Chapter 13 Flashcards
What is integral to managing compensation?
> financial planning
The cost implications of decisions such as updating the pay structure, merit increases, or gain-sharing proposals are critical for making sound decisions. But what accounts for these costs?
> budgets
Creating a compensation budget involves what?
> involves tradeoffs, such as how much of an increase should be allocated according to employee contributions to the organization’s success versus automatic across-the-board increases.
What do tradeoffs occur over?
> Tradeoffs also occur over short- versus long-term incentives, over pay increases contingent on performance versus seniority, and over cash compensation compared to benefits.
What does financial planning also require?
> Financial planning also requires understanding the potential returns gained from its allocation.2
Total compensation makes up at least what % of operating expenses in many organizations?
> 50%
As noted in Chapter 2, compensation strategy affects effectiveness not only by its influence on labour costs, but also by its influence in helping increase returns. What might returns be?
> Returns might be the productivity increases expected from a new gain-sharing or profit-sharing plan, or the expected value added by boosting merit increases to the top performers
In the past, financial planning in compensation was only about what?
> costs, not returns
returns generated by compensation strategy may often be intangible and harder to quantify.
Under the simple labour cost model, what are main factors to control to manage labour costs?
> number of employees and the hours they worked,
> average cash compensation (e.g., wages, bonuses),
> and average benefit costs (e.g., vacation, medical, and pensions).
As is apparent from following the business news during any recession, organizations often do what to reduce labour costs?
> organizations often reduce their workforce to cut labour costs.
What are some problems with workforce reductions?
1) if exit incentives cannot be effectively targeted and all employees are eligible, those who are most employable and most able to find another good job may be most likely to leave, with the result that the company has paid its top performers to leave.
2) workforce reductions can harm employee relations, particularly if they are perceived as unfair.
3) Third, organizations that make large workforce cuts also experience greater voluntary turnover.
4) Fourth, workforce reductions are expensive in terms of administrative costs, disruption of work processes and customer service, severance pay, and exit incentives (if used).
5) Fifth, some companies are so “lean” in their staffing that there may be little room to cut the workforce without reducing production or service levels.
6) Finally, if cuts are made too deep, the organization will be poorly positioned to increase revenue when business picks up again.
Announcements of layoffs and plant closings often have what effects? how about the long-term?
> often have favourable short-term effects on stock prices, as investors anticipate improved cash flow and lower costs.
> However, in the longer term, adverse effects such as loss of trained employees and lowered morale often translate into lower financial gains than anticipated.
Many employers attempt to buffer themselves from getting into a position in which layoffs are necessary by doing what?
> <by establishing different relationships with different groups of employees.
> The two commonly-referred to groups are core employees, with whom a strong and long-term relationship is desired, and contingent workers, whose employment agreements may cover only short, specific time periods.
Rather than defining employment in terms of the number of employees, what other measure is defined?
> the measure “hours of work” is often used. For non-management employees, hours over the prescribed work hours (usually 37.5 to 40 per week) are more expensive (1.5 × regular wage).
Under the measure “hours of work” what three factors are not independent?
> three factors—employment (number of employees, hours worked), cash compensation, and benefits costs—are not independent.
controlling the average cash compensation includes what?
> includes managing average salary level and variable compensation payments such as bonuses, gain sharing, or profit sharing.
> Base pay (the fixed component) is typically paid regardless of business performance.
> Variable pay, on the other hand, does not become a permanent part of the pay package.
The two approaches to managing adjustments to average compensation are what?
(1) top-down, in which upper management determines the amount to be spent on pay and allocates it “down” to each subunit for the plan year, and
(2) bottom-up, in which individual employees’ pay for the next plan year is forecast and summed to create an organization salary budget.
Top-down budgeting requires what of top management?
> requires top management of each organizational unit to estimate the pay increase budget for that unit.
> Once the total budget is determined, it is then allocated to each manager, who plans how to distribute it among their employees.
What is an example of typical unit-level budget?
> A typical one, controlling the planned pay level rise, is simply the percentage increase in average pay that is planned to occur for the unit.
Several factors influence the decision about how much to increase the average pay level for the next period: what are the main 5?
(1) how much the average level was increased this period,
(2) ability to pay,
(3) competitive market pressures,
(4) turnover effects, and
(5) cost of living.
The current year’s rise is what percentage?
> The current year’s rise is the percentage by which the average wage changed in the past yea
The decision regarding how much to increase the average pay level is in part a function of what? (therefore, what do financially healthy and unhealthy employers do?)
> is in part a function of financial circumstances.
> Financially healthy employers may wish to maintain their competitive position in the labour market or even to share outstanding financial success through bonuses and profit sharing.
> Conversely, financially troubled employers may not be able to maintain competitive market positions.
What is the turnover effect?
> The turnover effect recognizes the fact that when people leave (through layoffs, quitting, or retiring), they are typically replaced by workers earning a lower wage.
Although there is little research to support this conclusion, employees undoubtedly compare their pay increases to what?
> the cost of living
