Compensation System Change Introduction As Melanie Griffith gazed through the window of her office, she could see some employees walking to the parking lot to get to their cars; others were on their way to public transportation. The work day had just ended, but she was staying back in the office planning for the firm's strategic retreat. As the Director of Human Resources of ABC Inc., reporting directly to the Chief Executive Officer, she was tasked with analyzing and recommending changes to the firm's compensation strategy, among other things. The current pay for the employees was at the top of her mind. Was it fair and equitable? Was it competitive with other firms like ABC Inc.? What changes should be made, if any? How would these changes be implemented? How would these changes affect the employees and the firm? What would be the impact on compensation costs? She has reached out to you for advice. She has heard some good things about your human resource and compensation education, experience, and consulting services from her peers. Company Background and Strategy ABC Inc. is a private sector, non-unionized firm located in Ottawa, Ontario. It started its operations in 2005. The firm produces animal plushies (stuffed toys) for children. ABC has carved out a niche for itself as a Canadian producer of high-quality toys that are very "life-like" and offer high educational value since the toys are packaged with a descriptor of the animal in its native habitat along with information about its endangered status. A key marketing differentiator is the proportion of sales that go to non-profit organizations trying to save these animals from disappearing forever. ABC believes its toys are part of the mission to help endangered species survive, and the toys build a relationship between ABC, the purchaser, and the child who plays with it, all focused on ABC's mission. Current Challenges There are many business challenges including high production costs and lack of innovative products but when it comes to personnel related issues these are some of the challenges ABC Inc. is facing: 1. High Employee turnover With the fast changing business environment and lots of new competitors coming up in the market, the firm has recently experienced some turnover among employees, especially from core employee groups, such as production and marketing. To be specific, the turnover rate over the past two years among the production and marketing employees has been more than 25%, which is significantly higher than the average rate in the sector. Of the 53 employees who work in the Production jobs of Sewing Machine Operator, Fabric Cutter, Stuffing Machine Operators, and Q/C, 15 are replacements for turnover. They are not sure if this is because of pay dissatisfaction, but the CEO is concerned. 2. Productivity and wastage in production During the production process, production managers have noticed increase in wastage rates. This may also be one of the reasons behind increasing production costs. Productivity among the production factory employees also seem to be declining. Increasing employee productivity and reducing wastage is also a key concern. Organizational Structure ABC Inc. has grown to 120 employees today and is very profitable, with net earnings of $15 million last year. Reporting to the President and CEO are the following Directors: Finance, Marketing and Sales, Operations, and Human Resources as well as an Executive Assistant. Reporting to the Director, Finance are the following:  Manager of A/R  Manager of A/P  Manager of Payroll  Two financial assistants that work between payables, receivables, and payroll.  1 Administrative Assistant Reporting to the Director, Marketing and Sales are the following:  Customer Service Supervisor (Salima Yusuf) o 15 CSRs  7 National Accounts Managers [two for Not For Profit Promotions; two for Education Promotions; two Retail Sales; and one DTC sales]  3 Promotion Specialists  2 Administrative Assistants Reporting to the Director, Human Resources are the following:  Safety Officer  Human Resources Coordinator  Administrative Assistant Reporting to the Director, Operations are the following: Manager of Production Design and Setup with direct reports:  CAD/CAM operators o Embroidery Supervisor  2 Embroidery Machine Operators  2 Machine Maintenance Technicians  Materials Acquisition Specialist Reporting to the Manager of Operations are the following:  Scheduling Assistant  2 Sewing Room Supervisors o 20 Sewing Machine Operators o 8 Fabric Cutters  2 Stuffing/Finishing Room Supervisors o 12 Stuffing Machine Operators o 12 Finishers o 4 Q/C technicians)/Packing Reporting to the Manager of IT are the following:  4 Information Technology Support Analysts  1 Jr Information Technology Support Analyst  Warehouse Supervisor  2 Shipper/Receivers Outline of the ABC Production Process When Marketing has a customer for a new toy design, the specifics are turned over to Operations. First, the Manager of Production Design and her team will determine exactly how to "build" the toy. Each toy manufactured by ABC has a schedule associated with it that includes design, dies, fabric specifications and embroidery program. Currently, there is no culture of innovative thinking regarding the manufacturing and marketing of the toys. Employees are expected to conform to their job descriptions. Work is carefully planned and defined by management. The jobs are arranged hierarchically, with top management passing down instructions to middle and lower management. Employees do what they are asked to do. Supervisors ensure the tasks are completed on time and at the specified quality. The firm competes with general manufacturers for talent on the production lines and with all sectors for non-sector specific jobs, such as those in human resources and marketing. The CEO believes that the organization's success so far can be attributed to his clear vision and management control processes. But the difficulty in reducing costs in production, and the need to develop new ways to market and sell direct to customers has left him wondering if a new approach is required. Melanie thinks there could be changes in the management strategy and compensation systems of the organization. It is something you must analyze. The CEO is open to any management approach that would work for ABC Inc. Compensation Systems As ABC Inc. grew, pay was largely determined at the time of hiring through individual negotiation skills and prevailing market rates. There are currently no pay grades or ranges. This has resulted in a somewhat chaotic pay system that is becoming difficult to manage and which may be inequitable as well. Take, for example, Salima Yusuf and Ben Stockman. Salima has been working with ABC Inc. for ten years. She was hired as a Customer Service Representative (CSR). At her interview, among other things, she was asked about her education, previous experience, and pay at her last job. She had a diploma in marketing from a college, three years' experience working at a store/retailer, and was paid minimum wage. She was offered $12/hour to start (at that time, the minimum wage was $10.25/hr) with a potential for pay increases each year based on her work performance. The job at ABC Inc. was closer to her home, and she preferred it over her job at the retailer, so she did not push back and accepted the offer. Salima is now a Customer Service Supervisor, earning $20/hr after receiving approximately a 1-2 percent merit pay increase since 2010 and a promotion in 2015. As a Customer Service Supervisor, Salima oversees the work of 15 CSRs. The work is critical to the success of ABC Inc. The CSRs actively work to get new customers and to address the concerns of current customers and retain them as customers. Ben Stockman's case followed a different trajectory. He was three years ago as a Junior Information Technology Support Analyst. His job includes helping employees, including the CSRs, by troubleshooting problems with their computers, including software issues. At the time of hiring, he had a college diploma in information technology and worked a short stint over the summer of 2017 as an IT Help Desk Support Rep. At the interview, he was very forceful in negotiating his pay. The hiring manager, knowing their IT Help employee at that time was leaving for another job in Toronto, quickly agreed to Ben's demand for $19/hr. Ben has seen annual increases of about 2% and is now paid $20/hr. The cases of Ben and Salima are common at ABC Inc. However, the differences in pay are not restricted to differences in gender or other demographic characteristics. For instance, Tom and Osafa, two males, do similar jobs as supervisors, were hired around the same time, and had similar qualifications and previous work experience, but they earn significantly different salaries/wages. The employee database shows rates of pay for all ABC employees. ABC does not currently provide a benefit program that is in addition to the mandatory benefits: employment insurance, workers' compensation, CPP, and vacation. However, when a supervisor knows about a health situation for an employee, it is common for health expenses to be paid for by the company to 'help an employee out'. Such payments have amounted to approximately 3% of wage compensation in the last year.There is no company pension plan. The CEO is open to change on employee benefits and would like the firm to be more equitable and systematic in its approach. He is, however, very open and willing to consider other managerial strategies and approaches related to compensation and benefits that would work best for ABC Inc. Incentive pay structure Supervisors evaluate employees' performance once a year towards the end of the calendar year. ABC Inc. has a merit pay plan, which is the only pay for performance plan at ABC. It is based on performance appraisals by employees' immediate supervisors. It uses a graphic rating scale, with critical standards of performance, such as dependability and initiative, being judged on a scale of 1-5. The scores on the performance appraisals are converted to four levels (exceeds expectations, meets expectations, development required, and unsatisfactory), and a merit pay grid is used to determine increases to base pay (see Table 1 below). There are no additional increases to base pay; all pay increases are based on merit. Table 2: ABC's Merit Pay Grid Exceeds Expectations Meets Expectations Development Required Unsatisfactory Fourth (Top) Quartile 3% 2% 1% 0% Third Quartile 4% 3% 2% 0% Second Quartile 5% 4% 3% 0% First (Bottom) Quartile 5% 4% 3% 0% While Melanie and the CEO are satisfied with the current employee performance appraisal method, employees do not seem to be motivated by the merit pay system. Melanie is particularly concerned by the fact that the overall job satisfaction among the employees, based on a recent survey conducted last year, was found to be only "average." Almost everyone ends up getting between 2-3% pay increases. Melanie is willing to explore whether more appropriate methods to evaluate employees for an organization like ABC Inc. could be introduced. In addition to redesigning the base pay structure and ensuring fair and competitive base pay, the CEO would like to transform the organizational culture into one that is more performance-driven and which will address turnover as well. Management at ABC and "Bonuses" ABC's "mission" has attracted a strong management team and there has been little turnover in this group. Annual performance for all "Manager" positions and above is assessed in an annual meeting where significant results from the last year are reviewed. Goals and production targets are set annually for this group by position, but there are no real consequences for meeting (or not meeting) the targets. Management wage increases have an average increase close to 3%. In order to deliver on its mission, donations to wildlife protection non-profit organizations are targeted at 10% of gross revenue. In the past three years there has been little growth at ABC, but if ABC can successfully build its DTC sales, gross revenue could easily increase by 30% in the next year, with sustained growth after that. Melanie is wondering if an incentive program funded by this growth would be appropriate for ABC. ABC currently has an informal bonus program for management that is loosely based on two factors: "contribution to revenue" and "cost control." Since revenue is the driver of the contribution to the nonprofit organizations, it tends to get the most attention. Bonuses typically are paid from a pool of 5% of salary for the management group as a whole, but the bonuses are distributed based on the CEO's assessment of the individual's contribution. These assessments have disproportionately favoured the Sales and Marketing team (Director and National Accounts Managers) over Operations, with a token amount given to HR and Finance. The Production managers resent the bonus administration process since marketing activities usually result in increased costs to production, and less likelihood of managers in Production receiving a bonus. This resentment sometimes leads to poor communication between Marketing and Production when new toys are introduced. Your task You and your consulting team have been contracted by Melanie to provide recommendations based on your sound analysis of ABC's compensation systems and existing managerial strategy. Answer the following questions: 1. Apply motivation theory (as many as you want) to identify any issues with pay - are incentives working at cross purposes between key positions? Are some incentives paying out too well in certain positions, while others aren't paying out at all? 2. Assess the current compensation strategy. Which parts are working, and which parts aren't working well for ABC? 3. Recommend key changes ABC should make to its overall compensation strategy (including incentive plans) to improve pay satisfaction and also address the 'current challenges' the firm is facing. NEXT STEPS: You will also be completing a Compensation Strategy Template (see below) for at least 3 roles (one from senior/higher management, one from middle management, and one from entry level positions). Senior Management = Directors or higher Middle management - Managers/Supervisors Lower administrative - Admin assistants/operators/technicians Job descriptions for all jobs will be shared - you can select any three from those shared. Your task is to reflect the strategy you devised above, you can also make assumptions and research the market rates for these positions (for sections 2 and 3 of the template only tick or cross out for each job category. COMPENSATION SRATEGY TEMPLATE Jobs Covered Job 1 Job 2 Job 3 Total Compensation Level SENIOR MIDDLE ADMINISTRATIVE 1. Base Pay a. Job Evaluation b. Market Pricing c. Pay for Knowledge 2. Performance Pay a. Individual Performance Pay i. Piece Rates ii. Commissions iii. Merit Bonuses iv. Special Incentives b. Group Performance Pay i. Gain Sharing ii. Goal Sharing iii. Other Group Pay c. Organization Performance Pay i. Profit Sharing ii. Stock Plan iii. Other Organization Pay 3. Indirect Pay i. Mandatory Benefits ii. Pension Plan iii. Health and Life Insurance iv. Paid Time Off v. Employee Services vi.Other Benefits Total Pay Current Annual Salaries (not including bonuses or incentives) in CAD: Job Titles Salary Administrative Assistant--Finance 33280 Administrative Assistant--HR 35360 Administrative Assistant--Mktg/Sales 35620 CAD/CAM prod designs & tool/die 58240 Customer Service Representative 31720 Customer Service Supervisor 41600 Director Finance 95000 Director Human Resources 90000 Director Maketing and Sales 127000 Director Operations 140000 Embroidery Machine Operator 45240 Embroidery Supervisor 55120 Executive Assistant 50000 Fabric Cutter 32305 Financial Assistant 37128 Finisher 39433 Human Resources Coordinator 46800 Info Tech Support Analyst 50570 Info Tech Support Analyst--Junior 41600 Machine Maintenance Technician 56680 Manager Accounts Payable 56000 Manager Accounts Receivable 52000 Manager of IT 58000 Materials Acquisition Specialist 38480 Mgr Production Design/Setup 47000 National Accounts Manager 43357 Operations Manager 85000 Payroll Manager 43000 Promotions Specialist 34060 Q/C Technician/Packing 35750 Safety Officer 43680 Scheduling Assistant 39520 Sewing Machine Operator 33134 Sewing Room Supervisor 47320 Shipper/Receiver 51480 Stuffing Machine Operator 32301 Supervisor Stuffing/Finishing Room 48100 Warehouse Supervisor 62400 Please note that these are current salaries, based on your recommendation the compensation strategy template will reflect the new salary you have devised. AFTER THAT Next, devise a Job Grading System with at least a three-step progression for senior and middle management. The lower administrative staff and technicians could be hourly workers and may fall into a different category. You need to create a grading system for only one category (mid-senior level) OR hourly workers. To see an example of a what a grade pay system looks like: https://tulane.app.box.com/s/b6fuioub9h8j35r1x7nnrr1rx1bsy5rl For more information on the importance of Job Grading: https://preply.com/en/blog/b2b-job-grading/ SIMULATION REPORT FORMAT (Total marks out of 100): i. . Executive Summary iv. Introduction v. Case Diagnosis (answer the case questions) - Use sub-headings for all sections vi. Recommendations vii. New Compensation Strategy viii. Conclusion ix. Filled up Compensation Salary Template x. Job Grading (Step Progression) matrix/grid xi. References