PART FOUR COMPENSATION C H A P T E R T E l e v e n Establishing Strategic Pay Plans 11 Lecture Outline Strategic Overview Basic Factors in Determining Pay Rates Legal Considerations in Compensation Union Influences on Compensation Decisions Competitive Strategy, Corporate Policies and Compensation 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 Executives and 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 Comparable Worth Board Oversight of Executive pay Improving Productivity Through HRIS: Automating Compensation Administration APPENDIX FOR CHAPTER 11 Quantitative Job Evaluation Methods The Factor Comparison Job Evaluation Method The Point Method of Job Evaluation 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: Employees are guided to do what they are paid to do. Compensation plans are evolving from more generic, impersonal methods to programs which recognize and reward the specific competencies an organization needs in order to accomplish its strategic objectives. ANNOTATED OUTLINE I. Basic Factors in 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. A. Legal Considerations in Compensation – There are many laws which govern compensation. For example, the Fair Labor Standards Act (FLSA) regulates the minimum wage and requires that overtime be paid at a rate of one and one half times the normal rate of pay for hours worked over 40 in a workweek. Employees are categorized as exempt from the act, or not exempt (non-exempt) from its provisions. Figure 11-1 summarizes important issues governing white collar exemptions. Other compensation laws include the Equal Pay Act, the Employee Retirement Income Security Act (ERISA) the Age Discrimination in Employment Act (ADEA,) the Americans with Disabilities Act (ADA,) and the Family Medical Leave Act (FMLA.) Know Your Employment Law: Some Special Common Pay Applications – This segment discusses the legal considerations in making an offer of employment, in defining the workday, and what determines whether a person is an employee or an independent contractor. B. Union Influences on Compensation Decisions – Unions and labor relations laws influence pay plan design. The rulings of the National Labor Relations Act underscored the need for employers to involve union officials in developing the compensation package. C. 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. Distinguishing between high and low performers is a policy issue, as is seniority- based pay. 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. D. 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. Individual equity refers to the fairness of an individual’s pay as compared with what his/her co-workers are earning for the same or very similar jobs in the company. Last, procedural equity refers to the perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay. The New Workforce: 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 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. 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 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 11-3). 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 11-4). 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. This method is discussed in more depth in the Appendix to Chapter 11. 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. This method is described in more detail in the Appendix to Chapter 11. 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 11-5.) E. Step 5. Fine Tune Pay Rates – Fine-tuning involves correcting out-of-line rates and 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 11-6). You may depict the pay ranges as steps or levels, with specific corresponding pay rates for each step within each pay grade (see Table 11-4). 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 11-5), 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 Executives and Managers 1. What Determines Executive Pay? – Basic compensation elements for top executives include: base pay, short-term incentives, long-term incentives, and executive benefits and perks. Shareholder activism has tightened the restrictions on what companies pay top executives. 2. Elements of Executive Pay – Executive Compensation emphasizes performance incentives more than do other employees’ pay plans, since organizational results are likely to reflect executives contributions more directly. 3. 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 from 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 How employers pay employees has been evolving. Overall there has been more emphasis on the employee’s contribution, performance and value to the organization, and how that fits with strategic objectives. A. Broadbanding – means collapsing salary grades and ranges into just a few wide levels or bands. Figure 11-8 shows a sample of setting three bands. 1. Pros and Cons – Broadbanding injects greater flexibility into employee assignments, and allow an employee to move up or down along the pay scale without changing pay ranges. Broadbanding can, however, eliminate a sense of permanence in a set of job responsibilities. This is particularly difficult for new employees. B. 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. The Pay Gap – Although the gap is narrowing a bit, women still earn only about 77% as much as men. Education may reduce the wage gap C. Board Oversight of Executive Pay – Boards are clamping down on executive pay. Since 2005, the Financial Accounting Standards Board (FASB) has required that companies recognize as an expense the fair value of the stock options they grant. The Sarbanes Oxley Act makes executives personally liable for lapses in corporate financial oversight. D. Improving Productivity Through HRIS: Automating Compensation Administration - 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 APPENDIX FOR CHAPTER 11 I. Quantitative Job Evaluation Methods A. The Factor Comparison Job Evaluation Method - Factor comparison is a refinement of ranking. It is a quantifiable and accurate system for evaluating jobs and is frequently used. It is, however, somewhat complex. There are several steps in the process. 1. Obtain Job information – this is accomplished through job analysis. 2. Select Key Benchmark Jobs – which will be representative of the full range of jobs to be evaluated. 3. Rank Key Jobs By Factor – Based on the job descriptions and job specifications, each job is ranked by factor. Examples of factors are found in Figure 11A-1. The result of ranking is in Table 11A-1. 4. Distribute Wage Rates by Factors – The current market wage for a job is divided proportionately among the factors, according to that factor’s importance. 5, Rank Key Jobs According to Wages Assigned to Each Factor – The compensation committee does this individually, then the group meets to develop consensus. See Table 11A-2. 6, Compare the Two Sets of Rankings to Screen Out Unusable Key Jobs – A chart like the one in Table 11A-3 can now be drawn to show rankings from steps 3 and 5. They should be very nearly the same. Discrepancies may indicate that the job should not be used as a benchmark. 7. Construct the Job-Comparison Scale – Table 11A-4 depicts a scale constructed from the jobs evaluated in the previous steps. 8. Use the Job-Comparison Scale – Now that a scale exists, other jobs may be “slotted into” the scale based on where each compares against the benchmark. B. The Point Method of Job Evaluation – Widely used, the point method requires identifying several compensable factors, Point plans are explained to employees. They can be difficult to develop. While some organizations develop their own plans, others purchase packaged plans, which overcome the primary drawback to this method. The steps in this process are: 1. Determine Clusters of Job to be Evaluated – Because jobs vary widely, jobs are usually clustered into categories (shop jobs, clerical jobs, etc.) 2. Collect Job Information – This requires a thorough job analysis and accurate job descriptions 3. Select Compensable Factors – These are factors that the organization wishes to base pay upon. 4. Define Compensable Factors – In order that the committee may know what they are evaluating, factors must be clearly defined and differentiated. 5. Define Factor degrees – Degrees represent the amount of a factor existing in a job, and distinguish the level at which work is done. See Figure 11A-2. 6. Determine Relative Values of Factors – Some factors are bound to be more important than others, and may be weighed more or less heavily. 7. Assign Point Values to Factors and Degrees – Table 11A-5 shows an example. 8. Write the Job Evaluation Manual – A manual provides convenience and a way to document the process. 9. Rate the Jobs – Once points have been assigned to each job for each factor, the points may be added up, resulting in a total point value for the job. 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 (http://www.prenhall.com/dessler) 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, D.C. 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 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 1. 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. 2. 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. 3. 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. EXPERIENTIAL EXERCISES & CASES 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. Translating Strategy into HR Policies and Practice Case: The Hotel Paris The New Compensation Plan - The continuing case study of Hotel Paris is discussed here. In this example, Lisa Cruz, the HR manager is tasked with designing new compensation policies and a new, more strategically-oriented compensation plan. 1. Draw a diagram showing with arrows how compensation at Hotel Paris should influence employee performance, which should in turn influence Hotel Paris performance. Include at each level specific examples of compensation policies, employee behavior, and Hotel Paris outcomes. Answers will vary widely. Look for examples with good tie-in between policies, behaviors and proposed outcomes. 2. Would you suggest Hotel Paris implement a competency-based pay plan for its non- managerial staff—why or why not? The current plan is not linked to Hotel Paris’ strategic goals, and the link between pay and performance is weak and sometimes counterproductive. Competency-based pay would enable management to reward employees for exhibiting the skills Hotel Paris values. 3. Devise a ranking job evaluation system for the Hotel Paris’ non-managerial employees (housekeepers, valets, front desk clerks, phone operators, wait staff, groundskeepers, and security guards), and use it to show the worth of these jobs relative to one another. Answers will, again, vary. It is important to discuss how frequently each job interacts with the customer, what competencies are needed in each position, how students believe these jobs are paid in the local market, and whether assumptions are appropriate in light of what Hotel Paris is trying to do strategically. 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. PowerPoint Presentation by Charlie Cook The University of West Alabama 1 Human Resource Management ELEVENTH EDITION G A R Y D E S S L E R Establishing Strategic Pay Plans Chapter 11 Part 4 | Compensation 11–2 After studying this chapter, you should be able to: 1. List the basic factors in determining pay rates. 2. Explain in detail how to establish pay rates. 3. Explain how to price managerial and professional jobs. 4. Discuss competency-based pay and other current trends in compensation. 11–3 Basic Factors in Determining Pay Rates Direct Financial Payments Indirect Financial Payments Employee Compensation 11–4 Legal Considerations in Compensation Employee Compensation Equal Pay Act (1963) Employee Retirement Income Security Act (ERISA) 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 (1938) The Family and Medical Leave Act The Social Security Act of 1935 (as amended) Workers’ Compensation 11–5 FIGURE 11–1 Who Is Exempt? Who Is Not Exempt? Exempt Professionals Attorneys Physicians Dentists Pharmacists Optometrists Architects Engineers Teachers Certified public accountants Scientists Computer systems analysts Nonexempt Paralegals Nonlicensed accountants Accounting clerks Newspaper writers Exempt Executives Corporate officers Supervisors Superintendents General managers Individual who is in sole charge of an “independent establishment” or branch Nonexempt Working foreman/forewoman Working supervisor Lead worker Management trainees Exempt Administrators Executive assistant to the president Personnel directors Accountants Purchasing agents Nonexempt Secretaries Clerical employees Inspectors Source: Jeffrey Friedman, “The Fair Labor Standards Act Today: A Primer,” Statisticians Compensation, January/ February 2002, p. 53. Reprinted with permission of Sage Publications, Inc. Note: These lists are general in nature, and exceptions exist. Any questionable allocation of exemption status should be reviewed by labor legal counsel. 11–6 FIGURE 11–2 Primary Duties of White-Collar Exempt Positions Executive (Three Duties Are Required) 1. Management of the enterprise in which the employee is employed or of a permanent department or subdivision; AND 2. Who customarily and regularly directs the work of two or more other employees; AND 3. Who has the authority to hire or fire other employees or whose suggestions and recommendations are given particular weight. Administrative (Both Duties Are Required) 1. Performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers; AND 2. The exercise of discretion and independent judgment with respect to matters of significance. Professional (Either Duty Is Sufficient) 1. Performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instructions; OR 2. Performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. Source: André Honoreé, “The New Fair Labor Standards Act Regulations and the Sales Force: Who is Entitled to Pay?”, Compensation & Benefits Review, January/February 2006, p. 31. Reprinted by permission of Sage Publications, Inc. 11–7 FIGURE 11–3 Independent Contractor Source: Reprinted from www.HR.BLR.com with permission of the publisher Business and Legal Reports Inc., 141 Mill Rock Road East, Old Saybrook, CT© 2004. 11–8 Corporate Policies, Competitive Strategy, and Compensation • Aligned Reward Strategy ➢The employer’s basic task: ❖ To create a bundle of rewards—a total reward package— that specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy. ➢The HR or compensation manager along with top management creates pay policies that are consistent with the firm’s strategic aims. 11–9 TABLE 11–1 Developing an Aligned Reward Strategy Questions to Ask: 1. What must our company do 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? Source: Adapted from Jack Dolmat-Connell, “Developing a Reward Strategy that Delivers Shareholder and Employee Value,” Compensation and Benefits Review, March–April 1999, p. 51. 11–10 Compensation Policy Issues • Pay for performance • Pay for seniority • The pay cycle • Salary increases and promotions • Overtime and shift pay • Probationary pay • Paid and unpaid leaves • Paid holidays • Salary compression • Geographic costs of living differences 11–11 Equity and Its Impact on Pay Rates External Equity Procedural Equity Internal Equity Individual Equity Forms of Equity 11–12 Addressing Equity Issues Salary Surveys Job Analysis and Job Evaluation Performance Appraisal and Incentive Pay Communications, Grievance Mechanisms, and Employees’ Participation Methods to Address Equity Issues 11–13 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. 11–14 The Salary Survey To price benchmark jobs To make decisions about benefits Step 1. The Wage Survey: Uses for Salary Surveys To market- price wages for jobs 11–15 Sources for Salary Surveys Employer Self- Conducted Surveys Government Agencies Consulting Firms Sources of Wage and Salary Information Professional Associations The Internet 11–16 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 $169 for breakdowns by industry, location, etc. U.S. Office of Personnel Management www.opm.gov/oca/ 07tables/ 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 moving.com moving.com Median salaries for thousands of jobs, by city Doesn’t consider factors like company size or benefits 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 11–17 Establishing Pay Rates (cont’d) Skills Effort Responsibility Working Conditions Step 2. Job Evaluation: Identifying Compensable Factors 11–18 Establishing Pay Rates (cont’d) 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 11–19 Establishing Pay Rates (cont’d) Ranking Factor Comparison Job Classification Methods for Evaluating Jobs Point Method 11–20 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. 11–21 TABLE 11–3 Job Ranking by Olympia Health Care 1. Office manager $43,000 2. Chief nurse 42,500 3. Bookkeeper 34,000 4. Nurse 32,500 5. Cook 31,000 6. Nurse’s aide 28,500 7. Orderly 25,500 Ranking Order Annual Pay Scale 11–22 Job Evaluation Methods: Job Classification • Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes. ➢Classes contain similar jobs. ❖ Administrative assistants ➢Grades are jobs similar in difficulty but otherwise different. ❖ Mechanics, welders, electricians, and machinists ➢Jobs are classed by the amount or level of compensable factors they contain. 11–23 FIGURE 11–4 Example of a Grade Level Definition Source: www.opm.gov/fedclass/gscler.pdf. Accessed May 18, 2007. 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. 11–24 Job Evaluation Methods: Point Method • A quantitative technique that involves: ➢Identifying the degree to which each compensable factor is present in the job. ➢Awarding points for each degree of each factor. ➢Calculating a total point value for the job by adding up the corresponding points for each factor. 11–25 Establishing Pay Rates (cont’d) Point Method Ranking Method Classification Methods Step 3. Group Similar Jobs into Pay Grades 11–26 Establishing Pay Rates (cont’d) • Step 4. Price Each Pay Grade—Wage Curve ➢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 evaluation. ➢Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades. 11–27 FIGURE 11–5 Plotting a Wage Curve 11–28 Establishing Pay Rates (cont’d) • Step 5. Fine-Tune Pay Rates ➢Developing pay ranges ❖ Flexibility in meeting external job market rates. ❖ Easier for employees to move into higher pay grades. ❖ Allows for rewarding performance differences and seniority. ➢Correcting out-of-line rates ❖ Raising underpaid jobs to the minimum of the rate range for their pay grade. ❖ Freezing rates or cutting pay rates for overpaid (“red circle”) jobs to maximum in the pay range for their pay grade. 11–29 FIGURE 11–6 Wage Structure 11–30 TABLE 11–4 Federal Government Pay Schedule: Grades GS-8, GS-9, GS-10, GS-11 for Dallas-Fort Worth, Texas EFFECTIVE JANUARY 2007 Annual Rates by Grade and Step GS-8 41,246 42,621 43,997 45,372 46,747 48,122 49,498 50,873 52,248 53,623 GS-9 45,556 47,074 48,593 50,111 51,630 53,148 54,666 56,185 57,703 59,221 GS-10 50,169 51,841 53,513 55,185 56,857 58,529 60,201 61,873 63,545 65,218 GS-11 55,119 56,957 58,794 60,632 62,469 64,307 66,145 67,982 69,820 71,657 Source: http://opm.gov/oca/07tables/pdf/DFW.pdf. Accessed May 18, 2007. 11–31 FIGURE 11–7 Compensation Administration Checklist Source: Reprinted from www.HR.BLR.com with permission of the publisher Business and Legal Reports Inc., 141 Mill Rock Road East, Old Saybrook, CT © 2004. 11–32 Pricing Managerial and Professional Jobs Base Pay Executive Benefits and Perks Short-term Incentives Long-Term Incentives Compensating Executives and Managers 11–33 Pricing Managerial and Professional Jobs • What Really Determines Executive Pay? ➢CEO pay is set by the board of directors taking into account factors such as the business strategy, corporate trends, and where they want to be in the short and long term. ➢Firms pay CEOs based on the complexity of the jobs they filled. ➢Boards are reducing the relative importance of base salary while boosting the emphasis on performance- based pay. 11–34 Compensating Professional Employees • Employers can use job evaluation for professional jobs. • 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 seems most popular. • Professional jobs are market-priced to establish the values for benchmark jobs. 11–35 Competency-Based Pay • Competencies ➢Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance. • What is Competency-Based Pay? ➢Paying for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds. 11–36 Competency-Based Pay (cont’d) Support High- Performance Work Systems Support Performance Management Why Use Competency- Based Pay? Support Strategic Aims 11–37 Competency-Based Pay in Practice • Main elements of skill/competency/knowledge– based pay programs: 1. A system that defines specific skills, and a process for tying the person’s pay to his or her skill. 2. A training system that lets employees seek and acquire skills. 3. A formal competency testing system. 4. A work design that lets employees move among jobs to permit work assignment flexibility. 11–38 Competency-Based Pay: Pros and Cons • Pros ➢Higher quality ➢Lower absenteeism ➢Fewer accidents • Cons ➢Pay program implementation problems ➢Costs of paying for unused knowledge, skills, and behaviors ➢Complexity of program ➢Uncertainty that the program improves productivity 11–39 Other Compensation Trends • Broadbanding ➢Consolidating salary grades and ranges into just a few wide levels or “bands,” each of which contains a relatively wide range of jobs and salary levels. ➢Pro and Cons ❖ More flexibility in assigning workers to different job grades. ❖ Provides support for flatter hierarchies and teams. ❖ Promotes skills learning and mobility. ❖ Lack of permanence in job responsibilities can be unsettling to new employees. 11–40 FIGURE 11–8 Broadbanded Structure and How It Relates to Traditional Pay Grades and Ranges 11–41 Other Compensation Trends (cont’d) • Comparable Worth ➢Refers to the requirement to pay men and women equal wages for dissimilar jobs that are of comparable (rather than strictly equal) value to the employer. ➢Seeks to address the issue that women have jobs that are dissimilar to those of men and those jobs are often consistently valued less than men’s jobs. 11–42 The Pay Gap • Factors Lowering the Earnings of Women: ➢Women’s starting salaries are traditionally lower. ➢Salary increases for women in professional jobs do not reflect their above-average performance. ➢In white-collar jobs, men change jobs more frequently, enabling them to be promoted to higher- level jobs over women with more seniority. ➢In blue-collar jobs, women tend to be placed in departments with lower-paying jobs. 11–43 Board Oversight of Executive Pay • Factors Influencing Executive Compensation ➢FASB requirements for expensing of stock options at fair market value. ➢Increased SEC reporting requirements for compensation-related information. ➢Increased executive liability for accuracy in corporate financial reporting under the Sarbanes Oxley Act. ➢Shareholder activism protesting excessive executive compensation due to lack of independence by executive board compensation committees. 11–44 Improving Productivity Through HRIS: Automating Compensation Administration • Benefits of Compensation Automation: ➢Allows for quick updating of compensation programs. ➢Eliminates costs of formerly manual processes. ➢Coordinates centralized compensation budgets to prevent overages in compensation and raises. ➢Can integrate and automatically administer other pay actions. 11–45 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) salary compression salary survey benchmark job job evaluation compensable factor ranking method job classification (or grading) method classes grades grade definition point method factor comparison method pay grade wage curve pay ranges competency-based pay competencies broadbanding comparable worth PowerPoint Presentation by Charlie Cook The University of West Alabama 1 Human Resource Management ELEVENTH EDITION G A R Y D E S S L E R Quantitative Job Evaluation Methods Appendix for Chapter 11 Part 4 | Compensation 11–47 Quantitative Job Evaluation Methods • Factor Comparison Job Evaluation Method Step 1. Obtain job information Step 2. Select key benchmark jobs Step 3. Rank key jobs by factor Step 4. Distribute wage rates by factors Step 5. Rank key jobs according to wages assigned to each factor Step 6. Compare the two sets of rankings to screen out unusable key jobs Step 7. Construct the job-comparison scale Step 8. Use the job-comparison scale 11–48 FIGURE 11–A1 Sample Definitions of Five Factors Typically Used in 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 A. Physical effort, such as sitting, standing, walking, climbing, pulling, lifting, etc.; both the amount exercised and the degree of the continuity should be taken into account. B. Physical status, such as age, height, weight, sex, strength, and eyesight. Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration, p. 181. © 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ. 11–49 FIGURE 11–A1 Sample Definitions of Five Factors Typically Used in Factor Comparison Method (cont’d) Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration, p. 181. © 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ. 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. 11–50 TABLE 11–A1 Ranking Key Jobs by Factors1 11 is high, 4 is low. Mental Requirements Physical Requirements Skill Requirements Responsibility Working Conditions Welder 1 4 1 1 2 Crane operator 3 1 3 4 4 Punch press operator 2 3 2 2 3 Security guard 4 2 4 3 1 11–51 TABLE 11–A2 Ranking Key Jobs by Wage Rates1 11 is high, 4 is low. Hourly Wage Requirements Working Mental Physical Skill Responsibility Conditions 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) 11–52 TABLE 11–A3 Comparison of Factor and Wage Rankings Mental Requirements Physical Requirements Skill Requirements Responsibility Working Conditions A1 $2 A1 $2 A1 $2 A1 $2 A1 $2 Welder 1 1 4 4 1 1 1 1 2 2 Crane operator 3 3 1 1 3 3 4 4 4 4 Punch press operator 2 2 3 3 2 2 2 2 3 3 Security guard 4 4 2 2 4 4 3 3 1 1 1Amount of each factor based on step 3. 2Ratings based on distribution of wages to each factor from step 5. 11–53 TABLE 11–A4 Job (Factor) Comparison Scale Mental Requirements Physical Requirements Skill Requirements Responsibility Working Conditions 0.20 Crane Operator Crane Operator 0.30 Punch Press Operator 0.40 Welder Sec. Guard Sec. Guard Welder 0.50 0.60 Sec. Guard 0.70 0.80 Punch Press Operator 0.90 1.00 (Plater) 1.10 1.20 Sec. Guard 1.30 Punch Press Operator 1.40 Crane Operator Sec. Guard (Inspector) (Plater) 1.50 (Inspector) (Inspector) 1.60 Punch Press Operator 1.70 (Plater) 1.80 Crane Operator (Inspector) 1.90 2.00 Crane Operator Punch Press Operator Welder 2.20 (Plater) 2.40 (Inspector) (Plater) 2.60 2.80 3.00 Welder 3.20 3.40 3.60 3.80 4.00 Welder 11–54 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 11–55 FIGURE 11–A2 Example of One Factor (Complexity/ Problem Solving) in a Point Factor System Source: Richard W. Beatty and James R. Beatty, “Job Evaluation,” in Ronald A. Berk (ed.), Performance Assessment: Methods and Applications (Baltimore, MD: Johns Hopkins University Press, 1986), p. 322. Reprinted by permission. 11–56 TABLE 11–A5 Evaluation Points Assigned to Factors and Degrees First- Degree Points Second- Degree Points Third- Degree Points Fourth- Degree Points Fifth- Degree Points Decision making 41 82 123 164 204 Problem solving 35 70 105 140 174 Knowledge 24 48 72 96 123 Solution Manual for Human Resource Management Gary Dessler 9780133029864, 9789353942205, 9780135226803, 9780136089964, 9780134235455, 9780130141248, 9780131746176
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