Establishing Strategic Pay Plans 11 Establishing Strategic Pay Plans In this chapter, we will cover the basics of compensation. We will include basic considerations in determining and establishing pay rates, current trends and issues, and pricing managerial and professional jobs. Today, compensation plans are evolving from more generic, impersonal methods to programs that recognize and reward specific competencies needed by organizations to accomplish their strategic objectives. Copyright © 2013 Pearson Education

Learning Objectives Define competency-based pay. Explain the reasons for using the competency-based pay. Explain the difference between competency-based and traditional pay plans. In addition, after completing this chapter, you will be able to: Explain how to price managerial and professional jobs. Explain the difference between competency-based and traditional pay plans. List and explain six important trends in compensation management. Copyright © 2013 Pearson Education

Explain the difference between competency-based and traditional pay plans. How employers pay employees has been evolving. In this final section, we’ll look at fiveimportant contemporary compensation topics, competency-based pay, broadbanding,talent management, comparable worth, and executive pay. Copyright © 2013 Pearson Education

Competency-based pay Competency-based pay What is it? Why use it? In practice The bottom line Competency-based pay means 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. There are three reasons why you should consider using competency-based pay. First, in a high performance work system, you want employees to be enthusiastic about learning and moving into other jobs. Second, you can enhance your strategic plans by paying for skills that are critical to those plans. Finally, measurable skills, knowledge, and competencies are at the heart of performance management processes. In practice competency-based pay consists of four main components. These are a: system that defines skills and processes; training system; competency testing system; and work design that allows employees to move among jobs. Some note that competency-based pay “ignores the cost implications of paying [employees] forknowledge, skills and behaviors even if they are not used.”There may also be simpleralternatives. For example, overlapping rate ranges allow workers to move from grade tograde, within limits Copyright © 2013 Pearson Education

Competency-based pay Competency-based pay means the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job responsibilities or title he or she holds. Also called as knowledge-based pay and skill-based pay. Copyright © 2013 Pearson Education

Competencies Competencies are demonstrable personal characteristics such as knowledge, skills, and persona; behavior such as leadership. Why pay employees based on the skills levels they achieve, rather than based on the jobs they are assigned to? This to encourage employees to get and to use skills required to rotate among jobs.

Reasons of using Competency-based pay To ensure employees are enthusiastic about learning and moving into other jobs. To enhance strategic plans by paying for skills that are critical to those plans. Measurable skills, knowledge, and competencies are important for performance management processes. This approach is designed to motivate employees to become aspirational, build on their existing skills and apply these in their job. Copyright © 2013 Pearson Education

Other Reasons: Serves as a motivational tool It reinforces a culture of self-improvement It improve staff retention It encourages corporate transparency

4 Components: system that defines skills and processes; training system; competency testing system; and work design that allows employees to move among jobs. Copyright © 2013 Pearson Education

Differences between traditional system and competency-based pay Traditional – ties the worker’s pay to the worth of the job based on the job description and duties. Pay is job oriented. Competency-based pay – ties the worker’s pay to his/her competencies. Pay is person oriented. Copyright © 2013 Pearson Education

Example: Professional Pay Systems Certain professional jobs in an organization call for special compensation systems. This is determined by the nature of the job and the labor market for these skills.

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