Alfonso Gómez Franco Creative compensation practices March 2012
Alfonso Gómez Franco Creative compensation practices
March 2012
Creative compensation practices March 2012
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
If you have a great team, don’t let them go
Creative Compensation practices.
Alfonso GÓMEZ
Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. 2012
Pay, in the form of wages and salaries and a wide range of legally required and agreed upon benefits, collectively represent the means by which employees are financially compensated for joining organizations, staying in them and accomplishing certain levels of work performance. The compensation activity in personnel management, therefore, is a key people-processing activity, which begins with the planning that occurs before people enter organizations and continues until their exit and beyond.
Introduction Companies with high employee turnover ask themselves
what they can do to retain their employees. It is a great
waste of money to have your employees trained and
then let them go because they are not content with their
jobs. While some experts may say it is a good thing for
the companies to have a young crew, some may say it is
not the ideal thing to do in order to have a stable
workforce.
It has been said organizations must take their
compensation systems both attractive and equitable to
current and prospective employees. Information
regarding the external labor market, often supplied
through industry or area wage surveys, is necessary for
determining an appropriate pay structure in making
individual wage and salary decisions within that
structure. Also necessary is information regarding the
internal labor market. Again, is the compensation system
attractive? Is it equitable? A variety of job evaluation
methos are available for estrablishing pay grades and
ranges for jobs on the basis of their relative worth to the
organization.
We need to ask ourselves if we are ahead of
other companies by using the right compensation system
but before it is important to define what compensation is
and what creative compensation can be.
Compensation: Definition and facts
Experts in Human Resources have talked about
having the right compensation to maintain their key
elements. Compensation is defined as something given
or received as an equivalent for services, debt, loss,
injury, suffering, lack, or anything related.[1]
Compensation refers to all forms of financial returns and
tangible services and benefits employees receive as part
of an employment relationship. The main objective of
compensation strategy would be to give the correct
rewards for the right employee behaviors.
Throughout the world there are different
definitions of compensation. In English, “compensation”
means something that counterbalances, offsets, or
makes up for something else. In China, the traditional
characters for the word “compensation” are based on the
symbols for logs and water; compensation was treated
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
as an entitlement. In today’s China, compensation takes
on a more subtle meaning. A new word, dai yu, is used.
It refers to how you are being treated- your wages,
benefits training opportunities, and so on. When people
talk about compensation, they ask each other about the
dai yu in their companies.
In Japanese kyuyo means compensation, which
is made up of two separate characters and both mean
giving something.
Society sees pay as a measure of justice. For
example, a comparison of earning of women with those
of men highlights what many consider inequities in pay
decision. Sometimes differences in compensation among
countries are listed as a cause of loss of jobs from more
developed, higher-wage economies to less developed
ones. As Exhibit 1.1 reveals, labor costs in Mexico are
around 10 percent of those in the US. However, when
differences in productivity are factored in, the wage
advantage of Mexico, Korea and Taiwan disappears.
According to society, managerial, employee and
even global; compensations may take several meanings
and it is useful to be in context when using the term
correctly.
Exhibit 1.1 Hourly compensation costs for production workers in Manufacturing in U.S. dollars.
Source: Bureau of Labor Statistics, April 2003.
Creative compensations: a new term
It is true compensation has existend since
companies started to work. Compensation is an
important motivator when you reward achievement of the
desired organizational results. Ensure that management
of compensation takes this into consideration.
Money is considered a powerful source of
motivation. However, it is also said that salary increase
can only motivate until the next pay increase is due. This
is when creative compensation starts playing an
important role. Recognition, motivation, feedback but
above all an integration of every aspect of compensation
is needed.
2.44 4.75
5.7 7.77 8.09
10.88 13.15 13.28 13.76
15.23 15.88 16.14
18.35 19.29 19.4 19.59 20.32
21.98 22.86 23.13
0 5 10 15 20 25
Mexico Portugal
Taiwan Singapore
Korea Spain
Australia Ireland
Italy Canada France
U.K. Sweden
Netherlands Austria Japan
U.S. Denmark Germany Norway
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
Types of compensations: its options
There are several ways to classify
compensation, however, in this paper only two of them
will be analyzed.
Compensation represents both the intrinsic and
extrinsic rewards employees receive for performing for
their jobs. Intrinsic compensation reflects employees’
psychological mind-sets that result from performing their
jobs. Extrinsic compensation includes both monetary and
nonmonetary rewards. Organizational development
professionals promote intrinsic compensation through
effective job design. Compensation professionals are
responsible for extrinsic compensation.
I. Intrinsic Compensation
Intrinsic compensation represents employees’
critical psychological states that result from performing
their jobs. Job characteristics theory describes these
critical psychological states. According to this job theory,
employees experience enhanced psychological states
when their jobs rate high on five core job dimensions:
skill variety, task significance, autonomy, and feedback.
Jobs that lack these core characteristics do not provide
much intrinsic compensation.
Exhibit 1.2 The influence of Core Job Characteristics of
Intrinsic Compensation and Subsequent Benefits to employers.
According to job characteristics theory, jobs that demand
skill variety, task identity and task significance enable
employees to experience meaningfulness of work. Jobs
that provide autonomy lead to experienced responsibility
for outcomes of work. Jobs that convey feedback
enhance employees’ knowledge of the actual results of
their work activities, or how well they have performed.
Exhibit 1.2 gives a broader idea of what core job
characteristics are and the importance for employers.
Principles of intrinsic compensation also provide basis for
nonmoneteray recognition awards.
II. Extrinsic Compensation
Extrinsic compensation includes both monetary and
nonmonetary rewards. Compensation professionals
establish monetary compensation programs to reward
employees according to their job performance levels or
for learning job-related knowledge or skills. As we will
discuss shortly, monetary compensation represents core
compensation. Nonmonetary rewards include protection
programs (for example, medical insurance), paid time-off
(for example, vacations), and services (for example, day
care assistance). Most compensation professionals refer
to nonmonetary refer to nonmonetary rewards as
employee benefits or fringe compensation. Exhibit 1.3
shows the six types of monetary or core compensation.
Exhibit 1.3 Types of core compensation
• Skill variety, task identity, task signficance • Autonomy • Feedback
Core Job Characteristic
• Experienced meaningfulness of the work • Experienced responsibility for work outcomes • Gained knowledge of results of results from work
activities
Critical Psychological
State
• Lower turnover • Lower absenteeism • Enhanced job performance • Greater job satisfaction
Benefit to employers
Base Pay
Cost-of living Adjustments
Seniority Pay
Merit Pay
Incentive Pay
Pay for knowledge plans and Skill-Based Pay
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
Comparative anaylisis
Money has long been viewed as a reward and,
for some people, it is more important than anything else
their organization can give them. Newman and Hodgetts
investigated motivation in the hospitality industry, for
example, and found that workers here rank good wages
at their top of important work factors. This was a sharp
contrast to industrial workers who ranked interesting
work as first (and good wages as fifth) in importance. So
the role of money as reward will often vary by both
individual and industry, but one thing is clear: money is
an important reward. Commenting on money, Steve Kerr,
a compensation expert with Goldman Sachs, recently
noted that “Nobody refuses it, nobody returns it, and
people who have more than they could ever use do
dreadful things to get more”
Money provides a rich basis for studying
behavior at work because it offers explanations for why
people act as they do.
Money is also associated with four of the
important symbolic attributes for which humans strive:
achievement and recognition, status and respect,
freedom and control and power.
Individualizing the pay system. Traditionally the pay programs of organizations
have adopted a one-size-fits-all approach to rewards.
Individuals are given little choice with respect to how they
are rewarded and what rewards they receive. The
differences that exist within organizations are usually the
result of the type of work individuals do rather than their
needs and desires. This approach generally fits a
homogeneous workforce but does not fit a diverse
workforce. With a diverse workforce it runs a tremendous
risk of giving individuals rewards that they do not value
while failing to reward them with things that they value
highly. This can obviously have negative consequences
for both and the attraction and retention of individuals as
well for motivation.
Organizations need to think through the
consequences of having a diverse versus a
homogeneous workforce and then pick the reward profile
that fits the degree and type of diversity they desire.
Given that many organizations are moving towards a
more diverse workforce and becoming more global, it is
likely that organizations will increasingly choose to have
flexibility and individualization in their reward system.
This simply makes sense with respect to optimizing the
impact of the dollars organizations spend, particularly
organizations that are dealing with diverse markets and
multiple national cultures. Based on how organizations
are changing and the impact of reward systems, three
strategic techniques are appropriate:
1. Person-based pay should be used to reward
individuals for their skills, knowledge, and competencies
relative to their external market value.
2. Multiple pay for performance approaches should
be used, with variable pay and stock as rewards.
3. Reward systems should be individualized to fit
the characteristics of individuals that an organization
wishes to attract and retain. In most cases, this can best
be done by allowing individuals choice in the rewards
that they receive.
Although these three approaches are widely
applicable, they clearly do not fit all situations and they
are only the first step in developing an actual reward
system for an organization. The next step is to develop
actual pay practices that follow them and fit with the
management style, structure and strategy of the
organization.
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
How to implement a certain type of compensation.
Recognition is one of the compensation parts
that needs to be taken into consideration at any
company. Steps as the following need to be set up to
effectively manage a reward and recognition program.
1. When introducing new recognition procedures
and programs, take advantage of all communication tools
including Intranet and other knowledge-sharing networks
let everyone know what is going on.
2. Educate the managers so that they use
recognition as part of the total compensation package
3. Make recognition part of the performance
management process so that everyone begins to use it
4. Have site-specific recognition ceremonies that
are featured in the company’s communication outlets
such as the weekly newsletter and the bimonthly
magazine.
5. Publicize the best practices of the employees so
that everyone knows some of the things they can do in
order to earn recognition
6. Let everyone know the steps that the best
managers are taking to use recognition effectively
7. Continually review the recognition process in
order to introduce new procedures and programs and
scrap those that are not working well.
8. Solicit recognition ideas from both employees
and managers, as they are the ones who are most likely
to know what works well and what does not.
It could be said that there are easy and creative ways
to recognize employees.
Employees never seem to tire of recognition. In
psychological terms, they do not seem to become
satiated or filled up with recognition as they do, say, with
food or even money. For some, in fact, the more
recognition they get, the more they want.
Fortunately, it is not difficult to recognize people. Some
of the easiest and representative ways are the following:
• Practice giving concentrated focused recognition
by calling deserving employees into your office and
thanking them fordoing an outstanding job. During this
interaction, focus is only on the detailed recognition and
nothing else, so that the effect is not diluted by the
discussion of the matters.
• Buy a trophy and give it to the most deserving
employee in the unit or department. Inscribe the
individual’s name. To help ensure fairness and
acceptance, at the end of the month, have this recipient
choose the next member of the unit to be recognized and
explain why this individual was chosen.
• Write a note that recognizes an individual’s
contributions during the last pay period and attach this
note to the person’s paycheck.
• When you get a raise or a promotion,
acknowledge the role that was played by your support
staff by taking all of them out to lunch. In sports, a smart
quarterback who receives all the attention for a win will
always recognize especially his line in front of him and
may even take theses “unsung heroes” out for dinner or
buy them something.
• Take a picture of someone who is being
congratulated by his or her manager. Give a copy of the
photo to the employee and put another copy in a
prominent location for everyone to see.
• Have a senior manager come by and attend one
of your team meetings during which you recognize
people for their accomplishments
• Invite your work team or department to your
house on a Saturday evening to celebrate their
completion of a project or attainment of a particularly
important work milestone.
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
• Recognize the outstanding skill or expertise of
an individual by assigning the person an employee to
mentor, thus, demonstrating both your trust and your
respect.
• Next time you hear a positive remark made
about someone, repeat it to that person as soon as
possible.
• Stay alert to the types of praise and recognition
that employees seem to like the best and use these as
often as possible
• Catch people doing things right and let them
know!
How is all this relevant for your company?
1. Having the right compensation for the right
employee may save you a lot of money because
he or she might be excellent for your company
2. CEOs tend to be overpaid, because you want to
make them happy, so having a creative way of
compensation may do the same effect as raising
three times the amount of money you pay
3. Having a happy team will always result in better
performance and this is something your
company wants to have. (For a real example, go
to the section: Real case: Rewarding Teamwork
in the plains)
Companies applying compensation strategies.
Today there are a wide number of formal
recognition systems that are being effectively used by
organizations globally. All effective programs are
designed to reward effective employee performance
behavior and enhance employees’ satisfaction and
commitment. They are designed to meet the specific and
changing needs of the employees.
Patricia Sellers, an expert on implementing recognition
systems offers the following creative, but practical
suggestions.()
Select a pad of Post-it Notes in a color that
nobody uses and make it your “praising pad”.
Acknowledge your employees for work well done by
writing your kudos on your praising pad.
Hire a caterer to bring in lunch once a week.
Besides showing your respect and appreciation, this
encourages mingling and the sharing of information,
knowledge, ideas, and innovative solutions.
To get a team motivated during an important
project, have them design a simple logo for the
assignment. This will give the team not only a sense of
camaraderie and cohesion, but also a group identification
and focus.
These tidbits represent useful suggestion but
many companies have gone much further by designing
formal recognition systems that align their overall
objectives (increased productivity, reduced cost, better-
quality products and customer service, and even higher
profitability) and employee performance behaviors.
Real case: Rewarding Teamwork in the plains.
Behlen Manufactoring company in Columbus,
Nebraska. The 1100 mostly production employees are
organized into 32 teams. Some of these teams have only
a handful of members, whereas others have as many as
60. Although each individual receives a base-pay
component, which comes to about $8 an hour, the rest of
the compensation is variable and is determined in a
number of different ways, including how one’s team is
performing.
The centerpiece of the manufacturing company’s
variable reward plan is gain sharing, an increasingly
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
popular form of compensation whereby all members
share a usually fixed percentage of the documented
savings or performance gain accomplished by the team.
Behlen employees can earn monthly gain sharing of up
to $1 an hour when their teams meet productivity goals.
The CEO explained this team reward system as
follows: “if you are in a group that makes stock tanks, for
example, from the start of the process to the end of the
process, over all shifts, all month long, if the team
achieves certain levels of productivity, each of its
members is rewarded anywhere from 0 to $1 an hour for
every hour worked in that area” Documentation of the
gains is based on actual pounds of products, so that
everyone on the team knows exactly how well their team
is doing. Another part of the company’s variable-reward
system involves profit sharing. Employees receive 20 per
cent of the profits. In recent years this has resulted in
everyone’s getting a profit-sharing bonus equivalent to
three week’s salary. Still another part of the reward
package is the employee stock ownership plan. Each
employee receives company stock equal in value to two
percent of his or her base salary each year. Senior
managers in the company participate in the same reward
system as the workers, receiving the same proportional
benefits.
However, in the case of managers, performance
is calculated on the gross margin of their business unit
before selling and administrative costs are deducted.
How well has this company in the middle of the Great
Plains performed with this organizational reward system?
In each of the eight years this pay plan has been in pace,
performance has exceeded top management’s
expectation.
In addition to the five million dollars the firm
saved because of safety, quality and efficiency ideas that
were submitted through the teams, the company has
exceeded its profit goals each year. In fact, in the most
recent year profits were one million dollars greater than
expectations. The CEO explained it this way: “As people
focused in on their gain-sharing opportunities and they
have understood their profit-sharing opportunities, we are
seeing positive productivity improvements in every
corner of the plant”
Recent knowledge about HR: creative compensation
I. Laid-off Workers accept jobs with lower pay
Layoffs represent one type of involuntary termination
instigated by the employer. Oftentimes, employers
institute layoffs to control costs when business activity
slows down. This practice is also known as downsizing.
During the recent economic recession, when most
business activity slowed, announcements for company
layoffs were common newspaper headlines.
Not surprisingly, most laid-off workers seek
employment elsewhere after company downsizing. It is
reasonable to assume that displaced workers will find
jobs that pay at least as much as they were earning prior
to being laid off. However, the slowing economy has
substantially reduced the number of comparable
available jobs, creating a situation in which the supply of
qualified job applicants exceeds company demand for
these individuals.
In addition, more company layoffs are permanent
now, which means that the jobs will not be filled in the
future. As a result, many job seekers have accepted
comparable jobs at lower pay. For example, a New York
Times article called “Data show growing trend toward
permanent layoffs” indicates that those who managed to
find full-time employment after having been laid off (from
1999 through 2001) earned a median weekly average of
$571, compared with $609 in the jobs they lost.
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
II. Recommendations for managing executive
pay practices.
HR has gathered vast information about HR from
the bottom-up level. However, little has been revealed
concerning CEO’s positions and motivation for these
unique individuals. Compensation is no other exception.
We are to pay attention onto how compensation and
motivation for CEOs is a key element in an organization.
CEO compensation is under increasing scrutiny
because of its growth relative to other employee groups.
In fact, executive compensation has grown despite the
financial setbacks experiences by most firms in the early
2000’s. Several practices can be recommended to
ensure that executive pay, especially CEO pay, is fair
and equitable and is high enough to ensure the attraction
of talent but not too high to fly in the face of efficiency
and fairness to employees and company stockholders.
First, watchdog organizations, especially those
financed by concerned stockholders, play a viable role by
ensuring that by laws and regulations are followed when
developing and implementing executive compensation
plans. These organizations can draw attention to
outrageous compensation rates and initiate activity to
reduce compensation packages to reflect governance
and selection procedures would allow the selection of
board members who are not politically in the pocket of
the chief executive.
Conflict of interest clauses should be made clear
and be rigidly followed. Third, systematic procedures for
conducting accurate market surveys should be
implemented. A true random sampling of competitors
should be conducted to determine the real price of the
executive position. Fourth, and related to the previous
suggestion, consultants should adhere to ethical
guidelines for the profession. Perhaps the ethical code
provided by the Society for Human Resource
management (SHRM) for human resources professionals
could be followed. Finally, improved performance
management for senior executives is necessary.
Practical performance standards should be delineated
and adhered to during the evaluation period. Pay raises,
bonuses, and other forms of compensation should be
based on meeting and/or exceeding these standards.
In summary, it is not the intent to generalize the
belief that all CEEOs and other senior executives are
overpaid or have purely mercenary intentions. Many, in
light of their experience and firm performance under
command, are paid fairly. In these cases, one must turn
to motivation theory to understand the need to offer
marketable salaries to provide raises, bonuses, etc., to
continue to reinforce desired behavior. It is not
unreasonable to demand a higher salary than what the
executive is currently paid to make a job change.
The companies themselves must also receive
something in return for such high compensation. Paying
high compensation rates must also be reinforced by
achieving desired organizational objectives that are
clearly stated and understood by the employee.
However, many CEOs are overpaid. Implementing the
recommendations made here may help stem the tide of
rising compensation and develop a more fair and
equitable mechanism for distributing the rewards of work.
III. New pay techniques.
The standard base-pay technique provides for minimum
compensation for a particular job. It does not reward
above-average performance nor penalize below average
performance. Pay-for-performance plans correct this
problem. In fact, in many cases, such as those in which
pay is tied directly to measured performance, pay for
performance plans not only reward high performance but
also punish low-performance. Sometimes, of course,
these plans are unfair in the sense that some jobs may
be easy to do or carry very high incentives, thus allowing
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
employees to easily earn high rates of pay, whereas in
other cases the reverse is true. Similarly, in a group
incentive arrangement in which all members are highly
productive, the personnel will maximize their earnings,
but in groups where some individuals are poor
performers, everyone in the group ends up being
punished.
Despite the downside to some of these pay-for-
performance plans and the fact that they have been
around for many years, they have become quite propular
and can be considered new pay techniques. Exhibit 1.4
shows a brief summary of them.
Exhibit 1.4 New pay techniques.
Conclusion.
Compensation is one of the most important or
key element in HR Management. As this paper
describes, there are several techniques or
recommendations any company may follow. This is a
broader approach on how compensation can lead to a
better performance motivator.
From its definition to its actual application,
compensation is without a doubt an aspect we should be
concerned. There is a new approach nowadays about
creative compensation. There are many ways we can
improve our team’s steadiness such as giving them
positive feedback when needed, praising the best
customer, rewarding leadership effectiveness, rewarding
new goals, offering knowledge courses, training, extra
pay and so on. However it is key to any Human
Resource team to preserve its best elements and make
those ones who are not fully accomplishing the
company’s ideals, to go back on track.
Compensation systems are changing. Change
creates many exciting challenges for those who wish to
work as compensation professionals.
Comissions beyond sales to customers
Rewarding leadership effectiveness
Rewarding new goals
Pay for knowledge workers in teams
Skill pay
Competency pay
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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.
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