Compensation- Exam 1

Front 1

Compensation is viewed by society as

Back 1

A cause of increased taxes and price increases
Consumers sometimes see compensation as the cause of price increases.

Front 2

Stockholders are concerned with

Back 2

Executive pay relative to company performance

Front 3

Managers view compensation as

Back 3

A major expense and a means to influence employee behavior and to improve organization performance

Front 4

Employees view compensation as

Back 4

a return in an exchange with their employer, and entitlement, or a reward.

Front 5

In other countries, compensation relates to

Back 5

being taken care of.

Front 6

What are the two major components of total return for work?

Back 6

1. Total Compensation
2. Relational return

Front 7

What is Total Compensation?

Back 7

Total compensation is composed of cash compensation (based pay and incentives) and benefits.

Front 8

What is Cash Compensation?

Back 8

Base pay and incentives

Front 9

What is Relational Returns?

Back 9

Relational returns include psychological aspects of work such as recognition and status, challenging work, and learning opportunities.

Front 10

What are the Strategic Objectives of Compensation?

Back 10

1. Efficiency in performance and Quality, satisfying customers and stockholders, and controling costs
2. Fairness
3. Compliance with laws and regulations.

Front 11

What are the four strategic policies in the pay model?

Back 11

1. Internal Alignment
2. External Competitiveness
3. Employee contributions
4. Management

Front 12

What are the internal structure techniques associated with alignment?

Back 12

1. Work Analysis
2. Descriptions
3. Evaluation/certification

Front 13

The Pay structure techniques associated with?

Back 13

Competitiveness are market definitions, surveys, and pay policy lines.

Front 14

The Incentive Program techniques associated with contributions are?

Back 14

1. Seniority-based
2. Performance-based
3. Merit guidelines

Front 15

The evaluation techniques associated with management are?

Back 15

1. Planning
2. Budgeting
3. Communication

Front 16

Compensation

Back 16

Compensation: all forms of financial returns and tangible services and benefits that employees receive as part of an employment relationship.

Front 17

Relational Returns

Back 17

Relational Returns: Psychological Returns employees believe they recieve in the workplace

Front 18

Wage

Back 18

Wage: Pay calculated at an hourly rate

Front 19

Salary

Back 19

Salary: pay clculated at an annual or monthly rate

Front 20

Merit Increase

Back 20

Merit Increase: Increment to base pay in recognition of past work behaviour.

Front 21

Cost-of-living adjustment

Back 21

Cost-of-living Adjustment: Percentage increment to base pay provided to all employees regardless of performance.

Front 22

Incentives/ variable Pay

Back 22

Incentives/ Variable pay: one-time payments for meeting previously established performance objectives

Front 23

Allowances

Back 23

Allowances: Compensation to provide for items that are in short supply.

Front 24

Implicit Contract

Back 24

Implicit Contract: An unwritten understanding between employers and employees about their reciprocal obligations and returns.

Front 25

Strategic Objectives

Back 25

Strategic Objectives: goals identified by an organization as necessary for the achievement of its strategy for success

Front 26

Procedural Fairness

Back 26

Procedural Fairness: Fairness of the process used to make a decision

Front 27

External Competitiveness

Back 27

External Competitiveness: Comparison of compensation with that of competitors.

Front 28

Base Wage tends to reflect?

Back 28

Base wage tends to reflect the Value of the work or skills and generally ignores differences attributable to individual employees.

Front 29

Incentives tie pay increase difrectly to?

Back 29

Performance

Front 30

How does incentives differ from merit adjustments?

Back 30

1. Incentives do not increase the base wage, and so must be re-earned each pay period
2. The potential size of the incentive pay generally will be known beforehand.
Whereas merit pay programs evaluate the past performance of an individual and then decide on the size of the increase, the performance objective for incentive payments is specified ahead of time.

Front 31

What is another name for Variable pay and Why?

Back 31

Also known as incentives; are one-time payments, they do not have a permanent effect on labor costs.
When performance declines, incentive pay automatically declines as well.

Front 32

Can Incentives be short or long term?

Back 32

Both

Front 33

What are Long-term Incentives?

Back 33

Long-term incentives are intended to focus employee efforts on multi-year results.
- They can take the form of a cash bonus, more typically these returns are in the form of stock ownership or options to buy stock at specified, advantageous prices.

Front 34

Some people view pay as

Back 34

A measure of Justice

Front 35

What are the four contrasting perspectives of compensation?

Back 35

1. Society's views
2. Stockholders' Views
3. Employees' Views
4. Managers' Views

Front 36

What is the Individual Perspective of compensation?

Back 36

1. Financial security
2. Some people see pay as a reflection of their "worth"
3. Impacts the kind of life you lead.

Front 37

What are Manager's view of Compensation?

Back 37

1. Pay is a major Expense for the Organization
- 50-80% of total costs depending on the industry
2. Way to motivate employees
3. Way to attract and retain high quality Employees

Front 38

What are Society's view of Compensation?

Back 38

1. Government sets a minimum wage; " is it a livable" wage?
2. The appropriateness (or Fairness) of the pay of some
3. Benefits as a "right" in our society.
4. Economic Issues: Do pay increases lead to price increase (inflation)?

Front 39

What are the Stockholder's view on Compensation?

Back 39

1. Using stock to pay employees creates a sense of ownership.

2. Linking executive pay to company performance supposedly increases stockholders' returns.

Front 40

How do you calculate Total Compensation?

Back 40

Base Pay+ Bonuses+ Benefits

Front 41

How do you calculate the Annual Total Cash Compensation?

Back 41

Base pay + Incentives

Front 42

What is the Median CEO total cash compensation for 2005?

Back 42

$1,865,500

Front 43

What is a Return?

Back 43

An exchange between employer and themselves

Front 44

What is an Entitlement?

Back 44

1. for being an employee of the company
2. Increase in pay not based on increased performance, or added responsibility, or inflation.... merely because it's expected.

Front 45

What is a Reward?

Back 45

Rewards are for a job well done.

Front 46

What is An Exchange Relationship?

Back 46

Employer
- Rewards:Financial and other

Employee
- Work Performance

Front 47

What is Compensation?

Back 47

Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.

Front 48

Total Returns for Work

Back 48

Total Returns:
Total Compensation + Relational Returns
1. Relational Returns
2. Total Compensation
- Cash Compensation
- Benefits

Front 49

Relational Returns

Back 49

Recognition and status
Employment Security
Challenging work
Learning Opportunities

Front 50

Total Compensation

Back 50

Benefits:
- Income Protection
- Work/Life Balance
- Allowances
Cash Compensation
- Base Pay
- Merit/ Cost of Living
- Short-term Incentives
- Long-term Incentives

Front 51

What are the Forms of Pay?

Back 51

1. Direct Pay Forms
2. Indirect Pay Forms

Front 52

Direct Pay Forms

Back 52

Cash Compensation:
- Base
- Merit pay/Cost-of-living Adjustments
- Incentives

Front 53

Indirect Pay Forms.

Back 53

Benefits:
- Income Protection, Health
- Work/Life Focus (time off)
- Allowances (e.g., discounts)

Front 54

Wages

Back 54

Wage is typically used to describe hourly rate of pay.
- Employees who are covered by the Fair Labor Standards Act (FLSA)
Example: Clerks
- Non-Exempt from the FLSA

Front 55

Salary

Back 55

Salary is typically given in a yearly amount
- Exempt from the Fair Labor Standards Act (FLSA)
Example: Managers
Exempt from the FLSA

Front 56

Relational Returns from Work Non-Financial

Back 56

1.Recognition & Status
2.Employment Security
3.Challenging Work
4.Learning Opportunities

Front 57

What are the 3 Building Blocks to A Pay Model?

Back 57

1. Compensation Objectives

2. Policies that form the foundation of the compensation system.

3. Techniques that make up the compensation system

Front 58

Compensation Objectives

Back 58

1. Efficiency: Does the compensation system help the organization meet its goals while keeping labor costs in line?

2. Equity: is the pay system fair?

3. Compliance: Does the pay system meet the legal and ethical requirements?

Front 59

Efficiency

Back 59

Does the compensation system help the organization meet its goals while keeping labor costs in line?

Front 60

Equity

Back 60

Is the pay system fair?

Front 61

Compliance

Back 61

Does the pay system meet the legal and ethical requirements?

Front 62

Equity: The Fairness Issue

Back 62

Fairness is a critical issue in compensation
- Yet, fairness is subjective and personal

Front 63

Pay System Policies

Back 63

1. Internal Alignment
2. External Competitiveness
3. Employee Contributions
4. Management

Front 64

Internal Alignment

Back 64

Comparisons among jobs or skill levels inside a single organization

Front 65

External competitiveness

Back 65

Compensation relationships external to the organization:
Comparison with competitors

Front 66

Employee contributions

Back 66

Emphasis placed on employee performance

Front 67

Management

Back 67

Policies ensuring the right people get the right pay for achieving the right objectives in the right way

Front 68

Similarities and Differences in Strategies

Back 68

1. Different strategies within the same industry

2. Different strategies within the same company

3. Strategies may change with product life cycle.

Front 69

Strategy

Back 69

The fundamental Directions that an organization chooses

Front 70

Strategy Examples

Back 70

Corporate Level: "what business should we be in?"

Business unit level: "How to gain and sustain competitive advantage?"

Functional level: "how should Total Compensation help gain and sustain competitive advantage?"

Front 71

Strategic Perspective

Back 71

A strategic perspective focuses on those compensation choices that help the organization gain and sustain competitive advantage.

Front 72

What business should we be in?

Back 72

Corporate objectives, strategic plan, vision, and values

Front 73

How do we win (gain competitive advantages) in those businesses?

Back 73

Business unit strategies

Front 74

How should HR help us win?

Back 74

HR strategies

Front 75

How should total Compensation help us win?

Back 75

Social, competitive, and regulatory environment
- Strategic, compensation, decisions

Front 76

Support Business Strategy

Back 76

Pay systems should align with the organization's business strategy

Compensation systems can be tailored to:
1. innovator business strategy
2. cost cutter business strategy
3. Customer- focused business strategy

When business strategies change, pay systems should also change

Front 77

The pay model guides strategic pay decisions

Back 77

Five strategic compensation choices:
1. Objectives
2. Internal alignment
3. External competitiveness
4. Employee contributions
5. Management

- Stated versus Unstated Strategies

Front 78

Key Steps in Formulating a Total Compensation Strategy: 4 Steps

Back 78

1. Assess Total Compensation Implications

2. Map a Total Compensation Strategy

3. Implement Strategy

4. Reassess

Front 79

1. Assess Total Compensation Implications

Back 79

Before any new compensation program are designed, there must be a clear understanding by the organization of...
A. Competitive dynamics- Understand the business

B. Culture/ Values

C. Social and Political Context

D. Employee Needs/ Preferences

E. Nature of Union- Management relationship

F. Role of pay in overall HR strategy

Front 80

2. Map a Total Compensation Strategy

Back 80

Objectives
Alignment
Competitiveness
Contributions
Management

Front 81

3. Implement Strategy

Back 81

Design System to Translate strategy into Action

Choose Techniques to Fit Strategy

Front 82

4. Reassess

Back 82

Realign as Conditions Change

Realign as Strategy Changes

Front 83

A. Competitive dynamics- Understand the business

Back 83

- Customer needs
- Competitors' actions
- Labor Market conditions
- Laws
- Globalization

Front 84

B. Culture/ Values

Back 84

- A pay system reflects value guiding an employer's behaviors and treatment of employees

Front 85

C. Social and Political Context

Back 85

- Legal and regulatory requirements
- Cultural differences
- Changing work force demographics
- Employee values and expectations

Front 86

Step 1: Assess Total Compensation
Implications

A. Competitive dynamics – understand
the business

Back 86

Customer needs


Competitors’ actions


Labor market conditions


Laws


Globalization

Front 87

Step 1: Assess Total Compensation
Implications

B. Culture/values

Back 87

A pay system reflects values guiding an employer’s behaviors and treatment of employees

Front 88

Step 1: Assess Total Compensation
Implications

C. Social and political context

Back 88

Legal and regulatory requirements


Cultural differences


Changing work force demographics


Employee values and expectations

Front 89

Step 1: Assess Total Compensation
Implications

A. Competitive dynamics – understand
the business

Back 89

Customer needs


Competitors’ actions


Labor market conditions


Laws


Globalization

Front 90

Step 1: Assess Total Compensation
Implications

D. Employee needs/preferences

Back 90

People do not understand the
alternatives; too many choices confuse
them

Front 91

Step 1: Assess Total Compensation
Implications

B. Culture/values

Back 91

A pay system reflects values guiding an employer’s behaviors and treatment of employees

Front 92

Step 1: Assess Total Compensation
Implications

E. Nature of union

Back 92

management
relationship

Front 93

Step 1: Assess Total Compensation
Implications

C. Social and political context

Back 93

Legal and regulatory requirements


Cultural differences


Changing work force demographics


Employee values and expectations

Front 94

Step 1: Assess Total Compensation
Implications

F. Role of pay in overall HR strategy

Back 94

Supporting player

Agent of change

Front 95

Step 1: Assess Total Compensation
Implications

D. Employee needs/preferences

Back 95

People do not understand the
alternatives; too many choices confuse
them

Front 96

Step 1: Assess Total Compensation Implications

HR strategy: Pay as a supporting player or catalyst for change?

Back 96

Pay strategy is influenced by how it fits
with other HR systems


Pay can be a supporting player, as in the
high-performance approach


Pay can take the lead and be a catalyst
for change

Front 97

Step 1: Assess Total Compensation
Implications

E. Nature of union

Back 97

management
relationship

Front 98

Step 2: Map a Total Compensation Strategy

Back 98

Mapping is used to clarify and
communicate


Offers a picture of a company’s
compensation strategy based on the
five choices in the pay model

Front 99

Step 1: Assess Total Compensation
Implications

F. Role of pay in overall HR strategy

Back 99

Supporting player

Agent of change

Front 100

Steps 3 and 4: Implement and
Reassess

Back 100

Step 3

- Involves implementing the strategy through the design and execution of the compensation system


Step 4

- Recognizes that the strategy must change to fit changing conditions - Involves periodic reassessment

Front 101

Step 1: Assess Total Compensation Implications

HR strategy: Pay as a supporting player or catalyst for change?

Back 101

Pay strategy is influenced by how it fits
with other HR systems


Pay can be a supporting player, as in the
high-performance approach


Pay can take the lead and be a catalyst
for change

Front 102

Sources of Competitive Advantage:
Three Tests

Back 102

Is it aligned?


Does it differentiate?


Does it add value?

- Calculate the return on investment (ROI)

Front 103

Step 2: Map a Total Compensation Strategy

Back 103

Mapping is used to clarify and
communicate


Offers a picture of a company’s
compensation strategy based on the
five choices in the pay model

Front 104

Steps 3 and 4: Implement and
Reassess

Back 104

Step 3

- Involves implementing the strategy through the design and execution of the compensation system


Step 4

- Recognizes that the strategy must change to fit changing conditions - Involves periodic reassessment

Front 105

Sources of Competitive Advantage:
Three Tests

Back 105

Is it aligned?


Does it differentiate?


Does it add value?

- Calculate the return on investment (ROI)

Front 106

“Best Practices” versus “Best Fit”?

Back 106

Best Practices


Assumptions:


- A set of best-pay practices exists

-
Practices can be applied universally across all situations

-
Results in better performance with almost any business strategy

Best Fit

A company is more likely to achieve competitive advantage if the pay system:

-
Reflects company’s strategy and values


- Is responsive to employees’ and unions’ needs

-
Is globally competitive

Front 107

Guidance from the Research
Evidence

Back 107

Internal alignment
- Pay differences among internal jobs can
affect results


External competitiveness
- Paying higher than the average paid by
competitors can affect results


Employee contributions
- Performance-based pay can affect results

Front 108

Research evidence

Back 108

One study concluded that how you pay alsommatters as much as how much you pay


Studies conclude that performance-based pay that shares success with employees improves employee attitudes, behaviors, performance – especially when combined
with high-performance practices


Performance-based pay can be the best practice under right circumstances

Front 109

Competitive Advantage

Back 109

A business practice or process that results in better performance than one's competitors

Front 110

Strategic Perspective

Back 110

A focus on compensation decision that help the organization gain and sustain competitive advantage.

Front 111

Strategy

Back 111

The fundamental business decisions that an organization has made in order to achieve its strategic objectives, such as what business to be in and how to obtain competitive advantage

Front 112

High-performance systems generally include three features

Back 112

1. High skill/knowledge requirements (selective hiring)
2. Work designed so that employees have discretion and opportunities to collaborate with others (teams) and continue to learn (training and development)
3. Performance-based pay system.

Front 113

What is neccessary to formulate a compensation strategy?

Back 113

Assessing the compensation implications of many factors- including the organization's business strategy, the global competitive dynamics, its culture and values, the sociopolitical context, cmployee needs, unions, and how pay fits with other HR systems.

Front 114

Alignment of Pay Strategy Includes Three Aspects:

Back 114

1. Alignment with the business strategy
2. Alignment externally with the economic and sociopolitical conditions
3. Alignment internally with the overall HR system

Front 115

Internal Alignment (Internal Equity)

Back 115

The pay relationships between the job/skills/compentencies within a single organization. The relationships form a structure that can support the workflow, is fair to the employees, and directs their behavior toward organization objective

Front 116

Pay Structure

Back 116

The array of pay rates for different work or skills within a single organization. The number of levels, differentials in pay between the levels, and the criteria used to determine these differences create the structure.

Front 117

Distributive Justice

Back 117

Perceived fairness of pay or other work outcomes received.

Front 118

Line-of-sight

Back 118

Link between an individual employee's work and the achievement of organizational objectives

Front 119

Differentials

Back 119

Pay differences between job levels

Front 120

Gini Coefficient

Back 120

Statistic that varies between zero and one, increasing with the magnitude of pay differentials between job levels.

Front 121

Content

Back 121

Refers to the work performed in a job and how it gets done (tasks, behaviours, knowledge required, and so on)

Front 122

Value

Back 122

refers to the worth of the work: its relative contribution to the organization objectives.

Front 123

Use value

Back 123

Use value reflects the value of goods of services an employee produces in a job

Front 124

Exchange value

Back 124

is whatever wage an employer and employee agree on for a job.

Front 125

Job-based Structure

Back 125

A job-based structure looks at work content- tasks, behaviors, responsibilities

Front 126

Marginal Productivity Theory

Back 126

Unless an employee can produce something of value from his/her job equal to the value received in wages, it will not be worthwhile for an employer to hire that employee

Front 127

Human Capital

Back 127

The education, experience, knowledge, abilities and skills that people possess.

Front 128

Internal labour markets

Back 128

Rules and procedures that determine the pay for different jobs within a single organization and that allocate employees to those different jobs.

Front 129

Internal Alignment

Back 129

Address relationships inside the organization.

Front 130

Internal Structure

Back 130

The relationship among different jobs inside an organization make up its internal structure.

Front 131

Pay Structure

Back 131

The array of pay rates for different work or skills within a single organization.
The number of Levels, differentials in pay between the levels, and the criteria used to determine these differences create the structure.

Front 132

Workflow

Back 132

refers to the process by which goods and services are created and delivered to the customers.

A company's workflow reflects how it is organized- its design.

Front 133

Distributive Justice

Back 133

Perceived fairness of pay or other work outcomes received.

Front 134

Two Sources of Fairness

Back 134

1. The procedures for determining the pay structure, called procedural justice

2. The actual result of the procedures, which is the pay structure itself, called Distributive justice.

Front 135

Procedural Justice

Back 135

The procedures for determining the pay structure

Front 136

Distributive Justice

Back 136

refers to the fairness of the decision: guilty.

Front 137

Pay procedures are more likely to be perceived as Fair If?

Back 137

1. If they are consistently applied to all employees

2. If employees participated in the process.

3. If appeals procedures are included

4. If the data used are accurate.

Front 138

When applied to an internal structure, what does procedural justice addresses?

Back 138

Applied to internal structures, procedural justice addresses how design and administrative decisions are made, and whether procedures are applied in a consistent manner.

Front 139

When applied to internal structures, what does Distributive justice address?

Back 139

Distributive justice addresses whether the actual internal pay differences among employees are reasonable.

Front 140

What does internal pay structures influence?

Back 140

Employee's behavior

Front 141

Line-of-sight

Back 141

link between an individual employee's work and the achievement of organizational objectives.

Front 142

The criteria or rationale on which the structure is based should make clear the relationship between each job and the Organization's objectives.

Back 142

This is an example of Line-of-sight.

Front 143

Internal Pay Structure: Defined

Back 143

An internal Pay structure is defined by:
1. the number of levels of works
2. The pay differentials between the levels

3. The criteria used to determine those levels and differentials

Front 144

What is one feature of any pay structure?

Back 144

Its hierarchical nature; the number of levels and reporting relationshps.

Front 145

What does pay structure typically reflect in the organization>

Back 145

flow of work in the organization, some are more hierarchical with multiple levels, other are compressed with few levels.

Front 146

Differentials

Back 146

pay differences between job levels.

Front 147

Gini Coefficient

Back 147

statistic that varies between zero and one, increasing with the magnitude of pay differentials between job levels.

Front 148

What does a Gini of Zero Mean?

Back 148

it means everyone is paid the identical wage.

Front 149

The higher the Gini Coefficient (maximum=1),

Back 149

the greater the pay differentials between the levels.

Front 150

Content

Back 150

refers to the work performed in a job and how it gets done (tasks, behaviors, knowledge required, and so on.)

Front 151

Value

Back 151

refers to the worth of the work: its relative contribution to the organization objectives.

Front 152

A structure based on Content typically ranks jobs based on:

Back 152

Skills required, complexity of tasks, and/or responsiblitiy.

Front 153

Structure based on the Value of the work

Back 153

Focuses on the relative contribution of the skills, tasks, and responsibilities of a job to the organization's goals.

Front 154

In addition to including relative contribution, value may also include

Back 154

external market pressures (such as what competitors pay for this level of contribution).

Or value may include rates that have been agreed upon through collective bargaining or even legislated rated (minimum wage).

Front 155

Use value

Back 155

reflects the value of goods of services an employee produces in a job.

Front 156

Exchange Value

Back 156

is whatever wage the employer and employee agree on for a job.

Front 157

Job-based structure

Back 157

looks at work content- tasks, behaviors, responsibilities.

Front 158

Person-based structure

Back 158

shifts the focus to the employee: the skills, knowledge, or competencies the employee posses, whether or not they are used on the particular job the employee is doing.