compensation management 1
TRANSCRIPT
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ByMichael Oyelere
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What is meant by compensation Does it matter? If yes, why? Forms of payment A pay model Motivation and financial and non-financial
rewards Factors affecting levels of pay Evaluating reward process
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It is concerned with the formulation and implementation of strategies and policies that aim to reward people fairly, equitably and consistently in accordance with their value to the organisation
Armstrong and Murlis (2007)
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Other views about compensation management
It does not mean the same for everybody (eg)◦ Member of the society◦ A stockholder◦ A manager ◦ An employee
All have different interpretation of the term
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Societal view
◦ Compensation is the measure of justice.◦ Benefits given may be regarded as equity and
justice in society.◦ Job losses are attributed to labour cost.◦ Pay increase may lead to price increase
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Stockholders
◦ Stockholder have interest in employees pay◦ Stockholders have particular interest in executive
pay. ◦ Does firms with high paid executive perform
better?◦ Are firms with lesser paid executives worse-off?◦ What implication for firms where executive hold
substantial share?
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Manager
◦ Compensation influence managers success in two ways: 1. first it is a major expense 2. may lead to competitive advantage
◦ Is there relationship between employees productivity level and compensation?
◦ Research reveal that government establishments are high paying organisation, are they highly productive?
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Employees
◦ Compensation received for work done is the main source of financial security for most employees.
◦ Therefore, employees regards compensation as a return in exchange between their employer and themselves. An entitlement for being an employee of the company or a reward for job well done. How do you decide the amount due for specific job or
position? Is government legislation on minimum wage justifiable?
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Effects of pay on employees’ behaviours Pay can influence employee motivation and
behaviour in two ways◦ 1.incentive effect-◦ motivational intensity, direction and persistence
of employees. This is because motivation, with employees ability and work design determines employees behaviour such as performance.
◦ Incentive effect is actually the degree to which pay influences individual and aggregate motivation among the employees organisations have at any point in time
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2. sorting effect-
◦ This normally takes an indirect form. For example, different types of pay strategies may cause different type of people to apply and stay with an organisation.
◦ Researches shows that higher pay level help to attract more high-quality applicants and may improve retention.
◦ Would people who are highly capable and have a strong work ethic and interest in earning a lot of money prefer to work in an organisation that pays employees doing the same job more or less the same amount, regardless of their performance? Or would they prefer to work in organisation where there pay can be much higher (or lower) depending on how they perform?
◦ Read case provided
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Compensation –
◦ Refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship Milkovich, Newman and Gerhart (2011)
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Forms of pay
Milovich et al (2011) categories all the different types of return employees receive in to two:
Total compensation Relational returns
◦ See exhibit 1.4 (p11) for detail
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Total compensation returns are more transactional.
They include pay received directly as cash (e.g. Base, merit, incentive, cost-of-living adjustments) and indirectly as benefits (e.g. Pensions, medical insurance, programmes to help balance work and life demands brightly coloured uniforms).
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Cash compensation- base◦ This is the cash compensation that an employer
pays for the work performed. ◦ It tends to reflect the value of work or skills and
generally ignores differences attributable to individual employee. (e.g. A mail deliverer may be £15 an hour. However, some individual mail deliverer may receive more because of their experience and/or performance.
◦ Using the USA, can you explain the distinction between wage and salary?
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Cash compensation- Merit pay/cost-of-living adjustment◦ Merit increase are given as increment to the base
pay, normally in recognition of past work behaviour.
◦ Periodic adjustments to base wages may be made on the basis of changes in what other employers are paying for the same work, changes in the overall cost of living, or changes in experience or skills.
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Cash compensation- incentives Incentives tie pay increase to performance. It can be tied to the performance of an
individual employee, a team of employees, a total business unit, or some combination of individual, team, and unit. The performance objective may be expense reduction, volume increases, customer satisfaction, revenue growth, return on investments, increase in stock value.
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Cash compensation- incentives◦ Because incentives are one-time payments, they
do not permanently increase labour costs. When performance decline, incentive pay automatically declines. Consequently, incentives are frequently referred to as variable pay
Types of incentives Short term Long term
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Benefits- income protection
Benefits comes in different form. Some includes income protection, work/life services, and allowances are part of total compensation.
Medical insurance, retirement programme, life insurance, and savings plans are common benefits. They help protect employees from the financial risks inherent in daily life
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Benefits- work/life balance
◦ These are programmes that help employees better integrate their work life responsibilities include time away from work (vacation, jury duty), access to services to meet specific needs (drug counselling, financial planning, referrals for child and elder care) and flexible work arrangements ( non-traditional telecommunicating, nonpaid time off)
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Benefits- allowances
Allowances often grow out of what is in short supply. In most developing countries housing and transportation allowances are frequently part of pay package. In developed countries, manages assume that a car will be provided – only the make and model are negotiable.
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Relational returns from work
This includes recognition and status, employment security, challenging work, and opportunity to learn.
Other forms of relational return might include personal satisfaction from successfully facing new challenges, teaming with great co-workers, and receiving new uniforms.
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A pay model
See exhibit 1.5 (p 16)
What are the four policy issue in the pay model?
What purposes do the objectives in the pay model serve?
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Pay objectives
◦ Efficiency
◦ Fairness
◦ Compliance with laws and regulations
◦ Ethics
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Medtronic Support Medtronic mission
and increase complexity of business
Minimize increases in fixed costs
Attract and engage top talent
Emphasize personal, team, and Medtronic performance
Recognise personal and family total well-being
Ensure fair treatment
Whole Food We are committed to
increasing long-term shareholder value
Profits are earned every day through voluntary exchange with our customers
Profits are essential to create capital for growth, prosperity, opportunity, job satisfaction, and job security
Support team member happiness and excellence
We share together in our collective fate
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Pay objectives
Efficiency is aimed toward the followings:
◦ Performance improvement, ◦ increase quality,◦ delighting customer and ◦ stockholder, controlling labour costs
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Payment objectives Fairness is a fundamental objective of pay
system. For example, in the Medtronic’s objectives, fairness means “ensure fair treatment” and “recognise personal and family well-being”. Whole Food pay objectives discussed a “shared fate”.
The fairness objective calls for fair treatment for all employees by recognising both employee contributions (e.g. Higher pay for greater performance, experience, or training) and employee needs (e.g. A fair wage as well as fair procedures).
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Pay objectives
Compliance means conforming to national compensation law and regulations. It laws change, pay systems may need to change, too, ensure continued compliance. As companies go global, they must comply with the laws of all the countries in which the operate
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Pay objectives
Ethics means the organisation cares about how its results are achieved.
Objectives serves several purposes-◦ They guide the design of the pay system◦ They serve as a standard for judging the success
of the pay system
◦ See exhibit 1.7 Enron’s Ethics Statement (p18)
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Policy Choice
Every organisation must address the following four policy decisions –◦ Internal alignment◦ External competitiveness◦ Employees contributions◦ management
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Pay techniques
Techniques tie the four basic policies to the pay objectives