MilkovichNewman Compensation Ninth Edition Chapter 18 Mc GrawHillIrwin

Milkovich/Newman: Compensation, Ninth Edition Chapter 18 Mc. Graw-Hill/Irwin Budgets and Administration Copyright © 2008 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

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 18 -2

Managing Labor Costs n Financial planning is integral to managing compensation – Total compensation makes up at least 50 percent of operating expenses in many orgs § But, most orgs have not tried to analyze returns from their compensation decisions (e. g. , increases expected from new gainsharing plan, expected value of increasing merit increases for top performers relative to average performers) 18 -3

Controlling Employment: Staffing Levels and Hours n Staffing Levels – Most common approach to managing labor costs is to control number of ees a/o hours worked § Note: layoffs and plant closings often have positive shortrun effect on stock price, but loss of human capital and lowered morale may well lead to lower performance than anticipated § Contingent workforce is a possible buffer 18 -4

Control Salary Level: Top Down n Top management determines the amount of money to be spent on pay and allocates it “down” to each subunit for the plan year – Current year’s rise – Ability to pay – Competitive market – Turnover effects 18 -5

Control Salary Level: Bottom Up n. Instruct managers in compensation policies and techniques n. Distribute forecasting instructions and worksheets n. Provide consultation to managers n. Check data and compile reports 18 -6

Control Salary Level: Bottom Up (cont. ) n. Analyze forecasts n. Review and revise forecasts and budgets with management n. Conduct feedback with management n. Monitor budgeted versus actual increases 18 -7

Embedded Controls n Range maximums and minimums n Compa-ratios n Variable pay n Analyzing costs n Analyzing Value Added 18 -8

Exhibit 18. 9: Illustration of Value-Added Analysis 18 -9

Communication: Managing the Message n Compensation communicates n Employee’s understanding of the pay system is shaped – Indirectly through the paychecks they receive – Directly via formal communication about their pay, their performance, and the markets in which the organization competes 18 -10

Why Communicate Pay Information? n Devotion of considerable resources to designing a fair and equitable system intended to – Motivate effective performance – Encourage productivity n Misperception of pay system by employees n Openness about pay may – Engender goodwill – Affect perceptions of pay equity 18 -11

Pay: Change Agent in Restructuring n Pay often plays a singular role when organizations restructure n Strategic changes in business strategy mean the pay strategy must be realigned – Changing people’s pay captures their attention n Pay changes play two roles – Catalyst for change – Follower of change 18 -12

Structuring the Compensation Function n Centralization versus decentralization n Flexibility within corporate-wide principles n Reengineering and outsourcing 18 -13

Controls as Guidelines: Let (Thoughtful) Managers Manage n Traditional compensation plans often degenerate into bureaucratic nightmares that hinder the organization’s ability to respond to competitive pressures – Reducing the controls and guidelines inherent in any pay plan recommended § Banding eliminates or at least reduces the impact of range maximums and minimums § Replacing merit grids with bonuses § Replacing job evaluation with skill- or competency-based plans 18 -14