Strategic Reward System

Introduction

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Strategic Reward System Introduction



Course Description:
This course focuses on the design and management of strategic reward systems. Students will be able to assess the effectiveness and equality of reward systems within the organization as well as design an effective and fair SRS.

 

Time: Fridays and Saturdays every other week from 2:00 p.m. until 6:00
p.m. Alexandria

Instructor: Dr. Mohamed Taher

Phone: 01223163654 Email: taherhamed@hotmail.com

Course Materials:
(1)Class PowerPoint presentations (Primary material) (2)Textbook "Compensation", by Milkovich and Newman (9th edition),

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Strategic Reward Systems Pay for Performance

Reward Systems in most cases should be consistent with other HR systems. The Reward System is a key driver of:
  

HR Strategy Business Strategy Organization Culture

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Strategic Reward Systems Need for Consistency with Other HR Systems

SkillSkill-based pay

Training
Overtime pay rules in contract Labor Relations

Culture
Merit pay reinforces performance culture

Rewards

Performance Management Employment Merit Pay

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SignSign-on Bonus

Strategic Reward System Introduction

Compensation is such a broad and compelling topic that several books could be devoted to it. The focus of this course will be on the design and management of strategic reward systems. Chapter 1 will aid in understanding how and why pay systems work, our pay model, which emphasizes the key strategic objectives, policies, and techniques, also provides the structure for much of the course. The pay model plays a central role in formulating and implementing an organizations pay strategy. The pay model identifies four basic policy decisions that are the core of the pay strategy.


Chapter 2 discusses how to formulate and implement a compensation strategy. We analyze what it means to be strategic about how people are paid and how compensation can help achieve and sustain an organizations competitive advantage. 5
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Strategic Reward System Introduction



After we discuss strategy, the next sections of the course will examine each of the four basic policy decisions in detail. The first, internal alignment (Chapters 3 through 6), examines pay relationships within a single organization. The next section (Chapters 7 and 8) examines external competitiveness competitivenessthe pay relationships among competing organizations organizationsand analyzes the influence of market-driven marketforces. Once the compensation rates and structures are established, other issues emerge. How much should we pay each individual employee? How much and how often should a persons pay be increased, and on what basisexperience, seniority, or basis performance? Should pay increases be contingent on the organizations and/or the employees performance? How should the organization share its success (or failure) with employees? Stock awards, profit sharing, bonuses, merit pay?

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Strategic Reward System Introduction



These are examples of employee contributions, the third building block in the model (Chapters 9 and 10). After that, we cover employee services and 10). benefits (Chapter 11). The role of governments in compensation is examined in Chapter 12. We conclude with managing the compensation system 12. (Chapter 13), which includes planning, budgeting, evaluating, and communicating. More detail on global compensation systems will also be provided Even though the course is divided into sections that reflect the pay model, that does not mean that pay policies and decisions are discrete. All policy decisions are interrelated. Together, they influence employee behaviors and organization performance, and can be a source of competitive advantage. The intention throughout the course is to examine alternative approaches. The main idea is to believe and act based on that there rarely is a single correct approach; rather, alternative approaches exist or can be designed. The one most likely to be effective depends on the circumstances. We need to be as an employee, a manager, or an interested member of society able to assess effectiveness and fairness of pay systems or as a professional to design an effective and a fair one.
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Milkovich/Newman: Compensation, Ninth Edition

Chapter 1

The Pay Model

McGrawMcGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-

Contrasting Perspectives of Compensation

Societys Views Stockholders Views

Employees Views

Managers Views
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Contrasting Perspectives of Compensation

   

1. Compensation is used by society as a measure of justice, a cause of increased taxes and price increases. 2.Stockholders are concerned with executive pay 2.Stockholders relative to company performance. 3.Managers see compensation as a major expense and a 3.Managers means to influence employee behavior. 4.Employees see compensation as a return in an 4.Employees exchange with their employer, an entitlement, or a reward. In other countries, compensation relates to being taken care of.

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Compensation: Definition


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

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Compensation: Definition (cont.)



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

 ~46m 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 (Ex. 1.1) Belief that pay increases lead to price increases

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Exhibit 1.1 update: Hourly Compensation Costs for Production Workers (2007 data)
United States Brazil Canada Mexico Australia Hong Kong Japan South Korea Singapore Sri Lanka Taiwan $24.59 5.96 28.91 2.92 30.17 5.78 19.75 16.02 ($8.23 in 2000) 8.35 0.61* (comparable to China?) 6.58 Ireland Italy Netherlands Norway Poland Portugal Spain Sweden Switzerland United Kingdom Source: U.S. Department of Labor, Bureau of Labor Statistics, January 2009. Denmark Finland France Germany Hungary Austria Belgium Czech Republic 35.33 35.45 8.20 ($2.83 in 2000) 42.29 34.18 28.57 37.66 7.91 ($2.79 in 2000) 29.04 28.23 34.07 48.56 6.17 8.27 20.98 36.03 32.88 29.73

Hourly compensation costs include (1) hourly direct pay and (2) employer social insurance expenditures and other labor 1-13 taxes.

Compensation: Definition (cont.)



Stockholders
Linking executive pay to company performance theoretically increases stockholders' returns (see Ex. 1.2)

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
 Grocery store clerk pay (2005):
Industry average: $12.28/hr Costco: $16 Whole Foods $12.50 Sams Club $12 Wal-Mart Wal$9.68  Labor costs as % of total costs for grocery stores historically 15-18%; 15today norm is 9-12%; warehouse stores 4-6%; Whole Foods 25% 941-14

Labor Costs as a Percentage of Revenues, Airline Industry

(8e)

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What Is Compensation?

Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship
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Total Returns for Work

The two major components of total returns for work are total compensation and relational returns. Total compensation is composed of cash compensation (base pay and incentives) and benefits. Relational returns include psychological aspects of work such as recognition and status, challenging work, and learning opportunities.

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Exhibit 1.4: Total Returns for Work

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Forms Of Pay
 

Relational returns (Intangible)

Psychological in nature

Total compensation
Cash Compensation/ transactional
 Base wages
Difference between wage and salary: Salaries usually refers to a set amount of money that is paid to someone regardless of the amount of hours he\she actually works. Wage : a pay rate per he\ hour, multiplied by the number of hours worked.

 Merit pay/cost-of-living adjustments pay/cost-of Merit increases given in recognition of past work behavior adjustments to base Cost-of-living adjustments same increases to everyone, Cost-ofregardless of performance

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Forms Of Pay (cont.)

Cash Compensation/ transactional (cont.)
 Incentives/ Variable pay tie pay increases directly to performance
Does not increase base wage; must be re-earned each pay period re Potential size generally known beforehand Long-term (stock options), and short-term Longshort-

Benefits
 Income protection (some are legally required)  Work/life balance (includes pay for time not worked)  Allowances (e.g., expatriates)
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Exhibit 1.5: THE PAY MODEL

POLICIES TECHNIQUES OBJECTIVES

ALIGNMENT

Work Descriptions Evaluation/ INTERNAL analysis certification STRUCTURE

COMPETITIVENESS

Market Surveys definitions

Policy lines

PAY STRUCTURE

EFFICIENCY Performance Quality Customers Stockholders Costs FAIRNESS

CONTRIBUTORS

Seniority based

Performance based

Merit guidelines

INCENTIVE PROGRAMS

COMPLIANCE
MANAGEMENT
Costs Communication Change EVALUATION

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THE PAY MODEL

The four strategic policies in the pay model are internal alignment, external competitiveness, employee contributions, and administration. The internal structure techniques associated with alignment are work analysis, descriptions, and evaluation/certification. The pay structure techniques associated with competitiveness are market definitions, surveys, and pay policy lines. The incentive program techniques associated with contributions are seniority based, performance-based, and merit guidelines. The evaluation techniques associated with administration are planning, budgeting, and communication.
.

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THE PAY MODEL

The strategic objectives of compensation are (1) efficiency in performance and quality, satisfying customers and stockholders, and controlling costs, (2) fairness, and (3) compliance with laws and regulations.

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Exhibit 1.6: Pay Objectives at Medtronic and Whole Foods

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Four Policy Choices

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

External competitiveness

Focus - Compensation relationships external to the organization: comparison with competitors Pay is market driven
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Four Policy Choices (cont.)



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

Employee contributions
Focus - Relative emphasis placed on employee performance
 Performance based pay affects fairness

Management
Focus - Policies ensuring the right people get the right pay for achieving the right objectives in the right way

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