The Pay Model

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The Pay Model by Mind Map: The Pay Model

1. Why We Should Care About Compensation

1.1. How people are paid affects their behaviour & therefore organization's success

1.2. Compensation = major total cost of running business

1.3. Well designed comp system helps sustain competitive advantage

2. What Is Compensation

2.1. Society

2.1.1. Pay as a measure of justice

2.1.1.1. GENDER WAGE GAP - Difference between wages earned by men and wages earned by women - Gendered concentration in different fields, men make more $

2.1.1.2. Differences in compensation b/w countries

2.1.2. Pay as the cause of price increases

2.2. Shareholders

2.2.1. Equity for the operation of a business

2.2.2. Company's success = their success

2.2.3. Believe stock as pay creates sense of ownership & improved performance

2.2.3.1. Others argue: too much ownership dilutes stockholder wealth and may not be incentive enough to create the behavior intended

2.2.4. Interest in executive comp

2.2.4.1. Supposed to be tied to performance (i.e. paying executives based on company performance), there is debate on this

2.3. Managers

2.3.1. Compensation directly influences their success in 2 ways

2.3.1.1. 1. It is a major expense

2.3.1.1.1. Competitive pressures (global/local) force managers to consider the affordability of their compensation decisions

2.3.1.1.2. Labour costs often account for more than 50% of total costs

2.3.1.1.3. Compensation costs are even higher for certain industries

2.3.1.1.4. Small grocery stores and family run businesses often have labour costs between 15-19% but are driven away by big-box stores such as Walmart that can offer the same product at a lower price AND have lower labour costs

2.3.1.2. 2. Managers have to influence employee behaviours to improve organizational performance

2.3.1.2.1. The amount and way that people are paid affects

2.3.2. Pay as a major expense that has to be minimized or optimized

2.3.3. Pay's role in improving productivity, effectiveness & organizational behaviour

2.4. Employees

2.4.1. See pay as

2.4.1.1. The return in an exchange between their employer and themselves

2.4.1.1.1. Contribute their time and energy to a workplace:

2.4.1.1.2. Work performed

2.4.1.1.3. Invest in education and training

2.4.1.2. An entitlement for being an employee of the company

2.4.1.3. A reward for a job well done

2.5. Global views

2.5.1. English definition: something that counterbalances, offsets, or makes up for something else

2.5.2. Chinese definition: symbols for logs and water, therefore compensation provides the necessities of life

2.5.2.1. More recently, compensation in China refers to how one is being treated: wages, benefits, training opportunities, etc.

2.5.3. Japanese definition: characters meaning giving something

2.5.3.1. More recently, compensation in Japan refers to “taking care of something” which runs in accordance to many Japanese company policies of providing the employee with family, housing and commuting allowances

2.5.4. Clear definition = essential

2.5.4.1. COMPENSATION - All forms of financial returns & tangible services an employee receives as part of an employment relationship

3. Forms of Pay

3.1. TOTAL REWARDS - All rewards received by employees, including cash compensation, benefits & relational returns

3.1.1. RELATIONAL RETURNS - Psychological returns employees believe they receive in he workplace

3.1.1.1. Learning opportunities

3.1.1.2. Recognition & status

3.1.1.3. Challenging work

3.1.2. Total compensation - More transactional & includes pay received directly as cash

3.1.2.1. Base pay

3.1.2.2. Merit increses

3.1.2.3. Incentives

3.1.2.4. Cost of living adjustments

3.1.3. Indirect total compensation benefits

3.1.3.1. Pensions

3.1.3.2. Health care

3.1.3.3. Life insurance

3.1.3.4. Programs to help work/life balance

3.1.4. Cash compensation: base pay

3.1.4.1. BASE PAY - The cash compensation an employee receives for work performed - Reflects value of work/skills & ignores individual differences

3.1.4.1.1. SALARY - Pay expressed at an annual or monthly rate

3.1.4.1.2. WAGE - Pay expressed at an hourly rate

3.1.5. Cash compensation: merit increased & cost-of-living adjustments

3.1.5.1. MERIT INCREASE - Increment to base pay in recognition of past work behavior

3.1.5.1.1. Assessment of past performance is made and the size of the increase is varied according to performance

3.1.5.2. COST-OF-LIVING ADJUSTMENT - Percentage increment to base pay provided to all employees regardless of performance

3.1.5.2.1. Same % increase to everyone to maintain pay levels in accordance with cost of living increases

3.1.6. Cash compensation: incentives

3.1.6.1. INCENTIVES (VARIABLE PAY) - One-time payments for meeting pre-established performance objectives in a future time period

3.1.6.1.1. Both incentives & merit increases influence behaviour but differ - Incentives = future behaviour - Merit = past behavior

3.1.6.1.2. Can be based on individual or team based, total business uni performance

3.1.6.1.3. Performance objective may be expense reduction, volume increases, customer satisfaction, revenue growth, return on investments, increases in total shareholder value, etc.

3.1.6.1.4. Do not have a permanent effect on labour costs because incentive pay is a one time payment

3.1.7. Long-Term incentives

3.1.7.1. Intended to focus employees on multi-layered results

3.1.7.2. Usually in the form of stock ownership or options to buy stock at specified, advantageous prices

3.1.7.2.1. The idea behind stock ownership is that employees with a financial stake in the organization will focus on long term financial objectives as return on investment, market share, and return on net assets

3.1.7.2.2. Extended to different people depending on organization

3.1.7.2.3. Their hope is that employees will behave as though they are owners

3.1.8. Benefits: insurance & pensions

3.1.8.1. Part of total compensation

3.1.8.2. Some insurance programs are required by law (CPP, EI, Workers Comp)

3.1.8.2.1. Some companies provide EEs with a pension plan in addition to CPP

3.1.8.2.2. 39.2% of Canadians benefit from an ER sponsored pension plan

3.1.8.3. Common benefits: health, dental, life insurance and pensions are common benefits

3.1.8.4. Protect EEs from financial risks inherent in every day life

3.1.8.5. Regarded as an increasingly important form of compensation

3.1.9. Benefits: work/life programs

3.1.9.1. Programs that help EEs better integrate their work and life responsibilities

3.1.9.2. Access to services to meet specific needs

3.1.9.2.1. Drug counseling, financial planning, child/elder care

3.1.9.3. Flexible work arrangements

3.1.9.3.1. Non-traditional schedules, non-paid time off, telecommunicating

3.1.9.4. Appeals to changing workforce demographics

3.1.10. Benefits: allowances

3.1.10.1. Compensation to provide for items that are in short supply

3.1.10.1.1. Japanese companies offer a rice allowance

3.1.10.1.2. In Europe, managers expect a car to be provided

3.1.10.1.3. In China, housing (dormitories and apartments) and transportation allowance

3.1.10.1.4. Nunavut offers a cost of living allowance to make up for the elevated prices in Nunavut in comparison to its southern provinces

3.1.10.2. Companies who do not offer this type of compensation must attract talented employees in other ways

3.1.11. Total earnings opportunities: present value of a stream of earnings

3.1.11.1. Compensation decisions have temporal effect

3.1.11.2. Present value perspective shifts choice from comparing today's initial offers to consideration of future bonuses, merit increases & promotions

3.1.11.2.1. Some employers claim to have rationale for their seemingly low starting salary offers

3.1.12. The organization as a network of returns created by different forms of pay

3.1.12.1. Challenge: design network that leads to success

3.1.12.1.1. More useful if bonuses, development opportunities, promotions all work together

4. A Pay Model

4.1. Strategic Compensation Objectives

4.1.1. Three objectives

4.1.1.1. 1. Efficiency

4.1.1.2. 3. Compliance

4.1.1.2.1. Conforming to various federal, provincial, and territorial compensation laws and regulations

4.1.1.3. 2. Fairness

4.1.1.3.1. Fundamental objective of pay systems

4.1.2. Objectives guide design of pay system

4.1.2.1. Different objectives guide the design of different pay systems

4.1.2.2. Serve as standards for judging the success of the pay system

4.2. Four policy choices

4.2.1. INTERNAL ALIGNMENT - Pay comparisons between jobs or skill levels inside a single organization

4.2.1.1. Jobs and skills are compared in terms of their relative contribution to the organizations objectives

4.2.1.2. Refers to the pay rates both for EEs doing equal work and for those doing dissimilar work

4.2.1.3. Internal alignment/pay relationships within an organization affects all 3 compensation objectives

4.2.1.4. Affect employees decision to stay with a company, to become more flexible by investing additional training, or to seek greater responsibility

4.2.1.5. Fairness is determined by EEs comparisons to their pay to the pay of others in the firm

4.2.1.6. Compliance is affected by the basis used to make internal comparisons

4.2.2. EXTERNAL COMPETITIVENESS - Comparison of compensation with that of competitors

4.2.2.1. Employers have several options

4.2.2.2. Base pay + team incentives to offer higher pay if team performance warrants (Whole Foods)

4.2.2.3. Set the pay to match competitors, but tie bonuses to performance and offer stocks based on performance (Medtronic)

4.2.2.4. Benefit programs with an emphasis of work/life balance

4.2.2.5. Must ensure pay is sufficient enough to attract and retain the EE

4.2.2.6. Must control labour costs so that they remain competitive in the global economy

4.2.3. Employee contributions - The relative emphasis placed on performance

4.2.3.1. Directly affects EEs attitudes and work behaviours

4.2.3.2. ERS with strong pay for performance policies but greater emphasis on incentive and merit pay

4.2.3.3. Others emphasize stock options

4.2.3.4. Emphasis of performance at unit, division and company-wide levels

4.2.3.5. Employees need to understand the basis for judging performance in order to conclude that their pay is fair

4.2.4. Management

4.2.4.1. In order for the pay model to achieve internal alignment, external competitiveness, and employee contributions it must be managed effectively

4.2.4.1.1. Ensures the right people get the right pay for achieving the right objectives in the right way

4.2.4.1.2. Strategic thinking-managing pay as part of the business

4.2.4.1.3. Impact of pay decisions is easily managed and understood

4.2.4.1.4. Trying to understand how to attract and retain the right talent and engaging it is the new goal

4.3. Pay techniques

4.3.1. The way you go about paying EEs