BUS 681 Week 3 Assignment

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08l… 1/44

8 Building Pay Structures That Recognize Employee Contributions

Learning Objectives

When you �inish studying this chapter, you should be able to:

8-1. Explain the concept of pay structures and the �ive steps necessary to construct pay structures. 8-2. Discuss the components of merit pay systems.

8-3. Summarize the features of sales compensation plan design. 8-4. Describe the essentials of person-focused pay program design.

8-5. Summarize pay structure variations.

CHAPTER WARM-UP!

If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the Chapter Warm-Up! and see what you already know. After reading the chapter, you’ll have a chance to take the Chapter Quiz! and see what you’ve learned.

Pay structures (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss322) assign different pay rates for jobs of unequal worth and provide the framework for recognizing differences in individual employee contributions. No two employees possess identical credentials, nor do they perform the same jobs equally well. Companies recognize these differences by paying individuals according to their credentials, knowledge, or job performance. When completed, pay structures should de�ine the boundaries for recognizing employee contributions. Employee contributions in this context correspond to the pay bases that we addressed in previous chapters (i.e., seniority, merit, incentive pay, and person-based pay). Pay structures also have strategic value. Well-designed structures should promote the retention of valued employees.

In this chapter, we will address how companies structure these pay bases, with the exception of seniority, which we addressed in Chapter 3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03#ch03) . We will start out by considering the fundamental process of constructing pay structures. Then we will move on to speci�ic pay structures, including merit pay, sales incentive pay, person-focused pay, broadbanding, and two-tier structures.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08l… 2/44

8.1 CONSTRUCTING A PAY STRUCTURE

8-1. Explain the concept of pay structures and the �ive steps necessary to construct pay structures.

Compensation specialists develop pay structures based on �ive steps:

Deciding on the number of pay structures

Determining a market pay line

De�ining pay grades

Calculating pay ranges for each pay grade

Evaluating the results

Step 1: Deciding on the Number of Pay Structures

Most companies often establish more than one pay structure, depending on market rates and the company’s job structure.1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end1) Common pay structures include exempt and nonexempt structures, pay structures based on job families, and pay structures based on geography. A large-scale survey estimates that approximately 37 percent of companies establish pay structures on the basis of job exemption criteria, 17 percent based on job families, and 30 percent based on geographic scope.2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end2)

EXEMPT AND NONEXEMPT PAY STRUCTURES

As you will recall, these categories re�lect a distinction in the Fair Labor Standards Act (FLSA). Exempt jobs are not subject to the overtime pay provisions of the act. Core compensation terms for these jobs are usually expressed as an annual salary. Nonexempt jobs are subject to the overtime pay provision of the act. The core compensation for these jobs is therefore expressed as an hourly pay rate. Companies establish these pay structures for administrative ease. Some broadly consistent features distinguish exempt from nonexempt jobs: Exempt jobs, by the de�inition of the Fair Labor Standards Act, are generally supervisory, professional, managerial, or executive jobs that contain a wide variety of duties. Nonexempt jobs are generally nonsupervisory in nature, and the duties tend to be narrowly de�ined.

PAY STRUCTURES BASED ON JOB FAMILY

Executive, managerial, professional, technical, clerical, and craft jobs represent distinct job families. Pay structures are also de�ined on the basis of job family, each of which shows a distinct salary pattern in the market. For example, the Davis–Bacon Act requires contractors and subcontractors to pay wages at least equal to those prevailing in the area where work is performed. This act applies only to employers with federal or federally �inanced contracts worth more than $2,000 for the construction, alteration, or repair of public works or buildings. Moreover, the Davis–Bacon Act also applies only to laborers and mechanics, excluding clerical, professional, and managerial employees. Thus, companies holding federal contracts meeting these criteria have limited latitude for setting pay for certain jobs; however, the latitude for setting pay rates for other jobs is greater.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08l… 3/44

PAY STRUCTURES BASED ON GEOGRAPHY

Companies with multiple, geographically dispersed locations such as sales of�ices, manufacturing plants, service centers, and corporate of�ices may establish pay structures based on going rates in different geographic regions because local conditions may in�luence pay levels. As we discussed in Chapter 2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch02#ch02) , the cost of living is an important consideration. Cost of living varies considerably between broad regions (e.g., the northeast versus the southeast) and more narrowly focused areas (e.g., Boston, Massachusetts versus Fargo, North Dakota). Cost-of-living comparison calculators (for example, one furnished by CNN, http://money.cnn.com/calculator/pf/cost-of-living/ (http://money.cnn.com/calculator/pf/cost-of-living/) ) may be useful. Based on this calculator, a $50,000 salary in Fargo was equivalent to a $73,000 salary in Boston as of mid-2015. Among companies that deploy geographic-based pay structures, approximately half do so according to U.S. city or metropolitan area.3

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end3)

Step 2: Determining a Market Pay Line

In Chapter 7 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch07#ch07) , we discussed that companies rely on surveys to help establish pay policy levels and mixes. Our focus here will be on pay level policy considerations. We also discussed how to determine the market pay line in Chapter 7 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch07#ch07) . Again, the market pay line is representative of typical market pay rates relative to a company’s job structure. Pay levels that correspond with the market pay line are market-competitive pay rates. It is important to recall that surveys can provide a plethora of information pertaining to competitors’ full range of compensation practices, including base pay levels, types and value of incentives, and employee bene�its. Approximately more than 80 percent of companies establish their competitive pay-level position (matching, leading, or lagging the market) on base pay.4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end4)

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08l… 4/44

FIGURE 8-1 Pay Structure for Clerk Jobs

Figure 8-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#ch08�ig01) illustrates a market pay line for a series of clerical jobs. Pay rates that fall along the market pay line represent competitive pay rates based on the company’s selection of a relevant labor market, and these rates promote internal consistency because pay rates increase with the value of jobs based on a company’s systematic job evaluation. The clerk I job has the least complex and demanding duties, and it has fewer worker requirements than do the remaining clerk jobs (clerk II, clerk III, and chief clerk).

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08l… 5/44

Step 3: De�ining Pay Grades

Pay grades (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss320) group jobs for pay policy application. Human resource (HR) professionals typically group jobs into pay grades based on similar compensable factors and value. These criteria are not precise. In fact, no one formula determines what is suf�iciently similar in terms of content and value to warrant grouping jobs into a pay grade.

Job groupings are ultimately in�luenced by such other factors as management’s philosophy. Wider pay grades (i.e., grades that include a relatively larger number of jobs) minimize hierarchy and social distance between employees. Narrower pay grades tend to promote hierarchy and social distance. Figure 8-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#ch08�ig02) illustrates pay grade de�initions, based on the jobs used in Figure 8-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#ch08�ig01) .

Human resource professionals can develop pay grade widths as either “absolute” job evaluation point spreads or as percentage-based job evaluation point spreads. When absolute point spreads are used, grades are based on a set number of job evaluation points for each grade. For example, a compensation professional establishes pay grades equal to 200 points each. Grade 1 includes jobs that range from 1 to 200 job evaluation points, Grade 2 contains jobs that range from 201 to 400 points, and so on.

FIGURE 8-2 Pay Grade De�initions

Companies may choose to vary the “absolute” point spread by increasing the point spread as they move up the pay structure, in recognition of the broader range of skills that higher pay grades represent. For example, certi�ied public accounting jobs require a broader range of skills (e.g., knowledge of �inancial accounting principles and both state and federal tax codes) than do mailroom clerk jobs. Companies often assign trainee positions to the lower, narrower pay grades because trainees generally have limited job-relevant skills. For instance, Grade 1 may contain trainee positions with job evaluation scores that range from 1 to 150, Grade 2 may contain basic jobs beyond traineeships with scores of 151–400, and Grade 3 may include advanced jobs with scores of 401–1,000.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08l… 6/44

Step 4: Calculating Pay Ranges for Each Pay Grade

Pay ranges build upon pay grades. Pay grades represent the horizontal dimension of pay structures (i.e., job evaluation points). Pay ranges (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss321) represent the vertical dimension (pay rates). Pay ranges include midpoint, minimum, and maximum pay rates. The minimum and maximum values denote the acceptable lower and upper bounds of pay for the jobs within particular pay grades. Figure 8-3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#ch08�ig03) illustrates pay ranges.

Human resource professionals establish midpoints �irst, followed by minimum and maximum values. The midpoint pay value (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss285) is the halfway mark between the range minimum and maximum rates. Midpoints generally match values along the market pay line, representing the competitive market rate determined by the analysis of compensation survey data. Thus, the midpoint may re�lect the market average or median (Chapter 7 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch07#ch07) ).

A company sets the midpoints for its pay ranges according to its competitive pay policy, as discussed in Chapter 7 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch07#ch07) . If the company wants to lead the market with respect to pay offerings (market lead policy), it sets the midpoint of the ranges higher than the average for similar jobs at other companies. Companies wanting to pay according to the market norm (market match policy) should set midpoints equal to the market average. Companies wanting to lag the market (market lag policy) would set the midpoints below the market average. A company’s base-pay policy line graphically connects the midpoints of each pay grade.

FIGURE 8-3 Pay Range De�initions

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08l… 7/44

How do compensation professionals calculate pay grade minimums and maximums? They may fashion pay grade minimums and maximums after the minimums and maximums for pay grades that their competitors have established. An alternate approach is to set the pay grade minimums and maximums on the basis of range spread. A range spread (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss365) is the difference between the maximum and minimum pay rates of a given pay grade. It is expressed as a percentage of the difference between the minimum and maximum divided by the minimum.

FIGURE 8-4 Calculation of Range Spread

Companies generally apply different range spreads across pay grades. Most companies apply range spreads that vary typically between 20 percent and 80 percent.5

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end5) They most commonly use progressively higher range spreads for pay grades that contain more valuable jobs in terms of the companies’ criteria. Smaller range spreads characterize pay grades that contain relatively narrowly de�ined jobs that require simple skills with generally low responsibility. Entry-level clerical employees perform limited duties ranging from �iling folders alphabetically to preparing �ile folders and af�ixing labels. These jobs presumably represent bottom-�loor opportunities for employees who will probably advance to higher-level jobs as they acquire the skills needed to perform these jobs pro�iciently. Advanced clerical employees review and analyze forms and documents to determine the adequacy and acceptability of information.

Higher-level jobs afford employees greater promotion opportunities than entry-level jobs. Employees also tend to remain in higher pay grades longer, and the specialized skills associated with higher pay grade jobs are considered valuable. It therefore makes sense to apply larger range spreads to these pay grades. The following are typical range spreads for different kinds of positions:6

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end6)

10–50 percent: hourly employees

45–65 percent: salaried (non-executives)

45–85 percent: executive

TABLE 8-1 The Impact of Alternative Range Spreads on Pay Range Minimum and Maximum Values, with Midpoint of $25,000

Range Spread ($)

20% 50% 80% 120%

$22,727 $20,000 $17,857 $15,625

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08l… 8/44

Range Spread ($)

20% 50% 80% 120%

Maximum: minimum + (range spread × minimum) $27,272 $30,000 $32,143 $34,375

Difference between maximum and minimum values $4,545 $10,000 $14,286 $18,750

After deciding on range spread, compensation professionals calculate minimum and maximum rates. Figure 8- 4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#ch08�ig04) illustrates the calculation of minimum and maximum rates based on knowledge of the pay grade midpoint (as discussed earlier in Step 1) and the chosen range spread. Table 8-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#ch08tab01) illustrates the impact of alternative range spread values on minimum and maximum values. This approach is typically applied when a company chooses to base the minimum and maximum rates on budgetary constraints, we will discuss budgeting issues later in this chapter. Pay range spread percentage amounts can be calculated with knowledge of a pay range’s minimum and maximum values: (maximum rate – minimum rate)/minimum rate.

FIGURE 8-5 Calculating Pay Range Overlap

Adjacent pay ranges usually overlap with other pay ranges so that the highest rate paid in one range is above the lowest rate of the successive pay grade. Figure 8-5 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#ch08�ig05) illustrates how to

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08l… 9/44

calculate pay range overlap. Overlapping pay ranges allow companies to promote employees to the next level without adding to their pay. Approximately 36 percent of companies that responded to a large-scale survey indicate that they promote employees to higher pay grades without pay increases.7

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end7) For those that offer pay increases based on job promotions, the average increase was 7.6 percent for nonexempt employees, 8.8 percent for exempt employees, and 10.1 percent for of�icers/executives. Nonoverlapping pay ranges require pay increases for job promotions. Compensation professionals express overlap as a percentage. In this example, the degree of overlap between pay range A and pay range B is about 33 percent.

PAY COMPRESSION

The minimum pay rate for a range usually is the lowest pay rate that the company will pay for jobs that fall within that particular pay grade. In theory, newly hired employees receive pay that is at or near the minimum. In practice, new employees often receive well above minimum pay rates, sometimes only slightly below or even higher than the pay moderately tenured employees receive. Pay compression (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss319) occurs whenever a company’s pay spread between newly hired or less quali�ied employees, and more quali�ied job incumbents is small.8 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end8)

Two situations result in pay compression. The �irst is a company’s failure to raise pay range minimums and maximums. Companies that retain set range maximums over time limit increase amounts. For example, let’s assume that the entry-level starting salaries for newly minted certi�ied public accountants have increased 7 percent annually for the past 5 years. Tax-It, a small accounting �irm, did not increase its pay range minimums and maximums for entry-level accountants during the same period because of lackluster pro�its. Nevertheless, Tax-It hired several new accountants at the midpoint pay rate. Failure to pay competitive pay rates would hinder Tax-It’s ability to recruit talented accountants. As a result, many of the Tax-It accountants with 5 or fewer years’ experience have lower salaries (or slightly higher salaries at best) than newly hired accountants without work experience. The second situation that results in pay compression is a scarcity of quali�ied candidates for particular jobs. When the supply of such candidates falls behind companies’ demand, wages for newly hired employees rise, re�lecting a bidding process among companies for quali�ied candidates.

Pay compression can threaten companies’ competitive advantage. Dysfunctional employee turnover is a likely consequence of pay compression. Dysfunctional turnover represents high-performing employees’ voluntary termination of their employment. High-performing employees will probably perceive their pay as inequitable because they are receiving lower pay relative to their positive contributions (i.e., experience and demonstrated performance) than newly hired employees who are receiving similar pay.

How can companies minimize pay compression? Maximum pay rates represent the most that a company is willing to pay an individual for jobs that fall in that particular range. Maximum pay rates should be set close to the maximum paid by other companies in the labor market for similar jobs. Setting competitive maximum rates enables a company to raise pay rates for high-quality employees who may consider employment opportunities with a competitor; however, maximum rates should not exceed maximum rates offered by competitors for comparable jobs because high maximums represent costs to the company over and above what are needed to be competitive.

GREEN CIRCLE PAY RATES

Employees sometimes receive below-minimum pay rates for their pay ranges, especially when they assume jobs for which they do not meet every minimum requirement in the worker speci�ication section of the job description. Below-minimum pay range rates are known as green circle rates (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss181) . The pay rates of

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 10/44

employees who are paid at green circle rates should be brought within the normal pay range as quickly as possible, which requires that both employer and employee take the necessary steps to eliminate whatever de�iciencies in skill or experience that warranted paying below the pay range minimum. In addition, companies should regularly review current employees’ pay relative to the starting pay rates for newly hired employees in comparable jobs to plan for necessary pay adjustments before current employees’ pay falls below the minimum rates.9 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end9)

RED CIRCLE PAY RATES

On occasion, companies must pay certain employees greater than maximum rates for their pay ranges. Known as red circle rates (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss370) , these higher pay rates help retain valued employees who have lucrative job offers from competitors. On the other hand, exemplary employees may receive red circle rates for exceptional job performance, particularly when a promotion to a higher pay grade is not granted. For these exemplary performers, companies may provide lump sum pay awards that are not added to regular base pay.10

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end10) Red circle rates also apply to employees who receive job demotions to pay grades with lower maximum rates than the employees’ current pay. Companies usually reduce demoted employees’ pay over time until they receive pay that is consistent with their new jobs. In this case, red circle rates allow employees a chance to adjust to pay decreases.

Step 5: Evaluating the Results

After compensation professionals establish pay structures according to the previous steps, they must evaluate the results. They must speci�ically analyze signi�icant differences between the company’s internal values for jobs and the market’s values for the same jobs. If discrepancies are evident, the company must reconsider the internal values they have placed on jobs. If their valuation of particular jobs exceeds the market’s valuation of the same jobs, they must decide whether higher-than-market pay rates will undermine attainment of competitive advantage. If a company undervalues jobs relative to the market, managers must consider whether these discrepancies will limit the company’s ability to recruit and retain highly quali�ied individuals.

Compensation professionals must also consider each employee’s pay level relative to the midpoint of the pay grade. Again, the midpoint represents a company’s competitive stance relative to the market. Compa-ratios (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss59) index the relative competitiveness of internal pay rates based on pay range midpoints. Compa-ratios are calculated as follows:

Compa-ratios are interpreted as follows: A compa-ratio of 1 means that the employee’s pay rate equals the pay range midpoint. A compa-ratio less than 1 means that the employee’s pay rate falls below the competitive pay rate for the job. Companies with market lag policies strive for compa-ratios of less than 1. A compa-ratio that is greater than 1 means that an employee’s pay rate exceeds the competitive pay rate for the job.

Human resource professionals also can use compa-ratios to index job groups that fall within a particular pay grade. Compa-ratios speci�ically may be calculated to index the competitive position of a job—by averaging the pay rates for each job incumbent. Moreover, compa-ratios may be calculated for all jobs that comprise a pay grade, departments, or such functional areas as accounting.

Compa-ratios provide invaluable information about the competitiveness of companies’ pay rates. Compensation professionals can use compa-ratios as diagnostic tools to judge the competitiveness of their companies’ pay rates. Compa-ratios that exceed 1 tell compensation professionals that pay is highly

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 11/44

competitive with the market. Compa-ratios that fall below 1 tell them that pay is not competitive with the market and that they should consider another course of action to increase pay over a reasonable period.

We’ve reviewed the elements of pay structures and the steps compensation professionals follow to construct them. Next, we will consider three popular pay structures that should be familiar to compensation professionals:

Merit pay structure

Sales incentive compensation structure

Person-focused structure

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 12/44

8.2 DESIGNING MERIT PAY SYSTEMS

8-2. Discuss the components of merit pay systems.

As we noted in Chapter 3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03#ch03) , companies that use merit pay systems must ensure that employees see de�inite links between pay and performance. We also reviewed the rationale for using merit pay systems, as well as the possible limitations of this kind of pay system. Establishing an effective merit pay program that recognizes employee contributions requires avoiding such pitfalls as ineffective performance appraisal methods and poor communication regarding the link between pay and performance. In addition to these considerations, managers interested in establishing a merit pay system must determine merit increase amounts, timing, and the type of merit pay increase (i.e., permanent or recurring increases versus one-time or nonrecurring additions to base pay). They must also settle on base-pay levels relative to the base pay of functionally similar jobs.11

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end11)

Merit Increase Amounts

Merit pay increases should re�lect prior job performance levels and motivate employees to perform their best. As managers establish merit increase amounts, they must consider both past performance levels and establish rates that will motivate employees even after the impact of in�lation and payroll deductions. Updating compensation survey data should account for increases in consumer prices (Chapter 7 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch07#ch07) ). As we noted in Chapter 3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03#ch03) , “just-meaningful pay increases” refer to the minimum amounts employees will see as making a meaningful change in their compensation.12 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end12) Trivial pay increases for average or better employees will not reinforce their performance or motivate them.

No precise mathematical formula determines the minimum merit increase that will positively affect performance; managers must consider three research �indings.13

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end13) First, boosting the merit increase amount will not necessarily improve productivity because research has shown diminishing marginal returns on each additional dollar allocated to merit increases.14

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end14) In other words, each additional merit increase amount was associated with a smaller increase in production.

Second, employees’ perceptions of just-meaningful differences in merit increases depend on their cost of living, their attitudes toward the job, and their expectations of rewards from the job. For employees who value pay for meeting economic necessity, a just-meaningful difference in pay increase tends to depend on changes in the cost of living. On the other hand, for employees who value pay as a form of recognition, the size of the expected pay raise (versus cost of living) affects a just-meaningful difference.15

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end15)

Third, for the pay increase to be considered meaningful, the employee must see the size of the increase as substantive in a relative sense as well as in an absolute sense.16

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end16) Equity theory (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss135) suggests that an

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 13/44

employee must regard his or her own ratio of merit increase pay to performance as similar to the ratio for other comparably performing people in the company. In practical terms, managers should award the largest merit pay increases to employees with the best performance, and they should award the smallest increases to employees with the lowest acceptable performance. The difference between these merit increases should be approximately equal to the differences in performance.

It is also essential that compensation professionals design plans that reinforce employees’ motivation to perform well, with just-meaningful pay increases and merit increase percentages that clearly distinguish among employees based on their performance; however, the best-laid plans don’t always lead to the desired results. Well-designed merit pay structures (and others that we discuss shortly) will fail without adequate funding.

Compensation budgets (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss62) are blueprints that describe the allocation of monetary resources to fund pay structures. Compensation professionals index budget increases that fund merit pay programs in percentage terms. For example, a 10 percent increase for next year’s budget means that it will be 10 percent greater than the size of the current year’s budget. This value is often an indicator of the average pay increase employees will receive. It is obvious that the greater the increase in the compensation budget, the more �lexibility compensation professionals will have in developing innovative systems with substantial motivating potential.

The magnitude of the increases in compensation budgets in recent years has unfortunately been just slightly more than the average increases in cost of living. For example, the average earnings for social workers in the United States increased only 1.6 percent between May 2013 and May 2014.17

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end17) Although this value varies by occupation, industry, and region of the country, it does re�lect a trend in the United States of stagnant growth in compensation budgets. The picture becomes less positive because the increase in cost of living for the same period was 2.1 percent.18 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end18) This means that, on average, annual merit pay raises fell below the increase in cost of living by 0.5 percent, taking the motivational value out of pay increases.

Timing

The vast majority of companies allocate merit increases, as well as cost-of-living and other increases, annually. At present, companies typically take one of two approaches in timing these pay raises. Companies may establish a common review date (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss54) or common review period (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss55) so that all employees’ performances are evaluated on the same date or during the same period (e.g., the month of June, which immediately follows a company’s peak activity period). Best suited for smaller companies, common review dates reduce the administrative burden of the plan by concentrating staff members’ efforts to limited periods.

On the other hand, companies may review employee performance and award merit increases on the employee’s anniversary date (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss131) (i.e., the day on which the employee began to work for the company). Most employees will thus have different evaluation dates. Although these staggered review dates may not monopolize supervisors’ time, this approach can be administratively burdensome because reviews must be conducted regularly throughout the year.

Recurring versus Nonrecurring Merit Pay Increases

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 14/44

Companies have traditionally awarded merit pay increases permanently, and permanent increases are sometimes associated with some undesirable side effects (e.g., placing excessive cost burdens on the employer). In terms of costs, U.S. companies are increasingly concerned with containing costs as just one initiative in their quest to establish and sustain competitive advantage in the marketplace. Companies may advocate nonrecurring merit increases (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss298) (i.e., lump sum bonuses), which lend themselves well to cost containment and have recently begun to gain some favor among unions, including the International Brotherhood of Electrical Workers.19

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end19) Lump sum bonuses strengthen the pay-for-performance link and minimize costs because these increases are not permanent, and subsequent percentage increases are not based on higher base-pay levels.

The Watch It! Video discusses the performance appraisal process at Hautelook. The HR Director discusses that informal performance appraisals may take place multiple times during a year; however, decisions about permanent pay increases, bonuses, and promotions take place annually during the formal performance appraisal process. This video also discusses the company’s performance appraisal process and possible limitations, some of which we addressed in Chapter 3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03#ch03) .

WATCH IT!

If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the video exercise titled Hautelook: Appraising.

Present Level of Base Pay

Pay structures specify acceptable pay ranges for jobs within each pay grade. Thus, each job’s base-pay level should fall within the minimum and maximum rates for its respective pay grade. In addition, compensation professionals should encourage managers to offer similar base pay to new employees performing similar jobs unless employees’ quali�ications (i.e., education and relevant work experience) justify pay differences. This practice is consistent with the mandates of several laws (Chapter 2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch02#ch02) ) such as Title VII of the Civil Rights Act of 1964 and the Equal Pay Act of 1963. Of course, employees’ merit pay increases should vary with their performance.

Rewarding Performance: The Merit Pay Grid

Table 8-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#ch08tab02) illustrates a typical merit pay grid that managers use to assign merit increases to employees. Managers determine pay raise amounts by two factors jointly: employees’ performance ratings and the position of employees’ present base-pay rates within pay ranges. Pay raise amounts are expressed as percentages of base pay. For instance, let’s say that two employees will each receive a 5 percent merit pay increase. One employee is paid on an hourly basis, earning $8.50 per hour, and the other is paid on an annual basis, earning $32,000. The employee whose pay is based on an hourly rate (usually nonexempt in accord with the Fair Labor Standards Act; one who must be paid overtime for time worked in excess of 40 hours per week) receives a pay raise of $0.44 per hour, increasing her hourly pay to $8.94. The employee whose pay is based on an annual rate, typically exempt from the Fair Labor Standards Act provisions, receives a pay increase of $1,600, boosting her annual pay to $33,600.

In Table 8-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#ch08tab02) , employees whose current annual salary falls in the 2nd quartile of the pay range and whose performance

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 15/44

rates an average score receive a 6 percent merit pay increase. Employees whose current annual salary falls in the 1st quartile of the pay range and whose job performance is excellent receive a 12 percent merit pay increase. The term cell (as in spreadsheet software programs such as Microsoft Excel) is used to reference the intersection of quartile ranking and performance rating. Table 8-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#ch08tab02) contains 20 cells.

TABLE 8-2 Merit Pay Increase Grid

Performance Rating

Excellent (%) Above Average (%) Average (%) Below Average (%) Poor (%)

Q4 ⇒ $70,000

$65,000 5 3 1 0 0

$60,000

Q3 ⇒ $55,000

$50,000 7 5 3 0 0

$45,000

Q2 ⇒ $40,000

$35,000 9 7 6 2 0

$30,000

Q1 ⇒ $25,000

$20,000 12 10 8 4 0

$15,000

EMPLOYEES’ PERFORMANCE RATINGS

Merit pay systems use performance appraisals to determine employees’ performance. Where merit pay systems are in place, an overall performance rating guides the pay raise decision. In Table 8-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#ch08tab02) , an employee receives any one of �ive performance ratings ranging from “Poor” to “Excellent.” As you can see when we hold position in pay range constant, pay raise amounts increase with level of performance. This pattern �its well with the logic underlying pay-for-performance principles—it recognizes higher performance with greater rewards.

EMPLOYEES’ POSITIONS WITHIN THE PAY RANGE

Employees’ positions within the pay range are indexed by quartile ranking, which, in Chapter 7 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch07#ch07) , we described as a measure of dispersion. Again, quartiles allow compensation professionals to describe the distribution of data (i.e., in this case, hourly or annual base-pay amount) based on four groupings known as quartiles. In Table 8-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#ch08tab02) , the 1st quartile is the point below which 25 percent of the salary data lie (and above which 75 percent of the salary data are found), which is $25,000. In this example, 25 percent of the salary �igures are less than or equal to $25,000 and 75 percent of these �igures are greater than $25,000. The 2nd quartile is the point below which 50 percent of the salary data lie (and above which 50 percent of the salary �igures are found), which is $40,000

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 16/44

for this example. The 3rd quartile is the point below which 75 percent of the salary �igures lie (and above which 25 percent of the salary �igures are found), which is $55,000 for this example. The 4th quartile is the point below which all of the salary data lie, which is $70,000. The lower a person’s pay falls within its designated pay grade (e.g., the 1st quartile versus the 3rd quartile), the higher the percentage pay raise, all else being equal. Along those lines, the higher a person’s pay within its grade, the lower the percentage pay raise, all else being equal.

Holding performance ratings constant, compensation professionals reduce merit pay increase percentages as quartile ranks increase to control employees’ progression through their pay ranges. Pay grade minimums and maximums re�lect both corporate criteria about the value of various groups of unlike jobs and may be dictated by budgeting. We’ll look at the issue of budgeting shortly. Let’s take the case of two employees whose performance ratings are identical but whose base pay places them in different quartiles of the pay grade (i.e., one in the 3rd quartile and the other in the 1st quartile). If these employees were to receive the same pay raise percentage, the base-pay rate for the employee in the 3rd quartile likely would exceed the maximum pay rate for the range more quickly than would the base-pay rate for the employee in the 1st quartile.

Merit Pay Increase Budgets

Now that we’ve considered the design principles for merit pay grids, we’ll take a closer look at budgetary considerations. Budgets limit the merit pay increase percentages in each cell. A merit pay increase budget (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss283) is expressed as a percentage of the sum of employees’ current base pay. For instance, let’s assume that a company’s top �inancial of�icers and compensation professionals agree to a 5 percent merit pay increase budget. Let’s also assume that the sum of all employees’ current base pay is $10 million based on an employee population of 350. A 5 percent merit pay increase budget for this example equals $500,000, that is, 5 percent of the sum of all employees’ current base pay totaling $10,000,000 (5 percent × $10,000,000). In other words, the company will distribute $500,000 to increase current base pay of its employees. As described earlier, merit pay increases awarded to individual employees will vary according to performance level and position in the pay range; however, the total of the individual pay increases must not exceed the allotted merit pay increase budget, again, $500,000 in this example. As an aside, the typical merit pay increase budget today ranges between 2 and 3 percent for the small proportion of companies that even have awarded pay increases in the past few years. This range is much lower than the average 4 percent increase in recent past years.

Compensation professionals begin plans for setting the merit increase pay grid within the estimated merit increase pay budget with the following six steps:

1. Compensation professionals ask managers and supervisors to indicate the percentage of employees who they expect will fall in each of the performance categories in the performance appraisal instrument. Managers will often use the actual distribution of employees based on recent past years as an estimate for budget planning. The sample merit pay grid illustrated in Table 8-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#ch08tab02) lists �ive performance categories. For illustrative purposes, let’s assume the following performance distribution for employees:

Excellent: 10 percent

Above average: 20 percent

Average: 40 percent

Below average: 25 percent

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 17/44

Poor: 5 percent

2. Compensation professionals rely on position in the pay range to determine the percentage of employees whose pay falls into each pay quartile. For example, let’s assume the following distribution of employees in each pay quartile:

Q4: 20 percent

Q3: 25 percent

Q2: 40 percent

Q1: 15 percent

In other words, 20 percent of employees earn pay that falls in the range from $55,000 to $70,000 (4th quartile) in Table 8-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#ch08tab02) . Similarly, 25 percent of the employees earn pay that falls in the range from $40,000 to $55,000 (3rd quartile). The same rationale applies to the 1st and 2nd quartiles.

3. Compensation professionals combine both sets of information to determine the percentage of employees who fall into each cell. The percentage of employees whose performance rating is excellent and whose base pay falls in the 4th quartile equals 2 percent (10 percent × 20 percent). The sum of the cell percentages totals 100 percent.

Excellent (%) Above Average (%) Average (%) Below Average (%) Poor (%)

Q4 10 × 20 = 2 20 × 20 = 4 40 × 20 = 8 25 × 20 = 5 5 × 20 = 1

Q3 10 × 25 = 2.5 20 × 25 = 5 40 × 25 = 10 25 × 25 = 6.25 5 × 25 = 1.25

Q2 10 × 40 = 4 20 × 40 = 8 40 × 40 = 16 25 × 40 = 10 5 × 40 = 2

Q1 10 × 15 = 1.5 20 × 15 = 3 40 × 15 = 6 25 × 15 = 3.75 5 × 15 = 0.75

4. Next, compensation professionals calculate the expected number of employees who fall into each cell. It is important to remember that this is the expected (versus actual) number of employees because managers provide only an estimate of employees’ performance distribution. For this example, let’s assume that the company employs 350 people. The number of employees whose performance rating is excellent and whose base pay falls in the 4th quartile equals 7 (350 people × 2 percent).

Excellent Above Average Average Below Average Poor

Q4 350 × 2% = 7 350 × 4% = 14 350 × 8% = 28 350 × 5% = 17.5 350 × 1% = 3.5

Q3 350 × 2.5% = 8.75

350 × 5% = 17.5

350 × 10% = 35

350 × 6.25% = 21.875

350 × 1.25% = 4.375

Q2 350 × 4% = 14 350 × 8% = 28 350 × 16% = 56

350 × 10% = 35 350 × 2% = 7

Q1 350 × 1.5% = 5.25

350 × 3% = 10.5

350 × 6% = 21 350 × 3.75% = 13.125

350 × 0.75% = 2.625

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 18/44

5. Compensation professionals now distribute the merit increase budget amount ($500,000) to each cell based on the following formula:

Expected number of employees in cell × Desired pay increase for cell % × Current median pay level for the current quartile

We calculated the expected number of employees in each cell in the previous step. The desired pay increase amount is an estimate that we made (see Table 8-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#ch08tab02) ). Compensation professionals usually specify these percentage amounts initially on pay-for- performance and equity considerations as described earlier (i.e., holding performance constant, individuals in higher pay quartiles receive smaller percentage increases than employees in lower pay quartiles). We calculate the median values as described in Chapter 7 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch07#ch07) . Let’s assume for this example that the medians for each quartile are:

Q4: $65,000

Q3: $50,000

Q2: $35,000

Q1: $20,000

Excellent Above Average Average Below Average Poor

Q4 7 × 5% × $65,000 = $22,750

14 × 3% × $65,000 = $27,300

28 × 1% × $65,000 = $18,200

17.5 × 0% × $65,000 = $0

0.5 × 0% × $65,000 = $0

Q3 8.75 × 7% × $50,000 = $30,625

17.5 × 5% × $50,000 = $43,750

35 × 3% × $50,000 = $52,500

21.875 × 0% × $50,000 = $0

4.375 × 0% × $50,000 = $0

Q2 14 × 9% × $35,000 = $44,100

28 × 7% × $35,000 = $68,600

56 × 6% × $35,000 = $117,600

35 × 2% × $35,000 = $24,500

7 × 0% × $35,000 = $0

Q1 5.25 × 12% × $20,000 = $12,600

10.5 × 10% × $20,000 = $21,000

21 × 7% × $20,000 = $29,400

13.125 × 4% × $20,000 = $10,500

2.625 × 0% × $20,000 = $0

The sum of expected merit pay increases equals $523,425.

6. Compensation professionals check whether the expected merit increase total �its within the actual budgeted amount. In this example, the sum of expected increases exceeds the budgeted amount by $23,425 (i.e., $523,425 – $500,000). When the expected increase amount exceeds the budgeted amount, compensation professionals adjust the percentages in the cells with the following considerations in mind: lowering costs, recognizing performance differences, and considering equity.

Pay structures based on merit differ from sales compensation in at least two key ways. First, whereas sales compensation programs center on incentives that specify rewards an employee will receive for meeting a preestablished—often objective—level of performance, merit pay programs generally base an employee’s reward on someone else’s (most often the employee’s supervisor’s) subjective evaluation of the employee’s past performance. Second, in most instances, a sales employee’s

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 19/44

compensation is variable to the extent that it is composed of incentives. Under a merit pay system, an employee earns a base pay appropriate for the job (as discussed earlier in this chapter) that is augmented periodically with permanent pay raises or one-time bonuses.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 20/44

8.3 DESIGNING SALES INCENTIVE COMPENSATION PLANS

8-3. Summarize the features of sales compensation plan design.

Compensation programs for salespeople rely on incentives.20

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end20) Sales compensation programs can help businesses meet their objectives by aligning the �inancial self-interest of sales professionals with the company’s marketing objectives.21

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end21) By extension, sales compensation programs can help companies achieve strategic objectives by linking sales professionals’ compensation to ful�illing customer needs or other marketing objectives (e.g., increasing market share). Thus, sales compensation plans derive their objectives more or less directly from strategic marketing objectives, which, in turn, are derived from company competitive strategy. Particular sales objectives include:22

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end22)

Improve sales productivity: More volume and pro�it from current investment in sales resources.

New-customer sales volume

New-product sales volume

New balanced product-line sales

Reduced “churn” among current customers

Improve sales coverage of current customers: Regardless of industry, customers want �lexibility, customization, faster response, and personalized service. To meet these requirements, market- leading companies improve the coverage of their current customers. This often means investments in new ways to interact with customers.

Overall account volume

Greater share of the account’s business

Achievement of customer objectives

More lines of business sold

Account pro�itability

Grow sales overall: Track the percentage of sales realized from the following:

New direct customers

New distribution channels

New products

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 21/44

Alternative Sales Compensation Plans

Companies usually use one of �ive kinds of sales incentive plans. The type of plan appropriate for any given company will depend on the company’s competitive strategy. The order of presentation roughly represents the degree of risk (from lowest to highest) to employees.

Salary-only plans

Salary-plus-bonus plans

Salary-plus-commission plans

Commission-plus-draw plans

Commission-only plans

SALARY-ONLY PLANS

Under salary-only plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss388) , sales professionals receive �ixed base compensation, which does not vary with the level of units sold, increase in market share, or any other indicator of sales performance. From the employees’ perspective, salary-only plans are relatively risk-free because they can expect a certain amount of income. From a company’s perspective, salary-only plans are burdensome because the company must compensate its sales employees regardless of their achievement levels. Thus, salary-only plans do not �it well with the directive to link pay with performance through at-risk pay. Nevertheless, salary-only plans may be appropriate for such particular kinds of selling situations as:

Sales of high-priced products and services or technical products with long lead times for sales

Situations in which sales representatives are primarily responsible for generating demand, but other employees actually close the sales

Situations in which it is impossible to follow sales results for each salesperson (i.e., where sales are accomplished through team efforts)

Training and other periods when sales representatives are unlikely to make sales on their own

SALARY-PLUS-BONUS PLANS

Salary-plus-bonus plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss389) offer a set salary coupled with a bonus. Bonuses usually are single payments that reward employees for achievement of speci�ic, exceptional goals. For a real estate agent, generating in excess of $2 million in residential sales for a 1-year period may mean earning a bonus totaling several thousand dollars.

SALARY-PLUS-COMMISSION PLANS

Commission (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss50) is a form of incentive compensation based on a percentage of the selling price of a product or service. Salary-plus- commission plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss390) spread the risk of selling between the company and the sales professional. The salary component presumably enhances a company’s ability to attract good employees and allows a company to direct its employees’ efforts

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 22/44

to deter employees from undertaking tasks that do not lead directly to commissions (e.g., participating in further training or servicing accounts). The commission component serves as the employees’ share in the gains they generated for the company.

COMMISSION-PLUS-DRAW PLANS

Commission-plus-draw plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss52) award sales professionals with subsistence pay or draws—money to cover basic living expenses—yet provide them with a strong incentive to excel. This subsistence pay component is known as a draw (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss115) . Unlike salaries, however, companies award draws as advances, which are charged against commissions that sales professionals are expected to earn.

Companies use two types of draws. Recoverable draws (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss369) act as company loans to employees that are carried forward inde�initely until employees sell enough to repay their draws. Nonrecoverable draws (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss297) act as salary because employees are not obligated to repay the loans if they do not sell enough. Nonrecoverable draws clearly represent risks to companies because these expenses are not repaid if employee sales performance is lackluster. Companies that adopt nonrecoverable draws may stipulate that employees cannot continue in the employment of the company if they fail to cover their draw for a speci�ied number of months or sales periods during the year. This arrangement is quite common among car salespeople.

COMMISSION-ONLY PLANS

Under commission-only plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss51) , salespeople derive their entire income from commissions. Three particular types of commissions warrant mention. Straight commission (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss429) is based on a �ixed percentage of the sales price of the product or service. For instance, a 10 percent commission would generate a $10 incentive for a product or service sold that is priced at $100 and $55 for a product or service sold that is priced at $550.

Graduated commissions (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss178) increase percentage pay rates for progressively higher sales volume. For example, a sales professional may earn a 5 percent commission per unit for sales volume up to 100 units, 8 percent for each unit from 101 to 500 units, and 12 percent for each unit in excess of 500 sold during each sales period.

Finally, multiple-tiered commissions (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss287) are similar to graduated commissions, but with one exception. Employees earn a higher rate of commission for all sales made in a given period if the sales level exceeds a predetermined level. For instance, employees might earn only 8 percent for each item if total sales volume falls short of 1,000 units. If total sales volume exceeds 1,000 units, however, then employees might earn a per-item commission equal to 12 percent for every item sold. Evidence encourages the use of multiple-tiered commissions because a pattern of higher performance was achieved prior to the use of these structures.23

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end23) Commission-only plans are well suited for situations in which:

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 23/44

The salesperson has substantial in�luence over the sales.

Low-to-moderate training or expertise is required.

The sales cycle—the time between identifying the prospect and closing the sale—is short.

In contrast to salespeople on salary-only plans, commission-only salespeople shoulder all the risk: Employees earn nothing until they sell. Despite this risk, potential rewards are substantial, particularly with graduated and multiple-tiered commission plans.

Although commissions may �it well with cost-cutting measures, these incentives are not always the best tactic for compensating sales professionals. In fact, commission structures probably suffer from many of the same limitations of individual incentive plans that we discussed in Chapter 4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch04#ch04) (e.g., competitive behaviors among employees). Moreover, some sales experts argue that commissions undermine employees’ intrinsic motivation to sell (i.e., their genuine interest for the challenge and enjoyment that selling brings). These experts argue that once salespeople have lost that intrinsic motivation, commissions act essentially as controls to maintain sales professionals’ performance levels. Said another way, such professionals may simply go through the motions in order to earn money without regard to quality and customer satisfaction.24

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end24) In addition, the younger generation appears to be more risk averse than older generations, which is making it dif�icult for companies to �ill sales positions because members of the younger generation prefer higher certainty associated with earning base pay.25 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end25)

For any sales compensation plan, it is critical that companies establish realistic total sales targets and individual performance standards. Beyond reasonable limits, it is possible that sales compensation plans will back�ire. Consequences of such back�ire include lower employee motivation, unprofessional behavior, and compromised pro�its.

Sales Compensation Plans and Competitive Strategy

Sales plans with salary components are most appropriate for differentiation strategies. Under salary-based sales plans, employees can count on receiving income. By design, salary plans do not require employees to focus on attaining sales volume goals or other volume indicators (e.g., market share). Sales professionals who receive salaries can turn their attention to addressing clients’ needs during the presale and servicing phases of the relationship. Salary-based sales compensation applies to the sale and servicing of such technical equipment as computer networks, including the hardware (e.g., the individual computers and network server) and the software (e.g., applications programs such as Microsoft Excel or the Microsoft Windows operating system).

Commission-oriented sales compensation plans are best suited for lowest-cost strategies because compensation expenditures vary with sales revenue. As a result, only the most productive employees earn the best salaries. Commissions essentially represent rewards for “making the sale.” For example, real estate sales agents’ earnings depend on two factors: number of houses sold and their selling price. New-car salespersons’ earnings similarly depend on the number of cars sold and their selling price. In either situation, customers are likely to have questions and concerns following sales transactions. Many real estate sales companies employ real estate assistants at low salaries who mediate such buyers’ queries of the sellers as, “What grade of rock salt is most appropriate for the water softener apparatus?” Real estate assistants are often training to be full- �ledged real estate agents, and they view low pay as a necessary trade-off for learning the ropes.

Regardless of competitive strategy, rapidly growing companies, including ones that acquire new businesses, run the risk of undermining competitive advantage. Cisco Systems faced this problem in its sales function

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 24/44

because sales approaches and strategies within the company were decentralized. Communication across the businesses was poor and concerns about undermining sales performance increased. Cisco Systems implemented a sales center of excellence (COE) to help remedy this problem.26

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end26) COEs are established to serve as a capability center for a speci�ic area or focus. It allows management to maximize leverage and create alignment and consistency in how systems, methodologies, and business processes are developed and communicated.

Determining Fixed Pay and the Compensation Mix

Managers must balance �ixed and incentive pay elements to directly affect employee motivation. The mix depends mainly on three factors:

In�luence of the salesperson on the buying decision

Competitive pay standards within the industry

Amount of nonsales activities required

INFLUENCE OF THE SALESPERSON ON THE BUYING DECISION

For the most part, the more in�luence sales professionals have on “buying” decisions, the more the compensation mix will emphasize incentive pay. Salespeople’s in�luence varies greatly with the speci�ic product or service marketed and the way these are sold. Many sales professionals assume an order-taker role, with little in�luence over purchase decisions. For example, salespeople in such large department stores as Best Buy have little in�luence over the merchandise for sale because these stores send their buyers to manufacturers to purchase lines of products that will be sold in their stores throughout the United States and beyond. Product display and promotional efforts are determined by store management.

On the other end of the spectrum, some employees serve as consultants to the client. For instance, when a company decides to invest in computerizing its entire worldwide operations, it may approach a computer manufacturer such as Dell to purchase the necessary equipment. Given the technical complexity of computerizing a company’s worldwide operations, the client would depend on Dell to translate its networking needs into the appropriate con�iguration of hardware and software. These Dell sales professionals ultimately in�luence the purchaser’s decision to buy.

COMPETITIVE PAY STANDARDS WITHIN THE INDUSTRY

A company’s compensation mix must be as enticing as that offered by competitors if the company wants to recruit high-quality sales professionals. Industry norms and the selling situation are among the key determinants of compensation mix. For instance, competitive standards may dictate that the company must give greater weight to either incentive or �ixed pay, which we addressed earlier. Incentive (commission) pay weighs heavily in highly competitive retail industries, including furniture, home electronics, and auto sales. Salary represents a signi�icant pay component in such high entry-barrier industries as pharmaceuticals. In the case of pharmaceuticals, barriers to entry include the U.S. Food and Drug Administration regulations on testing new products that signi�icantly extend the time from product conception through testing to marketing for general use. Salary is an appropriate compensation choice because pharmaceutical companies face little risk of new competition.

AMOUNT OF NONSALES ACTIVITIES REQUIRED

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 25/44

In general, the more nonsales duties salespeople have, the more their compensation package should tend toward �ixed pay. Some companies and products, for instance, require extensive technical training or customer servicing activities. An excellent example is again the pharmaceuticals industry. Sales professionals employed by such companies as Bristol-Myers Squibb, Eli Lilly and Company, and Merck & Company must maintain a comprehensive understanding of their products’ chemical compositions, clinical uses, and contraindications.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 26/44

8.4 DESIGNING PERSON-FOCUSED PROGRAMS

8-4. Describe the essentials of person-focused pay program design.

As indicated in Chapters 3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03#ch03) and 4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch04#ch04) , merit pay and incentive pay represent job-based approaches to compensating employees. In Chapter 5 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch05#ch05) , we discussed the importance of person-focused pay that many companies recognize. For this discussion, we use the terms knowledge and skills interchangeably, as the design features for both structures are virtually the same. In their purest form, person-focused programs reward employees for the acquisition of job-related knowledge (or skills, in the case of skill-based pay plans). In practice, companies are concerned with how much employees’ performance improves as a result of their newly acquired knowledge. Our focus in this section is on the latter.

A fundamental issue in person-focused programs is whether investments in training provide measurable payoffs to companies. The American Society for Training and Development, a premier professional organization of training and development professionals, offered some insight. Based on a research study involving approximately 2,500 companies, training investments are positively related to future total stockholder return, gross pro�it margin, and income per employee.27

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end27) In addition, executives within and outside the training function at IBM maintain that training programs have strategic value for companies.28

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end28)

Establishing Skill Blocks

Skill (knowledge) blocks (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss415) are sets of skills (knowledge) necessary to perform a speci�ic job (e.g., typing skills versus analytical reasoning) or group of similar jobs (e.g., junior accounting clerk, intermediate accounting clerk, and senior accounting clerk). Table 8- 3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec4#ch08tab03) contains an example of a knowledge block—building market-competitive compensation systems—discussed in the accompanying companion casebook Building Strategic Compensation Systems.

The number of skill blocks included in a person-focused structure can range from two to several. The appropriate number of blocks depends on the variety of jobs within a company. The development of skill blocks should occur with three considerations in mind.

First, the company must develop job descriptions, which we discussed in Chapter 6 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch06#ch06) . Job descriptions should be treated as blueprints for the creation of a person-focused system. Well-crafted job descriptions should facilitate the identi�ication of major skills, the training programs employees need to acquire horizontal and vertical skills, and accurate measures of performance.

Second, individual jobs should be organized into job families, or groups of similar jobs such as clerical, technical, and accounting. The information conveyed within a job description should enable the plan developers to identify skills that are common to all jobs in the family and skills that are unique for individual

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 27/44

jobs in the family. Based on these groupings, all tasks necessary to perform the jobs in a job family should be listed to facilitate the identi�ication of the skills necessary to perform the tasks.

Third, skills should be grouped into blocks. There are no hard-and-fast rules compensation professionals can follow to determine skill blocks. A general guideline is that the blocked knowledge should relate to speci�ic job tasks and duties. Referring again to Table 8-3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec4#ch08tab03) , knowledge about the external environment and a company’s internal capabilities—two distinct sets of knowledge— together form the foundation of strategic analyses.

TABLE 8-3 Knowledge Block: Building Market-Competitive Compensation Systems

I. Strategic analyses

A. External market environment B. Internal capabilities

II. Compensation surveys

A. Using published compensation survey data B. Compensation surveys: Strategic considerations C. Compensation survey data: Summary, analysis, and interpretation

Transition Matters

A number of initial considerations arise in the transition from using job-based pay exclusively to using person- focused programs as well. These issues include assessment of skills, alignment of pay with the knowledge structure, and access to training.29

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end29)

SKILLS ASSESSMENT

The skills assessment issue centers on who should assess whether employees possess skills at levels that justify a pay raise, on what basis assessments should be made, and when assessments should be conducted. Gaining employee trust is critical during the transition period because employees may view new systems as threats to job security. Some combination of peer and self-assessments, as well as input from known “experts” such as supervisors, therefore, might be essential. The important ingredients here are employee input and the expertise of supervisors and managers. In the case of knowledge assessment, paper-and-pencil tests are useful tools.

Having established who should conduct assessments, on what basis should assessments be made? During the transition, companies use conventional performance measures that re�lect employees’ pro�iciency in skills use, complemented by employees’ self-assessments. The use of both types of data is likely to increase an employee’s understanding of the new system as well as build faith in it, particularly when testimony and the more conventional performance measures converge.

A �inal assessment matter concerns timing. During transition phases, managers should assess employees’ performance more frequently to keep employees informed of how well they are doing under the new system. In addition, more frequent assessments should reinforce the key aim of pay for knowledge (i.e., to encourage employees to learn more). Performance feedback is essential for this process.

ALIGNING PAY WITH THE KNOWLEDGE STRUCTURE

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 28/44

One of the most dif�icult tasks that managers face as they guide employees toward a person-focused system is aligning pay with the knowledge structure.30

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end30) This is often the case because most compensation surveys price whole jobs (e.g., surgeons) rather than speci�ic knowledge or skill sets that make up particular jobs, such as jobs that require manual dexterity. (See the article by Judy Canavan listed in endnote 30, which addresses strategies for pricing skills.) Still, upon implementation of pay for knowledge, employees’ core compensation must re�lect the knowledge or skills they have that the company incorporates into its person-focused structure. If employees’ actual earnings are more than what the person-focused system indicates, managers must develop a reasonable course of action so that employees can acquire skills that are commensurate with their current pay. If employees are underpaid, the company must provide pay adjustments as quickly as possible. The length of time required to make these necessary adjustments will depend on two factors: the number of such employees and the extent to which they are underpaid. With limited budgets, companies will obviously require more extended periods as either the number of underpaid employees or the pay de�icit increases.

ACCESS TO TRAINING

A �inal transition matter is access to training. Person-focused systems make training necessary, rather than optional, for those employees who are motivated for self-improvement. Companies that adopt pay for knowledge must therefore ensure that all employees have equal access to the needed training for acquiring higher-level skills. They must do so both to meet the intended aim of person-focused programs (i.e., to reward employees for enhancing their skills) and to address legal imperatives. Restricting access to training can lead to a violation of key laws (i.e., Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act of 1967; see Chapter 2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch02#ch02) ). Companies must also educate employees about what their training options are and how successful training will lead to increased pay and advancement opportunities within the company. In other words, employers should not assume that employees will necessarily recognize the opportunities that are available to them unless they are clearly communicated. Written memos, e-mails, and informational meetings conducted by HR representatives are effective communication media.

Training and Certi�ication

Successful person-focused programs depend on a company’s ability to develop and implement systematic training programs. For many of the reasons cited in earlier chapters (i.e., intense domestic and global competition, rapid technological advancement, and educational de�icits of new workforce entrants), progressive companies in the United States have adopted a continuous learning philosophy, which, like person- focused pay programs, encourages employees to take responsibility for enhancing their skills and knowledge.31 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end31) Training clearly represents a key venue for continuous learning.

Because employees are required to learn new skills constantly, training becomes an ongoing process. Companies implementing pay for knowledge typically increase the amount of classroom and on-the-job training.32 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end32) When training is well designed, employees should be able to learn the skills needed to increase their pay as well as the skills necessary to teach and coach other employees at lower skill levels. Accurate job descriptions are useful in determining training needs and focusing training efforts.

Employers must make necessary training available to employees so they can progress through the person- focused system. A systematic method for ensuring adequate training coverage involves matching training programs with each skill block. Accessibility does not require that employers develop and deliver training

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 29/44

themselves. Training that is developed and delivered by an agency not directly af�iliated with the company (e.g., community college, vocational training institute, university, or private consultant) can be just as accessible when the employer integrates the offering of these other sources with its person-focused program.

In-House or Outsourcing Training

The following criteria should be used to determine whether to develop and deliver training within the workplace or to outsource.33 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end33)

Expertise

Specialized training topics require greater expertise, and more generic topics require less expertise. Employers generally turn to in-house resources if they can draw on existing expertise. If in-house expertise is lacking, employers often seek an outside provider either to �ill the need directly or to train individuals who become instructors. Employers usually rely on in-house expertise for employer- and product-speci�ic training. Such training is governed by employer philosophies and procedures and is, therefore, not readily available in the external market.

Timeliness

Employers often seek outside services if the in-house staff does not have adequate time to develop and deliver the program within the time frame requested. For example, Oracle, a business applications software development company, trains its clients on how to use the systems it installs. Over time, client companies experience turnover, which often includes the departure of employees who are well trained to use installed Oracle systems. To maintain effective business operations, client companies require training on demand. PeopleSoft offers training on demand to its clients through different forms of media, including the Internet and DVDs.

Size of the Employee Population to Be Trained

Employers typically rely on in-house resources for larger groups of employees. The major impetus behind this decision is economics. If there is a large demand for training, the program is more likely to be delivered more than once, resulting in economies of scale.

Sensitivity or Proprietary Nature of the Subject Matter

Sensitive or proprietary training is de�ined as training used to gain a competitive advantage or training that gives access to proprietary, product, or strategic knowledge. Employers rarely issue security clearances to outside resources to provide training of this nature. If the area of the training is sensitive or proprietary, the training is likely to be done in-house regardless of the other factors just discussed.

CERTIFICATION AND RECERTIFICATION

Certi�ication (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss42) ensures that employees possess at least a minimally acceptable level of skill pro�iciency upon completion of a training unit. If employees do not have an acceptable degree of skill, then the company quite simply wastes any skill- based compensation expenditure. Supervisors and coworkers, who are presumably most familiar with the intricacies of their work, usually certify workers. Certi�ication methods can include work samples, oral questioning, and written tests.

Recerti�ication (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss368) , under which employees periodically must demonstrate mastery of all the jobs they have learned or risk losing

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 30/44

their pay rates, is necessary to maintain the workforce �lexibility offered by a person-focused plan.34

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end34) The recerti�ication process typically is handled by retesting employees, retraining employees, or requiring employees to occasionally perform jobs that use their previously acquired skills.

For example, the Society for Human Resource Management (SHRM) offers two types of professional certi�ication: the SHRM-CP (CP: certi�ied professional) and the SHRM-SCP (SCP: senior certi�ied professional). Individuals with at least one year of HR work experience earn certi�ication when they pass a comprehensive examination of knowledge in the HR domain. Because the �ield of HR knowledge changes over time, individuals with certi�ication must periodically earn continuing education credits to maintain certi�ication. Credits are earned through a wide variety of activities, including course and/or conference attendance, membership in professional organizations, leadership with the association, teaching, speaking, writing, and projects completed on the job. This updating process is known as recerti�ication.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 31/44

8.5 PAY STRUCTURE VARIATIONS

8-5. Summarize pay structure variations.

The principles of pay structure development reviewed previously apply to the majority of established pay structures in companies throughout the United States. Broadbanding and two-tier pay structures represent variations to those pay structure principles.

Broadbanding THE BROADBANDING CONCEPT AND ITS ADVANTAGES

Companies may choose broadbanding (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss33) to consolidate existing pay grades and ranges into fewer, wider pay grades and broader pay ranges.35

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end35) Figure 8-6 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec5#ch08�ig06) illustrates a broadbanding structure and its relationship to traditional pay grades and ranges. Broadbanding represents the organizational trend toward �latter, less hierarchical corporate structures that emphasize teamwork over individual contributions alone.36

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end36) Some federal government agencies, including the Navy, the General Accounting Of�ice, and the Central Intelligence Agency, began experimenting with the broadbanding concept in the 1980s to introduce greater �lexibility to their pay structures. Some private sector companies began using broadbanding in the late 1980s for the same reason. General Electric’s former plastics business is a noteworthy adopter of broadbanding.

FIGURE 8-6 Broadbanding Structure and Its Relationship to Traditional Pay Grades and Ranges

Broadbanding uses only a few large salary ranges to span levels within the organization previously covered by several pay grades. Thus, HR professionals place jobs that were separated by one or more pay grades in old

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 32/44

pay structures into the same band under broadbanding systems. For example, condensing three consecutive grades into a single broadband eliminates the hierarchical differences among the jobs evident in the original, narrower pay grade con�iguration. Employees holding jobs in a single broadband now have equal pay potential, unlike employees in a multiple pay grade con�iguration. In addition, elimination of narrow bands broadens employees’ job duties and responsibilities.

Some companies establish broadbands for distinct employee groups within the organizational hierarchy (e.g., upper management, middle management, professionals, and staff). This approach reduces management layers dramatically, and it should promote quicker decision-making cycles. Other companies create broadbands on the basis of job families (e.g., clerical, technical, and administrative). Job–family-based bands should give employees broader duties within their job classes. Still others may set broadbands according to functional areas, collapsing across job families. For example, a broadband may be established for all HR specialists (i.e., training, compensation, recruitment, and performance appraisal). These bands should encourage employees to expand their knowledge and skills in several HR functions.

Broadbanding shifts greater responsibility to supervisors and managers for administering each employee’s compensation within the con�ines of the broadbands. Because broadbands include a wider range of jobs than narrowly de�ined pay grades, supervisors have greater latitude in setting employees’ pay according to the tasks and duties they perform. Under traditional pay grades, employees receive pay and pay increases based on a limited set of duties stated in their job descriptions.

LIMITATIONS OF BROADBANDING

Notwithstanding the bene�its of broadbanding, it does possess some limitations. Broadbanding is not a cure-all for all compensation-related dysfunction within companies. For instance, broadbanding changes how compensation dollars are allocated, but not how much is allocated. Managers often think that �latter organizational structures reduce costs. To the contrary, broadbanding may lead to higher compensation expenses because managers have greater latitude in assigning pay to their employees. In fact, the federal government’s limited experience showed that broadbanding structures were associated with more rapid increases in compensation costs than traditional pay structures.37

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end37)

Broadbanding also necessitates a trade-off between the �lexibility to reward employees for their unique contributions and a perception among employees that fewer promotional opportunities are available. This transition from multiple narrowly de�ined pay grades to fewer broadbands reduces organizational hierarchies that support job promotions. Employers and employees alike need to rethink the idea of promotions as a positive step through the job hierarchy.

Two-Tier Pay Structures THE TWO-TIER PAY SYSTEM CONCEPT AND ITS ADVANTAGES

Two-tier pay structures (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss456) reward newly hired employees less than established employees. Under the temporary basis, employees have the opportunity to progress from lower entry-level pay rates to the higher rates enjoyed by more senior employees. Permanent two-tier systems reinforce the pay-rate distinction by retaining separate pay scales: Lower-paying scales apply to newly hired employees, and current employees enjoy higher-paying scales. Although pay progresses within each scale, the maximum rates to which newly hired employees can progress are always lower than more senior employees’ pay scales. Table 8-4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec5#ch08tab04) illustrates a typical two-tier wage structure.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 33/44

Two-tier wage systems are more prevalent in unionized companies. For example, at Ford Motor Company, a two-tier wage structure will compensate new hires substantially less than other employees, including an hourly base rate that is $10 below the previous one.38

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end38)

Labor representatives have reluctantly agreed to two-tier wage plans as a cost-control measure. In exchange for reduced compensation costs, companies have promised to limit layoffs. These plans represent a departure from unions’ traditional stance of single base-pay rates for all employees within job classi�ications.

Two-tier pay structures also enable companies to reward long-service employees while keeping costs down by paying lower rates to newly hired employees who do not have an established performance record within the company. As senior employees terminate their employment (i.e., taking jobs elsewhere or retiring), they are usually replaced by workers who are compensated according to the lower-paying scale.

TABLE 8-4 Two-Tier Wage Structures

Typical Base Rate

Assembler ($) Tool & Die ($)

Base Rate—Contract End 26.86 31.52

COLA Fold-In 1.19 1.19

New Agreement Base 28.05 32.71

Beginning COLA Float 1.06 1.06

Base Rate Plus COLA 29.11 33.77

Lump Sum Examples

Assembler ($) Tool & Die ($)

October 2014 Settlement Bonus 3,000 3,000

September 2015 Performance Bonus (3%) 2,171 2,534

September 2016 Performance Bonus (4%) 2,894 3,377

September 2017 Performance Bonus (3%) 2,170 2,533 Note: Based on a standard 2,080-year, plus 10 percent overtime, with projected COLA adjustments based on in�lation averaging 2.44 percent.

In 2015, Ford Motor Company’s management decided to hire approximately 1,500 new hourly employees because of increased business demand.39

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec10#ch08end39) The collective bargaining agreement between the company and the United Auto workers, set to expire at the end of 2015, limited the number of employees who can be paid at the lower-tier wage to 20 percent of the unionized hourly workforce. As a result, the company has been moving hundreds of workers from lower-tier (entry) wages to a higher pay rate.

LIMITATIONS OF TWO-TIER PAY STRUCTURES

A potentially serious limitation of two-tier plans is that the lower pay scale applied to newly hired workers may restrict a company’s ability to recruit and retain the most highly quali�ied individuals. Resentment can

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 34/44

build among employees on the lower tier toward their counterparts on the upper tier, which may lead to lower-tier employees’ refusal to perform work that extends in any way beyond their job descriptions. Such resentment may lead employees on the upper tier to scale back their willingness to take on additional work to the extent that they perceive pay premiums are not suf�iciently large to compensate for extra duties. In addition, opponents of two-tier wage systems contend that pay differentials cause lower employee morale. Finally, con�lict between the tiers may lead to excessive turnover. When high performers leave, then the turnover is dysfunctional to the company and can have long-term implications for productivity and quality.

COMPENSATION IN ACTION

As a line manager or HR manager, you will be faced with the challenge of determining which pay structures best suit the employee populations you serve. Regardless of the speci�ics of the plan (several speci�ic plans are covered in this chapter), there are general guidelines that should be followed to build the link between the pay structure and the successful recognition of employee contributions. As you are educated by compensation specialists, you will provide senior executives with recommendations that appropriately identify correct incentives and produce desired behaviors.

Action checklist for line managers and HR—keeping the focus on employees as structures are built

HR takes the lead

Assess the organization, and identify factors that will determine the pay structures within the organization (e.g., hourly versus salaried and geographic location). Line managers help in this assessment and provide additional insight to identify the correct factors.

Partner with compensation specialists to group employees into pay grades that are determined by some similarity in the work they produce; corresponding ranges will also be established for each grade.

Compensation specialists conduct market analyses to certify that current employees are being compensated at the right levels and that offers are being made to prospective employees that are comparable to the offers made by competitors (retain and attract top talent).

Line managers take the lead

Communicate with HR regarding behaviors in employee population—HR and line managers work together to ensure that the compensation and bene�its incentives are continuing to target the correct behaviors. HR carefully considers subtle changes to the system in face of market pressures or new leadership and direction within the company.

Employees will continue to progress within the grade in which they have been placed, receiving pay increases (as determined by line manager in consultation with HR) commensurate with their individual performance—compensation specialists will work with HR to ensure that, with these merit increases, equity still exists in the grade and that the percentage increases in pay correspond with superior levels of performance.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 35/44

END OF CHAPTER REVIEW

MyManagementLab Go to mymanagementlab.com (http://mymanagementlab.com) to complete the problems marked with this icon

.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 36/44

Summary

Learning Objective 1: Pay structures assign different pay rates for jobs of unequal worth and provide the framework for recognizing differences in individual employee contributions. Compensation professionals develop pay structures based on �ive steps: deciding on a number of pay structures, determining the market pay line, de�ining pay grades, calculating pay ranges for each pay grade, and evaluating the results.

Learning Objective 2: Merit pay systems reward employees for past performance. The key considerations include merit increase amounts, timing of increases, recurring versus nonrecurring increases, present level of base pay, merit pay grid design, and merit pay increase budget.

Learning Objective 3: The main components of sales incentive compensation plans is the choice of commission, bonus, salary, and the mix of these elements.

Learning Objective 4: Person-focused pay programs require consideration of skill blocks establishment, transition matters from job-based plans, and training and certi�ication.

Learning Objective 5: Two common pay structure variations include broadbanding and two-tier pay structures. Broadbanding consolidates existing pay grades and ranges into fewer, wider pay grades and broader pay ranges. Two-tier pay structures reward newly hired employees less than established employees.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 37/44

Key Terms pay structures 171 (ch08.xhtml#page_171) pay grades 174 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#page_174) pay ranges 175 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#page_175) midpoint pay value 175

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#page_175) range spread 176

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#page_176) pay compression 177

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#page_177) green circle rates 178

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#page_178) red circle rates 178

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#page_178) compa-ratios 179

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec1#page_179) equity theory 180

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#page_180) compensation budgets 180

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#page_180) common review date 180

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#page_180) common review period 180

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#page_180) employee’s anniversary date 181

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#page_181) nonrecurring merit increases 181

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#page_181) merit pay increase budget 183

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec2#page_183) salary-only plans 186

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_186) salary-plus-bonus plans 186

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_186) commission 186 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_186) salary-plus-commission plans 186

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_186) commission-plus-draw plans 186

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_186) draw 186 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_186) recoverable draws 186

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_186) nonrecoverable draws 186

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_186) commission-only plans 187

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_187)

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 38/44

straight commission 187 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_187)

graduated commissions 187 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_187)

multiple-tiered commissions 187 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_187)

skill (knowledge) blocks 189 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec3#page_189)

certi�ication 192 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec4#page_192) recerti�ication 192

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec4#page_192) broadbanding 192

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec4#page_192) two-tier pay structures 194

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08lev1sec5#page_194)

MyManagementLab CHAPTER QUIZ! If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the Chapter Quiz! and see what you’ve learned.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 39/44

Discussion Questions 8-1. Respond to the following statement: “Pay grades limit a company’s ability to achieve competitive

advantage.” Do you agree? Provide a rationale for your position.

8-2. Two employees perform the same job, and each received exemplary performance ratings. Is it fair to give one employee a smaller percentage merit increase because his pay falls within the 3rd quartile but give a larger percentage merit increase to the other because his pay falls within the 1st quartile? Please explain your answer.

8-3. Describe some ethical dilemmas sales professionals may encounter. How can sales compensation programs be modi�ied to minimize ethical dilemmas?

8-4. React to the statement: “Merit pay grids have the potential to undermine employee motivation.” Please discuss your views.

8-5. Compression represents a serious dysfunction of pay structures. Discuss some of the major rami�ications of compression. Also, discuss how companies can minimize or avoid these rami�ications.

CASE A New Sales Representative

An additional Supplemental Case can be found on MyMangementLab.

After 10 years in business, John Shurtman has determined that it is time to hire a sales representative. As the founder and president of United Fleet Service (UFS), John has been the main driver of new business sales for the company. However, as UFS has grown, John has found that he must spend more time on planning and administration, leaving little time to generate new sales leads or call on potential customers.

UFS provides maintenance, mechanical repair services, and body repair services to organizations that maintain �leets of large vehicles. UFS customers include mostly school districts that own bus �leets and municipalities that own �leets of �ire and police vehicles. While UFS has a strong hold on these public sector organizations, John sees many opportunities for expansion through targeting other potential customers such as utility companies and commercial trucking companies.

UFS has several competitors in its geographic area, but none provide as comprehensive a service as UFS. For example, several competitors provide mechanical repair services, but do not provide body repair services; on the other hand, several competitors provide body repair services, but do not provide mechanical repair services. UFS also has a reputation for high-quality repairs and fast turnaround times on service. With these strengths in mind, John is convinced that an effective sales representative that can take the time to contact and develop relationships with potential customers can help lead the organization to expansion.

John has experienced steady growth over the past 10 years, acquiring just two or three new customers each year. Leads on potential new customers have come primarily through referrals from current customers. John personally called on the leads to secure sales. Once a target was established as a customer, John handed the customer account over to a service advisor. The service advisor’s role is to process incoming vehicles and communicate work progress with customers. Service advisors are also encouraged to generate new sales from

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 40/44

current customers by suggesting add-on services or establishing ongoing maintenance schedules. Due to increased volume growth, the service advisors have had little time to develop more signi�icant relationships with customers. Because of this, UFS has missed out on many add-on sales opportunities.

Therefore, John plans to hire a new sales representative to both call on new customers and develop better relationships with current customers. Cultivating new customers will require cold-calling on potential customers as well as following up on referrals from current customers. Because most companies that have vehicle �leets establish contractual relationships with mechanical service providers, some new customers may take a long time to acquire. That is, the sales representative may have to interact with a potential new customer over an extended period of time until the company’s contract with another service provider expires.

Working with current customers will require signi�icant interaction with the service advisors to understand each customer’s past history of services and identify opportunities to increase the number and frequency of services provided. Growing business from current customers will also require spending time developing relationships with each customer.

Before he begins recruiting for this position, John must determine how to compensate the new sales representative. He’s researched market rates for sales representatives in his industry and has a targeted salary range, but he wants to make sure that the compensation plan provides enough incentive to both secure new sales and spend time developing relationships with current customers.

Questions:

8-6. What are the sales objectives for the new sales representative?

8-7. What role will the compensation design play in motivating the new sales representative?

8-8. What kind of sales incentive plan do you recommend? Why?

Crunch the Numbers! Calculating Pay Range Minimums, Maximums, and Pay Range Overlap

An additional Crunch the Numbers! exercise can be found on mymanagementlab.com (http://mymanagementlab.com) .

You have been assigned to calculate the pay range minimum and maximum values for two pay grades as well as the overlap between these two pay ranges.

Questions:

8-9. Pay Range A: For a pay range midpoint equal to $47,500, calculate the minimum and maximum pay values for a 15 percent range spread.

8-10. Pay Range B: For a pay range midpoint equal to $53,750, calculate the minimum and maximum pay rates for a 25 percent range spread.

8-11. What is the overlap between pay range A and pay range B?

MyManagementLab

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 41/44

Go to mymanagementlab.com (http://mymanagementlab.com) for Auto-graded writing questions as well as the following Assisted-graded writing questions:

8-12. How should companies address red circle rates for high performers and low performers, respectively?

8-13. Brie�ly discuss designing job-based pay systems (e.g., merit pay, sales incentive pay) and person- focused programs. What considerations arise when making a transition from using a job-based pay system to using a person-focused plan?

8-14. MyManagementLab Only – comprehensive writing assignment for this chapter.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 42/44

Endnotes 1. WorldatWork (2015). Compensation Programs and Practices (January). Scottsdale, AZ: WorldatWork. 2. WorldatWork and Deloitte Consulting LLP. (2012). Salary Structure Policies and Practices (October). Scottsdale, AZ: WorldatWork.

3. WorldatWork and Deloitte Consulting LLP. (2012). Salary Structure Policies and Practices (October). Scottsdale, AZ: WorldatWork.

4. WorldatWork and Deloitte Consulting LLP. (2012). Salary Structure Policies and Practices (October). Scottsdale, AZ: WorldatWork.

5. WorldatWork and Deloitte Consulting LLP. (2012). Salary Structure Policies and Practices (October). Scottsdale, AZ: WorldatWork.

6. WorldatWork (2015). Compensation Programs and Practices (January). Scottsdale, AZ: WorldatWork. 7. WorldatWork (2015). Promotional Guidelines (January). Scottsdale, AZ: WorldatWork. 8. Ulrich, L. (2008). Money talks: Identifying, preventing and alleviating systemic salary compression issues. Workspan, November, pp. 43–46.

9. Manoli, R. (2009). Addressing salary compression in any economy. Workspan, December, pp. 54–57. 10. Klein, A. L., McMillan, A., & Reiter, G. (2010). The mixed value of using lump sums in lieu of putting merit pay

into base pay. WorldatWork Journal, First Quarter, pp. 49–57. 11. Heneman, R. L. (1992). Merit Pay: Linking Pay Increases to Performance. Reading, MA: Addison-Wesley. 12. Krefting, L. A., & Mahoney, T. A. (1977). Determining the size of a meaningful pay increase. Industrial

Relations, 16, pp. 83–93. 13. Heneman, Merit Pay. 14. Rambo, W. W., & Pinto, J. N. (1989). Employees’ perceptions of pay increases. Journal of Occupational

Psychology, 62, pp. 135–145. 15. Krefting, L. A., Newman, J. M., & Krzysto�iak, F. (1987). What is a meaningful pay increase? In D. B. Balkin &

L. R. Gómez-Mejıá (Eds.), New Perspectives on Compensation. Upper Saddle River, NJ: Prentice Hall. 16. Heneman, Merit Pay. 17. U.S. Bureau of Labor Statistics. (2015). Occupational Earning Statistics. Available: www.bls.gov

(http://www.bls.gov) , accessed June 21, 2015. 18. U.S. Bureau of Labor Statistics. (2015). Consumer Price Index. Available: www.bls.gov (http://www.bls.gov) ,

accessed June 21, 2015. 19. Erickson, C. L., & Ichino, A. C. (1994). Lump-sum bonuses in union contracts. Advances in Industrial and

Labor Relations, 6, pp. 183–218. 20. Carey, J. F. (1992). Complete Guide to Sales Force Compensation. Homewood, IL: Irwin. 21. Kuhlman, D. C. (1994). Implementing business strategy through sales compensation. In W. Keenan Jr. (Ed.),

Commissions, Bonuses, & Beyond. Chicago, IL: Probus Publishing. 22 Colletti-Fiss, J. A., & Colletti-Fiss, M. S. (2007). Designing sales incentive plans for competitive advantage. In

D. Scott (Ed.), Incentive Pay (pp. 43–56). Scottsdale, AZ: WorldatWork. 23. Steenburgh, T., & Ahearne, M. (2012). Motivating salespeople: What really works. Harvard Business Review

(July). Available: http://www.hbr.org (http://www.hbr.org) , accessed February 28, 2015. 24. Keenan, W., Jr. (Ed.). (1994). The case against commissions. In Commissions, Bonuses, & Beyond. Chicago, IL:

Probus Publishing.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 43/44

25. Weber, L. (2015). Why it’s so hard to �ill sales jobs. The Wall Street Journal (February 4). Available: http://www.wsj.com (http://www.wsj.com) , accessed March 2, 2015.

26. DiMisa, J., & Jahanbakhsh, P. (2013). How to build a sales compensation center of excellence. Workspan (November): 43–46.

27. American Society for Training and Development. (2000). Pro�iting from Learning: Do Firms’ Investments in Education and Training Pay Off? Available: www.astd.org/virtual— community/research/PFLWhitePaper.pdf (http://www.astd.org/virtual— community/research/PFLWhitePaper.pdf) , accessed July 7, 2002.

28. American Society for Training and Development. (2006). C-Level perceptions of the strategic value of learning research report. January. Available: www.astd.org/astd/research/research (http://www.astd.org/astd/research/research) , accessed June 19, 2007.

29. Dewey, B. J. (1994). Changing to skill-based pay: Disarming the transition landmines. Compensation & Bene�its Review, 26, pp. 38–43.

30. Canavan, J. (2008). Overcoming the challenge of aligning skill-based pay levels to the external market. WorldatWork Journal (First Quarter): 18-25.

31. Rosow, J., & Zager, R. (1988). Training: The Competitive Edge. San Francisco, CA: Jossey-Bass. 32. Jenkins, G. D., Jr., & Gupta, N. (1985). The payoffs of paying for knowledge. National Productivity Review, 4,

pp. 121–130. 33. Noe, R. A. (2010). Employee Training and Development (5th ed.). Burr Ridge, IL: McGraw-Hill Higher

Education. 34. Jenkins, G. D., Jr., Ledford, G. E., Jr., Gupta, N., & Doty, D. H. (1992). Skill-Based Pay. Scottsdale, AZ: American

Compensation Association. 35. Dougherty, E. (2010). You want me to talk about what? Broadbanding? Workspan, March, pp. 69–72. 36. Risher, H. H., & Butler, R. J. (1993–1994). Salary banding: An alternative salary-management concept. ACA

Journal, 2, pp. 48–57. 37. Schay, B. W., Simons, K. C., Guerra, E., & Caldwell, J. (1992). Broad-Banding in the Federal Government—

Technical Report. Washington, DC: U.S. Of�ice of Personnel Management. 38. Giancola, F. (2009). Ford Motor Company’s 58 years of experience with a cost-of-living allowance plan.

WorldatWork Journal, Third Quarter, pp. 37–46. 39. Ramsey, M., & Stoll, J. D. (2015). Ford to move hundreds of entry-level workers to higher pay rate. The Wall

Street Journal (February 4). Available: http://www.wsj.com (http://www.wsj.com) , accessed February 6, 2015.

7/8/2020 Print

https://content.ashford.edu/print/Martocchio.7916.16.1?sections=ch08,ch08lev1sec1,ch08lev1sec2,ch08lev1sec3,ch08lev1sec4,ch08lev1sec5,ch08… 44/44

IV EMPLOYEE BENEFITS

Where We Are Now: PART III (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/part03#part03) , DESIGNING COMPENSATION SYSTEMS, explained the concepts and methods to build compensation systems that meet important goals of compensation professionals, including internal consistency, market competitiveness, and recognition of employee contributions. Our focus was on core compensation issues. We do know that employee bene�its represent an important component of total compensation. Now we turn to the myriad employee bene�its – discretionary bene�its, and legally-required bene�its. We also give attention to designing and planning the bene�its program in the discretionary bene�its chapter.

In PART IV (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/part04#part04) , WE WILL COVER

Chapter 9 DISCRETIONARY BENEFITS (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09#ch09)

Chapter 10 LEGALLY REQUIRED BENEFITS (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10#ch10)

MyManagementLab®

You can access the CompAnalysis Software to complete the online Building Strategic Compensation Systems Project by logging into www.mymanagementlab.com (http://www.mymanagementlab.com) .