Chapter 8: Rewarding Employees

Question 1

What three points should well-designed compensation packages address?

Answer 1

1. Attract high-quality job applicants
2. Motivate employees to be high performers
3. Encourage long-term employee retention

Question 2

What are the four components of an overall compensation package?

Answer 2

1. Base pay
2. Short-term incentives
3. Long-term incentives
4. Benefits

Question 3

When do employees consider their pay as fair?

Answer 3

Employees are more likely to consider their pay fair if they understand the principles on which it is based.

Question 4

Which points of a well-designed compensation package does base pay adress best?

Answer 4

• Most effective in attracting and retaining; low in motivating

Question 5

What is external based wage-setting?

Answer 5

managers look at what the market is paying for similar positions. Most useful when organizations are filling jobs from outside and are common in all firms (firm-general jobs)

Question 6

What are firm-general jobs?

Answer 6

skills and responsibilities are common across organizations.

Question 7

What is the problem of external based wage-setting?

Answer 7

defining the market you are comparing to and consideration whether you want to match market or pay differing amount.

Question 8

What is internal based wage-setting?

Answer 8

comparing across jobs within organizations. More useful for firm-specific jobs. The longer people remain within company, the less useful external market comparison becomes.

Question 9

What are firm-specific jobs?

Answer 9

jobs unique to your company that do not have an adequate market comparison

Question 10

What are job ladders?

Answer 10

People from outside are hired into lower rungs of ladder and move up as they gain more firm-specific skills and move to higher salary ranges.
- Once employees are past lower rungs; managers should complement market pricing with job evaluations to determine a job’s worth to company.

Question 11

What is a job evaluation and how can it be used in setting base pay?

Answer 11

you are trying to determine the relative value of dissimilar jobs and determine the worth of each job by establishing a hierarchy of jobs within organization. Identify a set of dimensions (compensable factors) that are common to all jobs.

Question 12

What is wage compression?

Answer 12

Wage compression occurs when there is only a small difference in pay between employees regardless of their skills, experience, seniority, or job responsibilities. It can happen when new hires are paid more than or close to the rate of an employee who has been in the job for a long time, potentially causing rifts within the workforce.

Question 12

What is the point-factor job evaluation method?

Answer 12

organization differentially weights dimensions to reflect strategic goals and there is a score for every job in the organization. Jobs with similar value are grouped together and ranked according to their relative value. To assign wages, companies use firm-general jobs as benchmark jobs and slot firm-specific jobs into pay hierarchy by comparing their value to the firm-general jobs.

Question 13

What is the main disadvantage pf the point-factor job evaluation method?

Answer 13

wage compression

Question 13

What is job levelling?

Answer 13

organization uses compensable factors to define a series of job levels and ten compare the unique job description against most relevant grade description to set wages for individual jobs.

Question 14

What are short-term incentives?

Answer 14

Monetary rewards for performance based on a period of less than one year

Question 15

What points of a well-designed compensation package are short-term incentives most effective for?

Answer 15

• Most effective in attracting and motivating

Question 16

What are individual bonuses?

Answer 16

bonus is only handed out to employees if they meet performance criteria. No guarantees for next pay period. Trade-off between base pay and individual bonuses: must meet local standards (minimum wage) and suffice in meeting basic needs (living wage).

Question 16

Name 3 common types of short-term incentives?

Answer 16

1. Individual bonuses
2. Group bonuses
3. Gainsharing

Question 17

What is gainsharing?

Answer 17

financial gains achieved on organizational level due to improved productivity are shared with employees.

Question 17

What are group bonuses?

Answer 17

bonus for team based on team performance. Encourages team members to collaborate due to mutual dependency.

Question 18

What is the main disadvantage of bonus systems?

Answer 18

excessive focus on goal achievement that employees will neglect other parts of job or solely focus on reaching the goal at all costs.

Question 19

What are nondiscretionary bonuses?

Answer 19

organizations set specific criteria for each employee that need to be met to receive a bonus. Most likely to result in dysfunctional effects.

Promised in advance if certain criteria are met

Question 20

What are discretionary bonuses?

Answer 20

not promised in advance (e.g. spot bonuses)

Question 21

What are spot bonuses?

Answer 21

bonuses that highlight special contributions and situations where employees have gone above and beyond the employer’s expectations.

Question 22

What are long-term incentives?

Answer 22

Monetary rewards for performance that spans periods of more than 1 year

Question 23

What points of a well-designed compensation package are long-term incentives most effective for?

Answer 23

- Most effective in attracting and retaining; low in motivating

Question 24

Name three common types of long-term incentives?

Answer 24

1. Profit sharing plans 2. Stock options 3. Employee stock ownership plans

Question 25

What are profit sharing plans?

Answer 25

employees receive a payment based on company’s profit next to base pay. Employees need to increase profit to earn more money themselves. Reduces turnover and improves company performance.

Question 26

What are stock options?

Answer 26

opportunities for employees to purchase specified number of shares of a company stock in future at guaranteed price. Options cannot be exercised unless they are vested.

Question 27

What are employee stock ownership plans and how do they work?

Answer 27

company contributes shares of stock to a trust that holds stock in individual employee accounts and employees earn stock based on pay and seniority. Trust distributes stock to leaving employees and employees can sell their stock back to company for a cash payment. Improves company performance and employee pay. More resilient during economic crises.

Question 28

What are benefits?

Answer 28

All forms of agreed upon nonmonetary compensation

Question 28

What points of a well-designed compensation package are benefits most effective for?

Answer 28

- Most effective in attracting and retaining; low in motivating

Question 29

Name three trends in benefits offered?

Answer 29

1. Shifting employee preferences 2. Customized benefits 3. Greater trend towards pay transparency

Question 30

How have changes in employee preferences changed benefits offered?

Answer 30

flexible working arrangements are becoming more popular

Question 31

What are customized benefits?

Answer 31

organizations allow employees to choose benefits best suited for their situation and prevents wasted benefits. Usually offered a core benefits package. Make sure employees understand the monetary value of the benefits you offer. Leads to perception of pay fairness.

Question 32

What are the benefits of more pay transparency?

Answer 32

- enhances trust in management, - employee engagement and - reduces employee turnover.

Question 33

What is merit pay?

Answer 33

Merit pay: increase in base employees can receive based on individual performance, usually expressed in %. But, merit pay increases are small, minimal threshold is 7% increase, uncommon. And merit pay usually doesn’t differentiate outstanding performance from run-of-the-mill performance.