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Chapter 7 Defining Competitiveness REVIEW QUESTIONS 1. Distinguish policies on external competitiveness from policies on internal alignment. Why is external competitiveness so important? External competitiveness refers to the pay relationships among similar jobs in different organizations, while internal consistency focuses on the relationships within a single organization. External competitiveness is an important concept because the pay level of an organization affects both the expense and quality of its work force, as well as the organization’s ability to attract and retain a qualified work force. 2. What factors shape an organization’s external competitiveness? The factors include labour market competition, product market competition, and characteristics unique to the organization and its work force. 3. What does marginal revenue product have to do with pay? Marginal revenue product is the additional revenue associated with the output of one additional human resource unit, and determines the level of employment (demand for labour) for a single employer. The interaction of the sum of all employers’ demand for labour and the supply of human resources determines the market pay level. EXPERIENTIAL EXERCISES 1. Using efficiency wage theory, find an organization (major league sports teams may make the relevant information publicly available) that offers above-market wages, and investigate whether the theory accurately predicts behaviour such as workers with better performance and lower turnover. If efficiency wage theory is correct, a lead policy results in higher productivity but also higher labour costs, unless these are offset by productivity gains. A hybrid policy can be tuned to the specific needs of the organization- its strategy, its work, and the types of employees it requires. 2. What is a relevant market? What is a relevant market for university professors? For Walmart associates? For hockey players? Gather information on market pay for politicians in your municipality. Defining a relevant market is important in the whole scope of defining an organization’s competitiveness. However, in reality little time is spent to do this task and so errors are often made in determining the estimates of competitors’ pay rates. Relevant markets are shaped by pressure from the labour and product markets and the organization. Relevant markets might include: comparable universities, Target associates, hockey players from teams in the same league, market pay for other municipalities. 3. Find a company that follows a lag policy. Why do they believe it pays to pay below market? Can you find any companies that follow performance-driven and/or work-life balance policies? A lag policy results in low labour costs, but may lead to unrecovered training costs, if trained employees leave for higher-paying jobs. CASE: Northern Software 1. What policy regarding external competitiveness would you advise? List the options and the pros and cons of each policy option. Offer the rationale for your recommendation. Given the choice to match, lead or lag, the most common policy is to match rates paid by the competitors. A lead policy maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay. The lead policy may have negative effects too. It may force the employer to increase the wages of current employees, too, to avoid misalignment and murmuring against the employer. 2. What forms of pay would you recommend? Again, offer your rationale. I would recommend Company B illustrated in Exhibit 7.2. The combination of a base salary of 64%, benefits at 17%, and options at 13% and bonus at 6% attracts and retains employees by offering incentives and benefits in addition to the base salary. 3. Consider the theories and research presented in this chapter. Which ones did you use to support your recommendation? Efficiency wage theory - above-market wages will improve efficiency by attracting workers who will perform better and be less willing to leave. Staffing programs must have the capability of selecting the best employees; work must be structured to take advantage of employees’ greater efforts. Signalling Theory - pay policies signal the kinds of behaviour the employer seeks. Pay practices must recognize desired behaviours with more pay, larger bonuses and other forms of compensation. 4. List three pieces of additional information you would like to have to refine your recommendation. Explain how this information would help you. The three major factors that shape external competitiveness are: (1) competition in the labour market for people with various skills; (2) competition in the product and service markets, which affects the financial condition of the organization; and (3) characteristics unique to each organization and its employees, such as its business strategy, technology, and the productivity and experience of its workforce. Chapter 8 Designing Pay Levels, Pay Mix and Pay Structures REVIEW QUESTIONS 1. Which competitive pay policy would you recommend to Research in Motion (RIM), the maker of the BlackBerry and Playbook, headquartered in Waterloo, Ontario? Why? The response to this question would be dependent on whether you were just starting the company; what your role is in the company; budgetary information etc. It is suggested that RIM follow the seven decisions of setting up externally competitive pay including: specify the employer’s external pay policy define the purpose of compensation survey choose relevant market competitors to survey design the survey interpret survey results and construct the market pay line construct an internal pay policy line that reflects external pay policy, and balance competitiveness with internal alignment through the use of ranges, flat rates, and/or bands. It is also suggested that the following steps be followed in survey design are deciding: whether to do the survey in-house or to involve consultants how many employers to survey which jobs to include in the survey, and what specific compensation information to collect 2. What factors determine the relevant market for pay surveys? The relevant market includes: a) employers who compete for the same occupations or skill required b) employers who compete for employees within the same geographic area c) employers who compete with the same products and services 3. Describe three approaches to selecting jobs for inclusion in a survey. a) Benchmark Jobs Approach- Benchmark jobs are chosen from as many levels in each of these structures as can be matched with the descriptions of the benchmark jobs that are included in the survey. b) Low-high Approach- The simplest approach is to identify the lowest and highest paid benchmark jobs for the relevant skills in the relevant market and to use the wages for these jobs as anchors for the skill-based structures. c) Benchmark Conversion Approach- If an employer is finding it hard to match survey jobs, it can apply its plan for creating internal alignment to the descriptions of survey jobs. 4. What do surveys have to do with pay discrimination? Market data provided by surveys may be used to defend pay differentials. That is, an organization may defend the pay level for a particular occupation by comparing to the external market. However, many believe the “market” reflects and perpetuates past discrimination. Care must be taken when conducting surveys to elicit valid business reasons for including and excluding specific employers. 5. Contrast pay ranges and grades with bands. Why would you use either? Does their use assist or hinder the achievement of internal alignment? External competitiveness? Pay ranges exist whenever two or more rates are paid to incumbents of a given job. They permit an employer to recognize individual differences, whether they are performance or experience based. From an external competitiveness perspective, they act as a control device, setting minimum and maximum levels that an employer is willing to pay for work. Pay ranges foster internal consistency by differentiating pay based on performance or experience differences among employees. EXPERIENTIAL EXERCISES 1. Determine the relevant market for a survey of university professors pay. Explain the factors you considered in order to arrive at this determination. Why is the definition of relevant market so important? The relevant market for university professors depends on the type of job: tenured or limited term. If the job is strictly teaching then the relevant market should only be teaching jobs that can either be temporary or permanent. Tenured jobs are typically permanent and so the relevant market is focused on tenured jobs. Relevant markets are important to identify in order to create boundaries for the information gathered. 2. Draft a recommendation regarding a competitive pay policy for Walmart. Explain why this particular has been made. Does is depend on circumstances faced by the employer? Which ones? What policy would you recommend to your provincial government? A pay policy recommendation for Walmart is focused on efficiency and cost-cutting so that wages are lower than competitors but above the legislated amounts. Provincial governments would typically pay more than minimum wage. 3. Design a survey for setting pay for cashiers/baristas in coffee shops and another for financial managers. Do the issues differ? Will the techniques used and the data collected differ? Why or why not? It is important to develop the relevant market for each type of job. These jobs cannot be compared since they require difference skills, abilities, behaviours etc. It may be easier to collect data for the cashiers/baristas because the relevant market and information is smaller than for financial managers. CASE: Calculating Pay Ranges Discussion Pay Policy Line is a pay line representing an adjustment to the market pay line to reflect the company’s external competitive position in the market (ie. lead, match, lag) The first step in building flexibility into the pay structure is to group different jobs that are considered substantially equal for pay purposes into a Pay Grade. Base pay data are used because base pay reflects the basic value of the work (or relevant skill sets). Grades enhance an organization’s ability to move people between jobs within a grade with no change in pay. Pay Ranges set an upper and lower limit between which all wages for all jobs in a particular grade are expected to fall. A range has three salient features: a midpoint, a minimum and a maximum. Range Spread is the specific numerical distance between the minimum and maximum of the pay range (ie. 15-20% spread from the midpoint to maximum and from the midpoint to minimum) Note: Refer to Exhibit 8.11- Updating Market Pay Line to Create Pay Policy Line Refer to Exhibit 8.12 to Develop Pay Grades Chapter 9 Employee Benefits REVIEW QUESTIONS 1. How does the concept of external equity differ when discussing pay versus benefits? Both pay and benefits need to be tested for external market fairness. Both involve a level issue and a mix issue. Is the dollar amount spent reasonable, relative to the market and your policy goals with respect to the market? Is the mix reasonable? With pay the mix issue is much more complex. How we allocate dollars among the many benefits is a complex issue. Finding what employee needs are and identifying a constellation of benefits that best satisfy these needs is difficult. A flexible benefits program shows some empowerment of workers to decide what mix best pleases them. Such a choice isn’t typically given to employees with respect to pay. Employees can’t typically choose what proportions they would like to have between base and variable pay. 2. Describe how a flexible benefits plan might increase worker satisfaction with benefits at the same time that costs are being reduced. Flexible benefits programs allow workers to choose, within boundaries, the types of benefits that best please them. In theory, this should increase worker satisfaction under the assumption that workers know better than benefits administrators what their needs are. Costs can be reduced if the dollar-spending amount given to employees is less than the amount allocated for the non-flexible package in the past. The optimal situation exists when dollar costs can be cut, but because of worker empowerment in choosing among the options, the satisfaction level actually rises. 3. Explain how an employee assistance plan could reduce costs for several other benefits. These programs are particularly important for helping employees who suffer workplace trauma ranging from harassment to physical assault. The number of EAPs in Canada is growing because they are a proactive way to reduce absenteeism and disability costs. EXPERIENTIAL EXERCISES 1. Your CEO is living proof that a little bit of knowledge is a dangerous thing. He just read in the Globe and Mail that employee benefits cost, on average, 38 percent of payroll. To save money, he suggests that the company fire its two benefits administrators, do away with all benefits, and give employees a 38 percent pay raise. What arguments could you provide to persuade the CEO that this is not a good idea? Employees expect benefits and a competitive benefit package can help the organization attract and retain good employees. Also some benefits are legally required and must be provided. Finally, a 38 percent pay hike could be much more expensive to the organization than the benefits because of tax advantages, group discounts, and the utility value of the benefits to the organization. There are advantages to employee benefits: they have tax benefits and reduced rate group costs that appeal to employees. The issue is not whether to have or not have benefits. Because they exist in competitor firms, you need to be concerned with being equitable. The question is: “how do I maximize return for my benefits dollars?” What does the market pay as a percent of payroll? If the dollar amount is high, find a way to shift costs to employees, or to eliminate low value benefits. If the cost is competitive, evaluate employee needs to make sure you have a match with the types of benefits offered. Evaluate your communication methods to ensure that employees understand their benefits, know their financial value, and how to make legitimate use of them when the need arises. After all these things are done, you need to pay attention to what positive things your benefits are doing. Monitor new recruits to see if benefits swayed their decision to join your firm. Conduct exit interviews to see if benefits were an issue. Link payout of some benefits to firm performance. 2. Your company has a serious turnover problem among employees with fewer than five years’ seniority. The CEO wants to use employee benefits to lessen this problem. What might you do, specifically in the areas of pension vesting, vacation and holiday allocation, and life insurance coverage, in an effort to reduce turnover? The organization could specifically tie each of these benefits to seniority and increase life insurance amounts and the number of vacation and holiday days with seniority. They could also increase the time required for pension funds to vest up to the legal maximum. The ideal situation would be to offer lower than average benefit levels for newcomers but provide a much steeper growth curve than other companies might offer. Students should note that this might influence ability to recruit new employees. 3. Assume you are politically foolhardy and decide to challenge your CEO’s decision in the previous question to use benefits as a major tool for reducing turnover. Before she fires you, what arguments might you use to try to persuade her? (Hint: Are there other compensation tools that might be more effective in reducing turnover? Might the changes in benefits have unintended consequences for more senior employees?) There are many other compensation tools available to try and reduce turnover. The organization may need to re-evaluate their salary plan in case turnover is due to feelings of inequity in wages. More senior employees may resent changes in benefits if they have unfavourable consequences for them, or if they are perceived as inequitable. The turnover itself may not be as costly as changes in benefits to control it. The compensation manager should examine the costs of turnover in terms of hiring and training replacements versus the costs necessary to keep the employees from leaving. It is unclear how much of an impact employee benefits have on turnover. We know employees who frequently job hop suffer lower pension coverage at retirement. What isn’t clear, though, is whether employees know this and choose to stay with companies because of it. In contrast, we do know there is reported “golden handcuff” effect with wages- some employees report that it is difficult to leave a company that pays higher than average wages. Is this invisible chain a good idea, though? If resentment builds because of the perceived loss of options, productivity may actually decline. The student should recognize there is no right answer to this question. Consequently, a good answer would call all these issues and point out that company specific data should be collected before making any design decisions. CASE: Lightning Industries 1. Cost out these packages given the data in Tables 1 and 2 and the information obtained from various insurance carriers and other information sources (Table 4) 2. Which package should you recommend to Jacobs? Why? 3. Which of the strategies do you think will require less input from employees in terms of their reactions? Discussion Need to look at factors influencing choice of benefits packages. Employer Factors include: Relationship to total compensation costs, Costs relative to benefits, Competitor offerings, Role of benefits (attraction, retention and motivation), Legal requirements. Employee Factors include: Equity (fairness), Personal needs as linked to: Age, Sex, Marital status, Number of dependants Need to review the two general strategies for controlling medical benefit costs: (i) motivating employees to change their demand for health care through changes in the design or administration of the plan and (ii) the promotion of preventive health programs. Chapter 10 Pay For Performance: Performance Appraisal and Plan Design REVIEW QUESTIONS 1. If you wanted workers to perceive their compensation package as secure, which components would you include and which would you avoid? I would build a large component that is base pay with low or no incentive component. Any incentive component should be based on work performance over which the employee has control, and should not be linked to risk sharing (where employees forego some base pay as a buy into possible larger incentive payments later). I would also try to increase developmental opportunities so that downsized employees would still have current skills that might be more in demand. 2. How does procedural justice differ from distributive justice? Defend the position that supervisors have considerable control over procedural justice in their departments, but little control over distributive justice. How might you use the principle of procedural justice to avoid having an employee quit because she believes her boss gave her an unfair evaluation? Procedural justice refers to fairness of the rules involved in the allocation of rewards. Distributive justice involves fairness of the actual reward, in relation to some standard (amounts of inputs required to receive a reward, what others receive). An employee who receives an unfair evaluation should have the opportunity to appeal that decision- that is a basic principle of procedural justice. Also, employees should have input into design of the appraisal process, including requirements that supervisors provide documentation (diaries) of the behaviours that let to the ratings. 3. Shaw Corporation manufactures speciality equipment for the auto industry (e.g., seat frames). One job involves operation of machines that form heat-treated metal into various set shapes. The job is fairly low-level and routine. Without any further information, which of the five types of appraisal formats do you think would be most appropriate for this job? Justify your answer. Based on the information given, one could argue that the ranking method would be the most appropriate method to rate employee performance. This is a relatively inexpensive method to use, and it requires no specific standard of production to compare. Since the workers manufacture speciality products, it is unlikely that there is a high production rate with set standards, reducing the attractiveness of a standard rating scale or a behaviourally anchored rating scale. It is also unlikely that these low-level employees would be rated with a management by objective format or an essay format. Given the relatively low-level position, it is unlikely that the company developed an adjective checklist format. The ranking method would have supervisors “rank” each employee in terms of their overall value to the organization. However, if the low level jobs do have prescribed routines, then they are ideal for behaviourally anchored rating scales. If the jobs have an identifiable way of behaving, the identification of behavioural examples that both guide performance and permit evaluation of effectiveness may be ideal. 4. Employees in your department have formed semi-autonomous work teams (they determine their own production schedule and individual work assignments). Individual performance is assessed using four performance dimensions: quantity of work, quality of work, interpersonal skills, and teamwork. Should the supervisor have a role in the rating process? What role, if any, should other members of the work team have in the assessment process? The supervisor may be the best judge of both quantity of work and quality of work. Certainly, team members should be involved in the process, and may have a unique perspective on interpersonal and teamwork skills. EXPERIENTIAL EXERCISES 1. Roycroft Industries makes CD cases that are particularly well received on the international market. Because of currency fluctuations, the profits Roycroft generates vary widely from year to year. Jim McVeigh, who works for Roycroft, is in charge of a large product development group where the emphasis is on flexible performance, creativity, and “doing whatever it takes to get the job done.” What kind of reward system would you recommend for this group of employees? In particular, should there be a large incentive component? Should rewards focus mostly on money, or should Roycroft work hard to incorporate the other 12 rewards noted in this chapter? Exhibit 10.1 gives some insight into the answer for this question. Roycroft faces an uncertain and highly variable profit picture. Employees in the product development department face variable tasks demanding flexibility and willingness to change. All these conditions suggest the compensation system should have a small or no incentive component (because of the low control employees have over profits) and a broad-based reward package. High empowerment, stable employment, and broad developmental opportunities should help build commitment of these employees and increase willingness to try new ways of doing their job. 2. A father decides to put his two sons to work in landscaping. The business involves going to a customer’s home and providing landscaping services (cut grass, edge sidewalk, pull weeds in flower beds, prune bushes and trees, rake leaves). Rather than paying a flat wage, the father decides to pay an incentive according to the following schedule (average across all lawns). At the end of the second week under this arrangement, the sons are quarrelling with each other and not happy with their dad. All of the disagreements revolve around the incentive system. What might be the problems? Each student response will vary according to the group discussions. According to the incentive schedule, there is little incentive to do the easier tasks like edging the sidewalk and cutting the grass since there is less incentive to earn. It is also unclear if the piece rate incentive per person is given only once per household or is in some way added to the hourly rate. All of this would cause quarrels between the sons. 3. Think about the last group project you worked on. Describe that project and identify three performance criteria you think would be appropriate for evaluating the team members. Should each team member rate each other team member on all these dimensions? Should the member ratings be used for feedback only or for feedback as well as for part of the overall grade (assuming the instructor agrees)? Should the instructor rate each team member on performance (all three criteria) in the group assignment? How are these questions relevant to setting up a 360-degree performance review? Group projects should have both methods of performance evaluation that evaluate individual and group performance. Self-assessments typically work better than peer evaluations since peer evaluations can turn into nasty attacks on individuals who are introverts. There are some similarities to a 360-degree performance review however, there are too many individuals in the group who are at the same rank which would not give sufficient diversity like the 360-degree feedback. CASE: Burger Boy 1. What appear to be the problems at this Burger Boy? 2. How many of these problems could be explained by compensation issues? 3. How many other problems could be lessened with diligent use of rewards other than pay? 4. Are hours of work a reward? What might explain why I was happy to be working 20 hours per week, but Chuck was unhappy with 30 hours per week? How might schedules be used as a reward? Discussion Problems at this Burger Boy are: Otis and Leon not managing workload when employees are absent (calling in sick from work), no back-up systems in place when employees are absent, puts too much pressure/stress on other employees, errors occur because of demands during busy times, not consistent with breaks, manager gives negative feedback publicly, not privately to employee, managers working too many hours- will burn out. Money alone is not the problem. Job descriptions should be clearly defined. Employees should learn other people’s jobs (rotation). Should open lines of communication, managers should communicate clearly and professional, not threatening/accusatory to their employees. Should review base salary, hours of work and eligibility for overtime. Solution Manual for Compensation George T. Milkovich, Jerry M. Newman, Barry Gerhart, Cole, Margaret Yap 9780071051569, 9781259086878, 9780078029493
