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PowerPoint Presentation by Charlie CookThe University of West Alabama
Chapter 11
Establishing Strategic Pay Plans
Part Four | Compensation
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–2
Basic Factors in Determining Basic Factors in Determining Pay RatesPay Rates
Direct financial payments Indirect financial payments
Employee Compensation Components
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–3
Corporate Policies, Competitive Strategy,Corporate Policies, Competitive Strategy,and Compensationand Compensation
• Aligned Reward StrategyAligned Reward Strategy The employer’s basic task:The employer’s basic task:
To create a bundle of rewards—a total reward package—that To create a bundle of rewards—a total reward package—that specifically elicits the employee behaviors that the firm needs specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy.to support and achieve its competitive strategy.
The HR or compensation manager along with top management The HR or compensation manager along with top management creates pay policies that are consistent with the firm’s strategic creates pay policies that are consistent with the firm’s strategic aims.aims.
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Compensation Policy IssuesCompensation Policy Issues• Pay for performancePay for performance
• Pay for seniorityPay for seniority
• The pay cycleThe pay cycle
• Salary increases and promotionsSalary increases and promotions
• Overtime and shift payOvertime and shift pay
• Probationary payProbationary pay
• Paid and unpaid leavesPaid and unpaid leaves
• Paid holidaysPaid holidays
• Salary compressionSalary compression
• Geographic costs of living differencesGeographic costs of living differences
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Equity and Its Impact on Pay RatesEquity and Its Impact on Pay Rates
External equity
Proceduralequity
Internal equity
Individualequity
Forms of Compensation Equity
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Addressing Equity IssuesAddressing 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
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Establishing Pay RatesEstablishing Pay Rates
1
2
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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.
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Step1: The Salary SurveyStep1: The Salary Survey
To price benchmark jobs
To make decisions about
benefits
Uses for Salary Surveys
To market-price wages for jobs
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Sources for Salary SurveysSources for Salary Surveys
Self-Conducted
Surveys
Government Agencies
Consulting Firms
Sources of Wage and Salary Information
Professional Associations
The Internet
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Step 2: Job EvaluationStep 2: Job Evaluation
Skills Effort Responsibility
Identifying Compensable Factors
Working conditions
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The Job Evaluation ProcessThe 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
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How to Evaluate JobsHow to Evaluate Jobs
RankingJob
classificationPoint method
Methods for Evaluating Jobs
Factor comparison
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Job Evaluation Methods: RankingJob Evaluation Methods: Ranking• Ranking each job relative to all other jobs, usually Ranking each job relative to all other jobs, usually
based on some overall factor.based on some overall factor.
• Steps in job ranking:Steps in job ranking:
1.1. Obtain job information.Obtain job information.
2.2. Select and group jobs.Select and group jobs.
3.3. Select compensable factors.Select compensable factors.
4.4. Rank jobs.Rank jobs.
5.5. Combine ratings.Combine ratings.
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Job Evaluation Methods: Job Evaluation Methods: Job ClassificationJob Classification
• Raters categorize jobs into groups or classes of jobs that Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes.are of roughly the same value for pay purposes. Classes contain similar jobs.Classes contain similar jobs.
Administrative assistantsAdministrative assistants Grades are jobs similar in difficulty but otherwise different.Grades are jobs similar in difficulty but otherwise different.
Mechanics, welders, electricians, and machinistsMechanics, welders, electricians, and machinists Jobs are classed by the amount or level of compensable factors Jobs are classed by the amount or level of compensable factors
they contain.they contain.
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Job Evaluation Methods: Point MethodJob Evaluation Methods: Point Method• A quantitative technique that involves:A quantitative technique that involves:
Identifying the degree to which each compensable factor is Identifying the degree to which each compensable factor is present in the job.present in the job.
Awarding points for each degree of each factor.Awarding points for each degree of each factor.
Calculating a total point value for the job by adding up the Calculating a total point value for the job by adding up the corresponding points for each factor.corresponding points for each factor.
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Step 3: Grouping JobsStep 3: Grouping Jobs
Point Method
Ranking Method
Classification Methods
Grouping Similar Jobs
into Pay Grades
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Step 4: Price Each Pay GradeStep 4: Price Each Pay Grade• The Wage Curve The Wage Curve
Shows the pay rates paid for jobs in each pay grade, relative to Shows the pay rates paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job the points or rankings assigned to each job or grade by the job evaluation.evaluation.
Shows the relationships between the value of the job as Shows the relationships between the value of the job as determined by one of the job evaluation methods and the determined by one of the job evaluation methods and the current average pay rates for your grades.current average pay rates for your grades.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–18
Step 5: Fine-Tune Pay RatesStep 5: Fine-Tune Pay Rates• Developing Pay RangesDeveloping Pay Ranges
Flexibility in meeting external job market ratesFlexibility in meeting external job market rates
Easier for employees to move into higher pay gradesEasier for employees to move into higher pay grades
Allows for rewarding performance differences and seniorityAllows for rewarding performance differences and seniority
• Correcting Out-of-Line RatesCorrecting Out-of-Line Rates
Raising underpaid jobs to the minimum of the rate range Raising underpaid jobs to the minimum of the rate range for their pay gradefor their pay grade
Freezing rates or cutting pay rates for overpaid (“red circle”) Freezing rates or cutting pay rates for overpaid (“red circle”) jobs to maximum in the pay range for their pay gradejobs to maximum in the pay range for their pay grade
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–19
HR in Practice: HR in Practice: Developing a Workable Pay PlanDeveloping a Workable Pay Plan
• Simplified Approach:Simplified Approach: Conduct a wage surveyConduct a wage survey
Conduct a job evaluationConduct a job evaluation
Conduct once-a-year job appraisalsConduct once-a-year job appraisals
Compile the compensation budget Compile the compensation budget for upcoming yearfor upcoming year
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Pricing Managerial and Professional JobsPricing Managerial and Professional Jobs
Base pay
Executive benefits/perks
Short-term incentives
Long-term incentives
Compensating Executives and Managers
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Pricing Managerial and Professional JobsPricing Managerial and Professional Jobs• What Determines Executive Pay?What Determines Executive Pay?
CEO pay is set by the board of directors taking into account CEO pay is set by the board of directors taking into account factors such as the business strategy, corporate trends, and factors such as the business strategy, corporate trends, and where they want to be in the short and long term.where they want to be in the short and long term.
CEOs can have considerable influence over the boards that CEOs can have considerable influence over the boards that determine their pay.determine their pay.
Firms pay CEOs based on the complexity of the jobs they fill.Firms pay CEOs based on the complexity of the jobs they fill.
Shareholder activism and government oversight have tightened Shareholder activism and government oversight have tightened the restrictions on what companies pay top executives.the restrictions on what companies pay top executives.
Boards are reducing the relative importance of base salary while Boards are reducing the relative importance of base salary while boosting the emphasis on performance-based pay.boosting the emphasis on performance-based pay.
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Compensating Professional EmployeesCompensating Professional Employees• Employers can use job evaluation for professional jobs.Employers can use job evaluation for professional jobs.
• Compensable factors focus on problem solving, Compensable factors focus on problem solving, creativity, job scope, and technical knowledge and creativity, job scope, and technical knowledge and expertise. expertise.
• Firms use the point method and factor comparison Firms use the point method and factor comparison methods, although job classification is most popular.methods, although job classification is most popular.
• Professional jobs are market-priced to establish the Professional jobs are market-priced to establish the values for benchmark jobs.values for benchmark jobs.
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Why Use Competency-Based Pay?Why Use Competency-Based Pay?
High-Performance Work Systems
StrategicAims
Competency-Based Pay Supports
Performance Management
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Competency-Based Pay in PracticeCompetency-Based Pay in Practice• Main elements of skill/competency/knowledge–based Main elements of skill/competency/knowledge–based
pay programs:pay programs:
1.1. A system that defines specific skillsA system that defines specific skills
2.2. A process for tying the person’s pay to his or her skillA process for tying the person’s pay to his or her skill
3.3. A training system that lets employees seek and acquire skillsA training system that lets employees seek and acquire skills
4.4. A formal competency testing systemA formal competency testing system
5.5. A work design that lets employees move among jobs to A work design that lets employees move among jobs to permit work assignment flexibilitypermit work assignment flexibility
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Competency-Based Pay: Pros and ConsCompetency-Based Pay: Pros and Cons• ProsPros
Higher qualityHigher quality
Lower absenteeismLower absenteeism
Fewer accidentsFewer accidents
• ConsCons Pay program implementation problemsPay program implementation problems
Costs of paying for unused knowledge, skills, and behaviorsCosts of paying for unused knowledge, skills, and behaviors
Complexity of programComplexity of program
Uncertainty that the program improves productivityUncertainty that the program improves productivity
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Special Topics in CompensationSpecial Topics in Compensation• BroadbandingBroadbanding
Consolidating salary grades and ranges into a few wide levels Consolidating salary grades and ranges into a few wide levels or “bands,” each of which contains a relatively wide range of or “bands,” each of which contains a relatively wide range of jobs and salary levels.jobs and salary levels.
Pros and ConsPros and Cons
More flexibility in assigning workers to different job gradesMore flexibility in assigning workers to different job grades
Provides support for flatter hierarchies and teamsProvides support for flatter hierarchies and teams
Promotes skills learning and mobilityPromotes skills learning and mobility
Lack of permanence in job responsibilities can be unsettling Lack of permanence in job responsibilities can be unsettling to new employees.to new employees.
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The Pay GapThe Pay Gap• Factors Lowering the Earnings of Women:Factors Lowering the Earnings of Women:
1.1. Women’s starting salaries are traditionally lower.Women’s starting salaries are traditionally lower.
2.2. Salary increases for women in professional jobs do not Salary increases for women in professional jobs do not reflect their above-average performance.reflect their above-average performance.
3.3. In white-collar jobs, men change jobs more frequently, In white-collar jobs, men change jobs more frequently, enabling them to be promoted to higher-level jobs over enabling them to be promoted to higher-level jobs over women with more seniority.women with more seniority.
4.4. In blue-collar jobs, women tend to be placed in In blue-collar jobs, women tend to be placed in departments with lower-paying jobs.departments with lower-paying jobs.
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Improving Productivity Through HRIS: Improving Productivity Through HRIS: Automating Compensation Automating Compensation AdministrationAdministration• Benefits of Compensation Automation:Benefits of Compensation Automation:
Allows for quick updating of compensation programsAllows for quick updating of compensation programs
Eliminates costs of formerly manual processesEliminates costs of formerly manual processes
Coordinates centralized compensation budgets to prevent Coordinates centralized compensation budgets to prevent overages in compensation and raisesoverages in compensation and raises
Can integrate and automatically administer other pay actionsCan integrate and automatically administer other pay actions
