Week 5 - Discussion - HR Stratgeic Mgmt -Due by Thurs at 5pm CST
ldbechet
hrmg_4201_week05_chapter11ppt.pptMotivating Employees Through Compensation
Chapter 11
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Learning Objectives
After reading this chapter you should be able to:
- Describe how employee compensation practices strategically align with overall HR strategy.
- Use the concepts of reinforcement theory, goal setting theory, equity theory, expectancy theory, and agency theory to explain how people react to compensation practices.
- Describe how pay surveys are conducted and used to create compensation level strategies.
- Explain job-based pay and skill-based pay approaches to compensation structure.
- Describe the major protections provided by the Fair Labor Standards Act, as well as state and local regulations.
How Can Strategic Employee Compensation Make an Organization Effective?
- Employee compensation is the process of paying and rewarding people for the contributions they make to an organization.
- Compensation is a broad term which includes pay and benefits such as insurance, retirement savings, and paid time off from work.
- Compensation represents the total package of rewards—both monetary and nonmonetary.
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Employee compensation is the process of paying and rewarding people for the contributions they make to an organization.
A major part of compensation, of course, is the amount of money employees take home in their paychecks, but there are other important aspects as well. Compensation includes benefits such as insurance, retirement savings, and paid time off from work.
Employees’ positive feelings that come from working at a particular place are also sometimes seen as a form of compensation.
Compensation thus represents the total package of rewards—both monetary and psychological—that an employee obtains from an organization.
HOW IS EMPLOYEE COMPENSATION STRATEGIC? (LO1)
- Compensation practices are strategic because they encourage employees to put forth their best effort and perform in ways that help the company produce its particular goods and services.
- Organizations choosing an external labor orientation frequently hire new employees, and these employees are not expected to form a long-term attachment to the organization.
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Organizations choosing an external labor orientation frequently hire new employees, and these employees are not expected to form a long-term attachment to the organization.
The lack of long-term commitment makes compensation particularly important.
In fact, compensation is the primary factor in these employees’ decisions about where to work.
External Equity
- Employees’ perception of external equity—which concerns the fairness of what the company is paying them compared with what they could earn elsewhere—are critical in such employment relationships.
- Organizations with an external labor orientation must assess how their compensation compares with the compensation offered by other organizations.
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Current and potential employees frequently compare the organization’s compensation packages with packages offered by other employers.
Employees’ perception of external equity—which concerns the fairness of what the company is paying them compared with what they could earn elsewhere—are critical in such employment relationships.
People who see a lack of external equity become dissatisfied and choose to work somewhere else. This means that organizations with an external labor orientation must frequently assess how their compensation compares with the compensation offered by other organizations
Internal Equity
- Employees’ perceptions of internal equity are their beliefs concerning the fairness of what the organization is paying them compared with what it pays other employees.
- Organizations with an internal orientation spend time and effort comparing and analyzing pay differences among their own employees.
- Pay practices, such as how much each person makes, are usually less secretive in these organizations than in organizations with an external orientation.
- Internally oriented organizations also use long-term incentives to reward employees who stay with them for long periods.
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Employees’ perceptions of internal equity—their beliefs concerning the fairness of what the organization is paying them compared with what it pays other employees—become critical.
Organizations with an internal orientation thus spend a great deal of time and effort comparing and analyzing pay differences among their own employees.
Pay practices, such as how much each person makes, are usually less secretive in these organizations than in organizations with an external orientation.[
Internally oriented organizations also use long-term incentives to reward employees who stay with them for long periods.
Figure 11.1 Strategic Framework for Employee Selection
HOW DOES COMPENSATION MOTIVATE PEOPLE? (LO2)
- Motivation can be defined as a force that causes people to engage in a particular behavior rather than other behaviors.
- Motivation is represented by three elements: behavioral choice, intensity, and persistence
- Behavioral choice involves deciding whether or not to perform a particular action.
- Intensity concerns deciding how much effort to put into the behavior.
- Persistence involves deciding how long to keep working at the behavior.
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Motivation can be defined as a force that causes people to engage in a particular behavior rather than other behaviors. More specifically, motivation is represented by three elements: behavioral choice, intensity, and persistence. Each element, in turn, requires a decision:
Behavioral choice involves deciding whether or not to perform a particular action.
Intensity concerns deciding how much effort to put into the behavior.
Persistence involves deciding how long to keep working at the behavior.
Motivation Theory
- Motivational theory and Compensation
- Reinforcement theory
- Goal-setting theory
- Justice theory
- Expectancy theory
- Agency theory
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We will look at five motivational theories and their relationship to compensation.
Reinforcement theory
Goal-setting theory
Justice theory
Expectancy theory
Agency theory.
Reinforcement Theory
- Comes from the field of psychology, holds that behavior is caused by chains of antecedents and consequents.
- Antecedents are factors in the environment that cue someone to engage in a specific behavior.
- Consequents are results associated with specific behaviors.
- Antecedents and consequents are linked together because the antecedent causes people to think about the consequent.
- When linked to compensation the theory states people will engage in the behaviors for which they are rewarded.
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This theory, which comes from the field of psychology, holds that behavior is caused by chains of antecedents and consequents. Antecedents are factors in the environment that cue someone to engage in a specific behavior.
For instance, the smell of fresh-baked apple pie might serve as an antecedent that encourages a person to eat.
Consequents are results associated with specific behaviors.
Antecedents and consequents are linked together because the antecedent causes people to think about the consequent. For example, one consequent of eating apple pie is the pleasurable feeling it gives you. Thus, the good smell motivates you to eat the pie because it reminds you of the pleasure associated with the taste. Of course a behavioral consequent can be negative, as when eating too much pie makes you feel sick.
When associated with compensation, though, the core idea of reinforcement theory is that people will engage in the behaviors for which they are rewarded.
Cues in the environment can help focus attention on the rewards that come after the completion of specific behaviors.
Goal-Setting Theory
- Goal-setting theory is grounded in cognitive psychology and holds that behavior is motivated by choices.
- Goals improve performance through four specific motivational processes:
- Goals focus attention away from other activities toward the desired behavior.
- Goals get people energized and excited about accomplishing something worthwhile.
- People work on tasks longer when they have specific goals.
- Goals encourage the discovery and use of knowledge.
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Goal-setting theory is grounded in cognitive psychology and holds that behavior is motivated by conscious choices.[ Goals improve performance through four specific motivational processes:
- Goals focus attention away from other activities toward the desired behavior. This effect is seen, for example, when a long-distance runner sets herself a goal to run a marathon in a certain time. Because of this goal, the runner is likely to spend more effort on running and less on other activities.
- Goals get people energized and excited about accomplishing something worthwhile. In our example, the runner’s goal provides her with a vision of accomplishing a difficult task. This sense of vision and potential accomplishment builds excitement that increases her intensity during workouts.
- People work on tasks longer when they have specific goals. The runner’s goal encourages her to be more persistent and not give up when facing setbacks such as fatigue or injury.
- Goals encourage the discovery and use of knowledge. Thus, the runner’s goal might encourage her to investigate and learn training tips and race strategies.
Justice Theory
- This theory holds that motivation depends on beliefs about fairness.
- Early form of this theory is equity theory. In equity theory people compare their inputs and outcomes to the inputs and outcomes of others.
- Equity theory is an example of what is known as distributive justice.
- Distributive justice is concerned with the fairness of outcomes. In terms of compensation, distributive justice focuses on whether people believe the amount of pay they receive is fair.
- A different form of justice is Procedural justice, which is concerned with the fairness of the procedures used to allocate outcomes. The focus here is on the process used to decide who gets which rewards.
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This theory holds that motivation depends on beliefs about fairness.
Early form of this theory is equity theory, In equity theory people compare their inputs and outcomes to the inputs and outcomes of others.
Equity theory is an example of what is known as distributive justice.
Distributive justice is concerned with the fairness of outcomes. In terms of compensation, distributive justice focuses on whether people believe the amount of pay they receive is fair.
A different form of justice is Procedural justice, which is concerned with the fairness of the procedures used to allocate outcomes. The focus here is on the process used to decide who gets which rewards.
Figure 11.2 Equity Theory
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Figure 11.3 Expectancy Theory
This theory proposes that motivation comes from three beliefs: valence, instrumentality, and expectancy.
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This theory proposes that motivation comes from three beliefs: valence, instrumentality, and expectancy.
According to expectancy theory, all three desirable beliefs must be present for motivation to occur.
For example, a sales representative may value a high commission (valence) and may believe that she will receive it if she closes a specific sale (instrumentality).
However, she won’t be motivated to pursue the sale unless she really believes she can do something that will influence the client to make the purchase (expectancy).
A food server in a restaurant may believe that he is able to provide great service (expectancy), and he may value high tips (valence), but if he doesn’t believe a certain customer will leave a tip even if his performance is excellent (instrumentality), he will not be motivated to give that customer great service.
In the end, expectancy theory suggests that people are motivated when they believe they will actually receive a reward for higher performance.
Agency Theory
- Agency theory focuses on the differences in interests between principals and agents to describe reactions to compensation.
- The conditions under which subordinate agents work with corporate managers may directly influence the behavior of the organization, such as taking risks pertaining to new ventures.
- Issues such as remuneration and risk-taking are among the major concerns of both parties in this relationship.
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Agency theory, developed in the 1970s, focuses on the way management of a firm manages its relations and enters into contractual arrangements with its managers or employees.
The conditions under which subordinate agents work with corporate managers may directly influence the behavior of the organization, such as taking risks pertain to new ventures.
Issues such as remuneration, accounting techniques or risk-taking are among the major concerns of both parties in this relationship.
Linking Motivation With Strategy
- Variable Compensation and Motivation
- Uniform Compensation and Motivation
HOW IS COMPENSATION LEVEL DETERMINED? (LO3)
- It all begins with the pay survey.
- The pay survey provides information about how much other organizations are paying employees.
- Pay surveys are conducted by consulting firms, which obtain confidential pay information from numerous organizations and create reports that describe average pay levels in other organization.
- Good comparison groups often include organizations that compete in the same product and service markets.
- This makes it easier to determine if the companies pay practice gives it a competitive advantage.
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It all begins with the pay survey.
The pay survey provides information about how much other organizations are paying employees.
Pay surveys are conducted by consulting firms, which obtain confidential pay information from numerous organizations and create reports that describe average pay levels in other organization.
This information is group by industry, number of employees, sales volume and operating budget.
This makes it easier to determine if the companies pay practice gives it a competitive advantage.
Figure 11.4 Sample BLS Pay Survey Results
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Source: Information from Bureau of Labor Statistics (http://www.bls.gov/home.htm).
Figure 11.5 Pay Survey Results for Training Professionals
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Source: Information from Holly Dolezalek, “The 2005 Annual Salary Survey,” Training 42, no. 10 (2005): 12-23.
Pay-Level Strategies
- There are three market strategies
meet-the-market which establishes pay that is in the middle of the pay range for the selected group of organizations.
lag-the-market where an organization establishes a pay level that is lower than the average in the comparison group.
lead-the-market where the average pay level is higher than the average in the comparison group.
HOW IS COMPENSATION STRUCTURE DETERMINED? (LO4)
- The pay structure focuses on how compensation differs for people working in the same organization.
- Job-based pay—focuses on evaluating different tasks and duties associated with various jobs in the organization.
- Skill-based pay focuses on the difference in skill and ability required to perform the job.
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There are two major methods for determining pay structure. One method—often referred to as job-based pay—focuses on evaluating differences in the tasks and duties associated with various positions that employees have. With this method, it is expected that people who have more difficult jobs will be paid more. The other method focuses on directly evaluating differences in the skills and abilities of employees and is often called skill-based pay. In an organization using skill-based pay, an employee might be paid for having a certain set of skills, even if the tasks that the employee normally performs do not require those skills.
Job-Based Pay
A job-based pay approach typically uses a point system that assigns a numerical value to each job position. The numerical value is designed to capture the overall contribution of the job to the organization. Of course, not everyone performing a certain job will be paid the same amount. Each job is assigned a range of acceptable compensation. Individuals in the job who contribute less are paid near the bottom of the range, and those contributing more are paid near the top. The general trend, however, is for people in jobs worth more points to receive higher compensation. In job-based pay the range of point totals that are grouped together into a pay grade.
Skill-Based Pay
A skill-based pay system shifts emphasis away from jobs and focuses on the skills that workers possess. In essence, this system pays people relative to their value rather than relative to the value of their current position. Employees are paid more when they develop more skills. The primary objective is to encourage the development of skills linked to the overall strategic direction of the organization.
Figure 11.6 Job-Based Pay for Management Accountants
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Source: Some of the data for these ranges are from Karl E. Reichardt and David L. Schroeder, “2005 Salary Survey,” Strategic Finance 87, no. 12 (2006): 34-50.
Figure 11.7 Skill-based Pay
HOW DO GOVERNMENT REGULATIONS INFLUENCE COMPENSATION? (LO5)
- Fair Labor Standards Act (FLSA) is a federal law that governs many compensation practices. The FLSA, which was passed in 1938, is designed to protect employees.
- The law establishes a national minimum wage, regulates overtime, requires equal pay for men and women, and establishes guidelines for employing children.
Summary of the Four Major Exceptions
Exempt and Nonexempt Employee
- The FLSA creates two broad categories of workers: exempt and nonexempt.
- Exempt employees are not covered by FLSA regulations. This group does not receive overtime for work over 40 hours in a week.
- Nonexempt employees, are covered by FLSA and receive overtime for time worked over 40 hours in a week.
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The FLSA creates two broad categories of workers: exempt and nonexempt.
Exempt employees are not covered by FLSA regulations. This group does not receive overtime for work by 40 hours in a week.
Nonexempt employees, are covered by FLSA and receive overtime for time work over 40 hours in a week.
