PART FOUR COMPENSATION
CHAPTER
T Eleven
Establishing
Strategic Pay Plans
11
Lecture Outline
Strategic Overview
Determining Pay Rates
Corporate Policies and Competitive Strategy
Equity and Its Impact on Pay Rates
Establishing Pay Rates
Step 1. The Salary Survey
Step 2. Job Evaluation
Step 3. Group Similar Jobs into Pay Grades
Step 4. Price Each Pay Grade—Wage Curves
Step 5. Fine-Tune Pay Rates
Pricing Managerial and Professional Jobs
Compensating Managers
Compensating Professional Employees
Competency-Based Pay
What is Competency-Based Pay?
Why Use Competency-Based Pay?
Competency-Based Pay in Practice
Competency-Based Pay: Pros, Cons, and Results
Other Compensation Trends
Broadbanding
Strategic Compensation
Comparable Worth
In Brief: This chapter covers the basics of compensation. Included are basic considerations in determining pay rates, establishing pay rates, current trends in compensation, pricing managerial and professional jobs, and current issues in compensation management.
Interesting Issues: This chapter lists and discusses many current and controversial issues in compensation management. You may want to incorporate a discussion of the current issues described in the chapter.
ANNOTATED OUTLINE
I.
Determining Pay Rates
Employee compensation – refers to all forms of pay or rewards going to employees, which include direct financial payments and indirect payments. Direct financial payments include wages, salaries, incentives, commissions, and bonuses. Indirect payments include financial benefits, like employer-paid insurance and vacations.
Know Your Employment Law: Compensation – the area of compensation management is highly regulated. Included here is:
1. Overview of Compensation Laws
2. 1938 Fair Labor Standards Act
3. Compensation Law in Practice: Making the Offer
4. Compensation Law in Practice: The Workday
5. Compensation Law in Practice: Independent Contractor
6. Union Influences on Compensation Decisions
7. Other Legislation Affecting Compensation
A.
Corporate Policies, Competitive Strategy, and Compensation – The basic thrust in pay plans today is to produce an aligned reward strategy to create compensation plans that guide employee behaviors in the desired, strategic direction.
1.
Salary Compression – means longer-term employees’ salaries are lower than those of workers entering the firm today. To raise salaries, employers can give raises based on longevity (plus skills), install a more aggressive merit pay program, or authorize supervisors to recommend equity adjustments for selected employees who are both highly valued and victims of pay compression.
2.
Geography – Cost of living differences between cities can be considerable. There are several ways that employers handle cost of living differentials.
B. Equity and Its Impact on Pay Rates – External and internal equity are crucial in pay rates. External equity refers to pay comparing favorably with rates in other organizations. Internal equity refers to employees viewing their pay as equitable given other pay rates in the organization. The following five steps should be taken to ensure external and internal equity: 1) conduct a salary survey; 2) conduct a job evaluation; 3) group similar jobs into pay grades; 4) price each pay grade by using wage curves; and 5) fine-tune pay rates.
The New Workplace: Globalization and Diversity, Compensating Expatriate Employees – The question of cost of living differentials has particular significance to multinational firms. This section describes home-based plans as well as host-based plans.
NOTES
Educational Materials to Use
II.
Establishing Pay Rates
A. Step 1. The Salary Survey
Introduction – Virtually all employers conduct at least an informal telephone, newspaper, or Internet salary survey to price benchmark jobs and benefits.
1.
Commercial, Professional, and Government Salary Surveys – Many employers use surveys published by consulting firms, professional associations, or government agencies. The Bureau of Labor Statistics (BLS) annually conducts area wage surveys, industry wage surveys, and professional, administrative, technical, and clerical (PATC) surveys in a recently organized National Compensation Survey.
2.
Using the Internet to Do Compensation Surveys – A rapidly expanding array of Internet-based options makes it fairly easy for anyone to access published compensation survey information. Several examples of sources of salary data are provided.
B. Step 2. Job Evaluation
Purpose of Job Evaluation is to determine a job’s relative worth through a formal and systematic comparison of jobs to determine the worth of one job relative to another. The basic principle is that jobs that require greater qualifications, more responsibilities, and more complex job duties should be paid higher than jobs with lesser requirements.
1.
Compensable Factors – determine the definition of job content, establish how the jobs compare to each other, and set the compensation paid for each job. Some employers develop their own compensable factors, while most use factors popularized by packaged job evaluation systems or by federal legislation.
2.
Preparing for the Job Evaluation – Job evaluation, a mostly judgmental process, demands close cooperation among supervisors, HR specialists, and employees and union representatives. The main steps include identifying the need for the program, getting cooperation, and choosing an evaluation committee to perform the actual job evaluation.
3.
Job Evaluation Methods: Ranking – is the simplest method, which ranks each job relative to all other jobs on some overall factor (see Table 11-1). The steps of the ranking method include: 1) obtaining job information; 2) selecting raters and jobs; 3) selecting compensable factors; 4) ranking jobs; and 5) combining ratings.
4.
Job Evaluation Methods: Job Classification (or grading) – is a simple, widely used method in which you categorize jobs into groups (see Figure 11-2). The groups are called classes if they contain similar jobs, or grades if they contain jobs that are similar in difficulty but otherwise different.
5.
Job Evaluation Methods: The point method – a more quantitative technique, 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.
6.
Job Evaluation Methods: Factor Comparison – is a quantitative technique, which is a refinement of the ranking method. It entails deciding which jobs have more of the chosen compensable factors.
7.
Computerized Job Evaluations – use structured questionnaires and statistical models. They 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.
C. Step 3. Group Similar Jobs into Pay Grades – The committee will probably group similar jobs into grades for pay purposes, instead of having to deal with hundreds of pay rates.
D. Step 4. Price Each Pay Grade—Wage Curves are typically used to help assign pay rates to each pay grade or job. They show the relationship between the value of the job and the average wage paid for this job (see Figure 11-3).
E. Step 5. Fine Tune Pay Rates – Fine-tuning involves correcting out-of-line rates and usually developing pay ranges.
1.
Developing Pay Ranges – Most employers develop vertical pay (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 pay grade (see Figure 11-4). You may depict the pay ranges as steps or levels, with specific corresponding pay rates for each step within each pay grade (see Table 11-2).
Correcting Out-of-Line Rates – The wage rate for a job may fall well off the wage line or well outside the rate range for its grade (see Figure 11-3), which means that the average pay for the job is currently too high or too low, relative to other jobs in the firm. If the point falls well below the line, a pay raise for the job may be required. If the point falls well above the wage line, a pay cut or a pay freeze may be required.
When You’re On Your Own HR For Line Managers and Entrepreneurs: Developing a Workable Pay Plan – Discusses some of the basic approaches that small firms can use to implement the concepts discussed in this chapter. It includes practical direction on developing a workable pay plan, compensation policies, and a discussion of legal issues.
NOTES
Educational Materials to Use
III.
Pricing Managerial and Professional Jobs
A. Compensating Managers
1.
What Really Determines Executive Pay? – Basic compensation elements for top executives include: base pay, short-term incentives, long-term incentives, and executive benefits and perks.
2.
Managerial Job Evaluation – The approach used by most large companies is to classify all executive and management positions into a series of grades, with salary ranges attached, to ensure some degree of equity among various divisions and departments.
B.
Compensating Professional Employees – Most employers use a market-pricing approach instead job evaluation, since it’s not easy to identify factors and degrees of factors which meaningfully differentiate among the values of professional work.
NOTES
Educational Materials to Use
IV.
Competency-Based Pay
Introduction – increasingly experts are moving away from basing pay on the value of the job and more towards paying for the competencies the job demands of those who fill it.
A.
What is Competency-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.
B.
Why Use Competency-based Pay? – Three reasons are given: 1) in a high performance work system you want employees to be enthusiastic about learning and moving among other jobs; 2) you can enhance your strategic plans by paying for skills that are critical for those plans; and 3) measurable skills, knowledge, and competencies are at the heart of performance management processes.
C.
Competency-based Pay in Practice – contain four main components: 1) a system that defines skills and processes for tying those skills to pay; 2) a training system for acquiring skills, 3) competency testing system, and 4) a work design that allows employees to move among jobs.
D.
Competency-based Pay: Pros, Cons, and Results – There are a variety of pros and cons which are discussed, as well as implementation pitfalls.
NOTES
Educational Materials to Use
V.
Other Compensation Trends
A. Broadbanding – means collapsing salary grades and ranges into just a few wide levels or bands. Figure 11-7 shows a sample of setting three bands.
B.
Strategic Compensation – IBM executed an organizational renewal through the implementation of a new compensation plan that contained four major changes:
1.
The Marketplace Rules
2.
Fewer Jobs, Evaluated Differently, In Broadbands
3.
Managers Manage
4.
Big Stakes for Stakeholders
C.
Comparable Worth – refers to the requirement to pay equal wages for jobs of comparable value to the employer rather than strictly equal value.
1.
The Gunther Supreme Court Case involved Washington County, Oregon, prison matrons who claimed sex discrimination. Washington County finally agreed to pay 35,000 employees in female-dominated jobs almost $500 million in pay raises over 7 years to settle the suit.
2.
Comparable Worth and Job Evaluation – Comparable worth has potentially significant implications for employers’ job evaluation procedures and perceived fairness.
HR Scorecard Strategy and Results: The New Compensation Plan – The Hotel Paris’ implementation of a strategic pay plan is outlined with the desired results that it obtained.
Improving Productivity Through HRIS: Automating the Compensation Planning Process – The history of compensation planning processes is outlined. Today, intranet-based systems are saving companies money and making the process quicker.
NOTES
Educational Materials to Use
DISCUSSION QUESTIONS
1.
What is the difference between exempt and non-exempt jobs? Under the Fair Labor Standards Act, certain categories of employees are exempt from the act or certain provisions of the act. Those categories of employees that are exempted from provisions of the act are called "exempt" while those covered by the act are called "non-exempt." Generally executives, administrative, managerial, and professional employees are exempt from minimum wage and overtime provisions.
2.
Should the job evaluation depend on an appraisal of the jobholder's performance? Why or Why not? No. Job evaluation involves comparing jobs to one another based on their content. Individual performance is covered under performance evaluation and does not affect the content of the job.
3.
What is the relationship between compensable factors and job specifications? Compensable factors include skill, effort, responsibility, working conditions, problem solving, know-how, accountability, and the like. Many of these factors are obtainable from job specifications that are part of the job analysis.
4.
Compare and contrast the following methods of job evaluation: ranking, classification, factor comparison, point method? The ranking method is the simplest, easiest to explain, and the quickest to implement. The drawbacks to the ranking method are a tendency to rely too heavily on guesstimates and it does not provide a yardstick for measuring the relative values of jobs. The classification (or grading) method is simple, and widely used. Most employers usually end up classifying jobs anyway, so this method often makes sense. The disadvantages are that it is difficult to write the class or grade descriptions and considerable judgment is required to apply them. The factor comparison method is considered a refinement of the ranking system, thus it may be considered to be more accurate than others. The disadvantages are the considerable time and effort involved to implement the system and to evaluate jobs. The point method, like the factor comparison method, is a quantitative analysis that is considered accurate. This system is easy to implement, but developing a point manual can be an expensive.
5.
What are the pros and cons of broadbanding, and would you recommend your current employer (or some other firm you're familiar with) use it? Why or why not? The advantages are that it injects greater flexibility into employee compensation and it is especially sensible where firms have flattened their organizations. It allows training and rotation of employees with fewer compensation problems. It also facilitates the boundaryless jobs and organizations being embraced by many firms. The negatives are that it may be more difficult to administer and keep track of individuals and to keep pay comparable.
6.
It was recently reported in the news that the average pay for most university presidents ranged around $200,000 per year, but that a few earned closer to $500,000 per year. What would account for such a disparity in the pay of universities' chief executive officers? The same things that account for the wide range of pay for the chief executive officers of other businesses and organizations in the same industry account for the disparity among universities. Many factors enter into this mix, including, but not limited to: size of the organization, ownership of the organization (public or private), focus of the organization (religious or secular, research or teaching), performance of the organization (financial and enrollment), prestige of the organization, and endowment and funding of the organization.
7. Do small companies need to develop a pay plan? Why or why not? Yes, small companies need to develop a pay plan. Students should use information learned in the chapter to justify their responses.
DESSLER COMPANION WEB SITE
We invite you to visit the Dessler homepage ( on the Prentice Hall Web site for the best online business support available. This site provides professors with a customized course Web site, including new communication tools, one-click navigation of chapter content, and great resources, such as Internet Resources, an HRCI Exam Prep Guide, assessment exercises, and more.
INDIVIDUAL AND GROUP ACTIVITIES
1.
Working individually or in groups, conduct salary surveys for the following positions: entry-level accountant and entry-level chemical engineer. What sources did you use, and what conclusions did you reach? If you were the HR manager for a local engineering firm, what would you recommend that you pay for each job? Students should be expected to use several of the resources indicated in Table 11-2 for gathering this information. Results should be checked for bias or contamination such as only surveying the largest firms in the area, or the unwillingness of some firms to provide this information. Student recommendations should be based on sound logic and conclusions from the data they collect.
2. Working individually or in groups, develop a compensation policy for the teller position at a local bank. Assume that there are four tellers: two were hired in May and the other two were hired in December. The compensation policy should address the following: appraisals, raises, holidays, vacation pay, overtime pay, method of pay, garnishments, and time cards. In developing their compensation policy for the teller position, the students should use the various Internet resources given in Table 11-2.
3.
Working individually or in groups, access relevant online Web sites to determine what equitable pay ranges are for jobs as network engineer, marketing manager, and HR manager with a bachelor’s degree and five years of experience in the following cities: New York, New York; San Francisco, California; Los Angeles, California; Houston, Texas; Dallas, Texas; Denver, Colorado; Miami, Florida; Atlanta, Georgia; Chicago, Illinois; Birmingham, Alabama; Detroit, Michigan; and Washington, . For each position in each city, what are the pay ranges and the average pay? Does geographical location impact the salaries of the different position? If so, how? The students should use resources and Internet sites discussed in the chapter to determine the pay ranges and average pay in each city.
4.
The HRCI “Test Specifications” appendix at the end of this book lists the knowledge someone studying for the HRCI certification exam needs to have in each area of human resource management (such as in Strategic Management, Workforce Planning, and Human Resource Development). In groups of four to five students, do four things: (1) review that appendix now; (2) identify the material in this chapter that relates to the required knowledge the appendix lists; (3) write four multiple choice exam questions on this material that you believe would be suitable for inclusion in the HRCI exam; and (4) if time permits, have someone from your team post your team’s questions in front of the class, so the students in other teams can take each others’ exam questions. Material from this chapter that relates to the test would include: determining pay rates, corporate policies and competitive strategy, equity and its impact on pay rates, the salary survey, job evaluation, pay grades, wage curves, fine-tune pay rates, compensating managers, compensating professional employees, competency-based pay, strategic compensation, and comparable worth. Virtually all of this chapter applies. Look for questions that have more than one plausible answer.
5. Some of America’s CEOs came under fire in 2004 because their pay seemed to some to be excessive, given their firms’ performances. To choose just two of very many: Citigroup CEO Sandy Weill got a $29 million cash bonus, and Sprint’s CEO Gary Forsee got $14 million. However, big institutional investors are no longer sitting back and not complaining. For example, TV’s Nightly Business Line says that pension manager TIAA-CREF is talking to 50 companies about executive pay. What do you think it was about the period 2000–2004 that got so many big investors to rebel against “excessive” executive pay? Do you think they were right to make a fuss? Why? One thing that is probably central to the criticisms is that corporate profits dropped dramatically during this period. This led many to question why executives continued to receive substantial bonuses and raises when performance is not good. Students may have many more ideas and perspectives as well.
EXPERIENTIAL EXERCISES & CASES
Experiential Exercise: Ranking the College’s Administrators
This exercise will give students experience in performing a job evaluation using the ranking method. When students have completed this exercise in their small groups, you should consider comparing results and discussing the similarities and differences.
Case Incident: Salary Inequities at Acme Manufacturing
What would you do if you were Black? This should generate lively discussion. Few students will argue for a “do nothing” approach, as the risk of legal damages is too high. Some students will argue that the discrepancies in salaries will not remain secret. If this is true, then women supervisors will discover they are underpaid and may seek additional back pay. Some students will suggest the company inform the supervisors that as a result of a recent compensation study, it was determined that these jobs were underpaid. The women in question will receive a larger raise at the time of their next performance review. Students in favor of this proposal will argue that by making it public but deferring the adjustment, they will signal that it is not a major crisis.
How do you think the company got into a situation like this in the first place? The informal system suggests that the local culture has overly influenced the compensation process. Issues like whether a spouse is working are not part of a professional compensation practice.
Why would you suggest Black pursue the alternative you suggested? Students will provide a variety of reasons. Those suggesting back pay as well as a raise will argue that:
a. The company needs to maintain fairness (a social justice approach).
b. They will signal to employees that unfair practices will not be tolerated.
c. They will gain the support of a group of stakeholders.
Those suggesting raises but no back pay may argue:
a. The women will likely feel their needs have been addressed.
b. It will be less expensive.
c. It will be less likely to draw a negative response from White males.
d. If the women push for back wages, they can be granted later.
Continuing Case: Carter Cleaning Company The New Pay Plan
1. Is the company at the point where it should be setting up a formal salary structure complete with job evaluations? Why? Yes, the company should set up a formal salary structure complete with job evaluations. The students should reference points in the chapter to justify their responses.
2. Is the company’s policy of paying 10% more than the prevailing wage rates a sound one, and how could that be determined? The students should use their judgment based on information presented in the chapter in giving their responses.
3. Similarly, is Carter’s male-female differential wise, and if not, why not? The salesperson’s male-female differential is not wise. The students should reference the Equal Pay Act of 1963 when providing their rationale.
4.
Specifically, what would you suggest Jennifer do now with respect to her company’s pay plan? There are many things that students could reasonably suggest, among them: eliminate the gender pay differential, establish performance or competency-based pay, establish a formal pay structure, etc.
KEY TERMS
employee compensation
All forms of pay or rewards going to employees and arising from their employment.
direct financial payments
Pay in the form of wages, salaries, incentives, commissions, and bonuses.
indirect financial payments
Pay in the form of financial benefits, such as insurance.
Davis-Bacon Act
A law passed in 1931 that sets wage rates for laborers employed by contractors working for the federal government.
Walsh-Healey Public
A law enacted in 1936 that requires minimum wage and working
Contract Act
conditions for employees working on any government contract amounting to more than $10,000.
Title VII of the 1964 Civil
This act makes it unlawful for employers to discriminate against any
Rights Act
individual with respect to hiring, compensations, terms, conditions, of privileges of employment because of race, color, religion, sex, or national origin.
Fair Labor Standards Act
Congress passed this act in 1936 to provide for minimum wages, maximum hours, overtime pay, and child labor protection. The law has been amended many times and covers most employees.
Equal Pay Act of 1963
An amendment to the Fair Labor Standards Act designed to require equal pay for women doing the same work as men.
Employee Retirement
The law that provides government protection of pensions for all
Income Security Act
employees with company pension plans. It also regulates vesting rights
(ERISA)
(Employees who leave before retirement may claim compensation from the pension plan).
salary compression
A salary inequity problem, usually caused by inflation, resulting in longer term employees in a position earning less than workers entering the firm today.
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.
job evaluation
A systematic comparison done in order to determine the worth of one job relative to another.
compensable factor
A fundamental, compensable element of a job, such as skills, effort, responsibility, and working conditions.
ranking method
The simplest method of job evaluation that involves ranking each job relative to all other jobs, usually based on overall difficulty.
job classification
A method for categorizing jobs into groups.
(or grading) method
classes
Grouping jobs based on a set of rules for each group or class, such as amount of independent judgment, skill, physical effort, and so forth, required for each class of jobs. Classes usually contain similar jobs.
grades
A job classification system like the class system, although grades often contain dissimilar jobs, such as secretaries, mechanics, and firefighters. Grade descriptions are written based on compensable factors listed in classification systems.
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.
point method
The job evaluation method in which a number of compensable factors are identified and then the degree to which each of these factors is present on the job is determined.
factor comparison
A widely used method of ranking jobs according to a variety of skill and
method
difficulty factors, then adding up these rankings to arrive at an overall numerical rating for each given job.
pay grade
A pay grade is comprised of jobs of approximately equal difficulty.
wage curve
Shows the relationship between the value of the job and the average wage paid for this job.
pay range
A series of steps or levels within a pay grade, usually based upon years of service.
competency-based pay
Where 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.
competencies
Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.
broadbanding
Consolidating salary grades and ranges into just a few levels or “bands,” each of which contains a relatively wide range of jobs and salary levels.
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.
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