MilkovichNewman Compensation Ninth Edition Chapter 1 Mc GrawHillIrwin

Milkovich/Newman: Compensation, Ninth Edition Chapter 1 Mc. Graw-Hill/Irwin The Pay Model Copyright © 2008 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Contrasting Perspectives of Compensation Society’s Views Stockholders’ Views Employees’ Views Managers’ Views 1 -2

Compensation: Definition n Employees – – Major source of financial security Return in an exchange between employer and themselves Entitlement for being an employee of the company Reward for a job well done 1 -3

Compensation: Definition (cont. ) n Society – Pay as a measure of justice § Gender pay gap in U. S. , after adjusting for differences in education, experience, occupation, has narrowed from 36 percent in 1980 to 13 percent in 2006 – Benefits as a reflection of justice in society § ~46 m Americans do not have health insurance (16% of population) § Proportion of Americans w/ private insurance 67. 5% in 2007 – Job losses (or gains) attributed to differences in compensation (see Ex. 1. 1) – Belief that pay increases lead to price increases 1 -4

Exhibit 1. 1 update: Hourly Compensation Costs for Production Workers (2007 data) United States $24. 59 Brazil 5. 96 Canada 28. 91 Mexico 2. 92 Austria 35. 33 Belgium 35. 45 Czech Republic 8. 20 ($2. 83 in 2000) Denmark 42. 29 Finland 34. 18 France 28. 57 5. 78 Germany 37. 66 Japan 19. 75 Hungary 7. 91 South Korea 16. 02 Australia 30. 17 Hong Kong ($8. 23 in 2000) ($2. 79 in 2000) Ireland 29. 04 Singapore 8. 35 Italy 28. 23 Sri Lanka 0. 61* Netherlands 34. 07 Norway 48. 56 Poland 6. 17 Portugal 8. 27 (comparable to China? ) Taiwan 6. 58 Source: U. S. Department of Labor, Bureau of Labor Statistics, January 2009. Spain 20. 98 Sweden 36. 03 Switzerland 32. 88 United Kingdom 29. 73 Hourly compensation costs include (1) hourly direct pay and (2) employer social insurance expenditures and other labor taxes. 1 -5

Compensation: Definition (cont. ) n Stockholders – Linking executive pay to company performance theoretically increases stockholders' returns (see Ex. 1. 2) n Managers – A major expense (labor expense can account for 50+% of total costs) – Used to influence employee behaviors and to improve the organization's performance (see Ex. 1. 3) § Grocery store clerk pay (2005): – – – Industry average: $12. 28/hr Costco: $16 Whole Foods $12. 50 Sam’s Club $12 Wal-Mart $9. 68 § Labor costs as % of total costs for grocery stores historically 15 -18%; today norm is 9 -12%; warehouse stores 4 -6%; Whole Foods 25% 1 -6

Labor Costs as a Percentage of Revenues, Airline Industry (8 e) 1 -7

What Is Compensation? Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship 1 -8

Exhibit 1. 4: Total Returns for Work 1 -9

Forms Of Pay n Relational returns – Psychological in nature n Total compensation – Cash Compensation/ transactional § Base wages – Difference between wage and salary § Merit pay/cost-of-living adjustments – Merit increases – given in recognition of past work behavior – adjustments to base – Cost-of-living adjustments –same increases to everyone, regardless of performance 1 -10

Forms Of Pay (cont. ) – Cash Compensation/ transactional (cont. ) § Incentives/ Variable pay – tie pay increases directly to performance – Does not increase base wage; must be reearned each pay period – Potential size generally known beforehand – Long-term (stock options), and short-term – Benefits § Income protection (some are legally required) § Work/life balance (includes pay for time not worked) § Allowances (e. g. , expatriates) 1 -11

Exhibit 1. 5: THE PAY MODEL POLICIES ALIGNMENT COMPETITIVENESS CONTRIBUTORS TECHNIQUES Work Descriptions Evaluation/ INTERNAL analysis certification STRUCTURE Market Surveys definitions Seniority based Policy lines Performance based Merit guidelines OBJECTIVES PAY STRUCTURE EFFICIENCY • Performance • Quality • Customers • Stockholders • Costs INCENTIVE PROGRAMS FAIRNESS COMPLIANCE MANAGEMENT Costs Communication Change EVALUATION 1 -12

Exhibit 1. 6: Pay Objectives at Medtronic and Whole Foods 1 -13

Four Policy Choices n. Internal alignment – Focus - Comparisons among jobs or skill levels inside a single organization – Pay relationships within an organization affect employee decisions to: § Stay with the organization § Become more flexible by investing in additional training § Seek greater responsibility n. External competitiveness – Focus - Compensation relationships external to the organization: comparison with competitors – Pay is ‘market driven’ 1 -14

Four Policy Choices (cont. ) n External competitiveness (cont. ) – Effects of decisions regarding how much and what forms: § To ensure that pay is sufficient to attract and retain employees § To control labor costs to ensure competitive pricing of products/ services n Employee contributions – Focus - Relative emphasis placed on employee performance § Performance based pay affects fairness n Management – Focus - Policies ensuring the right people get the right pay for achieving the right objectives in the right way 1 -15

Listening to HR’s Critics n Quantify people-management results into dollars – Productivity of workforce – Cost of vacant position – Cost of keeping bad manager – Dollar impact of hiring and keeping top performers vs. average ones in mission-critical jobs n Adopt “fact-based” decision-making – Not “I think” or “I believe” but “I know” re: cause and effect § Causes of turnover § What motivates workers to produce more § Which HR actions can turn business unit around § Source: Workforce Management, 7/31/06 1 -16

Evidence-based HR Decision-making n Assumption that correlation implies causation pervades decision making in human resources and pay plan design. – Inferential issue: "The CEO drank Wild Turkey; the company performed well; ergo, all CEOs should drink more Wild Turkey. The company uses individual incentives; the company performs well; ergo all companies should use more incentives. “ "The first step is to know what the evidence says. Know the research literature that pertains to your business. Diffusion and persistence do not prove effectiveness. “ n “The goal is to transform human resources into the R&D department for the human system, which is the most important system in almost all organizations. ” n – "In R&D, you go into the laboratory, you experiment and you keep up with the research that others do. Can you imagine walking into the R&D lab at a pharmaceutical company, asking the chief chemist about an important new study and having him respond that they don't keep up with the literature in chemistry? “ § Jeffrey Pfeffer, Stanford University, in Workforce Management, 11/3/08 1 -17