Week 2 D 1

3.1 SENIORITY AND LONGEVITY PAY

3-1 Describe seniority and longevity pay practices.

Seniority pay and longevity pay systems reward employees with periodic additions to base pay according to employees’ length of service in performing their jobs. These pay plans assume that employees become more valuable to companies with time and that valued employees will leave if they do not have a clear idea that their salaries will progress over time.

This rationale comes from human capital theory (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss205) ,

which states that employees’ knowledge and skills generate productive capital known as human capital. Employees can develop such knowledge and skills from formal education and training, including on- the-job experience. Over time, employees presumably refine existing skills or acquire new ones that enable them to work more productively. Thus, seniority pay rewards employees for acquiring and refining their skills as indexed by seniority.

Historical Overview A quick look back into U.S. labor relations history can shed light on the adoption of seniority pay in many companies. President Franklin D. Roosevelt advocated policies designed to improve workers’ economic status in response to the severely depressed economic conditions that had started in 1929. Congress instituted the National Labor Relations Act (NLRA) in 1935 to protect workers’ rights, predicated on a fundamental, but limited, conflict of interest between workers and employers. President Roosevelt and other leaders felt that companies needed to be regulated to establish an appropriate balance of power between the parties. The NLRA established a collective bargaining system nationwide to accommodate employers’ and employees’ partially conflicting and partially shared goals.

Collective bargaining led to job control unionism (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss233) ,

in which collective bargaining units negotiate formal contracts with employees and provide quasi-judicial grievance procedures to adjudicate disputes between union members and employers. Union shops establish workers’ rights and obligations and participate in describing and delineating jobs. In unionized workplaces, terms of collective bargaining agreements may determine the specific type of seniority system used, whereas seniority tends to be the deciding factor in nearly all job scheduling, transfer, layoff, compensation, and promotion decisions. Moreover, seniority may become a principal criterion for selecting one employee over another for transfer or promotion. Table 3-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03lev1sec1#ch03tab01) illustrates the rules for a seniority pay program contained in a collective bargaining agreement between the Board of Trustees of the University of Illinois and Local 698 of the American Federation of State, County, and Municipal Employees. That is, Table 3-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03lev1sec1#ch03tab01) shows the actual rates for job classification and seniority level.

Political pressures probably drive the prevalence of public sector seniority pay. Seniority-based pay systems essentially provide automatic pay increases. Performance assessments tend to be subjective rather than objective because accurate job performance measurements are very difficult to obtain. In contrast, employees’ seniority is easily indexed because time on the job is a relatively straightforward and concrete concept. Implementing such a system that specifies the amount of pay raise an employee will receive according to his or her seniority is automatic. Politically, “automatic” pay adjustments protect public sector employees from the quirks of election-year politics. In addition, the federal, state, and local governments can avoid direct responsibility for pay raises so employees can receive fair pay without political objections.

Who Participates?

TABLE 3-1 Hourly Wage Rates by Seniority Level

Classification Title Start ($) 13 Months ($) 25 Months ($) 37 Months ($)

Staff Nurse I 19.07 20.19 21.31 22.40

Nursing Assistant 9.94 10.17 10.53 10.83

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3.1 Seniority and Longevity Pay

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Medical Assistant 14.65 15.40 16.13 16.92

Medical Technologist 17.66 18.90 20.13 21.38

Source: Based on Agreement between the Board of Trustees of the University of Illinois and Local 698 of The American Federation of State, County, and Municipal Employees, AFL-CIO.

Today, most unionized private sector and public sector organizations continue to base salary on seniority or length of employee service, though the number of these workplaces is steadily declining as described in Chapter 2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch02#ch02) . In 2014, the overall unionization rate was 11.1 percent. Members of union-bargaining units whose contracts include seniority provisions, usually rank-and-file as well as clerical workers, receive automatic raises based on the number of years they have been with the company. In the public sector, most administrative, professional, and even managerial employees receive such automatic pay raises.

Effectiveness of Seniority Pay Systems Virtually no systematic research has demonstrated these pay plans’ effectiveness nor is there any documentation regarding their prevalence in the private sector. Seniority or longevity pay plans are likely to disappear from for-profit companies in increasingly competitive markets. Such external influences as increased global competition, rapid technological advancement, and skill deficits of new and current members of the workforce necessitate a strategic orientation toward compensation. These influences will probably force companies to establish compensation tactics that reward their employees for learning job-relevant knowledge and skills and for making tangible contributions toward companies’ quests for competitive advantage. Seniority pay meets neither goal.

Public sector organizations had until the 1990s, faced less pressure to change these systems because they exist to serve the public rather than make profits. For example, the Internal Revenue Service (IRS) is responsible for collecting taxes from U.S. citizens. Paying taxes to the federal government is an obligation of virtually all U.S. citizens. The amount of taxes each citizen pays is based on established tax codes. The IRS is not in the business of finding new customers to pay taxes. It does not compete against any other businesses for taxpayers.

The federal government, however, has now raised questions about the effectiveness of its seniority pay system for white-collar workers —the General Schedule—because most employees receive raises regardless of how well they perform. Questions about the effectiveness of its seniority pay system are based on how the world of work has dramatically changed since the system’s inception in 1949. The federal government has extensively considered the strategic importance of moving beyond seniority-based pay by studying the experience of private sector companies, though it has not made noteworthy modifications to its current pay system.

Design of Seniority Pay and Longevity Pay Plans Although seniority pay and longevity pay are similar, there are some important distinctions between them. The object of seniority pay is to reward job tenure or employees’ time as members of a company explicitly through permanent increases to base salary. Employees begin their employment at the starting pay rate established for the particular jobs. At specified time intervals, which can be as short as 3 months and as long as 3 years, employees receive designated pay increases. These pay increases are permanent additions to current pay levels. Over time, employees will reach the maximum pay rate for their jobs. Companies expect that most employees will earn promotions into higher-paying jobs that have seniority pay schedules. Figure 3-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03lev1sec1#ch03fig01) illustrates a seniority pay policy for a junior clerk job and an advanced clerk job. Pay rates are associated with seniority. When employees reach the top pay rate for the junior clerk position, they are presumably qualified to assume the duties of the advanced clerk position.

If employees choose to remain in their job classifications or are not qualified to advance to the next level, longevity pay plans rewards employees who have reached pay range maximums and who are not likely to move into higher grades. Longevity pay plans are used to help reward long-service employees for their continued contributions, without regularly paying more than the job is worth based on knowledge, skills, abilities, and other job-related requirements.

Most federal government employees are subject to longevity pay via the General Schedule (GS) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss172) , which is shown in Table 3-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03lev1sec1#ch03tab02) . The General Schedule classifies federal government jobs into 15 classifications (GS-1 through GS-15) based on such factors as skill, education, and experience levels. The GS-1 category include the lowest-level jobs and GS-15 include the highest-level jobs. In addition, jobs that require high levels of specialized education (e.g., a physicist), influence public policy significantly (e.g., law judges), or require executive decision making are classified in separate categories (the top executive in a U.S. government agency such as the U.S. Department of Labor): Senior Level (SL), Scientific and Professional (SP) positions, and the Senior Executive Service (SES).

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FIGURE 3-1 A Sample Seniority Policy for Junior and Advanced Clerk Jobs

The government typically increases all pay amounts annually to adjust for inflation. The 2015 schedule represents a 1 percent increase over 2014 rates. The federal government relies on a base schedule, shown in Table 3-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03lev1sec1#ch03tab02) , to compensate employees in most locations. Additional schedules are published for particular geographic areas where the cost of living differs substantially from the national average. Examples include the greater Boston and Los Angeles areas.

Employees are eligible for 10 within-grade step pay increases, each increase amounts to about 3 percent of the employee’s salary. At present, it takes employees 18 years to progress from Step 1 to Step 10 if they were to remain within a single GS grade. Progression through the steps is based on an assumption that their job performance is acceptable. The increase from step to step equals the within- grade increase (WGI) amount. The waiting periods within steps are:

Steps 1–3: 1 year

Steps 4–6: 2 years

Steps 7–9: 3 years

Position descriptions usually indicate a series of GS ranges for which the job may be classified. For example, a Human Resources Assistant position could fit within GS ranges 5 through 7. Determination of the grade depends upon the qualification level of the newly hired employee. For this position, an individual with the minimum acceptable qualifications would be placed in GS-5. An individual with one or more years of specialized experience would be placed in GS-6 if the experience were at least equivalent to GS-5 requirements. Placement in GS-7 would require at least one year of specialized experience fitting with GS-6 requirements. Employees could be eligible for promotions to classifications that are higher than advertised. For this job, movement to GS-8 would be based on competition under merit system principles, to be discussed in the next section. The pay increase associated with any promotion would typically be equal to at least two steps at the GS grade immediately before promotion. For this human resources assistant job, an employee whose classification is GS-7 (let’s assume Step 6) could be promoted to GS-8 based on merit. Pay would increase from $40,437 to at least $42,747 based on the following calculation: ($40,437 + [$1,155 × 2 steps]) where $1,155 is the WGI for Grade 7.

TABLE 3-2 Salary Table 2015-GS (Annual Rates by Grade and Step)

Grade Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Step 10

WGI

1 18161 18768 19372 19973 20577 20931 21528 22130 22153 22712 VARIES

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2 20419 20905 21581 22153 22403 23062 23721 24380 25039 25698 VARIES

3 22279 23022 23765 24508 25251 25994 26737 27480 28223 28966 743

4 25011 25845 26679 27513 28347 29181 30015 30849 31683 32517 834

5 27982 28915 29848 30781 31714 32647 33580 34513 35446 36379 933

6 31192 32232 33272 34312 35352 36392 37432 38472 39512 40552 1040

7 34662 35817 36972 38127 39282 40437 41592 42747 43902 45057 1155

8 38387 39667 40947 42227 43507 44787 46067 47347 48627 49907 1280

9 42399 43812 45225 46638 48051 49464 50877 52290 53703 55116 1413

10 46691 48247 49803 51359 52915 54471 56027 57583 59139 60695 1556

11 51298 53008 54718 56428 58138 59848 61558 63268 64978 66688 1710

12 61486 63536 65586 67636 69686 71736 73786 75836 77886 79936 2050

13 73115 75552 77989 80426 82863 85300 87737 90174 92611 95048 2437

14 86399 89279 92159 95039 97919 100799 103679 106559 109439 112319 2880

15 101630 105018 108406 111794 115182 118570 121958 125346 128734 132122 3388

Source: U.S. Office of Personnel Management. Available: http://www.opm.gov/policy-data-oversight/pay-leave/salaries-wages/salary- tables/pdf/2015/saltbl.pdf (http://www.opm.gov/policy-data-oversight/pay-leave/salaries-wages/salary-tables/pdf/2015/saltbl.pdf) , accessed February 15, 2015

Advantages of Seniority Pay Seniority pay offers a number of advantages to both employees and employers. Employees are likely to perceive they are treated fairly because they earn pay increases according to seniority, which is an objective standard. Seniority stands in contrast to subjective standards based on supervisory judgment. The inherent objectivity of seniority pay systems should lead to greater cooperation among coworkers.

Seniority pay offers two key advantages to employers. First, seniority pay facilitates the administration of pay programs. Pay increase amounts are set in advance, and employers award raises according to a pay schedule, much like the federal government’s GS. A second advantage is that employers are less likely to offend some employees by showing favoritism to others because seniority is an objective basis for making awards. The absence of favoritism should enable supervisors and managers effectively to motivate employees to perform their jobs even in the absence of a formal performance appraisal system.

Fitting Seniority Pay with Competitive Strategies Seniority pay does not necessarily fit well with the imperatives of competitive strategies because employees can count on receiving the same pay raises for average and exemplary performance, and this fact represents the greatest disadvantage of seniority pay systems. Employees who make significant contributions in the workplace receive the same pay increases as coworkers who make modest contributions. In addition, employees receive pay raises without regard to whether companies are meeting their competitive objectives. Employees clearly do not have any incentives to actively improve their skills or to take risks on the job because they receive pay raises regardless of any initiative they show. Finally, because seniority increases become a recurring part of base pay, the growing costs can become burdensome to employers. Besides, do pay raises earned years in the past continue to benefit the employer? Probably not. This especially would be the case if the employee were once a stellar performer and regressed to just an acceptable performer.

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So, in light of increased external pressures on companies to promote productivity and product quality, will seniority or longevity pay be gradually phased out? With the exception of companies that are shielded from competitive pressures, it is likely that companies that intend to remain competitive will set aside seniority pay practices. Although seniority pay plans reflect employees’ increased worth, they measure such contributions indirectly rather than based on tangible contributions or the successful acquisition of job-related knowledge or skills. Now more than ever, companies need to be accountable to shareholders, which will require direct measurement of employee job performance.

To illustrate the incompatibility of seniority pay structures with the attainment of competitive strategy further, Toyota, a manufacturer of automobiles, is reconsidering its use of seniority-based wage system for a performance-based pay system. Traditional Japanese companies defined seniority as employee age, leaving substantial pay gaps between younger and older employees. These gaps are making it difficult to attract younger talent to the company. Despite Toyota’s worldwide reputation as a manufacturer of high-quality automobiles, company management continually adopts employment practices that encourage even better-quality products. Performance-based pay fits with Toyota’s mission. Other Japanese companies, Hitachi, Panasonic, and Sony, are following suit.

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