Pay, Compensation,

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Pay, Compensation, Benefits

• Orlando V. Griego, PhD

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After studying this chapter, you should be able
to

• Evaluate the various research on pay,
  compensation, and benefits.
• Analyze what works and what doesnt.
• Consider trends in pay.
• Understand the greatest hits for helping
  organizations.

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Team Exercise

• Share your different case studies
• Determine the keys to success (or failure) for
  those companies
• Come up with a list of shared successes

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Research on Pay for Performance

• Lazear (1996) studied a firm switching from
  paying hourly wages to paying piece rates (pay
  for performance). A large autoglass company
  changed compensation structures between 1994 and
  1995. The productivity effects were anywhere from
  20 to 36 of output.
• Eskew and Heneman (1996) found that merit pay was
  viewed as marginally successful in influencing
  employee attitudes and behaviors.
• Luthans and Stajkovic (1999) proposed that pay
  for performance systems are ineffective because
  the rewards or pay need to be replaced by
  reinforcers. They imply that you do not
  necessarily get what you pay for, but you do get
  what you reinforce. As a result, they feel that
  rewards may do more harm than good.

Edward P. Lazear, Performance Pay and
Productivity, NBER Working Paper No. 5672,
Issued in July 1996 Eskew, D., Heneman, R.L.
(1996), "A survey of merit pay plan
effectiveness end of the line for merit pay or
hope for improvement?", Human Resource Planning,
Vol. 19 No.2, . Luthans, F., Stajkovic, A.D.
(1999), "Reinforce for performance the need to
go beyond pay and even rewards", The Academy of
Management Executive, Vol. 13 No.2, pp.49-57.
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The research is mixed. Why?
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Research on Pay for Performance

• Lowery et al. (1996) found that, generally, the
  employees appeared to approve of the merit pay
  plan, but they were concerned with its
  implementation. Favorable points included the
  opportunity to be judged on merit, the money
  offered by the plan, and the incentive to raise
  performance. In comparison, items of concern
  included the quality of the goals that are set,
  lack of fairness, and perceptions of favoritism
  when allocating rewards.
• Brudney and Condrey (1993) study on pay for
  performance found seven factors that were
  measured. Of those, five produced statistically
  significant differences among the groups. The
  five factors consisted of attitudes toward merit
  pay, organizational trust and commitment,
  importance of monetary rewards, linkage between
  pay and performance, and accuracy and fairness of
  the pay system.

Lowery, C.M., Petty, M.M., Thompson, J.W. (1996),
"Assessing the merit of merit pay employee
reactions to performance-based pay", Human
Resource Planning, Vol. 19 No.1, pp.26
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Research on Pay for Performance

• Siegall and Worth (2001) found that respondents
  indicated the more they trusted the
  administration, the more they saw positive
  outcomes from the new system. The more the system
  was seen as a method of negative control, the
  more respondents reported negative outcomes from
  the program.

Siegall, M. Worth, C. (2001). The impacts of
trust and control on faculty reactions to merit
pay, Personnel Review Volume 30   Issue 6.
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• Companies in the USA are moving toward pay
  systems that are flexible and strategically
  aligned with complex and changing business
  environments (Lawler, 2000).
• Competency based pay Pay is geared more to
  individual skills and abilities that contribute
  to company success than the job individuals
  perform.
• Variable pay plans Based on an objective or
  quantitative assessment of individual, group, or
  company performance, that do not add to base
  salary. Examples include bonuses, gainsharing
  plans, profit sharing, and stock based plans. Up
  from 47 in 1990 to 78 in 2000.
• Broadbanding Consolidating salary grades and
  ranges into just a few wide levels or bands,
  each of which contains a relatively wide range of
  jobs and salary levels.

Trends in Pay and Compensation
Source SHRM.org
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The Benefits Picture Today

• Most full-time employees in the United States
  receive benefits.
• Virtually all employers99offer some health
  insurance coverage.
• Benefits are a major expense (about one-third of
  wages and salaries) for employers.

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Annual Health Care Cost Increases
Source Eric Parmenter, Controlling Health-Care
Costs, Compensation and Benefits Review,
September/ October 2002, p. 44
Figure 131
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Private-Sector Employer Compensation Costs, June
2003
Source Total Employer Costs Rose to 22.61 in
Second Quarter,BNA Bulletin to Management,
September 11, 2003, p. 293
Figure 132
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Hourly Compensation Costs
Source www.bls.gov
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Workers Compensation Costs - 2003
2003 Workers Compensation Costs per 100 Payroll
Source California Govenors website
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Legally Required or Regulated Benefits
While not required under federal law, all these
benefits are regulated in some way by federal
law, as explained in this chapter.
Table 131
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Types of Employee Benefits

• Pay for time not worked
• Vacations, holidays, unemployment insurance, sick
  leave, parental leave, severance pay,
  Supplemental unemployment benefits (lay-offs)
• Insurance benefits
• Workers compensation, Hospitalization, health,
  and disability insurance, HMOs, PPOs, mental
  health, COBRA, life insurance, part-time worker
  benefits, pregnancy benefits
• Retirement benefits
• Social Security, Medicare, 401(k), Employee stock
  ownership plans,
• Services
• Credit unions, Employee assistance programs

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Other Benefits

• On-site or subsidized child care
• Elder care
• Fitness and medical facilities
• Food services
• Flexible work scheduling
• Telecommuting
• Educational subsidies
• Sabbaticals
• Loan programs for home office equipment
• Stock options
• Concierge services
• Trauma counseling

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Exercise

• Build the tallest free-standing tower

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Keys to Success

• What are the keys to long-term success?
• Size?
• Being global?
• Industry?
• Strategy?

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Keys to superior returns?

• Size?
• A. Analysis of 80 industries found a correlation
  of .10 between sales revenue and profitability.
• Industry?
• A. Conclusion of a major study Industry growth
  rates are almost completely unrelated to the
  likelihood that a company will be able to create
  superior value for shareholders over a 10 year
  period.
• Richard Rumelt, Strategic Management Journal

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Searching for the key...

• Being global?
• A. It doesnt hurt, butnot being global hasnt
  stopped Home Depot, Walgreens, and others from
  earning superior returns

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So What is the Key?
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Relationship Knowledge Focused Companies
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Instilling a Relational MindsetMost companies
say they value people but very few back it up
with strong action.

• Percentage of 300 executives interviewed who said
  their employees are the most critical variable
  in their companys success 90
• Ranking by same executives of People Specific
  Issues in a list of items Most Important to
  Our Business Last

Source Towers Perrin People Strategy
Benchmark Awareness and Attitude Survey

• Percentage 6900 executives interviewed who
  agreed it is important to link business
  strategy with talent strategy 62
• Percentage who do it 7

Source McKinsey War for Talent 2000
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Creating a Relationship Focused Organization
Why would a talented person want to work and stay
here?
Great Company
Great Job
Great Manager
Great Comp Benes
SourcesMcKinsey The War for Talent Gallup
First Break All The Rules
Your Employment Brand
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Creating a Employee Focused CompanyA great
manager will make or break the deal.
Great Manager is Most Important 80,000 executives
surveyed over 40 years
Bad Managers Drag the Company Of 4000 executives
who have worked for an underperformer

• Most important attribute when considering an
  employment decision Quality of the Manager.
• The critical player in building a strong
  workplace the Manager.
• Top four reasons for intention to leave directly
  related to the Manager.
• People leave managers, not companies.

• Percentage who believe they were prevented from
  learning 76
• Percentage who were hurt from a career
  development standpoint 81
• Percentage who were prevented from making a
  larger contribution to the bottom line 82
• Percentage who said made me want to leave the
  company 82

Sources Corporate Leadership Council and
First Break All The Rules
Source McKinsey War for Talent 2000
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Research

• A new study finds that the behavior of managers
  plays the biggest role in whether workers put
  more effort into their jobs.
• The study found that managers who did two things
  -- respected worker rights and maintained an
  effective, productive environment for workers --
  also had workers who put forth more effort and
  who got along better with each other and with
  bosses.
• Dr. Randy Hodson, 8/15/99,

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Developing Great TalentDeveloping internal
talent can yield the most efficient return of any
investment, and will achieve the highest growth
when supported by stretch assignments and great
coaching.
What is your primary focus?
Should be Developing and applying strengths,
talents and passions 90 Fixing weaknesses
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Source SRI, four years data on 400,000US men
and women
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Retaining Great TalentFew do it well. Employees
are more mobile than ever. Employees desire
development and challenge, fairness and
recognition.
Top Four Reasons for Intention to Leave, in order
1. Development opportunity of role (K) 2. Work
challenge (K) 3. Fairness
(R) 4. Recognition (R)
Source Corporate Leadership Council
K knowledge R relationships
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The Best Companies

• Consider these Best lists.
• Fortune Magazine (FM) 100 Best Companies to Work
  For
• Industry Week (IW) 100 Best Managed Companies
• Working Mothers Magazine (WM) 100 Best Companies

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FORTUNES 100 Best Companies to Work For

• 20 different fields represented
• 30 states represented
• 42 in information technology/financial services
• 58 are publicly traded
• 29 provide on-site day care
• Most provide flex-scheduling
• 53 offer on-site university courses
• 91 have tuition reimbursement
• 24 reimburse more than 4000/year
• 62 of public companies provide stock options

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FORTUNES 100 Best Companies to Work For

• Swimming pools and surging pay may give
  employees a lift, but continual training and
  humane treatment get the best employees to stick
  around.
• The 100 Best Companies To Work For In America
  by Shellly Branch, Fortune, 1999

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FORTUNES 100 Best Companies to Work For Top 10s
Averages

• Job Growth (last 2 years) 33
• Turnover Rate 12
• Training (hrs/year) 64
• Women in Workforce 48.5
• Minorities in Workforce 23

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The Best of the Best

• 164 public companies in the three Best
  Companies lists.
• 38 of the public companies are in two or more
  lists.

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Voluntary Turnover 100 Best vs. Industry Average
VOLUNTARY TURNOVER CALCULATION Number of full
time voluntary separations over the past year
(excluding retirements) divided by the number of
full time employees
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Fortune 100 Best v. Stock Market1998-2001
Reset Annually
Buy Hold
Russell 3000
SP 500
Fortune 100 Best
Market
Frank Russell Company, 2002
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Fortune 100 Best vs. Stock Market 1998-2002
Buy Hold
Reset Annually
Russell 3000
SP500
Fortune 100 Best
Market
Source Frank Russell Company, 2003
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Fortune 100 Best v. Stock Market 1998-2003
Annualized Return
Buy Hold
Reset Annually
Russell 3000
SP500
Fortune 100 Best
Market
Source Frank Russell Company, 2004
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Return on Assets
Source Jack Hurst and Associates
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Return on Equity
Source Jack Hurst and Associates
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Stock Returns of Fortunes Best Companies to
Work for vs. S P 500
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Satisfaction and Return to Shareholders
According to a recent study, the 100 best
companies to work for those with the highest
levels of satisfaction and moral outperformed
the 300 largest U.S. companies over both 5- and
10-year periods.
5-Year 1992-1997
10-Year 1987-1997
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Wegmans

• In a bruising industry rife with low pay, labor
  unrest and high turnover rates, Wegmans seems to
  keep its employees happy. The closely held grocer
  puts "employees first, customers second, "
• With 3.4 billion in sales last year, Wegmans has
  proved adept at trouncing its rivals.
• Turnover 6 compared to 19 for competitors
• Newsday, 1/05

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Wegmans

• It's a family-friendly life. We can actually
  spend time with family in this industry."
• "As employees we're not an employee we're a
  person...We have a personality, we have a name,
  we have a background, management knows it and who
  we are as individuals."
• More and more supermarket companies treat their
  people like a cost. Wegmans has realized their
  people are an asset
• Food is fun

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J.M. Smuckers Snack Foods
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Synovus Regional Financial Corporations
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Intel Xilinx are both on the list
Xilinx President and Chief Executive Officer Wim
Roelandts said he took a 20 percent cut, but the
lowest-paid workers did not have their pay
reduced at all.
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Edward Jones 1 in 2002 2003
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Edward Jones

• Jones brokers operate in solo offices, going
  door-to-door to drum up business. They don't have
  e-mail accounts the post office delivers their
  handwritten notes to clients. Jones recruits
  brokers from local churches rather than business
  schools. Jones customers hold mutual funds an
  average of 20 years.
• WSJ, 8/01
• On downsizing "We want to build the kind of
  relationship with workers that makes them willing
  to go the extra mile," says Jones' CEO, John
  Bachmann. "You can't do that if you get rid of
  them whenever times are rocky."
• Fortune, 2002

• The firm is enormously profitable and successful.
  Since Bachmann assumed control in 1980, it has
  grown its top and bottom lines at an annual
  compounded rate of 23 and consistently generates
  pretax margins and returns on equity of at least
  10 and 25, respectively, significantly above
  the industry average.
• Motley Fool, 2002

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The Container Store 1 2000-2001
Hoovers list of competitors
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The Container Store Employee Comments

• --"I love this company because 'Customer Service
  is 1'!!... All customers can use our phones at
  any time."
• --"At TCS we do 'everything' with pride, from
  sharing our line of products and matching
  knowledge to the tidy bathroom we clean
  ourselves!"
• --"Kudos to Kip and Garrett for creating a place
  we love."
• --"Working for this company has made me a better
  person and certainly made the world a better,
  more organized place."
• --"I miss everyone when I go on vacation."
• --"TCS is my family."
• --"I will never leave."

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SAS Institute Stats Software
SAS Video Clip
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• This software developer pioneered subsidized
  on-site child care. There's also a
  state-of-the-art fitness center, an on-site
  health center, a 15-of-pay contribution to
  retirement plans, and flexible work schedules.
• 98 percent of the top 100 companies on the
  Fortune 500 are SAS customers.
• 90 percent of the overall Fortune 500 are SAS
  customers.
• 24 years of double-digit growth.
• Fortune, 2001

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• Google spends considerable amounts on keeping
  its employees happy.
• health-conscious free lunches and dinners
• 12 weeks of maternity pay-at 75 percent
• low-cost daycare, fitness center, no dress code,
  dogs allowed at work
• onsite laundry and dry-cleaning, a staff
  masseuse, regular flu shots and cholesterol
  testing
• Source VNU eMedia, Inc. Nov 2002

• "Teamwork is very important, and we want people
  to have energy to be engaged."
• Of the 200 employees surveyed, "the most common
  response to the question of whether they were
  happy at the company," says Sullivan, "was 'very
  happy."'
• Google has become the largest search engine on
  the Internet
• Profitable since 2001

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Lets Look at Some Other Companies
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PK-35 Finnish Soccer Team

• Polls fans via their cell phones about training
  methods and match strategy
• The team has lost only one game while using the
  system
• Like being bumped from Division III to II (i.e.,
  APU going to the NCAA)
• Mbusiness Daily, 2001

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Centennial High School

• Highly participative high school
• Pledge card commitments include
• Maintain 95 daily attendance
• Stay clean and sober
• Resolve conflicts using the peer mediation
• Apply the six P's (Prepared, Polite, Prompt,
  Participate, Positive mental attitude and,
  Produce, (pass all classes)
• Accept and support the norms of Centennial High
  School
• Treat others with courtesy, respect, and dignity

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Kaos Pilots

• KaosPilots, the world's most adventurous
  alternative business school
• Three-year management training program designed
  to provide 30 Scandinavian students per "flight"
  with the skills they need to succeed in a rapidly
  changing, unpredictable economic environment.
• FastCompany, Dorte Hygum Sorensen, 6/96

Uffe Elbaek
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Marty Rodriquez

• The top broker worldwide for Century 21, among
  110,000 professionals in 25 countries.
• Seven years running, her seven-broker office in
  Glendora, California, a middle-income suburb, has
  been first in the United States in both unit
  sales and gross commissions.
• What's her secret? "Just because the transaction
  is done, that doesn't mean the relationship is
  over.
• Sell values, not value
• stay connected
• Honesty
• Source FastCompany

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Consider The Language of Business

• Account balance
• Acquisition
• Balance sheet
• Budget
• Closed-end fund
• Consolidation
• Control
• Debt/equity ratio
• Deflation
• Dilution
• Depreciation
• Division
• Downsizing

• Expected return
• Financial plan
• Fixed costs
• Forced conversion
• Guaranteed insurability
• Hedge hold
• Inflation uncertainty
• Itemized deduction
• Leverage
• Liquidate

• Margin
• Negative cash flow
• Order
• Projection
• Recapture
• Regulations
• Solvent
• Stock control
• Tangible assets
• Variance minimization
• Withholding

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This Organization Is Dis-OrganizationNo titles.
No offices. No paper. How Denmarks Oticon
thrives on chaos.

• Oticon in Denmark
• Hearing aides
• Vision People First
• Spaghitti structure
• Abolished the formal organization
• Projects, not functions or departments, are the
  defining unit of work.

• Today at Oticon, teams form, disband, and form
  again as the work requires. Project leaders (
  basically, anyone with a compelling idea )
  compete to attract the resources and people to
  deliver results.

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• All vestiges of hierarchy have disappeared.
  Oticon headquarters is an anti-paper anti-office
  with uniform mobile workstations consisting of
  desks without drawers and state-of-the-art
  networked computers. People are always on the
  move, their "office" nothing more than where they
  choose to park their caddie for the duration of a
  project Fast Company, 1996

• Results
• Size and profits have doubled
• Operating profits are 10 times higher
• 10 major product innovations

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Whole Foods, Inc.

• all work is teamwork, everyone sees the
  numbers, and people vote on who gets hired. Sound
  too soft? It's on track to become a
  billion-dollar company.
• Whole Foods Is All Teams, Fast Company, April 96,
  Charles Fishman

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Whole Foods, Inc.

• Plenty of companies talk the talk of empowerment,
  autonomy, and teamwork. This company has spent 16
  years turning those ( often empty ) slogans into
  a powerful - and highly profitable - business
  modelIt's a strategy that's conquering new
  markets and clobbering the competition.
• Ibid

• All work is teamwork
• The company's "Declaration of Interdependence"
  proclaims an unwavering commitment to diversity,
  community, and saving the planet.
• A salary cap limits executive pay to no more than
  eight times the average wage.

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Another Top 100 Whole Foods
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How will you lead?
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