Strategic Rewards Systems

Compensation & Benefits

Compensation and Benefits

Compensation (Rewards)
Gary Dessler in his book Human Resource Management defines compensation in these words "Employee compensation refers to all forms of pay going to employees and arising from their employment." The phrase 'all forms of pay' in the definition does not include non-financial benefits, but all the direct and indirect financial compensations.

Intrinsic versus Extrinsic Rewards

Intrinsic rewards are the personal satisfactions one derives from doing the job. These are self-initiated rewards: pride in ones work, a sense of accomplishment, or enjoying being part of a work team. Job enrichment, for instance, can offer employees intrinsic rewards by making work seem more meaningful. Extrinsic rewards, on the other hand, include money, promotions, and benefits. They are external to the job and come from an outside source, mainly management. Rewards may or may not enhance the employees financial well-being. Those that do, do so directlyfor instance, through wages, bonuses, or profit sharingor indirectly, through employer-subsidized benefits such as retirement plans, paid vacations, paid sick leaves, and purchase discounts. Nonfinancial rewards present a variety of desirable extras for organizations. These do not directly increase the employees financial position, but rather add attraction to life on the job. Performance-Based versus Membership-Based Rewards Organizations allocate rewards based on either performance or membership criteria. Performance-based rewards use commissions, piecework pay plans, incentive systems, group bonuses, merit pay, or other forms of pay for performance. Membership based rewards, on the other hand, include cost-of-living increases, benefits, and salary increases attributable to labor-market conditions, seniority or time in rank, credentials (such as a college degree or a graduate diploma), a specialized skill, or future potential (for example, the recent MBA graduate from a prestigious university). The key point here is that membership-based rewards are generally extended regardless of an individuals, groups, or organizations performance. In any case, performance may be only a minor determinant of rewards, despite academic theories holding that high motivation depends on performance-based rewards.

Job Evaluation and the Pay Structure

Job Evaluation The essence of compensation administration is job evaluation and the establishment of a pay structure. Job analysis as the process of describing job duties, authority relationships, skills required, conditions of work, and additional relevant information. We stated that job analysis data could help develop job descriptions and specifications, as well as job evaluations. By job evaluation, we mean using job analysis information to systematically determine the value of each job in relation to all jobs within the organization. In short, job evaluation seeks to rank all jobs in the organization in a hierarchy that reflects the relative worth of each. The ranking that results from job evaluation is not an end in itself. It should be used to determine the organizations pay structure. Note that we say should; in practice, this is not always the case. External labor market conditions, collective bargaining, and individual skill differences may require a compromise between the job evaluation ranking and the actual pay structure. Yet even when such compromises are necessary, job evaluation can provide an objective standard from which modifications can be made. Job Evaluation Methods Three basic methods of job evaluation are currently in use: ordering, classification, and point methods. Ordering Method The ordering method (or ranking method) requires a committee typically composed of both management and employee representativesto arrange jobs in a simple rank order, from highest to lowest. Classification Method The classification method was made popular by the U.S. These classifications are created by identifying some common denominatorskills, knowledge, responsibilitiesto create distinct classes or grades of jobs. Examples might include shop jobs, clerical jobs, and sales jobs, depending, of course, on the type of jobs the organization requires. Once the classifications are established, they are ranked in an overall order of importance according to the criteria chosen, and each job is placed in its appropriate classification. This latter action generally requires comparing each positions job description against the classification description and benchmarked jobs. Point Method Point method breaks down jobs based on various identifiable criteria (such as skill, effort, and responsibility) and allocates points to each of these criteria. Appropriate weights are given, depending on the importance of each criterion to performing the job, points are summed, and jobs with similar point totals are placed in similar pay grades.

Establishing the Pay Structure Once the job evaluation is complete, the data generated become the nucleus of the organizations pay structure. This means establishing pay rates or ranges compatible with the ranks, classifications, or points arrived at through job evaluation. Compensation Surveys Many organizations use surveys to gather factual information on pay practices within specific communities and among firms in their industry. They use this information for comparison purposes. It can tell compensation committees if the organizations wages are in line with those of other employers and, in shortages of individuals to fill certain positions, may help set wage levels. Where does an organization find wage salary data? Many industry and employee associations also conduct compensation surveys and make their results available. Organizations also can conduct their own surveys, and many large ones do.

Wage Curves After the compensation committee arrives at point totals from job evaluation and obtains survey data on what comparable organizations are paying for similar jobs, a wage curve can be fitted to the data. An example of a wage curve is shown in Exhibit 11-5. This example assumes use of the point method and plots point totals and wage data. A separate wage curve can be constructed based on survey data and compared for discrepancies. A completed wage curve tells the compensation committee the average relationship between points of established pay grades and wage base rates. Furthermore, it can identify jobs whose pay is out of the trend line. When a jobs pay rate is too high, it may be identified as a red circle rate. This means that the pay level is frozen or below-average increases are granted until the structure adjusts upward to put the circled rate within the normal range. Of course, a wage rate may be out of line but not red circled. The need to attract or keep individuals with specific skills may require a wage rate outside the normal range, although continuing to attract these individuals may ultimately upset the internal consistencies supposedly inherent in the wage structure. A wage rate may also be too low. Such undervalued jobs carry a green-circle rate, and the company may attempt to grant these jobs above-average pay increases or salary adjustments.

The Wage Structure It is only a short step from plotting a wage curve to developing the organizations wage structure. Jobs similar in terms of classes, grades, or points are grouped together. For instance, pay grade 1 may cover the range from 0 to 150 points, pay grade 2 from 151 to 300 points, and so on. As shown in Exhibit 11-6, the result is a logical hierarchy of wages. The more important jobs are paid more; and as individuals assume jobs of greater importance, they rise within the wage hierarchy. Jobs may also be paid in accordance with knowledge- or competency-based pay. Well return to this topic shortly.

Factors affecting compensation (Rewards) External Factors

When determining the wage structure, HR must also consider external factors like geographic differences in wages and labor supply. Consideration must also be given to how the organization will react to the wage structures of competing organizations. Geographic Differences Cost of labor is a function of supply and demand, among many other factors. When local supply of labor falls short of demand, wages will increase. Conversely if the local labor supply exceeds demand, wages will decrease. This can cause wage fluctuations in some geographic areas or cities, depending on how far workers are willing to travel for a job. Many states provide salary information organized by county or city for employers to use. For example, a company that runs long-term health care facilities may be able to pay minimum wage for certified nursing assistants in an area with few employers, yet need to pay

substantially more than minimum wage in a city where there are many employers competing for people with those skills. Labor Supply When unemployment rates are low, employers must work harder to attract qualified workers. This often includes raising wages to tempt workers to leave their current employment and apply. When unemployment rates are high, wages tend to be depressed because employers have a plentiful supply of applicants. Employers may also encounter situations where there is an oversupply of workers with one set of skills, such as framing carpenters, but a shortage of workers with another set of skills, such as welders. This would require a higher starting salary to attract workers with the correct skills. Competition Just as an organization must consider competition when setting prices for goods and services, they must consider the influence of competition on wages. When setting a policy on how to react to competition wages, HR professionals have three choices: 1. Match the competition by paying the market or going rate for labor. This ensures that the pay remains competitive, allowing employers to manage labor costs while still being able to attract qualified workers. 2. Lead the competition by paying higher wages than competing employers. This may seem like an expensive proposition, but many organizations feel that by leading the market, they will be able to attract better qualified employees, leading to lower training costs, better productivity, and lower turnover. 3. Lag the market by paying slightly less than the prevailing levels in the marketplace. This will lower labor costs, but will make it more difficult to attract and maintain qualified workers. Training and turnover costs will often offset any gains made by paying lower wages. Cost of Living Inflation raises the price of consumer goods and reduces the buying power of wages in real terms. The Consumer Price Index (CPI) is compiled by the U.S. Department of Labors Bureau of Labor Statistics and reports monthly on the prices consumers pay for a representative basket of goods and services.22 As the CPI increases, wages must also increase to allow workers to maintain their standard of living. The cost of living also varies according to location, prompting some large cities such as San Francisco to set their own minimum wage that is higher than the federal or even state minimum wage. Collective Bargaining The major function of most unions or collective bargaining units is to negotiate for the wages of its members. Communicating with Employees

No matter how the wage structure is developed, employees must know how the system is derived. If an organization neglects to inform its employees and fails to communicate how the process works, it will only lead to problem later. In fact, many reports note that how the pay plan is communicated is as important as what is communicated. Accordingly, organizations that want the most from their compensation system will find communicating the process to employees a major leap toward achieving compensation goals.

Incentive Compensation Plans Individual Incentives Individual incentive plans pay off for individual performances. 26 Popular approaches include merit pay, piecework plans, time-savings bonuses, commissions, and stock options. One popular and almost universally used incentive system is merit pay. Under a merit pay plan, employees who receive merit increases have a sum of money added to their base salary. Somewhat similar to a cost-of-living raise, merit pay differs in that the percentage of increase to the base wage rate is attributable solely to performance. Those who perform better generally receive more merit pay. Group Incentives Each individual incentive option we describe also can work for groups. That is, two or more employees can be paid for their combined performance. Group incentives make the most sense where employees tasks are interdependent and thus require cooperation. Organization-Wide Incentives Organization-wide incentives aim to direct the efforts of all employees toward achieving overall organizational effectiveness. This type of incentive produces rewards for all employees based on organization-wide cost reduction or profit sharing. Lincoln Electric has had a year-end bonus system for decades, over the years ranging from a low of 55 percent to a high of 115 percent of annual earnings. The Lincoln Electric plan pays off handsomely when employees beat previous years performance standards. This bonus is added to the employees salary, which has made Lincoln Electric workers some of the highest-paid electrical workers in the United States Forms of Pay Base Pay Pay in return for time worked, and separate from output or results achieved, base pay is typically the largest amount on an employees pay cheque. Employees have their wages (for hourly pay periods) or salaries (for weekly or monthly pay periods) guaranteed by employers as part of the terms of their employment. When given a preference for how they would choose their form of income, most employees prefer having the security in that the largest proportion of their compensation is base pay. Trade unions have generally pushed for base pay as the primary pay component.

Performance Pay
Sometimes known as performance-contingent pay, variable pay, or at risk pay, performance pay can be classified as to whether the performance is related to individual employees, a work team, or the entire organization. Plans which highlight individual performance are the most effective in almost any setting for promoting improved performance and include piece rates, commissions, merit pay and targeted incentives. Work team performance plans include productivity, gain-sharing and goal-sharing. Organization performance plans include profit sharing and stock plans.

Indirect Pay
The term indirect pay acknowledges that benefits are an integral and significant part of total compensation for most organizations and should be considered a component of employee pay in the same way as base pay and performance pay. Averaging anywhere from 10 to 40% of a given organizations total compensation, indirect pay can be any employee related expenditure not included in base or performance pay that is a gain to the employee. The six main categories of indirect pay are as follows: 1. Benefits mandated by law, including employer contributions to the Canada/Quebec Pension Plan, Employment Insurance, and the Workplace Safety and Insurance Board; 2. Deferred income plans, more commonly known as retirement or pension plans; 3. Health-related benefits such as life, medical, dental, or disability insurance; 4. Pay for time not worked, such as holidays and leaves; 5. Employee services, ranging from employee assistance programs to food services; 6. Miscellaneous benefits ranging from provision of agency cars to purchase discounts on agency products or services. Indirect pay systems vary as to whether they are fixed or flexible and as to whether the costs are borne by the employers, the employees or are shared. To be successful, management of indirect pay systems must consider union demands, the benefits other employers are offering, tax consequences, rising costs, and legal ramifications.

Benefits
Employee benefits are not performance-based, they are membership-based. Workers receive benefits regardless of their performances. Employee benefits as a whole have no direct affect on employee performance, however, inadequate benefits do contribute to low satisfaction level and increase absenteeism and turnover in employees (DeCenzo and Robbins; 2007). Therefore benefits package must be carefully designed. Package may include a cell phone to each worker, taking them to a training workshop or seminar, giving them a day or two off every month and so on.

ADVANTAGES OF COMPENSATION & BENEFITS

Advantages to Your Boutique: A well designed compensation and benefits plan helps to attract, motivate and retain talent in your firm (which is myWear). A well designed compensation & benefits plan will benefit your boutique in the following ways.

1. Job satisfaction: Your employees would be happy with their jobs and would love to work for you if they get fair rewards in exchange of their services. 2. Motivation: We all have different kinds of needs. Some of us want money so they work for the company which gives them higher pay. Some value achievement more than money, they would associate themselves with firms which offer greater chances of promotion, learning and development. A compensation plan that hits workers needs is more likely to motivate them to act in the desired way. 3. Low Absenteeism: Why would anyone want to skip the day and watch not-so-favorite TV program at home, if they enjoy the office environment and are happy with their salaries and get what they need and want? 4. Low Turnover: Would your employees want to work for any other boutique if you offer them fair rewards. Rewards which they thought they deserved? Advantage to Your Employees:

1. Peace of Mind: your offering of several types of insurances to your workers relieves them from certain fears. Your workers as a result now work with relaxed mind. 2. Increases self-confidence: Every human being wants his/her efforts to get acknowledgment. Employees gain more and more confidence in them and in their abilities if they receive just rewards. As a result, their performance level shoots up.