Pay Determination

Welcome to the very first video or the
very first lesson of the very first module of our course on managing
employee compensation. In this video, we're going to be talking
about the Overview of the Pay Model. So first of all, let's start with
the People Manager Value Proposition. So this begins with the organizational
objectives, needs and values. If it's a for-profit organization,
we might refer to this as the business strategy, and our business
strategy will be very different if we're an organization that might rely
on operational efficiency and low costs. Versus one such as maybe a tech
company that relies more on developing new products and
then bringing those to market. And depending on our organization, this will also depend on what it is
that we need our people to accomplish. Do we need to serve
underserved populations? As a non-profit with that mission or our
constituents as a government organization. Or do we need our people to again bring
innovative products to the market or contain costs? These are all different
potential organizational goals. And these are going to
define our HR strategy. That is how it is that we achieve our
goals through the employee performance. And that's going to vary a lot. And this is going to determine who it
is that we want to attract and retain. How it is that we manage
their performance. And also how we motivate and reward them. The kind of person who would excel at a
mission-driven organization could be very different from the kind of person who
would excel at an organization that is relying on keeping costs low, versus one
that's trying to be very innovative. And we're going to be focusing on this
last part, that is how to motivate and reward employees. And so what are the tools that
we have at our discretion? So we have lots of tools, and we're going to focus on particularly
the compensation elements. So the first part is the Total Cash. We include the total cash to mean
both the base cash or salary and also the short term incentives. The first module focuses
on paid determination and then also on short term incentives. We think of short term incentives as
things such as commissions or bonuses, or other short term incentive rewards,
where we try to link our key performance indicators to those
immediate methods of compensation. Now going up from there,
we also have Total Direct Cash. Total direct cash includes base cash,
short term incentives, and long term incentives. Those long term incentives tie the long
term performance of our organization to long term rewards. Those are, examples of long
term incentives would be, for example, a stock option. And then lastly we have Total Comp,
or the Pay Mix. Total comp includes the total
value of all the base cash, short term incentives, long term
incentives, and the benefits and perks. And the pay mix includes how we
distribute the resources between them. And benefits and perks, for
example, include things such as pension contributions,
health insurance and other benefits that the company both elects to give and
also those that are required by law. Going up even further,
we have the Employee Value Proposition. These are all of the things that makes
an employee want to come to work in the morning. This is what attracts them. This is what motivates them. This is what retains them. They include not just compensation, but
they also include all of the non-cash rewards, all of the things
that makes a job rewarding. We'll also go into
the Strategic Messaging Model. So this model maps how you'd
think about compensation and the mix of that compensation and then
the messaging around that compensation. So you can get the person that you
want to attract, retain, and motivate. So let's start with money. So money, the first element of
our strategic messaging model, includes just the simply the size
of the compensation package. So that includes, so for
example it includes whether you're allocating a lot of
resources to compensation. Perhaps paying the 25th percentile of
the market for total compensation. Perhaps you're paying the median or
perhaps you're paying the 75th percentile, that is you're trying to pay more
than 75% of your competitors. The second consideration is the Mix. So depending on who you want to attract,
retain and motivate, you might shift the allocation of
those compensation expenditures to the right element of the pay mix to
get that kind of person who you want. So for example, we might choose a pay
mix that prioritizes base cash if we want someone to attract people
who are highly skilled. We might try to allocate a larger portion
of a pay mix to short term incentives and try to beat the market
on short term incentives if we want to attract people who
are confident in their abilities, and we also want to motivate them
to do their job duties well. We might have a pay mix that
prioritizes long-term incentives if we're trying to have an organization
that really focuses on the alignment of an individual's activities to
the broader organization's goals. And that also wants to have a pay
mix that prioritizes retention. Because tools such as stock options
are particularly valuable for employees who stay around the organization
for long enough for those options to vest. Or you might have an organization
that really prioritizes the company culture and is more a egalitarian
when it comes to the pay mix but it also has a relatively
perhaps paternalistic view of all of the things that
the company offers to its employees. None of this means anything unless you're
able to really drive the message home on what this pay mix
means to your employees. You want to say, this is our pay mix, this
is how we try to compensate employees, this is the philosophy. For example, we are an organization that
tries to prioritize pay for performance, and you have that messaging and
then that's reflected in the pay mix, it's reflected in
the compensation expenditures. And so our strategic messaging model and throughout what we'll be doing
in this Coursera course, will be to talk about not just
the different elements of the pay mix and kind of the technical nitty gritty
about how to implement those, but also try to talk about, again,
the money mix and the messaging. How to tie those to who you want to
attract to retain and to motivate and how this fits into the broader
business strategy. Thanks, and I will see you next time when
we talk about examples of how we align our pay strategy to our business strategy.

Welcome. In this video, we're talking
about examples of pay strategy. So first of all, what are the goals
of our compensation plan? Once again, our compensation plan
needs to attract, retain, and motivate the kind of person who we need
to successfully execute our business strategy, and we also want to do
it in a way that's tax efficient. That is we're spending all of this
money on our compensation plan. We want to make sure that we're
allocating our pay mix in such a way that we can get as much money to our employees
to boost that value proposition and also to save money ourselves. We'll be talking more about the second
part tax efficiency throughout the Coursera course. For now, I want to talk about some
different ways that organizations have tried to attract, retain, and motivate the person they need to
execute their business strategy. Remember, so our methods for
attracting, obtaining, and motivating those workers are going to
depend on our strategic messaging model. We'll focus on each of those in turn. So first of all, let's talk about
how companies compete on money. So here's an example of Costco. Costco is an American retailer. Their compensation strategy relies
on them being an employer of choice. That is they want to pay a premium for workers in order to get
premium productivity. It's well known that Costco
tends to pay their workers and have a compensation package,
since it greatly exceed their competitors, both in terms of their base cash and
also their benefits. But we shouldn't really think
about this as costing it as $1 increase in pay per hour as directly
mapping onto $1 in increased cost. That is they also earn higher returns and
if they have a very productive and loyal workforce,
they have relatively less loss and leakage of their inventory
from their stores. And they also try to get the most
advantage of their premium pay through a whole set of complementary practices. So for example, the Costco because
they pay more than the market, get a lot of applications and
that let's them be very, very selective in who they
bring into the organization. Once they've identified as somebody who
they think would be a great fit for Costco, they then invest
intensively on training them. They are able to do this because
when someone joins Costco, Costco since it pays above the market
has very, very high retention rates. And so by training them,
they know that they can make those investments because they're
going to stick around for a long time. After that, they also have intensive cross
training across the different units, that is again, they can afford to use cross
training because again they tend to stay. Then also they have to
use workteams in order so they can get a bigger sense of
the organization and of Costco. And since they have people
who are trained across the different tasks of
running a retail store. And because they are intensively selected
and they are intensively trained, they make relatively good candidates for
management. And Costco is also famous for
our promoting from within. And then we also have Walmart, so interestingly Costco competes directly
in the same space as Walmart. Walmart's business strategy relies on
cutting costs and operational efficiency. And for them, this also translates
into keeping compensation costs low. And so their complementary practices
rely on operational efficiency in all aspects of the business
including their selection. They need to be able to select, identify workers cheaply to train
them at relatively low cost. And also to standardize work practices so that changes in their work
force are minimally disruptive. Let's go on to competing on pay mix. So if we look at Costco, Costco again, pays much higher base pay
rates than their competitors. And they also have very generous benefits
and again this attracts is very helpful for them to attract the kind of
person who they wanted to attract, entertain, and motivate. But that's not how all
organizations compete. Another example is a company
called SAS Institute. SAS Institute tends to unlike
other software companies, they rely very little on short term
incentives and long term incentives, and rather they focus on their
benefits package and base pay. They see these very generous benefits as allowing their employees to
focus directly on their work. They're pioneers in offering such
benefits as on site daycare and a reduced work week. And when the company's founder
was asked whether he sees this as paternalistic, he sees us being
really just being good to the employees. So that their employees can
give their best to the company. Another example is competing
on short term incentives. Lincoln Electric is a manufacturing
company headquartered in Cleveland. And their base pay is relatively
similar to their competitors, but interestingly their short
term incentives can typically constitute two-thirds of
their total compensation package. That is they very intensively use piece
rates and they also have a bonus program that rewards people for
producing products of high quality, for being highly reliable, for
being innovative and so on. And so Lincoln Electric because
their total pay package tends to be more than their competitors, they can also
be very selective on who they bring in. And likewise for those who do stay, they attract some of the most
productive workers in their industry. And they also are successful in motivating
them and retaining them as well. Early days in Microsoft, Microsoft used to
try to target the market median in terms of base pay back when there were companies
such as IBM and Hewlett Packard and so on. And they're competing for that talent and
Microsoft was a relatively young company. So they had a mix of base pay,
benefits, short term incentives, and long term incentives. And the way that they would model their pay would be to again match
the market on base pay, but then to try to be very aggressive in
their use of long term incentives. And Microsoft was one
of the early tech firms that offered their employees very
aggressive long term incentives. Their intentions for offering very generous long term incentives was
in part as a retention tool, that is individuals who left the organization
before their long term incentives. Their stock options vested
would be foregoing that income, and also it's conveyed a since of
shared destiny for early Microsoft. And so if we look at these organizations
altogether we should need to be reminded that these all have different
implications for their messaging. Now one of Microsoft's competitors for
software engineers could be Netflix. And so Netflix is an example of a company
that tends to pay very high base pay. One of Netflix's informal mottos was that at an average company the average
employee gets an average raise. But at Netflix the average employee
gets a very generous severance package. That is they tend to pay far above
their base pay to try and attract and retain the very best workers. And they're motivated
just to keep their jobs. Another way to put this is that we might
think about short term incentives as being a method for
attracting or obtaining and motivating the very most
productive workers. But in some sense base pay can work
the same way, that is your incentive for staying at a company like Netflix,
is just the ability to continue to collect that very high, very competitive base pay. Another thing that's interesting
about Netflix's compensation model is that they offer employees
a lot of flexibility. And how they allocate that very, very high base pay across the different
benefit structure and incentives. Interestingly at Netflix, Netflix allows it's employees to
purchase stock at a 50% discount. And also their options invest immediately and so what's interesting about Netflix is
that Netflix is essentially allowing their employees to exercise a lot of freedom or
responsibility over their paycheck. And likewise, freedom with responsibility
is one of Netflix's informal models, that is Netflix as an organization
that has to adapt with the times, adapt with business practices. It's had to reinvent itself from a mail
order DVD company to a company that offers streaming video to now a company
that also develops content. And as these business needs changes,
so do their workforce. And just as part of the deal of Netflix says that we have
to have this flexibility. We're also going to allow our employees
to have that same sort of flexibility in terms of the way they're compensated. So once again, I'm messaging for
all these different companies varies. Costco tries to communicate that we
want to be an employer of choice, we want to be the first company
that people to come to. Because we're an employer
that offers a very competitive total compensation package. SAS is trying to message its employees
that they want relatively few worries so
you can focus on your work, and so they have a compensation package
that concentrates on benefits. Lincoln Electric communicates that
it wants to have a star culture, an organization where the very most
productive people would want to come to work. Those people who would be
attracted to Lincoln Electric, because they can earn more on
their short term incentives at Lincoln Electric then they can
at Lincoln Electric's competitors. The message behind Microsoft is
that we have a shared destiny, and we're also going to use long term
incentives as a retention tool. And then lastly, Netflix. Netflix is an organization
that needs to adapt. Also imparts that same freedom with
responsibility onto it's workers when they choose the allocation of
their compensation practices.

Welcome back. In these set of videos we're
talking about how to benchmark pay, starting with producing a job description. So when we're producing a job description, what we're talking about is
performing a job analysis. You should think job analysis,
making a job description. Making a job description,
performing a job analysis. So you might be thinking, well,
if a job analysis is just producing a job description, why don't they just
call it job descriptioning? Well, that just sounds ridiculous, right? So why write a job description? The first reason is to benchmark pay. We need to figure out what it is that
we're trying to do or accomplish with this job so that we can go off into the labor
market and find an accurate benchmark. The second reason why we want to
write a job description is for compliance purposes. You might want to know, is this the kind of job where we need to
pay them a wage and give them overtime? Or is this the kind of job where
we can just give them a salary? A third reason has to do with staffing,
training, and development. For our workforce planning needs, we might want to know what kind of
tasks that we need this job to do. For training purposes, we might need to
know what kind of knowledge, skills, and abilities we need to
impart upon our employees. And for developmental purposes,
we might need to know what are some of the criteria that we'd
use as part of our job evaluation. A job description will give
us all this information. So what's in a job description? So let's start off with an example of
a compensation and benefits manager. So what do you see here? The first thing that you should see is, of course, the job title,
the compensation and benefits manager. The second thing that the job description
will have is the job summary. In this case, a compensation and benefits manager plans, directs,
and coordinates an employee's pay. You should think about a job summary
as kind of like the Thanksgiving description of what it is that
you do when your aunt asks, so sweetie, what is it that
you do in your job? And then, of course, you give your job
summary and they give you your yes dear. The second part is the job tasks or
the job duties. This is essentially
a description of the different, itemized description of the different
things that you do in your job. For example, for a compensation and benefits manager, one of their primary job
duties might be to perform a job analysis, which, again, you should think
is producing a job description. They also will potentially set
an organization's pay structure, determine the competitive wage rates, and
develop modified compensation plans, or select and manage the benefit vendors. Again, you should think about
these job tasks as the primary job duties of that occupation or
that job that you're trying to fill. And this is going to be also important for
compliance purposes, because depending on those job duties,
this can determine whether or not you'd be allowed to, for
example, pay this job salary. Next, we go on to requirements. Requirements, in the case of our
compensation and benefits manager, might be bachelor's degree in human
resources, management or related field. Or a Coursera certificate of course,
or commensurate experience. You might also say our
preferred qualifications. A master's in human resources or related
field, sufficient amount of experience, or a professional certification. Again, we want to develop accurate
descriptions of these job requirements so that we can communicate to potential job
seekers what kind of requirements or educational qualifications or experience
they need to apply for this job. It's also going to be important for
compliance purposes because some of the requirements of the jobs might be
bonafide occupational qualifications, things that this job actually really
truly needs to do in order to perform the job well. And also it could be important,
the educational requirements could be important when we're determining
whether we can pay this job a salary. The next component that a typical job
description will have is the job context. This, simply put, relates to what kind
of environment the job is located in. So, for example, for a compensation and benefits manager, this might be
the corporation headquarters over in St. Paul, our neighbors over in St.
Paul, Minnesota. And lastly, one of the things that you'll
typically see in a job description are the knowledge, skills, and abilities. In this case, a compensation and
benefits manager might be required to have knowledge of the principles of
compensation, knowledge of laws and legal codes and statutes related to
compensation, skill in using productivity software, such as Excel, or
ability to communicate effectively. We typically think about knowledge as
things that you can easily train or teach people,
things that you actually know. Skills is essentially being know how, and these different things
that you're able to do. And then lastly, ability is these
things such as physical strength or mathematical ability or intuition. These things that are harder to teach. There's also some other things
that a job description might have. One thing that it might have
are reporting relationships. Who does this job report to? How many people report to this job? And another thing that this might
have is whether this job is exempt or not exempt under
the Fair Labor Standards Act. We'll talk about this more when we get
to our Coursera module on compliance. Some job descriptions might also
have a job code for internal or reporting purposes and also pay range. Probably, the most typical thing is to say
that pay is commensurate with skills and experience, but it could also give
a range of different possibilities. So how do you write a job description? So typically,
when you're writing a job description, you might not be starting from scratch. You might be in an organization, for
example, that is trying to write a job description because operations
are expanding, or because it's been three years and you just want to make sure
the job description is up to date. Well in this case,
you might start from internal models. What job descriptions do you already have? A second step would be to use
external models, like from a website, such as the Bureau of Labor Statistics,
or professional associations or trade associations. That'll tell you what a typical
job description would look like. Then lastly, you would check with the
incumbent job holders and with management. Take these documents and you would say,
you conduct an interview and you would say, which components of this
job description look similar to what you do, which parts don't look similar? Can you think of any job
duties that you perform that are very important to your job, but
aren't reflected in these documents? Now again,
if you're revising one of these documents, you might start from your internal model. But if you're starting fresh, you might start perhaps from
one of the external models, and then check that with your job holders,
and then generate your internal document. So what laws should you consider? First of all, if your paying this
job a salary as opposed to wage and overtime, or if you have job requirements
that might effect women, minorities, or other protected groups, then you don't
want to miss our compliance video, which is also included as part
of our HRN specialization.