Z- 370 I-core Management kelley school of business

management

1. Compensation Z370 I-Core Management

2. Agenda Types of Motivation Extrinsic Motivation: Compensation Methods Pay Design Base Pay Pay for Performance Other incentives

3. This Class: How do you extrinsically motivate employees? Extrinsic Motivation – Compensation Salary (direct) AND benefits (indirect)

4. Why Focus on Money ? It motivates people (most of the time) There is a positive correlation between high pay and organizational performance Linking rewards to key behaviors shapes behavior Compensation is how we align employee behavior with company strategy High Pay (X) (satisfactory compensation) Job Performance (Y)

5. Compensation System Considerations Equity Theory Expectancy Theory

6. Base Pay: External Benchmarking Three strategies relative to the marketplace: Lead = Pay above industry average Meet = Pay at industry average Lag = Pay below industry average Employee Attraction Employee Retention Overall Labor Costs Lead Strategy More employees apply Turnover is lower Higher productivity offsets higher cost Lag Strategy Fewer employees apply Turnover no lower than with Meet strategy Costs are lower

7. Base Pay: Internal Equity (Pay Ranges/Pay Grades) Maximum Minimum Job 2 Job 3 Job 4 Job 5 Job 1 Salary/$$ Value of Job to Organization Pay Policy Line Pay Policy Line allows a company to adjust compensation for all jobs to Lead, Meet, or Lag – based on strategic considerations. The pay policy line helps companies establish the minimum and maximum pay levels based on going market rate. - $80,000 - $90,000 - $90,000 - $100,000 - $100,000 - $120,000 Manager Tier l Manager Tier ll Manager Tier lll Pay bands usually widen as you move up the organization. (Pay band for VPs are much wider than for database coordinators.)

8. Compensation System Considerations Equity Theory Expectancy Theory

9. Equity Theory/Organizational Justice 6

10. Fairness is more important than amount of reward 7

11. What happens if we perceive inequity? Change inputs – Exert less effort if underpaid or more if overpaid Change outcomes – Get a raise Distort perceptions of self – “I used to think I worked at a moderate pace, but now I realize I work a lot harder than everyone else” Distort perceptions of others – “Mike’s job isn’t as desirable as I thought” Choose a different referent – “I may not make as much money as my bother-in-law, but I’m doing a lot better than my dad did when he was my age.” Leave the field - Quit the job

12. Compensation System Considerations Equity Theory Expectancy Theory 9

13. Pay For Performance Reward Levels The closer the level is to the individual, the more motivating it is because people feel like they have more control over the outcomes. How much do you impact the stock price of the organization? 10

14. Expectancy Theory Expectancy Instrumentality Valence Motivation Do I believe I can do an acceptable job on the work expected of me? Probability of Effort leading to Performance Do I believe I’ll receive the promised reward if I do an acceptable job? Probability of Performance leading to Reward Is the promised reward valuable to me? Perceived value of the Reward 11

15. Expectancy Theory - another view - Expectancy - Instrumentality - Valence 12

16. Compensation System Considerations If employees do not understand their benefits or how to use them, the cost of benefits will be largely wasted!

17. In addition to compensation: Employee Benefits Some “New” Perks: Wellness care Transit benefit allowance Pet insurance Child care On-site medical care Sponsored events Student Loan repayment “Work From Home” policies On-site dry-cleaning On-site grocery delivery

18. Total Compensation? On Average: Wage/Salary = 67% Benefits = 34%

19. Let’s apply what we’ve learned

20. For Class #9 (by Tues night) Complete Application Video #4 Read text Chapter 6 Complete Knowledge Check #7