Strategic Compensation, 1st Edition Instructor Manual

Instructor Manual for Strategic Compensation: A Human Resources Management Approach by Joseph J. Martocchio Carol Ann Samhaber

CONTENTS Chapter 1: Strategic Compensation: A Component of Human Resources Management Systems 1 Chapter 2: Influences on Compensation Practice

16

Chapter 3: Traditional Bases for Pay: Seniority and Merit

32

Chapter 4: Incentive Pay

47

Chapter 5: Person-Focussed Pay

60

Chapter 6: Building Internally Consistent Compensation Systems

70

Chapter 7: Building Market-Competitive Compensation Systems

86

Chapter 8: Building Pay Structures That Recognize Employee Contributions

99

Chapter 9: Employer-Sponsored Benefits

116

Chapter 10: Employee Benefits

132

Chapter 11: Compensating Executives

152

Chapter 12: Compensating the Flexible Work Force: Contingent Employees and Flexible Work Schedules 170 Chapter 13: Compensating Expatriates

187

Chapter 14: International Compensation

203

Chapter 15: Challenges Facing Compensation Professionals

218

CHAPTER 1 Strategic Compensation: A Component of Human Resources Management Systems Preface Chapter one introduces students to the history and foundation of strategic compensation. In particular, this chapter explains compensation, strategic compensation, and the profession of compensation and role of the strategic business partner. This chapter continues to explore compensation in the broader organizational and human resources management contexts.

Learning Objectives 1-1. Define strategic compensation.

1-2. Summarize the role of compensation as a strategic business partner.

1-3. Explain strategic compensation decisions.

1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems.

1-5. Describe the fit of the compensation function in organizations.

1-6. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation professionals perform.

Outline/Table of Contents I. II. III. IV. V. VI. VII. VIII. IX. X.

Overview Defining Strategic Compensation The Transformation of HRM into A Strategic Business Partner Strategic Compensation Decisions Building Blocks and Structure of Strategic Compensation Systems Fitting the Compensation Function in an Organization’s Structure Stakeholders of the Compensation System Key Terms Discussion Questions and Suggested Answers End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

XI. XII.

Crunch the Numbers! Questions and Suggested Student Responses Simulation

Lecture Outline/Syllabus I.

Overview

A. Manpower planning 1. Predecessor to contemporary human resources management (HRM), focus was on effective deployment of employees, now called workforce planning or human resources planning 2. Goal was to achieve maximum productivity per employee B. Personnel management 1. Evolved due to government regulations concerning: a. Payroll taxes b. Minimum wage laws c. Equal pay for equal work and employment equity 2. Competitive advantage a. Since 1980’s recognition that employees can contribute to competitive advantage b. Competitive advantage describes an organization’s success when the organization acquires or develops capabilities that facilitate outperforming the competition c. HRM becomes a strategic function II.

Defining Strategic Compensation A. What Is Compensation?

1. Intrinsic and extrinsic rewards employees receive for performing their jobs a. Intrinsic compensation: reflects employees’ psychological mindsets that result from performing their jobs b. Extrinsic compensation: includes both monetary and nonmonetary rewards for: i. Obtaining certain job performance levels ii. Acquiring new skills and knowledge 2. Monetary compensation represents core compensation 3. Nonmonetary rewards (also known as employee benefits) include: a. Protection programs (e.g., medical insurance) b. Paid time off (e.g., vacations) c. Services (e.g., daycare assistance) B. What is Strategic Compensation?

1. Competitive business strategy refers to the planned use of organization resources 2. Human resources management strategies specify the use of multiple HRM practices to reinforce competitive business strategy.

3. Strategic compensation refers to the design and implementation of compensation systems to reinforce the objectives of both HRM strategies and competitive business strategies.

III. The Transformation of HRM into a Strategic Business Partner A. HRM and compensation professionals today need to think like the chief executive officer (CEO) to become a strategic partner in achieving organizational plans and results B. Compensation professionals can give the CEO and CFO an understanding of the roles employees play in the organizations to expand or shrink shareholder value C. How HRM functions serve as strategic business partner 1. Capital refers to factors that enable companies to generate income, raise stock prices, bring economic value, strong brand identity, and reputation 2. Human capital, refers to sets of collective skills, knowledge, and abilities that employees can apply to create value for their employers 3. Compensation professionals can leverage the value of human capital in a variety of ways such as a well-designed merit pay program to reinforce performance IV. Strategic Compensation Decisions Explained A. Environmental scanning 1. Used for strategy formulation 2. Main focus is discerning threats and opportunities B. Competitive business strategy choices 1. Lowest-cost strategy or cost leadership focuses on gaining completive advantage by being the lowest-cost producer of a product or service within the marketplace 2. Differentiation strategies develop products or services that are unique from those of their competitors C. Compensation decisions that support the firm’s strategy 1. Compensation professionals use two broad elements to support strategic initiatives a. Basic building blocks b. Structural design elements 2. Employee roles associated with competitive strategies a. Compensation professionals must design and implement compensation practices that elicit strategy-consistent employee roles

V. Building Blocks and Structure of Strategic Compensation Systems A. Building blocks: Core compensation and Employee Benefits 1. Core compensation a. Base pay includes hourly pay or wage or salary b. Is governed by the provincial and territorial employment standards

c. Is set according to compensable factors such as level of skill, effort, and responsibility required to perform the job and the severity of the working conditions i. Compensable factors are used to determine if jobs are equal within equal pay for equal work in the provincial and territorial employment standards and pay equity d. Is adjusted periodically for cost-of-living allowance (COLA) increases, differences in an employee’s job performance, and increases in an employee’s skill level or job knowledge e. Seniority pay systems reward employees with periodic additions to base pay according to employees’ length of service in performing their jobs i. Designed according to the human capital theory: employees will become more productive as they refine existing skills and acquire new skills and knowledge through length of service f. Merit pay is permanent base pay increases granted because of job performance g. Incentive pay or variable pay rewards employees for partially or completely attaining a pre-determined work objective h. Person-focused pay or competency-based pay rewards employee for specifically learning new curricula i. Pay-for-knowledge plans reward managerial, service, or professional workers for successfully learning specific curricula ii. Skill-based pay is used mostly for employees who perform physical work and increases as workers master new skills 2. Employee Benefits a. Represent nonmonetary rewards b. Discretionary benefits include three broad categories i. Protection programs that provide social insurance in the form of family benefits, promote health, and guard against income loss caused by factors such as unemployment, disability, or serious illness ii. Paid time off such as vacation iii. Services provide such enhancements as tuition reimbursement and day care assistance c. Government mandated benefits that attempt to promote worker safety and health and maintain family income streams i. Canada and Quebec Pension plans ii. Employment Insurance iii. Workers’ Compensation B. Fundamental Compensation System Design Elements 1. Internal consistency a. Internally consistent compensation systems clearly define the relative value of each job among all the jobs within an organization

b. Is based on the principle that employees working at jobs that require greater qualifications, more responsibilities, and/or more complex job duties should be paid more c. Is achieved using job analysis and job evaluation i. Job analysis is a systematic process for gathering, documenting, and analyzing information in order to describe jobs ii. Job evaluation is used to systematically recognize differences in the relative worth among a set of jobs 2. Market competitiveness a. Market-competitive pay systems are based on results of compensation surveys b. Compensation surveys collect and then analyze competitors compensation data 3. Recognizing Individual Contributions a. Pay structures recognize differences in employee contributions, such as credentials, job knowledge, and job performance b. Pay grades group jobs for pay policy application c. Pay ranges include minimum, maximum, and midpoint pay rates C. Alternative Pay Structure Configurations 1. Merit pay plans 2. Sales compensation plans 3. Broadband structures 4. Two-tier wage structures 5. Executive compensation 6. Contingent worker compensation 7. Expatriate compensation 8. Pay and benefits outside Canada VI. Fitting the Compensation Function in an Organization’s Structure A. How HRM Professionals Fit into the Corporate Hierarchy 1. Line employees are workers who are directly involved in producing a organization’s goods or services 2. Staff employees are workers whose job it is to support the line functionshuman resources management professionals are staff employees 3. HRM practices include: a. Recruitment b. Selection c. Performance appraisal d. Training e. Career development

f. Labour-management relations g. Employment termination h. Managing HRM within the context of legislation B. The Compensation Function 1. An executive is a top-level manager who reports directly to the corporation’s CEO or to the head of a major division 2. A generalist, who may be an executive, performs tasks in a variety of HRMrelated areas 3. A specialist may be an HRM executive, manager, or non-manager who is typically concerned with only one of the areas of compensation practice C. How the Compensation Function Fits into HRM Departments 1. Compensation, recruitment, and selection a. Companies can spark interest by communicating the positive features of the core compensation and employee benefits programs b. Companies may offer inducements such as signing bonuses 2. Compensation and performance appraisal a. Is key to effective merit pay programs b. Employees must perceive a strong relationship between attaining performance standards and receiving pay increases 3. Compensation and training a. Successful pay-for-knowledge plans depend upon an organization’s ability to develop and implement systematic training programs b. Companies implementing pay-for-knowledge plans typically increase the amount of classroom and on-the-job training 4. Compensation and career development a. Employees make lateral moves across an organization’s hierarchy or vertical moves up the hierarchy b. Employees compensation changes reflect career development 5. Compensation and labour-management relations a. Companies grant COLAs b. Companies establish base pay on seniority pay 6. Compensation and employment termination a. Employment terminations are either involuntary or voluntary b. Some companies offer severance pay for involuntary terminations c. Companies sponsor pension programs in the case of retirement d. Companies sometimes use early retirement programs to reduce workforce size 7. Compensation and legislation a. Laws were enacted to establish acceptable employment practices and protect employees’ rights

b. Are grouped on four main themes i. Income continuity, safety, and work hours ii. Pay discrimination iii. Accommodation of disabilities and family needs iv. Prevailing wage laws c. Relevant laws include: i.

Income continuity, safety, and work hours ii.

Pay discrimination iii. Medical care and the accommodation of disabilities and family needs iv.

Prevailing wage laws VII. Stakeholders of the Compensation System A. The success of HRM departments depends on how they will serve various stakeholders including: 1. Employees 2. Line managers 3. Executives 4. Unions 5. Provincial, territorial, and federal governments B. Employees 1. Must educate employees on training options and connections between training and their pay 2. Must determine which objectives of discretionary benefits are most important to their particular workforce C. Line managers 1. Use their knowledge of relevant laws to help them make sound compensation judgments 2. Advise them on establishing pay rates E. Executives 1. Develop and manage sound compensation systems F. Unions 1. Abide by their collective bargaining agreements G. Canadian Government 1. Keep updated and comply with all employment relevant legislation 2. Demonstrate that alleged discriminatory pay practices are not discriminatory End of the Chapter VIII. Key Terms

Competitive advantage: Describes an organization’s success when the organization acquires or develops capabilities that facilitate outperforming the competition Intrinsic compensation: Reflects employees’ psychological mind-sets that result from performing their jobs Extrinsic compensation: Includes both monetary and nonmonetary rewards Core compensation: Monetary compensation Employee benefits: Non-monetary compensation Competitive business strategy: The planned use of organization resources—financial capital, equipment capital, and human capital— to promote and sustain competitive advantage Human resources management strategies: Specify the use of multiple HRM practices to reinforce competitive business strategy Strategic compensation: Refers to the design and implementation of compensation systems to reinforce the objectives of both HRM strategies and competitive business strategies Capital: Refers to the factors that enable companies to generate income, higher organization stock prices, economic value, strong positive brand identity, and reputation Human capital: Refers to sets of collective skills, knowledge, and abilities that employees can apply to create value for their employers Environmental scanning is a task to decern external threats and opportunities and internal organizational strengths and weaknesses Cost leadership (lowest-cost strategy): Focuses on gaining competitive advantage by being the lowest-cost producer of a product or service within the marketplace, while selling the product or service at a price advantage relative to the industry average Differentiation strategies: Companies adopt this strategy when they develop products or services that are unique from those of their competitors Base pay: Recurring money employees receive for doing their jobs Hourly pay or wage: Base pay received for each hour worked Wage is one type of pay. Employees earn hourly pay for each hour worked Salary: Base pay received for performing a job, regardless of the actual number of hours worked Compensable factors: Skill, effort, responsibility, and working condition factors Cost-of-living adjustment (COLAs): Represent periodic base pay increases that are founded on changes in prices as recorded by the Consumer Price Index (CPI) Seniority pay: A system to reward employees with periodic additions to base pay according to employees’ length of service in performing their jobs Human capital theory: Employees’ knowledge and skills (human capital) add value Merit pay programs: Program that assumes that employees’ compensation over time should be determined, at least in part, by differences in job performance as judged by supervisors or managers

Incentive pay: Compensation (other than base wages or salaries) that fluctuates according to employees’ attainment of some standard based on a pre-established formula, individual or group goals, or organization earnings Variable pay: Compensation (other than base wages or salaries) that fluctuates according to employees’ attainment of some standard based on a pre-established formula, individual or group goals, or organization earnings Person-focused pay: Programs that reward employees for specifically learning new curricula Pay-for-knowledge: Programs that reward managerial, service, or professional workers for successfully learning specific curricula Skill-based pay: Programs that increase workers’ pay as they master new skills Government-mandated benefits are protection programs that attempt to promote worker safety and health, maintain family income streams, and assist families in crisis. The key governmentmandated by the following laws: the Social Security Act of 1935, various state workers’ compensation laws, the Family Medical Leave Act of 1993, and the Patient Protection and Affordable Care Act of 2010 Paid time off: Provides employees with pay for time when they are not working (e.g., vacation) Services: Provide such enhancements as tuition reimbursement and day care assistance to employees and their families Protection programs: Legally required benefits that attempt to promote worker safety and health, maintain the influx of family income, and assist families in crisis Internally consistent compensation systems: Clearly define the relative value of each job among all jobs within an organization Job analysis: A systematic process for gathering, documenting, and analyzing information in order to describe jobs Job evaluation: A process to recognize differences in the relative worth among a set of jobs and to establish pay differentials accordingly Market-competitive pay systems: Compensation professionals build market-competitive compensation systems based on the results of compensation surveys Compensation surveys: Collect and then analyze competitors’ compensation data Pay structures: Represent pay rate differences for jobs of unequal worth and the framework for recognizing differences in employee contributions Pay grades: Group jobs for pay policy application Pay ranges: Include minimum, maximum, and midpoint pay rates Line employees: Employees that are directly involved in producing companies’ goods or delivering their services Staff employees: Employees that support the line functions Executive is a top-level manager who reports directly to the coporation’s CEO or to the head of a major division Severance pay: Companies may choose to award and amount, usually the equivalent of several months’ pay following involuntary termination Pension programs: Provide income to individuals throughout their retirement

Early retirement programs: Contain incentives designed to encourage highly paid employees with substantial seniority to retire earlier than they had planned Generalist: A human resource professional that may be an executive that performs tasks in a variety of HRM related areas Specialist An HRM executive, manager, or non-manager who is typically concerned with only one of the areas of compensation practice IX.

Discussion Questions and Suggested Answers

1-1.

Define strategic compensation.

Compensation represents both the intrinsic and extrinsic rewards employees receive for performing their jobs. Together, both intrinsic and extrinsic compensation describes a organization’s total compensation level. Intrinsic compensation reflects an employee’s psychological mindsets that result from performing his or her job. Extrinsic compensation includes both monetary and nonmonetary rewards.

Learning Objective: 1-1. Define strategic compensation.

1-2.

Identify two organizations—one that you believe pursues a lowest-cost strategy and another that pursues a differentiation strategy. Relying on personal knowledge, company annual reports, or articles in newspapers and business periodicals, or credible online sources, discuss these companies’ competitive strategies. How might compensation professionals contribute to these objectives?

The cost leadership or lowest-cost strategy focuses on gaining competitive advantage by being the lowestcost producer of a product or service within the marketplace, while selling the product or service at a price advantage relative to the industry average. Ryanair is an excellent illustration of an organization that pursues a lowest-cost strategy because its management successfully reduced operating costs. At least two noteworthy decisions have contributed to Ryanair’s goals. First, Ryanair’s training and aircraft maintenance costs are lower than similar competitor’s costs because the airline uses only Boeing 737 aircraft. Ryanair enjoys substantial cost savings because it does not need to use different curricula for training flight attendants, mechanics, and pilots to learn about procedures specific to different aircraft models. Second, newer aircraft sport seats that do not recline, have seat-back pockets, or life jackets stowed under the seat. These cost less and also allow service personnel to clean aircraft more quickly, saving on labour costs. Third, Ryanair airplanes include one toilet to make room for additional passenger seats. Fourth, passengers are required to carry their luggage to the plane, reducing the cost of baggage handling.

Differentiation strategies are used to develop products or services that are unique from those of competitors. Differentiation strategies can take many forms, including design or brand image, technology, features, customer service, and price. P&G Corporation successfully pursues a differentiation strategy based on brand image and price premiums. The organization offers two separate dog food lines—Iams, a super-premium line that is nutritionally well balanced for dogs and uses high quality ingredients and Eukanuba, which is an ultra-premium line that contains more chicken and vital nutrients than the Iams line, as well as additional fatty acids. Together, Iams and Eukanuba appeal to a substantial set of dog owners. The Iams Company distinguishes Eukanuba from Iams by claiming that Eukanuba is “Extraordinary Nutrition.” The Eukanuba slogan is the organization’s basis for brand image.

Learning Objective: 1-3. Explain strategic compensation decisions.

1-3.

Stakeholder expectations pose challenges for compensation professionals. At times, there may be conflict among the expectations of different stakeholders. Give two examples and explain how compensation professionals meet their expectations.

1-4.

Are the three main elements of compensation systems—internal consistency, market competitiveness, and recognizing employee contributions—equally important, or do you believe that they differ in importance? If different, which do you believe is most important? Least important? Give your rationale.

X.

End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

Case Name: Competitive Strategy at Mountain Equipment Co-op Mountain Equipment Co-op (MEC) has been a leader in the athletic-gear industry for more than 48 years. MEC’s strategy of market differentiation focuses on members’ needs, the environment. and offering quality products at a reasonable price.

Mountain Equipment Co-op sells a wide array of athletic equipment for all types of sports to its members. As MEC has established members as owners, it has created a deep commitment among them to shop at MEC rather than other sports stores. This membership builds an inclusive environment with member events and member voting. Additionally, MEC carries sports gear for numerous sports, for the amateur to expert sports enthusiasts. Further, MEC is working to engage younger generations in their sports store and culture and stay relevant. MEC is growing both its online and brick and mortar stores; however, MEC recognizes it must grow its membership of outdoor enthusiasts to remain current and continue its growth. There are various competing sports gears retailers such as Sport Chek, Sports Experts, Sporting Life, and Cabelas in this competitive market place.

Instructor Notes The human resources planning process follows the organization’s strategic planning process. In this case, the organization adopted a differentiation strategy. Under the differentiation strategy will require some employees with a different skill set. Certain functions will need high levels of creativity and innovation.

Human resources management practices must shift to support these needs by attracting the right talent, and motivating the right behaviours to produce shoes for the new niche markets.

Questions and Suggested Student Responses:

1-5.

Following Mountain Equipment Co-op’s differentiation strategy, what are some considerations for the company’s human resources management practices?

Answers may vary.

1-6.

What kind of challenges will Mountain Equipment Co-op face specifically in the area of compensation?

The new hires the organization will need to make will create some compensation challenges. The organization will need to make compensation competitive in the market place to make sure that they are able to attract the new talent needed. However, they must also keep compensation internally consistent at the same time. The organization will need to examine its entire compensation strategy (including benefits and incentive pay) to make sure it is aligned with the organization’s new goals.

Learning Objective: 1-3. Explain strategic compensation decisions.

XI. Crunch the Numbers! Questions and Suggested Student Responses Calculating the Costs of Increasing the Total Compensation Budget at Butcher Enterprises

1-7.

On an average hourly basis, how much does Butcher Enterprises spend on wages and benefits, respectively, in dollars?

Butcher Enterprises spends an average of $19 per hour on wages and benefits. 70% of this amount or $13.30 is allocated for wages and 30% or $5.70 for benefits.

Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems.

1-8.

How much does the company spend on wages and benefits over the course of one year for 100 office workers? Assume that each worker provides 2080 hours of service each year.

The number of hours for 100 workers = 100 x 2080 = 208,000. The average hourly wage of $19 x 208,000 hours = $3,952,000 is how much the organization spends on wages and benefits over the course of one year.

Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems.

1-9.

How much additional money does the company need to match the market rates for this group of 100 employees?

You must first calculate the total for wages and benefits for market rate which is $23 x 208,000 hours = $4,784,000. The difference between $4,784,000 and $3,952,000 = $832,000.

Therefore, Butcher Enterprises would need to spend an additional $832,000 per year to match the market rate for this group of employees.

Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems.

XII.

Simulation

This text includes an artificial intelligence simulation through the Revel platform. This simulation

includes all of the organizational information required for students to interact with artificial intelligence either individually or in teams to build a job evaluation, salary survey, and employee compensation strategy assignments in the simulation.

Faculty can elect to allow students to explore the simulation as an applied sandbox, assign the simulation activities as exercises, assign one or more of the assignments, or finally, require students to complete all simulation assignments as a comprehensive suite of assignments assessing all course learning goals.

The simulation is ready to play out of the box, requiring no faculty setup or configuration. Students simply login into the simulation, read instruction files, and begin to interact with the avatars. Throughout the instructors’ manual the simulation will be discussed to support the faculty member.

CHAPTER 2 Influences on Compensation Practice Preface Chapter two begins to explore deeper compensation contextual factors. Students are introduced to patterns of pay differentials to make informed decisions about fair and competitive pay practices. These factors include interindustry, occupational, and geographic pay differentials, and the role of labour unions.

Learning Objectives 2.1 2.2 2.3 2.4 2.5

Discuss the reasons for interindustry wage differentials.

Explain the factors that contribute to pay differentials based on occupational characteristics.

Summarize the reasons for geographic pay differentials.

Discuss the role of labour unions in setting compensation.

Identify and discuss key employment laws pertinent to compensation practice.

Outline/Table of Contents

I. Overview II. Interindustry Wage Differentials III. IV.

Pay Differentials Based on Occupational Characteristics Geographic Pay Differentials

V. Labour Unions VI.Employment Laws Pertinent to Compensation Practice VII. VIII.

Key Terms Discussion Questions and Suggested Answers

IX.

End of Chapter Case; Instructor Notes, and Questions and Suggested

Student Responses X. XI.

Crunch the Numbers! Questions and Suggested Student Responses Simulation Lecture Outline/Syllabus

I. Overview A. Contextual influences on pay 1. Compensation professionals must understand patterns of pay differentials to make informed decisions about pay 2. Must also make decisions within scope of employment and labour laws 3. Global context also influences compensation

II. Interindustry Wage Differentials

A. The differences in wages and benefits across industries 1. Attributed to: a. The industry’s product market b. The degree of capital intensity c. The profitability of the industry d. Unionization

B. Organizations in Product Markets with Little Competition 1. Generally pay higher wages 2. Exhibit substantial profits 3. Exhibit limited new competition because of: a. Higher barriers to entry b. Insignificant influence of foreign competition 4. Government regulations and extremely expensive equipment represent entry barriers

C. Capital Intensity 1. Defined as the extent to which organizations’ operations are based on the use of large-scale equipment 2. The amount of average pay varies with the degree of capital intensity a. Generally manufacturing jobs are capital intensive, service jobs are not C. Profitability

1. Generally, the more profitable the industry, the higher the compensation

D. Unionization 1. Unionized industries tend to pay higher 2. Power of collectively negotiating leads to higher wages than individually negotiating III.

Pay Differentials Based on Occupational Characteristics

A. Occupation 1. Group of jobs, found at one or more organization, in which a common set of tasks are performed or are related in terms of similar objectives methodologies, materials, products, worker actions, or worker characteristics 2. Pay variations can occur within occupations, based on the complexity of the jobs B. Knowledge, skills and abilities 1. Role of job analysis 2. Jobs that require formal education or early experience are paid more C. Supply and demand 1. Organizations demand for individuals relative to supply influences compensation IV.

Geographic Pay Differentials

A. Relative pay differentials 1. Occur between geographic areas B. Pay rate differentials 1. Expressed in dollars as hourly or annual pay 2. For occupations based on particular geographic regions 3. Cost of living differences

V. Labour Unions A. Canada Labour Code 1. Designed to good-faith negotiations with workers over the terms of employment 2. Collective bargaining agreement is a written document that describes the terms of employment approved by management and employees during negotiations

B. Compensation Issues in Collective Bargaining 1. Union and management negotiations usually center on pay raises and employee benefits 2. Cost-of-living-adjustment (COLAs) a. Automatic pay increases based on changes in prices, as indexed by the consumer price index (CPI) b. Enables workers to maintain their standards of living by adjusting wages for inflation 3. Union influence has declined because:

a. Legislation outlawed unions’ use of intimidation b. Employment equity laws provided protections for women and minorities c. Globalization increasing competition d. Right-to-work laws that prohibit management and unions from entering into agreements requiring union membership as a condition of employment

e. Higher rates of unionization in the public or government sector

VI. Employment Laws Pertinent to Compensation Practice A. Legislative Actions 1. Canadian Charter of Rights and Freedoms Provincial and territorial employment standards Employment equity Workers’ Compensation

2. Government has two levels in Canada a. Federal government oversees Canadian provinces and territories b. Provincial and territorial governments enact laws that pertain exclusively to respective regions

B. Income Continuity, Safety, and Work Hours Laws 1. Three main factors a. Great Depression b. Family businesses to large factories

c. Division of labour

2. Provincial and territorial employment standards a. Addresses the main issues of hours of work, hourly wage, overtime, vacation and sick leave, termination, and holidays. b. Enforced by each province or territorial 2. Minimum wage a. Designed to ensure wages for a minimally acceptable standard of living 3. Overtime pay provisions a. Defined in provincial and territorial employment standards

C. Pay equity 1. Pay equity is a centerpiece legislation in Canada protecting equal payment for equal work for all Canadians. Federal law requires men and women to be paid the same amount for equal work 2. Provincial legislation may be concurrent with federal law or may exist in the absence of similar federal legislation. Wherever inconsistencies in federal or provincial laws exist, the law that provides individuals the greatest benefit generally prevails. b. Applies to jobs of equal worth defined by compensable factors, such as: i. Levels of skill ii. Effort iii. Responsibility . iv. Working conditions c. Jobs must have “similar”, not necessarily the “same” working conditions d. Pay differentials are not always illegal; are legal where such payments are made pursuant to: i. A seniority system ii. A merit system iii. A system which measures earnings by the quantity or quality of production iv. A differential based on any factor other than gender End of the Chapter

VII. Key Terms Interindustry wage differentials: Represent the pattern of pay and benefits associated with characteristics of industries Occupation: A group of jobs, found at more than one organization, in which a common set of tasks are performed or are related in terms of similar objectives, methodologies, materials, products, worker actions, or worker characteristics Canada Labour Code: requires private-sector employers to enter into good-faith negotiations with workers over the terms of employment.

Collective bargaining agreement: A written document that describes the terms of employment approved by management and employees during negotiations Spillover effect: Occurs when management of nonunion firms generally offered somewhat higher wages and benefits to reduce the chance that employees would seek union representation Federal government: Oversees Canada Provincial and territorial governments: Enact and enforce laws that pertain exclusively to their respective regions Minimum Wage The purpose of the minimum wage provision is to ensure a minimally acceptable

standard of living for workers and to protect women and children Great Depression: Triggered legislation designed to stabilize the income of an individual who became unemployed because of poor business conditions or workplace injuries Employment insurance: Provided temporary income to workers who became unemployed through no fault of their own Workers’ compensation: programs granted income to workers who were unable to work because of injuries sustained on the job Employment Standards: provincial or territorial legislation central to employee compensation and benefits. In particular, these labour laws outline workplace rules such as hours of work, hourly wage, overtime, vacation and sick leave, termination, and holidays.

Canadian Charter of Rights and Freedoms: establishes: the right for all Canadians to be free of discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

Pay Equity: Prohibits sex discrimination in pay for employees performing equal work Compensable factors: job attributes ( e.g., skill, effort, responsibility, and working conditions) that compensation professionals use to determine the value of jobs Baby boom generation: Generation born roughly between 1946 and 1964 and represented a swell in the American population VIII.

Discussion Questions and Suggested Answers

2-1.

Identify the contextual influence that you believe will pose the greatest challenge to companies’ competitiveness and identify the contextual influence that will pose the least challenge to companies’ competitiveness. Explain your rationale.

This is a very subjective question and answers can include things ranging from discussions of laws, politics, economics, or other contextual influences.

Learning Objective: Could support any chapter objective depending on the student’s response.

2-2.

Should the government raise the minimum wage? Explain your answer.

Answers can be pro or con. ‘Yes’ answers should discuss living or competitive wages among other things. ‘No’ answers should include impact on business and employment levels.

Learning Objective: 2-5 Identify and discuss key employment laws pertinent to compensation practice.

2-3.

Do unions make it difficult for organizations to attain competitive advantage?

Explain your answer.

2-4.

Explain the pros and cons of adjusting pay based on cost-of-living differences from an organization’s perspective and an employee’s perspective.

2-5.

Some people argue that there is too much government intervention, while others say there is not enough. Based on the presentation of laws in this chapter, do you think there is too little or too much government intervention? Explain your answer.

One could argue that the government doesn’t do enough to intervene based on the fact that although many laws, acts, and decrees protect employees and employers alike, it is difficult to focus attention on some matters. Increases in wages, for example, may be something that the government ought to look into more

closely and with more severity. Wages are a great source of struggle and anguish for many people. If the government increases wages in line living costs, then all would be well, but this is not always the case.

However, one could also argue that the government gets involved in such issues too readily, and that sometimes it’s best for the employees and employers to work out their differences on their own.

Learning Objective: 2-5 Identify and discuss key employment laws pertinent to compensation practice.

VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Exempt or Nonexempt?

Instructor Notes Suggested Student Responses:

2-6.

Why did Amy classify the shift leaders are exempt? Are there any advantages to Jones Department Store to having the shift leaders classified as exempt?

Amy informed Jane that shift leaders are part of the management team and are classified as exempt under the Employment Standards Act. The store is not required to pay exempt workers overtime pay.

Learning Objective: 2-5 Identify and discuss key employment laws pertinent to compensation practice.

2-7.

Do you think that the shift leaders are properly classified as exempt? Why or why not?

Yes, as they assume managerial tasks including employee management and decisions.

2-8.

What are some factors that Amy should consider when determining if shift leaders are exempt or non-exempt?

Amy should consider the fact that the shift leaders spend a majority of their time working on management and human resources management tasks.

Learning Objective: 2-5 Identify and discuss key employment laws pertinent to compensation practice.

IX. Crunch the Numbers! Questions and Suggested Student Responses Whether to Work Overtime or Hire Additional Employees Questions:

2-9.

Is it more cost effective to have current manufacturing employees work on an overtime basis during the life of the contract or to hire new employees?

Overtime option:

1000 employees will have to work an extra 4 hours per week, for 4,000 extra hours each week.

There are 52 weeks in a year and the contract spans 5 years, so there are a total of 260 weeks.

260 weeks multiplied by 4,000 hours = 1,040,000 additional hours.

Per the scenario, the hourly rate for these overtime hours is $30 per hour.

1,040,000 hours x $30 per hour = $31,200,000 Hire additional employees option: Base pay for the additional workers at $20 hour x 2080 hours a year (52 weeks x 40 hours each week) = $41,600 x 100 workers =$4,160,000 x 5 years =$20,800,000 Benefit costs = $10,000 x 5 years x 100 workers = $5,000,000 One-time costs per worker include $5,000 (recruitment) plus $3,000 (training), plus $12,000 (termination) = $20,000 x 100 workers =$2,000,000 Total cost of workers $20,800,000 +$5,000,000 +$2,000,000 = $27,800,000 Hiring additional employees is more cost efficient.

Learning Objective: 2-5 Identify and discuss key employment laws pertinent to compensation practice.

2-10. Let’s assume that the unemployment rate in the area is low, which is making it difficult to attract new manufacturing employees. ACME is finding that it is able to overcome this problem by paying new employees at a higher hourly rate of $25 per hour. Under this scenario, is it more cost effective to have current manufacturing employees work on an overtime basis or to hire new employees?

Hiring additional employees at $25 per hour would result in a higher total base pay.

Base pay for the additional workers at $25 hour x 2080 hours a year (52 weeks x 40 hours each week) = $52,000 x 100 workers =$5,200,000 x 5 years =$26,000,000 The total pay for these workers = 26,000,000+$5,000,000 +$2,000,000 =$33,000,000 This amount is higher than the cost of overtime at $31,200,000.

Thus, under this scenario of needing to pay $25 per hour to new employees, it is more cost efficient to pay current employees overtime.

Learning Objective: 2-5 Identify and discuss key employment laws pertinent to compensation practice.

2-11. Would it be more cost effective to hire 50 new employees as well as having half of current manufacturing employees work overtime?

To find the cost of this scenario, you must total half of the projected overtime cost and half of the cost to hire 100 employees.

Overtime: half of $31,200,000 = $15,600,000 Hiring additional workers: half of $27,800,000 = $13,900,000 The total of these two amounts = $29,500,000

This option would be more cost effective than paying overtime to all 1000 workers. However, it would cost more than hiring 100 workers. Thus hiring 100 workers is the most cost efficient option.

Learning Objective: 2-5 Identify and discuss key employment laws pertinent to compensation practice.

2-12. How would the compensation system change if the minimum wage provision of the employment act of a province were repealed?

2-13. Suggest ways that companies in low-paying industries can increase their ability to attract and retain highly qualified individuals.

Human resources management professionals should examine the external market environment. In searching for some experienced staff, such as marketing professionals, it is important to understand how to position the organization to compete for talent. They should also make an assessment of the labour market. As many of the positions require little skill, understanding the available labour pool and typical earnings ranges will help determine the compensation strategy. Internally, they should examine the necessary capabilities for the different functional areas. For example, because the customization of the product is what differentiates the product from competitors, the customer service function is crucial to business success. Further, the financial condition of the organization will help set the parameters of the compensation strategy.

XII.

Simulation

Students will be able to apply the learning goals from this chapter as they complete the simulation activities and assessments. In particular, students will consider the organizational and human resources management strategies as interact with artificial intelligence either individually or in teams to build a job evaluation, salary survey, and employee compensation strategy assignments.

CHAPTER 3 Traditional Bases for Pay: Seniority and Merit Preface Chapter three explores seniority and merit pay. Students are introduced to the premise of seniority pay, in particular, how it is calculated, the challenges, and rationale for this employee compensation strategy. Students then examine employee merit pay—the design of this compensation strategy and employee performance appraisal to support this strategy.

Learning Objectives 3.1 3.2 3.3 3.4 3.5

Describe seniority pay practices.

Explain the merit pay approach to compensation.

Explore a variety of performance appraisal methods.

Discuss how compensation professionals can strengthen the pay-for-performance link.

Summarize the possible limitations of merit pay programs.

Outline/Table of Contents

I. Seniority and Long-Service Pay II. Merit Pay III. Performance Appraisal IV.Strengthening the Pay-forPerformance Link V. Possible Limitations of Merit Pay Programs VI. VII.

Key Terms Discussion Questions and Suggested Answers

VII.

End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

VIII.

Crunch the Numbers! Questions and Suggested Student Responses

IX.

Simulation

Lecture Outline/Syllabus I. Seniority and Long-Service Pay A. Overview 1. Reward employees with periodic additions to base pay according to length of service 2. Rationale based on the human capital theory 3. Human capital theory based on belief that employees’ knowledge and skills generate productive capital and that they can be developed through formal education and training

B. Historical Overview 1. Collective Bargaining a. Led to job control unionism in which collective bargaining units negotiate formal contracts with employees and provide quasi-judicial grievance procedures 3. Seniority pay systems a. Essentially provide automatic pay increases

b. Performance assessments tend to be subjective c. The automatic pay adjustments were used to protect public sector employees from political quirks

C. Who Participates?

1. Most unionized private and public sector organizations a. Union administrative employees

2. Public employers include municipal, provincial, territorial, and federal governments

D. Effectiveness of Seniority Pay Systems 1. Virtually no systematic research demonstrating seniority pay system plans’ effectiveness or prevalence in the private sector 2. Federal government has considered moving beyond seniority-based pay

E. Design of Seniority Pay and Long-service Pay Plans 1. Seniority pay a. Object is to reward job tenure through permanent increases to base salary b. Employees start at set base pay then receive time-designated pay increases c. Employees can reach a maximum pay level for a position, but are expected to be promoted and qualify for a new, higher pay structure 2. Long-service pay a. Rewards employees who have reached pay grade maximums and who are not likely to move into higher grades b. Federal employees are subject to long-service pay i.

Is based on such factors as knowledge, skills, abilities, and other jobrelated requirements ii. The long-service pay classifies these federal government jobs into six classifications based on years of service

F. Advantages of Seniority Pay Plans 1. Employees may perceive that they are treated fairly because they earn pay increases by an objective standard instead of supervisory judgment 2. Set pay increases facilitate the administration of pay programs for employers 3. Avoids the perception, by employees, of favouritism

G. Fitting Seniority Pay with Competitive Strategies 1. Seniority pay does not fit well with the imperatives of competitive strategies because employees can count on receiving the same pay raises regardless of performance or if companies meet their competitive objectives

II. Merit Pay

A. Overview 1. Pay programs that assume that employees’ compensation over time should be determined, at least in part, by differences in job performance 2. Permanent increases are based on performance B. Who Participates?

1. Merit pay is one of the most common compensation methods in Canada 2. Occur most often in the private for-profit sector of economy

C. Exploring the Elements of Merit Pay 1. Based on objective and subjective indicators of an employee’s job performance 2. Employees must perceive a strong relationship between attaining performance standards and pay increases 3. Adequate funds should be available to fulfill promises to compensate employees 4. Adjustments to base pay should be made according to changes in the cost of living or inflation before awarding merit pay raises 5. Just-meaningful pay increase refers to the minimum pay increase that employees will see as making a meaningful change in compensation 6. Must set explicit performance standards that specify the procedures or outcomes against which employees’ job performance can be clearly evaluated

III.

Performance Appraisal

A. Types of Performance Appraisal Plans 1.

2.

3.

4.

Trait systems Comparison systems Behavioural systems Goal-oriented systems

B. Trait Systems 1. Are based on having raters evaluate each employee’s traits or characteristics 2. Appraisals are typically scored using descriptors ranging from unsatisfactory to outstanding 3. They are easy to construct, use, and apply to a wide range of jobs 4. They are easy to quantify 5. They are common in companies that rely on customer service 6. Drawbacks a. Can be highly subjective b. These systems rate individuals on subjective personality factors rather than objective job performance data

C. Comparison Systems 1. Evaluate a given employee’s performance against that of other employees 2. Forced distribution is an alternate approach that assigns employees to a groups that represent an entire range of performance (such as best, moderate, and poor performers) a. Not popular with managers because it fosters cutthroat competition b. Can distort ratings because employee performance may not fall into predetermined distributions 3. Paired comparisons

a. Each employee is compared to all others b. Each employee is ranked according to the number of times they are identified as being the better performer c. This method is best suited for small groups of employees who perform the same or similar jobs

D. Behavioural Systems 1. Rate employees on the extent to which they display successful job performance behaviours 2. These objective job behavioural methods, when developed and applied correctly, provide results that are relatively free of rater errors and biases 3. Critical incident technique (CIT) a. Requires job incumbents and their supervisors to identify performance incidents that distinguish successful performance from unsuccessful ones b. Supervisors then observe employees and record their performance on these critical job aspects 4. Behaviourally anchored rating scale (BARS) a. Similar to CIT, except the incidents are written as expectations instead of achieved behaviours b. Advantages i. Most highly defensible in court because it is based on actual observable job behaviours ii. Encourages all raters to make evaluations in similar ways

c. Disadvantages i. Difficult to maintain the volume of data ii. Each job must have distinct appraisal documents iii. As jobs change, so must documentation

E. Goal-Oriented Systems 1. Management by objectives (MBO) perhaps is the most effective performance appraisal technique because: a. Supervisors and employees determine objectives for employees to meet b. Employees rate themselves on how well they think they met the objectives

2. Evaluates employees’ progress toward strategic planning objectives 3. Drawbacks a. Companies generally do not fully describe the scope of managerial positions b. Time consuming c. Requires extensive communication between supervisor and employee d. Focuses on specific goals at the exclusion of other vital outcomes, which is referred to as a “results at any cost” mentality

F.Exploring the Performance Appraisal Process 1. Purposes a. Represents an organization’s way of telling employees the organization’s expectations of them b. Informs employees how well they are meeting those goals 2. Four activities to promote nondiscriminatory performance appraisal practices a. Conduct job analyses to ascertain characteristics necessary for a content valid performance appraisal system b. Incorporate these characteristics into a rating instrument c. Train supervisors to use the rating instrument properly d. Set up formal appeal mechanisms and have upper-level personnel review the ratings to insure accuracy and effectiveness

3. Sources of performance appraisal information a. Five main sources are the employee’s: i. Self ii. Supervisor iii. Coworkers iv. Subordinates (if applicable) v. Customers or clients (if applicable) b. 360-degree performance appraisals are performance appraisal systems that rely on many appropriate sources of performance related information 4. Errors in the performance appraisal process

a. Rating errors reflect differences between human judgment processes versus objective, accurate assessments uncoloured by bias, prejudice, or other subjective, extraneous influences b. Bias errors i. Happen when rater evaluates employees based on a negative or positive opinion of the employee rather than on the employee’s actual performance ii. First-impression effect—a manager would have a tendency to make an initial judgment about an employee, and allows that to affect their appraisal iii. Halo effects—rater generalizes behaviour on one aspect of the job to all aspects of the job iv. Similar-to-me effect—tendency on the part of raters to favourably judge employees whom they perceive as similar to themselves v. Illegal discriminatory bias occurs when supervisors allow an employee’s race, gender, nationality, or religion influence their performance ratings e. Contrast errors take place when the rater compares the employee to other employees rather than to specific performance standards f. Errors of central tendency occur when a supervisor rates all employees as average or close to average g. Errors of leniency or strictness i. Reflect the tendency to rate every employee at the high end or low end of the scale, regardless of actual performance ii. With a leniency error, managers rate employees’ performances more highly than they would rate them using objective criteria iii. The opposite occurs with errors of strictness

IV. Strengthening the Pay-forPerformance Link A. Link Performance Appraisals to Business Goals 1. Employee performance should be linked to the company’s competitive strategy

B. Analyze Jobs 1. Job analysis is important for establishing internally consistent compensation systems 2. Supervisors should match the employees’ performance to the job description

C. Communicate 1. Employees must clearly understand the link between performance and

D. Establish Effective Appraisals 1. Should be tied to employee’s future performance goals and career plans 2. Deficiencies in performance should include methods to remedy

3. Performance standards should be used for establishing performance targets

E. Empower Employees 1. Encourage employee self-appraisals between formal sessions

F. Differentiate Among Performers 1. Merit increases should consist of meaningful increments 2. Merit increases should clearly reflect differences in actual job performance

V. Possible Limitations of Merit Pay Programs A. Failure to Differentiate among Performers 1. Poor performers may receive merit increases even though they’re not warranted

B. Poor Performance Measures 1. May be too subjective 2. Developing performance measures for every job is difficult and expensive

C. Supervisors’ Biased Ratings of Employee Job Performance 1. Supervisors are subject to a number of errors when they make subjective assessments

D. Lack of Open Communication between Management and Employees 1. Lack of good communication can lead employees to mistrust the performance appraisal process

E. Undesirable Social Structures 1. Pay grades can reflect status differentials 2. Permanent merit increases may rigidify the relative pay status of employees over time

F. Mounting Costs 1. Merit pay presents an escalating cost burden to companies

G. Factors Other Than Merit 1. Supervisors may subconsciously use age or seniority instead of merit 2. Supervisors may let personal feeling determine pay increases 3. Company politics that puts focus on supervisors’ agendas or goals instead of work goals

H. Undesirable Competition 1. Between individual employees for limited funds 2. Between individuals in team settings, which may hinder teamwork

I.

Little Motivational Value 1. When employers and employees disagree on what is a “large enough” increase 2. When the yearly increase seems negligible on each paycheck End of the Chapter

VI.

Key Terms

Seniority pay: System that rewards employees with periodic additions to base pay according to employees’ length of service in performing their jobs Long-service pay: Systems that rewards employees with periodic additions to base pay according to employees’ length of service in performing their jobs Human capital theory: States that employees’ knowledge and skills generate productive capital known as human capital Merit pay programs: reward employees with permanent increases to base pay according to differences in job performance Just-meaningful pay increase: Minimum pay increase that employees will see as making a meaningful a substantial change in compensation Trait systems: Ask raters to evaluate each employee’s traits or characteristics Comparison systems: Evaluate a given employee’s performance against that of other employees Forced distribution: Assigns employees to groups that represent the entire range of performance Paired comparisons: Supervisors compare each employee to every other employee, identifying the better performer in each pair Behavioural systems: Rate employees on the extent to which they display successful job performance behaviours Critical incident technique (CIT): Requires job incumbents and their supervisors to identify performance incidents (e.g., on-the-job behaviours and behavioural outcomes) that distinguish successful performance from unsuccessful ones Behaviourally anchored rating scales (BARS): Performance assessment tool where incidents are written as expectations to emphasize the fact that the employee does not have to demonstrate the exact behaviour that is used as an anchor in order to be rated at that level Management by objectives (MBO): Supervisors and employees determine objectives for employees to meet during the rating period and employees appraise how well they have achieved their objectives 360-degree performance appraisal methods: Performance appraisal systems that rely on many appropriate sources of information Rating errors: Reflect differences between human judgment processes versus objective, accurate assessments uncoloured by bias, prejudice, or other subjective, extraneous influences Bias errors: When the rater evaluates the employee based on a personal negative or positive opinion of the employee rather than on the employee’s actual performance First-impression effect: When a rater makes an initial favourable or unfavourable judgment about an employee and then ignores or distorts the employee’s actual performance based on this impression Positive halo effect: When a rater generalizes an employee’s good behaviour on one aspect of the job to all aspects of the job Negative halo effect: When a rater generalizes an employee’s bad behaviour on one aspect of the job to

all aspects of the job Similar-to-me effect: Refers to the tendency on the part of raters to judge favourably employees whom they perceive as similar to themselves Illegal discriminatory bias: When a supervisor rates members of his or her race, sex, nationality, or religion more favourably than members of other classes Contrast errors: when the rater compares an employee with other employees rather than to specific, explicit performance standards Errors of central tendency: When supervisors rate all employees as average or close to average Leniency error: When a rater appraises employees’ performance more highly than they really rate compared with objective criteria Strictness errors: When a supervisor rates an employee’s performance lower than it would be if compared against objective criteria Internally consistent compensation systems: Job analysis is vital in establishing these systems in order to clarify the standards against which employees’ performance is judged VII.

Discussion Questions and Suggested Answers

3-1.

Human capital theory has been advanced as a rationale underlying seniority pay. Identify two individuals you know who have performed the same job for at least 2 years. Ask them to describe the changes in knowledge and skills they experienced from the time they assumed their jobs to the present. Discuss your findings with the class.

3-2.

Subjective performance evaluations are subject to several rater errors, which makes objective measures seem a better alternative. Discuss when subjective performance evaluations might be better (or more feasible) than objective ratings.

3-3.

Consider a summer job that you have held. Write a detailed job description for that job. Then, develop a behaviourally anchored rating scale (BARS) that can be used to evaluate an individual who performs that job in the future.

BARS are based on the critical incident technique. Scales are developed in the same fashion with one exception. For the CIT, a critical incident would be written as “the incumbent completed the task in a timely fashion.” A good example of applying BARS to a summer job would be that of a kitchen assistant.

A kitchen assistant has to be on time and show up for work prepared with the proper clothing and sanitation. The kitchen assistant has to make sure to keep their work area and the work area of everyone else clean, so as to provide fresh food that does not cause health problems or violate any health codes. If these basic rules are not followed then food preparation could be contaminated by unwanted bacteria or would not be prepared in a timely manner, thus harming business.

Learning Objective: 3-3. Explore a variety of performance appraisal methods.

3-4.

This chapter indicates that merit pay plans appear to be the most common form of compensation in Canada. Although widely used, these systems are not suitable for all kinds of jobs. Based on your knowledge of merit pay systems, identify at least three jobs for which merit pay is inappropriate. Be sure to provide your rationale given the information in this chapter.

Temporary workers do jobs that are not well suited for merit pay because there is no long term opportunity to measure performance. Repetitive assembly line work is not well suited to merit pay because there is limited ability to vary performance, piece work pay may be appropriate. Certain sales

jobs may not be suitable for merit pay if employees are paid based mostly on commissions.

Learning Objective: 3-2. Explain the merit pay approach to compensation.

3-5.

Select one job of your choice. Go to National Occupational Classification (NOC) https://noc.esdc.gc.ca/Home/Welcome/ec6650e34f8944bd9320753ae506a573?GoCTe mplateCulture=en-CA Review the major tasks for each job. Then, for each job, identify what you believe is the most appropriate performance appraisal method. Based on your choices, sketch a performance appraisal instrument. Discuss the rationale for your choice of performance appraisal methods.

Students should identify three different jobs from NOC and select the major tasks to understand the type of appraisal method that is appropriate. The different methods include forms of trait systems, comparison systems, behavioural systems and goal-oriented systems. The students should provide appropriate rationale to support the selection of a method related to the tasks required in each particular job.

Learning Objective: 3-3. Explore a variety of performance appraisal methods.

VII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Appraising Performance at Precision

Instructor Notes A merit pay program provides employees with an annual pay increase that is awarded based on the individual employee’s performance. In order for the program to work effectively, the company must have the ability to measure employee performance. Further, employees must know that their effort will lead to pay increases. An effective performance appraisal process must be able to recognize employee performance that is in line with the company’s productivity goals and/or business strategy. Ultimately the company must ensure that there is a strong link between pay and performance.

Suggested Student Responses:

3-6.

What are some problems with Precision’s performance appraisal process that might cause challenges for Jackson to implement a merit pay program?

Answers may vary.

3-7.

What changes do you recommend Precision make to the performance appraisal process to align it with a merit pay program?

The company most likely should design an entirely new process. They should start with job analysis that leads to well defined job descriptions and performance expectations for each job. Next, the company

should design a rating instrument that reflects the characteristics identified through the job analysis. This most likely will result in more than one version of the form. Finally, supervisors must be provided training on how to use the process to communicate performance expectations and evaluate the performance of employees. Supervisors also need guidance in the need for ongoing communication with employees on performance.

Learning Objective: 3-3. Explore a variety of performance appraisal methods.

VIII.

Crunch the Numbers! Questions and Suggested Student Responses

Costs of Long-Service and Merit Pay 3-8.

Under a merit pay system, calculate Nadia’s salary based on a 7 percent annual increase through the year 2024. For Ed, apply a 3 percent annual increase rate.

What are their adjusted salaries for each year?

Nadia’s salary in 2019 was $50,000 Ed’s salary in 2019 was $35,000

Learning Objective: 3-2. Explain the merit pay approach to compensation.

3-9.

Let’s assume that both employees have reached the maximum pay rates for their jobs in 2020. Under a long-service pay system, calculate the annual long-serivce payments for each employee through the year 2024. Using a 5 percent rate for each, what will the annual increases amount to? What will their base pay rates be at the end of 2020?

Under a long-service pay system, the employee receives an annual payment that is not added into base pay.

At the end of 2024, their base pay will remain the same which is $50,000 for Nadia and $35,000 for Ed. Therefore, each year their long-service payment will be the same amount which is 5% of their base pay.

Nadia = $2,500 Ed = $1,750 Learning Objective: 3-1. Describe seniority and long-service pay practices.

3-10.

Under a merit pay system scenario, let’s assume the goal is to provide Nadia and Ed with the same annual pay increases as measured in dollars, just for 2020. It’s been determined that Nadia’s annual increase rate will be 5 percent. What should the rate be for Ed? After applying the increase amounts, what will Nadia’s and Ed’s new salaries be at the end of 2020?

Nadia’s increase in 2020 will be 5% of $50,000 = $2,500. Her new salary in 2020 will be $52,500.

To give Ed the same $2,500 increase to his $35,000 base salary, he would receive a 7.14% increase and his new salary in 2020 would be $37,500.

Learning Objective: 3-2. Explain the merit pay approach to compensation.

IX.

Simulation

Students will be able to apply the learning goals from this chapter as they consider seniority, merit, and pay for performance as they complete the simulation activities and assessments. In particular, students will consider the learning goals from this chapter as they design the job evaluation, salary survey and compensation strategy assignments.

CHAPTER 4 Incentive Pay Preface Chapter four introduces students to employee incentive pay design. When employees, groups of employees, or entire organizations fail to meet pre-established performance standards such as annual sales, they forfeit some or all of their compensation. Expert incentive pay consultants argue that a critical element of successful incentive pay plans is the provision of regular, honest communication to employees.

Learning Objectives

4.1

Explore the incentive pay approach.

4.2

Describe the differences between incentive pay methods and traditional pay methods.

4.3

Summarize five types of individual incentive pay plans.

4.4

Explain two types of group incentive plans.

4.5

Discuss two types of organization-wide incentive plans.

4.6

Summarize considerations when designing incentive pay programs.

Outline/Table of Contents I. Exploring Incentive Pay II. Contrasting Incentive Pay with Traditional Pay

III. Individual Incentives IV.Group Incentives V. Company-Wide Incentives VI.Designing Incentive Pay Programs VII. VIII.

Key Terms Discussion Questions and Suggested Answers

IX.

End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

X.

Crunch the Numbers! Questions and Suggested Student Responses

XI.

Simulation

Lecture Outline/Syllabus I. Exploring Incentive Pay A. Compensation, other than base wages or salaries, which fluctuates according to employees’ attainment of some standard such as a pre-established formula, individual or group goals or organization earnings 1. Effectiveness based on three assumptions a. Individual employees and work teams differ in how much they contribute to the organization, and in how well they do it

b. The organization’s overall performance depends on the performance of its employees c. How well it attracts, retains, and motivates high performers 2 Adds to base pay as a one-time payment 3. Designed to control payroll costs or to motivate employee productivity

II. Contrasting Incentive Pay with Traditional Pay A. Traditional pay plans based on: 1. Fixed hourly wage or annual salary 2. Raises based on length of service or supervisor’s subjective ratings B. Incentive pay programs are designed to reward employees and teams for performance 1. Classified into three categories a. Individual-incentive plans b. Group-incentive plans c. Organization-incentive plans

III.

Individual Incentives

A. Individual incentives are appropriate when 1. Performance can be measured objectively 2. Employees have sufficient control over work outcomes 3. The incentives do not create a level of unhealthy competition among workers B. Defining Individual Incentives 1. Individual incentive plans reward employees for meeting such work-related performance standards as quality, productivity, customer satisfaction, safety, or attendance 2. Managers should choose factors that are within the individual employee’s control when they create individual performance standards

C. Types of Individual Incentive Plans

1. Piecework Plansa. Two types:

i. Rewards based on individual production against an objective standard ii. Rewards based on individual performance standards that include both objective and subjective criteria b. Two advantages to companies using piecework plans in manufacturing settings: i. Incentive effect refers to a worker’s willingness to work diligently to produce more quality output ii. Sorting effect refers to an employee’s choice to stay versus leave for another job,

probably one without an incentive pay contingency

2. Management incentive plans award bonuses to managers when they meet or exceed objectives based on sales, profits, production or other measures 3. Behavioural encouragement plans award employees for specific behavioural accomplishments such as good attendance or safety records 4. Referral plans award employees for referring new customers or recruiting successful job applicants C. Advantages of Individual Incentive Plans 1. Can promote the relationship between pay and performance 2. Can promote an equitable distribution of compensation within companies 3. These plans are compatible with the individualistic cultures

D. Disadvantages of Individual Incentive Plans 1. Have the potential to promote inflexibility 2. Supervisors set performance standards 3. May encourage undesirable workplace behaviours

IV.

Group Incentives

A. Use of teams in workplace increasing 1. Companies that use teams need to change individualistic compensation practices so that groups are rewarded for their behaviour together 2. Team-based organizational structures have higher expectations of employees B. Defining Group Incentives 1. Group incentive programs reward employees for their collective performance 2. Well-designed group incentive plans reinforce teamwork, cultivate loyalty to the organization, and increase productivity

C. Types of Group Incentive Plans

1. Team-based or Small Group Incentive Plans a. Each team member receives a financial reward upon completion of the group goal b. Work (process) teams are organizational units that perform the work of the organization on an ongoing basis c. Project teams are of people assigned to complete a one-time project d. Parallel teams or task forces include employees assigned to work on a specific task in addition to normal work duties

e. Rewards allocated three ways i.

Equal incentive payments to all team members ii. Differential payments to team members based on their contributions to the goal iii. Differential payments determined by a ratio of each team members’ base pay to the total base pay of the group 2. Gain-Sharing Plans a. Defined as group incentive systems that provide employees an incentive based on improved organization performance

b. Three main components i. Leadership philosophy, which refers to a cooperative organizational climate that promotes high levels of trust, open communication, and participation ii. Employee involvement systems, drives organizational productivity and includes improvement suggestions and problem-solving ideas iii. Bonuses, which are awarded when actual productivity exceeds targeted productivity levels

3.

Scanlon Plan

a. Developed by Joseph Scanlon in 1935 and emphasized employee involvement b. Includes three main components: i. Emphasis on teamwork to reduce costs, assisted by managementsupplied information on production concerns ii. Suggestion systems that route cost-saving ideas from the workforce through a labour–management committee that evaluates and acts on accepted suggestions. iii. A monetary reward based on productivity improvements to encourage employee involvement c. Gain-sharing formulas are based on the ration between labour costs and sales value of production which is the sum of sales revenue plus the value of goods in inventory

4. Rucker Plan a. Developed by Allan W. Rucker in 1933 b. Emphasizes employee involvement and provides monetary incentives

c. Uses a value-added formula to measure productivity, which is the difference between the value of the sales price and the value of materials used to make the product d. Larger Rucker ratio indicates that the value added is greater than the total employment costs e. Rucker Ratio = Value added/Total employment costs

5. Improshare a. Invented by Mitchell Fein in 1973 b. Defined as “Improved Productivity through Sharing” it measures productivity physically rather than in terms of dollar savings c. Aims to produce more products with fewer labour hours d. Based on labour hour ratio formula which is standard based on analyzing the historic relationship between the number of labour hours needed to complete a product is determined

D. Advantages of Group-Incentive Plans 1. Companies can more easily develop performance measures for group plans than individual plans as there are fewer groups and individuals 2. Greater group cohesion

E. Disadvantages of Group-Incentive Plans 1. May lead to higher employee turnover because of the free-rider effect where some employees make fewer contributions a. The most productive employees may leave when equal rewards are given for unequal contributions 2. Group members may feel uncomfortable with the fact that other members’ performance influences their compensation level

V. Company-Wide Incentives A. Defining Organization-wide Incentives 1. Instituted in the 19th century as a way for companies to ease workers’: a. Dissatisfaction with low pay b. Belief that organization management paid them substandard wages while earning substantial profits

2. Defined as systems that reward employees when the organization exceeds minimally

acceptable performance standards 3. Advocates believe that well-designed programs make workers’ and owners’ goals more compatible as workers strive toward increasing organization profits or value B. Types of Organization-wide Incentive Plans 1. Profit-sharing plans pay a portion of organization profits to employees a. Current profit-sharing plans award cash to employees typically on a quarterly or annual basis as part of their core compensation b. Deferred profit-sharing plans place cash awards in trust accounts for employees for retirement c. Calculating Profit-Sharing Awards i. Fixed first-dollar-of-profits formula uses a specific percentage of annual profits, contingent upon the successful attainment of an organization goal. ii. Graduated first-dollar-of-profits formula is based on percentages of pre- or post-tax profits and motivates employees to strive for extraordinary profit targets by sharing even more of the incremental gain with them iii. Profitability threshold formulas fund profit-sharing pools when profits fall within predetermined minimum and maximum levels ii. Not widely used, as it may be difficult to quantify each employee’s contribution

d. Advantages of Profit-Sharing Plans i. Enables employees to share in companies’ profits ii. Allows companies greater financial flexibility e. Disadvantages of Profit-Sharing Plans i. Can undermine the economic security of employees, particularly if it represents a sizable portion of direct compensation ii. May fail to motivate employees because they do not see a direct link between their efforts and corporate profits.

2. Employee Stock Option Plans a. Represent a long term organization-wide incentive plan that provides employees with stock options b. Organization stock represents total equity of an organization c. Organization stock shares represent equity segments of equal value d. Stock options describe an employee’s right to purchase organization stock

VI. Designing Incentive Pay Programs

A. Five Key Considerations 1. Should the plan be based on group or individual employee performance 2. What level of risk will the employees be willing to accept in their overall compensation package 3. Should the incentive pay replace or complement traditional pay 4. What criteria should be used to judge performance 5. Which time horizon for meeting goals would be most effective a. Long term b. Short term c. Some combination

B. Group versus Individual Incentives 1. Group incentives are most suitable where the nature of work is interdependent and the contributions of individual employees are difficult to measure 2. Individual incentives are most suitable for employees whose work is independent not interdependent, such as meeting production goals or sales quotas

C. Level of Risk 1. Increases as incentive pay represents a greater proportion of total core compensation 2. Should be dependent on the extent to which an employee controls the attainment of the desired goal

D. Complementing or Replacing Base Pay 1. When complementing base pay, the organization awards incentive pay in addition to base pay and fringe benefits 2. Companies may reduce base pay by placing the reduced portion at risk in an incentive plan 3. Companies in cyclical industries such as retail could benefit as compensation expenditure would vary with levels of business activity profitability of the organization

E. Performance Criteria 1. Measures used to appraise performance should be quantifiable and accessible 2. Measures should relate to the organization’s competitive strategy 3. If more than one measure is relevant, each should be weighed to reflect its relative importance to the organization’s competitive strategy

F. Time Horizon: Short Term versus Long Term 1. “Rule-of-thumb” is that short term is five years or fewer 2. Incentives for professionals’ and executives’ are generally long term

End of the Chapter VII.

Key Terms

Incentive pay: Rewards employees for partially or completely attaining a predetermined work objective Variable pay: Rewards employees for partially or completely attaining a predetermined work objective Piecework plans: Rewards employees based on their individual hourly production against an objective output standard and are determined by the pace at which manufacturing equipment operates Incentive effect: Refers to a worker’s willingness to work diligently to produce more quality output than simply attending work without putting in the effort Sorting effect: Addresses an employee’s choice to stay versus leave his or her employer for another job, presumably one without an incentive pay contingency Management incentive plans: Award bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division, department, or unit Behavioural encouragement plans: Employees receive payments for specific behavioural accomplishments Referral plans: Employees receive monetary bonuses under for referring new customers or recruiting successful job applicants Spot bonuses: Relatively small monetary gifts provided to employees for outstanding work or effort during a reasonably short period of time Group incentive programs: Reward employees for their collective performance, rather than for each employee’s individual performance Team-based incentives: When each group member receives a financial reward for the attainment of a group goal Gain-sharing: Group incentive systems that provide participating employees with an incentive payment based on improved organization performance for increased productivity, increased customer satisfaction, lower costs, or better safety records Scanlon plan: Include monetary rewards to employees for productivity improvements Sales value of production (SVOP): The sum of sales revenue plus the value of goods in inventory Rucker plan: Incentive plan that emphasizes employee involvement and provides monetary incentives to encourage employee participation using a value-added formula to measure productivity Value-added formula: Value added is the difference between the value of the sales price of a product and the value of materials purchased to make the product Improshare: Improved Productivity through Sharing—measures productivity physically rather than in terms of dollar savings like those used in the Scanlon and Rucker plans Labour hour ratio formula: A standard is determined by analyzing historical accounting data to find the number of labour hours needed to complete a product Free-rider effect: When some employees make fewer contributions to the group goals because they possess lower ability, skills, or experience than other group members Profit-sharing plans: Pay a portion of organization profits to employees, separate from base pay, costof-living adjustments, or permanent merit pay increases Current profit-sharing: award cash to employees, typically on a quarterly or annual basis Deferred profit-sharing: Place cash awards in trust accounts for employees Employee stock option plans: Present a long term organization-wide incentive plan that provide employees with stock options Company stock: Represents total equity of a organization Company stock shares: Represent equity segments of equal value Stock options: Describe an employee’s right to purchase organization stock

VIII.

Discussion Questions and Suggested Answers

4-1.

Indicate whether you agree or disagree with the following statement: “Individual incentive plans are less preferable than group incentives and company-wide incentives.”

4-2.

There is currently a tendency among business professionals to endorse the use of incentive pay plans. Identify two jobs for which individual incentive pay is appropriate and two jobs for which individual incentive pay is inappropriate. Be sure to include your justification.

Two jobs in which individual incentive pay is appropriate are occupations that have to do with production or sales, such as a salesman or an ice cream factory worker. Occupations such as these would benefit most from individual incentive pay because the performance of the individual would be based on how hard they worked and it is easy to determine someone’s effort by how many sales or products they produce.

Two jobs in which individual incentive pay would be inappropriate are concert violinist or firefighter. A violinist is a member of a team and individual performance cannot be measured. A firefighter needs to perform at the same high level no matter what and individual performance should not be measured.

Learning Objective: 4-3. Summarize five types of individual incentive pay plans.

4-3.

Critics of profit-sharing plans maintain that these plans do not motivate employees to perform at higher levels. Under what conditions are profit-sharing plans not likely to motivate employees?

4-4.

Unlike individual incentive programs, group and company-wide incentive programs reward individuals based on the group and company-wide performance standards, respectively. Under group and company-wide incentive programs, it is possible for poor performers to benefit without making substantial contributions to group or company goals. What can companies do to ensure that poor performers do not benefit?

Organizations can do several things to ensure that poor performers do not benefit from group plans. One is to have appraisal methods such as employee coworker, so as to make sure that if someone is performing well they are recognized, but if someone is not, they are noted and do not receive benefits.

Other methods include manager involvement with individual employee performance throughout the working process, with special emphasis on making sure that everyone is performing well.

Learning Objective: 4-6. Summarize considerations when designing incentive pay programs.

4-5.

Opponents of incentive pay programs argue that these programs manipulate employees more than seniority and merit pay programs. Discuss your views of this statement.

Answers will vary greatly based on the student’s position and point of view. Opponents of incentive pay may discuss the relative size of incentive payments compared to merit or seniority adjustments or the fact that any form of behaviour modification or behaviour encouragement is manipulation. Supporters of incentive pay may discuss the motivational value of incentive pay and the fact that employees know what

they are signing on for with an incentive plan.

IX.

End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

Case Name: Individual or Team Reward?

Instructor Notes Organizations often consider incentive pay plans to reward employees for their performance. A well-designed incentive pay plan can help an organization achieve objectives through improved productivity, quality and customer service. In order to accomplish this, the incentive pay plan must be appropriate for the particular objective. At Metropolitan Furniture, there is a need for high individual productivity and also a level of teamwork that allows the organization to meet delivery dates for furniture sets that involve the effort of multiple workers. These differing needs create a challenge for management to determine the right approach in designing an incentive pay plan.

Suggested Student Responses:

4-6.

What are some advantages of offering an individual piece-rate pay plan to the furniture builders at Metropolitan Furniture?

Answers may vary.

4-7.

What are some advantages of offering a team-based incentive pay plan?

The team-based incentive may eliminate concerns that an individual incentive program could bring such as one worker refusing to help out another worker in order to boost his or her own pay by working on his or her own pieces. Further, as on-time delivery is essential to the success of the organization, a team-based plan rewards an important behaviour within the organization. A team-based incentive program would also be easier to administer as rewards would be based on a few teams instead of several individuals.

Learning Objective: 4-6. Summarize considerations when designing incentive pay programs.

4-8.

What do you think Emily should do?

Student responses will vary. Those in support of an individual incentive program should emphasize higher individual productivity and improved retention of top performing workers.

Those in support of a team-based incentive should emphasize an increased emphasis on customer satisfaction with on-time delivery and the frequency of employees working together.

Learning Objective: 4-6. Summarize considerations when designing incentive pay programs.

X.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating Piecework Pay Awards

4-9.

Calculate the worker’s total earnings for his shift.

The worker starts with a base of $4.50 per hour. The employee then receives $0.75 per garment for each stitched garment over the 15 piecework standard.

Hour

Number of Garments above Standard

Incentive Pay

Total Pay for the Hour

One

10

$7.50

$12.00

Two

0

0

$4.50

Three

15

$11.25

$15.75

Four

13

$9.75

$14.25

Five

9

$6.75

$11.25

Six

3

$2.25

$6.75

Total pay for the shift: $64.50 Learning Objective: 4-3. Summarize five types of individual incentive pay plans.

4-10. How many dollars did the garment worker earn in incentive payments?

Total incentive pay: $37.50

Learning Objective: 4-3. Summarize five types of individual incentive pay plans.

4-11. On the following day, the garment worker completed a six-hour shift, but did not exceed the standard at any time during this shift. How much did he earn for the day?

6 hours x $4.50 per hour = $27.00 Learning Objective: 4-3. Summarize five types of individual incentive pay plans.

XI. Simulation

Students will be able to apply the learning goals from this chapter as they consider incentive pay to complete the simulation activities and assessments. In particular, students will consider the learning goals from this chapter as they design the salary survey and compensation strategy assignments.

CHAPTER 5 Person-Focused Pay Preface

Chapter five discusses person-focused pay plans as a means to reward employees for acquiring job-related, knowledge, skills, or competencies rather than for demonstrating successful job performance. Person-focused pay rewards employees for the promise of performance in the future; merit pay and incentive pay reward employees for promise fulfilled or job performance. This approach to compensating employees often refers to three basic types of person-focused pay programs: pay-for-knowledge, skill-based pay, and competency-based pay. Sometimes, organizations combine person-focused pay programs with traditional merit pay programs by awarding pay raises to employees according to how well they demonstrate competencies.

Learning Objectives 5-1.

5-2.

5-3.

5-4.

5-5.

5-6.

Define person-focused pay.

Describe the usage of person-focused pay.

Name and explain the reasons companies adopt person-focused pay programs.

Summarize the varieties of person-focused pay programs.

Contrast person-focused pay with job-based pay.

Explain the advantages and disadvantages of person-focused pay plans.

I.

Outline/Table of Contents Defining Person-Focused Pay: Competency-Based, Pay-for-Knowledge, and Skill-Based

II. Usage of Person-Focused Pay Programs III. Reasons to Adopt Person-Focused Pay Programs IV.Varieties of Person-Focused Pay

Programs V. Contrasting Person-Focused Pay with Job-Based Pay VI.Advantages and Disadvantages of Person-Focused Pay Programs VII.

Key Terms

VIII. IX.

Discussion Questions and Suggested Answers End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

X.

Crunch the Numbers! Questions and Suggested Student Responses

XI.

Simulation

I.

Lecture Outline/Syllabus Defining Person-Focused Pay: Competency-Based, Pay-for-Knowledge, and Skill-Based

A. Person-Focused Pay Plans 1. Rewards employees for acquiring job related, knowledge, skills, or competencies rather than for demonstrating successful job performance

2. Not compensated for demonstrating successful job performance B. Pay-for-Knowledge Plans 1. Rewards management, service, or professional employees for increasing and applying job related knowledge C. Skill-Based Pay 1. Mainly for employees who perform manual labour

2. Pay increase based on mastery and use of new job skills D. Types of skills 1. Horizontal skills or horizontal knowledge refer to similar skills or knowledge 2. Vertical skills or vertical knowledge are those skills traditionally considered supervisory 3. Depth of skills or depth of knowledge refers to the level of specialization or expertise an employee brings to a particular job E. Competencies 1. An individual’s capability to orchestrate and apply combinations of knowledge and skills consistently over time to perform work successfully in the required work situations 2. Foundational competencies represent the competencies that provide the foundation for success in school and in the world of work

3. Industry-related competencies are specific to an industry or industry sector 4. Occupational competences are developed to define performance in a workplace, to design competency-based curriculum, or to articulate the requirements for an occupational credential

II. Usage of Person-Focused Pay Programs A. Reported use of person-focused pay 1. Evidence suggests that companies with between 150 and 2000 employees use person-focused pay, mostly in manufacturing industry 2. One study found that a skilled-based pay plan in a manufacturing setting increased plant productivity by 58 percent 3. Mostly found in continuous process settings, like manufacturing, in which one employee’s job depends on the work of at least one other worker

III. Reasons to Adopt PersonFocused Pay Programs A. Overarching Reasons 1. Remove the view of pay as an entitlement 2. Establish the view of pay as a reward for acquiring and implementing job-relevant knowledge and skills

B. Technological Innovation 1. Making some jobs obsolete and requiring new and different worker skills 2. Fosters increased autonomy and team-oriented work places which demand different job-related skills C. Increased Global Competition 1. Canadian companies must become more productive in response to increased global competition 2. Foreign workers are better skilled in two ways

a. European Common Market and Pacific Rim economies emphasize learning, therefore their employees are better skilled and more productive b. Cultures emphasize and provide better learning and workplace instruction for non-college-bound students 3. HRM managers must tailor compensation programs to the particular skills they wish to foster

IV.

Varieties of Person-Focused Pay

Programs A. Stair-Step Model 1. Each step represents jobs from a particular job family that differ in terms of complexity 2. Each position differs according to the number of skills needed to perform the job 3. Each “step-up” requires more skills than the position “below” it 4. Training can be conducted either: a. In-house by the company’s own training department b. Outsourced to such organizations as: community colleges, vocational schools, four-year universities, training consulting firms, or suppliers’ client training programs

B. Skill-Blocks Model 1.

2.

3.

4.

Applies to jobs within one job family per model Employees progress to increasingly complex jobs Skills do not necessarily build on each other Emphasizes the development of both horizontal and vertical knowledge and/or skill depth

C. Job-Point Accrual Model 1. Encourages employees to develop skills and learn to perform jobs from different job families a. The number of jobs they can be trained to do is limited b. Companies want to avoid jack of all trades employees 2. The more points an employee accrues, the higher that employee’s compensation level will be D. Cross-Departmental Models 1. Promote staffing flexibility by training employees in one department with some of the critical skills they would need to perform effectively in other departments 2. Can help production companies manage sporadic, short-term staffing shortages and meet seasonal fluctuations in demands for products or services 3. Similar to the job-point accrual model, except for their intent a. Job-point accrual models encourage employees to learn skills and acquire knowledge that bears directly on the competitive advantages of companies b. Cross-departmental models promote staffing flexibility by training employees in one department with critical skills they would need to perform effectively in other departments

V. Contrasting Person-Focused Pay

with Job-Based Pay A. Job-Based Pay 1. Compensates employees for jobs they currently perform 2. Includes seniority pay, merit pay, and incentive pay a. Seniority pay increases employees pay automatically over time b. Merit pay awards a permanent addition to base pay, based on performance

c. Incentive pay provides pay raise amounts based on the attainment of predefined work goals

B. Person-Focused Pay 1. Compensates employees for developing the flexibility and skills to perform a number of jobs effectively 2. Rewards employees on their potential to make positive contributions to the workplace, based on the successful acquisition of work-related skills or knowledge 3. Person-focused pay plans apply in limited contexts, because not all jobs can be assessed based on skill or knowledge

VI. Advantages and Disadvantages of Person-Focused Pay Programs A. Advantages 1. Provide job enrichment and job security a. Job enrichment refers to a job design approach that creates more intrinsically motivating and interesting work environments b. Leads to increased employee commitment, enhanced work motivation, and improved employee satisfaction c. Job security is enhanced because workers are more flexible

2. Employers like because programs can lead to enhanced job performance a. Better quality and quantity of work b. Can rely on leaner staffing because multiskilled employees are better able to cover for unexpected absenteeism, family or medical leave, and training sessions that take employees away from work c. Provide companies with greater flexibility in meeting staffing demands at any particular time B. Disadvantages 1. Hourly labour costs, training costs, and overhead costs can all increase

2. May not mesh well with existing incentive pay programs

a. Employees may not want to learn new skills if increase for new skills is less than incentive award earned for existing skills 3. Depend in large part on well-designed training programs which may be costly 4. Companies struggle with determining the monetary value of skill and knowledge sets End of the Chapter VII.

Key Terms

Person-focused pay plans: Reward employees for acquiring job-related, knowledge, skills, or competencies rather than for demonstrating successful job performance Pay-for-knowledge: Plans that reward managerial, service, or professional workers for success fully learning specific curricula Skill-based pay: Increases the workers’ pay as they master new skills Horizontal skills: Similar skills or knowledge Horizontal knowledge: Similar skills or knowledge Vertical skills: Skills that are traditionally considered supervisory (e.g., scheduling, coordinating, training, and leading others) Vertical knowledge: Skills that are traditionally considered supervisory (e.g., scheduling, coordinating, training, and leading others) Depth of skills: Skills that are traditionally considered supervisory (e.g., scheduling, coordinating, training, and leading others) Depth of knowledge: Skills that are traditionally considered supervisory (e.g., scheduling, coordinating, training, and leading others) Competency: An individual’s capability to orchestrate and apply combinations of knowledge and skills consistently over time to perform work successfully in the required work situations Stair-step model: Pay structure that resembles a flight of stairs where the steps represent jobs from a particular job family that differ in terms of complexity Skill blocks model: Pay structure that resembles the stair-step model, however, the skills do not necessarily build on each other, instead emphasizing both horizontal and vertical skills Job-point accrual model: Pay structure that encourages employees to develop skills and learn to perform jobs from different job families Cross-departmental models: Pay structure that promotes staffing flexibility by training employees in one department with critical skills they would need to perform effectively in other departments Job-based pay: Compensates employees for jobs they currently perform, which include seniority pay, merit pay, and incentive pay

VIII. Discussion Questions and Suggested Answers 5-1.

“Person-focused pay plans are least preferable compared with individual incentive pay programs.” Indicate whether you agree or disagree with this statement. Detail your arguments to support your position.

Individual incentive pay programs are indeed more preferable than pay-for-knowledge in the fact that they pay employees based upon performance and completion or obtainment of certain goals.

Individual incentive plans promote an equitable distribution of compensation within companies, promote the relationship between pay and performance, and are compatible with the

individualistic culture in the United States. However, pay-for-knowledge plans may be better used when a company is in a skill-based industry.

Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans.

5-2.

Person-focused pay is becoming more prevalent in companies; however, personfocused pay programs are not always an appropriate basis for compensation.

Discuss the conditions under which incentive pay is more appropriate than pay-forknowledge pay programs. Be sure to include your justification.

5-3.

The use of drones has been proposed by retailers like Amazon.com as a method for package delivery. If drones eventually become a widely adopted technology for this purpose, some workers who are employed by delivery services or warehouses might become displaced. If the displaced workers were to become drone operators, explain some of the key knowledge and skill sets they could ascertain in a person-focused pay program.

A person-focused pay program requires employers to define specific knowledge and skills of workers.

Some examples of knowledge and skills drone operators would need that could provide the basis for a person-focused pay program include:

• •

Knowledge about laws related to drone operations, company policies and practices about using drones for delivery, and safety rules related to drone operation.

Skills needed would primarily include technical skills related to drone operation.

Learning Objective: 5-4. Summarize the varieties of person-focused pay programs.

5-4.

Discuss your reaction to the following statement: “campanies should not provide training to employees because it is the responsibility of individuals to possess the necessary knowledge and skills prior to becoming employed.”

5-5.

As discussed in the chapter, person-focused pay programs are not suitable for all kinds of jobs. Based on your understanding of person-focused pay concepts, identify at least one job for which this basis for pay is inappropriate. Be sure to provide your rationale.

Person-focused pay programs are not suitable for jobs such as store cashier, docker, mover, and so on, because they are occupations that are better suited for incentive pay programs of working harder, not necessarily knowing more.

Learning Objective: 5-2. Describe the usage of person-focused pay.

IX.

End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

Case Name: Person-Focused Pay at Mitron Computers

Instructor Notes A well-designed person-focused pay system has the potential to increase employee commitment, enhance motivation and improve employee satisfaction because they promote skill variety and autonomy. In this case, there is no incentive for the Technicians to further their skill development, which creates problems when a limited number of Technicians are able to complete the more complex steps in the computer building process. A person-focused pay system would create an incentive for the Technicians to attend training to develop their skills. However, the system is in conflict with their current team incentives and this issue would need to be addressed.

Suggested Student Responses:

5-6.

What are some advantages of a person-focused pay system at Mitron?

Such a system could create an incentive to broaden the Technician’s skills and as a result, they will have more variety in their work, which could lead to higher levels of motivation and job satisfaction.

Employees will also have more job security because of the flexibility of skills. Mitron also benefits from the flexibility that a better-trained staff provides. This will most likely solve the problem of delayed shipments.

Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans.

5-7.

What are some disadvantages?

The system could cause an increase in labour costs for Mitron. As more Technicians raise their pay rates, their labour costs will rise. The company’s training costs will also increase as more Technicians attend the training. The company must ensure that the increased efficiency and quality they gain from the system would outweigh this increased cost. The system is also in conflict with the team-based incentive pay plan. The Technicians miss out on some team-based incentive pay when they leave work to attend the training. Holly would need to resolve the conflict before implementing the new system.

Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans.

X.

Crunch the Numbers! Questions and Suggested Student Responses

Training Budget Costs 5-9 What is the total cost of training based on the current budget?

The total cost of training is is $577,500, totaling all budget items.

5-10. Let’s assume that 100 employees will participate in this training program. What is the average training cost per employee?

The total cost of the training is $577,500. If you divide that by 100 employees, the average training cost per employee = $5,775 Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans.

5-11 Employee salaries are based on an hourly rate of $20 and 100 employees receive training.

Based on total compensation for employees while in training (line D), how many hours does each

employee spend in training?

The total compensation amount = $240,000. The cost of one hour of training for 100 employees = 100 * $20 = $2000. $240,000/$2,000 = 120 hours each employee spends in training.

Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans.

XI. Simulation Students will be able to apply the learning goals from this chapter as they consider person and job-based pay to complete the simulation activities and assessments. In particular, students will consider the learning goals from this chapter as they design the job evaluation, salary survey, and compensation strategy assignments.

CHAPTER 6 Building Internally Consistent Compensation Systems Preface Chapter six introduces students to job descriptions as a cornerstone in the development of internally consistent compensation systems as well as describe recruitment, selection standards, training requirements, and performance criteria in performance evaluation systems. Within compensation, wellwritten job descriptions provide compensation professionals with sufficiently well-specified information about job duties and worker requirements upon which to begin making judgments about the relative worth of jobs based on differences in job content. With these judgments in hand, compensation professionals will be well positioned to survey market pay rates to establish competitive pay levels.

Learning Objectives 6.1 6.2 6.3 6.4 6.5

Explain the concept of internal consistency.

Summarize the practice of job analysis.

Describe the practice of job evaluation.

Summarize various job evaluation techniques.

Explain how internally consistent compensation systems and competitive strategy relate to each other.

Outline/Table of Contents

I. Internal Consistency II. Job Analysis III. Job Evaluation IV.

Job Evaluation Techniques

V. Internally Consistent Compensation

Systems and Competitive Strategy VI.Key Terms VII. VIII. IX.

XI.

Discussion Questions and Suggested Answers End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Crunch the Numbers! Questions and Suggested Student Responses

Simulation

Lecture Outline/Syllabus I. Internal Consistency A. Internally consistent compensation systems

1. Clearly define the relative value of each job among all jobs within a organization to represent the job structure or hierarchy 2. Based on a fundamental principle that states jobs that require greater qualifications, more responsibilities, and more complex job duties should offer more pay than those jobs that require less

3. Developed using two processes a. Job analysis i. Mostly a descriptive procedure ii. Identifies job content b. Job evaluation i. Is used to establish pay differentials among employees within an organization

II. Job Analysis A. Definition 1. A systematic process for gathering, documenting, and analyzing information in order to describe jobs 2. Identifies and defines job content a. Job duties that employees must perform b. Worker requirements (compensable factors) are needed to perform the job 3. Job context or working conditions, like: a. Social context b. Physical environment

B. Steps in the Job Analysis Process 1. Five main activities

a. Determine a job analysis program b. Select and train analysts c. Job analyst orientation d. Conduct the study: data collection methods and sources of data e. Summarize the results: writing job descriptions 2. Determine a job analysis program a. Decide between using an established system or developing its own b. Typical methods include questionnaires, interviews, observation, and participation 3. Select and train analysts a. Job analysts must be able to collect job-related information through various methods, relate to a wide variety of employees, analyze the information and write clearly and succinctly b. Ideally, a task force of representatives from throughout the organization conducts the analysis, while HRM staff members coordinate it c. Training should be provided on the basic assumptions of the model and the procedures

4. Direct job analysts orientation a. Before starting job analysis techniques the analyst must analyze the context in which employees perform their work b. Analysts should obtain and review internal information 5. Conduct the study: Data collection methods and sources of data a. Anaylsts should carefully choose the method of data collection and the sources of data b. The most common methods of data collection are questionnaires and observation c. Most common sources of data are job incumbents, superviosrs, and the job analysts d. A reliable job analysis method yields consistent results under similar conditions

e. A valid job analysis method accurately assesses each job’s duties 6. Summarize the results: writing job descriptions a. Should summarize the job’s purpose and list its tasks, duties, responsibilities, as well as the KSA’s necessary to perform the job at a minimum level c. Should contain: i. Job title to indicate the job designation ii. Job summary with two to four concise, descriptive statements iii. Job duties to describe the major work activities and supervisory responsibilities iv. Worker specification to list the education, skills, abilities, knowledge, and other qualifications needed to perform the job

C. Legal Considerations for Job Analysis 1. Job analyses are not required by the government, but can increase the chance that employment decisions are based on pertinent job requirements

D. Job Analysis Techniques 1. Can use established or custom designed techniques 2. Choosing depends on applicability and cost

E. The Canadian National Occupational Classification (NOC) within Employment and Social Development Canada and Statistics Canada 1. NOC divides 35,000 jobs into 9 categories based on skill type and level

III.

Job Evaluation

A. Definition 1. It is a technique used to systematically recognize differences in the relative worth among a set of jobs, and establish differentials accordingly

B. Compensable Factors 1. Defined as salient job characteristics by which companies establish relative pay rates 2. Universal compensable factors are skill, effort, responsibility, and working conditions 3. Two considerations when selecting which factors to use when evaluating a job a. Which factors are job-related? b. Which factors further the organization’s strategies?

C. The Job Evaluation Process 1. Six steps a. Determining single versus multiple job evaluation techniques b. Choosing the job evaluation committee

c. Training employees to conduct job evaluation d. Documenting the job evaluation plan e. Communicating with employees f. Setting up the appeals process 2. Determining single versus multiple job evaluation techniques a. Determine how many techniques are sufficiently broad to assess a diverse set of jobs b. It is not reasonable to expect that a single job evaluation technique based on a single set of compensable factors can adequately assess diverse sets of jobs 3. Choosing the job evaluation committee a. Usually chosen by the HRM professional b. Consists of rank and file employees, supervisors, managers, and union representatives, each with their own motivations d. Helps ensure commitment from employees and provides a check and balance system 4. Training employees to conduct job evaluations, by ensuring that they: a. Understand the process objectives, know organization objectives, and practice using criteria

5. Documenting the job evaluation plan a. Important for legal and training purposes b. Allows employees to understand how their jobs were evaluated 6. Communicating with employees a. Should be done formally and personally throughout the process b. Employees should have a chance to respond positively and negatively 7. Setting up the appeals process a. Appeals procedures should allow reviews on a case-by-case basis to provide a check on the process through reexamination and such appeals may reduce charges of illegal discrimination

IV.

Job Evaluation Techniques

A. Two general types 1. Market-based evaluations a. Use market data to determine differences in job worth b. Allow companies to assign pay rates that are neither too low nor too high relative to the market c. Compensation professionals use compensation surveys to determine the prevailing pay rates in the relevant job markets 2. Job-content evaluations a. Emphasize the organization’s internal value system to establish a hierarchy of internal job worth based on each job’s role in the organization strategy

b. Compensation professionals must judge the adequacy of pay differentials by comparing market rates with in-house rates 3. Must balance external market considerations with internal consistency objectives B. The Point Method 1. The most popular job-content method because it gives compensation professionals better control over balancing internal and market considerations 2. A quantitative method that assigns numerical values to compensable factors which are summed to indicate the overall value of the job 3. The relative worth of the job is established by the magnitude of its overall numeric value 4. Evaluates jobs by comparing compensable factors a. Each factor is defined and assigned a range of points based on the factor’s relative value to the organization b. Compensable factors are weighted to represent the relative importance of each factor to the job 5. The seven-step process a. Select benchmark jobs b. Choose compensable factors based on benchmark jobs c. Define factor degrees d. Determine the weight of each factor e. Determine point values for each compensable factor f. Verify factor degrees and point values g. Evaluate all jobs 6. Step 1: Select benchmark jobs a. Used to develop factors and their definitions to select jobs to represent the entire range of jobs in the organization b. Benchmark jobs found outside the organization, provide reference points against which jobs within the organization are judged 7. Step 2: Choose compensable factors based on benchmark jobs a. Managers must define compensable factors that adequately represent the scope of jobs slated for evaluation b. Each benchmark job should be described by these factors that help distinguish it from the value of all other jobs 8. Step 3: Define factor degrees a. Evaluators must divide each factor into a sufficient number of degrees to identify the level of a factor present in each job b. The number of degrees will vary depending on the comprehensiveness of the plan 9. Step 4: Determine the weight of each factor a. Represents the importance of the factor to the overall value of the job

b. Weighting often done by management or by a job evaluation committee 10. Step 5: Determine point values for each compensable factor in three stages a. Establish the maximum possible point values b. Determine point value by multiplying point total by percentage c. Distribute these points across degree statements within each compensable factor for use in a regression analysis 11. Step 6: Verify factor degrees and point values a. Committee members should review the point totals for each job b. Determine whether the hierarchy of jobs makes sense in the context of the organization’s strategy plan as well as the inherent content of the jobs 12. Step 7: Evaluate all jobs a. Once the evaluation system has been tested and refined b. By totaling the points for each job, which are then ranked according to their point values

13. Balancing internal and market considerations using the point method a. By converting point values into the market value of jobs through regression analysis i. Regression analyses enable compensation professionals to set base pay rates in line with market rates for benchmark or representative jobs ii. Companies get market pay rates through compensation surveys iii. An organization’s value structure for jobs based on the point method will probably differ from the market rates

C. Alternative Job-Content Evaluation Approaches 1. Simple ranking plan a. This plan orders all jobs from lowest to highest according to a single criterion, such as job complexity

2. Paired comparison and alternation ranking ranking a. Paired comparison i. Useful when there are many (20 or more) jobs to rate ii. Every job is paired with every other job iii. After all pairs are rated, the jobs are ranked by total points received

b. Alternation ranking i. Orders jobs by extremes

i. The relative value of each job is judged by a single criterion iii. Ranking begins by determining which job is the most then least valuable 3. Classification plans a. Place jobs into categories based on compensable factors b. Public sector organizations, such as the civil service systems, use this plan

D. Alternatives to Job Evaluation 1.

2.

3.

4.

Market pay rate Pay incentives Individual rates Collective bargaining

V. Internally Consistent Compensation Systems and Competitive Strategy A. Internally consistent compensation systems are important 1. Tightly specified job descriptions are appropriate for companies that pursue a lowest cost strategy 2. Some limitations

a. Reduce an organization’s agility to respond to to changes in competitor’s pay practices b. Establishing job hierarchies tends to create narrowly defined jobs, which leads to increased bureacracy End of the Chapter VI.

Key Terms

Internally consistent compensation systems: Clearly define the relative value of each job among all jobs within an organization Job analysis: Is a systematic process for gathering, documenting, and analyzing information in order to describe jobs Job content: refers to the actual activities that employees must perform in the job. Job content descriptions may be broad, general statements of job activities or detailed descriptions of duties and tasks performed in the job Job evaluation: Systematically recognizes differences in the relative worth among a set of jobs and establishes pay differentials accordingly Worker requirements: Represent the minimum qualifications and the knowledge, skills, and abilities (KSAs) that people must have to perform a particular job Working conditions: The social context or physical environment where work will

be performed Reliable job analysis method: Yields consistent results under similar conditions Valid job analysis method: Accurately assesses each job’s duties or content Job descriptions: Summarize a job’s purpose and lists its tasks, duties, and responsibilities, as well as the KSAs necessary to perform the job at a minimum level Job titles: Listed in job descriptions, indicate job designations.

Job summary: Statement contained in job descriptions, summarizes the job based on two to four descriptive statements Job duties: A section in job descriptions, describe the major work activities and, if pertinent, supervisory responsibilities Skill: An observable competence to perform a learned psychomotor act Ability: A present competence to perform an observable behavior or a behaviour that results in an observable product Knowledge: A body of information applied directly to the performance of a function National Occupational Classification: Is designed to classify occupational information from statistical surveys. It is also used in a range of contexts to compile, analyze and communicate information about occupations. Occupational information is of critical importance for the provision of labour market and career intelligence, skills development, occupational forecasting, labour supply and demand analysis, employment equity and numerous other programs and services. It provides a standardized framework for organizing the world of work in a manageable, understandable and coherent system.

Occupation-specific information requirements: A detailed comprehensive set of elements that apply to a single occupation or a narrowly defined job family Knowledge: Is organized sets of information used for the execution of tasks and activities within a particular domain Compensable factors: Job attributes (e.g., skill, effort, responsibility, and working conditions) that compensation professionals use to determine the value of jobs Universal compensable factors: Skill, effort, responsibility, and working conditions Market-based evaluation: An approach to job evaluation, uses market data to determine differences in job worth Job-content evaluation: Plans that emphasize the company’s internal value system by establishing a hierarchy of internal job worth based on each job’s function in company strategy Point method: Represents a job-content evaluation technique that uses quantitative methodology.

Quantitative methods assign numerical values to compensable factors that describe jobs, and these values are summed as an indicator of the overall value for the job.

Benchmark jobs: Found outside the company, provide reference points against which the values of jobs within the company are judged Simple ranking plans: Order all jobs from lowest to highest according to a single criterion (e.g., job complexity or the centrality of the job to the caompany’s competitive strategy) Paired comparison: A variation of simple ranking job evaluation plans, orders all jobs from lowest to highest based on comparing the worth of each job in all possible job pairs. Paired comparison also refers to a specific kind of comparison method for appraising job performance. Supervisors compare each employee to every other employee, identifying the better performer in each pair.

Alternation ranking: Avariation of simple ranking job evaluation plans, orders all jobs from lowest to highest, based on alternately identifying the jobs of lowest and highest worth Classification plans: A particular method of job evaluation, places jobs into categories based on compensable factors

VII.

Discussion Questions and Suggested Answers

6-1.

Discuss the differences between job analysis and job evaluation. How do these practices help establish internally consistent job structures?

Job analysis is almost purely descriptive, job evaluation partly reflects the values and priorities that management places on various positions. Job evaluation to systematically recognize differences in the relative worth among a set of jobs and to establish pay differentials accordingly.

6-2.

Write a draft job description (no longer than one page) for a job that you have had according to the principles described in this chapter.

The student response to this question will depend on the job selected. The job description should summarize the job’s purpose and list its tasks, duties, responsibilities, as well as the KSA’s necessary to perform the job at a minimum level. The description should include: • Job title to indicate the job designation • Job duties to describe the major work activities and supervisory responsibilities • Job summary with two to four concise, descriptive statements • Worker specification to list the education, skills, abilities, knowledge, and other qualifications needed to perform the job Learning Objective: 6-2. Summarize the practice of job analysis.

6-3.

This chapter provides rationale for conducting job analysis, and it indicates some of the limitations. Take a stand for or against the use of job analysis, and provide convincing arguments for your position.

The general purpose of job analysis is to record the requirements of a job and the work performed. Job analysis is performed as a preliminary to subsequent actions, including organizational analysis, development of a job description, creation of performance appraisals, the selection and promotion of an employee, training needs assessment, and last but certainly not least, compensation. Job analysis does have its many limitations, but all in all it is a useful and highly productive way to accurately outline the expectations and requirements of a given job.

Learning Objective: 6-2. Summarize the practice of job analysis.

6-4.

Respond to the statement “Building an internally consistent job structure is burdensome to companies. Instead, it is best to simply define and evaluate the worth of jobs by surveying the market.”

6-5.

Do you consider job evaluation to be an art or a science? Please explain.

Job evaluation is more of a science than an art, for the evaluation process consists of basic formulas and guidelines that are in essence quite rigid. In order to accurately evaluate a job, it is necessary to evaluate by the rules of job evaluation. For example, various job evaluation techniques require certain formulas and numbers. In order to determine point values for each compensable factor, for instance, one must use certain number parameters in order to get an accurate evaluation: “The maximum possible total points for

skills equal 600 points (60% x 1,000 points).”

Learning Objective: 6-3. Describe the practice of job evaluation.

VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Internal Consistency at Customers First

Instructor Notes Many organizations that experience rapid growth set pay in response to the external market. Such a strategy can be useful in recruiting the right talent for a start-up organization. However, internal consistency of pay rates is often overlooked leading to more long-term concerns for an organization.

Such inconsistency can cause feelings of inequity among employees and can lead to employee dissatisfaction and turnover. Further, if the inconsistencies fall along a particular protected class (i.e. those who feel they are paid less are in workgroups comprised mostly of females), an organization could face some legal challenges. A formal job analysis and job evaluation process that establishes an internally consistent pay structure can alleviate these concerns.

Suggested Student Responses: 6-6.

Do you think that job analysis and job evaluation will benefit Customers First?

6-7.

What is your opinion on Wendy’s view on job analysis and job evaluation?

The job analysis and job evaluation process can be time consuming for a organization. Further, a formal pay structure does create some bureaucracy within an organization and create some challenges when an organization needs to respond quickly to changes in the market pay for certain jobs. Another concern is that the resulting pay structure may require some pay adjustments to certain employees. It is unlikely that the organization would reduce pay but they might need to raise the pay of certain individuals, which could affect their labour costs.

Learning Objective: 6-5. Explain how internally consistent compensation systems and competitive strategy relate to each other 6-8.

What do you recommend Customers First do? Why?

While some of Wendy’s concerns are legitimate, if the organization is planning continued growth, a more formal pay structure would be helpful to avoid pay inequities and help support pay decisions at hire.

While it would be time consuming to take on, after the initial job analysis and job evaluation process is completed, the resulting pay structure would ultimately benefit the organization.

Learning Objective: 6-5. Explain how internally consistent compensation systems and competitive strategy relate to each other

IX.

Crunch the Numbers! Questions and Suggested Student Responses

6-9.

Refer to Step 5 in the discussion of the point method (in this chapter), and let’s assume that the total possible number of job evaluation points is 875 rather than 1,000. Based on the following weighting scheme, what is the possible maximum value of each compensable factor?

• Skill: 20% • Effort: 15% • Responsibility: 60% • Working Conditions: 5% Skill: 20% = (20 percent x 875) = 175 points Effort: 15% = (15 percent x 875) = 131.25 points Responsibility: 60% = (60 percent x 875) = 525 points Working Conditions: 5% = (5 percent x 875) = 43.75 points Learning Objective: 6-4. Summarize various job evaluation techniques.

6-10.

The sample worksheet (Table 6-9) shows point values for each compensable factor degree. Based on the information provided in and your answers to question 6-9, calculate the revised amounts.

Compensable Factor Skill Effort Responsibility Working Conditions

1 35 26.25 105 8.75

2 70 52.5 210 17.5

3 105 78.75 315 26.25

4 140 105 420 35

5 175 131.25 525 43.75

Total 175 131.25 525 43.75

Learning Objective: 6-4. Summarize various job evaluation techniques.

6-11.

Based on the revised sample worksheet (question 6-10), calculate the job point total with the following degree selection per compensable factor: • Skill: 3 • Effort: 3 • Responsibility: 5 • Working Conditions: 1 Compensable Factor Skill Effort Responsibility Working Conditions Total Job Point Value:

Skill: 3 = 105 Effort: 3 = 78.75 Responsibility: 5 = 525

1 35 26.25 105 8.75

2 70 52.5 210 17.5

3 105 78.75 315 26.25

4 140 105 420 35

5 175 131.25 525 43.75

Total 175 131.25 525 43.75 717.5

Working Conditions: 1 = 8.75 Total Job Point Value = 717.5

Learning Objective: 6-4. Summarize various job evaluation techniques.

X. Simulation Students will be able to apply the learning goals from this chapter as they consider job evaluation, internally consistent compensation systems, and competitive strategy to complete the simulation activities and assessments. In particular, students will consider the learning goals as they design the job evaluation, salary survey, and compensation strategy. Students will be required to directly apply the job evaluation techniques from this chapter to the job evaluation simulation assignment.

CHAPTER 7 Building Market-Competitive Compensation Systems Preface Chapter seven introduces students to market-competitive compensation systems. Specifically, students explore compensation surveys as these function as a cornerstone in the development of marketcompetitive compensation systems. Well-designed and executed surveys provide compensation professionals with sufficient data about other organizations’ pay rates and practices to begin establishing competitive pay policies that are focused on pay level and pay mix.

Learning Objectives 7-1.

7-2.

7-3.

7-4.

Explain the concept of market-competitive compensation systems and summarize the four activities compensation professionals engage in to create these systems.

Discuss compensation survey practices.

Describe how compensation professionals integrate internal job structures with external market pay rates.

Explain the basic concepts of compensation policies and strategic mandates: pay mix and pay level.

Outline/Table of Contents I. Market-Competitive Pay Systems: The Basic Building Blocks II. Compensation Surveys III. Integrating Internal Job Structures

with External Market Pay Rates IV.Compensation Policies and Strategic Mandates V.

Key Terms

VI. VII.

Discussion Questions and Suggested Answers End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

VIII.

Crunch the Numbers! Questions and Suggested Student Responses

IX.

Simulation

Lecture Outline/Syllabus I. Market-Competitive Pay Systems: The Basic Building Blocks A. Definition 1. Market-competitive pay systems represent organizations’ compensation policies that fit the imperatives of their competitive advantage 2. These systems play a significant role in attracting and retaining the most qualified employees 3. Based on four activities a. Conducting strategic analyses which entails an examination of an organization’s external market factors b. Assessments of competitors’ pay practices with compensation surveys c. Integrating the internal job structure with external market pay rates d. Determining compensation policies

II. Compensation Surveys A. Preliminary Considerations 1. Main considerations a. What organizations hope to gain from compensation surveys b. Which type of survey to use 2. What organizations hope to gain from compensation surveys a. Competitors’ compensation practices b. Employee’s preferences for alternative forms of compensation due to economic changes

3. Custom development versus use of an existing compensation survey a. Custom surveys preferable because the questions can be tailored specifically for each organization b. Most organizations choose not to develop own survey for three reasons: i. Not always practical because of the specialized knowledge and skills needed to develop effective ones ii. Not always effective because businesses are reluctant to give information directly to competitors iii. The staffing and design costs can be prohibitive

B. Using Published Compensation Survey Data 1. Two important considerations a. Survey focus: core or fringe compensation b. Sources of published survey data 2. Survey focus: Core Compensation or Employee Benefits a. Must decide on obtaining information about base pay, employee benefits, or both 3. Sources of published surveys a. Professional associations that survey members b. Industry associations c. Consulting firms who provide data from recently completed surveys or create surveys from scratch for clients d. Human Resources and Skills Development Canada offers consider Canadian employment data

C. Compensation Surveys: Strategic Considerations 1.

Two essential strategic considerations

a. Defining the relevant labour market b. Choosing benchmark jobs

2.

Defining the relevant labour market

a. Relevant labour markets represent the fields of potentially qualified candidates for particular jobs b. Defined on the basis of occupational classification, geography, and product or service market competitors c. Occupational classification refers to a group of two or more jobs that are based on similar work characteristics and responsibilities d. Organizations search a wider geographic area for candidates for jobs that require specialized skills or skills that are low in supply

e. Organizations use product or service market competitors to define the relevant labour market when industry specific knowledge is key and competition for market share is keen

3.

Choosing benchmark jobs

a. Used as reference points for setting pay levels b. Four characteristics i. The contents are well-known, relatively stable over time, and agreed upon by the employees involved ii. The jobs are common across a number of different employers iii. The jobs represent the entire range of jobs that are being evaluated within an organization iv. The jobs are generally accepted in the labour market for the purposes of setting pay levels c. Necessary because matches between an organization’s position to a position in a survey is not always possible since: i. Large organizations may have hundreds of unique jobs ii. Organizations adapt job duties and scope to fit their specific needs d. Organizations use job leveling to make corrections for differences between their jobs and external benchmark jobs i. Point factor leveling is a job leveling approach where participants rate a job based on a standard set of compensable factors that have point values associated with each level of the factor

D. Compensation Survey Data 1. Three compensation survey data characteristics a. Contains immense amounts of information i. May be a wide variety of pay rates across organizations, making it hard to build market-competitive pay systems ii. Statistics needed to describe large sets of data b. The data is generally outdated because of the lag time between data collection and use c. Statistical analysis should be used to integrate internal job structures (based on job evaluation points) with the external market (based on the survey data)

2.

Data analysis

1. Begins with basic tabulation of survey data which helps organize data, promotes decision makers’ familiarization with the data and reveals outliers

3.

Using the appropriate statistics to

summarize survey data a. Central tendency represents the fact that a set of data cluster (or center) around a central point c. Two central tendency measures i. Arithmetic mean which is calculated by adding all the salaries together and dividing by the sum of number of salaries added ii. Median is the meddle value in an ordered sequence of numerical data

4. Variation a. Represents the amount of spread or dispersion in a set of data b. Standard deviation refers to the mean distance of each salary from the mean i. Used as a reference point to judge whether employees’ compensation is below or above the market ii. Indicates the range for the majority of salaries, so it can be used to judge how an organization’s salary range compares to the market c. Quartile i. Describe dispersion by indicating the percentage of figures that fall below certain points ii. Allows compensation professionals to describe the distribution of data based on four points • Quartile 1 at 25% • Quartile 2 at 50% • Quartile 3 at 75% • Quartile 4 at 100% d. Percentiles ii. Describe dispersion by indicating the percentage of figures that fall below certain points ii. Based on 100 points

5.

Updating the survey data

a. Necessary because of the lag-time between data collection and data use

b. Failure to adjust could lead to real compensation (purchasing power of dollar) falls below nominal compensation (face value of dollar) c. Consumer Price Index (CPI) which is the most commonly used method to track cost changes can be used to update salary survey data

III. Integrating Internal Job Structures with External Market Pay Rates

A. Overview 1. Differences in the internal value of jobs should correspond to pay differences based on compensation survey data

2. Regression analysis a. Uses market pay rates as reference points for determining internal pay structures b. Enables decision makers to predict the values of one variable from another c. Finds the best fitting line (market pay line) between two variables i. Job evaluation points of benchmark jobs ii. Salary survey data for the benchmark jobs d. Equation i. Y = a + bX ii. Y = predicted salary iii. X = job evaluation points iv. a = the Y intercept: the Y value at which X = 0 v. b = the slope • Represents the change in Y for every change in the job evaluation points • Represents the dollar value of each job evaluation point 2 e. R i. Tells how well the variation of jobs based on job evaluation points explains the variation in market pay rates from the survey ii. Ranges from 0 to 1 iii. Represents the percentage variation in Y values that can be explained by the X values • Y = market pay rates • X = job evaluation points iv. Values • R2 = 0 means that none of the variation in market pay rates can be explained by the organization’s job structure • R2 -= 1 means that all the variation in market pay rates can be explained by the organization’s job structure • R2 between 0 and .30 represents a small amount of variation • R2 between .31 and .70 represents a medium amount of variation • R2 above .71 represents a large amount of variation

IV.

Compensation Policies and

Strategic Mandates A. Pay level policies 1. Organizations can choose from three pay level policies

a. Market lead b. Market lag c. Market match 2. Market lead policy distinguishes organizations from the competition by compensating employees more highly than most competitors

3. Market lag policy distinguishes from competition by compensating less than most competitors 4. Market match policy most closely follows the typical market pay rates because organizations pay according to the market pay line

B. Pay mix policies 1. Pay mix policies refer to the combination of core compensation and employee benefits components that make up an employee’s total compensation package 2. Pay mix may policies may be expressed in dollars (or other currency as relevant) or as a percentage of total dollars allocated for an employee’s total compensation

3.

What is an appropriate pay mix?

a. For policy purposes, it makes sense to consider guidelines for jobs within a particular structure (for example, managerial, administrative, or sales) because of the common job content and worker requirements of jobs within a particular structure End of Chapter V.

Key Terms

Market-competitive pay systems: Represent companies’ compensation policies that fit the imperatives of competitive advantage. Compensation professionals build market-competitive compensation systems based on the results of compensation surveys.

Strategic analysis: Entails an examination of an organization’s external market context and internal factors Compensation surveys: Involve the collection and subsequent analysis of competitors’ compensation data Compensation plans: Represent the selection and implementation of pay level and pay mix policies over a specified time period, usually one year Relevant labour markets: Represent the fields of potentially qualified candidates for particular jobs Job levelling: Refers to corrections that companies can make for differences between their jobs and external benchmark jobs. These corrections are based on subjective

judgment rather than on objective criteria.

Point factor levelling: Job leveling approach where participants rate a job based on a standard set of compensable factors that have point values associated with each level of the factor Central tendency: Represents the fact that a set of data clusters or centers around a central point. Central tendency is a number that represents the typical numerical value in a data set.

Mean: Is a measure of central tendency calculated as the sum of numbers (e.g., annual salaries in the marketing department) divided by the number of salaries Median: Is the middle value in an ordered sequence of numerical data. If there is an odd number of data points Variation: Represents the amount of spread or dispersion in a set of data Standard deviation: Refers to the mean distance of each salary figure from the mean Quartiles: Allow compensation professionals to describe the distribution of data based on four groupings Percentiles: Describe dispersion by indicating the percentage of figures that fall below certain points. There are one hundred percentiles ranging from the first percentile to the 100th percentile.

Real compensation: Measures the purchasing power of a dollar Nominal compensation: Is the face value of a dollar Consumer Price Index (CPI): Indexes monthly price changes of goods and services that people buy for day-to-day living Regression analysis: Describes the linear relationship between two variables (i.e., simple regression) or between the linear composite of multiple variables and one other variable (i.e., multiple regression) Market pay line: Representative of typical market pay rates, expressed as a mean or median, relative to an organization’s job structure Market lead policy: Distinguishes companies from the competition by compensating employees more highly than most competitors. Leading the market denotes pay levels above the market pay line.

Market lag policy: Distinguishes companies from the competition by compensating employees less than most competitors. Lagging the market indicates that pay levels fall below the market pay line.

VI.

Discussion Questions and Suggested Answers

7-1.

You are a compensation analyst for a pharmaceuticals organization, which is located in Mississauga, Ontario. Define the scope of the relevant labour markets for chemists and for data entry clerks. Describe the rationale for your definitions.

Relevant labour markets represent the fields of potentially qualified candidates for particular jobs.

Organizations collect compensation survey data from the appropriate relevant labour markets.

Relevant labour markets are defined on the basis of occupational classification, geography, and product or service market competitors. The relevant labour market for chemists might be the entire province of Ontario and other pharmaceutical organizations employing chemists as these jobs are specialized. The relevant labour market for data entry clerks might be just the city of Mississauga and any organization employing data entry clerks.

Learning Objective: 7-3. Describe how compensation professionals integrate internal job structures with external market pay rates.

7-2.

Can companies easily develop compensation systems that are both internally consistent and market competitive? What are some of the challenges to this goal?

7-3.

Which do you believe is most important for an company’s competitive advantage: internal consistency or market competitiveness? Explain your answer.

Market competitiveness is important to meet the growing demands of the market and stay ahead of the competition in order to make the most profit for the company.

Learning Objective: 7-1. Explain the concept of market-competitive compensation systems and summarize the four activities compensation professionals engage in to create these systems.

7-4.

Refer to the regression equation presented earlier in this chapter. When b = 0, the market pay line is parallel to the x-axis. Provide your interpretation.

7-5.

Refer to Table 7.4. Cross out salaries for Organization F and Organization G. Calculate the mean and median for the set of Organizations A through E.

Mean: 37,840 Median: 36,000 Learning Objective: 7-2. Discuss compensation survey practices.

VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Nutriment’s New Hires

Instructor Notes Nutriment is pursuing a differentiation strategy in order to create product that is not offered by their competitors. In order to successfully attract the right staff to ensure Nutriment has a competitive advantage, the organization must ensure that their pay structure is competitive in the local market while also managing costs. Nutriment has different job categories that may require different pay strategies.

The administrative positions only require Nutriment to match the compensation of their competitors.

However, the scientists will be more difficult to attract. As such, it is likely that they will need to take a pay lead strategy for their scientist. Nutriment may also have some concerns with internal consistency of compensation as the market will likely drive them to offer the scientists pay that is significantly more than that of the administrative staff members.

Suggested Student Responses:

7-6.

What are some strategic considerations in establishing a pay structure at Nutriment?

In considering a pay structure that is competitive in the market place, Nutriment should consider their industry, competitors and other external market factors. They must also consider their financial resources.

Nutriment’s business strategy is a differentiation strategy as they are looking to develop a unique product.

As such, recruiting and retaining talented staff members, particularly the scientists, will be essential in order for the business to succeed. They currently have an edge in the market place because of their scientific discoveries; however, it is a competitive market place for talent.

Learning Objective: 7-1. Explain the concept of market-competitive compensation systems and summarize the four activities compensation professionals engage in to create these systems.

7-7.

Should Stewart suggest a pay policy to lead, lag or match the market? Explain your recommendation.

Stewart should suggest two different strategies for Nutriment. For the administrative staff, a match strategy is appropriate. Because it is not necessary to pay higher salaries in order to attract the administrative staff, pursuing a match strategy can offer some cost savings. However, the organization should most likely take a lead strategy in order to create a compensation package that is attractive to scientists. There are few qualified scientists available and their skills are in demand.

Learning Objective: 7-4. Explain the basic concepts of compensation policies and strategic mandates: pay mix and pay level.

VIII.

Crunch the Numbers! Questions and Suggested Student Responses

Updating Salary Survey Data 7-8.

By what percent did the cost of goods and services change between December 2015 and June 2016?

December 2015 = 234.697 June 2016 = 237.248 % Change = (237.248 – 234.697) / 234.697 = 1.0869% increase Learning Objective: 7-2. Discuss compensation survey practices.

7-9.

(A) By what percent might you expect the average cost of goods and services to change over the second 6-month period of 2019? Hint: First, calculate the percentage cost change for the period July through December for each of the previous years: 2015 through 2018. Second, take the average of these five figures.

This calculation gives us the average percent cost change. We often rely on multiple years for estimations to give us a more stable picture of percent cost changes.(B) What is the estimated average salary for December 31, 2016? Hint:[(initial average salary ×average percent cost change) +initial average salary] ×100%.

A. July through December change: 2015 = (217.247-214.726) / 214.726 = 1.1741% 2016 = (220.472 -217.605) / 217.605 = 1.3175% 2017 = (227.145 – 225.419) / 225.419 = .7657% 2018 = (231.153 – 228.584) / 228.584 =1.1239% 2019 = (234.697 – 232.980) / 232.980 = .7369% Average % change = 1.0236% B.

($50,000 x 1.0236%) + $50,000 x 100% = $50,511.80 Learning Objective: 7-2. Discuss compensation survey practices.

7-10. (A) By what percent might you expect the average cost of goods and services to change between January 1, 2017 and December 31, 2017? Hint: First, calculate the percent cost change for the period January through December for each of the previous years: 2015 through 2016. Second, take the average of these five figures to calculate the average percent cost change.(B) What is the estimated average salary for December 38, 2015? Hint:[(December 2014 average salary ×average percentage cost change) +December 2018 average salary] ×100%.

A. 2015 = (217.247- 211.933) / 211.933= 2.5074%

2016 = (220.472 -217.488) / 217.488= 1.3720% 2017 = (227.145 – 221.148) / 221.148= 2.7118% 2018 = (231.153 – 227.759) / 227.759= 1.4902% 2019 = (234.697 – 231.444) / 231.444= 1.4055%

Average % change: 1.8973% B. ($50,511.80 x 1.8973%) + $50,511.80 x 100% = $51,470.16 Learning Objective: 7-2. Discuss compensation survey practices.

IX.

Simulation

Students will be able to apply the learning goals from this chapter as they consider job marketcompetitive compensation systems, compensation survey practices, internal job structures with external market pay rates, and the concepts of compensation policies and strategic mandates: pay mix and pay level to complete the simulation activities and assessments. In particular, students will consider the learning goals as they design the salary survey and compensation strategy. Students will be required to directly apply the compensation survey practices and concepts of compensation policies and strategic mandates from this chapter to the salary survey and compensation strategy assignments.

CHAPTER 8 Building Pay Structures That Recognize Employee Contributions Preface

In this chapter, students will learn how organizations structure these pay bases. Chapter eight begins by considering the fundamental process of constructing pay structures. This chapter

continues on to specific pay structures, including merit pay, sales incentive pay, person-focused pay, broadbanding, and two-tier structures.

Learning Objectives 8-1.

8-2.

8-3.

8-4.

8-5.

Explain the concept of pay structures and the five steps necessary to construct pay structures.

Discuss the components of merit pay systems.

Summarize the features of sales compensation plan design.

Describe the essentials of person-focused pay program design.

Summarize pay structure variations.

Outline/Table of Contents

I. Constructing a Pay Structure II. Designing Merit Pay Systems III. Designing Sales Incentive Compensation Plans IV.Designing Person-Focused Programs V. Pay Structure Variations VI.

Key Terms

VII. VIII.

Discussion Questions and Suggested Answers End of Chapter Case, Instructor Notes, and Questions and Suggested Student Responses

IX. X.

Crunch the Numbers! Questions and Suggested Student Responses Simulation Lecture Outline/Syllabus

I. Constructing a Pay Structure A. Overview 1. Based on five steps a. Deciding on how many pay structures to construct b. Determining a market pay line c. Defining pay grades d. Calculating pay ranges for each pay grade e. Evaluating the results

B. Step 1: Deciding on the Number of Pay Structures 1. Usually more than one depending on market rates and organization’s job structure 2. Exempt and nonexempt pay structures a. Categories reflect a distinction in the Employment Standards Acts (ESA) across the provinces and territories b. Exempt jobs are not subject to overtime provisions of the act and are expressed as an annual salary. c. Nonexempt jobs are subject to overtime provisions and compensation is expressed as an hourly pay rate 3. Pay structures based on job family a. Pay structures are defined on the basis of job family which show a distinct pattern in the market b. Distinct job families include: i. Executive ii. Managerial iii. Professional iv Technical v. Clerical vi. Craft

4. Pay structures based on geography a. The pay for similar positions that are within the same organization, but are located in different parts of the country, can be paid differently b. Local influences, like cost-of-living, influence pay structures

C. Step 2: Determining a Market Pay Line 1. Market pay line is representative of typical market pay rates relative to an organization’s job structure 2. Pay levels that correspond with the market pay line are market-competitive pay rates

D. Step 3: Defining Pay Grades 1. Pay grades group jobs for pay policy application based on similar compensable factors and value 2. Job groupings are influenced by other factors such as management philosophy 4. Wider pay grades minimize hierarchy and social distance between employees 5. Narrower pay grades tend to promote hierarchy and social distance 6. Organizations may choose to vary the “absolute” point spread by increasing the point spread as they move of up the pay structure, in recognition of the broader range of skills that higher pay grades represent

E. Step 4: Calculating Pay Ranges for Each Pay Grade 1. Pay ranges build upon pay grades

a. Pay ranges represent the vertical dimension (pay rates) and are designated with the following pay rates i. Minimum - the lower bound of pay within a pay grade ii. Midpoint - generally represents the competitive market average or median iii. Maximum - the upper bound of pay with a pay grade 2. Setting pay range midpoints a. According to competitive pay policy b. If the organization adopts a market lead policy, that organization’s midpoint will be higher than the market average c. If the organization adopts a market match policy, that organization’s midpoint will be similar to the market average e. If the organization adopts a market lag policy, that organization’s midpoint will be lower than the market average 3. Setting pay range minimums and maximums a. According to the market averages b. By developing a range spread i.

The difference between the minimum and maximum pay rates of a given pay grade ii. Progressively higher range spreads for pay grades that contain more valuable jobs in terms of an organization’s criteria iii. Smaller range spreads characterize pay grades that contain narrowly defined jobs that require simple skills with relatively low responsibility c. Higher-level jobs afford employees greater promotion opportunities than entry level jobs d. Adjacent pay ranges usually overlap with other pay ranges so that the highest rate paid to one is greater than the lowest rate of the successive pay grade 4. Pay compression a. Occurs whenever an organization’s pay spread between new hires or less qualified employees and more qualified job incumbents is small b. Occurs when i. Organizations fail to raise pay range minimums and maximums ii. Scarcity of qualified candidates for particular jobs

c. Can threaten an organizations’ competitive advantage when it results in dysfunctional turnover (high performing employees voluntarily terminate their employment) 5. Green circle pay rates a. Are below-minimum pay range rates b. Are usually offered because applicants do not meet every minimum requirement in the job description 6. Red circle pay rates a. Are above maximum pay range rates

b. For exemplary performers, may offer lump sum bonus not added to regular pay

F. Step 5: Evaluate the Results 1. To determine if there was any significant difference between the organization’s internal values for jobs and the market’s value for the same jobs a. If the organization’s valuation exceeds the market’s valuation, the organization must decide whether its higher-than-market pay rates will undermine its attainment of competitive advantage b. If the organization undervalues a position, it must determine if the discrepancy is limiting its ability to recruit quality employees 2. Compa-ratios a. Index the relative competitiveness of internal pay rates, based on pay range midpoints b. Are calculated by dividing the employee’s pay rate by the pay range midpoint c. A ratio of one means that the employee’s pay rate equals the pay range midpoint d. A ratio of less than one means the employee’s pay rate falls below the competitive pay rate for the job

II. Designing Merit Pay Systems A. An effective merit pay program that recognizes employee contributions requires avoiding such pitfalls as ineffective performance appraisal methods and poor communication regarding the link between pay and performance B. Merit Increase Amounts 1. Should reflect prior job performance levels and motivate employees to perform their best 2. Considerations in setting amount: a. There are diminishing marginal returns on each additional dollar allocated to merit increases b. Employees’ perceptions of just-meaningful differences in merit increases depend on their cost of living, their attitudes toward the job, and their expectations of rewards from the job c. Equity theory suggests that an employee must regard his or her own ratio of merit increase pay to performance as similar to the ratio for other comparably performing people

g. Compensation budgets are blueprints that describe the allocation of monetary resources to fund pay structures

C. Timing 1. Most increases given on an annual basis 2. Two main approaches a. Common review date/period which is best suited for smaller organizations b. Employee’s anniversary which can be burdensome as reviews must be conducted regularly throughout the year

D. Recurring versus Nonrecurring Merit Pay Increases 1. Recurring increases are permanently added to base pay 2. Nonrecurring increases contain costs and are given as one-time lump sum bonuses

E. Present Level of Base Pay 1. Pay structures specify acceptable pay ranges for jobs within each pay grade 2. Should be within federal guidelines of several equal employment opportunity laws

F. Rewarding Performance: The Merit Pay Grid 1. Amounts are determined by two main factors a. Performance ratings b. The position of employees’ present base pay rates within pay ranges 2. Employee performance ratings a. Overall performance ratings guide the pay raise decision b. Based on the principle of recognizing higher performance with greater rewards 3. Employees’ position within the pay range a. Salaries and hourly wages are indexed by quartile ranking b. Holding performance ratings constant, merit pay increase percentages are reduced as quartile ranks increase, to control employees’ progression through the pay ranges

G. Merit Pay Increase Budgets 1. Budgets limit the merit pay increase percentages in each cell 2. Expressed as a percentage of the sum of employees’ current base pay 3. Varies according to performance level and position in the pay range

4. Steps to ensuring that merit pay increases do not exceed the limit a. Supervisors and managers determine how many employees fall within each performance category b. Determine the percentage of employees whose pay falls into each quartile c. Combine both sets of information to determine the percentage of employees who fall into each cell

d. Calculate the expected number of employees in each cell to provide an estimate of the employees’ performance distribution e. Use this formula: (Expected number of each cell) X (Desired pay increase for cell %) X (Current median pay level for quartile) f. Ensure the total amount is within budget

III. Designing Sales Incentive Compensation Plans A. Purposes of Sales Incentive Compensation Plans 1. Help businesses meet their objectives by aligning the financial self-interest of sales professionals with the organization’s marketing objectives 2. Particular sales objectives include: a. Improve sales productivity b. Improve sales coverage of current customers c. Grow sales overall

B. Alternative Sales Compensation Plans 1. Choosing the appropriate plan depends on the organization’s competitive strategy 2. Five main alternatives a. Salary-only b. Salary-plus-bonus c. Salary-plus-commission d. Commission-plus-draw e. Commission-only

3.

Salary-Only Plans

a. Sales professionals receive fixed base compensation which does not vary with level of units sold, increase in market share, or any other indicator of sales performance b. Relatively risk-free compensation for employees c. Burdensome to employers because they must compensate regardless of their achievement levels d. Appropriate where i. Sales are of high-priced products and services, or technical products with long lead times for sales ii. Sales professionals are primarily responsible for generating demand whereas other employees actually close the sales iii. It is impossible to follow sales results for each sales professional since sales are accomplished through team efforts

iv. Sales professionals are involved in training or other activities when they are not directly involved in making sales

4.

Salary-plus-bonus plans

a. Offer set base pay with an incentive bonus b. Give one-time bonuses, usually tied to meeting specific, exceptional goals

5.

Salary-plus-commission plans

a. A commission is a form of incentive compensation based upon a percentage of the selling price of the product or service b. These plans spread the risk of selling between the organization and the sales professional

6.

Commission-plus-draw plans

a. Award sales professionals with subsistence pay (draw) to cover basic living expenses and also incentives to excel b. The draws are just advances on the commissions the sales professional will earn in the future c. Two types of draws i. Recoverable draws act as organization loans to employees that are carried forward indefinitely until the employee sells enough to repay ii. Non-recoverable draws act as salary because employees are not obligated to repay the loans if they do not sell enough

7.

Commission-only plans

a. Sales professionals derive their entire income through commissions and therefore shoulder all the risk b. Straight commissions award sales professionals with a fixed percentage of the sales revenue d. Graduated commissions award sales professionals with an increased percentage of the sales price as the volume increases e. Multiple-tiered commissions i. Award sales professionals with higher percentages of the sales made in a given period ii. Earned if the sales level exceeds a predetermined level f. Commission plans not always best tactic i. Can cause competitive behaviours between employees iii. Can undermine employees’ intrinsic motivation to sell • May lose their genuine interest for the challenge and enjoyment that selling brings • May “go through the motions” of selling and disregard quality and customer satisfaction

C. Sales Compensation Plans and Competitive Strategy 1. Sales plans with salary components are most appropriate for differentiation strategies because sales professionals can turn attention to addressing client needs 2. Commission-oriented sales compensation plans are best suited for lowest cost strategies because compensation expenditures vary with sales revenue

D. Determining Fixed Pay and the Compensation Mix 1. Depends mainly on three factors: a. Influence of the sales professional on the buying decision b. Competitive pay standards within the industry c. Amount of non-sales activities required 2. Influence of the sales professional on the buying decision a. The more influence sales professionals have on the “buying decisions”, the more the compensation mix will feature incentive pay b. In some industries, it is the sales professional’s technical expertise, more than sales skills that influences the “buying decision” 3. Competitive pay standards within the industry a. The compensation mix must be competitive with market standards to attract and retain quality sales professionals 4. Amount of non-sales activities required a. The more non-sales duties sales professionals are required to perform the more their compensation packages should include a fixed pay component

IV. Designing Person-Focused Programs A. Overview 1. Person-focused programs refer to both knowledge and skills 2. Reward employees for acquisition of job-related knowledge and/or skills 3. A fundamental issue is whether investments in training provide measurable payoffs to organizations

B. Establishing Skill Blocks 1. Skill or knowledge “blocks” are sets of skills necessary to perform a specific job, or group of jobs 2. The number of blocks varies according to the variety of jobs within a organization generally from two to several 4. Development should be based on three considerations: a. Job descriptions should be developed b. Individual jobs should be organized into job families or groups

c. Skills should be grouped into blocks

C. Transition Matters 1. Concerns moving from job-based pay exclusively to including person-focused knowledge plans 2. Skills assessment a. Centers on who should assess: i. Whether employees possess skills at levels that justify a pay raise ii. On what basis assessments should be made iii. When assessments should be conducted b. Input should come from peers, self-assessment, and experts (e.g. supervisors) c. Must identify performance measures d. Performance should be assessed frequently to during transition phases 4. Aligning pay with the knowledge structure a. One of most difficult tasks in moving toward a person-focused system b. If an employee’s actual earnings is more than the person-focused system indicates as being appropriate, managers must develop a reasonable course of action for that employee to acquire the skills or knowledge c. If employees are underpaid (over qualified), the organization must provide pay adjustments quickly 5. Access to training a. Person-focused systems make training necessary rather than optional for employees motivated towards self-improvement b. Employees must have equal access to training i. To meet the intended aim of person-focused programs ii. To reward employees for enhancing their skills iii. To address legal imperatives c. Access to training i.

organizations must ensure that all employees have equal access to the needed training for acquiring higher-level skills d. Employees must be formally informed of the options and rewards

D. Training and Certification 1. Successful person-focused programs depend on an organization’s ability to develop and implement systematic training programs 2. Organizations typically increase the amount of classroom and on-the-job training 3. Should be based on accurate job descriptions E. In-house or Outsourcing Training

1. Training can be in-house or outsourced depending on: a. Expertise: The availability of in-house expertise

b. Timeliness: Training will be outsourced if there is not enough time to develop and deliver it in-house c. Size of the employee population to be trained: Large numbers make in-house more cost effective d. Sensitivity or proprietary nature of the subject matter: The more sensitive the subject matter, the more likely the training will be in-house 2. Certification and recertification a. Certification ensures that employees possess minimal levels of skills proficiency b. Recertification involves retraining or retesting employees to ensure employees have retained minimal skills proficiency

V. Pay Structure Variations A. Broadbanding 1. The broadbanding concept and its’s advantages i.

Consolidates existing pay grades and ranges into fewer, wider pay grades and broader pay ranges

ii.

Represents the organizational trend toward flatter, less hierarchical corporate structures that emphasize teamwork over individual contributions alone

iii. Can reduce management layers and promote quicker decision-making cycles iv. Shifts responsibility to supervisors and managers for administering each employee’s compensation within the confines of the broadbands

2.

Limitations of broadbanding a. Changes how compensation dollars are allocated, but not how much b. Broadbanding can increase compensation expenses, because managers have greater latitude in assigning pay to their employees c. Necessitates a trade-off between the flexibility to reward employees for their unique contributions and a perception among employees that fewer promotional opportunities are available d. Makes employees and employers rethink the idea of promotions as a positive step through the job hierarchy

B. Two-Tiered Pay Structures 1. The two-tier pay system concept and its advantages a. Reward newly hired employees less than established employees b. On temporary basis, employees have opportunity to progress from lower entry-level pay rates to higher rates enjoyed by more senior employees

b. Permanent two-tier systems reinforce the pay-rate distinction by retaining separate pay scales c. Lower-paying scales apply to newly hired employees, whereas current employees enjoy higher-paying scales d. Maximum rates to which newly hired employees can progress are always lower than

more senior employees’ pay scales e. Most prevalent in unionized organizations

2. Limitations of two-tier pay structures a. The lower pay scale for new hires may restrict an organization’s ability to recruit and retain quality employees b. Lower tier employees may resent pay differential and not extend themselves beyond their job descriptions c. Can cause lower employee morale d. Can lead to excessive turnover End of Chapter VI.

Key Terms

Pay structures: Assign different pay rates for jobs of unequal worth and provide the framework for recognizing differences in individual employee contribution Pay grades: Group jobs for pay policy application Pay ranges: Represent the vertical dimension (pay rates) and includes midpoint, minimum, and maximum pay rates Midpoint pay value: The halfway mark between the range minimum and maximum rates Range spread: The difference between the maximum and minimum pay rates of a given pay grade Pay compression: Occurs whenever an organization’s pay spread between newly hired or less qualified employees, and more qualified job incumbents is small Green circle rates: Represent pay rates for jobs that fall below the designated pay minimums Red circle rates: represent pay rates that are higher than the designated pay range maximums Compa-ratios: Index the relative competitiveness of internal pay rates based on pay range midpoints Equity theory: Suggests that an employee must regard his or her own ratio of merit-increase pay to performance as similar to the ratio for other comparably performing people in the company Compensation budgets: Blueprints that describe the allocation of monetary resources to fund pay structures Common review date: Is the designated date when all employees receive performance appraisals Common review period: Is the designated period (e.g., the month of June) when all employees receive performance appraisals.

Employee’s anniversary date: represents the date an employee began working for his or her present employer.

Nonrecurring merit increases or merit bonuses: Lump sum monetary awards based on employees’ past job performances. Employees do not continue to receive nonrecurring merit increases every year.

Employees must instead earn them each time.

Merit pay increase budget: Is expressed as a percentage of the sum of employees’ current base pay Salary-only plans: Specific types of sales compensation plans. Sales professionals receive fixed-base compensation, which does not vary with the level of units sold, increase in market share, or any other indicator of sales performance.

Salary-plus-bonus plans: Specific types of sales compensation plans. Sales professionals receive fixed base compensation, coupled with a bonus. Bonuses are usually single payments that reward employees for achievement of specific, exceptional goals.

Commission: A form of incentive compensation based on a percentage of the selling price of a product or service

Salary-plus-commission plans: Spread the risk of selling between the organization and the sales professional Commission-plus-draw plans: Award sales professionals with subsistence pay or draws Draw: Subsistence pay component awarded as an advance, which is charged against commissions that sales professionals are expected to earn Recoverable draws: act as company loans to employees that are carried forward indefinitely until employees sell enough (i.e., earn a sufficient amount in commissions) to repay their draws.

Nonrecoverable draws: Act as salary because sales employees are not obligated to repay the loans if they do not sell enough.

Commission-only plans: Salespeople derive their entire income from commissions Straight commission: Is based on a fixed percentage of the sales price of the product or service Graduated commissions: Increase percentage pay rates for progressively higher sales volume in a given period Multiple-tiered commissions: Increase percentage pay rates for progressively higher sales volume in a given period only if sales exceed a predetermined level.

Skill (knowledge) blocks: Sets of skills (knowledge) necessary to perform a specific job or group of similar jobs Certification: Ensures that employees possess at least a minimally acceptable level of skill proficiency upon completion of a training unit Recertification: Employees periodically must demonstrate mastery of all the jobs they have learned or risk losing their pay rates Broadbanding: A pay structure form that leads to the consolidation existing pay grades and ranges into fewer, wider pay grades and broader pay ranges Two-tier pay structures: Reward newly hired employees less than established employees on either a temporary or permanent basis

VII.

Discussion Questions and Suggested Answers

8-1.

Respond to the following statement: “Pay grades limit a compnay’s ability to achieve competitive advantage.” Do you agree? Provide rationale for your position.

Pay grades group jobs for pay policy application. Human resources management (HRM) professionals typically group jobs into pay grades based on similar compensable factors and value. Wider pay grades minimize hierarchy and social distance between employees. Narrower pay grades, however, tend to promote hierarchy and social distance. Pay grades can be seen as a limitation to a company’s competitive advantage for it forces employees into specific categories. However, if a particular employee wants to improve and get paid more, they can strive to learn the skills of those who are of a higher pay grade.

Therefore, pay grades improve a company’s advantage because they promote competition in and around the job setting.

Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures.

8-2.

Two employees perform the same job, and each received exemplary performance ratings. Is it fair to give one employee a smaller percentage merit because his pay

falls within the third quartile but give a larger percentage merit increase to the other because his pay falls within the first quartile? Please explain your answer.

If company policy is to pay a market competitive wage and to trend toward that pay level than it is fair to accelerate base pay for a lower paid employee and slow base pay growth for a higher paid employee even if both have the same performance level.

Learning Objective: 8-2. Discuss the components of merit pay systems.

8-3.

Describe some ethical dilemmas sales professionals may encounter. How can sales compensation programs be modified to minimize ethical dilemmas?

8-4.

React to the statement: “Merit pay grids have the potential to undermine employee motivation.” Please discuss your views.

Merit pay grids do in fact have the potential to undermine employee motivation primarily in the case of employees in top quartiles in the range. Having a low pay increase opportunity can cause lack of motivation. Merit pay grids can also act as a deterrent to achieve more because the pay grid scale is skewed. However, the basic nature of merit pay is to promote working hard and drive employees to perform better. In most cases merit pay grids are great for increasing the motivation of employees.

Learning Objective: 8-2. Discuss the components of merit pay systems.

8-5.

Compression represents a serious dysfunction of pay structures. Discuss some of the major ramifications of compression. Also, discuss how compnaies can minimize or avoid these ramifications.

VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

Case Name: A New Sales Representative Instructor Notes This new position is the first outside sales position for CFS and John must carefully design a compensation package to motivate the Sales Representative to focus their efforts on the appropriate activities. John wants to expand his business and sees two distinct opportunities to do so. Expanding the business through adding new customers is one approach, and John also sees an opportunity to expand the business through further development of relationships with current customers. Both of these activities will take a great deal of time without promise of immediate sales and the compensation structure should recognize that requirement. However, as a small business, the organization must closely monitor their salary budget and therefore, connecting at least part of the salary to actual sales will help ensure that the Sales Representative generates the revenue necessary to support his or her position.

Suggested Student Responses:

8-6.

What are the sales objectives for the new sales representative?

The sales objectives for the new sales representative include opening new accounts and growing sales with current accounts.

Learning Objective: 8-3. Summarize the features of sales compensation plan design.

8-7.

What role will the compensation design play in motivating the new sales representative?

It is important that the compensation structure motivates the new sales representative to spend her or his time on activities that will help the organization achieve its’ goals. John wants to expand the business through growing transactions with current customers and securing sales agreements with new customers.

Learning Objective: 8-3. Summarize the features of sales compensation plan design.

8-8.

What kind of sales incentive plan do you recommend? Why?

Because this position requires providing customer service to current customers, a compensation structure that includes a base pay is important. Further, to provide incentives to grow the customer base, part of the compensation should include sales-based incentive pay. Students could provide a wide range of creative designs that contain a base pay plus incentive pay structure.

Learning Objective: 8-3. Summarize the features of sales compensation plan design.

IX.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating Pay Range Minimums, Maximums, and Pay Range Overlap

8-9.

Pay Range A: For a pay range midpoint equal to $47,500, calculate the minimum and maximum pay values for a 15 percent range spread.

Minimum: $47,500 / 100% + (15%/2) = $44,186.05 Maximum: $44,186.05 + (15% x $44,186.05) = $50,813.96 Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures.

8-10. Pay Range B: For a pay range midpoint equal to $53,750, calculate the minimum and maximum pay rates for a 25 percent range spread.

Minimum: $53,750 / 100% + (25%/2) = $47,777.78

Maximum: $47,777.78+ (25% x $47,777.78) = $59,722.23 Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures.

8-11. What is the overlap between pay range A and pay range B Overlap = 100% x ($50,813.96– $47,777.78)/( $50,813.96 – $44,186.05) = 100% x ($3,096.18 / $6,627.91) = 46.7% Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures.

8-12.

How should companies address red circle rates for high performers and low performers, respectively?

8-13.

Briefly discuss designing job-based pay systems (e.g., merit pay, sales incentive pay) and person-focused programs. What considerations arise when making a transition from using a job-based pay system to using a person-focused plan?

XI.

Simulation

Students will be able to apply the learning goals from this chapter as they consider pay structures and the five steps necessary to construct pay structures, merit pay systems, and person-focused pay programs to complete the simulation activities and assessments. In particular, students will consider the learning goals as they design the compensation strategy. Students will be required to directly apply the pay structures, merit pay, and person-focused pay practices from this chapter to the compensation strategy assignment.

CHAPTER 9 Employer-Sponsored Benefits Preface

Chapter nine introduces students to employer-sponsored or discretionary benefits. In particular, this chapter explains the concepts and methods to build compensation systems that meet important goals of compensation professionals, including internal consistency, market competitiveness, and recognition of employee contributions. Employee benefits represent an important component of total compensation.

Learning Objectives 9-1.

9-2.

9-3.

9-4.

9-5.

Discuss the origins of employer-sponsored benefits.

Explain the three categories of employer-sponsored benefits.

Summarize legislation that pertains to employer-sponsored benefits.

Discuss the fundamentals of designing and planning the benefits program.

Explain the benefits and costs of employer-sponsored benefits.

Outline/Table of Contents

I. II.

Origins of Employer-Sponsored Benefits Categories of Employer-Sponsored Benefits

III. IV. V. VI. VII.

Legislation Pertinent to Employer-Sponsored Benefits Designing and Planning the Benefits Program The Benefits and Costs of Employer-Sponsored Benefits Key Terms Discussion Questions and Suggested Answers

VIII.

End of Chapter Case, Instructor Notes, and Questions and Suggested Student Responses

IX.

Crunch the Numbers! Questions and Suggested Student Responses

X.

Simulation Lecture Outline/Syllabus

I.

II.

Origins of Employer-Sponsored Benefits 1. Companies have offered a tremendous number of both legally required and employer-sponsored benefits 2. Canadian retirement plans began in 1908 with the Canadian Government Annuities Act. 3. This was followed by the introduction of the Old Age Pensions Act of 1927.

Then in 1965, the Canadian Pension Act was introduced 4. Unions also indirectly contributed to the rise in employer-sponsored benefits offerings in non-union settings.

5. Increasing workplace diversity has led to more flexible benefit offerings Categories of Employer-Sponsored Benefits A. Protection Programs 1. Disability insurance a. Replaces income when employee becomes hurt or ill b. Short-term disability provides benefits for a limited time, usually less than six months i. Most short-term disability plans pay between 60 to 70 percent of their pretax salary ii. Insurance companies may impose preexisting conditions to limit their liabilities iii. Two waiting periods

•

Pre-eligibility period spans from the initial date of hire to the time of eligibility for coverage • Elimination period refers to the minimum amount of time an employee must waist after becoming disabled before disability insurance payments begin iv. Exclusion provisions list the particular health conditions that are ineligible for coverage c. Long-term disability provides benefits for extended periods between six months and life i. Payments generally equal a fixed percentage of pre-disability earnings, most typically 50 to 60 percent ii. Initially refers to illnesses or actions that prevent employee from performing their ‘own occupation’ iii. Eventually refers to ‘any occupation’ iv. Also includes preexisting condition and exclusion clauses 2. Life insurance a. Pays employees’ beneficiaries upon employee’s death b. Pays a multiple of the employee’s salary c. Three kinds i. Term life insurance ii. Whole life insurance iii. Universal life insurance d. Term life insurance provides income to employee’s beneficiaries only during a limited period based on a specified number of years subject to a maximum age e. Whole life insurance pays an amount to the designated beneficiaries and does not terminate until payment is made to beneficiaries f. Universal life insurance provides more flexible savings or cash accumulation plan than whole life insurance plans 3. Retirement programs a. Provide income to employees and their beneficiaries during some or all of their retirement b. Defined benefit plans (pension plans) guarantee retirement benefits specified in the plan document i. Expressed in terms of monthly sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years he or she has worked for the employer c. Defined contribution plans allow employees the option to make regular contributions to separate accounts in their names, based on a formula contained in the plan document i. Employers contribute money in form of company match

ii. The annual maximum allowable contribution to a participant’s account is the annual addition d. Profit sharing plans distribute money to employees i. Current profit sharing plans award employees with a share of the company’s profits ii. Deferred profit sharing plans set aside money in employee accounts for use in retirement e. Hybrid plans combine features of traditional defined benefit and defined contribution plans i. Cash-balance plans are the most common hybrid plan B. Paid Time Off 1. Compensates employees when they are not performing their primary work duties 2. Major types: a. Vacation b. Sick leave c. Personal leave d. Jury duty e. Bereavement leave f. Clean-up, preparation, or travel time g. Rest period “break” h. Lunch period i. Integrated time off policies j. Sabbatical leave k. Volunteerism 3. Helps employee achieve work-life balance 4. Can reduce absenteeism and improve productivity 5. Integrated time off policies a. Combine holiday, vacation, sick leave, and personal leave policies into a single paid time off policy b. Provide individuals the freedom to schedule time off without justifying the reasons c. Relieve the administrative burden of managing separate plans and the necessity to process medical certifications in the case of sick leave policies d. Bereavement or funeral leave are not included because the death of a friend or relative is typically an unanticipated event beyond an employee’s control 6. Sabbatical leave a. Paid time off for such professional activities as a research project or curriculum development b. Common in college and university settings and apply most often to faculty members

7. Volunteerism a. Refers to giving of one’s time to support a meaningful cause b. Companies are providing employees with paid time off to contribute to causes of their choice c. Companies favour providing paid time off for volunteer work for three reasons: i. First, volunteer opportunities allow employees to balance work and life demands ii. Second, giving employees the opportunity to contribute to charitable causes on company time represents positive corporate social responsibility, enhancing the company’s overall image in the public eye iii. Third, paid time off to volunteer is believed to help promote retention

C. Services 1. Employee assistance programs a. Help employees cope with such personal problems that may impair their job performance such as alcohol or drug abuse, domestic violence, the emotional impact of diseases, clinical depression, and eating disorders b. Annual cost per employee of an EAP is approximately $50 to $60 c. Employers’ gains outweigh their out-of-pocket expenses for EAPs due to reduced costs of turnover, absenteeism, medical costs, unemployment insurance rates, workers’ compensation rates, accident costs, and disability insurance costs 2. Family assistance programs a. Help employees provide elder care and childcare b. Elder care provides physical, emotional, or financial assistance for aging parents, spouses, or other relatives who are not fully self-sufficient because they are too frail or disabled c. Childcare programs focus on supervising preschool-age dependent d. Flexible scheduling and leave allows employees the leeway to take time off during work hours to care for relatives or react to emergencies e. Day care is a benefit where companies subsidize child or elder day care in community-based centers 3. Tuition reimbursement a. Employer fully or partially reimburses an employee for expenses incurred for education or training b. Employees choose the courses they wish to take, when they want to take them, and may enroll in courses that are not directly related to their work c. Pay increases are not directly associated with tuition reimbursement programs 4. Transportation services a. Help bring employees to the workplace and back home again by using more energy-efficient forms of transportation b. Sponsor public transportation or vanpools: employer-sponsored vans or buses that transport employees between their homes and the workplace

c. Provide transit subsidies to employees working in metropolitan and suburban areas served by mass transportation (e.g., buses, subways, and trains) 5. Outplacement assistance a. Provides technical and emotional support to employees who are being laid off or terminated b. Variety of career and personal programs designed to develop employees’ jobhunting skills and strategies and to boost employees’ self-confidence c. Those best suited to outplacement assistance programs include: i. Layoffs due to economic hardship ii. Mergers and acquisitions iii. Company reorganizations iv. Changes in management v. Plant closings or relocation vi. Elimination of specific positions, often the result of changes in technology

III.

d. Promote a positive image of the company among those being terminated, as well as their families and friends, by helping these employees prepare for employment opportunities 6. Wellness programs a. Promote and maintain employees’ physical and psychological health b. Must not make a condition of employment c. May emphasize weight loss, smoking cessation, and cardiovascular fitness d. Smoking cessation plans range from simple campaigns that stress the negative aspects of smoking to intensive programs directed at helping individuals to stop smoking e. Stress management programs help employees cope with many factors inside and outside work that contribute to stress f. Weight control and nutrition programs educate employees about proper nutrition and weight loss, both of which are critical to good health 7. Financial education a. Provides employees with the resource for managing personal budgets and longterm savings (e.g., for retirement) b. Relatively low cost benefit that helps employees plan current and future (retirement) budgets Legislation Pertinent to Employer-Sponsored Benefits

A. Internal Revenue Code 1. Canada Revenue Agency is a set of regulations pertaining to taxation in Canada 2. The Pension Benefits Act addresses matters of employers’ reporting and disclosure duties, funding of benefits, the fiduciary responsibilities for these plans, and vesting rights 3. Vesting refers to an employee’s nonforfeitable rights to retirement plan benefits a. Employees are always vested in their contributions to pension plans b. Cliff vesting: Must grant employees 100 percent vesting after no more than 3 years of service

IV.

c. 6-year graduated schedule: Allows workers to become 20 percent vested after 2 years and to vest at a rate of 20 percent each year thereafter until they are 100 percent vested after 6 years of service 4. Nondiscrimination rules: Prohibit employers from discriminating in favour of highly compensated employees in contributions or benefits, availability of benefits, rights, or plan features

Designing and Planning the Benefits Program

A. Benefits can work strategically by offering protection programs, paid time off, and services 1. Companies can involve employees in benefits determination process using surveys, interviews, and focus groups 2. Design issues include: a. Who receives coverage b. Financing of benefits c. Employee choice d. Cost containment e. Communication B. Determining Who Receives Coverage 1. Must decide if a company should extend benefits to part-time employees 2. Some campanies withhold benefits during the probationary period which is the initial term of employment (usually less than 6 months) C. Financing 1. Noncontributory financing implies that the company assumes total costs for each discretionary benefit 2. Contributory financing exists when the company and its employees share the costs 3. Employee-financed benefits exists when employers do not contribute to the financing of employer-sponsored benefits D. Employee Choice 1. Human resources management professionals must decide on the degree of choice employees should have in determining the set of benefits they will receive 2. Flexible benefits plans or cafeteria plans allow employees within an company to choose from among a set of benefits, as opposed to all employees receiving the same set of benefits 3. Core plus option plans extend a preestablished set of such benefits as medical insurance as a program core, which is usually mandatory for all employees E. Cost Containment 1. Due to rising health care costs, employee benefits account for a substantial percentage of total compensation costs 2. Employers face difficult trade-offs between employee benefits offerings and increases in core compensation F. Communication 1. Employees often are unaware of the value of benefits so companies should try to convey to employees the value they are likely to derive from having such benefits 2. A personal benefits summary is a useful approach 3. An effective communication program should have three objectives

V.

a. Create an awareness of and appreciation for the financial security and wellbeing of employees b. Provide an understanding about available benefits c. Encourage wise use of benefits

The Benefits and Costs of Employer-Sponsored Benefits A. Overview

1. Employer-sponsored benefits can promote competitive advantage 2. Employer-sponsored benefits can also undermine the imperatives of strategic compensation 3. Companies that provide Employer-sponsored benefits as entitlements are less likely to promote competitive advantage than companies that design discretionary fringe compensation programs to fit the situation 4. Employer-sponsored benefits offerings can promote particular employee behaviours that have strategic value 5. Employer-sponsored benefits can distinguish a company from its competition 6. Employer-sponsored benefits have tax advantages

a. Can translate into cost savings b. Companies pursuing differentiation strategies might invest more in research and development c. Companies pursuing lowest cost strategies might be able to lower prices End of Chapter VI.

Key Terms

Short-term disability insurance: Provides income benefits for limited periods of time, usually less than six months Long-term disability insurance: Provides benefits for extended periods of time anywhere between six months and life Short-term disability: An inability to perform the duties of one’s regular job usually for fewer than six months Pre-eligibility period: Spans from the initial date of hire to the time of eligibility for coverage in a disability insurance program Elimination period: Refers to the minimum amount of time an employee must wait after becoming disabled before disability insurance payments begin Long-term disability: Initially refers to illnesses or accidents that prevent an employee from performing his or her “own occupation” over a designated period. The term own occupation applies to employees based on education, training, or experience. After the designated period elapses, the definition becomes more inclusive by adding the phrase “inability to perform any occupation or to engage in any paid employment.” The second-stage definition is consistent with the concept of

disability in workers’ compensation programs.

Life insurance: Protects employees’ families by paying a specified amount to an employee’s beneficiaries upon the employee’s death Term life insurance: Provides protection to employees’ beneficiaries only during a limited period based on a specified number of years (e.g., 5 years) subject to a maximum age (e.g., 65 or 70). After that, insurance automatically expires.

Whole life insurance: is a type of life insurance that provides protection to employees’ beneficiaries during employees’ employment and into the retirement years.

Universal life insurance: Combines features of term life insurance and whole life insurance.

Provides protection to employees’ beneficiaries based on the insurance feature of term life insurance and a more flexible savings or cash accumulation plan than is found in whole life insurance plans.

Retirement programs: Provide income to employees and their beneficiaries during some or all of their retirement Pension plan: Provide income to individuals and beneficiaries throughout their retirement. Also called retirement programs.

Defined benefit plans: Guarantee retirement benefits specified in the plan document. This benefit usually is expressed in terms of a monthly sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years he or she has worked for the employer.

Defined contribution plans: Require that employers and employees make annual contributions to separate retirement fund accounts established for each participating employee, based on a formula contained in the plan document Company match: Refers to the amount of money an employer may choose to contribute to a defined contribution plan for an employee’s contributions.

Profit sharing plans: Pay a portion of company profits to employees, separate from base pay, costof-living adjustments, or permanent merit pay increases. Two kinds of profit-sharing plans are used widely today: current profit sharing and deferred profit sharing.

Deferred profit sharing plans: Place cash awards in deferred profit-sharing accounts for employees. These accounts are set aside on employees’ behalf as a source of retirement income.

Hybrid plans: Retirement plans that combine features of defined benefit and defined contribution plans.

Cash-balance plans: Represent a cross between traditional defined benefits and defined contribution retirement plans. The rate of monetary accumulation slows as the employee’s years of service increase.

Integrated paid time off policies: enable employees to schedule time off without justifying the reasons.

Paid time off banks: Policies that compensate employees when they are not performing their primary work duties. Companies offer most paid time off as a matter of custom, particularly paid holidays, vacations, and sick leave.

Sabbatical leaves: Paid time off for such professional development activities such as professional certification, conducting research, and curriculum development Volunteerism: Refers to giving of one’s time to support a meaningful cause Employee assistance programs (EAPs): Help employees cope with such personal problems that may impair their job performance (e.g., alcohol or drug abuse, domestic violence, the emotional impact of AIDS and other diseases, clinical depression, and eating disorders) Family assistance programs: Help employees provide elder care and childcare Flexible scheduling and leave: Allows employees to take time off during work hours to care for relatives or react to emergencies

Day care: Refers to programs that supervise and care for young children and elderly relatives when their regular caretakers are at work Tuition reimbursement programs: Programs that promote employees’education. Under a tuition reimbursement program, an employer fully or partially reimburses an employee for expenses incurred for education or training.

Transportation services: Programs that help bring employees to the workplace and back home again by using more energy-efficient forms of transportation Outplacement assistance: Refers to company-sponsored technical and emotional support to employees who are being laid off or terminated.

Wellness programs: Promote and maintain employees’ physical and psychological health Smoking cessation: Particular types of wellness programs that stress the negative aspects of smoking and can include intensive programs directed at helping individuals to stop smoking.

Stress management: A specific kind of wellness program designed to help employees cope with many factors inside and outside their work that contribute to stress Weight control and nutrition programs: A particular type of wellness program, are designed to educate employees about proper nutrition and weight loss, both of which are critical to good health.

Probationary period: The initial term of employment (usually less than six months) during which companies attempt to ensure that they have made sound hiring decisions. Employees are often not entitled to participate in employer-sponsored benefits programs during their probationary periods.

Noncontributory financing: Implies that the company assumes total costs for each employersponsored benefit Contributory financing: Implies that the company and its employees share the costs for employer-sponsored benefits.

Flexible benefits plan: Allows employees to choose a portion of their employer-sponsored benefits based on a company’s employer-sponsored benefits options.

Cafeteria plan: See also flexible benefits plan VII.

Discussion Questions and Suggested Answers

9-1.

Many compensation professionals are faced with making choices about which employer-sponsored benefits to drop because funds are limited and the costs of these benefits continually increase. Assume you make such choices. Rank order employersponsored benefits from the ones you would most likely eliminate to the ones you would least likely eliminate. Explain your rationale. Do such factors as the demographic composition of the workforce of the company matter? Explain.

9-2.

Discuss your views about whether employer-sponsored benefits should be an entitlement or something earned based on job performance.

9-3.

Assume that you are an HRM professional whose responsibility is to develop a brochure for the purpose of conveying the value of your company’s benefits program to potential employees. Your company has asked you to showcase the benefits program in a in a manner that will encourage recruits to join the company.

Develop the contents for one page that lists the benefits and the objectives.

This is a practical exercise. Results will vary widely.

Learning Objective: 9-4. Discuss the fundamentals of designing and planning the benefits program.

9-4.

Conduct some research in order to identify examples of innovative benefit practices.

A useful starting point is an Internet search using phrases such as “best companies to work for.”

This is a practical exercise. Results will vary widely.

Learning Objective: 9-4. Discuss the fundamentals of designing and planning the benefits program.

9-5.

Are employees more likely to favour defined contribution plans over defined benefit plans? How about employers? Explain your answers.

Employees are likely to favour defined benefit plans as the employer bears the risk in the investment. Employees know what to expect in their retirement based on the formula for the plan.

Employers are likely to favour defined contribution plans as the employee bears the risk in the investment. Employers are obligated to assure their company match is provided, but they do not have to guarantee the employee a specific level of funding as they do with defined benefit plans.

Learning Objective: 9-2. Explain the three categories of employer-sponsored benefits.

VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

Case Name: Time-off at Superior Software Services Instructor Notes

Many employers believe restrictive sick day policies may increase unscheduled absences.

Superior’s time-off policy seems to create such a concern. Because the company is deadline driven, pre-scheduled absences would help supervisors better schedule work to meet those deadlines.

While not all time off can be scheduled ahead, decreasing unscheduled absences could help avoid missed deadlines. A PTO bank could ultimately give employees more flexibility in scheduling their time-off needs.

Suggested Student Responses:

9-6.

Do you think changing Superior’s time-off policies will decrease unscheduled timeoff?

Unscheduled absences seem to occur at Superior because of the structure of the time-off benefits.

Employees plan their vacation time at the beginning of the year and most likely do not want to sacrifice vacation time to take care of personal business. The sick day policy encourages employees to call off from work with short notice. The PTO option would provide employees more flexibility

to schedule time off in advance when needed.

Learning Objective: 9-2. Explain the three categories of employer-sponsored benefits.

9-7.

Beyond reducing occurrences of unscheduled time-off, are there any other benefits to offering PTO?

PTO saves some administrative time because the employer does not have to keep track of different types of leave, or reasons for the leave. Employees often prefer PTO banks because they don’t have to provide their employer a reason to take time off, which gives them more freedom in scheduling time off.

Learning Objective: 9-2. Explain the three categories of employer-sponsored benefits.

9-8.

Are there any disadvantages to changing to PTO?

As the PTO policy is much different from the current policy, Superior would have to invest time and effort in guiding employees and supervisors on the new policy. Further, some employees may choose to use all of their PTO for more short-term time-off needs instead of scheduling vacations at the beginning of the year. This preference might make some work planning efforts a challenge for supervisors.

Learning Objective: 9-2. Explain the three categories of employer-sponsored benefits.

IX.

Crunch the Numbers! Questions and Suggested Student Responses

9-9.

How much more money would you need to contribute to meet the allowable maximum contribution?

Current contribution = 10% of $45,000 = $4,500 $24,000 - $4,500 = $19,500 more to meet the maximum contribution

Learning Objective: 9-2. Explain the three categories of employer-sponsored benefits.

9-10. In 2019, the company offers a $0.75 match for each dollar that you contribute between 3 percent and 6 percent of your annual salary. How much is the company match based on your 10 percent contribution?

Since you are contributing more than the 6% maximum match, you would receive $.75 on every dollar you contribute up to 6% of your annual salary.

6% of annual salary = $2,700 $.75 for each dollar = .75 x 2,700 =$2,025 company match

Learning Objective: 9-2. Explain the three categories of employer-sponsored benefits.

9-11. Based on the sum of your answers to questions 9-9 and 9-10, what is the difference between the IRS maximum annual addition for 2019 and the total contribution to

your pension plan?

Total contribution to the pension plan = $4,500 + $2,025 = $6,525 Annual addition = $53,000 - $6,525 = $46,475 difference

Learning Objective: 9-2. Explain the three categories of employer-sponsored benefits.

9-12. If a company’s budget were extremely limited and could only afford to offer one benefit, which would you select? Provide your rationale.

9-13. Name at least one discretionary benefit practice that would help companies to have better control over absenteeism.

X.

Simulation

Students will be able to apply the learning goals from this chapter as they consider employersponsored benefits to complete the simulation activities and assessments. In particular, students will consider the learning goals as they design the compensation strategy. Students will be required to directly apply the employer-sponsored benefits from this chapter to the compensation strategy assignment.

CHAPTER 10 Employee Benefits Preface

Chapter ten introduces students to government-mandated employee benefits. Canadian employers are responsible for six government-mandated benefits. Most often, Canadian employers collect the contributions from the employees, for the government mandated social insurance benefits, contribute, and remit the monies collected from to the government. Many would argue that these government mandated benefits form a critical safety net for Canadian employees.

Learning Objectives

10-1.

10-2.

Discuss the origins of and summarize the six main categories of government mandated benefits.

Discuss the main benefits and costs of government mandated benefits.

Outline/Table of Contents

I.

Origins and Kinds of Government-Mandated Benefits

II.

The Benefits and Costs of Government-Mandated Benefits

IV. V. VI. VII.

Key Terms Discussion Questions and Suggested Answers Case Crunch the Numbers! Questions and Suggested Student Responses

Lecture Outline/Syllabus I.

II.

Origins and Kinds of Government-Mandated Benefits A. Historic background 1. Historically provided a form of social insurance 2. Designed to minimize the possibility that individual who became unemployed or severely injured while working would become destitute 3. Workers’ compensation insurance came into existence when industrial accidents were very common 4. Income discontinuity caused by the Great Depression led to Employment Insurance Categories of Legally Required Benefits 1. Programs include:

a.

Employment Insurance b.

Canadian/Quebec Pension Plan c.

Workers’ Compensation d.

Health Insurance e.

Paid Time off f.

Pay upon termination A. Employment Insurance a.

After World War I, in 1919, the Canadian recommended public unemployment insurance, in particular, the federal government appointed a Royal Commission on Industrial Relations b.

This initial program was later reduced and replaced with the Employment and Social Insurance Act in 1935 which later became the Unemployment Insurance Act in 1940. c.

For those unemployed through no fault of their own d. Employers deduct Employment Insurance (EI) premiums from employees and also contribute 1.4 percent of the employee premiums. c. Criteria to qualify for benefits i. Claimants must have worked a minimum number of hours and weeks to claim EI ii. Eligible employees receive 55% of their average income in the past 14-45 weeks to a maximum of 45 weeks. Each of these elements are dependent on the local unemployment rate. iii. Claimants must demonstrate they are actively looking for employment while receiving EI. B. Canadian/Quebec Pension Plan

a. Canada Pension Plan i. Canadian retirement plans began in 1908 with the Canadian Government Annuities Act. This plan was designed to encourage Canadians to save for retirement and was the precursor to the current Registered Retirement Savings Plan. ii. This was followed by the introduction of the Old Age Pensions Act of 1927. iii. In 1965, the Canadian Pension Plan (CPP) was introduced. iv. Both employer and employee contribute to CPP as employers are required to match employees’ contribution to this plan v. Employees and self-employed individuals participate in CPP. vi. Employers then stop deducting CPP contributions when the employee’s annual earnings reach the maximum pensionable earnings or the maximum employee contribution for the year. vii. CPP is portable, meaning if an employee changes employers or geographical location, the CPP contributions to date follow that employee. viii. People can begin claiming CPP between 65-70 years old. ix. CPP also includes disability pension and survivor benefits. Disability benefits provide a disabled person with 75% of their pension. Survivor benefits are paid out as one lump sum payment. b. Quebec Pension Plan i. Employers and employees in Quebec contribute to the Quebec Pension Plan (QPP) and not CPP. ii. Similar to CPP, QPP is deducted from all Quebec employment income, with an annual basic exemption of $3,500.

C. Workers’ Compensation 1. Workers’ compensation insurance came into existence during the early decades of the twentieth century, when industrial accidents were very common and workers suffered from occupational illnesses.

2. All provinces and territories have workers’ compensation with Nunavut and the Northwest Territories have one shared plan.

3. Federal government employees are covered under the Federal Government Employees Compensation Act (GECA).

4. Workers’ Compensation is designed to protect an employee’s income and cover medical costs from a workplace injury. The aim is to rehabilitate an employee to be able to return to work.

5. Workers’ Compensation is a no fault insurance, meaning the employee is not able to sue the employer for the injury.

6. Employers pay a premium for Workers’ Compensation depending on the industry they operate in--this program is not government funded.

D. Health Insurance 1. Employees pay for health insurance premiums in all provinces and territories except Ontario.

E. Health insurance.

1. In Ontario, employers contribute to the provincial health care costs in the form of a tax payment.

2. Employers can elect to pay for employees’ health care premiums as taxable benefit.

E. Paid Time Off 1. Employers in all provinces and territories are required to provide employees with paid time off.

2. Time off includes maternity and paternity leave and vacation leave. Provinces and territories provide paid maternity and paternity leave payment by way of Employment Insurance. Employers can elect to top of this leave payment to return the leave payment to the employee’s net income for that period.

3. Provinces and territories also require employers to provide their employees with vacation pay. This requirement is outlined in the various Employment Standards Acts of each province or territory. Again, employers may elect to offer employees more vacation time or payment than legally required. All outstanding vacation earned must be paid to the employee upon termination of employment.

F. Pay upon termination 1. Employers must also pay employers upon termination of employment. These payments vary among provinces and territories. These payments apply to payment to employees who are laid off or terminated.

III. The Benefits and Costs of Government-Mandated Benefits 1. Benefits tend to emphasize social adequacy. Under the principle of social adequacy, benefits are designed to provide subsistence income to all beneficiaries regardless of their performance in the workplace.

2. Government mandated benefits may be a hindrance to companies in the short term because these offerings require substantial employer expenditures (contributions mandated by Employment Insurance and various state workers’ compensation laws).

Without these mandated expenditures on compensation, companies could choose to invest these funds in direct compensation programs designed to boost productivity and product or service quality.

3. HRM managers can minimize the cost burden associated with government mandated benefits. The first response is to reduce the likelihood of workers’ compensation claims.

End of Chapter IV. V.

Key Terms Discussion Questions and Suggested Answers

10-3. Discuss some of the choices an employer may make to help control health care costs.

10-4. In what ways may government-mandated benefits have contributed to an employee entitlement mentality regarding discretionary benefit offerings? Explain your rationale.

Employees do indeed often see benefits as entitlements for their membership in organizations because they often believe that by working for a company, they should get the benefits of employment that they deserve. As government-mandated benefits outline some requirements for retirement and health care insurance are available, employees believe they are entitled to these. It is the employer’s job to make sure that the employees are doing what they ought to do according to the companies’ expectations as well as to provide them with the promised benefits.

Learning Objective: 10-1. Discuss the origins of and summarize the six main categories of governmentmandated benefits.

10-5.

Prepare a statement not to exceed 250 words that describes your view of the governmentmandated benefits, for example whether they are necessary, their viability, or whether there should be changes in how the programs are funded).

Responses to this question may vary based on independent student research and their views.

Learning Objective: 10-1. Discuss the origins of and summarize the six main categories of governmentmandated benefits.

VI. Case

Calculating CPP in British Columbia Jun was recently promoted from part-time human resources advisor to fulltime Human Resources and Operations Manager for a small non-profit company in Vancouver. The company’s mission is to promote local artists to the Canadian and global communities. This is an organization that is important to Jun as it aligns with his philosophies of supporting artists, promoting Canadian culture and history, and the non-profit sector.

There are only four employees including an Art Technician, Community Outreach Curator, Events Coordinator, and Jun. Jun is responsible for bookkeeping up to the financial statements, human resources programs, and organizational operations. As there are few employees and limited funds, Jun completes most tasks with readily available software and online resources rather than accounting or human resources software and applications.

One of the tasks that Jun has to complete for all employees is the Canada Pension Plan (CPP) contributions. This is a newer responsibility for June therefore he will begin with researching the task requirements to ensure all payments are made correctly on behalf of the organization and employees.

Questions 1. Based on Table X, what is the 2020 maximum annual pensionable earnings, basic exemption amount, maximum contributory earnings, employee and employer contribution rate (%), maximum annual employee and employer contribution?

2. Based on Tables X and Y, calculate the total bi-weekly CPP contributions for one pay period in January for the employees and organization.

3. The Events Coordinator has asked Jun if his CPP contributions could be stopped. Please advise if these contributions could be stopped for this employee, support your decision with CPP guidelines.

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payrolldeductions-contributions/canada-pension-plan-cpp/cpp-contribution-rates-maximumsexemptions.html Table Y Number of Employees 1 1 1 1

Job Art Technician Community Outreach Curator Events Coordinator Human Resources/Operations Manager

Salary CA$ 80,000 45,000 47,000 75,000

Employee Age 32 49 64 39

https://www.glassdoor.ca/Salaries/vancouver-technical-artist-salarySRCH_IL.0,9_IM972_KO10,26.htm?countryRedirect=true https://www.payscale.com/research/US/Job=Community_Outreach_Officer/Salary https://www.payscale.com/research/US/Job=Community_Outreach_Officer/Salary https://www.payscale.com/research/CA/Job=Human_Resources_(HR)_Manager/Salary/f0bd3e9 b/Vancouver-BC Answers

1. 2020 maximum annual pensionable earnings $58.700 basic exemption amount $3,500 maximum contributory earnings $55,200 employee and employer contribution rate 5.25%

maximum annual employee and employer contribution for 2020 2,898 each 2. total annual payroll $247,000 247,000(14,000) basic exemption=$233,000 $233,000/26=$8,961.53 bi-weekly payroll $8,961.53 x 5.25%= $470.48 CPP contributions for all employees and organization for one pay period in January 3. No, contributions could not be stopped as the employee has not meet all three of the criteria, namely is not between 65-70 years old.

“In certain situations, an employee can elect to stop contributing to the CPP. In order to be eligible for this election, the employee must meet all the following conditions: 1. the employee is at least 65 years of age, but under 70 2. the employee receives a CPP or QPP retirement pension 3. the employee is receiving, or will receive, pensionable employment earnings that require CPP contributions”

VII. Crunch the Numbers

Workers’ Compensation in the Northwest Territories Jerry just assumed the position of Human Resources Business Partner for a fly-in camp in the Northwest Territories. The camp is privately owned by a local entrepreneur who is a cultural expert and skilled outdoor enthusiast. This camp is very popular with high end guests, particularly affluent Americans. The main guest activities include observing the aurora borealis, cultural tours, fly fishing, and hiking. Guests fly into the camp area, stay in luxurious lodges which are complete with numerous comforts including a master suite, spacious living area, and private outdoor spa and dine in the camp dining room inspired by local culture and cuisine.

Shortly after joining the camp, Jerry has determined there are a number of shortcomings in the human resources strategy and practices for the camp. He has an extensive professional to do list, however, first on that list is to ensure all employees have a health and safety program, workers’ compensation, and health benefits. Once all employees’ welfare is secured, he will then move on to building out a human resources strategy and operational tools.

Questions 1.

Go to the Northwest Territories Workers’ Safety and Compensation Commission website. Outline the principles of Meredith Principle within workers’ compensation.

2.

Based on Table 1 and Table 2 and Figure 1, calculate the Workers’ Compensation annual assessment payment.

3.

Is there a penalty for not registering the camp for Workers’ Compensation? If so, when is this applied?

Table 1 Camp 28 fulltime employees and these respective annual salaries Number of Job Employees 3 (1 of each administrative (administration, accounting, human of) resources) 4 6 3 2 10

front of the house guest services employees cooks housekeeping maintenance tour guides

Annual Salary per Job CA$ 65,000 105,000 98,000 70,000 75,000 55,000 55,000 45,000

https://ca.indeed.com/cmp/Government-of-the-NorthwestTerritories/salaries?job_category=admin https://ca.indeed.com/cmp/Government-of-the-NorthwestTerritories/salaries?job_category=accounting https://www.glassdoor.ca/Salaries/yellowknife-human-resources-manager-salarySRCH_IL.0,11_IC2277051_KO12,35.htm https://ca.indeed.com/cmp/Government-of-the-NorthwestTerritories/salaries?job_category=customer https://ca.indeed.com/cmp/Government-of-the-Northwest-Territories/salaries?job_category=food https://ca.indeed.com/cmp/Government-of-the-NorthwestTerritories/salaries?job_category=sanitation https://ca.indeed.com/salaries/tour-guide-Salaries,-Northwest-Territories Table 2

https://connect.wscc.nt.ca/Employer eServices/Rates/SubClass?qs=REDTpt7CJeXEtVP65K8YV%2f7eUoUGUrErH%2bXFa VST8rs3ZCYFRR0H7jagAULYw9e5Quhrf5gpfYhiv4sDfaSEc5691a9a1RT7pxhbKEgIn ldEZPAaiF36ArSfLWhmxdJh0bLisk1HMch%2f3csKsEDea4ynsm%2fQbWK9tONnEE

vcth%2bqbMZ846TFTSP4axPcNtnczTDiuGqWMbNTT3vjMIDnL6hyadAtqEmKSGdl %2bxMuIIwJlSafUCe4tSwouKp39caNr8S%2bsDnqp4KsVTuYfxBRvV0rZuoYxfu4HxP yhNOzZEujkkrcGfcRMe0Mc1hHszXQ7IZ6gk5p71MzwRjBm4Yl3%2bzZym%2fWEM dI Figure 1

https://wscc.nt.ca/employer-services/employer-rates Answers

1. The Meredith Principles are, “Over one hundred years ago, Sir William Meredith tabled a report in the Ontario Legislature, establishing what would become known as the Meredith Principles. Like all workers compensation systems in Canada, the Meredith Principles are the foundation of the WSCC. The Meredith Principles are a historic compromise in which employers fund the compensation system and share the liability for injured workers. In return, injured workers receive benefits while they recover, and cannot sue their employers.

The workers' compensation system in the Northwest Territories and Nunavut is an essential part of life in the north. It contributes to social and economic stability, and positively impacts the quality of life for northern workers.

The Meredith Principles are based on: NO FAULT COMPENSATION: workers are paid benefits regardless of how the injury occurred. The worker and employer waive the right to sue. There is no argument over responsibility or liability for an injury.

SECURITY OF BENEFITS: a fund is established to guarantee funds exist to pay benefits to workers.

COLLECTIVE LIABILITY: all employers share liability for workplace injury insurance.

The total cost of the compensation system is shared by all employers. All employers contribute to a common fund. Financial liability becomes their collective responsibility.

INDEPENDENT ADMINISTRATION: the organizations who administer workers’ compensation insurance are separate from government.

EXCLUSIVE JURISDICTION: only workers’ compensation organizations can provide workers’ compensation insurance. All compensation claims are made directly to the compensation board. The board is the decision-maker and final authority for all claims.” https://wscc.nt.ca/about-wscc/meredith-principles 2. Total payroll $1,723,000/100=$17,230 Sub-class rate 6.76*$17,230=$116,474.80 per year 3. Yes, “If you operate a business in the Northwest Territories or Nunavut, you must register with the WSCC. Employers who fail to register within the ten days of operating or establishing a business are charged a penalty.” https://wscc.nt.ca/employer-services/register-business

CHAPTER 11

Compensating Executives Preface

Chapter 11 will move students to consider executive compensation. Executive pay practices have raised concerns that many executives receive lucrative compensation and benefits even when organization performance falls below shareholder expectations. Many critics have questioned whether such practices may interfere with some executives’ motivation to achieve excellent performance. Other concerns have been voiced by labour unions, which focus on social injustice given the substantial gap in pay between executive and nonexecutive employees, particularly when executive-level management chooses to limit labour through extensive reductions-in-force of nonexecutive employees.

Learning Objectives 11-1.

11-2.

11-3.

11-4.

11-5.

Explain the difference between executive pay and pay for non-executives.

Define executive status.

List the components of executive compensation packages.

Discuss the principles and processes of setting executive compensation.

Briefly explain the executive compensation controversy as it relates to whether Canadian executives are paid too much.

Outline/Table of Contents I. II. III. IV. V. VI.

Contrasting Executive Pay with Pay for Nonexecutive Employees Defining Executive Status Executive Compensation Packages Principles and Processes for Setting Executive Compensation Executive Compensation: Are Canadian Executives Paid Too Much?

Key Terms

VII. VIII. IX.

Discussion Questions and Suggested Answers Crunch the Numbers! Questions and Suggested Student Responses Simulation

Lecture Outline/Syllabus Contrasting Executive Pay with Pay for Nonexecutive Employees A. Overview 1. CEO is the seller of their services and the compensation committee is the buyer 2. Under classic economic theory reasonable price of goods and services is obtained through negotiations with an informed buyer and informed seller) that are “arm’s length apart” 3. CEO hires a professional compensation consultant to determine their own compensation, however, this can be a conflict of interest 4. Executive pay often contradicts an organizations performance-based pay strategy as executives are often rewarded even after they fail II. Defining Executive Status A. Who are executives?

1. National Occupational Classification (NOC) provides criteria to guide us in the definition of executives as these are key employees who are highly compensated employees.

III. Executive Compensation Packages A. Overview 1. Current or annual core compensation 2. Deferred core compensation: Equity agreements 3. Deferred core compensation: Separation agreements 4. Clawback provisions 5. Employee benefits enhanced protection programs and perquisites B. Components of Current Core Compensation 1. Base Pay a. The fixed element of annual cash compensation b. Organizations that use formal salary structures may use pay grades and ranges for all employees, except for the CEO c. CEOs are not included in the pay structure because i. CEO’s work is highly complex and unpredictable and it is not possible to specify discrete responsibilities and duties ii. Setting CEO’s compensation differs dramatically from the rational processes compensation professionals use to build market-competitive pay structures d. Base pay represents only a small part of CEO’s total compensation because: i. It takes years before the fruits of the CEO’s strategic initiatives are realized 2. Bonuses I.

a. Represent single-pay-for-performance payments used to reward employees for achievement of specific, exceptional goals b. Compensation professionals design bonuses for merit pay programs, gain sharing plans, referral plans, and sales incentive compensation programs c. Four common bonuses for executives i. Discretionary bonus ii. Performance-contingent bonus iii. Predetermined allocation bonus iv. Target plan bonus d. Discretionary bonuses are awarded on an elective basis with the amount based on four factors: i. Organization profits ii. The financial condition of organization iii. Business conditions iv. Future prospects e. Performance-contingent bonuses are based on attainment of specific performance criteria f. Predetermined allocation bonus has a bonus pool based on a fixed-formula g. Target plan bonus ties bonuses to executive’s performance 3. Short-Term Incentive Compensation a. Used to recognize executives’ progress toward fulfilling competitive strategy goals b. Uses current profit sharing plans and gain sharing plans c. Designed to reward executives for meeting intermediate performance criteria that are dictated by competitive strategy, like: i. Change in organization’s earnings per share over a one-year period ii. Growth in profits iii. Annual cost savings d. Usually applies to more than one executive because of the synergy that results from the efforts D. Components of Deferred Core Compensation 1. An agreement between an employee and an organization to render payments to the executive at a future date 2. A hallmark of executive compensation packages designed to create a sense of ownership and align the interests of the executive with those of the owners or shareholders over the long term 3. Generally two types of plans a. Equity plans provide an executive with ownership stakes in the organization through a variety of mechanisms, including various stock option plans and stock purchase plans

b. Separation agreements guarantee that an executive will receive a lucrative compensation package upon employment termination E. Equity Agreements 1. Organization stock and stock options provide the foundation for equity agreements 2. Stocks: a. Organization stocks represent the total equity of the organization b. Organization stock shares represent equity segments of equal value c. Equity interest increases positively with the number of stock shares 3. Stock options a. Incentive stock options entitle executives to purchase stock in the future at a predetermined price i. The predetermined price equals the price at the time an executive receives the stock option ii. Executives are generally purchasing the stock at a discounted price iii. Executives generally purchase the stock after the price increases dramatically b. Capital gains is the difference between the stock price at the time of purchase and the lower stock price at the time an executive receives the stock option c. A capital loss occurs if the stock price at the time of disposition were lower than at the price of the stock option grant d. Non-statutory stock options do not qualify for favourable tax treatment i. Executives pay income taxes on the difference between the discounted price and the stock’s fair market value at the time of the stock grant ii. Executives do not pay taxes in the future when they choose to exercise their non-statutory stock options 4. Restricted stock plans, restricted stock units, and performance stock awards a. Restricted stock plans allow an organization to grant executives with stock options at market value or discounted value, or they may provide stock b. Executives do not have any ownership control over the disposition of the stock for a vesting period c. Restricted stock units are shares of organization stock that are awarded to executives at the end of the restriction period d. Under a performance plan an organization chooses to add to the vesting period a performance criterion for determining whether to award stock options or stock units 5. Stock appreciation rights a. Provide executives income at the end of a designated period, like restricted stock options b. Executives never have to exercise their stock rights to receive income

c. The organization awards executives based on the difference in stock price between the time the organization granted the stock rights at fair market value to the end of the designated period 6. Phantom stock a. Boards of directors promise to pay a bonus in the form of the equivalent of either the value of organization shares or the increase in that value over a period of time b. Can convert these into real shares, under two conditions: i. Executives must remain employed for a specific period ii. Executives must retire from the organization 7. Employee stock purchase plans a. Allows participating employees to purchase stock after a designated period of time. b. The span of time over which employees are permitted to contribute to their accounts is referred to as the offering period F. Separation Agreements 1. Golden parachutes a. Provide pay and benefits to executives following their termination resulting from a change in ownership or corporate takeover, that is, the merger or combining of two separate organizations b. Boards of directors include these clauses for three reasons: i. They limit executives’ risks in the event of these events ii. They promote recruitment and retention of talented executives iii. To prevent a CEO from working against a takeover bid in order to save his or her job c. Organizations can treat these as business expenses 2. Platinum parachutes a. Lucrative awards that compensate departing executives with severance pay, continuation of organization benefits and even stock options b. Given in order to avoid legal battles or critical press reports c. Given in the event the CEO is terminated after a period of unsatisfactory performance as determined by the shareholders and other organization executives G. Clawback provisions 1. Allow boards of directors to take back performance-based compensation if they were to subsequently learn that performance goals were not actually achieved 2. These provisions are becoming more common: a. Because of the increasing scrutiny of CEO compensation packages by the public and shareholders b. Particularly since the recent global financial crisis in the late 2000s 3. Led to passage of the Sarbanes-Oxley Act of 2002

IV.

a. Administered by the SEC b. Imposes rigorous requirements for organizations’ financial disclosure to limit the chance that covert misuses of corporate funds will occur c. In 2003, Canadian adopted Bill 198 which is essentially the Canadian equivalent of the C-SOX. Bill 198 requires organizations to establish managerial disclosure controls and procedures and internal controls over financial reports.

H. Employee Benefits: Enhanced Protection Program Benefits and Perquisites 1. Executives receive discretionary benefits like other employees, however, they differ in two ways: a. Protection programs include supplemental coverage that provide enhanced benefit levels b. The services component contains benefits exclusively for executives called perquisites or perks 2. Enhanced protection program benefits a. Supplemental life insurance i. Pays additional monetary benefits ii. Provides executives favourable tax treatment b. Supplemental retirement plans i. Are designed to restore benefits restricted under qualified plans 3. Perquisites a. Also known as perks, are an integral part of executives’ compensation b. Four purposes i. Recognizes the status the executive has achieved ii. Use for personal comfort or as a business tool iii. Use of a corporate aircraft could be considered a security measure iv. Permit executives to have fewer distractions such as financial planning services c. Many organizations have been scaling back offerings Principles and Processes for Setting Executive Compensation A. The Key Players in Setting Executive Compensation 1. Executive compensation consultants a. Propose several recommendations for alternative pay packages that are based on strategic analysis b Possible conflict of interest as consultants are hired by CEOs c. Recommending lucrative packages could bring the consultant or consulting organization more business 2. Board of Directors a. Supposed to represent shareholders’ interests b. Most boards contain fifteen members that generally include: i. CEOs and top executives of other organizations

V.

ii. Distinguished community leaders iii. Well-regarded professionals like physicians or attorneys iv. Top-level executives of the organization c. Give final approval of the compensation committee’s recommendations d. Possible conflict of interest as CEO’s recommend Board members and the Board members receive compensation for serving 3. The compensation committee a. Is comprised by Board of Directors members b. Inside organization board members c. Outside board members i. Help to minimize conflicts of interest ii. Make up the majority of most committees d. Perform three duties: i. Review consultants’ alternative recommendations ii. Discuss the assets and liabilities of each recommendation iii. Recommend the best proposal to the board of directors to consider B. Theoretical Explanations for Setting Executive Compensation 1. Agency theory a. Ownership is distributed among thousands of shareholders in large organizations b. Shareholders delegate control to top executives c. Agency problem exists because executives may pursue activities that may benefit themselves instead of shareholders 2. Tournament theory a. Casts lucrative executive compensation as the prize in a series of tournaments among middle- and top-level managers who aspire to become a CEO b. Winners at one level enter into the next level c. Chances of winning decrease dramatically as winners rise through the ranks 3. Social comparison theory a. Individuals compare themselves to individuals of similar or greater stature b. Demographics and occupation are common comparative bases c. CEOs on compensation committees might rely on their own compensation packages and those of other compensation CEOs of equal or greater stature to determine executive compensation Executive Compensation: Are Canadian Executives Paid Too Much?

A. Comparison between Executive Compensation and Compensation for Other Worker Groups 1. Median annual earnings for all civilian U.S. workers was $46,700 in 2017 B. Strategic Questions: Is Pay for Performance?

1. A simple statement cannot be made about the relationship between CEO pay and organization performance because of mixed evidence 2. Shareholder returns most often describe organization performance, but there are complex forces beyond the control of CEOs that may influence shareholder returns C. Ethical Considerations: Is Executive Compensation Fair?

1. Attract and retain top executives a. The Board of Directors and compensation professionals believe lucrative compensation for top executives is vital b. Many CEOs are recruited from other organizations 2. Income disparities a. Canadian CEOs earned an annual median total compensation of $1.6 million and U.S. CEOs earned $3.3 million b. Labour unions argue that substantial pay discrepancies are socially unjust and promote economic inequality 3. Layoffs borne by workers but not executives a. Between late 2008 and mid 2009 alone, more than two million employees lost their jobs while a scant few executives lost theirs D. International Competitiveness 1. Has forced organizations to a. Become more productive b. Consider the competitive impact of the vast differences in compensation levels between the CEOs of Canada and foreign organizations 2. International compensation comparisons a. CEOs, ranging from $0.9 million in Belgium to $2.7 million in Italy. b. The typical Canadian CEO earned only 33 percent of total compensation in salary while the typical Swedish CEO earned 62 percent of total compensation in salary. c. There is considerable variance in how much of total compensation is salary 3. Undermining Canadian organizations’ ability to compete a. High Canadian executive compensation practices have undermined efforts to compete internationally as Canadian employees may lose their faith in payfor-performance systems and their trust in their employers as colleagues lose their jobs and CEOs continue to receive higher compensation. b. Employees may not feel that working hard will lead to higher pay or job security; therefore, they may choose not to work proficiently.

End of Chapter VI.

Key Terms

Discretionary bonuses: Bonuses awarded to executives on an elective basis by boards of directors.

Boards of directors weigh four factors in determining discretionary bonus amounts: company profits, the financial condition of the company, business conditions, and prospects for the future.

Performance-contingent bonuses: Bonus awarded to executives are based on the attainment of such specific performance criteria as market share Predetermined allocation bonus: Bonuses awarded to executives are based on a fixed formula.

Company profits are often the main determinant of the bonus amounts.

Target plan bonus: Bonuses awarded to executives are based on executives’ performance. Executives do not receive bonuses unless their performance exceeds minimally acceptable standards.

Equity plans: A type of deferred compensation that is designed to provide an executive with an ownership stake in the company through a variety of mechanisms, including stock plans Separation agreements: A type of deferred compensation which guarantees that an executive will receive a lucrative compensation package upon employment termination Deferred compensation: An agreement between an employee and a company to render payments to an employee at a future date. Deferred compensation is a hallmark of executive compensation packages.

Incentive stock options: Entitle executives to purchase their companies’ stock in the future at a predetermined price. The predetermined price usually equals the stock price at the time an executive receives the stock options. Incentive stock options entitle executives to favourable tax treatment.

Capital gains: The difference between the company stock price at the time of purchase and the lower stock price at the time an executive receives the stock options when the stock price at disposition is higher Capital loss: The difference between the company stock price at the time of purchase and the lower stock price at the time an executive receives the stock options when the stock price at disposition is lower Non-statutory stock options: Do not qualify for favourable tax treatment Restricted stock plans: Stock options at market value or discounted value that a company grants executives. The company may provide stock instead. Under restricted stock plans, executives do not have any ownership control over the disposition of the stock for a predetermined period, often many years. This predetermined period is known as the vesting period, much like vesting rights associated with employer-sponsored retirement plans.

Restricted stock units: Shares of company stock that are awarded to executives at the end of the restriction period.

Performance plan: A type of equity agreement whereby a company’s board of directors establishes performance criteria that an executive must meet before receiving a reward of stocks or stock options Stock appreciation rights: A type of executive deferred compensation that provide executives income at the end of a designated period, much like restricted stock options, however, executives never have to exercise their stock rights to receive income. The company simply awards payment to executives based on the difference in stock price between the time the company granted the stock rights at fair market value to the end of the designated period, permitting the executives to keep the stock.

Phantom stock: A type of executive deferred compensation, and is an arrangement whereby boards of directors compensate executives with hypothetical company stock rather than actual shares of company stock. Phantom stock plans are similar to restricted stock plans because executives must meet specific conditions before they can convert these phantom shares into real shares of company stock.

Offering period: The span in time over which employees, including executives, may purchase the

employer’s stock based on the money set aside in their accounts established through payroll deductions Golden parachutes: A kind of executive deferred compensation that provide pay and benefits to executives following their termination resulting from a change in ownership or corporate takeover Platinum parachutes: Lucrative awards that compensate departing executives with severance pay, continuation of company benefits, and even stock options Sarbanes-Oxley Act of 2002: Mandates a number of reforms to enhance corporate responsibility, enhance financial disclosures, and combat corporate and accounting fraud Perquisites: Benefits offered exclusively to executives (e.g., country club memberships).

Perks: See also perquisites.

Supplemental life insurance: protection represents additional life insurance offered exclusively to executives. Companies design executives’ supplemental life insurance protection to increase the value of executives’ estates, bequeathed to designated beneficiaries (usually family members) upon their death, and to provide greater benefits than standard plans usually allow.

Supplemental retirement plans: Plans offered to executives are designed to restore benefits restricted under qualified plans Executive compensation consultants: Propose recommendations to chief executive officers and board of director members for alternate executive compensation packages Board of directors: Represents shareholders’ interests by weighing the pros and cons of top executives’ decisions Compensation committee: Contain board of director members within and outside a company.

Compensation committees review executive compensation consultants’ alternate recommendations for compensation packages, discuss the assets and liabilities of the recommendations, and recommend the consultant’s best proposal to the board of directors for its consideration.

Agency theory: Provides an explanation of executive compensation determination based on the relationship between company owners (shareholders) and agents (executives) Agency problem: Describes an executive’s behaviour that promotes his or her self-interest rather than the interests of the company owners or shareholders.

Tournament theory: Provides an explanation for executive compensation determination based on substantially greater competition for high-ranking jobs. Lucrative chief executive compensation packages represent the prize to those who win the competition by becoming chief executives.

Social comparison theory: Provides an explanation for executive compensation determination based on the tendency for the board of directors to offer executive compensation packages that are similar to those in peer companies.

VII.

Discussion Questions and Suggested Answers

11-1. What can be done to make the function of compensation committees consistent with shareholders’ interest? Explain your answer.

A compensation committee is made up of members within and outside the organization, also known as the Board of Directors. The Board of Directors represent shareholders’ interests by weighing the pros and cons of top executive decisions. The Boards of Directors have members including CEOs and top executives of other successful organizations, distinguished community leaders, well-regarded professionals, and possibly a few top-level executives of the organization. The best way for a compensation committee to be consistent with shareholder’s interest is to listen to shareholder pleas and reactions to certain decisions, as well as to perform the first three duties of being a compensation committee. These three duties are reviewing consultants alternate recommendations, discussing the assets and liabilities of the recommendations, then making recommendations of the best proposal to the Board of Directors for their consideration.

Learning Objective: 11-4. Discuss the principles and processes of setting executive compensation.

11-2. Which component of compensation is most essential to motivate executives to lead organizations toward competitive advantage? Discuss your rationale.

11-3. Discuss your position on executive compensation. Is executive compensation excessive or appropriate?

11-4. Discuss the differences between enhanced benefits and perquisites.

The main difference between enhanced benefits and perquisites is that in order to be eligible for perquisites one must be an executive. Enhanced benefits are a different matter, for although they are generally only accessible through protection programs that include supplementary coverage, they are not limited to executive ranking.

Learning Objective: 11-3. List the components of executive compensation packages.

11-5. Consult a recent news article about a company’s executive pay. Summarize the main issues detailed within the article.

Responses will depend on current article.

VIII.

Crunch the Numbers! Questions and Suggested Student Responses

11-6. By what percent does annual median pay differ between the oil and gas extraction industry and the retail trade industry for (a) chief executives, (b) human resources managers, (c) accountants and auditors, and (d) file clerks? a. b. c. d.

(187,199-180,360)/187,199 = 3.65% (118,730-95,020)/118,730 = 19.97% (71,780-64,920)/71,790 =9.56% (30,700-23,430)/30,700 = 23.68%

Learning Objective: 11-5.

Briefly explain the executive compensation controversy as it relates to whether Canadian executives are paid too much.

In the oil and gas extraction industry relative to the retail trade industry, what are the pay ratios between (a) chief executives, (b) human resources managers, (c) accountants and auditors, and (d) file clerks, respectively?

Ratio of Oil and Gas Extraction Industry to Retail Trade Industry a. 187,199/180,360 1.04:1

b. 118,730/95,020 1.25:1 c. 71,780/64,920 1.12:1 d. 30,700/23,430 1.21:1 Learning Objective: 11-5.

Briefly explain the executive compensation controversy as it relates to whether Canadian executives are paid too much.

11-7. What are the pay ratios for the chief executives job to (a) human resources managers, (b) accountants and auditors, and (c) administrative assistants in both industry A and B? Industry A Chief executives to HRM managers: 96,864/83,140 Ratio = 1.17:1 Chief executives to Accountants and Auditors: 96,864/60,875 Ratio = 1.59:1 Chief executives to Administrative Assistants: 96,864/36,461 Ratio = 2.65:1 Industry B Chief executives to HRM managers: 175,546/92,815 1.89:1 Chief executives to Accountants and Auditors: 175,546/90,601 1.93:1 Chief executives to Administrative Assistants: 175,546/36,766 4.77:1

Learning Objective: 11-5.

Briefly explain the executive compensation controversy as it relates to whether Canadian executives are paid too much.

11-8. Summarize three forms of deferred (stock) compensation.

11-9. What are the objectives of the say-on-pay rule? Do you think that shareholders should be limited to taking an advisory vote or should shareholders be able to determine an executive’s compensation?

11-10. Why is it important to provide effective communication about employee benefits?

Organizations invest significantly in employee benefits and it is important for employees to understand the value of their benefits. Effective communication should help employees understand the value, but also should help employees understand their benefit options so that they can make wise decisions on their benefit selections.

11-11. How can organizations improve their benefits communication?

Students may provide a variety of responses or creative ideas on how to improve benefits communications. A personal statement of benefits would be a useful tool to help summarize the value of each employee’s benefit selections. Further, instead of the bulky information packets that the organization currently provides, they should consider some more concise summary communications, supplemented with the availability of more detailed information. For example, the organization could be use the intranet to organize and store important documents that the employees can access as needed.

Finally, employees should be given an opportunity for face-to-face meetings to learn more about their benefit options. Open meetings where employees can come and learn more about their benefits and also ask specific questions.

IX. Simulation Students will be able to apply the learning goals from this chapter as they consider the components of executive compensation packages and the principles and processes of setting executive compensation to complete the simulation activities and assessments. In particular, students will consider the learning goals as they design the compensation strategy. Students will be required to directly apply the components, principles, and processes of setting executive compensation from this chapter to the compensation strategy assignment.

CHAPTER 12 Compensating the Flexible Work Force: Contingent Employees and Flexible Work Schedules Preface This chapter looks at compensation issues for contingent workers and demonstrates that compensating contingent workers is a complex proposition, often referred to as the gig economy.

Changing business conditions and personal preferences for work–life balance have led to an increase in contingent workers and the use of flexible work schedules in Canada. Human resources

management (HRM) and compensation professionals encounter tremendous challenges in managing pay and benefits for these individuals. Many organizations employ both types of individuals, often in the same jobs. To the casual onlooker, including others in the workplace, there are no visible differences; however, HRM and compensation professionals must take many factors into consideration. As we will learn in this chapter, compensation professionals should be aware of the differences between core employees and contingent workers and the complexities of compensating contingent workers, particularly, pertaining to the domain of legally required benefits.

Learning Objectives

12-1. Describe the four groups of contingent workers.

12-2. Discuss pay and benefits issues for contingent workers.

12-3. Summarize the three categories of flexible work schedules.

12-4. Discuss the pay and employee benefits issues for flexible work schedules, compressed work weeks, and telecommuting arrangements.

12-5. Describe unions’ reactions to contingent work and flexible work schedule arrangements.

12-6. Identify strategic issues and choices organizations have regarding the use of contingent workers.

Outline/Table of Contents I. II. III. IV. V. VI. VII. VIII. IX. X.

The Contingent Workforce Pay and Employee Benefits for Contingent Workers Flexible Work Schedules: Flextime, Compressed Work Weeks, and Telecommuting Pay and Employee Benefits for Flexible Employees Unions’ Reactions to Contingent and Flexible Workers Strategic Issues and Choices in Using Contingent and Flexible Workers Key Terms Discussion Questions and Suggested Answers End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Crunch the Numbers! Questions and Suggested Student Responses

Lecture Outline/Syllabus I.

The Contingent Workforce A. Overview 1. Many organizations employ core and contingent workforces a. Core employees work full-time and part-time jobs, and generally plan longterm or indefinite relationships with their employers b. Contingent workers are those that do not have an implicit or explicit contract for ongoing employment i. Some refer to contingent employment as participating in the gig economy B. Groups of Contingent Workers 1. Four main groups:

a. Part-time employees b. Temporary and on-call employees c. Leased employee arrangements d. Independent contractors, freelancers, and consultants 2. Part-time employees a. Voluntary part-time employees choose to work fewer than 30 hours per workweek i. To supplement full-time employment to meet financial obligations ii. Lifestyle choice for more free time for family, hobbies, or personal interests b. Involuntary part-time employees work fewer than 30 hours per workweek because they are unable to find full-time employment i. Often are skilled workers c. Advantages i. Cost savings on discretionary benefits ii. Considerable savings in the areas of paid leave, insurance, and legally required benefits iii. Cost savings on overtime expenses d. Job sharing i. Two or more part-time employees perform a single full-time job ii. May meet regularly to coordinate efforts iii. Represents a compromise between employees’ needs or desire not to work full-time and employers’ needs to staff jobs on a full-time basis 3. Temporary and on-call employees a. Reasons for hiring temporary workers i. To fill in for core employees on approved leave ii. To have an extra set of hands during busy business activities iii. Allows employers to determine need for more core employees iv. Allows employers to evaluate performance of workers for possible fulltime employment, similar to a probationary period v. Save on discretionary benefits costs b. Temporary employment agency i. Most common source of temporary employees ii. Most agencies placed mainly clerical and administrative workers, now also auditors, computer systems analysts, and lawyers iii. Use based on reputation and fees iv. Are the legal employers of the workers v. Select, train, and provide compensation for employees c. Direct hire arrangements i. Organizations hire temporary workers directly

ii. Temporary employees usually work less than a year d. On-call arrangements i. Work sporadically throughout year as needed ii. Skilled trade union workers can be on-call when unable to find full-time employment 4. Leased employee arrangements a. Generally for long-term assignments b. Leasing organization bills hiring organization for costs including payroll, benefits, and payroll taxes c. Their placement fees that are either a percentage of the client’s payroll or a fixed fee per employee d. Responsible for all HRM functions e. Differ from temporary agencies in that their placements generally remain in effect for the duration of the contract with the host organization 5. Independent contractors, freelancers, consultants a. Establish working relationships directly with host organizations b. Typically possess specialized skills that are in short supply in the labour market c. Independent contractors hired to complete particular projects that generally last for a year or less C. Reasons for Canadian Employers’ Increased Reliance on Contingent Workers 1. Main reasons: a. Economic recessions b. International competition c. Shift from a manufacturing to a service economy 2. Economic recessions a. Reduction in core employees to control costs b. Contingent workers used to restore staffing until economy stability and need for more core employees is determined c. Hiring contingent employees represents a form of risk control d. Contingent workers are easier to terminate 3. International competition a. Foreign businesses can manufacture goods more cheaply b. Forces Canadian businesses to streamline operations by lowering labour costs 4. Shift from a manufacturing to a service economy a. Six broad divisions of service industries: i. Transportation ii. Communication iii. Public utilities iv. Wholesale trade

II.

v. Retail trade (finance, insurance, real estate) vi. Government b. Manufacturing organizations’ employment declined substantially in past several years Pay and Employee Benefits for Contingent Workers A. Legalities 1. All parties involved employing contingent workers possess liability under federal and provincial or territorial legislation, including: a. Overtime and minimum wage guidelines under the provincial or territorial employment standards b. Provincial or territorial workers’ compensation insurance premiums c. Nondiscriminatory compensation and employment practices under provincial or territorial employment standards B. Part-Time Employees 1. Challenges for employers a. Should organizations pay part-time workers on an hourly basis or salary basis? b. Will equity problems arise between core employees and part-time employees? c. Should organizations offer part-time workers benefits?

2. Pay a. Part-time workers generally earn less c. Organizations often expect salaried part-time employees to do more than their fair share i. An explicit agreement can avoid this problem ii. Or, the organization can pay on an hourly basis 3. Employee benefits a. Generally different dependent on: i. The size of the organization ii. Whether the employer is private or public C. Temporary Employees 1. Temporary employment agencies are the legal employers and are responsible for complying with all federal and provincial or territorial employment standards 2. Possible compensation challenges a. Do equity problems arise between core employees and temporary employees? b. How do provincial or territorial employment standards affect overtime provisions affect temporary employees? c. Do organizations offer temporary workers benefits? d. Who is responsible for providing workers’ compensation protection: the temporary agency or the client organization?

III. A.

3. Pay a. Pay rates vary by occupation and worker qualifications b. Equity problems may arise where core and temporary employees work together c. Differences between temporary and seasonal employees i. For determining minimum wage and overtime pay eligibility under provincial or territorial employment standards ii. Temporary workers can work any time throughout year, seasonal workers work during regular periods iii. Seasonal workers, like life guards and summer camp counselors, are exempt unless the employer operates over seven months a year 4. Employee benefits a. Organizations generally do not provide discretionary benefits D. Leased Workers 1. Who the legal employer is - is less clear than it is for temporary or part-time employees a. Leasing organizations are legal employers regarding wage issues and legally required benefit b. Leasing organizations and client organizations are the legal employers regarding particular discretionary benefits 2. Employee benefits a. Leased employees are generally entitled to participation in the client organizations’ qualified retirement programs b. Leasing organizations become responsible for leased employees’ retirement benefits when the safe harbor rule requirements are met E. Independent Contractors, Freelancers, and Consultants 1. Hiring organizations not obligated to pay: a. Federal income tax withholding b. Overtime and minimum wages required under provincial or territorial employment standards, however, employers are obligated to pay financially dependent workers overtime and minimum wages c. Insurance premiums required under provincial or territorial workers’ compensation e. Canada Revenue Agency test i.

Used to determine whether an individual is an employee or an independent contractor ii. test includes control over work, ownership of tools, profit/loss, and work integration Flexible Work Schedules: Flextime, Compressed Work Weeks, and Telecommuting Flextime schedules 1. Employee can set work hours within parameters specific limits 2. May be required to be on-site during core business hours

a. When business activity is high b. When important business activity is conducted 3. Some incorporate banking hours feature that enables employees to vary number of work hours daily as long as they maintain the regular number of work hours on a weekly basis 6. Possible employer benefits a. Lower tardiness and absenteeism b. Higher productivity c. Extended business hours and better service 7. Possible drawbacks a. Increased overhead costs b. Coordination problems C. Compressed Workweek Schedules 1. Same work hours in fewer days per week like: a. Four 10-hour days b. Three 12-hour days 2. Can promote recruitment and retention by a. Reducing commuting time b. Providing more family time D. Telecommuting 1. Employees perform work away from business at home or other location 2. Work time generally split between business and off-site locations 3. Possible employer benefit a. Increased productivity b. Lower overhead costs c. Effective recruiting and retention practices 4. Possible employee benefits a. More family time b. Minimize commuting time and expenses c. Separation from office politics d. Higher job performance 5. Possible disadvantages a. Fewer direct employee interactions b. Difficulty conducting accurate performance appraisals c. May disrupt personal life E. Flexible Work Schedules: Balancing the Demands of Work Life and Home Life 1. Flextime gives parents the opportunity to schedule work around special events at their children’s schools

IV.

V.

2. Compressed work weeks enable parents on limited incomes to save on daycare costs by reducing the number of days at the office 3. Compressed work weeks and telecommuting reduce the time spouses have to spend away from each other Pay and Employee Benefits for Flexible Employees A. Pay a. Influence of provincial or territorial employment standards overtime pay provision i. Is based on a five day 35-hour work week ii. Flexible employees weekly hours may vary, but average out over time iii. Possible that organizations may make inadequate or excessive overtime payments B. Employee benefits a. Flexible work week schedules have the greatest impact on paid time-off benefits as many organizations determine benefits based on numbers of hours worked each month b. Paid time-off for holidays another issue c. Working condition fringe benefits i. Provide remote employees the necessary equipment to do work such as computers, printer, internet connectivity, and office supplies Unions’ Reactions to Contingent and Flexible Workers A. Most do not support the use of contingent workers and flexible work schedules 1. They believe it might threaten job security and it may lead to unfair, inequitable treatment 2. Common concerns a. Employers exploit contingent workers by paying them lower wages and benefits b. Employer’s efforts to get cheap labour will lead to a poorly trained and less skilled workforce that will hamper competitiveness c. Part-time employees are difficult to organize because their interests are centered on activities outside the workplace d. Part-time employment erodes labour standards: often denied fringe benefits, job security, and promotion opportunities e. Temporary employees generally have little concern for improving the productivity of an organization f. The union’s bargaining power becomes weak when organizations demonstrate their ability to perform effectively with temporaries g. The long days of compressed work weeks for flextime could endanger workers’ safety and health, even if the workers choose these long days h. Other issues include concerns about employee isolation, uncompensated overtime, and organization monitoring in the home

VI.

3. Some unions are beginning to accept flexible work schedules, believing that doing so will strengthen their bargaining power Strategic Issues and Choices in Using Contingent and Flexible Workers A. Cost control objectives 1. Contingent employment allows for lower discretionary benefit costs and provides less generous amounts of such benefits 2. Well-trained contingent workers can reduce training costs 3. Organization-specific training a. Represents a significant cost to organizations b. Training short-term contingent workers undermines strategy because of: i. The cost of training materials and instructors’ fees ii. Downtime pay for training time iii. Inefficiencies that may result until employees master new skills 4. Training may increase long-term employees’ productivity and flexibility, outweighing the short-term costs 5. Overall, contingent workers demonstrate less absenteeism B. Product and service innovation objectives 1. Requires employees that are creative, open-minded, and risk-taking 2. Requires organizations to take a longer-term focus to attain their pre-established objectives 3. Contingent employment could: a. Bring in an influx of new employees with new ideas b. Minimize groupthink, where employees agree on mistaken solutions because they share the same mindset and view issues through the lens of conformity C. Differentiation strategies 1. Flexible work schedules may: a. Enable employees to work when they are at their peak physical and mental best b. Allow employees to work with fewer distractions and worries about personal matters End of Chapter

VII.

Key Terms

Core employees: Have full-time jobs or part-time jobs, and they generally plan long-term or indefinite relationships with their employers Contingent workers: Contingent workers who typically possess specialized skills that are in short supply in the labour market. Companies select independent contractors to complete particular projects of short-term duration—usually a year or less.

Voluntary part-time employees: Someone who chooses to work fewer than 35 hours per regularly scheduled workweek Involuntary part-time employees: Work fewer than 35 hours per week because they are unable

to find full-time employment Job sharing: A special kind of part-time employment agreement. Two or more part-time employees perform a single full-time job.

Temporary employment agency: Source of temporary workers Direct hire arrangements: Companies’ recruitment and selection of temporary workers without assistance from employment agencies On-call arrangements: Employees work sporadically throughout the year when organizations require their service Independent contractors: contingent workers who typically possess specialized skills that are in short supply in the labour market. Companies select independent contractors to complete particular projects of short-term duration—usually a year or less.

Freelancers See also independent contractors Consultants: See also independent contractors Flextime schedules: Allow employees to modify their work schedules within specified limits set by the employer Core hours: As applied to flex-time schedule, are the hours when all workers must be present Banking hours: A feature of flex-time scheduling that allows employees to vary the number of hours they work each day as long as they work a set number of hours each week Compressed workweek schedules: Enable employees to perform their full-time weekly work obligations in fewer days than a regular five-day workweek Telecommuting: Represents alternative work arrangements in which employees perform work from home or some other location besides the office Groupthink: Occurs when all group members agree on mistaken solutions because they share the same mind-set and view issues through the lens of conformity

VIII. Discussion Questions and Suggested Answers 12-1. Discuss some of the problems that companies are likely to face when both contingent workers and core employees work in the same location. Does it matter whether contingent workers and core employees are performing the same jobs? Explain your answer.

Possible problems that may arise when companies put contingent workers and core employees in the same location are cultural differences and work reliance conflicts. Cultural differences generally emerge when one type of employee may feel that the other is inferior or hardly worth their time due to the temporary versus long-term contract and as one employee treating the other with disregard due to the fact that one may not be there for much longer is also a potential problem. Work reliance conflicts include situations in which a core employee becomes dependent on a contingent worker for substantial work or information and the contingent worker leaves forcing the core employee to put together the pieces.

Learning Objective: 12-1. Describe the four groups of contingent workers.

12-2. Companies generally pay temporary employees lower wages and offer fewer benefits than they extend to their core counterparts. Nevertheless, what are some of

the possible drawbacks for companies that employ temporary workers? Do you believe that these drawbacks outweigh the cost savings? Explain your reasoning.

12-3. What arguments can be made in favour of using compressed work week schedules for organizations that pursue lowest-cost strategies? What are the arguments against using compressed work week schedules in such situations?

Compressed work week schedules are profitable for companies that pursue lowest-cost strategies because it reduces the number of times employees must commute between home and work as well as provides more time together for dual-career couples who live apart. However, compressed work week schedules may cause problems for employers as their employees are not necessarily there when they need them to be.

Learning Objective: 12-6. Identify strategic issues and choices organizations have regarding the use of contingent workers

12-4. What impact will flexible work schedules have on employees’ commitment to their employers? On employee productivity? On company effectiveness?

Some CANADA organizations use flexible work schedules to help employees balance the demands of work and home life. Flextime, compressed work weeks, and telecommuting should provide single parents or dual-career parents the opportunity to schedule work around special events at their children’s schools. Compressed work weeks enable parents on limited incomes to save on daycare costs by reducing the number of days at the office. Parents can benefit from telecommuting in a similar fashion. Likewise, dual-career couples living apart also benefit from flexible work schedules. Compressed work weeks and telecommuting reduce the time spouses have to spend away from each other. As a result employees are potentially happier and at ease when they come to work, greatly increasing work productivity and overall organization effectiveness. An employee’s commitment to their employer will also be relatively high as they are appreciative of the companies or employers policies and their regard to the employee’s life at home.

Learning Objective: 12-6. Identify strategic issues and choices organizations have regarding the use of contingent workers

12-5. Discuss whether you believe that telecommuting or remote work arrangements should apply to certain job groups rather than all job groups in an company.

Provide rationale.

IX.

End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

Case Name: Telecommuting at MBS Instructor Notes: Telecommuting creates a flexible work arrangement that allows employees to work from home, for at least part of the standard workweek. This option can be considered a valuable benefit to

employees, particularly if they are challenged with balancing their work and home life.

Telecommuting is most appropriate for positions where employees work independently and do not need frequent interactions with co-workers. The Specialists in this case work in positions that are most likely appropriate for telecommuting as they work independently on their own accounts.

Suggested Student Responses:

12-6. Would offering telecommuting or remote work be an option at MBS? How? Offering the option for telecommuting or remote work could help improve employee satisfaction by giving employees more flexibility. The Specialists could save money on gas and parking and save time commuting. This extra time could help relieve some of the burden in trying to balance their lives. Improved employee satisfaction could lead to lower turnover rates. Offering telecommuting or remote work to employees could also offer some advantages in recruiting new employees if potential employees see the option as an attractive benefit. Further, MBS may be able to lower their overhead expenses and improve overall employee productivity.

Learning Objective: 12-3. Summarize the three categories of flexible work schedules.

12-7. Are there any disadvantages or challenges in offering telecommuting?

Establishing telecommuting or remote work could be complex for MBS as they determine how they will ensure that the employees have the equipment and supplies that they need. Further, telecommuting or remote work creates several management challenges due to the limited face-toface contact, such as effectively assessing performance for the purpose of performance appraisals.

Employees in telecommuting or remote work positions may also feel isolated as they do not have the daily interactions with their co-workers.

Learning Objective: 12-3. Summarize the three categories of flexible work schedules.

12-8. What do you recommend MBS do? Why? Students will most likely suggest that MBS offers the telecommuting or remote work option. While it would take some effort to develop a thorough telecommuting or remote work policy, the organization will most likely benefit from offering telecommuting or remote work.

Learning Objective: 12-3. Summarize the three categories of flexible work schedules.

X.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating the Costs of Full-time and Part-time Employment 12-9. Based exclusively on employing full-time workers, (a) How many are needed to complete the project? (b) What is the estimated total cost of wages and benefits? a.

100,000 hours/ 5 workweeks = 20,000 hours per week 20,000 hours/ 40 hours per worker = 500 workers needed b.

100,000 hours x $11.80 per hour for benefits = $1,180,000 100,000 hours x $20 per hour wage = $2,000,000 Total = $3,180,000 Learning Objective: 12-4. Discuss the pay and employee benefits issues for flexible work schedules, compressed workweeks, and telecommuting arrangements.

12-10. Based exclusively on employing part-time workers, (a) How many are needed to complete the project? (b) What is the estimated total cost of wages and benefits? a.

100,000 hours / 5 workweeks = 20,000 hours per workweek 20,000 / 20 hours per worker = 1,000 workers b.

100,000 hours x $3.37 per hour for benefits = $337,000 100,000 hours x $12 per hour wage = $1,200,000 Total = $1,537,000 Learning Objective: 12-4. Discuss the pay and employee benefits issues for flexible work schedules, compressed workweeks, and telecommuting arrangements.

12-11. Assume that your organization has asked you to calculate the cost of staffing the project with a combination of full- and part-time workers. You’ve already hired 15 full-time workers. (a) How many part-time workers should you hire? (b) What is the total cost of wages and benefits based on employing this mix of full- and part-time workers? a.

15 full-time workers x 40 hours per week x 5 weeks = 3,000 hours 100,000 hours – 3,000 hours = 97,000 hours needed by part-time workers 97,000/ 5 workweeks = 19,400 hours per week 19,400/ 20 hours per worker = 970 part-time workers needed b.

Full-time wages and benefits: 3,000 hours x $11.80 per hour for benefits = $35,400 3,000 hours x $20 per hour wage = $60,000

Total = $95,400 Part-time wages and benefits:

97,000 hours x $3.37 per hour for benefits = $326,890 97,000 hours x $12 per hour wage = $1,164,000 Total = $1,490,890 Total for full-time and part-time workers: $1,586,290 Learning Objective: 12-4. Discuss the pay and employee benefits issues for flexible work schedules, compressed workweeks, and telecommuting arrangements.

12-12. Explain leased employee arrangements. Discuss employee benefits for leased workers.

12-13. Provide your reactions to the following statement: Contingent workers should be compensated on a pay-for-knowledge system.

12-14. What role does the compensation package play in attracting the right talent for the CEO position?

The CEO holds a significant responsibility in ensuring the success of an organization. A high level of risk comes with that responsibility. To attract a CEO willing to take on such risk, the compensation package must be attractive and provide the incentives to accomplish the goals of the organization.

12-15. What are some recommendations the consultant may provide to the Board for the compensation package?

As base pay is typically a smaller part of a CEO’s compensation package, the recommendations are likely to focus on other aspects of compensation. With the questionable future of the organization, a bonus structure that is contingent on performance is important with a focus on improving revenues. To ensure that the new executive is vested in the future of the organization, stock options are an important part of the compensation package. As there is some risk of an acquisition, a golden parachute clause is also likely important. Perquisites should be limited as those are likely to spark the most negative response from employees who are facing budget cuts in the stores.

CHAPTER 13 Compensating Expatriates Preface

Chapter thirteen explores international compensation programs as these have strategic value as Canadian businesses continue to establish operations in such foreign locales as Pacific Rim countries, Eastern Europe, and Mexico. Compensation takes on strategic value by providing these employees minimal financial risk associated with working overseas, as well as lifestyles for them and their families comparable to their lifestyles in Canada. Multinational organizations develop special compensation packages to help compensate for the personal sacrifices international assignees and their immediate families make.

Learning Objectives

13-1.

13-2.

13-3.

13-4.

13-5.

Discuss competitive advantage and how international activities fit in.

Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs.

List the main components of international compensation programs.

Discuss the balance sheet approach for Canadian expatriates’ compensation packages.

Describe repatriation issues.

I. II. III. IV. V. VI. VII. VIII. IX. X.

Outline/Table of Contents Competitive Strategies and How International Activities Fit In Preliminary Considerations Components of International Compensation Programs Incentive Compensation for Canadian Expatriates Establishing Employee Benefits for Canadian Expatriates Balance Sheet Approach for Canadian Expatriates’ Compensation Packages Repatriation Pay Issues Key Terms Discussion Questions and Suggested Answers End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

XI.

Crunch the Numbers! Questions and Suggested Student Responses

I.

Lecture Outline/Syllabus Competitive Strategies and How International Activities Fit In A. Overview 1. Several factors have contributed to the expansion of the global market: a. Free trade agreements (such as USMCA) b. Unification of the European markets c. Gradual weakening of the Communist influence in Easter Europe and Asia d. Greater opportunities for foreign organizations to invest in Canada B. Lowest-Cost Producers’ Relocations to Cheaper Areas 1. Many Canadian businesses have established manufacturing and production facilities in Asian countries and in Mexico because labour is significantly less expensive than it is in Canada 2. Two key reasons for the cost difference: a. Labour unions generally do not have much bargaining power in developing Asian countries or in Mexico, where the governments possess extensive control over workplace affairs b. Asian governments historically have not valued individual employee rights as much as does the Canadian government C. Differentiation and the Search for New Global Markets 1. Coca Cola and Pepsi products are well known worldwide because these organizations aggressively introduced their soft drink products throughout numerous countries 2. However, Coke and Pepsi could distinguish themselves from competing organizations by taking on new business initiatives that depart from business as usual and meet specific market needs

D. How Globalization Is Affecting HRM Departments 1. Employee selection a. Culturally sensitive? b. Are families willing to adjust?

2. Training

a. Cross-cultural values 3. The use of international assignments is an important issue addressed by organizations located in countries across the world

II.

E. Complexity of International Compensation Programs 1. Four main challenges: a. How to further corporate interests abroad and encourage employees to take foreign assignments b. How to minimize financial risks to employees and make their (and their families) experiences as pleasant as possible c. How to promote a smooth transition back to life in Canada after completing assignment overseas (repatriation) d. How to promote their lowest-cost and differentiation strategies in foreign markets Preliminary Considerations A. Overview 1. Distinguishing between employees a. Host country nationals (HCNs) b. Third country nationals (TCNs) c. Expatriates 2. Important compensation factors like: a. Terms of the assignment b. Staff mobility c. Pay equity B. Host Country Nationals, Third Country Nationals, and Expatriates: Definitions and Relevance for Compensation Issues 1. Three designations: a. Host country nationals (HCNs) b. Third country nationals (TCNs) c. Expatriates 2. HCNs are foreign national citizens who work in Canadian organizations’ branch offices or manufacturing plants in their home country 3. TCNs are foreign citizens who work in Canadian organizations’ branch in a foreign country other than Canada or their home country 4. Expatriates are Canadian citizens employed by a Canadian organization in a foreign country

III.

5. HRM professionals construct international compensation packages based on three main factors: a. Term of international assignment b. Staff mobility c. Equity: pay referent groups 6. Term of international assignments a. Short term (less than one year) generally do not require major changes in domestic compensation packages b. Extended (long) term assignments necessitate changes to promote a sense of stability and comfort c. Compensation package changes may include: i. Housing allowances ii. Educational expenses for children iii. Adjustments to protect expatriates from paying “double” income taxes – to Canada and to the host country 7. Staff mobility a. From Canada to host country and back b. From Canada to one host country and then to another host country c. May require financial incentives to make moves as comfortable as possible 8. Equity: pay referent groups a. Expatirates are likely to evaluate compensation, in part, according to equity considerations b. Referrent groups i. Domestic employees ii. Host country employees Components of International Compensation Programs A. Setting Base Pay for Canadian Expatriates 1. Canadian organizations must determine method 2. Purchasing power important consideration influenced by: i. Stability of local currency ii. Inflation B. Methods for Setting Base Pay 1. Three main methods a. Home country-based b. Host country-based c. Headquarters-based 2. Home country-based method a. Expatriates receive amount they would get in Canada b. Job evaluation, based on compensable factors, used to compare jobs

IV.

c. Most appropriate for expatriates d. Equity pay problems not an issue because expatriates are typically in short term assignments 3. Host country-based method a. Pay based on what employees in the host country receive b. Factors include market pricing, job evaluation techniques, or jobholder’s past relevant work experience c. Most suitable when assignments are extended term 4. Headquarters-based method a. All pay is set according to scales used at organization headquarters b. Not based on home or host country pay levels c. Most suitable for expatriates who go from one foreign assignment to another d. Administratively simpler, since pay not based on assignment location C. Purchasing Power 1. Affects an employee’s standard of living 2. Diminished power undermines the strategic value of the compensation package to attract and maintain employees willing to work overseas 3. Currency stabilization a. Pay usually based on Canadian currency b. Many host countries do not accept Canadian currency as a legal tender c. Expatriates must exchange dollars for local currency based on current exchange rate which is the price at which one country’s currency can be swapped for another d. Rate fluctuations affected by: i. Government policies ii. Market forces 4. Inflation a. Defined as the increase in prices for consumer goods and services b. Increases in inflation diminish purchasing power Incentive Compensation for Canadian Expatriates A. Overview 1. International compensation plans to encourage expatriates to accept and remin on international assignments 2. Also compensates for willingness to tolerate less desirable living and working conditions a. Promote higher job performance b. Minimize dysfunctional turnover B. Foreign Service Premiums 1. Monetary payments above and beyond regular base pay 2. Designed to encourage employees to accept expatriate assignments

3. Generally apply to assignments over a year in length 4. Calculated: a. As a percentage of base pay b. As a percentage generally between 10 percent to 30 percent c. Percentage increases with assignment length or because of a shortage 5. Possible drawbacks a. Employees might believe the premium is a regular, permanent increase b. May not have incentive value if given in several small installments c. Employees may worry that their standard of living will decrease after repatriation when they lose the premium C. Hardship Allowances 1. Designed to recognize exceptionally hard living and working conditions at foreign locations 2. Are disbursed in small amounts throughout the duration of assignment 3. The greater the hardship, the larger the allowance a. Range from 5 percent to 35 percent 4. Numerous countries considered hardship locations

V.

D. Mobility Premiums 1. Designed to encourage employees to move from one assignment to another a. From a domestic position b. Between foreign assignments 2. Generally given in a one lump-sum payment Establishing Employee Benefits for Canadian Expatriates A. Overview 1. Organizations design benefits programs to attract and retain the best expatriates 2. Also promote a sense of security for expatriates and their families and help maintain contact with friends and family in Canada 3. International employee benefits plans include such protection programs as medical insurance and retirement programs 3. Canadian citizens working overseas continue to receive medical insurance and participate in their retirement programs 4. International and domestic plans are also similar in that they offer paid time off; however, international packages tend to incorporate more extensive benefits of this kind 5. Employers should take several considerations into account when designing international benefits programs, including: a. Total remuneration: What is included in the total employee pay structure (e.g., cash wages, benefits, mandated social programs, and other perquisites)? How much can the business afford?

b. Benefit adequacy: To what extent must the employer enhance mandated programs to achieve desired staffing levels? Programs already in place and employees’ utilization of them should be critically examined before determining what supplementary programs are needed and desirable. c. Tax effectiveness: What is the tax deductibility of these programs for the employer and employee in each country, and how does the Canada Revenue Agency treat expenditures in this area? d. Recognition of local customs and practices: Organizations often provide benefits and services to employees based on those extended by other businesses in the locality, independent of their own attitude toward these same benefits and services.

B. Standard Benefits for Canadian Expatriates 1. Protection programs a. Two main types: i. Government-mandated benefits ii. Employer-sponsored benefits b. Employer-sponsored benefits provide family benefits, promote health, and guard against income loss caused by such catastrophic fctors as unemployment, disability, or serious illness i. As a strategic response to workforce diversity ii. To retain the best-performing employees 2. Paid time off a. Benefits include: i. Annual vacations ii. Holidays iii. Emergency leave b. Expatriates typically receive the same annual vacation benefits as do their domestic counterparts c. Canadian organizations must comply with foreign laws that govern the amount of vacation d. Expatriates generally receive paid time off for foreign national or local holidays e. Leave for personal or family emergencies C. Enhanced Benefits for Canadian Expatriates 1. Four main types: a. Relocation assistance b. Education reimbursements for expatriates’ children c. Home-leave benefits and travel reimbursements d. Rest and relaxation leave and allowance 2. Relocation assistance a. Covers expatriates’ expenses to relocate to foreign posts

VI.

b. Payments based on three main factors: i. Distance ii. Length of assignment iii. Rank in the organization 3. Education reimbursements for expatriates’ children a. Generally for private, English-speaking schools b. Tuition is generally higher than in Canadian private schools c. Done for two reasons: i. Some foreign schools are not comparable to Canadian public schools ii. Most Canadian children do not speak a foreign language fluently 4. Home-leave benefits and travel reimbursements a. To manage the adjustment to the foreign culture b. To maintain direct personal contact with family and friends at home c. Length and frequency depends on expected duration of assignment e. Generally, expatriates have to be on the assignment for a specific period (6-12 months) 5. Rest and relaxation leave and allowances a. Provided for expatriates who work in designated hardship foreign locations b. Organizations can designate where the time can be spent c. Allowance to cover travel expenses between the foreign post and retreat locations, based on: i. Cost of transportation ii. Food iii. Lodging d. The National Joint Council under Treasury Canada publishes per diem schedules i. For various cities ii. Amounts set by location and family size Balance Sheet Approach for Canadian Expatriates’ Compensation Packages A. Overview 1. Provides expatriates the standard of living they normally enjoy in Canada 2. Strategic value for two reasons a. Protects expatriates’ standards of living b. Enables organizations to control costs because it relies on objective indexes that measure cost differences between Canada and foreign countries 3. Most appropriate when: a. The home country is an appropriate reference point for economic comparisons b. Employees are likely to maintain psychological and cultural ties with the home or base country c. Employees prefer not to assimilate into the foreign culture

d. The assignment is of limited duration e. The assignment following the international assignment will be in the home country f. The organization promises employees that they will not lose financially while on foreign assignment 4. Major expenditures a. Housing and utilities b. Goods and services c. Discretionary income d. Taxes 5. Allowances a. Are given when the costs are more in the foreign assignment b. Vary according to the customary lifestyle of expatriate 6. Determining costs in foreign countries a. Through interviews with returning expatriates b. From private consulting or research organizations c. The National Joint Council under Treasury Canada indexes of Living Costs Abroad, Shelter Allowances, and Hardship Differentials B. Housing and Utilities 1. Eployers provide to cover the difference between housing and utilites costs in Canada and in foreign posts a. The National Joint Council under Treasury Canada uses the term shelter allowance 2. Shelter allowance includes allowance for family status and salary range C. Goods and Services 1. Expatriates receive when the ost of living is higher in that country than it is in Canada 2. Based on The National Joint Council under Treasury Canada Indexes of Living Costs Abroad a. Place-to-place cost comparisons at specific times and currency exchange rates D. Discretionary Income 1. Covers a variety of financial obligations in Canada for which expatriates remain responsible while away 2. Usually long-term in nature E. Tax Considerations 1. Expatriates subject to income taxes i. Canada ii. Foreign country (where applicable) iii. Paying both is a form of double taxation 2. Employer considerations: Tax protection and tax equalization

VII.

a. Under the balance sheet approach, organizations choose between two approaches to help address concerns about double taxation: i. Tax protection ii. Tax equalization b. Hypothetical tax method is a key element of both tax protection and equalization i. Calculated as the Canadian income tax based on the same salary level, excluding all foreign allowances c. Under tax protection employers reimburse expatriates for the difference between the actual income tax amount and and the hypothetical tax when the actual tax amount is greater d. Under tax equalization employers take the responsibility for paying income taxes to Canada and foreign governments on behalf of the expatriates i. Deduct income from the expatriates’ paychecks that totals the hypothetical tax amounts at year’s end ii. Reimburse expatriates for the difference between the hypothetical tax and the actual income tax whenever the actual income tax amount is less Repatriation Pay Issues A. Overview 1. Returning expatriates might initially view domestic assignments as a punishment because their total compensation decreases when they lose special pay incentives and leave allowances 2. Some returning expatriates perceive their value to the organization heightens because of their overseas assignments, more so than the organization does 3. Organizations can prevent many of these problems by following two measures: a. Investing in career development programs to signa that the organization values returnees b. Organizations should capitalize on expatriates’ experiences to gain a better understanding of foreign business environments End of Chapter

VIII. Key Terms Canada–United States–Mexico Agreement (CUSMA): Free trade agreement between the U.S., Canada, and Mexico Repatriation: The process of making the transition from an international assignment and living abroad to a domestic assignment and living in the home country Host country nationals (HCNs): Foreign national citizens who work in Canadian companies’ branch offices or manufacturing plants in their home countries Third country nationals (TCNs): Foreign national citizens who work in Canada companies’ branch offices or manufacturing plants in foreign countries—excluding Canada and their own home countries Expatriates: Canadian citizens employed in Canadian companies with work assignments outside of Canada

Home country-based pay method: Compensates expatriates the amount they would receive if they were performing similar work in Canada Host country-based method: Compensates expatriates based on the host countries’ pay scales Headquarters-based method: Compensates all employees according to the pay scales used at the headquarters Exchange rate: The price at which one country’s currency can be swapped for another Inflation: Is the increase in prices for consumer goods and services Foreign service premiums: Monetary payments above and beyond regular base pay Hardship allowance: Compensates expatriates for their sacrifices while on assignment Mobility premiums: Reward employees for moving from one assignment to another Relocation assistance payments: Cover expatriates’ expenses to relocate to foreign posts Home leave benefits: Enable expatriates to take paid time off in Canada Balance sheet approach: Provides expatriates the standard of living they normally enjoy in Canada Housing and utilities allowances: Cover the difference between housing and utilities costs in Canada and in the foreign post Shelter allowance: Term used in Canada to refer to housing and utilities allowances Goods and services allowances: Offered when the cost of living is higher in that country than it is in the United States Indexes of living costs abroad: Compare the costs (Canadian dollars) of representative goods and services (excluding education) expatriates purchase at the foreign location with the cost of comparable goods and services purchased in Canada Discretionary income: Covers a variety of financial obligations in Canada for which expatriates remain responsible Hypothetical tax: Employer calculation of the Canadian income tax based on the same salary level, excluding all foreign allowances Tax protection: Employers reimburse expatriates for the difference between the actual income tax amount and the hypothetical tax when the actual income tax amount—based on tax returns filed with the Canada Revenue Agency—is greater Tax equalization: Employers take the responsibility for paying income taxes to the Canadian and foreign governments on behalf of the expatriates

IX.

Discussion Questions and Suggested Answers

13-1. Discuss the strengths and weaknesses of the following methods for establishing base pay in international contexts: home country-based pay, headquarters-based pay, and host country-based pay.

13-2. For a country of your choice, conduct research into the cultural characteristics and summarize these characteristics. Discuss whether you feel that pay-for-performance programs are compatible and provide your rationale.

Responses will vary based on country selected. For example, if a Canadian company were to decide to locate in Japan, certain cultural norms may need to be used by employees in order to safely establish a strong relationship with the people. For instance, in most food consumption areas it is polite to burp, take off ones shoes before entering, and sit down on the floor when eating. Pay-for-knowledge and pay-for-performance compensation plans may be best as the organization is first starting out so as to pay their employees based upon how well they cope with

the cultural differences and/or their knowledge of the customs. In order to promote this compatibility it may be best to hire an expert in the cultural norms and acceptances of the Japanese people.

Learning Objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs.

13-3. Discuss your reaction to the following statement: “Canadian companies should increase base pay (beyond the level that would be paid in Canada) to motivate employees to accept foreign assignments.”

Increasing base pay in order to motivate employees to do anything is often a sound idea, however in terms of accepting foreign assignments it is not all together necessary. Many employees would be more than happy to try something new and even to be paid less for such adventurous assignments.

Learning Objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs.

13-4. Allowances and reimbursements for international assignments are costly. Should organizations avoid international business activities? Explain your answer. If you answer no, what can organizations to do minimize cost?

13-5. Of the many reimbursements and allowances that Canadian organizations make for employees who take foreign assignments, which one is the most essential? Discuss your reasons.

The most essential reimbursement and allowance that Canadian companies make for employees who take foreign assignments is home-leave benefits and travel reimbursements. Under this allowance, companies offer home-leave benefits to help expatriates manage the adjustments to foreign cultures and to maintain direct personal contact with family and friends. As the name implies, home-leave benefits enable expatriates to take paid time-off in Canada. Most companies reimburse expatriates for expenses associated with travel between the foreign post and Canada.

These reimbursements apply to expatriates and to reimburse the cost of round-trip airfare, ground transportation, and accommodations while traveling to and from the foreign post.

Learning Objective: 13-3.List the main components of international compensation programs.

XI.

End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

Case Name: Jenkins Goes Abroad Instructor Notes: Many human resources management professionals face the new challenge of expanding operations globally. Even if a company is sending just a few employees abroad, if the duration is longer than a year, possible adjustments must be made to the individual’s compensation. Companies must consider not only the need to maintain employee’s standard of living as they move into a different economy, but also the

need to encourage the acceptance of an international assignment.

Suggested Student Responses:

13-6. How should Dale approach the determination of the consultant’s salaries as expatriates?

Initially, Dale should consider the fact that the assignment is relatively long term. The consultants will be in the U.K. for a period of more than a year, and therefore, an adjustment to their pay is most likely appropriate. As the Canadian dollar is currently weak against the Pound, Dale should also consider the purchasing power of the consultants in the U.K. and the fact that the consultants’ current Canadian salary will likely lead to a lower standard of living. However, the assignment is not permanent and therefore the employees will need to eventually transition back into the Canadian culture. Therefore, maintaining purchasing power is a priority. Because of this, Jenkins should most likely take a balance sheet approach to determining the pay of the expatriates.

Learning Objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs.

13-7. Should Jenkins offer any incentive compensation or additional benefits to the expatriates? Why or why not?

Based on Dale’s initial discussions with the consultants, it seems they may be hesitant to take the assignment because of their concerns with their long-term career growth. Therefore, an incentive such as a foreign service premium may be appropriate. Because the consultants will eventually transition back to Canada, Jenkins may also want to consider offering home leave benefits in order to help the consultants maintain contact with friends and colleagues.

Learning Objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs.

XI.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating an Expatriate’s Base Pay and Incentives

13-8. Calculate your colleague’s new base pay rate.

5% increase in base pay = $3,750 New base pay rate = $78,750 Learning Objective: 13-4. Discuss the balance sheet approach for Canadian expatriates’ compensation packages.

13-9. Calculate the (a) foreign service premium, (b) hardship allowance, and (c) shelter allowance. a) 20% foreign service premium = $15,000 b) 15% hardship allowance = $11,250 c) shelter allowance = $53,200

Learning Objective: 13-4. Discuss the balance sheet approach for Canadian expatriates’ compensation packages.

13-10. Based on your calculations for the previous questions, how much will your colleague receive for her 1-year assignment in Beijing, China?

Total compensation = $78,750 + $15,000 + $11,250 + 53,200 = $158,200 Learning Objective: 13-4. Discuss the balance sheet approach for Canadian expatriates’ compensation packages.

13-11. Describe the two choices available to organizations to protect expatriates from double taxation. Which of the two approaches is most fair to expatriates and why?

13-12. From the organization’s standpoint, what are the pros and cons of following the balance sheet approach?

CHAPTER 14 International Compensation Preface

Chapter fourteen requires students to consider wide variation in compensation and benefits practices across several regions of the world. Each country review with a brief treatment of governmental structure, norms, and historical events that helps shed light on pay and benefits, and statutory minimum wage rates. Next, basic benefits issues as paid time off, protection programs (including retirement and health care), and stand-out benefits in particular regions will be discussed.

Learning Objectives

14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside Canada.

14-2. For North America (United States and Mexico), summarize key facts about wage and salary, paid time-off benefits, and protection programs.

14-3. For South America (Brazil), summarize key facts about wage and salary, paid time-off benefits, and protection programs.

14-4. For Europe (Germany), summarize key facts about wage and salary, paid time-off benefits, and protection programs.

14-5. For Asia (India and the People’s Republic of China), summarize key facts about wage and salary, paid time-off benefits, and protection programs.

I. II.

Outline/Table of Contents Introduction Pertinent Concepts for Quantifying Economic Elements in the Discussion of Pay and Benefits Outside of Canada

III. IV. V. VI. VII.

North America South America Europe Asia Key Terms

VIII. IX.

Discussion Questions and Suggested Answers End of Chapter Case; Instructor Notes, and Questions and Suggested Student

X. I.

II.

III.

Crunch the Numbers! Questions and Suggested Student Responses

Lecture Outline/Syllabus Introduction A. Overview 1. Globalization has resulted in a high level of interconnections between the economies of various parts of the world 2. Canadian employers will increasingly conduct business with entities in a variety of other countries as former underdeveloped parts of the world experience tremendous economic, trade, and standard of living growth 3. In addition, the move from traditional manufacturing to knowledge and servicebased employment also means that jobs as well as markets are more likely to be dispersed geographically 4. Sometimes other countries impose stricter control over terms of compensation than Canada Pertinent Concepts for Quantifying Economic Elements in the Discussion of Pay and Benefits Outside of Canada A. Overview 1. The gross domestic product (GDP) describes the size of a country’s economy, where size is expressed as the market value of all final goods and services produced within the country over a specified period 2. GDP per capita generally indicates the standard of living within a country, the larger the per capita GDP, presumably the better is the standard of living 3. Purchasing power parity exchange rate (PPP) is the worth of all goods and services produced in the country valued at prices prevailing in Canada 4. Per capita expenditure on health care is the sum of public health expenditure and private expenditure on health, helps compensation professionals understand the standard of health care 5. Methodological differences make cross-country comparisons of reported hourly compensation difficult North America A. Overview 1. Mexico, Canada, and the United States are part of a trade bloc known as USMCA 2. The changes to NAFTA include changes in trade for agricultural products, automobiles and automotive parts, and textiles; increased thresholds for low-value (de minimis) shipments subject to informal entry procedures; enhanced data protection for biologic drugs 3. USMCA has 34 chapters, NAFTA has 22 chapters and includes changes to labour, the environment, anti-corruption, and regulatory policy United States

1. The United States consists of 50 states and five major territories 2. With a per capita gross domestic product (GDP) of $ $19.49 trillion in 2017

3. In 2018 there were 329.3 million people in the labour force 4. The American economy is very similar to that of Canada’s market-based economy 5. The United States has the world’s largest trade deficit of $621 billion in 2018 and by 2020, the United States budget deficit is projected to be 1.1 trillion Wage and salary

1. The basic rule of United States law holds that labour and employment law fall within both the federal and stated jurisdiction For example, the Fair Labour Standards Act (FLSA) outlines wages and overtime pay, which affect most private and public employment which each state must meet as a minimum.

Paid time off benefits 1. The United States has seven statutory holidays per year, with each state offering employees additional dates that vary by state.

2. On average, American employees are entitled to between 10 paid vacation days after one year of employment.

3. Maternity and paternity leave provisions are set out by each state and territory.

Protection benefits

C.

Social security 1. The U.S. Social Security benefits include retirement benefits similar to the Canada Pension Plan. Both plans are funded by matching contributions from employers and employees, and both are fully portable upon employment changes, much like 401(k) plans in the United States. In addition to the public plans, many employers provide supplementary pension plans that are regulated by state legislation that establishes minimum funding standards; specifies the types of investments that the plans may make; and deals with such matters as portability, benefit vesting, and locking-in contributions. Employers frequently have different plans for executive, managerial, and other employees.

2. The Obama administration introduced The Affordable Care Act (ACA) to allow Americans access to affordable health insurance such as medical, dental, vision, and other types of health insurance that they may not have been able to get on their own or through an employer.

3. Employers also provide long and short-term disability benefits for sickness or injury as part of a benefits package. According to the Kasier Family Foundation, the average annual single employee health insurance coverage premium was $6,251 and the average family health insurance coverage premium was $17,545 in 2015 4. Each state government provides Medicaid health insurance to individuals including low-income adults, children, pregnant women, seniors, and people with disabilities.

5. CHIP to low income families with children and Medicare for elderly Americans.

Mexico 1. Mexican labour law is based on the Constitution of Mexico, adopted in 1917.

2. Mexico’s population was 125,959,205 in 2018 with a labour force was nearly 54.51 million.

3. Per capita GDP—$19,900 in 2017.

4. Wage and salary

IV.

a. The Mexican government requires that two minimum wage rates be applied: i. The first, general minimum wage, applies to all workers and the amount depends upon the region of the country ii. The second is the occupational minimum wages that are higher than the general minimum wages b. Occupations that require greater skill, knowledge, and experience are compensated at higher rates 6. Paid time off benefits a. Workers are entitled to paid time off during public holidays and workers required to work during a mandatory holiday are entitled to double pay b. Female employees are entitled to maternity leave—six weeks prior to giving birth and six weeks after birth on full salary c. Employees are entitled to six vacation days after being employed for one year and to two more days for each subsequent year, up to a maximum of twelve days 7. Protection benefits a. Social security i. Social security programs in Mexico are administered by the Mexican Social Security Institute ii. Protect employees in the matters of occupational accidents and illnesses, maternity, sicknesses, incapacitation, old age, retirement, and survivor pensions, daycare for children of insured workers, and social services iii. The system is financed by contributions from workers, employers, and the government iv. Workers with at least 52 weeks worth of payments into the system who withdraw are entitled to continue making voluntary payments b. Pension and retirement benefits i. All workers must join the mandatory individual account system, which is slowly replacing the former social insurance system ii. At retirement, employees covered by the social insurance system before 1997 can choose to receive benefits from either the social insurance system or from the mandatory individual account system c. Health benefits i. Medical services are normally provided directly to patients (including oldage pensioners covered by the 1997 law) through the health facilities of the Mexican Social Security Institute ii. Benefits include general and specialist care, surgery, maternity care, hospitalization or care in a convalescent home, medicines, laboratory services, dental care, and appliances, and are payable for 52 weeks, but may in some cases be extended to 104 weeks d. Other benefits i. A national system of worker housing exists paid for by employer contributions in the form of payroll tax fixed at five percent and helps workers obtain sufficient credit for the acquisition of housing South America A. Overview 1. Brazil, Argentina, Colombia, and Chile are the largest economies in South America 2. The biggest trade bloc in South America used to be Mercosur, or the Southern Common Market, comprised of Argentina, Brazil, Paraguay, Uruguay, and Venezuela as the main members and Bolivia, Chile, Colombia, Ecuador, and Peru as associate states

V.

3. The second-biggest trade bloc was the Andean Community of Nations made up of Bolivia, Colombia, Ecuador, Peru, Venezuela, and Chile B. Brazil 1. The Consolidation of Labour Laws (Consolidacao das Leis do Trabalho) accords many employee benefits the status of fundamental constitutional rights and in general the employment relationship in Brazil is highly regulated by statute 2. Per capita GDP—$15,600.00 in 2017 3. Wage and salary a. Minimum wage imposed b. In accordance with the Federal Constitution, the minimum wage rate is nationally uniform and set by law 4. Protection benefits a. Social security i. The social security system that went into effect in 1991 details various benefits for workers in Brazil ii. Comprehensive social security benefits are provided by law to all workers regarding retirement for illness, old age, or length of service; death benefit pensions; assistance during imprisonment of worker; savings fund; social services; professional rehabilitation assistance; work accident payments; maternity leave payments; family salary support; accident insurance; and sick leave benefits b. Pensions i. Social insurance is provided to employed persons in industry, commerce, and agriculture, domestic servants, some categories of casual workers, elected civil servants, and the self-employed ii. The monthly benefit is equal to 70 percent of average earnings plus 1 percent of average earnings for each year of contributions, up to a maximum of 100 percent iii. Employees contribute 8.5 percent of gross earnings, and voluntary contributors and members of cooperatives contribute 20 percent of declared earnings c. Health benefits i. Medical services are provided directly to patients in rural and urban areas through the Unified Health System and include such benefits as general, specialist, maternity, and dental care; hospitalization; medicines (some cost sharing is required); and necessary transportation Europe A. Overview 1. The European Union (EU) is a unique international organization that aims at becoming an economic superpower while still retaining quintessential European practices such as high levels of employment, social welfare protection, and strong trade unions 2. Under the laws of all Member States, employers must provide employees with a written document about the terms of the employment contract 3. The concept of “employment at will” does not exist in the EU as in the United States 4. All member states either have specific legislation or unfair dismissal or general civil code provisions that apply to termination of employment contracts 5. The EU Website reports that community labour law was designed with the aim of ensuring that the creation of the Single Market did not result in a lowering of labour standards or distortions in competition

VI.

6. On the basis of article 137 of the treaty, the Community shall support and complement the activities of the Member States in the area of social policy, particularly minimum requirements at the EU level in the fields of working and employment conditions, and with regard to the information and consultation of workers B. Germany 1. The integration of the former East German economy is a strain on the overall economy of unified Germany, leading to high unemployment rates 2. Per capita GDP—$50,800 and labour force—45.9 million 3. Germany’s labour laws provide considerable voice to labour and job security to employees 4. Wage and salary a. Minimum wage in Germany is not mandated by the government, and is established through the collective bargaining process b. Two types of collective agreements: i. Association agreements are made between trade unions and employers’ associations ii. Organization agreements are made between trade unions and individual employers c. An extension of either type of agreement to other sectors or employers may be granted upon the request of at least one party to the collective agreement 6. Paid time off benefits a. The statutory minimum vacation has been set at 24 working days (or four weeks since Saturdays are counted) b. Younger workers have a right to a vacation of 25 to 30 working days; disabled workers have an additional five days of vacation c. Expectant mothers can take 6 weeks’ leave before the due date and 8 weeks after giving birth 7. Protection benefits a. Pensions i. Germany has a statutory pension system analogous to the Social Security system in the United States ii. Employers offer the organization pension plan and a tax-favoured investment plan b. Health insurance i. German laws stipulate guidelines for the minimal health welfare of workers ii. For blue collar workers (and some white collar workers) mandatory state health insurance premiums are shared equally by the insured and by the employer iii. Employees whose income exceeds a certain amount can opt out of the state plan and purchase private health insurance Asia A. Overview 1. Asia has several trade blocs including the Asia-Pacific Economic Cooperation, the Asia-Europe Economic Meeting, the Association of Southeast Asian Nations, and the South Asian Association for Regional Cooperation 2. Given the wide variation and diversity in the world’s largest and most populous continent, however, there is no unifying economic body like the EU or USMCA that represents all the countries of Asia B. India

C.

1. Indian economy is growing steadily, but is plagued with income disparity and developmental challenges 2. Per capita GDP—$7,200 and labour force—521.9 million 3. The Directive Principle of State Policy has statutes that affect various aspects of the employment relationship such as working conditions and participation in management 4. There are wide variations between the public and private sectors, with the Ministry of Labour and labour laws governing employment relationships in the public sector and more employer discretion allowed in the private sector 5. Wage and salary a. Minimum wage is fixed by an authority dual system b. Minimum wage rates are determined by the government for certain sectors, and a collective agreement determines others c. Minimum wage rates for occupations that are largely nonunionized or have little bargaining power may be set in accordance with the Minimum Wages Act, 1948 6. Paid time off benefits a. Leave is usually calculated for each year based on the number of days worked in the previous year and if worker does not take all of the accumulated leave it is allowed to roll over to the succeeding calendar year up to a maximum of 30 days b. There is no statutory provision of holidays or paternity leave but maternity leave is allowed in the form of paid time off and possible medical bonus 7. Protection benefits a. Pensions i. First and current laws regarding pensions were passed in 1952 (employees’ provident funds), with amendments in 1972 (payment of gratuity), 1976 (employees’ deposit-linked insurance), 1995 (employees’ pension scheme), and 1995 (national social assistance program) ii. In 2004, a voluntary old age, disability, and survivors’ benefits scheme was enacted iii. Voluntary coverage exists for employees of covered establishments with monthly earnings of more than 6,500 rupees, with the agreement of the employer and for establishments with less than 20 employees if the employer and a majority of the employees agree to contribute iv. Provident fund contributions include 12 percent of basic wages (10 percent of basic wages in five specified categories of industry) in covered establishments with less than 20 employees and some other specific cases v. The maximum monthly earnings for contribution purposes are 6,500 rupees (1 USD = 46.3 rupees) b. Health Benefits i. State governments arrange for the provision of medical care on behalf of the Employees’ State Insurance Corporation ii. Services are provided in different states through social insurance dispensaries and hospitals, state government services, or private doctors under contract People’s Republic of China 1. The PRC monist state characterized by a fast-growing economy that has shifted from a centrally planned system to a more market-oriented one.

2. Per capita GDP—$16,700 and labour force—806.7 million 3. The PRC Labour Law was established in 1995, resulting in a break from the traditional “iron rice bowl” system of employment, with a shift from state-owned

4.

5.

6.

7.

enterprises to private ones, a move which has given rise to new employment relationship issues Since the introduction of the PRC Labour Law the employment relationship is now defined by individual contracts Wage and salary a. According to China’s Labour Act, 1994, the State possesses the responsibility to implement a system of guaranteed minimum wages b. There is no national minimum wage rate in China; instead, minimum wage rates are set by region c. Separate standards are stipulated by provincial, regional, and municipal peoples’ governments for their respective regions and reported to the State Council for consent d. The provisions concerning minimum wages apply to enterprises, private nonenterprise entities, individual industrial and commercial households with employees (the employing entities), and the labourers who have formed a labour relationship with them Paid time off benefits a. The length of an employer-approved medical treatment period generally depends on employee age and period of service and can range from 3 to 24 months b. Employees who have worked for 1 to 10 years are entitled to annual paid leave of 5 days, 10 days for those who have worked 10 to 20 years, and 15 days for those who have worked 20 or more years c. Employees who have worked for more than one year are entitled to “home leave” if they do not live in the same place as their spouse or parents c. Women are entitled to no less than 90 days of maternity leave starting 15 days prior to birth Protection benefits a. Pensions i. There has been a new law to decouple the employment relationship from the social insurance system, setting up a unified basic pension system with social insurance and mandatory individual accounts ii. Coverage includes employees in urban enterprises and urban institutions managed as enterprises and the urban self-employed iii. Employees of government and communist party organizations and of cultural, educational, and scientific institutions (except for institutions financed off-budget) are covered under a government-funded, employeradministered system iv. An employee contribution to mandatory individual accounts is 8 percent of gross insured earnings v. The minimum earnings for employee contribution and benefit purposes are equal to 60 percent of the local average wage for the previous year vi. The maximum earnings for employee contribution and benefit purposes vary, but they may be as much as 300 percent of the local average wage for the previous year b. Health insurance i. A unified medical insurance system exists with all employers and workers participating in this system; employers contribute six percent of payroll employees contribute two percent of their salary. ii. Health insurance is based on Basic Medical Insurance Fund consisting of a

Pooled Fund and Personal Accounts iii. Employees’ contributions go directly to their Personal Accounts and 30 percent of employer contributions are paid into this account iv. The social insurance fund reimburses the cost of the medical benefit from 10 percent up to 400 percent of the local average annual wage End of Chapter VII. Key Terms Gross domestic product (GDP): The size of a country’s economy expressed as the market value of all final goods and services produced within the country over a specified period GDP per capita: Generally indicates the standard of living within a country Purchasing power parity (PPP) exchange rate: The worth of all goods and services produced in the country valued at prices prevailing in Canada Per capita expenditure on health care: The sum of public health expenditure and private expenditure on health

VIII. Discussion Questions and Suggested Answers 14-1. Discuss the main differences between the minimum pay regulations in the Canada and one other country’s practices discussed in this chapter. How do these differences affect organizations’ ability to compete with other organizations worldwide?

The answer may vary depending on the country chosen by students.

Learning Objective: Could apply to Objectives 2, 3, 4 or 5 depending on the country selected.

14-2. Discuss the main differences between retirement systems in Canada (taking into account government-mandated and employer-sponsored programs) and one other country discussed in this chapter. Does it appear that the costs of retirement programs are creating burdens for competitive advantage?

The answer may vary depending on the country chosen by students.

Learning Objective: Could apply to Objectives 2, 3, 4 or 5 depending on the country selected.

14-3. Discuss the main differences between paid time-off practices in Canada and one other country discussed in this chapter.

14-4. Discuss the main differences between health care systems in Canada and one other country discussed in this chapter. Does it appear that the costs of health care programs are creating burdens for competitive advantage?

Learning Objective: Could apply to Objectives 2, 3, 4 or 5 depending on the country selected.

14-5. Describe the purchasing power exchange rate and indicate how it is helpful to compensation professionals whose work spans multiple countries.

IX.

End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

Case: North American Expansion for Threads Apparel

Instructor Notes:

Companies that expand their operations internationally must understand the basic legal requirements as well as norms for pay and benefit in the country where they are doing business.

CUSMA has increased trade between the Canada, United States, and Mexico and as a result, more organizations are doing business in one or both of these countries. However, employment practices in Canada and Mexico still differ from the United States and an organization entering into one of these countries must understand the labour environment.

Suggested Student Responses:

14-6. What are some labour-related factors that Threads should consider when comparing Mexico and Canada?

Beyond the availability of the right talent, an important consideration is related to costs and employment practices. An organization must consider local pay rates, and costs of healthcare and retirement benefits. An organization should also consider the presence or absence of organized labour.

Learning Objective: 14-2. For North America (Canada and Mexico), summarize key facts about wage and salary, paid time-off benefits, and protection programs.

14-7. What are some labour-related factors that would favour Canada as the location of the new facility? Mexico?

The employment environment in Canada is more similar to the United States than Mexico. As such, Thread’s management may find it easier to transition into the Canadian work environment. With higher paid workers, Threads could potentially more easily maintain the high quality standards that they have based their reputation on. Canada also has a public healthcare system, which reduces the burden placed on employers. Threads may choose to provide additional healthcare benefits, but costs will likely be lower than they pay for U.S. workers. Mexico is more attractive from a cost management standpoint. Labour costs are far below those in Canada, which are more in line with U.S. norms. Mexico has lower pay rates, and the government provides most healthcare and retirement benefits.

Learning Objective: 14-2. For North America (Canada and Mexico), summarize key facts about wage and salary, paid time-off benefits, and protection programs.

X.

Crunch the Numbers! Questions and Suggested Student Responses

Comparing the Rates of Change in GDP Per Capita for Select Countries

14-8. What is the five-year change in GDP per capita (2002–2006) for (a) the United States, (b) Australia, (c) Singapore, (d) Denmark, and (e) Italy?

Country United States Australia Singapore Denmark Italy

2002 45,418 36,256 42,860 40,239 33,305

2006 49,130 39,169 54,212 43,276 33,900

Difference 3,712 2,913 11,352 3,037 595

Learning Objective: 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States.

14-9. What is the five-year change in GDP per capita (2007–2011) for (a) the United States, (b) Australia, (c) Singapore, (d) Denmark, and (e) Italy?

Country United States Australia Singapore Denmark Italy

2007 49,571 40,357 56,606 43,774 34,261

2011 48,282 41,340 60,742 40,930 32,100

Difference -1,289 983 4,136 -2,844 -2,161

Learning Objective: 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States.

14-10. State whether the rate of change for the more recent five-year period (2007–2011) was lower than or higher than the rate of change for the earlier 5-year period (2002–2006) in each country: (a) the United States, (b) Australia, (c) Singapore, (d) Denmark, and (e) Italy.

Country

(2007-2011)

(2002-2006)

United States Australia Singapore Denmark Italy

-1,289 983 4,136 -2,844 -2,161

3,712 2,913 11,352 3,037 595

More recent period higher or lower?

Lower Lower Lower Lower Higher

Learning Objective: 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States.

14-11. Why is it important for HRM and compensation professionals to learn about compensation practices in other parts of the world? Discuss.

14-12. Which factor do you think is most important when deciding whether to establish business operations in another country? Explain your rationale.

CHAPTER 15 Challenges Facing Compensation Professionals Preface

The final chapter will ensure students appreciate there is much more to consider besides the fundamentals of employee compensation. In this chapter, four key issues that will shape the work of compensation and benefits professionals are examined including the future include the reduction employee benefits costs for employers, underemployment and the compensation–productivity gap, workforce demographic shifts, and the rising wages in China.

Learning Objectives

15-1. Explain the issues surrounding reducing employee benefits costs for employers.

15-2. Describe the issue of underemployment and the compensation–productivity gap.

15-3. Explain the influence of changing workforce demographics on employee benefits practices.

15-4. Discuss the issue of rising wages in China.

Outline/Table of Contents I.

Overview

II. III. IV. V. VI.

Reduce Employee Benefit Costs for Employers Underemployment and the Compensation-Productivity Gap Workforce Demographic Shifts Rising Wages in China Key Terms

VII. VIII.

Discussion Questions and Suggested Answers End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

IX.

Crunch the Numbers! Questions and Suggested Student Responses

I.

II.

Lecture Outline/Syllabus Overview A. Four key issues that will shape the work of compensation professionals: 1. Reduce Employee Benefit Costs for Employers 2. Underemployment and the compensation-productivity gap 3. Workforce demographic shifts 4. Rising wages in China Reduce Employee Benefit Costs for Employers

1. In 2016 human resources management professionals are most concerned about reducing the costs of short-term disability, long-term disability costs, workers’ compensation, and incidental employee work absence.

2. The top priority to human resources management professionals are the increasing compensation costs of employees' complex mental health issues impacting company long term disability costs.

3. Managers and employees as having insufficient knowledge concerning mental health issues and the stigma of mental health issues as significant concerns.

4. Statistics Canada’s Work Absence Statistics of Full-Time Employees, 2016 reported that employee workplace absences have increased, costing employers in terms of reduced productivity. This reduced productivity negatively impacts organizational growth.

III. Underemployment and the Compensation-Productivity Gap 1. Exploring the enduring effects of the so-called great Recession which took hold during the December 2007-June 2009 period 2. Economic recession refers to a general slowdown in economic activity 3.Underemployment refers to employees who wish to work full-time and are working parttime or have completed education higher than their current job requires.

4.It is more difficult for the underemployed to find full-time employment 5.Underemployment results in low earnings compared to those not underemployed.

6. Underemployment across Canada affects one in five employees.

7. Underemployment in Canada affects recent university graduates and immigrants most significantly.

8. Underemployment leads to earning losses because the underemployed work fewer hours and take jobs within lower-paying occupations.

9. Underemployed workers are likely to have lower future earnings partly because employers provide less or no training to part-time workers.

10. Underemployment may slow down the economic recovery from the recession. Lower current pay and anticipated lower future earnings will likely reduce the consumption of goods and services, thus holding back increases in spending, business production, employment levels, and pay increases.

11. The gap between real hourly compensation and labour productivity indicates whether workers’ pay is keeping up with productivity. Productivity growth promotes rising living standards in the following manner. Increases in productivity growth indicate companies’ investments in capital equipment and information technology.

12. Canadian labour productivity was less than that of the United States. The Canadian unit labour cost, or cost to produce one unit in Canada was 106.491 yet was 81.571 in the United States.

13. The Conference Board of Canada reported that Canada ranked fifth in the world in terms of labour productivity growth or a rating of B. The best performing country was Australia with an A rating. Productivity growth is important as the value indicates productivity per capita income.

14. High unemployment following recessions leaves employees with relatively lower power to bargain for higher pay because the supply of individuals seeking work is greater than the organization’s demand for new workers. Second, most organizations experience profit losses during economic recessions, and, then, profits generally increase following recessions. Organizations promote profits, in part, by holding down employees’ pay.

IV. Workforce Demographics Shifts

1. Statistics Canada indicates labour force diversity will continue to increase based on age, gender, race, and ethnicity. This increase is the result of changes both in the composition of the population and in labour force participation rates across demographic groups.

2. The projected growth of the labour force will be affected by the aging of the baby boom generation—persons born between 1946 and 1964. In 2022, baby boomers will be 58 to 76 years old.

3. The occupation with the most over 65 year old workers in managerial while the greatest number of fulltime employees age 25-54 years was business, finance, and administration occupations.

4. The participation rate for older workers (ages 55 and older) has continued to rise.

5. Statistics Canada reports that in 2015, one in five Canadians aged 65 and older, or nearly 1.1 million seniors worked--this is the highest number since the 1981 Census.

6. In 1976, the number of women in the labour force was 52.3 percent of all women and rose dramatically to 82.9 percent in 2017. During the same period the percentage of men participating in the Canadian labour force decreased from 94.5 to 91.1 percent between 1976 and 2017.

7. Offering relevant employee benefits is important to organizations’ attainment of a positive return on investment in benefits programs.

8. Relevance for employee benefits i. An employer-sponsored benefits program is most effective when the needs and preferences of the workforce are similar ii. Differences in employee preferences and needs necessitates flexible benefit offerings iii. Part-time or full-time status could be considered a relevant dimension for further defining diversity iv. Benefits professionals may use surveys to gather information about employee a. Demographics b. Needs c. Preferences d. Recent or anticipated life changes e. Preference on benefits 4. Current offerings can be compared with the survey results

V.

Rising Wages in China

A. Overview 1. Canadian organizations relocated manufacturing facilities Canada to other countries such as China due to lower their labour costs 2. Rising costs are reducing the competitive advantage gained from relocating manufacturing facilities to China 3. Among developing Asian countries, China’s average pay rate is highest 4. Minimum wage rose rates an average of 24 percent 5. Average monthly income increased to 1567.14 Yuan per month in 2019.

6. Chinese policy makers are supportive of increased wages a. Encouraging higher wages promotes domestic consumption b. Increased domestic consumption will decrease the country’s reliance on exports to sustain growth c. Reduced reliance on exports is necessary as labour costs within China increase rapidly

7. Labour shortages contributed to wage increases in China a. One-child policy led to a rapidly aging Chinese population.

End of Chapter VI.

Key Terms

Economic recession: Refers to a general slowdown in economic activity Underemployment: Refers to employees who wish to work full-time, but are forced to work parttime for economic reasons, such as poor business conditions or the inability to find a job

VII.

Discussion Questions and Suggested Answers

15-1. This chapter discusses four important issues that will shape compensation professionals’ work for years to come. Which of these issues stands to create the greatest uncertainty for compensation professionals? Explain your answer.

15.2

Explain why wages are increasing in China, and discuss how this trend will influence an organization’s choice to conduct business there.

Chinese policy makers are supportive of increased wages because encouraging higher wages promotes domestic consumption. Increased domestic consumption decreases the country’s reliance on exports to sustain growth. In addition to policy changes, the labour shortage caused by the impact of the country’s one-child policy is impacting the need to increase wages. These higher wages creates less of a cost savings for companies who chose to conduct business in China.

Learning Objective: 15-2. Discuss the issue of rising wages in China.

15-3. Discuss how organizations stand to benefit from a diverse workforce.

The growing diversity of the workforce creates workplaces with workers with differing knowledge and skills. As such, a more diverse workforce can support innovation, product development, and change management.

Learning Objective: 15-4. Explain the influence of changing workforce demographics on employee benefits practice.

VIII. End of Chapter Case, Instructor Notes, and Questions and Suggested Student Responses Benefits for Part-time Workers

Instructor Notes

While the trend in the workplace is toward not offering benefits to part-time workers, as more organizations discover the benefits of engaging part-time workers, organizations must consider their benefit policies for part-time workers. Extending part-time workers benefits could be costly

for organizations. However, the need to attract and retain talented part-time workers may influence companies to extend their benefits to part-timers. In doing so, organizations should carefully consider which benefits to offer based on the nature of the position, the costs to the organization and employee preferences. Further, if an organization offers benefits to part-time workers, it is important that they clearly communicate the value of such benefits in order to ensure that part-time workers understand the value of the benefits in their total compensation.

Student Questions 15-4. What are some factors should be considered when determining whether or not to offer benefits to part-time workers?

Considerations include the costs associated with extending part-time workers benefits. In doing so, human resources management professionals should estimate the number of part-time workers the organization is likely to hire. They must also look at the type of workers that will be part-time and whether or not offering benefits is important to attract and retain these workers.

Learning Objective: 15-4. Explain the influence of changing workforce demographics on employee benefits practice.

15-5.

Do you think organizations should offer benefits to part-time workers? If yes, should it offer paid time off for sickness, for example; the RRSP matching plan; and extended health benefits? Or only one or two of the benefits? Explain your recommendation.

Students should provide a response and support for their position. If in support of offering benefits, students should cite the need to attract and retain talent. Those opposing most likely will examine the cost issue. Some students may recommend offering partial benefits, particularly paid time-off as the costs are more in line with the expected return from offering these benefits. If an organization is considering only offering partial benefits, getting feedback from the part-time workers may be useful to understand which benefits they value.

Learning Objective: 15-4. Explain the influence of changing workforce demographics on employee benefits practice.

IX.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating Regional and Industry Pay Differences in China

15-5. Calculate the average annual pay for each region: (a) Beijing, (b) Tianjin, (c) Shanghai, and (d) Henan. a) Bejing 32531 + 42809 + 55689 + 47657 = 178686 /4 = 44671.5 b) Tianjin 41255 + 42765 + 43931 + 38910 = 166861 / 4 = 41715.25 c) Shanghai

22722 + 30443 + 52064 + 42990 = 148219 / 4 = 37054.8 d) Henan 19869 + 23142 + 28898 + 25966 = 97875 / 4 = 24468.8 Learning Objective: 15-2. Discuss the issue of rising wages in China.

15-9. Calculate the average annual pay for each industry: (a) agriculture, (b) manufacturing, (c) scientific, research, and technical services, and (d) health and social service. a) agriculture 32531 + 41255 + 22722 + 19869 = 116377 / 4 = 29094.3 b) manufacturing 42809 + 42765 + 30443 + 23142 = 139159 / 4 = 34789.8 c) scientific, research, and technical services 55689 + 43931 + 52064 + 28898 = 180582 / 4 = 45145.5 d) health and social service 47657 + 38910 + 42990 + 25966 = 155523 / 4 = 38880.8 Learning Objective: 15-2. Discuss the issue of rising wages in China.

15-10. Which industry displays the (a) lowest average annual salary, and (b) highest average annual salary? Which region displays the (a) lowest average annual salary, and (b) highest average annual salary?

Industry a) lowest average annual salary: Agriculture b) highest average annual salary: Scientific, research, and technical services Region a) lowest average annual salary: Henan b) highest average annual salary: Bejing Learning Objective: 15-2. Discuss the issue of rising wages in China.