Milkovich/Newman: Compensation, Ninth Edition

Chapter 18

Budgets and Administration

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Exhibit 1.5: THE PAY MODEL

POLICIES TECHNIQUES OBJECTIVES

ALIGNMENT

Work Descriptions Evaluation/ INTERNAL analysis certification STRUCTURE

COMPETITIVENESS

Market Surveys definitions

Policy lines

PAY STRUCTURE

EFFICIENCY Performance Quality Customers Stockholders Costs FAIRNESS

CONTRIBUTORS

Seniority based

Performance based

Merit guidelines

INCENTIVE PROGRAMS

COMPLIANCE
MANAGEMENT
Costs Communication Change EVALUATION

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Managing Labor Costs

Financial planning is integral to managing compensation

Total compensation makes up at least 50 percent of operating expenses in many orgs
But, most orgs have not tried to analyze returns from their compensation decisions (e.g., increases expected from new gainsharing plan, expected value of increasing merit increases for top performers relative to average performers)

18-3

Controlling Employment: Staffing Levels and Hours

Staffing Levels
Most common approach to managing labor costs is to control number of ees a/o hours worked
Note: layoffs and plant closings often have positive shortrun effect on stock price, but loss of human capital and lowered morale may well lead to lower performance than anticipated Contingent workforce is a possible buffer

18-4

Control Salary Level: Top Down

Top management determines the amount of money to be spent on pay and allocates it down to each subunit for the plan year
Current years rise

Ability to pay
Competitive market Turnover effects

18-5

Control Salary Level: Bottom Up

Instruct

managers in compensation policies and techniques Distribute forecasting instructions and worksheets Provide consultation to managers Check data and compile reports

18-6

Control Salary Level: Bottom Up (cont.)

Analyze

forecasts Review and revise forecasts and budgets with management Conduct feedback with management Monitor budgeted versus actual increases

18-7

Embedded Controls

Range maximums and minimums

Compa-ratios
Variable pay

Analyzing costs
Analyzing Value Added

18-8

Exhibit 18.9: Illustration of Value-Added Analysis

18-9

Communication: Managing the Message

Compensation communicates

Employees understanding of the pay system is shaped

Indirectly through the paychecks they receive Directly via formal communication about their pay, their performance, and the markets in which the organization competes

18-10

Why Communicate Pay Information?

Devotion of considerable resources to designing a fair and equitable system intended to

Motivate effective performance Encourage productivity

Misperception of pay system by employees Openness about pay may

Engender goodwill Affect perceptions of pay equity
18-11

Pay: Change Agent in Restructuring

Pay often plays a singular role when organizations restructure Strategic changes in business strategy mean the pay strategy must be realigned
Changing peoples pay captures their attention

Pay changes play two roles

Catalyst for change
Follower of change
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Structuring the Compensation Function

Centralization versus decentralization Flexibility within corporate-wide principles Reengineering and outsourcing

18-13

Controls as Guidelines: Let (Thoughtful) Managers Manage

Traditional compensation plans often degenerate into bureaucratic nightmares that hinder the organizations ability to respond to competitive pressures
Reducing the controls and guidelines inherent in any pay plan recommended
Banding eliminates or at least reduces the impact of range maximums and minimums Replacing merit grids with bonuses Replacing job evaluation with skill- or competency-based plans

18-14