1. Reward Systems

2. Compensation Theory, Job Evaluation and Pay Administration
Why is compensation important to organizations?
Need to control costs to remain solvent and competitive
Need to remain competitive with internal and external labor markets
Need to use pay to motivate employees
The basic problem: a limited pie to divide among all employees
MGMT 412 | Reward Systems
Fall 2008

3. Compensation Costs Per Hour
Information from DoL, Bureau of Labor Statistics
Compensation Costs Per Hour
Series ID : CCU D & CCU D ( )
Series ID: CMU D (C) & CMU D (C) (2004 & forward)
MGMT 412 | Reward Systems
Fall 2008

4. What is a Job Worth? Market price; willing seller and willing buyer
Issues of justice and equity
Male/female wage differentials
U.S. wages vs. wages in less developed countries
Gaps between executive and rank-and-file employee pay
Currently in US around 400x rank-and-file pay (20x for most of 20th century -- comparable to Canada & UK)
Especially an issue in the current environment (Fall 2008)
But....does CEO incentive pay lead to performance? Who knows?
MGMT 412 | Reward Systems
Fall 2008

5. Women’s Pay Equality http://www.infoplease.com/ipa/A0193820.html
MGMT 412 | Reward Systems
Fall 2008

6. The Basic Pay Model Compensation plan efficiency based on:
Internal consistency
External competitiveness
Employee contributions to the firm
Compensation:
“All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship”
MGMT 412 | Reward Systems
Fall 2008

7. ? A Basic Question Can we satisfy everybody?
Perceptions of fairness come from:
Actual pay amounts
Relative pay amounts on internal basis
Relative pay amounts on external basis
Pay administration
MGMT 412 | Reward Systems
Fall 2008

8. Job Evaluation Equal Pay Act
Determining the relative value of jobs within the organization
General basis:
Effort
Skill
Responsibility
Working conditions
Approaches
Whole job (ranking, classification)
Decomposed (point factor)
Equal Pay Act
MGMT 412 | Reward Systems
Fall 2008

9. Ranking How to: Pro and con Order the jobs from highest to lowest
Easy to use and to explain to employees
Cumbersome for any but the small organization
Very difficult to add jobs / re-evaluate jobs
Very subjective; it is difficult to say what criteria are being used, so difficult to justify/explain to employees or courts
MGMT 412 | Reward Systems
Fall 2008

10. Classification How to:
Set up grades or categories with descriptions of the necessary responsibility, skill, effort and working conditions (or other factors as desired)
Include benchmark or representative jobs to serve as anchors; these should be
Common and well-known
Stable content
Truly representative of grade
Can be priced on external market
MGMT 412 | Reward Systems
Fall 2008

11. U.S. Government General Schedule
Used since 1923
Includes 18 classes or grades
Uses 9 factors to develop grades
These factors fit into the four categories of skill, effort, responsibility and working conditions
MGMT 412 | Reward Systems
Fall 2008

12. GS Factors Knowledge required by the position Supervisory controls
Nature or kind of knowledge and skills needed
How the knowledge and skills are used in doing the work
Supervisory controls
How the work is assigned
The employee’s responsibility for carrying out the work
How the work is reviewed
Guidelines
The nature of guidelines for performing the work
The judgement needed to apply the guidelines or develop new guides
Complexity
The nature of the assignment
The difficulty in identifying what needs to be done
The difficulty and originality involved in performing the work
Scope and effort
The purpose of the work
The impact of the work product or service
Personal contacts
Purpose of contacts
Physical demands
Work environment
MGMT 412 | Reward Systems
Fall 2008

13. Classification: Pro and Con
Used by U.S. government (not necessarily a positive factor, but some evidence that it works)
Relatively easy to develop and administer
Can be difficult to write grades for jobs from multiple job families
MGMT 412 | Reward Systems
Fall 2008

14. Point-Factor Plans
The most commonly used type of job evaluation method
Make the criteria for comparisons explicit, unlike ranking and classification
The criteria for classification (the compensable factors) are related to the strategy of the business; they are the factors valued by or of high worth to the firm
MGMT 412 | Reward Systems
Fall 2008

15. Point-Factor: How it Works
Point factor plans all include three elements:
Compensable factors are defined
Degrees or level of each factor are given numerical rankings
Factors weighted as to their relative value to the organization
Job worth is measured by the total number of points
The steps to follow:
Job analysis
Determine compensable factors
Scale the factors
Weight the factors
Communications and documentation
Apply the plan
Compensable Factors
“Characteristics in the work that the organization values, that help it pursue its strategy and achieve its objectives”
MGMT 412 | Reward Systems
Fall 2008

16. Selecting Compensable Factors
These should be:
Based on the work performed
Based on the strategy and values of the organization
Acceptable and considered to be fair by all concerned parties
As a result, compensable factors should be developed by each organization, rather than using an off-the-shelf plan
Basic group of compensable factors:
Skill
Effort
Responsibility
Working conditions
MGMT 412 | Reward Systems
Fall 2008

17. The Hay Plan
A widely used plan developed by a consulting firm, Hay Associates, and aimed toward management jobs
It includes:
Know-how
Functional expertise
Managerial skills
Human relations
Problem solving
Environment
Challenge
Accountability
Freedom to act
Impact of end results
Magnitude
MGMT 412 | Reward Systems
Fall 2008

18. Other Plans J.C. Penney looks at:
Decision making impact on the company’s objectives
Communications
Supervision and management
Knowledge requirements
Internal customers
External customers
Many firms (i.e., 3M, TRW) add a factor for “International Responsibilities”
MGMT 412 | Reward Systems
Fall 2008

19. Weighting Compensable Factors
Each factor contributes a different amount towards the total score for the job, depending on the importance of the factor to the organization. These weights can be arrived at in two ways
Committee judgments (compensation committee, which is made up of management representatives)
Statistical analysis: the weights are chosen so that the factor scores for a selected group of benchmark jobs will predict market prices or current rates for those jobs
When compensable factors are weighted and the total number of points determined, points assigned to each level of the factors
MGMT 412 | Reward Systems
Fall 2008

20. Point-Factor: Pro and Con
Point-factor systems orderly, rational, and make criteria for evaluating jobs explicit
Time consuming to set up (and they do need to be periodically updated), but very simple to add new jobs
Job evaluations may still be affected by what the evaluator already knows or believes the market value of the job to be
MGMT 412 | Reward Systems
Fall 2008

21. Why Conduct Salary Surveys?
To create and adjust pay structure
Adjust actual pay in response to the market
All jobs on scheduled basis (almost a COLA); be careful this doesn’t become an entitlement
Jobs for which supply or demand has changed
Monitor other forms of pay, such as shift differentials, bonuses, incentives, overtime practices
Estimate competitors’ labor costs
However, we cannot market price every job
MGMT 412 | Reward Systems
Fall 2008

22. What Is The Market? Who? How to determine this?
Employers who compete for the same occupations and skills
Employers who compete for employees in the same geographic area
Employers who compete with the same products
How to determine this?
Who are our competitors?
Where do we recruit?
Where are employees going?
Interaction of skill/place/product
If labor market is rich in a particular skill, may recruit/price locally
If labor market does not include skills, recruiting and pricing are on a wider scale
Commuting time within a market may also be a factor
MGMT 412 | Reward Systems
Fall 2008

23. Guidelines for Salary Surveys (I)
How many firms to include
Include fewer firms if you are a major employer and make the market
Commercial surveys often include several hundred firms (but they make money by getting participants and selling them surveys)
Price fixing issues
Under the Sherman Act, surveys can be viewed as a conspiracy in restraint of trade
Having a third party conduct the survey protects you, but you lose control
MGMT 412 | Reward Systems
Fall 2008

24. Guidelines for Salary Surveys (II)
Make or buy
For national data, may need to buy from a consultant
Some firms may be reluctant to respond to your survey, but will participate in third-party survey
More control with own survey
Purchasing a survey means you get what they want to report
Running your own survey takes more time, but may be less expensive
Odd jobs, local jobs may not be available commercially
Free data from Department of Labor...but you get what you pay for (useful in general terms)
MGMT 412 | Reward Systems
Fall 2008

25. Guidelines for Salary Surveys (III)
What jobs to survey
Benchmark jobs:
Well-known and stable content
Stable pricing (stable supply/demand)
Represent entire structure
Represent majority of covered positions
Market sensitive jobs
MGMT 412 | Reward Systems
Fall 2008

26. What Data to Collect
Basic company information, for comparability, weighting of results
How closely surveyed jobs match your jobs
Salary range
Actual pay (individuals, range or average); may include actual pay and tenure/experience
Other forms of compensation
Benefits (optional)
MGMT 412 | Reward Systems
Fall 2008

27. How to Survey Mail surveys cheapest, but may not be as accurate
Interviews are more accurate (allow you to verify content) but are very time consuming
Compromises may be phone verification or interviews every second or third year (DoL surveys)
MGMT 412 | Reward Systems
Fall 2008

28. Putting it Together: The Pay Regression Line
Job evaluation (internal equity) gives us relative value of jobs within the organization
Salary surveys (external equity) gives us dollar value of selected jobs outside the organization
The pay regression line combines the two sources of information
MGMT 412 | Reward Systems
Fall 2008

29. Basic Information
MGMT 412 | Reward Systems
Fall 2008

30. The Pay Regression Line
Legal Sect’y
Dept. Sect’y
MGMT 412 | Reward Systems
Fall 2008

31. Developing Pay Grades
Pay grades are “convenient groupings of a wide variety of jobs...similar in work difficulty and responsibility requirements but possibly having nothing else in common”
Pay grades allow compensation to be administered for a group of jobs that are worth approximately the same
A pay grade can be a single rate or a range of rates
An administrative convenience
MGMT 412 | Reward Systems
Fall 2008

32. Basic Characteristics of Pay Grades
Grades normally provide for a range of pay rates, though single rates are possible
Pay grades contain a minimum, midpoint and maximum
The range from minimum to maximum can be from 20% to 100%, with 30% to 35% being most common
The midpoint of pay grades increase in a constant percentage, normally 5% to 15%. However, the percentage increase may be larger at the top of the pay structure
There is normally some overlap between pay grades. If there is a 30% range within a pay grade and there is a 10% difference between midpoints, there will be a 67% overlap
MGMT 412 | Reward Systems
Fall 2008

33. Developing Pay Grades
How many grades? Differences between grades? Grade width?
The range of jobs included in the structure is an influence. A wider range of jobs requires more grades, possibly wider grades (to cover a wider range of pay) or less overlap between grades
Fewer pay grades will normally be wider pay grades, allowing the organization to place more emphasis on recognizing time in job
Can be argued that differences between grades should increase as one advances through the pay structure; the value of incumbents in higher level jobs increases more with time and wider variation in performance is possible. In lower level jobs, the learning curve levels off much sooner and there is less scope for harming or contributing to the organization
Small increments between pay grades reduces the effect of an error in assigning a job to a pay grade
MGMT 412 | Reward Systems
Fall 2008

34. Other Issues Single rate pay grade? What is the midpoint?
Is there a single “market rate” for the job, or are there a variety of rates?
How do you then reward seniority or performance?
Often found in union settings
What is the midpoint?
Midpoint is the market rate for the job
However, firm may determine their “market rate” as being higher or lower than the survey average
MGMT 412 | Reward Systems
Fall 2008

35. Other Pay Plan Issues Who evaluates jobs?
Moving individuals through pay structures
Merit vs. seniority
Special situations
Pay differentials
Compression between employees and supervisors
Compression between old and new employees
MGMT 412 | Reward Systems
Fall 2008

36. Moving Individuals Through Pay Structures
Merit vs. seniority
Faster progression to the midpoint, then slow down
Grade maximum; what then?
Special situations
Red circled jobs
Green circled jobs
MGMT 412 | Reward Systems
Fall 2008

37. Pay Compression Compression between current and newly hired employees
Between employees and supervisors
May occur if employees are very senior and supervisors brought in from outside
Also possible if employees work significant overtime or have shift pay
May also happen with commission sales and sales management
Solutions:
Ensure sufficient distance between pay ranges for employees and supervisors (10%) and watch actual pay
Pay commissions to sales managers or select sales management staff who are motivated by security rather than money
Compression between current and newly hired employees
Happens when market rates change faster than employees move through grade
What happens if an employee can quit and be rehired at a higher salary?
Solution: Adjust rate of progression through grade
MGMT 412 | Reward Systems
Fall 2008