Chapter Eight Establishing Strategic Reward Plans © 2007 Pearson Education Canada 8-1 Dessler, Cole, Goodman, and Sutherland In-Class Edition Management of Human Resources Second Canadian Edition

© 2007 Pearson Education Canada 8-2 Strategic Aspects of Total Rewards –pay for skills and competencies –pay for performance –flexible pay systems –pay for skills and competencies –pay for performance –flexible pay systems Three Strategic Approaches

© 2007 Pearson Education Canada 8-3 Direct Payments (pay) Direct Payments (pay) Two Main Components of Pay Indirect Payments (benefits) Indirect Payments (benefits) Strategic Aspects of Total Rewards

© 2007 Pearson Education Canada 8-4 Basic Considerations in Determining Pay Rates Legal –employment/labour standards –pay equity –human rights –Canada/Quebec Pension Plan –Workers’ Compensation –Employment Insurance Union –collective bargaining Compensation policies –leader or follower in pay Equity –internal and external Legal –employment/labour standards –pay equity –human rights –Canada/Quebec Pension Plan –Workers’ Compensation –Employment Insurance Union –collective bargaining Compensation policies –leader or follower in pay Equity –internal and external

© 2007 Pearson Education Canada 8-5 Establishing Pay Rates Step 1. Conduct job evaluation—for internal equity Step 2. Group similar jobs into pay grades Step 3. Conduct salary survey—for external equity Step 4. Price each pay grade using wage curves Step 5. Fine-tune pay rates Step 1. Conduct job evaluation—for internal equity Step 2. Group similar jobs into pay grades Step 3. Conduct salary survey—for external equity Step 4. Price each pay grade using wage curves Step 5. Fine-tune pay rates

© 2007 Pearson Education Canada 8-6 Establishing Pay Rates Job Evaluation –systematic comparison of jobs to determine their relative worth Benchmark Job –job commonly found in organizations –critical to firm’s operations Compensable Factor –fundamental compensable aspect of a job; eg. skill, effort, responsibility, working conditions Job Evaluation –systematic comparison of jobs to determine their relative worth Benchmark Job –job commonly found in organizations –critical to firm’s operations Compensable Factor –fundamental compensable aspect of a job; eg. skill, effort, responsibility, working conditions Step 1. Job Evaluation

© 2007 Pearson Education Canada 8-7 Establishing Pay Rates Step 1. Job Evaluation Classification/grading method Ranking method Point method

© 2007 Pearson Education Canada 8-8 Establishing Pay Rates Ranking Method 1.Obtain job information 2.Group jobs to be rated 3. Select compensable factors 4. Rank jobs 5. Combine ratings Ranking Method 1.Obtain job information 2.Group jobs to be rated 3. Select compensable factors 4. Rank jobs 5. Combine ratings Step 1. Job Evaluation

© 2007 Pearson Education Canada 8-9 Establishing Pay Rates Ranking OrderAnnual Pay Office manager $60,000 Chief nurse54,000 Bookkeeper50,000 Nurse40,000 Cook26,000 Nurse’s aide24,000 Maid20,000 Ranking OrderAnnual Pay Office manager $60,000 Chief nurse54,000 Bookkeeper50,000 Nurse40,000 Cook26,000 Nurse’s aide24,000 Maid20,000 Step 1. Job Evaluation

© 2007 Pearson Education Canada 8-10 Establishing Pay Rates Classification/Grading Method –categorize jobs into groups (classes or grades) –classes contain similar jobs –grades contain dissimilar jobs of equal difficulty Classification/Grading Method –categorize jobs into groups (classes or grades) –classes contain similar jobs –grades contain dissimilar jobs of equal difficulty Step 1. Job Evaluation

© 2007 Pearson Education Canada 8-11 Establishing Pay Rates Point Method –identify compensable factors –determine the degree to which each factor is present in each job Point Method –identify compensable factors –determine the degree to which each factor is present in each job Step 1. Job Evaluation

© 2007 Pearson Education Canada 8-12 Establishing Pay Rates Point Method (1 of 2) 1. determine clusters of jobs to be evaluated 2. collect job information 3. select and define compensable factors 4. define factor degrees Point Method (1 of 2) 1. determine clusters of jobs to be evaluated 2. collect job information 3. select and define compensable factors 4. define factor degrees Step 1. Job Evaluation

© 2007 Pearson Education Canada 8-13 Establishing Pay Rates Point Method (2 of 2) 5. determine factor weights 6. assign point values to factors and degrees 7. write the job evaluation manual 8. rate the jobs Point Method (2 of 2) 5. determine factor weights 6. assign point values to factors and degrees 7. write the job evaluation manual 8. rate the jobs Step 1. Job Evaluation

© 2007 Pearson Education Canada 8-14 Point System – XYZ Company Possible Points Weight Skill Technical Skill/Education1-10 Job-Related Experience1-10 Updating of Knowledge1-525% Effort Physical Effort1-5 Visual Effort1-5 Mental Effort1-1020% Responsibility Autonomy1-10 Supervisory Responsibility0-15 Internal/External Contacts1-1540% Working Conditions Work Environment1-5 Travel0-1015% %

© 2007 Pearson Education Canada 8-15 Point System – ABC Company Factor Level (I-IV) Min.LowMod.HighWeight IIIIIIIV Skill Experience Education/Training % Effort Physical Mental % Responsibility Safety of Others Equipment and Materials Assisting Trainees Product/Service Quality % Working Conditions Unpleasant Conditions Hazards % %

© 2007 Pearson Education Canada 8-16 Establishing Pay Rates Pay Grade –jobs of approximately equal value, eg.: point: jobs falling within a range of points ranking: all jobs falling within 2-3 ranks classification: jobs already in classes/grades factor comparison: specified range of pay rates Pay Grade –jobs of approximately equal value, eg.: point: jobs falling within a range of points ranking: all jobs falling within 2-3 ranks classification: jobs already in classes/grades factor comparison: specified range of pay rates Step 2. Group Similar Jobs into Pay Grades

© 2007 Pearson Education Canada 8-17 Establishing Pay Rates –formal or informal survey by employer –commercial, professional, and government salary surveys –formal or informal survey by employer –commercial, professional, and government salary surveys Step 3. Conduct a Wage/Salary Survey

© 2007 Pearson Education Canada 8-18 Establishing Pay Rates –find average pay for each pay grade –plot pay rates for each pay grade –fit a wage line through points (regression) –price jobs –find average pay for each pay grade –plot pay rates for each pay grade –fit a wage line through points (regression) –price jobs Step 4. Price Each Pay Grade—Wage Curves

© 2007 Pearson Education Canada 8-19 Establishing Pay Rates Job Evaluation Points Average Wage Rates * ** ** * *** * Wage Curve Step 4. Price Each Pay Grade—Wage Curves

© 2007 Pearson Education Canada 8-20 Establishing Pay Rates Step 5. Fine-Tune Pay Rates I II III IV V VI Wage Structure

© 2007 Pearson Education Canada 8-21 Establishing Pay Rates Step 5. Fine-Tune Pay Rates Broadbanding $200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $35,000 Band 1 Trainee Band 2 Independent Contributor Band 3 Senior Specialist Band 4 Expert Represents organization to external groups Provides strategic direction and advice Serves as a mentor or resource for ideas Represents work group in meetings Work is checked regularly by supervisor Develops credibility and reputation Works under close supervision Learning how things are done

© 2007 Pearson Education Canada 8-22 Current Trends in Compensation Skill/competency-based pay Customized job evaluation plans

© 2007 Pearson Education Canada 8-23 Current Trends in Compensation –to eliminate systemic pay discrimination by providing equal pay to: male-dominated job classes female-dominated job classes of equal value –to eliminate systemic pay discrimination by providing equal pay to: male-dominated job classes female-dominated job classes of equal value Pay Equity

© 2007 Pearson Education Canada 8-24 Current Trends in Compensation –must ensure no gender bias in job evaluation –long-term solution is women and men equally represented in all jobs; i.e. no male or female- dominated jobs (occupational segregation) –must ensure no gender bias in job evaluation –long-term solution is women and men equally represented in all jobs; i.e. no male or female- dominated jobs (occupational segregation) Pay Equity

© 2007 Pearson Education Canada 8-25 Pay for Managerial and Professional Jobs –pay based on performance as well as the value of the job Compensating managers: -salary, benefits, short-term incentives, long-term incentives, perquisites Compensating professional employees: -market pricing as difficult to identify compensable factors –pay based on performance as well as the value of the job Compensating managers: -salary, benefits, short-term incentives, long-term incentives, perquisites Compensating professional employees: -market pricing as difficult to identify compensable factors

© 2007 Pearson Education Canada 8-26 Incentive Plans Variable Pay –plan that links pay to productivity or profitability Variable Pay –plan that links pay to productivity or profitability

© 2007 Pearson Education Canada 8-27 Incentive Plans Spot Bonus –spontaneous incentive awarded to individuals for accomplishments not easily measured by a standard Spot Bonus –spontaneous incentive awarded to individuals for accomplishments not easily measured by a standard

© 2007 Pearson Education Canada 8-28 Incentives for Operations Employees –piecework plans—straight; guaranteed –team or group incentive plan –piecework plans—straight; guaranteed –team or group incentive plan

© 2007 Pearson Education Canada 8-29 Incentives for Managers and Executives Short-term Incentives annual bonus Short-term Incentives annual bonus Long-term Incentives capital accumulation plans Long-term Incentives capital accumulation plans

© 2007 Pearson Education Canada 8-30 Incentives for Managers and Executives –eligibility –fund size –determining individual awards –eligibility –fund size –determining individual awards Annual Bonus—Decisions

© 2007 Pearson Education Canada 8-31 Incentives for Managers and Executives Stock options – right to purchase a stated number of shares of a company’s stock at today’s price at some time in the future Stock options – right to purchase a stated number of shares of a company’s stock at today’s price at some time in the future Long-Term Incentives

© 2007 Pearson Education Canada 8-32 Incentives for Salespeople Salary Plan (fixed salary) Salary Plan (fixed salary) Commission Plan (pay in direct proportion to sales) Commission Plan (pay in direct proportion to sales) Combination Plan (salary plus commission) Combination Plan (salary plus commission)

© 2007 Pearson Education Canada 8-33 Organization-Wide Incentive Plans –profit sharing plans –employee share purchase/stock ownership plans –gainsharing plans –profit sharing plans –employee share purchase/stock ownership plans –gainsharing plans

© 2007 Pearson Education Canada 8-34 Developing Effective Incentive Plans Employee Recognition Programs Lack of recognition and praise is the #1 cause of employee turnover Lack of recognition and praise is the #1 cause of employee turnover