chapter 1 - the pay model

Question 1

Pay affects motivation

Answer 1

In two ways:
1. Incentive effect - degree to which pay influences individual and aggregate motivation among the employees; extra effect, persistence, intensity (prospective)
2. Sorting effect - affect that pay can have on the composition of the workforce; who applies, who stays and who self-select out

P = f (M+A+O)
Performance = Motivation + Ability + Opportunity

Question 2

performance equation

Answer 2

P = f (M+A+O)
Performance = Motivation + Ability + Opportunity

Question 3

Rewards Framework - Many Forms of Total Rewards

Answer 3

1. base salary or wages
2. short-term incentives (bonuses)
3. long-term incentives (equity)
4. health and welfare benefits
5. recognitions programs
6. career growth and progression

Question 4

Forms of Pay Adjustments

Answer 4

Periodic adjustments to base wages:

1. Merit Increase: increase in base wage given in recognition of past work performance and/or behavior (retrospective)
2. Market Adjustment: pay increase to base wage based on market movement
3. Cost-of-living Adjustment (COLA): pay increase to base wage or supplemental payment intended to bring pay in line with inflation in a geographical area (generally the same amount is given to everyone in a geographic area)

COLAs are a thing of the past and is more reflective of the cost of goods, not the cost of labor.

Question 5

Forms of Pay

Answer 5

Incentives (variable pay):

• Tie pay increases directly to performance
• Do not increase base pay; must be re-earned each pay period
• Potential size of the payment will generally be known beforehand (unlike merit increases)
• Are one-time payments, and do not permanently increase labor costs
• May be long-term (stock options) or short term

Can be tied to individual performance, team, department, etc. Objectives can be cost reduction, ROI, increased GMs, etc.
Incentives influence future performance