Reward Systems

Reward Systems Intrinsic Rewards Status Growth

Responsibility

Extrinsic Rewards Non-financial (office, staff, title, etc.) Financial (direct and indirect compensation)

Financial Rewards: Indirect Compensation Protection Programs Examples: pensions, health coverage, life insurance, social welfare programs

Public Private Mandatory versus Voluntary Contributory versus Non-contributory

Financial Rewards: Indirect Compensation Pay for Time Not Worked (at work and off work) Examples: breaks, meal time, transit time, medical leave, military leave, education leave, vacation

Services and Perquisites General

(Examples: financial services, counseling, dining discounts) Limited (Examples: automobile, cellular phone, clothing allowance, gym membership)

Financial Rewards: Direct Compensation Base Pay Incentives Cost-of-Living Adjustments (COLAs) Merit Pay

Compensation System Objectives External Competitiveness Internal Equity Legal Compliance Motivational Soundness Linkages to Performance Cost Effectiveness Culture Creating

Total Comp Policy Planning: Key Issues 1. Degree of income protection and replacement to be provided for employees, for dependents and for retirees. 2. Provisions (if any) to be made for income supplementation benefits. 3. Relation of benefits to job level. 4. Recognition for seniority. 5. Recognition for performance or productivity. 6. –Er’s responsibility for costs of –ee benefits, dependent benefits, and retiree benefits.

7. Basis and use of external comparisons. 8. Effect of union settlements on benefits for nonrepresented employees. 9. Application of plans to –ees of acquired orgs. 10. Coverage for part-time employees. 11. Employee choice and plan flexibility. 12. Responsibility for planning and managing the plans/programs.

Compensation Laws & Regs Wages Wage Controls Payment Schedules Pay Increases Overtime Incentive Pay Wage Adjustments (longevity, education, etc.) Bonuses Contracts Work Agreements Child Labor Benefits

Basic Compensation Markets Blue Collar – “Labor” Professional Supervisory and Managerial Entertainers and Athletes

External Influences on Compensation Supply of Labor Demand for Labor Org Location Economic State Competition Union Influence Product/Service Demand

Internal Influences on Compensation Organization Size Willingness to Pay Ability to Pay Tradition Unionization Job Itself Employer Prestige Work Force Character Desired Employee Quality Ratio of Labor Costs to Total Costs

Organizational Compensation System Requirements Maximize ability to attract and retain qualified employees Be within ability to pay Allow organization to remain competitive

Compensation Terminology Wage versus Salary

Exempt versus Nonexempt

Assigning Pay to Jobs Job Pricing = placing a monetary value on the worth of a job to the organization RULE: Each job is worth only so much to the organization OPTIONS: 1. Flat Rates 2. Pay Ranges

Pay Considerations Prevailing wages and salaries Collective bargaining Economic realities Worth of position/job Worth of employee Difficulty in filling job Priority of work in organization

Basic Compensation Decisions Wage level decisions compared to other organizations Wage structure decisions comparing job to job Individual wage decisions comparing individuals in same jobs

Wage Level Decisions Lead Competition Match Competition Lag Competition

Wage Structure Decisions System for assigning value to jobs within an organization Ranking Classification Point/Factor

Wage Structures Rankings Each job in relation to other from most important to least important Classification Jobs sorted by requirements, responsibilities Point/Factor Jobs evaluated and sorted by objective factors

Ranking System Job A - President Job B – Vice President Job C1 – Treasurer/CFO Job C2 – Manager of Operations/COO Job D – Sales Manager Job E – Salesperson Job F – Order Entry Clerk Job G – Cleaning Crew Member

Classification System Grade

Step Step Step Step Step Step Step 1 2 3 4 5 6 7

1

15,625 16,146 16,666 17,183 18,009 19,039 19,543

2

17,568 17,985 18,567 19,060 19,841 20,408 20,975

3

19,168 19,807 20,446 21,085 21,724 22,363 23,002

4

22,235 23,057 23,669 24,386 25,430 26,110 26,833

5

24,878 25,681 26,484 27,287 28,090 28,982 29,876

6

27,731 28,626 29,521 31,011 32,206 33,104 34,891

Point/Factor Systems Job A = 100 Job B = 110 points Job C = 160 points Job D = 180 points Job E = 200 points Job F = 220 points Job P = 430 points

Pay Adjustments Fixed Rate Increases step increases, flat dollar increases

Percentage Increases across the board, competitive percent

Incentives

Levels of Incentives Individual Group Company-wide Executive

Individual Incentive Plans Piecework Payment (Straight and Differential) Standard Hour Commissions Bonuses Skills-based Pay Non-financial Awards

Group Incentive Plans Piece-rate Systems Standard Hour Plans Group Bonuses Profit Sharing

Company-wide Incentives Profit Sharing (Cash Plan or Deferred Plan)

Gainsharing Stock Ownership Plans (ESOP)

Executive Incentives Salaries Stock Options Long-term Incentive Plan Payouts Directors’ Fees Perquisites

Executive Compensation Organization

Salary & Bonus

Long-term Company Comp Performance

Boeing

2,684,000

1,245,000

-128%

Tenet Healthcare

116,400,000 72,000,000 +63%

Dell Computer

82,300,000

37,500,000 -13.2%

Disney

14,500,000

48,000,000 -60%

Household Intl

5,000,000

41,300,000 -50%

GE

6,900,000

43,000,000 -39%

Directors’ Fees Board Member Compensation Fees Insurance Travel Stocks Retirement contributions

Board Fees Bear Sterns Investments PM Industries Pepsico American Express Coca-cola Georgia Pacific Microsoft 42,000

$150,000 $ 85,000 $ 78,000 $ 67,500 $ 61,000 $ 53,000 $

Perquisites Memberships Company car/limo Corporate Travel Corporate Jet/Yacht Clothing Allowance Free Parking Dining Privileges No/low Cost Loans Memberships: Gym, Golf & Social Clubs Entertainment Expenses Season Tickets to Sporting Events Financial and Legal Counseling Education/seminar Funding Funding for Family Education

Perquisites (Perks) continued

Kidnapping & Ransom Insurance & Services Housing Allowance or Accommodations Living Accommodations Away from Home Company Credit Cards Special Relocation Allowances Spouse/family Travel Golden Parachute/Severance Package

Golden Parachute In effect if acquisition or forced to leave Typical severance package: 2-3 x annual salary and bonus accelerated vesting of options Example: Mattel Corporation Package=5 years salary and bonuses = $26.4 mil Purchase office furniture & equipment for $1.00 Forgiveness of $4.2mil personal loan Forgiveness of $3mil home loan Cash of $3.31mil to cover taxes on loans Received $47mil, plus options

Executive Pay Decisions

Daily Dilbert, 29 October, 2005

HRM Crises of Finances: HRM Implications Bankruptcies Acquisitions and Mergers Scandals with officers/managers Private & Corporate Lawsuits Government investigations and charges Arrests and convictions Tragedies workplace accidents & illnesses travel accidents work-related accidents EXAMPLE: Air France – Concorde/SST crash Union Carbide – Bophol, India, chemical spill Merrill Lynch – 9/11 Twin Towers crashes

Evaluation of Incentives Attention getter? Understandable? Establishes culture through values? Improves communication? Pays when it should? (achievements versus failures)

Improves individual performance? Improves organizational performance?