COMPENSATION AND REWARDS Definition: Compensation-

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COMPENSATION AND REWARDSDefinition:The sum total of all forms of payments or rewards provided to employees for performing tasks to achieveorganizational objectives.Compensation- Nature and scopeThe complex process includes decisions regarding variable pay and benefits It suggests an exchange relationship between the employee and the organizationIt involves design, development, implementation, communication and the evaluation of rewardstrategy and process of the organizationCompensation Objectives1.2.3.4.5.6.7.To reward employees’ past performance fairly, in line with efforts, skills and competenciesTo attract and retain competitive high performing employeesTo motivate the high performing employees and reinforce desirable employee behaviourTo remain competitive in the labor marketTo align employees’ future performance with organizational goalsTo communicate the employees their worth to the organizationTo provide employee social statusCompensation Policy Issues Pay for performancePay for senioritySalary increases and promotionsOvertime and shift payProbationary payPaid and unpaid leavesPaid holidaysSalary compression (A salary inequity problem, generally caused by inflation, resulting in longerterm employees in a position earning less than workers entering the firm today)Geographic costs of living differencesmsmemon@engineer.comPage 1

Compensation Administration Processmsmemon@engineer.comPage 2

Classification of rewardsBase pay The direct financial compensation an individual receives based on the time workedTwo bases of calculationo Hourly/wage: payment for the number of hours workedo Salaried : receive consistent payments at the end of specific period regardless of number ofhours workedmsmemon@engineer.comPage 3

Variable PayAny plan that ties pay to productivity or profitability i.e. the standard by which managers tiecompensation to employee effort and performance.it is linked to individual, group, or organizational performance and not to time workedIncentive Pay Programs– Establish a performance “threshold” to qualify for incentive payments.– Emphasize a shared focus on organizational objectives.– Create shared commitment in that every individual contributes to organizational performance andsuccess. Frederick Taylor– Popularized scientific management and the use of financial incentives in the late 1800s. Systematic soldiering: the tendency of employees to work at the slowest pace possible and toproduce at the minimum acceptable level.TYPES OF INCENTIVES1. Individual Incentives2. Group/team Incentives3. Organizational Incentives1. Individual Incentive Plans Piecework Plans– The worker is paid a sum (called a piece rate) for each unit he or she produces. Straight piecework:A fixed sum is paid for each unit the worker produces under an established piece rate standard.An incentive may be paid for exceeding the piece rate standard. Standard hour plan:– An incentive plan that sets pay rates based on the completion of a job in a predetermined“standard time.”– If employees finish the work in less than the expected time, their pay is still based on thestandard time or the job multiplied by their hourly rate.msmemon@engineer.comPage 4

Advantage and disadvantages of pieceworkEasily understandable, equitable, and powerful incentivesEmployee resistance to changes in standards or work processes affecting outputQuality problems caused by an overriding output focusPossibility of violating minimum wage standardsEmployee dissatisfaction when incentives either cannot be earned due to external factors or arewithdrawn due to a lack of need for outputMerit pay– A permanent cumulative salary increase the firm awards to an individual employee based on his or herindividual performance.Bonuses Bonus– Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, orother performance criteria. Spot bonus– Unplanned bonus given for employee effort unrelated to an established performance measure.2. Group Incentive PlansTeam Incentive Plans– Compensation plans where all team members receive an incentive bonus payment when production orservice standards are met or exceeded. Establishing Team Incentive Payments– Set performance measures upon which incentive payments are based– Determine the size of the incentive bonus.– Create a payout formula and fully explain to employees how payouts will be distributed.Gain sharing PlansPrograms under which both employees and the organization share the financial gains according to apredetermined formula that reflects improved productivity and profitability. Scanlon Rucker Improsharemsmemon@engineer.comPage 5

The Pros and Cons of Team Incentive Plans Team incentives support group planning and problem solving, thereby building a team culture.The contributions of individual employees depend on group cooperation.Unlike incentive plans based solely on output, team incentives can broaden the scope of thecontribution that employees are motivated to make.Team bonuses tend to reduce employee jealousies and complaints over “tight” or “loose” individualstandards.Team incentives encourage cross-training and the acquiring of new interpersonal competencies.Individual team members may perceive that “their” efforts contribute little to team success or to theattainment of the incentive bonus.Intergroup social problems—pressure to limit performance (for example, team members are afraidone individual may make the others look bad) and the “free-ride” effect (one individual puts in lesseffort than others but shares equally in team rewards)—may arise.Complex payout formulas can be difficult for team members to understand.3. Organizational Incentive PlansProfit Sharing– Any procedure by which an employer pays, or makes available to all regular employees, in addition totheir base pay, current or deferred sums based upon the profits of the enterprise.– Paid once in a year or deferred sums until retirementChallenges: Agreement over division of profits between company and employees. Possibility of no payout due to financial condition of company.msmemon@engineer.comPage 6

Stock Options– Granting employees the right to purchase a specific number of shares of the company’s stock at aguaranteed price (the option price) during a designated time period.– The value of an option is subject to stock market conditions at the time that option is exercised.WHY INCENTIVE PLANS FAILPerformance pay can’t replace good management.You get what you pay for.“Pay is not a motivator.”Rewards punish.Rewards rupture relationships.Rewards can have unintended consequences.Rewards may undermine responsiveness.Rewards undermine intrinsic motivation.Indirect Financial Compensation – BenefitsAre most effective as motivators when the award is combined with a meaningful employee recognitionprogram. Intrinsic motivators are worthwhile as financial package Organization reward high performing employees Psychological rewards that employees receive in recognition of their skills and contributionsTypes of Awards– Often used to recognize productivity gains, special contributions or achievements, and service to theorganization.– Employees feel appreciated when employers tie awards to performance and deliver awards in a timely,sincere and specific way. Recognition awards– Recognition has a positive impact on performance, either alone or in conjunction with financialrewards. Combining financial rewards with nonfinancial ones produced performance improvement in servicefirms almost twice the effect of using each reward alone.– Day-to-day recognition from supervisors, peers, and team members is important. Service awards-Award for the length of service and exactly not on performancemsmemon@engineer.comPage 7

Needs and Motivation Abraham Maslow’s Hierarchy of Needs– Five increasingly higher-level needs:1.2.3.4.5.physiological (food, water, sex)security (a safe environment)social (relationships with others)self-esteem (a sense of personal worth)self-actualization (becoming the desired self)– Lower level needs must be satisfied before higher level needs can be addressed or become of interest tothe individual. Herzberg’s Hygiene–Motivator theory– Hygienes (extrinsic job factors) Inadequate working conditions, salary, and incentive pay can cause dissatisfaction and preventsatisfaction.– Motivators (intrinsic job factors) Job enrichment (challenging job, feedback and recognition) addresses higher-level(achievement, self-actualization) needs.– The best way to motivate someone is to organize the job so that doing it helps satisfy the person’shigher-level needs.Equity and motivation of employees Pay Equity (also Distributive Fairness)– An employee’s perception that compensation received is equal to the value of the work performed.– A motivation theory that explains how people respond to situations in which they feel they havereceived less (or more) than they deserve. Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratiowith the value of the ratio for other individuals in similar jobs.msmemon@engineer.comPage 8

The greater the perceived disparity between my input/output ratio and the comparison person’sinput/output ratio, the greater the motivation to reduce the inequity. Vroom’s Expectancy Theory– A person’s motivation to exert some level of effort is a function of three things: Expectancy: that effort will lead to performance. Instrumentality: the connection between performance and the appropriate reward. Valence: the value the person places on the reward.Motivation E x I x V If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward. Employee confidence building and training, accurate appraisals, and knowledge of workers’ desiredrewards can increase employee motivation.msmemon@engineer.comPage 9

Determinants of compensationINTERNAL DETERMINANTS Employer’s Compensation Strategy– Setting organization compensation policy to lead, lag, or match competitors’ pay. Worth of a Job– Establishing the internal wage relationship among jobs and skill levels. Employee’s Relative Worth– Rewarding individual employee performance Employer’s Ability-to-Pay– Having the resources and profits to pay employees.EXTERNAL DETERMINANTS Labor Market Conditions– Availability and quality of potential employees is affected by economic conditions, governmentregulations and policies, and the presence of unions. Area Wage Rates– A firm’s formal wage structure of rates is influenced by those being paid by other area employers forcomparable jobs.msmemon@engineer.comPage 10

Cost of Living– Local housing and environmental conditions can cause wide variations in the cost of living foremployees.– Inflation can require that compensation rates be adjusted upward periodically to help employeesmaintain their purchasing power. Collective BargainingThe term extends to all negotiations that take place between an employer, group of employers or one ormore employers’ organizations on the one hand, and one or more workers’ organizations on the other to(a) Determine the working conditions and terms of employment and / or(b) Regulate relations between employer and employee/workers and / or(c)Regulate relations between employer organization or employee/workers organizationmsmemon@engineer.comPage 11

2. Group Incentive Plans Team Incentive Plans – Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded. Establishing Team Incentive Payments – Set performance measures upon which incentive payments are based – Determine the size of the incentive bonus.

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