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Human Resource Management Session DIRECT FINANCIAL COMPENSATION Primary Determinants of Direct Financial Compensation Organization Compensation Policies Organizational Level Ability to Pay Employee Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck Job Direct Financial Compensation Pricing Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Economy Legislation Job Job Analysis Job Descriptions Job Evaluation Organization as a Determinant of Direct Financial Compensation • Compensation Policies • Organizational Level • Ability to Pay Compensation Policies • Pay leaders - Pay higher wages and salaries • Market rate, or going rate - Pay what most employers pay for same job • Pay followers - Pay below market rate because poor financial condition or believe not require highly capable employees Ability to Pay Organization’s assessment of ability to pay is important factor in determining pay levels Compensation Surveys • What are other firms paying? • Geographic area of survey • Specific firms to contact • Jobs to include Cost of Living • When prices rise over a period of time and pay does not, real pay is actually lowered • Some firms index pay increases to inflation rate The Economy • Affects financial compensation decisions • Depressed economy generally increases labor supply • Cost of living often rises as economy expands Job Analysis and Job Descriptions • Before organization can determine relative difficulty or value of jobs, must first define content • Done by job analysis/job descriptions Ranking Method • Simplest method • Raters examine description of each job • Jobs arranged in order according to value 10 Skill-Based Pay Compensates on basis of job-related skills and knowledge • Employees and departments benefit when employees obtain additional skills • Appropriate where work tends to be routine and less varied • Must provide adequate training opportunities or system becomes demotivator 22 Seniority • Length of time employee has been associated with company, division, department, or job • Labor unions tend to favor seniority 23 Experience • Regardless of nature of job, very few factors have a more significant impact on performance than experience • Dot-com world has changed attitude with regard to experience 24 Team-Based Pay If team is to function effectively, firms should provide reward based on overall team performance 25 Company-Wide Pay • Profit sharing - Distribution of predetermined percentage of firm’s profits to employees • Gainsharing - Bind employees to firm’s productivity and provide incentive payment based on improved company performance • Scanlon plan - Reward to employees for savings in labor costs resulting from employees’ suggestions 26 Professionals Compensation • Initially compensated for knowledge they bring to organization • Maturity curves reflect relationship between professional compensation and years of experience 27 Sales Representative Compensation • Straight salary • Straight commission • Endless variety of part-salary, partcommission combinations 28 Executive Compensation Critical factor in attracting and retaining best managers 29 Determining Executive Compensation Firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance 30 Types of Executive Compensation • Base salary • Short-Term Incentives or Bonuses • Stock option plans • Performance-Based Pay • Executive benefits (Perks) • Golden parachutes 31 Short-Term Incentives or Bonuses • Payment of bonuses reflects a managerial belief in their incentive value • 90% of executives receive bonuses 32 Performance-Based Pay • Trend toward more performance-based compensation packages for executives • Shareholders become increasingly disenchanted with high levels of executive compensation performance-based pay may gain in popularity 33 Golden Parachutes • Perquisite that protects executives in event another company acquires firm or executive is forced to leave firm for other reasons • Attempts to rein in obscene golden parachute plans 34 Trends & Innovations: Outrageous Severance Pay Examples? • • • • • • • • Philip Purcell, Morgan Stanley, $113 million Stephen Crawford, Morgan Stanley, $32 million Harry Stonecipher, Boeing $600,000/year Carly Fiorina, Hewlett-Packard, $21 million Franklin Raines, Fannie Mae, $1.4 million/year Scott Livengood, Krispy Kreme, $46,000/month James Kilts, Gillette, $100 million Jack Welch, GE corporate $9 million annual pension plan payout, plus perks such as lifetime use of GE’s $80,000-per-month Manhattan apartment with free food and free maid service; lifetime use of GE fleet of corporate jets, including Boeing 737 jet; new Mercedes plus limousine and driver; and assorted free sports and opera box tickets 35 A Global Perspective: Costs of Expatriates • Employers today know that it is more expensive to send workers abroad • Tokyo ranks as most expensive city for expatriates, followed by London, Moscow and Osaka, Japan 36 ... Factor Weight 105 140 Education 35% 35 70 Job Knowledge 25% 25 50 75 100 Contacts 18% 18 42 66 90 Complexity of Duties 17% 17 51 85 5% 10 15 Initiative 20 175 125 25 13 Job Evaluation Worksheet... Weight 105 140 Education 35% 35 70 Job Knowledge 25% 25 50 75 100 Contacts 18% 18 42 66 90 Complexity of Duties 17% 17 51 85 5% 10 15 Initiative Total Job Value 20 175 125 25 239 14 The Hay Guide... Pay Ranges for Pay Grades 400 500 Minimum $12.00 13.30 14.60 17. 20 Midpoint $13.30 14.60 15.90 17. 20 18.50 Maximum $14.60 15.90 17. 20 18 19.80 Average Pay Per Hour Broadbanding and Its Relationship