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Establishing Pay Plans

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1 Establishing Pay Plans
Chapter 11 Establishing Pay Plans

2 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 Page 301 The previous chapters explained training, appraising, and developing employees. Once employees have done their jobs and been appraised, they expect to be paid. The main purpose of this chapter is to show you how to establish a pay plan. We explain job evaluation techniques, techniques for finding the relative worth of a job, and how to conduct on- and offline salary surveys. We also show you how to price the jobs in your firm by developing pay grades and ranges.

3 What does a pay check mean to you?

4 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

5 What are an employer’s objectives of compensation system?

6 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

7 Strategic Pay Issues Fixed pay Variable 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

8 Entitlement Philosophy vs. Pay for Performance
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 Seniority based Across the board COL Guaranteed movement of scales Industry comparisons only Santa Claus bonuses

9 The Elements of Total Compensation
Indirect Compensation/ Benefits Base Compensation This graphic shows that an employee’s total compensation has three components. The relative proportion of each varies extensively by firm. Generally, the largest element of total compensation is base compensation, the fixed pay an employee receives on a regular basis. Another component of total compensation is pay incentives, which are programs designed to reward employees for good performance. Benefits is the final component, and encompasses a wide variety of programs; including health insurance, vacations, and unemployment compensation. Pay Incentives

10 Employee Compensation
Direct or Indirect compensation is given based on: Increments of time Hourly (Non-exempt) Salaried (Exempt) Performance Piecework Commission Page 302 There are basically two ways to make direct financial payments to employees: on increments of time and on performance. Time-based pay is still most popular: Blue-collar workers get hourly or daily wages, for instance, and others, like managers or Web designers, tend to be salaried and paid by the week, month, or year. The second option is to pay for performance. Piecework is an example; it ties compensation to the amount of production (or number of “pieces”) the worker produces, and is popular as an incentive plan. For instance, you divide a worker’s hourly wage by the standard number of units he or she is to produce in one hour. Then for each unit produced over and above this standard, pay the worker an incentive. Sales commissions are another example of performance-based (in this case, sales-based) compensation. In this chapter, we explain how to formulate plans for paying employees a time-based wage or salary; subsequent chapters cover performance-based financial incentives and bonuses, and employee benefits. Several basic factors influence the design of any pay plan: legal, union, company

11 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 Page 302 Various laws specify things like minimum wages, overtime rates, and benefits. For example, the 1931 Davis-Bacon Act allows the secretary of labor to set wage rates for laborers and mechanics employed by contractors working for the federal government. Amendments provide for paid employee benefits. The 1936 Walsh-Healey Public Contract Act sets basic labor standards for employees working on any government contract that amounts to more than $10,000. It contains minimum wage, maximum hour, and safety and health provisions, and requires time-and-a-half pay for work over 40 hours a week.

12 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 Page 303 1964 Civil Rights Act makes it unlawful for employers to discriminate against any individual with respect to hiring, compensation, terms, conditions, or privileges of employment because of race, color, religion, sex, or national origin. Other significant compensation-related laws include the 1938 Fair Labor Standards Act, the 1963 Equal Pay Act, and the 1974 Employer Retirement Income Security Act. 1938 Fair Labor Standards Act This law, originally passed in 1938 and since amended many times, contains minimum wage, maximum hours, overtime pay, equal pay, record-keeping, and child labor provisions that are familiar to most working people. It covers the majority of U.S. workers—virtually all those engaged in the production and/or sale of goods for interstate and foreign commerce. In addition, agricultural workers and those employed by certain larger retail and service companies are included.

13 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 Page 303 1963 Equal Pay Act The Equal Pay Act, an amendment to the Fair Labor Standards Act, states that employees of one sex may not be paid wages at a rate lower than that paid to employees of the opposite sex for doing roughly equivalent work. Specifically, if the work requires equal skills, effort, and responsibility and involves similar working conditions, employees of both sexes must receive equal pay, unless the differences in pay stem from a seniority system, a merit system, the quantity or quality of production, or “any factor other than sex.” 1974 Employee Retirement Income Security Act (ERISA) This act provides for the creation of government-run employer-financed corporations to protect employees against the failure of their employer’s pension plan. In addition, it sets regulations regarding vesting rights. (Vesting refers to the equity or ownership the employees build up in their pension plan should their employment be terminated before retirement.) And it regulates portability rights (the transfer of an employee’s vested rights from one organization to another), and contains fiduciary standards to prevent dishonesty in pension plan funding.

14 Other Legislation Affecting Pay
$ 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 Page 304 Other Legislation Affecting Compensation Various other laws influence compensation decisions. For example, the Age Discrimination in Employment Act prohibits age discrimination against employees who are 40 years of age and older in all aspects of employment, including compensation. The Americans with Disabilities Act prohibits discrimination against qualified persons with disabilities in all aspects of employment, including compensation. The Family and Medical Leave Act aims to entitle eligible employees, both men and women, to take up to 12 weeks of unpaid, job-protected leave for the birth of a child or for the care of a child, spouse, or parent. And various executive orders require employers that are federal government contractors or subcontractors to not discriminate and to take affirmative action in various employment areas, including compensation. The National Labor Relations Act of 1935 (or Wagner Act) and associated legislation and court decisions legitimized the labor movement. It gave unions legal protection and granted employees the right to organize, to bargain collectively, and to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection. The 1935 Act created the National Labor Relations Board (NLRB) to oversee employer practices and ensure employees receive their rights. Its rulings underscore the need to involve union officials in developing the compensation package.

15 Important Policy Issues
In writing the pay plan, ask the following: Will we be a pay leader or a follower? Will we emphasize seniority or performance? What pay cycle? Page 305 Exactly how the firm will use its pay plan to further its strategic aims will manifest itself in the firm’s pay policies. The HR or compensation manager will write the policies in conjunction with top management, in a manner that’s consistent with the firm’s strategic aims. Whether to emphasize seniority or performance is another issue. Seniority-based pay may be advantageous to the extent that employees perceive seniority as an objective standard. One disadvantage, though, is that top performers may get the same raises as poor ones. Other policies usually cover the pay cycle, as well as how to award salary increases and promotions, overtime pay, probationary pay, and leaves for military service, jury duty, and holidays.

16 Important Policy Issues
How do we fix salary compression? How should we compensate based on geography or overseas employees? Is the pay rate equitable with rates in other organizations outside the firm? Page 306 How to handle salary compression is another policy issue. Salary compression, which means longer-term employees’ salaries are lower than those of workers entering the firm today, is a creature of inflation. Prices (and starting salaries) go up faster than the company’s salaries, and firms need a policy to handle it. Constructing one is tricky. On the one hand, you don’t want to treat current employees unfairly or to have them leave with their knowledge and expertise. However, mediocre performance or lack of assertiveness, not salary compression, may explain some low salaries. One policy is to give raises based on Geography also plays a policy role. Cost-of-living differences between cities can be considerable. For example, a family of four might live in Miami for just over $39,000 per year, while the same family’s annual expenditures in Chicago or Los Angeles would be over $56,000. Last but not least, no one likes to think they’re paid less than they deserve. So equity, both external and internal, is crucial in determining pay. Externally, pay must compare favorably with rates in other organizations, or an employer will find it hard to attract and retain good employees. Pay rates must also be equitable internally: Each employee should view his or her pay as equitable given other pay rates in the organization.

17 Germany $245k France $193k US $153k
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 Page 306 With a home-based salary plan, an international transferee’s base salary reflects his or her home country’s salary. The employer then adds allowances for cost-of-living differences —housing and schooling costs, for instance. This is a reasonable approach for short-term assignments, and avoids the problem of having to change the employee’s base salary every time he or she moves. In the host-based plan, the firm ties the international transferee’s base salary to the host country’s salary structure. In other words, the manager from New York who is sent to France would have his or her base salary changed to the prevailing base salary for that position in France, rather than keep the New York base salary. The firm usually tacks on cost-of-living, housing, schooling, and other allowances here as well. A survey of multinational enterprises suggests most set expatriates’ salaries according to their home-country base pay. US $153k

18 Establishing Pay Plans
The 5 step process: The salary survey Job evaluation Pay grade grouping Page 307 Step 1. The Salary Survey It’s difficult to set pay rates if you don’t know what others are paying, so salary surveys play a big role in pricing jobs. Virtually every employer conducts at least an informal telephone, newspaper, or Internet salary survey. Employers use these surveys in three ways. First, they use survey data to price benchmark jobs, around which the firm then slots its other jobs, based on their relative worth to the firm. (Job evaluation, explained next, helps determine the relative worth of each job.) Second, employers typically price 20% or more of their positions directly in the marketplace (rather than relative to the firm’s benchmark jobs), based on a formal or informal survey of what comparable firms are paying for comparable jobs. (A dot-com firm might do this for jobs Step 2. Job Evaluation Job evaluation is aimed at determining a job’s relative worth. It is a formal and systematic comparison of jobs to determine the worth of one job relative to another and eventually results in a wage or salary hierarchy. The basic principle is this: Jobs that require greater qualifications, more responsibilities, and more complex job duties should be paid more highly than jobs with lesser requirements.25 Step 3. Group Similar Jobs into Pay Grades Once it’s used job evaluation to determine the relative worth of each job, the committee can turn to the task of assigning pay rates to each job; however, it will usually want to first group jobs into pay grades. If the committee used the ranking, point, or factor comparison methods, it could of course just assign pay rates to each individual job.31 But for a large employer, such a plan would be difficult to administer, since there might be different pay rates for hundreds or even thousands of jobs. And even in smaller organizations, there’s a tendency to try to simplify wage and salary structures as much as possible. Therefore, the committee will probably group similar jobs (in terms of their ranking or number of points, for instance) into grades for pay purposes. Instead of having to deal with hundreds of pay rates, it might only have to focus on, say, 10 or 12. Step 4. Price Each Pay Grade—Wage Curves The next step is to assign pay rates to your pay grades. (Of course, if you chose not to slot jobs into pay grades, you would have to assign individual pay rates to each individual job.) You’ll typically use a wage curve to help assign pay rates to each pay grade (or to each job). Step 5. Fine-Tune Pay Rates Fine-tuning involves developing pay ranges and correcting out-of-line rates. Instructor’s note: In the film clip, the owner and manager did many things improperly. Ask students what they saw. Answers will vary but should include: They did not have data to present to the employee regarding her request. The employee focused on her needs, not business reasons for her request for an adjustment. The owner and manager needed to listen, take notes, commit to nothing except to get back with the employee at a later time when they had conducted more research. Price pay grade- wage curves Fine tune pay rates

19 The Salary Survey Definition
The salary survey is a survey aimed at determining prevailing wage rates which include: Formal (legal) Informal Page 307 Salary survey A survey aimed at determining prevailing wage rates. A good salary survey provides specific wage rates for specific jobs. Formal written questionnaire surveys are the most comprehensive, but telephone surveys and newspaper ads are also sources of information. Benchmark job A job that is used to anchor the employer’s pay scale and around which other jobs are arranged in order of relative worth.

20 Uses of Salary Surveys Benchmark jobs
Employers price 20% or more of their positions currently in the job market Surveys collect data on benefits Page 307 Employers use surveys to price benchmark jobs around which the firm slots other jobs Employers price 20% or more of their positions currently in the job market Surveys collect data on benefits such as insurance, sick leave, and vacations, as a basis for decisions about employee benefits

21 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 Page 308 Commercial, Professional, and Government Salary Surveys Many employers use surveys published by consulting firms, professional associations, or government agencies. For example, the Bureau of Labor Statistics (BLS) conducts three annual surveys: (1) area wage surveys; (2) industry wage surveys; and (3) professional, administrative, technical, and clerical (PATC) surveys. Private consulting and/or executive recruiting companies like Hay Associates, Heidrick and Struggles, and Hewitt Associates publish data covering compensation for top and middle management and members of boards of directors. Professional organizations like the Society for Human Resource Management and the Financial Executives Institute publish surveys of compensation practices among members of their associations. Watson Wyatt Data Services of Rochelle Park, New Jersey, publishes several compensation surveys. Its top management compensation surveys cover dozens of top positions, including chief executive officer, top real estate executive, top financial executive, top sales executive, and top claims executive, all categorized by function and industry. Watson Wyatt also offers middle management compensation surveys, supervisory management compensation surveys, sales and marketing personnel surveys, professional and scientific personnel surveys, and surveys of technician trades, skilled trades, and office personnel, among others. Wageweb

22 Doing an Internet Based Salary Survey
YAHOO! Page 309

23 Job Evaluation Definition
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 Page 310 Jobs than require greater qualifications, more responsibilities, more complex duties are higher on the pay scale than jobs with less requirements. Job evaluation is aimed at determining a job’s relative worth. It is a formal and systematic comparison of jobs to determine the worth of one job relative to another and eventually results in a wage or salary hierarchy. The basic principle is this: Jobs that require greater qualifications, more responsibilities, and more complex job duties should be paid more highly than jobs with lesser requirements. Compensable Factors You can use two basic approaches to compare several jobs. First, you can take an intuitive approach. You might decide that one job is more important than another and not dig any deeper into why. As an alternative, you could compare the jobs by focusing on certain basic factors the jobs have in common. Compensation management specialists call these compensable factors. They are the factors that establish how the jobs compare to one another, and that set the pay for each job.

24 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) Page 310 Equal Pay Act factors Skill Know-how Hay Consulting Effort Problem solving Responsibility Accountability Work conditions

25 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 Page 311 Preparing for the Job Evaluation Job evaluation is mostly a judgmental process, one demanding close cooperation among supervisors, HR specialists, and employees and union representatives. The main steps include identifying the need for the program, getting cooperation, and then choosing an evaluation committee. The committee then performs the actual evaluation. Identifying the need for job evaluation should not be difficult. For example, dissatisfaction reflected in high turnover, work stoppages, or arguments may result from paying employees different rates for similar jobs. Next (since employees may fear that a systematic evaluation of their jobs may actually reduce their pay rates), getting employees to cooperate in the evaluation is a second important step. Next, choose a job evaluation committee. There are two reasons for doing so. First, the committee should include several people who are familiar with the jobs in question, each of whom may have a different perspective regarding the nature of the jobs. Second, if the committee is composed at least partly of employees, the committee approach can help ensure greater employee acceptance of the job evaluation results.

26 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 Page 311 The evaluation committee performs three main functions. First, it usually identifies 10 or 15 key benchmark jobs. These will be the first jobs to be evaluated and will serve as the anchors or benchmarks against which the relative importance or value of all other jobs can be compared. Next, the committee may select compensable factors (although the HR department will usually choose these as part of the process of determining the specific job evaluation technique the firm will use). Finally, the committee performs its most important function— actually evaluating the worth of each job.

27 Job Evaluation Method 1:Ranking
Obtain job information Select raters and jobs Select compensable factors Rank jobs Combine ratings Page 312 Job Evaluation Methods: Ranking The simplest job evaluation method ranks each job relative to all other jobs, usually based on some overall factor like “job difficulty.” There are several steps in the job ranking method. 1. Obtain job information. Job analysis is the first step: Job descriptions for each job are prepared and are usually the basis for ranking jobs. (Sometimes job specifications are also prepared, but the job ranking method usually ranks jobs according to the whole job, rather than a number of compensable factors. Therefore, job specifications—which list the job’s demands in terms of problem solving, decision making, and skills, for instance—are not as necessary with this method as they are for other job evaluation methods.) 2. Select jobs. It is often not practical to make single ranking for all jobs in an organization. The usual procedure is to rank jobs by department or in clusters (such as factory workers or clerical workers). This eliminates the need for direct comparison of, say, factory jobs and clerical jobs. 3. Select compensable factors. In the ranking methods, it is common to use just one factor (such as job difficulty) and to rank jobs based on the whole job. Regardless of the number of factors you choose, it’s advisable to explain the definition of the factor(s) to the evaluators carefully so that they evaluate the jobs consistently. 4. Rank jobs. The simplest way is to give each rater a set of index cards, each of which contains a brief description of a job. Then they rank these cards from lowest to highest. Some managers use an “alternation ranking method” for making the procedure more accurate. Here you take the cards, first choosing the highest and the lowest, then the next highest and next lowest, and so forth until you’ve ranked all the cards. Table 11-3 illustrates a job ranking. Jobs in this small health facility are ranked from orderly up to office manager. The corresponding pay scales are on the right. After ranking, it becomes possible to slot additional jobs between those already ranked and to assign an appropriate wage rate. 5. Combine ratings. Usually several raters rank the jobs independently. Then the rating committee (or the employer) can simply average the rankings. This is the simplest job evaluation method, as well as the easiest to explain. And it usually takes less time than other methods. Some of its drawbacks derive more from how it’s used than from the method itself. For example, there’s a tendency to rely too heavily on “guesstimates.” Similarly, ranking provides no yardstick for quantifying the value of one job relative to another. For example, job number 4 may in fact be five times “more valuable” than job number 5, but with the ranking system all you know is that one job ranks higher than the other. Ranking is usually more appropriate for small organizations that can’t afford the time or expense of developing a more elaborate system. Try not to rely on guesstimates Best for small organizations

28 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! Page 312 Instructor’s note: GS-10 really might be a fire chief and a press secretary – wanted to make sure you’re paying attention! Job Evaluation Methods: Job Classification Job classification (or job grading) is a simple, widely used method in which raters categorize jobs into groups. The groups are called classes if they contain similar jobs, or grades if they contain jobs that are similar in difficulty but otherwise different. Thus, in the federal government’s pay grade system, a “press secretary” and a “fire chief” might both be graded “GS-10” (GS stands for “General Schedule”). On the other hand, in its job class system, the state of Florida might classify all “secretary IIs” in one class, all “maintenance engineers” in another, and so forth. There are several ways to categorize jobs. One is to draw up class or grade descriptions (similar to job descriptions) and place jobs into classes or grades based on how well they fit these descriptions. Another is to draw up a set of rules for each class (for instance, how much independent judgment, skill, physical effort, and so on, does the class of jobs require?). Then categorize the jobs according to these rules.

29 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 Page 313 The usual procedure is to choose compensable factors and then develop class or grade descriptions for each class in terms of amount or level of the compensable factor(s) in those jobs. Based on these compensable factors, raters write a grade definition (written descriptions of the level of, say, responsibility and knowledge required by jobs in each grade.) Similar jobs can then be combined into grades or classes. Example of GS grade definition

30 Pay Structure of a Large Restaurant Developed Using a Job-Based Approach
Number of Positions Jobs 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 2 1 5 45 4 3 6 $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. A simplified example of a typical job-based pay structure appears in this illustration. One category of compensation tools is a job-based approach. This approach assumes that work gets done by people who are paid to perform well-defined jobs. Each job is designed to accomplish specific tasks and is normally performed by several people. Because all jobs are not equally important to the firm and the labor market puts a greater value on some jobs than on others, the compensation system’s primary objective is to allocate pay so that the most important jobs are paid the most.

31 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 Page 313 Job Evaluation Methods: Point Method The point method is a more quantitative technique. It involves identifying (1) several compensable factors, each having several degrees, as well as (2) the degree to which each of these factors is present in the job. Assume there are five degrees of “responsibility” a job could contain. Further assume you assign a different number of points to each degree of each factor. Once the evaluation committee determines the degree to which each compensable factor (like “responsibility”) is present in the job, it can calculate a total point value for the job by adding up the corresponding points for each factor. The result is a quantitative point rating for each job.

32 Point Example 1st Degree 2nd Degree 3rd Degree 4th Degree 5th Degree
Points Assigned to Compensable Factor Degrees 1st Degree 2nd Degree 3rd Degree 4th Degree 5th Degree Factor 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 14 22 10 5 28 44 20 10 42 66 30 15 56 88 40 20 70 110 50 25 The point factor system uses compensable factors to evaluate jobs. Compensable factors are work-related criteria that the organization considers most important in assessing the relative value of different jobs. The MAA plan has three separate units: Unit 1 for hourly blue-collar jobs; Unit 2 for nonexempt clerical, technical, and service positions; and Unit 3 for exempt supervisory, professional, and management-level positions. The MAA plan includes 11 factors divided into four broad categories. The Unit 1 plan is shown here, with the points assigned to factor degrees.

33 Method 4: Factor Comparison
Definition 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 Page 314 Job Evaluation Methods: Factor Comparison The factor comparison method entails deciding which jobs have more of the chosen compensable factors. The method is actually a refinement of the ranking method. With the ranking method, you generally look at each job as an entity and rank the jobs on some overall factor like job difficulty. With the factor comparison method, you rank each job several times—once for each of several compensable factors.

34 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 Page 314 Computerized Job Evaluations Using a quantitative job evaluation method such as the point plan can be time consuming. Accumulating the information about “how much” of each compensable factor the job contains traditionally involves a tedious process in which evaluation committees debate the level of each compensable factor in a job. They then write down their consensus judgments and manually compute each job’s point values. CAJE—computer-aided job evaluation—can streamline this process. Computer-aided job evaluation, says one expert, can simplify job analysis, help keep job descriptions up to date, increase evaluation objectivity, reduce the time spent in committee meetings, and ease the burden of system maintenance. Most of these systems have two main components. There is, first, a structured questionnaire. This contains items such as “enter total number of employees who report functionally to this position.” Second, all CAJE systems use statistical models.

35 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 Page 314 Group Similar Jobs into Pay Grades Once it’s used job evaluation to determine the relative worth of each job, the committee can turn to the task of assigning pay rates to each job; however, it will usually want to first group jobs into pay grades. If the committee used the ranking, point, or factor comparison methods, it could of course just assign the committee will probably group similar jobs (in terms of their ranking or number of points, for instance) into grades for pay purposes. Instead of having to deal with hundreds of pay rates, it might only have to focus on, say, 10 or 12. A pay grade is comprised of jobs of approximately equal difficulty or importance as established by job evaluation.

36 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 Page 315 Wage curve The wage curve shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation. Note the link to the figure shows pay rates on the vertical axis, and pay grades (in terms of points) along the horizontal axis. There are several steps in pricing jobs with a wage curve. First, find the average pay for each pay grade, since each of the pay grades consists of several jobs. Next, plot the pay rates for each pay grade. Then fit a line, called a wage line, through the points just plotted. Wage curve

37 Fine Tune Pay Rates Pay ranges are a series of steps or levels in a pay grade, usually based on years of service Page 316 Developing Pay Ranges Most employers do not pay just one rate for all jobs in a particular pay grade. Instead, they develop vertical pay (or “rate”) ranges for each horizontal pay grade. These pay ranges may appear as vertical boxes within each grade, showing minimum, maximum, and midpoint pay rates for that grade, There are several reasons to use pay ranges for each pay grade. First, it lets the employer take a more flexible stance in the labor market. For example, it makes it easier to attract experienced, higher-paid employees into a pay grade if the starting salary for the lowest step may be too low to attract them. Pay ranges also let companies provide for performance differences between employees within the same grade or between those with different seniorities. Sample pay grade schedule

38 Scatter Diagram of Evaluated Jobs
Average Pay Per Hour Evaluated Points

39 Correcting Out-of-Line Rates
Freezing wages, transferring or promoting Too high – lower by Red circled Too low – raise pay Correct pay for grade Page 317 Correcting Out-of-Line Rates The wage rate for a particular job may fall well off the wage line or well outside the rate range for its grade, as shown. This means that the average pay for that job is currently too high or too low, relative to other jobs in the firm. You should raise the wages of underpaid employees to the minimum of the rate range for their pay grade. Green circled jobs

40 Developing a Workable Pay Plan
Several steps to a workable pay plan Conduct a wage survey by using Page 318 Do a web based job evaluation Develop a pay policy that covers Classify employees correctly

41 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 Page 319 Developing compensation plans for managers or professionals is similar in many respects to developing plans for any employee. The basic aim is the same: to attract and keep good employees. And job evaluation—classifying jobs, ranking them, or assigning points to them, for instance—is as applicable to managerial and professional jobs as to production and clerical ones. Job evaluation provides only a partial answer to the question of how to pay managers and professionals. These jobs tend to stress harder-to-quantify factors like judgment and problem solving more than do production and clerical jobs. There’s also more emphasis on paying managers and professionals based on ability—based on their performance or on what they can do—rather than on the basis of static job demands like working conditions.

42 Compensating Managers
Top executives compensated by: Base pay + guaranteed bonus Short term incentives Long term incentives Perks Page 319 Short term incentives are usually cash or stock bonuses for short term goals. Long term incentives may include stock options for projects that drive up stock values. Executive benefits and perks may include supplemental executive retirement plans, life insurance, and health insurance without a deductible or a coinsurance. Instructor’s note: Many answers are possible to the question in the slide. What might be interesting is to discuss if any of your students have had friends and family members who have had some unusual perks offered to them. Can you name some incentives and perks?

43 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 Page 320 What Really Determines Executive Pay? Salary is the cornerstone of executive compensation; it’s the element on which employers layer benefits, incentives, and perquisites—all normally bestowed in proportion to base pay. Executive compensation emphasizes performance incentives more than do other employees’ pay plans, since organizational results are likely to reflect executives’ contributions more directly than those of lower-echelon employees. Incentives equal 25% or more of a typical executive’s base pay in many countries, including the United States, United Kingdom, France, and Germany.

44 Compensating Professionals
Job emphasizes creativity and problem solving Job evaluation is useful Some disciplines result in 4-6 grades with a broad salary range Page 320 Compensating non-supervisory professional employees like engineers and scientists presents unique problems. Analytical jobs like these emphasize creativity and problem solving, compensable factors not easily compared or measured. Furthermore, how do you measure performance? The professional’s economic impact on the firm often relates only indirectly to his or her actual efforts. For example, the success of an engineer’s invention depends on many factors, like how well the firm markets it. Employers can use job evaluation for professional jobs. Compensable factors here tend to focus on problem solving, creativity, job scope, and technical knowledge and expertise. Firms use the point method and factor comparison methods, although job classification seems most popular and focuses on market pricing and salary structure. Most employers use a market-pricing approach. They price professional jobs in the marketplace as best they can, to establish the values for benchmark jobs. Then they slot these benchmark jobs and their other professional jobs into a salary structure. Each professional discipline (like engineering or R&D) usually ends up having four to six grade levels, each with a broad salary range.

45 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 Page 322 Skill-Based Pay With what experts call competence-, knowledge-, or skill-based pay, the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds.60 One expert defines competencies as “demonstrable characteristics of the person, including knowledge, skills, and behaviors, that enable performance.” Some firms are broadbanding their pay plans. Broadbanding means combining salary grades and ranges into just a few wide levels or bands, each of which contains a relatively wide range of jobs and salary levels. Skill-based programs generally contain four main components: (1) a system that defines specific skills, and a process for tying the person’s pay to his or her skill; (2) a training system that lets employees seek and acquire skills; (3) a formal competency testing system; and (4) a work design that lets employees move among jobs to permit work assignment flexibility. A study of one such skill-based pay program concluded that it had resulted in 58% greater productivity, 16% lower labor cost per part, and an 82% reduction in scrap, versus a comparison facility.

46 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 Page 322 Competence testing. With JBP, you receive the pay attached to your job regardless of whether you acquire the competence needed to perform the job. With SBP, your supervisor must certify that you’re competent in the skills required by the job before you get a pay increase. Effect of job change. With JBP, your pay usually changes when you switch jobs. With SBP, if you move up, you must demonstrate proficiency before getting a raise. Similarly, you can, for instance, fill in for a missing colleague in a lower paying job, but still receive your (higher-skill) pay. Seniority and other factors. JBP systems often tie pay to time in grade or seniority. SBP pays for skills, not seniority. Advancement opportunities. There tend to be more opportunities for advancement with SBP plans than with JBP plans because the company-wide focus on skill building fosters more development and more opportunities. Similarly, SBP enhances organizational flexibility because workers’ skills are applicable to more jobs and thus more portable.

47 High Performance Insight
General Mills implemented a skills-based plan Plan viewed as a success as it improved flexibility Level 3 Page 322 HIGH-PERFORMANCE INSIGHT A General Mills manufacturing facility implemented one such plan.64 This facility paid workers based on attained skill levels. There were basically four clusters (or “blocks”) of jobs, corresponding to the four production areas: mixing, filling, packaging, and materials. Within each block, workers could attain three levels of skill. Level 1 indicates limited ability, such as knowledge of basic facts and ability to perform simple tasks without direction.65 Level 2 means the employee attained partial proficiency and could, for instance, apply technical principles on the job. Attaining Level 3 means the employee is fully competent in the area and could, for example, analyze and solve production problems. Level 3 Level 3 Level 3 Level 2 Level 2 Level 2 Level 2 Level 1 Level 1 Level 1 Level 1 Mixing Filling Packaging Materials

48 Broadbanding 6 bands 2 bands
Broadbanding - Consolidating salary grades and ranges 6 bands Page 324 Broadbanding - Consolidating salary grades and ranges into just a few wide levels or “bands,” each of which contains a relatively small range of jobs and salary levels 2 bands

49 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

50 Compensation Plans in Practice
Most employees don’t understand it so how effective can they be in motivating people? Must make it known! Page 326 In one recent survey, only 40% of the participants reported that they attempted to assess the effectiveness of their new compensation systems. Based on this survey, “There is little evidence that pay is seen as a management tool or that measuring and monitoring program effectiveness is an important priority. Payroll may be the single largest item in the budget, but that apparently has not prompted many companies to determine if they are getting enough bang for their buck.” Another survey found that only 34% of organizations had an articulated compensation strategy, and only 27% of employees within these organizations understood the reward program. Only 20% of the employees said the reward program encouraged the desired behaviors. Most employers would therefore do well to study the results Mr. Gerstner got by changing the pay plan at IBM.

51 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 Page 327 On the other hand, dot-com employees want more than good pay. In addition to competitive compensation and benefits, for instance, dot-com employees expect an entrepreneurial work environment and numerous skill development opportunities.

52 Dot.Com Research Insight
In addition to competitive compensation and benefits, employees have: Cultural expectations Rewards expectations Career opportunity expectations Page 327 Research conducted by PricewaterhouseCoopers indicates that dot-com employees have specific expectations of their employers. These expectations fall into three categories: culture, rewards, opportunity. 1. Cultural expectations: Entrepreneurial work environment, high visibility within the organization, respect for work–life balance. 2. Rewards expectations: Competitive compensation and benefits, recognition for unique contributions, a piece of the action. 3. Career opportunity expectations: Skill development opportunities, active career mentoring, flexibility in career pathing. Other important features of dot-com company rewards include these: Most dot.com firms ignore internal equity and rely exclusively on market-based pay (because of fast turnover and the urgent need for advanced skills). Dot-coms traditionally emphasize stock ownership over cash in the compensation mix—one expert contends that “dot-com executives received cash compensation packages that were less than half what they might have earned at a traditional employer.” Dot-coms also tend to start new hires at market rates of pay, eliminate regular merit increases, and keep an employee’s salary constant until the person changes his or her role.

53 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) Page 328 Comparable worth refers to the requirement to pay men and women equal wages for jobs of comparable (rather than strictly equal) value to the employer. In its broadest sense, comparable worth may mean comparing quite dissimilar jobs, such as nurses to fire truck mechanics or secretaries to technicians. The problem is, women often have jobs that are quite dissimilar to those of men. County of Washington v. Gunther (1981) was a pivotal case for comparable worth. It involved Washington County, Oregon, prison matrons who claimed sex discrimination. The county had evaluated comparable but nonequal men’s jobs as having 5% more “job content” (based on a point evaluation system) than the women’s jobs, but paid the men 35% more. After seesawing through the courts to the U.S. Supreme Court, Washington County finally agreed to pay 35,000 employees in female-dominated jobs almost $500 million in pay raises over seven years to settle the suit. Comparable worth has implications for job evaluation. $618 $473

54 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? Page 329 Five steps to pay rates - Conduct salary survey, evaluate jobs, develop pay grades, use wage curves, and fine-tune pay rates. Five step ranking method: Obtain job information, Select raters and jobs, Select compensable factors, Rank jobs, Combine ratings

55 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 Page 329

56 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 Page 329


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