CH-7-9 Performance Management – Management of Human Resources: The Essentials : Chapter Notes

This Document Contains Chapters 7 to 9 CHAPTER 7 PERFORMANCE MANAGEMENT LEARNING OUTCOMES 1. EXPLAIN the five steps in the performance management process. 2. DESCRIBE five performance appraisal methods and the pros and cons of each. 3. DISCUSS the major problems inhibiting effective performance appraisals. 4. DISCUSS 360-degree appraisal from multiple sources. 5. DESCRIBE the three types of appraisal interviews. 6. DISCUSS the future of performance management. REQUIRED PROFESSIONAL CAPABILITIES  Provides the information necessary for the organization to effectively manage its people practices  Provides development information, support activities, and procedures for learners, supervisors, and managers to assist in achieving performance improvement  Assists and coaches supervisors to help employees achieve required performance levels CHAPTER SUMMARY Performance management is the process encompassing all activities related to improving employee performance, productivity, and effectiveness. The five steps in the process are: defining performance expectations; providing on-going feedback and coaching; conducting performance appraisal and evaluation discussions; determining performance rewards or consequences; and conducting development and career opportunities discussions. Performance appraisal methods include: graphic rating scales, alternation ranking, paired comparison, narrative forms, forced distribution, critical incidents, behaviourally anchored rating scales (BARS), and management by objectives (MBO). Appraisal problems include unclear standards, halo and recency effects, distribution errors (central tendency, strictness, or leniency), and appraisal and similar-to-me biases. The use of 360-degree feedback which gathers and consolidates ratings from different sources (supervisor, self, peers, subordinates, and customers) has grown rapidly. Formal appraisal discussions take one of three forms: satisfactory-promotable, satisfactory-not promotable, or unsatisfactory-correctable. Action plans are developed accordingly. Appraisals can be difficult task for managers; training can help to improve the quality of the performance appraisal dialogue between manager and employee and increase satisfaction. LECTURE OUTLINE I. THE STRATEGIC IMPORTANCE OF PERFORMANCE MANAGEMENT Performance management is the process encompassing all activities related to improving employee performance, productivity, and effectiveness (goal setting, pay for performance, training and development, career management, and disciplinary action). Effective performance management can fulfill three main purposes: align employee actions with the organization’s strategic goals, help to change organizational culture, and provide input in to other HR systems, such as career development and remuneration (compensation). II. THE PERFORMANCE MANAGEMENT PROCESS The five steps in the process are: (Fig. 7.1 p. 173) • defining performance expectations • providing on-going feedback and coaching • conducting performance appraisal and evaluation discussions • determining performance rewards or consequences • conducting development and career opportunities discussions. III. STEP 1: DEFINING PERFORMANCE EXPECTATIONS Defining performance expectations and goals is a critical step in employees’ understanding how their work makes a contribution to achieving business results. Job performance consists of two dimensions; task performance reflects direct contributions to job-related processes, whereas contextual performance reflects indirect contributions by improving a range of supportive behaviours that go beyond those specified for the job (e.g. helping, displaying positive attitude). Performance expectations need to be legally defensible, clear and measurable, communicated to employees and supported by the organization. Expectations cannot discriminate directly or indirectly against anyone on protected grounds (gender, age, disability, and so on). In global companies performance appraisal criteria may need to be modified to be consistent with cultural norms and values. Teaching Tip: Use the Global HRM Discussion Box (p. 174) to provide a specific example of cultural differences. Teaching Tip: Ask students to draw on their past experience to come up with a quick list of other contextual performance behaviours– behaviours that make the work go smoothly and make working there more enjoyable. IV. STEP 2: PROVIDING ONGOING COACHING AND FEEDBACK Performance management should not be confused with performance appraisal. Throughout the performance management process, managers and their reports (subordinates) should continue to discuss progress using two-way communication. Employees should be made aware that they are responsible for monitoring their own performance and asking for help. For unsatisfactory employees a performance improvement plan (PIP) can help to make expectations and deadlines for improvement crystal clear. V. STEP 3: PERFORMANCE APPRAISAL AND EVALUATION DISCUSSION The performance appraisal itself is generally conducted with the aid of a predetermined and formal method to increase validity and reliability and to reduce error and bias. 1. Formal Appraisal Methods a. Graphic rating scale – rating on traits or duties, b. Alternation ranking method – best vs. worst trait rating, c. Paired comparison method – between employees trait rating (see Fig. 7.2 p. 176) d. Forced distribution method – set % of ratings must fall into each rating category e. Critical incident method – desirable & undesirable behaviours f. Narrative forms – written description of issue, goals, solutions) g. Behaviourally anchored rating scales (BARS) – more descriptive rating scale focused on behaviours not traits (see Fig. 7.3, p. 178) h. Management by Objectives (MBO) – assessment of progress against specific, measurable goals All of these methods have advantages and disadvantages (see Table 7.3 p. 185). Teaching Tip: Consider assigning one of the experiential exercises (p. 197) as class preparation followed by small group, in-class discussion and debrief. Alternatively, or in addition, have students comment on the method(s) of performance appraisal used in organizations where they work/have worked. For added interest, and if time allows, hold a short discussion on whether the performance of volunteers in non-profit organizations should be evaluated. 2. Mixing the Methods Most firms combine several appraisal techniques in order to offset disadvantages of single methods (see Fig. 7.3, p. 185). Ultimately no one single solution is best for all performance management systems. Determining factors include resource constraints (time , money, people) and organizational factors (budget, turnover, strategy). 3. The Use of Technology in Performance Appraisals Over the past few years, web-based performance management has become a mainstream practice, even in medium and small organizations. Basic benefits include ability to keep computerized notes on each employee and combine notes with trait ratings to generate written text for each part of the appraisal. Other benefits include higher completion rates, clearer direction to and support from employees, better information for managers and executives through advanced reporting capabilities, and succession planning tools. Technology has also enabled electronic performance monitoring (EPM) where supervisors track and capture performance data electronically through computer networks, wireless audio or video links, GPS devices, and monitoring of customer service phone calls. Teaching Tip: Have students list as many ways as possible that their supervisor can find out what they are doing, how much they are doing, and where they are using electronic monitoring. For instance, security cameras can also capture retail clerk activity. Discuss the pros and cons of electronic monitoring. 4. Performance Appraisal Problems and Solutions Because of the high stakes (raises, careers and peace of mind) performance appraisal tends to be an emotional and difficult experience for both managers and employees. The result is often dishonest appraisals, avoidance of appraisals, and serious concerns about the fairness of the process. According to several studies, the majority of organizations view their performance management systems as ineffective. Many problems are associated and can be fixed with the design of the appraisal system. a. Validity and reliability – relevant to the job, cover all aspects of the job, be specific, produce consistent ratings (see also Ch. 5) b. Rating scale problems – 7 main problems • Unclear performance standards (see Table 7.2, p. 182) • Halo effect – other ratings influenced by rating on one trait • Central tendency – only using centre of scale • Strictness/leniency – only using top or bottom of scale • Appraisal bias – allowing individual differences to influence ratings (e.g. gender, age, disability, race, and so on) • Recency effect – using only recent performance as basis for ratings • Similar-to-me bias – giving higher rating based on rater-ratee similarity Teaching Tip: Uncover students’ understanding of these problems by having them make the connection to grading. Students often believe that there is a forced distribution system in play and complain about strict or central tendency grading (no one can get an “A”). Link back to the workplace by discussing the impact on employees when they question the quality of the rating process and the raters. 5. How to Avoid Appraisal Problems There are at least four ways in which managers can minimize the impact of appraisal problems: • Make appraisers aware of appraisal problems • Provide training in accurate rating and effective appraisal discussions • Choose the right appraisal tool (see Table 7.3, p.185) • Use multiple raters to hopefully offset biases or idiosyncrasies, responsibility for rating is diffused so easier to give poor rating 6. Who Should Do the Appraising Although supervisors are the traditional source of performance appraisals, there are several other options. a. Supervisors – easy, makes sense, is in position to observe, is responsible for performance b. Self – opportunity valued by employees, sometimes inflated, more accurate if asked to rate oneself vs. others, may accentuate differences between rater and rate c. Peers – often more opportunity to observe at more revealing times, “logrolling” problem where collusion results in high ratings, can improve perceptions of open communication, motivation, group cohesion and satisfaction, especially in self-managed teams d. Committees – group of supervisors, more reliable, fair and valid e. Subordinates – observers of managerial performance, employee-identified or anonymous “upward feedback” helps identify and solve problems, especially valuable for developmental purposes, simply knowing you will be appraised can raise performance f. 360-Degreee Appraisal – feedback collected from multiple different sources (see Fig. 7.4, p. 188), evidence of effectiveness is mixed 360-degree feedback was originally used only for training and development but is now used for performance management and pay as well. This is important support for coaching, leadership development, succession planning, rewards and recognition. Reasons for rapid growth in 360-degree approach • Flatter organizations employ more open communication climate • Fits goals of continuous learning • Meaningful in today’s reality of complex jobs and matrix and team structures • Enhances perceptions of fairness “jury” versus a “judge” Several common features of 360-degree systems are: • Confidential and anonymous • Completed by appropriate parties (those with knowledge of performance) • Use custom-designed questionnaires linked to strategy, vision, and values • Information compiled into individualized reports Advice for using 360-degree feedback • Have performance criteria developed by a representative group familiar with job • Be clear about who will have access to reports • Provide training for all supervisors, raters, and rates • Assure all raters that their comments will be kept anonymous • Plan to evaluate the 360-degree feedback system for fine-tuning. Teaching Tip: As preparation for class, ask students to use their social network (family and friends) to find someone who has gone through a 360 degree appraisal process either as an appraiser or as the person being appraised, and ask them if they would share their thoughts on the process. 7. Formal Appraisal Discussions The essence of a performance appraisal is the feedback provided in a one-on-one conversation called the formal appraisal discussion. However, discussions are often avoided by supervisors and managers who have not been trained to provide constructive feedback and deal with defensive employees. Teaching Tip: Ask students to work in pairs or groups to share their experiences with performance appraisal – non-existent, just given a rating, or actually received constructive and useful feedback. 8. Types of Interviews—There are three basic types of formal appraisal discussions, each with its own objectives. a. Satisfactory – promotable: Easy, discuss career plans and develop specific action plan for educational and professional development b. Satisfactory – not promotable: not as easy, goal is to maintain satisfactory performance often through valued incentives (e.g. time off, small bonus, verbal recognition, additional decision-making authority) c. Unsatisfactory – correctable: can be difficult, goal is to lay out action plan to resolve unsatisfactory performance Teaching Tip: Ask whether there should be a fourth category of unsatisfactory – uncorrectable. 9. Preparing for the Formal Appraisal Discussion There are three things to do in preparation for a formal appraisal discussion/interview: • Assemble the performance data, compare to performance standards, review past appraisals • Prepare the employee – give at least a week to review own performance, analyze problems, read over job description, formulate questions and comments • Find a mutually agreeable time and private place and allow plenty of time (nonsupervisory < 1 hr, supervisory 2 -3 hours) Teaching Tip: Collect data from students on how long their appraisal interview was and where it took place. Graph the data and present at the start of the next class or post on the learning management system. a. How to conduct the interview: Constructive feedback is considered a positive and motivating experience, but there are four things to keep in mind: • Be direct and specific • Do not get personal • Encourage the person to talk • Develop an action plan b. How to handle criticism and defensive employees: Maintain the person’s sense of dignity and worth by providing objective unbiased criticism privately and immediately following poor performance (do not save until formal appraisal). Anticipate a range of reactions (denial, anger, aggression, withdrawal) and prepare as follows: • Recognize that defensive behaviour is normal • Never attack a person’s defences • Postpone action • Recognize human limitations 10. Ensuring That the Formal Appraisal Discussion Leads to Improved Performance It is important to clear up performance problems by setting goals and a schedule for achieving them. Follow these seven steps to ensure performance appraisals have the desired effect and are legally defensible: • Let the employee know that his/her performance is unacceptable and your minimum expectations • Ensure your expectations are reasonable • Let employees know that warnings are part of establishing a just cause case to support discharge (termination) if minimum standards are not met • Take prompt corrective measures to avoid appearing to condone poor performance/conduct • Avoid sending mixed messages in different documents • Allow reasonable amount of time to improve performance • Provide employees with necessary support to facilitate improvement 11. How to Handle a Formal Written Warning Formal writing warnings serve two purposes: a) may shake employee out of bad habits, and 2) can help manager defend employee’s rating (to boss, court, or human rights tribunal). Should include standards, clarify that employee was aware of standards, specify violation, indicate opportunity for behaviour correction, specify actions required to correct the behaviour. VI. LEGAL AND ETHICAL ISSUES IN PERFORMANCE MANAGEMENT Ethics should be the bedrock of performance management; “tell people where they stand and be straight with them”. Factors that promote a legally defensible process include: • Using job analysis to create job performance standards • Using this information to develop/purchase behavioural rating instruments • Providing definitive performance standards to all employees • Using clearly defined individual dimensions of job performance • Avoiding abstract trait names if using graphic rating scale • Employing subjective supervisory ratings as only one component of appraisal • Training supervisors to use rating instruments properly and minimize bias • Allow regular contact between appraisers and employees being evaluated • Having more than one appraiser conduct independent appraisals • Using formal appeal mechanisms and review of ratings by upper-level managers • Documenting all evaluations and reasons for any termination decision • Providing corrective guidance to assist poor performers in improving their performance VII. THE FUTURE OF PERFORMANCE MANAGEMENT Recent research indicates that effective performance management involves: • Linking business goals and strategy • Showing leadership and accountability at all organizational levels • Closely tying appraisal results to reward and recognition outcomes • Investing in employee development planning • Having an administratively efficient system with sufficient communication support The key success factor for effective appraisals is the quality of the dialogue between manager and employee. DISCUSSION BOXES Global HRM: Performance Appraisal Criteria in China (p. 174) The use of performance appraisal has increased in China since 1978, but performance appraisal criteria differ from those in the west. Reflecting the Confucian view achievement is a function of effort rather than ability; as such, the attitudes and moral character of a person have been regarded as highly relevant to performance. However, researchers discovered that, when given a list of appraisal criteria from both eastern and western style appraisals, Chinese workers picked three factors that were very acceptable, including work dedication, efficiency and teamwork. Thus, the researchers demonstrated that carefully selected criteria can be applicable across cultures. STRATEGIC HR: Jaguar Land Rover Formal Appraisal Discussion Training. (p. 191) When Indian conglomerate Tata took over carmaker Jaguar Land Rover in 2008 the performance management process was redesigned, with one component being new performance appraisal training for its 1500 managers. Managers were coached on specific techniques for managing the formal appraisal discussion including: “say what you see”, empathy, “broken record”, active listening, questioning, reassurance, nonverbal communication, and calm, even tone and pace. ETHICAL DILEMMAS Is it fair to factor in employee self-ratings in 360-degree performance appraisal when we know that these appraisals tend to be inflated? (p. 189) While it is true that employees value the opportunity to participate in performance appraisal factoring in self-ratings makes a great deal of sense. Employees are more likely to accept and act upon the results if they have had the opportunity to provide input. Furthermore, since other raters may have a strictness bias, which may “balance out” the final evaluation results, resulting in composite ratings that are more reliable, fair, and valid. The difference between employee self-ratings and others ratings can be a useful point of discussion, as some employees are not aware of how they are perceived by others. KEY TERMS 360-degree appraisal A performance appraisal technique that uses multiple raters including peers, subordinates, supervisors, and customers. (p. 188) alternation ranking method Ranking employees from best to worst on a particular trait. (p. 175) appraisal bias The tendency to allow individual differences such as age, race, and sex to affect the appraisal ratings that these employees receive. (p. 183) behaviourally anchored rating scale (BARS) An appraisal method that aims to combine the benefits of narratives, critical incidents, and quantified ratings by anchoring a quantified scale with specific narrative examples of good and poor performance. (p. 177) central tendency A tendency to rate all employees in the middle of the scale. (p. 182) contextual performance An individual’s indirect contribution to the organization by improving the organizational, social, and psychological behaviours that contribute to organizational effectiveness beyond those specified for the job (p. 174) critical incident method Keeping a record of uncommonly good or undesirable examples of an employee's work-related behaviour and reviewing it with the employee at predetermined times. (p. 176) electronic performance monitoring (EPM) Having supervisors electronically monitor the amount of computerized data an employee is processing per day and thereby his or her performance. (p. 180) forced distribution method Predetermined percentages of ratees are placed in various performance categories. (p. 176) formal appraisal discussion An interview in which the supervisor and employee review the appraisal and make plans to remedy deficiencies and reinforce strengths. (p. 189) graphic rating scale A scale that lists a number of traits and a range of performance for each. The employee is then rated by identifying the score that best describes his or her level of performance for each trait. (p. 175) halo effect In a performance appraisal, the problem that occurs when a supervisor's rating of an employee on one trait biases the rating of that person on other traits. (p. 182) management by objectives (MBO) Involves setting specific measurable goals with each employee and then periodically reviewing the progress made. (p. 178) paired comparison method Ranking employees by making a chart of all possible pairs of the employees for each trait and indicating the better employee of the pair. (p. 175) performance management The process encompassing all activities related to improving employee performance, productivity, and effectiveness. (p. 172) recency effect The rating error that occurs when ratings are based on the employee’s most recent performance rather than performance throughout the appraisal period. (p. 184) similar-to-me bias The tendency to give higher performance ratings to employees who are perceived to be similar to the rater in some way. (p. 184) strictness/leniency The problem that occurs when a supervisor has a tendency to rate all employees either high or low. (p.183) task performance An individual’s direct contribution to their job –related processes. (p. 173) unclear performance standards An appraisal scale that is too open to interpretation of traits and standards. (p.182) PART FOUR: TOTAL REWARDS CHAPTER 8 STRATEGIC PAY PLANS LEARNING OUTCOMES 1. EXPLAIN the strategic importance of total rewards. 2. EXPLAIN in detail each of the three stages in establishing pay rates. 3. DISCUSS competency-based pay. 4. DEFINE pay equity and EXPLAIN its importance today. 5. COMPARE the three types of organization-wide incentive plans. 6. EXPLAIN under what conditions it is best to use an incentive plan. REQUIRED PROFESSIONAL CAPABILITIES  Monitors the competitiveness of the total compensation strategy on an ongoing basis  Provides for delivery of payroll services in compliance with applicable legislation and company policy and advises the organization on related matters  Ensures accurate and timely delivery of pay  Monitors the competitiveness of the compensation program relative to comparable organizations  Ensures pay records are accurate and complete CHAPTER SUMMARY A total rewards approach considers individual reward components as part of an integrated whole to determine the best mix of rewards that are aligned with business strategy and provide employee value, all within the cost constraints for the organization. Establishing pay rates involves three stages: job evaluation (determining the relative worth of jobs), conducting market wage and salary surveys, and combining job evaluation and market wage/salary survey data through a wage curve. Ideally pay rates should ensure internal and external equity. Compensable factors (e.g. skill, effort, responsibility, and working conditions) are used to compare jobs; jobs of approximately equal value are combined into pay grades for pay purposes. In contrast, competency-based pay plans provide employee compensation based on the skills and knowledge that they are capable of using, rather than the job that they currently hold. Compensation for managers includes salary, benefits, short-term incentives, long-term incentives and perquisites. Out-of-line and red-circle wages must be addressed, as must situations of systemic pay inequity (e.g. where women make less than men for comparable worth jobs). Organizations have used a combination of fixed and variable pay (cash bonus/incentives, profit-sharing, gainsharing, team-based incentives, and so on) to achieve the organization’s strategy for a long time. A major challenge is to determine what incentives are appropriate in a given circumstance. Organization-wide incentives (e.g. profit-sharing, stock ownership, gainsharing) attempt to make employees think like owners. Incentive plans are particularly appropriate when units of output are easily measured, employees can control output, the effort-reward relationship is clear, work delays are under employees’ control, and quality is not paramount. LECTURE OUTLINE I. THE STRATEGIC IMPORTANCE OF TOTAL EMPLOYMENT REWARDS Total employment rewards refer to an integrated package of all rewards (monetary and nonmonetary, extrinsic and intrinsic) gained by employees arising from their employment (see Fig. 8.1, p. 199). A total rewards approach recognizes how the business environment has changed (e.g. more virtual, knowledge-based, and service-based) and attempts to determine the best mix of rewards that are aligned with business strategy and that provide employee value, within the cost constraints of the organization. 1. The Five Components of Total Rewards The five components of total rewards are: compensation, benefits, work-life programs, performance and recognition, and development and career opportunities. Teaching Tip: Consider using the Strategic HR Discussion Box on p. 200 to break the myth that the best companies offer the highest salaries. 2. Impact of Rewards The purpose of rewards is to attract, retain, motivate and engage employees5. Engagement refers to a positive emotional connection to the employer and a clear understanding of the strategic significance of the job, which results in discretionary effort on the part of the employee. Research shows competitive base pay helps to attract employees, but career opportunities are what make them stay (as long as the cash compensation is satisfactory). II. BASIC CONSIDERATION IN DETERMINING PAY RATES Four basic considerations influence the formulation of any pay plan: legal requirements, union issues, compensation policy, and equity. 1. Union Influences on Compensation Decisions Historically, wage rates have been the main issue in collective bargaining, but other issues (e.g. time off with pay, income security during layoff, cost-of-living adjustments, and pensions) are also important. a. Union attitudes towards compensation decisions – suspicion about validity and motives behind job evaluation systems, involvement of union is critical to acceptability of pay decisions, pay determination processes can be reviewed by Industrial Relations Board Teaching Tip: Compare pay rates for unionized and non-unionized workers doing the same job and use this as a launching pad to discuss pay implications of privatization of government services. 2. Compensation Policies Internally set policies include where to set pay levels relative to the market ( leader or follower), basis for salary increases, probationary pay, overtime (outside of legislated), and pay during vacations, jury duty, military service and other leaves of absence. Determining factors include business strategy and cost of various types of compensation. 3. Equity and Its Impact on Pay Rates External equity is ensured when employees perceive their pay as fair given the pay rates in other organizations (for same or similar jobs) and helps to attract and retain employees. Internal equity is when employees perceive their pay as being fair given the pay rates of others in the organization (in same, similar, and dissimilar jobs) and helps to promote job satisfaction and motivation. Teaching Tip: Students and younger workers often equate physical activity “busyness” with worth. Have students debate the commonly heard complaint that managers are overpaid because they just sit in their office doing nothing. 4. Legal Considerations in Compensation a. Employment/Labour Standards Acts (Canada Labour Code) – governs minimum wage, overtime pay, vacation pay, statutory holiday pay, termination (severance) pay b. Pay Equity Acts – must use gender-neutral job evaluation system, pay for female-dominated jobs that are equal in value to male-dominated jobs must be increased c. Human Rights Acts – prohibited grounds alone cannot explain differences in pay d. Canada/Quebec Pension Plan – mandatory employer and employee contributions e. Other legislation affecting compensation – worker’s compensation laws, Employment Insurance Act (no-fault termination, maternity leave, parental leave, compassionate care leave) Teaching Tip: Have students research and compare the legal standards in various provinces/territories and/or with various American states. Discuss the rationale for having a minimum wage and the contention that increasing the minimum wage will result in organizations hiring fewer workers (fixed wage budget). III. PAY EQUITY Pay equity requires that equal wages be paid for jobs of equal value, as determined by gender neutral job evaluation techniques. Historically, the average pay for Canadian women has been considerably lower than that for men, and although it has closed somewhat over time the gap persists, even for women with same qualifications doing the same work as male colleagues. Factors such as differences in hours worked, experience levels, education levels, and level of unionization contribute to the gap along with systemic discrimination. Organizations sometimes claim that female and male jobs are not easily comparable, but the Supreme Court does not support this position. Fights for back pay can be very lengthy. IV. ESTABLISHING PAY RATES In practice, the process of establishing pay rates that are both externally and internally equitable requires three stages: internal job evaluation, conducting external wage/salary surveys, and combining the results of the first two stages to determine actual pay rates. 1. Stage 1: Job Evaluation Job evaluation involves a systemic comparison to determine the relative worth of jobs within a firm, usually by focusing on benchmark jobs, which are critical to the firm or commonly found in other organizations. Relative worth can be established intuitively through ranking methods or by looking at levels of compensable factors, which are fundamental elements of a job. • Compensable factors – skill, effort, responsibility, and working conditions is most common set, alternative factors are know-how, problem solving, accountability, and working conditions, may need different factors for different departments, groups or units but use same set for comparing jobs within that dept./group/unit • Job evaluation committee – diverse group (including employees, HR staff, managers, and union representatives), ensure fair and comprehensive representation of each job • Classification method – also known as grading method, categories jobs into classes (different level similar jobs) or grades (similar level dissimilar jobs) based on grade/group description • Point method –identify compensable factors and sub-factors, determine factor weights and degrees, assess the degree of each factor present in the job, then calculate overall point value (See Table 8.1, p. 206) Teaching Tip: Having students go through a simple point method example can make it much easier to grasp the concepts of compensable factors, degrees and relative worth. Consider using Experiential Exercise # 3, on p. 229. Other organizations you could use include car dealerships, high-end salons (receptionist, trainee stylist/hair washer, colourist, stylist) or restaurant (chef, sous-chef, server, dishwasher, bartender). 2. Stage 2: Conduct a Wage/Salary Survey A good wage/salary survey provides specific wage rates for comparable jobs; formal written questionnaire surveys are the most comprehensive. Information on what others are paying for the same or similar jobs can be obtained through any or a combination of: • Formal and informal surveys by the employer – phone survey, conversations at professional meetings, formal written surveys. • Commercial, professional, and government salary surveys – e.g. Statistics Canada (see Table 8.2, p. 208), Toronto Board of Trade, Towers Watson, Mercer, Certified General Accountants and Professional Engineers Ontario. • Salary survey interpretation and use – large organizations participate on average in 11 surveys and use 7 in setting own compensation practices, watch for upward bias Teaching Tip: Recruiters and hiring managers complain about students who are unrealistic about what they will make after graduation, so having them do a salary survey on their chosen occupation (or one they think may be a possibility) could have high value in terms of managing expectations as well as showing them how to find and compare salary surveys. 3. Stage 3: Combine the Job Evaluation and Salary Survey Information to Determine Pay for Jobs The final stage is to assign pay rates to each pay grade, or job (if classes or grades not used), using a wage curve, which is a graphic description of the relationship between the value of the job (# points) and the average (market) wage paid for the job (see Fig. 8.2, p.210). • Developing rate ranges – pay ranges reflect a series of steps or levels within a grade (see Table 8.3, p. 210), employees are placed somewhere in the range for their job based on experience and performance (see Fig. 8.3, p. 211) • Broad banding - reducing the number of salary grades and ranges to include a wider range of jobs and salary levels, increases flexibility and accommodates boundaryless jobs • Correcting out-of-line rates – current wages/salaries may be too high or too low, if low then raise, if high then red circle and freeze until other jobs catch up, transfer or promote individual, or freeze, try to transfer/promote, if unsuccessful then cut pay V. PAY FOR KNOWLEDGE Pay-for-knowledge based systems are known as competency-based pay (managers and professionals) and skill-based pay (manufacturing). Pay for range, depth and types of knowledge that employees may be capable of using, rather than for the job that they hold. • Core competencies - knowledge and behaviours that all employees must exhibit (e.g. customer service orientation). • Functional competencies - specific to a particular occupation/organizational function (e.g. negotiation skills for salespeople). • Behavioural competencies – expected behaviours Competencies can add flexibility but must be directly important, currently relevant, objectively measurable, and ideally obtained from on-the-job training (not classroom education). Pay for competencies should not replace or overshadow pay for performance. VI. DEVELOPING EFFECTIVE INCENTIVE PLANS There are two major practical considerations in developing an effective incentive plans: when and how. 1. When to Use Incentives Goals need to be reasonable and achievable but not too easy, implement with management support, employee acceptance and supportive culture (teamwork, trust, and multi-level involvement), use when units of output can be measured, job is standardized, workflow is clear and delays are few or consistent • Performance pay cannot replace good management • Firms get what they pay for – watch for unintended consequences • “Pay is not a motivator” – only buys temporary compliance • Rewards rupture relationships – pursuit of individual rewards over teamwork • Rewards may undermine responsiveness – focus on keeping status quo not making or responding to change 2. How to Implement Incentive Plans Seven principles that support effective implementation and lead to superior business results. • Pay for performance tied to critical business goals • Link incentives to other activities (e.g. career development challenging opportunities) • Link incentives to valued measurable competencies • Match incentives to company culture (vision, mission, operational principles) • Keep group incentive clear and simple • Overcommunicate when it comes to recognizing value of employee contributions • Meaningful work can be as much or more motivating than financial rewards VII.MONEY AND MOTIVATION Organizations have used financial incentives for over 100 years. Today’s effects to achieve the organization’s strategy through motivated employees include fixed pay that is independent of performance (e.g. base pay, consistent allowances) and variable pay, which is tied to performance/productivity (e.g. cash bonuses/incentives, profit-sharing, gainsharing, team-based incentives, and so on). More than 84% of Canadian employers have one or more variable pay plans in place (see Figure 8.4, p. 215); the advantages of performance-based pay are that it controls base pay inflation and provides a “line of sight” between individual jobs and organizational success, making employees think more like partners in the business. Merit pay: two basic characteristics – raise (permanent addition to salary) given at designated time of year and is based exclusively on individual performance. Advantages: performance-linked compensation can be effective while giving same raise may reduce effort (will get raise regardless of contribution) Disadvantages: often not necessarily tied to performance, validity of performance-appraisal system essential, despite performance differences supervisors minimize differences between employees in computing raises to avoid problems, everyone thinks they are “above-average” performers and should get big raise, can rapidly increase salary budget VIII. TYPES OF INCENTIVE PLANS There are several types of incentive plans; incentives can be offered at individual, group, and organization-wide levels. Incentives can be formal or informal and monetary or nonmonetary. While there may be some common elements, plans often differ depending on the type of employee (e.g. operating, executive/managerial, salespeople, and professionally qualified employees. • Incentives for Operations Employees Several incentives plans are particularly well-suited for use with operations employees, such as those doing production work. • Piecework Plans Piecework is the oldest, and still most commonly used, incentive plan. Earnings are tied directly to what the worker produces either amount or amount per given period of time. Job evaluation is used to determine production standards for units/hour or units/day. Three types of piecework plan are straight piecework (no guarantee, solely on amount), guaranteed piecework (minimum wage regardless of quantity plus bonus), and differential piece-rate (percentage premium for extra production). Advantages: simple to calculate, easily understood by employees, appear equitable in principle, and powerful because rewards are tied to performance. Disadvantages: disliked by employees due to employers raising of production standards to suppress wages, standards need to be revised every time jobs are re-evaluated, and because production standards predict income – decreases interest in improving quality, job rotation, learning new technology/equipment, doing preventative maintenance of equipment, or helping other workers (if individual plan). • Team or Group Incentive Plans Due to the disadvantages of piecework plans, many organizations have switched to team or group-based incentive plans, where standards are set for the group, rather than the individual. There are three ways of implementing team/group-based plans: • Measure output of each member and reward group members based on output of a) highest producer, b) lowest producer, average production. • Measure output of whole group – everyone gets same reward based on group output • Choose measurable but broader definition of group performance that the group can control e.g. total labour hours per final product – everyone gets same reward for group achievement Rationale: many jobs are interrelated not independent, reinforces group planning, problem solving and collaboration, reduces jealously, makes members indebted to each other, and encourages sense of cooperation, especially in terms of on-the-job training for new group members. Disadvantages: less effective at motivating individual employees because weaker link between individual effort and reward. Need high levels of communication about plan specifics and strong worker involvement in design and implementation. • Incentives for Senior Managers and Executives Senior managers and executives receive both short-term and long-term incentives based on divisional and corporate profitability. Short-term Incentives: The Annual Bonus More than 90% of Canadian firms provide an annual bonus, which can be the same as, less than or more than the bonus received in the previous year. a. Eligibility – key position, salary level cut-off point, salary grade b. How much to pay out (fund size) – total allocation: non-deductible formula or deductible formula c. Determining individual awards – discretionary or target-based, individual, split-award or multiplier (product) method Teaching Tip: Have students debate the Ethical Dilemma (p. 220) about the basis for manager/executive bonuses. Linking back to performance appraisal errors (Ch. 7), what types of discrimination might come into play if bonuses are discriminatory. Long-term Incentives Because short-term incentives can produce counterproductive behaviours (e.g. artificially keeping costs down, falsifying income records), many organizations also use long-term incentives to influence executive decision-making and promote long-term growth perspective. There are many types of long-term incentives of varying popularity (see Fig. 8.5 p.222). d. Stock options – right to buy stated # of shares in future at today’s price, often requires vesting period, popular but can be worthless due to factors outside of executives’ control, originally targeted at managers and highly skilled workers but now being used for non-managers and non-executives, seen as less effective and efficient than direct share ownership and distort true value of company (not reflected in financial statements) Teaching Tip: Have students look at the 3 year stock price history for a company of interest to see what the effect would have been of being granted stock options 3 years ago. Would the stock options have increased in value, maintained value, or become less valuable. e. Plans providing share “units” – granted specified # of units whose value is equal to and fluctuates with stock price, subject to certain conditions – performance share unit, restricted share unit, and deferred share unit plan. • INCENTIVES FOR SALESPEOPLE Sales compensation plans have typically relied on incentives (e.g. commissions), but this varies by industry. Plans can range from 100% salary to 100% commission, but many organizations use a combined approach. 1. Salary Plan – fixed salary with small awards/prizes, better fit for prospecting, customer relationship building, and account servicing, especially in technical industries (e.g. aerospace), predictable income and expenses, facilitates transfers, can be demotivating to high-performing salespeople because of seniority criteria 2. Commission Plan – paid only for results, attracts high performers, selling investment is reduced, easy to understand and compute, but puts too much focus on making sale at any cost, can create wide variation in income between individuals and over time, pure commission associated with higher turnover 3. Combination Plan – provide advantages of both salary and commission plans, some guaranteed income but less incentive, can be complicated (e.g. base pus percentage of profits plus percentage of sales) Teaching Tip: Have students contact companies as prospective employees to find out how salesperson compensation works in different industries (e.g. furniture, automotive, retail) – what is the base salary, what is the commission rate on sales, and how often is commission paid. IX. ORGANIZATION-WIDE INCENTIVE PLANS Most employers have incentive plans in which virtually all employees can participate. 1. Profit-Sharing Plans Most or all employees receive share of company profits (cash plan or cash and deferred benefits). Although limited in Canada (only 15% of employers) they are easy to administer and have tax advantages for employees. However, there are “line of sight” issues (weak link between individual effort and company performance), they produce one-time productivity improvement, and annual payout is less effective. 2. Employee Share Purchase/Stock Ownership Plan (ESOP) ESOPS are more popular than profit-sharing (approx. 60% of Canadian publically traded companies); believed to create sense of ownership and commitment. Cash contributions (employee, and sometimes employer) used to fund a trust which purchases shares of company stock (open-market or treasury stock). Stock distributed when employee leaves the company or on annual basis. Value of shares is taxable benefit to employees but can create tax problems if not vested or shares drop in value. 3. Gainsharing Plans Incentive plan that engages many or all employees in a common effort to achieve a company’s’ productivity objectives – any resulting cost-saving gains are shared among employees and the company (e.g. Rucker and impro-share plan). Straightforward and works well in stable organization with predictable goals and measures of performance. Most cost savings are generated in yearly years “low-hanging fruit”. Payouts can vary by employees’ base salary and collective bargaining agreements. DISCUSSION BOXES STRATEGIC HR: Rewards Program Effectiveness at the World’s Most Admired Companies (p. 200) The world’s most admired companies (MACs) excel in six key areas related to reward program effectiveness: focus on excellence, alignment with strategy, goals and culture, promoting total rewards view, strong internal talent development, leveraging manager’s skills in reward program implementation, and reinforcing HR’s role in supporting managers with implementation. For these reasons they tend to offer lower base salaries and have a stronger pool of home-grown talent. Strategic HR: Rewards That Work (p. 217) The workforce today is comprised of member of four distinct age groups. In developing incentive programs employers should consider the demographics of their workforce; understanding these groups will help determine the most attractive incentive program approach. From oldest to youngest, four generations currently in the workforce who have different incentive preferences are Traditionalists, Boomers, Generation X and Generation Y (Millenials). ETHICAL DILEMMAS What should employers do when there is a shortage of a certain type of skill and they cannot attract any workers unless they pay a market rate above the maximum of their salary range for that job? How should other jobs (without a skill shortage) in the same company in the same salary range be paid? (p. 209) The preferred strategy when dealing with skills shortages is to offer higher pay to attract and retain employees in the skills-shortage occupations. In order to maintain internal equity, other jobs in the same salary range should be paid within-range rates. As soon as the skills shortage is over, within-range rates are once again paid to those occupations. To accomplish this without resorting to demotivating pay cuts, “red circling” is generally used, whereby the pay rates of such overpaid employees are typically frozen until general salary increases bring the pay range up to encompass their salaries. Is it right that CEOs earn enormous amount of money when most employees are getting small increases each year (sometimes even less than inflation)? (p. 219) This question should provoke hot debate. Those in favour of egalitarianism will argue that large pay differentials are demotivating and are totally inappropriate in firms that stress teamwork and employee empowerment. Others will argue that CEOs deserve to earn a great deal because they have a much larger impact on company performance, survival, and profitability than do other employees. If differentials are not large enough, there will be no motivation to obtain the KSAs required to assume such jobs. In addition, to attract and retain high-calibre employees, the pay must be attractive enough to compensate for the high risk and high stress involved. Is it ethical to provide potentially large bonuses to managers and executives on a purely discretionary basis, not necessarily related to performance? (p. 220) Providing bonuses, regardless of size on a purely discretionary basis has several problems, most of which have to do with perceptions of fairness. First, discretionary bonuses may be awarded based on favouritism, which demotivates other employees. Second, discretionary bonuses for managers and executives are likely to be viewed negatively by employees if their own bonuses are based on performance. Most would argue that providing potentially large bonuses is problematic, because subjective standards can be inappropriately high or unacceptably low. It is far more appropriate to establish a performance-based bonuses for every position, tailoring them as needed to the level and nature of the job. The higher the position, the more is awarded based on organizational and unit performance, the lower the position, the more is awarded based on individual and group performance; a combined approach is often the most effective. Is it fair to compensate sales employees on a 100-percent commission basis with no financial security? (p. 224) In some jurisdictions (such as British Columbia), it is illegal to compensate outside sales employees on a 100-percent commission basis without providing a guaranteed minimum wage. Even in jurisdictions in which this is not the case, many would argue that it is neither ethical nor desirable to have a compensation system with no guaranteed minimum amount covering basic living expenses. Research has shown that turnover is higher with 100% commission plans and a salesperson’s income can vary greatly from period to period and is often dependent on factors outside of their control e.g. product competition, pricing decisions, and territory potential. These are some indicators that the system is unfair or perceived as unfair. On the other hand, if an incoming employee prefers a 100% commission scheme, and understands exactly how the plan will work then there is nothing unfair about it at all. KEY TERMS benchmark job A job that is critical to the firm’s operations or that is commonly found in other organizations. (p. 203) broad banding Reducing the number of salary grades and ranges into just a few wide levels or “bands,” each of which then contains a relatively wide range of jobs and salary levels. (p. 211) capital accumulation programs Long-term incentives most often reserved for senior executives. (p. 221) classes Groups of jobs based on a set of rules for each class, such as amount of independent judgment, skill, physical effort, and so forth. Classes often contain similar jobs. (p. 204) classification/grading method A method for categorizing jobs into groups. (p. 204) compensable factor A fundamental, compensable element of a job, such as skill, effort, responsibility, and working conditions. (p. 203) differential piece-rate plan A plan by which a worker is paid a basic hourly rate plus an extra percentage of his or her base rate for production exceeding the standard per hour or per day. It is similar to piecework payment but is based on a percentage premium. (p. 218) employee share purchase/stock ownership plan (ESOP) A trust is established to hold shares of company stock purchased for or issued to employees. The trust distributes the stock to employees on retirement, separation from service, or as otherwise prescribed by the plan. (p. 226) external equity When an employee perceives his or her pay as fair given the pay rates in other organizations. (p. 201) fixed pay Compensation that is independent of the performance level of the individual, group, or organization. (p. 215) gainsharing plan An incentive plan that engages employees in a common effort to achieve productivity objectives and share the gains. (p. 226) grade/group description A written description of the level of compensable factors required by jobs in each grade. Used to combine similar jobs into grades or classes. (p. 204) grades Groups of jobs based on a set of rules for each grade, where jobs are similar in difficulty but otherwise different. Grades often contain dissimilar jobs. (p. 204) guaranteed piecework plan The minimum hourly wage plus an incentive for each piece produced above a set number of pieces per hour. (p. 217) internal equity Employees perceives his or her pay as fair given the pay rates of others in the organization. (p. 201) job evaluation A systematic comparison to determine the relative worth of jobs within a firm. (p. 203) job evaluation committee A diverse group (including employees, HR staff, managers, and union representatives) established to ensure the fair and comprehensive representation of the nature and requirements of the jobs in question. (p. 204) merit pay (merit raise) Any salary increase awarded to an employee based on his or her individual performance. (p.216) pay equity Providing equal pay to male-dominated job classes and female-dominated job classes of equal value to the employer. (p. 202) pay grade Comprises jobs of approximately equal value. (p. 207) pay ranges A series of steps or levels within a pay grade, usually based on years of service. (p. 209) piecework A system of pay based on the number of items processed by each individual worker in a unit of time, such as items per hour or items per day. (p. 217) point method A job evaluation method in which a number of compensable factors are identified, the degree to which each of the factors is present in the job is determined, and an overall point value is calculated. (p. 205) profit-sharing plan A plan whereby most or all employees share in the company's profits. (p. 225) red circle pay rate A rate of pay that is above the pay range maximum. (page 212) stock option The right to purchase a stated number of shares of a company stock at today's price at some time in the future. (p. 221) straight piecework plan A set payment for each piece produced or processed in a factory or shop. (p. 217) team or group incentive plan A plan in which a production standard is set for a specific work group, and its members are paid incentives if the group exceeds the production standard. (p. 218) total employment rewards An integrated package of all rewards (monetary and non-monetary, extrinsic and intrinsic) gain by employees arising from their employment. (p. 199) variable pay Any plan that ties pay to productivity or profitability. (p. 215) wage curve A graphic description of the relationship between the value of the job and the average wage paid for this job. (p. 209) wage/salary survey A survey aimed at determining prevailing wage rates. A good salary survey provides specific wage rates for comparable jobs. Formal written questionnaire surveys are the most comprehensive. (p. 207) CHAPTER 9 EMPLOYEE BENEFITS AND SERVICES LEARNING OUTCOMES 1. EXPLAIN the strategic role of employee benefits. 2. DESCRIBE seven government-mandated benefits. 3. EXPLAIN why the cost of health insurance benefits is increasing and how employers can reduce these costs. 4. DESCRIBE the two categories of pension plans and the shift that is occurring in their relative popularity. 5. DISCUSS three types of personal employee services and six types of job-related services offered to employees. 6. EXPLAIN how to set up a flexible benefits program. REQUIRED PROFESSIONAL CAPABILITIES  Ensures compliance with legally required programs  Integrates the basic benefits program with disability management  Performs an analysis of organizational and employee needs related to benefit plans  Administers the reporting, funding, and fiduciary aspects of the plan  Provides information and counselling to pension-plan participants CHAPTER SUMMARY The strategic importance of benefits (indirect financial payments) is increasing in the post-job security era. Strategically aligned benefits can attract and retain the right people to achieve business objectives. Six major government-mandated benefits are: EI, C/QPP, workers’ compensation, vacations/holidays, leaves of absence, and termination pay. Health insurance costs are rising due to new drugs, increased drug use, and reduced provincial coverage. Organizations are responding by increasing employee portion, restricting covered drugs, implementing health/wellness plan, and offering health spending accounts. Two categories of pension plans are defined benefit and defined contribution. Three types of personal employee services are credit unions, counselling services, and employee assistance plans. Six types of job-related services are subsidized child-care, eldercare, subsidized transportation, food services, educational subsidies, and family friendly benefits. The flexible benefits approach allows the employee to put together his or her own benefit plan, subject to total cost limits and the inclusion of certain compulsory items. LECTURE OUTLINE I. THE STRATEGIC ROLE OF EMPLOYEE BENEFITS Employee benefits and services can be defined as all the indirect financial payments that an employee receives during his or her employment. In an era of modest salary increases, benefits have become even more important, but also more costly for organizations (37% of payroll, compared to 15% in 1953). Administering government-mandated and employer-sponsored benefits is a highly specialized and also increasingly expensive task. Research indicates that benefits matter to employees and that, if they are aligned with business strategy, can help to attract and retain the right people to achieve business objectives, although most employees do not realize the value or cost of their benefits. Teaching Tip: As class preparation have students get a life insurance quote for a $ 100,000 policy and for a year of basic health insurance (not including dental). II. GOVERNMENT-MANDATED BENEFITS Canada has one of the world’s finest collections of social programs to protect its citizens when they cannot earn income. The following plans are funded through employer and employee contributions, along with general tax revenues. (Table 9.2 p. 233) 1. Employment Insurance (EI) Employment insurance is a federal program intended to provide temporary financial assistance to eligible person (contributor with minimum hours of work in specified period of time, willing and able to work) who experience interruption to their work through no fault of their own EI is funded by contributions from both eligible employees (through payroll deduction) and employers (1.4 times employee contribution). Benefit received is generally 55% of average earnings during last 14 – 45 weeks of qualifying period or maximum weekly rate; payable for up to 45 weeks; claimants must demonstrate active job search and are permitted to work part-time; SUB pays up to 90% of wage (approved by Canada Employment Insurance Commission). Teaching Tip: Discuss the rationale, and the pros and cons of allowing individuals on EI to work part-time in addition to collecting benefits. 2. Pay on Termination of Employment Employment/labour standards legislation requires that employees whose employment is being terminated by the employer be provided with termination pay (severance pay and/or pay in lieu of reasonable notice) when they leave. a. Reasonable advance notice periods – written notice unless on contract or fired for just cause, varies across jurisdictions but often one week per year of employment to specified maximum; notice can be replaced by pay in lieu of reasonable notice b. Severance pay – Ontario (1 week’s pay for every year of employment, to max. 26 weeks), subject to certain employment and employer conditions; Federal jurisdiction (greater of two days’ worth of wages for every year of employment or a total of five days wages. c. Pay for mass layoffs – 5 provinces require additional pay for layoffs of more than 50 employees, 2 provinces set threshold at 10 or more employees longer time to reemployment; rationale is longer time to re-employment. Teaching Tip: As class preparation or as a follow-up assignment, have students research Canadian news stories to find out how much severance pay was given to workers at companies who permanently laid off their workforce. 3. Leaves of Absence All provinces and territories and the federal jurisdiction require unpaid leaves of absence to be provided to employees in certain circumstances (e.g. maternity/parental leave, adoption leave, bereavement leave, compassionate care leave). Amounts vary by jurisdiction, parental leaves can sometimes be split between partners but upon return from maternity, parental or adoption leave the employee is entitled to old or similar job. Clear procedures and forms are essential, and medical certificates should be obtained to support medical leaves. Costs of offering leaves of absence include temporary workers, training costs for replacement workers and lost productivity. 4. Canada/Quebec Pension Plan (C/QPP) Introduced in 1966, C/QPP provides working Canadians with a basic level of financial security on retirement or disability via one of three types of benefits: retirement pensions (25% avg. earnings), disability benefits (75% of pension benefit earned), or survivor benefits (lump sum and monthly pensions). Self-employed are included, but casual and migrant workers are excluded. C/QPP benefits are portable and adjusted to inflation in line with CPI. Contributions made by employees are matched by employers, based on earnings up to “year’s maximum pensionable earnings”. 5. Workers’ Compensation Workers’ compensation provides sure and prompt income and medical benefits to victims of work-related accidents or illnesses or their dependents, regardless of fault. Specifics vary by province/territory but in all cases employee and employer cannot sue each other. Employers pay full cost of premiums, provincial/territorial boards determine and collect payments, determine rights to compensation and pay benefits to injured workers or to the families of workers killed on the job. Benefits include payment of medical and rehabilitation expenses, as well as income benefits while off work. All benefits are non-taxable. a. Controlling workers’ compensation costs – renewed focus on accident prevention, safety and health programs, rehabilitation programs (physical therapy and career counselling), and increased opportunities for modified work 6. Vacations and Holidays Labour/employment standards legislation sets out a minimum amount of paid vacation that must be provided to employees, usually two weeks per year; however, the requirements vary by jurisdiction, and the actual number varies from employer to employer, based on what they want to offer over the minimum. The number of paid (statutory) holidays also varies by jurisdiction, from 5 days to 9 days. Teaching Tip: Given the diverse religious composition of Canada’s workforce, some have suggested that religion-based holidays (e.g. Good Friday, Christmas Day) should become optional instead of mandatory holidays, allowing more flexibility to take holidays that fit your own religious tradition (e.g. Yom Kippur, Hanukkah, Eid). Hold a debate (in-class, short written paper, or Twitter). 7. Paid Breaks There is also mandated, paid and unpaid time off requirements within a work day at provincial/territorial and federal levels. Contrary to popular belief, coffee or other rest breaks in addition to an eating period are not government mandated. Payment often depends on whether the employee is free to leave the workplace. Teaching Tip: Many young workers are unaware or feel uncomfortable asking for their statutory required break, and often end up working long hours without a break. Survey students to find out if their employers provided mandatory breaks. III. VOLUNTARY EMPLOYER-SPONSORED BENEFITS Although they are not required to do so, employers often provide many other employee benefits. Many of these benefits offer great value because they can be purchased by the employer at a much lower cost than if individual employees had to purchase it on their own. (Figure 9.1 p. 239) 1. Life Insurance Virtually all employers provide and 100% fund group life insurance plans that provide life insurance equal to about two years of salary for their employees, regardless of health or physical condition. Employees can buy additional life insurance; other types of insurance coverage include accidental death and dismemberment or critical illness insurance. 2. Supplementary Healthcare/Medical Insurance Most employers provide their employees with supplementary healthcare/medical insurance (over and above provincial healthcare plans) for non-work-related injuries accidents and illnesses. Employees must pay a deductible (small amount) before benefits begin, but in many cases the plan premiums are paid entirely by the employer. a. Reducing health benefit costs – dramatically increasing costs (See Fig. 9.2, p. 240) due to expensive drugs, rising drug use by aging population; solutions include increasing amount by paid by employees (increase premiums, reduce coinsurance levels, change coverage), publish restricted list of drugs (generics vs. name brand, proven vs. new), health promotion (newsletters, wellness programs, counselling), and flexible healthcare spending accounts (HCSA) b. Retiree health benefits – often exceed costs for active employees, early retirees use extensively before govt. healthcare starts at 65, not required to be pre-funded, at risk if business fails; reduce cost by increasing deductibles, tightening eligibility requirements, and reducing maximum payouts Teaching Tip: The ethical dilemma on p. 242 deals with retiree health benefits. 3. Short-Term Disability Plans and Sick Leave Plans Short-term disability plans provide for continuation of all or part of an employees’ earning when the employee is absent from work because of non-work-related illness or injury. Medical certification usually required is absence greater than 2 – 3 days, and coverage reduces over time and cease when employee returns to work or qualifies for long-term disability. Sick-leave plans grant full pay for a specified number of permissible sick days – usually up to about 12 per year; most jurisdictions require a couple of unpaid days of sick leave. Many employees use sick leave as vacation extension or come to work sick if there is a buyback or payout plan for unused sick days. 4. Long-Term Disability Long-term disability insurance is aimed at providing income protection or compensation for loss of income (50 – 75% of base pay), because of long-term illness or injury that is not work-related; usually starts when sick leave or short-term disability is used up. Number of LTD is rising sharply due to chronic illnesses more common in aging workforce. Disability management programs are priority to get workers safely back to work; key elements include prevention, early assessment and intervention, monitoring and managing absences, early and safe return-tow work policies, and on-going contact with the employee. Three most common approaches to returning disabled workers to work are: reduced work hours, reduced work duties, and work-station modification based on an evaluation of the worker’s physical capabilities. a. Mental health benefits – leading cause of short-term and long-term disability claims in Canada (e.g. depression), annual cost of $ 51 billion Canadian (underestimated due to underreporting), challenges in addressing mental health issues (Fig. 9.3, p. 244) 5. Sabbaticals Uncommon but provide employees with time off for rejuvenation or pursuit of a personal goal; usually unpaid, but can be fully or partially paid by employer; used to retain high valued employees especially those at risk of burnout; employees maintain job security and seniority. 6. Retirement Benefits Pre-funded employer-sponsored pension plans are intended to supplement and employee’s government-sponsored retirement benefits (C/QPP). Pension fund assets have grown considerably but laws restrict investment in foreign securities. a. Two categories of pension plans – with a defined benefit pension plan benefits are pre-determined, whereas with defined-contribution plans only the contributions are specified, benefits are only known when an annuity is purchased upon retirement. Two other types of defined contribution plans are group registered retirement savings plans (group RRSP) which are funded by the employee and deferred-profit sharing plan (DPSP) which is funded by the employer; these two plans are popular in Canada because no tax is paid until employee’s death or termination of employment (see Table 9.3, p. 245). Pension planning is complicated for both employer and employee; employers must educate and inform (but not advise) plan members about pension investments or face lawsuits. Economic recessions shrink values of pension funds causing defined contribution members to defer retirement and defined benefit plans to become “endangered species” due to need for major increase to company contributions to adequately fund pension obligations. When designing a pension plan there are several legal and policy issues: • Membership requirements – min. # of years of service • Benefit formula (defined benefit plans) – final or average earnings • Retirement age – often “30 and out” but mandatory retirement prohibited under human rights legislation • Funding – contributory or non-contributory (employer only) • Vesting – employees right to employer contributions and earnings on those contributions • Portability – transfer to new employer’s pension plan or roll over into a locked-in RRSP Teaching Tip: Discussion of pensions often causes students’ eyes to glaze over, however, Critical Thinking Question # 2 (p. 256), highlights the importance of paying attention to vesting and portability, given Gen Y patterns of high job mobility. b. Phased retirement Using reduced workdays or shortened workweeks can ease labour shortage while helping retiring employees maintain income levels with a combination of employment and pension income. Varies by jurisdiction. (Fig. 9.4 p. 248) Teaching Tip; Discuss the pension problem facing many countries, which had its roots in unsupported assumptions about population growth in the 1950s – 1970’s. Why didn’t population rates remain stable? What are the consequences of raising the eligible age to receive retirement benefits? c. Supplemental employee retirement plans (SERPs) The Income Tax Act has not changed the maximum pension benefit permissible under the act (for tax deductibility of plan contributions) since 1976, resulting in pension benefits being less than benefit formula would otherwise provide; tends to affect executives and other high earners. Supplemental employee retirement plans (SERPs) provide the difference, ¾ of employers provide them but not all are pre-funded. IV. EMPLOYEE SERVICES Although vacations, paid holidays, insurance and retirement benefits account for the largest portion of an organization’s benefits costs, many employers also provide a range of services to help employees with personal and work-related issues. 1. Personal Services Personal services are intended to help employees with work-life balance, with personal issues that might affect work, and provide a sense of overall well-being. a. Credit unions – membership-based financial institutions, offer accounts and loans at favourable rates b. Counselling services – financial, family, career, job placement ,pre-retirement, legal c. Employee assistance plans (EAPs) – confidential counselling or treatment for mental health, marital/family, work-life balance, stress, legal problems, substance abuse, or other addictions; significant increase after recession of 2008; help reduce absenteeism and disability costs; assess quality of external EAP providers d. Other personal services – social and recreational opportunities, company goods and services 2. Job-Related Services Job-related services are provided to help employees perform their jobs more effectively and efficiently. Help to reduce absenteeism, increase productivity, job satisfaction, and organizational commitment. a. Subsidized childcare – referrals to community providers, on-site childcare, childcare for mildly ill children, and emergency backup childcare b. Eldercare – flexible hours, support groups, counselling, free pagers, adult daycare, referral services to locate community services c. Subsidized employee transportation – public transit, carpooling/shuttles/buses d. Food services – cafeterias/dining facilities, coffee wagons, vending machines e. Educational subsidies – tuition refunds, expense reimbursement, in-house educational programs; some cover all courses, some just directly job-related courses 3. Executive Perquisites Executive perquisites (perks, for short) are usually given to only a few top executives; include cars and/or chauffeurs/drivers, use of company properties, corporate jet, management loans, salary guarantees “golden parachutes”, financial counselling, relocation benefits, security systems, executive dining rooms, legal services, tax assistance, liberal expense accounts, club memberships, season tickets, credit cards, physical fitness programs, concierge services, and subsidized education for their children. Teaching Tip: Use the ethical dilemma on pg. 252, to capture students’ attitudes about executive perquisites. Have them take the perspective of a front-line employee, a rising manager, and a current senior manager (executive). V. FLEXIBLE BENEFITS PROGRAMS Research conducted over 30 years ago found that an employee’s choice of benefits is influence by his/her age, marital status and sex. Flexible benefit programs recognize that what one employee finds as attractive may be unattractive to another. In 1980 there weren’t any flexible plans, but by 2005, 41% of Canadian employers offered them, and 85% have or plan to implement one soon. There are advantages to both employers and employees (see Fig. 9.5, p. 253). Communication and employee co-operation are critical issues; face-to-face communication supplemented by a company website is the recommended approach. VI. BENEFITS ADMINISTRATION Benefits administration is a challenge even in small companies (e.g. keeping track of each employee’s employment status and making changes). Software packages and outsourcing to a benefits administration provider can make the process more efficient, more consistent and generate enhanced service. 1. Keeping Employees Informed Correct information must be provided to all employees in a timely, clear manner, but especially to the large number of people approaching retirement. Pension legislation dictates information disclosure to plan members and their spouses. Real-time e-statements, electronic pension booklets and pension-modelling tools available through the company’s website can help employees understand their benefits and plan their lives more effectively. DISCUSSION BOXES GLOBAL HRM: Defined Benefit Pension Problems and Solutions Around the World (p. 246) Many countries designed generous defined benefit social security programs between 1950 and 1970, based on assumptions of a stable population. However, declining populations have meant that younger employees are subsidizing older ones, which is not sustainable. Solutions have included increasing contribution rates, raising the normal retirement age to 67, and moving to defined contribution plans. Pension planning is complex for workers moving across multiple jurisdictions (e.g. European Union, Canadian provinces) due to a patchwork of legislation that needs to be simplified. ETHICAL DILEMMAS Should it be the employer’s responsibility to cover health-care costs for early retirees until they become eligible for government health-care benefits at age 65? (p. 242) While it can be argued that there are no legal or ethical obligations to do so, failing to cover health-care costs for early retirees until they become eligible for government health-care benefits at age 65 will decrease the attractiveness of early retirement windows. Since many firms have been using early retirement incentives as a means of downsizing and/or restructuring without having to lay off or terminate employees, and of creating more opportunities for their younger employees to enhance their ability to retain such workers, failing to do so is not in the employer’s best interests. Should an employer with a pension plan that covers employees in several provinces give each group the minimum vesting and portability benefits for their province or take the most generous of these and provide it to all employees? (p. 247) Since internal equity is a key compensation issue, most will argue that the company pension plan should be standardized across jurisdictions. Doing so will also make it easier for the firm to encourage transfers and/or promotions from the firm’s facilities in one jurisdiction to those in another jurisdiction. Should the use and applicability of executive perks be made available to employees who do not qualify for these benefits? (p. 252) Many will no doubt say that executive perquisites should say that perks should be available throughout the organization in order to enhance engagement within the organization by non executive employees. It is important to remember that perks generally are provided as an incentive to attract and retain talented people as well as to facilitate productivity in their roles. Therefore, benefits and perks will often reflect to difficulty in attracting and retaining such talent. However, many firms are no longer offering perks that highlight differences in position and status, such as executive dining rooms, executive apartments, company planes, and full-time chauffeurs for high-ranking employees, since such perks can hinder teamwork and cooperation. This is especially true in organizations with a flat structure and/or team-based design. KEY TERMS Canada/Quebec Pension Plans (C/QPP) Programs that provide three types of benefits: retirement income; survivor or death benefits payable to the employee's dependents regardless of age at time of death; and disability benefits payable to employees with disabilities and their dependents. Benefits are payable only to those individuals who make contributions to the plans or to their family members. (p.236) coinsurance The percentage of expenses (in excess of the deductible) that are paid for by the insurance plan. (p. 240) deductible The annual amount of health/dental expenses an employee must pay before insurance benefits will be paid. (p. 239) deferred profit-sharing plan (DPSP) A plan in which a certain amount of company profits is credited to each employee's account, payable at retirement, termination, or death. (p. 245) defined benefit pension plan A plan that contains a formula for determining retirement benefits. (p. 244) defined contribution pension plan A plan in which the employer's contribution to the employees' retirement fund is specified. (p. 244) disability management A proactive employer-centred process that coordinates the activities of the employer, the insurance company, and health-care providers in an effort to minimize the impact of injury, disability, or disease in a worker’s capacity to successfully perform his or her job. (p. 243) employee assistance plan (EAP) A company-sponsored program to help employees cope with personal problems that are interfering with or have the potential to interfere with their job performance, as well as issues affecting their well-being or the well-being of their families. (p. 249) employee benefits Indirect financial payments given to employees. They may include supplementary health and life insurance, vacation, pension plans, education plans, and discounts on company products. (p. 232) employment insurance (EI) A federal program intended to provide temporary financial assistance to eligible persons who experience interruption to their work through no fault of their own. (p. 233) flexible benefits programs Individualized benefits plans to accommodate employee needs and preferences. (p. 252) group life insurance Life insurance provided at lower rates for all employees, including new employees, regardless of health or physical condition. (p. 238) pay in lieu of reasonable notice A lump-sum equal to an employees’ pay for the notice period provided to employees who cease working immediately.(p. 234) pension plans Plans that provide income when employees reach a predetermined retirement age. (p. 244) phased retirement An arrangement whereby employees gradually ease into retirement using reduced workdays or shortened workweeks. (p. 247) portability A provision that employees who change jobs can transfer the lump-sum value of the pension they have earned to a locked-in RRSP or their new employer's pension plan. (p. 247) short-term disability and sick leave Plans that provide pay to an employee when he or she is unable to work because of a non-work-related illness or injury. (p. 242) supplemental employee retirement plans (SERPs) Plans that provide the additional pension benefits required for employees to receive their full pension benefits in cases where their full pension benefits exceed the maximum allowable benefits under the Income Tax Act. (p. 248) vesting A provision that employer money placed in a pension fund cannot be forfeited for any reason. (p. 247) workers' compensation Workers' compensation provides income and medical benefits to victims of work-related accidents or illnesses or their dependents, regardless of fault. (p. 236) Instructor Manual for Management of Human Resources: The Essentials Nina D. Cole, Gary Dessler, Nita Chhinzer 9780132114905, 9780133807332, 9780134305066