Topic 8 Managing the Employment Relationship

8. COMPENSATION AND REWARDS

INTRODUCTION
Total rewards → a comprehensive approach to compensating and rewarding employees.
Organizations with this total rewards approach create a value proposition for current and
prospective employees that consider the total value they receive for contributing their time and
energy to the company. Influences the kinds of employees who are attracted to and remain with
the organization. Reason → aligns rewards with business strategy.

COMPENSATION
- Total → all types of financial rewards and tangible benefits and services employees receive
as part of their employment.
- Direct → financial rewards employees receive in exchange for their work.
- Indirect → the benefits and services employees receive in exchange for their work.

DECISIONS ABOUT BASE PAY

Organizations make decisions to define a job structure or relative pay for different jobs within the
organization. They establish relative pay for different functions and different levels of
responsibility for each function.
- Job structure → the relative pay for different jobs within the organization.
- Pay level → the average amount (including wages, salaries, and bonuses) the organization
pays for a particular job.
- Pay structure → the pay policy resulting from job structure and pay-level decisions.

LEGAL REQUIREMENTS
HR legislation: Employers may not base differences in rewards on an employee's age, sex, race, or
other prohibited grounds of discrimination. Any differences in pay must instead be tied to such
business-related considerations as job responsibilities or performance.

Employment standards: The Canada Labour Code and the relevant provincial and territorial laws
include minimum requirements for wages, hours of work, overtime pay, vacation, statutory
holidays, as well as other specific provisions.

Pay equity: is in place federally and in several provincial jurisdictions, and attempts to address the
wage gap between female and male-dominated jobs to ensure that jobs of equal value within the
organization receive similar rates of pay. Organizations establish the worth of a job in terms of its
difficulty and its importance to the organization. The employer then compares the evaluation
points awarded to each job with the pay for each job. If jobs have the same number of evaluation
points, they should be paid equally.

Pay transparency (Ontario): disrupts the stigma of discussing salary with co-workers and others
and reduces the wage gap between female and male employees.
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ECONOMIC INFLUENCES ON PAY

Organizations must keep costs low enough that they can sell their products profitably, yet they
must be able to attract workers in a competitive labor market.

- Product and Labour Markets

The organization's product market includes organizations that offer competing goods and
services—competing to serve the same customers. Organizations under pressure to cut labor costs
may respond by reducing staff levels, freezing pay levels, postponing hiring decisions, or requiring
employees to bear more of the cost of benefits such as insurance premiums.

- Pay Level
Although legal requirements and economic influences limit organizations’ choices about pay
levels. When organizations have a broad range in which to make decisions about pay, they can
choose to pay at, above, or below the rate set by market forces. Economic theory holds that the
most profitable level, all things being equal, would be at the market rate. Often, however, all
things are not equal from one employer to another.

- Gathering Information About Market Pay

Benchmarking is a procedure in which an organization compares its own practices against those
of successful competitors. Involves the use of pay surveys that provide information about the
going rates of pay at competitors in the organization’s product and labor markets.

- How Do Employees Judge Pay Fairness?

According to equity theory, people measure outcomes such as pay in terms of their inputs. In
general, employees compare their pay and contributions using several considerations:
- What do they think employees in other organizations earn for doing the same job.
- What do they think other employees holding different jobs within the organization earn
for doing work at the same or different levels.
- What do they think other employees in the organization earn for doing the same job as
theirs.

JOB STRUCTURE
Job evaluation → an administrative procedure for measuring the relative internal worth of the
organization's jobs. To conduct a job evaluation, the committee identifies the characteristics of a
job that the organization values and chooses to pay for. They provide the basis for decisions about
relative internal worth. The organization may limit its pay survey to jobs evaluated as key jobs.
These are jobs that have relatively stable content and are common among many organizations, so
it is possible to obtain survey data about what people earn in these jobs.

PAY STRUCTURE
Reflects decisions about how much to pay and the relative value of each job. It should reflect what
the organization knows about market forces, as well as its own unique goals.
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Hourly wage → rate of pay for each hour worked.

Piecework rate → rate of pay for each unit produced.
Salary → rate of pay for each week, month, or year worked.

- PAY RATES
Pay policy line: a graphed line showing the mathematical relationship between job evaluation
points and pay rate. Using this line, the analyst can estimate the market pay level for a given job
evaluation.

- PAY GRADES: sets of jobs having similar worth or content, grouped together to establish
rates of pay. Drawback: grouping jobs will result in rates of pay for individual jobs that do
not precisely match the levels specified by the market and organization’s job structure.

- PAY RANGES: a set of possible pay rates defined by a minimum, maximum, and midpoint
of pay for employees holding a particular job or a job within a particular pay grade or
band. Firms want some flexibility. Usually pay ranges overlap, this gives the company
more flexibility.

ALTERNATIVES TO JOB-BASED PAY

- Broadbanding → reducing the number of pay ranges in the organization's pay structure.
Reduces promotion opportunities but provides flexibility for lateral career moves.
- Competency-based pay systems (skill-based) → pay structures that set pay according to
the employees' levels of skill or knowledge and what they are capable of doing.

DETERMINIG WAGE LEVELS

1. Conduct a pay survey → using the network, government statistics, benchmarking…
2. Conduct a job evaluation to determine the internal relative worth → compare jobs on
content, evaluate according to compensable factors, assign points to each job title.
3. Group similar jobs into pay grades.
4. Set a pay range for each pay grade.
5. Fine-tune specific pay rates.

VARIABLE PAY
Forms of pay are linked to an employee's performance as an individual, group member, or
organization member. For incentive pay to motivate employees to contribute to the organization's
success, the plans must be well designed. In particular, effective plans meet the following
requirements:
- Performance measures are linked to the organization's goals.
- Employees believe they can meet performance standards.
- The organization gives employees the resources they need to meet their goals.
- Employees value the rewards given.
- Employees believe the reward system is fair.
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- The plan takes into account that employees may ignore any goals that are not rewarded.

If incentive pay is extremely rewarding, employees may focus on only the performance measures
rewarded under the plan and ignore measures not rewarded.

PAY FOR INDIVIDUAL PERFORMANCE

- Piecework rate
Some organizations pay production workers a piecework rate, a wage based on the amount
workers produce. This rate is often paid in addition to employees' base pay. The amount paid per
unit is set at a level that rewards employees for above-average production volume. An advantage is
a direct link between how much work the employee does and the amount the employee earns.
Complex job or hard-to-measure jobs do not apply very well.

- Standard hours plan

An incentive plan that pays workers extra for work done in less than a preset "standard time."
Same as piecework, care about quickness or output, but lose focus of quality or customer service.

- Merit pay
System of linking pay increases to ratings on performance appraisals. An advantage is that it
provides a method for rewarding performance in all of the dimensions measured in the
organization's performance management system. If that system is appropriately designed to
measure all the important job behaviors, then the merit pay is linked to the behaviors the
organization desires. A drawback is that it can quickly become expensive. Managers at a majority
of organizations rate most employees' performance in the top two categories. Also, performance
may be enhanced or reduced by factors beyond the employees' control.

- Performance bonuses
Reward individual performance, but bonuses are not rolled into base pay. The employee must
re-earn them during each performance period. In some cases, the bonus is a one-time reward..
Bonuses for individual performance can be extremely effective and give the organization great
flexibility in deciding what kinds of behavior to reward.

- Commissions
Incentive pay is calculated as a percentage of sales.

PAY FOR TEAM PERFORMANCE

Both types of incentives have the advantage that they encourage group or team members to
cooperate so that they can achieve their goals. However, depending on the reward system,
competition among individuals may be replaced by competition among teams.

- Gainsharing
A team incentive program that measures improvements in productivity and effectiveness and
distributes a portion of each gain to employees. Addresses the challenge of identifying
appropriate performance measures for complex jobs. Gainsharing frees employees to determine
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how to improve their own and their team's performance. Also broadens employees' focus beyond
their individual interests. Gainsharing is most likely to succeed when organizations provide the
right conditions:
- Management commitment.
- Need for change or strong commitment to continuous improvement.
- Management acceptance and encouragement of employee input.
- High levels of cooperation and interaction.
- Employment security.
- Information sharing on productivity and costs.
- Goal setting.
- The commitment of all involved parties to the process of change and improvement.
- Performance standards and calculations that employees understand and consider fair and
that are closely related to managerial objectives.
- Employees who value working in teams.

- Team Bonuses and Awards

Bonuses for team performance tend to be for smaller workgroups. These bonuses reward the
members of a group for attaining a specific goal, usually measured in terms of physical output.
Team awards are similar to team bonuses, but they are more likely to use a broad range of
performance measures, such as cost savings, successful completion of a project, or even meeting
deadlines.

PAY FOR ORGANIZATIONAL PERFORMANCE

These kinds of incentive pay are likely to be most effective in organizations that emphasize
growth and innovation, which tend to need employees who thrive in a risk-taking environment.
These organizational-level incentives can motivate employees to align their activities with the
organization’s goals.

- Profit sharing
Incentive pay in which payments are a percentage of the organization's profits and do not become
part of the employees' base salary. It may encourage employees to think more like owners, taking
a broad view of what they need to do in order to make the organization more effective. They are
more likely to cooperate and less likely to focus on narrow self-interest. Also, practical advantage
of costing less when the organization is experiencing financial difficulties. An organization setting
up a profit-sharing plan should consider what to do if profits fall. If profit-sharing payments
disappear along with profits, employees may become discouraged. One way to avoid this kind of
problem is to design profit-sharing plans to reward employees for high profits but not penalize
them when profits fall. This solution may be more satisfactory to employees but does not offer the
advantage of reducing labor costs without layoffs during economic downturns.

- Stock Ownership
It may not have a strong effect on individuals' motivation. Employees may not see a strong link
between their actions and the company's stock price, especially in larger organizations. The link
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between pay and performance is even harder to appreciate because the financial benefits mostly
come when the stock is sold.
- Stock options → rights to buy a certain number of shares of stock at a specified
price. Employees may focus so much on the stock price that they lose sight of
other goals. Ideally, managers would bring about an increase in stock price by
adding value in terms of efficiency, innovation, and customer satisfaction. Hiding
losses and inflating the recorded value of revenues are just two ways some
companies have boosted stock prices, enriching managers until these misdeeds
come to light.
- Employee stock ownership plan (ESOP) → an arrangement in which the
organization distributes shares of stock to all its employees by placing them in a
trust. They carry a significant risk for employees. Problems with the company's
performance therefore can take away significant value from the ESOP. Many
companies set up ESOPs to hold retirement funds, so these risks directly affect
employees' retirement income. Still, ESOPs can be attractive to employers. Along
with tax and financing advantages, ESOPs give employers a way to build pride in
and commitment to the organization. Employees have a right to participate in
votes by shareholders. This means employees participate somewhat in
corporate-level decision-making.

Employee benefits → compensation in forms other than cash. Examples include paid vacation
time, tuition reimbursement, and pension plans, among a wide range of possibilities. They
contribute to attracting, retaining, and motivating employees.

BENEFITS REQUIRED BY LAW

1. Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) – a contributory, mandatory
plan that provides retirement pensions, disability benefits, and survivor benefits.
Contributory plan: all costs of the plan are funded by employees, employers, and the
plan's own investments.
2. Employment Insurance (EI) – federally mandated program to provide temporary
financial assistance to unemployed workers.
3. Workers’ Compensation Acts – provincial programs that provide benefits to workers who
suffer work-related injuries or illnesses.

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OPTIONAL BENEFITS THAT SOME EMPLOYERS PROVIDE
- Paid leave.
- Medical insurance.
- Employee wellness program.
- Employee assistance program.
- Life insurance.
- Disability insurance.

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Check book for more details.
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RETIREMENT PLANS
Phased retirement – a gradual transition into full retirement by reducing hours or job
responsibility. Employers have a choice of using defined benefit plans or defined contribution
plans.
- Defined benefit plan pension plan that guarantees a specified level of retirement income.
- Defined contribution plan a retirement plan in which the employer sets up an individual
account for each employee and specifies the size of the investment into that account.