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8 Describe the various performance appraisal methods.

9 List the problems that have been associated with performance appraisal.

10 Explain the characteristics of an effective appraisal system.

11 Describe the legal considerations associated with performance appraisal.

12 Explain how the appraisal interview should be conducted.

13 Discuss how performance appraisal is affected by a country’s culture.

1 Describe performance management.

2 Define performance appraisal.

3 Identify the uses of performance appraisal.

4 Discuss the performance appraisal process.

5 Identify the various performance criteria (standards) that can be established.

6 Identify who may be responsible for performance appraisal.

7 Explain the performance appraisal period.

Chapter ObjeCtives After completing this chapter, students should be able to:

Learn It If your professor has chosen to assign this, go to mymanagementlab.com to see what you should particularly focus on and to take the Chapter 7 Warm-Up.

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Over 10 million students improved their results using the Pearson MyLabs. Visit mymanagementlab.com for simulations, tutorials, and end-of-chapter problems.

Performance Management and Appraisal7

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The tools we describe in this chapter and in Chapters 8 provide human resources (HR) professionals with a foundation to evaluate and improve the capability of a company’s employees (human capital) to its competitive advantage. Let’s consider a metaphor to bring the opening sentence to life. Think about, for example, a delivery vehicle. Many factors contribute to fuel efficiency, two of which include low tire pressure or an air conditioner that is low in refrigerant. In the former case, insufficient tire pressure creates greater drag on the vehicle, which raises fuel consumption. In the latter case, the  air conditioner will not efficiently cool the car, and the compressor will continually run because it cannot keep the interior of the car at the desired lower temperature. Compressors are driven by the engine, which, of course, are fueled by gasoline.

Companies prefer to have fuel-efficient vehicles to maintain lower operating costs because they want to maximize profitability. Mechanics can use an air gauge to determine whether tire pressure falls within standard limits specified by the automobile manufacturer. Specialized ther- mometers can be used to determine the adequacy of refrigerant levels in air conditioning systems.

From an HR standpoint, delivery vehicles are capital, and we have learned that employees are human capital. Both help add value to companies. Fuel efficiency is a measure of performance. Lower-than-standard or expected fuel efficiency can be thought of as (lower) job performance. Air gauges and specialized thermometers can be thought of as performance appraisal techniques that help mechanics (managers or supervisors) judge two factors known to influence a vehicle’s fuel efficiency (an employee’s job performance). We take up the topics of performance management and performance appraisal in this chapter.

performance Management performance management (pM) is a goal-oriented process directed toward ensuring that organizational processes are in place to maximize the productivity of employees, teams, and ultimately, the organization. It is a major player in accomplishing organizational strategy in that it involves measuring and improving the value of the workforce. PM includes incentive goals and the corresponding incentive values so that the relationship can be clearly understood and communicated. There is a close relationship between incentives and performance.

PM systems are one of the major focuses in business today. Although every HR function contributes to PM, training, performance appraisal, and compensation appraisal play a more sig- nificant role. Whereas performance appraisal occurs at a specific time, PM is a dynamic, contin- uous process. Every individual in the organization is a part of the PM system. Every component of the system is integrated to ensure continuous organizational effectiveness. With PM, every

ObjeCtive 7.1

Describe performance management.

HR Web Wisdom

Performance Management http://www.opm.gov/perform/ overview.asp

Office of Personnel Management Web site on performance management.

performance management (PM) Goal-oriented process directed toward ensuring that organizational processes are in place to maximize the productivity of employees, teams, and ultimately, the organization.

166 Part 3 • Performance management and training

worker’s efforts should focus on achieving strategic goals. A well-developed job description is needed to determine whether performance expectations have been achieved. If workers’ skills need improvement, additional training should be provided. In PM systems, training has a direct tie-in to achieving organizational effectiveness, as does pay and performance. A good PM system ensures that people make good, effective use of their time.

PM may be the single largest contributor to organizational effectiveness in recent years. An effective PM system should be the responsibility of everyone in the organization starting with the CEO and moving throughout the entire organization because companies that disregard PM do not prosper.1

performance appraisal performance appraisal (pa) is a formal system of review and evaluation of individual or team task performance. A critical point in the definition is the word formal because, in actuality, managers should be reviewing an individual’s performance on a continuing basis.

PA is especially critical to the success of PM. Although PA is but one component of PM, it is a vital one, in that it directly reflects the organization’s strategic plan. Although evaluation of team performance is critical when teams exist in an organization, the focus of PA in most firms remains on the individual employee. Regardless of the emphasis, an effective appraisal system evaluates accomplishments and initiates plans for development, goals, and objectives.

Most managers rely on PA techniques as a basis to provide feedback, encourage performance improvement, make valid decisions, justify terminations, identify training and development needs, and defend personnel decisions such as why one employee received a higher pay increase than another employee. PA serves many purposes, and improved results and efficiency are increasingly critical in today’s globally competitive marketplace. Therefore, abandoning the only program with performance in its name and employees as its focus would seem to be an ill-advised over- reaction. Additionally, managers must be concerned about legal issues, which we consider later in this chapter. Developing an effective PA system has been and will continue to be a high priority for management.

Uses of performance appraisal For many organizations, the primary goal of an appraisal system is to improve individual and organizational performance. There may be other goals, however. A potential problem with PA, and a possible cause of much dissatisfaction, is expecting too much from one appraisal plan. For example, a plan that is effective for developing employees may not be the best for determining pay increases. Yet a properly designed system can help achieve organizational objectives and enhance employee performance. In fact, PA data are potentially valuable for virtually every human resource functional area.

Human Resource Planning In assessing a firm’s HR, data must be available to identify those who have the potential to be promoted or for any area of internal employee relations. Through PA it may be discovered that there is an insufficient number of workers who are prepared to enter management. Plans can then be made for greater emphasis on management development. Succession planning is a key concern for all firms. A well-designed appraisal system provides a profile of the organization’s human resource strengths and weaknesses to support this effort.

Training and Development Performance appraisal should point out an employee’s specific needs for training and develop- ment. For instance, if Pat Compton’s job requires skill in technical writing and her evaluation reveals a deficiency in this factor, she may need additional training to overcome this shortcom- ing. If a firm finds that a number of first-line supervisors are having difficulty in administering disciplinary action, training sessions addressing this problem may be appropriate. By identifying deficiencies that adversely affect performance, training and development (T&D) programs can be developed that permit individuals to build on their strengths and minimize their deficiencies.

ObjeCtive 7.2

Define performance appraisal.

performance appraisal (PA) Formal system of review and evaluation of individual or team task performance.

ObjeCtive 7.3

Identify the uses of performance appraisal.

chaPter 7 • Performance management and aPPraisal 167

An appraisal system does not guarantee properly trained and developed employees. However, determining T&D needs is more precise when appraisal data are available.

Career Planning and Development Career planning is an ongoing process whereby an individual sets career goals and identifies the means to achieve them. On the other hand, career development is a formal approach used by the organization to ensure that people with the proper qualifications and experiences are avail- able when needed. PA data is essential in assessing an employee’s strengths and weaknesses and in determining the person’s potential. Managers may use such information to counsel subordinates and assist them in developing and implementing their career plans.

Compensation Programs PA results provide a basis for rational decisions regarding pay adjustments. Most managers believe that you should reward outstanding job performance tangibly with pay increases. They believe that the behaviors you reward are the behaviors you get. Rewarding behaviors necessary for accomplishing organizational objectives is at the heart of a PM system. To encourage good performance, a firm should design and implement a reliable PA system and then reward the most productive workers and teams accordingly. Creators of total rewards systems want to ensure that individual performance supports organizational objectives.

Internal Employee Relations PA data are also used for decisions in several areas of internal employee relations, including promotion, demotion, termination, layoff, and transfer. For example, an employee’s performance in one job may be useful in determining his or her ability to perform another job on the same level, as is required in the consideration of transfers. Certainly, PA data is vital when promotions are considered or layoffs must be made. However, when the performance level is unacceptable, demotion or even termination may be appropriate.

Assessment of Employee Potential Some organizations attempt to assess an employee’s potential as they appraise his or her job performance. Although past behaviors may be a good predictor of future behaviors in some jobs, an employee’s past performance may not accurately indicate future performance in other jobs. The best salesperson in the company may not have what it takes to become a successful district sales manager, where the tasks are distinctly different. Similarly, the best systems analyst may, if promoted, be a disaster as an information technology manager. Overemphasizing technical skills and ignoring other equally important skills is a common error in promoting employees into management jobs. Recognition of this problem has led some firms to separate the appraisal of performance, which focuses on past behavior, from the assessment of potential, which is future oriented.

performance appraisal process As shown in Figure 7-1, the starting point for the PA process is identifying specific performance goals. An appraisal system probably cannot effectively serve every desired purpose, so manage- ment should select the specific goals it believes to be most important and realistically achievable. For example, some firms may want to stress employee development, whereas other organizations may want to focus on pay adjustments. Many firms rely on PA results to help inform decisions to terminate employment, particularly after a regular pattern of inadequate job performance. In any case, PA serves a developmental purpose, evaluative purpose, or both.

The next step in this ongoing cycle continues with establishing performance criteria (stan- dards) and communicating these performance expectations to those concerned. Then the work is performed and the supervisor appraises the performance. At the end of the appraisal period, the appraiser reviews work performance and evaluates it against established performance standards. This review helps determine how well employees have met these standards, determines reasons for deficiencies, and develops a plan to correct the problems. At this meeting, goals are set for the next evaluation period, and the cycle repeats.

ObjeCtive 7.4

Discuss the performance appraisal process.

168 Part 3 • Performance management and training

establish performance Criteria (standards) Management must carefully select performance criteria as it pertains to achieving corporate goals.2 The most common appraisal criteria are traits, behaviors, competencies, goal achievement, and improvement potential.

Traits, Behaviors, and Competencies Traits, behaviors, and competencies are often used as PA standards. Traits represent an individ- ual’s predisposition to think, feel, and behave, and many traits are usually thought of as being biologically created. A personality trait is more ingrained with an individual as with a person being introverted or extroverted, or less conscientious or more conscientious.

Behaviors are typically viewed as resulting from a variety of sources including traits and situational context. For example, a highly conscientious person is more likely to engage in behaviors that lead to timely task completion than someone who is less conscientious because conscientious- ness is associated with dutifulness. Employees who tend to be less conscientious may step up their game in situations where they have the opportunity to earn substantial performance-based bonuses than in situations where pay is the same regardless of performance differences.

A behavior may have been learned from parents, from significant friends, or from a certain work environment. A behavior can be changed, but traits are usually more established. Often a young person who joins the military will have many behavioral changes take place prior to return- ing to civilian life. An appropriate behavior to evaluate for a manager might be leadership style. For individuals working in teams, developing others, teamwork and cooperation, or customer service orientation might be appropriate. Desired behaviors may be appropriate as evaluation criteria because if they are recognized and rewarded, employees tend to repeat them. If certain behaviors result in desired outcomes, there is merit in using them in the evaluation process.

Competencies, as we discussed in Chapter 4, refer to an individual’s capability to orchestrate and apply combinations of knowledge, skills, and abilities consistently over time to perform work successfully in the required work situations. Competencies may be technical in nature, relate to interpersonal skills, or are business oriented. For example, analytical thinking and achievement orientation might be essential in professional jobs. In leadership jobs, relevant competencies might include developing talent, delegating authority, and people management skills. The competencies selected for evaluation purposes should be those that are closely associated with job success.

Many of these commonly used traits, behaviors, and competencies are subjective and may be either unrelated to job performance or difficult to define. In such cases, inaccurate evaluations may

ObjeCtive 7.5

Identify the various performance criteria (standards) that can be established.

Identify Specific Performance

Appraisal Goals

Establish Performance Criteria and

Communicate Them to

Employees

Examine Work Performed

Appraise Performance

Discuss Appraisal with Employee

Figure 7-1 Performance Appraisal Process

chaPter 7 • Performance management and aPPraisal 169

occur and create legal problems for the organization as well. This was the case in Wade v. Mississippi Cooperative Extension Service where the circuit court ruled:

In a performance appraisal system, general characteristics such as leadership, public acceptance, attitude toward people, appearance and grooming, personal conduct, outlook on life, ethical habits, resourcefulness, capacity for growth, mental alertness, and loyalty to organization are susceptible to partiality and to the personal taste, whim, or fancy of the evaluator as well as patently subjective in form and obviously susceptible to completely subjective treatment by those conducting the appraisals.

At the same time, certain traits, behaviors, and competencies may relate to job performance and, if this connection is established, using them may be appropriate.

Goal Achievement If organizations consider ends more important than means, goal achievement outcomes become an appropriate factor to evaluate. The outcomes established should be within the control of the indi- vidual or team and should be results that lead to the firm’s success. At upper levels, the goals might deal with financial aspects of the firm such as profit or cash flow, and market considerations such as market share or position in the market. At lower organizational levels, the outcomes might be meeting the customer’s quality requirements and delivering according to the promised schedule.

To assist the process, the manager needs to provide specific examples of how the employee can further his or her development and achieve specific goals. Both parties should reach an agreement as to the employee’s goals for the next evaluation period and the assistance and resources the manager needs to provide. This aspect of employee appraisal should be the most positive element in the entire process and help the employee focus on behavior that will produce positive results for all concerned.

Improvement Potential When organizations evaluate their employees’ performance, many of the criteria used focus on the past. From a PM viewpoint, the problem is that you cannot change the past. Unless a firm takes further steps, the evaluation data become merely historical documents. Therefore, firms should emphasize the future, including the behaviors and outcomes needed to develop the employee, and in the process, achieve the firm’s goals. This involves an assessment of the employee’s potential. Including potential in the evaluation process helps to ensure more effective career planning and development.

The HR Director of the California Health Foundation explains the nature of the compa- ny’s PM system. The employee appraisal system is open-ended and includes just a few general categories, covering the employee’s past performance with respect to their objectives set at the previous year’s appraisal, and their future goals in the company. The following Watch It video describes California’s PA system, including a review of the criteria for an employee receiving a good PA, and HR’s methods of dealing with both positive and negative PAs and efforts to maintain a positive work culture that emphasizes a culture of personal responsibility, flexibility, and development.

responsibility for performance appraisal Often the human resource department is responsible for coordinating the design and implementa- tion of PA programs. However, it is essential that line managers play a key role from beginning to end. These individuals usually conduct the appraisals, and they must directly participate in devel- oping the program if it is to succeed. In a recent survey of 1,143 U.S. employees, 53  percent get

ObjeCtive 7.6

Identify who may be responsible for performance appraisal.

Watch It 1 If your instructor has assigned this, go to MyManagementLab to watch a video titled The California Health Foundation: Performance Management and respond to questions.

170 Part 3 • Performance management and training

feedback about their performance from their managers. But many would like to get an expanded view of their performance and receive input from others such as from peers, project leaders, and even clients.3 Several possibilities exist with regard to the person(s) who will actually rate the employee.

Immediate Supervisor An employee’s immediate supervisor has traditionally been the most logical choice for evaluating performance, and this continues to be the case. The supervisor is usually in an excellent position to observe the employee’s job performance, and the supervisor has the responsibility for managing a particular unit. When someone else has the task of evaluating subordinates, the supervisor’s authority may be undermined. Also, subordinate T&D is an important element in every manag- er’s job, and as previously mentioned, appraisal programs and employee development are usually closely related.

On the negative side, the immediate supervisor may emphasize certain aspects of employee performance and neglect others. Also managers have been known to manipulate evaluations to justify pay increases and promotions and vice versa.

In most instances, the immediate supervisor will probably continue to be involved in evaluating performance. Organizations will seek alternatives, however, because of technological advances and a desire to broaden the perspective of the appraisal.

Subordinates Historically, our culture has viewed evaluation by subordinates negatively. However, this thinking has changed somewhat. Some firms conclude that evaluation of managers by subordinates is both feasible and needed. They reason that subordinates are in an excellent position to view their superiors’ managerial effectiveness. Advocates believe that this approach leads supervisors to become especially conscious of the work group’s needs and to do a better job of managing. In the higher education environment, it is a common practice for instructors to be evaluated by students. Critics are concerned that managers (and instructors) will be caught up in a popularity contest or that employees will be fearful of reprisal. If this approach has a chance for success, one thing is clear: the evaluators must be guaranteed anonymity. Ensuring this might be particu- larly difficult in a small department and especially if demographic data on the appraisal form could identify raters.

Peers and Team Members A major strength of using peers to appraise performance is that they work closely with the evalu- ated employee and probably have an undistorted perspective on typical performance, especially in team assignments. Problems with peer evaluations include the reluctance of some people who work closely together, especially on teams, to criticize each other. On the other hand, if an employee has been at odds with another worker, he or she might really “unload on the enemy,” which results in an unfair evaluation. Another problem concerns peers who interact infrequently and lack the information needed to make an accurate assessment.

Organizations are increasingly using teams, including those that are self-directed. Team mem- bers know each other’s performance better than anyone and can, therefore, evaluate performance more accurately. Also, peer pressure is a powerful motivator for team members, and members who recognize that peers within the team will be evaluating their work show increased commitment and productivity. When employees work in teams and their appraisal system focuses entirely on individual results, it is not surprising that they show little interest in their teams. But this problem can be corrected. If teamwork is essential, make it a criterion for evaluating employees; rewarding collaboration will encourage teamwork.

Self-Appraisal If employees understand their objectives and the criteria used for evaluation, they are in a good position to appraise their own performance. Many people know what they do well on the job and what they need to improve. If they have the opportunity, they will criticize their own performance objectively and take action to improve it. Many times employees are tougher on themselves than the supervisor will be. Also because employee development is self-development, employees who

chaPter 7 • Performance management and aPPraisal 171

appraise their own performance may become more highly motivated. Self-appraisal provides employees with a means of keeping the supervisor informed about everything they have done during the appraisal period.4

Even if a self-appraisal is not a part of the system, the employee should at least provide the manager a list of his or her most important accomplishments and contributions over the appraisal period. This will prevent the manager from being blindsided when the employee complains, perhaps justifiably, “You didn’t even mention the Bandy contract I landed last December!”

As a complement to other approaches, self-appraisal has great appeal to managers who are primarily concerned with employee participation and development. For compensation pur- poses, however, its value is considerably less. Some individuals are masters at attributing good performance to their own efforts and poor performance to someone else’s.

Customer Appraisal Customer behavior determines a firm’s degree of success. Therefore, some organizations believe it is important to obtain performance input from this critical source. Organizations use this approach because it demonstrates a commitment to the customer, holds employees accountable, and fosters change. Customer-related goals for executives generally are of a broad, strategic nature, whereas targets for lower-level employees tend to be more specific. For example, an objective might be to improve the rating for accurate delivery or reduce the number of dissatisfied customers by half. It is important to have employees participate in setting their goals and to include only factors that are within the employees’ control.

360-Degree Feedback People all around the employee whose performance is being judged may provide input. Those sources, as we have already discussed, include senior managers, the employee himself or herself, a supervisor, subordinates, peers, team members, and internal or external customers. By shifting the responsibility for evaluation to more than one person, many of the common appraisal errors can be reduced or eliminated. Software is available to permit managers to give the ratings quickly and conveniently. Furthermore, including the perspective of multiple sources results in a more comprehensive and fair view of the employee’s performance and minimizes biases resulting from limited views of performance.

Having multiple raters also makes the process more legally defensible. However, it is impor- tant for all parties to know the evaluation criteria, the methods for gathering and summarizing the feedback, and the use to which the feedback will be put. An appraisal system involving numer- ous evaluators will naturally take more time and, therefore, be more costly. Nevertheless, the way firms are being organized and managed may require innovative alternatives to traditional top-down appraisals.

In a survey of training participants, 84 percent said their 360-degree experience was useful.5 However, some managers believe that the 360-degree feedback method has problems. General Electric’s (GE’s) former CEO Jack Welch maintains that the 360-degree system in his firm had been “gamed” and that people were saying nice things about one another, resulting in all good ratings.6 Another critical view with an opposite twist is that input from peers, who may be competitors for raises and promotions, might intentionally distort the data and sabotage the colleague. Yet because so many firms use 360-degree feedback evaluation, it seems that many firms have found ways to avoid the pitfalls.

Significant risks with 360-degree feedback are confidentiality and possible legal ramifica- tions. Many firms outsource the process to make participants feel comfortable that the informa- tion they share and receive is completely anonymous. Information is very sensitive, and in the wrong hands, could impact careers. In addition, Nesheba Kittling, an attorney at labor law firm Fisher & Phillips, states that “Employees’ performance reviews are an employers’ first line of defense against discrimination claims.”7 Detailed documentation of job performance “provides support for an employer’s contention that it had legitimate, non-discriminatory reasons” for adverse action against an employee such as a demotion or termination.8

As an important aside, the 360-degree feedback evaluation method is based on the reliance of multiple sources to provide information about an employee’s performance.

HR Web Wisdom

360-Degree Evaluation http://www.custominsight. com/360-degree-feedback/what- is-360-degree-feedback.asp

360-Degree Evaluation— Delivering Feedback

360-degree feedback evaluation method Popular performance appraisal method that involves evaluation input from multiple levels within the firm as well as external sources.

172 Part 3 • Performance management and training

The 360-degree method is unlike traditional performance reviews, which provide employees with feedback only from supervisors. The 360-degree feedback provides an all-inclusive view of each employee. As many as 90 percent of Fortune 500 companies use some form of 360-degree feedback for either employee evaluation or development. Many companies use results from 360-degree programs not only for conventional applications but also for succession planning, training, and professional development.9

performance appraisal period Formal performance evaluations are usually prepared at specific intervals. Although there is nothing magical about the period for formal appraisal reviews, in most organizations they occur either annually or semiannually. Even more significant, however, is the continuous interaction (primarily informal), including coaching and other developmental activities, that continues throughout the appraisal period. Managers should be conditioned to understand that managing performance is a continuous process that is built into their job every day.

In the current business climate, firms may want to consider monitoring performance more often. Changes occur so fast that employees need to look at objectives and their own roles throughout the year to see whether changes are in order. Southwest Airlines has asked its manag- ers to have monthly check-ins with staff rather than semiannual ones.10 Employees with Royal Caribbean Cruises are evaluated approximately three weeks prior to the completion of their contract, which is typically six months. Some even consider these relatively shorter intervals to be too long: “Think of a sports team: A coach doesn’t wait until the end of a season to give his players feedback.”11

Some organizations use the employee’s date of hire to determine the rating period. At times a subordinate’s first appraisal may occur at the end of a probationary period, anywhere from 30 to 90 days after his or her start date. However, in the interest of consistency, it may be advisable to perform evaluations on a calendar basis rather than on anniversaries. If firms do not conduct all appraisals at the same time, it may be impossible to make needed comparisons between employees.

The frequency of providing employees with performance feedback is important. The following Watch It video describes The Weather Channel PA process in which appraisals are recommended to be done on an ongoing, continual basis so that an employee always knows where he or she stands as far as what is expected and how well he or she is doing. This way, the employee can look forward to performance reviews instead of dreading them; performance reviews will be an official confirmation of all of the progress that the employee has been making under the ongoing relationship of appraisal and feedback with the employee’s manager.

ObjeCtive 7.7

Explain the performance appraisal period.

Watch It 2 If your instructor has assigned this, go to MyManagementLab to watch a video titled Weather Channel: Performance Appraisal and respond to questions.

Choosing a performance appraisal Method The various methods are next presented as if they are separate and distinct when in actuality each may be used in conjunction with another method. For instance, the 360-degree feedback method may incorporate portions of the ranking scale. There are multiple approaches to apprais- ing employee performance. It is instructive to group them into categories according to what they are designed to measure. PA methods fall into four broad categories:

• Trait systems • Comparison systems • Behavioral systems • Results-based systems

ObjeCtive 7.8

Describe the various performance appraisal methods.

chaPter 7 • Performance management and aPPraisal 173

Trait Systems trait systems ask raters to evaluate each employee’s traits or characteristics (e.g., quality of work, quantity of work, appearance, dependability, cooperation, initiative, judgment, leadership respon- sibility, decision-making ability, or creativity). Appraisals are typically scored using descriptors ranging from unsatisfactory to outstanding. Figure 7-2 contains an illustration of a trait method of performance appraisal.

The trait approach does have limitations. First, trait systems are highly subjective12 because they are based on the assumption that every supervisor’s perception of a given trait is the same. For example, the trait “quality of work” may be defined by one supervisor as “the extent to which an employee’s performance is free of errors.” To another supervisor, quality of work might mean “the extent to which an employee’s performance is timely.” Human resource professionals and supervi- sors can avoid this problem by working together in advance to specify the definition of traits clearly.

Another drawback is that systems rate individuals on subjective personality factors rather than on objective job performance data. Essentially, trait assessment focuses attention on employees rather than on job performance. Employees may simply become defensive rather than trying to understand the role that the particular trait plays in shaping their job performance and then taking corrective actions. Moreover, traits represent a predisposition to behave, think, or feel. Although traits do influence behavior, these do not fully account for behavior.13 For example, highly conscientious individuals tend to be dutiful and complete assignments on a regular basis. However, other factors, including illness or ongoing distractions, could interfere with the productivty that one might expect to be associated with a particular trait.

Comparison Systems Comparison systems evaluate a given employee’s performance against that of other employees. Employees are ranked from the best performer to the poorest performer. In simplest form, super- visors rank each employee and establish a performance hierarchy such that the employee with the best performance receives the highest ranking. Employees may be ranked on overall performance or on various traits.

An alternative approach, called a forced distribution method PA and sometimes referred to as a stacked ranking system, assigns employees to groups that represent the entire range of performance. For example, three categories that might be used are best performers, moderate performers, and poor performers. A forced distribution approach, in which the rater must place a specific number of employees into each of the performance groups, can be used with this method. Figure 7-3 displays a forced distribution rating form for an animal keeper job with five performance categories.

Many companies use forced distribution approaches to minimize the tendency for supervisors to rate most employees as excellent performers. This tendency usually arises out of supervisors’

trait systems Type of performance-appraisal method, requiring raters (e.g., supervisors or customers) to evaluate each employee’s traits or characteristics (e.g., quality of work and leadership).

comparison systems A type of performance-appraisal method, require that raters (e.g., supervisors) evaluate a given employee’s performance against other employees’ performance attainments. Employees are ranked from the best performer to the poorest performer.

forced distribution method Performance appraisal method in which the rater is required to assign individuals in a work group to a limited number of categories, similar to a normal frequency distribution.

Employee’s Name: Employee’s Position:

Supervisor’s Name: Review Period:

Instructions: for each trait, circle the phrase that best represents the employee.

1. diligence a. outstanding b. above average c. average d. below average e. poor

2. cooperation with others a. outstanding b. above average c. average d. below average e. poor

3. communication skills a. outstanding b. above average c. average d. below average e. poor

4. leadership a. outstanding b. above average c. average d. below average e. poor

5. decisiveness a. outstanding b. above average c. average d. below average e. poor

Figure 7-2 A Trait-Oriented Performance Appraisal Rating Form

174 Part 3 • Performance management and training

self-promotion motives. Supervisors often provide positive performance ratings to most of their employees because they do not want to alienate them. After all, their performance as supervisors depends largely on how well their employees perform their jobs.

The forced distribution systems tend to be based on as few as three levels. In GE’s system, the best performers are placed in the top 20 percent, the next group in the middle 70 percent, and the poorest performing group winds up in the bottom 10 percent. The underperformers are, after being given a time to improve their performance, generally let go.

Although used by some prestigious firms, the forced distribution system appears to be unpopular with many managers.14 Some believe it fosters cutthroat competition, paranoia, and general ill will, and destroys employee loyalty.15 For example, David Auerback, a former Microsoft employee, stated that this type of appraisal system had employees feeling helpless and “encouraged people to backstab their co-workers.”16 Many believe that a “rank-and-yank” system such as forced distribution is not compatible when a company encourages teamwork. In addition, critics of forced distribution contend that they compel managers to penalize a good, although not a great, employee who is part of a superstar team. Another reason employees are opposed to forced ranking is that they suspect that the rankings are a way for companies to rationalize firings more easily.

Forced distribution approaches have drawbacks. The forced distribution approach can dis- tort ratings because employee performance may not fall into these predetermined distributions. Let’s assume that a supervisor must use the following forced distribution to rate her employees’ performance:

• 15 percent well below average • 25 percent below average • 40 percent average • 15 percent above average • 5 percent well above average

This distribution is problematic to the extent that the actual distribution of employee performance is substantially different from this forced distribution. If 35 percent of the employees’ perfor- mance were either above average or well above average, then the supervisor would be required to underrate the performance of 15 percent of the employees. Based on this forced distribution, the supervisor can rate only 20 percent of the employees as having demonstrated above-average or well-above- average job performance. Management–employee relationships ultimately suffer

Instructions: You are required to rate the performance for the previous 3 months of the 15 workers employed as animal keepers to conform with the following performance distribution:

• 15 percent of the animal keepers will be rated as having exhibited poor performance. • 20 percent of the animal keepers will be rated as having exhibited below-average

performance. • 35 percent of the animal keepers will be rated as having exhibited average

performance. • 20 percent of the animal keepers will be rated as having exhibited above-average

performance. • 10 percent of the animal keepers will be rated as having exhibited superior

performance.

Use the following guidelines for rating performance. on the basis of the five duties listed in the job description for animal keeper, the employee’s performance is characterized as:

• Poor if the incumbent performs only one of the duties well. • Below average if the incumbent performs only two of the duties well. • Average if the incumbent performs only three of the duties well. • Above average if the incumbent performs only four of the duties well. • Superior if the incumbent performs all five of the duties well.

Figure 7-3 A Forced Distribution Performance Appraisal Rating Form

chaPter 7 • Performance management and aPPraisal 175

because workers feel that ratings are dictated by unreal models rather than by individual perfor- mance. Perhaps extensive training and development interventions enabled many more employees than anticipated to perform well above average (12 percent versus 5 percent). The “forced” nature of this system results in 7 percent of employees being placed in an undeservedly lower rating category. Also, under a pay-for- performance plan, those 7 percent would receive a lower than earned pay increase award.

Another comparative technique for ranking employees establishes paired comparisons. Supervisors compare each employee to every other employee, identifying the better performer in each pair. Figure 7-4 displays a paired comparison form. Following the comparison, the employees are ranked according to the number of times they were identified as being the better performer. In this example, Allen Jones is the best performer because he was identified most often as the better performer, followed by Bob Brown (identified twice as the better performer) and Mary Green (identified once as the better performer).

Comparative methods are best suited for small groups of employees who perform the same or similar jobs. They are cumbersome for large groups of employees or for employees who per- form different jobs. For example, it would be difficult to judge whether a production worker’s performance is better than a secretary’s performance because the jobs are substantively different. The assessment of a production worker’s performance is based on the number of units he or she produces during each work shift; a secretary’s performance is based on the accuracy with which he or she types memos and letters.

As do trait systems, comparison approaches have limitations. They tend to encourage sub- jective judgments, which increase the chance for rater errors and biases. In addition, small dif- ferences in performance between employees may become exaggerated by using such a method if supervisors feel compelled to distinguish among levels of employee performance.

Behavioral Systems behavioral systems rate employees on the extent to which they display successful job perfor- mance behaviors. In contrast to trait and comparison methods, behavioral methods rate objective job behaviors. When correctly developed and applied, behavioral models provide results that are relatively free of rater errors and biases. The three main types of behavioral systems are the critical incident technique (CIT), behaviorally anchored rating scales (BARS), and behavioral observation scales (BOS).

The critical incident technique (Cit)17 requires job incumbents and their supervisors to identify performance incidents (e.g., on-the-job behaviors and behavioral outcomes) that dis- tinguish successful performances from unsuccessful ones. The supervisor then observes the employees and records their performance on these critical job aspects. Supervisors usually rate employees on how often they display the behaviors described in each critical incident. Figure 7-5 illustrates a CIT form for an animal keeper job. Two statements represent examples of ineffec- tive job performance (numbers 2 and 3), and two statements represent examples of effective job performance (numbers 1 and 4).

The CIT tends to be useful because this procedure requires extensive documentation that identifies successful and unsuccessful job performance behaviors by both the employee and

paired comparisons Supervisors compare each employee to every other employee, identifying the better performer in each pair.

behavioral systems Performance appraisal methods that focus on distinguishing between successful and unsuccessful behaviors.

critical incident technique (CIT) Performance appraisal method that requires keeping written records of highly favorable and unfavorable employee work actions.

Instructions: Please indicate by placing an X which employee of each pair has performed most effectively during the past year.

X Bob Brown X Mary Green mary green Jim smith

X Bob Brown mary green Jim smith X Allen Jones

Bob Brown Jim smith X Allen Jones X Allen Jones

Figure 7-4 A Paired Comparison Performance Appraisal Rating Form

176 Part 3 • Performance management and training

the supervisor. The CIT’s strength, however, is also its weakness: Implementation of the CIT demands continuous and close observation of the employee. Supervisors may find the record keeping to be overly burdensome.

behaviorally anchored rating scales (bars)18 are based on the CIT, and these scales are developed in the same fashion with one exception. For the CIT, a critical incident would be written as “the incumbent completed the task in a timely fashion.” For the BARS format, this incident would be written as “the incumbent is expected to complete the task in a timely fash- ion.” The designers of BARS write the incidents as expectations to emphasize the fact that the employee does not have to demonstrate the exact behavior that is used as an anchor to be rated at that level. Because a complete array of behaviors that characterize a particular job would take many pages of description, it is not feasible to place examples of all job behaviors on the scale. Experts therefore list only those behaviors that they believe are most representative of the job the employee must perform. A typical job might have 8–10 dimensions under BARS, each with a separate rating scale.

Table 7-1 illustrates a portion of a BARS system that was developed to evaluate college recruiters. Suppose the factor chosen for evaluation is Ability to Present Positive Company Image. On the very positive end of this factor would be “Makes excellent impression on college recruits. Carefully explains positive aspects of the company. Listens to applicant and answers questions in a very positive manner.” On the very negative end of this factor would be “Even with repeated instructions continues to make a poor impression. This interviewer could be expected to turn off college applicant from wanting to join the firm.” As may be noted, there are several levels in between the very negative and the very positive. The rater is able to determine more objectively how frequently the employee performs in each defined level.

As with all PA techniques, BARS has its advantages and disadvantages.19 Among the vari- ous PA techniques, BARS is the most defensible in court because it is based on actual observable job behaviors. In addition, BARS encourages all raters to make evaluations in the same way. Perhaps the main disadvantage of BARS is the difficulty of developing and maintaining the vol- ume of data necessary to make it effective. The BARS method requires companies to maintain distinct appraisal documents for each job. As jobs change over time, the documentation must be updated for each job.

Another kind of behavior system, a behavioral observation scale (bOs),20 displays illustra- tions of positive incidents (or behaviors) of job performance for various job dimensions. The evalu- ator rates the employee on each behavior according to the extent to which the employee performs in a manner consistent with each behavioral description. Scores from each job dimension are averaged to provide an overall rating of performance. BOS is developed in the same way as a BARS instru- ment, except that it incorporates only positive performance behaviors. The BOS method tends to

behaviorally anchored rating scale (BARS) Performance appraisal method that combines elements of the traditional rating scale and critical incident methods; various performance levels are shown along a scale with each described in terms of an employee’s specific job behavior.

HR Web Wisdom

Appraisal News http://www.performance- appraisal.com/home.htm

Performance appraisal news and general PA information is provided.

behavioral observation scale (BOS) A specific kind of behavioral system for evaluating job performance by illustrating positive incidents (or behaviors) of job performance for various job dimensions.

Instructions: for each description of work behavior, circle the number that best describes how frequently the employee engages in that behavior.

1. the incumbent removes manure and unconsumed food from the animal enclosures. 1 2 3 4 5 never almost never sometimes fairly often Very often

2. the incumbent haphazardly measures the feed items when placing them in the animal enclosures.

1 2 3 4 5 never almost never sometimes fairly often Very often

3. the incumbent leaves refuse dropped by visitors on and around the public walkways. 1 2 3 4 5 never almost never sometimes fairly often Very often

4. the incumbent skillfully identifies instances of abnormal behavior among the animals, which represent signs of illness.

1 2 3 4 5 never almost never sometimes fairly often Very often

Figure 7-5 A Critical Incidents Performance Appraisal Rating Form

chaPter 7 • Performance management and aPPraisal 177

be difficult and time-consuming to develop and maintain. Moreover, to ensure accurate appraisal, raters must be able to observe employees closely and regularly. However, observing employees on a regular basis may not be feasible where supervisors are responsible for several people.

Results-Based Systems results-based performance appraisal methods focus on measurable outcomes such as an indi- vidual’s or team’s sales, customer service ratings, productivity, reduced incidence of workplace injuries, and so forth. The selection of results largely depends on three factors. The first factor

results-based performance appraisal Performance appraisal method in which the manager and subordinate jointly agree on objectives for the next appraisal period; in the past a form of management by objectives.

Table 7-1

BARS for Factor: Ability to Present Positive Company Image

Clearly Outstanding Performance: Makes excellent impression on college recruits. Carefully explains positive aspects of the company. Listens to appli- cant and answers questions in a very positive manner.

Excellent Performance: Makes good impression on college recruits. Answers all questions and explains positive aspects of the company. Answers questions in a positive manner.

Good Performance: Makes a reasonable impression on college recruits. Listens to applicant and answers questions in knowl- edgeable manner.

Average Performance: Makes a fair impression on college recruits. Listens to applicant and answers most questions in a knowledgeable manner.

Slightly Below Average Performance: Attempts to make a good impression on college recruits. Listens to applicants but at times could be expected to have to go to other sources to get answers to questions.

Poor Performance: At times makes poor impression on college recruits. Sometimes provides incorrect information to applicant or goes down blind avenues before realizing mistake.

Very Poor Performance: Even with repeated instructions continues to make a poor impression. This interviewer could be expected to turn off college applicant from wanting to join the firm.

H r b l o o p e r s

Appraising Performance at Global Insurance

If your professor has assigned this, go to mymanagementlab.com to complete the HR Bloopers exercise and test your application of these concepts when faced with real-world decisions.

As Devin Franklin hung up from a call with yet another unhappy employee, he realized there was a problem with the new PA system. Devin, the HR Manager at Global Insurance, rolled out a new performance rating form about a month ago and has since heard from several frustrated employees. Devin met his goal to get the new system in place before the end of the year, but may have rushed the process too much. He created a basic form using rating scales that asked supervisors to rate all employees on the same common factors such as quality and quantity of work, customer service skills, and gen- eral attitude. The easy to use form allowed supervisors to just check the right boxes and give it to the employees. But there have been a

variety of complaints suggesting the appraisals aren’t effectively eval- uating the employees’ performance. Many complaints have argued different definitions of the factors being evaluated such as attitude. Some of the field insurance agents who work outside of the office on their own have even suggested that their direct supervisors shouldn’t evaluate their customer service skills because the supervisors never actually observe their customer interactions. The supervisors have asked him a lot of questions about the form as well. Devin consid- ered organizing a training program for the supervisors, but he decided there just wasn’t enough time. Now he’s not sure if a training program would even fix the problems.

178 Part 3 • Performance management and training

is the relevance of the results that may be used to judge a company’s progress toward meeting its strategic goals. The second factor is the reliability with which results can be measured. The third factor is the extent to which the results measure is truly a measure of performance over which an employee has the resources and latitude to achieve the designated results.

Management by objectives (MbO) could possibly be the most effective PA technique because supervisors and employees determine objectives for employees to meet during the rating period and employees appraise how well they have achieved their objectives. MBO is used mainly for managerial and professional employees and typically evaluates employees’ progress toward strategic planning objectives.

Employees and supervisors together determine particular objectives tied to corporate strategies. Employees are expected to attain these objectives during the rating period. The crucial phase of the MBO process requires that challenging but attainable objectives and standards be established through interaction between superiors and subordinates. Individuals jointly established objectives with their superiors, who then give them some latitude in how to achieve the objectives. Action plans require clear delineation of what specifically is to be accomplished and when it is to be completed. For example, if a sales manager has a per- formance objective of increasing sales in his or her area by 38 percent next year, the action plan might include the employment of three experienced salespersons, six calls a week by the sales manager on major customers, and assignment of appropriate sales quotas to all the salespeople.

At the end of the rating period, the employee writes a report explaining his or her progress toward accomplishing the objectives, and the employee’s supervisor appraises the employee’s performance based on accomplishment of the objectives. Despite the importance of managerial employees to company success, it is often difficult to establish appropriate performance goals because many companies simply do not fully describe the scope of these positions. MBO can promote effective communication between employees and their supervisors.

With MBO, performance is evaluated on the basis of progress toward objective attainment. Having specific performance objectives provides management with a basis for comparison. When objectives are agreed on by the manager and the subordinate, self-evaluation and controls become possible. In fact, with MBO, PA can be a joint effort, based on mutual agreement.

With MBO, it is left up to the managers to take corrective action when results are not as planned. Such action may take the form of changes in personnel, changes in the organization, or even changes in the objectives. Other forms of corrective action may include providing additional training and development of individual managers or employees to enable them to better achieve the desired results. Corrective action should not necessarily have negative connotations. Under MBO, objectives can be renegotiated downward without penalty or fear of job loss. Various segments of the MBO process can easily be integrated into an effective goal-oriented system. Goal-oriented systems are often a component of broader development programs that help employees achieve career goals.

On the downside, MBO is time-consuming and requires a constant flow of information between employees and employers. Moreover, its focus is only on the attainment of particular goals, often to the exclusion of other important outcomes. This drawback is known as a “results at any cost” mentality.21 The role of automobile sales professionals historically was literally limited to making sales. Once these professionals and customers agreed on the price of a car, the sales professionals’ work with customers was completed. Automobile salespeople today remain in contact with clients for as long as several months following the completion of the sale. The purpose is to ensure customer satisfaction and build loyalty to the product and dealership by addressing questions about the vehicle’s features and reminding clients about scheduled service checks.

Another results-oriented practice is the work standards method. The work standards method is a PA method that compares each employee’s performance to a predetermined standard or expected level of output. Standards reflect the normal output of an average worker operating at a normal pace. Firms may apply work standards to virtually all types of jobs, but production jobs generally receive the most attention. An obvious advantage of using work standards as appraisal criteria is objectivity. However, for employees to perceive that the standards are objective, they should understand clearly how the standards were set. Management must also explain the rationale for any changes to the standards.

work standards method Performance appraisal method that compares each employee’s performance to a predetermined standard or expected level of output.

chaPter 7 • Performance management and aPPraisal 179

The work standards method is often coupled with a particular incentive pay plan known as the piecework plan. Piecework plans typically found in manufacturing settings, rewards employees based on their individual hourly production against an objective output standard and is determined by the pace at which manufacturing equipment operates. For each hour, workers receive piecework incentives for every item produced over the designated production standard. Workers also receive a guaranteed hourly pay rate regardless of whether they meet the designated production standard. Companies use piecework plans when the time to produce a unit is relatively short, usually less than 15 minutes, and the cycle repeats continuously. Piecework plans are usually found in such manufacturing industries as textiles and apparel.

Figure 7-6 illustrates the calculation of a piecework incentive.

problems in performance appraisal PA is constantly under a barrage of criticism. The rating scales method seems to be the most vulnerable target. Yet in all fairness, many of the problems commonly mentioned are not exclu- sive to this method but rather, reflect improper implementation. The following section highlights some of the more common problem areas.

Appraiser Discomfort Conducting PAs is often a frustrating task for managers. If a PA system has a faulty design, or improper administration, employees will dread receiving appraisals and the managers will despise giving them. In fact, some managers have always loathed the time, paperwork, difficult choices, and discomfort that often accompanies the appraisal process. Going through the proce- dure cuts into a manager’s high-priority workload and the experience can be especially unpleas- ant when the employee in question has not performed well.

Subjectivity of Performance Evaluations A potential weakness of many PA methods is that they lack objectivity. For example, commonly used factors such as traits, behaviors, and competencies are virtually impossible to measure with objective measures. In addition, these factors may have little to do with an employee’s job performance. Although subjectivity will always exist in appraisal methods, employee appraisal based primarily on personal characteristics may place the evaluator and the company in untena- ble positions with the employee and equal employment opportunity guidelines. The firm may be hard-pressed to show that some of these factors are job related.

Almost all people make rating errors. Rating errors reflect differences between human judgment processes versus objective, accurate assessments uncolored by bias, prejudice, or other

ObjeCtive 7.9

List the problems that have been associated with performance appraisal.

rating errors In performance appraisals, differences between human judgment processes versus objective, accurate assessments uncolored by bias, prejudice, or other subjective, extraneous influences.

Piecework standard: 15 stitched garments per hour

hourly base pay rate awarded to employees when the standard is not met: $4.50 per hour

that is, workers receive $4.50 per hour worked regardless of whether they meet the piecework standard of 15 stitched garments per hour.

Piecework incentive award: $0.75 per garment stitched per hour above the piecework standard

Guaranteed Hourly Base Pay ($)

Piecework Award (No. of Garments Stitched above the Piecework Standard × Piecework Incentive Award)

Total Hourly Earnings ($)

first hour 4.50 10 garments × $0.75/garment = $7.50

12.00

second hour 4.50 fewer than 15 stitched garments, thus piecework award equals $0

4.50

Figure 7-6 Calculation of a Piecework Award for a Garment Worker

180 Part 3 • Performance management and training

subjective, extraneous influences.22 Human resource departments can help raters to minimize errors by carefully choosing rating systems and to recognize and avoid common errors. Major types of rater errors include:

• Bias errors • Contrast errors • Errors of central tendency • Errors of leniency or strictness

BIAS ERRORS bias errors happen when the rater evaluates the employee based on a personal negative or positive opinion of the employee rather than on the employee’s actual performance. Four ways supervisors may bias evaluation results are first-impression effects, positive and negative halo effects, similar-to-me effects, and illegal discriminatory biases.

A manager biased by a first-impression effect might make an initial favorable or unfavorable judgment about an employee and then ignore or distort the employee’s actual performance based on this impression. For instance, a manager expects that a newly hired graduate of a prestigious university will be an exemplary performer. After one year on the job, this employee fails to meet many of the work objectives; nevertheless, the manager rates the job performance more highly because of the initial impression.

A positive halo effect (oftentimes, referred to simply as a halo effect) or negative halo effect (also known as a horn error) occurs when a rater generalizes an employee’s good or bad behavior on one aspect of the job to all aspects of the job. For example, Rodney Pirkle, account- ing supervisor, placed a high value on neatness, a factor used in the company’s PA system. As Rodney was evaluating the performance of his senior accounting clerk, Jack Hicks, he noted that Jack was a very neat individual and gave him a high ranking on this factor. Also consciously or unconsciously, Rodney permitted the high ranking on neatness to carry over to other factors, giving Jack undeserved high ratings on some other performance criteria even though his actual performance was low. This phenomenon is known as the positive halo effect, an evaluation error that occurs when a manager generalizes one positive performance feature or incident to all aspects of employee performance, resulting in a lower rating. Of course, if Jack had not been neat, yet, performed well on every other dimension, the opposite, the horn error would have occurred.

A similar-to-me effect refers to the tendency on the part of raters to judge favorably employees whom they perceive as similar to themselves. Supervisors biased by this effect rate more favorably employees who have attitudes, values, backgrounds, or interests similar to theirs. For example, employees whose children attend the same elementary school as their manager’s children receive higher PA ratings than do employees who do not have children. Similar-to-me errors or biases easily can lead to charges of illegal discriminatory bias, wherein a supervisor rates members of his or her race, gender, nationality, or religion more favorably than members of other classes.

This pitfall occurs when managers allow individual differences to affect the ratings they give. If there are factors to avoid such as gender, race, or age, not only is this problem detrimental to employee morale, but it is obviously illegal and can result in costly lawsuits. The effects of cultural bias, or stereotyping, can definitely influence appraisals.23 Managers establish mental pictures of what are considered ideal typical workers, and employees who do not match this picture may be unfairly judged. Although all people have biases of some type that can affect the appraisal process, a successful evaluator will manage these biases.24

CONTRAST ERRORS Supervisors make contrast errors when they compare an employee with other employees rather than to specific, explicit performance standards. Such comparisons qualify as errors because other employees are required to perform only at minimum acceptable standards. Employees performing at minimally acceptable levels should receive satisfactory ratings, even if every other employee doing the job is performing at outstanding or above-average levels.

ERRORS OF CENTRAl TENDENCy When supervisors rate all employees as average or close to average, they commit errors of central tendency. Such errors are most often committed when raters are forced to justify only extreme behavior (i.e., high or low ratings) with written explanations; therefore, HR professionals should require justification for ratings at every level of the scale and not just at the extremes. With such a system, the rater may avoid possible

bias errors Evaluation errors that occur when the rater evaluates the employee based on a personal negative or positive opinion of the employee rather than on the employee’s actual performance.

first-impression effect An initial favorable or unfavorable judgment about an employee’s which is ignored or distorted.

positive halo effect (or halo effect) Evaluation error that occurs when a manager generalizes one positive performance feature or incident to all aspects of employee performance, resulting in a higher rating.

negative halo effect (or horn error) Evaluation error that occurs when a manager generalizes one negative performance feature or incident to all aspects of employee performance, resulting in a lower rating.

illegal discriminatory bias A bias error for which a supervisor rates members of his or her race, gender, nationality, or religion more favorably than members of other classes.

contrast errors A rating error in which a rater (e.g., a supervisor) compares an employee to other employees rather than to specific explicit performance standards.

central tendency error Evaluation appraisal error that occurs when employees are incorrectly rated near the average or middle of a scale.

chaPter 7 • Performance management and aPPraisal 181

controversy or criticism by giving only average ratings. However, because these ratings tend to cluster in the fully satisfactory range, employees do not often complain. Nevertheless, this error does exist and it influences the accuracy of evaluations. Typically, when pay raises are given, they will be based on an employee’s rated performance. When a manager gives an underachiever or overachiever an average rating, it undermines the compensation system.25

ERRORS OF lENIENCy OR STRICTNESS Raters sometimes place every employee at the high or low end of the scale, regardless of actual performance. With a leniency error, managers tend to appraise employees’ performance more highly than they really rate compared with objective criteria. This behavior is often motivated by a desire to avoid controversy over the appraisal. However, leniency provides a false sense of confidence to the employee and diminishes exceptional performance by other workers. It is most prevalent when highly subjective (and difficult to defend) performance criteria are used, and the rater is required to discuss evaluation results with employees. When managers know they are evaluating employees for administrative purposes, such as pay increases, they are likely to be more lenient than when evaluating performance to achieve employee development. Leniency, however, may result in failure to recognize correctable deficiencies. The practice may also deplete the merit budget and reduce the rewards available for superior employees. Rather than confronting employees whose performance is not acceptable, managers may avoid the situation by giving false-positive performance evaluations. An organization may find itself in a difficult situation when after firing a problem employee, the recent excellent performance evaluation shows up as part of a lawsuit.26 Rating an employee as outstanding and then firing him or her because of poor performance will make a supervisor look foolish if taken to court. On the other hand, strictness errors occur when a supervisor rates an employee’s performance lower than it would be if compared against objective criteria.

Employee Anxiety The evaluation process may also create anxiety for the appraised employee.27 This may take the form of discontent, apathy, and turnover. In a worst-case scenario, a lawsuit is filed based on real or perceived unfairness. Opportunities for promotion, better work assignments, and increased compensation may hinge on the results. This could cause not only apprehension but also outright resistance. One opinion is that if you surveyed typical employees, they would tell you PA is management’s way of highlighting all the bad things they did all year.

Characteristics of an effective appraisal system The basic purpose of a PA system is to improve the performance of individuals, teams, and the entire organization. The system may also serve to assist in making administrative decisions concerning pay increases, promotions, transfers, or terminations. In addition, the appraisal system must be legally defensible. Although a perfect system does not exist, every system should possess certain characteristics. The following factors assist in accomplishing these purposes.

Job-Related Criteria Job-relatedness is perhaps the most basic criterion needed in employee performance appraisals. The evaluation instrument should tie in closely to the accomplishment of organizational goals.28 The Uniform Guidelines on Employee Selection Procedures and court decisions are quite clear on this point. More specifically, evaluation criteria should be determined through job analysis. Subjective factors, such as initiative, enthusiasm, loyalty, and cooperation may be important; however, unless clearly shown to be job related, they should not be used.

Performance Expectations Employees must understand in advance what is expected of them. How can employees function effectively if they do not know what they are being measured against? On the other hand, if employees clearly understand the expectations, they can evaluate their own performance and make timely adjustments as they perform their jobs, without having to wait for the formal evaluation review. The establishment of highly objective work standards is relatively simple

leniency error Giving an undeserved high performance appraisal rating to an employee.

strictness errors Being unduly critical of an employee’s work performance.

ObjeCtive 7.10

Explain the characteristics of an effective appraisal system.

182 Part 3 • Performance management and training

in many areas, such as manufacturing, assembly, and sales. For numerous other types of jobs, however, this task is more difficult. Still, evaluation must take place based on clearly understood performance expectations.

Standardization Firms should use the same evaluation instrument for all employees in the same job category who work for the same supervisor. Supervisors should also conduct appraisals covering similar periods for these employees. Regularly scheduled feedback sessions and appraisal interviews for all employees are essential. Most large companies require groups of supervisors to come together to standardize employee performance reviews. They hash out the rationale behind each employee’s performance rating and adjust them to ensure that they reflect similar standards and expectations.29

Formal documentation of appraisal data serves several purposes, including protection against possible legal action. Employees should sign their evaluations. If the employee refuses to sign, the manager should document this behavior. Records should also include a description of employee responsibilities, expected performance results, and the role these data play in making appraisal decisions. Although PA is important for small firms, they are not expected to maintain PA systems that are as formal as those used by large organizations. Courts have reasoned that objective criteria are not as important in firms with only a few employees because in smaller firms top managers are more intimately acquainted with their employees’ work.

Trained Appraisers A common deficiency in appraisal systems is that the evaluators seldom receive training on how to conduct effective evaluations. Unless everyone evaluating performance receives training in the art of giving and receiving feedback, the process can lead to uncertainty and conflict. The training should be an ongoing process to ensure accuracy and consistency. It should cover how to rate employees and how to conduct appraisal interviews. Instructions should be rather detailed and the importance of making objective and unbiased ratings should be emphasized.

Continuous Open Communication Most employees have a strong need to know how well they are performing. A good appraisal sys- tem provides highly desired feedback on a continuing basis. There should be few surprises in the performance review. However, in one survey, only 45 percent of individuals felt their managers consistently communicated their performance concerns throughout the year.30 Managers should handle daily performance problems as they occur and not allow them to pile up for six months or a year and then address them during the PA interview. When something new surfaces during the appraisal interview, the manager probably did not do a good enough job communicating with

e T H i c a l D i l e m m a

Abdication of Responsibility You are the new vice-president for HR of a

company that has not been performing well, and everyone, including yourself, has a mandate to deliver results. The pressure has never been greater. Shareholders are angry after 31 months of a tough market that has left their stock underwater. Many shareholders desperately need stock performance to pay for their retirement. Working for you is a 52-year-old manager with two kids in college. In previous evalua- tions, spineless executives told him he was doing fine, when he clearly was not, and his performance is still far below par.

If you are to show others in the company that you are willing to make tough decisions, you feel you must fire this individual. The question is who’s going to suffer: the firm and ultimately shareholders whose retirements are in jeopardy, or a nice guy who’s been lied to for 20 years? 1. What would you do? 2. What factor(s) in this ethical dilemma might influence a person

to make a less-than-ethical decision?

chaPter 7 • Performance management and aPPraisal 183

the employee throughout the appraisal period. Even though the interview presents an excellent opportunity for both parties to exchange ideas, it should never serve as a substitute for the day-to-day communication and coaching required by performance management.

Conduct Performance Reviews In addition to the need for continuous communication between managers and their employees, a special time should be set for a formal discussion of an employee’s performance. Because improved performance is a common goal of appraisal systems, withholding appraisal results is absurd. Employees are severely handicapped in their developmental efforts if denied access to this information. A performance review allows them to detect any errors or omissions in the appraisal, or an employee may disagree with the evaluation and want to challenge it.

Constant employee performance documentation is vitally important for accurate PAs. Although the task can be tedious and boring for managers, maintaining a continuous record of observed and reported incidents is essential in building a useful appraisal. The appraisal interview will be dis- cussed in a later section.

Due Process Ensuring due process is vital. If the company does not have a formal grievance procedure, it should develop one to provide employees an opportunity to appeal appraisal results that they consider inaccurate or unfair. They must have a procedure for pursuing their grievances and having them addressed objectively.

Legal Considerations in performance appraisal Employee lawsuits may result from negative evaluations. Employees often win these cases, thanks in part to the firm’s own PA procedures. A review of court cases makes it clear that legally defensi- ble PA systems should be in place. Perfect systems are not expected, and the law does not preclude supervisory discretion in the process. However, the courts normally require an absence of adverse impact on members of protected classes or validation of the process. It also expects a system that keeps one manager from directing or controlling a subordinate’s career. There should also be a system whereby the appraisal is reviewed and approved by someone or some group in the organiza- tion. Another requirement is that the evaluator must have personal knowledge of the employee’s job performance. In addition, the system uses predetermined norms that limit the manager’s discretion.

Mistakes in appraising performance and decisions based on invalid results can have seri- ous repercussions. For example, discriminatory merit pay increases have resulted in costly legal action. In settling cases, courts have held employers liable for back pay, court costs, and other costs related to training and promoting certain employees in protected classes. Further, giving higher-than-earned evaluations and then firing an employee may set the stage for a suit, espe- cially if the individual is a member of a protected group. The apparent inconsistency may give the employee a basis for claiming discrimination.31

Legislation that prohibits illegal discrimination in employment practices (e.g., the Age Discrimination in Employment Act) certainly applies PA practices. In the case of Mistretta v. Sandia Corporation (a subsidiary of Western Electric Company, Inc.), a federal district court judge ruled against the company, stating, “There is sufficient circumstantial evidence to indicate that age bias and age based policies appear throughout the performance rating process to the detriment of the protected age group.” The Albemarle Paper v. Moody case also supported vali- dation requirements for PAs, as well as for selection tests. Organizations should avoid using any appraisal method that results in a disproportionately negative impact on a protected group.

An employer may also be vulnerable to a negligent retention claim if an employee who con- tinually receives unsatisfactory ratings in safety practices, for example, is kept on the payroll and he or she causes injury to a third party. In these instances, firms might reduce their liability if they provide substandard performers with training designed to overcome the deficiencies.

It is unlikely that any appraisal system will be immune to legal challenge. However, systems that possess the characteristics discussed are more legally defensible. At the same time, they can provide a more effective means for achieving PM goals.

ObjeCtive 7.11

Describe the legal considerations associated with performance appraisal.

184 Part 3 • Performance management and training

performance appraisal interview The appraisal interview is the Achilles’ heel of the entire evaluation process. In fact, appraisal review sessions often create hostility and can do more harm than good to the employee– manager relation- ship. To minimize the possibility of hard feelings, the face-to-face meeting and the written review must have performance improvement, not criticism, as their goal. The reviewing manager must use all the tact he or she can muster in discussing areas needing improvement. Managers should help employees understand that they are not the only ones under the gun. Rating managers should emphasize their own responsibility for the employee’s development and commitment for support.

The appraisal interview definitely has the potential for confrontation and undermining the goal of motivating employees. The situation improves considerably when several sources provide input, including perhaps the employee’s own self-appraisal. Regardless of the system used, employees will not trust a system they do not understand.

Scheduling the Interview Supervisors usually conduct a formal appraisal interview at the end of an employee’s appraisal period. It should be made clear to the employee as to what the meeting is about.32 Employees typically know when their interview should take place, and their anxiety tends to increase if their supervisor delays the meeting. Interviews with top performers are often pleasant experiences for all concerned. However, supervisors may be reluctant to meet face-to-face with poor performers. They tend to postpone these anxiety-provoking interviews.

Interview Structure A successful appraisal interview should be structured in a way that allows both the supervisor and the subordinate to view it as a problem-solving rather than a fault-finding session. The manager has several purposes when planning an appraisal interview. Certainly the employee’s performance should be discussed, focusing on specific accomplishments.33 Also, the employee should be assisted in setting goals and personal-development plans for the next appraisal period. The manager should suggest means for achieving established goals, including support from the manager and firm. For instance, a worker may receive an average rating on a factor such as qual- ity of production. In the interview, both parties should agree to the specific improvement needed during the next appraisal period and specific actions that each should take.34

During performance reviews, managers might ask employees whether their current duties and roles are effective in achieving their goals. In addition to reviewing job-related performance, they might also discuss subjective topics, such as career ambitions. For example, in working on a project, perhaps an employee discovered an unrealized aptitude. This awareness could result in a new goal or serve as a springboard to an expanded role in the organization.

The amount of time devoted to an appraisal interview varies considerably with company policy and the position of the evaluated employee. Although costs are a consideration, there is merit in conducting separate interviews for discussing (1) employee performance and devel- opment and (2) pay. Many managers have learned that as soon as the topic of pay emerges in an interview, it tends to dominate the conversation, with performance improvement taking a back seat. For this reason, if pay increases or bonuses are involved in the appraisal, it might be advisable to defer those discussions for one to several weeks after the appraisal interview.

Use of Praise and Criticism Some managers believe that they should focus only on negative items. However, focusing only on weaknesses has the potential to damage relationships with subordinates.35 No one wants a lengthy interview where they are constantly bombarded with criticism. A person might reason that “If I am this bad, I had better find another job.”

As suggested previously, conducting an appraisal interview requires tact and patience on the part of the evaluator. Praise is appropriate when warranted, but it can have limited value if not clearly deserved. If an employee must eventually be terminated because of poor performance, a manager’s false praise could bring into question the “real” reason for being fired.

Criticism, even if warranted, is especially difficult to give. The employee may not perceive it as being constructive. It is important that discussions of these sensitive issues focus on the

ObjeCtive 7.12

Explain how the appraisal interview should be conducted.

chaPter 7 • Performance management and aPPraisal 185

deficiency, not the person. Effective managers minimize threats to the employee’s self-esteem whenever possible. When giving criticism, managers should emphasize the positive aspects of performance; criticize actions, not the person; and ask the employee how he or she would change things to improve the situation. Also, the manager should avoid supplying all the answers and try to turn the interview into a win–win situation so that all concerned gain.

Employees’ Role From the employees’ side, two weeks or so before the review, they should go through their diaries or files and make a note of all projects worked on, regardless of whether or not they were successful.36 The best recourse for employees in preparing for an appraisal review is to prepare a list of creative ways they have solved problems with limited resources. They will look especially good if they can show how their work contributes to the value of the company. This informa- tion should be on the appraising manager’s desk well before the review. Reminding managers of information they may have missed should help in developing a more objective and accurate appraisal.

Concluding the Interview Ideally, employees will leave the interview with positive feelings about management, the com- pany, the job, and themselves. If the meeting results in a deflated ego, the prospects for improved performance will be bleak. Although you cannot change past behavior, future performance is another matter. The interview should end with specific and mutually agreed-on plans for the employee’s development. Managers should assure employees who require additional training that it will be forthcoming and that they will have the full support of their supervisor. When management does its part in employee development, it is up to the individual to perform in an acceptable manner.

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National Culture and performance appraisal PA is an area of human resource management that has special problems when translated into different countries’ cultural environments. The use of PA in the United States is relatively new compared to many older countries. Here, formal PA came into systematic use toward the begin- ning of the 20th century. However, PA in China has evolved over many centuries. As early as the third century a.d., Sin Yu, Chinese philosopher, criticized a biased rater employed by the Wei dynasty saying, “The Imperial Rater of Nine Grades seldom rates men according to their merits but always according to his likes and dislikes.”37

Chinese managers often have a different idea about what performance is than do Western managers because Chinese companies tend to focus appraisals on different criteria. Chinese managers appear to define performance in terms of personal characteristics, such as loyalty and obedience, rather than outcome measurement. Chinese PAs place great emphasis on moral char- acteristics. On the other hand, Western PA seeks to help achieve organizational objectives, and this is best obtained by concentrating on individual outcomes and behaviors that are related to the attainment of those objectives.38

Culture also plays a significant role in the success and failure of PA systems in the Middle East. In the Middle East there is a view called wasta, which significantly affects how business is conducted. Wasta refers to using mutual favors instead of merit to get things done. Because wasta implies reciprocity, it remains entrenched in society, and it has a major effect on HR, espe- cially PA. Wasta affects many aspects of HR such as selection and promotions because friend- ship and family connections is the criteria used instead of merit.39

ObjeCtive 7.13

Discuss how performance appraisal is affected by a country’s culture.

186 Part 3 • Performance management and training

summary 1. Describe performance management. Performance man-

agement (PM) is a goal-oriented process that is directed to- ward ensuring that organizational processes are in place to maximize productivity of employees, teams, and ultimately, the organization. PM systems are one of the major focuses in business today. With PM, the effort of each and every worker should be directed toward achieving strategic goals.

2. Define performance appraisal and identify the uses of performance appraisal. Performance appraisal (PA) is a system of review and evaluation of individual or team task performance.

PA data are potentially valuable for use in numer- ous human resource functional areas, including human resource planning, recruitment and selection, training and development, career planning and development, compen- sation programs, internal employee relations, and assess- ment of employee potential.

3. Discuss the performance appraisal process. The identi- fication of specific goals is the starting point for the PA process and the beginning of a continuous cycle. Then job expectations are established with the help of job analy- sis. The next step involves examining the actual work performed. Performance is then appraised. The final step involves discussing the appraisal with the employee.

4. Identify the various performance criteria (standards) that can be established. The most common appraisal criteria are traits, behaviors, competencies, goal achievement, and improvement potential.

5. Identify who may be responsible for performance appraisal and explain the performance period. People who are usually responsible for PA include immedi- ate supervisors, subordinates, peers and team members, self-appraisal, and customer appraisal.

Formal performance evaluations are usually prepared at specific intervals. Although there is nothing magical about the period for formal appraisal reviews, in most organizations they occur either annually or semiannually.

6. Identify the various performance appraisal methods. PA methods include 360-degree feedback evaluation, rating scales, critical incidents, work standards, ranking, forced distribution, behaviorally anchored rating scales, and results-based approaches.

7. List the problems that have been associated with per- formance appraisal. The problems associated with PAs include appraiser discomfort, lack of objectivity, halo/ horn errors, leniency/strictness, central tendency, recent behavior bias, personal bias (stereotyping), and employee anxiety.

8. Explain the characteristics of an effective appraisal system. Characteristics include job-related criteria, performance expectations, standardization, trained appraisers, continuous open communication, conduct performance reviews, and due process.

9. Describe the legal considerations associated with performance appraisal. A review of court cases makes it clear that legally defensible PA systems should be in place. Perfect systems are not expected, and the law does not preclude supervisory discretion in the process. However, systems that possess certain characteristics are more legally defensible.

10. Explain how the appraisal interview should be conducted and discuss how performance appraisal is affected by a country’s culture. A successful appraisal interview should be structured in a way that allows both the supervisor and the subordinate to view it as a problem-solving rather than a fault-finding session.

PA is an area of human resource management that has special problems when translated into different countries’ cultural environments. The use of PA in the United States is relatively new compared to many older countries. Here, for- mal performance appraisal came into systematic use toward the beginning of the 20th century. However, PA in other countries has evolved over many centuries and is strongly affected by a country’s culture.

chaPter 7 • Performance management and aPPraisal 187

performance management (PM) 165 performance appraisal (PA) 166 360-degree feedback evaluation

method 171 trait systems 173 comparison systems 173 forced distribution method 173 paired comparison method 175 behavioral systems 175 critical incident technique 175

behaviorally anchored rating scale (BARS) 176

behavioral observation scales (BOS) 176

results-based systems 177 management-by-objectives (MBO) 178 work standards method 178 rating errors 179 bias errors 180

first-impression effect 180 halo effect (positive) 180 negative halo effect (horn error) 180 similar-to-me effect 180 illegal discriminatory bias 180 contrast errors 180 errors of central tendency 180 leniency error 181 strictness errors 181

Key terms

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exercises 7-1. Visit an HR manager in your local area. What PA

method does this firm use? Ask how well the PA method is accepted in the organization.

7-2. Your PA uses a rating form with the following charac- teristics: leadership, public acceptance, attitude toward

people, appearance and grooming, personal conduct, outlook on life, ethical habits, resourcefulness, capacity for growth, mental alertness, and loyalty to organiza- tion. Could any of these characteristics pose a problem with regard to a legal challenge? Why? Discuss.

Questions for review 7-3. Define performance management and performance

appraisal. 7-4. What are the uses of performance appraisal? 7-5. What are some reasons that people give for getting rid

of performance appraisal? 7-6. What are the steps in the performance appraisal

process? 7-7. What aspects of a person’s performance might an

organization evaluate? 7-8. Many different people can conduct performance

appraisals. What are the various alternatives? 7-9. What appraisal intervals are often used in appraisal

reviews? 7-10. Briefly describe each of the following methods

of performance appraisal: (a) 360-degree feedback evaluation

(b) rating scales (c) critical incidents (d) work standards (e) ranking (f) forced distribution (g) behaviorally anchored rating scales (h) results-based systems 7-11. What are the various problems associated with

performance appraisal? Briefly describe each. 7-12. What are the legal considerations associated with

performance appraisal? 7-13. Explain why the following statement is often true:

“The Achilles’ heel of the entire evaluation process is the appraisal interview itself.”

7-14. How might different countries’ cultures view performance appraisal?

188 Part 3 • Performance management and training

i n c i D e n T 1 These Things Are a Pain “There, at last it’s finished,” thought Rajiv Chaudhry, as he laid aside the last of 12 PA forms. It had been a busy week for Rajiv, who supervises a road maintenance crew for the Georgia Department of Highways.

In passing through Rajiv’s district a few days previously, the governor had complained to the area superintendent that repairs were needed on several of the highways. Because of this, the superintendent assigned Rajiv’s crew an unusually heavy workload. In addition, Rajiv received a call from the HR office that week reminding him that the PAs were late. Rajiv explained his predicament, but the HR specialist insisted that the forms be completed right away.

Looking over the appraisals again, Rajiv thought about several of the workers. The PA form had places for marking quantity of work, quality of work, and cooperativeness. For each characteristic, the worker could be graded outstanding, good, average, below average, or unsatisfactory. As Rajiv’s crew had completed all of the extra work assigned for that week, he marked every worker outstanding in quan- tity of work. He marked Joe Blum average in cooperativeness because Joe had questioned one of his decisions that week. Rajiv had decided to patch a pothole in one of the roads, and Joe thought the small sec- tion of road surface ought to be broken out and replaced. Rajiv didn’t include this in the remarks section of the form, though. As a matter of fact, he wrote no remarks on any of the forms.

Rajiv felt a twinge of guilt as he thought about Roger Short. He knew that Roger had been goofing off, and the other workers had been carrying him for quite some time. He also knew that Roger would be upset if he found that he had been marked lower than the other workers. Consequently, he marked Roger the same to avoid a confrontation. “Anyway,” Rajiv thought, “these things are a pain, and I really shouldn’t have to bother with them.”

As Rajiv folded up the PAs and put them in the envelope for mail- ing, he smiled. He was glad he would not have to think about PAs for another six months.

Questions 7-15. What weaknesses do you see in Rajiv’s performance

appraisals? 7-16. Should HR have the ability to “insist that the forms be

completed right away”? Discuss. 7-17. Many managers would agree with Rajiv in saying that “these

things are a pain, and I really shouldn’t have to bother with them.” What are the disadvantages in doing away with performance appraisal?

i n c i D e n T 2 Performance Appraisal? As the production supervisor for Sweeny Electronics, Nakeisha Joseph was generally well regarded by most of her subordinates. Nakeisha was an easygoing individual who tried to help her employees in any way she could. If a worker needed a small loan until payday, she would dig into her pocket with no questions asked. Should an employee need some time off to attend to a personal problem, Nakeisha would not dock the individual’s pay; rather, she would take up the slack herself until the worker returned.

Everything had been going smoothly, at least until the last PA period. One of Nakeisha’s workers, Bill Overstreet, had been experi- encing a large number of personal problems for the past year. Bill’s wife had been sick much of the time, and her medical expenses were high. Bill’s son had a speech impediment, and the doctors had rec- ommended a special clinic. Bill, who had already borrowed the limit the bank would loan, had become upset and despondent over his circumstances.

When it was time for Bill’s annual PA, Nakeisha decided she was going to do as much as possible to help him. Although Bill could not

be considered more than an average worker, Nakeisha rated him out- standing in virtually every category. Because the firm’s compensation system was heavily tied to PA, Bill would be eligible for a merit increase of 10 percent in addition to a regular cost-of-living raise.

Nakeisha explained to Bill why she was giving him such high rat- ings, and Bill acknowledged that his performance had really been no better than average. Bill was very grateful and expressed this to Nakeisha. As Bill left the office, he was excitedly looking forward to telling his work buddies about what a wonderful boss he had. Seeing Bill smile as he left gave Nakeisha a warm feeling.

Questions 7-18. From Sweeny Electronics’ standpoint, what difficulties might

Nakeisha’s PA practices create? 7-19. What can Nakeisha do now to diminish the negative impact of

her evaluation of Bill? 7-20. Might a forced distribution performance appraisal system over-

come the problem that Nakeisha has created? Discuss.

chaPter 7 • Performance management and aPPraisal 189

MyManagementLab® Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

7-21. Why are performance management and performance appraisal practices so impor- tant to a firm?

7-22. What are the characteristics of an effective appraisal system?

endnotes Scan for Endnotes or go to http://www.pearsonhighered.com/mondy

190

1 Summarize the training and development process.

2 Explain how to determine specific training and development needs and objectives.

3 Summarize various training methods.

4 Describe alternative training and development delivery systems.

5 Summarize training and development implementation issues.

6 Explain the metrics for evaluating training and development.

7 Describe factors that influence training and development.

8 Summarize some human resource management training initiatives.

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9 Explain the concept of careers and career paths.

10 Identify career planning approaches.

11 Discuss career development and career development methods.

12 Describe management development.

13 Define organization development (OD) and describe various OD techniques.

14 Summarize the learning organization idea as a strategic mind-set.

15 Identify some training issues in the global context.

8 Training and Development Chapter ObjeCtives After completing this chapter, students should be able to:

191

Learn It If your professor has chosen to assign this, go to mymanagementlab.com to see what you should particularly focus on and to take the Chapter 8 Warm-Up.

No other human resources (HR) practice set is most squarely designed to develop a company’s employees than training and development. training and development (t&D) is the heart of a continuous effort designed to improve employee competency and organizational performance. There are many elements that fit within a T&D umbrella. The most common elements include training, career development, organizational development, and organizational learning. For the sake of organization, we can distinguish between these four elements based on two dimensions— focus on the individual employee or groups of employees and time frame, short and long term. Tim frames do not come with a set number of years. Short time frames are based on the specific learning objectives and expected time for employees to learn and apply those skills. Long time frames are based on the time frame a company sets to achieve its strategic objectives. Figure 8-1 shows the organization of T&D elements.

training provides learners with the knowledge and skills needed for their present jobs. Showing a worker how to operate a lathe or a supervisor how to schedule daily production are examples of training. On the other hand, development involves learning that goes beyond today’s job and has a more long-term focus. It prepares employees to keep pace with the organi- zation as it changes and grows. We often associate development with the concept of careers and career development practices, which we discuss later in this chapter.

T&D activities have the potential to align a firm’s employees with its corporate strategies. Some possible strategic benefits of T&D include employee satisfaction, improved morale, higher retention, lower turnover, improved hiring, a better bottom line, and the fact that satis- fied employees produce satisfied customers. Individuals and groups receive the bulk of T&D effort. However, some firms believe that to achieve needed change, they must move the entire organization in a different direction. Efforts to achieve this are the focus of organization development (OD).

training and development (T&D) Heart of a continuous effort designed to improve employee competency and organizational performance.

training Activities designed to provide learners with the knowledge and skills needed for their present jobs.

development Learning that goes beyond today’s job and has a more long-term focus.

organization development (OD) Planned and systematic attempts to change the organization, typically to a more behavioral environment.

192 Part 3 • Performance management and training

Improved performance, the bottom-line purpose of T&D, is a strategic goal for organizations. Toward this end, many firms have become or are striving to become learning organizations. A learn- ing organization is a firm that recognizes the critical importance of continuous performance-related T&D and takes appropriate action.

Our focus in this chapter is on training and development, careers, organizational development, and the learning organization.

training and Development process Major adjustments in the external and internal environments necessitate corporate change. The general T&D process that anticipates or responds to change may be seen in Figure 8-2. First, an organization must determine its specific needs for training. As we will see, needs are considered at the levels of the organization, task, and persons. From that information, HR professionals judge whether training is essential, and if so, what the training should be, why training should be conducted, who should be trained, and where training should occur. Then specific objectives need to be established. The objectives might be quite narrow if limited to the supervisory abil- ity of a manager, or they might be broad enough to include improving the management skills of all first-line supervisors. In exemplary organizations, there is a close link between the firm’s strategic mission and the objectives of the T&D program. Review and periodic updating of these objectives is necessary to ensure that they support the changing strategic needs of the organi- zation. After setting the T&D objectives, management can determine the appropriate methods and the delivery system to be used. Naturally, management must continuously evaluate T&D to ensure its value in achieving organizational objectives.

learning organization Firm that recognizes the critical importance of continuous performance-related T&D and takes appropriate action.

ObjeCtive 8.1

Summarize the training and development process.

Figure 8-1 organization of training and development elements

Short Term Long Term

Groups / Organization organizational organizational development Learning

Individuals training career management

Determine Specific T&D Needs

Establish Specific T&D Objectives

Select T&D Method(s) and Delivery System(s)

Implement T&D Programs

Evaluate T&D Programs

EXTERNAL ENVIRONMENT

INTERNAL ENVIRONMENT

Figure 8-2 Training and Development Process

chaPter 8 • training and deveLoPment 193

Determine specific training and Development Needs The first step in the T&D process is to determine specific T&D needs. In today’s highly competitive business environment, undertaking a program because other firms are doing it is asking for trouble. A systematic approach to addressing bona fide needs must be undertaken and must be done taking into consideration the mission of the organization.

A training and development needs assessment helps companies determine whether train- ing is necessary. It may be determined by conducting analyses on three levels, which include organization, task, and person.

Organizational Analysis Organizational analysis focuses on the firm’s strategic mission, goals and corporate plans are studied, along with the results of strategic human resource planning. Let’s consider a brief exam- ple of T-Mobile to illustrate an organizational analysis. T-Mobile is a U.S.-based subsidiary of T-Mobile International AG and its headquarters are located in Bellevue, Washington. The com- pany operates the fourth-largest wireless network in the United States behind Verizon Wireless, AT&T, and Sprint, and it provides wireless voice, messaging, and data services in the United States, Puerto Rico, and the U.S. Virgin Islands under the T-Mobile, MetroPCS, and GoSmart Mobile brands.

T-Mobile had a reputation of excellent customer service quality based on a variety of sur- veys, including JD Powers and Associates, but there was a dramatic drop in quality that was highly noticeable between 2010 and 2012 when talks of AT&T acquiring T-Mobile were public.1 According to Sascha Segan, writer for PC Magazine, “T-Mobile’s workforce was dejected and polishing their resumes….”2 In addition, “The result was an apathetic, aimless carrier full of sad people who didn’t think they’d have a job in a year.” T-Mobile’s CEO John Legere recog- nized the need to improve customer service quality to better address customer needs and to have consumers see the company differently.3

Task Analysis task analysis focuses on the tasks required to achieve the firm’s purposes. In this case, improving customer service quality is one of T-Mobile’s goals. Job descriptions are important data sources for this analysis level, and it is logical that customer service employees who serve in the role of sales and those who serve in post-sales service are most relevant to the CEO’s objective because they not only specify the tasks of these jobs, but also indicate the knowledge, skills, and abili- ties (KSAs) required to perform these jobs adequately. The following are some of the Customer Service Representative job tasks that are specified in the Occupational Information Network (O*NET).4

• Confer with customers by telephone or in person to provide information about products or services, take or enter orders, cancel accounts, or obtain details of complaints.

• Check to ensure that appropriate changes were made to resolve customers’ problems. • Keep records of customer interactions or transactions, recording details of inquiries,

complaints, or comments, as well as actions taken. • Resolve customers’ service or billing complaints by performing activities such as

exchanging merchandise, refunding money, or adjusting bills. • Refer unresolved customer grievances to designated departments for further investigation. • Order tests that could determine the causes of product malfunctions.

These tasks can help HR professionals determine training content and how best to design train- ing to impart knowledge and skills. In addition, specifying the tasks better enable HR professionals to select evaluation measures of training effectiveness, including learning of knowledge and skills to perform these jobs more effectively as well as indicators of job performance changes (hopefully, improvements) following the completion of training over time.

Person Analysis person analysis focuses on obtaining answers to the questions: Who needs to be trained? What do they need to do differently from what they’re doing today? and What kind of KSAs do employees need?

ObjeCtive 8.2

Explain how to determine specific training and development needs and objectives.

training and development needs assessment Heart of a continuous effort designed to improve employee competency and organizational performance.

organizational analysis Training needs assessment activity, which focuses on the firm’s strategic mission, goals, and corporate plans are studied, along with the results of strategic HR planning.

task analysis A training needs assessment activity, which focuses on the tasks required to achieve the firm’s purposes.

person analysis A training needs assessment activity that focuses on finding answers to questions such as Who needs to be trained? What do they need to do differently from what they’re doing today? What kind of knowledge, skills, and abilities (KSAs) do employees need?

194 Part 3 • Performance management and training

Specifying the KSAs necessary for task performance is essential information that will help in the selection of training methods. For example, a simple classroom lecture could be an effec- tive vehicle for imparting basic knowledge about customer service principles and product knowl- edge. Role plays could be an effective approach to having trainees demonstrate whether they have learned basic knowledge and can effectively combine knowledge with skills to effectively complete customer service representative tasks. Among many, O*NET lists the following most important KSAs, respectively, to the customer service representative job:5

Customer and Personal Service—Knowledge of principles and processes for providing customer and personal services. This includes customer needs assessment, meeting quality standards for services, and evaluation of customer satisfaction.

Active Listening—Giving full attention to what other people are saying, taking time to understand the points being made, asking questions as appropriate, and not interrupting at inappropriate times.

Oral Comprehension—The ability to listen to and understand information and ideas presented through spoken words and sentences.

Performance appraisals and interviews or surveys of supervisors and job incumbents are helpful at this level. Also industry surveys of customer service quality, as discussed previously about T-Mobile, are a useful source of information.

Establish Training and Development Program Objectives T&D must have clear and concise objectives and be developed to achieve organizational goals. Without them, designing meaningful T&D programs would not be possible. Worthwhile evalua- tion of a program’s effectiveness would also be difficult, at best. As we discussed in the previous section, T-Mobile might pursue customer service training to improve its standing in customer service quality among its major competitors. Consider these purposes and objectives for a train- ing program involving employment compliance:

Training area: employmenT ComplianCe

Purpose: To provide the supervisor with

1. Knowledge and value of consistent human resource practices

2. The intent of Equal Employment Opportunity Commission (EEOC) legal requirements

3. The skills to apply them

Objectives: To be able to

1. Cite the supervisory areas affected by employment laws on discrimination

2. Identify acceptable and unacceptable actions

3. State how to get help on EEOC matters

4. Describe why we have disciplinary action and grievance procedures

5. Describe our disciplinary action and grievance procedures, including who is covered

As you see, the purpose is established first. The specific learning objectives that follow leave little doubt about what the training should accomplish. With these objectives, managers can determine whether training has been effective. For instance, in the example, a trainee either can or cannot state how to get help on equal employment opportunity matters.

training Methods When a person is working in a garden, some tools are more helpful in performing certain tasks than others. The same logic applies when considering T&D methods, and these methods are changing continuously and improving. Regardless of whether programs are in-house or out- sourced, firms use a number of methods for imparting knowledge and skills to the workforce

ObjeCtive 8.3

Summarize various training methods.

chaPter 8 • training and deveLoPment 195

and usually more than one method, called blended training, is used to deliver T&D. As part of the blended training process, mobile learning is enhancing or replacing some traditional training methods. T&D methods are discussed next. Each of these training methods should be evaluated and selected for what it does best.

Classroom Method The classroom method, in which the instructor physically stands in front of students, continues to be effective for many types of training. One advantage of instructor-led training is that the instructor may convey a great deal of information in a relatively short time. The effectiveness of instructor-led programs improves when groups are small enough to permit discussion, and when the instructor is able to capture the imagination of the class and use new technology to provide a better classroom learning experience. Also, the charisma or personality that the instructor brings to class may excite the students to want to learn. The classroom setting allows for real-time dis- cussion that is not easily replicated, even with the most advanced technology.

E-Learning The tradition of instructors physically lecturing in front of live corporate students has dimin- ished somewhat in recent years. e-learning is the T&D method for online instruction using technology- based methods such as DVDs, company intranets, and the Internet.

The Internet offers many opportunities for learning. For example, companies such as Coursera, Udacity partner with universities to offer massive open online courses (MOOCs) that enable thousands of students who are located anywhere in the world at any time of the day to take university-level courses. Initially, the audience for MOOCs was mainly college-level students. Increasingly, companies are adopting MOOCs as an e-learning tool. Partnering with highly rec- ognized universities that offer MOOCs could increase the value of training in a variety of ways, including through learning leading-edge information and techniques from world-famous profes- sors and assessments by current and prospective clients that training is state-of-the art. “There’s a lot of potential for how MOOCs can be used for corporate training and development,” said Julia Stiglitz, head of business development and strategic partnerships for Coursera, which also partners with universities such as Stanford and UC Berkeley to offer online college courses.6 “The compa- nies are looking for new ways to train their employees and get them up to speed on skills that may not have been relevant five years ago.”

The benefits of e-learning are numerous and include decreased costs, greater convenience and flexibility, improved retention rates, and a positive environmental impact.7 It can be self- paced, can often be individualized, and can be done while at work or off-shift. A concept can be viewed as often as needed. Individuals using e-learning can be working on different parts of a program, at varying speeds, and in different languages.

Luxottica is an Italian eyewear and optical company whose chain stores include LensCrafters, Pearle Vision, and Sunglass Hut, with 38,000 employees worldwide. Angi Willis, Luxottica’s learning technology project manager said, “We just didn’t have the manpower, technology or bud- get to efficiently and effectively manage and execute our various training programs.” Luxottica put training online so employees could have instant access to information they needed to do their jobs, including details on new products and regulations as well as continuing education.8

The advantages of using e-learning are numerous; however, the biggest advantage is cost savings. According to Gordon Johnson, vice-president of marketing for infrastructure provider Expertus, “Online meetings are one-third the cost of face-to-face meetings, so the question becomes not which is best, but whether face-to-face training is three times better. Usually not.”9

For Union Pacific, the largest railroad company in North America, both distance and time have been hurdles to learning. About 19,000 of its 48,000 widely disbursed employees work on the railroad’s locomotives and freight cars, many on different schedules. So the company uses a blend of traditional learning and e-learning that provides the kind of training far-flung employees require, at a time when they can use it.

Firms that consistently have a high turnover rate have turned to e-learning because class- room learning is not cost-effective. Nike faced a challenge that a number of retailers today are confronting. Nike designed an online training program that the company could offer to employ- ees in its own stores as well as at other retailers that sell Nike products. The program conveys a

e-learning The T&D method for online instruction using technology- based methods such as the DVDs, company intranets, and the Internet.

196 Part 3 • Performance management and training

lot of information quickly, but it is also easy to learn. This is important because the training is directed at 16- to 22-year-olds.10

A takeoff on e-learning is the live virtual classroom, often referred to as virtual instructor led, that uses a Web-based platform to deliver live, instructor-led training to geographically dis- persed learners. Organizations can bring together entire teams for just an hour or two per week. They can also bring content specialists into the classroom for only the necessary time required from two minutes to two hours. Virtual instructor led training is ideal for organizations that have many technicians needing frequent training while they continue to do their job in the field.11 The need to have large blocks of time that takes workers away from their jobs is thus eliminated. Training can now be provided in blocks of time as opposed to several days. For example, a two- day live training session might be provided in five 75-minute modules delivered over time. These provide both cost savings and convenience.12

Case Study The case study is a T&D method in which trainees study the information provided in the case and make decisions based on it. The goal of the case study method is to provide trainees with the opportunity to sharpen critical thinking skills. Often, the case study method occurs with an instructor who serves as a facilitator. It is also quite common for trainees to analyze the case in teams because problem solving typically involves consultation with others.

If an actual company is involved, the student would be expected to research the firm to gain a better appreciation of its financial condition and environment. Research on companies has been significantly enhanced through the availability of case studies of a variety of business functions. There are many sources of business case studies, including Harvard Business School Publishing.

Behavior Modeling and Tweeting behavior modeling is a T&D method that permits a person to learn by copying or replicating behaviors of others. Behavior modeling has been used to train supervisors in such tasks as con- ducting performance reviews, correcting unacceptable performance, delegating work, improving safety habits, handling discrimination complaints, overcoming resistance to change, orienting new employees, and mediating individuals or groups in conflict.

Social networking, such as Twitter, has been used as a learning tool involving behavior modeling. “In a corporation, micro-blogging can be a way to augment behavior modeling,” says Sarah Millstein, author of the O’Reilly Radar Report. This works by having a person who excels at a task send out frequent updates about what he or she is doing. The company might even for- malize the process to the extent that it would select exemplary performers to post on a regular basis and determine those employees who should follow their posts.13

Role-Playing role-playing is a T&D method in which participants are required to respond to specific prob- lems they may encounter in their jobs by acting out real-world situations. Rather than hear- ing an instructor talk about how to handle a problem or by discussing it, they learn by doing. Role-playing is often used to teach such skills as administering disciplinary action, interviewing, grievance handling, conducting performance appraisal reviews, team problem solving, effective communication, and leadership-style analysis. A successful role-playing activity occurs if the activity actually mirrors real-life situations. It has also been used successfully to teach work- ers how to deal with individuals who are angry, irate, or out of control. Some restaurant chains use role-playing to train servers how to deal with difficult situations such as a couple having an argument at the dinner table. The classic case of using role-playing is when a manager must take disciplinary against a worker for something they did improperly. Managers never know how an employee will react when being reprimanded. When acting out the role of the worker, he or she may randomly choose from a variety of roles such as being stoic, starting to cry, promising never to do it again, or take this job and shove it.

Training Games Games can be quite useful learning tools to aid in the group dynamic process. Games are a cost- effective means to encourage learner involvement and stimulate interest in the topic, thereby enhancing employees’ knowledge and performance.14 According to Elizabeth Treher, founder,

case study T&D method in which trainees are expected to study the information provided in the case and make decisions based on it.

behavior modeling T&D method that permits a person to learn by copying or replicating behaviors of others to show managers how to handle various situations.

role-playing T&D method in which participants are required to respond to specific problems they may encounter in their jobs by acting out real-world situations.

chaPter 8 • training and deveLoPment 197

president, and CEO of The Learning Key Inc., “Team-based business games result in bet- ter knowledge retention, provide focused, memorable learning and a more enjoyable learning atmosphere than traditional methods.”15 A major benefit of games is that learners retain 75 per- cent of the knowledge they acquire when playing games, according to research by the National Training Laboratories. McDonald’s in Japan estimates new employee training time to prepare burgers has been cut in half as a result of a video game created in conjunction with Nintendo.16 Microsoft Xbox support agents use the Xbox Customer Care Framework (CCF) Assessment simulator training game. The game simulates real-life circumstances caused by generating the stress and anxiety of receiving difficult customer relations calls.17 Even the U.S. Marine Corps uses a game-based training program called Mission Impact, which places learners in a simulated battalion to improve their environmental performance.

business games are a T&D method that permits participants to assume roles such as presi- dent, controller, or marketing vice president of two or more similar hypothetical organizations and compete against each other by manipulating selected factors in a particular business situa- tion. Participants make decisions affecting such factors as price levels, production volumes, and inventory levels. Typically, a computer program manipulates their decisions, with the results simulating those of an actual business situation. Participants are able to see how their decisions affect other groups and vice versa. The best thing about this type of learning is that if a poor deci- sion costs the company $1 million, no one gets fired, yet the business lesson is learned.

In-Basket Training in-basket training is a T&D method in which the participant is asked to establish priorities for and then handle a number of business papers, e-mails, texts, memoranda, reports, and telephone messages that would typically cross a manager’s desk. The messages, presented in no particular order, call for anything from urgent action to routine handling. The participant is required to act on the information contained in these messages. In this method, the trainee assigns a priority to each particular situation before making any decisions. This form of training has been quite ben- eficial to help predict performance success in management jobs. Assessment centers commonly make use of this method in the selection process.

On-the-Job Training On-the-job-training (Ojt) is an informal T&D method that permits an employee to learn job tasks by actually performing them. Often OJT will also have a significant impact on personal development. The key to this training is to transfer knowledge from a highly skilled and expe- rienced worker to a new employee, while maintaining the productivity of both workers. OJT is used to pass on critical “how to” information to the trainee. Individuals may also be more highly motivated to learn because it is clear to them that they are acquiring the knowledge needed to perform the job. At times, however, the trainee may feel so much pressure to produce that learn- ing is negatively affected. Firms should be selective about who provides OJT. Regardless of who does the training, that person must have a good work ethic and correctly model the desired behavior.

Apprenticeship Training apprenticeship training is a training method that combines classroom instruction with OJT. While in training, the employee earns less than the master craftsperson, who is the instructor. The National Association of Manufacturers projects that by 2020 some 10 million skilled workers will be needed and apprenticeships remain one of the most vital sources for securing skilled labor.18 Such training is common with craft jobs, such as those of plumber, carpenter, machinist, welder, fabricator, laser operator, electrician, and press brake operator. As baby boomers continue to leave the workforce, they must be replaced by competent operators, and apprenticeship programs pro- vide an effective way of accomplishing this. Many organizations are partnering with high schools, vocational schools, and universities as they search for new skilled workers. Organizations often donate look-alike equipment to the schools so students can be trained on the system.

The U.S. Department of Labor has implemented new regulations governing apprenticeships. Historically apprenticeships were defined by the amount of instruction time—typically 10,000 hours over four years. The new regulations offer provisions for competency-based apprentice- ships, electronic and distance training, and the issuance of interim credentials. These credentials

business games T&D method that permits participants to assume roles such as president, controller, or marketing vice-president of two or more similar hypothetical organizations and compete against each other by manipulating selected factors in a particular business situation.

in-basket training T&D method in which the participant is asked to establish priorities for and then handle a number of business papers, e-mail messages, memoranda, reports, and telephone messages that would typically cross a manager’s desk.

on-the-job training (OJT) An informal T&D method that permits an employee to learn job tasks by actually performing them.

apprenticeship training Training method that combines classroom instruction with on-the- job training.

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can be used toward college credits. “It’s nice because a person isn’t waiting until the end of the program to get some kind of reward,” says Steve Mandes, executive director at National Institute for Metalworking Skills (NIMS).19

Team Training team training focuses on imparting knowledge and skills on individuals who are expected to work collectively toward meeting a common objective. For example, many automobile manu- facturers organize teams to focus on the completion of car assembly. One such team installs the interior components, including dashboard, seats, carpeting, headliner, and trim. Many individu- als work together to complete these tasks in an ordered sequence within a designated period of time to ensure that the factory meets its daily production quota. Other examples include teams of sales representatives and post-sales representatives to ensure that the customer receives a product configuration that meets its business needs and has subsequent support to ensure that employees of the client firm are able to properly use the product, such as inventory software.

The nature of the work and business needs determines whether coordination training or cross-training is necessary. team coordination training educates team members how to orches- trate the work that they do to complete the task such as in the previous examples. All team training initiatives involve information sharing and procedures for ensuring that the work is con- ducted in proper order. For example, in the automobile assembly example, team members must ensure that all of the electrical wires that run across the floor are properly connected to their appropriate components (such as power window motors) before door trim is installed.

The success of team coordination training can mean the difference between life and death. The U.S. Coast Guard (USCG) regularly conducts a program for its rescue and recovery mission teams, which it calls Team Coordination Training (TCT).

Team Coordination Training (TCT) is a program that focuses on reducing the probability for human error by increasing individual and team effectiveness. Safety has long been the Commanding Officer’s responsibility and, until recently, was assumed to be the logical result of finely tuned technical skills. USCG mishap data suggests that while technical skills are an essential component of any job, they alone will not ensure safety.20

Cross-training educates team members about the other members’ jobs so that they may per- form them when a team member is absent, is assigned to another job in the company, or has left the company altogether. Ideally, effective cross-training initiatives will raise flexibility, commu- nication, morale, and interdepartmental relations. Cross-training is also prevalent in a variety of employment settings because pressures to manage labor costs have often led to fewer employees who are hired to perform the same job. Restaurants are a common setting where cross-training is important. For example, it may be necessary for a server to step in to assist the kitchen staff prepare meals when one or more kitchen staff members is absent.

training and Development Delivery systems The previous section focused on the various T&D methods available to organizations, and the list is constantly changing. In this section, our attention is devoted to how training may be delivered to participants.

Corporate Universities A T&D delivery system provided under the umbrella of the organization is referred to as a corporate university. The corporate T&D institution’s focus is on creating organizational change that involves areas such as company training, employee development, and adult learn- ing. It aims to achieve its goals by conducting activities that foster individual and organizational learning and knowledge. It is proactive and strategic rather than reactive and tactical and can be closely aligned to corporate goals. Even though they are called universities, they are not so in the straightest sense because degrees in specific subjects are not granted. General Electric (GE0 has its Crotonville campus and McDonald’s has its Hamburger University. Intel University in Arizona administers programs developed by training groups located worldwide. The university also teaches nontechnical skills such as dealing with conflict and harassment avoidance.

team training Training focused on teaching knowledge and skills to individuals who are expected to work collectively toward meeting a common objective.

team coordination training Team training focused on educating team members how to orchestrate the individual work that they do to complete the task.

cross-training Type of training for educating team members about the other members’ jobs so that they may perform them when a team member is absent, is assigned to another job in the company, or has left the company altogether.

ObjeCtive 8.4

Describe alternative training and development delivery systems.

corporate university T&D delivery system provided under the umbrella of the organization.

chaPter 8 • training and deveLoPment 199

Recent years have seen the decline of corporate universities as companies such as Xerox, Andersen, Ford, Pfizer, Aetna, and Merrill Lynch moved away from them largely because of the significant overhead costs associated with maintaining learning facilities and dedicated staff. However, in New York City, North Shore-Long Island Jewish Health System’s corporate university serves 42,000 employees across 15 hospitals.21 Deloitte LLP has recently built a $300 million corporate university in Westlake, Texas. Its 750,000 square feet will house state-of- the-art learning technology, 800 sleeping rooms, and even a ballroom. Marc Rosenberg, a learn- ing consultant, says, “There’s only so much you can do with social networking on the Internet, especially in services firms where you rely so much on your colleagues for help.”22 Also, firms are better able to control the quality of training and to ensure that all employees receive the same messages.

Colleges and Universities For decades, colleges and universities have been the primary delivery system for training profes- sional, technical, and management employees. Many public and private colleges and universi- ties are taking similar approaches to training and education as have the corporate universities. Corporate T&D programs often partner with colleges and universities or other organizations, such as the American Management Association, to deliver both training and development. As we discussed, the advent of MOOCs has created greater opportunities for partnerships between educational institutions and companies.

Community Colleges Community colleges are publicly funded higher education establishments that deliver vocational training and associate degree programs. Also, labor unions partner with some community col- leges to sponsor formal courses as part of apprenticeship programs in the skilled trades such as carpentry and plumbing. For example, a course on electrical wiring principles and practices would be found in the curriculum for apprentices preparing to become master electricians. Some employers have discovered that community colleges can provide certain types of training better and more cost effectively than the company can. Rapid technological changes and corporate restructuring have created a new demand by industry for community college training resources.

Online Higher Education A form of online e-learning that has increased substantially in recent years is the use of online higher education. Online higher education is defined as formal educational opportunities including degree and training programs that are delivered, either entirely or partially, via the Internet. One reason for the growth of online higher education is that it allows employees to attend class at lunchtime, during the day, or in the evening. It also saves employees time because it reduces their need to commute to school. It increases the range of learning opportunities for employees and increases employee satisfaction. Another point that needs to be made is that skep- ticism regarding the quality of online degrees appears to be fading. John Challenger, chief execu- tive of outplacement firm Challenger, Gray & Christmas, agrees. “We did once have a clear line between online and brick-and-mortar degrees, but that’s changing,” he says. “Hiring managers are catching up.”23

Enrollment in online universities continues to grow. The University of Phoenix has the largest student body in North America. The university has more than 200 campuses worldwide and confers degrees in more than 100 degree programs at the bachelor’s, master’s, and doc- toral levels. Clemson University’s Master of Human Resource Development is a fully online course designed for in-career practitioners. The 36-credit program follows a cohort structure, with approximately 40 students in each unit. Class sessions are offered several times a week, to allow for an average of 10 students in each class. Students are assigned a “home group” within the cohort, but can choose another class to attend when work–life demands such as schedule conflicts or travel arise.24

In recent years, programs have been introduced that provide students with more and more autonomy and control of their programs of study. There are basically three categories of online higher education programs available: hybrid, synchronous, and asynchronous. Hybrid programs permit students to take some classes online and some in a traditional university setting. Online syn- chronized study offers students the choice of studying through an online portal system; however,

online higher education Educational opportunities including degree and training programs that are delivered, either entirely or partially, via the Internet.

200 Part 3 • Performance management and training

the student is expected to appear for most classes on a real-time schedule. With this approach, students interact with a real professor and obtain real-time support for the learning material. With asynchronous learning, students have a series of assignments that need to be completed in a cer- tain time frame. A system is available that allows students to communicate with the professor and classmates. Marianne Mondy, a legislative auditor for Louisiana, received her MBA through the University of Phoenix. She was given the option of totally completing her MBA online or to do a portion of her work on campus. She chose the online option because of her work schedule. All courses were six weeks in length and each assignment had to be completed in a fixed time frame. Online higher education is not for everyone and the key to success is discipline. Jeff Seaman of Babson Survey Research Group, which studies online education, said, “You need discipline. Otherwise, the ‘anytime, anywhere’ aspect frees you to put off the work.”25

Vestibule System vestibule system is a T&D delivery system that takes place away from the production area on equipment that closely resembles equipment actually used on the job. For example, a group of lathes may be located in a training center where the trainees receive instruction in their use. A pri- mary advantage of the vestibule system is that it removes the employee from the pressure of hav- ing to produce while learning. The emphasis is focused on learning the skills required by the job.

Video Media The use of video media such as DVDs continues to be a popular T&D delivery system. These media are especially appealing to small businesses that cannot afford more expensive training methods and are often incorporated in e-learning and instructor-led instruction. In addition, they provide the flexibility desired by any firm. Behavior modeling, previously mentioned, has long been a successful training method that uses video media.

Simulators simulators are a T&D delivery system comprised of devices or programs that replicate actual job demands. The devices range from simple paper mock-ups of mechanical devices to computerized simulations of total environments. T&D specialists may use simulated sales counters, automo- biles, and airplanes. A prime example is the use of simulators to train pilots. Simulated crashes do not cost lives or deplete the firm’s fleet of jets. John Deere uses an Excavator Training Simulator to train new operators in a risk-free environment. The simulator provides specific realistic les- sons on proper operator techniques, machine controls, and safe operation at a virtual job site.26 Crane operator trainees use a software simulator based on actual crane functions. Trainees sit in an authentic crane cab, with real control options while the simulation offers a realistic experience.27

Social Networking Today’s employees interact, learn, and work in much different ways and styles than in the not- so-distant past. Increasingly mobile and geographically dispersed workforces are becoming the norm. At the same time, dwindling or stagnant travel budgets are creating a need for different training methods. As a result, some organizations are using social networking and collaborative tools to enable informal learning. In a recent study, 55 percent of respondents also expect an increase in informal learning usage, which includes social media, blogs, wikis, and discussion groups.28 Informal learning often takes place outside the corporate training departments. It does not necessarily follow a specified curriculum and often begins accidentally. It is experienced directly in the course of everyday life or work. By embracing informal learning, learners may be more motivated to gain knowledge. Thus, informal learning has surfaced as an important part of employee development.

The premise behind the educational success of social networking is the learning approach referred to as constructivism. A constructivist learning environment differs from the traditional model. In this setting, the teacher guides the learner toward multiple learning sources, rather than acting as the sole source of knowledge.29 With more workers around the world using social media, they are getting and trusting information from their peer group more than in the past.30 Often organizations are using communication meetings called huddles, which are usually called daily for a short period of time such as seven minutes, as informal learning opportunities.31 Many believe that using shared, social learning solutions will grow.

vestibule system T&D delivery system that takes place away from the production area on equipment that closely resembles equipment actually used on the job.

simulators T&D delivery system comprised of devices or programs that replicate actual job demands.

chaPter 8 • training and deveLoPment 201

implementing training and Development programs A perfectly conceived training program will fail if management cannot convince the participants of its merits. Participants must believe that the program has value and will help them achieve their personal and professional goals. A long string of successful programs certainly enhances the credibility of T&D.

Implementing T&D programs is often difficult. One reason is that managers are typically action-oriented and feel that they are too busy for T&D. According to one management develop- ment executive, “Most busy executives are too involved chopping down the proverbial tree to stop for the purpose of sharpening their axes.” Another difficulty in program implementation is that qualified trainers must be available. In addition to possessing communication skills, the trainers must know the company’s philosophy, its objectives, its formal and informal organiza- tion, and the goals of the training program. T&D requires more creativity than perhaps any other human resource function.

Implementing training programs presents unique problems. Training implies change, which employees may vigorously resist. It may also be difficult to schedule the training around present work requirements. Unless the employee is new to the firm, he or she undoubtedly has specific full-time duties to perform. Another difficulty in implementing T&D programs is record keep- ing. It is important to maintain training records, including how well employees perform during training and later on the job. This information helps measure program effectiveness and chart the employees’ progress in the company.

Metrics for evaluating training and Development Managers should strive to develop and use T&D metrics because such information can smooth the way to budget approval and executive buy-in. Most managers agree that training does not cost, it pays, and that training is an investment, not an expense. However, the actual value of the training must be determined if top management will be ready to invest in it.

The traditional framework for evaluation of training is based on four criteria.32 Although this framework was developed decades ago, HR professionals often rely on it to organize evalu- ation efforts.

Reactions The first criterion, trainee reactions, refers to the extent to which trainees liked the training program related to its usefulness, and quality of conduct. Trainee reactions, when assessed, are measured on completion of the training session by survey. The survey questions can be spe- cific or general (“how satisfied were you with the presentation of sales skill strategies?” versus “how satisfied were you with the overall training program?”). This information may help train- ing designers pinpoint potential problem aspects of the training as well as possible reasons for the shortcomings.

Evaluating a T&D program by asking the participants’ opinions of it is an approach that pro- vides a response and suggestions for improvements, essentially a level of customer satisfaction. You cannot always rely on such responses, however. The training may have taken place in an exotic location with time for golfing and other fun activities, and the overall experience may bias some reports. Nevertheless, this approach is a good way to obtain feedback and to get it quickly and inexpensively.

Learning The second criterion, learning, refers to the extent to which principles, facts, and techniques were understood and retained in memory by the employee. As with trainee reactions, learning is often assessed on completion of the training program (and sometimes, throughout the training course) by the appropriate tests (typing speed or recall of concepts from memory). Both evalua- tion criteria are important because positive trainee reactions and learning are expected to lead to more job-related and concrete ways of assessing training.

Some organizations administer tests to determine what the participants in a T&D program have learned. The pretest–posttest control group design is one evaluation procedure that may be used. In this procedure, both groups receive the same test before and after training. The

ObjeCtive 8.5

Summarize training and develop- ment implementation issues.

ObjeCtive 8.6

Explain the metrics for evaluating training and development.

reactions Training evaluation criterion focused on the extent to which trainees liked the training program related to its usefulness, and quality of conduct.

learning The extent to which an employee understands and retains principles, facts, and techniques.

202 Part 3 • Performance management and training

experimental group receives the training but the control group does not. Each group receives randomly assigned trainees. Differences in pretest and posttest results between the groups are attributed to the training provided. A potential problem with this approach is controlling for vari- ables other than training that might affect the outcome.

Behavior The third criterion, behavior change, refers to the changes in job-related behaviors or perfor- mance that can be attributed to training. Specifically, this criterion assesses transfer of training. transfer of training refers to the extent to which an employee generalizes knowledge and skill learned in training to the work place, as well as maintains the level of skill proficiency or knowl- edge learned in training. An example of generalization may be the application of principles for dealing effectively with “difficult” individuals in a training setting to dealing diplomatically with irate customers, or managing a highly competitive coworker in the work place. An example of skill maintenance is whether a typing speed of 90 words per minute demonstrated during training is sustained over time when the employee is back on the job.

Tests may accurately indicate what trainees learn, but they give little insight into whether the training leads participants to change their behavior. For example, it is one thing for a manager to learn about motivational techniques but quite another matter for this person to apply the new knowledge. A manager may sit in the front row of a training session dealing with empowerment of subordinates, absorb every bit of the message, understand it totally, make a grade of 100 on a test on the material, and then return the next week to the workplace and continue behaving in the same old autocratic way. The best demonstration of value occurs when learning translates into lasting behavioral change. Michael Allen, winner of the Distinguished Contribution to Workplace Learning and Performance Award, said, “We don’t care about what people know. We care about what they can do … with what they know. Our challenge, as effective instructional designers, is to get people to make the leap from knowing to doing and that’s where we often fail.”33

Organizational Results The fourth criterion, results, refers to the extent to which tangible outcomes that can be attrib- uted to training are realized by the organization. Organizational results refer to such outcomes as enhanced productivity, lower costs, and higher product or service quality. Results in the context of training indicate whether (and how well or poorly) an organization has attained competitive advantage. Likewise, assessment of results over time can inform whether (and how well or poorly) competitive advantage has been sustained over time. Whereas much research on trainee reactions, learning, and behavior has amassed over the last several decades, relatively few gains have been made for results.

Here metrics address the business’s bottom line, such as productivity data, rather than num- bers of training sessions completed or the satisfaction employees gained from a training session. For instance, if the objective of an accident-prevention program is to reduce the number and severity of accidents by 15 percent, comparing accident rates before and after training provides a useful metric of success. Leslie Joyce, vice-president of global talent management at Novelis and former CLO at Home Depot, said, “If there is change in behavior or improvement in perfor- mance, most CEOs I’ve worked with will agree that training has had an impact.”34

Return on investment (ROI) is an important results criterion. CEOs want to see training in terms that they can appreciate such as business impact, business alignment, and ROI, that is, the extent to which benefits of training outweigh the costs to provide it. However, a recent study from the ROI Institute showed that although 96 percent of executives want to see the busi- ness effects of learning, only 8 percent receive it.35 Nevertheless, in today’s global competitive environment, training will not be rewarded with continued investment unless training results in improved performance that impacts the bottom line. Today, organizations can only justify invest- ing in training that is clearly essential to business success and that actually delivers results that enable the company to compete effectively.

benchmarking is the process of monitoring and measuring a firm’s internal processes, such as operations, and then comparing the data with information from companies that excel in those areas. Because training programs for different firms are unique, the training measures are necessarily broad. Common benchmarking questions focus on metrics such as training costs, the ratio of train- ing staff to employees, and whether new or more traditional delivery systems are used. Information

behavior change Change in job-related behaviors or performance that can be attributed to training.

transfer of training Training evaluation method focusing on the extent to which an employee generalizes knowledge and skill learned in training to the work place, as well as maintains the level of skill proficiency or knowledge learned in training.

organizational results Typically, training outcomes such as enhanced productivity, lower costs, and higher product or service quality.

HR Web Wisdom

Benchmarking http://www.benchnet.com

The Benchmarking Exchange and Best Practices homepage is provided

benchmarking Process of monitoring and measuring a firm’s internal processes, such as operations, and then comparing the data with information from companies that excel in those areas.

chaPter 8 • training and deveLoPment 203

Factors influencing training and Development There are numerous factors that both impact and are impacted by T&D.

Top Management Support For T&D programs to be successful, top management support is required; without it, a T&D pro- gram will not succeed. The most effective way to achieve success is for executives to provide the needed resources to support the T&D effort. The comments by Carol Freeland, principal/owner of ACTS+ in Hot Springs Village, Arizona, best described the importance of support from the CEO when she said, “If the CEO does not believe in the inherent value of training, any training effort on the part of the company will be fruitless and languish.”36

The recession saw many training budgets suffer as executives looked for ways to reduce costs. By 2011 firms had started to boost the size of their training staffs.37 However, even as the economy improved, training professionals were having to do more with less. As Karen O’Lonard, principal analyst of Bersin & Associates, said, “Companies aren’t rolling out more training, but are trying to get better results from existing programs.”38

Shortage of Skilled Workers Shortage of future skilled workers was first projected in the 1980s but has recently received additional attention. Mark Tomlinson, executive director and general manager of the Society of Manufacturing Engineers, compares the shortage of skilled workers to viewing an iceberg in stormy seas. “We’re just approaching it; we haven’t hit it yet but we know it’s there. People are starting to see it. They just don’t know how to deal with it.”39 There will likely be major shortages of future skilled workers; for example, 240,000 jobs for skilled workers go unfilled annually, even in a recession. It took Cianbro Corporation, a heavy construction company in the Northeast, 18 months to hire 80 experienced welders.40 As another example, the number-one problem facing surface finishers today is finding qualified employees.41

Unemployment figures are misleading because they do not show employers who are beg- ging for skilled workers. Worldwide many companies are struggling to find skilled workers. Baby boomers—the best-educated and most-skilled workforce in U.S. history—are preparing to retire. Labor experts are concerned that workers in the United States lack the critical skills needed to replace baby boomers. Silicon Valley companies are having difficulty finding software engineers; Union Health Service and the Harvard hospital system find it hard to find nurses and

ObjeCtive 8.7

Describe factors that influence training and development.

HR Web Wisdom

American Society for Training and Development http://www.astd.org

The homepage for the American Society for Training and Development is presented.

derived from these questions probably lacks the detail to permit specific improvements of the train- ing curricula. However, a firm may recognize, for example, that another organization is able to deliver a lot of training for relatively little cost. This information could then trigger the firm to follow up with interviews or site visits to determine whether that phenomenon represents a “best practice.”

Quality standards are another important results measure. A well-recognized standard is the ISO 9001 quality assurance standard, which states: “Employees should receive the training and have the knowledge necessary to do their jobs.” To comply with the standard, companies must maintain written records of their employee training to show that employees have been properly trained. Think of possible questions that a compliance auditor might ask when auditing a firm. Some might be “How does your firm assess the need for the types and amounts of training and education received by all categories of employees? What percentage of employees receives train- ing annually? What is the average number of hours of training and education per employee?” Under ISO 9001, monitoring the quality of training is important.

We have considered a variety of training methods, delivery systems, and training evaluation criteria. Careful planning and orchestration of these methods and systems is essential to achiev- ing effective training. The Watch It video describes Wilson Learning’s approach and philosophy.

Watch It 1 If your professor has assigned this, sign into mymangementlab.com to watch a video titled Wilson Learning: Training and to respond to questions.

204 Part 3 • Performance management and training

technicians; and manufacturers such as Caterpillar and Westinghouse cannot hire enough weld- ers and machinists to operate their state-of-the-art lathes.42

Part of the problem in finding qualified people for manufacturing jobs is that there is a genera- tion of young people for which manufacturing has not been an attractive job prospect because they have seen many jobs outsourced and they question the long-term future in these jobs. In addition, training needs are changing and the old skill requirements of reading, writing, and arithmetic have been expanded. Executives are increasingly demanding additional skills of their new hires such as critical thinking and problem solving, communication, collaboration, and creativity.43

Technological Advances Change is occurring at an amazing speed, with knowledge doubling every year. Perhaps no factor has influenced T&D more than technology. As technology becomes capable of handling more and more tasks, employers combine jobs and confer broader responsibilities on remaining work- ers. For example, the technology of advanced automated manufacturing, such as that in the auto- mobile industry, is today doing the jobs of other employees, including the laborer, the materials handler, the operator-assembler, and the maintenance person. In fact, it is now commonplace for a single employee to perform all of those tasks in a position called “manufacturing technician.” The expanding range of tasks and responsibilities in almost all jobs demand higher levels of reading, writing, and problem-solving skills. Employees must possess higher levels of reading skills than before because they must now be able to read the operating and troubleshooting man- uals (when problems arise) of automated manufacturing equipment that is based on computer technology. Previously, the design of manufacturing equipment was relatively simple and easy to operate, based on simple mechanical principles such as pulleys.

Technological innovation also has fostered increased autonomy and team-oriented work places, which also demand different job-related skills than employees once needed. For example, the manufacturing technician’s job mentioned previously, is generally more autonomous than its predecessor. Thus, technicians must be able to manage themselves and their time. Employers now rely on working teams’ technical and interpersonal skills to drive efficiency and to improve qual- ity. Today’s consumers often expect customized products and applications, which require that employees possess sufficient technical skill to tailor products and services to customers’ needs, as well as the interpersonal skills necessary to determine client needs and customer service.

Global Complexity The world is simply getting more complex, and this has had an impact on how an organiza- tion operates. No longer does a firm just compete against other firms in the United States. Now more than ever, to sustain competitive advantage companies must provide their employees with leading-edge skills, and encourage employees to apply their skills proficiently. Increasing cus- tomer expectations also mean the standards for success are constantly rising. To compete in the more complex global environment, companies must be able to simultaneously integrate global operations, respond to diverse local/national needs within subsidiary operations, and implement innovation rapidly around the world.

There is reason to suspect that many U.S. firms are already behind in this regard. Employers in both the European Common Market and some Pacific Rim economies have long emphasized learning as a proactive tool for responding to strategic change. For example, in Ireland, the pri- vate sector offers graduate employment programs to employees in particular skill areas such as science, marketing, and technology. In short, global competition necessitates that companies in the United States become more productive and there is growing consensus that training must be at the forefront of their attempts to do so.

Learning Styles Although much remains unknown about the learning process, what is known affects the way firms conduct training. It is known that adults retain approximately 20 percent of what they read and hear, 40 percent of what they see, 50 percent of what they say, 60 percent of what they do, and 90 percent of what they see, hear, say, and do.44 Because of these differences, it is important to use a wide range of T&D methods. Learning style supports the concept that people have a natural preference, based on their dominant sense, in how they choose to learn and process information. It may be visual, hear- ing, or touching.45 Some learn best from working in a group whereas others prefer studying on an

chaPter 8 • training and deveLoPment 205

individual basis. Still others absorb best by seeing how the material provides a practical application, and others want to know the theoretical basis. Some learners can readily absorb information by reading written words whereas others learn best through hearing the words spoken.

In studying the information in this text, the different learning styles will become apparent. There are exercises at the end of each chapter to provide hands-on application of the mate- rial. Being able to read the words in the text will appeal to some whereas others will learn best through hearing the instructor’s lecture. Each chapter’s PowerPoint slides provide a visual representation of the material. The incidents at the end of each chapter require extending your newfound knowledge in a practical manner.

To cope with the different learning styles, firms use multiple methods, called blended train- ing (also referred to as blended learning), to deliver T&D. This involves using a combination of training methods that are strategically combined to best achieve a training program’s objec- tives.46 John Leutner, head of global learning services for Xerox corporate HR, said, “The new blended learning is about creating a richer, more meaningful development experience that relates to a person’s work and performance.”47

Another learning principle is that learners progress in an area of learning only as far as they need to achieve their purposes. Professors have long known that telling students which concepts are important motivates them to study the material, especially if the information is prime test material. Research indicates that unless there is relevance, meaning, and emotion attached to the material taught, trainees will not learn.

Another learning principle is that the best time to learn is when the learning can be useful. One way this impacts T&D is the need for training on a timely basis. just-in-time training (on-demand training) is training provided anytime, anywhere in the world when it is needed. Computer technology, the Internet, intranets, smartphones, and similar devices have made these approaches economically feasible to a degree never before possible. The ability to deliver knowl- edge to employees on an as-needed basis, anywhere on the globe, and at a pace consistent with their learning styles greatly enhances the value of T&D.

Other Human Resource Functions Successful accomplishment of other human resource functions can also have a crucial impact on T&D. For instance, if recruitment-and-selection efforts or its compensation package attract only marginally qualified workers, a firm will need extensive T&D programs. Hiring marginally qualified workers will likely have a significant impact on the firm’s safety and health programs. Therefore, additional training will be required.

human resource Management training initiatives HR is responsible for many company-wide training initiatives on HR-related matters. Among these initiatives are orientation (onboarding), ethics, compliance (equal employment opportu- nity, Occupational Safety and Health), and diversity. We will limit our discussion to orientation

blended training The use of multiple training methods to deliver T&D.

just-in-time training (on-demand training) Training provided anytime, anywhere in the world when it is needed.

ObjeCtive 8.8

Summarize some human resource management training initiatives.

e T h i C a l D i l e m m a

The Tough Side of Technology You are the HR director for a large manufac-

turing firm that is undergoing major changes. Your firm is in the pro- cess of building two technologically advanced plants. When these are completed, the company will close four of its five old plants. It is your job to determine who will stay with the old plant and who will be retrained for the newer plants.

One old-plant employee is a 56-year-old production worker who has been with your firm for 10 years. He seems to be a close personal

friend of your boss, as they are often seen together socially. However, in your opinion, he is not capable of handling the high-tech work required at the new plants, even with additional training. He is not old enough to receive any retirement benefits and there are other quali- fied workers with more seniority who want to remain at the old plant. 1. What would you do? 2. What factor(s) in this ethical dilemma might influence a person

to make a less-than-ethical decision?

206 Part 3 • Performance management and training

(onboarding). We already discussed ethics training and diversity training in Chapters 2 and 3. Safety training is discussed in Chapter 13. Resources for other types of compliance training are available online on the government agency responsible for the compliance issue. For exam- ple, the Office of Federal Contract Compliance Programs Web site addresses affirmative action requirements, and the U.S. Department of Labor provides learning resources for determining whether jobs are exempt from the overtime pay provision of the Fair Labor Standards Act.

Orientation is the initial T&D effort to inform new employees about the company, the job, and the work group. It becomes a way to engage new employees and reinforce the fact that they made the proper career choice. It also familiarizes them with the corporate culture and helps them to quickly become productive. A good orientation program is quite important because first impressions are often the most lasting and need to start the minute an applicant accepts an offer of employment. One of the orientation goals at Booz Allen is to make a posi- tive first impression and create excitement before the new hire’s first day on the job, using their online new-hire portal.48

New employees usually decide whether or not to stay at a company within their first six months of employment, and orientation programs give organizations an opportunity to get the relationship off to a good start. Therefore, new-hire orientation programs are particularly crucial for the rapid transition from new hires to contributing members of the organization. Orientation formats are unique to each firm. However, some basic purposes are listed here.

• The Employment Situation. At an early point in time, it is helpful for the new employee to know how his or her job fits into the firm’s organizational structure and goals.

• Company Policies and Rules. Every job within an organization must be performed within the guidelines and constraints provided by policies and rules. Employees must understand these to ensure a smooth transition into the workplace.

• Compensation. Employees have a special interest in obtaining information about the reward system. Management normally provides this information during the recruitment- and-selection process and often reviews it during orientation.

• Corporate Culture. The firm’s culture reflects, in effect, “How we do things around here.” This relates to everything from the way employees dress to the way they talk.

• Team Membership. A new employee’s ability and willingness to work in teams was likely determined before he or she was hired. In orientation, the program may again emphasize the importance of becoming a valued member of the company team.

• Employee Development. An individual’s employment security is increasingly becoming dependent on his or her ability to acquire needed knowledge and skills that are constantly changing. Thus, firms should keep employees aware not only of company-sponsored developmental programs, but also of those available externally.

• Socialization. To reduce the anxiety that new employees may experience, the firm should take steps to integrate them into the informal organization. Some organizations have found that employees subjected to socialization programs, including the topics of politics and career management, perform better than those who have not undergone such training.

To this list, add the fact that there are numerous forms and documents a new employee must complete or read and acknowledge.

Supervisors represent the front line of orientation. Roger Chevalier, California-based man- agement consultant and author of A Manager’s Guide to Improving Workplace Performance, said, “If employees are selected properly, 85 percent of whether or not they will succeed is based on the environment created by a supervisor.”49 Peers also often serve as excellent information agents. There are several reasons for using peers in performing this function. For one thing, they are accessible to newcomers, often more so than the boss. Peers also tend to have a high degree of empathy for new people. In addition, they have the organizational experience and technical expertise to which new employees need access. Some organizations assign a mentor or “buddy” to new hires to work with them until they are settled in.

Although orientation can occupy a new employee’s first few days on the job, some firms believe that learning is more effective if spread out over time. For example, a company may deliver a program in a system of 20 one-hour sessions over a period of several weeks. Some firms are sensitive to information overload and make information available to employees on an as-needed basis. For example, a new supervisor may eventually have the responsibility for

orientation Initial T&D effort for new employees that informs them about the company, the job, and the work group.

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evaluating his or her subordinates. But knowledge of how to do this may not be needed for six months. A training segment on performance evaluation may be placed on the Internet or a firm’s intranet and be available when the need arises. This approach is consistent with just-in-time training, mentioned previously.

Careers and Career paths In the sections that follow, we will address a series of interrelated topics—careers, career paths, and career planning. A career is a general course that a person chooses to pursue throughout his or her working life. Historically, a career was a sequence of work-related positions an individual occupied during a lifetime, although not always with the same company. However, today there are few relatively static jobs. A career path is a flexible line of movement through which a person may travel during his or her work life. Following an established career path, the employee can undertake career development with the firm’s assistance. From a worker’s perspective, following a career path may involve weaving from company to company and from position to position as he or she obtains greater knowledge and experience. Career paths have historically focused on upward mobility within a particular occupation, which was a choice not nearly as available as in the past. The days of the cradle to the grave job have largely disappeared. Other career paths include the network, lateral skill, dual-career paths, adding value to your career, demotion, and being your own boss as a free agent. Most careers are no longer a straight ascent up the corporate ladder. By selecting an alternative career path, a person may transfer current skills into a new career, one that was only dreamed about in the past. Typically, these career paths are used in combination and may be more popular at various stages of a person’s career.

In the Watch It video, you will learn that Verizon provides employees with the opportunity to develop a career path that fits their interests and the company’s needs. Verizon also provides a variety of training programs to help facilitate the attainment of career goals.

ObjeCtive 8.9

Explain the concept of careers and career paths.

career General course that a person chooses to pursue throughout his or her working life.

career path A flexible line of movement through which a person may travel during his or her work life.

Traditional Career Path Although the traditional career path is not as viable a career path option as it previously was, understanding it furthers one’s comprehension of the other career path alternatives. The t raditional career path is one in which an employee progresses vertically upward in the orga- nization from one specific job to the next. The assumption is that each preceding job is essential preparation for the next-higher-level job. Therefore, an employee must move, step-by-step, from one job to the next to gain needed experience and preparation. One of the biggest advantages of the traditional career path is that it was straightforward and very predictable.50 The path was clearly laid out, and the employee knew the specific sequence of jobs through which he or she must progress.

Today, the old model of a career in which an employee worked his or her way up the ladder in a single company is becoming somewhat rare. The up-or-out approach, in which employees have to keep getting promoted quickly or get lost, is becoming outmoded. The certainties of yesterday’s business methods and growth have disappeared in most industries. However, the one certainty that still remains is that there will always be top-level managers and individuals who strive to achieve these positions. The manner in which these positions are obtained may be different.

Network Career Path The network career path contains both a vertical sequence of jobs and a series of horizontal opportunities. The network career path recognizes the interchangeability of experience at certain levels and the need to broaden experience at one level before promotion to a higher level. Often,

traditional career path Employee progresses vertically upward in the organization from one specific job to the next.

network career path Method of career progression that contains both a vertical sequence of jobs and a series of horizontal opportunities.

Watch It 2 If your professor has assigned this, sign into mymangementlab.com to watch a video titled Verizon: Career Planning and to respond to questions.

208 Part 3 • Performance management and training

this approach provides more realistic opportunities for employee development in an organization than does the traditional career path. For instance, a person may work as an inventory manager for a few years and then move to a lateral position of shift manager before being considered for a pro- motion. The vertical and horizontal options lessen the probability of blockage in one job. Royal Caribbean crew members are often given several different work assignments prior to a promotion. One major disadvantage of this type of career path is that it is more difficult to explain to employ- ees the specific route their careers may take for a given line of work.

Lateral Skill Path The lateral skill path allows for lateral moves within the firm, taken to permit an employee to become revitalized and find new challenges. Neither pay nor promotion may be involved, but by learning a different job, an employee can increase his or her value to the organization and also become rejuvenated and reenergized. Firms that want to encourage lateral movement may choose to use a skill-based pay system that rewards individuals for the type and number of skills they possess. Another approach is job enrichment. This approach rewards (without promotion) an employee by increasing the challenge of the job, giving the job more meaning, and giving the employee a greater sense of accomplishment.

Dual-Career Path The dual-career path was originally developed to deal with the problem of technically trained employees who had no desire to move into management through the normal upward mobility procedure. The dual-career path recognizes that technical specialists can and should be allowed to contribute their expertise to a company without having to become managers. A dual-career approach is often established to encourage and motivate professionals in fields such as engineer- ing, sales, marketing, finance, and HR. Individuals in these fields can increase their specialized knowledge, make contributions to their firms, and be rewarded without entering management. Whether on the management or technical path, compensation would be comparable at each level. The dual system has been a trademark in higher education, where individuals can move through the ranks of instructor, assistant professor, associate professor, and professor without having to go into administration.

Adding Value to Your Career Adding value to your career may appear to be totally self-serving, but nevertheless, it is a logi- cal and realistic career path. In the rapidly changing world today, professional obsolescence can creep up on a person. What makes a person valuable in today’s work environment is the knowledge and experience he or she brings to a job. An individual’s knowledge must be ever expanding, and continual personal development is a necessity. The better an employee’s quali- fications, the greater the opportunities he or she has with the present firm and in the job market. A person must discover what companies need, then develop the skills necessary to meet these needs as defined by the marketplace. Individuals should always be doing something that contrib- utes significant, positive change to the organization. If any vestige of job security exists, this is it. Basically, the primary tie that binds a worker to the company, and vice versa, is mutual success resulting in performance that adds value to the organization.

Demotion Demotion is the process of moving a worker to a lower level of duties and responsibilities, which typically involves a reduction in pay. Demotions have long been associated with failure, but limited promotional opportunities in the future and the fast pace of technological change may make demotion a legitimate career option. If the stigma of demotion can be removed, more employees, especially older workers, might choose to make such a move. Some people get into a position only to find their skills were better suited to their old job. Sometimes they decide they do not want to have as much responsibility because of things going on in their personal lives. Working long hours for limited promotional opportunity loses its appeal to some after a while, especially if the worker can financially afford the demotion. In certain instances, this approach might open up a clogged promotional path and at the same time permit a senior employee to escape unwanted stress without being viewed as a failure.

lateral skill path Career path that allows for lateral moves within the firm, taken to permit an employee to become revitalized and find new challenges.

dual-career path Career path that recognizes that technical specialists can and should be allowed to contribute their expertise to a company without having to become managers.

demotion Process of moving a worker to a lower level of duties and responsibilities, which typically involves a reduction in pay.

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Free Agents (Being Your Own Boss) Free agents are people who take charge of all or part of their careers by being their own bosses or by working for others in ways that fit their particular needs or wants. Many became free agents because of company downsizing and have no desire or would have difficulty reentering the cor- porate world.51 Some free agents work full-time; others work part-time. Others work full-time and run a small business in the hope of converting it into their primary work. Free agents come in many shapes and sizes, but what distinguishes them is a commitment to controlling part or all of their careers. They have a variety of talents and are used to dealing with a wide range of audi- ences and changing their approach on the spot in response to new information or reactions. They also tend to love challenges and spontaneity.52

Career planning approaches Career planning is an ongoing process whereby an individual sets career goals and identifies the means to achieve them. Individuals in today’s job market must truly manage their careers. Career planning should not concentrate only on advancement opportunities because the present work environment has reduced many of these opportunities. At some point, career planning should focus on achieving successes that do not necessarily entail promotions.

“If you don’t know where you’re going, any road will get you there” is certainly true in career planning. Career planning must now accommodate a number of objectives and enable us to prepare for each on a contingency basis. It will need updating to accommodate changes in our own interests as well as in the work environment. Historically, it was thought that career plan- ning was logical, linear, and indeed, planned. Today, a new job assignment often is thought of as being paid to learn a new task and increase your experience level in case you must leave your job. Because of the many changes that are occurring, career planning is essential for survival for individuals and organizations. Individuals should have a strategy or plan for unexpected career events that begins while they are still employed.

Self-Assessment self-assessment is the process of learning about oneself. Anything that could affect one’s perfor- mance in a future job should be considered. It is one of the first things that a person should do in planning a career. A self-assessment can help a person target career choices and goals. Conducting a realistic self-assessment may help a person avoid mistakes that could affect his or her entire career progression. A person should take time to analyze his or her past successes and failures. A  thorough self-assessment will go a long way toward helping match an individual’s specific qualities and goals with the right job or profession. Remember, you cannot get what you want until you know what you want. The self-assessment is not something that is done once and forgot- ten. It is something that spans a career and into retirement. The self-assessment may show that you do not want to retire at 65. Some enjoy working well past what traditionally has been thought of as the retirement age. As a 95-year-old former mentor said, “work is what keeps me alive and going. Everyone I know who retired died young, and certainly much younger than me.”53

Some useful tools include a strength/weakness balance sheet and a likes and dislikes survey. However, any reasonable approach that assists self-understanding is helpful, which include a strength/weakness balance sheet and a likes/dislikes survey.

A self-evaluation procedure, developed originally by Benjamin Franklin, that assists people in becoming aware of their strengths and weaknesses is the strength/weakness balance sheet. Employees who understand their strengths can use them to maximum advantage. By recognizing their weaknesses, they are in a better position to overcome them. This statement sums up that attitude: “If you have a weakness, understand it and make it work for you as a strength; if you have a strength, do not abuse it to the point at which it becomes a weakness.”

To use a strength/weakness balance sheet, the individual lists strengths and weaknesses as he or she perceives them. This is quite important, because believing, for example, that a weak- ness exists even when it does not can equate to a real weakness. Thus, if you believe that you make a poor first impression when meeting someone, you will probably make a poor impression. The perception of a weakness often becomes a self-fulfilling prophecy.

free agents People who take charge of all or part of their careers by being their own bosses or by working for others in ways that fit their particular needs or wants.

ObjeCtive 8.10

Identify career planning approaches.

career planning Ongoing process whereby an individual sets career goals and identifies the means to achieve them.

self-assessment Process of learning about oneself.

strength/weakness balance sheet A self-evaluation procedure, developed originally by Benjamin Franklin, that assists people in becoming aware of their strengths and weaknesses.

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Table 8-1 shows an example of a strength/weakness balance sheet. Typically, a person’s weaknesses will outnumber strengths after the first few attempts. However, as the individual repeats the process, some items that first appeared to be weaknesses may eventually be seen as strengths and should then be moved from one column to the other. A person should devote suf- ficient time to the project to obtain a fairly clear understanding of his or her strengths and weak- nesses. Typically, the process should take at least several days during which the list is drafted and subsequently modified. People change, and every few years the process should again be undertaken again.

A likes and dislikes survey assists individuals in recognizing restrictions they place on themselves. Connecticut-based career counselor Julie Jansen said, “It’s important in identifying what you want to do, what your skills are, and what you don’t—and do—like about your current occupation.”54 You are looking for qualities you want in a job and attributes of a job you do not want. For instance, some people are not willing to live in certain parts of the country, and such feelings should be noted as a constraint. Some positions require a person to spend considerable amount of time traveling. Thus, an estimate of the amount of time a person is willing to travel would also be helpful. Recognition of such self-imposed restrictions may reduce future career problems.

The size of the firm might also be important. Some like a major organization whose prod- ucts or services are well known; others prefer a smaller organization, believing that the oppor- tunities for advancement may be greater or that the environment is better suited to their tastes. All factors that could affect an individual’s work performance should be listed in the likes and dislikes survey. An example of this type of survey is shown in Table 8-2.

Formal Assessment Combining self-assessment with formal assessment tools designed to inform career plan- ning considerations provides a more comprehensive approach. Formal assessment refers to the use of established external approaches to facilitate evaluation of an issue at hand. There are many tools, including the use of performance appraisal, which we already addressed in Chapter 7. An example is the 360-degree feedback method. In this chapter, we will focus on another approach. In the career planning domain, testing tools to identify career interests based on values and personality represent one approach. Although individuals may complete

likes and dislikes survey Procedure that helps individuals in recognizing restrictions they place on themselves.

formal assessment The use of established external approaches to facilitate evaluation of an issue at hand.

Table 8-1

Strength/Weakness Balance Sheet

Strengths Weaknesses

Work well with people.

Good manager of people.

Hard worker.

Lead by example.

People respect me as being fair and impartial.

Tremendous amount of energy.

Get the job done when it is defined.

Excellent at organizing other people’s time.

Can get the most out of people who are working for me.

Have a great amount of empathy.

Do not like constant supervision.

Often say things without realizing consequences.

Cannot stand to sit at a desk all the time.

Basically a rebel at heart but have portrayed myself as just the opposite. My conservatism has gotten me jobs that I emotionally did not want.

Am sometimes nervous in an unfamiliar environment.

Interest level hits peaks and valleys.

Many people look on me as being unstable.

Not a tremendous planner for short range.

Exclusively better at long-range planning.

Impatient—want to have things happen fast.

Do not like details.

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these tests on their own and read the report that is generated based on their responses, it often makes sense to work with a career counselor who can answer questions and make further recommendations.

Perhaps the most well-known example is the Myers-Briggs Type Indicator. This assess- ment tool contains dozens of questions that elicit an individual’s preferences for how they would behave in different situations. The MBTI describes the following four prefer- ences: Energy measures an individuals’ degree of extraversion or introversion to determine whether a person gains energy through interpersonal relationships (extraversion) or through self-reflection (introversion). Information-Gathering measures a preference for gathering information about facts to consider before making a decision (Sensing) or a preference for gathering information about possibilities before making a decision. Decision making measures a preference for the amount of consideration a person gives to their own or oth- ers’ feelings and values relative to facts and details. Preferences to consider the effect of a decision on personal feelings as well as on others (Feeling) stand in contrast to a pref- erence to make objective decisions (Thinking). Lifestyle refers to an individual’s inclina- tion to be either flexible or structured. A preference to establish goals, strategies for goal attainment, and deadlines for meeting them (Judging) stands in contrast to a preference for embracing the unexpected, modifying decisions, and working without definitive timelines and deadlines (Perceiving).

An example of a formal test is the Career Key, which is based on Holland’s Theory of Career Choice. This theory is premised on the idea that people are more likely to thrive in situations that match their personalities. It specifies six personality and corresponding situational types. For example, according to Holland’s theory:55

Persons having an Investigative personality type “dominate” this environment. There are more of them than there are people of other personality types. For example, in a sci- entific laboratory there will be more persons having an “Investigative” personality than there will be people who have an Enterprising type. “Investigative” people create an “Investigative” environment. For example, they particularly value people who are pre- cise, scientific, and intellectual—who are good at understanding and solving science and math problems.

Examples of jobs that fit this description include architects and physicians.

Table 8-2

Likes and Dislikes Survey

Likes Dislikes

Enjoy traveling

Would like to live in the Southeast United States

Enjoy being my own boss

Would like to live in a medium-sized city

Enjoy watching football and baseball

Enjoy playing racquetball

Do not want to work for a large firm

Would not want to work in a large city

Would not like to work behind a desk all day

Would not like to wear suits all the time

Try It! If your professor has assigned this, sign onto mymanagementlab.com to complete the Managing Your Career simulation and test your application of these concepts when faced with real-world decisions.

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Career Development and Career Development Methods Career development is a formal approach used by the organization to ensure that people with the proper qualifications and experiences are available when needed. Beverly Kaye, coauthor of Love ’Em or Lose ‘Em: Getting Good People to Stay, studied the top 20 reasons employees remain with their company and discovered that career development opportunities was number one on the list. It was even more important than receiving greater pay.56 With career development, the organization identifies paths and activities for individual employees as they develop.

Career planning rests with the employee. However, career development must closely paral- lel individual career planning if a firm is to retain its best and brightest workers. Employees must see that the firm’s career development effort is directed toward furthering their specific career objectives. Companies must therefore help their employees obtain their career objectives and most notably, career security. They must provide them with opportunities to learn and do dif- ferent things. Performing the same or a similar task over and over provides little development. Through effective career development, a pool of men and women can be developed who can thrive in any number of organizational structures in the future.

Properly designed and implemented career development programs can aid in recruiting and hiring and ensure that the best employees are in the pipeline for future leadership positions. Formal career development is important to maintain a motivated and committed workforce. In fact, Gen Y workers tend to favor personalized career guidance as opposed to big salaries and retirement packages. Further, high-potential employees are more likely to remain with organiza- tions that are willing to invest in their development.

Career development should begin with a person’s job placement and initial orientation. Management then observes the employee’s job performance and compares it to job standards. At this stage, strengths and weaknesses will be noted, enabling management to assist the employee in making a tentative career decision. Naturally, this decision can be altered later as the process continues. This tentative career decision is based on a number of factors, including personal needs, abilities, and aspirations, and the organization’s needs. Management can then schedule development programs that relate to the employee’s specific needs.

Career development programs are expected to achieve one or more of the following objectives:

• Effective development of available talent. Individuals are more likely to be committed to career development that is part of a specific career plan. This way, they can better understand the purpose of development. Career development consistently ranks high on employees’ want lists, and they can often be a less expensive option than pay raises and bonuses.

• Self-appraisal opportunities for employees considering new or nontraditional career paths. Some excellent workers do not view traditional upward mobility as a career option because firms today have fewer promotion options available. Other workers see themselves in dead- end jobs and seek relief. Rather than lose these workers, a firm can offer career planning to help them identify new and different career paths.

• Development of career paths that cut across divisions and geographic locations. The devel- opment should not be limited to a narrow spectrum of one part of a company.

• A demonstration of a tangible commitment to developing a diverse work environment. Individuals who recognize a company as desiring a diverse environment often have greater recruiting and retention opportunities.

• Satisfaction of employees’ specific development needs. Individuals who see their personal development needs being met tend to be more satisfied with their jobs and the organization. They tend to remain with the organization.

• Improvement of performance. The job itself is the most important influence on career development. Each job can provide different challenges and experiences.

• Increased employee loyalty and motivation, leading to decreased turnover. Individuals who believe that the firm is interested in their career planning are more likely to remain with the organization.

ObjeCtive 8.11

Discuss career development and career development methods.

career development Formal approach used by the organization to ensure that people with the proper qualifications and experiences are available when needed.

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• A method of determining training and development needs. If a person desires a certain career path and does not currently have the proper qualifications, this identifies a training and development need.

There are numerous methods for career development. Some currently used methods, most of which are used in various combinations, are discussed next.

Manager/Employee Self-Service Manager and employee self-service have proven to be useful in career development. Many com- panies are providing managers with the online ability to assist employees in planning their career paths and developing required competencies. Through employee self-service, employees are pro- vided with the ability to update performance goals online and to enroll in training courses.

Discussions with Knowledgeable Individuals In a formal discussion, the superior and subordinate employees may jointly agree on what career development activities are best. The resources made available to achieve these objectives may also include developmental programs. In some organizations, human resource professionals are the focal point for providing assistance on the topic. In other instances, psychologists and guidance counselors provide this service. In an academic setting, colleges and universities often provide career planning and development information to students. Students often go to their professors for career advice.

Company Material Some firms provide material specifically developed to assist in career development. Such mate- rial is tailored to the firm’s special needs. In addition, job descriptions provide valuable insight for individuals to personally determine whether a match exists between their strengths and weak- nesses and specific positions.

Performance Appraisal System The firm’s performance appraisal system can also be a valuable tool in career development. Discussing an employee’s strengths and weaknesses with his or her supervisor can uncover developmental needs. If overcoming a particular weakness seems difficult or even impossible, an alternative career path may be the solution.

Workshops Some organizations conduct workshops lasting two or three days for the purpose of helping workers develop careers within the company. Employees define and match their specific career objectives with the needs of the company. At other times, the company may send workers to workshops available in the community or workers may initiate the visit themselves. Consider just two of the developmental activities available for HR professionals:

• Society for Human Resource Management Seminar Series. Many HR seminars are available to SHRM members.

• American Management Association, Human Resource Seminars. There are numerous human resource seminars offered through the AMA.

Management Development Management development consists of all learning experiences provided by an organization resulting in upgrading skills and knowledge required in current and future managers. Although leadership is often depicted as an exciting and glamorous endeavor, there is another side; failure can quickly result in losing one’s position. The risks are especially high because of today’s rapid changes. This situation magnifies the importance of providing development opportunities for a firm’s management group. Even in the recent recession, the demand for management develop- ment continued to be strong. Although budgets were being slashed, managers and executives were asking for more help. A recent study found that almost 70 percent of companies believe that senior executives need to improve their leadership skills. More than half of companies reported

ObjeCtive 8.12

Describe management development.

management development Consists of all learning experiences provided by an organization resulting in upgrading skills and knowledge required in current and future managerial positions.

214 Part 3 • Performance management and training

that their top leaders needed to also improve their strategic planning skills. Several other skills that leaders need are encouraging teamwork, motivating people, and creativity.57 The DDI’s Global Leadership Forecast 2011 found that organizations with the highest-quality leaders were 13 times more likely to outperform their competition in metrics such as financial accomplish- ment, product quality and services, employee engagement, and customer approval.58

A firm’s future lies largely in the hands of its managers. This group performs certain func- tions essential to the organization’s survival and prosperity. Managers must make the right choices in most of their decisions; otherwise, the firm will not grow and may even fail. Therefore, it is imperative that managers keep up with the latest developments in their respective fields and, at the same time, manage an ever-changing workforce operating in a dynamic environment. Also note that as managers reach higher levels in the organization, it is not so much their technical skills that they need, but their interpersonal skills and their business knowledge.

First-line supervisors, middle managers, and executives may all participate in management development programs. These programs are available in-house, by professional organizations, and at colleges and universities. T&D specialists often plan and present in-house programs, at times using line managers. Organizations such as the SHRM and AMA conduct conferences and seminars in a number of specialties. Numerous colleges and universities also provide man- agement development programs. Colleges and universities may possess expertise not available within business organizations. In these cases, academicians and management practitioners can advantageously present T&D programs jointly.

Mentoring and Coaching Mentoring and coaching have become important means of management development. Because the purposes of mentoring and coaching are similar in concept and the terms are often used interchangeably in the literature, they are discussed together. Coaching and mentoring activities, which may occur either formally or informally, are primarily development approaches emphasiz- ing one-on-one learning.

Mentoring is an approach to advising, coaching, and nurturing for creating a practical relationship to enhance individual career, personal, and professional growth and development. The concept of a mentor is believed to have its origins in Greek mythology when Odysseus set out for the Trojan War and placed the running of his palace in the hands of his trusted friend, Mentor.59 Mentors may be anywhere in the organization or even in another firm. For years, men- toring has repeatedly been shown to be the most important factor influencing careers. In a study done by Gartner Research, having a mentor helps a person get promoted five times more often than his or her peers who do not have mentors. They are also promoted six times more than the competition.60

Most Fortune 500 companies have a mentoring program. Mentors equip protégés to learn for themselves by sharing experiences, asking demanding questions, challenging decision making, and expanding problem-solving skills. It focuses on skills to develop protégés to perform to their highest potential, leading to career advancement. Mentors have the potential to help mentees discover their strengths and weaknesses, formulate a career path, set goals, manage stress, and balance work and personal obligations. Organizations are using mentoring to prepare a successor and also to transition knowledge and skills within the organization. Technology can be used to match up mentors and mentees. These relationships may be quite fluid and form and dissolve around specific issues, such as helping younger people to build their professional networks.

E-mentoring, or open mentoring, is being used more and more today as opposed to face-to-face interaction with positive results. Many keep in touch with their mentors via e-mail, Facebook, and Twitter, but they may get together for lunch if they happen to be in the same location.

Most believe that women can truly benefit from a female mentor who has knowledge and experience and can show them “the ropes.” For various reasons, mentors tend to seek out their mirror images. Because women and minorities are not equally represented at the firm’s top lev- els, they sometimes are left without a female mentor. Women who are mentored, particularly by other women, are more likely to enhance and expand career skills, advance in their careers, receive higher salaries, and enjoy their work more. Women want and need to have advice pro- vided by mentors to effectively use their talents and realize their potential, not only for their personal benefit but to assist their firms.61

mentoring Approach to advising, coaching, and nurturing for creating a practical relationship to enhance individual career, personal, and professional growth and development.

chaPter 8 • training and deveLoPment 215

Coaching is often considered a responsibility of the immediate boss, who provides assis- tance, much like a mentor, but the primary focus is about performance. Coaching involves help- ing workers see why they have been selected to perform the task or why they have been selected for the team. The coach has greater experience or expertise than the protégé and is in the position to offer wise advice. It is employee development that is customized to each individual and is therefore immediately applicable and does not require stepping away from work for extended periods of time.

Reverse Mentoring reverse mentoring is a process in which older employees learn from younger ones. There are people in organizations who are approaching retirement who do not want to retire and who have tremendous knowledge that should not go to waste. There are young people who know things others do not know and who are anxious to expand their horizons. The existence of these two diverse, but potentially mutually helpful, populations has led to reverse mentoring. At Procter & Gamble, the reverse mentoring program allows senior management to be mentored in areas such as biotechnology. It pairs scientists and top managers to explore the potential impact of biotechnology on P&G’s customers, suppliers, and overall business. Time Warner has a Digital Reverse Mentoring Program between their executives and technology savvy college students.62 Phil McKinney, a vice-president at Hewlett-Packard, uses reverse mentoring by spending time with his company’s college interns to understand what motivates them and how they work.63

Organization Development: a strategic human resources tool Individuals and groups receive the bulk of T&D effort. However, some firms believe that to achieve needed change, they must move the entire organization in a different direction. Efforts to achieve this are the focus of OD—planned and systematic attempts to change the organization, typically to a more behavioral environment. OD education and training strategies are designed to develop a more open, productive, and compatible workplace despite differences in personalities, culture, or technologies. The OD movement has been strongly advocated by researchers such as Chris Argyris and Warren Bennis.64 OD applies to an entire system, such as a company or a plant, and is a major means of achieving change in the corporate culture. Various factors in the firm’s corporate culture affect employees’ behavior on the job. To bring about desired changes in these factors and behavior, organizations must be transformed into market-driven, innovative,

coaching Often considered a responsibility of the immediate boss, who provides assistance, much like a mentor.

reverse mentoring A process in which older employees learn from younger ones.

HR Web Wisdom

CareerOneStop http://www.careeronestop. org/

Career One Stop Pathways to Career Success.

ObjeCtive 8.13

Define organization development (OD) and describe various OD techniques.

h r b l o o p e r s

Management Development at Trends Apparel

If your professor has assigned this, go to mymanagementlab.com to complete the HR Bloopers exercise and test your application of these concepts when faced with real-world decisions.

As the HR Director at Trends Apparel, Laura Kent finds it challenging to support management development for the retail chain’s local store managers. Turnover of the managers is high and exit interviews indicate lack of training as a concern. After reading an article about other organizations using a new e-learning training program on management skills, she thinks she has found a solution to the dilemma. She contacted the company that developed the training program and learned that the training helps managers develop skills in inventory management and marketing products. Laura thought it sounded perfect for Trends Apparel managers and immediately purchased the training. However, after a month, only 2 of the 40

managers have enrolled in the training, and those two did not finish the training. In frustration, Laura organized a conference call with a group of managers to discuss the problem. She is surprised to learn that the managers don’t see the training as relevant. They said what they really need is training in managing employees. For example, they need to learn how to better deal with employee problems and how to motivate employees. In addition, the managers told Laura that the e-learning program was just hard to work into their schedules. They felt coaching from other managers would be more helpful to them. Laura now realizes that even though the e-learning training program is already paid for, it is likely not going to be used.

216 Part 3 • Performance management and training

and adaptive systems if they are to survive and prosper in today’s highly competitive global environment. This type of development is increasingly important as both work and the workforce diversify and change.

Numerous OD interventions are available to the practitioner. Interventions covered in the following sections include survey feedback, a technique often combined with other interventions such as quality circles and team building.

Survey Feedback The organization development method of basing change efforts on the systematic collection and measurement of subordinate’s attitudes through anonymous questionnaires is survey feedback. It enables management teams to help organizations create working environments that lead to better working relationships, greater productivity, and increased profitability. Survey feedback generally involves the following steps:

1. Members of the organization, including top management, are involved in planning the survey.

2. All members of the organizational unit participate in the survey. 3. The OD consultant usually analyzes the data, tabulates results, suggests approaches to

diagnosis, and trains participants in the feedback process. 4. Data feedback usually begins at the top level of the organization and flows downward to

groups reporting at successively lower levels. 5. Feedback meetings provide an opportunity to discuss and interpret data, diagnose problem

areas, and develop action plans.

Quality Circles The United States received the concept of quality circles from Japan several decades ago. This version of employee involvement is still in use today, improving quality, increasing motivation, boosting productivity, and adding to the bottom line. Quality circles are groups of employees who voluntarily meet regularly with their supervisors to discuss their problems, investigate causes, recommend solutions, and take corrective action when authorized to do so. The team’s recommendations are presented to higher-level management for review, and the approved actions are implemented with employee participation.

Toyota North America Inc. uses quality circles to develop a competitive workforce spirit. Approximately 37 percent of the automaker’s assemblers participate in Toyota’s global “Quality Circles” competition that pits worker against worker in a friendly competition to develop more efficient manufacturing methods. The ultimate target is 100 percent. Quality circles are one way that Toyota sees as providing an edge over the competition. Toyota holds competitions twice a year to identify the best ideas.65

Team Building team building is a conscious effort to develop effective work groups and cooperative skills throughout the organization. It helps members diagnose group processes and devise solu- tions to problems. Effective team building can be the most efficient way to boost morale, employee retention, and company profitability. Whether it’s a lieutenant leading troops into battle or execu- tives working with their managers, the same principles apply. An important by-product of team building is that it is one of the most effective interventions for improving employee satisfaction and work-related attitudes. Individualism has deep roots in U.S. culture. This trait has been a vir- tue and will continue to be an asset in our society. However, there are work situations that make it imperative to subordinate individual autonomy in favor of cooperation with a group. It seems apparent that teams are clearly superior in performing many of the tasks required by organiza- tions. The building of effective teams, therefore, has become a business necessity.

Team building uses self-directed teams, each composed of a small group of employees responsible for an entire work process or segment. Team members work together to improve their operation or product, to plan and control their work, and to handle day-to-day problems. They may even become involved in broader, company-wide issues, such as vendor quality, safety, and business planning. There are basically two types of team-building exercises. In the

survey feedback Organization development method of basing change efforts on the systematic collection and measurement of subordinate’s attitudes through anonymous questionnaires.

quality circles Groups of employees who voluntarily meet regularly with their supervisors to discuss problems, investigate causes, recommend solutions, and take corrective action when authorized to do so.

team building Conscious effort to develop effective work groups and cooperative skills throughout the organization.

chaPter 8 • training and deveLoPment 217

first, there is an attempt to break down barriers to understanding that workers have built. In the second, participants “place their lives” in the hand of others such as falling backward, believ- ing that the team will catch you.66 Team-building exercises run the spectrum from a paint-ball battle67 to the raw egg exercise that Southwest Airlines creates. At Southwest Airlines, the firm divides new employees into teams and gives them a raw egg in the shell, a handful of straws, and some masking tape. Their task is, in a limited amount of time, to protect that delicate cargo from an eight-foot drop. The exercise prepares teams of employees for creative problem solving in a fast-paced environment.68

In one team-building exercise, participants were instructed to untangle a 60-foot yellow rope. At first participants tried to untangle the rope on an individual basis, which resulted in fail- ure. Ultimately, they began to share their ideas on how to untangle the rope, and within minutes it was untangled.69 A classic team-building exercise is called “blind man’s bluff” where a blind- folded person who is “it” has to chase others with only the verbal assistance of team members to guide him or her.70

Pump It Up sells inflatable playgrounds throughout the United States and uses the play- grounds and childlike activities to create team-building exercises. The head office worked with team-building experts to devise a handbook of business-related team-building activities, includ- ing “Leading the Crowd Playfully” (to break the ice) and “Tag Team Climbing” (to improve cooperation). However, just bouncing around—in socks, in full view of the boss—may improve team morale.71

A classic team-building exercise is called “Team Banquets,” where workers with different knowledge, skills, and experience are brought together to accomplish a single goal: create a banquet. The Team Banquet brings together 25 to 30 employees and challenges them to prepare a gourmet banquet within two hours. Only the raw ingredients and equipment are provided.72 Through team building, management and participants discover that the exercises provide an excellent analogy to the workplace and provide an outstanding means for developing teamwork.

Learning Organization as a strategic Mindset A learning organization needs to provide a supportive learning environment and it provides spe- cific learning processes and practices. Also, it is vital that management supports and reinforces learning. A learning organization moves beyond delivering tactical training projects to initiating learning programs aligned with strategic corporate goals. Once undervalued in the corporate world, training programs are now credited with strengthening customer satisfaction, contributing to partnership development, enhancing research and development activities, and finally, reinforc- ing the bottom line. Being recognized as a company that encourages its employees to continue to grow and learn can be a major asset in recruiting. Learning organizations view learning and development opportunities in all facets of their business and try to constantly look ahead and ensure that all employees are taking full advantage of their learning opportunities.73 In a learning organization employees are rewarded for learning and are provided enriched jobs, promotions, and compensation. Organizations with a reputation for having a culture of being a learning leader tend to attract more and better-qualified employees.

In the competition to become listed in the “100 Best Companies to Work for in America,” learn- ing and growth opportunities were a high priority. On nearly every survey, T&D ranks in the top three benefits that employees want from their employers, and they search for firms that will give them the tools to advance in their profession. It is clear that T&D is not merely a nice thing to provide. It is a strategic resource; one that firms must tap to energize their organizations in the 21st century.

training in the Global Context The focus on this chapter has been training from a U.S. perspective. It is important to recognize that broadening training practice to the world stage presents additional issues. For instance, some countries distinguish themselves from others through the widespread use of specific training models. For example, the apprenticeship training model is prevalent in some European countries such as Germany, and it is successful there for a number of reasons because of the collaborative efforts between schools and industry. According to Wilfried Porth who is in charge of HR and

ObjeCtive 8.14

Summarize the learning organiza- tion idea as a strategic mind-set.

ObjeCtive 8.15

Identify some training issues in the global context.

218 Part 3 • Performance management and training

labor relations at Daimler, “You need a school system which supports it. We have this tradition in Germany of being loyal to the company. We also have a technology focus here in Germany. For that, you need very skilled people.”74 In addition, Professor Hagen Kramer of Karlsruhe University of Applied Sciences states “The apprentices must be given structure training by their employer, alongside the general and vocational education they receive. It all ensures Germany has enough labour to do the jobs.”

Language and cultural differences play an important role in whether training initiatives are successful. For example, we have learned from our students that there isn’t always a direct translation of concepts between the English and Chinese languages, which makes field specific training challenging. In terms of learning, some researchers maintain that the Chinese believe in constant change and the importance of the relationships between things whereas Westerners embrace a more deterministic world that is rule-based.75 For effective training, HR professionals must take the time to learn about the cultural differences and to consult experts who can help cre- ate training programs that will enable trainees to learn what the company requires them to learn.

1. Summarize the training and development process. Training is designed to permit learners to acquire knowl- edge and skills needed for their present jobs. Development involves learning that goes beyond today’s job. The process begins with the organization’s determination of its specific training needs. Then specific objectives need to be established. After setting the T&D objectives, management can determine the appropriate methods and the delivery system to be used. Management must con- tinuously evaluate T&D to ensure its value in achieving organizational objectives.

2. Explain how to determine specific training and develop- ment needs and objectives. Training professionals rely on three analytic approaches to determine training needs – organizational analysis, task analysis, and person analysis.

3. Summarize various training methods. Training methods include instructor-led training, e-learning, case study, behavior modeling, role-playing, training games, in-basket training, on-the-job training, and apprenticeship training.

4. Describe alternative training and development delivery systems. Delivery systems include corporate universi- ties, colleges and universities, community colleges, online higher education, vestibule system, video media, and simulators.

5. Summarize training and development implementation issues. Implementing T&D programs is often difficult. One reason is that managers are typically action-oriented and feel that they are too busy for T&D. Training and devel- opment requires more creativity than perhaps any other human resource function.

6. Explain the metrics for evaluating training and devel- opment. Some possible metrics for evaluating training

and development include participants’ opinion, extent of learning, behavioral change, accomplishment of T&D objectives, return on investment from training, and benchmarking.

7. Explain factors influencing training and development. There are numerous factors that both impact and are impacted by T&D, including top management support, shortage of skilled workers, technological advances, world complexity, lifetime learning, learning styles, and other human resource functions.

8. Summarize some human resource management training initiatives. Orientation is the guided adjustment of new employees to the company, the job, and the work group. HR typically takes the lead on a variety of other training programs including ethics, compliance (for example, safety and health), and diversity training.

9. Explain the concept of a careers and career paths. A career is the general course that a person chooses to pursue throughout his or her working life. A career path is a flexible line of movement through which a person may travel during his or her work life. Career paths include tra- ditional career path, network career path, lateral skill path, dual-career path, adding value to your career, demotion, and free agents.

10. Identify career planning approaches. Career planning is an ongoing process whereby an individual sets career goals and identifies the means to achieve them. Self- assessment (for example, a likes and dislikes survey) and formal assessment approaches (for example, surveys that measure how an individual would behave in particular situations) help organizations and employees with career planning.

summary

chaPter 8 • training and deveLoPment 219

11. Discuss career development and career development methods. Career development is a formal approach used by the organization to ensure that people with the proper quali- fications and experiences are available when needed. Career development methods include manager/employee self- service, discussions with knowledgeable individuals, com- pany material, performance appraisal system, and workshops.

12. Describe management development. Management devel- opment consists of all learning experiences provided by an organization for the purpose of providing and upgrad- ing skills and knowledge required in current and future managers.

13. Define organization development (OD) and describe various OD techniques. Organization development is planned and systematic attempts to change the organiza- tion, typically to a more behavioral environment. OD techniques include survey feedback, a technique often

combined with other interventions such as quality circles and team building.

14. Summarize the learning organization idea as a strategic mind-set. A learning organization is a firm that recognizes the critical importance of continuous performance-related T&D and takes appropriate action. Learning organizations view learning and development opportunities in all fac- ets of their business and try to constantly look ahead and ensure that all employees are taking full advantage of their learning opportunities.

15. Identify some training issues in the global context. Countries differ by training models. For example, some countries such as Germany offer apprenticeship training programs which combine extensive on-the-job and tra- ditional classroom learning over long periods. Language and cultural barriers represent an important challenge to training multicultural workforces.

training and development (T&D) 191 training 191 development 191 organization development (OD) 191 learning organization 192 training and development needs

assessment 193 organizational analysis 193 task analysis 193 person analysis 193 e-learning 195 case study 196 behavior modeling 196 role-playing 196 business games 197 in-basket training 197 on-the-job training (OJT) 197 apprenticeship training 197 team training 198

team coordination training 198 cross-training 198 corporate university 198 online higher education 199 vestibule system 200 simulators 200 reactions 201 learning 201 behavior change 202 transfer of training 202 organizational results 202 benchmarking 202 blended training 205 just-in-time training (on-demand

training) 205 orientation 206 career 207 career path 207 traditional career path 207

network career path 207 lateral skill path 208 dual-career path 208 demotion 208 free agents 209 career planning 209 self-assessment 209 strength/weakness balance sheet 209 likes and dislikes survey 210 formal assessment 210 career development 212 management development 213 mentoring 214 coaching 215 reverse mentoring 215 survey feedback 216 quality circles 216 team building 216

Key terms

MyManagementLab® Go to mymanagementlab.com to complete the problems marked with this icon .

8-1. What do you believe would be the best method(s) of training for the following jobs? Discuss.

a. an entry-level machine operator b. new assistant manager for a McDonald’s

restaurant c. salesperson for a new automobile dealership

8-2. What do you believe would be the best delivery system(s) for the aforementioned jobs?

8-3. E-learning creates a situation in which training may be quite different from that which existed in the past. What might be some pros and cons for using e-learning in training and development practice?

exercises

220 Part 3 • Performance management and training

i n C i D e n T 1 Training at Keller-Globe Lou McGowen was worried as she approached the training director’s office. She supervises six punch press operators at Keller-Globe, a maker of sheet metal parts for the industrial refrigeration industry. She had just learned that her punch presses would soon be replaced with a continuous-feed system that would double the speed of operations. She was thinking about how the workers might feel about the new system when the training director, Bill Taylor, opened the door and said, “Come on in, Lou. I’ve been looking forward to seeing you.”

After a few pleasantries, Lou told Bill of her concerns. “The opera- tors really know their jobs now. But this continuous-feed system is a whole new ball game. I’m concerned, too, about how the workers will feel about it. The new presses are going to run faster. They may think that their job is going to be harder.”

Bill replied, “After talking with the plant engineer and the produc- tion manager, I made a tentative training schedule that might make you feel a little better. I think we first have to let the workers know why this change is necessary. You know that both of our competitors changed to this new system last year. After that, we will teach your people to operate the new presses.”

“Who’s going to do the teaching?” Lou asked. “I haven’t even seen the new system.”

“Well, Lou,” said Bill, “the manufacturer has arranged for you to visit a plant with a similar system. They’ll also ship one of the punch presses in early so you and your workers can learn to operate it.”

“Will the factory give us any other training help?” Lou asked. “Yes, I have asked them to send a trainer down as soon as the

first press is set up. He will conduct some classroom sessions and then work with your people on the new machine.”

After further discussion about details, Lou thanked Bill and headed back to the production department. She was confident that the new presses would be a real benefit to her section and that her workers could easily learn the skills required.

Questions 8-21. Evaluate Keller-Globe’s approach to training. 8-22. How might the use of social media assist Lou in training her

employees?

i n C i D e n T 2 There’s No Future Here! “Could you come to my office for a minute, Bob?” asked Terry Geech, the plant manager.

“Sure, be right there,” said Bob Glemson. Bob was the plant’s quality control director. He had been with the company for four years. After completing his degree in mechanical engineering, he worked as a production supervisor and then as a maintenance supervisor prior to moving to his present job. Bob thought he knew what the call was about.

“Your letter of resignation catches me by surprise,” began Terry. “I know that Wilson Products will be getting a good person, but we sure need you here, too.”

“I thought about it a lot,” said Bob, “but there just doesn’t seem to be a future for me here.”

“Why do you say that?” asked Terry. “Well,” replied Bob, “the next position above mine is yours. Since

you’re only 39, I don’t think it’s likely that you’ll be leaving soon.” “The fact is that I am leaving soon,” said Terry. “That’s why it’s

even more of a shock to learn that you’re resigning. I think I’ll be mov- ing to the corporate office in June of next year. Besides, the company has several plants that are larger than this one, and we need good people in those plants from time to time, both in quality control and in general management.”

8-4. Define training and development. 8-5. What is a learning organization? 8-6. What are the steps in the T&D process? 8-7. What are the various training and development

methods? Briefly describe each. 8-8. What are the various training and development delivery

systems? Briefly describe each. 8-9. How is social networking used in informal training? 8-10. Define orientation, and explain the purposes of

orientation. 8-11. What are some metrics for evaluating training and

development? 8-12. Define career. Why is it important for individuals to

conduct career planning? 8-13. What is the process of developing a strength/weakness

balance sheet?

8-14. Why is it important for a firm to conduct career development?

8-15. What are some career development methods? 8-16. What are the various career paths that individuals

may use? 8-17. Define management development. Why is it important? 8-18. Distinguish between mentoring and coaching. What is

reverse mentoring? 8-19. Define each of the following: (a) organization development (b) survey feedback (c) quality circles (d) team building 8-20. How is the focus on training and development in the

United States different than in other countries?

Questions for review

chaPter 8 • training and deveLoPment 221

“Well, I heard about an opening in the Cincinnati plant last year,” said Bob, “but by the time I checked, the job had already been filled. We never know about opportunities in the other plants until we read about the incumbent in the company paper.”

“All this is beside the point now. What would it take to get you to change your mind?” asked Terry.

“I don’t think I will change my mind now,” replied Bob, “because I’ve given Wilson Products my word that I’m going to join them.”

Questions 8-23. Evaluate the career planning and development program at this

company. 8-24. What actions might have prevented Bob’s resignation?

MyManagementLab® Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

8-25. Why is executive onboarding for external hires so difficult? 8-26. What are some factors that influence T&D?

endnotes Scan for Endnotes or go to http://www.pearsonhighered.com/mondy

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Part Four Compensation Chapter 9

Direct Financial Compensation

(Core Compensation)

Chapter 10

Indirect Financial Compensation

(Employee Benefits)

224

Learn It If your professor has chosen to assign this, go to mymanagementlab.com to see what you should particularly focus on and to take the Chapter 9 Warm-Up.

MyManagementLab® Improve Your Grade!

Over 10 million students improved their results using the Pearson MyLabs. Visit mymanagementlab.com for simulations, tutorials, and end-of-chapter problems.

9 Direct Financial Compensation (Core Compensation) Chapter ObjeCtives After completing this chapter, you should be able to:

1 Describe direct financial compensation (core compensation), indirect financial compensation (employee benefits), and nonfinancial compensation.

2 Identify and discuss the components of direct financial compensation.

3 Review the determinants of direct financial compensation.

4 Describe contextual influences on direct financial compensation.

5 Discuss how to use job evaluation to build job structures.

6 Describe various competitive compensation policies.

7 Explain the use of compensation surveys for job pricing and determining market competitive pay structures.

8 Discuss compensation for sales representatives.

9 Discuss compensation for contingent workers.

10 Explain executive compensation and the various features of executive compensation packages.

225

A Society of Human Resource Management (SHRM) survey of human resources (HR) execu- tives identified “retaining and rewarding the best employees as their number one challenge.”1 We’ve discussed several practices in this book, thus far, that HR professionals rely on to facili- tate the attainment of this goal. Compensation also is an important tool toward meeting this objective. For instance, highly successful companies, such as software developer and manufac- turer Adobe, provide highly competitive compensation packages that consist of lucrative pay amounts and employee benefits (for example, health insurance). In fact, Adobe is among the top 25 companies that offers extremely generous compensation amounts.2

Compensation: an Overview Compensation is the total of all rewards provided employees in return for their work. The com- ponents of a total compensation program are shown in Figure 9-1.

The overall purpose of compensation is to attract, retain, and motivate employees. There are at least three mechanisms by which compensation contributes to this purpose. First, pay helps define a person’s standard of living. All else equal, higher pay enables people to meet their most basic needs such as food and shelter more easily than those who earn less. Also, higher pay enables people to enjoy the finer things in life such as frequenting gourmet restaurants, driving a luxury car, and taking exotic vacations. Second, pay level influences an employee’s attitudes such as job satisfaction, which, in turn, should contribute to bet- ter job performance. Third, the type of payment such as incentive pay aligns the interests of employees with a company’s mission. Employees and companies alike strive to maxi- mize their earnings. Incentive compensation serves this common interest. For instance, sales employees have the potential to earn greater amounts of incentive pay for the attainment of progressively higher sales goals. From the company’s perspective, higher sales contribute to increased earnings.

Direct financial compensation (core compensation) consists of the pay that a person receives in the form of wages, salaries, commissions, and bonuses. indirect financial compensation (employee benefits) consists of all financial rewards that are not included in direct financial compensation. This form of compensation includes a wide variety of rewards normally received indirectly by the employee such as paid vacation and medical care. Nonfinancial compensation consists of the satisfaction that a person receives from the job itself or from the psychological or physical environment in which the person works. Although our focus will not be on nonfinancial compensation, it is worth giving brief consideration through an illustration to better describe the total compensation concept.

ObjeCtive 9.1

Describe direct financial compensation (core compensation), indirect financial compensation (employee benefits), and nonfinancial compensation.

compensation Total of all rewards provided employees in return for their services.

direct financial compensation (core compensation) Pay that a person receives in the form of wages, salary, commissions, and bonuses.

indirect financial compensation (employee benefits) All financial rewards that are not included in direct financial compensation.

nonfinancial compensation Satisfaction that a person receives from the job itself or from the psychological and/or physical environment in which the person works.

226 Part 4 • ComPensation

Watch It 1 If your professor has assigned this, sign into mymanagementlab.com to watch a video titled Motivation (TWZ Role Play) and to respond to questions.

Employers may choose to award nonfinancial compensation to complement an employee’s paycheck, especially when economic conditions make it difficult to provide higher pay. Examples of nonfinancial compensation practices include training for employees who value professional development and flexible work scheduling for those who give high priority to work–life balance. As you will learn in the following Watch It video, the effectiveness of nonfinancial compensation practices significantly depends on knowing each employee as an individual to provide options of interest and value to them.

Managers tend to view financial compensation as both an expense and an asset. It is an expense in the sense that it reflects the cost of labor. For example, on average, companies spent $31.57 per hour worked per employee in December 2013. Of this total, companies spent $21.77 on wages and $9.80 on all employee benefits.3 The costs of labor continually rise. For example, the cost of wages rose, on average, 1.9 percent between December 2012 and December 2013. The increase in the cost of benefits was greater, equaling 2.2 percent.4

Financial compensation is instrumental in recruiting and hiring good people and in encour- aging them to put forth their best efforts and remain in their jobs. A firm that pays well attracts many applicants, enabling management to pick and choose the skills and traits it values. It holds on to these quality hires by equitably sharing the fruits of its financial success, not only among the management team but also with the rank and file. Compensation programs have top management’s attention because they have the potential to influence employee work attitudes and behavior that lead to improved organizational performance and achieving the firm’s strate- gic plan. We can find evidence for top management’s interest in many of the “About Careers” sections of company Web sites. For example, the U.S. Office of Personnel Management (OPM) describes the role and importance of careers in its various U.S. federal government agencies, including the OPM:

OPM helps the President manage the civil service of the Federal government. While our work has a direct impact on employees and Departments/agencies throughout the Federal government, don’t forget that we are an employer of choice in our own right. We are look- ing for candidates like you to help OPM implement crucial initiatives like the Affordable Care Act and develop policies, products and services for the Federal workforce! We offer employees the rewarding experience of guiding and advising on myriad human resource challenges as well as contributing to an effective and efficient merit system of employment in Government.5

Figure 9-1 Components of a Total Compensation Program

Compensation

Financial Nonfinancial Direct Wages Salary Commissions Bonuses

Indirect (Benefits) Legally Required Benefits Social Security Unemployment Compensation Workers‘ Compensation Family & Medical Leave

Discretionary Benefits Paid Time Off Health Care Life Insurance Retirement Plans Employee Stock Option Plans Employee Services Premium Pay

Meaningful Appreciated Satisfying Learning Enjoyable Challenging

The Job Job Environment Sound Policies Capable Managers Competent Employees Congenial Coworkers Appropriate Status Symbols Working Conditions

Workplace Flexibility Flextime Compressed Workweek Job Sharing Telecommuting Part-Time Work

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 227

Components of Direct Financial Compensation There are five types of direct financial compensation. These include employee base pay, cost-of-living adjustments, seniority pay, pay-for-performance, and person-focused pay. An employee’s direct financial compensation rarely consists of all five components. Most employ- ees receive base pay, and companies choose which of the remaining four types of financial compensation to include. Companies choose one additional or combination of direct financial compensation components for employee groups based on how best to direct employee job performance (for example, sales employees versus clerical employees). Also, factors such as labor unions influence how direct employee compensation is structured.

Employee Base Pay Most employees receive base pay, which we describe momentarily. Over time, HR profession- als work with managers and supervisors to make adjustments to base pay. There are a variety of methods for making these adjustments. HR professionals work with managers and supervisors to adjust employee base pay based on one or more of the remaining four types of direct financial compensation.

Base Pay Employees receive base pay, or money, for performing their jobs. Base pay is recurring; that is, employees continue to receive base pay as long as they remain in their jobs. Companies disburse base pay to employees in one of two forms: hourly pay or wage or as salary. Employees earn hourly pay for each hour worked. They earn salaries for performing their jobs, regardless of the actual number of hours worked. Companies measure salary on an annual basis. The Fair Labor Standards Act established criteria for determining whether employees should be paid hourly or by salary. In July 2013, the average weekly rate for workers was approximately $824.6 On an annual basis, this figure translates to $42,848 (based on a 40-hour work week over 52 calendar weeks).

Cost-of-Living Adjustments Cost-of-living adjustments (COLas) represent periodic base pay increases that are founded on changes in prices as recorded by the consumer price index (CPI). In recent years, the typical COLA equaled approximately 2–3 percent annually. COLAs enable workers to maintain their purchasing power and standard of living by adjusting base pay for inflation. real hourly com- pensation measures the purchasing power of a dollar, whereas nominal hourly compensation is the face value of a dollar. Increases in the costs of goods and services cause nominal pay to be less than real pay. For example, let’s assume that an employee accepted a job at $10 per hour. This figure—$10 per hour—represents nominal pay. At the same time, $10 also represents real pay. However, over 1 year, let’s assume that the price of goods and services increased, on aver- age, 5 percent. At the end of the year, nominal hourly pay remains at $10. Hourly real pay, on the other hand, declined by 5 percent, or $0.50. In other words, $10 purchases only $9.50 worth of goods and services. In this example, $9.50 represents hourly real pay.

COLAs are most common among workers represented by unions because one of the main goals of unionization is to protect the standard of living of its membership. When a union empha- sizes cost of living, it may try to pressure management into including a COLA, which rarely is found outside unionized employment settings. Provisions for COLAs are contained in an escala- tor clause in the labor agreement that automatically increases wages as the U.S. Bureau of Labor Statistics’ cost-of-living index (Consumer Price Index) rises. The average hourly union wage remains substantially higher than nonunion wages ($24.18 versus $20.10).7 Some of the differ- ential can be attributed to the use of COLA in union settings.

Seniority Pay seniority is the length of time an employee has been associated with the company, division, department, or job. seniority pay systems reward employees with periodic additions to base pay according to employees’ length of service in performing their jobs. These pay plans assume that employees become more valuable to companies with time and that valued employees will leave if they do not have a clear idea that their salaries will progress over time.8 This rationale comes from human capital theory,9 which, as we discussed in earlier chapters, states that employees’

ObjeCtive 9.2

Identify and discuss the components of direct financial compensation.

base pay The monetary compensation employees earn on a regular basis for performing their jobs. Hourly pay and salary are the main forms of base pay.

hourly pay One type of base pay. Employees earn hourly pay for each hour worked.

salary One type of base pay. Employees earn salaries for performing their jobs, regardless of the actual number of hours worked. Companies generally measure salary on an annual basis.

cost-of-living adjustment (COLA) Escalator clause in a labor agreement that automatically increases wages as the U.S. Bureau of Labor Statistics’ cost-of-living index rises.

real hourly compensation Measure of the purchasing power of a dollar.

nominal hourly compensation The face value of a dollar.

seniority Length of time an employee has been associated with the company, division, department, or job.

seniority pay Pay program in which pay increases are based on length of service.

human capital theory A theory premised on the idea that employees’ knowledge and skills generate productive capital known as human capital. Employees can develop knowledge and skills from formal education or on-the-job experiences.

228 Part 4 • ComPensation

knowledge and skills generate productive capital known as human capital. Employees can develop such knowledge and skills from formal education and training, including on-the-job experience. Over time, employees presumably refine existing skills or acquire new ones that enable them to work more productively. Thus, seniority pay rewards employees for acquiring and refining their skills as indexed by seniority.

Historically, seniority pay programs were common methods for rewarding employee perfor- mance. However, most companies set aside the use of seniority plans in favor of pay-for-perfor- mance methods that explicitly measure performance such as merit pay and incentive pay meth- ods. Increased competitive and economic pressures make it important that companies reward employees commensurately with their measurable contributions.

Still, we do find seniority pay programs commonly in use within government agencies and in a variety of other employment settings in which labor unions represent the interests of work- ers. We can look to the U.S. federal government for an example of a comprehensive seniority pay program that is known as the General schedule. Figure 9-2 displays this arrangement. The General Schedule classifies federal government jobs into 15 classifications (GS-1 through GS-15) based on such factors as skill, education, and experience levels. Employees are eligible for 10 within-grade step pay increases. At present, it takes employees 18 years to progress from Step 1 to Step 10. Employees spend one year each in Steps 1 through 3, two years each in Steps 4–6, and three years each in Steps 7–9. In addition, jobs that require high levels of specialized education (e.g., a physicist), influence public policy significantly (e.g., law judges), or require executive decision making are classified in separate categories: Senior Level (SL), Scientific and Professional (SP) positions, and the Senior Executive Service (SES). The gov- ernment typically increases all pay amounts annually to adjust for inflation; however, President Barack Obama instituted a pay freeze for most federal employees in 2013 because of poor economic conditions.

human capital As defined by economists, refers to sets of collective skills, knowledge, and ability that employees can apply to create economic value for their employers.

General Schedule (GS) Classification of federal government jobs into 15 classifications (GS-1 through GS-15), based on such factors as skill, education, and experience levels. In addition, jobs that require high levels of specialized education (e.g., a physicist), significantly influence public policy (e.g., law judges), or require executive decision making are classified in three additional categories: Senior Level (SL), Scientific & Professional (SP) positions, and the Senior Executive Service (SES).

Figure 9-2 salary table: 2014 General schedule

Annual Rates by Grade and Step

Grade

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Step 7

Step 8

Step 9

Step 10

WITHIN GRADE

AMOUNTS

1 $ 17,981 $ 18,582 $ 19,180 $ 19,775 $ 20,373 $ 20,724 $ 21,315 $ 21,911 $ 21,934 $ 22,494 Varies

2 20,217 20,698 21,367 21,934 22,179 22,831 23,483 24,135 24,787 25,439 Varies

3 22,058 22,793 23,528 24,263 24,998 25,733 26,468 27,203 27,938 28,673 735

4 24,763 25,588 26,413 27,238 28,063 28,888 29,713 30,538 31,363 32,188 825

5 27,705 28,629 29,553 30,477 31,401 32,325 33,249 34,173 35,097 36,021 924

6 30,883 31,912 32,941 33,970 34,999 36,028 37,057 38,086 39,115 40,144 1,029

7 34,319 35,463 36,607 37,751 38,895 40,039 41,183 42,327 43,471 44,615 1,144

8 38,007 39,274 40,541 41,808 43,075 44,342 45,609 46,876 48,143 49,410 1,267

9 41,979 43,378 44,777 46,176 47,575 48,974 50,373 51,772 53,171 54,570 1,399

10 46,229 47,770 49,311 50,852 52,393 53,934 55,475 57,016 58,557 60,098 1,541

11 50,790 52,483 54,176 55,869 57,562 59,255 60,948 62,641 64,334 66,027 1,693

12 60,877 62,906 64,935 66,964 68,993 71,022 73,051 75,080 77,109 79,138 2,029

13 72,391 74,804 77,217 79,630 82,043 84,456 86,869 89,282 91,695 94,108 2,413

14 85,544 88,395 91,246 94,097 96,948 99,799 102,650 105,501 108,352 111,203 2,851

15 100,624 103,978 107,332 110,686 114,040 117,394 120,748 124,102 127,456 130,810 3,354

Source: U.S. Office of Personnel Management. http://www.opm.gov. Accessed March 17, 2014.

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 229

Performance-Based Pay Performance-based pay is governed by how well one performs the job. To maximize company objectives of the firm, it is important to link employee compensation to performance. This basic rule applies to all within the organization, ranging from the company president to hourly employee. It recognizes that some workers are just better than other workers in performing the same job.

The objective of performance-based pay is to improve productivity by rewarding those who best assist in achieving this goal. It is based on the assumption that given the proper incentives, most employees will work harder and smarter. In a recent survey, companies that reported the best results from their pay-for-performance programs used multiple rewards to recognize and reward performance, including base pay increases (91 percent), short-term incentives (71 percent), spot bonuses (49 percent), equity awards (33 percent), other long- term incentives (18 percent), and profit sharing (7 percent).10 An effective performance appraisal program is a prerequisite for any pay system tied to performance. Using this approach, workers would need to first have a clear understanding of what goals the organi- zation wanted them to achieve. Then, based on the result of performance appraisal, rewards would be forthcoming.

When Sprint’s CEO Dan Hesse took over the wireless provider, he wanted employees to clearly understand what he thought was important and what they should focus on to achieve  maximum rewards. He wanted compensation to be based on improving the customer experience, strengthen- ing the brand, and generating cash to increase profits. The amount paid for performance extended from 5 percent for entry-level employees to 50 percent and higher at the vice-president level.11 As another example, if it is important to improve safety in the workplace, this goal must be com- municated to employees and included in their performance review. If worker behavior leads to fewer accidents, workers should be rewarded.12 Rewards might be as simple as a pat on the back or additional money in their paychecks. Appraisal data provide input for such approaches as merit pay and incentive pay bonuses. Each of these approaches to compensation management will be discussed in the following sections. These include merit pay, merit bonuses, and incentive pay, of which there are three categories: individual incentive pay, group incentive pay, and company-wide incentive pay.

MERIT PAy Merit pay is a pay increase added to employees’ base pay based on their level of performance. It assumes that employees’ compensation over time should be determined, at least in part, by differences in job performance.13 Employees earn permanent merit increases based on their performance. The increases reward excellent effort or results, motivate future performance, and help employers retain valued employees. Merit increases are usually expressed as a percentage of hourly wages for nonexempt employees and as a percentage of annual salaries for exempt employees. In 2013, employees earned average merit increases of 2.8 percent. The rate varied according to the level of employee performance. The highest performers earned 4.6  percent to base pay, average performers earned 2.6 percent, and the lowest performers earned 0.2 percent.14

In practice, however, it historically has been merely a cost-of-living increase in disguise.15 This is the case because most companies do not offer cost-of-living increases as well as merit pay increases. For example, a 4 percent merit pay increase is misleading from the standpoint of recognizing employee performance when cost-of-living has increased by 3 percent. The pay increase amount attributed to performance is a mere 1 percent.

At times, companies provide automatic pay increases under the guise of merit pay, which defeats the purpose. As John Rubino, president of Rubino Consulting Services, an international HR consulting firm, said, “Companies with base-salary programs and automatic annual pay increases offer little to motivate employees.”16 Past studies by compensation professionals have determined that merit pay is marginally successful in influencing pay satisfaction and perfor- mance. From the employer’s viewpoint, a distinct disadvantage to the typical merit pay increase is that it increases the employee’s base pay. Therefore, employees receive the added amount each year they are on the payroll regardless of later performance levels.

The recent recession may have created a compensation revolution with regard to merit pay. Pay increases in which everyone is treated essentially the same with only small differ- ences between the best performer and mediocre ones are a thing of the past for some firms.

merit pay Pay increase added to employees’ base pay based on their level of performance.

230 Part 4 • ComPensation

Craig E. Schneier, the HR boss at biotechnology giant Biogen Idec, does not believe that all employees and positions are equal. At Biogen, one vice-president might get double what another vice-president in the next office will get.17 Certainly this philosophy bodes well for many Generation Y employees because they want to be rewarded based on their individual performance and do not believe the time a person devotes to the job should be a primary consideration.18

It has become increasingly difficult to justify merit pay increases based on a previous employment period but added perpetually to base pay. There are many long-term employees who are poor performers who have high salaries because of past automatic cost-of-living increases. Although numerous companies continue with traditional merit pay plans, some companies are starting to quietly freeze or cut pay for some so as to be able to reward others. According to Myrna Hellerman, senior vice-president at Sibson Consulting, “much can be learned from best- practices companies where base pay increases must be earned, based on demonstrated individual achievement. Pay raises are not an entitlement; the entitlement era is over.”19

MERIT BONUSES Companies are increasingly placing a higher percentage of their compensation budget in merit bonuses, which is a one-time annual financial award, based on productivity that is not added to base pay. This approach better enables companies to control the cost of direct compensation by not adding pay increases to base pay on a permanent basis, which is the case for seniority and merit pay. Figure 9-3 shows the differences in cost between the use of merit pay and merit bonuses.

More and more companies embrace the concept of pay for performance. Recently when the economy was slowing down and employers were holding down across-the-board pay raises, companies still put a large percentage of salary budgets toward bonuses.20 A recent survey found that 70 percent of employers offer bonuses as a reward to employees.21 The use of bonuses helps managers control their cash outlay in a tough business environment while laying the foundation to share success with top producers.22 Managers commonly contend that the use of bonuses is a win–win situation because it boosts production and efficiency and gives employees some control over their earning power. A positive side effect of using bonuses to reward high performance is that it may encourage coworkers to increase their productivity so that they can also receive the bonuses.

merit bonus One-time annual financial award, based on productivity that is not added to base pay.

Figure 9-3 Permanent annual merit increases versus Bonus awards: a Comparison

(At the end of 2014, John Smith earned an annual salary of $35,000.)

Cost of Increase (Total Current Salary—2014

Annual Salary)

Total Salary under

year

Increase Amount

(%)

Permanent Merit Increase

($) Bonus

Award ($)

Permanent Merit Increase (Percent

Increase × Previous Annual Salary) ($)

Bonus Award Annual (Percent Increase × 2014

Salary) ($)

2015 3 1,050 1,050 36,050 36,050

2016 5 2,853 1,750 37,853 36,750

2017 4 4,367 1,400 39,367 36,400

2018 7 7,122 2,450 42,122 37,450

2019 6 9,649 2,100 44,649 37,100

2020 5 11,881 1,750 46,881 36,750

2021 3 13,287 1,050 48,287 36,050

2022 6 16,185 2,100 51,185 37,100

2023 8 20,279 2,800 55,279 37,800

2024 7 24,148 2,450 59,148 37,450

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 231

Many organizations today are providing spot bonuses for critical areas and talents. spot bonuses are relatively small monetary gifts provided to employees for outstanding work or effort during a reasonably short period of time. If an employee’s performance has been exceptional, the employer may reward the worker with a one-time bonus of as low as $50 and $100 or $500. For certain professional jobs, it is not unheard of for a highly productive worker to receive $5,000 shortly after a noteworthy achievement.

INCENTIvE PAy incentive pay rewards employees for partially or completely attaining a predetermined work objective. Incentive or variable pay is defined as compensation—other than base wages or salaries—that fluctuates according to employees’ attainment of some standard, such as a pre-established formula, individual or group goals, or company earnings.23 Much like   seniority and merit pay approaches, incentive pay augments employees’ base pay, but incentive pay appears as one-time payments. Employees usually receive a combination of recurring base pay and incentive pay, with base pay representing the greater portion of direct financial compensation. More employees are presently eligible for incentive pay than ever before, as companies seek to control costs and motivate personnel continually to strive for exemplary performance. Companies increasingly recognize the importance of applying incentive pay programs to various kinds of employees as well, including production workers, technical employees, and service workers.

Companies generally institute incentive pay programs to control payroll costs or to motivate employee productivity. Companies can control costs by replacing annual merit or seniority increases or fixed salaries with incentive plans that award pay raises only when the company enjoys an offsetting rise in productivity, profits, or some other measure of busi- ness success. Well-developed incentive programs base pay on performance, so employees control their own compensation levels. Companies can choose incentives to further business objectives.

There are many kinds of incentive pay plan options. Companies use incentive pay to reward individual employees, groups of employees, or whole companies based on their performance. Management typically relies on business objectives to determine incentive pay levels.

INDIvIDUAL INCENTIvE PLANS In this section, we will review the four commonly used individual incentive pay plans: piecework, management incentives, behavioral encouragement plans, and referral plans. Then, we will briefly address the pros and cons of individual incentive plans.

piecework is an incentive pay plan in which employees are paid for each unit they pro- duce. For example, if a worker is paid $8 a unit and produces 10 units a day, the worker earns $80. Sometimes a guaranteed base is included in a piece-rate plan, meaning that a worker would receive this base amount no matter what the output. Historically, piecework is espe- cially prevalent in the production/operations area. Requirements for the plan include develop- ing output standards for the job and being able to measure the output of a single employee. Piecework pay plans have declined in use somewhat because the plan requires constant moni- toring. For instance, if on day one the worker produced 8 units and on day two the worker produced 12 units, each day must be counted separately. Also, professionals such as industrial engineers are needed to maintain the system. Obviously, a piecework plan would not be feasi- ble for many jobs.

Management incentive plans award bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division, department, or unit. Management incentive plans differ from piecework plans in that piecework plans base rewards on the attainment of one specific objective, and management incentive plans often require multiple complex objectives. For example, management incentive plans reward man- agers for increasing market share or reducing their budgets without compromising the quality and quantity of output. The best-known management incentive plan is management by objec- tives (MBO).24 When used as part of incentive programs, superiors communicate the amount of incentive pay managers will receive based on the attainment of specific goals. As an aside, when MBO is used as part of merit pay systems, superiors make subjective assessments of managers’ performance, and they use these assessments to determine permanent merit pay increases.

Under behavioral encouragement plans, employees receive payments for specific behav- ioral accomplishments (e.g., good attendance or safety records). For example, companies usually

spot bonus Relatively small monetary gifts provided to employees for outstanding work or effort during a reasonably short period of time.

incentive pay Compensation, other than base wages or salaries, that fluctuates according to employees’ attainment of some standard (e.g., a pre-established formula, individual or group goals, or company earnings).

piecework Incentive pay plan in which employees are paid for each unit they produce.

management incentive plans Bonuses to managers who meet or exceed objectives based on sales, profit, production, or other measures for their division, department, or unit.

behavioral encouragement plans Individual incentive pay plans that reward employees for specific such behavioral accomplishments as good attendance.

232 Part 4 • ComPensation

award monetary bonuses to employees who have exemplary attendance records for a specified period. When behavioral encouragement plans are applied to safety records, workers earn awards for lower personal injury or accident rates associated with the improper use of heavy equipment or hazardous chemicals. Behavioral encouragement plans have the potential to save companies substantially more money than the cost of these awards. For example, frequent absenteeism in a company’s workforce could disrupt production goals and quality. Customers may respond by choosing to make purchases for better quality products from other companies. Loss of customer bases will have a negative impact on profitability and reputation that prompts prospective cus- tomers to choose alternate sources to purchase products.

Companies commonly rely on referral plans to enhance recruitment of highly qualified employees. Employees may receive monetary bonuses for referring new customers or recruiting successful job applicants. In the case of recruitment, employees can earn bonuses for making successful referrals for job openings. For example, there has been a tremendous shortage of nurses for the past several years. Because of the shortage, hospitals commonly offer sign-on bonuses of up to $15,000 to recruit nurses and referral bonuses of up to $5,000. A successful referral usually means that companies award bonuses only if hired referrals remain employed with the company in good standing beyond a designated period, often at least 30 days. Referral plans rely on the idea that current employees’ familiarity with company culture should enable them to identify viable candidates for job openings more efficiently than employment agencies could because agents are probably less familiar with client companies’ cultures. Employees are likely to make only those referrals they truly believe are worthwhile because their personal reputations are at stake.

Individual incentive plans have advantages and disadvantages. On the positive side, indi- vidual incentive plans promote an equitable distribution of compensation within companies (i.e., the amount employees earn depends on their job performance). The better employ- ees perform, the more they earn. Equitable pay ultimately enables companies to retain the best performers. Paying better performers more money sends a signal that the company appropriately values positive job performance. Another advantage of individual incentive plans is their compatibility with such individualistic cultures as the United States. Because U.S. employees are socialized to make individual contributions and be recognized for them, the national culture of the United States probably enhances the motivational value of individual incentive programs.

A downside of individual incentive plans is that they may encourage undesirable workplace behavior when these plans reward only one or a subset of dimensions that constitute employees’ total job performance. Let’s assume that an incentive plan rewards employees for quantity of output. If employees’ jobs address such various dimensions as quantity of output, quality, and customer satisfaction, employees may focus on the one dimension—in this case, quantity of output—that leads to incentive pay and thereby neglect the other dimensions.

GROUP INCENTIvE PLANS In baseball, as with other team sports, you do not judge the team based on its ace pitcher or great outfielder. The criterion for success is overall team performance, its win–loss record. In business, companywide plans offer a possible alternative to the incentive plans previously discussed. Team-based incentives are determined by how well the team performs in the accomplishment of the job. Because team performance consists of individual efforts, individual employees should be recognized and rewarded for their contributions. However, if a team is to function effectively, firms should also provide a reward based on the overall team performance as well. Changing a firm’s compensation structure from an individual-based system to one that involves team-based pay can have powerful results. By so doing, a firm can improve efficiency, productivity, and profitability.

There are many kinds of team incentive programs. Most companies define these programs based on the type of team:25 Work (process) teams refer to organizational units that perform the work of the organization on an ongoing basis. Membership is relatively permanent, and mem- bers work full time on the team. Customer service teams and assembly teams on production lines represent excellent examples of work teams. Work teams are effective when individuals are cross-trained to perform team members’ work when they are absent. The goal is to maintain consistency in performance quality (e.g., addressing customer concerns promptly even when

referral plans Individual incentive pay plans for rewarding the referral of new customers or recruiting successful job applicants.

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 233

one or more team members are absent) and output (e.g., in the case of assembly teams). Team members ultimately engage in performance sharing rather than focusing exclusively on one set of tasks.

Project teams consist of a group of people assigned to complete a one-time project. Members usually have well-defined roles and may work on specific phases of the project, either full time or in addition to other work responsibilities of the team. Project teams usually work across such functions as engineering, product development, and marketing to ensure that the final product meets company specifications in terms of cost, quality, and responsive- ness to market demands (e.g., Toyota’s hybrid vehicles). Many individuals collaborated to ensure the production of cars that rely less on fossil fuels, demonstrate excellent gas mileage, and offer the same driving experience that people have come to expect of gasoline-powered automobiles.

Parallel teams, or task forces, include employees assigned to work on a specific task in addition to normal work duties. The modifier parallel indicates that an employee works on the team task while continuing to work on normal duties. Also, parallel teams or task forces operate on a temporary basis until their work culminates in a recommendation to top management. Task forces are used to evaluate existing systems and processes, to select new technology, and to improve existing products. People often serve on a voluntary basis or are appointed; in many cases, they are not compensated specifically for extra work or outcome of extra work.

Teams or groups may ultimately receive incentive pay based on such criteria as customer satisfaction (i.e., customer service quality), safety records, quality, and production records. Although these criteria apply to other categories of incentive programs as well (individual, com- panywide, and group plans), companies allocate awards to each worker based on the group’s attainment of predetermined performance standards.

Team incentives have both advantages and disadvantages. On the positive side, firms find it easier to develop performance standards for groups than for individuals. For one thing, there are fewer standards to determine. Also, the output of a team is more likely to reflect a complete product or service. Another advantage is that employees may be more inclined to assist others and work collaboratively if the organization bases rewards on the team’s output. When teams perform highly, it is the interaction among team members, not the members themselves, that creates the high performance. If a team member is asked who was respon- sible for the high performance of the team, he or she would likely say “We were” and mean it. A potential disadvantage for team incentives relates to exemplary performers. If individuals in this category perceive that they contribute more than other employees in the group, they may become disgruntled and leave. Christopher Avery, a Texas-based speaker and consultant who specializes in issues concerning individual and shared responsibility in the workplace and the author of Teamwork Is an Individual Skill: Getting Your Work Done When Sharing Responsibility, said, “If management wants to reward a high-performing team member, give that person a raise.”26

Gain sharing plans are designed to bind employees to the firm’s productivity and provide an incentive payment based on improved company performance. Gain sharing programs, such as the Scanlon, Rucker, and Improshare plans, are the most popular companywide plans that have been adopted by U.S. corporations. The goal of gain sharing is to focus on improving cost-efficiency, reducing costs, improving throughput, and improving profitability. Gain sharing helps align an organization’s people strategy with its business strategy. Gain sharing plans (also known as pro- ductivity incentives, team incentives, and performance sharing incentives) generally refer to incentive plans that involve many or all employees in a common effort to achieve a firm’s perfor- mance objectives.

Joseph Scanlon, after whom the Scanlon plan was named, developed the first gain sharing plan during the Great Depression, and it continues to be a successful approach to group incentive. The scanlon plan provides a financial reward to employees for savings in labor costs resulting from their suggestions. Employee-management committees evaluate these suggestions. Participants in these plans calculate savings as a ratio of payroll costs to the sales value of what that payroll pro- duces. If the company is able to reduce payroll costs through increased operating efficiency, it shares the savings with its employees. Scanlon plans are not only financial incentive systems, but

gain sharing Plans designed to bind employees to the firm’s productivity and provide an incentive payment based on improved company performance.

Scanlon plan Gain sharing plan that provides a financial reward to employees for savings in labor costs resulting from their suggestions.

234 Part 4 • ComPensation

also systems for participative management. The Scanlon plan embodies management–labor coop- eration, collaborative problem solving, teamwork, trust, gain sharing, open-book management, and servant leadership.

COMPANyWIDE INCENTIvE PLANS The use of companywide incentive plans can be traced to the nineteenth century. Companies instituted profit sharing programs to ease workers’ dissatisfaction with low pay and to change their beliefs that company management paid workers substandard wages while earning substantial profits. Quite simply, management believed that workers would be less likely to challenge managerial practices if they received a share of company profits. Organizations normally base companywide plans on the firm’s profitability or market value. Companywide plans include profit sharing and employee stock option plans.

profit sharing is a compensation plan that results in the distribution of a predetermined percentage of the firm’s profits to employees. Many firms use this type of plan to integrate the employees’ interests with those of the company. Profit-sharing plans can aid in recruiting, moti- vating, and retaining employees, which usually enhances productivity.

There are several variations of profit-sharing plans, but three basic kinds of plans used today are current profit sharing, deferred profit sharing, and combination plans.

• Current plans provide payment to employees in cash or stock as soon as profits have been determined.

• Deferred plans involve placing company contributions in an irrevocable trust, credited to individual employees’ accounts. The funds are normally invested in securities and become available to the employee (or his or her survivors) at retirement, termination, or death.

• Combination plans permit employees to receive payment of part of their share of profits on a current basis, while deferring payment of part of their share.

Normally, most full-time employees are included in a company’s profit-sharing plan after a specified waiting period. vesting determines the amount of company profit an employee owns in his or her account. Firms often determine this sum on a graduated basis. For example, an employee may become 25 percent vested after being in the plan for two years; 50 percent vested after three years; 75 percent vested after four years; and 100 percent vested after five years. This gradual approach to vesting encourages employees to remain with the firm, thereby reducing turnover.

The results of profit sharing include increased efficiency and lower costs. However, varia- tions in profits may present a special problem. When employees have become accustomed to receiving added compensation from profit sharing, and then there is no profit to share, they may become disgruntled.

HR Web Wisdom

Scanlon Leadership Network http://www.scanlon.org/

A promoter of the Scanlon principles to advance their applications among organizations.

profit sharing Compensation plans that result in the distribution of a predetermined percentage of the firm’s profits to employees.

vesting An employee’s acquired nonforfeitable rights to pension benefits.

H r B l o o p e r s

Motivating Software Development Teams As she gets ready to start her presentation,

Jennifer Senders is excited about her new plan to improve perfor- mance of the software development teams at Creators Software. As a Senior Compensation Analyst, she was charged with creating a new team-based pay plan to replace the company’s current indi- vidual bonus system. All of the software developers at Creators work in teams to design and deliver software solutions for a wide variety of clients. The workforce at Creators is very talented, but many of the developers would prefer to work alone. As a result, many of the teams were having problems meeting deadlines and other expected

team outcomes. Jennifer knows that for the team to work well together, the incentives should focus on team goals instead of indi- vidual goals. However, a glance at her audience as she explains the new bonus structure suggests they may not share her enthusiasm. She gets a hint about their concerns as soon as she asks for ques- tions. Several hands go up and the employees begin to ask about individual rewards. One developer states that he knows he works harder than others on his team and he doesn’t want them affecting his pay. As Jennifer starts to respond, she is thinking fast about what she might need to change.

If your professor has assigned this, go to mymanagementlab.com to complete the HR Bloopers exercise and test your application of these concepts when faced with real-world decisions.

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 235

A basic problem with a profit-sharing plan stems from the recipients’ seldom knowing precisely how they helped generate the profits, beyond just doing their jobs. HR professionals refer to this as a line-of-sight problem. And, if employees continue to receive a payment, they will come to expect it and depend on it. If they do not know what they have done to deserve it, they may view it as an entitlement program and the intended ownership attitude may not materialize.

Under employee stock plans, companies grant employees the right to purchase shares of company stock. Company stock represents total equity of a company. Company stock shares represent equity segments of equal value. Equity interest increases positively with the number of stock shares. stock options describe an employee’s right to purchase company stock. Employees do not actually own stock until they exercise the stock option rights. This is done by purchasing stock at a designated price after a company-chosen time period lapses, usually no more than 5 years. Employee stock options provide an incentive to work productively, with the expectation that collective employee productivity will increase the value of company stock over time. Employees earn monetary compensation when they sell the stock at a higher price than they originally paid for it.

Employee stock option plans represent just one type of general stock compensation plan. Two other basic kinds of stock plans are widely used today. First, employee stock ownership plans (esOps) place company stock in trust accounts for employees. The purpose of ESOPs is similar to deferred profit sharing because these trusts are set aside on employees’ behalf as a source of retirement income and these awards provide favorable treatment to employees. Second, stock compensation plans represent an important type of deferred compensation for executives. Deferred compensation is supposed to create a sense of ownership, aligning the interests of the executive with those of the owners or shareholders of the company over the long term.

Person-Focused Pay Thus far, we have studied job-based pay practices. job-based pay compensates employees for jobs they currently perform. HR professionals establish a minimum and maximum accept- able amount of pay for each job. In the case of merit pay, managers evaluate employees based on how well they fulfilled their designated roles as specified by their job descriptions and periodic objectives. Managers then award a permanent merit addition to base pay, based on employee performance. With incentive pay, managers award one-time additions to base pay. Pay raise amounts are based on the attainment of work goals, which managers communicate to employees in advance.

In contrast, person-focused pay compensates employees for developing the flexibility, knowledge, and skills to perform a number of jobs effectively. Moreover, these programs reward employees on their potential to make positive contributions to the workplace based on their suc- cessful acquisition of work-related skills or knowledge. Job-based pay plans reward employees for the work they have done as specified in their job descriptions or periodic goals (i.e., how well they have fulfilled their potential to make positive contributions in the workplace).

skill-based pay is a system that compensates employees for their job-related skills and knowledge, rather than how well he or she performs on the present job. Skill-based pay is a method of recruiting and retaining highly skilled employees that enables employers to offer compensation based on the knowledge, skills, and abilities that employees bring to the company and that they develop over the course of their employment, rather than based solely on the duties associated with a position.27 Essentially, job descriptions, job evaluation plans, and job- based salary surveys are replaced by skill profiles, skill evaluation plans, and skill-based salary surveys. The system assumes that employees who know more are more valuable to the firm and, therefore, they deserve a reward for their efforts in acquiring new skills. When employees obtain additional job-relevant skills, both individuals and the departments they serve benefit. For example, a department may have six different types of machines, each requiring different skills to operate. Under a skill-based pay system, the worker would increase his or her pay as additional machines are learned.

Although skill-based pay appears to have advantages for both employer and employee, there are some challenges for management. The firm must provide adequate training opportunities or else the system can become a demotivator. Also, because it takes an average of only three years

employee stock plans The right to purchase shares of company stock.

company stock The total equity or worth of the company.

company stock shares Equity segments of equal value, which increase with the number of stock shares held.

stock option plan Incentive plan in which employees can buy a specified amount of stock in their company in the future at or below the current market price.

employee stock option plan (ESOP) Plan in which a firm contributes stock shares to a trust, which then allocates the stock to participating employee accounts according to employee earnings.

stock compensation plans Companywide incentive plans that grant employees the right to purchase shares of company stock.

deferred compensation An agreement between an employee and a company to render payments to an employee at a future date.

job-based pay Employee compensation for jobs employees currently perform.

person-focused pay Compensation for developing the flexibility, knowledge, and skills to perform a number of jobs effectively.

skill-based pay System that compensates employees for their job-related skills and knowledge, not for their job titles.

236 Part 4 • ComPensation

for a worker to reach a maximum level in a skill-based pay system, what will keep employees motivated? Notwithstanding these concerns, there is evidence to suggest that companies with skill-based plans were more likely than other plans to have greater levels of workforce flexibility. That greater flexibility, in turn, led to greater productivity. 28

Competency-based pay plans generally reward employees for acquiring job-related com- petencies, knowledge, or skills rather than for demonstrating successful job performance. Competency-based pay often refers to two basic types of person-focused pay programs: pay- for- knowledge and skill-based pay. These programs sometimes incorporate a combination of both types of person-focused pay systems, which reward employees for successfully acquiring new job-related knowledge or skills. There are other times when companies combine competency- based pay programs with traditional merit pay programs by awarding pay raises to employees according to how well they demonstrate competencies.

Determinants of Direct Financial Compensation Now that we have defined the components of direct financial compensation, it is important to consider how companies determine what its direct financial compensation should be. There are many factors to consider, which are shown in Figure 9-4, starting with consideration of contextual factors. But, first, we briefly summarize the key points illustrated in Figure 9-4.

Management techniques used for determining a job’s relative worth include job analysis, job descriptions, and job evaluation, and together, these lead to the creation of job structures. An organi- zation must first define and describe job content. HR professionals use job analysis for this purpose. The primary by-product of job analysis is the job description. Job descriptions serve many different purposes, including data for evaluating jobs. With job descriptions, HR professionals can use job evaluation to judge the relative worth of all jobs. The primary basis for making value judgments is consideration of skill, knowledge, ability, and working conditions.

After companies have clearly written job descriptions and they have specified job struc- tures that show the relative worth of jobs, they move on to the next step, which is to decide on competitive compensation policies. HR professionals must give careful consideration to the compensation policies that it will pursue, and these focus on pay level (for example, paying higher, on average, than the market for similar jobs) and pay mix (percentage of direct financial compensation that goes toward salary, employee benefits [Chapter 10], and adjustments such as incentive pay).

Coupled closely with these choices is job pricing, which leads to the construction of pay structures. HR professionals conduct compensation surveys to identify what and how the com- petition is paying its employees. Once armed with information about market pay rates, HR pro- fessionals develop pay structures features that facilitate administration of pay policies. These include pay range and pay grades.

competency-based pay Compensation plan that rewards employees for the capabilities they attain.

ObjeCtive 9.3

Review the determinants of direct financial compensation.

Figure 9-4 Determinants of Direct Financial Compensation

Job Structures Job Analysis

Job Evaluation

Pay Structures Pay Grades Pay Ranges

Contextual Influences on Direct Financial Compensation

Labor Market Labor Unions Economy Interindustry Wage Differentials Legislation

Competitive Pay Policies Compensation Surveys

Pay-Level Policies Pay Mix Policies

Direct Financial Compensation Base Pay (hourly wage and salary)

Cost-of-living Adjustment Pay-for-Performance Person-focused Pay

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 237

Contextual influences on Direct Financial Compensation HR professionals do not build the compensation system in a vacuum. There are many contextual influences that must be taken into account. Among the most prominent considerations are labor market, labor unions, the economy, interindustry wage differentials, and legislation.

Labor Market Potential employees located within the geographic area from which employees are recruited constitute the labor market. Labor markets for some jobs extend far beyond the location of a firm’s operations. An aerospace firm in St. Louis, for example, may be concerned about the labor market for engineers in Fort Worth or Orlando, where competitive firms are located. Managerial and professional employees are often recruited from a wide geographic area. As global economics increasingly sets the cost of labor, the global labor market grows in importance as a determinant of financial compensation for individuals.

Pay for the same jobs in different labor markets may vary considerably. Administrative assis- tant jobs, for example, may carry an average salary of more than $50,000 or higher per year in a large, urban community but only $25,000 or less in a smaller town. Oftentimes, the cost-of-living is higher in large, urban communities and the competition for the best employees is higher in large, urban areas where there are more companies competing for the best. Compensation manag- ers must be aware of these differences to compete successfully for employees. The market rate is an important guide in determining pay. Many employees view it as the standard for judging the fairness of their firm’s compensation practices.

Labor Unions The National Labor Relations Act declared legislative support, on a broad scale, for the right of employees to organize and engage in collective bargaining. Unions normally prefer to determine compensation through the process of collective bargaining, which describes the negotiations between the labor union that represents employee interests and company management. An excerpt from the National Labor Relations Act prescribes the areas of mandatory collective bargaining between management and unions as “wages, hours, and other terms and conditions of employment.” These broad bargaining areas obviously have great potential to impact compensation decisions. When a union uses comparable pay as a standard in making compensation demands, the employer needs accurate labor market data. For example, as we previously discussed, unions often rely on the CPI data as the criterion for awarding COLA.

Unions’ gains also influenced nonunion companies’ compensation practices. Many nonunion companies offered similar compensation to their employees. This phenomenon is known as a spillover effect because management of nonunion firms generally offered somewhat higher wages and benefits to reduce the chance that employees would seek union representation.29

Economy The economy definitely affects financial compensation decisions. For example, a depressed economy generally increases the labor supply, and this serves to lower the market rate. In addi- tion, companies often choose not to award pay raises to contribute to cost containment objectives in a slow economic environment where business activity is likely to suffer. A booming economy, on the other hand, results in greater competition for workers and the price of labor is driven upward.

Interindustry Wage Differentials In competitive labor markets, companies attempt to attract and retain the best individuals for employment partly by offering lucrative wage and benefits packages. Some companies unfortu- nately were unable to compete on the basis of wage and benefits. Indeed, there are differences in wages across industries. These differences are known as interindustry wage or compensation differentials.

ObjeCtive 9.4

Describe contextual influences on direct financial compensation.

labor market Potential employees located within the geographic area from which employees are recruited.

HR Web Wisdom

Calculate Salary Differences from City to City http://www.salary.com

Web site to determine numerous costs of a move to another city.

spillover effect Nonunion companies’ offer of similar compensation unionized companies with the goal of reducing the likelihood that nonunion workforces will seek union representation.

interindustry wage or compensation differentials Pattern of pay and benefits associated with characteristics of industries.

238 Part 4 • ComPensation

Interindustry differentials can be attributed to a number of factors, including the industry’s product market, the degree of capital intensity, the profitability of the industry, unionization, and gender mix of the workforce.30 Companies that operate in product markets in which there is relatively little competition from other companies tend to pay higher wages because these companies exhibit substantial profits. This phenomenon can be attributed to such factors as higher barriers to entry into the product market and an insignificant influence of foreign com- petition. Government regulation and extremely expensive equipment represent entry barriers in such industries as mining. The U.S. defense industry and the public utilities industry have high entry barriers and no threats from foreign competitors.

Capital intensity also explains pay differentials between industries. The amount of aver- age pay varies with the degree of capital intensity. On average, capital-intensive industries such as construction pay more than industries that are less capital intensive such as retail. Capital- intensive businesses require highly capable employees who have the aptitude to learn how to use complex technology. Service such as retail industries are not capital intensive, and most have the reputation of paying low wages. The operation of service industries depends almost exclusively on employees with relatively common skills rather than on employees with specialized skills to operate such physical equipment as casting machines or robotics.

Legislation Federal and state laws can also affect the amount of compensation a person receives and how that amount is determined. For example, prevailing wage laws specify how pay rates should be cal- culated. The Equal Pay Act prohibits an employer from paying an employee of one gender less money than an employee of the opposite gender, if both employees do work that is substantially the same. Equal employment legislation, including the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act, prohibits discrimination against specified groups in employment matters, including compensation. The same is true for fed- eral government contractors or subcontractors covered by Executive Order 11246 and the Rehabilitation Act. States and municipal governments also have laws that affect compensation practices. Our focus in the next section, however, is on the federal legislation that provides broad coverage and specifically deals with compensation issues. These laws appear in chronological order of their passage.

DAvIS–BACON ACT OF 1931 The Davis–Bacon Act of 1931 was the first national law to deal with minimum wages. It mandates a prevailing wage for all federally financed or assisted construction projects exceeding $2,000. Contractors must pay wages at least equal to the prevailing wage in the local area. The U.S. Secretary of Labor determines prevailing wage rates based on compensation surveys of different areas. In this context, “local” area refers to the general location where work is performed. Cities and counties represent local areas. The “prevailing wage” is the typical hourly wage paid to more than 50 percent of all laborers and mechanics employed in the local area. The act also requires that contractors offer fringe benefits that are equal in scope and value to fringe compensation that prevails in the local area.

WALSH–HEALy ACT OF 1936 The Walsh–Healy Act covers contractors and manufacturers who sell supplies, materials, and equipment to the federal government. Its coverage is more extensive than the Davis–Bacon Act. This act applies to both construction and nonconstruction activities. In addition, this act covers all of the contractors’ employees except office, supervisory, custodial, and maintenance workers who do any work in preparation for the performance of the contract. The minimum contract amount that qualifies for coverage is $10,000 rather than the $2,000 amount under the Davis–Bacon Act of 1931.This legislation also requires one-and-a-half times the regular pay rate for hours more than 8 per day or 40 per week.

FAIR LABOR STANDARDS ACT OF 1938, AS AMENDED The most significant law affecting compensation is the Fair Labor Standards Act (FLSA) of 1938. The purpose of the FLSA is to establish minimum labor standards on a national basis and to eliminate low wages and long working hours. The FLSA attempts to eliminate low wages by setting a minimum wage and to make long hours expensive by requiring a higher overtime pay rate for excessive hours. It also requires record keeping and provides standards for child labor. The Wage and Hour Division of

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 239

the U.S. Department of Labor (DOL) administers this act. The amount of the minimum wage has changed several times since it was first introduced in 1938 and continues to do so; it rose from $6.55 to $7.25 per hour in 2009.

Even though the federal and some state governments raise the minimum wage from time to time, most workers who earn the minimum wage argue that it is insufficient to afford the basic necessities. In the summer of 2013, fast food workers across the United States walked off their jobs to protest against what they believe is insufficient pay. The following Watch It video captures workers’ concerns about the minimum wage level and the collective response of restaurant owners to their concerns.

Watch It 2 If your professor has assigned this, sign into mymanagementlab.com to watch a video titled Fast Food Workers Walk Out, Demanding Higher Pay and to respond to questions.

Tipped workers, on the other hand, may receive an hourly minimum wage of $2.13.31 However, if hourly wage plus tips do not add up to the minimum wage ($7.25 per hour), the company must make up the difference. It is here that minimum-wage violations often occur.32 In 2014, the Internal Revenue Service (IRS), which is the government agency that creates and enforces tax regulations, instituted a change in the taxation of tips that are automatically added to the bill by the restaurant. Until then, companies paid the entire amount to its servers and the IRS expected that servers would report tips as income for taxation purposes. We simply do not know whether servers routinely report all, some, or none of their tips to the IRS for taxation. Now, companies are required to withhold taxes from tips before distributing them to employ- ees. This policy change will substantially increase restaurants’ paperwork and likely reduce servers’ income.33

The act distinguishes between exempt and nonexempt employees for the purposes of determining which employees are required to be paid an overtime rate of one-and-one-half times the employee’s regular rate after 40 hours of work in a 168-hour period. Companies are not required to pay overtime to exempt employees, but they are required to do so for nonex- empt employees. exempt employees are categorized as executive, administrative, profes- sional, or outside salespersons. All others are nonexempt employees. Aggressive action is being taken against companies that fail to pay the overtime requirement.34 Although the act covers most organizations and employees, certain classes of employees are specifically exempt from overtime provisions.

An executive employee is essentially a manager (such as a production manager) with broad authority over subordinates. An administrative employee, although not a manager, occupies an important staff position in an organization and might have a title such as account executive or market researcher. A professional employee performs work requiring advanced knowledge in a field of learning, normally acquired through a prolonged course of specialized instruction.35 This type of employee might have a title such as company physician, legal counsel, or senior statistician. Outside salespeople sell tangible or intangible items away from the employer’s place of business.

EqUAL PAy ACT OF 1963 Congress enacted the Equal Pay Act of 1963 to remedy a serious problem of employment discrimination in private industry: “Many segments of American industry [have] been based on an ancient but outmoded belief that a man, because of his role in society, should be paid more than a woman even though his duties are the same.”36 The Equal Pay Act of 1963 is based on a simple principle: Men and women should receive equal pay for performing equal work.

The Equal Pay Act of 1963 pertains explicitly to jobs of equal worth. Companies assign pay rates to jobs according to the skill, effort, responsibility, and working conditions required.

Pay differentials for equal work are not always illegal. Pay differentials between men and women who are performing equal work are acceptable only when made on a seniority system, merit system, incentive system, or on any factor other than sex.

exempt employees Employees categorized as executive, administrative, professional, or outside salespersons, and not required to be paid at an overtime rate for work beyond the completion of standard work hours.

nonexempt employees Employees not categorized as executive, administrative, professional, or outside salespersons, and required to receive overtime pay for work beyond the completion of standard work hours.

240 Part 4 • ComPensation

It is essential that sound performance appraisal practices be in place for the many reasons we discussed in Chapter 7, performance appraisal practices are essential to determine whether pay differentials between men and women performing equal work are illegal.

WALL STREET REFORM AND CONSUMER PROTECTION ACT (DODD–FRANk ACT) The Dodd– Frank Act was signed into law in 2010 and has provisions relating to executive compensation and corporate governance that impact the executives, directors, and shareholders of publicly traded companies. We will cover specific provisions of the act in the discussion about executive compensation, which follows later in this chapter.

build job structures Using job evaluation A job structure is an ordered set of jobs that represents the job structure or hierarchy. That is, jobs that require higher qualifications, more responsibilities, and more complex job duties should be paid more than jobs that require lower qualifications, fewer responsibilities, and less-complex job duties. Internally consistent job structures formally recognize differences in job characteristics that enable compensation managers to set pay accordingly. HR professionals use job evaluation systematically to recognize differences in the relative worth among a set of jobs and to establish pay differentials accordingly.

When done properly, job evaluation helps to eliminate internal pay inequities that exist because of illogical pay structures. For example, pay inequity probably exists if the mailroom supervisor earns more than the chief accountant. For obvious reasons, organizations prefer inter- nal pay equity. However, when a job’s pay rate is ultimately determined to conflict with the market rate, the latter is almost sure to take precedence. Job evaluation measures job worth in an administrative rather than an economic sense. The latter can be determined only by the market- place and made known through compensation surveys.37 We will discus compensation surveys later in this chapter.

The HR department may be responsible for administering job evaluation programs. However, committees made up of individuals familiar with the specific jobs to be evaluated often perform the actual evaluations. A typical committee might include the HR executive and representatives from other functional areas such as finance, production, information technol- ogy, and marketing. The composition of the committee usually depends on the type and level of the jobs being evaluated. In all instances, it is important for the committee to keep personalities out of the evaluation process and to remember that it is evaluating the job, not the person(s) performing the job. Some people have difficulty making this distinction. This is understandable because some job evaluation systems are similar to some performance appraisal methods. In addition, the duties of a job may, on an informal basis, expand, contract, or change depending on the person holding the job.

The four traditional job evaluation methods are the ranking, classification, factor compari- son, and point. There are innumerable versions of these methods, and a firm may choose one and modify it to fit its particular purposes. Another option is to purchase a proprietary method such as the Hay Plan. The ranking and classification methods are nonquantitative, whereas the factor comparison and point methods are quantitative approaches.

Ranking Method The ranking method is the simplest of the four job evaluation methods. In the job evaluation ranking method, the raters examine the description of each job being evaluated and arrange the jobs in order according to their value to the company. The procedure is essentially the same as the ranking method for evaluating employee performance. The only difference is that you eval- uate jobs, not people.

Classification Method The classification method involves defining a number of classes or grades to describe a group of jobs. In evaluating jobs by this method, the raters compare the job description with the class description. Class descriptions reflect the differences between groups of jobs at various difficulty

ObjeCtive 9.5

Describe how to use job evalua- tion to build job structures.

job structure An ordered set of similar jobs based on worth.

job evaluation Process that determines the relative value of one job in relation to another.

job evaluation ranking method Job evaluation method in which the raters examine the description of each job being evaluated and arrange the jobs in order according to their value to the company.

classification method Job evaluation method in which classes or grades are defined to describe a group of jobs.

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 241

levels. The class description that most closely agrees with the job description determines the classification for that job. For example, in evaluating the job of receptionist, the description might include these duties:

• Greet and announce visitors. • Answer phone and route calls. • Receive and route mail.

Assuming that the remainder of the job description includes similar routine work, this job would probably be placed in the lowest job class.

Each class is described in such a way that it captures sufficient work detail, yet is general enough to cause little difficulty in slotting a job description into its appropriate class.

Factor Comparison Method The factor comparison method is somewhat more involved than the two previously discussed qualitative methods. The factor comparison method of job evaluation assumes that there are five universal factors consisting of mental requirements, skills, physical requirements, responsi- bilities, and working conditions; the evaluator makes decisions on these factors independently.

The five universal job factors are:

• Mental requirements, which reflect mental traits such as intelligence, reasoning, and imagination.

• Skills, which pertain to facility in muscular coordination and training in the interpretation of sensory impressions.

• Physical requirements, which involve sitting, standing, walking, lifting, and so on. • Responsibilities, which cover areas such as raw materials, money, records, and supervision. • Working conditions, which reflect the environmental influences of noise, illumination, venti-

lation, hazards, and hours.

In this method, the evaluation committee creates a monetary scale, containing each of the five universal factors, and ranks jobs according to their value for each factor. Unlike most other job evaluation methods, which produce relative job worth only, the factor comparison method deter- mines the absolute value as well.

Point Method In the point method, raters assign numerical values to specific job factors, such as knowledge required, and the sum of these values provides a quantitative assessment of a job’s relative worth. Historically, some variation of the point plan has been the most popular option.

Point plans require time and effort to design. A redeeming feature of the method has been that, once developed, the plan was useful over a long time. In today’s environment, the shelf life may be considerably less. In any event, as new jobs are created and old jobs substantially changed, job analysis must be conducted and job descriptions rewritten on an ongoing basis. The job evaluation committee then evaluates the jobs. Only when job factors change, or for some reason the weights assigned become inappropriate, does the plan become obsolete.

Competitive Compensation policies A compensation policy refers to choices that compensation professionals make to promote competitive advantage. Broadly, policy choices are made about pay level and pay mix. pay level compensation policies determine whether the company will be a pay leader, be a pay follower, or strive for an average position in the labor market. Pay level policies have the greatest impact on attracting and retaining employees. pay mix compensation policies refer to the combination of direct and indirect financial compensation and employee benefits components (see Figure 9-1) that make up an employee’s compensation package. Pay mix policies have the greatest impact on motivating employees. The components of the compensation package help focus an employee’s performance on what the employer expects, such as excellent customer service, sales, innovative use of technology, and so forth.

factor comparison method Job evaluation method that assumes there are five universal factors consisting of mental requirements, skills, physical requirements, responsibilities, and working conditions; the evaluator makes decisions on these factors independently.

point method Job evaluation method in which the raters assign numerical values to specific job factors, such as knowledge required, and the sum of these values provides a quantitative assessment of a job’s relative worth.

HR Web Wisdom

The Hay Group Guide Chart-Profile Method http://www.haygroup.com

Homepage of the Hay Plan, the most widely used job measurement system in the world, is provided.

ObjeCtive 9.6

Describe various competititve compensation policies.

compensation policy Policies that provide general guidelines for making compensation decisions.

pay level compensation policies Determine whether the company will be a pay leader (market lead), a pay follower (market lag), or assume an average position (market match) in the labor market.

pay mix compensation policies Combination of direct (core compensation) and indirect financial compensation (employee benefits) components that make up an employee’s total compensation package.

242 Part 4 • ComPensation

Pay Level Compensation Policies We will review the three pay level policies followed by pay mix. Figure 9-5 illustrates the market lead, market match, and market lag pay level policies.

MARkET LEAD Companies that pursue a market lead policy are organizations that pay higher wages and salaries than competing firms. Using this strategy, they feel that they will be able to attract high-quality, productive employees and thus achieve lower per-unit labor costs. Higher- paying firms usually attract more highly qualified applicants than lower-paying companies in the same labor market. The Mayo Clinic, headquartered in Rochester, Minnesota, is a pay leader.38 The Mayo Clinic is known for its leading research and medical care, which requires it to hire and retain bright and talented researchers and medical practitioners.

MARkET MATCH The market match policy is the average pay that most employers provide for a similar job in a particular area or industry. Many organizations have a policy that calls for paying the market rate. In such firms, management believes that it can still employ qualified people and remain competitive.

MARkET LAG Companies may choose to pay below the market rate (market lag policy) because of poor financial conditions or because they are hiring employees whose skills and expected impact on the company’s success are relatively lower than employees whose skills and expected impact are much greater. For example, in pharmaceutical companies that rely heavily on research and development, janitorial services workers might receive below-market pay rates compared to research scientists who are directly responsible for the firm’s success through innovative product development.

Besides the considerations already discussed, two additional issues bear mention. First, most companies do not pursue a single pay level policy. As emphasized in the market lag discussion, the relative importance of jobs to the company and the level of knowledge and skills required to perform the jobs influence pay policy level choices. Second, the principle of labor supply and demand factor into companies’ decisions about which pay policy levels to choose. For example, companies will likely choose the pay leader policy for jobs that are in high demand by compa- nies, but for which jobs are in relatively low supply. Consider the case of biomedical engineers.

Employment of biomedical engineers is projected to grow by 62 percent from 2010 to 2020, much faster than the average for all occupations. However, because it is a small occupation, the fast growth will result in only about 9,700 new jobs over the 10-year period.

market lead policies Pay policy that distinguishes companies from the competition by compensating employees more highly than most competitors. Leading the market denotes market levels above the market pay line.

market match policy Average pay that most employers provide for a similar job in a particular area or industry.

market lag policies Pay policy that distinguishes companies from the competition by compensating employees less than most competitors. Lagging the market indicates that market levels fall below the market pay line.

Figure 9-5 Pay Level Policy

Clerk I

$26,000

$24,000

$21,000

$18,000

$15,000

$12,000

Clerk II

Job Worth (Based on Job Evaluation)

A n

n u

a l Sa

la ry

Clerk III Chief Clerk

Ma rke

t M atc

h

Po licy

Ma rke

t La g P

olic y

Ma rke

t L ea

d

Po licy

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 243

The aging baby-boom generation is expected to increase demand for biomedical de- vices and procedures, such as hip and knee replacements, because this generation seeks to maintain its healthy and active lifestyle. Additionally, as the public has become aware of medical advances, increasing numbers of people are seeking biomedical advances for themselves from their physicians.

Biomedical engineers will likely experience more demand for their services because of the breadth of activities they engage in, made possible by the diverse nature of their training.

Biomedical engineers work with medical scientists, other medical researchers, and manufacturers to address a wide range of injuries and physical disabilities. Their ability to work in different activities with other professionals is enlarging the range of applica- tions for biomedical engineering products and services, particularly in healthcare.39

Pay Mix As noted earlier, pay mix compensation policies refer to the combination of direct and indirect financial compensation and employee benefits components (see Figure 9-1) that make up an employee’s compensation package. Pay policy mix may be expressed in dollars (or other cur- rency as relevant) or as a percentage of total dollars allocated for an employee’s total compensa- tion. Figure 9-6 illustrates an example of a pay policy mix.

This example indicates that base pay accounts for 57 percent of the money allocated to an employee’s total compensation. Let’s assume that the company spends $200,000 annually to fund a particular employee’s total compensation package. Of the total, an employee receives base pay in the amount of $114,000 (that is, $200,000 × 57 percent).

What is an appropriate pay mix? For policy purposes, it makes sense to consider guidelines for jobs within a particular structure (for example, managerial, administrative, or sales) because of the common job content and worker requirements of jobs within a particular structure. For exam- ple, in a technology company, a greater portion of incentive compensation might be allocated to engineers than to administrative staff. Engineers possess crucial skills relating to the company’s ability to find innovative applications of technology, and bonus incentives throughout the year may promote innovation initiatives. On the other hand, the administrative staff, though impor- tant to the company, may not play as important a role in determining the company’s profitability or objectives. Therefore, less of their total compensation would likely be devoted to incentive awards. Also, some employees, such as sales, may receive the majority of their compensation in the form of incentive pay. To motivate a sales force to continually exceed quarterly targets, quarterly bonuses equal to or exceeding their annual base salaries might be used.

Ability to Pay An organization’s assessment of its ability to pay is also an important factor in determining pay levels. Financially successful firms tend to provide higher-than-average compensation. However, an organization’s financial strength establishes only the upper limit of what it will pay. To arrive at a specific pay level, management must consider other factors.

Base Wage 57%

6%

10%

Benefits 27%

Short-Term Incentives

Long-Term Incentives

Figure 9-6 Pay Mix Policy

244 Part 4 • ComPensation

Market Competitive pay structures: job pricing Using Compensation surveys pay structures represent pay rate differences for jobs of unequal worth and the framework for recognizing differences in employee contributions. These structures result from an analysis based on compensation survey work. Compensation surveys involve the collection and subse- quent analysis of competitors’ compensation data. Compensation surveys traditionally focused on competitors’ wage and salary practices. Employee benefits have more recently also become a target of surveys because benefits are a key element of market-competitive pay systems. Compensation surveys are important because they enable compensation professionals to obtain realistic views of competitors’ pay practices. Companies recognize these differences by paying individuals according to their credentials, knowledge, or job performance. When completed, pay structures should define the boundaries for recognizing employee contributions. Well- designed structures should promote the retention of valued employees. Pay grades and pay ranges are structural features of pay structures.

Pay Grades A pay grade is the grouping of similar jobs to simplify pricing jobs. For example, it is much more convenient for organizations to price 15 pay grades than 200 separate jobs. The simplicity of this approach is similar to a college or university’s practice of grouping grades of 90–100 into an A category, grades of 80–89 into a B, and so on. In following this approach, you also avoid a false suggestion of preciseness. Although job evaluation plans may be systematic, none are scientific.

Plotting jobs on a scatter diagram is often useful to managers in determining the appropri- ate number of pay grades for a company. Looking at Figure 9-7, notice that each dot on the scat- ter diagram represents one job. The location of the dot reflects the job’s relationship to pay and evaluated points, which reflects its worth. When this procedure is used, a certain point spread determines the width of the pay grade (100 points in this illustration). Although each dot repre- sents one job, it may involve dozens of individuals who have positions in that one job. The large

ObjeCtive 9.7

Explain the use of compensation surveys for job pricing and determining market competitive pay structures.

pay structures Pay rate differences for jobs of unequal worth and the framework for recognizing differences in employee contributions.

compensation survey A means of obtaining data regarding what other firms are paying for specific jobs or job classes within a given labor market.

pay grade Grouping of similar jobs to simplify pricing jobs.

Average Pay per Hour

(Current Rates or Market Rates)

$19.80

18.50

17.20

15.90

14.60 14.00 13.30 12.90

12.00 100 200 300 400 500

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Evaluated Points

Pay Ranges for Pay Grades

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Summary Evaluated Points

0–99 100–199 200–299 300–399 400–500

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$12.00 13.30 14.60 15.90 17.20

$13.30 14.60 15.90 17.20 18.50

$14.60 15.90 17.20 18.50 19.80

Pay Grade Minimum Pay Range Midpoint Maximum

4 5

1

2

3

4

5

Figure 9-7 Scatter Diagram of Evaluated Jobs Illustrating the Wage Curve, Pay Grades, and Pay Ranges

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 245

dot at the lower left represents the job of receptionist, evaluated at 75 points. The receptionist’s hourly rate of $12.90 represents either the average wage currently paid for the job or its market rate. This decision depends on how management wants to price its jobs.

A wage curve (or pay curve) is the fitting of plotted points to create a smooth progression between pay grades. The curve often equates to the market match policy. The line drawn mini- mizes the distance between all dots and the line; a line of best fit may be straight or curved. However, when the point system is used, a straight line is often the result, as in Figure 9-7. The use of statistical methods to determine the line is essential given the sheer number of data points (pay rates) collected during the compensation survey process.

Pay Ranges After pay grades have been determined, the next decision is whether all individuals performing the same job will receive equal pay or whether pay ranges should be used. A pay range includes a minimum and maximum pay rate with enough variance between the two to allow for a signifi- cant pay difference. Pay ranges are generally preferred over single pay rates because they allow a firm to compensate employees according to performance and length of service. Pay then serves as a positive incentive. When pay ranges are used, a firm must develop a method to advance indi- viduals through the range. Companies typically use different range spreads for jobs that are more valuable to the company.

POINTS ALONG THE RANGE Referring again to Figure 9-6, note that anyone can readily determine the minimum, midpoint, and maximum pay rates per hour for each of the five pay grades. For example, for pay grade 5, the minimum rate is $17.20, the midpoint is $18.50, and the maximum is $19.80. The minimum rate may be the hiring-in rate that a person receives when joining the firm, although in practice, new employees often receive pay that starts above this level. The maximum pay rate represents the maximum that an employee can receive for that job regardless of how well he or she performs the job.

PROBLEM OF TOPPING OUT A person at the top of a pay grade will have to be promoted to a job in a higher pay grade to receive a pay increase unless (1) an across-the-board adjustment is made or (2) the job is re-evaluated and placed in a higher pay grade. This situation has caused numerous managers some anguish as they attempt to explain the pay system to an employee who is doing a tremendous job but is at the top of a pay grade. Consider this situation:

Everyone in the department realized that Beth Smithers was the best administrative assistant in the company. At times, she appeared to do the job of three people. Bob Marshall, Beth’s supervisor, was especially impressed. Recently, he had a discussion with the human resource manager to see what he could do to get a raise for Beth. After Bob described the situation, the human resource manager’s only reply was, “Sorry, Bob. Beth is already at the top of her pay grade. There is nothing you can do except have her job upgraded or promote her to another position.

Situations like Beth’s present managers with a perplexing problem. Many would be inclined to make an exception to the system and give Beth a salary increase. However, this action would violate a traditional principle, which holds that every job in the organization has a maximum value, regardless of how well an employee performs the job. The rationale is that making exceptions to the compensation plan would result in widespread pay inequities. Having stated this, today many organizations are challenging traditional concepts as they strive to retain top- performing employees.

RATE RANGES AT HIGHER LEvELS The rate ranges established should be large enough to provide an incentive to do a better job. At higher levels, pay differentials may need to be greater to be meaningful. There may be logic in having the rate range become increasingly wide at each consecutive level. Consider, for example, what a $200-per-month salary increase would mean to a file clerk earning $2,000 per month (a 10 percent increase) and to a senior cost accountant earning $5,000 per month (a 4 percent increase). Assuming an inflation rate of 4 percent, the accountant’s real pay would remain unchanged.

wage curve Fitting of plotted points to create a smooth progression between pay grades (also known as the pay curve).

pay range Minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference.

246 Part 4 • ComPensation

Broadbanding broadbanding is a technique that collapses many pay grades (salary grades) into a few wide bands to improve organizational effectiveness. Employees today perform more diverse tasks than they pre- viously did. Broadbanding creates the basis for a simpler compensation system that de-emphasizes structure and control and places greater importance on judgment and flexible decision making. Bands may also promote lateral development of employees and direct attention away from vertical promotional opportunities. The decreased emphasis on job levels should encourage employees to make cross-functional moves to jobs that are on the same or an even lower level because their pay rate would remain unchanged. Broadbanding allows for more flexibility within ranges, allows more movement of employees within the ranges, and can reduce the need for promotions.40

The use of broadbanding has declined in recent years. Although broadbanding is success- ful in some organizations, the practice is not without pitfalls. Because each band consists of a broad range of jobs, the market value of these jobs may also vary considerably. Unless carefully monitored, employees in jobs at the lower end of the band could progress to the top of the range and become overpaid.41

Two-Tier Wage System two-tier wage systems reward newly hired employees less than established employees. Under the temporary basis, employees have the opportunity to progress from lower entry-level pay rates to the higher rates enjoyed by more senior employees. Permanent two-tier systems reinforce the pay-rate distinction by retaining separate pay scales: Lower-paying scales apply to newly hired employees, and current employees enjoy higher-paying scales. Although pay progresses within each scale, the maximum rates to which newly hired employees can progress are always lower than more senior employees’ pay scales.

Two-tier wage systems are more prevalent in unionized companies. For example, at Ford Motor Company, a two-tier wage structure will compensate new hires substantially less than other employees, including an hourly base rate that is $10 below the previous one.42 However, labor representatives have reluctantly agreed to two-tier wage plans as a cost-control measure. In exchange for reduced compensation costs, companies have promised to limit layoffs. These plans represent a departure from unions’ traditional stance of single base-pay rates for all employees within job classifications.

Two-tier pay structures also enable companies to reward long-service employees while keep- ing costs down by paying lower rates to newly hired employees who do not have an established per- formance record within the company. As senior employees terminate their employment (i.e., taking jobs elsewhere or retiring), they are usually replaced by workers who are compensated according to the lower-paying scale.

Adjusting Pay Rates When pay ranges have been determined and jobs assigned to pay grades, it may become obvi- ous that some jobs are overpaid and others underpaid. Underpaid jobs are normally brought up to the minimum of the pay range as soon as possible. Referring again to Figure 9-6, you can see that a job evaluated at about 225 points and having a rate of $14.00 per hour is represented by a circled dot immediately below pay grade 3. The job was determined to be difficult enough to fall in pay grade 3 (200–299 points). However, employees working in the job are being paid 60  cents per hour less than the minimum for the pay grade ($14.60 per hour). If one  or more female employees should be in this circled job, the employer might soon learn more than desired about the Equal Pay Act and the Fair Pay Act. Good management practice would be to correct this inequity as rapidly as possible by placing the job in the proper pay grade and increasing the pay of those in that job.

Overpaid jobs present a different problem. Figure 9-6 illustrates an overpaid job for pay grade 4 (note the circled dot above pay grade 4). Employees in this job earn $19.00 per hour, or 50 cents more than the maximum for the pay grade. An ideal solution to the problem of an overpaid job is to promote the employee to a job in a higher pay grade. This is a great idea if the employee is qualified for a higher-rated job and a job opening is available. Another possibility would be to bring the job rate and employee pay into line through a pay cut. Although this decision may appear logical, it is

broadbanding Compensation technique that collapses many pay grades (salary grades) into a few wide bands to improve organizational effectiveness.

two-tier wage system A wage structure where newly hired workers are paid less than current employees for performing the same or similar jobs.

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 247

generally not a good management practice because this action would punish employees for a situa- tion they did not create. Somewhere in between these two possible solutions is a third: to freeze the rate until across-the-board pay increases bring the job into line.

Pricing jobs is not an easy task. It requires effort that never ends. It is one of those tasks that managers may dislike but must do anyway.

Salary Compression salary compression occurs when less experienced employees are paid as much as or more than employees who have been with the organization a long time as a result of a gradual increase in starting salaries and limited salary adjustments for long-term employees. Salary compression continues to be a major challenge for compensation managers even in a recession when pay cuts and freezes were the focus of the daily news.

Salary compression typically occurs when there is only a minimum pay differential with various skills and responsibility levels. Salary compression can cause people in jobs of less responsibility to make more than workers in jobs that have more responsibility. For example, salary compression occurs when a worker earns as much or more than their supervisor. Reasons for this imbalance may be caused by the employee being paid overtime or a premium for the job whereas the supervisor cannot earn these benefits.

As workers discover inequities in their pay, resentment and lower productivity may follow with the employees ultimately leaving the company when the economy improves. Further, from a risk management perspective, companies need to make sure that salary compression is not causing problems with such laws as the Equal Pay Act. Unfortunately, no easy solution is avail- able, and it is projected that the gap between current and new employees is getting wider and will continue to do so.

The solution to salary compression is simple; unfortunately the solution usually requires money, which is limited for most organizations. A company can build in compression funding to any annual budget increases. Still yet another way to remedy salary compression is to focus a primary portion of raises to your best employees and not waste compensation on across-the-board adjustments.

salary compression Situation that occurs when less experienced employees are paid as much as or more than employees who have been with the organization a long time due to a gradual increase in starting salaries and limited salary adjustments for long-term employees.

e t H i c a l D i l e m m a

But He’s a Friend You have worked for your company for more

than 30 years, and you have been the CEO much of this time. The company has grown to be one of the most successful firms in the world and your reputation is viewed as impeccable. The company was basically nothing when you arrived.

You have a close friend who joined the firm shortly after you did. You went to the same university and were friends in the same frater- nity. As you built the company, your friend prospered with you. In fact, many believe that if something happened to you, he would be offered your position. As your CFO, you have given your friend tremendous power. But you believe that he has earned it because he has devel- oped the most productive and well-respected unit in the company. In fact, many of the rising stars in the country want to work for him. Seemingly, he can do no wrong.

But a shocking tale is related to you one morning by a young CPA, and a friend of the family who works in the department overseen by your friend. He tells you of a plot he believes your friend has devised that can significantly improve the financial picture for the firm in the short run. The plan involves delaying reporting of certain expenses

that could result in a significant stock price increase and a bonanza for your friend if he chooses to exercise his stock options. You are aware that he has recently gone through a bitter divorce that has had a dev- astating effect on his financial well-being. You think, “He is not a bad guy, just in a bad situation.”

Your young friend is obviously fearful of the repercussions of reporting what he has discovered. If what he said is true and your friend exercises his stock options, it could result in the Securities and Exchange Commission (SEC) getting involved and a public relations disaster for you. Because everyone is aware of your friendship, both reputations could be severely damaged. There would also likely be financial penalties for the firm. You believe the young man will keep quiet about what he believes is occurring if you ask him to, but you are left with a dilemma. The CFO is your closest friend and you both have survived many business encounters in the past. 1. What would you do? 2. What factor(s) in this ethical dilemma might influence a person

to make a less-than-ethical decision?

248 Part 4 • ComPensation

sales representative Compensation Designing compensation programs for sales employees involves unique considerations. Bob Cartwright, SPHR, president and CEO of Texas-based Intelligent Compensation LLC, advises companies on sales strategies saying, “Understanding what the business needs are, where the gaps exist and what needs to be driven to get business from point A to point B—that’s the key.”43 Proper ratio of base pay, commissions, and bonuses must be established. For this reason, this task may belong to the sales staff rather than to HR. Nevertheless, many general compensation practices apply to sales jobs. For example, job content, relative job worth, and job market value are all relevant factors.

The straight salary approach is one extreme in sales compensation. In this method, sales- persons receive a fixed salary regardless of their sales levels. Organizations use straight salary primarily to emphasize product support after the sale. For instance, sales representatives who deal largely with the federal government on a continuous basis often receive this form of compensation.

At the other extreme is straight commission, in which the person’s pay is totally deter- mined as a percentage of sales. If the salesperson makes no sales, the individual receives no pay. On the other hand, highly productive sales representatives can earn a great deal of money under this plan.

Between these extremes are the endless varieties of part-salary, part-commission combinations. The possibilities increase when a firm adds various types of bonuses to the basic compensation pack- age. The emphasis given to either commission or salary depends on several factors, including the organization’s philosophy toward service, the nature of the product, and the amount of time required to close a sale.

ObjeCtive 9.8

Discuss compensation for sales professionals.

Contingent Worker Compensation As we discussed in Chapter 5, contingent workers are those who do not have an implicit or explicit contract for ongoing employment. Contingent workers are employed through an employ- ment agency or on an on-call basis and often earn less than traditional employees. Flexibility and lower costs for the employer are key reasons for the growth in the use of contingent workers. An inherent compensation problem relates to internal equity. You may have two employees working side by side, one a contingent worker and the other a regular employee, performing the same or near identical tasks, and one makes more money than the other. In most cases, contingents earn less pay and are far less likely to receive health or retirement benefits than their permanent coun- terparts.44 In March 2013, 74 percent of full-time workers were offered participation in a health insurance plan whereas only 24 percent of part-time workers were offered the same.45 Similarly, 74 percent of full-time workers had access to retirement plans whereas this was the case for only 37 percent of part-time workers.

executive Compensation Although there has been considerable discussion regarding what some say are excessive salaries by executives, one should remember that the skills possessed by company executives largely determine whether a firm will prosper, survive, or fail. A company’s executive compensation program is a critical factor in attracting and retaining the best available talent. Thus, compensa- tion programs need to be developed that motivate these executives to strive to achieve long-term success for the firm. The five main components of executive compensation packages include: base salary, bonuses and performance-based pay, stock option plans, perquisites (perks), and severance packages.

ObjeCtive 9.9

Discuss compensation for contingent workers.

ObjeCtive 9.10

Explain executive compensa- tion and the various features of executive compensation packages.

Try It! If your professor has assigned this, sign onto mymanagementlab.com to complete the Motivation simulation and test your application of these concepts when faced with real-world decisions.

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 249

Base Salary Although it may not represent the largest portion of the executive’s compensation package, base salary is obviously important. It is a factor in determining the executive’s standard of living. Salary also provides the basis for other forms of compensation; for example, it may determine the amount of bonuses and certain benefits. The U.S. tax law does not allow companies to deduct more than $1 million of an executive’s salary unless it is performance based and meets specified criteria.46

Bonuses and Performance-Based Pay As shareholders become increasingly disenchanted with the high levels of executive compen- sation for less-than-stellar accomplishments, performance-based pay is gaining in popularity. Although the Dodd–Frank Act has influenced executive pay, it appears that the greater influence has been the initiative to link pay to performance.47 If pay for performance is appropriate for lower-level employees, should top executives be exempt from the same practice? The true super- stars can still have huge earnings if their targets are met.

Payment of bonuses reflects a managerial belief in their incentive value. Cash bonuses, paid periodically based on performance goals, often provide real incentives. In the past, bonuses could be quite large and often were not tied to “real” performance goals. Hopefully, million-dollar pay packages not tied to performance are a thing of the past.

The Dodd–Frank Act requires the Securities and Exchange Commission (SEC) and other agencies to regulate incentive pay at financial institutions. The SEC requires that institutions with $1 billion or more in assets (about 380 firms) be required to discourage “inappropriate risk” and disclose bonus details. Firms with $50 billion in assets (about 30 firms) would have to defer at least half of the top executives’ bonuses for three years. These mechanisms are designed to discourage short-term thinking.

Stock Option Plans Stock option plans give the executive the option to buy a specified amount of stock in the future at or below the current market price. The stock option is a long-term incentive designed to integrate the interests of management with those of the organization. To ensure this integration, some boards of directors require their top executives to hold some of the firm’s stock. Stock options have lost some of their appeal because of accounting rule changes that require companies to value and book an appropriate expense for options as they are granted. Nevertheless, there are several bona fide reasons for including stock ownership in executive compensation plans. In addition to potentially aligning employees’ interests with those of shareholders, retaining top executives is also a factor.

Perquisites (Perks) perquisites (perks) are any special benefits provided by a firm to a small group of key executives and designed to give the executives “something extra.” Possible executive’s perks include a company-provided car, limousine service, and use of the company plane and yacht. The SEC has lowered the threshold for disclosure of executive perks from $50,000 to $10,000. Once-hidden information regarding perks must now be disclosed. Compensation committees are now focusing more on core incentives such as salaries, bonuses, and long-term incentives and cutting perks and severance pay. Perks such as having a corporate jet or yacht are things that upset the public and legislators. David E. Gordon of Frederic W. Cook & Co., a compensation consultancy, said, “These kinds of perks just aren’t worth it. They are a small fraction of overall compensation but have the ability to get 50 percent of the attention.”48

A decrease in executive perquisites is a key prediction of the Dodd–Frank Act. In 2008, 60 percent of companies granted more than three perks to the top brass, whereas just 6 percent offered their senior managers zero perks. Five years later, just 33 percent offer three or more such extras, whereas a full 15 percent offer none at all.49

Severance Packages What most people may not understand is that massive severance payments are not set up by a board of directors after a CEO has quit or been fired. These payments were negotiated prior to being hired. Not only should CEO pay be considered but CEO pay contracts should also be examined. But hopefully the environment is changing.

perquisites (perks) Special benefits provided by a firm to a small group of key executives and designed to give the executives something extra.

250 Part 4 • ComPensation

The SEC has adopted far-reaching executive compensation disclosure rules that apply to publicly traded companies. The new rules require companies to list all the agreements for each executive, to disclose the payment triggers, and, most importantly, to give an estimated dollar value of potential payments and benefits and the specific factors used to determine them. For the first time, investors will see the estimated total dollar value of the exit packages. No longer will these agreements become exposed only at the time of a merger and acquisition deal or when the board removes a CEO.

Executive Compensation Issues in the United States For some time now, executive pay for the nation’s highest-paid chief executives, including salary, bonuses, perks, and stock options, has been a lightning rod for criticism and debate.50 In fact, every day there seems to be another story related to highly lucrative executive pay. The AFL-CIO, which is a federation of labor unions, has even set up an Executive PayWatch Web site. According to the site, CEOs of the top 299 companies in the Standard & Poor’s 500 Index received, on average, $12.3 million in total compensation in 2012. That is 354 times the average worker’s median pay of $34,645.51 Other studies have estimated the pay difference as even higher. No matter what figure is chosen, it is evident that the pay gap between the most affluent executives and the average worker has become enormous. It is difficult for workers who make $12 to $18 an hour to appreciate why these executives merit such large salaries. This obvious disparity has caused considerable discus- sion regarding the proper ratio of CEO compensation to that of the average worker.52

Examples of lucrative executive compensation practices abound. For example, James J. Mulva, who stepped down as CEO of ConocoPhillips after 10 years, received an exit package worth $157 million, which is the largest award in 2012. Much of the payout came from the market value of stock gains he received as well as payouts from a cash severance, a bonus, and additional retire- ment distributions.53 Occidental Petroleum chief Ray Irani received a five-year total compensation of $127,447,000. In 2006, thanks to a rise in oil prices and the company’s payment scheme, Irani took home a total of $460 million. In 2010, he took home nearly $59  million in salary, perks, bonuses, and other stock awards.54 Some CEOs, like Richard Fuld of Lehman Brothers, took home more pay, despite the fact that Lehman Brothers set a record as the largest bankruptcy.55 The ques- tion of what is excessive compensation has emerged as the number one concern of shareholders.

There continues to be attempts to hold down executive salaries. However, sometimes it appears as though as soon as one compensation loophole is filled, another one emerges. IRS rules, for instance, state that performance-based compensation does not count toward the $1 million maximum deduction that companies can take on compensation paid to top executives. Thus, there was an explosion in bonuses and deferred compensation. Once that loophole was defused, another one was found. IRS restrictions are relaxed once an executive has left the firm, so there was an increase in generous postretirement perks.56

Many believe the Dodd–Frank Act will have a significant impact on executive compensa- tion practices.57 A recent sample survey suggests that the Dodd–Frank Act may already have an impact on CEO pay relative to company performance. This survey showed that more than half of the compensation awarded to CEOs in 2012 was tied to performance.58 And some CEOs still receive compensation packages that most would perceive as excessive. Larry Ellison, CEO of Oracle, has accepted more than $60 million in stock options every year since 2008. Apple’s new CEO Tim Cook got a package worth $378 million for his first year.59

Air Products & Chemicals, Inc., maker of industrial gases, instituted a 65 percent cut in CEO John McGlade annual bonus in 2012 because company performance fell substantially below its growth target. In addition, a cut in stock options resulted in a reduction in total direct compensation by 19 percent.60 Now if Air Products & Chemicals, Inc., does well in the long run, both McGlade and the company benefit.

Three provisions in the Dodd–Frank Act relate to say on pay, golden parachute contracts, and clawback policies.61 The provision for say on pay gives shareholders in all but the smallest companies an advisory vote on executive pay. This is something that governance advocates have long wanted. Those who support the concept of say on pay believe that the vote will cause greater accountability on executive pay decisions.62 The Dodd–Frank Act requires 5,000 compa- nies to hold nonbinding shareholder say-on-pay votes at least every three years. Companies must also hold shareholder votes on the frequency of say on pay with the option of one, two, or three years, or to abstain. Frequency votes are required to be held every three years. Thus far,

say on pay Provision that gives shareholders in all but the smallest companies an advisory vote on executive pay.

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 251

shareholder votes appear to be highly favorable in support of company pay plans. A survey by Semler Brossy revealed that 76 percent of companies have passed say on pay with more than 90 percent shareholder approval.63 A recent study found that boards that give CEOs higher pay opportunities are more likely to receive lower levels of support in shareholder say-on-pay votes than those with lower CEO pay.64 Also, shareholders appear to want their say on pay on an annual basis as opposed to every two or three years.65 Institutional Shareholder Services (ISS), which recommends mutual funds and other large shareholders on how to vote in corporate elec- tions, has recommended “no” votes on executive pay in about 13 percent of the proposals it has reviewed this proxy season.66 All of the companies with a failed say-on-pay vote in 2012 had a negative recommendation from the proxy advisory firm ISS.67 One major company to receive a negative vote on say on pay was Spectrum Pharmaceuticals. The negative vote may have been influenced by the high pay relative to shareholder return.68

A golden parachute contract is a perquisite that protects executives in the event that another company acquires their firm or if the executive is forced to leave the firm for other reasons. To hire and retain talented individuals, some corporations negotiate employment agreements that include golden parachutes.69 At times, golden parachute contracts have been abused. As an extreme example, CEO Robert Nardelli left Home Depot with a golden parachute worth $210 million even though Home Depot’s stock performed poorly.70

The Dodd–Frank Act has disclosure requirements for golden parachute arrangements between the companies and their executive officers. It requires a shareholder advisory vote on certain para- chute arrangements where shareholder approval of the business combination itself is sought. Legally, a “no” vote has little effect because the vote is advisory, and the vote cannot bind a company or its board to overrule any company or board decision or change or add to the company’s or board’s duties. But from a shareholder relations viewpoint, the answer is more problematic. A “no” vote may indicate future shareholder involvement.71 Largely as a result of the Dodd–Frank Act, although golden parachutes continue to exist, many companies have scaled back the change-in-control sever- ance payments to ward off shareholders’ concerns and line up with evolving best practices.72 Although golden parachutes are commonly used, mounting examples of shareholders’ rejections of these proposals is evident. For example, H. J. Heinz Company was sold to 3G Capital and Berkshire Hathaway. Heinz’s shareholders rejected a proposed golden parachute arrangement including $56 million for chairman, president, and CEO Bill Johnson that included stock awards accelerated by the planned sale.73A clawback policy allows the company to recover compensation if a later review indicates that payments were not calculated accurately or performance goals were not met. The Dodd–Frank Act requires companies to develop clawback policies to recover compensation later deemed excessive.74 The clawback is a procedure included in an executive’s employment con- tract that allows the company to recover payments made through performance-based incentives under certain circumstances.75 It requires executives to return incentive pay if the results on which it was granted are later adjusted downward for any reason. The CEO of Atlanta-based homebuilder Beazer Homes paid back $6.5 million in bonus pay and stock profits to settle an SEC complaint. According to the complaint, CEO Ian McCarthy failed to reimburse the company for cash bonuses, incentive and equity-based compensation, and profits from Beazer stock sales that he received in the year after the company filed fraudulent financial statements.76

Executive Compensation in the Global Environment The pay gap between the most affluent executives and the average worker in the United States remains wide. It has been reported that the ratio between CEO and the average worker is 354 to 1 in the United States. By contrast, the ratio is 50 in Venezuela, 22 in Britain, 20 in Canada, and 11 in Japan.77 Whereas people in the United States derive great status from high pay, nations in large parts of Europe and Asia shun conspicuous wealth.

Governance of executive pay varies from country to country, but there is a definite increase in shareholder influence on executive pay issues from Europe to North America to Asia Pacific and beyond. This trend will likely continue. Shareholders in Europe have been the leaders of the push. Executives at French firms face binding shareholder votes on certain aspects of their pay packages, including share options and retirement packages. Another proposal in France requires that severance payments be conditional on performance—a practice essentially unheard of in the past. Also, European governments are trying to exert more direct influence over executive pay as well. Legislators in the Netherlands want to limit nonperformance-based compensation by

golden parachute contract Perquisite that protects executives in the event that another company acquires their firm or the executive is forced to leave the firm for other reasons.

clawback policy Allows the company to recover compensation if subsequent review indicates that payments were not calculated accurately or performance goals were not met.

252 Part 4 • ComPensation

imposing an additional tax on salary and severance payments.78 Starting in 2003, public com- panies in the United Kingdom were required to give shareholders an advisory up-or-down vote on executive pay packages. Although the say-on-pay vote is nonbinding, advocates believe that it has increased the discussion between companies and large investors, which resulted in an improved alignment between pay and performance. As an example, share option plans, which were criticized for rewarding short-term share price volatility over long-term value creation, have been largely replaced with performance-contingent stock.79

Investors in the Netherlands, Sweden, Norway, and Switzerland can cast a binding vote on executive pay. In addition, Switzerland’s law, passed in 2013, prohibits awarding signing bonuses or termination bonuses. Severe fines will be levied on companies that violate the new rules.80 Across Europe, companies are making efforts to improve executive pay disclosure. It is quite likely these trends will continue in the wake of the recent recession. The United States has been slow to react to compensation governance, but there is evidence that this may be changing. As part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, shareholders get a nonbinding vote on executive pay and generous packages set up for executives who part ways with the company.

summary 1. Describe direct financial compensation (core compen-

sation), indirect financial compensation (employee benefits), and nonfinancial compensation. Compensation (core compensation) is the total of all rewards provided employees in return for their services. Direct financial compensation consists of the pay that a person receives in the form of wages, salaries, commissions, and bonuses. Indirect financial compensation (employee benefits) con- sists of all financial rewards that are not included in direct financial compensation. Nonfinancial compensation con- sists of the satisfaction that a person receives from the job itself or from the psychological or physical environment in which the person works.

2. Idenify and discuss the components of direct financial compensation. The components include base pay (hourly wage and salary) and various adjustments to base pay over time. The categories are cost-of-living adjustments, senior- ity pay, performance-based pay (merit pay and various types of incentive pay practices), and person-focused pay (including competency-based pay).

3. Review the determinants of direct financial compensation. HR professionals engage in a variety of activities to establish job structures, compensation policies, and pay structures. Each of these structures is based on a variety of practices. For example, job structures are the outcome of the implementation of both job analaysis and job evaluation techniques.

4. Describe contextual influences on direct financial com- pensation. There are many factors that HR professionals

must take into account when building compensation programs. The most prominent considerations are labor unions, the economy, interindustry wage differentials, and a variety of legislation.

5. Discuss how to use job evaluation to build job structures. Job evaluation is a process that determines the relative value of one job in relation to another. In the job evalua- tion ranking method, the raters examine the description of each job being evaluated and arrange the jobs in order according to their value to the company. The classification method involves defining a number of classes or grades to describe a group of jobs. In the factor comparison method, raters need not keep the entire job in mind as they evaluate; instead, they make decisions on separate aspects or factors of the job. In the point method, raters assign numerical val- ues to specific job factors, such as knowledge required, and the sum of these values provides a quantitative assessment of a job’s relative worth.

6. Describe various competitive compensation policies. Broadly, competitive pay policies refer to pay level and pay mix. Pay level choices include whether to lag, match, or lead the market pay rates, on average. Pay mix refers to the composition of an employee’s direct (core compensation) and indirect (employee benefits) financial compensation. Choices about how to structure pay (for example, base pay, short-term incentives, and employee benefits versus incen- tives and employee benefits) must be made.

7. Explain the use of compensation surveys for job pric- ing and determining market competitive pay structures.

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 253

Compensation surveys enable HR professionals to know the pay level and pay mixes of its competitors. Assigning dollar values to the company’s jobs is considered to be job pricing.

8. Discuss compensation for sales representatives. Designing compensation programs for sales employees involves unique considerations such as the formula for determining incentive payments.

9. Discuss compensation for contingent workers. Contingent workers are employed on the expectation of a defined term of employment. Most often, contingent workers receive less

pay and employee benefits than workers who do not have an expectation of a defined term of employment.

10. Explain executive compensation and the various fea- tures of executive compensation packages. In determining executive compensation, firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance. Executive compensation often has five basic elements: (1) base salary, (2) bonuses and performance-based pay, (3) stock option plans, (4) executive performance-based pay, (5) perquisites, and (6) severance packages.

MyManagementLab® Go to mymanagementlab.com to complete the problems marked with this icon .

Key terms compensation 225 direct financial compensation (core

compensation) 225 indirect financial compensation

(empoloyee benefits) 225 nonfinancial compensation 225 base pay 227 hourly pay (wage) 227 salary 227 cost-of-living adjustment (COLA) 227 real hourly compensation 227 nominal hourly compensation 227 seniority 227 seniority pay 227 human capital theory 227 human capital 228 General Schedule 228 merit pay 229 merit bonuses 230 spot bonuses 231 incentive pay 231 piecework 231 management incentive plans 231 behavioral encouragement plans 231

referral plans 232 gain sharing 233 Scanlon plan 233 profit sharing 234 vesting 234 employee stock plans 235 company stock 235 company stock shares 235 stock options 235 employee stock option plans

(ESOPs) 235 stock compensation plans 235 deferred compensation 235 job-based pay 235 person-focused pay 235 skill-based pay 235 competency-based pay 236 labor market 237 spillover effect 237 interindustry wage or compensation

differentials 237 exempt employees 239 nonexempt employees 239 job structure 240

job evaluation 240 job evaluation ranking method 240 classification method 240 factor comparison method 241 point method 241 compensation policy 241 pay-level compensation policies 241 market lead policies 242 market match policies 242 market lag policies 242 pay mix compensation policies 241 pay structures 244 compensation survey 244 pay grade 244 wage curve 245 pay range 245 broadbanding 246 two-tier wage systems 246 salary compression 247 perquisites (perks) 249 say on pay 250 golden parachute contract 251 clawback policy 251

exercises 9-1. What form of incentive compensation might be used for

the following jobs to increase productivity? a. machine operator b. automobile salesperson c. group of five people cooperating to get the job done 9-2. The section on Executive Compensation provided statis-

tics that suggest that some executives today may be paid excessively high salaries. What might be some pros and cons for paying large salaries to top executives?

9-3. What form of equity is involved if you hear one of your employees say the following?

a. That guy at XYZ Company does the same type work I do but gets $10,000 more a year.

b. That person in maintenance makes more than I do as the maintenance manager.

c. I joined the firm the same time he did and now he is making $10,000 more than me for doing the same job.

254 Part 4 • ComPensation

i n c i D e n t 1 A Motivated Worker Bob Rosen could hardly wait to get back to work Monday morning. He was excited about his chance of getting a large bonus. Bob is a machine operator with Ram Manufacturing Company, a producer of electric motors in Wichita, Kansas. He operates an armature-winding machine. The machine winds copper wire onto metal cores to make the rotating elements for electric motors.

Ram pays machine operators on a graduated piece-rate basis. Operators are paid a certain amount for each part made, plus a bonus. A worker who produces 10 percent above standard for a certain month receives a 10 percent additional bonus. For 20 percent above standard, the bonus is 20 percent. Bob realized that he had a good chance of earning a 20 percent bonus that month. That would be $1,787.

Bob had a special use for the extra money. His wife’s birthday was just three weeks away. He was hoping to get her a car. He had already saved $4,000, but the down payment on the car was $5,500. The bonus would enable him to buy the car.

Bob arrived at work at seven o’clock that morning, although his shift did not begin until eight. He went to his workstation and

checked the supply of blank cores and copper wire. Finding that only one spool of wire was on hand, he asked the forklift truck driver to bring another. Then, he asked the operator who was working the graveyard shift, “Sam, do you mind if I grease the machine while you work?”

“No,” Sam said, “that won’t bother me a bit.” After greasing the machine, Bob stood and watched Sam work.

He thought of ways to simplify the motions involved in loading, wind- ing, and unloading the armatures. As Bob took over the machine after the eight o’clock whistle, he thought, “I hope I can pull this off. I  know the car will make Kathy happy. She won’t be stuck at home while I’m at work.”

Questions 9-24. Explain the advantages of a piecework pay system such as that

at Ram. 9-25. What might be problems associated with the piecework pay

system?

Questions for review 9-4. Define each of the following terms: (a) compensation (b) direct financial compensation (c) indirect financial compensation (d) nonfinancial compensation 9-5. What are the contextual influences on direct financial

compensation? 9-6. Discuss the determinants of direct financial

compensation. 9-7. Discuss the difference between pay-for-performance

and person-focused pay. 9-8. What are the differences between pay level and pay mix

compensation policies? 9-9. How has government legislation affected compensation? 9-10. What is the difference between an exempt and a nonex-

empt employee? 9-11. Define job evaluation. Give the primary purpose of job

evaluation. 9-12. Distinguish between the following job evaluation

methods: (a) ranking (b) classification (c) factor comparison (d) point method

9-13. Define job pricing. What is the purpose of job pricing? 9-14. Define pay grades. State the basic procedure for deter-

mining pay grades. 9-15. Define pay ranges. What is the purpose of establishing

pay ranges? 9-16. Define broadbanding. What is the purpose of using

broadbanding? 9-17. Distinguish between merit pay, bonus, spot bonuses,

and piecework. 9-18. Discuss the main issues that are associated with com-

pensating contingent workers. 9-19. What are some companywide pay plans? Briefly discuss

each. 9-20. How is the compensation for sales representatives

determined? 9-21. Describe each of the following: (a) say on pay (b) golden parachute contract (c) clawback policies 9-22. What are the various types of executive compensation? 9-23. How does executive pay in the United States compare to

executive compensation in the global environment?

ChaPter 9 • DireCt FinanCial ComPensation (Core ComPensation) 255

i n c i D e n t 2 The Controversial Job David Rhine, compensation manager for Farrington Lingerie Company, was generally relaxed and good-natured. Although he was a no- nonsense, competent executive, David was one of the most popular managers in the company. This Friday morning, however, David was not his usual self. As chairperson of the company’s job evaluation committee, he had called a late-morning meeting at which several jobs were to be considered for re-evaluation. The jobs had already been rated and assigned to pay grade 3. But the office manager, Ben Butler, was upset that one was not rated higher. To press the issue, Ben had taken his case to two executives who were also members of the job evaluation committee. The two executives (production manager Bill Nelson and general marketing manager Betty Anderson) then requested that the job ratings be reviewed. Bill and Betty supported Ben’s side of the dispute, and David was not looking forward to the confrontation that was almost certain to occur.

The controversial job was that of receptionist. Only one recep- tionist position existed in the company, and Marianne Sanders held it. Marianne had been with the firm 12 years, longer than any of the committee members. She was extremely efficient, and virtually all the executives in the company, including the president, had noticed and commented on her outstanding work. Bill Nelson and Betty Anderson were particularly pleased with Marianne because of the cordial man- ner in which she greeted and accommodated Farrington’s customers

and vendors, who frequently visited the plant. They felt that Marianne projected a positive image of the company.

When the meeting began, David said, “Good morning. I know that you’re busy, so let’s get the show on the road. We have several jobs to evaluate this morning and I suggest we begin…” Before he could finish his sentence, Bill interrupted, “I suggest we start with Marianne.” Betty nodded in agreement. When David regained his composure, he quietly but firmly asserted, “Bill, we are not here today to evaluate Marianne. Her supervisor does that at performance appraisal time. We’re meeting to evaluate jobs based on job content. To do this fairly, with regard to other jobs in the company, we must leave personalities out of our evalu- ation.” David then proceeded to pass out copies of the receptionist job description to Bill and Betty, who were obviously very irritated.

Questions 9-26. Do you feel that David was justified in insisting that the job,

not the person, be evaluated? Discuss. 9-27. Do you believe that there is a maximum rate of pay for every

job in an organization, regardless of how well the job is being performed? Justify your position.

9-28. Assume that Marianne is earning the maximum of the range for her pay grade. In what ways could she obtain a salary increase?

MyManagementLab® Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

9-29. Why is it important for HR professionals to understand legislation, labor unions, and interindustry wage differentials when establishing compensation programs?

9-30. Why might a firm want to be a pay leader as opposed to paying market rate?

endnotes Scan for Endnotes or go to http://www.pearsonhighered.com/mondy

256

1 Define indirect financial compensation (employee benefits).

2 Describe legally required benefits.

3 Define discretionary benefits and explain the various types of discretionary benefits.

4 Discuss the alternative types of health care plans.

5 Explain the various kinds of retirement plans.

6 Summarize life insurance and disability insurance.

7 Describe alternative paid time off policies.

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Over 10 million students improved their results using the Pearson MyLabs. Visit mymanagementlab.com for simulations, tutorials, and end-of-chapter problems.

8 Identify employee service benefits.

9 Describe the premium pay benefit practice.

10 Discuss voluntary benefits.

11 Explain the various employee benefit laws.

12 Describe customized benefit plans.

13 Discuss global issues in employee benefits.

14 Summarize the issues of communicating information about benefit plans.

15 Explain workplace flexibility (work-life balance).

10 Indirect Financial Compensation (Employee Benefits) Chapter ObjeCtives After completing this chapter, students should be able to:

257

Learn It If your professor has chosen to assign this, go to mymanagementlab.com to see what you should particularly focus on and to take the Chapter 10 Warm-Up.

indirect Financial Compensation (employee benefits) Most organizations recognize that they have a responsibility to their employees to provide certain benefits such as insurance and other programs for their health, safety, security, and general welfare (see Figure 10-1). indirect financial compensation (employee benefits) consists of all financial rewards not included in direct financial compensation. They typically account for about 30 percent of a firm’s financial compensation costs. In December 2013, employers spent, on average, $9.80 per hour worked for each employee to provide benefits. The most expensive benefit was health insur- ance, which cost $2.70 per hour worked for each employee.1 Despite the rising costs of benefits, firms continue to offer them to attract and retain highly qualified employees.2 In addition, according to a recent SHRM survey, benefits are the second most important driver of job satisfaction, com- ing in just behind job security.3 Although benefits cost the firm money, employees usually receive them indirectly. For example, an organization may spend thousands of dollars a year contributing to health insurance premiums for each employee. The employee does not receive the money but does obtain the health insurance coverage benefit such as regular visits to their physicians.

As a rule, employees receive benefits because of their membership in the organization. Benefits are typically unrelated to employee productivity; therefore, although they may be valuable in recruiting and retaining employees, they do not generally serve as motivation for improved performance.4 As the name indicates, legally required benefits are mandated by law. Legislation mandates some benefits, and employers provide other discretionary and voluntary benefits. Discretionary benefits are benefit payments made as a result of unilateral management decisions in nonunion firms and from labor–management negotiations in unionized firms. Voluntary benefits, on the other hand, are usually100 percent paid by the employee, but the employer typically pays the administrative cost. Voluntary benefits have two distinct advan- tages: (1) they are generally nontaxable to the employee and (2) the cost may be much less for large groups of employees than for individuals. Often a hybrid situation exists in which

ObjeCtive 10.1

Define indirect financial compen- sation (employee benefits).

indirect financial compensation (employee benefits) All financial rewards that are not included in direct financial compensation.

258 Part 4 • ComPensation

employers pay a portion of the benefit and the employee pays the remainder. For example, both firms and employees contribute to the cost of health insurance coverage. In 2013, employers paid approximately 80 percent of the cost to provide health insurance coverage whereas the employee paid the remainder. Employers paid a lower share of the cost (about 70 percent) for employees whose health insurance coverage includes family members.5

Historically, compensation departments have not dealt with nonfinancial factors. However, the new compensation model suggests that this is changing. Nonfinancial compensation con- sists of the satisfaction that a person receives from the job itself or from the psychological or physical environment in which the person works. The components of nonfinancial compensation consist of the job itself and the job environment are also listed in Figure 10-1. Our focus in this chapter will be on indirect financial compensation.

Legally required benefits The U.S. government established programs to protect individuals from catastrophic events such as disability and unemployment. Legally required benefits are protection programs that attempt to promote worker safety and health, maintain family income streams, and assist families in cri- sis. The cost of legally required benefits to employers is quite high. As of September 2012, U.S. companies spent an average of $5,000 per employee annually to provide legally required ben- efits.6 Human resources (HR) staffs and compensation professionals in particular must follow a variety of laws as they develop and implement programs.

Legally required benefits historically provided a form of social insurance. Prompted largely by the rapid growth of industrialization in the United States in the early 19th and 20th centuries and the Great Depression of the 1930s, initial social insurance programs were designed to mini- mize the possibility that individuals who became unemployed or severely injured while working would become destitute. In addition, social insurance programs aimed to stabilize the well-being of dependent family members of injured or unemployed individuals. Furthermore, early social insurance programs were designed to enable retirees to maintain subsistence income levels. These intents of legally required benefits remain intact today.

The most substantial legally required benefits include various kinds of Social Security benefits, unemployment insurance, and workers’ compensation.

Social Security The Social Security Act of 1935 created a retirement benefits program. It also established the Social Security Administration. Subsequent amendments to the act added other forms of protection, such as disability insurance (1965) and survivors’ benefits (1939). The acronym—OASDI—stands for the Old-Age (that is, retirement), Survivor, and Disability Insurance programs. Medicare was established in 1965.

nonfinancial compensation Satisfaction that a person receives from the job itself or from the psychological and/or physical environment in which the person works.

ObjeCtive 10.2

Describe legally required benefits.

Figure 10-1 Indirect Financial Compensation (Employee Benefits) in a Total Compensation Program

HR Web Wisdom

Total Rewards http://www.worldatwork. org/aboutus/html/aboutus- waw.html

Total rewards include everything the employee perceives to be of value resulting from the employ- ment relationship.

Financial Nonfinancial Direct Indirect (Benefits) The Job

Meaningful Appreciated Satisfying Learning Enjoyable Challenging

Job Environment Sound Policies Capable Managers Competent Employees Congenial Co-workers Appropriate Status Symbols Working Conditions

Workplace Flexibility Flextime Compressed Workweek Job Sharing Telecommuting Part-Time Work

EXTERNAL ENVIRONMENT

INTERNAL ENVIRONMENT

Compensation

Legally Required Benefits Social Security Unemployment Compensation Workers‘ Compensation

Discretionary Benefits Paid Time-Off Health Care Life Insurance Retirement Plans Disability Protection Employee Stock Option Plans Employee Services Premium Pay

ChaPter 10 • indireCt FinanCial ComPensation (emPloyee BeneFits) 259

Disability insurance protects employees against loss of earnings resulting from total inca- pacity. Survivors’ benefits are provided to certain members of an employee’s family when the employee dies. These benefits are paid to the widow or widower and unmarried children. Unmarried children may be eligible for survivors’ benefits until they are 18 years old. In some cases, students retain eligibility until they are 19. Medicare provides hospital and medical insur- ance protection for individuals 65 years of age and older and for those who have become dis- abled at an earlier age.

The Federal Insurance Contribution Act (FICA) requires that employees and employers pay a portion of the cost of OASDI and Medicare coverage. Both the employer and employee each pay 6.2 percent of an employee’s pay for the Social Security portion and 1.45 percent for Medicare. These amounts are deducted from an employee’s paycheck and usually appear as FICA and Medicare (or HI for hospital insurance). Self-employed individuals pay the entire amount (15.3 percent). The Social Security rate is applied to a maximum taxable wage of $113,700, which is subject to increase each year. That is, annual pay above this amount is not subject to FICA tax. The rate for Medicare applies to all earnings. Approximately 95 percent of the workers in this country pay into and may draw Social Security benefits. In 2013, approximately 57 million people were receiving at least one type of Social Security benefits.7 The Social Security program currently is running a deficit, which is expected to increase, and the retirement of the 77-million- member baby-boom generation has begun, which will hasten the deficit increase. Unless Congress makes changes by 2033, the program will no longer be able to pay full benefits.8

The age for receiving full Social Security benefits (that is, retirement age) has been increased slowly until it reaches 67 in 2022. These changes will not affect Medicare, with full eligibility under this program holding at age 65.

Unemployment Insurance Unemployment insurance provides workers whose jobs have been terminated through no fault of their own monetary payments for up to 26 weeks or until they find a new job. The basic program is state-run with oversight from the U.S. Department of Labor. States pay the ben- efits; the federal government pays the states for administrative costs. Employers pay the Federal Unemployment Tax at a rate of 6.2 percent on the first $7,000 each employee earns. If they pay it on time, the percent is offset by 5.8 percent so the actual rate is 0.8 percent. The permanent Extended Benefits Program provides an additional 13 or 20 weeks of compensation to workers who exhaust basic benefits in states where unemployment has worsened.

The intent of unemployment payments is to provide an unemployed worker time to find a new job equivalent to the one lost without suffering financial distress. Without this benefit, work- ers might have to take jobs for which they are overqualified or end up on welfare. Unemployment compensation also serves to sustain consumer spending during periods of economic adjustment. In the United States, unemployment insurance is based on both federal and state statutes, and although the federal government provides guidelines, the programs are administered by the states and therefore benefits vary by state. A payroll tax paid solely by employers funds the unemploy- ment compensation program. Unemployment rates range from 3.0 percent in North Dakota to 9.5 percent in Nevada.9

unemployment insurance Provides workers whose jobs have been terminated through no fault of their own monetary payments for up to 26 weeks or until they find a new job.

e t h i c a l D i l e m m a

A Poor Bid You are vice-president of HR for a large con-

struction company, and your company is bidding on an estimated $2.5 million public housing project. A local electrical subcontractor submitted a bid that you realize is 20 percent too low because labor costs have been incorrectly calculated. It is obvious to you that ben- efits amounting to more than 30 percent of labor costs have not been

included. In fact, the bid was some $30,000 below those of the other four subcontractors. But accepting it will improve your chance of win- ning the contract for the big housing project. 1. What would you do? 2. What factor(s) in this ethical dilemma might influence a person

to make a less-than-ethical decision?

260 Part 4 • ComPensation

Workers’ Compensation Workers’ compensation provides a degree of financial protection for employees who incur expenses resulting from job-related accidents or illnesses in the form of coverage of rehabilita- tion costs and temporary or permanent partial income replacement based on severity. As with unemployment compensation, the various states administer individual programs, which are sub- ject to federal regulations. Employers pay the entire cost of workers’ compensation insurance, and their past experience with job-related accidents and illnesses largely determines their pre- mium expense. These circumstances should provide further encouragement to employers to be proactive with health and safety programs.

Discretionary benefits Discretionary benefits are benefit payments made as a result of unilateral management deci- sions in nonunion firms and from labor–management negotiations in unionized firms. An employee’s desire for a specific benefit may change, requiring organizations to continuously check the pulse of its workforce to determine the most sought after benefits. Discretionary benefits fall into three broad categories: protection programs (health insurance and retirement plans), paid time off, and services. Protection programs provide family benefits, promote health, and guard against income loss caused by such catastrophic factors as unemployment, disability, or serious illnesses. Paid time off provides employees time off with pay for such events as vaca- tion. Services provide such enhancements as tuition reimbursement and day-care assistance to employees and their families.

As we noted, social maladies prompted some federal and state legislation that created partic- ular employee benefits. Quite different from these reasons are other factors that have contributed to the rise in discretionary benefits.

Most discretionary benefits originated in the 1940s and 1950s. During both World War II and the Korean War, the federal government mandated that companies not increase employees’ wages or salaries, but it did not place restrictions on companies’ employee benefits expenditures. Companies invested in expanding their offerings of discretionary benefits as an alternative to pay hikes as a motivational tool to enhance worker productivity.

Separate from the benevolence of employers, employee unions directly contributed to the increase in employee welfare practices through the National Labor Relations Act (NLRA) of 1935, which legitimized bargaining for employee benefits. Union workers tend to participate more in benefits plans than do nonunion employees (92 percent versus 72 percent). Unions also indirectly contributed to the rise in benefits offerings because nonunion companies often fashion their employment practices after union companies as an approach to minimize the chance that their employees will seek union representation and may offer their employees benefits that are comparable to the benefits received by employees in union settings.

health Care Health care represents the most expensive item in the employee benefits package. In fact, accord- ing to research from the Kaiser Family Foundation, the United States spends more per capita on health care than any other country.10 These costs threaten to go even higher.11 The Office of Management and Budget estimates that the United States spends more than $900 billion per year in health care costs and annual expenditures are expected to exceed $1 trillion as soon as 2014.12 An additional $360 billion per year is spent in the administration of the system.13 Some com- panies have reduced or eliminated salary increases or bonuses, or both, to provide increasingly expensive medical benefits for employees.

A number of factors have combined to create the high cost of health care:

• An aging population • A growing demand for medical care • Increasingly expensive medical technology • Inefficient administrative processes

ObjeCtive 10.3

Define discretionary benefits and explain the various types of discretionary benefits.

workers’ compensation Provides a degree of financial protection for employees who incur expenses resulting from job- related accidents or illnesses.

discretionary benefits Benefit payments made as a result of unilateral management decisions in nonunion firms and from labor–management negotiations in unionized firms.

ObjeCtive 10.4

Discuss the alternative types of health care plans.

ChaPter 10 • indireCt FinanCial ComPensation (emPloyee BeneFits) 261

Two long-standing forms of health insurance programs include fee-for-service plans and managed care plans. Larger employers commonly offer employees one or more types of health insurance programs. An emerging class of health insurance programs is based on consumer- driven health care, in which employees play a greater role in decisions on their health care, have better access to information to make informed decisions, and share more in the costs. We discuss each one in turn.

Fee-for-Service Plans Fee-for-service plans provide protection against health care expenses in the form of a cash ben- efit paid to the insured or directly to the health care provider after the employee has received health care services. These plans pay benefits on a reimbursement basis. Three types of eligible health expenses are hospital expenses, surgical expenses, and physician charges. Under fee-for- service plans, policyholders (employees) may generally select any licensed physician, surgeon, or medical facility for treatment, and the insurer reimburses the policyholders after medical ser- vices are rendered.

Fee-for-service plans provide three types of medical benefits under a specified policy: hos- pital expense benefits, surgical expense benefits, and physician expense benefits. Companies sometimes select major medical plans to provide comprehensive medical coverage instead of limiting coverage to the three specific kinds just noted or to supplement these specific benefits.

Fee-for-service plans contain a variety of stipulations designed to control costs and to limit a covered individual’s financial liability. Some of the common fee-for-service stipula- tions include deductibles, coinsurance, out-of-pocket maximums, and maximum benefits limits. Over a designated period, employees must pay for services (i.e., meet a deductible) that before insurance benefits become active. The deductible amount is modest, usually a fixed amount ranging anywhere between $100 and $500 depending on the plan. Deductible amounts may also depend on annual earnings, expressed either as a fixed amount for a range of earnings or as a percentage of income.

Insurance plans feature coinsurance, which becomes relevant after the insured pays the annual deductible. Coinsurance refers to the percentage of covered expenses paid by the insured. Most fee-for-service plans stipulate 20 percent coinsurance. This means that the plan will pay 80 percent of covered expenses, whereas the policyholder is responsible for the difference, in this case 20 percent. Coinsurance amounts vary according to the type of expense. Insurance plans most commonly apply no coinsurance for diagnostic testing and 20 percent for other medical services. Many insurance plans provide benefits for mental health services. Coinsurance rates for these services tend to be the highest, usually 50 percent.

As discussed previously, health care costs are on the rise. Despite generous coinsurance rates, the expense amounts for which individuals are responsible can be staggering. These amounts are often beyond the financial means of most individuals. Thus, most plans specify the maximum amount a policyholder must pay per calendar year or plan year, known as the out-of-pocket maxi- mum provision.

Managed Care Plans Managed care plans emphasize cost control by limiting an employee’s choice of doctors and hospitals. Two common forms of managed care are health maintenance organizations (HMOs) and preferred provider organizations (PPOs).

HMOs are sometimes described as providing prepaid medical services because fixed peri- odic enrollment fees cover HMO members for all medically necessary services only if the ser- vices are delivered or approved by the HMO. HMOs generally provide inpatient and outpatient care as well as services from physicians, surgeons, and other health care professionals.

HMO plans share several features in common with fee-for-service plans, including out-of- pocket maximums, pre-existing condition clauses, preadmission certification, second surgical opinions, and maximum benefits limits. HMOs differ from fee-for-service plans in three impor- tant ways. First, HMOs offer prepaid services, whereas fee-for-service plans operate on a reim- bursement basis. Second, HMOs include the use of primary care physicians as a cost-control measure. Third, coinsurance rates are generally lower in HMO plans than in fee-for-service plans.

fee-for-service plans Insurance protection for three types of medical expenses: hospital expenses, surgical expenses, and physician’s charges.

coinsurance The percentage of covered expenses paid by the insured. Most fee-for-service plans stipulate 20 percent coinsurance. This means that the insured will pay 20 percent of covered expenses, whereas the insurance company pays the remaining 80 percent.

out-of-pocket maximum The maximum amount an employee pays for health care during a calendar or plan year.

managed care plans Health care delivery that emphasizes cost control by limiting an employee’s choice of doctors and hospitals. These plans also provide protection against health care expenses in the form of prepayment to health care providers.

prepaid medical services HMOs are sometimes described as providing prepaid medical services because fixed periodic enrollment fees cover HMO members for all medically necessary services only if the services are delivered or approved by the HMO.

262 Part 4 • ComPensation

HMOs designate some of their physicians, usually general or family practitioners, as primary care physicians. HMOs assign each member to a primary care physician or require each member to choose one. primary care physicians determine when patients need the care of specialists. HMOs use primary care physicians to control costs by significantly reducing the number of unnecessary visits to specialists. As primary care physicians, doctors perform several duties. The most important duty is perhaps to diagnose the nature and seriousness of an illness promptly and accurately, after which the primary care physician refers the patient to the appropriate specialist.

The most common HMO copayments apply to physician office visits, hospital admissions, prescription drugs, and emergency department services. Office visits are nominal amounts, usually $15–$50 per visit. Hospital admissions and emergency department services are higher, ranging between $50 and $250 for each occurrence. Mental health services and substance abuse treatment require copayments as well. Inpatient services require copayments that are similar in amount to those for hospital admissions for medical treatment; however, copayments for outpatient services such as psychotherapy are generally expressed as a fixed percentage of the fee for each visit or treatment. HMOs usually charge a copayment ranging between 15 and 25 percent.

Under a preferred provider organization (ppO), a select group of care providers agrees to furnish health care services to a given population at a higher level of reimbursement than under fee- for-service plans. Physicians qualify as preferred providers by meeting quality standards, agreeing to follow cost-containment procedures implemented by the PPO, and accepting the PPO’s reim- bursement structure. In return, the employer, insurance company, or third-party administrator helps guarantee provider physicians’ minimum patient loads by furnishing employees with financial incentives to use the preferred providers.

PPO plans include features that resemble fee-for-service plans or HMO plans. Features most similar to fee-for-service plans are out-of-pocket maximums and coinsurance, and those most similar to HMOs include the use of nominal copayments. Pre-existing condition clauses, pread- mission certification, second surgical opinions, and maximum benefits limits are similar to those in fee-for-service and HMO plans. PPOs contain deductible and coinsurance provisions that dif- fer somewhat from other plans.

Specialized Insurance Plans Employers often use separate insurance plans to provide specific kinds of benefits and are often referred to as specialized insurance plans. We will focus on dental plans, vision plans, prescrip- tion drug plans, and mental health and substance abuse plans because of the rampant inflation in prescription drug costs and the increased recognition that mental health disorders may hinder worker productivity. Dental and vision care are popular benefits in the health care area.

Dental and vision care plans usually operate on a fee-for-service or managed care basis. Employers typically pay the entire costs for both types of plans except for a deductible, which may amount to $50 or more per year. Dental plans may cover, for example, 70 to 100 percent of the cost of preventive procedures and 50 to 80 percent of restorative procedures. Most health care plans offer dental coverage. Some plans also include orthodontic care.

The American Academy of Ophthalmology estimates that vision-related diseases cost the United States $139 billion per year and rank as the fourth most costly chronic disease category, surpassing the direct costs of hypertension, diabetes and stroke.14 Vision care plans may cover all or part of the cost of eye examinations and eyewear.

prescription drug plans cover the costs of drugs. These plans apply exclusively to drugs that state or federal laws require to be dispensed by licensed pharmacists. Prescription drugs dispensed to individuals during hospitalization or treatment in long-term care facilities are not covered by prescription drug plans. Insurers prepare formulary lists, which specify which pre- scription drugs are covered, how much they will pay, and the basis for paying for drugs.

Approximately 20 percent of Americans experience some form of mental illness or sub- stance abuse at least once during their lifetimes.15 Mental and substance abuse plans provide mental health and substance abuse benefits designed to cover treatment of mental illness and chemical dependence on alcohol and legal and illegal drugs. Mental health and substance abuse plans cover the costs of a variety of treatments, including prescription psychiatric drugs (e.g., antidepressant medication), psychological testing, inpatient hospital care, and outpatient care (e.g., individual or group therapy). Mental health benefits amounts vary by the type of disor- der. Psychiatrists and psychologists rely on the Diagnostic and Statistical Manual of Mental

primary care physicians Designated by HMOs to determine whether patients require the care of a medical specialist. This functions to control costs by reducing the number of medically unnecessary visits to expensive specialists.

preferred provider organization (PPO) Managed-care health organization in which incentives are provided to members to use services within the system; out-of-network providers may be used at greater cost.

prescription drug plans Coverage of the costs of drugs that state or federal laws require be dispensed by licensed pharmacists.

mental and substance abuse plans Mental health and substance abuse benefits are designed to cover treatment of mental illness and chemical dependence on alcohol and legal and illegal drugs.