RWTI Business Research Report BY Jehrli2 Business Research Report Title Presented to: Assessment Code: RWTI Student Name: Student ID: Date: Mentor Name: Table of Contents Executive Summary Introduction As manufacturers of high precision electronic test equipment, ABC Electronic Test Equipment is in a highly competitive industry that is always looking for the most highly qualified and skilled employees.
Edward Lawler of the Center for Effective Organizations at the University of Southern California, the author of many books on compensation, believes that “employees value themselves in relation to the market lace and if a competitor were to offer higher pay it is likely that employee will change companies” (Wilson, 2003). As we look towards the future this has become a growing concern for us at ABC Electronic Test Equipment. Millions of skilled workers from the baby boomer generation continue to retire which is leading to a large number of available positions and fewer skilled employees to fill those positions (MacLean, 2007).
The goal of any compensation strategy is to recruit and retain the highest quality employees. To do this we must have a competitive pay structure that lso fits the needs and goals of our company. With that in mind, I have prepared this report for executive review of compensation methods currently being used in the market with a specific focus on employee compensation and what it is based on. Research Findings During my research I found that there are many different strategies regarding compensation.
Some strategies focus on base pay, some on bonuses and lor variable pay, and others on benefits. I have focused on 3 methods that are being used today – the skill/competency based method, the pay for performance method, and strategic compensation method. Skill/Competency Based Strategy A skill/competency based strategy is a method where employees are compensated based on their ability to demonstrate the skills and/ or competency needed to perform certain duties.
In the manufacturing environment we have many positions that are dependent on the demonstration of tangible skills, for example the ability to operate a forklift or to be able to repair specific machinery. These are primarily non- exempt positions such as laborers, mechanics, and electricians (Wilson, 2003). Other competencies such as analytical thinking and leadership ability. Some positions may equire demonstration of both skills and competencies such as a shift supervisor or a floor lead.
Implementing this strategy requires a skills and competency inventory for all positions in the company. This can be a very exhausting task and take several months to complete. Once the skills and competency requirements have been defined, a development plan for skilled employees would need to be designed as well as a method for evaluating and recording employees acquired skills. When employees can demonstrate that they have learned required skills they are then eligible for a pay increase.
Competency requirements are not as straight forward as skill requirements and the most common way to develop these requirements is to observe the qualities demonstrated by those that are regarded as top performers as compared to those deemed as average and collect data via surveys, interviews, observations, and tests and use that data to identify the core competencies needed to be successful (Heneman, 2002). Employees who demonstrate high levels of competency are compensated more than those that do not.
Analysis: This strategy does require a lot of upfront investment in time and development and it takes time or the ROI to be realized. However, once it is instituted it is easily maintained and employees have clear and concise requirements needed to increase their pay. Also, it has shown success in other manufacturing environments. On the downside, it is focused primarily on base pay as a compensation method and therefore does not have flexibility to adjust easily to economic conditions and may lead to the need to lay off employees during economic downturns.
Performance Based Strategy Performance based pay strategy is a variable pay system which is intended to increase employee productivity by rewarding employees based on their performance ather than paying based on the time that an employee spends at work (Wisegeek). Due to the fact that performance based employees have a vested interest in the success of the company their productivity is likely to improve which can lead to the need for fewer employees to maintain production levels leading to a reduction in labor costs to the employer.
Studies have shown that time based employees only produce 50 to 60 percent of the output of performance based employees (Atchinson). Performance based pay plans are becoming increasingly utilized by companies cross all industries as they try to improve their productivity while limiting their costs and remaining competitive. An effective performance based plan allows an employer to distribute some of the financial risk and rewards of the business to the employees.
The employer can keep base pay compensation below the market average while still offering employees the opportunity to make more money than what is offered at the high end of the market pay range. This leaves the employer less vulnerable to fluctuations in the economic environment by lowering the fixed cost of wages (Miller, 2011). There are many ways to implement a performance based plan but all require that goals be set, measurable, and achievable in the given timeframe (Intech).
Performance plans can be very flexible and goals can be set for any metrics that the company would like to focus on. For example, goals can be based on overall company profits, cost reductions, safety, sales, production, and/or demonstrating company values. The plans can be designed to reward individual performance, team can be awarded as cash bonuses, commission, extra vacation or personal time off, company paid meals, or other incentives. The performance plan can be tailored to the companies needs as well as to provide employees with rewards that are tailored to their needs.
Also, due to the flexibility of performance plans if the desired results are not being achieved or if the needs of the business have changed the plan can be modified relatively easy compared to other compensation methods (Wisegeek 2). There are possible issues with implementing a pay for performance plan. For instance, if rewards are based primarily on individual goals this could lead to unhealthy competition in the workplace that can breakdown teamwork. A pay for erformance plan can lead to dissatisfaction among senior workers who feel they should be rewarded more than Junior workers.
Also, employee moral can become low if they are unable to meet goals due to reasons outside of their control or if performance goals are set at levels which may be unobtainable. Analysis: Implementing a performance base plan could provide several benefits to the company in terms of cost reductions and increased employee productivity. The key to its success is in developing a well-designed plan that meets the needs of the company while providing the employees with the incentives they desire.
Periodic reviews of the plans effectiveness would need to be implemented and adjustments made if the desired results were not being achieved or as the needs of the company change. However, we could run into issues with employee moral during extended economic downturns when goals are not able to be met or if the incentive policy is not clearly defined and communicated to the employees. Also, this plan is based on monetary awards only and may not be as effective for employees who are not solely driven by cash incentives.
The Strategic Plan The strategic plan method can be seen as an extension of the pay for performance lan as variable pay is still at the center of the plan; however the strategic plan incorporates a total compensation view to employee pay. J. R. Shuster and Patricia Zingheim of Shuster-Zingheim and Assoc. , a compensation consulting company, and authors of the book “The New Pay’, describe new pay as follows: “Under new pay,… pay programs respond to specific business and human resource challenges… New Pay requires the use of all the possible ‘communication’ to hit the proper performance targets….
Base pay, variable pay, indirect pay… The centerpiece of new ay is variable pay (which) facilitates the employee-organization partnership by linking the fortunes of both parties in a positive manner (Encyclopedia of Business). ” It is a shift in thinking of base pay and variable pay as the primary factors of compensation and developing a “total rewards” mentality towards the compensation package. Programs may incorporate base pay, indirect pay, variable pay, perks-pay, works-pay, growth pay, advancement opportunity, psychic income, and/or quality of life.
The following list gives a basic description of each of these: Base Pay – Guaranteed Salary Variable Pay- Overtime, Bonus, Stock Option, Variable Pay, any “one-time” payment Indirect Pay- Benefits Perks-pay – $ Values of prestige cars, accessories Works-pay – Uniform allowance, cell phone Opportunity for Advancement – Can I advance on this Job? Psychic Income – The emotional quality of the workplace (this can be negative) Quality of Life – Can I balance my life on this Job? Encyclopedia of Business) The advantages of developing a new pay system are that it will allow the company to align compensation with the companys objectives and lets employees know what contributions are valued by the company. Also many of the elements of this plan require very little overhead to implement and do not have the continually growing costs of base pay increases. Implementing an effective plan has been shown to lead to employees being self-motivated, employee innovation, and the strengthening teamwork.
The disadvantage is in the difficulty of communicating the plan to employees. The plan must be communicated and understood by the employees so that they do not see the plan as a reduction of their pay but as a realignment of the pay structure that provides them with a greater value than the current traditional pay structure. Analysis: The primary underlying premise of strategic pay is the view that employee compensation be seen has an investment and not a cost. It requires a shift from the focus of what employees cost to what employees produce.
The plan provides a large amount of flexibility and can be implemented over time. The plan also provides a means to attract and retain employees who are not driven by cash incentives alone. Effective implementation is dependent on employee participation in the development of the plan and continual open communication throughout the process. When a strategic plan is implemented it can provide several benefits to both he company and the employees and provide valuable tools when negotiating with potential new employees that can be used to differentiate us from our competition.
Recommendations Based on the research I have performed I would make the following recommendations: 1. My first recommendation is to conduct a market analysis to determine the current market rates of compensation and our competitor practices and to perform employee surveys to determine attitudes towards compensation, benefits, and general satisfaction in the workplace to provide us with guidelines for developing our own program. 2. For my second recommendation I would suggest developing performance goals for all work groups and begin the process of instituting a pay for performance plan. . My third recommendation is to use the data collected from market research and employee surveys to build upon the pay for performance plan we have instituted and develop a strategic plan that focuses on total compensation. 4. My final recommendation is to institute a monitoring program to ensure that our compensation plan is having the desired effect and make adjustments as needed. Conclusion methods currently being used in the marketplace. I provided 3 examples – skill/ ompetency method, performance based pay method, and strategic pay method.
All three of these methods and/or a combination of these methods are being used throughout the manufacturing industry. Based on the research I suggested that we take the steps to develop a strategic plan by initially implementing a pay for performance plan and continuing to build upon that base to work towards a total compensation approach. I believe this will provide us the most benefit as we move into the future by allowing us to continually tailor or compensation towards achieving our companies goals and individual employee’s needs.