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Compensation: Structure and Pg

By hrloco Aug 07, 2014 2320 Words
1. How do differing perspectives (society, managers and employees) affect the views of compensation? (11 marks) Differing perspectives certainly do affect the view of compensation. Our textbook discusses in pages 2-5 (Milkovich et al) that society in general may "view pay as measure of justice" (pg. 2). The example used in our textbook refers to the pay gap between men and women in society. It is stated that the pay gap is narrowing but it still persists compared to various other OECD countries. Economists have concluded that various factors may have contributed to this gap. For example: human capital, demographic characteristics, and job characteristics. What this may mean is that "women are more likely to study health and education, whereas men are more likely to study engineering and other technology fields" (Mikovich et al, pg. 3) Women are also more willing than men to adjust their work location and hours in order to take care of young children and elderly parents, and to do most, if not all, of the "unpaid" housework. From the manager's point of view, compensation directly influences their success in two ways. According to Milkovich et al on page 4, it is a "major expense." Managers need to think of and be aware of both global and local competitive pressures when making compensation decisions. Moreover, managers need to either minimize or optimize pay in a way to influence employee behaviour and to improve organization performance. This is the second way that compensation influences their success. As Milkovich et al states "The amount and the way people are paid affects the quality of their work, their attitude toward customers, their willingness to be flexible or learn new skills or suggest innovations, and even their interest in unions or pursuing legal action against their employer" (pg. 4). For employees, compensation is usually their major source of financial security. Employees may view compensation "as an entitlement for being an employee of the company, or as a reward for a job well done" (Milkovich et al, pg. 4) Employees may even feel that compensation is their return on their investment in education and training or also their time and energy spent at the workplace. 2. Explain the difference between base pay and performance pay. (8 marks) A base pay can be either a wage or salary and is the cash compensation received for the work performed (Milkovich et al, pg. 5) As defined in our textbook a wage is pay expressed at an hourly rate, while, a salary is pay expressed at an annual or monthly rate (pg. 5). The main difference between base pay and performance pay is that "base pay tends to reflect the value of the work or skills and generally ignores differences attributable to individual employees." (pg. 5) An example of performance pay would be merit increases. Merit increases "are given as increments to the base pay in recognition of past work behaviour (pg. 6). Another type of performance pay are incentives (or variable pay). Incentives are "one-time payments for meeting preestablished performance objectives in a future time period. (Milkovich et al, pg. 6) An interesting and important difference between both merit increases and incentives is that merit increases recognize past behaviour, while incentives offer pay to influence future behaviour. Another type of incentive would be long-term incentives. Long-term incentives are generally in the form of stock ownership or options to buy stock at a specified, advantageous prices. This may also be a way to influence behaviour as stock owners may behave like owners. 3. What are the three tests used to determine whether a pay strategy is a source of competitive advantage? Are these tests difficult to pass? Can compensation be a source of competitive advantage? (6 marks) The three tests used to determine whether a pay strategy is a source of competitive advantage are: (1) Is it aligned? (2) Does it differentiate? and (3) Does it add value? (Milkovich et al, pg. 27) Being aligned means the organization should support its business strategy, support external economic and sociopolitical conditions, and support its internal overall HR system. An organization also should have a pay system that isn't easy to copy. This is what makes it different and unique as there may be parts of a pay system that is easy to replicate, but copying blindly without thinking of its various parts is not recommended. The last test (which is the most difficult) is whether the pay strategy adds value. Measuring return on investments (ROI) is difficult because organizations need to be aware of the human element which cannot be measured objectively without considering equity and fairness. As Milkovich et al describe, "the challenge is to design the "fit" with the environment, business strategy, and pay plan. The better the fit, the greater the competitive advantage" (pg. 28). With this being said, "if managers align pay decisions with the organization's strategy and values...the organization will be more likely to achieve competitive advantage" (pg. 28). 4. Why is internal alignment an important compensation policy? (5 marks) Internal alignment is an important compensation policy for various reasons. As discussed in Chapter 3 of our textbook, "The relationships among different jobs inside an organization form a job structure that should support the organization's strategy, support the workflow, and motivate behaviour toward organization objectives" (pg. 37). Internal alignment is related to workflow and is an important part of internal alignment because it is "the process by which goods and services are delivered to the customer" (pg. 38). A workflow is achieved by having a compensation structure with pay differences between employees. These pay differences between job levels are called differentials. (pg. 39) As illustrated by Milkovich et al, "Internal job and pay structures influence employees' behaviour by providing pay increases for promotions, more challenging work, and greater responsibility as employees move up in the job structure" (pg. 38). A salient reason why internal alignment is an important compensation policy is for its outcomes: reduce pay-related grievances, reduces pay-related work stoppages, facilitate performance, facilitate career progression, reduce turnover, and increase experience (Milkovich et al, pg. 51). 5. Explain the difference between egalitarian versus hierarchical pay structures. (10 marks) There are numerous differences between egalitarian and hierarchical pay structures. A hierarchical structure has more layers while an egalitarian pay structure is delayered. Egalitarian structures have few levels and small differentials vs. hierarchical structures that have many levels and large differentials. The criteria used for both pay structures could be the same: either person or job. The fit for a hierarchical pay structure is tailored and for egalitarian it is loosely coupled. A tailored structure is defined as a "pay structure for well-defined jobs with relatively small differences in pay" (pg. 47). A loosely coupled structure is a "pay structure for jobs that are flexible, adaptable, and changing" (pg. 47). A hierarchical structure seeks to promote individual performance and an egalitarian structure supports a team environment. When looking at the criterion for fairness, a hierarchical structure encourages a performance based process and the egalitarian structure focuses on equal treatment. Hierarchical structures maintain their belief in the motivational effects of frequent promotion while the behaviour rewarded in an egalitarian structure is cooperation within individuals and teams. 6. Describe the major decisions involved in job analysis. (6 marks) The major decisions involved in job analysis are based on the following questions: (1) Why are we collecting job information? (2) What information do we need? (3) How should we collect it? (4) Who should be involved? (5) How useful are the results? (Milkovich et al, pg. 58) We collect job information for various reasons. Our textbook states that "Potential uses for job analysis have been suggested for every major human resources function." (pg. 58) Job analysis also identifies the skills and experience required to perform the work and training programs may be designed with job analysis. Moreover, both employees and supervisors look to the required behaviours and results expected in a job to help assess performance and also provide rationale for employee behaviour. More importantly, in compensation, job analysis establishes similarities and differences in the content of jobs and also helps establish an internally fair and aligned job structure. The information that is needed should "adequately identify, define, and describe a job." (Milkovich et al, pg. 61) For example, job titles, departments, and the number of people who hold the job are examples of information that identifies a job. This information can be collected either through conventional methods or quantitative methods. Conventional methods usually entail questionnaires and interviews, and quantitative methods consist of statistically analyzed means such as multiple choice questions which can be machine scored. The people involved are jobs holders, supervisors, and analysts. The results are useful when and if both employees and employers agree and are satisfied that the information collected is reliable, valid, acceptable, current, and useful. 7. What are the differences between a job and a task? (4 marks) The differences between a job and a task are as follows: A job is a group of tasks performed by one person that make up the total work assignment of that person, eg., customer support representative. (Milkovich et al, pg. 59) Moreover, it is a specific duty, role, or function. A task, on the other hand, is a lot simpler as it is the smallest unit of analysis, a specific statement of what a person does; e.g., answers the telephone. (Milkovich et al, pg. 59) 8. Case Scenario Assignment 1 (50 marks)

1. Explain in general terms what is meant by the phrase Internal Equity (Internal Alignment) and outline the reasons this will be important to John’s compensation strategy. (15 Marks) •Internal equity (Internal alignment) is the relationship between the jobs within a single organization. It "refers to the pay rates both for employees doing equal work and for those doing dissimilar work." (Milkovich et al, pg. 12) •This is important to John's compensation strategy because it should "support the organization's strategy, support the workflow, and motivate behaviour toward organization objectives." (pg. 37) •As John will need to hire various staff members, he will need an internal job structure which is aligned to the strategy and also is fair when employees compare their pay to the pay of others in the organization. •A compensation structure is required to support the work teams and thus a pay structure is required. Pay differences between programmers/analysts, project managers, administrative assistants, and senior and executive staff is essential in order to accomplish a work flow. •This is important as "internal job and pay structures influence employees' behaviour by providing pay increases for promotions, more challenging work, and greater responsibility as employees move up in the job structure." (Milkovich et al, pg. 38) 2. Explain in general terms what is meant by the phrase External Equity (External Competitiveness and outline the reasons this will be important to John’s compensation strategy. (15 Marks) •External competitiveness "refers to compensation relationships external to the organization (i.e., compared with competitors)." (Milkovich et al, pg. 12) •This will be important to John's compensation strategy because he will have to think of what he will pay his employees compared to that of his competitors as to attract top flight candidates. •It would be also beneficial for John to think of the mix of pay forms that the organization will utilize. This may be in the form of base pay, incentives, stock, benefits, etc. •It is important for John to think of how total compensation will be positioned against competitors. For example, evidence has shown that "paying higher than the average pay by the competitors can affect results." (Milkovich et al, pg. 29) •External competitiveness decision has "a twofold effect on objectives: (1) they ensure that the pay is sufficient to attract and retain employees-if employees do not perceive their pay as competitive with what other organizations are offering for similar work, they may leave - and (2) they control labour costs so that the organization remain competitive in the global economy." (Milkovich et al, pg. 12) 3. What are the major processes that you will recommend that John implement in order to achieve both internal and external equity in his Canadian operations ? (20 Marks)

In order to achieve both internal and external equity and to guide the design of the pay system in his Canadian operation, I would recommend John have his basic objectives in place. These are: efficiency, fairness, and compliance with laws and regulations. (Milkovich et al, pg. 9) •I would advise to address a Pay Model that includes crucial decisions regarding internal alignment, external competitiveness, employee contributions and management. •I would recommend to John to firstly develop a total compensation strategy using the four step process as described in our textbook. It is (1) Assess Total Compensation Implications, (2) Map a Total Compensation Strategy, (3) Implement Strategy, (4) Reassess the Fit (Milkovich et al, pg. 24) •I would also recommend to John to decide on two strategic choices: (1) how tailored to organization design and workflow to make the structure, and (2) how to distribute pay throughout the levels in the structure. This relates to deciding between an Egalitarian structure vs. a Hierarchical structure or even a mix of both. (Milkovich et al, pg. 47) •I will recommend that John implements the three test competitive advantage: (1) Is it aligned? (2) Does it differentiate? and (3) Does it add value? (Milkovich et al, pg. 27-28) •I would also recommend looking at people at work. This entails constructing a work-related internal job structure through the process of Job Analysis. It can be either Job-based or Person- based structured. The purpose of this is to (1) collect and summarize information that identifies similarities and differences in jobs, (2) determine what is valued about the job, (3) quantify the relative value of jobs, and (4) translate relative value of jobs into an internal structure. (Milkovich et al, pg. 57) I would suggest for John to involve employees as well as supervisors in the process of Job Analysis as to make it as effective and fair as possible. •As stated in our textbook, "the underlying premise of any strategic perspective is that if managers align pay decisions with the organization's strategy and values, are responsive to employees and union relations, and are globally competitive, the organization will be more likely to achieve competitive advantage." (Milkovich et al, pg. 28)

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