STRATEGIC COMPENSATION

Transcription

1 Seventh Edition STRATEGIC COMPENSATION A HUMAN RESOURCE MANAGEMENT APPROACH Joseph J. Martocchio University of Illinois at Urbana-Champaign PEARSON Boston Columbus*f;Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

2 CONTENTS Preface xiii Part I Setting the Stage for Strategic Compensation 1 Chapter 1 STRATEGIC COMPENSATION 2 A Component of Human Resource Systems 2 Exploring and Defining the Compensation Context 4 What Is Compensation? 4 Core Compensation 5 Employee Benefits 6 A Historical Perspective on Compensation: The Road Toward Strategic Compensation 9 Strategic Versus Tactical Decisions 11 Competitive Strategy Choices 13 Tactical Decisions that Support the Firm's Strategy 14 Compensation Professionals' Goals 15 How HR Professionals Fit into the Corporate Hierarchy 15 How the Compensation Function Fits into HR Departments 15 The Compensation Department's Main Goals 19 Stakeholders of the Compensation System 20 Employees 20 Line Managers 20 Executives 21 Unions 21 U.S. Government 21 COMPENSATION IN ACTION 21 Summary 22 Key Terms 22 Discussion Questions 22 CASE: Competitive Strategy at Sportsman Shoes 23 Endnotes 23 Chapter 2 CONTEXTUAL INFLUENCES ON COMPENSATION PRACTICE 25 Employment Laws that Influence Compensation Tactics 26 Income Continuity, Safety, and Work Hours 27 Pay Discrimination 31 Civil Rights Act of Accommodating Disabilities and Family Needs 37 Prevailing Wage Laws 38 Laws that Guide Discretionary Employee Benefits 39 Internal Revenue Code 39 Mi

3 iv Contents Employee Retirement Income Security Act of 1974(ERISA) 40 Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) 41 Continuation of Coverage under COBRA 42 Health Insurance Portability and Accountability Act of 1996 (HIPAA) 42 Pension Protection Act of Patient Protection and Affordable Care Act of Contextual Influences on the Federal Government as an Employer 44 Labor Unions as Contextual Influences 44 Market Influences 46 COMPENSATION IN ACTION 48 Summary 48 Key Terms 48 Discussion Questions 49 CASE: Exempt or Nonexempt? 49 Endnotes 50 Part II Bases for Pay 51 Chapter 3 TRADITIONAL BASES FOR PAY 52 Seniority and Merit 52 Seniority and Longevity Pay 53 Historical Overview 53 Who Participates? 54 Effectiveness of Seniority Pay Systems 54 Design of Seniority Pay and Longevity Pay Plans 55 Advantages of Seniority Pay 56 Fitting Seniority Pay with Competitive Strategies 57 Merit Pay 57 Who Participates? 57 Exploring the Elements of Merit Pay 58 Performance Appraisal 60 Types of Performance Appraisal Plans 60 Exploring the Performance Appraisal Process 65 Strengthening The Pay-For-Performance Link 69 Link Performance Appraisals to Business Goals 69 Analyze Jobs 69 Communicate 69 Establish Effective Appraisals 69 Empower Employees 69 Differentiate among Performers 70 Possible Limitations of Merit Pay Programs 71 Failure to Differentiate among Performers 71

4 Contents Poor Performance Measures 71 Supervisors' Biased Ratings of Employee Job Performance 71 Lack of Open Communication between Management and Employees 71 Undesirable Social Structures 71 Factors Other than Merit 71 Undesirable Competition 72 Little Motivational Value 72 COMPENSATION IN ACTION 72 Summary 73 Key Terms 73 Discussion Questions 73 CASE: Appraising Performance at Precision 74 Endnotes 75 Chapter 4 INCENTIVE PAY 76 Exploring Incentive Pay 77 Contrasting Incentive Pay with Traditional Pay 77 Individual Incentives 80 Defining Individual Incentives 80 Types of Individual Incentive Plans 80 Advantages of Individual Incentive Pay Programs 83 Disadvantages of Individual Incentive Pay Programs 83 Group Incentives 83 Defining Group Incentives 84 Types of Group Incentive Plans 84 Advantages of Group Incentives 89 Disadvantages of Group Incentives 90 Companywide Incentives 90 Defining Companywide Incentives 91 Types of Companywide Incentive Plans 91 Designing Incentive Pay Programs 93 Group versus Individual Incentives 93 Level of Risk 94 Complementing or Replacing Base Pay 94 Performance Criteria 94 Time Horizon: Short Term versus Long Term 95 COMPENSATION IN ACTION 95 Summary 96 Key Terms 96 Discussion Questions 97 CASE: Individual or Team Reward? 97 Endnotes 98 Chapter 5 PERSON-FOCUSED PAY 99 Defining Person-Focused Pay: Competency-Based, Pay-For-Knowledge, And Skill-Based Pay 100 What Is a "Competency"? 101

5 vi Contents Usage of Person-Focused Pay Programs 102 Reasons to Adopt Person-Focused Pay Programs 103 Technological Innovation 103 Increased Global Competition 104 Varieties of Person-Focused Pay Programs 104 Contrasting Person-Focused Pay With Job-Based Pay 109 Advantages of Person-focused Pay Programs 110 Advantages to Employees 110 Advantages to Employers 111 Disadvantages of Person-focused Pay Programs 112 COMPENSATION IN ACTION 113 Summary 114 Key Terms 114 Discussion Questions 114 CASE: Person-focused Pay at Mitron Computers 114 Endnotes 115 Part III Designing Compensation Systems 117 Chapter 6 BUILDING INTERNALLY CONSISTENT COMPENSATION SYSTEMS 118 Internal Consistency 119 Job Analysis 120 Steps in the Job Analysis Process 121 Legal Considerations for Job Analysis 125 Job Analysis Techniques 127 U.S. Department of Labor's Occupational Information Network (O*NET) 127 Job Evaluation 132 Compensable Factors 132 The Job Evaluation Process 133 Job Evaluation Techniques 134 The Point Method 135 Alternative Job-Content Evaluation Approaches 138 Alternatives to Job Evaluation 140 Internally Consistent Compensation Systems and Competitive Strategy 140 COMPENSATION IN ACTION 141 Summary 142 Key Terms 142 Discussion Questions 142 CASE: Internal Consistency at Customers First 143 Endnotes 144 Chapter 7 BUILDING MARKET-COMPETITIVE COMPENSATION SYSTEMS 145 Market-Competitive Pay Systems: The Basic Building Blocks 145 Compensation Surveys 146

6 Contents vii Preliminary Considerations 146 Using Published Compensation Survey Data 147 Compensation Surveys: Strategic Considerations 150 Compensation Survey Data 153 Updating the Survey Data 159 Integrating Internal Job Structures with External Market Pay Rates 161 Compensation Policies and Strategic Mandates 163 COMPENSATION IN ACTION 164 Summary 165 Key Terms 165 Discussion Questions 165 CASE: Nutriment's New Hires 165 Endnotes 166 Chapter 8 BUILDING PAY STRUCTURES THAT RECOGNIZE EMPLOYEE CONTRIBUTIONS 176 Constructing a Pay Structure 177 Step 1: Deciding on the Number of Pay Structures 177 Step 2: Determining a Market Pay Line 178 Step 3: Defining Pay Grades 178 Step 4: Calculating Pay Ranges for Each Pay Grade 178 Step 5: Evaluating the Results 184 Designing Merit Pay Systems 184 Merit Increase Amounts 185 Timing 186 Recurring versus Nonrecurring Merit Pay Increases 186 Present Level of Base Pay 186 Rewarding Performance: The Merit Pay Grid 186 Merit Pay Increase Budgets 188 Designing Sales Incentive Compensation Plans 190 Alternative Sales Compensation Plans 191 Sales Compensation Plans and Competitive Strategy 192 Determining Fixed Pay and the Compensation Mix 193 Designing Person-focused Programs 194 Establishing Skill Blocks 194 Transition Matters 195 Training and Certification 196 Pay Structure Variations 198 Broadbanding 198 Two-Tier Pay Structures 200 COMPENSATION IN ACTION 201 Summary 202 Key Terms 202 Discussion Questions 202 CASE: A New Sales Representative 202 Endnotes 203

7 viii Contents Part IV Employee Benefits 205 Chapter 9 DISCRETIONARY BENEFITS 206 An Overview of Discretionary Benefits 206 Components of Discretionary Benefits 208 Protection Programs 208 Paid Time Off 211 Services 213 The benefits and costs of Discretionary Benefits 215 COMPENSATION IN ACTION 216 Summary 217 Key Terms 217 Discussion Questions 217 CASE: Time off at Superior Software Services 218 Endnotes 219 Chapter 10 EMPLOYER-SPONSORED RETIREMENT PLANS AND HEALTH INSURANCE PROGRAMS 220 Exploring Retirement Plans 221 Origins of Employer-Sponsored Retirement Benefits 221 Trends in Retirement Plan Coverage and Costs 222 Qualified Plans 222 Minimum Standards for Qualified Plans 223 Defined Benefit Plans 225 Minimum Funding Standards 226 Benefit Limits and Tax Deductions 226 Defined Contribution Plans 226 Individual Accounts 226 Investments of Contributions 226 Employee Participation in Investments 227 Minimum Funding Standards 227 Contribution Limits and Tax Deductions 227 Types of Defined Contribution Plans 227 Section 401 (k) Plans 227 Profit Sharing Plans 227 Stock Bonus Plans 228 Employee Stock Ownership Plans 228 Hybrid Plans: Cash Balance Plans 228 Defining and Exploring Health Insurance Programs 229 Origins of Health Insurance Benefits 229 Health Insurance Coverage and Costs 230 Fee-for-Service Plans 231 Features of Fee-for-Service Plans 232 Managed Care Plans 234 Health Maintenance Organizations 234

8 Contents ix Features of Health Maintenance Organizations 234 Preferred Provider Organizations 236 Features of Preferred Provider Organizations 236 Deductibles 236 Coinsurance 236 Point-of-Service Plans 236 Specialized Insurance Benefits 236 Prescription Drug Plans 237 Mental Health and Substance Abuse 237 Features of Mental Health and Substance Abuse Plans 237 Consumer-Driven Health Care 238 COMPENSATION INACTION 239 Summary 240 Key Terms 240 Discussion Questions 241 CASE: A Health Savings Account at Frontline PR 241 Endnotes 242 Chapter 11 LEGALLY REQUIRED BENEFITS 243 An Overview of Legally Required Benefits 244 Components of Legally Required Benefits 244 Social Security Act of State Compulsory Disability Laws (Workers' Compensation) 251 Family and Medical Leave Act of The Benefits and Costs of Legally Required Benefits 256 Designing and Planning The Benefits Program 257 Determining Who Receives Coverage 257 Financing 258 Employee Choice 258 Cost Containment 261 Communication 262 COMPENSATION IN ACTION 264 Summary 265 Key Terms 265 Discussion Questions 266 CASE: Benefits for Part-Time Workers 266 Endnotes 267 Part V CONTEMPORARY STRATEGIC COMPENSATION CHALLENGES 269 Chapter 12 COMPENSATING EXECUTIVES 270 Contrasting Executive Pay with Pay for Nonexecutive Employees 271 Principles of Executive Compensation: Implications for Competitive Strategy 271 Defining Executive Status 272 Who Are Executives? 272

9 Contents Key Employees 272 Highly Compensated Employees 272 Executive Compensation Packages 273 Components of Current Core Compensation 274 Short-Term Incentives 275 Components of Deferred Core Compensation 276 Employee Benefits: Enhanced Protection Program Benefits and Perquisites 279 Principles and Processes for Setting Executive Compensation 281 The Key Players in Setting Executive Compensation 281 Theoretical Explanations for Setting Executive Compensation 283 Executive Compensation Disclosure Rules 285 Other Benefits 287 Say on Pay 288 Executive Compensation: Are U.S. Executives Paid Too Much? 288 Comparison between Executive Compensation and Compensation for Other Worker Groups 288 Strategic Questions: Is Pay for Performance? 289 Ethical Considerations: Is Executive Compensation Fair? 290 International Competitiveness 290 COMPENSATION IN ACTION 291 Summary 292 Key Terms 292 Discussion Questions 293 CASE: CEO Pay in the News 293 Endnotes 294 Chapter 13 COMPENSATING THE FLEXIBLE WORKFORCE 295 Contingent Employees and Flexible Work Schedules 295 The Contingent Workforce 296 Groups of Contingent Workers 296 Reasons for U.S. Employers' Increased Reliance on Contingent Workers 301 Pay and Employee Benefits for Contingent Workers 303 Part-Time Employees 304 Temporary Employees 305 Leased Workers 306 Independent Contractors, Freelancers, and Consultants 307 Flexible Work Schedules: Flextime, Compressed Workweeks, and Telecommuting 309 Flextime Schedules 309 Compressed Workweek Schedules 309 Telecommuting 310 Flexible Work Schedules: Balancing the Demands of Work Life and Home Life 310

10 Contents xi Pay and Employee Benefits for Flexible Employees 311 Pay 311 Employee Benefits 311 Unions' Reactions to Contingent Workers and Flexible Work Schedules 313 Strategic Issues and Choices in Using Contingent and Flexible Workers 313 COMPENSATION INACTION 314 Summary 315 Key Terms 315 Discussion Questions 316 CASE: Telecommuting at MedEx 316 Endnotes 317 Part VI Compensation Issues around the World 319 Chapter 14 COMPENSATING EXPATRIATES 320 Competitive Advantage and How International Activities Fit In 321 Lowest-Cost Producers' Relocations to Cheaper Production Areas 321 Differentiation and the Search for New Global Markets 321 How Globalization Is Affecting HR Departments 322 Complexity of International Compensation Programs 322 Preliminary Considerations 323 Host Country Nationals, Third Country Nationals, and Expatriates: Definitions and Relevance for Compensation Issues 323 Term of International Assignment 323 Staff Mobility 324 Equity: Pay Referent Groups 324 Components of International Compensation Programs 324 Setting Base Pay For U.S. Expatriates 325 Methods for Setting Base Pay 325 Purchasing Power 326 Incentive Compensation for U.S. Expatriates 327 Foreign Service Premiums 327 Hardship Allowances 327 Mobility Premiums 328 Establishing Employee Benefits for U.S. Expatriates 328 Standard Benefits for U.S. Expatriates 329 Enhanced Benefits for U.S. Expatriates 330 Balance Sheet Approach for U.S. Expatriates' Compensation Packages 331 Housing and Utilities 332 Goods and Services 332

11 XII Contents Discretionary Income 333 Tax Considerations 333 Repatriation Pay Issues 334 COMPENSATION IN ACTION 335 Summary 336 Key Terms 336 Discussion Questions 336 CASE: Jenkins Goes Abroad 336 Endnotes 337 Chapter 15 PAY AND BENEFITS OUTSIDE THE UNITED STATES 338 Epilogue Chapter 16 Glossary 368 Author Index Subject Index North America 339 Canada 342 Mexico 343 South America 345 Brazil 345 Europe 346 Germany 346 Asia 348 India 348 People's Republic of China 349 COMPENSATION IN ACTION 351 Summary 352 Discussion Questions 352 CASE: North American Expansion for Threads Apparel 352 Endnotes 353 CHALLENGES FACING COMPENSATION PROFESSIONALS 356 Fallout from the "Great Recession" 357 What is an Economic Recession? 357 Underemployment: Implications for Compensation 358 The Compensation-Productivity Gap 360 Rising Wages in China 362 Challenges in Health Care Reform 362 Key Considerations for Employers 363 Challenges to the Legality of PPACA 363 Workforce Demographic Shifts Labor Force Diversity 364 Relevance for Employee Benefits 365 Considerations for Employee Motivation 366 Summary 366 Key Terms 366 Discussion Questions 366 Endnotes 366