Compensation Study Guide Essay

Ill study Guide- HRM 438 Pay for Performance (PFP) Theory Job Performance Performance represented by behaviors of employees??”behavioral focus o When we talk about Job performance, what we are really talking about are specific behaviors of employees- focus on behaviors, not outcomes o Performance = Ability * Motivation You need both ability and motivation in order to perform successfully Performance is determined by both ability and motivation (multiplicative relationship) your textbook states this as: Behavior = f (Motivation, Ability, Environment) 1.

Attraction- helps attract people with necessary abilities 2. Retention- helps retain the talent with those abilities 3. Development- motivates employees to further develop abilities 4. Direction- directs both effort & behavior by rewarding desired behaviors Goal of PEP: Ultimately to increase organizational performace ???motivate effort from employees??”includes persistence of effort a. To motivate employees by rewarding desired employee behaviors (i. e. erformance) in order to ultimately achieve organizational success i. Tie compensation to performance (to some degree) in order to motivate it. Do this by having portion of compensation be variable- based n performance direct behavior in appropriate direction To motivate employees by rewarding desired employee behaviors (i. e. performance) in order to ultimately achieve organizational success Basics of Motivation (3 things) 1. Exchange between two parties 2.

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Employees get something they value from employer 3. Employer gets desired behaviors from employees a. value to the Individual Employee i. Involves satisfying employee needs & desires it. Valued “thing” can be both monetary and non-monetary (extrinsic & intrinsic) b. Exchange of Value (between employee & employer) i. Exchange must be seen as fair- rules created and followed c. Desired Behaviors i. Desired behaviors must be clearly identified, specific, & measurable it.

Behaviors must also be under the control of the employee Content & Process Theories of Motivation Basics of each content I neory 0 Content theories of motivation inform us that money is a motivator because it can satisfy needs/desires of people- to a point 0 MasloWs Hierarchy of Needs: 0 People are motivated by the desire to get their innate needs satisfied, and there are two categories of needs: 1 . “Lower-order” needs: safety, security, existence- urvival needs 2. “Higher-order” needs: personal growth, self-esteem, self- actualization 0 Money is a powerful motivator to people because it can fulfill “lower- order” needs of individuals 1 .

Allows you to buy food, shelter, clothing- the necessities of survival OFulfilling those basic needs is a very powerful instinct, but what about after those needs are fulfilled 1. Question: does money help fulfill the “higher-order” needs? Herzbergs Hygiene-Motivator theory: 2. Theory that states there are two types of “factors” relating to Job satisfaction and motivation: 3. Hygiene factors- aspects of a Job (e. g. ompensation) that if NOT present in sufficient amounts cause dissatisfaction, but won’t result in true satisfaction 4.

Motivating factors- aspects of a Job that will cause true Job satisfaction and are thus truly motivating 5. This theory is related to MasloWs Hierarchy of Needs theory: 6. Money is a hygiene factor that can be a source of dissatisfaction if not sufficient to ensure comfortable survival (lower-order needs), but not true Job satisfaction 7. Surveys of pay satisfaction find most people are somewhat dissatisfied with their pay- regardless of level 8. Only the fulfillment of higher-order needs eads to true Job satisfaction and is thus truly and consistently motivating to people 9.

Higher-order needs tend to be fulfilled by intangible rewards- challenge, recognition, enjoyment of work, social fulfillment at work, etc. Process Theory 0 Process theories of motivation describe how the process of motivation (exchange of value) actually works Many different theories explain why money is a motivator: 1. Equity Theory 2. Expectancy Theory 3. Operant Conditioning 4. Agency Theory 5. Goal-setting Theory 0 All these theories basically conclude that money acts as a reward that reinforces esired behavior 1.

The difference is in how each theory describes the process of motivation- all are insightful in their own unique ways Implications for PFP (similar to exercise in class) Expectancy Theory is a psychological theory that states that motivating people via rewards depends on three things: o Valence The degree to which the potential reward is valued & desired by the person o Instrumentality The degree to which the person believes that a reward will actually result from successTul perTormance- tnat tnere Is a llnK Detween perTormance & reward o Expectancy The degree to which the person believes that they have the means (e. g. bility, power, control) to successfully achieve performance (and thus get the reward) ??? Motivation is then a product of all three factors: o Motivation = Valence* Instrumentality * Expectancy o Implication is that if any of the three are perceived to be zero, then no motivation Operant Conditioning theory states that behavior is modified through positive & negative consequences o Positive consequences are called “rewards”- behavior occurs more frequently o Negative consequence are called “punishments”- behavior ccurs less frequently o The effectiveness of a consequence is affected by the following factors: o Reward Value & “Satiation” The degree to which the person still desires the reward- more valued = better ??? Extrinsic rewards tend to have “diminishing returns”- lose value over time o Immediacy of the Reward The amount of time between the behavior and the reward More immediate rewards more strongly reinforce behavior o Contingency of the Reward ??? How consistently the reward is given following the behavior ??? Consistent application of rewards reinforces behavior, inconsistent doesn’t 0 Goal Setting heory is a psychological theory that states people are motivated by goals (either self- or other-set) that are rewarded Goals motivate by doing the following: directing & focusing behavior, encouraging effort & persistence, and encouraging strategizing (critical-thinking) 0 In order to motivate, goals should have the following characteristics: 0 Specific 0 People need to know specifically what they need to do, in order to do it 0 Measurable 0 There must be some way of accurately knowing if a goal was achieved or not 0 Achievable (Realistic) 0 The goal can’t be impossible for the person due to being unrealistic or out of their ontrol OChallenging 0 More challenging goals are better motivators of performance 0 If rewards are tied to the achievement of goals, Agency theory is an economic theory that recognizes a fundamental problem: people (employees) tend to act in their own self-interest Often this self-interest conflicts with the interests of the organization 0 This can result in behaviors that are NOT beneficial to the organization, even though people are employed as “agents” of it 0 An “agent” is someone who is employed by another for a specific duty People will act in their own interest IF they won’t suffer any egative consequences 0 Examples: 0 Ex. 1: Office Space movie: Peter & the “efficiency consultants” 0 Ex. : Gov’t employees: compensation = 100% base pay, merit system poorly executed 0 Solution: align employee self-interest with the organization’s interest 0 If interests are aligned, then people’s inherent “selfishness” benefits the organization We can use compensation systems to align employee and organizational interests 0 people are motivated! Pay Tor PerTormance Plans Iron Rule of Compensation What it is Be very careful what you compensate (incentivize), because you WILL get what you compensate for!! ?? Watch out for unintended consequences!! Lots of stories of well-intentioned incentives gone wrong ??? Green Giant foods- bonuses for purity of food Sears- commission for recommending auto repairs Contests gone wrong Always think carefully about what might go wrong Remember: people tend to act in a self-interested manner- align interests ??? Use incentives carefully- avoid incentivizing Just one aspect of performance!! ?? Think of performance in a more holistic manner- multi-faceted total performance ???It is a good idea to pilot-test new incentive programs prior to rolling out company-wide ??? Allows or a chance to work out the kinks and correct issues ??? Implications of incentives gone wrong Short-Term Incentives Definition (time-frame) Short-term incentives are defined as additions to base pay that operate within a time-frame of a (roughly) a single year ??? Additions to base pay mean that the compensation is variable- is NOT a scheduled or pre-determined form of compensation ??? Base pay & benefits are only fixed forms of compensation ??? Involves a degree of risk to the employee- some like this, others don’t ??? Main purpose is to motivate behavior in the short-term Increase performance to support organizational goals

Short-term incentives can take many different forms: ??? Merit Pay ??? Lump-sum Bonuses & “Spot” Awards Individual Incentive Plans Team/Group Incentive Plans ??? Merit pay??”definition, purpose, criticisms, effectiveness evidence ??? Merit Pay- criticisms & problems ??? Merit pay has been heavily criticized for NOT being motivational ??? Main problem is the expectation of merit pay- employees expect to receive some sort of merit increase regardless of performance ??? Merit pay doesn’t actually reflect “merit”, but just average performance ??? Basically becomes a de facto Cost of Living Adjustment COLA) ??? Many companies have gone along with this expectation, and thus merit pay loses its effectiveness- doesn’t actually reward merit ??? PA systems are often very poorly designed & executed Disadvantage to merit pay is that it can be expensive Notice that merit pay adjusts BASE SALARY This adjustment/increase carries forward to next year, year after, etc. ?? Base salary can Increase rap101y even witn small merlt Increases year arter year ??? Ex: with a 3% merit increase per year: Companies using merit pay often use “merit pay grids” to engage in some form ost control/budgeting for the system ??? Companies generally try to control costs by using a “target” merit increase % ??? Ex: they will say we want our average merit % increase to be 3% for the year ??? Merit pay costing also allows you to estimate or calculate exactly (depends on the method) the total $ cost of your merit pay increases ??? Merit Grids involve integrating the following information: ??? Merit Increase Percentages for performance levels The % increase for each performance level is set by HR or Management ??? Ex: assume a 1 to 5 performance rating system- people rated a 1 get 0%, 5 gets 4% ??? Distribution (%) of employees in each performance level Taken from the annual performance review/evaluation data ??? Ex: 15% are rated a 5, 25% are rated a 4… Employee salary data Can use individual or aggregate (average) salary data- depends on whether you want a cost estimate or the precise total cost ??? Individual Incentives (incentive pay & lump-sum advantages & disadvantages ??? These are one-time bonuses given to employees to reflect above-average performance ??? Can be given annually or semi-annually, quarterly, etc.

Lump-Sum bonuses are often used in place of merit pay increases ??? Doesn’t hange base pay, so bonuses don’t carry forward like merit pay does ??? Sends that message that rewards must be earned every year!! ??? Function Just like base pay- reward consistently above average performance ??? Spot Awards reward employees for outstanding performance on specific projects/tasks ??? Not based on a predetermined level of performance, Just an ad hoc award ??? Performance is so outstanding that it deserves extra reward ???Advantages: These types of incentives are that they are cheaper than using merit pay adjustments ??? Can be tightly tied to desired behaviors- very powerfully motivating ???

Disadvantages: Sends message that bonuses must be earned every year- doesn’t reward past performance ??? Some employees recognize this as a cost-cutting measure Group Incentives??”types, definition, differences with individual incentives (performance differences), advantages & disadvantages ??? Team/Small Group Incentives o Extra pay (usually bonuses) that accrue to groups of employees based on achieving some predetermined level (standard) of performance ??? “Groups” could mean small teams, units, plants/offices, divisions, the entire organization o Very similar in mechanics to individual incentives Predetermined standards are set as goals for people to achieve ??? Level of achievement determines the size of the bonus/incentiveo Advantages: somewhat powerful motivator, necessary for team-oriented structure, cohesiveness of teams o Disadvantages: not as powerful as individual incentives, free-rider problems, motivational issues for high-performing individuals Long- I erm Incentlves Definition ??? Long-term incentives (LTls) are defined as additions to base pay that operate over longer than a single year period ??? Simply another form of variable pay ??? Long-term incentive plans have multiple purposes:

Motivate long-term value creation (based on increased performance) ??? Encourage employees to remain at company Tax-breaks for employee and employer for deferred compensation ??? L TIS often have legal tax advantages for both parties ??? Long-term incentives also take many different forms: Pension Plans Employee Stock Ownership Plans (ESOPs) ??? Length of Service Incentives Types & basics of each o Pensions are compensation systems that defer presently earned compensation for later use during retirement to supplement Social Security payments o Two Main Types: Defined Benefit Pension (“Traditional” Pension) ?? Predetermined monthly benefit level based on some formula o Usually some variation of: Benefit = Earnings * Years of Service ??? Benefit NEVER runs out- is present until death of individual or his/her beneficiary ???Investment risk borne by employer- must adequately fund the “pool” of money ??? Defined Contribution Pension (“401 (k)”) Predetermined employer contribution to an account o Often in the form ofa “match” of employee money up toa certain $ amount or % ??? Upon retirement employee retires with their “account” of money and can use it without restriction- lots of flexibility o Might run out prior to death or might not ?? Investment risk borne by the employee- they are responsible for managing money Performance Appraisal (PA) 0 Employee Stock Ownership Plans (ESOPs) 0 Employees are given company stock as a form of compensation 0 Company stock as compensation usually takes one of two forms: Stock Grants- employees are given full shares of company stock 0 Has immediate value- the current price of a share of stock at time of grant 0 Ultimate value depends on when the employee sells the stock- time of sale 0 Stock Options- employees are given the “option” to purchase shares of stock at a predetermined price 0 Value of options depends on the ifference between the “option price” and the value of stock at the time of “exercise date” (when options are used/cashed in) 0 Stock options are usually only valid for a fixed period of time 0 Options can be worthless if the “option price” is higher than the actual stock price 0Known as your stock options being “under water” 0 Can be a great way for the company to save money- Microsoft example 0 Is risky for the employee- they bear all the risk Lengtn 0T service ” Bonuses 0 Some companies offer one time bonuses or compensation if employees hit certain length of service goals/targets 0 This is becoming more rare today- fewer people emaining with companies for long periods of time 0 Generally in the form of lump- sum bonuses or some gift/perko Bonuses: cash bonus- either a fixed amount or % of salary 0 Gifts: the proverbial “golden watch” or some other gift 0 Perks: might be parking privileges, club memberships, etc. Some companies award profit-sharing eligibility or better benefit levels for employees in this category 0 Ex: blue-collar employee becomes eligible for white-collar employee benefits Often times there are recognition ceremonies, plaques, dinners/parties, etc. to honor the individual for heir longevity Concept of Performance Appraisal ??? General definition Common Problems with PA General definition Two dimensions??”Task vs. Contextual performance, what each is ??? Two main ways of assessing performance??”behaviors vs. outcomes ??? Performance Dimensions ??”what they are, how they are identified Behavioral Approach to PA Ranking Scales??”definition, advantages & disadvantages, forced distribution ranking system ??? Rating Scales??”definition, advantages & disadvantages, recommended number of scale points, scale anchors definition, BARS scale Outcomes Approach to PA

Parts to a Outcomes PA: Major Responsibilities, Objectives, Standards (what they are in general) Raters in a PA System Common Sources of Raters 360 Degree PA??”what it is, why it is effective Employee Benefits Legally Required Benefits General definitions of each Retirement Benefits General definitions & features of DB & DB plans DITTerences Detween D c plans Advantages of DC plans over DB plans for employers Medical Benefits Types of HC plans Disability benefits??”general definition of each, features Non-Financial Benefits What they are??”examples Importance of despite being non-financial US Compensation Law ELSA Minimum Wage laws??”Federal vs.

State minimums, exceptions for employees in tipping positions, Living Wage definition ??? Fair Labor Standards Act (FLSA- 1938) Minimum Wage Laws Federal & state minimums Work Hours/Overtime Pay ??? Exempt & Non-Exempt status Child Labor Laws- won’t cover much due to lots of state variation Anti- Discrimination Laws Equal pay Act (1963) CiVil Rights Act (1964) Age Discrimination in Employment Act (1967) Americans with Disabilities Act (1990) ??? Prevailing Wage Laws Federal law- “Davis-Bacon” laws for federal contracts ??? State laws- vary by state; ifferent eligibility requirements ??? Federal Minimum Wage Imposes a minimum hourly wage “floor”- currently $7. 25 ??? States can pass legislation to increase the minimum wage, but cant go below ???Current Illinois min. wage: $8. 25/hr What about salaried employees? There is no minimum salary specified by law, but…

Salaried employees’ hourly pay must be at least minimum wage ??? Employees who earn tips must be paid minimum of $2. 13/hr ??? Their tips + wage must equal or exceed the regular minimum wage ??? If they don’t, employer can be sued and forced to pay difference (e. g. back pay) ??? Living Wage” proposals are common today- tying minimum wage to average living costs in local area ??? Often full-time workers earning minimum wage don’t earn enough money to live on in expensive areas- called the “working poor” ??? Overtime laws??”pay rate required, threshold for hours, notion of exempt vs. non- exempt employees ??? Work Hours/Overtime (OT) Pay o Requires workers to be paid at least 1. times the hourly rate for hours worked beyond 40/week- provided employee isn’t considered “exempt” from FLSA ??? companles are not requlrea to pay 01 to exempt employees regardless 0T tne umber of hours worked oThree categories of ELSA exempt employees: ??? Executive: higher-level managerial employees can be ruled exempt ???Vast majority of executive employees are exempt ??? Professional: mid-level employees who are considered “learned” ??? Most professional employees are considered exempt Administrative: mid-to low-level non-managerial employees can be ruled exempt, even if paid hourly ??? A smaller % of these employees are exempt- rest are “non- exempt” o Exempt/Non-Exempt status is often abused by employers They misclassify employees as Exempt in order to avoid paying OT ???Work Hours/ Overtime (OT) Pay Companies are not required to pay OT to exempt employees regardless of the They misclassify employees as Exempt in order to avoid paying OT Anti-Discrimination Laws ??? Purpose of these laws Know the names of the major laws and the protected personal characteristics (protected classes) ??? Equal Pay Act (amended by Lilly Ledbetter Fair Pay Act) o An anti-discrimination law that forbids wage discrimination on the basis of gender- “equal pay for equal work” ??? Why gender? historical pay differences between men & women o Jobs are considered equal if they require equal skill, effort, esponsibility, and have similar working conditions ??? Jobs don’t have to be identically equal, Just “substantially’ equal o Differences in pay between men & women may be legal if based on: ??? Seniority differences Merit/Performance differences Quantity or Quality of production Some factor other than gender- shift differentials, extra responsibilities, conditions o Effect of EPA has been to close male-female wage gap- but didn’t eliminate it ??? Women still make less then men- partly due to discrimination, partly due to legitimate labor market factors ??? Civil Right Act (Title VI’) Prohibits any discrimination on the basis of race, color, gender, religion, and national origin- overlaps with Equal Pay Act on gender discrimination ??? Doesn’t matter if discrimination is intentional (“Disparate Treatment”) or unintentional (“Disparate Impact”)- still illegal o Discriminatory actions are very broadly defined, and include compensation and compensation-related factors (e. g. promotions, tralnlng opportunltles, etc. ??? Age Dlscrlmlnatlon In Employment Act (A o Prohibits discrimination based on age- cant pay older people less o Can pay older people MORE- seniority systems are legal Americans with Disabilities Act (ADA) o Prohibits discrimination based on disability/handicap- can’t pay disabled less o Can only differentiate if performance/merit-based reasons Prevailing Wage Laws General definition and purpose Prevailing Wage (PW) laws ???Federal and State laws that regulate the compensation paid to government contractors & their employees- people that work on publicly-funded projects ??? Usually refers to construction-type work on public works-type projects ??? Contractors must pay local “market” wages to their employees for work done on these (often very large) projects ??? Wage rates are et by Federal law or State law for individual localities ??? Wage rates are often close to union wage rates for that specific occupation & area ???Laws were enacted in 1930’s to prevent “predatory contractors”- contractors who would win bids for work by using low labor cost estimates for their bids ??? Ex: a contractor from rural downstate Illinois (where wages are naturally much lower) could bid a project in Chicago (where wages are naturally much higher) using downstate wages and thus win the bid for the project due to lower labor costs ??? If allowed, often results in “race to the bottom” for wages- government wants to avoid this ???


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