Once the plan is developed, communicating the plan with your employees is also essential. The US military is perhaps the best known for this type of classification system. The goals of compensation are first to attract people to work for your organization. Before we discuss specifics, you should be aware of courses and certifications that can be earned through the WorldatWork Society of Certified Professionals, specifically related to compensation (other certifications will be discussed in their respective chapters). Currency valuation fluctuations could cause challenges in this regard.Bobby Watson, “Global Pay Systems, Compensation in Support of a Multinational Strategy,” Compensation Benefits Review 37, no. In addition, where possible, asking for participation from your employees through the use of pay attitude surveys, for example, can create a transparent compensation process, resulting in higher performing employees. The expectancy theory says that employees will put in as much work as they expect to receive. Choosing a Payroll Service: A Buying Guide for... Find out what qualities and costs you should look for when... Do you know all your labor laws? As an extra incentive, many organizations offer to match what the employee puts into the plan, usually based on a percentage. According to Flippo ‘policy’ is a man-made rule of pre-determined course of action that is established to guide the performance of work toward the organisation objectives. Figure 6.4 "Sample Pay Scale for General Federal Jobs" shows an example. which does not take into account specific commissions on trades, which can greatly increase total compensation. Compensation is also used to motivate employees to work at their peak performance and improve morale. A compensation package is an important part of the overall strategic HRM plan, since much of the company budget is for employee compensation. Review the incentives they offer and be prepared to discuss your findings in class. This can incubate a stagnant environment. While some organizations still offer pension plans, such plans are far more rare. Both are paid as a percentage of income by the employee and employer. With this benefit, employees receive unemployment benefits and/or job training when they are laid off or let go from a current job. HR managers can also develop pay systems based on skills and competency and utilize a broadbanding approach, which is similar to pay grades. Lynn Cameron, managing partner of TechEdge, discusses compensation strategies. The expectancy theoryThe expectancy theory says that employees will put in as much work as they expect to receive reward for. How to develop and implement a compensation plan, Ensuring equity, fairness, legality and competitiveness, Patrick Proctor, SHRM-SCP, is certified as a senior professional in human resources. Companies need a thoughtful compensation program to remain competitive within their industry and to attract and retain top talent. A percentage is paid on behalf of the employee in case he or she is hurt on the job. Requirements for Keeping Paycheck Records. Be able to define and discuss the types of pay systems and factors determining the type of pay system used. An example of a worker with this type of compensation is a real estate broker: They sell a house and will be compensated off of that sale. First, the size of the organization and the expected expansion of the organization will be a factor. The right way to launch a compensation program has a lot to do with doing your research first and then not skipping or missing any critical steps. Additionally, managing a workforce without a predetermined budget is insanity in action. It helps keep your business competitive in the marketplace in terms of base pay, incentives, total compensation and benefits opportunities. According to a survey performed by Salary.com, the average number of paid vacation days in the United States is nine days for one year of service, fourteen days for five years of service, and seventeen days for ten years of service to the organization.Jessica Yang, “Paid Time Off from Work Survey,” Salary.com, accessed September 15, 2011, http://www.salary.com/Articles/ArticleDetail.asp?part=par088. For example, in June 2011, the US unemployment rate was 9.2 percent, which is quite high for the country. Usually, employees earn more days as they stay with the company. When an employee is given the right to purchase company stock at a particular rate in time. For example, in 2010, the US military spent 22 percent of its budget on personnel salaries.US Department of Defense, Financial Summary Tables, May 2009, accessed February 11, 2011, http://comptroller.defense.gov/defbudget/fy2010/fy2010_summary_tables_whole.pdf. Before the package is developed for employees, it’s key to understand the role compensation plays in the bottom line of the organization. Be sure to take the time necessary to develop a complete program and communicate the plan effectively to everyone on your team. A company could decide its pay philosophy is a market minus philosophy, which pays less than the market rate. Here are... IVR systems offer an affordable way to streamline the... What You Need to Know About Predictive Scheduling... Predictive scheduling offers hourly workers more predictability in... Offering a 401(k) Plan? Why or why not? While a pension plan can motivate employee loyalty, 401(k) plans are far more popular. Questions such as what is a fair wage from the employee’s perspective and how much can be paid but still retain financial health are important starting points. Is your compensation good enough to retain employees? Bonuses are used to motivate employees or increase their overall performance. If there is no set pay scale, how can you ensure individual salary offers are fair and nondiscriminatory? This model can work well if market pressures or labor supply-and-demand pressures greatly impact your particular business. But also, consideration of your workforce needs is crucial to any successful compensation plan. Of course, any person creating these rankings should be familiar with the duties of all the jobs. For example, in 2011, US automaker General Motors gave one of its highest profit-sharing payouts ever. However, many pension plans have gone bankrupt, and the United States has an agency to protect people from losing pension benefits. There are many other aspects to the creation of a good compensation package, including not only pay but incentive pay and other types of compensation. With an appropriate pay system, companies find that customer service is better because employees are happier. can also occur, in which individual jobs are compared with every other job, based on a ranking system, and an overall score is given for each job, determining the highest-valued job to the lowest-valued job. In addition, disability and life insurance benefits are offered. Is the overall program equitable (i.e., fair to all employees)? The just-world fallacy or just-world hypothesis is the cognitive bias that a person's actions are inherently inclined to bring morally fair and fitting consequences to that person; thus, it is the assumption that all noble actions are eventually rewarded and all evil actions eventually punished. Inflation and cost of living in a given area can also determine compensation in a given market. For large companies, this may work fine, but smaller, more agile organizations may use other methods to determine pay structure. The organization that uses a market plus philosophy will determine the going rate and add a percentage to that rate, such as 5 percent. Beyond direct compensation, there is indirect compensation, such as benefits and equity-based programs, which is just as important a part of your plan. Startup Costs: How Much Cash Will You Need? For example, if an employee works forty hours a week with medical insurance, but the schedule is reduced to twenty hours, no longer qualifying him or her for benefits, COBRA would be an option. A job evaluation system that determines the value of a job by calculating the total points assigned to compensable factors. Is your compensation philosophy keeping in line with labor market changes, industry changes, and organizational changes? Some of their compensable factors include the following: In this point-factor system, autonomy ranks the highest and is given a weight of twenty-nine, while knowledge is given a rate of twenty, for example. Within these factors are specific statements such as “procedural proficiency.” Each of these statements is given a point value in each category of know-how, problem solving, and accountability. which is not tied to merit but is given to employees as an annual inflationary increase. When the company started with fewer than fifteen employees, a management fit model was used. The point values for each of the statements are added for each job description, providing a quantitative basis for job evaluation and eventually, compensation. One such recent change is the movement of employee pension plans to 401(k) plans. A theory that says people will evaluate their own compensation by comparing their compensation to others’ compensation. Pay systems can also be used to reward individual or team performance and encourage employees to work at their own peak performance. In HR, this is an important theory to understand, because even if someone is being paid fairly, they will always compare their own pay to that of others in the organization. In this system, one hundred points are given for knowledge for a bachelor’s degree and two to three years of experience, and eighty points are given if an employee has an associate’s degree or high school diploma and two to three years of experience. Fifty-eight percent of WorldatWork membersWorldatWork, “Spot Bonus Survey,” July 2000, accessed July 23, 2011, http://www.worldatwork.org/waw/research/html/spotbonus-home.html. A paired comparisonIndividual jobs are compared with every other job, based on a ranking system, and an overall score is given for each job, determining the highest valued job for pay decisions. Instead of guessing what employees would like to see in their compensation packages, you decide to develop a compensation survey to assess what benefits are most important to your employees. A nonexempt employee is usually an hourly employee. They include commissions, bonuses, profit sharing, stock options, team pay, and merit pay. Thus, there is no guarantee of a routine number of hours worked per pay period. Of course, these factors can create morale issues, the exact thing we want to avoid when compensating employees. requires companies to allow employees to extend their group coverage for up to thirty-six months. Surveying the employees allows you, as the HR professional, to better understand the needs of your specific workforce. Maximum CNC performance, along with a high degree of flexibility and openness represent the basis for almost every machine concept. One major internal factor is the compensation strategy the company has decided to use. For 401(k) plans, a certain time period before the employer will match the employee funds contributed. Brainstorm a list and be prepared to present to the rest of the class. An advantage of this method is its quantitative nature, but a disadvantage is the expense of performing an elaborate job evaluation. However, employees would be ineligible to receive these benefits if they quit their job, as it must be involuntary. A compensation policy that determines the going rate and adds a percentage to the market rate, so pay is higher than the market. Similar to pay grade levels, but this structure offers more flexibility in that there are fewer pay grades, called bands, which allows for greater flexibility. A type of incentive that gives employees stock (ownership) in the organization. A proprietary job evaluation method that focuses on three factors called know-how, problem solving, and accountability; this method is most applicable to management positions. Another example of an organization with a market minus philosophy is Southwest Airlines. The process of determining the relative worth of jobs to determine pay structure. The OASDHI tax in 2011 is 4.2 percent on earnings for employees, up to $106,800 and 6.2 percent for the employer up to the same limits. If the tips and direct wage do not meet the minimum wage, the employer must pay the difference. However, since the system is rigid, it may not be appropriate for some organizations in hiring the best people. Pay is the hourly, weekly, or monthly salary an employee earns. According to John Mackey, Whole Foods CEO, paying on a market minus philosophy makes good business sense: “Fewer things harm an organization’s morale more than great disparities in compensation. How to Get a Bank Loan for Your Small Business, How to Conduct a Market Analysis for Your Business, Market Research Guide for Business Owners, Guide to Developing a Training Program for New Employees. Performance appraisals are discussed further in Chapter 10 "Managing Employee Performance". provides federal employees injured in the performance of their jobs compensation benefits, such as disability. Although you can use any of the four types to compensate employees for their work, employers typically choose one and stick with it. This includes communication before implementing the plan as well as communication about the plan. The advantage to incentive pay is that company goals can be linked directly to employee goals, resulting in higher pay for the employee and goal achievement by the organization. These can range from leadership ability to specific responsibilities and skills required for the job. This covers both retirement income as well as medical benefits, called Medicare, once the employee reaches retirement age. A proper compensation plan can also increase loyalty in the organization. How you communicate your pay system is extremely important to enhance the motivation that can be created by fair and equitable wage. The first step in development of a plan is to ask the employees what they care about. Of the benefits we discussed, which ones are required by law? In the United States, the number of days off provided is a major budget item worth considering. As you dig deeper, you see this is a problem throughout the sales team. Each of these attributes represents a critical value to any compensation program, as it's the foundation of the employer's relationship with each of its employees. Some employees would rather receive more pay with fewer benefits or better benefits with fewer days off. Discuss reasons for the pay difference between the jobs you choose. This video provides tips on negotiating salary from the perspective of an employee. Other companies may decide to utilize a market plus philosophy, which pays higher than the average. Figure 6.2 The Process for Implementing Compensation Strategy. Then job descriptions are reviewed and assigned a set of statements that most accurately reflect the job. For women of color, the gap is wider at 69 cents for African-American women and 59 cents for Latina women.National Organization for Women, “Facts about Pay Equity,” accessed February 15, 2011, http://www.now.org/issues/economic/factsheet.html. Some organizations offer cost of living annual increases (COLAs),A pay increase not tied to merit but given to employees as an annual inflationary increase. Write down each of these rates and be prepared to share in class. The average bonus in 2010 was $128,530,Aaron Smith, “The 2010 Wall Street Bonus,” CNN Money, February 24, 2011, accessed July 23, 2011, http://money.cnn.com/2011/02/24/news/economy/wall_street_bonus/index.htm. Most insurance plans also allow for wellness visits and other alternative care (e.g., massage and acupuncture) within the plans. Imagine Brady is eating lunch with his friends when he observes a woman using sign language to converse with … When choosing the best type of plan for your organization, the following aspects should be considered: First, the cost is usually a major consideration for the HR professional. Sixty-two percent of organizations have a written, documented compensation policy.Dow Scott, “Survey of Compensation Policies and Practices,” WorldatWork, accessed July 23, 2011, http://www.worldatwork.org/waw/research/html/comppol03.html. WorldatWork offers several certifications in the area of compensation: These certifications involve taking a multiple-choice exam online or at one of the WorldatWork testing locations. There is a bias favoring men as the “breadwinners,” and therefore they are paid more. Medical insurance usually includes hospital expenses, surgical expenses, and routine health-care visits. First, the compensation package should be positive enough to attract the best people for the job. A strategically designed compensation philosophy that is kept current, relevant and in accordance with employment laws, supports several important components of your business: The Society for Human Resource Management (SHRM) further outlines the purpose and value of maintaining a dynamic and strategic compensation program: Key takeaway: A compensation program constitutes a company's total method of renumeration, including payment, benefits and any other form of compensation for services rendered. Next, consider the quality of care your employees will receive and, finally, how simple will the plan be for your HR department to administer. Indiana University, “Edward L. Thorndike,” accessed February 14, 2011, Aaron Smith, “The 2010 Wall Street Bonus,”, Bobby Watson, “Global Pay Systems, Compensation in Support of a Multinational Strategy,”. 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