Now we turn to the topic of how managers and HRM professionals maintain a workforce that has been recruited and developed. Maintenance of the current workforce involves compensation, wage and salary systems, benefits, and occasional terminations.
The term compensation refers to (1) all monetary payments and (2) all goods or commodi- ties used in lieu of money to reward employees.94 An organization’s compensation structure includes wages and/or salaries and benefits such as health insurance, paid vacations, or em-ployee fitness centers. Developing an effective compensation system is an important part of HRM because it helps to attract and retain talented workers. In addition, a company’s com- pensation system has an impact on strategic performance.95 HR managers design the pay and benefits systems to fit company strategy and to provide compensation equity.
Wage and Salary Systems. Ideally, management’s strategy for the organiza- tion should be a critical determinant of the features and operations of the pay system.96 For example, managers may have the goal of maintaining or improving profitability or market share by stimulating employee performance. Thus, they should design and use a merit pay system rather than a system based on other criteria such as seniority.
The most common approach to employee compensation is job-based pay, which means linking compensation to the specific tasks an employee performs. However, these systems present several problems. For one thing, job-based pay may fail to reward the type of learn- ing behavior needed for the organization to adapt and survive in today’s environment. In addition, these systems reinforce an emphasis on organizational hierarchy and centralized decision making and control, which are inconsistent with the growing emphasis on em- ployee participation and increased responsibility.97
Skill-based pay systems are becoming increasingly popular in both large and small com- panies, including Sherwin-Williams, au Bon Pain, and Quaker Oats. Employees with higher skill levels receive higher pay than those with lower skill levels. At the Quaker Oats pet food plant in Topeka, Kansas, for example, employees might start at something like $8.75 per hour but reach a top hourly rate of $14.50 when they master a series of skills.98
Also called competency-based pay, skill-based pay systems encourage employees to develop their skills and competencies, thus making them more valuable to the organization as well as more employable if they leave their current jobs.
Compensation Equity. Whether the organization uses job-based pay or skill- based pay, good managers strive to maintain a sense of fairness and equity within the pay structure and thereby fortify employee morale. Job evaluation refers to the process of de- termining the value or worth of jobs within an organization through an examination of job content. Job evaluation techniques enable managers to compare similar and dissimilar jobs and to determine internally equitable pay rates—that is, pay rates that employees believe are fair compared with those for other jobs in the organization.
Organizations also want to make sure their pay rates are fair compared to other compa- nies. HRM managers may obtain wage and salary surveys that show what other organi- zations pay incumbents in jobs that match a sample of “key” jobs selected by the organiza- tion. These surveys are available from a number of sources, including the U.S. Bureau of Labor Statistics National Compensation Survey.
Pay-for-Performance. Many of today’s organizations develop compensation plans based on a pay-for-performance standard to raise productivity and cut labor costs in a competitive global environment. Pay-for-performance, also called incentive pay, means tying at least part of compensation to employee effort and performance, whether it be through merit-based pay, bonuses, team incentives, or various gainsharing or profit-sharing plans. Data show that, while growth in base wages is slowing in many industries, the use of pay-for-performance has steadily increased since the early 1990s, with approximately
70 percent of companies now offering some form of incentive pay.99 The U.S. Congress and President Bush recently called for implementing performance-based pay in agencies of the federal government. The seniority-based pay system used by most federal agencies has come under intense scrutiny in recent years, with critics arguing that it creates an environ- ment where poor performers tend to stay, and the best and brightest leave out of frustration.
A survey conducted by the Office of Personnel Management found that only one in four federal employees believe adequate steps are taken to deal with poor performers, and only two in five think strong performers are appropriately recognized and rewarded.100
With pay-for-performance, incentives are aligned with the behaviors needed to help the organization achieve its strategic goals. Employees have an incentive to make the company more efficient and profitable because if goals are not met, no bonuses are paid.
The best HR managers know that a compensation package requires more than money. Al- though wage/salary is an important component, it is only a part. Equally important are the benefits offered by the organization. Benefits make up 40 percent of labor costs in the United States.101
Some benefits are required by law, such as Social Security, unemployment compensa- tion, and workers’ compensation. In addition, companies with 50 or more employees are required by the Family and Medical Leave Act to give up to 12 weeks of unpaid leave for such things as the birth or adoption of a child, the serious illness of a spouse or family member, or an employee’s serious illness. Other types of benefits, such as health insurance, vacations, and such things as on-site daycare or fitness centers are not required by law but are provided by organizations to maintain an effective workforce. At Aegis Living, a chain of assisted living centers based in Redmond, Washington, CEO Dwayne Clark uses bene- fits to keep turnover of low-paid patient care staff to a low 34 percent (the average annual turnover rate in assisted living is 93 percent). Clark offers Appreciation Days for employees to take days off and negotiates with suppliers and prospective vendors to provide perks such as discounted massages and haircuts, special mortgage interest rates, and prepared meals from community kitchens.102
One reason benefits make up such a large portion of the compensation package is that health care costs continue to increase. Many organizations are requiring that employees absorb a greater share of the cost of medical benefits, such as through higher co-payments and deductibles. Microsoft, for example, recently sliced health care benefits by requiring a higher co-pay on prescription drugs.103
Computerization cuts the time and expense of administering benefits programs tremen- dously. At many companies, such as Wells Fargo and LG&E Energy, employees access their benefits package through an intranet, creating a “self-service” benefits administra- tion.104 This access also enables employees to change their benefits selections easily. Today’s organizations realize that the “one-size-fits-all” benefits package is no longer appropriate, so they frequently offer cafeteria-plan benefits packages that allow employees to select the benefits of greatest value to them.105 Other companies use surveys to determine which combination of fixed benefits is most desirable. The benefits packages provided by large companies attempt to meet the needs of all employees.
Despite the best efforts of line managers and HRM professionals, the organization will lose employees. Some will retire, others will depart voluntarily for other jobs, and still oth- ers will be forced out through mergers and cutbacks or for poor performance.
The value of termination for maintaining an effective workforce is twofold. First, em- ployees who are poor performers can be dismissed. Productive employees often resent dis- ruptive, low-performing employees who are allowed to stay with the company and receive pay and benefits comparable to theirs. Second, employers can use exit interviews as a valu- able HR tool, regardless of whether the employee leaves voluntarily or is forced out. An exit interview is an interview conducted with departing employees to determine why they are leaving. The value of the exit interview is to provide an inexpensive way to learn about pockets of dissatisfaction within the organization and hence reduce future turnover. The oil services giant Schlumberger includes an exit interview as part of a full-scale investiga-tion of every departure, with the results posted online so managers all around the company can get insight into problems.106 However, in many cases, employees who leave voluntarily are reluctant to air uncomfortable complaints or discuss their real reasons for leaving. Com- panies such as T-Mobile, Campbell Soup, and Conair found that having people complete an online exit questionnaire yields more open and honest information. When people have negative things to say about managers or the company, the online format is a chance to speak their mind without having to do it in a face-to-face meeting.107
For companies experiencing downsizing through mergers or because of global competi- tion or a shifting economy, often a large number of managers and workers are terminated at the same time. In these cases, enlightened companies try to find a smooth transition for departing employees. For example, General Electric laid off employees in three gradual steps. It also set up a reemployment center to assist employees in finding new jobs or in learning new skills. It provided counseling in how to write a résumé and conduct a job search. Addi- tionally, GE placed an advertisement in local newspapers saying that these employees were available.108 By showing genuine concern in helping laid-off employees, a company commu- nicates the value of human resources and helps maintain a positive corporate culture.
Source: Daft Richard L., Marcic Dorothy (2009), Understanding Management, South-Western College Pub; 8th edition.