Dessler HRM 12e ch 011 establishing strategic pay plans

Part I: Introduction Managing Human Resources Today Managing Equal Opportunity and Diversity Mergers, Acquisitions, and Strategic Human Resource Management Part II: Staffing the Organization Personnel Planning and Recruiting Selecting Employees Training and Developing Employees Part III: Appraising and Compensating Employees Performance Management and Appraisal Compensating Employees Part IV: Employee and Labor Relations Ethics, Employee Rights, and Fair Treatment at Work Working with Unions and Resolving Disputes Improving Occupational Safety, Health, and Security Part V: Special Issues in Human Resource Management Managing Human Resources in Entrepreneurial Firms Managing HR Globally Measuring and Improving HR Management’s Results

Chapter 11

Establishing Strategic Pay Plans

Part Four | Compensation

WHERE WE ARE NOW…

1 List the basic factors determining pay rates.

2 Define and give an example of how to conduct a job

evaluation.

3 Explain in detail how to establish pay rates.

4 Explain how to price managerial and professional jobs.

5 Explain the difference between competency-based and

traditional pay plans.

6 Explain the importance today of broadbanding,

comparable worth, and board oversight of executive

pay.

LEARNING OUTCOMES

Basic Factors in Determining Pay Rates

Direct financial

Employee Compensation

Components

Legal Considerations in

Compensation

Employee Compensation

Equal Pay Act (1963)

Employee Retirement Income Security Act

Age Discrimination in Employment Act

Americans with Disabilities Act

Davis-Bacon Act (1931)

Walsh-Healey Public

Contract Act (1936)

Title VII of the 1964

Civil Rights Act

Fair Labor Standards Act

Act of 1935 (Wagner Act) Workers’ Compensation

FIGURE 11–1

Independent Contractor

FIGURE 11–2 Some Typical Exempt, Nonexempt Job Titles

EXEMPT

Attorneys Physicians Pharmacists Engineers Teachers Scientists Computer systems analysts General managers

Personnel directors Accountants

Purchasing agents

NONEXEMPT

Paralegals Accounting clerks Newspaper writers Working supervisor Management trainees Secretaries

Clerical employees

FIGURE 11–3 Who Is Exempt? Who Is Not Exempt?

Does the employee perform any

of the following types of duties/jobs?

Executive—management is the employee’s primary duty

Administrative—employee performing nonmanual office work

Professional/creative—employee whose work requires highly advanced knowledge/education; creative and artistic professional

Computer professional—employee involved in design or application of computers and related systems Outside sales—employee making sales

or taking orders which influence sales outside of the employer's premises

Is the employee paid at

least $455 per week

per hour The outside

sales exemption is not

subject to the salary basis

test.

A thorough analysis of the job duties must be performed to determine exempt status An exempt position must pass both the salary basis and the duties tests.

No

Corporate Policies, Competitive

Strategy,

Aligned Reward Strategy

specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy

creates pay policies that are consistent with the firm’s strategic aims

TABLE 11–1 Developing an Aligned Reward Strategy

Questions to Ask:

1 What must our company do, (for instance in terms of improving

customer service), to be successful in fulfilling its mission or

achieving its desired competitive position?

2 What are the employee behaviors or actions necessary to

successfully implement this competitive strategy?

3 What compensation programs should we use to reinforce those

behaviors? What should be the purpose of each program in

reinforcing each desired behavior?

4 What measurable requirements should each compensation

program meet to be deemed successful in fulfilling its purpose?

5 How well do our current compensation programs match these

requirements?

Compensation Policy Issues

• Pay for performance

• Pay for seniority

• The pay cycle

• Salary increases and promotions

• Overtime and shift pay

Equity and Its Impact on Pay

Rates

External

equity

Procedural equity

Internal equity

Individual equity

Forms of Compensation

Equity

Addressing Equity Issues

Area wage and salary surveys

Job analysis and job evaluation

Performance appraisal and incentive pay

Communications, grievance mechanisms,

and employees’ participation

Methods to Address Equity

Issues

Establishing Pay Rates

1

2 3 4 5

Steps in Establishing Pay Rates

Determine the worth of each job in your organization

through job evaluation (to ensure internal equity).

Conduct a salary survey of what other employers are

paying for comparable jobs (to help ensure external equity).

Group similar jobs into pay grades.

Price each pay grade by using wave curves.

Fine-tune pay rates.

Step1: The Salary Survey

To price

benchmark jobs

To make decisions about

benefits

Uses for Salary Surveys

To market-price wages for jobs

Sources for Salary

Consulting Firms

Sources of Wage and Salary Information

Professional Associations

The Internet

TABLE 11–2 Some Pay Data Web Sites

Sponsor Internet Address What It Provides Downside

Salary.com Salary.com Salary by job and zip code,

plus job and description, for hundreds of jobs

Adapts national averages by applying local cost-of-living differences

Wageweb www.wageweb.com Average salaries for more than

150 clerical, professional, and managerial jobs

Charges for breakdowns by industry, location, etc

Salaries and wages for U.S

government jobs, by location

Limited to U.S

government jobs

Job Smart http://jobstar.org/tools/

salary/sal-prof.php Profession-specific salary surveys Necessary to review numerous salary

surveys for each profession

cnnmoney.com cnnmoney.com Input your current salary and

city, and this gives you comparable salary in destination city

Based on national averages adapted

to cost-of-living differences

Step 2: Job Evaluation

Identifying Compensable Factors

Working conditions

The Job Evaluation Process

1

Performing the actual evaluation Getting the cooperation of employees

Preparing for the Job Evaluation

Identifying the need for the job evaluation

Choosing an evaluation committee

2 3 4

How to Evaluate Jobs

Methods for Evaluating Jobs

Factor comparison

Job Evaluation Methods: Ranking

• Ranking each job relative to all other jobs, usually

based on some overall factor.

• Steps in job ranking:

1 Obtain job information.

2 Select and group jobs.

3 Select compensable factors.

4 Rank jobs.

5 Combine ratings.

TABLE 11–3 Job Ranking by Olympia Health Care

Job Evaluation Methods:

Job Classification

• Raters categorize jobs into groups or classes of jobs that

are of roughly the same value for pay purposes.

they contain

FIGURE 11–4 Example of a Grade Level Definition

This is a summary chart of the key grade level criteria for the GS-7 level of clerical and assistance work Do not use this chart alone for classification purposes; additional grade level criteria are in the Web-based chart.

Job Evaluation Methods: Point

present in the job

corresponding points for each factor

Step 3: Grouping Jobs

Point Method

Ranking Method

Classification Methods

Grouping Similar Jobs into Pay Grades

Step 4: Price Each Pay Grade

• The Wage Curve

the points or rankings assigned to each job or grade by the job evaluation

determined by one of the job evaluation methods and the current average pay rates for your grades

FIGURE 11–5 Plotting a Wage Curve

Step 5: Fine-Tune Pay Rates

• Developing Pay Ranges

• Correcting Out-of-Line Rates

for their pay grade

jobs to maximum in the pay range for their pay grade

FIGURE 11–6 Wage Structure

TABLE 11–4 Federal Government Pay Scales

HR in Practice:

Developing a Workable Pay Plan

• Simplified Approach:

for upcoming year

FIGURE 11–7

Compensation

Administration

Checklist

Pricing Managerial and

Professional Jobs

Base

pay

Executive benefits/perks

Short-term incentives

Long-term incentives

Compensating Executives

and Managers

Pricing Managerial and

factors such as the business strategy, corporate trends, and

where they want to be in the short and long term

determine their pay

the restrictions on what companies pay top executives

boosting the emphasis on performance-based pay

Compensating Professional

• Compensable factors focus on problem solving,

creativity, job scope, and technical knowledge and

expertise

• Firms use the point method and factor comparison

methods, although job classification is most popular.

• Professional jobs are market-priced to establish the

values for benchmark jobs.

Competency-Based Pay

• Competencies

skills, and behaviors, that enable performance

• What is Competency-Based Pay?

knowledge, rather than for the job title he or she holds

Why Use Competency-Based

Pay?

High-Performance

Work Systems

StrategicAims

Competency-Based Pay Supports

Performance Management

Competency-Based Pay in Practice

• Main elements of skill/competency/knowledge–based

pay programs:

permit work assignment flexibility

Competency-Based Pay: Pros and

Special Topics in Compensation

• Broadbanding

or “bands,” each of which contains a relatively wide range of

jobs and salary levels

to new employees

FIGURE 11–8 Broadbanded Structure and How It Relates

to Traditional Pay Grades and Ranges

Comparable Worth

• Concept:

equal wages for dissimilar jobs that are of comparable

(rather than strictly equal) value to the employer

• Basis:

are dissimilar to those of men and those jobs are often

consistently valued less than men’s jobs

The Pay Gap

• Factors Lowering the Earnings of Women:

reflect their above-average performance

enabling them to be promoted to higher-level jobs over women with more seniority

departments with lower-paying jobs

Board Oversight of Executive Pay

• Factors Influencing Executive Compensation

at fair market value

awards in firms which had U.S treasury loans

compensation-related information

financial reporting under the Sarbanes Oxley Act

compensation due to lack of independence by

executive board compensation committees

Improving Productivity Through

HRIS: Automating Compensation

Benefits of Compensation Automation:

overages in compensation and raises

K E Y T E R M S

employee compensation

direct financial payments

indirect financial payments

Davis-Bacon Act (1931)

Walsh-Healey Public Contract

Act (1936)

Title VII of the 1964 Civil Rights Act

Fair Labor Standards Act (1938)

Equal Pay Act (1963)

Employee Retirement Income

Security Act (ERISA)

classes grades grade definition point method factor comparison method pay grade

wage curve pay ranges competency-based pay competencies

broadbanding comparable worth

Chapter 11

Appendix

Quantitative Job Evaluation

assigned to each factor

screen out unusable key jobs

FIGURE 11–A1 Sample Definitions of Five Factors Typically

Used in the Factor Comparison Method

1 Mental Requirements

Either the possession of and/or the active application of the following:

A (inherent) Mental traits, such as intelligence, memory, reasoning, facility in verbal expression,

ability to get along with people, and imagination.

B (acquired) General education, such as grammar and arithmetic; or general information as to sports, world events, etc.

C (acquired) Specialized knowledge, such as chemistry, engineering, accounting, advertising, etc.

2 Skill Requirements

A (acquired) Facility in muscular coordination, as in operating machines, repetitive movements, careful

coordinations, dexterity, assembling, sorting, etc.

B (acquired) Specific job knowledge necessary to the muscular coordination only; acquired by

performance of the work and not to be confused with general education or specialized knowledge.

It is very largely training in the interpretation of sensory impressions.

Examples

1 In operating an adding machine, the knowledge of which key to depress for a subtotal would be skill.

2 In automobile repair, the ability to determine the significance of a knock in the motor would be skill.

3 In hand-firing a boiler, the ability to determine from the appearance of the firebed how coal should be

shoveled over the surface would be skill.

3 Physical Requirements

FIGURE 11–A1 Sample Definitions of Five Factors Typically

Used in the Factor Comparison Method (cont’d)

4 Responsibilities

A For raw materials, processed materials, tools, equipment, and property.

B For money or negotiable securities.

C For profits or loss, savings or methods’ improvement.

D For public contact.

E For records.

F For supervision.

1 Primarily the complexity of supervision given to subordinates; the number of subordinates is a secondary

feature Planning, direction, coordination, instruction, control, and approval characterize this kind of supervision.

2 Also, the degree of supervision received If Jobs A and B gave no supervision to subordinates,

but A received much closer immediate supervision than B, then B would be entitled to a higher rating than A in the supervision factor.

To summarize the four degrees of supervision:

Highest degree—gives much—gets little

High degree—gives much—gets much

Low degree—gives none—gets little

Lowest degree—gives none—gets much

5 Working Conditions

A Environmental influences such as atmosphere, ventilation, illumination, noise, congestion,

fellow workers, etc.

B Hazards—from the work or its surroundings

C Hours

TABLE 11–A1 Ranking Key Jobs by Factors 1

1 1 is high, 4 is low.

Mental Requirements Requirements Physical Requirements Responsibility Skill Conditions Working

Punch press operator 2 3 2 2 3

TABLE 11–A2 Ranking Key Jobs by Wage Rates 1

1 1 is high, 4 is low.

Hourly Wage

Requirements

Working Conditions Mental Physical Skill Responsibility

Welder $9.80 4.00 (1) 0.40 (4) 3.00 (1) 2.00 (1) 0.40 (2)

Crane operator $5.60 1.40 (3) 2.00 (1) 1.80 (3) 0.20 (4) 0.20 (4)

Punch press operator $6.00 1.60 (2) 1.30 (3) 2.00 (2) 0.80 (2) 0.30 (3)

Security guard $4.00 1.20 (4) 1.40 (2) 0.40 (4) 0.40 (3) 0.60 (1)

TABLE 11–A3 Comparison of Factor and Wage Rankings

Mental Requirements Requirements Physical Requirements Skill Responsibility Conditions Working

1 Amount of each factor based on step 3.

2 Ratings based on distribution of wages to each factor from step 5.

TABLE 11–A4 Job (Factor)-Comparison Scale

Value

Mental Requirements

Physical Requirements

Skill

Working Conditions

0.20 Crane Operator Crane Operator

0.40 Welder Sec Guard Sec Guard Welder

1.20 Sec Guard

1.30 Punch Press Operator

1.40 Crane Operator Sec Guard (Inspector) (Plater)

1.60 Punch Press Operator

1.70 (Plater)

1.80 Crane Operator (Inspector)

2.00 Crane Operator Punch Press Operator Welder

2.20 (Plater)

4.00 Welder

The Point Method of Job Evaluation

Step 1 Determine clusters of jobs to be evaluated

Step 2 Collect job information

Step 3 Select compensable factors

Step 4 Define compensable factors

Step 5 Define factor degrees

Step 6 Determine relative values of factors

FIGURE 11–A2 Example of One Factor (Complexity/Problem Solving)

in a Point Factor System

0 0 Seldom confronts problems not covered by job routine or organizational policy;

analysis of data is negligible Benchmark: Telephone operator/ receptionist.

1 40 Follows clearly prescribed standard practice and demonstrates straightforward

application of readily understood rules and procedures Analyzes noncomplicated

data by established routine Benchmark: Statistical clerk, billing clerk

2 80 Frequently confronts problems not covered by job routine Independent judgment

exercised in making minor decisions where alternatives are limited and standard policies established Analysis of standardized data for information of or use by

others Benchmark: Social worker, executive secretary

3 120 Exercises independent judgment in making decisions involving nonroutine problems

with general guidance only from higher supervision Analyzes and evaluates data pertaining to nonroutine problems for solution in conjunction with others

Benchmark: Nurse, accountant, team leader

4 160 Uses independent judgment in making decisions that are subject to review in the

final stages only Analyzes and solves nonroutine problems involving evaluation of a wide variety of data as a regular part of job duties Makes decisions involving

procedures Benchmark: Associate director, business manager, park services

director

5 200 Uses independent judgment in making decisions that are not subject to review