comprehensive. Layoffs might also stimulate the exit of top performers as well. Layoff survivors might not appreciate the extra work that they have to do with fewer people which might also trigger their exit from the organization. Negative effects on morale after a layoff are not usually incorporated into the layoff costs which will also cause these costs to be lower than anticipated. 2. Calculate the compounding effect of an annual 5 percent merit pay increase on a salary of $60 000 over five years. How much less money would be paid out if the merit pay increase of 5 percent were not added to base pay and had to be re-earned each year? If merit pay is included in bases pay after five years the base pay would be $76,576.89. This is calculated by taking the base pay and multiplying by 1.05 every year. If the merit pay is not included in the base pay then the employee would continue to have a salary of $60,000 each year and merit pay of $3,000. 3. Consider the top-down and bottom-up approaches to controlling salary levels. Which one do you think would be more effective in a small entrepreneurial company? In a large government department? In a small entrepreneurial company a bottom-up approach would be better for controlling salary levels. It is important to maintain the entrepreneurial focus of the company and so each person should have discussions with the compensation people carefully so as not to lose the intellectual capital for the business. In a large government department it is more appropriate to have top-down communications where information is released that will disclose the salaries that need to be controlled which might not necessary be all of the government salaries. CASE: Two Harbours Teachers Summary of Case The summary of the Two Harbours Teachers is concerned with the salary schedules that include “steps” and “lanes”. There are conditions that can lead to salary increases even though the board does not grant pay or cost of living increases. When six teachers resigned it can save the district $260,664; however when nine teachers are hired at $230,994, the savings created to the district is $29,670. In computing total salaries for the district of $3,110,000, the average salary is $31,100. The end result is a net savings of 1.34 percent to the district. Well-managed school districts that will closely adhere to budget costs can become very cost effective as to the administration of faculty salaries in making these kinds of decisions. It is important to recognize budgets as a planning and control tools when administering teacher salaries across the board. Learning Outcomes The learning outcome is to develop an understanding of the budget and expense ramification of compensation decisions. Discussion 1. Discuss how budget considerations must be balanced against strategic needs of the company or organization when developing or changing a compensation system. Possible solutions: A. Current total salary expenses are $3,110.000; the average salary is $31,100. Here’s how the changes affect the bottom line: • The 6 teachers who are leaving will save the district $260,664 • The 9 new teachers will cost the district $230,994 • The 94 teachers who got a pay increase will cost the district $79,994 These adjustments mean that the new total salary expense is $3,160,324 (a 1.62 percent increase) with an average salary of $30,683 (a 1.34 percent reduction). B. When enrolment declines, teachers with lower seniority (and lower salaries) are laid off first. Although total salary expenses will drop, the average salary will rise because the population of teachers is more heavily weighted toward the upper right quadrant of Exhibit 1. As enrolment rises, the result is exactly opposite. The district is likely to add younger teachers whose salaries tend to be in the lower left quadrant of Exhibit 1. Total salary expenses rise, but the average salary drops. Both total expenses and the average salary rise as the population of teachers migrates toward the upper left quadrant of Exhibit 1. If we assume the number and distribution of teachers in Exhibit 1 remains static, total expenses in the first year of the 5 percent increase are $3,266 million with an average of $32,665. In year 2, the total rise to $3,429 million and the average increases to $34,288. C. Obviously you are in a tough spot. One approach is to suggest that the technological improvements and district provided teacher training precludes the need for teachers to acquire education credits on the outside. So the district has “subsidized” teacher training rather than leaving that expense up to the teachers, as is ordinarily the case. Another potential argument is that the technology will make teaching easier, reducing work demands. Hence, holding the line on salaries is commensurate with reduced teaching loads. Finally, you might try appealing to the educational needs of children. Suggest that the decision comes down to providing the best possible education to the children or increasing teachers salaries. D. Economic arguments are always important. When salaries lag inflation, teachers receive a de facto pay cut. This is likely to drive away the best and brightest teachers. The implementation of technological advancements in the classroom increases teacher’s work demands. In addition to the usual classroom responsibilities, teachers will now have to train and supervise students in the use of the computers and associated services. Furthermore, teachers have to take full advantage of these computer skills and reorganize the way they teach. The district should now include a new “lane” in the salary schedule, which compensates teachers for acquiring advanced computer skills and training. Solution Manual for Compensation George T. Milkovich, Jerry M. Newman, Barry Gerhart, Cole, Margaret Yap 9780071051569, 9781259086878, 9780078029493
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