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© 2003 Prentice Hall, Inc Instructor presentation questions: Chapter 11 Establishing Pay Plans
© 2003 Prentice Hall, Inc Strategic Overview Chapter purposes: Job evaluation techniques Conducting on and offline salary surveys Pricing the jobs in your firm Focus on pay for performance and incentive plans
© 2003 Prentice Hall, Inc What does a pay check mean to you?
© 2003 Prentice Hall, Inc What does a pay check mean to you? Security Status within the organization Internal comparison of personal worth; competitive score card Must comply with legal requirements
© 2003 Prentice Hall, Inc What are an employer’s objectives of compensation system?
© 2003 Prentice Hall, Inc What are objectives of compensation system? Legal system that is non-discriminatory Attract job applicants Retain current employees Motivate to quality production Equitable system…fairness Provides security for employees Costs don’t exceed the benefits produced
© 2003 Prentice Hall, Inc Strategic Pay Issues Fixed pay Performance- awards, bonuses, merit systems Job based system Below market Monetary rewards Centralized pay decisions Variable pay Membership Individual based system Above market Non-monetary rewards Decentralized system
© 2003 Prentice Hall, Inc Entitlement Philosophy vs. Pay for Performance Seniority based Across the board COL Guaranteed movement of scales Industry comparisons only Santa Claus bonuses No increases for longevity No increases to poorer performers Lower increases for same performance above midpoints Compares outside industry Bonuses tied to org. and group performance against objectives
© 2003 Prentice Hall, Inc The Elements of Total Compensation Total Compensation Pay Incentives Indirect Compensation/ Benefits Base Compensation
© 2003 Prentice Hall, Inc Employee Compensation Direct or Indirect compensation is given based on: Increments of time Hourly (Non-exempt) Salaried (Exempt) Performance Piecework Commission
© 2003 Prentice Hall, Inc Legal Considerations The 1931 Davis-Bacon Act sets wages for laborers working for contractors federally employed contractors The 1936 Walsh-Healy Public Contract Act set Basic labor standards Maximum hours Safety/health standards
© 2003 Prentice Hall, Inc Legal Considerations Title VII of the 1964 Civil Rights Act makes it unlawful for employers to discriminate against any individual The 1938 Fair Labor Standards Act provides for minimum wages, maximum hours, overtime pay and child labor protection
© 2003 Prentice Hall, Inc Legal Considerations The 1963 Equal Pay Act establishes equity between employees of different sex doing the same work The 1974 Employee Retirement Income Security Act (ERISA) protects employees against the failure of their employers pension plan….big issue today
© 2003 Prentice Hall, Inc Other Legislation Affecting Pay Age Discrimination in Employment Act Americans Disabilities Act Family and Medical Leave Act Labor Relations Act of 1935 (Wagner Act) Created National Labor Relations Board— NLRB
© 2003 Prentice Hall, Inc Important Policy Issues In writing the pay plan, ask the following: 1.Will we be a pay leader or a follower? 2.Will we emphasize seniority or performance? 3.What pay cycle?
© 2003 Prentice Hall, Inc Important Policy Issues 4.How do we fix salary compression? 5.How should we compensate based on geography or overseas employees? 6.Is the pay rate equitable with rates in other organizations outside the firm?
© 2003 Prentice Hall, Inc Overseas employees have special compensation needs Home based - salary reflects his or her home country’s salary with COLA’s – good short term solution Host based - salary tied to the host country’s salary structure with COLA’s – better long term solution
© 2003 Prentice Hall, Inc Establishing Pay Plans The 5 step process: The salary survey Job evaluation Pay grade grouping Price pay grade- wage curves Fine tune pay rates
© 2003 Prentice Hall, Inc The Salary Survey The salary survey is a survey aimed at determining prevailing wage rates which include: Formal (legal) Informal Definition
© 2003 Prentice Hall, Inc Uses of Salary Surveys Benchmark jobs Employers price 20% or more of their positions currently in the job market Surveys collect data on benefits
© 2003 Prentice Hall, Inc Commercial, Professional and Government Salary Surveys BLS gives : Area wage surveys…Cedar Valley SHRM Industry wage surveys….College surveys PATC surveys Private consultants Hay Associates, Heidrick and Struggles, and Hewitt Associates publish data covering compensation for top and middle management
© 2003 Prentice Hall, Inc Doing an Internet Based Salary Survey YAHOO!
© 2003 Prentice Hall, Inc Job Evaluation Job evaluation is the formal and systematic comparison of jobs in order to determine the worth of one job relative to another The comparison results in a wage or salary hierarchy Compensable factors are fundamental elements of a job Definition
© 2003 Prentice Hall, Inc Compensable Factors Two approaches in comparing jobs – Intuitive or via compensable factors Intuitive based on decision that one job is more important than another (wholistic) Compensability determined arbitrarily but some metrics include: (parts valued) Skill Effort Responsibility Work conditions Know-how Problem solving Accountability Equal Pay Act factors Hay Consulting
© 2003 Prentice Hall, Inc Preparing for the Job Evaluation Its mostly a judgmental process which requires cooperation among managers Identify the need for the program Get cooperation Choose an evaluation committee who will do the evaluation
© 2003 Prentice Hall, Inc Job Evaluation Committees Performs 3 main functions: Identifies key benchmarks Selects some compensable factors Evaluate the worth of each job via one of the methods on the following slides
© 2003 Prentice Hall, Inc Job Evaluation Method 1:Ranking Obtain job information Select raters and jobs Select compensable factors Rank jobs Combine ratings Try not to rely on guesstimates Best for small organizations
© 2003 Prentice Hall, Inc Method 2: Job Classification Rates categories of jobs into groups Groups called classes if jobs are similar Called grades if groups contain different jobs of similar difficulty Example: General Schedule grading used by the U.S. government – GS-10 might grade both a dog catcher and the President!
© 2003 Prentice Hall, Inc Ways to Categorize Jobs Write-up class or grade descriptions Draw up a set of guidelines Choose compensable factors and develop class or grade definitions Example of GS grade definition
© 2003 Prentice Hall, Inc Pay Structure of a Large Restaurant Developed Using a Job-Based Approach Jobs Number of Positions Pay GRADE 6 GRADE 5 GRADE 4 GRADE 3 GRADE 2 GRADE 1 Chef Manager Sous-Chef Assistant Manager Lead Cook Office Manager General Cook Short Order Cook Assistant to Lead Cook Clerk Server Hostess Cashier Kitchen Helper Dishwasher Janitor Busser Security Guard $20.00-$31.00/hr. $11.50-$21/hr. $7.50-$12.00/hr. $6.50-$8.00/hr. $6.00-$7.00/hr. $5.50-$6.25/hr.
© 2003 Prentice Hall, Inc Method 3: Point The point method is more quantitative Identifies compensable factors The degree to which each of these factors is present Assume five degrees of “responsibility” Most widely used method
© 2003 Prentice Hall, Inc Point Example 1st Degree Skill 1. Knowledge 2. Experience 3. Initiative and Ingenuity Effort 4. Physical Demand 5. Mental or Visual Demand Responsibility 6. Equipment or Process 7. Material or Product 8. Safety of Others 9. Work of Others Job Conditions 10. Working Conditions 11. Hazards Factor 2nd Degree rd Degree th Degree th Degree Points Assigned to Compensable Factor Degrees
© 2003 Prentice Hall, Inc Method 4: Factor Comparison Factor comparison is a widely used method to rank jobs by a variety of skills and difficulties, then adding these to obtain a numerical rating for each job With this method you rank each job several times—once for each of several compensable factors Definition
© 2003 Prentice Hall, Inc Computerized Job Evaluations Other methods can be time consuming CAJE or computer automated job evaluation streamlines things Simplifies job analysis Increases objectivity Manages data Uses structured questionnaire and statistical models
© 2003 Prentice Hall, Inc Group Similar Jobs Into Pay Grades A pay grade is composed of equally difficult jobs Committee will assign pay rates to each job based on one of the job methods Ranking method grades fall in to a point range Point method grades fall within two-three ranks Factor comparison grades pay rate range Classification method puts into classes or grades
© 2003 Prentice Hall, Inc Price Each Pay Grade - Wage Curves Developing a wage curve involves the following: Find the average pay for each pay grade Plot the pay rates for each pay grade Fit the line called a wage line through the points just plotted Price the jobs Wage curve
© 2003 Prentice Hall, Inc Fine Tune Pay Rates Pay ranges are a series of steps or levels in a pay grade, usually based on years of service Sample pay grade schedule
© 2003 Prentice Hall, Inc Instructor presentation questions: Scatter Diagram of Evaluated Jobs Average Pay Per Hour Evaluated Points
© 2003 Prentice Hall, Inc Correcting Out-of-Line Rates Correct pay for grade Too low – raise pay Freezing wages, transferring or promoting Too high – lower by Green circled jobs Red circled
© 2003 Prentice Hall, Inc Developing a Workable Pay Plan Several steps to a workable pay plan Conduct a wage survey by using Do a web based job evaluation Develop a pay policy that covers Classify employees correctly
© 2003 Prentice Hall, Inc Pricing Managerial and Professional Jobs Goal is to attract and keep Harder to quantify evaluation Paid on basis of ability More complex and stress incentives over evaluation
© 2003 Prentice Hall, Inc Compensating Managers Top executives compensated by: Base pay + guaranteed bonus Short term incentives Long term incentives Perks Can you name some incentives and perks?
© 2003 Prentice Hall, Inc What Really Determines Executive Pay? Company size and performance Industry CEO average pay is $3.6 million May emphasize 25% performance incentive Board sets CEO pay; major issue Shareholders may affect pay as SEC requires disclosure of all CEO pay Complexity of the job
© 2003 Prentice Hall, Inc Compensating Professionals Job emphasizes creativity and problem solving Job evaluation is useful Some disciplines result in 4-6 grades with a broad salary range
© 2003 Prentice Hall, Inc Compensation Trends Skill-based programs pay for range, depth, and type of skills: Define specific skills Training system Competency testing Flexible work assignments Broadbanding combines salary grades into a few with wide salary ranges
© 2003 Prentice Hall, Inc Skill-based Pay versus Evaluation-based Pay Competence testing Effect of job change Seniority and other factors Advancement opportunities SBP may increase productivity and lower labor costs over JBP
© 2003 Prentice Hall, Inc High Performance Insight General Mills implemented a skills-based plan Plan viewed as a success as it improved flexibility Level 3 Level 2 Level 1 Mixing Level 3 Level 2 Level 1 Filling Level 3 Level 2 Level 1 Packaging Level 3 Level 2 Level 1 Materials
© 2003 Prentice Hall, Inc Broadbanding Broadbanding - Consolidating salary grades and ranges
© 2003 Prentice Hall, Inc Broadbanding Reflects flattened organization with fewer pay grades with broader pay ranges Rewards multi-function specialists Decentralizes HR “control” to business unit Enhances employee career development Focuses on skills and competencies, not job tasks and responsibilities
© 2003 Prentice Hall, Inc Compensation Plans in Practice Most employees don’t understand it so how effective can they be in motivating people? Must make it known!
© 2003 Prentice Hall, Inc Compensation Plans for Dot-com Companies Don’t use traditional pay plans Hiring and keeping good employees without a flexible compensation plan Most successful firms hire people then find jobs Link hiring pay to competitive practice for that position, based on real-time external research
© 2003 Prentice Hall, Inc Dot.Com Research Insight In addition to competitive compensation and benefits, employees have: Cultural expectations Rewards expectations Career opportunity expectations
© 2003 Prentice Hall, Inc Comparable Worth The concept by which women who are usually paid less than men can claim that men in comparable rather than strictly equal jobs are paid more The “equal” standard is becoming “comparable” County of Washington v. Gunther (1981)
© 2003 Prentice Hall, Inc Chapter 11 Summary Two pay bases – time increments and production volume Establishing pay rates involves five steps – Can you name them? Job evaluation determines the relative worth of a job Five-step ranking method of job evaluation is simple to use – Can you name these steps?
© 2003 Prentice Hall, Inc Chapter 11 Summary Classification or grading groups similar jobs into classes Point method identifies compensable factors and the degree to which each of these is present in a job Factor comparison method decides which jobs have the most compensable factors
© 2003 Prentice Hall, Inc Chapter 11 Summary Most managers group similar jobs into wage or pay grades for pay purposes Compensation plan for executive, managerial, and professional personnel can be complex Trends in compensation include skill- based pay, broadbanding, and adjustments for comparable worth
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