Gp9 ch19 final

BY:APARNA ALAPATI GITIKA BHATLANICKY KUMARISAKSHI KHARBANDAVANSHIKA AHUJA

Management: Making it Work

Management: Making It Work

Pay management issues• Managing Labor costs• Understanding embedded controls• Analyzing value-added returns• Communication• Designing the compensation department

Contract system – decentralized decision making Compensation system- objectives in pay model Answers to basic questions

• What is the impact• Does it help• How

Managing Labor Costs

Exhibit 18.2: Staffing Analysis Identifies Reasons for Pay Variances

Reducing Headcount

Often used to cut labor costs Cuts take form of layoffs or exit incentives Advantages of Reduction in Force (RIF)

Reduces benefit costs Opportunity to re-shape workforce and create

positive sorting effects Layoffs- short term and long term effects

Core and Contingent Employees

Segmented Supplies- St. Luke’s Labor Cost Model

Source: © George T. Milkovich.

Hours

Hours of work is used to define employment Firms examine overtime costs versus hiring

costs to manage labor costs Three factors in the labor cost model are not

independent Employment Cash compensation Benefit costs

Controlling Average Cash Compensation

Average cash compensation includes average salary level plus variable compensation payments

The variable component will rise and fall in line with business performance

Adjustments to average cash compensation level can be made in two ways Top down Bottom up

Control Salary Level: Top Down

Factors influencing decision on the increase of the average pay level for the next period:

Current year’s rise Ability to pay Competitive market pressures Turnover effects Cost of living

Current year’s rise

Ability to pay – Financially healthy/troubled employers

Competitive market pressures Turnover effects (churn/slippage) – annual

turnover*planned average increase

Cost of living CPI Changes in prices in the product and service markets Changes in wages in labor markets

Rolling it all together

Control Salary Level : Bottom Up

Ethics: Managing or Manipulating?

Managing compensation ethically is increasingly complicated for several reasons Pay really matters The fierce pressure to achieve results

Use of pay for performance –adds to the pressure

Cont….

Performance-based pay is not the only reason that presents ethical dilemmas

A starting point to judge our ethical behavior may be our compensation model presented with the advice: Strive to achieve both efficiency and

fairness.

Embedded Controls

Controls on managers’ pay decisions come from two different aspects of the compensation process Controls that are inherent in the design of

the techniques The formal budgeting process

Range maximums and minimums

Range set the maximum and minimum pay for the work

If employees are paid above the range maximum, these rates are called red circle rates

Pay below minimum is used for trainees, and may occur if outstanding employees receive a number of rapid promotions and pay increases have not kept up

Broad bands are used to offer managers greater flexibility compared to a grade-range design

Compa-ratio

Assessing how managers pay employees in relation to the midpoint

Compa-ratio is calculated: It can be calculated for individual

employees, for organization units, for each range etc

Cont….

Variable pay- it must be re-earned each period Analyzing costs- its done prior to recommending

pay increase Analyzing value added: here there is a shift in how

compensation is viewed Compensation becomes an investment as well as an expense Decisions are based on analysis of the return on this

investment

Communication: Managing the Message

It signals what is important and what is not ?Employee’s understanding of the pay system is shaped:

Indirectly through the paychecks they receive Directly via formal communication

Reasons for communicating pay information Employees misperceive system and differentials are

underestimated. Considerable resources are used in designing a fair and

equitable system, it is imp to gain an accurate view of the system

World atWork recommended a 6 stage process of communication

Compensation communication cycle

Conducting formal communication sessions for various audiences

• Avoid formal communication if pay system is not based on work related or business related.

• Few employers use open book approach as it results in high commitment, improves employee attitudes and performance.

• How employees process information and make decisions, the figure below offers some ideas when contemplating compensation communications:

Pay as change agent

Compensation plays a role when organisations restructure.

Strategic changes in business strategy means that compensation strategy must be realigned as well.

Pay changes play two roles in any restructuring Leading catalyst for change Follower of change

Structuring the compensation function

• Centralization – decentralization• Flexibility within corporate-wide principles• Reengineering and outsourcing