What is the difference between base pay and variable pay? Give examples from your own organization. Use at least one resource from the course readings and respond to at least one co

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Module 2: Core Elements of Monetary Rewards

Topics

Topic 1: What are Monetary Rewards? Topic 2: Key Elements of Analysis and Documentation

Topic 3: Assessing and Rewarding Performance Topic 4: Regulatory Aspects of Monetary Rewards

Topic 5: Philosophy of Market Positioning and Link to Total Rewards Topic 6: Conclusions

Topic 1: What are Monetary Rewards?

The total rewards approach to compensation management is strategically planning a targeted reward package to successfully attract, retain, and motivate segmented populations of employees who possess the requisite knowledge, skills, and abilities (KSAs) needed to achieve the organization's objectives. Table 1.2 in module 1 illustrates the interdependent relationship of the components of the total rewards approach to compensation. The table shares the three major components of total rewards, including the monetary, non-monetary, and other elements of the work experience, which combine strategically for the total rewards philosophy for the organization. Column 1 in Table 2.1 below shares many of the monetary rewards organizations offer today and will be described in this module.

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Table 2.1 Three Elements of the Total Rewards Model

Monetary Rewards

Non- monetary Rewards

Work Experience

Base Pay Income Protection Benefits

Values of the Organization

Variable Pay Medical Insurance

Community (Individual and Organizational)

Merit and Cost of Living Increases

Vision and Dental

Recognition

Retirement Savings

Disability Training and Development

Performance Feedback

Life Insurance

Promotions

Deferred Compensation

Paid Time Off

Sense of Accomplishment

Day Care Employee

Assistance Program

Health Related Programs

Tuition Assistance

Monetary Rewards

Monetary rewards are, unmistakably, a vital element of total rewards. Christofferson & King (2006, p. 27) describe mometary rewards as "the pay provided by an employer to an employee for services rendered (i.e. time, effort, and skill)." Monetary rewards include, but are not limited to, the list of rewards in column 1 of table 2.1 above. As the largest

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expenditure of most organizations' rewards budget, monetary rewards help to satisfy several of the need areas described on Maslow's Hierarchy of Needs (Maslow, 1954); for example, short- and long-term survival and self-esteem.

An important psychological view of the perception of pay is vital to the discussion of monetary rewards. Lawler (1971, 2000) states that in order for pay to not become a dissatisfier it must be viewed as being fair. Fairness is defined as being paid an equitable amount of salary as compared to others performing relatively the same job. And the fairness necessity extends to both internal and external comparisons. Therefore, organizations must take steps to ensure that the pay and rewards for the work performed are based on objective criteria from research. This is done through the job evaluation, which examines the internal worth of the position, and the competitive and market evaluation that determined the pay for the position against outside positions. These evaluations are important for many reasons, including that the perception of fairness by the incumbent employees is mandatory for both pay and performance rewards to be effective. Organizations realize that "in addition to being strategically aligned, performance measures and standards need to be sufficiently objective and credible so that employees feel they are being measured fairly. In absence of the perception of fair and valid measurements, there is little chance the employee will see the link between individual performance and their rewards" (Lawler, 2000, p. 152). Therefore, steps must be taken to assess and document not only each job's responsibilities and requisite knowledge, skills, and abilities, but also a pay comparison for similar work. Monetary rewards are not restricted to base pay, but also include variable pay and, in many positions, compensation paid long after the employee has completed the work.

Designation of Employee Types

Although there are many types of employees in an organization in the United States, distinctions are typically made among three major categories for compensation purposes. These three are hourly, salaried, and executive employees. Hourly employees are also known as nonexempt employees because they are paid by the hour and are subject to overtime pay as regulated by the Fair Labor Standards Act (FLSA). Salaried employees are exempt from overtime; most managers and professionals fit into this category. The pay of salaried employees is calculated on an annual, monthly, or some other periodic means rather than on an hourly basis. Executives are also salaried employees, but they are designated as a separate category in this discussion due to the amount of variable pay generally at risk in their roles. For some top-level executives, the variable pay can be as much as 95 percent (Mathis & Jackson, 2008).

Types of Pay

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There are several basic terms prevalent in the discussion of types of pay, including base pay, variable pay, merit pay, cost of living adjustments, retirement, and deferred compensation. A definition of each term follows:

Base pay is considered "the cash compensation that an employer pays for the work performed" (Milkovich & Newman, 2008, p. 10). Whether an hourly, salaried, or executive employee, base pay is one of the key elements that organizations benchmark for competitive or market positioning purposes. This base pay "reflects the value of the work or skills and generally ignores differences attributable to individual employees" (Milkovich & Newman, 2008, p. 10). Differences attributable to the level of responsibility and/or the size of the organization are not ignored, however, and are taken into consideration when compensation is compared for competitive comparisons. For example, an administrative assistant to the chief executive of an organization may have a base rate of 25 dollars per hour if the organization has revenues less than a million dollars, but if the organization is one with revenues of more than $100 million, the base rate will likely be higher. Also, the length of service of the employee enters into the equation. An administrative assistant with 10 years of experience will likely have a higher per-hour rate than one with less than two years of experience.

Variable pay is "compensation linked directly to individual, team, or organizational performance" (Mathis & Jackson, 2008, p. 361). While there are other forms and combinations, examples of variable pay include bonuses, incentives, stock options, and stock grants. Also known as incentives, variable pay is tied to performance and can be paid daily, weekly, monthly, quarterly, or annually. Incentives are paid in addition to base pay and are at risk. In other words, they are not guaranteed. Incentives are earned based upon what is agreed on before the performance period begins. The performance objectives that variable pay is based on are linked to the strategic goals of the organization or support of those goals. For example, the goal may be to provide incentives toward increased revenues, employee satisfaction, customer satisfaction, cost reduction, innovation, or any other key element for the success of the organization. If the variable pay is considered in the competitive or market positioning purposes, an average or norm payout of the variable payout is used. Variable pay is renegotiated each performance period and is not rolled into the base pay, unlike merit or cost of living adjustments. Variable pay for executives often takes the form of pay or stock (options or grants) either as a portion of or the entire incentive.

Most organizations reward with both short- and long-term variable or incentive pay. Longer-term incentives are to help focus the employee on future performance goals, usually beyond the year in which the performance occurred. Real estate developers, for example, may have short-term variable pay tied to locating and developing a property,

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and long-term variable pay tied to the occupancy of the property in future years. Most executives will also have short- and long-term variable pay tied to the current and longer-term objectives of the organization.

Merit and Cost of Living Adjustments: After being hired into a position, an employee typically receives an increase in base pay periodically (intervals of 12 or 18 months, for example) based on their performance against a set of expectations for their set of responsibilities. A merit increase is an increment to the base pay in recognition of past work (Mathis & Newman, 2008, p. 10). The range of merit increase is dependent upon the budget for the merit increases and the employee's level of performance. Typically, the merit increase is higher and the time cycle shorter for those employees who are evaluated as higher performing. Thus, an outstanding performer may receive a merit increase of 7 percent after an eight-month period of time, while an average performer may receive a merit increase of 5 percent after a year.

Cost-of-living adjustments increase an employee's pay in line with inflation and are not based upon performance. Cost-of-living adjustments are not given by all organizations across the board to all employees, but rather may adjust only the lower-paid employees who are most affected by inflation. Some organizations will adjust their wage and salary scales every few years and adjust only those employees who fall under the new minimum of the scale. Other organizations combine their merit increases with the cost-of-living adjustments, which allows for a differentiation for the level of performance while also providing an adjustment for inflation.

Retirement and Deferred Compensation: In addition to the base and variable pay, many organizations also provide for the future retirement compensation of their employees. This reward is discussed as monetary rewards because, although it is not rewarded until after retirement, it is a monetary reward that is earned while the employee is working and the organization funds the future rewards as the employee works. This reward can be a very important portion of the total rewards strategy because it satisfies the need for future financial security, satisfying one of the need levels on Maslow's hierarchy of needs.

One type of retirement funding is a defined contribution plan, of which there are various forms, including 401Ks and profit sharing whereby the employer contributes an amount, typically a percentage of the employee's income, with the employee contributing as well. Another type of retirement benefit (increasingly rare) is the defined benefit plan. In this plan the employee receives a set amount of money during their retirement years, as in a traditional pension.

In addition to savings and earnings for retirement, many organizations also offer the opportunity for salaried employees (mostly executives) to defer their compensation to

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future years. This deferred compensation helps the executive prepare for their future years while also equalizing their income better for tax purposes.

Topic 2: Key Elements of Analysis and Documentation

While the total rewards approach to compensation management is a holistic approach to the work experience (recognizing the importance of monetary, non-monetary, and other elements of the work experience), it is the monetary element of the entire employment experience that has traditionally been viewed as imperative to be perceived as fair both internally and externally (Lawler, 2000). This perception is important whether it is an hourly, salaried, or executive-level position. Analysis, research, and documentation helps an organization ensure this perception of fairness.

Figure 2.1 below illustrates the key elements. The first step is the work flow analysis, which reviews the entire system of bringing in raw materials (human resources or materials) and transforming them into goods or services. The internal and external assessment for equity and competitiveness begins with a job analysis. Through the job analysis, the core elements of the job are determined, which then leads to the creation of a job specification. The job specification is a listing of the core KSAs; the KSAs from the job specification are used to design a job description. The job evaluation is an internal comparison of the value of the job, while the market evaluation is a comparison for similar jobs in other organizations. The job evaluation measures the internal equity, while the market evaluation measures the competitiveness of the pay for the position. Because a job can have a variety of names, depending on the organization or the industry, it is the core job specification (KSAs) that are compared when setting a price or value on a position (the rate of pay). For example, a position with responsibility for cleaning a guest room may be titled housekeeper, room attendant, or guest service representative, depending on the hotel company. Without knowing the core elements of the job, one could not know if they are comparing the same positions.

Figure 2.1 Key Elements of Analysis and Documentation

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Figure 2.1 illustrates the key elements of analysis and documentation comprising the key steps leading to the decisions for market positioning of compensation and other monetary rewards. The first step is the overall work flow analysis, how work flows through the organization. Job analysis is the step of collecting information that identifies the KSAs of the position. From the information obtained through the job analysis, job specifications and job descriptions can be designed. The job specifications and job descriptions are used for most of the HR activities; for example, hiring, promoting, determining of exempt or nonexempt status, and structuring of pay. The job evaluation and market evaluation are conducted in order to access internal and external positioning. With the steps from the broad work flow through job and market evaluation conducted, the organization has the data needed to decide its market positioning, what they need to pay for specific jobs in relation to what the competition is paying.

Work Flow Analysis: "Work flow refers to the process by which goods and services are delivered to the customer" (Milkovich & Newman, 2008, p. 60). The analysis of the work flow, therefore, is a study of that flow, and may begin at the end of the process with the desired or actual outputs (the goods and services). The activities (the tasks and jobs) that lead to the outputs are studied to see if they are achieving the desired outputs. Lastly, the inputs (the people, material, information, data, equipment, etc.) must be assessed to determine if they make the outputs and activities more efficient or better (Mathis & Jackson, 2008).

Figure 2.2 Work Flow: A Systems Approach

The work flow analysis is a broad look at the whole system of the organization and is essential to determine the throughput activities (the tasks and jobs) needed to produce the output (the goods and services). The analysis shows how much labor is required to achieve the organization's business goals and can also show if there are gaps in the needed labor. A simple example is automobile production. The raw materials of steel, computer parts, tires, leather, and other materials for various car parts, the design of the car, and the desires of the customers are the inputs. The throughput are the tasks and jobs performed by the employees and machines to assemble the car, which is the final output that is sold to customers. At times, a problem in the end result (the output) will trigger the need to conduct a work flow analysis. For example, when automobiles have been recalled for technical or performance difficulties, the company will look at both the

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throughput and the inputs to see where the problems lie. It may be found that certain jobs have to be redesigned in order to ensure the that gap in the system is corrected.

Job Analysis: Mathis & Jackson (2008) define job analysis as "a systematic way of gathering and analyzing information about the content, context, and human requirements of jobs" (p. 174). While there are various methods of collecting information on the characteristics of a job, the end result is the same. The various methods of questionnaires, interviews, observations, and logs/diaries collect information on the characteristics of a job that differentiates it from other jobs. This information is used for the design of both a job description and the job specifications. The work flow analysis, a broad look at the entire organization, yields some basic information about the level of labor needed, while the job analysis provides more specific details about the job. The job analysis further defines the specific tasks required of each position. It defines what each job is required to entail in order for the entire work flow process to work properly.

The job analysis is one of the core activities that provides the basis for the standard employment functions performed by human resources professionals. The information gained clarifies hiring criteria, defines the Bona Fide Occupational Qualifications (BFOQs) promotional standards/ criteria, and identifies training needs and performance evaluation criteria. The information is also used for meeting the FLSA regulations for the classification of jobs for exempt and nonexempt determination. In addition, the data allows compliance with the Americans with Disabilities Act (ADA), requiring that organizations must identify job activities for essential versus marginal job functions and also document the steps taken to identify the job responsibilities.

Job Specifications: Job specifications are a list of the qualifications (the knowledge, skills, and abilities) an individual needs to perform a job satisfactorily. The job specification takes the broader job analysis to an additional level of specification. The KSAs include education, experience, work skill requirements, personal abilities, and mental and physical requirements. The job specification is used as a basis for hiring. It is important to note that the job specifications are what a person needs to do the job, and therefore a crucial element of the process of designing a total rewards package that will attract the KSAs for the organization to achieve its business objectives. The job specifications supply essential data for decisions that are made about market positioning as well as other decisions that will be made in order to determine what total rewards will be offered.

Job Descriptions: Job specifications are a summary version of the more definitive job description, which further describes the outcomes and responsibilities of the job (Mathis & Jackson, 2008, p. 186). The job description provides a "word picture" of the outcomes of the job. Portions of performance standards (those indicators of what the job accomplishes

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and how performance is measured in key areas of the job description) are generally drawn from the job description. Descriptions of the salaried and executive-level positions often include more detailed information on the nature of the job, its scope and accountability. Many of the salaried and executive-level job descriptions capture the relationships among the job, the person performing it, and the organizational objectives; how the job fits into the organization; the results expected; and what the person performing it brings to the job (Milkovich & Newman, 2008, p. 103). The strategic alignment of the organization's objectives and monetary rewards is very evident when the specific responsibilities of the employee are clearly related to the objectives of the organization and are documented in the job description and included as an outcome in the performance appraisal process. This allows the employee to be compensated and given incentives for accomplishing work, service, or projects that relate directly to the organization's objectives.

Job Evaluation: Job evaluation is a formal, systematic means to identify the relative worth of jobs within an organization (Mathis & Jackson, 2008). It identifies a job's comparative worth within the organization and shows how valuable the organization deems the job to be. The evaluation is based on a combination of job content, skills required, value to the organization, organizational culture, and the external market (Milkovich & Newman, 2008, p. 115). Some methods of comparison include the point method, such as the long-popular Hay system. Point plans are the most commonly used job evaluation approach in both the United States and Europe (Bernardin, 2003; Mathis & Jackson, 2008; WorldatWork, 2007). The point plan differs from ranking and classification methods in that it makes explicit the criteria for evaluating jobs, known as the compensable factors.

Point methods have three common characteristics:

compensable factors

factors with degrees numerically scaled

weights reflecting the relative importance of each factor

Each job's relative value, and hence its location in the pay structure, is determined by the total points assigned to it (Milkovich & Newman, 2008, p. 125). Other methods for job evaluation include the ranking method, classification, and factor comparison method. The internal job evaluations allow organizations to equate the worth of a position to the pay structure. The higher the worth of the position, the higher the pay.

The internal job evaluation helps to define the relationship of jobs inside the organization, the internal worth of a job, and how each job is aligned with others. In addition to determining the location within the pay structure, this knowledge helps individual employees plan their careers. For example, a computer software organization may have a

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series of escalating internal worth positions beginning with an entry-level position of a computer programmer, a senior programmer, a lead programmer who supervises other programmers, and a division director. If the internal worth of jobs is clearly defined and communicated, the information can be used to define career paths and to help the individual employee understand their position's relative worth in the hierarchy of jobs within the organization. Thinking back to Maslow's hierarchy of needs, this understanding of relative worth can lead to satisfaction in the need areas of self-esteem and self- actualization.

Competitive Evaluation, Market Evaluation, and Market Positioning: While job evaluation is a focus of comparative worth within the organization, the competitive and market evaluation is identifying the relative value of jobs based on what other employers are paying for similar work performed outside the organization. With the knowledge gained through a competitive or market evaluation, the organization can then decide its market positioning, whether it will match the market, lead it, or lag behind. The decisions for market positioning are significant decisions for the overall total rewards approach to compensation management. Although it is only one of the decisions to be made, it is one of the very important major decisions and will affect the other two elements of non- monetary rewards and other elements of the work environment.

External competitiveness is information gained through the competitive and market evaluation and refers to the pay relationships among organizations. This is the value of a job as measured by pay relative to its competition (Milkovich & Newman, 2008). The factors that shape the external competitiveness include the labor market, the individual product or service markets, and organizational factors. The organizational factors are those related to the business strategy, the experience of the workforce, and the size and profitability of the organization. The market competitiveness of compensation has a significant impact on how equitably employees view their compensation. Providing competitive compensation to employees is a necessity for all employers for recruitment, retention, and motivation (Mathis & Jackson, 2008). Most organizations establish specific policies about where they want to be positioned in the labor market; this is called market positioning and is a key element of the organization's compensation philosophy.

The three competitive pay policy alternatives generally attributed to the decisions that organizations make for market positioning are to:

match: paying with the competition

lead: paying more than the competition

lag: paying below-market rates

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Organizations do not base their decisions about market position on base pay alone. Rather, they also include the variable forms of compensation that are awarded for the position. The basic premise is that the competitiveness of pay will affect the organization's ability to achieve its compensation objectives, and this in turn will affect its performance. Today it is realized, in the total rewards approach to compensation management, that the monetary element of the reward package has to be evaluated along with all the other important elements of non-monetary rewards and the other important elements of the work experience. Rather than focusing on just one aspect of the compensation strategy, all dimensions but be considered together. In module 4, the design of the total rewards philosophy of the organization will be discussed and it is revealed then how organizations make their decisions on the monetary element not in isolation but in conjunction with other elements. In their book, The Workforce Scorecard, Huselid, Becker, and Beatty (2005) concur by stating that embedding compensation strategy within the broader HR strategy affects results. They share that compensation does not operate alone, but as a part of the overall HR perspective.

Eventually, however, organizations will have to make the decisions as to what their market position will be regarding compensation. "Given the choice to match, lead, or lag, the most common policy is to match rates paid by competitors" (Milkovich & Newman, 2008, p. 201). Organizations justify this policy by saying that failure to match competitors rates would make the existing employees unhappy and limit the organization's ability to recruit. Many non-union organizations tend to match or even lead the competition in order to discourage the formation of unions. However, while the compensation being viewed as fair brings some advantages, it may not necessarily lead to the ability to recruit, retain, and motivate unless other important aspects of the reward package are offered to satisfy the employees' wants, needs, and desires.

Just as a company would attempt to "position" its products or services in terms of price (similar to how Wal-Mart positions itself as a low cost leader), or geographically (as McDonald's does by offering grits in southern states), an organization can position itself to attract the segment or segments of the population it requires in order to meet its business objectives. Organizations decide how they will position their pay structure relative to the competition. Marriott's philosophy is to pay equal to (match) or better than (lead) the competition, but to never pay less than (lag) the competition, whereas a nonprofit organization may pay equal to (match) or less than (lag) corporations outside the nonprofit arena but offer a more generous benefit package, or rely on the admirable mission of the organization to attract employees.

These strategi

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