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Human Resource Management

Fifteenth Edition

Chapter 11

Establishing Strategic Pay Plans

Where are we Now … We now start the 4th Part of this text that focus on Compensation.

Chapter 11 starts it ---- Establishing Strategic Pay Plans

Once you’ve appraised and coached your employees, they of course expect to be paid. Prudent employers don’t set pay rates arbitrarily.

Each employee’s pay should make sense in terms of what other employees earn, and this requires a pay plan.

Thus, the main purpose of this chapter is to show you how to establish a pay plan. The main topics we cover are basic factors in determining pay

rates; job evaluation methods; how to create a market-competitive pay plan; pricing managerial and professional jobs; contemporary topics in compensation; and total rewards for employee engagement

Learning Objectives (1 of 2)

11-1. List the basic factors determining pay rates.

11-2. Define and give an example of how to conduct a job evaluation.

11-3. Explain in detail how to establish a market-competitive pay plan.

After studying this Chapter 11, you will be able to:

11-1. List the basic factors determining pay rates.

11-2. Define and give an example of how to conduct a job evaluation.

11-3. Explain in detail how to establish a market-competitive pay plan.

Learning Objectives (2 of 2)

11-4. Explain how to price managerial and professional jobs.

11-5. Explain the difference between competency-based and traditional pay.

11-6. Describe the importance of total rewards for improving employee engagement

After studying this chapter, you will also be able to:

11-4. Explain how to price managerial and professional jobs.

11-5. Explain the difference between competency-based and traditional pay plans.

11-6. Describe the importance of total rewards for improving employee engagement

I. List the basic factors determining pay rates.

Employee compensation refers to all forms of pay or rewards going to employees, which include direct financial payments and indirect payments. Direct financial payments include wages, salaries, incentives, commissions, and bonuses. Indirect payments include financial benefits like employer-paid insurance and vacations.

Basic Factors in Determining Pay Rates

Employee Compensation

Direct

Indirect

Basic Factors in Determining Pay Rates

Employee compensation includes all forms of pay going to employees and arising from their employment.

It has two main components, direct financial payments - (wages, salaries, incentives, commissions, and bonuses) and

indirect financial payments - (financial benefits like employer-paid insurance and vacations)

Aligning Total Rewards with Strategy

Aligned Reward Strategy - is creating a compensation package that produces the employee behaviors the firm needs to achieve its competitive strategy.

Aligning Total Rewards with Strategy

The compensation plan should first advance the firm’s strategic aims—management should produce an aligned reward strategy. This means creating a compensation package that produces the employee behaviors the firm needs to achieve its competitive strategy. Put another way, the rewards should provide a clear pathway between each reward and specific business goals.

Equity and its Impact on Pay Rates (1 of 2)

Equity Theory of Motivation - is once a person perceives an inequity a tension or drive will develop that motivates him or her to reduce the tension and perceived inequity.

Equity and Its Impact on Pay Rates

the equity theory of motivation - postulates that people are motivated to maintain a balance between what they perceive as their contributions and their rewards. Equity theory states that if a person perceives an inequity a tension or drive will develop that motivates him or her to reduce the tension and perceived inequity.

Equity and its Impact on Pay Rates (2 of 2)

Type of Equity

External

Internal

Individual

Procedural

Equity and Its Impact on Pay Rates

In compensation, one can address external, internal, individual, and procedural equity.

● External equity - refers to how a job’s pay rate in one company compares to the job’s pay rate in other companies.

● Internal equity - refers to how fair the job’s pay rate is when compared to other jobs within the same company (for instance, is the sales manager’s pay fair, when compared to what the production manager earns?).

● Individual equity - refers to the fairness of an individual’s pay as compared with what his or her coworkers are earning for the same or very similar jobs within the company, based on each person’s performance.

● Procedural equity refers to the “perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay.

Legal Considerations in Compensation

Davis-Bacon Act (1931)

Walsh-Healey Public Contract Act (1936)

Title VII of the 1964 Civil Rights Act

Legal Considerations in Compensation

Employers do not have free reign in designing pay plans. Various laws specify things like minimum wages, overtime rates, and benefits. For example, the 1931 Davis-Bacon Act lets the secretary of labor set wage rates for laborers and mechanics

employed by contractors working for the federal government.

The 1936 Walsh- Healey Public Contract Act sets basic labor standards for employees working on any government contract that amounts to more than $10,000. It contains minimum wage, maximum hour, and safety and health provisions, and requires time-and-a-half pay for work over 40 hours a week.

Title VII of the 1964 Civil Rights Act makes it unlawful for employers to discriminate against any individual with respect to hiring, compensation, terms, conditions, or privileges of employment because of race, color, religion, sex, or national origin.

We’ll look next at other important compensation – related laws.

Other Important Legal Considerations in Compensation

Fair Labor Standards Act (1938)

Exempt / Nonexempt

Equal Pay Act (1963)

Employee Retirement Income Security Act (1974)

Vesting & Portability Rights

Fiduciary Standards

Other important compensation – related laws include the following:

The 1938 Fair Labor Standards Act - originally passed in 1938 and since amended many times, contains minimum wage, maximum hours, overtime pay, equal pay, record-keeping, and child labor provisions that are familiar to most working people. It covers virtually all U.S. workers engaged in the production and/or sale of goods for interstate and foreign commerce. In addition, agricultural workers and those employed by certain larger retail and service companies are included. State fair labor standards laws cover most employers not covered by the Fair Labor Standards Act (FLSA).

Exempt/Nonexempt Specific categories of employees are exempt from the FLSA or certain provisions of the act, and particularly from the act’s overtime provisions. They are “exempt employees.” A person’s exemption depends on his or her

responsibilities, duties, and salary.

1963 Equal Pay Act - is an amendment to the Fair Labor Standards Act, states that employees of one sex may not be paid wages at a rate lower than that paid to employees of the opposite sex for doing roughly equivalent work. Specifically, if the work requires equal skills, effort, and responsibility and involves similar working conditions, employees of both sexes must receive equal pay, unless the differences in pay stem from a seniority system, a merit system, the quantity or quality of production, or “any factor other than sex.”

1974 Employee Retirement Income Security Act (ERISA) Aimed at protecting employees’ pensions, It provides

for the creation of government-run, employer-financed corporations to protect employees against the failure of their employers’ pension plans.

It also sets regulations regarding vesting rights (vesting - refers to the equity or ownership the employees build up in their pension plans should their employment terminate before retirement). ERISA also regulates portability rights ( which is the transfer of an employee’s vested rights from one organization to another). It also contains fiduciary standards - to prevent dishonesty in pension plan funding.

Other Legislation Affecting Compensation

Age Discrimination in Employment Act

American with Disabilities Act (1990)

Family and Medical Leave Act

Executive Orders

Worker’s Compensation Laws

Social Security Act of 1935

Garnishment Law

Other Legislation Affecting Compensation

Various other laws influence compensation decisions. Which includes:

The Age Discrimination in Employment Act - prohibits age discrimination against employees who are 40 years of age and older in all aspects of employment, including compensation.

The Americans with Disabilities Act - prohibits discrimination against qualified persons with disabilities in all aspects

of employment.

The Family and Medical Leave Act - aims to entitle eligible employees, both men and women, to take up to 12 weeks of unpaid, job-protected leave for the birth of a child or for the care of a child, spouse, or parent.

And various executive orders require employers that are federal government contractors or subcontractors to not discriminate in certain employment areas, including compensation.

Each state has its own workers’ compensation laws. Among other things, these aim to provide prompt, sure, and reasonable income to victims of work-related accidents.

The Social Security Act of 1935 (as amended) provides for unemployment compensation for workers unemployed through no fault of their own for up to 26 weeks (and recently extended), and for retirement benefits.

The federal wage garnishment law limits the amount of an employee’s earnings that employers can withhold (garnish) per week, and protects the worker from discharge due to garnishment.

Know Your Employment Law (1 of 2)

The Workday

Let’s take a look…

Know Your Employment Law

The Workday

Employers need to be vigilant about employees who arrive early or leave late, lest the extra time spent on the employer’s property obligate the employer to compensate the employee for that time. For example, a diligent employee may get dropped off at work early and spend, say, 20 minutes before his or her day actually starts doing work-related chores such as compiling a list of clients to call that day. While there is no hard and fast rule, some courts follow the rule that employees who arrive 15 or more minutes early are presumed to be working unless the employer can prove otherwise. If using time clocks, employers should always instruct employees not to clock in more than 5–10 minutes early (or out 5–10 minutes late).

Smart phones give employers further reason to meticulously record workers’ hours. An app from the Department of Labor lets employees track their work hours. The Chicago Police Department distributed smart phones to its officers in the field.

One police officer subsequently sued, claiming that he wasn’t paid overtime for the hours he spent using his smart phone off the clock. Vendors such as Pacific Timesheet (www.pacifictimesheet.com) provide mobile payroll time sheets. Outside the office, employees can fill these in via their iPhones or similar devices. Newer time clocks have iPad-like touch screens and reduce “buddy punching” with instant photos and biometric sensors. ■

Know Your Employment Law (2 of 2)

The Independent Contractor

Let’s take a look…

Know Your Employment Law

The Independent Contractor

Whether someone is an employee or an independent contractor is a continuing concern for employers. For example, a federal court ruled that most of FedEx’s roughly 15,000 owner-operator delivery people were independent contractors, not

employees. Why claim that someone is an independent contractor? Because the FLSA’s overtime and most other requirements do not apply, and the employer need not pay unemployment compensation; payroll taxes; Social Security taxes; or city, state, and federal income taxes or compulsory workers’ compensation for that worker.

The problem is that many so-called independent contractor relationships aren’t independent contractor relationships. In general, an individual is an independent contractor if the payer has the right to control or direct only the result of

the work and not what will be done and how it will be done. However, there is no single rule or test. Instead, the courts will look at the total situation. The major consideration is this: The more the employer controls what the worker does and

how he or she does it, the more likely it is that the courts will find the worker to be an employee.

Figure 11-3 lists some factors courts will consider. The IRS lists rules at its Web site. Uber faces lawsuits that its drivers are employees, not independent contractors. To minimize the risks of independent contractor misclassification, employers

should execute written agreements with all independent contractors; you’ll find samples online. Furthermore, employers should not impose work rules on or attempt to prohibit independent contractors from working for others. They should require

independent contractors to provide their own tools and to be separately incorporated business entities. Because the Affordable Care Act covers employers with 50 or more employees, government agencies will be looking more closely at employers’ independent contractors. To minimize problems, some employers are having staffing companies supply more of their workforce, thus staying below the 50-employee limit. ■

Independent Contractors

Figure 11-3 Independent Contractor

Source: Reproduced with permission from the publisher BLR—Business & Legal Resources (www.HR.BLR.com)

Take a look in that text at Figure 11-3 that lists some factors courts will consider – regarding Independent Contractors

Union Influences on Compensation Decisions

Wagner Act

NLRB

Union Influences on Compensation Decisions

Unions and labor relations laws also influence pay plan design. The National Labor Relations Act of 1935 (Wagner Act) granted employees the right to unionize and to bargain collectively. Historically, the wage rate has been the main issue in collective bargaining. However, unions also negotiate other pay-related issues, including time off with pay, income security (for those in industries with periodic layoffs), cost-of-living adjustments, and health care benefits.

The Wagner Act created the National Labor Relations Board (NLRB) to oversee employer practices and ensure that employees receive their rights.

Pay Polices

Seniority-based

Performance

Other pay policies

Geography

Pay Policies

The employer’s compensation strategy will manifest itself in pay policies. Managers need pay policies on a range of issues. One is whether to emphasize seniority or performance.

Seniority-based pay -may be advantageous to the extent that seniority is an objective standard.

How to distinguish between high and low performers is another policy issue. Its best to establish compensation policies, that differentiate more aggressively between top performers and others.

Other pay policies that cover how to award salary increases and promotions, overtime pay, probationary pay, leaves for military service, jury duty, and holidays.

Geography How to account for geographic differences in cost of living is another big pay policy issue. Employers handle cost-of-living differentials for transferees in several ways. One is to pay a differential for ongoing costs in addition to a one-time allocation. Others simply raise the employee’s base salary.

Improving Performance: The Strategic Context

Wegmans Food Markets

Let’s talk about it…

Improving Performance: The Strategic Context

Wegmans Food Markets

Strategic compensation management means formulating a total rewards package that produces the employee skills and behaviors that the company needs to achieve its strategic goals. Wegmans exemplifies this. It competes in the retail food sector, where profit margins are thin and where online competitors and giants like Walmart drive costs and prices down. The usual competitor’s reaction is to cut employee benefits and costs. Wegmans takes a different approach. It views its workforce

as an integral part of achieving Wegmans’s strategic aims of optimizing service while controlling costs by improving systems and productivity. For example, one dairy department employee designed a new way to organize the cooler, thus improving ordering and inventory control.48 The firm offers above-market pay rates, affordable health insurance, and a full range of employee benefits. Wegmans’s pay policies thus aim to produce exactly the sorts of high-productivity employee behaviors the company needs to achieve its strategic aims.

It’s likely that its pay policies are one reason for Wegmans’s exceptional profitability. For example, its employee turnover (about 38% for part-timers, 6%–7% for full-timers) is well below the industry’s overall average of about 47%.50 Its stores (which at about 120,000 square feet are much larger than competitors’) average about $950,000 a week in sales (compared to a national average of $361,564), or about $49 million in sales annually, compared with a typical Walmart store’s grocery sales of $23.5 million in sales. As Wegmans’s human resource head has said, good employees assure higher productivity, and that translates into better bottom-line results.52 ■

Source: Based on Demby, “Two Stores Refused to Join the Race.”; www.wegmans.com; Demby, “Two Stores

Refuse to Join the Race,” www.hoovers.com/company/Wegmans_Food_Markets_Inc/cfhtji-1.Html.

Talk About it (Discussion) : If Wegmans does so well with a high-pay policy, why don’t more employers do

this as well?

Improving Performance: HR Practices Around The Globe (1 of 2)

Compensating Expatriate Employees

Let’s talk about it…

Improving Performance: HR Practices Around the Globe

Compensating Expatriate Employees

The question of cost-of-living differentials has particular significance to multinational firms, where pay rates range widely from, say, France to Zambia. How should multinationals compensate expatriate employees—those it sends overseas? Two basic international compensation policies are popular: home-based and host-based plans.

With a home-based salary plan, an international transferee’s base salary reflects his or her home country’s salary. The employer then adds allowances for cost-of-living differences—housing and schooling costs, for instance. This is a reasonable approach for short-term assignments, and avoids the problem of having to change the employee’s base salary every time he or she moves. In the host-based plan, the firm ties the international transferee’s base salary to the host country’s

salary structure. In other words, the manager from New York who is sent to France would have his or her base salary changed to the prevailing base salary for that position in France, rather than keep the New York base salary. The firm usually tacks on cost-of-living, housing, schooling, and other allowances here as well.

Most multinational enterprises set expatriates’ salaries according to the home-based salary plan. (Thus, a French manager assigned to Kiev by a U.S. multinational will generally have a base salary that reflects the salary structure in the manager’s home country, in this case France.) In addition, the person typically gets allowances including cost-of-living, relocation, housing, education, and hardship allowances (for more challenging countries). The employer also usually pays any extra tax burdens resulting from taxes the manager is liable for over and above those he or she would have to pay in the home country. ■

Source: Based on Compensation Management

Talk About it (Discussion) : Why do you think most employers opt for the home-based salary plan?

II. Define and give an example of how to conduct a job evaluation.

Next we will examine – How to conduct a job evaluation

Job Evaluation Methods

Market-Base

Job Evaluation

Job Evaluation Methods

Employers use two basic approaches to setting pay rates: market-based approaches and job evaluation methods.

Many firms, particularly smaller ones, simply use a market-based approach. Doing so involves conducting formal or informal salary surveys to determine what others in the relevant labor markets are paying for particular jobs. They then use these figures to price their own jobs.

Job evaluation methods involve assigning values to each of the company’s jobs. This process helps produce a pay plan

in which each job’s pay is equitable based on what other employers are paying for these jobs and based on each job’s value to the employer.

Compensable Factors

Compensable Factors - a fundamental, compensable element of a job, such as skill, effort, responsibility, and working conditions.

Compensable Factors - is a fundamental, compensable element of a job, such as skills, effort, responsibility, and working conditions.

You can use two basic approaches to compare the worth of several jobs. First, you might decide that one job is more important than another is, and not dig any deeper. As an alternative, you could compare the jobs by focusing on certain basic factors the jobs have in common. Compensation management specialists call these compensable factors.

Again, they are the factors that establish how the jobs compare to one another, and that determine the pay for each job.

Preparing for the Job Evaluation

Identify the Need

Get Employees Cooperation

Choose Evaluation Committee

Perform the Evaluation

Preparing for the Job Evaluation

Job evaluation is a judgmental process and demands close cooperation among supervisors, HR specialists, and employees and union representatives.

The initial steps include identifying the need for the program, getting cooperation, and then choosing an evaluation committee. The committee then performs the actual evaluation. Identifying the need for job evaluation shouldn’t be difficult.

Employees may fear that a systematic evaluation of their jobs may reduce their pay rates, so getting employees to cooperate in the evaluation is important.

Finally, choose a job evaluation committee. The committee usually consists of about five members, most of whom are employees. Management has the right to serve on such committees, but employees may view this with suspicion

Job Evaluation Methods: Ranking (1 of 2)

Obtain job information

Select and group jobs

Select compensable factors

Rank jobs

Combine ratings

Compare current pay with what others are paying based on salary surveys

Assign a new pay scale

Job Evaluation Methods: Ranking

The simplest job evaluation method ranks each job relative to all other jobs, usually based on some overall factor like “job difficulty.” There are several steps in the job ranking method

Obtain job information

Select and group jobs

Select compensable factors

Rank jobs

Combine ratings

Compare current pay with what others are paying based on salary surveys

Assign a new pay scale

Take a look at Figure 11-2 that illustrates an example….

Job Evaluation Methods: Ranking (2 of 2)

Table 11-2 Job Ranking at Jackson Hospital

Ranking Order	Our Current Annual Pay Scale	What Others Pay: Salary Survey Pay	Our Final Assigned Pay
1. Office manager	$43,000	$45,000	$44,000
2. Chief nurse	42,500	43,000	42,750
3. Bookkeeper	34,000	36,000	35,000
4. Nurse	32,500	33,000	32,750
5. Cook	31,000	32,000	31,500
6. Nurse’s aide	28,500	30,500	29,500
7. Orderly	25,500	27,000	27,000

Note: After ranking, it becomes possible to slot additional jobs (based on overall job difficulty, for instance) between those already ranked and to assign each an appropriate wage rate.

Job Evaluation Method of Ranking

Figure 11-2 in the text illustrates the job evaluation method of Ranking.

Job Evaluation Methods: Job Classification

Figure 11-4 Example of a Grade Definition

Grade	Nature of Assignment	Level of Responsibility
GS-7	Performs specialized duties in a defined functional or program area involving a wide variety of problems or situations; develops information, identifies interrelationships, and takes actions consistent with objectives of the function or program served.	Work is assigned in terms of objectives, priorities, and deadlines; the employee works independently in resolving most conflicts; completed work is evaluated for conformance to policy; guidelines, such as regulations, precedent cases, and policy statements require considerable interpretation and adaptation.

Source: From “Grade Level Guide for Clerical and Assistance Work” from U.S. Office of Personnel Management, June 1989.

Job Evaluation Methods: Point Method

Point Method - a job evaluation method in which a number of compensable factors are identified and then the degree to which each of these factors is present on the job is determined .

Job Evaluation Methods: Point Method

The point method’s overall aim is to determine the degree to which the jobs you’re evaluating contain selected compensable factors. It involves identifying several compensable factors for the jobs, as well as the degree to which each factor is present in each job. Assume there are five degrees of the compensable factor “responsibility” a job could contain. Further, assume you assign a different number of points to each degree of each compensable factor. Once the evaluation committee determines the degree to which each compensable factor (like “responsibility” and “effort”) is present in a job, it can calculate a total point value for the job by adding up the corresponding degree points for each factor. The result is a quantitative point rating for each job. The point method of job evaluation is the most popular job evaluation

method today.

“Packaged” Point Plans A number of groups (such as the Hay Group, the National Electrical Manufacturer’s Association, and the National Trade Association) have developed standardized point plans. Many thousands of employers use these systems. They contain ready-made factor and degree definitions and point assessments for a wide range of jobs. Employers can often use them with little or no modification.

Computerized Job Evaluations

Most such computerized systems have two main components. There is, first, a structured questionnaire. This contains items such as “enter total number of employees who report to this position.” Second, such systems may use statistical models.

These allow the computer program to price jobs more or less automatically, by assigning points based on the questionnaire responses.

III. Explain in detail how to establish a market-competitive pay plan.

Now we will examine How to establish a Market-Competitive Pay Plan.

How to Create a Market-Competitive Pay Plan

Choose Benchmark Jobs

Select Compensable Factors

Assign Weights to Compensable Factors

Convert Percentages to Points for Each Factor

How to Create A Market-Competitive Pay Plan

In a market-competitive pay plan a job’s compensation reflects the job’s value in the company, as well as what other employers are paying for similar jobs in the marketplace. Because the point method (or “point-factor method”) is so popular, we’ll use it as the centerpiece of our step-by-step example for creating a market-competitive pay plan.

The 16 steps in creating a market-competitive pay plan begin

1. Choose Benchmark Jobs - Particularly when an employer has dozens or hundreds of different jobs, it’s impractical

and unnecessary to evaluate each of them separately. Therefore, the first step in the point method is to select benchmark jobs. Benchmark jobs are representative of the jobs the employer needs to evaluate.

2. Select Compensable Factors The choice of compensable factors depends on tradition (as noted, the Equal Pay

Act of 1963 uses four compensable factors: skill, effort, responsibility, and working conditions), and on strategic and practical considerations. The employer should carefully define each factor. This is to ensure that the evaluation committee members will each apply the factors with consistency.

3. Assign Weights to Compensable Factors - Having selected compensable factors, the next step is to determine the relative importance (or weighting) of each factor (for instance, how much more important is “skill” than “effort”?). This is important because for each cluster of jobs some factors are bound to be more important than others are.

4. Convert Percentages to Points for Each Factor - Next, we want to convert the percentage weights assigned to each compensable factor into point values for each factor (this is, after all, the point method). It is traditional to assume we are working with a total of l,000 points (although one could use some other figure). To convert percentages to points for each compensable factor, multiply the percentage weight for each compensable factor (from the previous step) by 1,000.67

This will tell you the maximum number of points for each compensable factor.

Creating a Market-Competitive Pay Plan (1 of 3)

Define Each Factor’s Degrees

Determine For Each Factor Its Factor Degrees’ Points

Review Job Descriptions and Job Specifications

Evaluate the Jobs

Creating A Market-Competitive Pay Plan - continued

Next in this 16 steps process is..

5. Define Each Factor’s Degrees - this is when you will split each factor into degrees, and define (write degree definitions for) each degree so that raters may judge the amount or degree of a factor existing in a job.

6. Determine for Each Factor Its Factor Degrees’ Points - The evaluation committee must be able to determine the number of points each job is worth. To do this, the committee must be able to examine each job and (from each factor’s degree definitions) determine what degree of each compensable factor that job has. For them to do this, we must first assign points to each degree of each compensable factor.

7. Review Job Descriptions and Job Specifications - The heart of job evaluation involves determining the amount or degree to which the job contains the selected compensable factors such as effort, job complexity, and working conditions. The team conducting the job evaluation will frequently do so by first reviewing each job’s job description and job specification.

8. Evaluate the Jobs - Steps 1–7 provide us with the information (for instance, on points and degrees) based

on which we can evaluate the jobs. The committee has now gathered the job descriptions and job specifications for the benchmark jobs they will focus on. Now Evaluate the Job. ---With a market-competitive pay system, the employer’s actual pay rates are competitive with those in the relevant labor market, as well as equitable internally. Put simply, the basic approach is to compare what the employer is currently paying for each job (“internal pay”) with what the market is paying for the same or similar job (“external pay”), and then to combine this information to produce a market competitive pay system. Wage Curves Wage curves play a central role in assigning wage rates to jobs. The wage curve typically shows the pay rates paid for jobs, relative to the points or rankings assigned to each job by the job evaluation

Creating a Market-Competitive Pay Plan (2 of 3)

Draw the Current (Internal) Wage Curve

Conduct a Market Analysis: Salary Survey

Draw the Market (External) Wage Curve

Compare and Adjust Current and Market Rates for Jobs

Creating A Market-Competitive Pay Plan - continued

Next in this 16 steps process is..

9. Draw the Current (Internal) Wage Curve - First, to study how each job’s points relates to its current pay rate, we start by drawing an internal wage curve. Plotting each job’s points and the wage rate the employer is now paying for each job (or wage rates, if there are several for each job) produces a scatter plot in Figure 11-7 (in the text). We now draw a wage curve (on the right) through these plots that shows how point values relate to current wage rates.

10. Conduct a Market Analysis: Salary Surveys - Next, we must compile the information needed to draw an external wage curve for our jobs, based on what other employers are paying for similar jobs. Salary surveys— surveys of what others are paying—play a big role in pricing jobs. Using The Internet to Do Compensation Surveys - Internet-based options makes it easy for anyone to access published compensation survey information.

11. Draw the Market (External) Wage Curve - The current/internal wage curve from step 9 is helpful. What the current (internal) wage curve does not reveal is whether our pay rates are too high, too low, or just right relative to what other firms are paying. For this, we need to draw a market or external wage curve. To draw the market/external wage curve, we produce a scatter plot and wage curve However, instead of using our firm’s current wage rates, we use market wage rates (obtained from salary surveys). The market/ external wage curve thereby compares our jobs’ points with market pay rates

for our jobs.

12. Compare and Adjust Current and Market Wage Rates for Jobs - How different are the market rates other employers are paying for our jobs and the current rates we are now paying for our jobs? To determine this, we combine both the current/internal and market/external wage curves on one graph, as in Figure 11-9 in the text. Based on comparing the current/internal wage curve and market/external wage curve in Figure 11-9, we must decide whether to adjust the current pay rates for our jobs, and if so how. This calls for a policy decision by management. Strategic considerations influence this decision.

Creating a Market-Competitive Pay Plan (3 of 3)

Develop Pay Grades

Establish Rate Ranges

Address Remaining Job

Correct Out-of-Line Rates

Underpaid / Red circle

Creating A Market-Competitive Pay Plan - continued

Next in this 16 steps process is..

13. Develop Pay Grades - Employers typically group similar jobs (in terms of points) into grades for pay purposes.

Then, instead of having to deal with hundreds of job rates, you might only have to focus on, say, pay rates for 10 or 12 pay grades. A pay (or wage) grade is composed of jobs of approximately equal difficulty or importance as determined by job evaluation. If you used the point method of job evaluation, the pay grade consists of jobs falling within a range of points. If the ranking method was used, the grade consists of a specific number of ranks. If you use the classification system, then your jobs are already categorized into classes (or grades). Determining the Number of Pay Grades It is standard to establish grades of equal point spread. (In other words, each grade might include all those jobs falling between 50 and 100 points, 100 and 150 points, 150 and 200 points, etc.)

14. Establish Rate Ranges - Most employers do not pay just one rate for all jobs in a particular pay grade. Instead, employers develop vertical pay (or “rate”) ranges for each of the horizontal pay grades (or pay classes). These pay (or rate) ranges often appear as vertical boxes within each grade, showing minimum, maximum, and midpoint pay rates for that grade, as in Figure 11-10 in the textbook. (Specialists call this graph a wage structure. Figure 11-10 graphically depicts the range of pay rates—in this case, per hour—paid for each pay grade.) Developing Rate Ranges - Compensation experts sometimes use compa ratios. The compa ratio equals an employee’s pay rate divided by the pay range midpoint for his or her pay grade. The compa-ratio can help reveal how many jobs in each pay grade are paid above and below competitive

market pay rates.

15. Address Remaining Jobs - To this point, we have focused our job evaluation on a limited number of benchmark

jobs, as is traditional. We now want to add our remaining jobs to the wage structure. We can do this in two ways. We can evaluate each of the remaining jobs using the same process we just went through. Or we can simply slot the remaining jobs into the wage structure where we feel they belong, without formally evaluating and assigning points to these jobs.

16. Correct Out-of-Line Rates - Finally, the wage rate the firm is now paying for a particular job may fall well off the

wage curve or well outside the rate range for its grade.

This means that the average pay for that job is currently too high or too low, relative to other jobs in the firm. For underpaid jobs, the solution is clear: Raise the wages of underpaid employees to the minimum of the rate range for their pay grade. Current pay rates falling above the rate range are a different story.

These are “red circle,” “flagged,” or “overrates.” There are several ways to cope with this problem. One is to freeze the rate paid to these employees until general salary increases bring the other jobs into line. A second option is to transfer or promote the employees involved to jobs for which you can legitimately pay them their current pay rates. The third option is to freeze the rate for 6 months, during which time you try to transfer or promote the overpaid employees. If you cannot, then cut the rate you pay these employees to the maximum in the pay range for their pay grade. The accompanying HR Tools feature explains a streamlined pay plan procedure for small businesses.

Improving Performance: HR Tools for Line Managers and Small Businesses

Developing a Workable Pay Plan

Let’s talk about it…

Improving Performance: HR Tools for Line Managers and Small Businesses

Developing a Workable Pay Plan

Pay plans are as important for small firms as a large ones. Pay that is too high wastes money; too low

triggers turnover; and internally inequitable causes endless demands for raises. The owner who wants to

concentrate on major issues like sales needs a rational pay plan.

Surveying market rates come first. Sites like LinkedIn and Salary.com will show localized average pay

rates for jobs in your geographic area. The Sunday newspaper classified ads (online and offline) will contain

information on wages offered for jobs similar to those you’re trying to price. Local job service “one-stop”

offices can provide a wealth of information, as they compile extensive information on pay ranges and averages

for many jobs. Employment agencies, always anxious to form ties with employers, will provide good

data. Local college and university career centers will reveal prevailing pay rates for many jobs. Professional

associations (such as the careers link for civil engineers at www.asce.org) are good sources of professionals’

pay rates.

Smaller firms are making use of the Internet in other ways. StockHouse Media Corp (www.stockhouse.com) uses the Web for determining salaries for all the firm’s personnel. For example, the HR manager surfs the Web to monitor rates and trends by periodically checking job boards, company Web sites, LinkedIn, and industry associations. If you employ more than 20 employees or so, conduct at least a rudimentary job evaluation (probably using the ranking method we covered on pages 356–357). You will need job descriptions (see, for example O*NET and jobdescription.com), since these will be the source of data regarding the nature and worth of each job.

You may find it easier to split your employees into three clusters—say, managerial/professional, office/clerical, and plant personnel. For each of the three groups, choose one or more compensable factors. Then rank (or assign points to) each job in that cluster based on, say, a ranking job evaluation. For each job you will then want to create a pay range. In general, you might choose as the midpoint of that range the average market salary for that job, or an average of the market rate and what you are currently paying. Then produce a total range of about 30% around this average, broken into five steps. (Thus, assemblers, one of the plant personnel jobs, might earn from $8.00 to $12.60 per hour, in five steps.)

Required compensation policies will include amount of holiday and vacation pay (as we explain in Chapter 13), overtime pay policy, method of pay (weekly, biweekly, monthly), garnishments, and time card or sign-in sheet procedures. Many examples are available online. ■

Talk About it (Discussion) : What type of job evaluation method would you use in a company with 15

employees? Why?

IV. Explain how to price managerial and professional jobs.

Next we examine - How to Price Managerial and Professional jobs.

Pricing Managerial and Professional Jobs

Developing compensation plans for managers or professionals is similar in many respects to developing plans for any employee. The basic aim is the same: to attract, motivate, and retain good employees. And job evaluation is about as applicable to managerial and professional jobs (below the top executive levels) as to production and clerical ones.

There are some big differences though. Managerial jobs tend to stress harder-to-quantify factors like judgment and problem solving more than do production and clerical jobs. There is also more emphasis on paying managers and professionals

based on their performance or on what they can do, rather than on static job demands like working conditions

What Determines Executive Pay

Job Complexity

The Employer’s Ability to Pay

The Executive’s Human Capital

What Determines Executive Pay?

The traditional wisdom is that company size and performance significantly affect top managers’ salaries. Yet early studies showed that these explained only about 30% of CEO pay: “In reality, CEO pay is set by the board taking into account a variety of factors such as the business strategy, corporate trends, and most importantly where they want to be in a short and long term.

One study concluded that three main factors:

job complexity - (span of control, the number of functional divisions over which the executive has direct responsibility, and management level),

the employer’s ability to pay (total profit and rate of return), and

the executive’s human capital - (educational level, field of study, work experience), accounted for about two-thirds of executive compensation variance. In practice, CEOs exercise influence over their boards of directors, so their pay sometimes doesn’t reflect strictly arms-length negotiations.

Compensating Executives

Base Pay

Short-term Incentives

Long-term incentives

Executive Benefits and Perks

What Determines Executive Pay?

Compensation for a company’s top executives usually consists of four main elements:

Base pay - includes the person’s fixed salary as well as, often, guaranteed bonuses such as “10% of pay at the end of the fourth fiscal quarter, regardless of whether the company makes a profit.”

Short-term incentives - are usually cash or stock bonuses for achieving short-term goals, such as year-to-year sales revenue increases.

Long-term incentives - aim to encourage the executive to take actions that drive up the value of the company’s stock and include things like stock options; these generally give the executive the right to purchase stock at a specific price for a specific period.

Finally, executive benefits and perks - include things such as supplemental executive retirement pension plans. With so many complicated elements, employers must also be alert to the tax and securities law implications of their executive compensation decisions.

One study concluded that three main factors:

job complexity - (span of control, the number of functional divisions over which the executive has direct responsibility, and management level),

the employer’s ability to pay (total profit and rate of return), and

Compensating Professional Employees

In compensating professionals, employers should first ensure that the person is actually a “professional” under the law.

The Fair Labor Standards Act “provides an exemption from both minimum wage and overtime pay for employees employed

as bona fide executive, administrative, professional and outside sales employees.” However, calling someone a professional doesn’t make him or her one. In addition to earning at least $455 per week, the person’s main duty must “be the performance of work requiring advanced knowledge,” and “the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Improving Performance Through HRIS: Payroll Administration

Developing a Workable Pay Plan

Let’s take a look…

Improving Performance Through HRIS: Payroll Administration

Payroll administration is one of the first functions most employers computerize or outsource, and for good reason. Administering the payroll system—keeping track of each employee’s FLSA worker status, wage rate, dependents, benefits, overtime, tax status, and so on; computing each paycheck; and then directing the actual printing of checks or direct deposits is a time-consuming task, one complicated by the need to comply with many federal, state, and local wage, hour, and other laws.

Many employers do perform this function in-house, usually with a payroll processing software package. Intuit’s Basic Payroll lets the employer “enter hours worked and get instant paycheck calculations, including earnings, payroll taxes, and deductions. Then print paychecks yourself. Basic Payroll calculates federal and state payroll taxes for you, so you can easily e-pay federal taxes and write a check for state taxes.” Kronos’s Workforce Payroll automates the payroll process, and offers self-service features. For example (see www.kronos.com/HR/Payroll-Software/Payroll-Software.aspx), Workforce Payroll will “let your employees see pay stubs and earning histories, make changes to direct deposit and W-4 forms, print W-2s, and even check out how changes to their deductions will affect their paychecks.”

On the other hand, many employers do outsource payroll administration to vendors such as ADP. These vendors offer a range of payroll processing options. For instance, smaller employers may opt to call in their payroll data to the vendor’s specialists, while larger ones may have this data processed automatically online. In deciding which vendor to use, the employer should consider its goals and the potential economic benefits, as well as factors such as the vendor’s reputation. SHRM recommends evaluating the initial list of prospective vendors based on the employer’s goals for the relationship. Don’t just consider the relative economic benefits of outsourcing the function (rather than doing it in-house), but also the desirability of integrating the employer’s internal systems with the vendor’s, streamlining tax compliance and filings, and increasing employee self-service.■

V. Explain the difference between competency-based and traditional pay.

Next we now learn to Explain the difference between competency=based and traditional pay.

Contemporary Topics in Compensation

In this final section, we’ll look at five important contemporary compensation topics: competency-based pay, broadbanding, comparable worth, board oversight of executive pay, and total rewards.

Competency-Base Pay

Defines Skills

Choose Method

Training system

Formal Testing

Design Work

Competency-based pay means the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds. In practice, competency-based pay usually comes down to pay for knowledge,

or skill based pay.

Most such pay programs generally contain five elements.

The employer defines specific required skills and chooses a method for basing the person’s pay on his or her skills. A training system lets employees acquire skills. There is a formal competency testing system. And, the work is designed so that employees can easily move among jobs of varying skill levels.

Improving Performance: HR Practices Around The Globe (2 of 2)

JLG’s Skilled-Based Pay Program

Let’s talk about it…

Improving Performance: HR Practices Around the Globe

JLG’s Skill-Based Pay Program

JLG industries supplies access equipment such as aerial work platforms and mast booms. The firm instituted a skill-based pay program to reward employees for the number of basic skills they can perform rather than for the jobs to which they are assigned. JLG integrated the skill pay program into its existing payroll system, and supported it with a computerized reporting system. As an employee acquires and masters a new skill, JLG increases his or her pay on a scheduled basis.

Pay increases are directly proportional to employee “value” based on skill acquisition. Pay adjustment increments are $0.30 per hour and can be in addition to regularly scheduled merit increases. Qualified employees are eligible to receive a skill-based wage adjustment at three times. The first increase is available at the completion of an initial 6-month probationary employment period. An additional skill-based adjustment may come in conjunction with the employee’s annual merit review. Other skill-based adjustments are allowed yearly and 6 months after the annual merit review.

JLG assigns hourly production and maintenance workers to a particular “job family.” A job family consists of a group of employees performing similar activities and requiring similar skills. Each job family has a set of required skills, including certain job-related skills as well as skills related to quality and safety. Skill assessment is ongoing. Formal evaluation begins at the end of the 6-month probationary period, at which time the employee is tested for mastery of the minimum skills required for the job family. (A 100% mastery of these minimum skills is required for successful completion of the probationary period.) Then, twice a year, the company analyzes the employee’s progress toward more advanced skills, and sets training

objectives. Overall responsibility for skills acquisition and career development rests with the employee. The employee determines his/her level of participation in acquiring new or additional skills. Supervisors assist by helping the employee identify and plan for new skills to be acquired, and by creating opportunities for cross-training and certifying the skills training.

To determine if an employee is qualified for a skill-based pay raise, a comparison is made between the employee’s current wage rate and the skill-based target rate within the job family to which the employee is assigned. If the current wage rate is equal to or greater than the target rate, no pay adjustment is made. If the current rate is below the target rate, a skill-based adjustment is authorized for employees who mastered the job family’s skills.

In place since the 1990s, JLG reports that the program is producing benefits. The skill mastery it fosters permits faster adaptation to technology and product mix changes. With a greater skill range, workers are better able to focus on problem areas and avoid idle time waiting for problems to be fixed, or for work done by others. Employees participate more actively in problem solving because of their wider perspective on total workflow. The program permits lower overall staffing levels by incorporating into job family skill requirements specialized tasks others might otherwise be hired to perform. The company has been able to raise minimum hiring qualifications. Overall increases in productivity have enabled expansion of capacity. ■

Source: From “JLG Industries, Inc., “Information: Skill-Based Pay Program,” www.bmpcoe.org/bestpractices/internal/jlg/jlg_14.html.

Talk About it (Discussion) : Review our discussion of competencies in Chapter 4; then write three competency

statements for one job you believe they would have at a company such as JLG. A useful competency statement includes three elements: the name and a brief description of the competency, a description of the observable behaviors that represent proficiency in the competency, and proficiency levels.

Broadbanding

Figure 11-11 Broadbanded Structure and How It Relates to Traditional Pay Grades and Ranges

Broadbanding - means collapsing salary grades into just a few wide levels or bands, each of which contains a relatively wide range of jobs and pay levels. Figure 11-11 illustrates this. Here, the company’s previous six pay grades are consolidated into two broad grades or “broadbands.”

A company may create broadbands for all its jobs, or for specific groups such as managers or professionals. The (vertical) pay rate range of each broadband is relatively large, since it ranges from the minimum pay of the lowest grade the firm

merged into the broadband up to the maximum pay of the highest merged grade.

Comparable Worth

Comparable worth refers to the requirement to pay men and women equal wages for jobs that are dissimilar but of comparable value (for instance measured in points) to the employer. This may mean comparing dissimilar jobs, such as nurses to truck mechanics. The question “comparable worth” seeks to address is this: Should you pay women who are performing jobs equal to men’s or just comparable to men’s the same as men?

Diversity Counts The Pay Gap

Diversity Counts: The Pay Gap

All this notwithstanding, women in the United States earn only about 81% as much as men. In general, education may reduce the wage gap somewhat. But gaps remain, even among the most highly trained. For example, new female medical doctors recently earned about $17,000 per year less than their male counterparts did. Reasons put forward for the male-female gap range from the outdated notion that employers view women as having less leverage, to the fact that professional men change jobs more often (gaining more raises in the process) and that women tend to end up in departments that pay less. In any case, it’s a problem employers should recognize and address. ■

Board Oversight of Executive Pay

Dodd-Frank Law

The Financial Accounting Standards Board

The Sarbanes-Oxley Act

The Securities and Exchange Commission (SEC)

Board Oversight of Executive Pay

There are various reasons why boards are scrutinizing their executives’ pay more than in the past.

The Dodd-Frank Law of 2010 requires that American companies give shareholders a “say on pay.” Law firms are filing class-action suits demanding information from companies about their senior executive pay decisions.

The Financial Accounting Standards Board requires that most public companies recognize as an expense the fair value of the stock options they grant.

The Sarbanes-Oxley Act makes executives personally liable, under certain conditions, for corporate financial oversight lapses. The chief justice of Delaware’s Supreme Court said that governance issues, shareholder activism, and other changes have “created a new set of expectations for directors.”

The Securities and Exchange Commission (SEC) requires filing detailed compensation-related information, including a listing of all individual “perks” or benefits if they total more than $100,000.

VI. Describe the importance of total rewards for improving employee engagement

Next we now learn to Describe the importance of Total Rewards for Improving Employee Engagement

Employee Engagement Guide For Managers

Total Reward Programs

Total Reward and Employee Engagement

Trends Shaping HR: Digital and Social Media

Recognition Rewards

Let’s take a look…

Trends Shaping HR: Digital and Social Media

Noncash recognition/appreciation rewards such as gift cards, merchandise, and recognition are important parts of such total compensation. New digital and social media tools enable employees to recognize and reward each other. For example, a West Virginia DuPont plant installed an online system that enabled employees to give each other recognition; 95% were soon using it. International Fitness Holdings lets employees use a Facebook-type application to

recognize peers by posting messages and sending private e-mails. Employers contract with sites like Globoforce.com to provide online recognition systems. ■

Chapter 11 Review

What you should now know….

In review of Chapter 11 , you should now be able to:

11-1. List the basic factors determining pay rates.

11-2. Define and give an example of how to conduct a job evaluation.

11-3. Explain in detail how to establish a market-competitive pay plan

11-4. Explain how to price managerial and professional jobs.

11-5. Explain the difference between competency-based and traditional pay plans.

11-6. Describe the importance of total rewards for improving employee engagement.