Compensation Management
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Study Guide
Compensation Management By
Adam Gifford
About The Author
Adam Gifford is a human resources professional with experience in the hospitality, retail, and manufacturing industries. He has extensive professional experience in operations management, government compliance, labor law, and employee training and development. Adam is an active member of the Society for Human Resources Management, the American Society for Training and Development, and the Academy of Management. He holds numerous degrees in the business field including a Bachelor of Science in Management Science from Lock Haven University, a Master of Human Resources Management from Keller Graduate School of Management, and a Master of Business Administration from Rollins College.
Copyright © 2015 by Penn Foster, Inc.
All rights reserved. No part of the material protected by this copyright may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.
Requests for permission to make copies of any part of the work should be mailed to Copyright Permissions, Penn Foster, 925 Oak Street, Scranton, Pennsylvania 18515.
Printed in the United States of America
07/08/2015
All terms mentioned in this text that are known to be trademarks or service marks have been appropriately capitalized. Use of a term in this text should not be regarded as affecting the validity of any trademark or service mark.
INSTRUCTIONS TO STUDENTS 1
LESSON ASSIGNMENTS 7
LESSON 1—INTRODUCTION AND DETERMINATION OF THE PAY STRUCTURE 9
EXAMINATION—LESSON 1 33
LESSON 2—DETERMINING PAY LEVEL AND INDIVIDUAL PAY 39
EXAMINATION—LESSON 2 63
LESSON 3—EMPLOYEE BENEFITS AND MANAGING THE PAY SYSTEM 69
EXAMINATION—LESSON 3 85
LESSON 4—MANAGING THE SYSTEM 91
EXAMINATION—LESSON 4 105
RESEARCH ASSIGNMENT 111
ANSWERS 115
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YOUR COURSE Welcome to Compensation Management! This course is based on the textbook Compensation, Ninth Edition, by George Milkovich and Jerry Newman. This study guide contains additional information that pertains to the topics in your lessons as well as highlights of important points from your textbook. Self-checks to measure your understanding of each lesson are included along with their answers.
The course material consists of a study guide, divided into six lessons. Each lesson is broken up into several assignments. Each assignment covers a specific topic or topics. The study material for your course consists of
1. The textbook, Compensation, Ninth Edition
2. This study guide, which contains
� Additional information that pertains to the topics in your lessons
� Self-checks to measure your understanding of each lesson, as well as the answers to the self-checks
� Lesson examinations to be submitted for grading
� A research assignment that you’ll develop after you complete your studies
OBJECTIVES When you complete this course, you’ll be able to
� Define compensation, list the different forms of pay, and describe the pay model
� Compare compensation strategies, list the steps in devel- oping a total compensation strategy, and determine sources of competitive advantage
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� Define internal alignment, determine what factors shape internal structure, and analyze the strategic choices involved in designing internal structure
� Discuss a job description based on the data collected
� List the major decisions that go into a job evaluation and evaluate the different methods used to create a job evaluation
� List the types of skill plans; create a skills analysis and a competency analysis
� Determine the factors that shape external competitive- ness, describe the competitive pay policy alternatives and describe the consequences of pay level and mix decisions
� Describe the purposes of a survey, how to design one, and create a market pay line using survey information
� Determine how performance pay can motivate employee behavior and design a pay-for-performance plan
� List the types of team incentive plans and long-term incentive plans
� Analyze the strategies for better understanding and measuring job performance, including common errors in appraising performance, and evaluate how pay can be tied to performance appraisals
� Describe the growth in employee benefits; describe the key issues in benefits planning, design, and administra- tion and list the main components of a benefit plan
� Identify the legally required benefits, retirement and sav- ings plan payment benefits, medical, and medical-related benefits
� Identify compensation strategies for supervisors, corpo- rate directors, executives, scientists, engineers, sales forces, and contingent workers
� Describe the impact of unions on wage determination and union attitudes toward alternative reward systems
Instructions to Students2
� Determine the reasons for variations in global pay sys- tems, compare the costs of pay systems in different countries, and describe the elements that determine expatriate pay
� Describe the laws that regulate pay in the workplace, define discrimination, and analyze the causes of pay dif- ferences in the workplace
� Determine methods of controlling salary levels, list the embedded controls that exist within a pay system, and effectively communicate changes in a pay system
YOUR TEXTBOOK Your textbook, Compensation, Ninth Edition, contains the bulk of the material upon which your examinations will be based, so it’s important that you read it carefully and com- pletely. Your textbook material is broken down into lessons.
The pages for each lesson are clearly indicated in this study guide. Note that the page numbers for Compensation, Ninth Edition, called out in this study guide correspond to the page numbers in the black circles at the top of each page in the textbook.
Your textbook contains many features that make your study easy, including the following:
� The table of contents, which indicates the breakdown of topics
� The preface, which highlights the purpose and organization of the text
� The body of the text, which includes 18 chapters
� “Your Turn” features, which provide compensation management case studies
� A summary at the end of each chapter, which provides an overview of what you’ve just learned
Instructions to Students 3
� A glossary, which provides definitions of the key terms presented in the textbook
� A name index and a subject index, which you can use to easily find information in your textbook
A STUDY PLAN This study guide divides the material to be covered into six lessons. Each lesson is divided into multiple assignments to make your learning more manageable. Each assignment includes a reading from your textbook and a supplementary assignment in this study guide. Each assignment has self- check questions to check your understanding of what you’ve learned. Be sure to complete all of the work in each lesson before moving on to the next. You’ll find this easy to do if you follow the plan of study outlined below.
1. Read the instructions to each assignment in this study guide. The instructions will tell you the pages in your textbook that you’ll be reading. Note that the page num- bers for Compensation, Ninth Edition, called out in this
study guide correspond to the page numbers in the black circles at the top of each page in the textbook.
2. Read the assigned pages in this study guide.
3. Read the assigned textbook pages. Pay careful attention to what you’re reading.
4. When you’ve finished the assignment, complete the homework assignment and self-check. The self-checks are based on both your textbook and this study guide. You should complete the self-checks in the study guide. They’re for your use only—they aren’t graded. Don’t send your answers to the school.
Instructions to Students4
5. Once you’ve completed the exercises, turn to the answers provided at the back of this study guide. These exercises are designed to show how well you understand the mate- rial, so test yourself honestly. Make every effort to complete the questions before turning to the answers at the back of this study guide. If you find any weak areas in your knowledge, go back and review the relevant material until you understand it.
6. Follow this procedure for the next assignments, until you’ve completed the lesson.
7. When you’re confident that you understand all of the assigned material within a lesson, complete the lesson examination provided in this study guide. The examination is based on both your textbook and this study guide.
8. Complete the discussion board post for each lesson.
9. If you have any questions during your studies, e-mail your instructor for assistance.
Now review the description of lesson assignments provided in the outline that follows and begin your study of compensation management with the first assignment of Lesson 1. Enjoy your studies!
Instructions to Students 5
NOTES
Instructions to Students6
Note that the page numbers for Compensation, Ninth Edition, called out in this study guide correspond to the page numbers in the gray boxes at the top of each page in the textbook.
Lesson 1—Introduction and Determination of the Pay Structure For: Read in the Read in the study guide: textbook:
Assignment 1 Pages 9–12 Pages 1–32
Assignment 2 Pages 13–16 Pages 33–59
Assignment 3 Pages 17–20 Pages 60–88
Assignment 4 Pages 21–23 Pages 89–118
Assignment 5 Pages 24–27 Pages 119–151
Assignment 6 Pages 28–32 Pages 152–181
Examination 41289000 Material in Lesson 1
Lesson 2—Determining Pay Level and Individual Pay For: Read in the Read in the study guide: textbook:
Assignment 7 Pages 39–43 Pages 182–215
Assignment 8 Pages 44–47 Pages 216–256
Assignment 9 Pages 48–51 Pages 257–290
Assignment 10 Pages 52–55 Pages 291–333
Assignment 11 Pages 56–61 Pages 334–402
Examination 41289100 Material in Lesson 2
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Lesson 3—Employee Benefits and Managing the Pay System For: Read in the Read in the study guide: textbook:
Assignment 12 Pages 69–73 Pages 403–434
Assignment 13 Pages 74–77 Pages 435–467
Assignment 14 Pages 78–81 Pages 468–495
Assignment 15 Pages 81–84 Pages 496–511
Examination 41289200 Material in Lesson 3
Lesson 4—Managing the System For: Read in the Read in the study guide: textbook:
Assignment 16 Pages 91–95 Pages 512–547
Assignment 17 Pages 96–98 Pages 548–583
Assignment 18 Pages 99–103 Pages 584–612
Examination 41289300 Material in Lesson 4
Research Assignment 41200800
Lesson Assignments8
Note: To access and complete any of the examinations for this study
guide, click on the appropriate Take Exam icon on your student portal.
You should not have to enter the examination numbers. These numbers
are for reference only if you have reason to contact Student CARE.
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Introduction and Determination of the Pay Structure Lesson 1 includes six assignments that provide an introduction to compensation and an overview of pay structure. For each assignment, complete the assigned reading in this study guide and in your textbook, Compensation, Ninth Edition, by George Milkovich and Jerry Newman.
ASSIGNMENT 1: INTRODUCTION AND THE PAY MODEL Read this assignment. Then read pages 1–32 in your textbook.
When you complete this assignment, you’ll be able to
� Define compensation
� List the different forms of pay
� Describe the pay model
Everyone who has a job earns some form of compensation. Many people view their compensation as simply a paycheck that they receive weekly, biweekly, or even monthly. The reality is that the paycheck is the last step in a very long and detailed process that involves a tremendous amount of research as well as dozens of individual decisions throughout different levels of an organization.
Defining compensation is quite a bit more difficult than you might think, because there are many different views as to what “compensation” actually is. The reality is that there are different definitions of compensation based on which group is defining the term. For example, all of the following groups might define compensation differently:
� Society
� Stockholders (company owners)
� Managers
� Employees
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Your textbook combines these different views to come up with a single definition of compensation. Your textbook defines compensation as “All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.” This definition of compensation is fairly broad. Each component of the definition can be broken down into smaller and more definable and measurable forms.
The different forms of compensation are as follows:
� Base pay. Cash that an employer pays for the work that’s performed by an employee. An example can be a flat hourly wage of $8 an hour for a retail sales person or a $50,000 a year salary for an accountant.
� Merit pay and cost-of-living adjustments. Cash that employees receive to adjust for increases in prices of goods and services or to adjust for changing wages in their industry or profession.
� Cash incentives. Cash provided to an employee based on his or her individual performance or the performance of his or her group, division, or organization. When the person, group, division, or organization is more productive or more profitable, then they receive cash in addition to their base pay.
� Long-term incentives. This is a benefit that employees’ will receive as an incentive for long-term employment with the organization or as an incentive for long-term, individual productivity. It usually takes the form of company ownership either through stock ownership or options to purchase stock at a below-market price.
� Income protection. A benefit that protects a person’s income in the event that they’re unable to work. Some income-protection programs are required by law, such as worker’s compensation for injured employees or unemployment insurance for employees who have been laid off due to a decrease in organizational output.
� Work/life balance. Benefits that enable employees to better manage their home life and their work life. Some examples include paid and unpaid time off from work, access to services at either a discounted rate or free of charge, and flexible work-hour arrangements.
Lesson 1 11
� Allowances. A benefit that gives employees access to some- thing that’s either expensive or in short supply. Examples include a company car or company-paid meals.
� Present value of earning streams. This includes the total amount of compensation that a person will receive over a period of time. It’s very common for organizations to start an employee at a very low rate of pay and give frequent and larger increases as the employee begins to prove that he or she can perform at the designated tasks. The present value of a future stream of income is often shown to employees to overcome their objections to a low starting salary.
� Relational returns. These are nonfinancial gains that a person receives from his or her work. Examples may include local fame, a feeling of belonging, challenging work, and the opportunity to learn.
Your textbook is organized around the concept known as the pay model. The pay model outlines how an organization designs, develops, and maintains a system of compensation. An illustration of the pay model is provided in Exhibit 1.5 on page 20 of your textbook. The three main parts of the pay model are as follows:
� Objectives. The objectives of a compensation system include efficiency, fairness, and compliance. These are the building blocks of any compensation system and drive any of the work that’s performed when designing, developing, and maintaining a compensation system.
� Techniques. These are the specific tasks that are used to design, develop, and maintain a compensation system.
� Policies. These are the guiding points that determine the foundation for all of the decisions based around an organization’s compensation model.
Homework Assignment 1
Complete the Review Questions on page 32 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Note: These homework assignments are for your use only. While they
won’t be graded, they are required.
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Self-Check 1 At the end of each section of Compensation Management, you’ll be asked to pause and
check your understanding of what you’ve just read by completing a “Self-Check” exercise.
Answering these questions will help you review what you’ve studied so far. Please
complete Self-Check 1 now.
Select the one best answer for each of the following multiple-choice questions.
1. How would you describe the relationship between CEO pay and shareholder return at Verizon?
a. Stock fell and pay rose.
b. Stock rose and pay rose.
c. Stock fell and pay fell.
d. Stock rose and pay fell.
2. Which of the following is a policy of the pay model?
a. Performance c. Alignment
b. Quality d. Cost
3. Which of the following is considered a relational return in terms of total returns for work?
a. Base pay c. Employment security
b. Income protection d. Work/life balance
4. According to the pay model, management means ensuring that the right people get the right
_______ for achieving the right objectives in the right way.
a. benefits c. promotions
b. pay d. jobs
5. Which country has the highest compensation cost per worker?
a. Brazil c. Japan
b. South Korea d. Sweden
Check your answers with those at the back of the study guide.
Lesson 1 13
ASSIGNMENT 2: STRATEGY Read this assignment. Then read pages 33–59 in your textbook.
When you complete this assignment, you’ll be able to
� Compare and contrast compensation strategies
� List the steps involved in developing a total compensation strategy
� Determine the sources of competitive advantage
Choosing a compensation strategy is far more important than most people think. An organization must choose a compensation strategy just as a baseball team chooses a pitching strategy and the military chooses an offensive strat- egy. If an organization doesn’t have a compensation strategy, it will have to make reactive compensation choices based on the ever-changing market environment rather than making proactive choices that keep it ahead of the changes.
Compensation strategy can take one of two forms. Organizations can have different compensation strategies within the same industry, and different departments can have different strategies within the same organization. The strategy selected depends on the organization’s goals as well as the goals of the individual department within the organization.
The primary compensation theory for most organizations is for the compensation strategy to support organizational strategy. This makes sense, because the organizational strategy is the guiding force behind all of the organization’s decisions. Therefore, the compensation decisions support the organizational strategy.
An organization developing a total compensation strategy should follow the following four steps: assessing compensation implications, mapping of the total compensation strategy, implementing the compensation strategy, and reassessing the compensation strategy.
1. Assess the total compensation implications. Look at the organization as a whole, analyzing the organization’s industry as well as its competition. The organization’s
Compensation Management14
culture and values should guide the compensation decision-making process. Analyze the legal and regula- tory requirements for compensation in all states and countries in which the organization operates. Identify what employees want and need in a compensation package.
Contrary to popular belief, not every employee simply wants more money and less work. In some cases, it might make sense to integrate choices into a compensation system, allowing employees some say in what they get.
If the organization’s employees are represented by a union, the organization will need to work with union officials and union representatives when making com- pensation choices.
Finally, your compensation system must be a good fit for the people who are accountable for managing the system. This is most often the human resources department.
2. Map a total compensation strategy. After identifying the various factors influencing compensation, the organi- zation must develop the model and put it into a form that can be communicated to the entire organization. This process is called mapping. Mapping can be done through pictures, charts, text, or a combination of all three. A map allows the organization to present the compensation package in “solid form.”
3. Implement the strategy. Once the development and design work have been completed, the compensation strat- egy can be implemented. This can either be a quick process or a long and drawn-out one depending on the organiza- tion’s size and the complexity of the compensation package.
4. Reassess the strategy. This is probably the most important of the four steps as well as the one that’s most often forgotten. The organization and its industry will go through many changes as time passes. The compensation package also needs to change to meet the new demands of the organization and market. The compensation should consistently be reevaluated against the changes that are occurring to ensure that it’s still meeting its strategic requirements.
Lesson 1 15
A compensation strategy can be used as a tool for competitive advantage against other organizations within the industry. To determine of the organization’s compensation strategy is a source of competitive advantage, you need to ask three questions:
1. Is the compensation program aligned with the organiza- tion’s business strategy, the economic and sociopolitical conditions, and the internal human resources (HR) system?
2. Does the compensation program differentiate the organization from its competitors?
3. Does the compensation system add value by creating incentives for employees to be more productive?
If the answer to all three of these questions is “yes,” then the compensation package is a source of competitive advantage.
A tremendous amount of research has been done on compen- sation programs. As with most business topics, the research shows that there’s more than one “right” way to do things. Some of the research shows that there’s a single best way to do design, develop, and maintain a compensation package, regardless of the organization’s type and size and the industry in which it operates. In contrast, some of the research has shown that there’s not a single right way of doing things, and that a compensation program must fit the specific organization’s type, size, and larger industry.
Homework Assignment 2
Complete the Review Questions on page 59 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Compensation Management16
Self-Check 2 Select the one best answer for each of the following multiple-choice questions.
1. Based on the vicious circle, what happens after organizational performance decreases?
a. Organizational performance continues to decrease.
b. Organizational performance begins to increase again.
c. Pay for performance increases.
d. Pay for performance decreases.
2. Out of every four workers, how many claim to be satisfied with their compensation?
a. 1 c. 3
b. 2 d. 4
3. Which of the following is the third step in developing a total compensation strategy?
a. Assess the company culture.
b. Choose a technique to fit the strategy.
c. Map the objectives.
d. Realign the strategy as economic conditions change.
4. Which of the following is a source of competitive advantage?
a. Alignment c. Management involvement
b. Competitiveness d. Pay differentiation
5. A _______ focuses on those compensation choices that help the organization gain and sustain
competitive advantage.
a. pay model c. strategic perspective
b. business response d. compensation system
Check your answers with those at the back of the study guide.
Lesson 1 17
ASSIGNMENT 3: DEFINING THE INTERNAL ALIGNMENT Read this assignment. Then read pages 60–88 in your textbook.
When you complete this assignment you’ll be able to
� Define internal alignment
� Determine what factors shape internal structure
� Analyze the strategic choices involved in designing internal structure
It should come as no surprise that different people earn different compensation within the same organization. It’s often a very difficult task to determine these differences, but it’s still a very important step in creating a compensation program. Determining these differences is known as internal alignment. Your textbook defines internal alignment as the pay relationships among different jobs, skills, and competen- cies within a single organization. The end result of internal alignment is known as the pay structure. Your textbook defines pay structure as the array of pay rates for different work or skills within a single organization, as well as the number of levels and the differentials in pay between those levels, and the criteria used to determine the differences described in the structure. Each part of this definition is described in a bit more detail below.
1. Levels of pay. The term level is used to define the hierarchical structure of an organization. An example of this includes which employees are salaried managers and which are hourly employees.
2. Differentials in pay. Pay differentials include the actual variance in pay between different employees. An example of this would be that a salesperson earns $40,000 a year whereas a manufacturing employee earns $20,000 a year.
3. Criteria used. The criteria used relate to how the pay differentials will be determined. Basically, they involve what work is performed for each job, the skills needed to perform each job, and who will be performing each job.
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Internal pay structures differ in almost every organization due to the factors that influence these structures. The differ- ent factors that shape the organization’s internal structure are as follows:
� Economic pressures. Organizations are constantly affected by changes in the larger economy. These changes affect pay structures as well. One of the major economic changes that shape a pay structure is the supply and demand of labor for the organization and its industry.
� Government policies, laws, and regulations. A number of laws regulate pay structures in an attempt to maintain fairness. Violations of these laws can cost an organization hundreds of thousands of dollars, in addition to giving it a poor public image. Because these laws are constantly changing, the pay structure must constantly be adapted to meet these new requirements.
� External stakeholders. Groups outside of the organiza- tion may have a stake in how the organization’s pay structure is organized. These groups can include labor unions, politicians, and stockholders.
� Cultures and customs. The customs and cultures of the geographic area in which an organization operates can influence the pay structure. This is especially important to take into consideration when operating in a foreign country that may have a very different view on compen- sation than the home country.
� Organizational strategy. This has been mentioned before and will definitely be mentioned again. The organization’s strategy drives every decision that’s made within the organization, including decisions on pay structure.
� Human capital. This includes the abilities and skills required to perform certain jobs. The level of human capital will influence the pay structure based on the skill needed to perform each job.
� Organization work design. Work design determines which responsibilities each person and each position within an organization will have. The amount and level of responsibility for each person and each position will influence the pay structure.
Lesson 1 19
� Overall HR policies. Human resource policies will help to determine how the pay structure will look. Some of these policies can include how often a person can be promoted, where new hires will be recruited from, and how much training will be provided to each employee.
� Internal labor markets. The internal labor market is determined by the amount of pay available for different jobs within an organization and the number and avail- ability of employees for those jobs. Both of these factors are a major influence on the overall pay structure.
� Employee acceptance. For a pay structure to be effective it must be accepted by the employees. Employees who aren’t happy with the organizational pay structure will either be unproductive or seek employment elsewhere. Both of these decisions will obviously have a negative impact on the organization.
� Changes in the pay structure. Changes in the pay structure are caused by changes in the organization’s economic environment. Because the economic environ- ment is always changing, so will the organization’s pay structure.
In addition to the large number of factors listed here, the economic and psychological affects of the structure chosen must be considered. Three major theories are used to predict how employees will deal with different types of pay structures:
� Equity theory. According to this theory, employees will tend to judge the fairness of their organization’s pay structure by making comparisons to similar pay struc- tures. These comparisons will include comparisons to jobs similar to their own, comparisons to jobs within the organization that are different than their own, and comparisons to their job against pay levels at other organizations.
� Tournament theory. This theory says that employees will work harder and be more productive if there are larger pay differentials within their organization. The thought behind this theory is that if an employee will receive a large pay increase for a promotion then he or she will work harder for that promotion.
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� Institutional theory. According to this theory, there are a certain number of best practices for determining a pay structure and that an organization will get the best result if they just follow these practices.
Self-Check 3 Select the one best answer for each of the following multiple-choice questions.
1. When an organization gives large increases in pay for job promotions to create competition, is
an example of _______ theory.
a. egalitarian c. institutional model
b. equity model d. tournament
2. Which of the following refers to pay differences among job levels?
a. Values c. Differentials
b. Relative contribution d. Content
3. Pay structure refers to the array of _______ for different work or skills within a single
organization.
a. benefits c. people
b. pay rates d. promotions
4. Which type of structure relies on the work content?
a. Job-based structure c. External structure
b. Person-based structure d. Internal structure
5. The pay relationships among different jobs, skills, and competencies is referred to as
a. internal alignment. c. internal competitiveness.
b. external alignment. d. external competitiveness.
Check your answers with those at the back of the study guide.
Homework Assignment 3
Complete the Review Questions on page 88 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Lesson 1 21
ASSIGNMENT 4: JOB ANALYSIS Read this assignment. Then read pages 89–118 in your textbook.
When you complete this assignment, you’ll be able to
� Determine the information that needs to be collected
� Define the methods that are used to collect data
� Create a job description based on the data collected
Different jobs have different tasks that are required to com- plete the work. Job analysis is the systematic method of discovering and describing the differences and similarities among the jobs within an organization. This is an important step in designing a pay structure, because pay is most often based on the work that’s performed. The end result of a job analysis is the determination of a job structure.
To perform a job analysis, you’ll need to collect a great deal of information about the types of jobs in your organization and what specific work is actually performed for each job. A job analysis requires the following information:
� Job identification. The job’s identity as defined by titles, departments, number of employees, and exemptions from federal laws.
� Job content. The specific tasks that are to be performed and the objectives to be completed for each job.
� Employee data. Employee behaviors that will result in certain outcomes, such as employee characteristics, internal relationships, and external relationships.
� Level of analysis. The level of the job within the organi- zational hierarchy.
Obviously, job analysis requires a great deal of information. Two main methods of data collection can be used during the data collection phase: the conventional method and the quantitative method.
� Conventional method. Entails collecting information from the employees who do the work through observations of the work or interviews with employees about the job.
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� Quantitative method. Entails collecting information from the employees who do the work through question- naires that ask specific questions about the work they perform.
Once all of the information has been collected, a job description is written. The textbook defines a job description as a summary and documentation of the job information. The job description is then used to make any number of HR decisions. In addition to the job information, many job descriptions also include methods for measuring whether the work was performed at an acceptable level.
An important step of job analysis is evaluating the quality of your work. This is an important step, because it allows you to determine if all of the work you put into the project was worth your time and effort. Consider the following when assessing the job analysis:
� Reliability. Have you received the same results over time when using the same research methods? If your job analy- sis isn’t reliable, you’ll need to rethink your research methods.
� Validity. Have you accurately recorded the tasks for each job? If your results lack validity, then you need to find a way to collect more accurate data.
� Acceptability. Do employees within the organization agree with the descriptions of their jobs? If these descrip- tions don’t have acceptability, then you need to discuss where the differences in information have occurred with the employees.
� Usefulness. Will the information enable you to make compensation-related decisions? If you the information isn’t useful, then you need to question why this project was even taken on in the first place.
Homework Assignment 4
Complete the Review Questions on page 118 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Lesson 1 23
Self-Check 4 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following refers to the practicality of the information collected in a job analysis?
a. Reliability c. Acceptability
b. Validity d. Usefulness
2. Which law requires that the essential elements of a job be specified?
a. The Americans with Disabilities Act c. The Equal Pay Act
b. The Fair Labor Standards Act d. The Civil Rights Act
3. Which of the following would be included in the job identification task?
a. Specific job tasks to be completed
b. Behaviors that will result in outcomes
c. Job titles
d. External relationships
4. A job description has a section that lists the qualifications required for the job. What are
these requirements called?
a. Work specifications c. Work requirements
b. Job requirements d. Job specifications
5. Job analysis is the systematic process of collecting information to determine which of the
following?
a. Pay discrepancies
b. Similarities and differences among jobs
c. Skill requirements
d. Performance measurements
Check your answers with those at the back of the study guide.
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ASSIGNMENT 5: EVALUATING WORK Read this assignment. Then read pages 119–151 in your textbook.
When you complete this assignment, you’ll be able to
� Define job evaluation
� List the major decisions that go into a job evaluation
� Evaluate the different methods used to create a job evaluation
Once you’ve completed your job analysis, you must determine the values for the different jobs within your organization. Basically, you need to determine how much money each job is worth. This process is known as job evaluation. Job evalu- ation is defined as the process of systematically determining the relative worth of jobs to create a job structure for the organization. This can be a difficult process, because there’s a tremendous amount of information that goes into determining the value of every job within an organization.
Five major decisions must be made when completing the job evaluation:
1. Establish the purpose. The pay structure must be aligned with the organization’s strategy. The purpose of the job evaluation is to support the organizational strategy, to support the flow of work, to create fairness among employees, and to motivate productive behavior that supports the organization’s goals.
2. Determine whether to use a single pay plan or multiple pay plans. You must decide if you’re going to develop a single pay plan for the entire organization or if you’re going to develop multiple pay plans that fit the variety of work that’s performed in the organization. Each option has pros and cons, so there’s no single “right” choice.
Lesson 1 25
3. Choose among alternative methods. A number of tools can be used to evaluate jobs, including ranking, classification, and point methods. Each of these will be discussed in more detail later in this lesson.
4. Obtain involvement of relevant stakeholders. The results of the job evaluation will impact every person within the organization. It’s a good idea to involve people throughout the organization in this process.
5. Evaluate the usefulness of the results. Just because the job evaluation has been completed and implemented doesn’t mean that the work is done. The pay levels must be reevaluated from time to time to ensure that they still meet the organization’s objectives. Job evaluations will change as the economic environment of the organization changes.
The three methods for performing a job evaluation are as follows:
� Ranking. This method involves ordering each job in the organization from highest to lowest pay based on widely accepted definitions of each job. This is the easiest and quickest method of evaluation, but the results can be less effective because the method focuses more on a universal definition of a job than on the importance of the job within the organization.
� Classification. This method involves defining a set number of classes of work and then assigning each job to a specific class. There can be as many or as few classes as is necessary based on the organization’s structure. This method allows for a bit more customization of job evalua- tion within the organization with only a bit more expertise and time required than the ranking method.
� Point method. This method involves assigning points to compensable factors. A compensable factor is defined as those characteristics in the work that the organization values, that help it pursue its strategy and achieve its objectives.
Compensation Management26
The design of a point plan requires six steps:
1. Conduct a job analysis. This task is completed for any job evaluation, as discussed in previous assignments.
2. Determine the compensable factors. This is the key part of the entire job evaluation. Compensable factors should be based on organizational strategy, be based on work performance, and be acceptable to the individuals who hold a stake in the ultimate evaluation.
3. Scale the factors. Once the compensable factors have been determined, they must be broken down into sub- groups based on the degree of skill required for each factor.
4. Weigh the factors according to importance. After the factors have been scaled, assign each of them a weight based on their overall value to the job.
5. Communicate the plan and train users. Once all of the job evaluations have been completed, the information must be communicated to the organization. This commu- nication should include the method that was used to evaluate the jobs as well as the evaluation for each job.
6. Apply the evaluation to nonbenchmarked jobs. The job evaluation is generally completed by the HR department or by an outside organization. Once the evaluation is finished, you can go back and apply the evaluation to jobs that weren’t included in the initial evaluation or to new jobs that have been created within your organization.
Homework Assignment 5
Complete the Review Questions on page 151 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Lesson 1 27
Self-Check 5 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following is the final step in designing a point plan?
a. Scale the factors.
b. Develop online software support.
c. Communicate the plan and train the users.
d. Apply to nonbenchmark jobs.
2. Which of the following is the most commonly used job evaluation approach in the United
States?
a. Ranking c. Classification
b. Alternation ranking d. The point method
3. Which of the following is a characteristic of a benchmark job?
a. Its contents are well known and relatively stable over time.
b. The job is unique to the employer.
c. Only a few people are employed in the job.
d. The job is at the high end of the pay scale.
4. Which of the following are the characteristics in the work that the organization values and that
help it pursue its strategy and achieve its objectives?
a. Pay factors c. Compensable factors
b. Promotional factors d. Strategic factors
5. Job evaluation is the process of systematically determining the relative worth of jobs to create
a _______ for the organization.
a. job structure c. pay line
b. job hierarchy d. pay scale
Check your answers with those at the back of the study guide.
Compensation Management28
ASSIGNMENT 6: PERSON-BASED STRUCTURES Read this assignment. Then read pages 152–181 in your textbook.
When you complete this assignment, you’ll be able to
� List the types of skill plans
� Create a skills analysis
� Create a competency analysis
In the previous assignment you learned about job evaluation based on specific jobs. That method focuses on specific jobs within the organization regardless of who is performing the work. This assignment focuses more on the people who perform the work rather than on the actual work itself.
Some pay plans compensate people based on the skills that they possess rather than on the actual work performed. Such plans are known as skill-based structures. A skill-based structure is defined as a pay structure that links pay to the depth or breadth of the skills, abilities, and knowledge a person acquires that are relevant to the work.
To create a skill-based structure, you must first perform a skill analysis. A skill analysis is a systematic process of iden- tifying and collecting information about the skills required to perform work in an organization. Five decisions must be made when performing a skill analysis:
1. Determine the plan’s objective. As with all pay plans, you must ensure that the objectives of the plan reflect the organization’s objectives.
2. Determine the information to be collected. Determine which specific information about a person will be collected and used to determine pay. A frequently used method is to compile information about the specific training that an employee has received. This can include training acquired outside of work (such as a college degree), training acquired at work (such as specific machine-operation training), or a combination of both.
Lesson 1 29
3. Determine the methods to certify skills. Just because an employee receives training doesn’t necessarily mean that he or she has acquired any new skills. You must develop a method to determine whether an employee has actually acquired new skills. This can be done through any number of methods, including peer reviews, skills testing, demonstrations, or interviews. This should be a continuous process, because skills can be lost over time if they aren’t practiced. Just because an employee learned a skill 10 years ago doesn’t mean that he or she has that skill today.
4. Determine who should be involved. It’s imperative that employees be involved in the entire process. Both employees and managers should be consulted when determining which skills are necessary in meeting the organization’s overall objectives.
5. Determine the usefulness of the results for pay purposes. Determine if the work that you put into developing a skill- based structure has been worth the time and resources required. This is an ongoing process, so the structure should always be evaluated for effectiveness as the organization changes.
Some pay plans compensate people based their competencies rather than on the skills that they have. These are known as competency-based structures. A competency-based structure is a pay structure that focuses on the broadly applicable knowledge, skills, and behaviors that form the foundation for success at any level or job within the organization.
The following are the three basic steps in creating a competency- based structure:
1. Determine the core competencies. The core competencies are those competencies that best reflect the knowledge, skills, and behaviors that form the foundation for success at any level or job within the organization. These are the competencies that will be measured.
2. Create competency sets. A competency set assigns a specific action or actions to a competency. These are what will be used to actually measure the competencies.
Compensation Management30
3. Determine competency indicators. A competency indi- cator is an observable behavior that indicates the level of competency within each competency set. This is the tool that will be used to measure each person’s competencies.
Five basic decisions must be made when performing a competency analysis. These decisions look a lot like the decisions that must be made when developing a skill-based plan. The five decisions are
1. Determine the plan’s objective. As with all pay plans, you need to ensure that the plan’s objectives reflect the organization’s objectives.
2. Determine the information to be collected. Determine which specific information about a person will be collected and used to determine pay. The concept of a competency can be a bit difficult to pinpoint, but you can generally define it by focusing on five areas:
a. Skills—demonstration of expertise
b. Knowledge—accumulated information
c. Self-concepts—attitudes, values, self-image
d. Traits—general disposition to behave in a certain way
e. Motives—recurrent thoughts that drive behavior
3. Determine the methods to certify competencies. This is probably the most difficult part of developing a competency-based plan, because competencies aren’t as objectively measured as skills.
4. Determine who should be involved. It’s imperative that employees be involved in the entire process. Both employees and managers should be consulted when determining which competencies are necessary in meeting the organization’s objectives.
5. Determine the usefulness of the results for pay pur- poses. Determine if the work that you put into developing a competency-based structure has been worth the time and resources. This is an ongoing process, so the structure should always be evaluated for effectiveness as the organization changes.
Lesson 1 31
When you finish your textbook reading, complete Self-Check 6 and Homework Assignment 6. After you’ve completed the exer- cises and have reviewed the assignments in this lesson, take the examination for Lesson 1 and submit it to the school for grad- ing. Don’t move on to the next lesson until you’ve completed the examination for Lesson 1.
Homework Assignment 6
Complete the Review Questions on page 181 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Compensation Management32
Self-Check 6 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following is the degree to which the evaluation assesses the relative worth of
jobs to the organization?
a. Reliability c. Acceptability
b. Validity d. Usefulness
2. Which of the following are the observable behaviors that show the level of competency within
a competency set?
a. Competency benchmarks c. Competency markers
b. Competencies measures d. Competency indicators
3. Which of the following links pay to the depth or breadth of the skills, abilities, and knowledge
a person acquires that are relevant to the work?
a. Skill analysis c. Skill inventory
b. Skill-based structure d. Skill survey
4. In which of the following conceptions of competency would “values” be considered?
a. Skills c. Self-concept
b. Knowledge d. Traits
5. Which of the following is the systematic process of identifying and collecting information about
the skills required to perform the work in an organization?
a. Skill analysis c. Skill inventory
b. Skill-based structure d. Skill survey
Check your answers with those at the back of the study guide.
33
1. If you’re an FMC technician and you earn $14.50 per hour,
how many core elective points must you have earned?
A. 40 C. 240
B. 140 D. 365
2. Which of the following is an example of wage criteria bias?
A. Rich doesn’t give Suzanne a high increase in pay because
he feels that a woman isn’t an effective employee.
B. Rich doesn’t give Suzanne a high increase in pay because
Suzanne’s pay is already at a low rate due to a poorly
designed job evaluation.
C. Rich doesn’t give Suzanne a high increase in pay because
Suzanne hasn’t performed as well as is required for her
job.
D. Rich doesn’t give Suzanne a high increase in pay because
there’s not enough money in the budget to give every
employee a raise.
E x
a m
in a
t io
n E
x a
m in
a t io
n Lesson 1
Introduction and Determination of Pay Structure
When you feel confident that you have mastered the material in
Lesson 1, go to http://www.pennfoster.edu and submit your
answers online. If you don’t have access to the Internet, you can
phone in or mail in your exam. Submit your answers for this
examination as soon as you complete it. Do not wait until
another examination is ready.
Questions 1–20: Select the one best answer to each question.
EXAMINATION NUMBER
41289000
Whichever method you use in submitting your exam
answers to the school, you must use the number above.
For the quickest test results, go to
http://www.pennfoster.edu
Examination, Lesson 134
3. A skill plan that’s based on depth rather than breadth focuses on the skills required to
A. manage a warehouse.
B. drive a forklift.
C. manage people.
D. perform all of the accounting tasks for an organization.
4. Andrew is performing a job evaluation using the point method. He just created a list
of the different levels of skills required for each factor. Which step did Andrew just
complete?
A. Conduct the job analysis.
B. Determine compensable factors.
C. Scale the factors.
D. Weigh the factors according to importance.
5. Kurt is currently working with the labor union that represents the employees in his
organization on developing a compensation strategy. Which step of the total compensation
strategy formulation is he executing?
A. Assessing total compensation implications
B. Mapping a total compensation strategy
C. Implementing the strategy
D. Reassessing the strategy
6. Brent’s organization is currently going through a vicious circle. Which of the following
about his organization is correct?
A. Performance throughout the organization has increased, so management decides to
decrease pay because the employees are already motivated by things other than
money.
B. Performance throughout the organization has decreased, so management decides
to increase pay to motivate employees.
C. Performance throughout the organization has decreased, so management decides
to decrease pay to cut costs.
D. Employee pay has increased due to high performance, thus increasing the employees’
motivation to work harder and continually improve organizational performance.
7. Teresa is developing a Web site that will explain the organization’s pay and benefits
package to its employees. Which step of the total compensation strategy formulation
is she executing?
A. Assessing total compensation implications
B. Mapping a total compensation strategy
C. Implementing the strategy
D. Reassessing the strategy
Examination, Lesson 1 35
8. Ron is a computer programmer who works for General Electric Plastics. He has recently
been assigned to a two-month project where he will write a program that determines
the number of units that need to be produced in a single month for his company to
break even. He will be working on this project alone and will have no employees.
Which of the following levels at General Electric Plastics best describes Ron’s position?
A. Executive C. Technical/Managerial
B. Director D. Professional
9. Stephanie works in the 2�-bolt manufacturing division and Christine works in the 6�-bolt
manufacturing division. Stephanie earns a higher wage than Christine because the 2�
bolts are manufactured in an area where the cost of living is much higher than the area
where the 6� bolts are manufactured. Which of the following is this an example of?
A. Content C. Use value
B. Relative contribution D. Exchange value
10. Which of the following is an example of the ranking method being used to perform a
job evaluation?
A. Using the job definitions that are provided on the Department of Labor Web site to
create the different levels of positions within an organization
B. Creating 16 different descriptions in which each job within the organization will fit
C. Creating a list of specific tasks for each job and placing a value on each one based
on how much they contribute to the organization’s mission
D. Creating a list of specific skills required for each job and placing a value on each
based on how much they contribute to the organization’s mission
11. Kevin just completed a job evaluation for his organization. After presenting his findings
to the HR director, he was told that the position of vice president didn’t have a high
enough salary based on its level of responsibility and the position of maintenance
worker didn’t have a high enough salary based on its level of responsibility. Which
of the following was missing from Kevin’s evaluation?
A. Supports organizational strategy
B. Supports work flow
C. Fair to employees
D. Motivates behavior toward organizational objectives
12. The employees at the McKinney Corporation have become very upset about their wage
levels because they found out that they’re the lowest paid employees in their industry.
This is an example of
A. equity theory. C. institutional model.
B. tournament theory. D. internally aligned structure.
Examination, Lesson 136
13. Shanda is performing a job analysis, and she sent a questionnaire to all the employees
in the accounting department inquiring about the work that they perform. She noticed
that there was a great deal of variance among different people who all hold the same
position. None of them could agree on the work that they perform. Which of the
following is missing from her job analysis?
A. Reliability C. Acceptability
B. Validity D. Usefulness
14. Which of the following is an example of a quantitative method being used to collect
information for a job analysis?
A. Kim is informally interviewed by a member of the HR department about what she
does at work all week.
B. Kim is observed by her supervisor who is compiling a list of all of the tasks that
she completes in a week.
C. Kim is keeping a list of all of the tasks that she completes in a week.
D. Kim is filling out a survey that asks her to rank, in order of importance, the
different responsibilities that she has in the receiving department.
15. Brittany is collecting data for a job analysis, and she just finished collecting data on
how store managers teach selling skills to their new sales associates so that they will
be able to meet their individual daily sales goals. This is an example of which kind of
information?
A. Identification C. Employee data
B. Content D. Essential elements
16. Which of the following is an example of higher wages based on human capital?
A. Gus earns more than Seymour because Gus is a member of a labor union and
Seymour isn’t.
B. Gus earns more than Seymour because Gus is much better at negotiating salary
increases than Seymour.
C. Gus earns more than Seymour because Gus has been trained on all of the
machines that are used on his manufacturing line.
D. Gus earns more than Seymour because Gus has missed fewer days of work than
Seymour.
17. Forrest just gave his assistant a 3% raise because his assistant just took on the
responsibility of department budgeting. Which of the following policy choices did
Forrest just make?
A. Internal alignment C. Employee contributions
B. External competitiveness D. Management
Examination, Lesson 1 37
18. Ana Lisa has a company credit card on which she is allowed to purchase gas for her
car because her job requires her to drive a lot. This is an example of which form of
pay?
A. Long-term incentive C. Benefits: work/life balance
B. Benefits: income protection D. Benefits: allowances
19. Charlotte just received a $500 bonus because her department finished its design
project ahead of schedule. This is an example of which form of pay?
A. Cash compensation: base
B. Cash compensation: merit pay
C. Cash compensation: cost-of-living adjustment
D. Cash compensation: incentives
20. Which of the following companies saw an increase in stock price as well as an increase
in CEO pay?
A. Gap C. Pfizer
B. Whole Foods D. Texas Instruments
Examination, Lesson 138
NOTES
Determining Pay Level and Individual Pay You spent most of the previous lesson learning about compensation as it relates to internal alignment with the organization’s goals and objectives. The assignments in this lesson focus on the second policy of compensation—external competitiveness. You can see how competiveness fits into the big picture by taking a look at Exhibit II.1 on page 183 of your textbook.
ASSIGNMENT 7: DEFINING COMPETITIVENESS Read this assignment. Then read pages 182–184 and 185– 215 in your textbook.
When you complete this assignment, you’ll be able to
� List the factors that shape external competitiveness
� Describe the competitive pay policy alternatives
� Determine the consequences of pay-level and mix decisions
External competitiveness is an organization’s pay relative to its competitors. Contrary to popular belief, not all companies try to pay the lowest amount to decrease costs. Some organi- zations do pay low wages relative to their competitors, but others use a strategy of paying at or above their competitors’ level. The specific choice of which strategy to use has to do with the organization’s goals. Regardless of the specific strategy employed, the organization’s goals are to control costs and to attract and retain employees.
Three major factors are taken into consideration when deter- mining an organization’s external competitiveness:
� Labor market factors
� Product and service markets
� Organizational characteristics
39
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Compensation Management40
A number of factors within the labor market affect decisions regarding external competitiveness. These factors include
� How the labor market works. In general, the labor market follows the law of supply and demand, just like the market for any other product or service. The market wage is set where the supply of labor meets the demand for labor. Understanding how the demand and supply or labor works will help you understand this better.
� The demand for labor. The demand for labor changes when the demand for particular products and services that use that labor change. In general, when demand for labor increases, wages increase. When demand for labor decreases, wages decrease.
� Marginal product. This is the additional output produced with the employment of an additional person. So if your organization can currently produce 10 toasters per day and you hire another person and productivity goes up to 12 toasters per day, then the marginal product for that person is 2 toasters per day.
� Marginal revenue. This is the additional output produced with the employment of an additional person. So in our toaster example, if you sell toasters for $20 per unit, then the new employee’s marginal revenue is $40 per day.
� The supply of labor. The supply of labor changes when wages change. In general, when the wages of a job increase, the supply of labor to that job increases. When the wages of a job decrease, the supply of labor to that job decreases.
A number of factors within the product and service markets affect decisions regarding external competitiveness. These factors include
� The demand for the product or service. When demand for a product increases, the price of that product increases. This means that there’s more money available to spend on higher wages. When demand for a product decreases, then prices also decrease, leaving less money available for wages.
Lesson 2 41
� The degree of competition. Markets with a high degree of competition tend to have lower prices and lower profits. This means that they have less money available for wages. These markets tend to pay less than those that have little or no competition for their employees.
� People flow to the work. In some industries, such as health care, the customers come to a specific location. This means that the employees must also be at this location. In this case, the organization must pay the wages that are demanded in that particular area because it’s unable to move to a lower-cost location.
� Work flows to the people. In some industries, such as business consulting, the organization sends employees to the customer. This means that the employees can be from anywhere. In this scenario, the organization must pay the wages that are demanded in the specific areas where its employees are located.
A number of internal organizational factors can influence decisions regarding external competitiveness. These factors include
� Industry and technology. The amount and level of tech- nology that’s used within the organization’s industry will be a factor in determining external competitiveness. A higher level of technology generally means higher wages.
� Employer size. In general, larger organizations pay more than smaller ones. This is because they’re usually able to spread their costs over a greater number of people, which means that more money is available for wages.
� Employee preferences. Not all employees agree that money is the most important form of compensation. Some employees value things like health insurance and dental insurance more than money; others value time off and flexible schedules more than money. The preferences of an organization’s employees will affect the choices made about external competitiveness.
Compensation Management42
� Organizational strategy. Different organizations within the same industry will still have different organizational strategies. This means that their compensation strategies will also differ, because the compensation strategy will be aligned with the larger organizational strategy.
An organization can adopt a number of external competitive strategies. Keep in mind that there’s no one “best” strategy. The strategy that’s chosen will drive all of the organization’s major decisions with regard to its compensation program. The following are some of the more common external competitive strategies:
� Match the competition. The most common pay policy is to match the wages of the competition within the industry. This allows a more even playing field when it comes to recruiting and retaining quality employees.
� Lead policy. This is a policy of paying more than the com- petition within the industry. A lead policy tends to attract and retain higher-quality employees. Unfortunately, it can also mask other problems within the organization, such as when people stay at their jobs due only to the higher pay despite the fact that they aren’t happy with their work.
� Lag policy. This is a policy of paying a lower rate than the competition within the industry. Lower wages usually come with a promise of higher future earnings through stock options or company ownership opportunities.
� Flexible policy. Many organizations combine matching, lead, and lag policies. They may vary each policy by department or geographic area, depending on the supply and demand of labor. An example of this would be a company that adopts a lead policy for its salespeople so they can generate more revenue while also adopting a lag policy for its manufacturing employees so it can reduce costs.
Homework Assignment 7
Complete the Review Questions on page 215 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Lesson 2 43
Self-Check 7 Select the one best answer for each of the following multiple-choice questions.
1. Human capital theory states that _______ earnings flow to those who improve their _______
by investing in themselves.
a. higher; wage level c. higher; sick time usage
b. higher; work hours d. higher; productivity
2. According to efficiency-wage theory, _______ wages may _______ efficiency and _______
labor costs.
a. high; increase; lower c. high; increase; lower
b. low; decrease; lower d. low; decrease; increase
3. Which of the following generally occurs when demand for labor is greater than the supply of
labor?
a. Wages increase. c. Wages stay the same.
b. Wages decrease. d. Supply decreases.
4. Why would an employer pay more than the reservation wage?
a. Work with negative characteristics requires higher pay to attract workers.
b. Above-market wages will improve efficiency by attracting workers who will perform better
and be less likely to leave.
c. Pay policies signal the kinds of behavior the employer seeks.
d. Job seekers won’t accept jobs whose pay is below a certain wage, no matter how
attractive other job aspects.
5. Which of the following is best expressed by the formula below?
Base + Bonus + Benefits + Value of stock / Number of employees
a. External competitiveness c. Pay forms
b. Pay level d. Cost controls
Check your answers with those at the back of the study guide.
Compensation Management44
ASSIGNMENT 8: DESIGNING PAY LEVELS, MIX, AND PAY STRUCTURES Read this assignment. Then read pages 216–256 in your textbook.
When you complete this assignment, you’ll be able to
� List the purposes of a survey
� Design a survey
� Create a market pay line using survey information
Once you’ve selected an external competitive strategy, it’s time to determine what the organization’s pay levels are going to be. To do this, you need to obtain information about the pay levels at the different organizations within your industry. A survey can be used to complete this task. A survey is the systematic process of collecting information and making judgments about the compensation paid by other employers.
An organization will conduct a survey for five main reasons:
� To adjust the pay level. It’s common practice to adjust the pay of employees based on their performance or to match increased costs of living.
� To adjust the pay mix. Recall that compensation is more than just the amount of money that an employee receives. Employers will often change the pay mix to match what the competition is doing.
� To adjust the pay structure. Developing a pay structure can be time-consuming and expensive. Very often employ- ers will use data from other organizations to design and maintain their pay structure.
� To study special situations. Sometimes compensation- related situations emerge that impact only a small group of employees, or even a single employee. Information from outside organizations can often help in dealing with such situations.
Lesson 2 45
� To estimate the labor cost of competitors. Determining competitors’ pay levels can help shed light on their cost structure as a whole. This information can help the organization make pricing and budgeting decisions in addition to compensation-related decisions.
Once you’ve figured out the reason for performing the survey, your next step will be to design the survey. A number of factors must be considered when designing a survey so that you get relevant and useful data:
� Who should be involved? In general, the compensation manager and the human resources department will be involved in designing the survey. Other stakeholders in the organization may want to be involved or at least be privy to the information that’s collected.
� How many employers should be surveyed? The num- ber of employers surveyed will depend on the size of the industry, the resources available to conduct the survey, and the time and money allotted to the project.
� Which jobs should be included? The number of jobs to include in the survey will depend on the number of jobs that are in the organization and the resources that are available for the survey. If you include more jobs, the infor- mation will be more accurate. However, avoid including too many jobs, because the overworked human resources managers that you speak with may not have the time to give you all of the information that you need.
� What information should be collected? Some of the information that can be collected is base pay, total cash, and total compensation.
Once you’ve collected all of the information that you think you’ll need, it’s time to interpret the survey results and con- struct a market line. The first thing that you must do is verify the data. This means that you go through the data and check it for accuracy. You’ll want to discard any inaccurate data or any statistical outliers, because they’ll only harm the quality of your pay line.
Once the data has been verified, you then need to perform a statistical analysis on the data. A number of different statistical analysis tools can be used to make sense of the data. After
Compensation Management46
you’ve performed your statistical analysis, you need to update the survey data. Because your competition constantly changes their pay levels, you’ll want to make this process an ongoing effort. Any time that you collect new data you’ll want to use it to replace the old data.
Finally, you’ll use the data to construct a market pay line. This is a visual representation of all the data that was col- lected for each job. To do this, graph a line that connects the points that correspond to positions within your organization and their salaries. This pay line will then be used as a tool to determine the pay levels for the different positions within your organization.
Homework Assignment 8
Complete the Review Questions on page 256 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Lesson 2 47
Self-Check 8 Select the one best answer for each of the following multiple-choice questions.
1. Where is the external competitiveness information located on the pay structure?
a. The x-axis c. The pay-policy line
b. The y-axis d. The pay ranges
2. Which of the following cities has the highest pay level?
a. Kansas City, Missouri c. Richmond, Virginia
b. Pittsburgh, Pennsylvania d. Indianapolis, Indiana
3. Which of the following is considered a relevant market for performing a survey?
a. Employees within the same geographic area
b. Employees in a different geographic area
c. Employees with different jobs in the same organization
d. Employees with the same jobs in the same organization
4. Which of the following is a measure of how tightly all of the rates are clustered around the
mean?
a. Median c. Standard deviation
b. Weighted mean d. Percentiles
5. Which of the following is a purpose of a survey?
a. To allow competitors to estimate your labor costs
b. To adjust the pay mix
c. To create a job description
d. To analyze the work that’s being done in each job
Check your answers with those at the back of the study guide.
Compensation Management48
ASSIGNMENT 9: PAY-FOR- PERFORMANCE Read this assignment. Then read pages 257–258 and pages 259–290 in your textbook.
When you complete this assignment, you’ll be able to
� Determine how performance pay can motivate employee behavior
� Design a pay-for-performance plan
Different people perform differently at their jobs. This is true of every organization, regardless of its size or industry. Once a pay line has been developed, the organization must determine if and how it’s going to pay people for their individ- ual contributions to the organization as well as for their individual performance levels.
The one thing that every employer wants from its employees is for them to perform in ways that lead to better organiza- tional performance. Although this behavior isn’t 100% controllable through compensation, it can be a major factor in influencing employee behavior. A good individual compen- sation plan will help an organization recruit and retain high-performing employees. It can also help to motivate employees to pursue training opportunities to increase their skills and productivity. Finally, it can also be used to motivate employees to perform well at their jobs, which will ultimately improve the organization’s performance. To make this work, employee performance must be able to be meas- ured and managed. Without measurement, there’s no way to define what good performance actually is. Without manage- ment, there’s no way to help employees be the most effective performers that they can be.
Motivating people to be high-performing employees isn’t always as easy as just throwing more money into their paychecks. Seemingly endless research has been done on employee motivation, and there are many theories on how to motivate people.
Lesson 2 49
The following are some of the more popular theories:
� Maslow’s need hierarchy. According to Maslow, people are motivated by their inner needs, and if those needs aren’t met, then people can become frustrated and lose motivation.
� Herzberg’s two-factor theory. This theory is very similar to Maslow’s theory in that people are motivated by inner needs. There are some small differences between this theory and Maslow’s, but the basic premise is the same.
� Expectancy theory. According to this theory, employees are motivated by their ability to perform a task as well as the reward they receive for performing it.
� Equity theory. This theory states that employees are motivated when the perceived outputs are equal to or less than the perceived inputs. In other words, people are motivated when they feel that the compensation they receive is a fair amount for the work that they’ve performed.
� Reinforcement theory. According to this theory, people are positively motivated by rewards.
� Goal setting. This theory states that people are moti- vated by challenging goals as well as receiving rewards for achieving those goals.
� Agency theory. This theory states that people are motivated by set wages.
Keep in mind that these are theories are used to predict what will work best within an organization. People tend to be motivated by a combination of these theories, and different people will be motivated by different things. These theories only serve as a way to understand why these differences exist. People are also motivated by things other than cash payments. That’s why compensation is made up of a total reward system rather than just cash payments.
Compensation plays a major role in influencing employee behavior. As stated earlier in this course, the four major employee behaviors that organizations attempt to influence are the decision to join the organization, the decision to stay
Compensation Management50
with the organization, the development of skills, and the motivation to perform well. Each of these desired behaviors is explored below.
� Joining a firm. It should come as no surprise that the level of pay will influence a person’s decision to join an organization. Although people are motivated by many things, pay tends to be an objective measurement that they can use to make a decision.
� Staying with a firm. Low pay can be a cause for high turnover within an organization. The cost of replacing and training new employees is often more expensive than the money that’s saved from lower wages. People who are well paid may also leave an organization if they feel that lower-performing employees are being overpaid despite their lack of performance.
� Developing skills. It’s difficult to determine if skill-based pay is good or bad for an organization. There’s definitely motivation to learn new skills, but that motivation can quickly fade if there are no training opportunities or the skill-based pay program is poorly managed. There’s also the possibility of employees taking the training that the organization has provided and seeking employment elsewhere for a higher level of pay.
� Performing well. Most of the research is mixed when it comes to the question of whether employees perform better when pay is higher.
Homework Assignment 9
Complete the Review Questions on page 290 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Lesson 2 51
Self-Check 9 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following would prefer to have 100% of their pay based on their individual
performance?
a. Materialistic c. Risk-takers
b. Low self-esteem d. Risk-averse
2. Agency motivation theory states that employee performance is motivated by
a. pay.
b. positive reinforcement from supervisors.
c. negative reinforcement from supervisors.
d. recognition from their peers.
3. Which of the following theories states that employees are motivated when their pay is equal
to their perceived effort and work?
a. Maslow’s need hierarchy c. Expectancy theory
b. Herzberg’s two-factor theory d. Equity theory
4.Which of the following is an increase in base pay that’s tied to performance?
a. Gain sharing c. Merit pay
b. Across-the-board increase d. Profit sharing
5. If individual performance measurements are unstable and unclear, and there’s a high level of
variability in organizational performance, then which cell should you use to determine your
pay-for-performance strategy? (See Exhibit 9.3 on page 263 in your textbook.)
a. Cell A c. Cell C
b. Cell B d. Cell D
Check your answers with those at the back of the study guide.
Compensation Management52
ASSIGNMENT 10: PAY-FOR- PERFORMANCE PLANS Read this assignment. Then read pages 291–333 in your textbook.
When you complete this assignment, you’ll be able to
� Define pay-for-performance plan
� List the types of short-term pay-for-performance plans
� List the types of team incentive plans
� List the types of long-term incentive plans
Once the organization has determined if and how it will reward employees for their performance, you must develop a plan of action for how to make it happen. You’ll develop what’s known as a pay-for-performance plan, which rewards specific employees and employee teams based on their performance in achieving organizational goals.
Here we’ll examine three categories of pay-for-performance plans:
� Short-term incentive plans
� Team incentive plans
� Long-term incentive plan
The most common type of pay-for-performance plan is once that rewards individuals over the short term for achieving organizational goals or for doing work that helps others achieve organizational goals. These plans usually take the form of cash awards. The main types of short-term incentive plans include
� Merit pay. A merit pay increase occurs when employees receive an increase in their base pay due to their ratings on a performance evaluation (note that the concept of performance evaluations will be discussed in greater detail later in this course). An example of this would be an employee who receives a 6% increase in salary because she achieved a ranking of at least four out of five on every section of her annual performance evaluation.
Lesson 2 53
� Lump-sum bonuses. A lump-sum bonus is a one-time cash reward an employee receives that doesn’t increase his or her base pay. An example of this would be an employee who receives a cash bonus of $1,500 at the end of the year because the organization exceeded its profit goal for the year.
� Individual spot awards. An individual spot award occurs when an employee receives a one-time cash reward for a specific performance. Although this sounds much like a lump-sum bonus, it differs in the fact that an individual spot award is much more spontaneous, whereas a lump- sum bonus tends to be more planned. An example of this would be an employee who receives a $50 cash reward for giving excellent service to a new customer.
Much of the work that’s performed in the workplace today is completed by teams rather than by individuals. This has created the need for pay-for-performance plans for groups of people rather than just for individuals. The main types of team incentive plans are as follows:
� Gain-sharing plans. With a gain-sharing plan, a team receives a bonus that’s based on the increases in productivity or decreases in costs that it created. Gain- sharing plans are the most common team incentives because the bonuses are paid based on the team’s accomplishments. An example of this would be a team that receives a $2,000 bonus because they were able to save the organization $10,000 through decreased labor costs.
� Profit-sharing plans. With a profit-sharing plan, employees receive a cash bonus based on the organization’s prof- itability. A profit-sharing plan can also be applied when a specific organizational profit level must be met before any employee receives a bonus. This latter version of a profit-sharing plan assumes that no employee receives a performance bonus unless the entire organization meets its profit objectives. An example of a profit-sharing plan would be an employee who receives a check for $250 because the company exceeded its quarterly profit goals.
Compensation Management54
� Earnings-at-risk plans. With an earnings-at-risk plan, an employee can receive an increase in pay when the organization meets its productivity and profit goals, but then can also experience a decrease in pay when the organization falls short of its productivity and profit goals. An example of this would be an employee who takes a 2% cut in base pay because the employee didn’t meet his productivity goals and the organization failed to earn a profit for the year.
Thus far, the discussion has been about incentive plans that focus on short-term performance. A number of plans are designed to motivate long-term productivity that takes at least one year to measure. The main types of long-term incentive plans are as follows:
� Employee stock ownership plans (ESOPs). With an ESOP, employees receive shares of stock as part of their pay. The idea behind this is that the employees will be more vested in the success of the organization if they’re actually part owners and can earn money when the price of the stock increases. An example of this would be an employee who receives 100 stock option shares (note that stock options will be discussed later in this course) for each quarter worked after one year of service.
� Performance plans. With a performance plan, an employee receives a bonus based on meeting or exceed- ing organizational goals that are set three or more years in the future. These plans are generally reserved for higher-level managers and company officers who have more control over the long-term success of the organiza- tion. An example of this would be a CEO who receives a $10,000 bonus if organizational output increases at least 4% for the next three years.
� Broad-based option plans (BBOPs). With a BBOP, employees receive an amount of stock based on a per- centage of their annual income. This stock grant will generally occur only after an organization has met its profitability goals, so if the goals aren’t met, then no employee receives the stock shares. An example of this would be an employee who receives shares of company stock that are worth 7% of her annual salary because the company was able to exceed its annual profit goals.
Lesson 2 55
Self-Check 10 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following is a disadvantage of an ESOP?
a. There’s no long-term benefit for increased performance.
b. There’s no immediate benefit for increased performance.
c. Employees who become large stockholders may not know how to effectively run the
business.
d. There’s a high level of taxes levied on stock options for both the employee as well as the
organization.
2. Which of the following pieces of information do you need to know to execute a Scanlon plan?
a. Sales value of production
b. Individual productivity levels
c. Length of time needed to produce one unit
d. Number of units produced
3. Which of the following variable pay plans is based on financial and operational measures of
performance?
a. Cash profit sharing c. Balanced scorecard
b. Stock options d. Gain sharing
4. Who receives the gains that are created from an Improshare plan?
a. Employees c. Employees and management
b. Management d. Stockholders
5. If pay varies as a function of production and rate is determined by time period per unit of
production, then which of the following incentive plans would be most effective?
a. Straight piecework c. Taylor differential
b. Standard hour d. Rowan
Check your answers with those at the back of the study guide.
Homework Assignment 10
Complete the Review Questions on page 322 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Compensation Management56
ASSIGNMENT 11: PERFORMANCE APPRAISALS Read this assignment. Then read pages 334–402 in your textbook.
When you complete this assignment, you’ll be able to
� List the common errors in appraising performance
� Analyze the strategies for better understanding and measuring job performance
� Evaluate how pay can be tied to performance appraisals
The past two assignments have examined performance pay. The concept of performance pay is almost worthless unless you can devise a way to measure and rate individual and group per- formance. This is where performance appraisals are useful. A performance appraisal is a simple method used to measure and rate the performance of an employee. Because compensation is often tied to performance appraisals, performance appraisals need to be taken seriously by the organization, because they’re definitely something that will be taken very seriously by the employee.
A number of errors can occur during the employee appraisal process. These errors are a result of human nature, so it’s important that the people who are performing the appraisals know what these errors are and how they can be avoided. The following are some of the more common errors that can occur during the employee appraisal process:
� Halo error. This error occurs when the appraiser gives a positive review for all duties based on the employee’s high performance in a single job function.
� Horn error. This error occurs when the appraiser gives a negative review for all duties based on the employee’s low performance in a single job function.
� First-impression error. This error occurs when the appraiser gives a positive or negative review based on the initial impression of the employee.
Lesson 2 57
� Recency error. This error occurs when the appraiser gives a positive or negative review based on the most recent impression of the employee.
� Leniency error. This error occurs when the appraiser consistently gives all employees higher than deserved ratings.
� Severity error. This error occurs when the appraiser consistently gives all employees lower-than-deserved ratings.
� Central tendency error. This occurs when the appraiser avoids all excessively high or low ratings for employees.
� Clone error. This error occurs when the appraiser gives higher ratings to employees who are most similar to the rater in terms of work ethic, personality, appearance, and social status.
� Spillover error. This error occurs when the appraiser continues to give an employee high or low ranks based on the employee’s performance in previous rating periods.
Understanding and measuring job performance isn’t an easy task. It’s important that your organization adopt strategies to make performance measurement an effective tool, because an ineffective performance review process can cause poor employee morale and excessive turnover. The following are some strategies for developing a better understanding of job performance and the ability to measure it:
1. Improve appraisal formats. Employees can either be ranked or rated. With ranking, the employee’s performance is compared to other employees who have similar tasks. In contrast, when employees are rated their performance is compared to an objective set of performance measure- ments. Employee rating is the more popular tool.
Note that the format of the appraisal is almost as important as the appraisal itself. An effective appraisal format will have the following five characteristics:
� The appraisal will give a great deal of feedback that the employee can use for professional development.
Compensation Management58
� The appraisal is easy to administer.
� The data on the appraisal form can be used for collection and research.
� The appraisal format helps minimize costs of the appraisal process.
� The appraisal format measures valid criteria that directly relates to the employee’s job.
2. Select the right raters. Contrary to popular belief, it’s not always the supervisor who completes the perform- ance appraisal for the employee. A number of groups can perform an appraisal, including
� Supervisors. The supervisor is usually tasked with performing the appraisal simply because he or she is generally the person who assigns the work and who is ultimately accountable for the work that the employee performs.
� Peers. Peers often spend much more time working with an employee than supervisors do. This allows them to have a better view of how well or how poorly an employee performs on his or her day-to-day tasks. Peer reviews have become more commonplace as the use of teams in the workplace has increased.
� The employee. Many organizations now require employees to complete a self-review. These reviews aren’t usually used to determine merit raises, but they are used to see if there’s a gap between the employee’s perceived performance and his or her actual performance.
� Customers. Because the customers are the ones ultimately responsible for the money made by an organization, then it makes sense to use their input when it comes to employee performance. Using customer evaluations has increased over the past decade as competition for customer dollars has increased.
Lesson 2 59
� Subordinates. It’s becoming more common in the workplace for employees to rate their supervisors. Such ratings are often used to ensure that the supervisor is an effective leader and is giving the employees the tools they need to be high performers.
3. Understand how raters process information. Raters are human, and we know that humans sometime make mistakes. It’s important to know the types of errors that raters can make and why they make these errors. The most common types of errors include
� Errors in the rating process. These errors occur when the rater uses factors other than actual employee performance when completing the evaluation.
� Errors in observation. These errors occur when the rater doesn’t always observe the positive or negative performance measures of the person being evaluated.
� Errors in storage and recall. These errors occur when there are long periods of time between evalua- tions and the rater is unable to recall many of the details about the employee’s performance. This can also occur when the rater uses only a few of the employee’s observed behaviors to measure the employee’s overall performance.
� Errors in the actual evaluation. These errors occur when the rater uses the evaluation for something other than a measurement of employee performance.
4. Train raters to rate more accurately. Much of this assignment has been focused on the errors that raters can make in the evaluation process. It’s important to ensure that raters are made aware of these errors and that they know how to minimize them when completing performance evaluations.
Compensation Management60
Once you understand how the performance evaluation process should look, it’s time to put it into practice. The first thing to do is to determine the factors of performance that you want to measure. Then you need to figure out what type of scale you’re going to use for each of these measurements. Next you’ll want to gather a team of employees and supervi- sors to get their input on how the process should work and how the evaluation should look. From there, you need to train the raters on how to complete performance evaluations and how to avoid the most common rater errors. Finally, the raters should begin to keep notes of employee performance, so that when it does come time to complete the evaluation, they’ll have all of the information that they need.
When you finish your textbook reading, complete Self-Check 11 and Homework Assignment 11. After you’ve completed the exercises and have reviewed the assignments in this lesson, take the examination for Lesson 2 and submit it to the school for grading. Don’t move on to the next lesson until you’ve com- pleted the examination for Lesson 2.
Homework Assignment 11
Complete the Review Questions on pages 368–369 of your textbook.
When you’re done, check your answers with those at the back of the
study guide.
Lesson 2 61
Self-Check 11 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following is a performance appraisal that uses specific adjectives as anchors
for measurement?
a. Management by objective c. Behaviorally anchored rating scale
b. Essay d. Standard rating scale
2. Which is the most common type of performance evaluation format used for exempt
employees?
a. Standard rating scale c. Management by objective
b. Essay d. Behaviorally anchored scale
3. When does spillover error occur?
a. When a supervisor continues to downgrade an employee for performance errors in
prior rating periods
b. When a supervisor avoids extreme ratings across all employees
c. When a supervisor consistently rates someone higher than is deserved
d. When a supervisor allows the employee performance at the end of the rating period to
play a large role in determining the performance level for the entire rating period
4. Which of the following performance appraisal formats has the worst economic criterion?
a. Ranking c. Management by objective
b. Standard rating scales d. Essay
5. What type of error occurs when a supervisor downgrades an employee on an entire
performance review based on poor performance in a single dimension?
a. Halo error c. Recency error
b. Horn error d. Clone error
Check your answers with those at the back of the study guide.
Compensation Management62
NOTES
63
1. Which of the following is an example of an error in the actual
evaluation?
A. Rhonda gives George a lower evaluation due to gender
differences.
B. Tony gives Chet a poor evaluation because all he can
remember is the fact that Chet showed up late to his
job interview a year ago.
C. Sarah gives Christa a good evaluation because Christa
just started showing up for work on time after receiving
three warnings for being late.
D. Lonnie gives Rick a good evaluation because they both
drive the same cars and Lonnie thinks that makes Rick
a smarter and better employee.
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n Lesson 2
Determining the Pay Level and Individual Pay
When you feel confident that you have mastered the material in
Lesson 2, go to http://www.pennfoster.edu and submit your
answers online. If you don’t have access to the Internet, you can
phone in or mail in your exam. Submit your answers for this
examination as soon as you complete it. Do not wait until
another examination is ready.
Questions 1–20: Select the one best answer to each question.
EXAMINATION NUMBER
41289100
Whichever method you use in submitting your exam
answers to the school, you must use the number above.
For the quickest test results, go to
http://www.pennfoster.edu
Examination, Lesson 264
2. The following is one of the possible ratings that employees can get on their perform-
ance evaluation, “Willing to participate in all functions of the department. Works well
with both internal and external customers. Consistently performs at a level expected
from all ranks of management.” This would most likely be part of which type of
performance evaluation?
A. Ranking
B. Standard rating scale
C. Behaviorally anchored rating scale
D. Management by objective
3. Jeremy is completing a performance appraisal for his employee Ron. Jeremy gave Ron
all low-level ratings despite the fact that Ron is a very high performer at work. The
reason that Jeremy gave Ron these low marks is because Jeremy noticed that Ron
came in late to work a few days over the course of the year. This is an example of
which type of error in the appraisal process?
A. Clone error C. Central-tendency error
B. Horn error D. Halo error
4. The Omega Corporation uses a Scanlon plan to determine bonuses for the year. Based
on the following information, how much money will be available for distribution as a
bonus?
2008 Annual Data
Sales value of production: $100,000
Total wage bill: $30,000
Operating Month, June 2009
Sales value of production: $10,000
Actual wage bill: $2,000
A. $3,000 C. $1,000
B. $2,000 D. $0
5. Karen didn’t receive a bonus this year despite the fact that her store was able to earn
a profit of 2% more than last year. The reason that she didn’t receive a bonus was
because she exceeded her payroll expenses by 3% for the year. What type of variable-
pay plan does Karen’s employer use?
A. Cash profit sharing C. Gain sharing
B. Balanced scorecard D. Team incentives
Examination, Lesson 2 65
6. Paul works in a manufacturing plant where he is paid an hourly wage. In addition to
his hourly wage, he is also paid a bonus amount based on the amount of minutes that
he can reduce his per unit manufacturing time. Which of the following best describes
Paul’s incentive plan?
A. The pay is a constant function of production level, and the focus is on units of
production per time period.
B. The pay is a constant function of production level, and the focus is on time period
per units of production.
C. The pay varies as a function of production level, and the focus is on units of
production per time period.
D. The pay varies as a function of production level, and the focus is on time period per
units of production.
7. In Exhibit 8.11 on page 239, which wage has the greatest frequency?
A. $39 C. $41
B. $40 D. $42
8. The Jeffreys Company has a dynamic workforce that deals with constantly changing
objectives that aren’t always easy to understand. It’s also a seasonal business, and
organizational success can change on an annual basis. For example, last year was its
best year ever, but the year before was the worst year ever due to one season. What
would be the best strategy for the Jeffreys Company to pursue regarding rewards?
A. Focus on a wide range of nonmonetary rewards and include a large bonus potential.
B. Focus on a wide range of nonmonetary rewards but focus on higher base pay and
lower incentives.
C. Focus on large monetary rewards with a large bonus potential.
D. Focus on large monetary rewards but focus on higher base pay and lower
incentives.
9. Ken is a used-car salesman who gets paid only when he sells a car. If he sells a lot of
cars, he can earn a lot of money, but if he doesn’t sell any cars then he won’t make
any money. Recently he hasn’t been able to sell any cars due to the poor economy.
He has become unmotivated at work because he had been putting in over 80 hours a
week and not earning any money despite all of the time worked. Which motivational
theory is this an example of?
A. Maslow’s need hierarchy C. Equity
B. Expectancy D. Goal setting
Examination, Lesson 266
10. Which of the following is an example of reinforcement theory as a way to motivate
employees?
A. Giving employees a check for $100 as soon as they make their first sale
B. Paying employees a standard wage regardless of the amount of work they do
C. Paying employees more money at the end of the year because they spent more
hours at work throughout the year
D. Providing medical insurance for employees so they don’t have to worry about large
medical bills in the event of sickness or injury
11. Tina just received a 4% increase in pay because her performance evaluation was in the top
10% of the entire organization. What type of wage component is this an example of?
A. Merit pay C. Individual incentive
B. Lump-sum bonus D. Success-sharing plan
12. Chuck is an appliance salesman who is considered a risk taker. Which type of compensation
plan would best motivate Chuck?
A. A flat hourly wage so that Chuck is paid based on the amount of time he works
B. An annual salary so that Chuck is paid the same amount regardless of the amount
of time he works
C. A pure commission schedule so that Chuck is paid based on the amount of
merchandise that he sells
D. An hourly wage plus a small quarterly bonus based on store sales
13. Which of the following types of plans saw an increase in use between 1996 and 2002?
A. Special recognition plans C. Gain-sharing plans
B. Cash profit-sharing plans D. Stock option plans
14. The hourly wages in the manufacturing department are as follows:
Dan: $5
Tim: $10
Bob: $10
Casey: $15
Frank: $15
Ralph: $15
Stephanie: $20
Rachel: $20
Kim: $25
According to central tendency theory, which wage is the mode?
A. $5 C. $15
B. $10 D. $20
Examination, Lesson 2 67
15. Pat works in a manufacturing plant where he is paid an hourly wage. The hourly rate
can change based on the number of units that Paul produces. His straight hourly rate
is $10 per hour, if he produces more than his goal he receives $12 per hour, and if he
produces less than his goal he earns $8 per hour. What type of incentive plan is this
an example of?
A. Taylor differential piece rate system
B. Merrick multiple piece rate system
C. Rowan plan
D. Gantt plan
16. How much higher is the pay in Las Vegas, Nevada, than in Milwaukee, Wisconsin?
A. 1.2% C. 3.2%
B. 2% D. 4.4%
17. The Baer Corporation has made the decision to pay its manufacturing employees at a
rate below its competitors’ average wages. Baer will use its generous benefits package
rather than its wages to attract talented employees. Which type of policy is this an
example of?
A. Match C. Lag
B. Lead D. Flexible
18. The Hansen Corporation pays its employees a relatively modest salary, but they have
the potential to earn a large bonus and they can earn quite a bit through their stock
options. Which type of pay mix does The Hansen Corporation use?
A. Performance driven C. Work/life balance
B. Market match D. Security
19. The McKinney Company can produce 200 printed shirts per day. It sells those shirts for
$10 each to retailers, who then sell them for $15 each. It costs the McKinney Company
$5 to produce one shirt. The McKinney Company just hired Sam as a machine operator,
and it can now produce 230 shirts per day. What is the marginal revenue of Sam’s
labor?
A. $150 C. $450
B. $300 D. $2,300
20. The McKinney Company can produce 200 printed shirts per day. It then sells those
shirts for $10 each to retailers, who then sell them for $15 each. It costs the McKinney
Company $5 to produce one shirt. The McKinney Company just hired Sam as a machine
operator, and it can now produce 230 shirts per day. What is the marginal product of
Sam’s labor?
A. 30 shirts C. 200 shirts
B. 170 shirts D. 230 shirts
Examination, Lesson 268
NOTES
Employee Benefits and Managing the Pay System Up to this point in the course, nearly everything that has been discussed has revolved around the wages that are paid to employees. We now examine employee benefits. The assignments in this lesson will help you to determine benefits for individual employees. Exhibit IV.2 on page 404 of your textbook shows how employee benefits fit in with the larger pay model.
ASSIGNMENT 12: THE BENEFIT DETERMINATION PROCESS Read this assignment. Then read pages 403–405 and pages 406–434 in your textbook.
When you complete this assignment, you’ll be able to
� Describe why employee benefits have increased over the past 70 years
� Describe the key issues in benefits planning, design, and administration
� List the main components of a benefits plan
Employee benefits are the part of the total compensation pack- age, other than pay for time worked, provided to employees in whole or in part by employer payments. Employee benefits most commonly take the form of medical insurance, dental insurance, unemployment compensation, and retirement savings plans. They can also take the form of more creative benefits, such as free coffee, subsidized legal services, health club memberships, and concierge service.
Employee benefits have grown over the past 70 years as a part of total compensation. This increase in the use of employee benefits is due to a number of reasons, including
� Wage and price controls. Throughout U.S. history, there have been times where the federal government has made it illegal to increase employee wages. To be able to
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recruit and retain quality employees during such periods, U.S. firms began offering benefits to supplement stag- nant wages.
� Unions. Organized labor groups have continually pushed for better employee benefits. This was especially true during those periods when wages weren’t permitted to increase.
� Employer impetus. Many of the benefits that are com- mon today were originally used by employers to increase employee morale as well as productivity.
� Cost-effectiveness of benefits. Employee benefits are becoming a more favorable part of compensation because many of the rewards aren’t taxable. They’re also cost- effective to employees, because group insurance plans generally are cheaper for the employee than individual insurance plans.
� Government impetus. Many of the benefits that were once almost nonexistent are now required by law. Some of these benefits include workers’ compensation, unemployment insurance, and Social Security.
As you can imagine, a great deal of administrative work goes into developing and maintaining an employee benefits program. Many organizations have a dedicated person who does nothing else but manage the benefits program. Larger organizations may even have an entire department dedicated to these tasks.
A good benefits planning process is crucial. Just as with every- thing else that we’ve discussed with regards to compensation management, the goals of the benefits program must match the organization’s goals. These goals may be employee recruitment, employee retention, increased morale, or increased productivity. In fact, most organizations use a bit of each of these goals when designing their benefits packages.
Lesson 3 71
Once the plan has been designed, it needs to be managed. Management of the program creates a whole new set of chal- lenges. Some of these challenges include determining which employees will receive which benefits and who else might receive the benefits (e.g., the families of employees, retirees, families of the retirees).
A number of factors influence the benefits offered by the organization. These factors come from the employer as well as from the employees. The employer-related factors that influence the benefits package include
� Relationship to total compensation costs. The employer must determine how much it will actually spend on employee benefits as a part of the total compensation package. Some employers offer high pay with lower benefits, others offer low pay with higher benefits.
� Costs relative to benefits. Each benefit that’s given to employees has a cost for the product and for the administration of the benefit.
� Competitor offerings. The external equity decision must be made with benefits just like it was made with compensation. The organization must determine if it wants its benefits package to be a market lead, a market lag, or a market match.
� The role of the benefits in attraction, retention, and motivation of employees. Ultimately, the benefits package must be aligned with the organization’s goals. The goals of employee attraction, retention, and motivation must be examined to ensure that the benefits package is helping the organization work toward those goals.
� Legal requirements. Regardless of the amount of money that an organization has for benefits and regardless of the organization’s goals, certain employee benefits are required by law. An employer must provide these bene- fits to employees or face serious legal consequences.
Compensation Management72
The employee factors that influence the choices of benefits packages include
� Equity. It’s common for employees from one organization to compare their benefits to employees at different organ- izations. If a lack of fairness is perceived by employees from one organization, then a number of problems could arise within that organization.
� Personal needs. The demographic makeup at each employer differs. This means that employees at different employers have different needs. An employer must take a look at the actual needs of its employees when making decisions about the benefits package.
Once the benefits package has been determined, it must be administered. Administration of the benefits package has three functions:
� Communication. Benefits packages aren’t always the easiest things to understand. The benefits administrator must develop ways to communicate the benefits package to new employees as well as to existing ones.
� Claims processing. A claim occurs when a specific event has occurred and an employee demands a payment that was promised by the employer. Processing the paperwork for a claim can often be tedious and time-consuming.
� Cost containment. Organizations continually strive to reduce costs while still maintaining quality benefits packages. Cost containment is crucial in benefits admin- istration because of the large amounts of money that organizations spend on their benefits packages.
Homework Assignment 12
Complete the Review Questions on pages 433–434 of your textbook.
When you’re done, check your answers with those at the back of the
study guide.
Lesson 3 73
Self-Check 12 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following is a cost-containment method that controls benefit costs by seeking
competitive bids?
a. Probationary period c. Copay
b. Benefit limitations d. Administrative cost containment
2. Which of the following is the most common benefit for full-time employees?
a. Vacations c. Medical insurance
b. Life insurance d. Retirement plans
3. Which of the following is a legally required benefit?
a. Paid time off c. Retirement savings
b. Medical insurance d. Workers’ compensation insurance
4. Which of the following is when an employer offers employees a choice of medical plans of
varying costs?
a. Full-defined contribution c. Menu-driven
b. Tiered network d. Managed competition
5. What did the federal government do during World War II that’s often cited as one of the main
reasons for the growth in benefits over the past several decades?
a. It mandated that employers provide health care for their employees.
b. It mandated that all major manufacturers unionize.
c. It limited the amount of money that employees could receive in wages.
d. It limited the number of hours that an employee could work in a single day.
Check your answers with those at the back of the study guide.
Compensation Management74
ASSIGNMENT 13: BENEFIT OPTIONS Read this assignment. Then read pages 435–467 in your textbook.
When you complete this assignment, you’ll be able to
� Identify the legally required benefits
� List the retirement and savings plan payment benefits
� List the medical and medical-related benefits
� List the miscellaneous benefits that don’t fit into any of the other categories
In the last assignment, you learned how to go about determin- ing and administering benefits packages. In this assignment, you’ll take a look at the many types of benefits that can be offered to employees.
The first group of benefits is those benefits that are required by law. These include
� Workers’ compensation. Workers’ compensation insurance covers employees in the case of a work-related accident. These expenses can include wage replacement, medical treatment, rehabilitation, and lost productivity.
� Social Security. Social Security ensures that workers and their families receive payments after they retire. The employee and employer both contribute money to the fund based on the employee’s wages. A person’s Social Security benefits are based on the total number of years that the person worked, regardless of the employer.
� Unemployment insurance. Unemployment insurance ensures that workers will receive a modest income for a limited amount of time if they’re laid off from work.
� Family and Medical Leave Act (FMLA). The FMLA allows employees to take unpaid, protected leave for number of weeks per year in the event of a new child (birth, adoption, or foster care) or in the event that they must care of a sick family member. The employer isn’t required to pay a salary to the employee, but it must give the employee his or her old salary and a similar position upon his or her return to work.
Lesson 3 75
� Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA allows employees to remain on their employer’s health insurance for a limited period of time after the employee is laid off of work. The employer isn’t required to fund the employee’s insurance premiums, but the employer is required to keep the employee on the insurance if the employee so wishes.
� Health Insurance Portability and Accountability Act (HIPAA). HIPAA protects employees from insurance discrimination based on their previous claims. This means that an employer can’t deny coverage to an employee based on any preexisting conditions, even if those conditions would increase the cost of providing the insurance benefit.
The second group of benefits includes those that are designed to help employees invest money and save for their retirement. These include
� Defined benefit plans. Employees receive a set level of pay after they retire. The amount can either be a fixed dollar amount of it can be a percentage of an employee’s earnings throughout his or her employment with the organization.
� Defined contribution plans. Employees choose the amount of their pay that they’ll invest. The amount of money that they will receive upon retirement will be a function of the amount of money invested plus the amount that money increased over time.
� Individual retirement accounts (IRAs). Employees can invest part of their earnings and receive tax incentives on the money invested. Unlike with a defined benefit plan and a defined contribution plan, employees can set up IRAs on their own without the help of an employer.
� Employment Retirement Income Security Act (ERISA). This legislation was passed to protect employ- ers’ contributions to defined benefit plans. The legislation was put into place to protect the benefits that employers promise their employees.
Compensation Management76
The third group of benefits is those designed to help employ- ees take care of their medical expenses. These include
� General health care. Many employers provide health insurance for their employees. This coverage is generally provided with a reduced premium payment for the employee.
� Short- and long-term disability. This benefit provides a supplemental income for employees who are unable to work for an extended period of time due to injury or illness.
� Dental insurance. This works the same way as medical insurance except that it covers dental care expenses.
� Vision care. This works the same way as medical insurance except that it covers vision care.
The fourth group of benefits is miscellaneous benefits that don’t really fit into any of the other three groups. These include
� Paid time off during working hours. Most employers pay employees for work breaks, meals, and travel time. In some states, this is required by law.
� Payment for time not worked. This includes the pay- ment of wages at certain times when the employee isn’t working. Examples of payment for time not worked include paid vacations, paid holidays, and paid sick leave.
� Child care. Some employers provide on-site child care or will supplement the cost of off-site child care.
� Elder care. Some employers provide supplemented care for employee’s older relatives.
� Domestic partner benefits. Some employers will extend the same benefits to unmarried couples as they do to married couples.
� Legal insurance. This works the same way as medical insurance except that it covers legal services rather than medical expenses.
Lesson 3 77
Self-Check 13 Select the one best answer for each of the following multiple-choice questions.
1. What percentage of employers offer domestic partner benefits?
a. 11 c. 18
b. 12 d. 22
2. Which of the following insurance options allows employees to see any physician and to use
any facility that they choose?
a. Traditional coverage c. Preferred provider organization
b. Health maintenance organization d. Point-of-service plan
3. Which of the following laws protects employees who are in a defined benefit plan?
a. Family and Medical Leave Act
b. Consolidated Omnibus Budget Reconciliation Act
c. Health Insurance Portability and Accountability Act
d. Employment Retirement Income Security Act
4. Which of the following insurance options limit the geographic area in which the employee can
receive coverage?
a. Traditional coverage c. Preferred provider organization
b. Health maintenance organization d. Point-of-service plan
5. Which of the following laws allows an employee to remain on the employer’s health insurance
policy for a time period after they’ve been laid off?
a. Family and Medical Leave Act
b. Consolidated Omnibus Budget Reconciliation Act
c. Health Insurance Portability and Accountability Act
d. Employment Retirement Income Security Act
Check your answers with those at the back of the study guide.
Homework Assignment 13
Complete the Review Questions on pages 467 of your textbook.
When you’re done, check your answers with those at the back of the
study guide.
Compensation Management78
ASSIGNMENT 14: COMPENSATION OF SPECIAL GROUPS Read this assignment. Then read pages 468–469 and pages 470–495 in your textbook.
When you complete this assignment, you’ll be able to identify compensation strategies for
� Supervisors
� Corporate directors
� Executives
� Scientists and engineers
� Sales forces
� Contingent workers
Not all employees fit nicely into an organizational compensation plan. There will always be some employees for whom the compensation plan must be either altered slightly or completely redesigned. This assignment focuses on compensation for those employees who are in these special groups.
Each of these groups has its own special needs when it comes to compensation. These needs stem from the different and unique factors of the work that must be accomplished. These special employee groups include
� Supervisors. This group faces the challenge of balancing the demands of management with the actions of employees. Compensation for this group must motivate line employees to want to take on the added responsibility and stress of management.
� Corporate directors. A corporate director is a person who sits on the board of directors and approves the actions of the CEO and other high-level executives. This group essen- tially acts in the best interests of the company’s owners. To motivate them to do a good job, they’re compensation generally consists of a small amount of cash and a great deal of stock options so that they earn a lot of money only if the organization performs well.
Lesson 3 79
� Executives. The CEO and other executives are generally the highest-paid people in the organization. With this high compensation also comes responsibility for the per- formance of the entire organization. Because they have such high-profile positions that require a great deal of responsibility, they tend to have unique pay plans.
An executive pay plan consists of the following components:
1. Base salary. The base amount of cash received regard- less of individual or organizational performance.
2. Bonuses. Year-end or quarter-end cash payouts that are generally tied to the organization’s performance. They’re designed to motivate short-term performance for the organization.
3. Long-term incentives and capital appreciation plans. These generally consist of stock options or stock transfers. These are designed to motivate long-term performance for the organization.
4. Executive benefits. Executives generally receive slightly better benefits than other employees due to their higher pay levels. They may also receive other benefits, such as extended life insurance and deductible-free medical insurance.
5. Executive perquisites. Rewards that are generally designed to meet the needs of the executive either inside or outside of the organization. Examples include a company car, hous- ing, health club membership, paid travel, and luxury office space.
� Scientists and engineers in high-technology industries. The goal of compensation for this group is to reward them for their scientific and technical training as well as for the innovations and benefits that come as a result of that training.
� Sales forces. The sales force represents the link between the organization and its customers. The goals of the organization—specifically those that deal with customers—should be heavily considered when designing compensation for the sales force.
Compensation Management80
� Contingent workers. A contingency worker is a worker who is hired through a temporary-help agency, on an on-call basis, or as an independent contractor. The main challenge for this group is equity. Contingent workers tend to do many of the same tasks that full-time workers do, but work on different schedules. They must be compensated for their work and also for their lack of consistent scheduling.
Self-Check 14 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following is a cash or stock award that’s determined by a stock increase at a
later date?
a. Incentive stock options c. Phantom stock plan
b. Nonqualified stock options d. Stock appreciation rights
2. For which special group of employees should external competitiveness be a major factor?
a. Sales staff c. Boards of directors
b. Contingent workers d. Professional employees
3. Which special group of employees should receive compensation that helps to offset their
inconsistent scheduling and use?
a. Sales staff c. Boards of directors
b. Contingent workers d. Professional employees
(Continued)
Homework Assignment 14
Complete the Review Questions on pages 494–495 of your textbook.
When you’re done, check your answers with those at the back of the
study guide.
Lesson 3 81
ASSIGNMENT 15: UNION ROLE IN WAGE AND SALARY ADMINISTRATION Read this assignment. Then read pages 496–511 in your textbook.
When you complete this assignment, you’ll be able to
� Describe the impact of unions on wage determination
� Describe union attitudes toward alternative reward systems
Labor unions have been a driving force behind many of the changes that have occurred in compensation management. Despite the fact that union membership is declining, unions
Self-Check 14 4. What should the compensation package look like for a salesperson who sells a very technical
product that takes a great deal of time to explain and sell?
a. Very high level of commission with no benefits
b. Very high level of base pay with a smaller commission
c. Very high level of benefits that complements a high level of commission and bonus pay
d. Very low level of base pay with a high level of bonus for greater sales
5. Which special group should receive compensation that reinforces production goals as well as
the need to manage and motivate employees?
a. Supervisors c. Boards of directors
b. Top management d. Professional employees
Check your answers with those at the back of the study guide.
Compensation Management82
continue to influence all aspects of the work world in a number of ways. Unions affect the determination of wages in the following ways:
� Impact on general wage and benefit levels. In general, unionized workers earn higher wages than nonunion workers. The benefits that unionized employees receive also tend to be better than the benefits received by nonunion employees.
� The structure of wage packages. In general, the benefits that union members receive are a higher per- centage of total compensation than that of nonunionized employees. Unions have also developed a two-tier wage system whereby newer employees are hired into the firm at a wage rate much lower than that of veteran employees.
� The spillover effect. The spillover effect is the effect that unions have on nonunion firms. Many employers will attempt to match the compensation packages of union employees so as to discourage their own employees from unionizing.
� Impact on wage and salary policies and practices in unionized firms. Unions have influenced compensation administration through the use of labor contracts. The following are some examples:
1. Basis of pay. Contracts generally include the differ- ent pay levels for base pay, overtime, and shift differentials.
2. Occupation-wage differentials. Contracts will specify the different wage rates that will be earned by the different occupations within the union.
3. Experience/merit differentials. Contracts will specify the different wage rates that will be earned by the length of employment.
4. Other differentials. Pay differences can also be a factor of geographic location or number of hours worked (full time vs. part time).
Lesson 3 83
5. Vacations and holidays. It’s very common to find a list of paid holidays within a contract. The eligibility for payment and the amount paid for holidays is also covered in this section of the contract.
6. Wage adjustment provisions. Multiyear contracts usually include a provision for wage adjustments to meet the changing cost of living that occurs over the life of the contract.
You’ve already learned about a number of different types of alternate reward systems. Some of these have been accepted by unions whereas others haven’t. The following list summa- rizes some of the attitudes of unions toward alternate reward systems:
� Lump-sum awards. These one-time payments in lieu of a merit increase are common in union contracts.
� Employee stock ownership plans. These are more com- mon in organizations that are facing intense competition. These plans allow wages to remain relatively low while still allowing the employees to be rewarded.
� Pay-for-knowledge plans. Unions prefer these plans because they reward employees for being more valuable to the firm.
� Gain-sharing plans. Although unions don’t always fully support these types of plans, they’ll rarely voice serious objection until the true costs and benefits of the plan have been revealed.
When you finish your textbook reading, complete Self-Check 15 and Homework Assignment 15. After you’ve completed the exercises and have reviewed the assignments in this lesson, take the examination for Lesson 3 and submit it to the school for grading. Don’t move on to the next lesson until you have completed the examination for Lesson 3.
Homework Assignment 15
Complete the Review Questions on page 511 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Compensation Management84
Self-Check 15 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following is an example of the spillover effect?
a. A unionized organization adopts the compensation policies of another unionized
organization.
b. A nonunionized organization adopts the compensation policies of another nonunionized
organization.
c. A unionized organization adopts the compensation policies of a nonunionized organization.
d. A nonunionized organization adopts the compensation policies of a unionized organization.
2. Which of the following refers to when an employee receives a lower wage because he or she
was hired after a date specified in the union contract?
a. Two-tier pay plan c. Experience/wage differentials
b. Occupational-wage differentials d. Automatic progression
3. Which of the following is a true statement about union wages versus nonunion wages?
a. Nonunion wages tend to be about 10% higher than union wages.
b. Union wages tend to be about 10% higher than nonunion wages.
c. Union wages and nonunion wages tend to be the same.
d. Nonunion wages tend to push union wages up during times of high unemployment.
4. A union agreement says that the wages will be up for review and possible renegotiation two
years after the date of the contract. What is this an example of?
a. Deferred wage increase c. Cost-of-living adjustment
b. Reopener clause d. Escalator clause
5. Which of the following companies has the highest percentage of unionized workers?
a. General Motors c. General Electric
b. Costco d. UPS
Check your answers with those at the back of the study guide.
85
1. Norm is a union negotiator who is working on a bargaining
agreement between his union and the automobile manufac-
turing plant where the employees work. On the second day
of negotiations, the two parties began discussing a reward
system for the employees. Norm decided that he didn’t really
have an opinion on the system and wanted to see more data
about the costs to the company and the benefits to the
employees before he took a stand on the issue. Which type
of reward system were the groups discussing?
A. Lump-sum awards
B. Employee stock ownership plans
C. Pay-for-knowledge plans
D. Gain-sharing plans
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n Lesson 3
Employee Benefits and Managing the Pay System
When you feel confident that you have mastered the material in
Lesson 3, go to http://www.pennfoster.edu and submit your
answers online. If you don’t have access to the Internet, you can
phone in or mail in your exam. Submit your answers for this
examination as soon as you complete it. Do not wait until
another examination is ready.
Questions 1–20: Select the one best answer to each question.
EXAMINATION NUMBER
41289200
Whichever method you use in submitting your exam
answers to the school, you must use the number above.
For the quickest test results, go to
http://www.pennfoster.edu
Examination, Lesson 386
2. Which of the following is an example of a COLA clause?
A. A section in a union contract that states that all employees will receive a minimum
of a 3% raise each year to keep up with increasing living expenses
B. A section in a union contract that states that all wage levels for line employees will
be renegotiated two years from the original date of the contract
C. A section in a union contract that outlines the specific wages and benefits that each
employee in each job will receive
D. A section in a union contract that states when each employee will receive an annual
performance evaluation and how much merit increase the employee is able to
receive for his or her performance
3. Which of the following is an example of a reopener clause?
A. A section in a union contract that states that all employees will receive a minimum
of a 3% raise each year to keep up with increasing cost-of-living expenses
B. A section in a union contract that states that all wage levels for line employees will
be renegotiated two years from the original date of the contract
C. A section in a union contract that outlines the specific wages and benefits that each
employee in each job will receive
D. A section in a union contract that states when each employee will receive an annual
performance evaluation and how much merit increase the employee is able to
receive for his or her performance
4. Which of the following companies has the highest percentage of unionized employees?
A. Kroger C. Coca-Cola
B. Costco D. UPS
5. The owner of Best Shipping, Inc., has decided to increase the pay of the company’s
employees by 15% in an attempt to avoid a unionization attempt by the employees.
Which of the following is this an example of?
A. Occupation-wage differentials
B. Wage adjustment provisions
C. Spillover effect
D. Experience and merit differentials
6. Karen is an executive for a major international shipping firm. As a part of her long-
term incentive plan, she’s permitted to purchase her own company stock at 90% of
its market value, but must hold that stock until her company’s annual figures are
published at the end of the business year. What type of long-term incentive plan
does Karen have?
A. Incentive stock options C. Stock appreciation rights
B. Phantom stock plans D. Restricted stock plans
Examination, Lesson 3 87
7. Beth is a full-time employee at a large department store. Which of the following
benefits must Beth’s employer provide to be in full compliance with the law?
A. Sick leave pay C. Unemployment compensation
B. Short-term disability D. Medical insurance
8. Which benefit do medium and large firm have the highest percentage of compared to
small firms?
A. Paid holidays C. Health insurance
B. Paid sick leave D. Defined contribution plan
9. Milton is a retired bank executive who has always received medical insurance through
Social Security. In which year did Milton most likely retire and start receiving his Social
Security benefits?
A. 1943 C. 1963
B. 1953 D. 1973
10. The year is 1998 and Ana has a total of $10,000 in earnings for the year. How much is
she required to pay in Old Age Survivors Insurance?
A. $85 C. $535
B. $145 D. $765
11. William receives medical insurance as part of the benefits plan from his employer.
When William or any of his family members goes to the doctor for their annual
checkup, they’re required to pay the full amount of the visit. Which type of health care
option does William’s employer have?
A. Traditional coverage C. Preferred provider organization
B. Health maintenance organization D. Point-of-service plan
12. Lonnie was laid off from his job and was unable to find work for a year due to the poor
economy. Lonnie’s former employer allowed him to stay on the company’s health insurance
plan during this year so that he and his family would still have health coverage. Which
law required Lonnie’s employer to do this?
A. Family Medical Leave Act
B. Consolidated Omnibus Budget Reconciliation Act
C. Health Insurance Portability and Accountability Act
D. Employee Retirement Income Security Act
13. Which decade saw executives receiving the highest percentage of their compensation
as base salary?
A. 1970s C. 1990s
B. 1980s D. 2000s
Examination, Lesson 388
14. Bob has a health care plan through his employer that requires him to pay $25 every
time he visits the doctor. This is an example of which of the following?
A. Probationary period
B. Benefit limitation
C. Copay
D. Administrative cost containment
15. Which of the following employees would be classified as a professional according to the
Fair Labor Standards Act?
A. Stephanie, an employee with Allied Consolidated, Inc., has an engineering degree
and spends three out of her five workdays completing basic administrative tasks.
B. Mark, an employee with Allied Consolidated, Inc., spends all of his time at work
completing basic administrative tasks.
C. Len, an employee with Allied Consolidated, Inc., has an engineering degree
and spends no more than one out of his five days at work completing basic
administrative tasks.
D. Wayne, an employee with Allied Consolidated, Inc., has no formalized training
and spends no more than one out of his five days at work completing basic
administrative tasks.
16. Ron is a customer service employee who earns $12 per hour. For the past 10 years, he
has worked almost 50 hours a week, but his employer has never paid him any over-
time wages. Because of this, Ron has contributed far less to his retirement account
than he normally would have. Which law is Ron’s employer in violation of?
A. Fair Labor Standards Act of 1938
B. Employee Retirement Income Security Act of 1974
C. Health Maintenance Act of 1973
D. Family Medical Leave Act of 1993
17. Miranda receives health care benefits from her employer. She was given a choice of
three plans and chose the one that she felt was the most affordable for her and also
gave her and her family the level of coverage that she felt necessary. Which type of
health care plan does Miranda’s employer offer?
A. Full-defined contribution C. Menu-driven
B. Tiered network D. Managed competition
18. Which benefit do full-time workers have the greatest percentage of compared to
part-time workers?
A. Short-term disability C. Retirement
B. Life insurance D. Dental
Examination, Lesson 3 89
19. Chuck was an employee at a manufacturing plant during the Korean War. The federal
government put a freeze on wages at the time in an attempt to control manufacturing
costs. What most likely happened as a result of this wage control?
A. Chuck’s employer provided a higher level of benefits so as to retain Chuck’s
employment.
B. A labor union came in to Chuck’s manufacturing plant and fought for higher wages.
C. The federal government instituted the Social Security program to supplement
Chuck’s wages.
D. Chuck’s employer started giving the employees more breaks in an attempt to
reduce the number of injuries.
20. Which year saw the highest benefits as a percentage of payroll?
A. 1969 C. 1998
B. 1990 D. 2004
Examination, Lesson 390
NOTES
Managing the System The last part of the pay model is managing the system. The assignments in this examine several important management issues. Exhibit VI.1 on page 549 of your textbook shows how management fits in with the larger pay model.
ASSIGNMENT 16: INTERNATIONAL PAY SYSTEMS Read this assignment. Then read pages 512–547 in your textbook.
When you complete this assignment, you’ll be able to
� List the reasons for variations in global pay systems
� Compare the costs of pay systems in different countries
� Describe the elements that determine expatriate pay
The global marketplace has forced changes in the ways that businesses operate. Every aspect of a business is in some way or another impacted by international competition. The compensation management function isn’t immune to these forces. Many organizations have made sweeping changes to their compensation systems to more readily compete in the global marketplace.
There are a number of variations in international pay practices. These variations create challenges when companies from other countries compete with each other or merge to form a new organization. The five main factors for variation in international pay practices are
1. Variations in the social contract. The social contract is the relationships between the government, the company owners, and all of the employees. Some of the major variations here are employees’ expectations and the enforcement of local legislation.
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2. Variations in culture. Culture is defined as shared mental programming that’s rooted in the values, beliefs, and assumptions held in common by a group of people and that influence how information is processed. Some of the major variations here include collectivist versus individualistic cultures and national work ethics.
3. Variations in trade unions. Different countries have different views when it comes to trade and labor unions. In some countries, the percentage of workers who are members of unions is very high, whereas in others it’s very low.
4. Variations in ownership and financial markets. In some countries, such as the United States, a very high percentage of the population owns shares of corpora- tions, so corporate ownership is very widespread. In other countries, such as South Korea, a very low per- centage of the population owns shares of a corporation, so corporate ownership is very concentrated. This differ- ence is important when it comes to using stock options or stock transfers as a form of compensation.
5. Variations in managers’ autonomy. Managerial autonomy refers to the degree of discretion that man- agers have to make total compensation a strategic tool. This autonomy can be limited in different countries by governments, trade unions, company policies, and the local business culture.
Another major factor that will create challenges in a pay system is the differences in the standards of living for each country. Not only will cost-of-living differences come into play here, but so will the expectations of the employees in differ- ent jobs. Understanding the differences in cost of living and pay expectations will help to make a more informed decision as to international pay rates.
Pay practices differ between organizations, between regions, between countries, and between continents. An entire collection of books could be written on these differences, but many compensation professionals use the Japanese model of pay and the German model of pay to illustrate the main differences between the pay practices in the United States and many of its major trading partners.
Lesson 4 93
� The Japanese national system. This system is primarily based on three factors. The Japanese system focuses on lifetime employment within the company, seniority-based pay and promotion, and decentralized labor unions that represent workers within a single organization.
� The German national system. The German system is characterized by heavy government regulation. Company owners and managers have very little authority when it comes to making compensation decisions due to the high level of legislation regarding pay and benefits.
Many of the compensation strategies that are used around the world can be categorized into three main strategies:
� Localizer: “Think global, act local.” This strategy seeks competitive advantage by adopting the pay strategies of its local operations.
� Exporter: “Headquarters knows best.” This strategy seeks competitive advantage by adopting a single pay strategy for the entire organization.
� Globalizer: “Think and act globally and locally.” This strategy seeks competitive advantage by getting input from its local operations to develop a pay strategy for the entire organization.
An expatriate is an employee from an organization’s home country who is employed in an operation outside of that home country. Employing an expatriate can be expensive considering all of the components that go into an expatriate pay system. These components include
� Salary. One of the challenges in determining an expatri- ate’s salary is maintaining internal alignment when it comes to standard of living. An expatriate will expect to have at least the same standard of living as people who hold similar positions in the home country.
� Taxes. Oftentimes, expatriates are required to pay taxes on their income in their home country as well as in the country where they’re working. This means that the employer must make up the cost difference caused by this double taxation.
Compensation Management94
� Housing. Expatriates commonly receive a housing bene- fit. This can either be in the form of a housing allowance or company-provided housing.
� Allowances and premiums. Many companies provide a number of added allowances and benefits that will make the employee’s stay in a foreign country a bit more manageable. These allowances usually differ country by country depending on a number of different factors.
One of the major obstacles with expatriate pay is internal alignment. Expatriates must be paid enough to make up for differences in costs and living situations, but they can’t be paid too much so as to create severe inequalities compared to other employees. The main tool that’s used to manage this problem is the balance sheet approach. The costs in the home country are used as a standard, and compensation is then added to ensure that the expatriate can still maintain that standard while living in a different country. The three main objectives of the balance sheet approach are to
1. Ensure mobility of people to global assignments as cost-effectively as is feasible
2. Ensure that expatriates neither gain nor lose financially
3. Minimize adjustments required of expatriates and their dependents
Homework Assignment 16
Complete the Review Questions on page 547 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Lesson 4 95
Self-Check 16 Select the one best answer for each of the following multiple-choice questions.
1. If the base country salary is $100,000 and the host country has a cost of living that’s 10%
higher, then how much should an organization pay according to the balance sheet approach?
a. $90,000 c. $110,000
b. $100,000 d. $200,000
2. According to the Big Mac standard, which of the following countries has the highest cost of
living?
a. Russia c. Sweden
b. Peru d. United States
3. Which of the following countries has the most highly centralized social contract?
a. Singapore c. Poland
b. Korea d. Cuba
4. Chuck is a U.S. citizen who is working in China for a firm that’s based in Japan. Which of the
following terms best describes Chuck?
a. Expatriate c. Local-country national
b. Third-country national d. Multinational operate
5. Daimler had a very strong government and trade union relationship, whereas Chrysler had
very limited government involvement. This is an example of which type of pressure?
a. Economic c. Organizational
b. Institutional d. Employee
Check your answers with those at the back of the study guide.
Compensation Management96
ASSIGNMENT 17: GOVERNMENT AND LEGAL ISSUES IN COMPENSATION Read this assignment. Then read pages 548–549 and pages 550–583 in your textbook.
When you complete this assignment, you’ll be able to
� Describe the laws that regulate pay in the workplace
� Define discrimination
� Analyze the causes of pay differences in the workplace
All businesses are touched by government regulations in one way or another. Compensation is one area that’s heavily reg- ulated by state and federal laws. In this assignment, you’ll learn about some of the major pieces of federal legislation that regulate compensation.
The Fair Labor Standards Act of 1938 was the first major piece of legislation used to regulate compensation. This act covers nearly every employee in the United States. The major provisions of the act cover minimum wage, hours of work, and child labor. The Fair Labor Standards Act sets a federal minimum wage that most companies must adhere to. In addition, most states have established their own minimum wage that’s above the federal level, taking into account geo- graphic cost-of-living differences. The act also sets a standard for overtime pay. The general provision states that employees will receive at least one-and-a-half times their hourly wage for any hours worked over 40 per week. As with most items in this act, there are some exemptions to this provision. Finally, the act establishes a minimum age for certain jobs and certain industries. In general, people under the age of 18 can’t work in hazardous jobs and people under the age of 16 can’t work in jobs involving interstate commerce. Just like the first two provisions, there are a number of exemptions and limitations here as well.
The federal government also establishes a prevailing wage law. This means that any work done for a government contract must pay the market rate for labor in that area.
Lesson 4 97
The Equal Pay Act of 1963 prohibits wage discrimination on the basis of gender. This law basically states that people who work the same job in the same organization can’t earn different wages based on their gender. It should be noted that they can earn different wages based on other criteria, such as seniority, merit, quality, and training or education differences.
Title VII of the Civil Rights Act of 1964 prohibits discrimina- tion in compensation based on a person’s sex, race, color, religion, or national origin. The act prohibits disparate treat- ment, which involves applying different standards to different employees based on their sex, race, color, religion, or national origin. The act also prohibits disparate impact, which involves company policies that may have a differential effect on people due to their sex, race, color, religion, or national origin.
One of the more challenging issues in compensation manage- ment is dealing with the possibility of pay discrimination in jobs that aren’t similar. The courts have determined that discrimination can occur in dissimilar jobs. To prove that discrimination has occurred, the courts have used market wage data as well as analysis of jobs of a comparable worth. As a compensation professional, it’s your responsibility to ensure that your organization isn’t discriminating based on any factor in any job.
Just because pay differences are present, this doesn’t mean that discrimination is the cause. Differences in pay exist for a number of legitimate reasons, including
� Differences in occupations and qualifications. Such differences can include college education, professional certifications, job tenure, and work schedules and conditions.
� Differences in industries and firms. As you’ve learned, different organizations use different pay structures and pay levels. This is often a cause for different pay levels.
� Union membership. In general, union members earn higher wages and receive better benefits than nonunion employees.
Compensation Management98
Self-Check 17 Select the one best answer for each of the following multiple-choice questions.
1. Which of the following laws requires that government construction contractors pay the going
rate for labor in the geographic area of their contract?
a. Davis-Bacon Act c. Equal Pay Act
b. Sarbanes-Oxley Act d. Worker Economic Opportunity Act
2. Which of the following bases for difference in pay is illegal according to the Equal Pay Act?
a. Seniority c. Quality of performance
b. Gender d. Quantity of production
3. Which of the following is a characteristic of an executive according to the Fair Labor Standards
Act?
a. Supervises two or more employees
b. Does work that’s primarily intellectual and nonroutine
c. Performs work requiring knowledge generally required by prolonged, specialized study, or
engaged in original and creative activity in a recognized artistic field
d. Receives pay at an hourly rate rather than a fixed annual salary
4. Which of the following laws was in question in the case of Griggs v. Duke Power Co.?
a. Davis-Bacon Act c. Title VII of the Civil Rights Act
b. Fair Labor Standards Act d. Worker Economic Opportunity Act
5. Which of the following prohibits employment discrimination based on race?
a. Davis-Bacon Act c. Title VII of the Civil Rights Act
b. Fair Labor Standards Act d. Worker Economic Opportunity Act
Check your answers with those at the back of the study guide.
Homework Assignment 17
Complete the Review Questions on page 583 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Lesson 4 99
ASSIGNMENT 18: MANAGEMENT: MAKING IT WORK Read this assignment. Then read pages 584–612 in your textbook.
When you complete this assignment, you’ll be able to
� Determine methods of controlling salary levels
� List the embedded controls that exist within a pay system
� Effectively communicate changes in a pay system
Now that you’ve reviewed all of the information about design- ing an effective compensation system, it’s time to make the system work. This is where you bring everything together and ensure that your system is managed properly to ensure that it’s as effective as its design.
Labor costs, just like any other business costs, must be budgeted and managed. There are always a limited amount of dollars that go into any compensation budget, and those dollars must be used in the most effective ways possible.
The simple labor cost model can be simplified into a mathe- matical formula. The formula is
Labor costs = Employment � (Average cash compensation + Average benefit cost)
The most common way to manage these costs is to manage the labor costs and the hours worked. These are functions of wages, bonuses, and the number of total hours worked for all employees. A number of methods are available to track and manage these numbers. Regardless of the method that’s used, it’s always important to know exactly how much labor is costing your organization.
Many organizations choose to control their labor costs from the top down. This means that top management determines the budget for pay increases for the year and adds that amount of money to the managers’ budgets. The managers then allocate the money to their employees as they see fit
Compensation Management100
or how the compensation program dictates. A number of factors determine how much money is allocated to the annual labor budget. These factors include
� Ability to pay. The organization must be in a financial position to actually give higher wages to the employees. Unfortunately, it’s not always the case that an employer has enough money for increases in pay or benefits.
� Competitive market pressures. In some instances changing economic markets will alter an organization’s compensation strategy. This could either mean a need to increase wages more than or less than planned.
� Turnover effects. In general, when employees leave the organization they’re replaced by employees who will be at a lower pay level. These lower pay levels must be taken into consideration during the budgeting process.
� Cost of living. In general, employees’ living expenses increase over time due to inflation. There’s no doubt that employees take this into consideration when they’re judging their own pay levels.
Some organizations choose to control their labor costs from the bottom up. This means that managers make recommen- dations for pay raises and send those recommendations to upper management for approval or adjustment. This process has eight steps:
1. Instruct the managers in compensation policies and techniques.
2. Distribute forecasting instructions and worksheets.
3. Provide consultation to managers.
4. Check the data and compile reports.
5. Analyze the forecasts.
6. Review and revise forecasts and budgets with management.
7. Conduct feedback with management.
8. Monitor budgeted verses actual increases.
Lesson 4 101
Controls must be put in place when managers are allowed to make compensation decisions for their employees. These controls act to limit managers’ pay decisions so as to maintain a manageable budget. They also serve as guidelines to help managers make important pay decisions. Some of these controls include
� Range maximums and minimums. The pay range sets the minimum and maximum amounts that will be paid for work. This limits managers’ choices when making pay decisions, because wages can’t increase over the maximum or fall under the minimum.
� Compa-ratios. The compa-ratio shows the employer’s pay line as compared to the competition. This can show managers whether their pay policy decisions will put their employees above or below the competition.
� Variable pay. Variable pay allows greater flexibility in salary planning and budgeting because it’s a one-time expense that won’t be reflected in subsequent budgets.
� Cost analysis. This should be performed before making any proposal to see the possible effects of a pay increase. Software is available that makes this type of analysis easier for larger organizations with lots of employees at different pay levels.
� Value-added analysis. Understanding how much value is added to the organization based on pay changes is key to making more informed and more effective decisions. Having this knowledge can better guide managers in determining what kinds of pay decisions to make throughout the organization.
It’s imperative that the compensation system is clearly communicated to all employees throughout the organization. Any changes that are made should also be communicated. The following six-step process can help to ensure effective communication in your organization:
1. Define the objectives of the communication.
2. Obtain the information that will be communicated.
3. Develop the strategy of communication.
Compensation Management102
4. Determine how the information will be communicated.
5. Conduct the communication sessions.
6. Evaluate the program and make changes as needed.
Compensation can be an important tool to facilitate organiza- tional change. The amount and types of compensation that people earn can communicate organizational objectives and goals. Amount and types of compensation can also be used to communicate changes that have already taken place within the organization. However this occurs, employees will be looking at their compensation as a form of communication about the organization.
When you finish your textbook reading, complete Self-Check 18 and Homework Assignment 18. After you’ve completed the exercises and have reviewed the assignments in this lesson, take the examination for Lesson 4 and submit it to the school for grading.
Homework Assignment 18
Complete the Review Questions on page 612 of your textbook. When
you’re done, check your answers with those at the back of the study
guide.
Lesson 4 103
Self-Check 18 Select the one best answer for each of the following multiple-choice questions.
1. What is the fourth step in the compensation communication cycle?
a. Define the objectives. c. Develop the strategy.
b. Obtain the information. d. Determine the media.
2. Using the following information to determine the compa-ratio:
Range midpoint: $15 per hour
Employee 1 wage: $10 per hour
Employee 2 wage: $15 per hour
Employee 3 wage: $20 per hour
a. .1 c. 1
b. .5 d. 5
3. Use the following information to determine the percent wage change:
Average pay, beginning of year: $90,000
Average pay, end of year: $120,000
a. 25% c. 50%
b. 33% d. 66%
4. Which of the following refers to when employees use the initial data to strongly affect their
decisions and beliefs?
a. Persistence of beliefs c. Herding
b. Anchoring/framing d. Pattern recognition
5. If an organization has 20 employees with an average cash compensation of $30,000 each per
year and an average benefit cost of $20,000 each per year, then what are the annual labor
costs?
a. $50,000 c. $1,000,000
b. $100,000 d. $5,000,000
Check your answers with those at the back of the study guide.
Compensation Management104
NOTES
105
1. The Baer Corporation hasn’t been doing well due to the
economy. Due to this decrease in performance, the employee
stock options have lost their value. The Compensation Manager
is trying to explain to the employees why this is occurring,
but they have expectations of high returns on their options
because the company has never seen hard financial times.
Which of the following is this an example of?
A. Persistence of belief C. Herding
B. Anchoring/framing D. Pattern recognition
2. The following is a list of shipping clerks and their hourly
wages:
Bernard: $15
Samuel: $12
Barbara: $12
Jessica: $15
The salary range midpoint for shipping clerks is $13.50.
Use this information to determine the compa-ratio.
A. .1 C. 1.1
B. 1 D. 11
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n Lesson 4
Managing the System
When you feel confident that you have mastered the material in
Lesson 4, go to http://www.pennfoster.edu and submit your
answers online. If you don’t have access to the Internet, you can
phone in or mail in your exam. Submit your answers for this
examination as soon as you complete it. Do not wait until
another examination is ready.
Questions 1–20: Select the one best answer to each question.
EXAMINATION NUMBER
41289300
Whichever method you use in submitting your exam
answers to the school, you must use the number above.
For the quickest test results, go to
http://www.pennfoster.edu
Examination, Lesson 4106
3. The following is a list of some major U.S. cities and their corresponding Consumer
Price Index numbers:
Philadelphia: 100
Atlanta: 155
Los Angeles: 127
Seattle: 109
If you were aligning your cost of living raises to the Consumer Price Index, then in
which city would you give the highest pay raises?
A. Philadelphia C. Los Angeles
B. Atlanta D. Seattle
4. The following information was taken from the Wyatt Cabinet Company payroll
database:
Annual labor cost: $10 million
Turnover rate: 20%
Planned average payroll increase: 5%
Using this information, calculate the turnover effect.
A. $1,000 C. $100,000
B. $10,000 D. $1 million
5. The following information was taken from the Wyatt Cabinet Company payroll
database:
Average employee salary, beginning of year: $40,000
Average employee salary, end of year: $48,000
Using this information, calculate the percentage level of increase in payroll for the year.
A. 1% C. 10%
B. 5% D. 20%
6. Camille is classified as an expatriate. Which of the following is the most likely the
reason that she was selected for an overseas assignment?
A. Her specific expertise C. Management development
B. To protect the company’s interests D. Sales
7. Paula is an employee who is moving from the United States to Argentina for her job.
Her employer is using the balance sheet approach to determine her new base salary in
Argentina. If Paula currently earns $50,000 per year and the cost of living in Argentina
is 5% higher than in the United States, then how much should her employer pay her?
(Assume that taxes are the same and there will be no relocation bonus.)
A. $47,500 C. $52,500
B. $50,000 D. $55,000
Examination, Lesson 4 107
8. Ronald is a CEO of a major corporation that produced some fraudulent documents to
increase the value of the company’s stock. Once the stock price was high, Ronald sold
all of his shares. Once the fraudulent documents were uncovered, the stock price
quickly declined. Which law is Ronald in violation of?
A. Davis-Bacon Act
B. Sarbanes-Oxley Act
C. Financial Accounting Standards Board 123 R
D. Securities and Exchange Commission Rule on Executive Compensation and
Related-Party Disclosure
9. Vortex Construction just received a contract to build a new federal building in Memphis,
Tennessee. It must pay its employees 20% more than their normal wages to meet the
going pay rate in that area. Which law is Vortex in compliance with by giving its
employees an increase in pay for this job?
A. Davis-Bacon Act C. Fair Labor Standards Act
B. Walsh-Health Public Contracts Act D. Equal Pay Act
10. In which year was the inflation-adjusted value of the minimum wage the lowest?
A. 1952 C. 1962
B. 1957 D. 1967
11. Which of the following would constitute a violation of the Equal Pay Act?
A. Bob and Jill work at different companies but have the same job. Bob earns more
money because his supervisor believes that men are more productive than women.
B. Bob and Jill work at the same company but have different jobs. Bob earns more
money because his supervisor believes that men are more productive than women.
C. Bob and Jill work at the same company and have the same job. Bob earns more
money because his supervisor believes that men are more productive than women.
D. Bob and Jill work at different companies and have different jobs. Bob earns more
money because his supervisor believes that men are more productive than women.
12. Which of the following would be an example of disparate impact?
A. Requiring employees to take a high-level foreign language test to earn a promotion
even though the new job doesn’t require knowing or understanding any foreign
language
B. Hiring an employee because he is the same religion as you are
C. Lowering a female employee’s pay because she is pregnant
D. Terminating an employee because she refuses to say prayers with the rest of the
employees
Examination, Lesson 4108
13. Which of the following is an example of a violation of Title VII of the Civil Rights Act
of 1964?
A. Failing to hire a person because he has a disability
B. Failing to hire a person because you think she’s too old for the job
C. Failing to hire a person because you don’t like his political views
D. Failing to hire a person because you don’t like the color of her skin
14. Which of the following employees would be covered under the Fair Labor Standards Act?
A. A book author who spends all of her time writing original romance novels
B. A commercial airline pilot who routinely spends four days at a time flying around
the country
C. A retail employee who is paid an hourly wage to operate a cash register
D. A regional manager who has eight manufacturing plant managers who work for her
15. The following information was taken from the Wyatt Cabinet Company payroll
database:
Number of employees: 100
Average annual cash compensation: $20,000
Average annual benefit cost: $10,000
Using the simple labor cost model, determine the annual labor cost for Wyatt Cabinet
Company.
A. $200,000 C. $2 million
B. $300,000 D. $3 million
16. Don is an employee at Colin Software, which is based in the United States. Don is
classified as a third-country national. Which of the following would best describe Don?
A. He is a U.S. citizen, but he’s working in the company’s branch in Mexico.
B. He is a U.S. citizen who is working in the United States.
C. He is a Mexican citizen who is working in the company’s branch in Mexico.
D. He is a Mexican citizen who is working in the company’s branch in Japan.
17. Best Computers, Inc., is a multinational corporation with operations in over 30 different
countries. They’ve been classified as a localized company. Which type of pay scale
would you probably see at Best Computers, Inc.?
A. A pay scale that’s the same for every employee in the company regardless of which
country that are working
B. A pay scale that uses compensation information from the different countries to
determine a companywide pay scale
C. A pay scale that’s different for every operation in every country depending on what
the local pay scales look like
D. A pay scale that uses a two-tiered system based on employee seniority
Examination, Lesson 4 109
18. Karen is an employee at a boat manufacturing plant in Germany. Which of the following
characteristics would most likely be true of Karen’s employer?
A. Karen earns the same amount as many of the other boat manufacturing employees
who work for different companies.
B. Karen receives up to 30% of her annual salary in the form of a performance bonus.
C. Karen has been guaranteed life employment within her firm and she intends on
staying there for her entire career.
D. Karen and all of her coworkers are members of the same union.
19. Tim is a member of a union that represents every employee in his company. Tim’s
neighbor, Franklin, works for a different company and is a member of a different union.
In which country is Tim most likely employed?
A. United States C. Germany
B. Japan D. Canada
20. According to the Big Mac approach, which country has the lowest cost of living?
A. United States C. Chile
B. Britain D. Japan
Examination, Lesson 4110
NOTES
111
COMPENSATION MANAGEMENT RESEARCH ASSIGNMENT
Background Total compensation is determined by looking at many different factors of a job. These factors can lead to a wide variety of compensation packages for different jobs. Looking at different compensation packages will help you to understand why different jobs have different levels of total compensation.
Procedure Obtain a recent copy of the Sunday newspaper for a large city in the United States. (Note: Some of the major metropolitan newspapers can be found in libraries and bookstores all over the country.) Use the job postings to write an essay in which you complete the tasks and answer the questions below:
1. List three positions where wages are paid in terms of an annual salary. Why do these positions pay a salary instead of an hourly wage?
2. List three positions where wages are paid in terms of an hourly rate. Why do these positions pay an hourly rate instead of a salary?
3. Which law regulates the determination of the form of compensation? What are the legal requirements for a position that pays a salary? Why do you think this law was established?
4. List three positions where wages are paid in another form besides salary or hourly. What are the other forms of compensation? Why do you think these specific methods have been chosen? How are these methods of compensation more or less effective that hourly or salary wages?
Your completed research assignment will consist of an essay with an introduction, a body, and a conclusion and a Works Cited page.
Goal This project is designed to make you analyze the different factors that help to determine total compensation. You’ll accomplish this by reading about different jobs and different compensation levels.
Writing Guidelines 1. Complete the assigned tasks and answer the questions
in the form of one essay with an introduction, a body, and a conclusion.
2 Type your submission, double-spaced, in a standard print font, size 12. Use a standard document format with one- inch margins. (Do not use any fancy or cursive fonts.)
3. Include the following information at the top of your paper:
a. Name and address
b. Student number
c. Course title and number (Compensation Management, HRM 210)
d. Research assignment number (41200800)
4. Read the assignment carefully and answer each question.
5. Be specific. Limit your submission to the questions asked and issues mentioned.
6. Incorporate and properly reference the sources of information obtained from your assignment, as well as from any other sources of information that you deem relevant. To cite your sources, please follow this procedure:
a. Use in-text citations to indicate references to infor- mation from outside sources. Include the author’s name and the relevant page number(s) in parentheses. Here’s an example: Human beings have been described as “symbol-using animals” (Burke 3).
Research Assignment112
b. At the end of your paper, include a Works Cited page, listing all of the sources you’ve consulted. Use either MLA or APA format for this page. For information on how to prepare this page, go to the Penn Foster Library.
7. Remember that this is a college course, and your work in all respects should reflect college-level skills. Proofread your work at least twice and pay careful attention to spelling, grammar, punctuation, and typographical errors.
Grading Criteria Your assignment grade will be based on the following criteria:
Content: 70%
Written Communication: 20%
Format: 10%
Content
The student
� Provides clear answers to the assigned question(s)
� Answers the question(s) in essay form and complete sentences
� Supports his or her opinion by citing specific information from the assigned websites and other references used
� Stays focused on the assigned issues
� Writes in his or her own words and uses quotation marks to indicate direct quotations
Written Communication
The student
� Includes an introductory paragraph, a body, and a concluding paragraph in his or her essay
� Uses correct grammar, spelling, punctuation, and sentence structure
Research Assignment 113
Research Assignment114
� Provides clear organization by using words like first, however, on the other hand, and so on, consequently, since, next, and when
Format
The paper is double-spaced and typed in font size 12. It includes the student’s
� Name and address
� Student number
� Course title and number (Compensation Management, HRM210)
� Research assignment number (41200800)
Submitting Your Work Use this procedure to submit your research assignment for grading:
1. On your computer, save a revised and corrected version of your title page and essays.
2. Go to http://www.pennfoster.edu and log in.
3. Go to Student Portal.
4. Click on Take Exam next to the lesson you’re working on.
5. Enter your e-mail address in the box provided. (Note: This information is required for online submission.)
6. Attach your file or files as follows:
a. Click on the Browse box.
b. Locate the file you wish to attach.
c. Double-click on the file.
d. Click on Upload File.
e. If you have more than one file to attach, repeat steps a-d.
7. Click on Submit Files.
Homework Assignment 1 1. From a societal perspective, compensation may be
viewed as
� A measure of the inherent equity and justice in a soci- ety (examine the wages of similarly situated men versus women, blacks versus whites, and so on)
� A cause of tax increases (public employee wages) or cost push inflation (increased wages cause higher pro- duction costs, which may be passed on as price increases for goods and services)
� A reason for US difficulties in competing in interna- tional markets
From a stockholder perspective, compensation may be viewed as
� A mechanism to increase stockholders’ wealth
� A key method to link executive pay to company per- formance
From a managerial perspective, compensation may be
� A major expense to be managed
� A means to influence employee work attitudes and behavior, which affect productivity
From an employee perspective, compensation may be
� A return for services rendered
� A reward for meritorious performance
� An indicator of the worth of an individual’s skills or training
� A major determinant of economic and social well-being
From a global perspective, compensation may be
� Countries like China and Japan have replaced tradi- tional words associated with pay to words that capture the more contemporary and comprehensive meanings associated with pay
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� These include dai yu, in Chinese, which refers to how the employee is being treated, and teate, in Japanese, which means taking care of something
2. If you’re a “traditional” college student, your answer will most likely focus on direct compensation only, since most students in this category will have expenses beyond their present earning capacity. If you’re a “nontradi- tional” student, you’re more likely to focus on the total returns from work—cash compensation, benefits, and relational returns. Your response will vary—these differ- ences in perspectives are likely to differ based on a combination of various factors (age, occupation, family status, and so on) affecting your life.
3. The “network of returns” an instructor receives will depend on the type of college or university (for example, research versus teaching orientation) he or she attends. Relational returns moving beyond compensation and benefits are stressed.
If an instructor attends a research university, the most appropriate network is the probability to explore the chosen field of academics in detail, along with the ability to receive appropriate grants, scholarships, and be able to publish papers with ease. Laboratory facilities, oppor- tunities to conduct case studies and organizational research should be available easily. In case the instruc- tor is working within a team, it is essential that the university provide the team with advanced technologies to be able to communicate, and carry out research. However, if an instructor attends a college whose mission is focused on teaching (for example, small, liberal arts colleges), the most appropriate network would probably include extensive facilities that allow the instructor to access the latest studies, so as to be able to correlate the knowledge with the syllabi. Access to libraries, the Internet and attendance at seminars and conferences related to the instructors’ subject should be encouraged and the instructor must ideally be given a free hand in being able to explore various academic avenues within the scope of the syllabus and expanding and encourag- ing the spirit of questioning and understanding within the students.
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Answers
If the network is changed, teaching effectiveness could be affected. Academia typically provides higher pay for research effectiveness when compared to teaching effectiveness.
4. The four policy issues in the pay model are (1) internal alignment; (2) external competitiveness; (3) employee contribution; and (4) management of the pay system.
The basic objectives include efficiency, fairness, and compliance with laws and regulations. Efficiency can be correlated to improving performance, increasing quality, delighting customers, and stockholders, and also to con- trolling labor costs. Fairness is a fundamental objective that ensures fair treatment of all the employees by recog- nizing both employee contributions (for example, higher pay for greater performance, experience, or training), and employee needs (for example, a fair wage as well as fair procedures). Procedural fairness refers to the process used to make pay decisions, wherein it is suggested that the way a pay decision is made may be as important as the results of the decision. Compliance as a pay objective means conforming to federal and state compensation laws and regulations. Pay systems need to be updated to keep up with changes in the laws. In effect, objectives guide the design of the pay system. The pay model also includes guidelines for the organization wherein it cares about how results are achieved. In the face of the disas- trous Enron affairs, ethics have taken on an important role. The pay model calls for combining objectives of effi- ciency and fair treatment of employees as well as compliance. Objectives also serve as standards for judg- ing the success of the pay system.
5. The various types of pay include (1) pay received directly as cash, including base, merit, incentives, and cost-of- living adjustments; (2) pay received indirectly (benefits), including retirement, medical insurance, paid time off, and programs to help balance work and life demands; and (3) relational returns, including the psychological, nonfinancial returns (for example, recognition and sta- tus, employment security, challenging work, opportunities to learn, personal satisfaction from suc- cessfully facing new challenges, and teaming with great coworkers).
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Comparisons of the types of pay will depend on current and prior work experiences and the comparison person’s work experiences. For example, the comparison person’s differences regarding direct/cash pay could include financial incentives, such as piece rate production or commission pay for a sales position. Indirect pay benefits may include health insurance, life insurance, dental insurance, optical insurance, and prescription drug plans.
6. Your response will vary depending on the type of com- pensation article you select for analysis. The following response is based on research studies referenced in Chapter 1.
(1) Many studies use managers’ opinions as measures of success. For example, Rynes, Colbert, and Brown (2002; see footnote #47) conducted a study that surveyed 5000 human resource professionals regarding the extent to which they agreed with various HR research findings. Responses from 959 participants suggest that there are large discrepancies between research findings and HR practitioners’ beliefs in several content areas, especially selection. The authors concluded that the lack of aware- ness of the HR professionals of the research findings could be costly to organizations.
The types of variables used in research studies and how they are measured significantly impact the quality of the research results. For example, many studies purport to measure organization performance. However, there is a lack of agreement on which variable(s) to use to measure performance. This is evidenced by the many variables used to assess performance: accounting measures (return on assets or cash flow), financial measures (earn- ings per share or total shareholder return), operational measures (scrap rates or defect indicators), qualitative measures (customer satisfaction), and opinions of man- agers (that is, how effective is your gain-sharing plan?).
Thus, answering the question, “is the research useful?” requires separating opinions from facts as well as assessing the value of the variables and how they’re measured. Opinion data is just that—data about opin- ions. It demonstrates what people think or believe is
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occurring but may not indicate what is actually going on. Studies conducted on a compensation survey data showed HR executives reporting that their respective firms’ target pay level was well above the median.
(2) Empirical research studies typically employ statistical analysis techniques to analyze the variables of interest. The correlation coefficient is a common measure of asso- ciation and indicates how changes in one variable are related to changes in another. A study conducted to explore the extent to which employee participation in the job evaluation process during the implementation of a compensation system influenced pay satisfaction, showed that increasing the involvement of employees in implementing a pay plan would increase their satisfac- tion with pay. The results indicated the level of employee participation in the job evaluation project didn’t correlate significantly with any aspect of pay satisfaction. Thus, a relationship didn’t exist between employee participation and satisfaction.
On the other hand, even if the results had indicated a relationship existed between increased levels of employee participation and satisfaction with pay, this relationship (measured by the correlation coefficient) doesn’t ensure causation. For example, just because an organization involves its employees in a job evaluation program and their satisfaction with pay increases, it can’t be concluded that employee involvement caused an improvement in their satisfaction with pay. Other explanations—length of time since last pay increase, percentage of last pay increase, and pay grade level of the employee’s job—may lie beneath the results. While the increased levels of employee participation and satis- faction with pay are associated, causation is a tough link to make.
Research on compensation often attempts to answer questions that don’t involve causality. For example, the results of the study by Rynes, Colbert, and Brown (2002; see footnote #47) indicate a discrepancy between academic research findings and the beliefs of HR execu- tives in several content areas of HR. This is a descriptive study, focused on providing benchmarking information; causation isn’t suggested.
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(3) Research studies focused on compensation often examine the impact of a certain type of pay program (that is, merit or performance-based pay, team-based pay, gain-sharing) on a measure of organizational per- formance (that is, customer satisfaction, company performance, productivity, quality) over a period of time. Researchers typically want to demonstrate that the intro- duction of a pay program will improve performance. Consider a hypothetical study with the following research question—if the performance measure improves during the time frame covered by the study, was the pay pro- gram responsible? Assuming performance improves, was the pay program responsible? Or, was some other vari- able responsible for the increased performance (that is, change in leadership, use of new supplier vendors, and change in operating procedures)?
The best way to establish causation is to explore compet- ing explanations for the improved performance results, either statistically or through the use of control vari- ables. Research methodology emphasizes or “requires” that alternative explanations need to be accounted for to establish causality. It is often difficult to disentangle the effects of a pay program to clearly establish causality. However, it is essential to examine the overall pattern of evidence to make judgments about the effects of a pay program.
For example, it was found in a study of seven organiza- tional characteristics, that the one that best predicted simulated organizational choice was pay for individual (versus team-based) productivity.
Self-Check 1 1. a
2. c
3. c
4. b
5. d
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Homework Assignment 2 1. Your answer may vary. The best way to organize the
answer to this question is to construct a table similar to the one in Exhibit 2.1. Then, spend some time compar- ing and contrasting the differences between Microsoft and Merrill Lynch with respect to the five issues. While the objectives are similar Microsoft—support the busi- ness objectives and support recruiting, motivation, and retention. Merrill Lynch—focus on customer, attract, motivate, and retain the best talent using fair, under- standable policies and practices, there are differences in how they translate into action. Microsoft would place greater emphasis on retention since the types of skills it employs require a longer lead-time for training and are also more expensive. At Merrill Lynch, financial services offered to clients and companies take on a vast signifi- cance to their employees, since pay for performance is largely stressed upon.
With respect to internal alignment, Merrill Lynch empha- sizes differences in pay, using an egalitarian structure. At Microsoft internal alignment must support a perform- ance-driven structure; less emphasis would be placed on an egalitarian pay structure. Regarding external competi- tiveness, Merrill Lynch is competitive with the market in base and benefits, and is a market leader in bonus and stock. Microsoft has made changes in its approach to external competitiveness. It shifted its strategy to increase base pay and bonuses to the 65th percentile from the 45th percentile, of competitors’ pay, while retaining a strong emphasis on options. It recently replaced stock options with stock awards based on indi- vidual performance.
After studying the differences and similarities between Microsoft and Merrill Lynch, you can apply this frame- work to the company you selected.
2. The strategic approach proposes that pay programs, in combination with other HR programs, should be based on the unique characteristics of the company, its employees, and its external environment. Thus, if the pay system reflects the organization’s strategy and val- ues, is responsive to employees and union relationships,
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and is globally competitive, the company is more likely to achieve competitive advantage. The company’s compen- sation strategy should support the achievement of the company’s mission, vision, objectives, and strategies— the better the fit, the greater the competitive advantage
The best practices approach suggests that certain pay practices and programs are superior, regardless of the organization’s internal or external conditions; best prac- tices are not necessarily linked to the organization’s strategy. These practices have been proven in certain companies and efforts should be spent on disseminating them throughout the workplace. Thus, adopting best-pay practices allows an employer to gain preferential access to superior HR talent. This talent, in turn, influences the strategy the organization adopts and will be a source of competitive advantage.
3. Medtronic’s statement lauds stability, so it is likely emphasis would be placed on internal alignment issues. However, because the company depends heavily on research and development efforts to produce “the great- est possible reliability and quality in our products,” the internal structure would need enough flexibility to stimu- late creativity and innovation. The culture of the company portrays a very nurturing environment that would offer substantial relational returns from work. External competitiveness and market issues may be dealt with through employees “sharing in the company’s success.”
4. Alignment of a pay strategy involves three aspects: (1) alignment with the business strategy; (2) aligned exter- nally with the economic and sociopolitical conditions; and (3) aligned internally with the overall HR system. Alignment is probably the easiest test to pass.
Differentiation of a pay strategy involves having a differ- ent strategy compared to one’s competitors. Advocates of the strategic approach propose that sustained advantage comes from how the pay system is managed. While it may be easy to imitate any single pay practice of a com- petitor, the strategic perspective implies it is the way pay practices fit together and fit the organization’s strategy that is hard to copy. Simply copying competitors, blindly
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benchmarking and following best practices amounts to trying to stay in the race—not winning it.
A compensation system adds value if it allows the com- pany to attract, retain, and motivate the kinds of employee behaviors that will help the company achieve its goals. It must do so in a cost-effective manner, so the company isn’t at a competitive disadvantage in market- ing its goods and services. Since compensation is often a company’s largest controllable expense, the challenge is determining how to calculate the return on investment (ROI) of different forms of pay. Trying to measure ROI for a compensation strategy implies that people are “human capital,” a view that some people find dehumanizing. Viewing pay as an investment with measurable returns diminishes the importance of treating employees fairly. Of all three tests, this one is the most difficult to “pass.”
The ability of compensation to be a source of competitive advantage is an issue for debate. As indicated above, several types of single pay practices are easily imitated (that is, amount of base pay, benefits, stock options, and so on). However, as the strategic perspective implies, it is the way pay practices fit together, fit the organization’s strategy, and are managed that may result in a sus- tained competitive advantage.
5. Your answer will vary. Essential facts include the shift in ideology about higher pay being the only incentive for ones’ career. Evidence supports affective and cognitive aspects such as job satisfaction, motivation and innova- tion as being furthered by nonfinancial returns attributable to ones’ job. Emotional, mental, and physi- cal well-being have taken on a vast role in career decision making and is supported by major companies around the world that strive to provide necessary facili- ties that move beyond the scope of pay. Commitment toward ones’ job, also supported by research evidence, seems to decrease without elements of relational returns. Relational returns is a value-add that employees look toward when pay-for-performance or other accepted forms of pay are on par with industry standards. Essentially, the quality of work-life balance is stressed upon by employees seeking to further their career in a fulfilling manner.
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Self-Check 2 1. d
2. c
3. b
4. a
5. c
Homework Assignment 3 1. Internal alignment, also referred to as internal equity,
recognizes the relative value of various jobs within an organization. Internal alignment forms the basis of the pay structure by providing appropriate pay differentials to jobs of unequal worth. It recognizes the differential value of the qualifications to perform different jobs and the conditions under which jobs are performed. Perceptions of internal alignment by employees will affect their motivation, their desire to remain with an organiza- tion, and their interest in pursuing various HR activities, such as training and development.
2. The factors that influence internal equity include (1) societal norms or customs regarding fair wage differen- tials; (2) economic factors, including (a) productivity differences attributable to differences in employees, the jobs, and the match between employees’ qualifications and job requirements, (b) the abundance or shortage of skills, and (c) the value of the output of each job (mar- ginal productivity); (3) organizational factors, including (a) the organizational “culture” or values, (b) congruence with career paths, (c) union contract requirements, (d) technology-dictated skills, and (e) human resource man- agement policies; and (4) employee acceptance—workers’ perceptions of what constitutes an equitable system.
3. Internal alignment, often-called internal equity, refers to the pay relationships between the jobs/skills/competen- cies within a single organization. The relationship among different jobs within an organization makes up its inter- nal structure. These relationships form a pay structure that can support the workflow, is fair to employees, and
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direct their behavior toward organization objectives. Pay structure refers to the array of pay rates for different work or skills within a single organization. The number of levels, differentials in pay between the levels, and the criteria used to determine those differences create the structure.
4. It’s a “wage” deemed to be “fair” by some authority other than that negotiated in an employer/employee relation- ship. In fourteenth-century Western Europe, the church endorsed a “just wage” doctrine, a schedule of wages that supported the existing class structure. Market forces, that is, supply and demand, were ignored as an appropriate determinant of pay structures.
In contemporary US economy, some say pay differences between men and women are due to society’s past acceptance of a “just” wage differential between men and women, merely on the basis of sex and without regard to the nature of the work done or the individual’s qualifica- tions or performance. However, comparable worth advocates advocate a “just wage” doctrine since they wish to ignore market forces, that is, supply and demand, in setting wages for jobs held predominantly by women.
5. In all probability, this structure is hierarchical in nature. Further information required to form a decision would include variables such as the content of work involved with each level, the pay differential between each level. The responsibility associated with each level, and the freedom that individuals have to perform their jobs needs to be determined. Is individual performance or teamwork stressed? Is the fairness to each of these individuals merited on performance, or equal treatment? Are these individuals motivated enough to move up the ladder? Either of these structures can influence faculty behaviors depending on the variables involved. Performance, moti- vation, cooperation, and the willingness to continue work are some of the behaviors that could be influenced. Research indicates that more hierarchical structures are related to greater performance when the work flow depends more on individual contributors. Employees expect to advance based on their own performance and
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prefer a structure geared to offering promotional opportunities. However, if the college insists on close collaboration and sharing of knowledge, then a more egalitarian structure (with fewer organizational levels) appears to be related to greater performance.
Self-Check 3 1. d
2. c
3. b
4. a
5. a
Homework Assignment 4 1. Work-related information is needed to determine pay for
each job in an organization based on the different tasks and responsibilities of each job. There is no satisfactory substitute that can ensure that the resulting pay struc- ture is work related, and that it will provide reliable, accurate data to make and explain pay decisions.
One of the most often asked questions by employees is related to pay. For example, why am I paid “x”? Or, why does Jane make more than I do? A well-done job analy- sis process will provide a manager with reliable, accurate data to explain why an employee is paid “x” amount and to discuss the differences in pay rates for different jobs (to respond to “why does Jane make more than I do?”). Thus, job analysis data help managers to defend their pay decisions when challenged.
The real issue should be, how much detail is needed to make pay decisions? The answer is enough to help set individual employees’ pay, encourage continuous learn- ing, increase the experience and skill of the work force, and minimize the risk of pay-related grievances. The risk of omitting this detail is dissatisfied employees who file lawsuits or complain about management’s inability to
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justify their decisions. The response to inadequate analy- sis shouldn’t be to dump the analysis; rather, an approach to obtain more useful analysis should be implemented.
2. It helps ensure that pay decisions are related to identifi- able job similarities and differences within an organization. Recognition of job similarities and differ- ences is an important aspect of internal alignment. Jobs are more likely to be described, differentiated, and valued fairly if reliable, accurate information about the jobs are available.
3. The decisions include the following:
(1) Why perform job analysis? There are several potential uses of job analysis information including (a) clarifying hiring and promotion standards; (b) identifying training needs; (c) identifying the required behaviors and results expected of a job to facilitate performance evaluation; and (d) establishing a job structure for compensation purposes. In compensation, job analysis has two uses: (1) it establishes similarities and differences in the work content of the jobs, and (2) it helps establish an inter- nally fair and aligned job structure which assists in ensuring consistent treatment of employees across work units.
(2) What information is needed? Analysis should begin with a review of job information already collected. Information needed falls in two categories: (1) informa- tion related to the job (job identification data and job content data), and (2) information related to the employee (employee characteristics and internal and external relationships).
(3) How to collect information? The two approaches are (1) conventional methods which involve an analyst using a questionnaire in conjunction with structured inter- views of job incumbents and supervisors, and (2) quantitative methods which involve inventories or ques- tionnaires, in which possible work tasks or worker attributes are listed. Each task may be scaled (assessed) in terms of time spent, importance, and/or learning time required.
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(4) Who should be involved? The extent to which the var- ious parties are involved must be decided. An HR employee (job analyst, human resource generalist, or compensation specialist) or a supervisor usually collects data. Jobholders and/or supervisors typically provide the data; sometimes employees above and below the level of the job being analyzed are included. Top management support of the process is essential.
(5) How useful are the results? Results should be judged in terms of its reliability, validity, acceptability, useful- ness, and costs.
4. Task data emphasizes the actual work performed in a job and the outcome or purpose of each task. Behavioral data focuses on the kinds of employee behaviors that will result in the outcomes.
5. The quantitative approach, which involves the use of an online questionnaire or an inventory, lends itself to sta- tistical analysis. This approach allows more data to be collected faster from more jobholders. Responses can be machine scored, and the results can be sued to develop a profile of the job. If more than one employee is doing a specific job, results of these employees can be compared or averaged to develop the profile. Another advantage is that quantitative inventories can be tailored to the unique needs of one organization and/or to a specific job family, such as information processing jobs. Based on the characteristics of this approach, the data collected and the results are likely to be more objective. This is an essential factor in light of the increased importance of supporting all human resource decisions on a work- relatedness basis. In addition, employee challenges and lawsuits can be better defended with the use of objective data.
6. The decision on which type of pay structure to utilize should be based on which approach is most appropriate for the organization. The organization’s strategy (mission, vision, objectives), combined with the product/service offered, the nature of the competitive environment, and type of technology used, will be key determinants of which structure to employ. The nature of the work flow and whether individual- or team-based performance is emphasized are additional factors to consider.
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While person-based structures are currently popular, job-based structures are still the most common as they are appropriate across the widest variety of organizations and employee groups. It is becoming more common for an organization to employ both types of structures for different employee groups (managers, professionals, tech- nicians, administrative employees) due to the differences in work flow.
7. Sometimes the people advocating the use of job analysis become so enamored with the technical aspects of the process, the statistics, and the computers, they lose sight of the objective of the process—obtaining job- related information on which to base pay decisions. Being focused on the process rather than the practical use of the results may result in a lack of interest and potential alienation of managers and employees.
In addition, if subsequent pay decisions turn out to have little relationship to job analysis results, employees and managers will most definitely question why they should spend their time being involved in the process, that is, completing and reviewing questionnaires.
Self-Check 4 1. d
2. a
3. c
4. d
5. b
Homework Assignment 5 1. Organization strategy and objectives—Job evaluation
aligns with the organization’s strategy by including what it is about work that adds value and contributes to pur- suing the organization’s strategy and achieving its objectives.
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Flow of work—Job evaluation supports work flow in two ways: (1) by integrating each job’s pay with its relative contributions to the organization and (2) by setting pay for new, unique, or changing jobs.
Fairness—Job evaluation can reduce disputes and griev- ances over pay differences among jobs by establishing a workable, agreed-upon structure that reduces the role of chance, favoritism, and bias in setting pay.
Motivate people’s behaviors toward organization objec- tives—Job evaluation calls out to employees what it is about their work that the organization values, what sup- ports the organization’s strategy and its success. It can also help employees adapt to organization changes by improving their understanding of what is valued and why that value may have changed.
2. Different employers wish to emphasize different aspects of work; the different approaches should support the organization’s strategy. Consequently, a wide variety of job evaluation approaches exist. Some organizations desire to be more formalistic, legalistic, and thus use very detailed plans. For example, many nurses are unionized and also face constant review from patients and their lawyers. For both of these reasons, hospitals tend to spell out quite specifically who is responsible for what.
In the current economy, retailers like a 7-Eleven, have high turnover because they employ relatively unskilled labor and pay low wages. It likely is a first job for employees. While job duties need to be spelled out, there are typically fewer types of jobs in a retail environment. Thus, job evaluation plans are less likely to be highly for- malized. Due to the different groups a college employs—administrators, administrative support staff, and professional staff (faculty)—a college would likely have multiple plans for each of these employee groups.
3. The advantage of using multiple plans is it provides a higher likelihood of covering all significant aspects of work content (due to the wide diversity of work among various job families). For example, production jobs may vary in terms of manipulative skills, knowledge of statis- tical quality control, and working conditions. But these
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tasks and skills may not be relevant to other job families, that is, technical and finance jobs. Multiple plans allow an organization to capture the differences in the work content of several job families.
The disadvantages of multiple plans include the need to identify appropriate factors for each job family, the potential difficulty of meshing the results of separate plans together, and the risk of undervaluing/overvaluing some job families in comparison to others. In addition, some employees in one plan may wish to compare their jobs with jobs in another structure; this involves com- paring apples and oranges. Employers must place a priority on communicating the reasons for different job evaluation plans.
4. With job evaluation, the systematic evaluation of jobs reflects the internal job structure within a single organi- zation. This structure and the underlying relationships among jobs are the basis of internal alignment. As a process, job evaluation can help gain employee accept- ance of pay differences among jobs. Its usefulness is it provides a framework for an exchange of views—open discussion and communication. Internal alignment may suffer with market-pricing because the intrinsic value of the work to the organization is essentially ignored—the focus is on external competitiveness issues.
Job evaluation is viewed by some as a process for linking internal value with external market rates. Aspects of job content take on value based on their relationship to mar- ket wages. For example, if willingness to work closely with customers commands higher wages in the labor market, then the nature of customer contacts becomes a useful criterion for establishing differences among jobs. If some aspect of job content, such as stressful working conditions, isn’t related to wages paid in the external labor market, then that aspect may be excluded in job evaluation. Based on this perspective, the value of job content is based on what it can command in the external market; it has no intrinsic value.
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5. Colleges need high-quality professors who can “package” the material based on the type of students (admissions standards vary widely so the skill level of students will also differ). Thus, faculty need technical competence— knowledge/skills—in their chosen fields, plus the ability to interact constructively with students. Since knowledge is so important, it will probably swamp any other com- pensation factors in determining pay for faculty. Some faculty may want a job evaluation plan that can accom- modate a wide variety of types of knowledge as well as levels of knowledge. Teaching effectiveness has become a more widely discussed issue. Thus, at most schools, knowledge wouldn’t be the only compensable factor. However, it is doubtful whether any schools actually base pay on teaching effectiveness. Other compensable factors may include ability to conduct quality research (according to pre-determined criteria) and service involve- ment (school, community, and professional).
The faculty is a key group of employees in the college environment. They need adequate support from the administrative staff and strong leadership to set direction for the school to ensure its financial viability. Thus, the teaching faculty (and perhaps the research faculty, depending on the school) will play a key role in determin- ing if the school’s education mission is achieved.
Generic factors, such as the ones in the Hay Plan (know- how, problem solving, and accountability), wouldn’t be as applicable to evaluating faculty jobs. Of these generic factors, know-how is the only applicable factor. The other factors would have to be modified to apply to faculty positions.
6. First, find out from the HR department what forums are available for employee participation and the anticipated uses of the job evaluation information. Ideally, one or more employees should be provided an opportunity to be involved in the job analysis phase of the process. This may mean they could complete a questionnaire for their respective job(s). Second, get a commitment that an employee’s pay won’t be reduced nor will any be jobs be eliminated because of the evaluation. While changes in jobs may be suggested based on the results of the evalu- ation, the procedures for making these changes must be
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clearly specified and communicated to employees. Employees should be provided with this information, as well as general information as to what exactly job evalua- tion is as well as its usefulness.
Self-Check 5 1. b
2. d
3. a
4. c
5. a
Homework Assignment 6 1. The advantages include enhanced employee acceptance
of decisions, increased trust and commitment, possible improvements in turnover and satisfaction with pay and administration, increased employee perceptions of equity, and the possibility of reducing union/management ten- sions. Some disadvantages include the possibility of conflict due to differing perspectives, since unions or managers may prefer to bargain for results rather than work jointly. Also, when more people involved, expenses increase and it takes longer to reach consensus.
Employees may supply job and knowledge analysis data on work tasks, operating procedures, and so on. Employees may serve on committees to help select the job evaluation plan to be used, the compensable factors, the job analysis method or the knowledge or skill certifi- cation procedures.
2. The top portion of Exhibit 5.3 (Chapter 5) and Exhibits 6.3 and 6.5 provides the process, along with the essen- tial components, for the job- and person-based approaches to designing an internal pay structure. The basic decisions which focus on techniques and mechan- ics use for each approach are outlined in the bottom portion of each of these exhibits.
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An example, based on Exhibit 6.3, illustrates why the process matters. Exhibit 6.3 indicates the key compo- nents involved in designing a skill-based internal structure: skill analysis, skill blocks, and skill certifica- tion. Failure to include any of these components in designing an internal pay structure would severely com- promise the viability and acceptability of the resulting structure. For example, if certification methods of skills were not included, the resulting internal structure would most likely contain inequities that will have a negative impact on employees’ equity perceptions of the pay structure. In addition, if managers and employees with a stake in the results are not involved in the process of designing the internal structure, negative perceptions of the pay structure are likely to exist.
An advantage of a skill-based plan is that people can be deployed in a way that better matches the flow of work, thus avoiding bottlenecks as well as idle hands. Skill plans can focus on depth and/or breadth. Skill-based structures can be evaluated using the objectives already specified for an internally aligned structure: supports the organization strategy, supports work flow, is fair to employees, and directs their behavior toward organiza- tion objectives. The major skill analysis decisions include (1) What is the objective of the plan? (2) What informa- tion should be collected? (3) What methods should be used? (4) Who should be involved? (5) How useful are the results for pay purposes? Skill- and job-based systems hone in on information about specific tasks.
3. The usefulness of the different approaches to designing pay structures should first be judged in terms of how well an approach achieves its objectives. In addition, there are other criteria to evaluate the usefulness of either a job- or person-based pay system. (1) Reliability— Reflects consistency of results achieved by different evaluators using the same approach. (2) Validity—Does the approach achieve the desired results (that is, a high percent of correct decisions acceptable to employees) and consistency of results (consistent with results of other plans)? (3) Acceptability—Provide option for formal appeals process or an employee attitude survey.
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(4) Costs—These include design, administrative, and labor costs resulting from any pay structure changes. (5) Wages criteria bias—How do we evaluate jobs held pre- dominantly by women and are there any unintended negative consequences for women employees? Are we potentially undervaluing such jobs?
4. Many of the bias issues associated with job evaluation are also issues for skill-based or competency-based plans. The gender of the jobholder may unconsciously influence the evaluator. Also, the gender of the evaluator may affect results. If the evaluation is based on current wages paid for jobs, then the evaluation is likely to per- petuate any existing bias in the pay structure. Additional sources of bias include differential access to training pro- grams for skill-based plans and the vagueness and subjectivity of competency assessment.
5. Several approaches can be used to ensure a job evalua- tion or a skill/competency-based plan supports a customer-centered strategy. First, communication of the objectives associated with achieving a customer-centered strategy must be conveyed to employees. Next, specific details related to achieving the objectives of this strategy must be communicated to all employees. Measurement of customer attitudes, feedback of this information to employees, and tying this information to the pay system is essential. Where feasible, employee involvement in developing objectives to achieve a customer-centered strategy and designing a pay system to support this strategy must be encouraged. When employees can see a clear linkage between the objectives of a customer-cen- tered strategy and the pay system (job- or skill/competency-based plan), they are more likely to focus their work efforts on achieving the objectives asso- ciated with the customer-centered strategy.
Self-Check 6 1. b
2. d
3. b
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4. c
5. a
Homework Assignment 7 1. External competitiveness refers to the pay relationships
among similar jobs in different organizations, while inter- nal consistency focuses on the relationships within a single organization. External competitiveness is an important concept because the pay level of an organiza- tion affects both the expense and quality of its workforce, as well as the organization’s ability to attract and retain a qualified workforce.
2. The factors include labor market competition, product market competition, and characteristics unique to the organization and its workforce.
3. Marginal revenue product is the additional revenue asso- ciated with the output of one additional unit of labor and determines the level of employment (demand for labor) for a single employer. The interaction of the sum of all employers’ demand for labor and the supply of human resources determines the market pay level.
4. Efficiency wage theory predicts that high wages may result in more productive workers and actually lower labor costs in certain situations; thus, profits are higher. Higher productivity results from the attraction of higher- quality applicants, less turnover, increased worker effort and less need for supervision. Thus, efficiency increases by hiring better employees or motivating present employ- ees to work smarter or harder. So, efficiency wage theory predicts an organization would pay above-market wages.
Some of the research on this theory indicates support for it. For example, research results indicate higher wages attract more qualified applicants. However, higher wages also attract more unqualified applicants so an above market wage doesn’t guarantee a more productive work force. It has also been found that fewer supervisors are employed when an organization pays an above-market wage.
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However, if the pay level is set too high and isn’t offset by higher productivity or fewer employees, an employer’s high labor costs will either reduce profits or, if the high labor costs are passed on to the consumer in terms of higher prices, the competitiveness of an employer to compete in its product market will be harmed.
5. The appropriate labor market is defined by three factors: occupation (skill/knowledge required to do the job); geog- raphy (willingness to relocate, commute, or work in a virtual situation); and competitors (other employers that compete in the same product/service and labor markets).
If the market isn’t defined correctly, the estimates of competitors’ pay rates will be inaccurate and the pay level and mix inappropriately established. This can be an expensive problem, both if an employer pays wages higher than intended (above-average labor costs) or if the employer pays wages lower than intended (difficulty attracting and retaining the required skills).
6. Your answer should focus on the characteristics of each policy to determine which policy a company follows. Exhibit 7.8 provides a good framework to facilitate the discussion.
If efficiency wage theory is correct, a lead policy results in higher productivity but also higher labor costs, unless these are offset by productivity gains. A lag policy results in low labor costs, but may lead to unrecovered training costs, if trained employees leave for higher-paying jobs.
It should be pointed out that IBM most likely follows a performance-driven policy; there are several references to its pay practices in this chapter. An excellent example of a company that offers a work/life balance policy is SAS Institute, the world’s largest privately owned software company. It clearly emphasizes its work/life programs over cash compensation and gives only limited bonuses and no options. Its headquarters in Cary, North Carolina, includes free onsite child care centers, subsi- dized private schools for children of employees, two doctors on site for free medical care, and recreation facilities. Working more than 35 hours per week is discouraged.
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Self-Check 7 1. d
2. c
3. a
4. d
5. b
Homework Assignment 8 1. The most common pay policy for an employer is to match
rates paid by competitors. Failure to do so may nega- tively affect their employees’ level of satisfaction with pay. In the long run, lower pay rates will likely limit an organization’s ability to recruit and retain employees. However, the specific pay policy adopted by an employer will depend on a combination of several external and internal organizational factors—wage rates of competi- tors, union strength, the supply of qualified applicants, cost of living, and financial position of the organization.
2. The questions involved in survey design are the same for both jobs: (1) who should be involved in the survey design; (2) how many employers to include; and (3) what information to collect. The main issue is the same for both jobs: assuring job comparability. However, the rele- vant labor market differs. A survey for a welding job would probably encompass the local or regional market, while the relevant labor market for a financial or other managerial position would be the national labor market. For a welder, a questionnaire to selected local employers could probably elicit sufficient data. For managerial posi- tions, job titles alone are inadequate descriptions of duties. Organizational size, type of business, reporting relationships, and paragraph descriptions of duties are useful to assess comparability of positions. The data col- lected differs in order to attain the same objective: relevant pay comparisons.
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3. Factors that determine the relevant market include the purpose of the survey, the occupations or skills being surveyed, the geography or distance employees appear willing to commute, other employers that compete with similar products and services. The market must be defined when conducting a survey because it identifies the scope of wages relevant to an organization in setting its own pay level and pay mix.
4. Market data provided by surveys may be used to defend pay differentials. That is, an organization may defend the pay level for a particular occupation by comparing it to an external market. However, some believe the “market” reflects and perpetuates past discrimination. Care must be taken when conducting surveys to elicit valid busi- ness reasons for including and/or excluding specific employers.
5. Pay ranges exist whenever two or more rates are paid to incumbents in a given job. Pay grades group different jobs considered substantially equal for pay purposes together. Bands, known as broad banding, collapses salary grades into a few broad bands, each with a sizable pay range. This approach consolidates as many as four or five traditional grades into a single band with one minimum and one maximum; a range midpoint is typi- cally not specified. Ranges permit an employer to recognize individual differences, whether they are per- formance or experience based. Grades enhance an employer’s ability to move people among jobs within a grade with no change in pay. Their use fosters internal alignment by differentiating pay based on performance or experience differences among employees. They also allow an employer to meet employees’ expectations that their pay will increase over time. From an external competi- tiveness perspective, they act as a control device, setting minimum and maximum levels that an employer is will- ing to pay for work.
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Self-Check 8 1. b
2. d
3. a
4. c
5. b
Homework Assignment 9 1. First, the amount of money each boy could expect to
make from each activity (cutting grass, edging sidewalk, pulling weeds in flower beds, pruning bushes and trees, raking leaves) should be examined. The wage per hour for each activity is provided below.
Notes related to calculations: Wages per 8 hours for cut- ting grass, edging sidewalk, pulling weeds in flower beds, pruning bushes and trees, raking leaves don’t account for travel time between jobs not for any tips received. Taxes are not calculated.
Since we don’t have information about which activities, if at all, the boys prefer, it’s obvious that the boys would rather spend time cutting grass, since not only is the activity easy to finish, but also that a lot more houses can be included in the activity, since it takes only 24 minutes to finish at one house. Without taking a break, if the boys cut grass at four houses in an hour, the
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Incentive Wage per
1 hour
Wage per
8 hour
Cut grass $4 $16.00 $128
Edge sidewalk $1 $10.00 $80
Pull weeds $6 $12.00 $96
Prune bushes,
and so on $5 $10.00 $80
Rake leaves $5 $10.00 $80
money earned with this activity amounts to $16. Since travel time isn’t accounted for in the landscaping busi- ness, they are unlikely to make the wages indicated above for an 8 hour day. Also, since the boys don’t receive any base pay for the landscaping business, they incur a high level of risk. All their pay depends on the number of units, that is, houses at which grass is cut, sidewalks edged, houses at which weeds are pulled, houses at which bushes are pruned, houses at which leaves are raked. What if it rains? What if a customer forgets and isn’t at home for an appointment? Thus, the boys don’t view the amount they receive as fair (distribu- tive justice).
Several changes need to be made. First, the father should consider paying a base wage, perhaps $2 to $3 per hour. This would provide some security for the boys and also compensate them for the travel time between jobs. He could also consider keeping piece rate incentives at the same level or at a slightly lower level, keeping in mind that the boys have an option of teeming up a few difficult and a few easy tasks.
2. Several assumptions have to be made. Although it is known what type of product is provided by Father Michael’s Wraps, do they make the bread products? Or do they distribute bread products? What employee groups are involved—exempt or nonexempt? In designing a compensation program, it is assumed the company makes bread products and the employee group is nonex- empt employees (people involved in baking bread products). Since this job may not rank too highly on the intrinsic-interest scale, and since it doesn’t have ele- ments of stress attached to it, one can easily assume that it is a high turnover rate for the industry. Since turnover is so high, one of the most likely reasons is the employees are leaving due to too little pay—too little pay triggers feelings of unfair treatment. Thus, the first issue is to provide an adequate wage. Use of a salary survey could assist in determining an amount the employees would view as fair. The pay program should include a large base pay component with a low or no incentive component. Any incentive component should be based
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on work performance over which the employee has con- trol and shouldn’t be linked to risk sharing (where employees forego some base pay as a buy into possible larger incentive payments later). Other rewards that should be provided include providing good benefits, structuring the work to emphasize social interaction, incorporating sufficient variety in the work assignments, providing regular feedback, and ensuring the working conditions are safe.
3. Exhibit 9.3 provides some insight into the answer for this question. ‘Restco products’ faces an uncertain, highly variable profit picture. Employees in the company face variable tasks demanding flexibility and willingness to change. Based on these conditions, the compensation system should emphasize base pay with a small or no incentive component (because f the low control employ- ees have over profits) and a broad-based reward package. High empowerment, stable employment, and broad developmental opportunities should help build the com- mitment of these employees and increase their willingness to try new ways of doing their jobs.
4. While focusing on cost-cutting strategies to remain com- petitive, employers today need to take into consideration several factors that motivate employees to perform better, remain competitive, and not leave their current jobs. Compensation is, but one of many rewards that influ- ence employee behavior. Sometimes this important point is missed by compensation experts. Several surveys and study clearly point to the fact that workers highly value other job rewards as empowerment, recognition, and opportunities for advancement. And there is growing sen- timent for letting workers choose their own “blend” of rewards from among elements such as—compensation benefits, social security, and so on. Organizations may also be overpaying in cash and missing the opportunity to let employees construct both a more satisfying and less-expensive reward package. Known as cafeteria com- pensation, this idea is based on the notion of different rewards having different dollar costs associated with them. Armed with a fixed sum of money, employees move down the line, buying more or less of the 13 rewards as
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their needs dictate. While widespread use of this type of system may be a long time in the future, the cafeteria approach still underscores the need for integration of rewards in compensation design.
5. As a supervisor, the base pay, pay-for-performance (if put in place) and other benefits and rewards can’t be directly controlled by you, since these are decisions affected by the upper management, external factors such as competition, economic factors, etc that are beyond your control. As a supervisor, you can’t control elements of distributive justice either. However, you can ensure that the factor of procedural justice is designed/ corre- lated in a manner that encourages the feeling of fairness in the employees. Employees are concerned about the fairness of the procedures used to determine the amount of rewards they receive. Employees expect procedural justice. Evidence suggests that organizations using fair procedures and having supervisors who are viewed as fair in the means they use to allocate rewards are per- ceived as more trustworthy and command higher levels of commitment. Some research even suggests that employee satisfaction with pay may depend more on the procedures used to determine pay than on the actual level distributed. A key element in fairness is communi- cations. Employees want to know in advance what is expected of them. They want the opportunity to provide input into the standards or expectations. And, if per- formance is judged lacking relative to these standards, they want a mechanism for appeals. In a union environ- ment, this is the grievance procedure. Something similar needs to be set up in a nonunion environment.
Self-Check 9 1. c
2. a
3. d
4. c
5. b
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Homework Assignment 10 1. Pay (base + incentive) rates for similar jobs at major
competitors in the local market are needed. Regional data may also be required; this depends on the geo- graphic location of Senior Sam’s bakery. A salary survey can provide this information. Regarding turnover, it will be helpful to know if it differs by job, length of tenure, and by work shift (if different work shifts are used at Senior Sam’s Bakery). The primary information related to the labor budget that is needed is whether the budget will include an increase for next year and the amount of the increase.
In revamping the compensation program, the first step is to convene a meeting of the involved managers and supervisors to gather their inputs regarding the objec- tives of the pay program—what do the managers and supervisors want? Obviously, they want lower turnover. Other matters need to be addressed. Should employees work in teams? Is an incentive plan appropriate? If so, what type of performance measures should be estab- lished? Should the incentive plan emphasize short-term or long-term performance or both? For this case, the fol- lowing assumptions are made. Employees won’t work in teams. The primary focus will be on implementing a short-term individual incentive plan. Since this type of plan focuses on short-term results, it will have minimal impact on retention so a long-term incentive plan will also be implemented.
Based on this, the first recommendation is to establish a base wage that matches the market rate (based on salary survey data). Since employees won’t be working in teams, an individual incentive plan must be selected. The one selected is lump-sum bonuses. Since the target employees select items to be packed and shipped to dif- ferent customers, relevant performance measures focused on this work must be established. These can include efficiency- and quality-focused measures; for example, number of orders packed accurately within a specified time frame (to be determined by a time study). Based on the study, three performance levels are
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determined—minimum, target, and superior. Based on the labor budget, bonus amounts are established; they will be awarded on a quarterly basis. The long-term incentive plan will be an ESOP. Employees will share in the success or failure of Senior Sam’s Bakery through stock ownership.
2. In an earnings-at-risk plan, employee base wages can be affected either positively or negatively. If a company has a successful year, employees receive their base pay and a predetermined amount of variable pay. However, if a company does poorly, base pay is reduced by some amount. The overall payout is typically higher than for other incentive plans (gain-sharing or profit sharing) in high performance years. Under gain-sharing or profit sharing, if a company does well, employees receive their base pay and a predetermined amount of variable pay. However, if a company has a bad year, employees forgo any variable pay; there is no reduction in base pay. Clearly, at-risk plans shift part of the risk of doing busi- ness from the company to the employees. Employees who have an aversion to risk, or who need to have a sta- ble income will avoid employment situations with an at-risk pay plan. These plans also appear to be met with decreases in satisfaction with both pay in general and the process used to set pay.
3. The recommended compensation plan is based on man- agement setting objectives that are viewed as both fair and consistent with employee needs. This type of plan should foster and incorporate employee suggestions that focus on meeting the established objectives. To encour- age this type of organization culture, the pay plan must focus on encouraging and rewarding employee sugges- tions. This would entail an incentive system based on suggested new product ideas, services, and/or any other means of developing a competitive edge. A gain-sharing incentive plan, such as the Scanlon Plan or Rucker Plan, could be developed. If a new idea results in cost savings or increased profits for a company, a percentage of the savings is returned to the employees. Another type of incentive could be an annual bonus that is awarded to employees based on their meeting some predetermined
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performance measure. Finally, employees could receive deferred profit sharing based on the profits resulting from their new product suggestions and/or cost saving applications.
There are several problems management must be con- cerned with. Regardless of the type of incentive plan implemented, the employees must perceive them as fair and meeting their needs. There must be a cooperative spirit where employees will support an incentive program that will induce their participation.
4. Companies are required to report stock options as an expense. Prior to this date, generally accepted accounting rules didn’t require options to be reported as an over- head cost. They were (wrongly) viewed as a free good under old accounting rules. For example, a CEO issued with 500,000 shares with a vesting period of five years, can purchase the stock after five years at the initial-offer price (if the market price is now lower than that, the stock option is said to be “underwater” and isn’t exer- cised). If the executive bought the shares, they were typically issued from a pool of un-issued shares. The money paid by the CEO was treated like money paid by any investor—more often than the not, the money isn’t found. Cases like Enron, which didn’t expense options, gave an unrealistic picture of profits and helped to ele- vate stock prices. This dampens popularity of options. Companies like Cisco still report options accounting for 13 percent of profits this year, versus nontech firms like Pfizer (3 percent of profits) and General Electric (1 per- cent of profits). Under the new accounting rules Cisco now reports profits of 22 cents per share, 4 cents per share lower than before option expensing was required. Some estimates suggest the ruling will lower earnings by 4 percent across the spectrum of companies with stock options. Thus, companies like Microsoft, Dell Inc., Pfizer Inc., etc have either stopped granting options or only grant them to executives as a direct result of the chang- ing rules. All these factors make stock options less popular.
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5. When forced to choose the type of plan with greater pro- ductivity “pep,” experts agree that individual incentive plans have better potential for, and probably better track records in, delivering higher productivity. Group plans suffer from what is called the free-rider problem. However, this can be combated by the use of good per- formance measurement techniques. Specifically, free riders have a harder time loafing when there are clear performance standards. However, one must remember that group pay-for-performance plans are gaining popu- larity while individual plans are stable or declining in interest. This is probably answered with an idea that group-based plans, particularly gain-sharing plans, cause organizations to evolve into learning organizations. Since this is almost an imperative in today’s technologi- cally, economically dynamic environment, this could act as a point of competitive advantage. Apparently the sug- gestions employees are encouraged to make (how to do things better in the company) gradually evolve from first- order learning experiences of a more routine variety (maintenance of existing ways of doing things) into sug- gestions that exhibit second-order learning characteristics—suggestions that help the organization break out of existing patterns of behavior and explore different ways of thinking and behaving. Thus, in compa- nies that value innovation, creativity, group performance plans seem to be the best option.
Self-Check 10 1. b
2. a
3. c
4. c
5. d
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Homework Assignment 11 1. The four methods of improving performance ratings
include the following:
Strategy 1: Improve appraisal formats—The types of formats: Ranking and rating. Ranking formats include the straight ranking, alternate ranking, and the paired- comparison procedures. The rating formats include descriptors that consist of adjectives, behaviors, or outcomes. Standard rating scale use adjectives. Behaviorally anchored rating scales (BARS) uses behav- iors. Management by objectives (MBO) use outcomes. A final type of format includes the essay format. Evaluating performance appraisals formats include five dimensions: (1) employee development potential; (2) administrative ease; (3) personnel research potential; (4) cost; and (5) validity.
Strategy 2: Select the right raters—This includes the 360-degree feedback which entails feedback by raters encompassed by the supervisors, peers, self, customer, and subordinates.
Strategy 3: Understand how raters process information— Research shows that: (1) raters observe rate behavior; (2) rater encodes this behavior (forming stereotypes); (3) rater stores information (rater forgets things); (4) the time between storing observations/ behaviors and the per- formance appraisal influences relevance of the appraisal; (5) information is reconsidered and integrated to reach final ratings. This strategy talks about the errors in the rating process, the errors in observation (attention), errors in storage and recall, and errors in the actual evaluation.
Strategy 4: Training raters to rate more accurately—rater training can be divided into three distinct categories: (1) rater-error training; (2) performance-dimension training; and (3) performance-standard training. Several guide- lines to improve rater training have been summarized.
2. The nature of the task—packing books into boxes for shipment to customers throughout the United States—is fairly routine and mechanistic. The most appropriate
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appraisal format would be a behavior-based evaluation that defines specific performance expectations against which employee performance is evaluated. The BARS for- mat falls into this category. Since the scales are anchored with concrete behaviors, the evaluations of employees are usually less subjective. The behavioral anchors specify performance expectations representing the different levels of performance possible by an employee. This approach fits the objective in this sce- nario—to reward the best performers with larger pay increases. The dimensions selected should reflect the activities involved in the task. For example, behavioral examples that reflect quantity and quality issues can be specified, with clear criteria related to the procedures involved in packing books into boxes.
To minimize employee complaints, employees need to be involved in the process of developing performance dimen- sions and building the scales to measure how well they perform on these dimensions. Research indicates partici- pation results in employees having more positive reactions to ratings, regardless of how well they do. They’re happier with the system’s fairness, appraisal accuracy, and give better evaluations of managers. They also indicate intentions to stay with the organization. Managers also respond well to employee involvement. They feel they have a greater ability to resolve work prob- lems, have higher job satisfaction, and have less reason to distort appraisal results to further their own interests.
3. Suggestions of activities related to the project might include: research activities, writing a paper on the proj- ect topic, typing the paper, preparing an oral presentation on the project topic, giving the oral presen- tation in class. The specific performance standards for each of these activities vary; for example, with respect to research—find “x” number of articles on the topic by a certain date.
4. The following components of the company’s HR system can be used in the legal defense of Ms. Lacy’s discrimi- nation charge. The performance appraisal system used by your company incorporates clear criteria (performance
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dimensions and scale levels are objectively stated) for evaluating performance and has specific written instruc- tions on how to complete the appraisal. In addition, the company’s appraisal system is based on sound, ade- quately developed job descriptions. The company’s policy stipulates that supervisors provide feedback about the appraisal results to the involved employees, and that the appraisal results are reviewed by a higher-level supervi- sor. In addition, the company can provide data to support consistent administration of these performance appraisal system guidelines to all employees. As a super- visor, you have attended a training program on the company’s performance system. Since you are aware of the above guidelines, you can document your compliance with the guidelines. Thus, you can confidently tell your boss you have followed the company’s guidelines in com- pleting Ms. Lacy’s performance appraisals and awarding her pay increases.
Self-Check 11 1. d
2. c
3. a
4. c
5. b
Homework Assignment 12 1. Among the reasons identified as being responsible for the
growth in the size of benefit packages, unions, cost effec- tiveness of benefits, and government impetus can still affect the growth of employee benefits today. Although the employer impetus was a driving force in earlier times for the growth of benefits, it could now prove to be a bane, with the companies realizing that a lack of hard data about payoffs has forced benefits to become a costly affair. Also, with governmental legislations changing almost rapidly, there could always be a scanner intro- duced to tax ‘fringe benefits’.
150
2. Employees expect benefits and a competitive benefit package can help an organization attract and retain good employees. Also, some benefits are legally required and must be provided. Finally, a 38 percent of the payroll could be an advantage as they have tax benefits and reduced rate group costs that appeal to employees. Since Lawson Chemical’s competitors offer benefits, it must be concerned with being competitive and equitable. The company should address two questions. “How can it maximize its’ return for its benefits’ dollars? What does the market pay as a percent of payroll? If Lawson Chemical determines the cost of benefits is competitive, it still needs to evaluate employee needs to make sure a match exists with the types of benefits offered. The com- pany also must evaluate its communication methods to ensure that employees understand their benefits, know their financial value, and know how to make legitimate use of them when the need arises. It can be explained to Kelly that a survey of new employees could be done to see if benefits swayed their decision to join the firm. Exit interviews should be conducted to see if benefits were an issue with employees leaving. The payout of some bene- fits can be linked to firm performance (for example, some of the pension payout could be tied to the profit sharing plan of Lawson Chemical).
3. The external market definitely influences decisions about designing an employee benefit program. Syracuse is a declining market where labor supply exceeds demand, that is, low turnover. In the short run it is possible to save on both benefit and wage costs. A decision to pay (including benefits) below the market standards will save the company money, without resulting in heavier turnover. However, since employees have a sense of mar- ket conditions, the better employees may bolt at the first opportunity.
The second part of the question asks about benefits for an older workforce. Evidence suggests there is higher interest in pension and health care benefits among older workers. The employees should be asked if the current mix of benefits is meeting their needs, and whether a shift in some funds to one or both of these categories
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might be welcomed. Remember, the overall costs must be controlled since any increased payouts must be met by reductions elsewhere.
4. The first step is to determine if Crangles’ benefit costs are competitive in the industry. A survey of the competi- tors should be conducted; the objective is obtain information about the types of benefits offered and which, if any, benefit costs are shared among the employers and employees. Next, employee inputs need to be gathered regarding perceptions about the current benefit package. Informal discussions with employees (if the company is small) or formal administration of a questionnaire (if the company is midsized, or large) would help identify the magnitude, and nature of any existing problems or issues. Based on the information from the competitor survey and the employees, the next step is to decide which benefits to provide on a contribu- tory basis. One viable option is to implement a cafeteria-style or flexible benefit plan. This would provide employees great flexibility in choosing the benefit options of greatest value to them and their families. Since they will be sharing a portion of the benefit costs, they are likely to be more receptive if they can have more benefit choices. Finally, a communication program for the employees must be developed to make them aware of the changes.
5. Employee benefits are widely claimed to help in the retention of workers. Benefit schedules are specifically designed to favor longer-term employees. For example, retirement benefits, the amount of vacation time, employees’ savings plans, profit-sharing plans, and stock purchase plans increase with years of service, and most plans don’t provide for full employee eligibility until a specified number of years of service have been reached. By tying these benefits to seniority, it is assumed that workers are more reluctant to change jobs. There is also some research to support this common assumption that benefits increase retention. Two studies found that higher benefits reduced mobility. Detailed follow-up studies, though, found that only two specific benefits curtailed employee turnover: pensions and medical
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coverage. There are times when turnover may be good— something we may not want to discourage, in light of “job lock” which is probably isn’t a desirable outcome for employers.
Employee benefits also might be valued if we could prove they increase employee satisfaction. Simply pumping more money into benefits is inappropriate. Rather, employers must make fundamental changes in the way they approach the benefit planning process. Companies must realize that declining satisfaction with benefits is a result of long-term changes in the workforce. Changing values, in turn, necessitate a reevaluation of benefit packages.
Finally, employee benefits also are valued because they may have an impact on the bottom line. Although sup- porting evidence is slim, there are some glimmers of potential. Employee stock ownership plans used for pen- sions, according to some reports, improve company productivity. Presumably, owning stock motivates employees to be more productive. Similar productivity improvements are reported for employee assistance pro- grams with reports of up to 25 percent jumps in productivity after their implementation. This finding sug- gests there may be some payoff to so-called work/life benefits, those that increase employee perceptions of a company’s caring attitude. And in one well-constructed research study, this caring attitude led to greater worker involvement in suggesting ways to improve productivity and in helping others with their work.
Self-Check 12 1. d
2. a
3. d
4. b
5. c
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Homework Assignment 13 1. James’s plan to control costs through a selection strat-
egy is definitely a smart option. Considering health benefits form the highest percentage of employee bene- fits, it could save the company several thousand dollars by being stringent in the selection process. Some organi- zations, for instance, don’t hire smokers.
James can also consider offering lower than average ben- efit levels for newcomers but provide a much steeper growth curve than other companies might offer. Note that this approach might influence a company’s ability to recruit new employees. In tight labor markets this might be a factor that needs to be studied before implementation.
2. In the majority of states, unemployment compensation paid out to eligible workers is financed exclusively by employers that pay federal and state unemployment insurance tax. The federal tax amounts to 6.2 percent of the first $7,000 earned by each worker. In addition, states impose a tax above the $7,000 figure. The extra amount a company pays depends on its experience rat- ing—lower percentages are charged to employers who have terminated fewer employees. The tax rate may fall to almost 0 percent in some states for employers that have had no recent experience (hence the term “experi- ence rating”) with downsizing and may rise to 10 percent for organizations with large numbers of layoffs.
3. An organization could specifically tie each of these bene- fits to seniority. It could increase life insurance amounts and tie the number of vacation days and holidays to sen- iority. A company has two options regarding its contributions to a pension plan: full vesting after 3 years or 20% after 2 years and 20% each year thereafter, resulting in full vesting after 6 years. An employer may use the second option in the hope that earlier benefit accrual will reduce turnover.
The ideal situation would be to offer lower than average benefit levels for newcomers but provide a much steeper growth curve than other companies might offer. Note this
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approach might influence a company’s ability to recruit new employees. In tight labor markets this might be a factor that needs to be studied before implementation.
4. The two major benefits to employers of a defined contri- bution pension plan are (1) the employee assumes the risks associated with changes in inflation and interest rates which affect costs and (2) the employer costs are known or “defined” up front. The most important factor for companies is that defined contribution plans allow employers to forecast and control pension costs. This is less true for defined benefit plans.
5. Consumer-directed health services are one way of cost control for companies offering employee benefits. These services involve negotiation of rates with hospitals and other health care providers. One trend involves direct contracting, which allows self-insured companies or employer associations to buy health care services directly from physicians or provider-sponsored networks. Some experts contend that direct contracting can save 30 to 60 percent over fee-for-service systems. One mini-trend in this cost control strategy is to further shift costs to those who most use the service. Charging smokers more for insurance would be an example. Indeed, there is general evidence that cost shifting to high users is picking up steam as one of several cost control strategies yielding good results. All this involves employees being explained in detail, the services available, why, and why not, and how to access them. This certainly indicates that these services could be assessed as being a great communica- tions tool for employee benefits.
Self-Check 13 1. c
2. a
3. d
4. b
5. b
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Homework Assignment 14 1. Historically, directors frequently were given the role of
“rubber stamping” decisions made by top management. Such boards were stacked with people affiliated in some way with the organization (for example, retired corporate officers, suppliers, attorneys). Modern corporate boards have changed considerably. In light of Enron, and other corporate scandals, that involved directors willingly or unwillingly being party to it, stockholders are angry about what they perceive to be excessively high executive compensation, and a big part of the blame falls on the corporate directors, especially those who serve on the Compensation Subcommittee. As an early reaction to these complaints, directors are much more active in deci- sion making and somewhat less prone to grant huge salaries to the CEO. Typically, the board of directors were, in exchange for meeting at least quarterly and usu- ally monthly a typical director receives about $55,000 in cash and incentives and a total (with stock options) of about $150,000; however some companies are now tying all pay to meeting earnings targets, some without the option of exercising stocks until a prescribed year in the future, and then only if the company meets annual earn- ings per share growth targets.
Another backlash includes the fact that stockholders are demanding that CEO’s executive compensation be justi- fied, considering that their pay packages are not directly linked to the financial performance of the company, which interests the stockholders the most. It has been argued that the directors keep a tab of the exact amount that the CEOs earn. This however is more difficult than it sounds.
Not only do they help set strategic plans that affect the profitability of an organization, they also face the possi- bility that disgruntled stockholders may sue them over corporate strategies that are either unprofitable or unpopular. Keeping all these factors in mind, one can willingly assume that not many will volunteer to serve on the prickly corporate board of directors.
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2. The compensation of scientists and engineers focuses on rewarding them for their special scientific or intellectual training. Due to this, the fact that a freshly graduated engineer/ scientist with all the latest knowledge in the field will prove to be valuable resource on projects requiring the necessary expertise. Gradually though, the knowledge accumulated starts to become obsolete. Upon tracking the salaries of these professionals, you will see a close resemblance between pay increases and knowledge obsolescence. Due to this, many companies have tried to deal with the plateau effect and accommodate the differ- ent career motivations of mature professional by a dual-career ladder. The managerial ladder offers a pro- motion path with increasing responsibility for management of people. The professional track rises with increasing technical responsibility.
A second reason for classifying these professionals under the special group status is equity. The very nature of technical knowledge and its dissemination requires the relatively close association of these employees across organizations. Partially because of this and partially because of the volatile nature of both jobs and salaries in these occupations, organizations rely very heavily on external market data in pricing scientists’ and engineers’ base pay. The result is the maturity curve; which reflect the relationship between scientist/engineer compensa- tion and years of experience in the labor market. Generally, surveying organizations ask for information about salaries as a function of years since the incum- bent(s) last received a degree. This is intended to measure the half-life of technical obsolescence.
3. One approach to explaining why executives receive such large sums of money involves social comparisons. Executive salaries bear a consistent relative relationship to compensation of lower-level employees in this view. With a rise in salary of lower-level employees in response to market forces, a corresponding rise in top executive salaries’ takes place in order to maintain the same rela- tive relationship. In general, managers who are in the second level of a company earn about two-thirds of a CEO’s salary, while the next level down earns slightly
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more than half of a CEO’s salary. However, there tends to be a gradual increase in the spread between execu- tives’ compensation and the average salaries of their employees.
A second approach to understanding executive compen- sation focuses less on the difference in wages between executive and other jobs and more on explaining the level of executive wages. The premise in this economic approach is that the worth of CEOs, or their subordi- nates, should correspond closely to some measure of company success, such as profitability or sales. Numerous studies over the past 30 years have demon- strated that executive pay bears some relationship to company success. A recent article analyzing the results from over 100 executive pay studies found empirical evi- dence that firm size (sales or number of employees) is by far the best predictor of CEO compensation. Size vari- ables are nine times better at explaining executive compensation than are performance measures. Some evi- dence contradicts this, though. Research has shown that Executive compensation in some firms was highly related to company value, while at others there was no relation- ship whatsoever. Worse yet, the present value of future compensation (mostly stock options, which account for about 75 percent of executive pay packages) shows very little sensitivity to company value.
A third view of CEO salaries, called agency theory, incor- porates the political motivations that are an inevitable part of the corporate world. This argument states that CEOs make decisions that aren’t in the economic best interest of the firm and its shareholders. One variant on this view suggests that the normal behavior of a CEO is self-protective—CEOs will make decisions to solidify their positions and to maximize the rewards they personally receive. It is possible to state that the CEO, if truly underpaid, not underpaid in a company that is perform- ing well, or not underpaid bin a company that is performing poorly will still end up with increased wages. Agency theory argues that executive compensation should be designed to ensure that executives have the best interests of stockholders in mind when they make decisions.
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4. Hiring contingent workers has proven to be the major source of savings is in the area of employee benefits. Another reason why Romance Novels, Inc could have increased its workforce mix of contingent workers to 28 percent is because the added flexibility such employment offers the employer. In today’s fast-paced marketplace, lean and flexible are desirable characteristics, and con- tingent workers offer these options.
However, while employee benefit costs are about 50 per- cent less for contingent workers, sometimes wages are higher. Contingent workers often work beside regular workers yet often receive lower wages and benefits for the same work, and this has resulted in equity issues. Employers deal with this potential inequity in two ways. One response is to view contingent workers as a pool of candidates for traditional hiring status—high performers may be moved off contingent status and afforded more employment stability. A second way to view contingent workers is to champion the idea of boundaryless careers. At least for high-skilled contingent workers, it is increas- ingly popular to view careers as a series of opportunities to acquire valuable increments in knowledge/skills. Contingent status isn’t seen as a penalty if employees who accept the idea of boundaryless careers view contin- gent status as part of a fast-track developmental sequence. Thus, lower wages can be offset by opportuni- ties for rapid development of skills—opportunities that might not be so readily available in more traditional employment arrangements.
5. Although enough empirical research points out that executive pay bears some relationship to company suc- cess. According to a recent article analyzing the results from over 100 executive pay studies, the evidence sug- gested that firm size (sales or number of employees) was by far the best predictor of CEO compensation. The eco- nomic approach also states that the worth of CEOs should correspond closely to some measure of company success, such as profitability or sales.
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However, it can also be argued that according to the same article that analyzed results from over 100 execu- tive pay studies, size variables were nine times better at explaining executive compensation than were perform- ance measures. Thus, how big the firm is, explained what the top executive was paid better than how well the executive performed. Since stock options are a likely component of the CEO’s salary, this pay component could have problems. Since stock options reward execu- tives when stock prices go up, increases in stock prices are not necessarily related to executive performance. Indeed, in markets with prolonged stock increases, exec- utives may receive windfall profits regardless of the firm’s performance. Stock options are also criticized because there is no downside risk to the executive. If the stock price doesn’t increase above the grant price, then the executive is unlikely to exercise the option. It can also be pointed out that CEO compensation in other countries doesn’t begin to compare to CEO compensation in the United States. The average salary for CEOs in the 100 largest US companies is $15.7 million per year. However, wages in the European Union are much lower. For exam- ple, wages plus incentives for French CEOs average about $2 million, and U.K. salaries for CEOs are about 16 percent behind this.
Hence it becomes easier to perhaps understand, and empathize with Tiger Woods’ $2 million payout for work- ing four days to win a Masters Championship as against why William Clay Ford made $30 million as CEO of Ford Motor Company.
Self-Check 14 1. c
2. a
3. b
4. b
5. a
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Homework Assignment 15 1. Spillover effect, specifically, involves employers seeking
to avoid unionization by offering workers the wages, ben- efits, and working conditions won in rival unionized firms. Although union wage settlements have declined over the years, the impact of the spillover effect can’t be understated. Due to this, nonunion management contin- ues to enjoy the freedom from union “interference” in decision making, and the workers receive the spillover of rewards already obtained by their unionized counter- parts. Several studies document the existence of this phenomenon, although smaller as union power dimin- ishes, providing further evidence of the continuing role played by unions in wage determination. These factors diminish the impact unions have on wages.
2. Whether unions raise wages, or if unionized employees are better off than they would be if they were nonunion, isn’t easy since several measurement problems are diffi- cult to overcome. The ideal situation would compare numerous organizations that were identical except for the presence or absence of a union. Any wage differences among these organizations could then be attributed to unionization (a union wage premium). Unfortunately, few such situations exist. One alternative strategy that has been adopted is to identify organizations within the same industry that differ in level of unionization. Consider a company that is unionized and another that isn’t, both being in the same industry. It is still difficult to argue with assurance that wage differences between the two firms are attributable to the presence or absence of a union.
First, the fact that the union has not organized the entire industry weakens its power base (strike efforts to shut down the entire industry could be thwarted by nonunion firms). Consequently, any union impact in this example might underestimate the role of unions in an industry where the percentage of unionization is greater.
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A second problem in measuring union impact is appar- ent from this example. The nonunionized company can offer concessions that are indirectly attributable to the presence of a union, and would lead to underestimation of union impact on wages.
3. Merit pay is traditionally based on individual perform- ance. Unions prefer administrative rules that apply to the entire union membership equally. Further, unions are very distrustful of many performance measures used to decide whether merit increases are given. Unless the measure is objective, i.e., some easily calculated quanti- tative measure, there is always concern that human error or bias will enter into the decision making process.
In Chapter 11 a variety of different errors that raters make in the normal course of deciding who will get merit awards was discussed. Even beyond this, though, unions fear reprisals against particularly vocal union members. By placing the power to decide who gets merit increases in management’s hands and making the performance criteria relatively subjective, unions fear that unfair treatment will be the outcome.
4. Unions prefer wage increases linked to objective meas- ures over which employees have control. Seniority is a prime example. Anyone checking employment records can calculate seniority for employees. Years of service with a company are objective. Employees, as long as they remain employed, control their seniority.
Most other measures used to determine wage increases are less objective than seniority. Skill-based pay has some comforting elements of objectivity. Workers who complete training programs and are certified to have new skills receive wage increases under skill-based pay plans. This is a relatively objective standard for measuring per- formance. While some forms of gain sharing plans may also have objective performance standards (measures of costs and productivity), there are usually some elements of subjectivity even in the most objective-appearing measure. A second factor weighing in favor of skill-based pay is that training is a human capital investment in workers. Their value to an organization increases. Even if layoffs should occur in the future, the employability of these workers is enhanced.
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Self-Check 15 1. d
2. a
3. b
4. b
5. a
Homework Assignment 16 1. Your response will vary as to your rankings of the factors
in the global guide. The following suggested rankings are recommended in applying the global guide to DaimlerChrysler: (1) institutional variations, (2) organiza- tional variations, (3) economic variations, and (4) employee variations.
2. Nationwide pay determination is a highly centralized approach with significant government involvement, that is, laws and regulations. Industrywide pay determination is highly decentralized, with little government involve- ment. The most powerful participants, that is, companies or unions, typically set pay rates. Custom, if not regula- tion, forces other industry members to follow.
When wages are set based on nationwide or industrywide patterns, then compensation is essentially removed as a key factor on which companies can compete and can dif- ferentiate themselves in order to attract employees.
3. Japanese pay systems tend to emphasize the following: person rather than the job; seniority and skills possessed rather than job or work performed; promotions based upon supervisory evaluation of trainability, skill/ability levels, and performance rather than solely on perform- ance; internal alignment over competitors’ market rates; and employment security based on the performance of the organization and the individual (formerly lifetime security). The advantages of the Japanese approach include low turnover/high commitment/security, greater acceptance of change, more predictability for companies
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and employees, and flexibility. The disadvantages of the Japanese approach are high costs associated with an aging work force, discourages unique contributors, and discourages women and younger employees. In addition, the Japanese system constrains the use of pay as a strategic tool by organizations.
German pay systems are embedded in a social partner- ship between business, labor, and government. Pay decisions are highly regulated; over 90 different laws apply. Different tariff agreements (pay rates and struc- tures) are negotiated for each industrial sector by the major employers and unions. Methods for job evaluation and career progression are included in the tariff agree- ments, which don’t apply to managerial jobs. The advantages of the German approach include the provi- sion of generous social benefits, supports commitment and security, provides greater predictability for compa- nies and employees, and companies don’t compete on the basis of pay. There are several disadvantages. An aging population, low birth rates, earlier retirement ages, and high pension and unemployment benefits are push- ing up the costs of the social support system. A relatively inflexible labor market has slowed job creation, as employers are finding it easier to move to other EU coun- tries. The German system is highly bureaucratic. Like the Japanese system, the German system limits the use of pay as a strategic tool by organizations.
The US approach to pay has several advantages. US companies possess considerable flexibility to align pay systems with business strategies, which results in greater variability among companies within and across industries. The US pay system supports performance, with costs varying based on performance. US firms encourage innovation, recognizing the enormous talent and contributions to be tapped from work-force diversity. Disadvantages include higher turnover, greater employee skepticism about change, increased uncertainty facing employees, the system’s short-term focus, and employ- ees’ stress about continuous change.
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However, a caveat must be offered. While the above sce- narios portray typical approaches to pay practices for each country, variations exist in pay practices among companies in all countries.
4. Expatriates: Employees who are citizens of the nation in which the employer is based, but who work for the com- pany outside its home nation (for example, a Japanese citizen working for Toshiba in Toronto).
Local nationals: Employees who are citizens of the coun- try in which the subsidiary is located (for example, a Canadian citizen working for Toshiba in Toronto).
Third-country nationals: Employees who are citizens of neither the employer’s base country nor the subsidiary’s country (for example, a German citizen working for Toshiba in Toronto).
5. The premise of this approach is employees on overseas assignments should have the same spending power as they would in their home country. Therefore, the home country is the standard for all payments. The objective is to (1) ensure mobility of people to global assignments as cost-effectively as feasible; (2) ensure that expatriates neither gain nor lose financially; and (3) minimize adjust- ments required of expatriates and their dependents.
The argument against this pay system is it isn’t linked to performance. The Japanese system of pay is often linked to seniority, which is time spent on the job and not per- formance based. Another aspect of expatriate pay is that equalizing pay may not motivate an employee to move, particularly if the new location has less personal appeal. Therefore, many employers offer some form of financial incentive or bonus to encourage the move.
Self-Check 16 1. c
2. c
3. d
4. b
5. b
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Homework Assignment 17 1. The exact role government plays in the contemporary
workplace depends in part on one’s political ideology. Different countries and cultures have different perspec- tives on the role government should play. In the US government affects compensation both directly and indi- rectly. Government affects compensation directly through wage laws requiring specific wages under certain condi- tions. Government is a key stakeholder in compensation decision-making, affecting decisions in several areas: fairness of procedures for determining pay (pay discrimi- nation); sufficiency of safety nets for the unemployed and disadvantaged (minimum wage and unemployment com- pensation); and protection of employees from exploitation (overtime pay and child labor restrictions). Government affects compensation indirectly through actions that affect the supply and demand for labor. The government is both a consumer and an employer.
2. The effect of raising the minimum wage has differential effects on the wages of workers. An increase in minimum wage causes pay rates at the low end of the wage scale to increase; pay rates above the minimum often increase in order to maintain differentials. However, the shift in pay structure doesn’t affect all industries equally. Increases in minimum wage have a greater effect in labor-intensive industries, such as retail and service firms that tend to pay at or near minimum wages to many employees.
3. Access discrimination involves denying particular jobs, promotions, or training opportunities to qualified women or minorities. Valuation discrimination focuses on the pay women and minorities receive from the jobs they perform—it refers to paying women and minorities less for equal work. Two standards for defining valuation dis- crimination are proposed. The first standard is equal pay for equal work, covered by the Equal Pay Act that stipu- lates it is discriminatory to pay minorities or women less than males when they are performing equal work. This definition is a legally established standard. The second standard is equal pay for work of comparable worth. It has been proposed that valuation discrimination also
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occurs when men and women hold entirely different jobs, that is, office jobs staffed by women and craft jobs staffed by men. The issue centers on the legality of pay- ing employees in one job group less than employees in the other if the two job groups contain work that isn’t equal in content but is, in some sense, of comparable worth to the employer. While existing federal laws don’t support this standard, several states have enacted laws that require a comparable-worth standard for state and local government employees.
4. Use of these contemporary pay practices can complicate the documentation of potential pay discrimination claims because there is a lack of consensus regarding the defi- nitions of these pays practices. For example, the definition of competencies is less specific than job duties specified in a job description. When job tasks are fairly routine, pay differences are difficult to justify on a work- related basis.
5. Factors to explain the earnings gap between the sexes and among races include differences in occupational attainment and jobs held by men and women; differences in personal work-related characteristics and work behav- iors (experience, seniority, education); differences among industries and firms; differences in contingent pay; dif- ferences in union membership; and discrimination.
6. Compliance with laws and regulations can be a con- straint or an opportunity. A proactive compensation manager can influence the nature of regulations and their interpretation via several efforts. First, a compensa- tion manager can join professional associations to stay informed on emerging issues and to act in concert to inform and influence public and legislative opinion. Second, a compensation manager should constantly review compensations practices and their results on employees. An organization can also form links between the HR and law departments to encourage information flow and coordinate efforts.
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Self-Check 17 1. a
2. b
3. a
4. c
5. c
Homework Assignment 18 1. The emphasis on managing and controlling compensa-
tion costs enables managers to foresee the financial impact of pay expenditures on organization performance and to use those expenditures where they will have a maximum effect on organization objectives. If an organi- zation doesn’t effectively manage all costs, it will be less able to be competitive in its product/service market. Budgets reflect what an organization has deemed impor- tant to carry out its objectives. Costs can be managed by controlling all aspects of compensation, including bene- fits and services, and controlling headcount, including hours worked and skills used.
2. Administration helps meet pay objectives by guiding and regulating decisions about pay so that they are consis- tent with the system’s objectives.
3. A decentralized compensation function would push responsibilities and expenses closer to the units and managers affected by them; this may help ensure that decisions are business-related. However, decentralization may lead to problems of inconsistent treatment of employees pay discrimination and subunit goals that are inconsistent with organization objectives. The compensa- tion function should be structured to be compatible with organization strategies.
4. Range minimums and maximums establish the parame- ters of value that the employer places on work performed. Range midpoints reflect the pay policy line of the employer in relationship to external competition.
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Comp-ratios assess how managers actually pay employ- ees in relation to range midpoints and can be calculated for an individual, a group, or a unit. Increase guidelines ensure consistent treatment of employees among differ- ent managers.
5. Benefits management is the prime candidate due to the complexity of regulations plus the amount of clerical work involved.
6. It’s important for the management to design a pay sys- tem that is based on work-related or business-related logic, but in the absence of such a system, it is better if formal communication is avoided until the system is put into place. However, it still means that communication must take place, since employees are prone to assimilat- ing intended and unintended messages transmitted through the pay system, factual or nonfactual data transmitted via the rumor mills.
Research has identified that employee behavior on pay communication consists of four types: (1) Persistence of beliefs—indicated by reluctance to accept evidence that contradicts existing beliefs. It’s recommended that com- munication concentrate on changing existing beliefs by actively engaging employees in the pay system design and communication. (2) Anchoring/framing—indicated by initial data strongly influencing decisions/beliefs. It’s recommended that communication recognize the fact that first data matters. For example, market data swamps the job-evaluation results, and that previous bonuses set expectation for the ones in the future. (3) Herding—indicated by following fashions in programs/ techniques. Communication should involve benchmark- ing selectively, and the usage of pilot programs and test trials to guide the pay system are recommended. (4) Pattern recognition—indicated by people “discovering” patterns in random events, and believing that correlation means causation. Communication should entail that higher pay may not mean higher performance, and higher performance may not mean higher pay.
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Self-Check 18 1. d
2. c
3. b
4. b
5. c
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