Chapter 10 Compensation.
"It is not the employer who pays the WAGES-he only handles the money. It is the PRODUCT (CUSTOMER) that pays the wages."
A major component of the reward systems designed for your hospitality enterprise will include the plans for compensation for both hourly and management employees. As was true for each of the human resources functional areas discussed previously, it is important that the compensation plan be linked to the mission statement and organization goals. The specifics of your compensation plan will vary based upon such considerations as the types of products and services offered and whether your hospitality organization operates on a profit or not-for-profit basis.
At the same time, compensation plans must be linked together with your organization's benefit program to ensure a harmonious relationship between the two. The variety and complexity of benefit programs offered by hospitality organizations continue to expand. With increasing frequency prospective job candidates are choosing the particular hospitality company they wish to work for on the basis of benefit offerings as opposed to the specific compensation. In "the next chapter" this trend is likely to continue.
As all service industries are competing for the same pool of unskilled and semiskilled employees, compensation structures are becoming more innovative and competitive in their approaches. Keeping abreast of the changes and innovations in the administration of these programs is increasingly important to your personal success as a manager with human resources responsibilities.
At the conclusion of this chapter you will be able to:
1. Understand the importance of compensation planning to sound human resources practices.
2. Distinguish between exempt and nonexempt personnel.
3. Develop a compensation plan for a hospitality organization.
4. Plan a job evaluation for a hospitality organization.
5. Plan an external compensation survey.
6. Identify the effects of a collective bargaining agreement on your compensation plan.
7. Explain the philosophies behind the tipping versus service charge debate.
8. Describe the role of compensation as a motivator in the service sector.
9. Discuss the advantages and disadvantages of a pay-for-performance compensation plan.
10. Distinguish between the various types of incentive programs.
11. Maintain an awareness of the legal issues pertaining to compensation in a service enterprise.
12. Identify the trends and changes in compensation planning.
MANAGEMENT PHILOSOPHY OF WORK AND COMPENSATION PLANNING IN THE HOSPITALITY INDUSTRY
The development of a sound compensation plan is critical to the credibility of your hospitality management team. The compensation plan translates into the policies and procedures that are used to implement and administer the compensation component of your total reward system. It is imperative that a great deal of care and thought go into compensation planning, as no other plan in your organization will be examined as closely for inequities in the structure.
The compensation policies that you initially develop set the precedent for all actions taken with respect to wages and salaries. These policies and procedures serve as a decision-making guideline for the operational managers. In large hospitality organizations, where compensation decision making occurs at a multitude of levels, it is these policies and procedures that help to ensure consistency in implementation.
Additionally, compensation planning involves a large portion of your hospitality operations budget. Labor costs continue to increase along with legislation raising minimum-wage levels. So for management credibility, improved decision making, and sound budgetary considerations your compensation plan (i.e., policies and procedures) must be carefully coordinated, communicated, integrated, and administered to ensure consistency.
This chapter discusses practices and policies commonly used in the hospitality industry today in the establishment of equitable compensation plans. It is important for you to remember that wage and salary policies are individually based upon your company's own needs and operational objectives. For a hospitality enterprise, however, to be successful in compensation planning, it is critical that all compensation policies and procedures are well planned, fully developed, and carefully articulated to the people within your operation.
EXEMPT VERSUS NONEXEMPT PERSONNEL
A mutual understanding of the terminology as we use it in the remainder of this chapter must be reached. Please note that this terminology is used for the purpose of explaining the different pay structures that exist in the hospitality industry. In the context of this chapter wage is money that is paid to your hourly employees regardless of whether their skill level is unskilled, semiskilled, or skilled. Salary is paid to those employees who work for a weekly, monthly, or annual rate of pay. While you probably think of salaried employees as management, in the hospitality industry our skilled personnel (such as chefs) are also frequently compensated on a base salary. And in other, less frequent situations, you will find management who are compensated on a hourly basis.
The terms compensation and pay will be used generically to include people employed by our organization. We define compensation as the rate of pay (or award) given to employees in the hospitality industry for the performance of work or the provision of services. In previous chapters we have used the terms hourly and salaried to make distinction between management and nonmanagement resources. Though that distinction was sufficient for previous and future discussions, the topic of compensation requires specific terminology.
When establishing a compensation plan for your people it becomes important, for Fair Labor Standards Act (FLSA) classification, to distinguish not between management and nonmanagement, but rather between exempt and nonexempt personnel. These terms stem from federal and state minimum wage and overtime regulations that specifically define the legal requirements that must be adhered to if you wish to exclude a category of employees from overtime pay.
Exempt personnel are those employees to whom, under Section 13(a)(1) of the federal minimum wage law, you are not required to pay overtime. According to the law, any employee employed in a bona fide executive, administrative, or professional capacity is considered exempt from both minimum wage and the overtime provisions of the law. We therefore say that these employees are exempt from overtime pay. Employees must meet several requirements or tests for exemption that are outlined in the law before exemption is presumed. Modifications are periodically made in the specific terms and conditions for exempt status. We suggest, therefore, that you check with the nearest Office of the Wage Hour Division for the most current information on specific exemptions. Nonexempt personnel are those employees who must be paid overtime according to the overtime provisions of the Fair Labor Standards Act. We say then that these employees are nonexempt from overtime pay.
The government agency responsible for the regulations regarding overtime is the Department of Labor. Hospitality organizations, as well as others, sometimes have difficulty making the distinction between exempt and nonexempt employees due to the complexity of the overtime regulations. This can lead to violations in the law, oftentimes, unknowingly. In 1998 alone, the United States Department of Labor investigations show, business paid $120 million in back wages and penalties for overtime violations. These violations involved more than 173,000 employees. (1)
In 1995 the Employment Policy Foundation estimated that the liability for back pay for each 1 percent of the white-collar work force that was found to be incorrectly classified as nonexempt rather than exempt would be $1.9 billion! (2) Table 10-1 identifies the breakdown, by industry, of the percentage of employees who work overtime.
As you can see in Table 10-1, the services industry has the second largest percentage of overtime workers. If employees are eligible for overtime pay and they are incorrectly categorized as exempt, those employees are liable for back pay, overtime pay, and in some cases, punitive damages. It is important that you, as the manager with human resources responsibilities, understand the definitions for exempt employees and how those definitions apply specifically to your situation. It is up to you to contact the Wage and Hour Division of the Employment Standards Administration of the U.S. Department of Labor. A list of district offices, phone and fax numbers can be found at: www.dol.gov/dol/esa/public/contacts/whd/ american2.htm.
INDUSTRY EXPERTS SPEAK "The terms wage and salary are not used operatively in the industry. Rather, the term salary is used to cover all compensation plans. Most companies do not like to make an obvious distinction between wage and salaried employees. Only in salary or wage structure and how they are paid (i.e., hourly, semiweekly, weekly) is this distinction used. Operationally, wages and salaries are the same and mean the same," according to Richard Ysmael, Foodworks Management Services, Motorola Inc.
CONSIDERATIONS IN DEVELOPING A COMPENSATION PLAN
The compensation plan for your hospitality organization must fit into the overall human resources business plan. As is true in the development of any human resources plan, the place to begin is with the objectives. What are the objectives of your compensation plan? These stem directly from the mission statement of the hospitality enterprise and the organization's or unit's business and financial goals. You also need to take into consideration the role that compensation plays in your total rewards system (Figure 10-1).
Think for a moment about what you feel might be some possible objectives for a good compensation plan. Job satisfaction on the part of your employees would be one objective, as would a reduction in grievances, a fair pay structure, a system rewarding seniority, and a plan that will attract job candidates to your hospitality organization. Each of these objectives could be the basis of a compensation policy or procedure. The point we are trying to make is that the objectives of your compensation plan are unique to the mission and goals of your operation.
Now answer another question. From management's viewpoint, what do you feel is the most important consideration in the internal pay structure of your hospitality company? As a manager with human resources responsibilities you will be expected to assist in the control of labor costs. Sound management practices require that you pay competitively, but not excessively.
If you pay excessive wages and salaries, you may be assured of enough labor, but your labor costs would skyrocket. The amount of discretion you will have in determining the compensation plan for your particular hospitality operation will be determined not only by external job factors, but internal factors as well.
What do you think your employees will feel is the most important characteristic of the compensation plan you develop? If your answer is that it be equitable or fair, you are absolutely correct! There is no way you can prevent your employees from comparing the compensation they earn with that of others. And not only will this comparison be among employees in your operation, but with other operations as well (Figure 10-2). Think for a moment about the period of time when you will be interviewing on your campus for your first postgraduation job. We guarantee that you will know the starting salaries for most of the companies interviewing on campus whether you personally interviewed with them or not. And part of the decision-making process that each of you will use in determining which job to accept will include a comparison, and ultimately a determination, of whether the salary being offered to you is equitable. If you do not feel an offer is fair, you will not accept that offer.
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There is nothing that can destroy the morale of a group of employees faster than the belief that the pay structure is inequitable. That belief will occur if your employees feel that they are doing the same work (or more) as another who is getting paid more money. Skilled employees may feel that the quality of their work is higher than that of another worker, and that the pay structure has not taken their talents and experience into consideration. If this attitude of inequity persists, it will permeate your operation, and low morale along with higher turnover may be the result. Table 10-2 identifies the outcomes of a sound compensation plan in the hospitality industry.
One of the considerations that you need to take into account in the development of a compensation plan is that of equity. An external consideration that you must take into account involves the pool of available labor for each skill level that your hospitality enterprise requires. How much competition is there for the available labor supply? The low levels of unemployment in some market areas means that established pay rates must be competitive for recruitment and selection procedures to be effective. How attractive are your job openings as compared to the restaurant, hotel, or catering operation down the street from your property?
A related external consideration is how your hospitality company or organization is viewed as an employer. Do you have a reputation as a low-wage company? Pay must be set high enough to attract the people you need and still allow the company an opportunity to meet its labor expense budgets. Although the rate of pay is very important in attracting and retaining employees, do not forget that it must be considered as part of the total reward system, which also includes benefits, ability for advancement, and quality of the work environment. A planned process for individual growth and career development through promotions becomes an integrated component of a sound rewards system.
Internal considerations in the development of an equitable compensation plan include any collective bargaining agreements that might be in existence, whether you establish a single rate of pay or a range of rates for each job, if and how cost of living adjustments (COLA) will be maintained, and if and how seniority will be rewarded. The needs and expectations of your employees in "the next chapter" will be dynamic rather than static. A compensation plan should stimulate your people to work for pay increases through improved performance. Later in this chapter we further discuss the pay-for-performance compensation strategy.
In the hospitality industry, the largest single cost factor is that of wages and salaries. Both management and nonmanagement employees have a vested interest in assuring equitable compensation policies and procedures. To have a uniform centralized compensation plan is simply good human resources management.
There is no single approach to determining appropriate wages and salaries. Decisions now need to be made regarding how much you are going to pay your employees. These decisions must take into account both your management philosophy of compensation and the internal and external considerations discussed previously. What other factors are important in wage and salary determination for the hospitality industry? How do you decide how much to pay? For those of you who will be entering existing hospitality operations, how will you find out whether you are paying appropriate wages? Why is it necessary to establish a wage and salary scale?
An established wage and salary structure will assist you with labor cost containment and the administration of the compensation plan. Actually, you have already collected the information you need to begin the process of wage and salary determination. The job analysis provided us with information concerning job content that we then used to write job descriptions and job specifications. In a job evaluation this information is used to categorize the jobs and establish a job hierarchy.
The process of job evaluation examines the internal pay relationship within an organization. We define job evaluation as a systematic process that assesses the relationships that exist among job positions within a hospitality organization to provide a set of criteria for differentiating jobs for the purpose of wage determination. It helps establish which jobs should be paid more within the hospitality organization. Job evaluation assists you in maintaining internal equity in the pay rates among jobs.
In the job analysis process, we did not analyze the employee's performance level, but rather the duties and responsibilities associated with each job in your hospitality operation. So it is with job evaluation, the job analysis information assists you, the manager with human resources responsibilities, in grading the jobs by job families so that a pay rate can be assigned to each job grade level. In some hospitality organizations wage or salary ranges are used instead of one rate per job grade. At this stage, however, we are not attempting to determine what an employee's actual amount of pay should be within that range.
The amount of money, before deductions, which is paid to an employee to perform a specific job is known as the base pay of that job. Earlier, we discussed one of the external considerations in developing a compensation plan, your competition. To ensure the competitiveness of your compensation structure, external surveys are conducted. Local area compensation surveys provide you with information concerning pay rates for the specific segment of the hospitality industry that is of concern to you. These data give you the ability to determine the competitive position of your pay rates in comparison to the level of compensation provided by other companies for comparable jobs.
In order to attract and retain the people your operation needs, it is important to know what other companies pay for comparable jobs. If your pay structure is too low, employee dissatisfaction may result in high turnover, excessive recruitment efforts, and high orientation and training costs. To maximize the benefits from a compensation survey, you must determine first if your operations are really comparable to the operation in the survey. This includes an examination of the duties the employees perform. If dishwashers are being paid $8.00/hour, you need to find out what their job descriptions require. A second consideration is an evaluation of the total reward system, including the benefit packages of your competitors. Your hospitality operation might be effective in attracting and retaining employees as a result of the benefits package you offer, even though your wage and salary levels are somewhat lower.
Hospitality operations should be viewed by you as competitive if: m They are geographically close (although management jobs are competitive on a national basis)
* They provide similar products and/or services
* They draw employees away from your operation
The first step toward determining the value of each job is job grading. Once the job descriptions have been written, the jobs can be compared and evaluated against each other. Job grading can be defined as a method of establishing a job hierarchy through a comparison of job content. To do this, the jobs are categorized in terms of compensable factors obtained from the job analysis: the skill level required, job responsibilities, efforts, working conditions, and job requirements such as educational background and prior work experience. These compensable factors enable you to rank jobs by placing one job at a higher level or grade than another job in the hierarchy.
The judgments made by you and your management team determine which compensable factor(s) place a job at a higher point on the hierarchy scale (Figure 10-3). The philosophy, mission statement, and organizational goals also influence which factors are weighted more than others. It is important to recognize that there is no one set of factors, but rather a group of factors that vary in their individual importance relative to their contribution to the overall success of your particular operation. As the mission statements of each hospitality enterprise vary, so does the importance of the various compensable factors that are used to rank the jobs within the enterprise. If you can distinguish between the important and unimportant aspects of a job, the result is a means by which jobs within your hospitality organization can be compared.
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Let's use a job description for a line server and identify what the relevant compensable factors would be for a food service operation. We believe that those would be: Skill Level/Job Requirements
--Knowledge of materials and processes
--Judgment and initiative
--Time required to learn the job
--Methods and procedures
--Contact with guests
--Supervision of others
--System to master
--Danger from equipment
Remember, our evaluation process involves the job of a food service worker, not any one particular individual that is performing that job. For each of our compensable factors we need to determine a standard scale. Let's look at two of the compensation factors under skill level and see how this would be applied.
Education: No high school diploma 5 points High school diploma 15 points Some college education 20 points Bachelor's degree 25 points Master's degree 30 points Time required to learn the job: 0-1 week 5 points 2-3 weeks 10 points 4-8 weeks 15 points 9-26 weeks 20 points 27-52 weeks 25 points 1-2 years 30 points
Our job of food service worker requires a high school diploma, equal to 15 points, and 2-3 weeks to learn the job, which equals 10 points. This accumulation of points needs to be done for each of the other compensable factors so that we have a total number of points for the food service worker job in our food service operation.
Hospitality organizations frequently use the job-classification method of job evaluation that classifies jobs into a number of grades. These grades then become the basis of compensation administration. After the jobs are quantified according to the compensable factors we just discussed, each job in the organization is classified into a grade level. The result is job clusters or families, each with its own grade level number that remains consistent throughout the organization.
Statistical analysis procedures can be used for the purpose of job grading. Once a system is established, historical data from your hospitality operation can be used to update your job grades as operational changes cause job descriptions to be modified. With the aid of a computer, statistical techniques remove some of the subjectivity associated with traditional job grading methods and, hence, better assure equitable internal pay relationships among jobs. And as we discuss later, equity is critical in improving human relations and for using compensation as a motivational tool in human resources management.
The next step in job evaluation (after job grading) is job pricing. We define job pricing as a method of setting the range of pay or rate of pay for each job grade. Decisions now need to be made to determine what your organization is willing to pay for each grade level. How much a job is worth is determined by several variables. These include the job information you have gathered through your job grading process, the external labor market data collected in your local compensation surveys, and any collective bargaining agreements that your hospitality organization may be guided by. You are now faced with the task of establishing wages and salaries alluring enough to attract quality people and simultaneously assuring them of a fair internal pay structure in order to maximize retention.
What do you need to take into consideration when you determine the pay differences within your hospitality operation? What considerations are those based upon? The determination of pay differences is a human resources management decision. One of your decisions includes where you want to be with respect to your local pay structure. Do you want to pay wages and salaries that are higher than your competition to attract employees away from your competitors? What type of a public relations image do you want to portray with respect to compensation? The competitiveness of the market, the quality of the employees available, and what your need is for quality people in your hospitality operation form the basis for determining starting wage and salary rates (Figure 10-4). These decisions all must take into account the effect of any collective bargaining agreements, along with a thorough understanding of the legal issues and laws pertaining to compensation administration.
In the hospitality industry the type of people we hire is as important to the success of our operation as the work that they perform. Table 10-3 identifies some of the people characteristics that may affect the level or amount of wages you decide to pay particular individuals. In particular, our industry has recognized the commitment of its people to the organization and hospitality industry at large. This is reflected in compensation plans that reward previous industry experience and length of service. Hospitality has been an industry proud to take care of its own and provide opportunities for advancement and career growth.
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As job applicants continue to be scarce, your compensation plans will need to be innovative in providing for the long-term needs of your people. In the hospitality industry, the pay structures reflect the organization's belief that when an individual is hired, consideration should be given to what the long-term abilities and contributions of that individual will be to the operation, rather than what he or she can actually do on the day that the individual is hired.
What other traditions exist in the hospitality industry with respect to wage and salary differences? One factor may be the particular segment of the hospitality industry you will be working in. Another difference relates to the specific department your employees are in. And within departments there are the differences that we have already discussed that exist among the jobs themselves. And even among the employees working in the same job, pay differences exist based upon the individual's length of service with the industry, with the company, the employee's personal performance record, working conditions, and whether the company is unionized. Perhaps the "graveyard" front desk shift is paid higher than the more desirable daytime shifts. Or the night server in a 24-hour restaurant might be paid higher wages to compensate for fewer tips and a less desirable working environment.
As you have learned in this discussion, compensation plans and policies are heavily dependent upon the job analysis and job descriptions developed in Chapter 3. Providing both external and internal equity in your wage and salary structure is a vital component of your job as human resources manager. If your wage and salary structure is to be accepted, the results of your job evaluation process must be clearly communicated to employees at all levels of your hospitality enterprise. Equally important is the fair administration of the compensation program.
EFFECTS OF COLLECTIVE BARGAINING
A trade union operation requires that you, as the human resources manager, be fully aware of all collective bargaining agreements. The conditions pertaining to wage determination, increases, and incentive-type programs are as a general rule very specific. It is your responsibility to conduct all compensation planning within the framework that is established by those agreements.
Because one of the union's major concerns is with the equity of your pay structure, representatives will sometimes be willing to assist in the job evaluation process. Several conditions that might encourage employee interest in unions are tied to compensation. These include unequitable wages, wages that are inappropriate for the work performed, employees feeling that there is no flexibility or incentives in their wage earning capabilities, inadequate benefits, and employees who feel that they are not recognized for their performance on the job. This profile of compensation-related conditions shows again the importance and value of sound compensation decision making.
TIPPING OR SERVICE CHARGES?
The compensation our staff receives from tips is a long-standing tradition in our industry in the United States. Servers are paid less than the minimum wage standards required by the Fair Labor Standards Act (FLSA) because the difference is compensated by tips received. A tip is a gratuity given by a customer to an employee. This is quite different from the hospitality industry in many European countries where it is not unusual for an automatic service charge to be added to your bill. A service charge is an amount added to a customer's check by the employer. The amount is usually a fixed percentage of the check total.
Proponents of the service charge system argue that for too long our industry has permitted our customers to compensate the waitstaff instead of paying them their fair wages (Figure 10-5). It is true that no other service industry historically has relied on tipping to compensate its employees. While the theory of tips is that they are to serve as a reward for good service, they have long lost this attribute as customers routinely leave tips with little or no regard to the quality of the service received.
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According to the law, when hospitality organizations institute a service charge system into their hospitality operations, that money is considered part of the operation's gross receipts. As such, it can be used by the employer to pay any business expense, including paying waitstaff the full minimum wage. The argument in favor of the service charge system states that if we want to treat our employees as professionals, then it is time we start compensating them professional wages.
A tip, according to the 1959 definition provided by the Internal Revenue Service, must be solely at the discretion of the customer. Furthermore, the customer must have the right to determine the amount of the tip and to whom the tip shall go. None of these factors can be determined by company policy. Those in favor of retaining the tipping system believe that the system does reward, with the highest gratuities, those employees who provide the best service. As such, the system of tipping serves to motivate the staff to sell more products and provide better service.
In hospitality operations using the tipping system, the division of gratuities among employees varies from company to company and from operation to operation. Some properties permit the employees who received the gratuity to keep all of it; some company policies require a pooling and division of all gratuities at the end of a designated shift. Even the procedures for dividing the gratuities vary. These policies are legal, provided that the tipped employee is not required to share tips with employees who do not regularly and customarily participate in tip-pooling arrangements such as chefs and dishwashers.
The decisions that you make with regard to the policies and procedures for handling gratuities in your hospitality operation reflect your own philosophy as a manager with human resources responsibilities. It is important for you to recognize that the policies you establish will become an integral part of your overall compensation plan.
The hospitality industry has historically not been known for its high rates of pay. Some of that reputation stems from undesirable working conditions in the form of late hours, weekends, and holidays. Let's face it, we have each selected a career in an industry that works its hardest when others are at play. To maintain a competitive edge with other service industries that are competing for the same people, your compensation rates must be periodically reviewed. Does the company you work for, or own, want to be viewed as a good employer? The community's perception of your operation and the hospitality industry as an employer is largely reflected in the compensation policies and procedures you develop.
COMPENSATION AS A MOTIVATIONAL TOOL?
Do you believe that money is a motivator for the people who report to you? Can wages be effective as motivational tools? Would you still work if you did not need the monetary rewards? In the United States, historically, most individuals would answer yes to that question. (3) So, if money is not the main reason you go to work, what does motivate you? Each of you undoubtedly came up with a somewhat different answer to that question, which is why a discussion on theory of pay as a motivational tool can become so complex. Once the basic individual needs in each of us is met, there is no single source of satisfaction that will motivate all of us.
The ability to understand why people behave as they do and the ability to motivate them to behave in a specific manner are two interrelated managerial qualities that are essential for effective human resources management. The process of goal setting can be directly related to motivational theories. Goal setting emphasizes the importance of investing an individual's mental and physical resources in the areas that have the highest potential for payoff. Therefore, the more clearly a goal and its rewards are visualized, the greater its motivational pull. This is equally true for all employees, regardless of where they fall in the job hierarchy.
The basic premise in our discussion of pay as a motivator is that your compensation plan does satisfy the employee's basic needs of food, shelter, and clothing that Maslow identifies in his Needs Hierarchy. When those needs are not met, pay becomes, according to Hertzberg, a dissatisfier in the workplace. Hertzberg's theory states that pay is not a motivational factor, but rather a hygiene or maintenance factor. According to these theories on motivation and others found in literature, the motivational value of money may change after a person's basic needs have been satisfied. Because human beings have a way of continually redefining their needs, whether money will motivate is to some degree a matter of the amount of pay involved and the amount of pay the employee is already earning. Therefore, whereas some people will be highly motivated to work for money, other compensatory factors, such as recognition for seniority, might be more motivational for other employees in our hospitality operations.
In traditional compensation plans, using the job evaluation technique discussed previously, equal job positions are usually slotted in the same pay range or grade. In such systems, job grade level and the assignment of an employee to that job are the basis for pay determination. The determinant of pay was established by the labor market and what the job was worth compared to all other jobs in the hospitality enterprise. In "the next chapter" you will be faced with a number of alternatives to this traditional way of thinking about compensation planning. The concept of pay-for-performance includes a variety of individual and group incentive plans such as gain sharing, commissions, bonuses, profit sharing, and employee stock ownership plans, which are some innovative compensation plans being used by other industries. The hospitality industry is now turning towards some of these ideas. Let's examine some of the key elements in each of these concepts.
Some of the long-standing customs regarding pay structures in the hospitality industry will be changing as employees continue to become increasingly scarce. Historically, wage rates were structured to reward the employees with the highest skill levels with the higher wages. Oftentimes, the level of skill required by the job was determined to be more important (i.e., higher wage) than the contribution of the particular job to the achievement of the operation's objectives. In "the next chapter," there will be less disparity in compensation among unskilled, semiskilled, and skilled employees. More important than level of skill will be the level of the performance.
To motivate and retain our valuable employees, hospitality organizations are trying to develop methods of determining who should be and who should not be rewarded. Many of these programs are founded upon the idea of basing rewards on the level of performance each person obtains along with the value of that performance level to the overall success of the hospitality enterprise. Those that contribute the most to the achievement of the organizational goals and operational objectives are compensated with the largest reward Figure 10-6). Those who do not make a significant contribution to the organization's success receive a proportionately lesser reward.
It is in pay-for-performance compensation plans that pay has its greatest influence as a motivator. People usually like to know what they can expect in return for their level of performance. In such a system, the staff knows what to expect regarding the level of effort that they must achieve in order to receive a desired outcome or reward. Rewards serve to motivate performance by satisfying the needs of our employee's that relate to work.
For compensation to be effective as a motivator, your employees must believe that good performance will lead to greater pay, and at the same time, that minimal performance levels will not be rewarded. Too often in traditional compensation plans, the employees perceive that no one recognizes extra effort and that even marginal performance levels will receive the same percentage pay increases each year. This will depend upon your merit budget and whether or not management can distinguish between good and bad performance and reward as such.
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A pay-for-performance system is based upon established performance goals that are designed to be challenging, but obtainable. Here, risk taking is encouraged through a nonpunitive appraisal process that is based upon both quantitative and qualitative performance measures. This approach tends to foster both creativity and team spirit among your people. In addition, such programs have been found to increase productivity levels. Although it is appealing to most people to believe that their pay is tied directly to their performance, there can be problems in implementing pay-for-performance plans. The major obstacle for most hospitality organizations, especially those with several decentralized levels of management, is the difficulty in accurately and objectively linking pay levels to performance. In addition, pay-for-performance plans must be clearly communicated to your employees, or those plans lose their effectiveness.
Let's now look at a few of the compensation plans that take into account job performance and see how each of them differs in its approach to basing pay on the measurable achievements of employees.
Individual and Group Incentive Pay Programs
Incentive plans relate increases in compensation to increases in performance based upon a set of established performance criteria or standards in an endeavor to directly reward above-average performance. Standards might be based upon amount of time saved, sales volume generated, breakage reduction in glassware and china, improved customer service, or improved safety records. In hospitality production operations, such as in-flight feeding kitchens, a piece-rate plan can be established.
For an incentive program to be effective, it must be based on performance only, and there must be a clear relationship between what your employees do and what they receive for doing it. Everyone likes to get rewarded for a job well done. This behavior pattern begins when you are a small child. You quickly learned that when you did something right, you received a reward in the form of a cookie, hug, or praise. The reward followed the performance immediately.
A growing number of hospitality companies are taking a new look at their compensation programs to see how they can better utilize incentive plans in their total rewards system. In a study conducted in the late 1990s it was found that between 40 and 70 percent of major corporations had some type of incentive plan in place as part of their compensation program. (4) These plans need to be clearly thought out. The basic idea behind incentives is that people will perform in ways that get rewarded and will not perform in ways that will not get rewarded. It is important, therefore, to make sure that the incentives you develop tie back into your strategic human resources plans and business results.
Individual incentive programs have been found to have a greater motivational effect on performance than do group incentive programs. This is due to the fact that in group incentive programs the reward is tied to the performance of the group rather than individual efforts. The larger the group, the less motivational the incentive program becomes. Group incentive programs aid in the development of cooperation and teamwork within your hospitality organization. The pros and cons of individual versus group incentive programs will need to be carefully weighed in light of your organization's goals.
There are a great variety of incentive plans that you might want to consider implementing in your hospitality organization. These might include contests, achievement/recognition awards (good safety records), gifts, prizes, merchandise, travel incentives (least glassware broken over a specified period of time), earned time off, commissions or bonuses, profit sharing, gain sharing, and employee stock ownership plans. We now briefly discuss a few of these options with which you may not be familiar.
Commission plans relate pay directly to the amount of sales generated. On a straight commission plan, your employees must sell or they will receive no compensation. In the hospitality industry, a modification of the traditional commission plan can be used to relate rewards to performance. For example, your waitstaff could receive a percentage of the total wine sales or dessert sales they generate over a specified period of time. We just need to expand our thinking to include a greater number of employees who can be called sales persons.
Bonus plans or lump sums are offered on a periodic basis to employees who achieve a high level of performance. It is important that this level of performance is measurable and that the performance goal is agreed upon by both the employer and employee. These may be used in the hospitality industry instead of the annual raise used in traditional compensation planning. The message given by awarding bonuses is much different from the message given by annual pay raises. Pay raises are expected by each of your employees, independent of the level of performance they have maintained throughout the year. Bonuses, given for the achievement of specific performance levels, indicate to your people that mediocrity will not be accepted in your hospitality organization. This has the effect of reducing the friction that is created by across-the-board increases. These increases actually penalize your high performers and create burnout and frustration when their contributions to the organization's success go unnoticed. Bonuses allow the outstanding employee to maximize his or her earnings, while the earnings of nonperformers are static.
Profit sharing is a program in which employees receive a portion of the hospitality company's profit at the end of the year. If profits are raised through the contributions of all employees, then all share in the rewards. The distribution of these profits may be deferred until the employee retires, or they may be distributed annually. The motivational factor behind profit sharing is that the employees will become more conscious of the effect their performance has on the bottom line, and, therefore, will be motivated to work toward the success of the hospitality organization. For this to occur, your people need to be made aware of how their individual performance can affect profits.
Gain sharing is a more sophisticated approach to profit sharing that is used as a group rather than as an individual incentive plan. Gain sharing distributes a portion of the company's profit based upon the contributions of specific employee groups to specific stated objectives. The implementation of gain sharing can contribute to a team-building atmosphere within the hospitality organization.
Employee Stock Ownership Plans
Employee stock ownership plans (ESOP) are offered to employees by a number of corporations such as Marriott and Motorola. An employee stock ownership plan gives employees the option to buy stock in the company that they work for. The specific guidelines for stock purchase vary from company to company. The idea behind ESOP is that they give your employees a chance for ownership in the company, thereby improving performance levels, increasing loyalty, and assisting in the development of a sense of teamwork.
The idea of paying for an individual's contribution to the hospitality organization rather than merely for his or her length of service is the heart of the pay-for-performance compensation system. This system is most effective when improved efforts can be related directly to improved performance. Although care must be taken in developing objective performance standards, the hospitality work environment provides numerous occasions for this system to be successfully applied. The motivational effects of these plans--improved morale and better communications--are all advantages in a well-administered and well-implemented system. They also become important tools in our continuing efforts to attract and retain our people.
Incentive programs have been created in an effort to motivate our people to reach new heights in production and efficiency in service. Incentive programs alone, however, do not make our people high achievers. In order to be effective, these programs have to be clearly communicated so that all people affected understand the opportunities the programs provide for their financial advancement (Figure 10-7). Do your employees know what performance is rewarded by additional pay? Incentive programs are most successful when the employee can readily see the relationship between what he or she does and the reward he or she receives. Whatever incentive program you select to implement, it must be administered accurately, with the performance levels being measured objectively to maintain the equity of your compensation plan.
[FIGURE 10-7 OMITTED]
LEGAL ISSUES IN COMPENSATION ADMINISTRATION
The decision-making process you use in compensation planning is closely governed by federal and state regulations. It is up to you to investigate the appropriate state laws that apply where your hospitality operation(s) is or are located; here we discuss the federal legislation that affects compensation decision-making.
Fair Labor Standards Act
The Fair Labor Standards Act (FLSA) is a broad federal statute that includes information and regulations on the following compensatory areas:
* Federal minimum wage law
* Employee meals and meals credit
* Equal pay
* Child labor
* Tip, tip credits, and tip-pooling procedures
* Uniform and uniform maintenance
* Exempt versus nonexempt employees
This act was first passed in 1938 and has been amended several times for the purpose of raising the minimum wage rates and expanding the groups of employees covered under the act. As of this writing, employees covered by this act are entitled to receive a minimum wage of $5.15 per hour and overtime pay at a rate that is not less than one and one-half times the regular rate of pay for any hours worked over 40 in a workweek. Minimum wage exceptions are granted in a variety of specific situations, including circumstances relating to tipped employees. The act is enforced by the Department of Labor, which maintains regional offices of the Wage and Hour Division throughout the country. It is our recommendation that any specific questions you may have concerning your hospitality operations' compensation plans be addressed directly to their closest office.
Compensatory time is a spin-off of the FLSA provision regarding overtime. The use of compensatory time practices has been common in the hospitality industry, where the nature of the business requires shifts longer than 8 hours and some weeks longer than 40 hours. "Comp time" is then given to these employees instead of overtime pay. Generally, this is practiced on a voluntary basis. For example, the food service operation you are working in is busier than usual on a Saturday afternoon, and you ask one of your waitstaff to work a double shift. If the person agrees to work the double shift, you promise him or her an extra day off next week. Even though the double shift will put that employee over a 40-hour work week, you compensate by giving the individual an extra day off the following week.
The problem with this situation is that according to the Fair Labor Standards Act, you are in violation of not paying overtime. The extra hours your waitstaff employee worked in the first week cannot be offset by reduced work hours in the second week. Doing so is a dangerous practice. If an employee reports such policies to the Wage and Hour Division of the Department of Labor, you will be required to pay overtime rates (1.5 times the hourly rate of pay) for all hours worked over 40 in one week. (These regulations are different in California.) Overtime, however, is not paid on hours worked over eight in a given day.
The FLSA rules regarding compensatory time off are very specific. You must be sure to check with a legal advisor to make sure that your policies are in keeping with the requirements of the law.
Equal Pay Act of 1963
The Equal Pay Act was passed to prohibit companies from paying wage and salary differentials on the basis of sex. Jobs that require the same skill level, effort, responsibility, and working conditions must be paid at the same rate of compensation. (5) Seniority systems and merit or pay-for-performance systems can legally result in differentiated pay scales even though skills and responsibilities are the same. All employers who are governed by the FLSA are also covered by the provisions in the Equal Pay Act (EPA). The EPA is enforced by the Equal Employment Opportunity Commission (EEOC) (Table 10-4). Even though the EPA stipulates that pay rates must not discriminate between sexes, a pay differential still exists between the sexes.
In the early 1960s, the cry was one of "equal pay for equal work." The passing of the Equal Pay Act in 1963 and a year later of the Civil Rights Act was a response to the discriminatory practices that existed at that time in the United Sates. The hospitality industry, which historically has been dominated by white male employees, was no exception. During the 1980s, the slogan changed to "equal pay for comparable worth" and while still not covered by any laws, it continues to be a hotly debated issue. The proponents of comparable worth feel that jobs should receive the same rate of pay if they contribute equally to the success of the organization. Jobs of equal value are said to be of comparable worth to the organization.
The Civil Rights Act of 1964
The Civil Rights Act of 1964 contains Titles I through VII. Title VII, which established the Equal Employment Opportunity Commission (EEOC), deals with a number of compensation-related elements. Title VII makes it unlawful for an employer to discriminate with respect to hiring, compensation, conditions, privileges, or terms of employment "on the basis of race, color, creed, sex, or national origin."
Executive Order 11246
Although Executive Order 11246 is not a piece of legislation, it is an order issued in 1965 under President Lyndon Johnson. This order established affirmative action programs for all employers covered by the order (government contractors and subcontractors with ten or more employees and $10,000 in contracts). Employers who meet these criteria are subject to review by the Office of Federal Contract Compliance Programs (OFCCP), and, if found guilty of compensation discrimination, are subject to paying back wages with interest.
Age Discrimination Act of 1967
Just as Title VII prohibits discrimination on the basis of race, color, creed, sex, or national origin, the Age Discrimination Act of 1967 prohibits discriminatory employment practices on the basis of age for those individuals between the ages of 40 and 69. The EEOC is the agency that administers this act. An amendment to this act in 1978 raised the age limit of mandatory retirement programs from 65 to 70. For hospitality organizations with a senior and, therefore, more highly compensated group of human resources, labor costs will be impacted.
There are many legal constraints imposed upon hospitality companies by the legislation already discussed. In addition is the Social Security Act of 1935 that requires employers' as well as employee contributions to the plan. Typically these funds must be paid at least quarterly.
[FIGURE 10-8 OMITTED]
State legislation should be thoroughly investigated for all states where you have a responsibility toward a hospitality operation. Worker compensation, unemployment insurance laws, discrimination laws, and even minimum wage standards could differ significantly from what federal legislation requires.
TRENDS IN COMPENSATION PLANNING
Compensation planning has become one of the key human resources functions (Figure 10-8). Approaches and methods are becoming innovative tools to assist you in attracting and then retaining the people you need at all levels in your hospitality organization. We have identified five of the trends that you should keep informed of as you enter the hospitality industry.
1. Your employees are no longer willing to sacrifice leisure time for extensive overtime hours. This relates directly to the issue of work-family, which we discuss at length in Chapter 11.
2. To accommodate the changes in attitude and demographics, your compensation plan will need to be flexible as opposed to rigid.
3. As pay becomes more closely related to an individual's performance level and/or contribution to the hospitality enterprise, tools to measure performance standards and contribution levels will become more reliable and more widely available. The increasing use of computers in the workplace, to handle data, will assist in the progression.
4. As the hospitality industry becomes more global and as individual companies expand their markets across the United States, compensation plans will need to become more considerate of the global, as opposed to the national, rate of pay.
5. The changes in compensation programs will increase the likelihood of hourly employees making more money than their supervisors. A watchful eye will need to be kept on the effect this occurrence will have on the traditional subordinate-supervisor relationships as the number of pay levels included in the compensation plan are reduced.
COMPENSATION ADMINISTRATION IN THE HOSPITALITY INDUSTRY
The success of a compensation plan lies in its credibility and how well it is maintained as both the hospitality enterprise and hospitality industry changes and grows. So far in this chapter, you have succeeded in developing an equitable plan, one that is based upon well-written job descriptions. All your compensation policies should be formalized into a written manual and made available to all employees. Once, however, this has been accomplished, it does not mean that you can forget about the compensation component of your total reward system. On the contrary, all elements of your reward system need constant attention in order to maintain their effectiveness in attracting and retaining the best people available.
If your compensation plan, along with the bonus, merit pay, and other incentive programs you have established in your hospitality operation are to be effective as motivational devices, they must be constantly communicated as such to your employees. Once your employees have been hired and have fallen into the job routine, they will need to be reminded of the opportunities that your compensation package provides for them. Promote the rewards that are offered and give your employees time to think about the incentives they are working toward.
Once an employee has earned a reward, take an opportunity to issue the reward where other employees can honor the recipient. Not only does this give the employee receiving the reward a chance to be recognized for his or her contribution, but it also allows the other workers to be reminded that rewards are obtainable for them as well.
The degree of autonomy you will have in compensation decision making will depend on the size of the hospitality organization you are working in. In large organizations, there will be a compensation department with staff personnel whose job is to administer the compensation plan. In very large organizations, these departments will include individuals who are experts in compensation. These compensation professionals may or may not have worked in a hospitality enterprise previously, but rather have developed competencies in the areas of compensation, benefits, pension plans, job analysis, and incentive pay systems. In these large hospitality companies the compensation professionals work with the line managers to obtain the compensation objectives of the hospitality enterprise.
In smaller hospitality organizations, compensation administration and decision making rests with the general manager of the food service or lodging operation. This would include decisions in the job evaluation process that we discussed earlier in this chapter, as well as decisions regarding changes in any of the established pricing structures. Compensation surveys should be conducted periodically (we suggest no less frequently than once a year, although significant changes in the local labor market may require more frequent review) to ensure that your hospitality organization's pay structure remains competitive. If it does not, you will find yourself losing some of your most valuable employees over pay differentials to neighboring hospitality operations. COLA, or cost of living adjustments, are provided for by some hospitality organizations to counter the effects of inflation in our economy.
As your hospitality organization is dynamic, not static, it grows larger, or perhaps even smaller in size. The jobs within your operation are similarly altered. Job re-evaluation must be conducted to take into consideration the changes that will be reflected in the job descriptions. None of the human resources management tools that we have described to you is firmly fixed in cement, never to be changed.
Maintaining the accuracy of the job descriptions is one of the most useful functions performed by a human resources manager. New jobs are likely to be created that will require evaluation, and efforts will need to be made to ensure the continued equity of your compensation plan.
As changes in the wage and salary structure influence both human resources development and recruitment, the administration of compensation is a vital human resources activity. As employees become scarce commodities in the service sector, keeping pay levels competitive will be a major challenge you face in "the next chapter."
Compensation development, implementation, and administration in hospitality organizations are vital human resources management activities. The satisfaction of your work force and, in essence, the success or failure of the operation, is heavily dependent upon an equitable compensation plan that both attracts and retains the caliber of people required by the mission statement of the hospitality enterprise. In "the next chapter," the continuing changes in the labor market will play a large role in determining the relationship between job hierarchy and pay structure. Pay is still used to satisfy our basic physical needs, but also assists us in recognizing our star performers and permits us the ability to give our employees a sense of accomplishment, no matter what job they perform for us in the hospitality operation. It is very difficult for a hospitality organization to keep all of its employees happy and satisfied, which is why it is so important that your selection of rewards is targeted at satisfying the needs of your employees. Of all the rewards an organization can offer to its employees, the wages and salaries are the most visible.
If you were to develop the ideal compensation plan for your hospitality organization, what would you want to provide?
* Competitive pay rates that would attract qualified, competent people.
* A reward for longevity with your company that would encourage retention among the employees.
* A promotional incentive that would motivate your people to seek the opportunities your hospitality organization has to offer.
* A reward for quality work to show all employees that your organization strives for excellence in the goods and services it provides.
* An equitable system that all employees view as fair.
* Procedures that permit a uniform approach to compensation changes that seek to maintain the integrity of the reward system.
* An effective method for controlling compensation costs. This, in effect, is based upon your organization's ability to pay.
Let's now turn our attention to compensation's partner in the reward system: benefits.
CASE PROBLEM 10-1 You are the human resources manager of a 90-room, nonunionized hotel located in South Carolina. The property has a limited-menu, coffee-shop-type restaurant with no alcoholic beverage service. There is one other hotel property in your geographic area that is close enough to compete with you for both guests and employees. The labor market in the area is very tight, with unemployment at a low 5.7 percent. The lowest wage you pay to your hourly employees is $7.70 per hour. No one in the area will work for any less. Historically, you have never linked compensation directly to performance appraisals or productivity levels. You believe with the current labor market situation that a pay-for-performance compensation plan (for nonexempt employees) would be beneficial. The general manager, however, is less than enthusiastic. She feels that you will encounter a number of difficulties in switching to a pay-for-performance plan and that the problems will outweigh the benefits. How will you convince the general manager that a pay-for-performance plan will be of benefit? Anticipate what concerns she may have, identify them, and develop solutions for each of them. Prepare a two-page transition plan to present to the general manager for the short-term implementation of a pay-for-performance system. Make sure that your plan addresses any potential concerns your employees may have. CASE PROBLEM 10-2 You are a strong advocate of adding a service charge to every guest check. You feel that tipping is not an effective method of compensation for service employees. You are the food-and-beverage manager of a 300-seat dinner house. This is a chain with ten properties located throughout the eastern seaboard. The two individuals who own the chain of dinner houses strongly resist the idea of implementing a service-charge system. They believe that tipping is a preferred system. The chain is six years old and presently uses a tipping system. The only exception is that a 20% service charge is added to parties of twenty or more. These parties are notified of this policy at the time they make their reservations. How will you convince the two owners that a service-charge system is the wave of the future? Prepare a three-page written report that you will present to them to convince them to switch from the current system of tipping. Be logical and thorough in your ideas. OR, take the position of the owners and prepare a written report that will convince the manager of this operation that the tipping system should prevail. Be logical and thorough in your ideas. (Just because they own the operation does not mean they are dictators when it comes to establishing operational policies.) CASE PROBLEM 10-3 Using the hospitality operation you prepared for Case 1, develop a three-page report arguing either for or against compensation as a motivational tool. Make sure that you are specific, using several different types of individual and group incentive pay plans as examples.
Age Discrimination Act of 1967
Civil Rights Act of 1964
employee stock ownership plans (ESOP)
Equal Pay Act
Executive Order 11246
Fair Labor Standards Act (FLSA)
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RECOMMENDED WEB SITES
1. The Basics of Overtime: ahlberg-cpa.com/basovrt.htm
2. Average Annual Pay by State and Industry: stats.bls.gov/news.release/annpay.nws.htm
3. American Compensation Association: www.acaonline.org
4. Fair Labor Standards Act Advisor--Wage and Hour Division: www.dol.gov/elaws/flsa.htm
5. Wynford Group--Calgary Canada, Compensation Surveys: www.wynford.ab.ca
6. Minimum Wage Hike: Fact; Fallacy: www.epf.org
7. Foodservice: Employment Mistakes (Minimum Wage): www.txrestaurant.org
1. Describe the process involved in compensation planning.
2. What is the one most important characteristic of a compensation plan?
3. Explain the concepts of external and internal pay equity.
4. List the intended outcomes of a sound compensation plan.
5. Describe the job evaluation process. List several examples of compensable factors important in the grading of jobs in your hospitality organization.
6. Present a brief argument for both tipping and a service-charge system.
7. Describe how a hospitality organization can develop a pay-for-performance compensation plan. How does this differ from traditional compensation plans?
8. Do you believe that pay can motivate performance in the hospitality industry? Why or why not? Identify some of the compensatory incentives an employer in the hospitality industry could offer to you that would personally motivate you to perform at a high level.
9. Differentiate among the following incentive programs: bonus plans, profit sharing, and gain sharing. Why might each of these programs fail to motivate improved performance?
10. What is the key focus of the FLSA? Discuss the legalities of compensatory time.
11. Identify potential problems in compensation administration in hospitality organizations.
Mary L. Tanke, Ph.D.
Florida International University
(1.) B. P. Sunoo, "Overtime Abuse: You Could Be Guilty," Workforce 78 (February 1999): 40-51.
(3.) David W. Belcher, "Toward a Behavioral Science Theory of Wages," in M. S. Wortman (ed.),
Creative Personnel Management: Readings in Industrial Relations (Boston: Allyn and Bacon, Inc., 1969): p. 202-218.
(4.) Jennifer Laabs, "Line Managers Can Make (or Break) Incentives Programs," Workforce 78 (February 1999): 80-83.
(5.) U.S. Department of Labor, "Equal Pay," WHD Publication 1320 (Washington, DC: Government Printing Office, 1974).
TABLE 10-1 Overtime Percentages by Industry Percent of Percent all OT share of workers all OT who are workers by Industry Male Female Industry Agriculture 66.7% 33.3% 1.5% Mining/Construction 94.7% 5.3% 8.4% Manufacturing 73.3% 26.7% 30.4% Transportation 87.5% 12.5% 5.6% Communications/Utilities 83.3% 16.7% 2.7% Trade 67.8% 32.2% 19.1% Bank, Finance, Real Estate 51.2% 48.8% 2.7% Services 39.3% 60.7% 24.5% Public Administration 71.6% 28.4% 5.1% (Source: Employment Policy Foundation: Washington, DC) TABLE 10-2 Outcomes of a Compensation Plan in the Hospitality Industry The Goal: To reduce the inequities among wages and salaries Intended Outcomes: Increased Motivation Improved Job Performance Advancement Opportunities Reduced Absenteeism Employee Retention Employee Job Satisfaction Attract Best Employees Career Development Competitive Advantage TABLE 10-3 Characteristics of the Individuals You Hire That May Affect the Level of Compensation * Skill level * Education * Length of service or seniority (industry and organizational commitment) * Experience TABLE 10-4 Equal Pay Act Charges: 1992-1998 (Filed and Resolved) Fiscal Year 1992 1993 1994 1995 Receipts 1,294 1,328 1,381 1,275 Resolutions 1,185 1,120 1,171 1,249 Monetary Benefits (Millions) * $2.2 $2.4 $2.8 $2.8 1996 1997 1998 Receipts 969 1,134 1,071 Resolutions 1,235 1,172 1,134 Monetary Benefits (Millions) * $1.9 $2.4 $2.7 (Source: The U.S. Equal Employment Opportunity Commission, Washington, DC)
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|Title Annotation:||Section 4 Reward Systems|
|Author:||Tanke, Mary L.|
|Publication:||Human Resources Management for the Hospitality Industry, 2nd ed.|
|Date:||Jan 1, 2001|
|Previous Article:||Chapter 9 Discipline, counseling, and exiting the organization.|
|Next Article:||Chapter 11 Benefits.|