Gp9 ch19 final


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Gp9 ch19 final

  2. 2. Management: Making It Work Pay management issues • Managing Labor costs • Understanding embedded controls • Analyzing value-added returns • Communication • Designing the compensation department Contract system – decentralized decision making Compensation system- objectives in pay model Answers to basic questions • What is the impact • Does it help • How
  3. 3. Managing Labor Costs
  4. 4. Exhibit 18.2: Staffing AnalysisIdentifies Reasons for Pay Variances
  5. 5. Reducing Headcount Often used to cut labor costs Cuts take form of layoffs or exit incentives Advantages of Reduction in Force (RIF)  Reduces benefit costs  Opportunity to re-shape workforce and create positive sorting effects Layoffs- short term and long term effects
  6. 6. Core and Contingent Employees
  7. 7. Segmented Supplies- St. Luke’s Labor Cost ModelSource: © George T. Milkovich.
  8. 8. Hours Hours of work is used to define employment Firms examine overtime costs versus hiring costs to manage labor costs Three factors in the labor cost model are not independent  Employment  Cash compensation  Benefit costs
  9. 9. Controlling Average Cash Compensation Average cash compensation includes average salary level plus variable compensation payments The variable component will rise and fall in line with business performance Adjustments to average cash compensation level can be made in two ways  Top down  Bottom up
  10. 10. Control Salary Level: Top Down Factors influencing decision on the increase of the average pay level for the next period:  Current year’s rise  Ability to pay  Competitive market pressures  Turnover effects  Cost of living
  11. 11.  Current year’s rise Ability to pay – Financially healthy/troubled employers Competitive market pressures Turnover effects (churn/slippage) – annual turnover*planned average increase
  12. 12.  Cost of living  CPI  Changes in prices in the product and service markets  Changes in wages in labor markets Rolling it all together
  13. 13. Control Salary Level : Bottom Up
  14. 14. Ethics: Managing or Manipulating? Managing compensation ethically is increasingly complicated for several reasons  Pay really matters  The fierce pressure to achieve results Use of pay for performance –adds to the pressure
  15. 15. Cont…. Performance-based pay is not the only reason that presents ethical dilemmas A starting point to judge our ethical behavior may be our compensation model presented with the advice:  Strive to achieve both efficiency and fairness.
  16. 16. Embedded Controls Controls on managers’ pay decisions come from two different aspects of the compensation process  Controls that are inherent in the design of the techniques  The formal budgeting process
  17. 17. Range maximums and minimumsRange set the maximum and minimum pay for the work If employees are paid above the range maximum, these rates are called red circle rates Pay below minimum is used for trainees, and may occur if outstanding employees receive a number of rapid promotions and pay increases have not kept upBroad bands are used to offer managers greater flexibility compared to a grade-range design
  18. 18. Compa-ratio Assessing how managers pay employees in relation to the midpoint Compa-ratio is calculated: It can be calculated for individual employees, for organization units, for each range etc
  19. 19. Cont…. Variable pay- it must be re-earned each period Analyzing costs- its done prior to recommending pay increase Analyzing value added: here there is a shift in how compensation is viewed  Compensation becomes an investment as well as an expense  Decisions are based on analysis of the return on this investment
  20. 20. Communication: Managing the Message It signals what is important and what is not ? Employee’s understanding of the pay system is shaped:  Indirectly through the paychecks they receive  Directly via formal communication Reasons for communicating pay information  Employees misperceive system and differentials are underestimated.  Considerable resources are used in designing a fair and equitable system, it is imp to gain an accurate view of the system World atWork recommended a 6 stage process of communication
  21. 21. Compensation communication cycle
  22. 22. Conducting formal communication sessions for variousaudiences
  23. 23. • Avoid formal communication if pay system is not based on work related or business related.• Few employers use open book approach as it results in high commitment, improves employee attitudes and performance.• How employees process information and make decisions, the figure below offers some ideas when contemplating compensation communications:
  24. 24. Pay as change agent Compensation plays a role when organisations restructure. Strategic changes in business strategy means that compensation strategy must be realigned as well. Pay changes play two roles in any restructuring  Leading catalyst for change  Follower of change
  25. 25. Structuring the compensation function• Centralization – decentralization• Flexibility within corporate-wide principles• Reengineering and outsourcing