Deck 18: Management: Making It Work

Question 1

How can employers control labor costs

Answer 1

The planning of finances is important for the managing of the labor costs. Managing compensation through creation of costs budget, updating pay structure, instituting gain sharing and increasing merit pay are required to be carried out by employers.
Employers can control the costs of labor in an organization through the following ways:
• Creation of compensation budget through tradeoffs where the increase of pay is allocated to employee's contribution
• Understanding the potential returns of profit from the allocation
• Managing the number of employees and the hours of work
• Managing the average cash compensation
• Managing average benefits costs
• Using the information about the pay of competitors and staffing helps in improving and understanding the labor costs
Hence the above techniques undertaken by the employers will help in controlling costs of labor in an organization.

Question 2

Managing Compensation Costs, Headcount, and Participation/Communication Issues
Cisco Systems, Hewlett-Packard, American Airlines, and General Motors are examples of companies that have cut employment or cut wages and/or benefits to reduce labor costs in hopes of becoming more competitive and more profitable. Indeed, American and GM went through bankruptcy in part to gain control over labor costs. In contrast, some companies-Southwest Airlines, Nucor, and Lincoln Electric-have a no-layoff practice and do not appear to have cut wages or benefits even in years when sales have declined significantly (They have also not gone through bankruptcy). What is the difference between these two sets of companies Is it simply that one set of companies cares more about its employees than the other set of companies cares about its employees Or, is it also the case that Southwest, Nucor, and Lincoln Electric have set up their compensation strategies in a way that makes them more able (than Cisco, HP, American, and GM) to cut labor costs when times are tough (For more background, go to google.com or another search engine and conduct a separate search for each company using its name and the term "layoff.") What about protecting investment in employees and employee relations
What can an employer do to make labor costs flexible so that profits do not take as much of a beating during difficult economic times and so that fewer employees need to be laid off If you were in charge of designing a compensation system for a company that is fairly new but is now reaching a stage and size where it needs a formal compensation system, how would you design the compensation system to have labor cost flexibility To what degree would you have others at the company participate in the design of the new compensation system Who would participate Would you follow a policy of pay openness in communicating your compensation system Provide a rationale for your decisions.

Answer 2

Steps an employer can take to make labor costs flexible during the time of economic difficulties, without affecting profits and undertaking too much of layoffs
• Setting up performance based payment system. This will help the employees to understand the basis of payment easily and they will be able to understand the economic crisis the company is going through. During the economic crisis the total business will go down and henceforth the compensation will also go down without cutting down the employee strength too much.
• Cross training the employees to make them able to perform a variety of work, is another way. This will enable the organization to cut down the process of unnecessary hiring and thereby will reduce the labor cost and layoff during economic crisis. But this practice should be practiced by the company irrespective of the economic condition it is in.
As a compensation manager of a company that is getting elevated from the nascent stage to the mature stage, one should focus on the following to make the labor cost flexible:
• The compensation system should be based on performance. The performance based compensation should be individualistic as well as team based in nature. Team should be awarded bonus in regular intervals for their cumulative achievement as well as the high performing individual in the team should be awarded also.
• Cross training of employees should be given priority to reduce the cost of hiring. People who will be successful in the training and perform the job should be provided with incentives.
• Automation should be brought in processes wherever possible to reduce the labor cost.
• Employee should be trained properly so that they can be sure of the work they are doing. This will reduce the labor cost by ensuring that a double check is not necessary.
• The compensation system should focus on the job role one is performing.
To design the compensation structure, the compensation manager should consult with,
• The higher management: They are the policy makers and based on the policy of the company only the compensation system should be designed. The compensation manager must understand the higher management's objective, whether it is profit oriented or growth oriented before making any compensation system for the organization.
• The finance and accounts department: The finance and account department will be able to provide rough estimation of the fund available each year for making compensation to the employees.
• The labor union: The labor union should also be consulted to know the demand of the labors. Matching the company's goal with that of the labors demand the compensation policy should be determined. This will ensure employee satisfaction.
In communicating the compensation system, pay openness should be followed. This will help in employee satisfaction and motivation. If openness in pay communication is followed, employees will be able to know the parameters used for a pay hike. This will ensure healthy competition among employees and motivate them to perform better. Moreover, if secrecy is maintained the employees will always be speculative of others' salary and won't be satisfied with their own salary. But in pay openness they will know information about any employee's salary and the basis for it and hence no dissatisfaction will prevail.

Question 3

Deb Allen's life-altering discovery at work really "communicated" her company's pay practices. Swamped with work at an asset-management firm, she went into the office over the weekend and found a document abandoned on the copy machine. The document contained the base compensation, raises, performance ratings, and bonus information for 80 of her colleagues.
Ms. Allen was outraged that a noted screw-up was making $65,000 a year more than more competent colleagues, while some new hires were earning almost $200,000 more than their counterparts with more experience. The discovery led her to question why she was working weekends for less pay than others were getting. "I just couldn't stand the inequity of it," she says. Three months later she quit.
But Ms. Allen couldn't bring herself to share the information with her colleagues. "I would have been better off not knowing any of that," she explains. "I couldn't give it to people who were still working there because it would make them depressed, like it made me depressed."
How would you have reacted if you were Ms. Allen Explain why.

Answer 3

If anyone is in Ms. A's place, he/she should react in the following ways:
• The person should talk to the management regarding the discrimination and ask for justification for the pay discrimination.
• If management does not respond in a positive manner or fails to justify the basis of pay discrimination, the person should inform it to the labor union, if the company have any, and ask for justice.
• If the labor union also fails, the person should sue the company in court for pay discrimination, under Equal Pay Act, 1963.

Question 4

How does the management of the pay system affect pay objectives

Question 5

Deb Allen's life-altering discovery at work really "communicated" her company's pay practices. Swamped with work at an asset-management firm, she went into the office over the weekend and found a document abandoned on the copy machine. The document contained the base compensation, raises, performance ratings, and bonus information for 80 of her colleagues.
Ms. Allen was outraged that a noted screw-up was making $65,000 a year more than more competent colleagues, while some new hires were earning almost $200,000 more than their counterparts with more experience. The discovery led her to question why she was working weekends for less pay than others were getting. "I just couldn't stand the inequity of it," she says. Three months later she quit.
But Ms. Allen couldn't bring herself to share the information with her colleagues. "I would have been better off not knowing any of that," she explains. "I couldn't give it to people who were still working there because it would make them depressed, like it made me depressed."
Put yourself in the place of the compensation director at Ms. Allen's company. Based on the pay model and what you now know about compensation, are there any possible businessand work-related explanations for what Ms. Allen observed (i.e., the screw-up getting $65,000 more; new hires earning $200,000 more than more-experienced employees; and Ms. Allen making less pay than others)

Question 6

Why is the structure of the compensation function important

Question 7

Deb Allen's life-altering discovery at work really "communicated" her company's pay practices. Swamped with work at an asset-management firm, she went into the office over the weekend and found a document abandoned on the copy machine. The document contained the base compensation, raises, performance ratings, and bonus information for 80 of her colleagues.
Ms. Allen was outraged that a noted screw-up was making $65,000 a year more than more competent colleagues, while some new hires were earning almost $200,000 more than their counterparts with more experience. The discovery led her to question why she was working weekends for less pay than others were getting. "I just couldn't stand the inequity of it," she says. Three months later she quit.
But Ms. Allen couldn't bring herself to share the information with her colleagues. "I would have been better off not knowing any of that," she explains. "I couldn't give it to people who were still working there because it would make them depressed, like it made me depressed."
As the compensation director, what would you do if Ms. Allen had brought you this document, and asked for your help in understanding what was going on. (Firing the person who left it on the copier is not an option. It may have been you.)

Question 8

Give some examples of how employers use inherent controls.

Question 9

What activities in managing the pay system are likely candidates to be outsourced Why

Question 10

Use Exhibit 18.10 to explain how the research on individual decisions making can be used in pay communication.