Deck 11: Compensation: Methods and Policies

Question 1

Is pay compression a potential problem in terms of employee morale? Why?

Answer 1

Pay compression is the scenario wherein the salary of different skilled or experienced employee has minor difference. This occurs when employer recruits new employee with same or higher salary level than the existing employees working in same organization for longer period.
Pay compression occurs when organization do not keep proper standard in fixing the salary and related compensation like incentives. For example, an organization announcing incentives for employee on achieving the target set by organization. This is a general statement wherein employee working hard will be getting the incentive and also the one who do not work properly will be receiving the salary increase.
Pay compression is one of the potential problems which affect the employee morale. Pay compression have following effect on employee's morale:
1. If a hardworking employee who achieve his or her targets gets the same salary as that of an employee who does not even work and does not achieve his or her targets.
2. Employee loses the urge to work and do not put efforts as per his or her capability. This will result in employee deciding to look for another job and employee losing his or her productivity.
3. Employee will lose his or her interest to work if found the salary is not in line with the market trend. Employer will also find it difficult to hire right talent if the salary decided is below the market value.
Pay compression and the morale of the employee can be improved if the salary levels are fixed after reviewing each component as per the market trend. Also, employee should be given opportunity to give feedback about the salary level offered by the organization. Job rotation is another way of motivating employee, so that they do not keep thinking about salary.

Question 2

Why are more firms not using the Lincoln Electric compensation-type plan?

Answer 2

The Lincoln Electric compensation type plan is the most popular gain sharing plan. The Lincoln Electric plan was coined by person JFL in the year 1907. This plan mainly gave importance to employee motivation.
The most of the organizations does not use Lincoln Electric compensation type plan because of the below mentioned reasons:
1. This plan will work for the employees who can perform under pressure and for the employees who are competitive and want to improve by themselves.
2. The employees should be ready to accept low salary and ready to do low paid work, if the company slowdowns.
3. The employees do not get any paid holidays and sick leaves. The employees get promotion based on merit they get in their performance.
4. The pay system was based on the amount and quality of the employee's work and if an employee gets high rating in the department, then in the same department there will be other one who will get lower rating. This system will create a bad atmosphere in the organization.

Question 3

What gainsharing system do you believe is the most effective? Why?

Answer 3

Gain sharing system is the method by which organization shares its profits gained to its employees. This works out by when an individual organization exceeds its actual performance by comparing the plan made during the start of the month or year. The performance of organization is measured by comparing the past data, production or sales planned and gain. This gain is distributed to employees on monthly, quarterly or yearly basis. The gain distributed serves as motivation among employees, improve productivity, enhances team work and improve the confidence.
The most effective gain sharing plan is Scanlon plans. This is implemented by taking the suggestions from employee, encourage employee's participation and group incentives. This plan is implemented in unionized and non- unionized companies to achieve benefit for the company. This plan is effective since organization implemented value added ideas that is by forming a steering committee to gather cost benefit ideas, the ideas are then evaluated by the team. Team members are given freedom to express their own ideas to improve the current process. After carefully evaluating the ideas then it is planned for implementation. Later the status of the ideas is reported to the management by evaluating the actual gain the company will be getting. The final gain sharing portion is designed in such a way that it benefits the individual and organization. This involves team work and encourages both blue collar and while collar employees to take part in the project designated to achieve profit. It not only improves team participation, also saves time and reduces unwanted process. The gain recovered through this idea is significant and distributed to employees on monthly basis by comparing the base line data.

Question 4

Should stock option plans be used as part of executive compensation packages? Why or why not?

Question 5

How can a person's acquisition of knowledge be determined so that his or her pay can be changed? Explain.

Question 6

Explain the meaning and intent of a feedback pay system.

Question 7

Explain the concept of a variable pay system.

Question 8

Outline a plan to develop a fair and equitable compensation system.

Question 9

Why is it important to include operating employees (non-managers) in the development and use of an incentive program?

Question 10

What is the individual performance modifier that the Tower Perrin survey identified? Explain it in managerial terms.

Question 11

American Woodmark's scorecard approach can be most effectively used with what type of organizations? Employees?

Question 12

Should the federal government regulate and control what compensating of executives should be? Why or why not?

Question 13

What are some of the advantages and disadvantages of a merit-based compensation system?