Week 5 - Discussion - HR Stratgeic Mgmt -Due by Thurs at 5pm CST
ldbechet
hrmg_4201_week05_chapter12ppt.pptDesigning Compensation and Benefit Packages
Chapter 12
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LEARNING OBJECTIVES
After reading this chapter you should be able to:
- Describe basic elements of a compensation package.
- Explain different features of base pay and employee benefit plans.
- Explain various types of individual incentives, including the strengths and weaknesses of each form of incentive.
- Explain various types of group and organizational incentives, including the strengths and weaknesses of each form of incentive.
- Create compensation packages that align the mix of individual, group, and organizational incentives with human resource strategy.
How Can a Strategic Compensation Package Make an Organization Effective?
- The compensation package represents the blend of rewards employees receive from the organization.
- Money paid as wages or salary is the largest component of most compensation packages.
- Benefits and short and long term rewards make up the rest of the package.
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A compensation package represents the mix of rewards employees receive from the organization. Money paid as wages or salary is the largest component of most compensation packages.
Some workers are paid a fixed amount for each time period, but for others the amount varies with performance. In these situations, determining the percentage of pay that will depend on performance is an important compensation decision.
When pay is linked to performance, another important decision concerns whether the amount paid will depend on individual performance, the performance of a group, or the performance of the organization as a whole.
Still another part of the compensation package is made up of employee benefits such as health insurance and retirement savings, and organizations must decide what proportion of employees’ compensation will take this form.
HOW DO COMPENSATION PACKAGES ALIGN WITH STRATEGY? (LO1)
- At-risk Compensation
- At-risk pay is compensation that can vary from pay period to pay period.
- The money is at risk because the employee will not earn it unless performance objectives are met.
- Line of Sight
- The extent to which employees can see that their actions influence the outcomes used to determine whether they receive a particular reward.
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The notion of at-risk pay relates to the motivational theories discussed in Chapter 11.
Reinforcement theory and expectancy theory suggest that motivation is higher when pay is at risk. Thus, most students work harder when their assignments are scored and reflected in an overall grade. Agency theory also suggests that when people bear the risk for outcomes, they want the opportunity to earn higher rewards.
In practice, most compensation packages include some at-risk pay and some guaranteed rewards. The key to aligning compensation and strategy is to determine how much of the compensation to place at risk
Common Elements of Compensation Packages
- The main elements of the Compensation Package consist of:
- Base pay: is compensation that is consistent, not at risk, across time periods and not directly dependent on performance.
- Employee benefits: are rewards other than monetary salary and wages, typically includes such things as retirement saving and insurance.
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The main elements of the Compensation Package consist of:
Base pay is a form of compensation that is not at risk and may consist of an hourly wage or an annual salary.
Employee benefits, are rewards other than monetary salary and wages. Organizations are required by laws and tax regulations to provide similar benefits to all employees.
Elements of the Compensation Package
- Individual incentive is a reward that is based on the personal performance of the employee. Individual incentives are linked to performance behaviors and outcomes.
- A group incentive is a reward based on the collective performance of a team or organization.
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Individual incentive is a reward that is based on the personal performance of the employee. Individual incentives are linked to performance behaviors and outcomes.
A group incentive is a reward based on the collective performance of a team or organization.
Figure 12.1 Combining Compensation Package Elements
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WHAT ARE COMMON APPROACHES TO BASE PAY? (LO2)
- Two basic methods:
- Job Based Pay – Each job evaluated with a point system and base pay is set at a higher level in jobs worth more points.
- Skill Based Pay – Skill sets are defined in terms of the number of tasks that an employee is capable of performing. Employees who are able to perform more tasks are paid a higher base wage.
WHAT ARE COMMON EMPLOYEE BENEFIT PLANS? (LO3)
Legally Required Benefits
- Social Security
- Unemployment Insurance
- Workers’ Compensation
- Healthcare Plans
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Legally required benefits are mandated by government regulations. The regulations are designed to protect people from hardship associated with not being able to work and earn a living. Protection is given to workers who are injured, laid off, or past the age when they might be expected to work. In most cases, legally required benefits must be given to all workers in specified amounts.
In the early days of the United States, most people lived together in extended families engaged in farming. Families worked together and helped individuals whose age or health prevented them from working. As more people moved into cities, this reliance on families became less common, creating a need for other sources of support for elderly and disabled people. The Great Depression that began in the late 1920s also created severe economic hardship for many people. These needs resulted in the Social Security Act of 1935, which began the establishment of government programs aimed at providing financial security for retired and disabled workers. The Social Security Act created a social security system in which workers pay into a fund and then draw from the fund when they retire
Unemployment insurance program that provides protection for workers who lose their jobs through no fault of their own.
Worker’s compensation programs, which provide workers with compensation when they suffer work-related injuries. Because worker’s compensation is no-fault insurance, individuals receive benefits even if their own carelessness caused the accident.
Health care plan as part of their discretionary benefit package. These plans provide access to medical services from physicians, hospitals, and other providers.
One trend to reduce health costs has been the move to health maintenance organizations (HMOs). An HMO is a prepaid health plan with a specific health care provider that supplies health services to clients for a fixed rate.
Health savings accounts (HSAs), which are personal accounts that people use to pay for health services.
New Health Care Legislation
- In March 2010 Congress passed a Health Care Reform Bills. One provision requires:
- Employers with more than 50 employees must provide health insurance for all employees or pay a fine.
Health care plan as part of their discretionary benefit package. These plans provide access to medical services from physicians, hospitals, and other providers.
One trend to reduce health costs has been the move to health maintenance organizations (HMOs). An HMO is a prepaid health plan with a specific health care provider that supplies health services to clients for a fixed rate.
Health savings accounts (HSAs), which are personal accounts that people use to pay for health services.
Discretionary Benefits
- Common discretionary benefits include:
- supplemental insurance
- retirement savings
- pay without work
- lifestyle benefits
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Most organizations offer employees a benefit package that extends well beyond what is legally required.
Offering more than what is legally required provides an opportunity for organizations to use benefits as a tool for attracting and retaining employees.
Common discretionary benefits include supplemental insurance, retirement savings, and pay without work.
Supplemental Insurance includes:
Life insurance pays benefits to families or other beneficiaries when the insured individual dies.
Disability insurance, which provides benefits to individuals who have physical or mental disabilities that prevent them from being able to work
Retirement Savings:
Defined benefit plan guarantees that when employees retire, they will receive a certain level of income based on factors such as their salary and the number of years they worked for the organization.
Defined contribution plan. Here, the organization pays a certain amount each month into a retirement savings account for each employee.
Pay without work involves paying employees as if they worked during a certain period—for example, holidays and vacations—even though they were not actually working
Figure 12.2 Percentage of Workers Receiving Discretionary Benefits
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Figure 12.3 Accrual of Retirement Benefits
WHAT ARE COMMON INDIVIDUAL INCENTIVES? (LO4)
- Piece-rate incentive, where employees are paid a fixed amount for each piece of output they produce.
- Commissions represent a special form of piece-rate compensation that is most often associated with sales. For each sale obtained, a commission, or percentage of the total amount received, is paid to the salesperson.
- Merit pay increases represent an increase in base salary or hourly rate that is linked to performance
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Piece-rate incentive, where employees are paid a fixed amount for each piece of output they produce.
Commissions represent a special form of piece-rate compensation that is most often associated with sales. For each sale obtained, a commission, or percentage of the total amount received, is paid to the salesperson.
Merit pay increase, represent an increase in base salary or hourly rate that is linked to performance
COMMON INDIVIDUAL INCENTIVES
- Merit bonus is a sum of money given to an employee in addition to normal wages on a fixed schedule, such as at the end of the year.
- Sometimes bonuses are unplanned and given when high performance is observed.
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Merit bonus is a sum of money given to an employee in addition to normal wages. It differs from a merit increase in that a merit pay increase becomes part of the base pay for the next year, while a merit bonus does not. In many cases, merit bonuses are given on a fixed schedule, such as at the end of the year.
Sometimes Merit bonuses are unplanned and given when high performance is observed.
WHAT ARE COMMON GROUP AND ORGANIZATIONAL INCENTIVES? (LO5)
- Goal-based team reward – provides a payment when a team reaches a specific goal.
- Discretionary team bonus – provides payment when high performance is observed. With discretionary rewards, no goal is set to achieve a specific outcome.
- Team Awards are usually
- Divided equally among the team or
- Higher-performing members receive a greater reward then other team members.
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The main difference is that team incentives are linked to the collective performance of groups rather than to the performance of individuals. Rewards are given when the group as a whole demonstrates high performance.
One type of group incentive is the goal-based team reward, which provides a payment when a team reaches a specific goal. Following the principles of goal-setting theory that was introduced in Chapter 11, an incentive of this kind provides a team with a specific objective and rewards the team if the objective is achieved.
Discretionary team bonus, which provides payment when high performance is observed. With discretionary rewards, no goal is set to achieve a specific outcome.
Team Award are usually
Divided equally among the team or
Higher-performing members receive a greater reward then other team members.
Group and Organizational Incentives
- Gainsharing occurs when groups of workers receive a portion of the financial return from reducing costs and improving productivity.
- Profit sharing occurs when employees receive incentive payments based on overall organizational profits.
- Stock plans transfer corporate stock to individual employees. Two popular programs are:
- stock options, which represent the right to buy company stock at a given price on a future date and could be tied to performance or pay grade.
- employee stock ownership plans (ESOPs), in which the organization contributes stock shares to a tax-exempt trust that holds and manages the stock for employees
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Gainsharing occurs when groups of workers receive a portion of the financial return from reducing costs and improving productivity. In essence, gainsharing aligns the interests of workers with the interests of company owners
Profit sharing occurs when employees receive incentive payments based on overall organizational profits. As many as 70 percent of Fortune 1,000 companies participate in some form of profit sharing.[ In most profit-sharing plans, the publicly reported earnings of an organization are shared with employees. Some organizations share the reward when the profit is reported, while others defer payment so that employees only receive a share of the profit if they remain employed for a number of years.
Stock plans transfer corporate stock to individual employees. In some cases, shares of stock are given directly to employees. However, most organizations instead provide stock options, which represent the right to buy company stock at a given price on a future date. Most stock options are granted at current stock prices. This means that the stock option has no value unless the stock price increases; after all, anyone can buy the stock at the current price. If the stock price does increase, an employee can buy the stock at the option price and reap a substantial reward. Another is employee stock ownership plans (ESOPs), in which the organization contributes stock shares to a tax-exempt trust that holds and manages the stock for employees
Issues that increase the likelihood of success for gainsharing programs
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Source: Information from Matthew H. Roy and Sanjiv S. Dugal, “Using Employee Gainsharing Plans to Improve Organizational Effectiveness,” Benchmarking 12 (2005): 250-259.
HOW DO STRATEGIC DECISIONS INFLUENCE A COMPENSATION PACKAGE? (LO6)
- The organization must decide how much compensation to allocate to base pay, benefits, individual incentives, and group incentives in order to align pay to the organization’s broad HR strategy.
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Decision makers must first set the pay level and must then decide how much pay to place at risk. Organizations with differentiation strategies generally place a higher percentage of pay at risk than do organizations with cost-reduction strategies. Finally, the organization must decide how much compensation to allocate to base pay, benefits, individual incentives, and group incentives. Specific forms of incentives are most effective when they are aligned with the organization’s broad HR strategy.
Figure 12.4 Strategic Compensation Process
Figure 12.5 Typical Compensation Elements
