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T9: Compensation (Questions to consider in a compensation approach: (What…

- - - - Group incentives and team awards
        
        Like gain-sharing but with a small work group
        
        Can benefit from being part of a balanced scorecard
      - Gain-sharing
        
        Sharing productivity gains with employees in specific departments/groups
        
        Works people with the 'workers' than profit sharing because they have more input/control over the results
        
        'Scanlon Plan' is an example of this - see p.517
        
        Evidence shows does improve performance
        
        Needs a number of measures in place to work - see TG
    - - Profit sharing
        
        Weaknesses
        
        Reduce motivation due to negative effects of business downturn
        
        Some uncertainty about the real motivational impact of profit sharing
        
        Reduce motivation if payments are deferred
        
        Can be negatively compared to other organisations
        
        Agency Theory implication - lower wage agents assume more risk in this situation, so need to be given larger reward as a result
        
        Characteristics
        
        Not a fixed cost, variable with organisation performance
        
        Not tied to base salary
        
        Get employees to think more like owners
        
        Reduce self-interest and promote teamwork, collaboration and contribution
      - Ownership
        
        Employee stock ownership plans (ESOPs)
        
        Similar to profit-sharing but even stronger link to overall organisation performance
        
        Does not meet 'Reinforcement theory' requirements of 'experiencing the rewards as benefit is not experienced until shares are sold and this is often upon leaving the org
        
        Links to 'Agency theory' in getting employees to think like owners - at least at the higher levels - not clear about lower level employees
        
        Stock Options
        
        Popularity is waining, in part due to tax changes
        
        Some organisation, e.g. McDs, have extended this to all levels
  - - - Characteristics
        
        generally based on annual appraisals
        
        Pay rises linked to performance
        
        Very common but scarce evidence of effectiveness
        
        Often uses a 'merit increase grid' to determine % increases
      - Weaknesses
        
        Ignore factors out of the employees control
        
        Generally only one judge - supervisor/manager
        
        Even best performers only get minimal reward compared to mediocre performers
        
        Early large raise can reduce motivation when minimal raises follow
        
        Can individualise people and discourage teamwork
        
        Can encourage dysfunctional behaviour just to meet results
    - - Weaknesses
        
        Administrative complications
        
        Can lead to dysfunctional behaviour simply to get the reward
        
        Do not fit team or group approach
        
        Some jobs have no 'measurable' outcomes
        
        Discourage development as this may take time away from earning reward
        
        Can reward volume at the expense of quality/service
      - Characteristics
        
        Tied to objective, measurable outcomes
        
        Not part of base pay
        
        Need to be earned and re-earned
  - - - Relatively low base salary with significant bonus potential
      - Increasingly oriented to 'contingent pay'
      - Contingent on short or long term goals
- - - - Unfavourable comparison
        
        Leave or stay but become dysfunctional
        
        Reduced input
        
        Increase outcomes, i.e. theft / asking for a payrise
      - Favourable comparison
        
        Increased cooperation
        
        Increased effort
  - - - Link is clear and recognised by employee
      - Reward closely follows behaviour
  - - - Employees perception of how strong the link is
      - The value of the reward to the employee
      - Strength of the link ee performance and reward
  - - - 'Principal' (Owner OR Manager)
      - 'Agent' (Manager OR Employee)
    - - Options
        
        'Behaviourally based pay contract - greater risk for 'Principal' so reduced reward for 'Agent' - may require more monitoring to avoid information asymmetry
        
        'Outcome based pay contract' - greater risk for 'Agent' so 'Principal' offers greater reward (compensating wage differential)
      - Factors to consider when choosing and option:
        
        Risk aversion - favours 'behavioural'
        
        Outcome uncertainty - managers will favour 'behavioural'
        
        Job programmability - less routine means monitoring is more difficult and therefore favours 'outcome'
        
        Measurable job outcomes - favours 'outcome'
        
        Ability to pay - 'Outcome' costs more in good times, so may be less likely if the organisation simply cannot afford it. (Self - could greatly benefit where high economies of scale can be gained)
        
        Tradition - 'Outcome' is becoming more popular, but if tradition is against it, it may not be viable.
      - The principal must choose a contract structure / compensation package that will more closely align the agent with the principals goals/risk comfort/decision making tendencies.
    - - Goals: Shareholder goal to maximise wealth, manager goal to maximise prestige or personal pay = manager may expend on extravagant but non-value-adding endeavours
      - View on risk: With diversification, shareholders can be more willing to take risks than managers whose job/income will be on the line and therefore make them risk averse. - This may be seen in the projects they pursue but also in their own pay structure which if they can control it, may be more likely to be focused on a good base salary than contingent on a bonus structure that is more at risk
      - Decision-making horizons: Manager may focus on short-term goals as they will likely move to other companies, owners are in it for the long haul so may focus on long-term goals.
    - - Player goal incongruence
      - Player information asymmetry
- - - - workers compensation
      - unemployment insurance
      - social security
    - - i.e. health insurance
    - - Not as common in NZ as covered by Govt and KS
      - Higher level positions may have additional benefits
    - - Sick leave / maternity leave / holidays
      - In NZ minimums prescribed by law
      - Benefits therefore are those that go beyond the minimum requirements, i.e. birthday leave, additional maternity leave such as teachers union agreement
    - - This area has considerable scope for additional benefits and with the increasing focus on women in the workforce is becoming a key differentiation strategy for organisations who want to target this market
      - Examples
        
        child-care support
        
        parental leave
        
        work hours/location flexibility
      - Topic guide outlines considerations for effective management of these types of benefits
- - - - Internal equity - different jobs / same organisation
      - External equity - same jobs / different organisations
      - Explained: That people with calculate the perceived outcomes and the perceived inputs, then compare these to others and come up with a favourable or unfavourable judgement.
      - Result: If they find things unfavourable, they will work to rectify this situation through:
        
        Increase outcomes, i.e. theft / asking for a payrise
        
        Leave or stay but become dysfunctional
        
        Reduced input
    - - Upper limit contraint - what the product market will allow to remain competitive
      - Lower limit constraint - what the labour market with allow to remain competitive
        
        Are the employees an expenses or an asset?
        
        EFFICIENCY WAGE THEORY (p.463) - When does the benefits of higher pay outweigh the cost?
        
        When technology or structure requires high skill
        
        When employees are not highly supervised
      - Benchmarking with help determine what the market rate is
        
        Method: Market Pay Surverys (p.463)
        
        Consider both product and labour market surveys, weighting each depending on problem areas
        
        Also consider revenues/employee and revenues/labour cost to get a better understanding of ROI in other organisations
        
        Also need to consider; product quality, customer satisfaction, workforce quality (i.e. education/skills levels)
      - Strategic goals will determine where an organisation should sit against the market norms, at/below/above
    - - Job evaluation
        
        Determines compensable factors - aspects of value that the organisation will pay for
        
        Level of decision-making
        
        Required education
        
        Job complexity
        
        Responsibility / reports
        
        Working conditions
        
        Required experience
        
        Point-factor system - system of job evaluation
      - Problems - bureaucracy plus see topic guide
        
        See list on topic guide
        
        Government regulations
        
        Overtime regulations
        
        Taxation
        
        Minimum wages
        
        Superannuation entitlements
        
        Bureaucracy
      - Responses to problems
        
        Delayering and banding
        
        Paying the person
        
        Knowledge based systems
        
        Competency based system
        
        Skills based system