9/24/2020 1 Compensation Management Instructor Associate Prof Dr Pham Thi Bich Ngoc National Economics University Course Objectives Upon successful completion of this course, students should be able[.]
9/24/2020 Course Objectives Compensation Management Upon successful completion of this course, students should be able to demonstrate comprehensive understanding of concepts and importance of compensation and compensation management in an organization; the complexities of compensation systems, along with an in-depth appreciation of the key ingredients necessary to ensure their successful implementation in any organizational setting demonstrate comprehension by constructing a compensation system encompassing: 1) internal consistency, 2) external competitiveness 3) employee contributions, 4) organizational benefit systems, and 5) administration issues analyze, integrate, and apply the knowledge to solve compensation related problems in organizations Instructor: Associate Prof Dr Pham Thi Bich Ngoc National Economics University Course schedule Course Materials Week Unit 1: Introduction to Compensation management Week Unit 2: Defining Internal Alignment Week Unit 3: Job-based structure and Job evaluation Week Unit 4: Person-based structure Reference books: Week Unit 5: Defining Competitiveness Long, R J (2013), Strategic compensation in Canada, 5th Edition, Nelson Education Limited., Canada Rose, M (2014), Reward Management, Kogan Page Limited, USA Week Unit 6: Designing Pay Levels, Mix, and Pay Structures Week Unit 7: Pay-for-Performance Week Unit 8: The Benefit Determination Process LMS Week Unit 9: Benefit Options Week 10 Unit 10: Compensation of Special Groups Week 1113 Presentations and Wrap up Course book Milkovich, G.T., and Newman, J.M., Gerhart, B (2014), Compensation, 11th ed., McGraw Hill Irwin, Inc., Boston Contents Week Module materials, the assignments and various communications will be delivered through the LMS site It is your responsibility to check it regularly! 9/24/2020 Unit 1: Introduction to Compensation Management Course Evaluation Class Participation Individual assignment/Midterm examination Group Assignment 10% Final Exam 50% Instructor: Associate Prof Dr Pham Thi Bich Ngoc 20% National Economics University 20% Compensation Outline Compensation and Compensation Management: Definition, role, purposes Forms of Pay A Pay Model Compensation Strategy Compensation is a systematic approach to providing monetary value to employees in exchange for work performed Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship Total reward/compensation refers to both intrinsic and extrinsic reward that employees receive for performing their jobs 9/24/2020 Compensation Compensation Stockholders stock to pay employees creates a sense of ownership that will improve performance, which will, in turn, increase stockholder wealth) Stockholders have a particular interest in executive pay→ higher organizational performance Society perspective Employees Manager Society perspective: pay as a measure of justice Total compensation package may also be seen as a reflection of equity or justice in society Stockholders: Stockholders are interested in how employees are paid (using Manager: compensation is a major expense; manager can also use it to influence employee behaviors and to improve the organization’s performance Employees: pay plays a vital role in a person’s economic and social well-being Employees may see compensation as a return in an exchange between their employer and themselves, as an entitlement for being an employee of the company, or as a reward for a job well done 10 Effects of Pay on Employees’ Behaviors Compensation system Pay can influence employee motivation and behavior in two ways: Compensation system consists of integrated policies, processes, practices and administrative procedures for implementing the system pay can affect the motivational intensity, direction, and persistence of current employees pay can also have an indirect, but important, influence via a sorting effect on the composition of the workforce (different types of pay strategies may cause different types of people to apply to and stay in an organization) 11– 12 11 12 9/24/2020 Forms of Pay Purpose of compensation ▪ Recruit and retain qualified employees ▪ Increase or maintain morale/satisfaction ▪ Reward and encourage peak performance ▪ Reward people for the value they create ▪ Align reward practices with both business goals and employee values ▪ help in the process of motivating people and gaining their commitment and engagement; ▪ support the development of a performance culture; ▪ develop a positive employment relationship and psychological contract 13 14 Forms of Pay Forms of Pay 15 Cash compensation Base wage is the cash compensation that an employer pays for the work performed tends to reflect the value of the work or skills and generally ignores differences attributable to individual employees Salary vs wage Merit Pay/Cost-of-Living Adjustments Periodic adjustments to base wages may be made on the basis of changes in what other employers are paying for the same work, changes in the overall cost of living, or changes in experience or skill Merit increases are given as increments to base pay and are based on performance In contrast to merit pay, cost-of-living adjustments give the same increases to everyone, regardless of performance Finally, companies may also use merit bonuses As with merit increases, merit bonuses are based on a performance rating but, unlike merit increases, are paid in the form of a lump sum rather than becoming (a permanent) part of the base salary 16 9/24/2020 Forms of Pay Forms of Pay Incentives Incentives also tie pay increases to performance incentives not increase the base wage and so must be re-earned each pay period the potential size of the incentive payment will generally be known beforehand relies on an objective measure of performance (e.g., sales) incentives explicitly try to influence future behavior Merit adjustments merit pay programs evaluate past performance of an individual and then decide on the size of the increase a merit increase program typically relies on a subjective rating of performance merit recognizes (rewards) past behavior, which is hoped to influence future behavior 17 18 Forms of Pay Forms of Pay Benefits Income Protection: employers must pay into a fund that provides income replacement for workers who become disabled or unemployed; Medical insurance, retirement programs, life insurance, and savings plans are common benefits They help protect employees from the financial risks inherent in daily life Work/Life Balance: Relational Returns from Work recognition and status, employment security, challenging work, and opportunities to learn Other forms of relational return might include personal satisfaction from successfully facing new challenges, teaming with great co-workers 19 Incentives Incentives can be tied to the performance of an individual employee, a team of employees, a total business unit, or some combination of individual, team, and unit Incentives may be short- or longterm Long-term incentives: are intended to focus employee efforts on multi-year results (e.g stock ownership or Stock options incentives are frequently referred to as variable pay Programs that help employees better integrate their work and life responsibilities include time away from work (vacations, jury duty), access to services to meet specific needs (drug counseling, financial planning, referrals for child and elder care), and flexible work arrangements (telecommuting, nontraditional schedules, nonpaid time off) Allowances: housing (dormitories and apartments) and transportation allowances 20 9/24/2020 Pay Model Policies INTERNAL ALIGNMENT COMPETITIVENESS Compensation objectives Techniques Work Analysis →Descriptions →Evaluation / Certification INTERNAL STRUCTURE Market Definitions → Surveys→ Policy Lines Objectives EFFICIENCY • Performance • Quality • Customer and Stockholder • Cost Efficiency Fairness Compliance Ethics PAY STRUCTURE CONTRIBUTIONS Seniority Based → Incentives→ Merit Guidelines FAIRNESS COMPLIANCE PAY FOR PERFORMANCE MANAGEMENT Cost→ Communication→ Change ETHICS EVALUATION 21 22 Four Policy Choices Four Policy Choices Internal alignment refers to comparisons among jobs or skill levels inside a single organization Jobs and people’s skills are compared in terms of their relative contributions to the organization’s business objectives determining what is an appropriate difference in pay for people performing different work is one of the key challenges facing managers (1) to ensure that the pay is sufficient to attract and retain employees—if employees not perceive their pay as competitive in comparison to what other organizations are offering for similar work, they may be more likely to leave—and (2) to control labor costs so that the organization’s prices of products or services can remain competitive in a global economy 23 External competitiveness refers to pay comparisons with competitors External competitiveness decisions—both how much and what forms—have a twofold effect on objectives: 24 9/24/2020 Four Policy Choices Four Policy Choices Employee Contributions The emphasis to place on employee contributions (or nature of pay mix) is an important policy decision how its pay is positioned and what forms it uses create an advantage over competitors 25 Management Management means ensuring that the right people get the right pay for achieving the right objectives in the right way answering the question: what is the impact of this policy, this technique, this decision? what difference does it make? Does the decision help the organization achieve its objectives It goes beyond simply managing pay as an expense to better understanding and analyzing the impact of pay decisions on people’s behaviors and organizations’ success How open and transparent should the pay decisions be to all employees? Who should be involved in designing and managing the system? 26 Pay Techniques 27 Techniques tie the four basic policies to the pay objectives Various techniques exist The Totality of Decisions 28 9/24/2020 Three Compensation Strategies 29 Different Strategies within the Same Industry Google, Microsoft, and SAS all compete for software engineers and marketing skills Microsoft: strong emphasis on stock-related compensation; Its benefits continue to lead the market SAS Institute: takes a very different approach 30 Compensation strategy: Strategic choices Different Strategies within the Same Company 31 Different business units within the same corporation will have very different competitive conditions, adopt different business strategies, and thus fit different compensation strategies 32 9/24/2020 Compensation strategy: Compensation system and strategies 33 DEVELOPING A TOTAL COMPENSATION STRATEGY: FOUR STEPS 34 SOURCE OF COMPETITIVE ADVANTAGE: THREE TESTS Three tests determine whether a pay strategy is a source of advantage: (1) Is it aligned? (2) Does it differentiate? (3) Does it add value? Align: Alignment of the pay strategy includes three aspects: (1) align with the business strategy, (2) align externally with the economic and sociopolitical conditions, and (3) align internally within the overall HR system Differentiate: Add Value: what are returns that a company get from incentives, benefits, and even base pay 35 ... pay strategies may cause different types of people to apply to and stay in an organization) 11 – 12 11 12 9/24/2020 Forms of Pay Purpose of compensation ▪ Recruit and retain qualified employees... relationship Total reward /compensation refers to both intrinsic and extrinsic reward that employees receive for performing their jobs 9/24/2020 Compensation Compensation Stockholders stock to pay...9/24/2020 Unit 1: Introduction to Compensation Management Course Evaluation Class Participation Individual assignment/Midterm examination Group Assignment 10 % Final Exam 50% Instructor: Associate