Chapter 9 Direct Financial Compensation (Core Compensation)cf.linnbenton.edu/bcs/bm/godwinm/upload/BA224_mondy_ch09.pdf · Contingent Worker Compensation In most cases, contingent

Chapter 9

Direct Financial Direct Financial Compensation (Core Compensation)

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Total Compensation Components


Direct Financial Compensation

�Base pay

�Cost-of-living adjustments

�Seniority pay

Performance-based pay�Performance-based pay

�Person-focused pay


Base Pay

�Recurring pay for performing work

�Paid as hourly wage or annual salary

�The distinction is often associated with the �The distinction is often associated with the Fair Labor Standards Act for determining eligibility for overtime pay

�Exempt: no overtime pay

�Non-exempt: overtime pay


Cost-of-Living Adjustment

�Pay increase to compensate for rises in the average cost of goods and services

�Protects standard of living by ensuring that nominal pay (face value) does not fall nominal pay (face value) does not fall significantly below real pay (purchasing power)


Seniority Pay

�Pay increases automatically as years of service increase

�Human capital theory:Workers become more proficient (build human capital) over more proficient (build human capital) over time

�The General Schedule is the federal government’s comprehensive seniority-based pay system

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General Schedule (GS)


Performance-Based Pay

�Pay increases awarded based on level of performance attainment

�Performance measures vary (e.g., employee performance, company employee performance, company performance)

�Main types of pay-for-performance:

� Merit pay and merit bonuses

� Incentive pay (individual, group, company)


Merit Pay Increase

�Pay-for-performance

�Pay increased based on supervisor’s evaluation of past performance

�Pay increase is a permanent increment to base pay


Merit Bonuses / Spot Bonuses

�Merit bonuses reward individuals for past performance. Unlike merit pay increases, merit bonuses represent a one-time award (not built into base pay)(not built into base pay)

�Spot bonuses are one-time rewards to give timely recognition of good performance


Permanent Pay Increase vs. Bonus


Incentive Pay

�Individual incentive plans (piecework, management incentives, behavioral encouragement plans, and referral plans)

�Group or team-based plans (design based �Group or team-based plans (design based on purpose of teamwork)

�Company-wide plans reward employees based on company-wide metrics such as profit or the value of company stock


Types of Individual Incentive Plans

�Piecework plans: reward workers for every item produced over a designated production standard

�Management incentive plans: award bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division


Types of Individual Incentive Plans (Cont.)

�Behavior encouragement plans:

employees receive payments for specific behavioral accomplishments

�Referral plans: employees receive bonuses for recruitment of highly qualified employees


Company-Wide Incentive Plans

�Profit sharing

�Employee stock option plans


Profit Sharing

�Distribution of predetermined percentage of firm’s profits to employees

�Kinds of plans:

�Current profit sharing�Current profit sharing

�Deferred profit sharing

�Combination plans

�Vesting: Determines amount of profit employee owns


Employee Stock Plans

Companies grant employees right to purchase share of company

�Company stock (a unit of company equity)

�Company stock shares (shares of company equity)

�Stock options (right to purchase stock)


Determinants ofDirect Financial Compensation

�Job structures

�Competitive compensation policies

�Pay structures�Pay structures


Determinants ofDirect Financial Compensation (Cont.)


Contextual Influences on Direct Financial Compensation

�Labor market

�Labor unions

�Economy�Economy

�Inter-industry wage differentials

�Legislation


Legislation

�Davis-Bacon Act of 1931

�Walsh-Healy Act of 1936

�Fair Labor Standards Act of 1938�Fair Labor Standards Act of 1938

�Equal Pay Act of 1963

�Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)


Build Job Structures UsingJob Evaluation

� Job structure: An ordered set of jobs represents the job structure or hierarchy. That is, jobs that require higher qualifications, more responsibilities and more complex job duties should be paid moreshould be paid more

� Job evaluation: Systematically recognizes differences in the relative worth among a set of jobs and to establish pay differentials accordingly


Competitive Compensation Policies

Compensation policy: Choices that compensation

professionals make to promote competitive advantage

�Pay level policies

�Market lead policies�Market lead policies

�Market match policies

�Market lag policies

�Pay mix policies


Pay Level Policies

�Market lead: Pay higher wages and salaries to attract high-quality, productive employees and thus achieve lower per-unit labor costs

�Market match, or going rate: Pay what most �Market match, or going rate: Pay what most employers pay for same job

�Market lag: Pay below market rate because of firm’s poor financial condition or belief that it does not require highly capable employees

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Wage Curve

�Fitting of plotted points to create smooth progression between pay grades

�Creates a smooth progression

�Often uses statistical methods�Often uses statistical methods


Pay Level Policy


Pay Mix Policies


Scatter Diagram of Evaluated Jobs Illustrating Wage Curve, Pay Grades, and Pay Ranges


Broadbanding

�Technique that collapses many pay grades (salary grades) into a few wide bands to improve organizational effectiveness

�Lateral employee development�Lateral employee development

�Develops employee skills and encourages team focus


Broadbanding and Its Relationship to Traditional Pay Grades and Ranges

Average Hourly Pay

Grade 4

Grade 6

Grade 5

9-30

Average Hourly Pay

Grade 4

Grade 1

Grade 2

Grade 3

Job Worth

Low High

Band I

Band II

Band III

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Two-Tiered Pay

�New employees paid less

�Temporary or permanent rewards

�Mainly in unionized companies�Mainly in unionized companies

�May hinder recruiting

�Can lower employees’ morale


Adjusting Pay Rates

�Overpaid and underpaid jobs

�Bring underpaid jobs up to minimum of pay range

�Promote person who is overpaid or freeze �Promote person who is overpaid or freeze rate until across-the-board pay increases bring job into line

�Bad idea to cut pay


Salary Compression

Salary compression: Occurs when less experienced employees are paid as much as or more than employees who have been with the organization a long time due to a with the organization a long time due to a gradual increase in starting salaries and limited salary adjustment for long-term employees


Sales Representative Compensation

�Salary

�Commission

�Blended


Contingent Worker Compensation

�In most cases, contingent workers earn less pay than permanent counterparts

�Far less likely to receive health or retirement benefitsretirement benefits

�May have contingent workers side-by-side with regular workers at similar jobs


Executive Compensation

�Text says, skills possessed by company executives largely determine whether firm will prosper, survive, or failsurvive, or fail

�Compensation programs need to motivate executives to strive to achieve long-term success for firm


Types of Executive Compensation

�Base salary

�Bonuses and performance-based pay

�Stock option plans�Stock option plans

�Perquisites (perks)

�Severance packages


Base Salary

�Factor in determining executive’s standard of living

�Salary provides basis for other forms of compensation; may determine amount compensation; may determine amount of bonuses and certain benefits

�U.S. tax law does not allow companies to deduct more than $1 million of executive’s salary


Bonuses and

Performance-Based Pay

�Trend toward more performance-based compensation packages for executives

�Payment of bonuses reflects managerial belief in their incentive value belief in their incentive value


Stock Option Plans

�Options for managers to buy specified amount of stock in future at or below current market price

�Some boards of directors require their top �Some boards of directors require their top executives to hold some of firm’s stock

�Financial Accounting Standards Boards require companies to expense stock options, thereby making them less attractive


Perquisites (Perks)

�Special benefits provided by firm to small group of key executives

�Designed to give executives something extra something extra

�Securities and Exchange Commission lowered threshold for disclosure of executive perks from $50,000 to $10,000


Severance Packages

�Often negotiated at hire of the executive

�SEC requires companies to list all agreements for each executive

�Investors will see estimated total dollar value of exit packages


Addendum

Dodd-Frank Act on

Executive Compensation


Executive CompensationIssues in the U.S.

�Say on Pay

�Golden parachute contract

�Clawback contract provision


Say on Pay

�Dodd-Frank Act gives shareholders in all but smallest companies an advisory vote on executive pay

�Some expect vote will cause greater �Some expect vote will cause greater accountability on executive pay

�Votes at least every 3 years


Golden Parachute Contract

�Perquisite protecting executives in event another company acquires firm or executive is forced to leave firm for other reasons

�Dodd-Frank Act has disclosure �Dodd-Frank Act has disclosure requirements

�Requires shareholder advisory vote on certain arrangements


Clawback Contract Provision

�Provision allows company to recover compensation if subsequent review indicates payments were not calculated accurately or performance goals were not accurately or performance goals were not met

�Dodd-Frank Act requires companies to develop Clawback policies to recover compensation later deemed excessive


Documents

Chapter 9 Direct Financial Compensation (Core Compensation)cf.linnbenton.edu/bcs/bm/godwinm/upload/BA224_mondy_ch09.pdf · Contingent Worker Compensation In most cases, contingent