Transcript Chapter 9

Chapter 9
Determining Pay & Benefits
Gaining Competitive Advantage
• Problem: wanted to become “one of the great
service organizations of the world”
– Turnover problem—customers had to continually deal
with new ees
Problem: wanted to become “one of the
• Solution: retirement and health care benefit
plans were too expensive for lower paid ees
– Lower paid ees paid less for their benefits than the
highly paid employees
Gaining Competitive Advantage
• What did Manor Care do?
– Contribute more to lower salaried retirement accounts
(ees with lowest incomes would receive a contribution
equal to 3% of salary
– Vary out-of-pockets and deductibles based on salary
• How was it communicated?
– Via bulletins, newsletters, letters sent to ee’s homes,
and videotaped presentation at each site
Gaining Competitive Advantage
• What were the results?
– Enrollments in the benefit plans increased
dramatically among frontline ees
– Turnover rates dropped by 56% by the end of
the first year
– Dramatic improvement in customer service
– Gained a strong recruiting advantage in the
marketplace
Linking Pay & Benefits to
Competitive Advantage
• EEs receive compensation in return for
work performed
• Compensation is more than salary it is “all
forms of financial returns and tangible
services and benefits employees receive
as part of an employment relationship”
– “Financial returns’ refers to pay
– “Services and benefits” refers to insurance,
paid vacation, sick days, pension plans, and
ee discounts
Linking Pay & Benefits to
Competitive Advantage
• Compensation expert—Richard Henderson
states—”Probably no one cost of business is
more controllable and has a greater influence on
profits than labor costs”
• Firm’s compensation system can:
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Improve cost efficiency
Ensure legal compliance
Enhance recruitment efforts
Reduce morale and turnover problems
Improving Cost Efficiency
• Labor costs greatly affect competitive advantage
because they represent a large portion of a
company’s operating budget—cutting costs
company can achieve cost leadership (labor is
between 40 and 80 cents of each revenue
dollar on such costs)
• Benefits have risen in the past 25 years from
$250 billion to $740 billion
– Health insurance premiums will continue to grow at
double digit percentages and will affect the bottom
line (pay freezes and layoffs)
Achieving Legal Compliance
• Discrimination, minimum wages, and
overtime pay
• Benefits, pensions, compensation for
unemployment, and workers’
compensation for work-related injuries
Pay and benefits is directly tied to success
of recruitment efforts and reducing morale
and turnover problems
Pay Satisfaction: The Importance of
Equity
• Amount of pay has been found to be less
important than its perceived fairness or
equity
– $9 million--$10 million—ballplayers—stems
from perceptions of inequity not from need or
greed. Maybe someone less capable as a
ballplayer is earning more money
Equity Theory
• Equity theory—a pay fairness theory that states that
people form equity beliefs by comparing their
outcome/imput ratio to that of a referent other
• Imputs—the perceptions that people have concerning
what they contribute to the job
• Outcomes—the perceptions that people have regarding
the returns they get for the work they perform
• People feel equity when the O/I ratios of the individual
and his or her referent other are perceived as being
equal (You feel you contribute the same to the
referent other but earn less money
Equity Theory
• A person’s referent other could be any one of
several people. People may compare
themselves to others:
– Doing the same job within the same organization
– In the same organization, but performing different jobs
– Doing the same job in other organizations
People do not limit their comparisons to just one
person—they have several referent others.
Perceived fairness is achieved only when each
comparison is viewed as equitable.
Equity Theory
• When ee’s O/I ratios are less than that of their
referent others, they feel they are being
underpaid; when greater, they feel they are
being overpaid (both conditions produce feelings
of tension
• When underpaid:
– Decrease their imputs by reducing their effort or
performance
– Escape the situation—this response may be
manifested by a variety of behaviors, such as
absenteeism, tardiness, excessive work breaks, or
quitting
Little issue with overpaid ees
Establishing Pay Rates within an
Organization
• EEs feel pay is equitable when they
perceive these circumstances:
– It is fair relative to the pay coworkers in the
same org receive (called internal consistency)
– It is fair relative to the pay received by
workers in other organizations who hold
similar positions (called external
competitiveness)
– It fairly reflects their input to the organization
(called employee contributions)
Establishing Pay Rates within an
Organization
• To achieve internal consistency, a firm’s ees
must believe that all workers are being paid
what they are “worth”; company pay rates reflect
the overall contribution of each person’s job to
the organization (level of contribution, nurse vs.
orderly
• For pay rates to be internally consistent, then, an
org must first determine the overall importance
of worth of each job
• Job worth is based on skill and effort—
systematic process of determining this is called
job evaluation
Job Evaluation
• Discuss Taking a Closer Look 9-1 page 269
(ensuring the accuracy and fairness of job
evaluations
• Job Evaluations Committees—a committee of
individuals convened for the purpose of making
job evaluations (from various levels and job
functions)—some subjectivity—need rating
scales used to evaluate jobs must be clearly
defined, and evaluators thoroughly trained.
Job Evaluation
• Job Evaluation process is analogous to
performance appraisal in that evaluators
are asked to provide certain ratings on a
form
• Job evaluation ratings focus on the
requirements of the job and not on the
performance of the individual jobholder
Point Factor Approach
• Jobs are evaluated separately on several
criteria—compensable factors (Discuss Exhibit
9-1 on page 270 and Exhibit 9-2 on page 271)
• Development of point factor rating scale:
– Select and define compensable factors used to
determine job worth
– Determine the number of levels or degrees for each
factor
– Carefully define each degree level. Each adjacent
level must be clearly distinguishable
Point Factor Approach
• Development of point factor rating scale:
– Weigh each compensable factor in terms of its
relative importance for determining job worth
– Assign point values to the degrees associated
with each compensable factor
• Rate each job one factor at a time, until all
jobs rated on all factors (very difficult and
time consuming)
Assigning Jobs to Pay Grades
• When job evaluations have been
completed, jobs are grouped into pay
grades based on the total number of
points received. (Discuss Exhibit 9-3 page
272)
• Decide on the number of grades—College
we have 12 grades—some orgs have as
many as 20 to 25
Achieving External
Competitiveness
• Firm achieves external competitiveness when ees
perceive that their pay is fair in relation to what their
counterparts make in other organizations (what do our
competitors make?)
• Collect survey information for benchmark jobs (Surveys
from BLS/Mercer/Towers Perrin (Take a Closer Look 9-2
page 274)
• Pay Policy—a company policy stipulating how well it will
pay its ees relative to the market (majority of firms pay at
the market rate)
• Once benchmark jobs have been evaluated then we
would evaluate non-benchmark jobs (Figure 9-2)
• Statistical relationship between job evaluation points and
prevailing market rates
Establishing a Pay Range
• Pay range stipulates the minimum and maximum
for pay rates for all jobs within a grade (market
rate is set at the midpoint)
– Range spread—10 to 255 for office and production
work, 35 to 60% for professional and lower-level
management positions, and 60 to 120% for top level
management positions
– New ees paid at the bottom of the range—move
through the range based upon performance
Skill-Based Pay
• Skill-based pay is based on the assumption that
workers who acquire additional skills can make
a greater contribution to the organization and,
consequently; should be paid more (ees are
acquiring new job skills)
– Teachers earn a Master’s degree they have additional
skills
– General Mills production environments—broaden
worker’s skills so company gains greater flexibility in
work scheduling
Advantages of Skill-Based Pay
• Additional skills permits workers to perform all
portions of the production process
• EEs have broadened skills no longer be limited
to the perspective that comes from doing just
one step of the process—So—
– Communicate more effectively with ees doing other
parts of production
– Solve problems more effectively due to broader
understanding of the organization
– More committed to see that the organization operates
effectively—due to their overview of the entire
organization
Disadvantages of Skill-Based Pay
• Added labor costs due to ees being paid more
• May lead to pay inequity perception if two people are
doing the same job, yet one is receiving greater pay for
acquiring the additional skill
• Not cost effective if org cannot make effective use of ee
skills
• Problem in determining when one ee has more skills
than another (could be made subjectively)
• Develop additional training programs and certification
programs can become an administrative burden
Legal Constraints on Pay Practices
• FLSA- Fair Labor Standards Act
established in 1938—federal statute
covering all employers engaged in
interstate commerce
– Exempt and non-exempt ees (Discuss Exhibit
9-4 page 279)
– Minimum wage
– Overtime—non compliance with provision is
the most frequent violation (California more
than 8 hours in a day)
Pay & Discrimination
• Equal Pay Act—amendment passed to the
FLSA in 1963 prohibits sex discrimination
in pay
– Prohibits employers from paying lower wages
to one sex where the work of the two sexes is
substantially equal (jobs require equal skill,
effort, and responsibility)
• Comparable worth—a standard for judging
pay discrimination that calls for equal pay
for equal worth
Employee Benefit Options
• Worker’s Compensation—a state run, no-fault
insurance system that provides income
protection for workers experiencing job-related
injuries or illnesses
• Unemployment Compensation—a system
designed to provide income to individuals who
have lost a job through no fault of their own
-Quitting one’s job without good cause
-being discharge for misconduct connected with
work
-refusing suitable work while unemployed
Employee Benefit Options
• Social Security—a law that provides
eligible workers with retirement and
disability incomes and Medicare coverage
– Monthly benefits to those at least 62 years of
age
– Ee and employer make contributions—these
are for current retirees
COBRA—continued health insurance for a
period of up to 3 years (18 months for those
who loose their jobs)
Insurance
• Health Insurance—cover hospitalization,
physician care, and surgery (Discuss Take
a Closer Look 9-3 page 284)
• LTD—Long term disability
• Life Insurance—premiums usually paid by
employer
• Pension Plans—defined contribution—
401k (portable); defined benefit—monthly
benefit for life
Insurance
• Flexible benefit plans—cafeteria plans
– Ees may choose to receive cash or purchase
benefits from among the options provided
under the plan (American Airlines—on the
Road to Competitive Advantage)
– Discuss Exhibit 9-5 page 286
Cost Containment
• Benefit costs have been spiraling due to:
– General increases in health costs
– Drastic escalation of prescription drug costs
– Continued development of expensive life-saving
technology, such as MRIs
– Aging workforce. Older people require more health
care, and the health care they receive is typically
more expensive than that needed by younger workers
– Increase in the usage of mental health professionals
following the September 11, 2001, terrorist attacks
Choose the Right Health Insurance
Carrier
• Is the program tailored to company needs?
• Are the prices competitive?
• Will there be a good provider/vendor
relationship?
• Will payouts be accurate?
• How good is the customer service?
• Is the insurance carrier financially secure?
Goal is to increase the attractiveness of the
benefits package while holding the cost down