Chapter 11 Establishing Strategic Pay Plans Part Four

Chapter 11 Establishing Strategic Pay Plans Part Four | Compensation Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Power. Point Presentation by Charlie Cook The University of West Alabama

WHERE WE ARE NOW… Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

LEARNING OUTCOMES 1. List the basic factors determining pay rates. 2. Define and give an example of how to conduct a job evaluation. 3. Explain in detail how to establish pay rates. 4. Explain how to price managerial and professional jobs. 5. Explain the difference between competency-based and traditional pay plans. 6. Explain the importance today of broadbanding, comparable worth, and board oversight of executive pay. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 3

Basic Factors in Determining Pay Rates Employee Compensation Components Direct financial payments Copyright ©

Legal Considerations in Compensation Davis-Bacon Act (1931) Equal Pay Act (1963) Walsh-Healey Public Contract Act (1936) Employee Retirement Income Security Act Title VII of the 1964 Civil Rights Act Employee Compensation Age Discrimination in Employment Act Fair Labor Standards Act (1938) Americans with Disabilities Act The Family and Medical Leave Act The Social Security Act of 1935 (as amended) National Labor Relations Act of 1935 (Wagner Act) Workers’ Compensation Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 5

FIGURE 11– 1 Independent Contractor Copyright © 2011 Pearson Education, Inc. publishing as Prentice

FIGURE 11– 2 Some Typical Exempt, Nonexempt Job Titles EXEMPT NONEXEMPT Attorneys Paralegals Physicians Accounting clerks Pharmacists Newspaper writers Engineers Working supervisor Teachers Management trainees Scientists Secretaries Computer systems analysts Clerical employees General managers Personnel directors Accountants Purchasing agents Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 7

FIGURE 11– 3 Who Is Exempt? Who Is Not Exempt? Step 1: Salary Basis Test Yes Step 2: Exemption Applicability Is the employee paid at least $455 per week ($23, 660 per annum), *not subject to reduction due to variations in quantity/quality of work performed? Does the employee perform any of the following types of duties/jobs? *The computer professional exemption has a salary basis test of $455 per week or $27. 63 per hour. The outside sales exemption is not subject to the salary basis test. Professional/creative—employee whose work requires highly advanced knowledge/education; creative and artistic professional No Executive—management is the employee’s primary duty Administrative—employee performing nonmanual office work Yes Step 3: Job Analysis A thorough analysis of the job duties must be performed to determine exempt status. An exempt position must pass both the salary basis and the duties tests. Computer professional—employee involved in design or application of computers and related systems Outside sales—employee making sales or taking orders which influence sales outside of the employer's premises No Employee is Nonexempt Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 8

Corporate Policies, Competitive Strategy, and Compensation • Aligned Reward Strategy Ø The employer’s basic task: v To create a bundle of rewards—a total reward package—that specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy. Ø The HR or compensation manager along with top management creates pay policies that are consistent with the firm’s strategic aims. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 9

TABLE 11– 1 Developing an Aligned Reward Strategy Questions to Ask: 1. What must our company do, (for instance in terms of improving customer service), to be successful in fulfilling its mission or achieving its desired competitive position? 2. What are the employee behaviors or actions necessary to successfully implement this competitive strategy? 3. What compensation programs should we use to reinforce those behaviors? What should be the purpose of each program in reinforcing each desired behavior? 4. What measurable requirements should each compensation program meet to be deemed successful in fulfilling its purpose? 5. How well do our current compensation programs match these requirements? Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 10

Compensation Policy Issues • Pay for performance • Pay for seniority • The pay cycle • Salary increases and promotions • Overtime and shift pay • Probationary pay • Paid and unpaid leaves • Paid holidays • Salary compression • Geographic costs of living differences Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 11

Equity and Its Impact on Pay Rates Forms of Compensation Equity External equity Internal equity Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Individual equity Procedural equity 11– 12

Addressing Equity Issues Area wage and salary surveys Methods to Address Equity Issues Job analysis and job evaluation Performance appraisal and incentive pay Communications, grievance mechanisms, and employees’ participation Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 13

Establishing Pay Rates Steps in Establishing Pay Rates 1 Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity). 2 Determine the worth of each job in your organization through job evaluation (to ensure internal equity). 3 Group similar jobs into pay grades. 4 Price each pay grade by using wave curves. 5 Fine-tune pay rates. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 14

Step 1: The Salary Survey Uses for Salary Surveys To price benchmark jobs To market-price wages for jobs Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall To make decisions about benefits 11– 15

Sources for Salary Surveys Sources of Wage and Salary Information Self. Conducted Surveys Consulting Firms Professional Associations Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Government Agencies The Internet 11– 16

TABLE 11– 2 Some Pay Data Web Sites Sponsor Internet Address What It Provides Downside Salary. com Salary by job and zip code, plus job and description, for hundreds of jobs Adapts national averages by applying local cost-of-living differences Wageweb www. wageweb. com Average salaries for more than 150 clerical, professional, and managerial jobs Charges for breakdowns by industry, location, etc. U. S. Office of Personnel Management www. opm. gov/oca/ 09 Tables/index. asp Salaries and wages for U. S. government jobs, by location Limited to U. S. government jobs Job Smart http: //jobstar. org/tools/ salary/sal-prof. php Profession-specific salary surveys Necessary to review numerous salary surveys for each profession cnnmoney. com Input your current salary and city, and this gives you comparable salary in destination city Based on national averages adapted to cost-of-living differences Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 17

Step 2: Job Evaluation Identifying Compensable Factors Skills Effort Copyright © 2011 Pearson Education,

The Job Evaluation Process Preparing for the Job Evaluation 1 Identifying the need for the job evaluation 2 Getting the cooperation of employees 3 Choosing an evaluation committee 4 Performing the actual evaluation Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 19

How to Evaluate Jobs Methods for Evaluating Jobs Ranking Job classification Copyright © 2011

Job Evaluation Methods: Ranking • Ranking each job relative to all other jobs, usually based on some overall factor. • Steps in job ranking: 1. Obtain job information. 2. Select and group jobs. 3. Select compensable factors. 4. Rank jobs. 5. Combine ratings. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 21

TABLE 11– 3 Job Ranking by Olympia Health Care Ranking Order Annual Pay Scale 1. Office manager $43, 000 2. Chief nurse 42, 500 3. Bookkeeper 34, 000 4. Nurse 32, 500 5. Cook 31, 000 6. Nurse’s aide 28, 500 7. Orderly 25, 500 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 22

Job Evaluation Methods: Job Classification • Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes. Ø Classes contain similar jobs. Administrative assistants Ø Grades are jobs similar in difficulty but otherwise different. v Mechanics, welders, electricians, and machinists Ø Jobs are classed by the amount or level of compensable factors they contain. v Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 23

FIGURE 11– 4 Example of a Grade Level Definition This is a summary chart of the key grade level criteria for the GS-7 level of clerical and assistance work. Do not use this chart alone for classification purposes; additional grade level criteria are in the Web-based chart. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 24

Job Evaluation Methods: Point Method • A quantitative technique that involves: Ø Identifying the degree to which each compensable factor is present in the job. Ø Awarding points for each degree of each factor. Ø Calculating a total point value for the job by adding up the corresponding points for each factor. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 25

Step 3: Grouping Jobs Point Method Grouping Similar Jobs into Pay Grades Ranking Method

Step 4: Price Each Pay Grade • The Wage Curve Ø Shows the pay rates paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation. Ø Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 27

FIGURE 11– 5 Plotting a Wage Curve Copyright © 2011 Pearson Education, Inc. publishing

Step 5: Fine-Tune Pay Rates • Developing Pay Ranges Ø Flexibility in meeting external job market rates Ø Easier for employees to move into higher pay grades Ø Allows for rewarding performance differences and seniority • Correcting Out-of-Line Rates Ø Raising underpaid jobs to the minimum of the rate range for their pay grade Ø Freezing rates or cutting pay rates for overpaid (“red circle”) jobs to maximum in the pay range for their pay grade Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 29

FIGURE 11– 6 Wage Structure Copyright © 2011 Pearson Education, Inc. publishing as Prentice

TABLE 11– 4 Federal Government Pay Scales Copyright © 2011 Pearson Education, Inc. publishing

HR in Practice: Developing a Workable Pay Plan • Simplified Approach: Ø Conduct a wage survey Ø Conduct a job evaluation Ø Conduct once-a-year job appraisals Ø Compile the compensation budget for upcoming year Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 32

FIGURE 11– 7 Compensation Administration Checklist Copyright © 2011 Pearson Education, Inc. publishing as

Pricing Managerial and Professional Jobs Compensating Executives and Managers Base pay Short-term incentives Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Long-term incentives Executive benefits/perks 11– 34

Pricing Managerial and Professional Jobs • What Determines Executive Pay? Ø CEO pay is set by the board of directors taking into account factors such as the business strategy, corporate trends, and where they want to be in the short and long term. Ø CEOs can have considerable influence over the boards that determine their pay. Ø Firms pay CEOs based on the complexity of the jobs they fill. Ø Shareholder activism and government oversight have tightened the restrictions on what companies pay top executives. Ø Boards are reducing the relative importance of base salary while boosting the emphasis on performance-based pay. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 35

Compensating Professional Employees • Employers can use job evaluation for professional jobs. • Compensable factors focus on problem solving, creativity, job scope, and technical knowledge and expertise. • Firms use the point method and factor comparison methods, although job classification is most popular. • Professional jobs are market-priced to establish the values for benchmark jobs. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 36

Competency-Based Pay • Competencies Ø Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance • What is Competency-Based Pay? Ø Paying for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 37

Why Use Competency-Based Pay? Competency-Based Pay Supports High-Performance Work Systems Strategic Aims Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Performance Management 11– 38

Competency-Based Pay in Practice • Main elements of skill/competency/knowledge–based pay programs: 1. A system that defines specific skills 2. A process for tying the person’s pay to his or her skill 3. A training system that lets employees seek and acquire skills 4. A formal competency testing system 5. A work design that lets employees move among jobs to permit work assignment flexibility Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 39

Competency-Based Pay: Pros and Cons • Pros Ø Higher quality Ø Lower absenteeism Ø Fewer accidents • Cons Ø Pay program implementation problems Ø Costs of paying for unused knowledge, skills, and behaviors Ø Complexity of program Ø Uncertainty that the program improves productivity Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 40

Special Topics in Compensation • Broadbanding Ø Consolidating salary grades and ranges into a few wide levels or “bands, ” each of which contains a relatively wide range of jobs and salary levels. Ø Pros and Cons v More flexibility in assigning workers to different job grades v Provides support for flatter hierarchies and teams v Promotes skills learning and mobility v Lack of permanence in job responsibilities can be unsettling to new employees. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 41

FIGURE 11– 8 Broadbanded Structure and How It Relates to Traditional Pay Grades and

Comparable Worth • Concept: Ø Employers should be required to pay men and women equal wages for dissimilar jobs that are of comparable (rather than strictly equal) value to the employer. • Basis: Ø Seeks to address the issue that women have jobs that are dissimilar to those of men and those jobs are often consistently valued less than men’s jobs. • Question at Hand: Ø Who will get to make final decisions on the comparability of jobs? v Employers v Courts Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 43

The Pay Gap • Factors Lowering the Earnings of Women: 1. Women’s starting salaries are traditionally lower. 2. Salary increases for women in professional jobs do not reflect their above-average performance. 3. In white-collar jobs, men change jobs more frequently, enabling them to be promoted to higher-level jobs over women with more seniority. 4. In blue-collar jobs, women tend to be placed in departments with lower-paying jobs. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 44

Board Oversight of Executive Pay • Factors Influencing Executive Compensation Ø FASB requirements for expensing of stock options at fair market value. Ø U. S. government’s “pay czar” overseeing certain pay awards in firms which had U. S. treasury loans. Ø Increased SEC reporting requirements for compensation-related information. Ø Increased executive liability for accuracy in corporate financial reporting under the Sarbanes Oxley Act. Ø Shareholder activism protesting excessive executive compensation due to lack of independence by executive board compensation committees. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 45

Improving Productivity Through HRIS: Automating Compensation Administration • Benefits of Compensation Automation: Ø Allows for quick updating of compensation programs Ø Eliminates costs of formerly manual processes Ø Coordinates centralized compensation budgets to prevent overages in compensation and raises Ø Can integrate and automatically administer other pay actions Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 46

KEY TERMS employee compensation direct financial payments indirect financial payments Davis-Bacon Act (1931) Walsh-Healey Public Contract Act (1936) Title VII of the 1964 Civil Rights Act Fair Labor Standards Act (1938) Equal Pay Act (1963) Employee Retirement Income Security Act (ERISA) salary compression salary survey benchmark job evaluation compensable factor Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall ranking method job classification (or grading) method classes grade definition point method factor comparison method pay grade wage curve pay ranges competency-based pay competencies broadbanding comparable worth 11– 47

Chapter 11 Appendix Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–

Quantitative Job Evaluation Methods • Factor Comparison Job Evaluation Method Step 1. Obtain job information Step 2. Select key benchmark jobs Step 3. Rank key jobs by factor Step 4. Distribute wage rates by factor Step 5. Rank key jobs according to wages assigned to each factor Step 6. Compare the two sets of rankings to screen out unusable key jobs Step 7. Construct the job-comparison scale Step 8. Use the job-comparison scale Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 49

FIGURE 11–A 1 Sample Definitions of Five Factors Typically Used in the Factor Comparison Method 1. Mental Requirements Either the possession of and/or the active application of the following: A. (inherent) Mental traits, such as intelligence, memory, reasoning, facility in verbal expression, ability to get along with people, and imagination. B. (acquired) General education, such as grammar and arithmetic; or general information as to sports, world events, etc. C. (acquired) Specialized knowledge, such as chemistry, engineering, accounting, advertising, etc. 2. Skill Requirements A. (acquired) Facility in muscular coordination, as in operating machines, repetitive movements, careful coordinations, dexterity, assembling, sorting, etc. B. (acquired) Specific job knowledge necessary to the muscular coordination only; acquired by performance of the work and not to be confused with general education or specialized knowledge. It is very largely training in the interpretation of sensory impressions. Examples 1. In operating an adding machine, the knowledge of which key to depress for a subtotal would be skill. 2. In automobile repair, the ability to determine the significance of a knock in the motor would be skill. 3. In hand-firing a boiler, the ability to determine from the appearance of the firebed how coal should be shoveled over the surface would be skill. 3. Physical Requirements A. Physical effort, such as sitting, standing, walking, climbing, pulling, lifting, etc. ; both the amount exercised and the degree of the continuity should be taken into account. B. Physical status, such as age, height, weight, sex, strength, and eyesight. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 50

FIGURE 11–A 1 Sample Definitions of Five Factors Typically Used in the Factor Comparison Method (cont’d) 4. Responsibilities A. B. C. D. E. F. 1. For raw materials, processed materials, tools, equipment, and property. For money or negotiable securities. For profits or loss, savings or methods’ improvement. For public contact. For records. For supervision. Primarily the complexity of supervision given to subordinates; the number of subordinates is a secondary feature. Planning, direction, coordination, instruction, control, and approval characterize this kind of supervision. 2. Also, the degree of supervision received. If Jobs A and B gave no supervision to subordinates, but A received much closer immediate supervision than B, then B would be entitled to a higher rating than A in the supervision factor. To summarize the four degrees of supervision: Highest degree—gives much—gets little High degree—gives much—gets much Low degree—gives none—gets little Lowest degree—gives none—gets much 5. Working Conditions A. Environmental influences such as atmosphere, ventilation, illumination, noise, congestion, fellow workers, etc. B. Hazards—from the work or its surroundings C. Hours Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 51

TABLE 11–A 1 Ranking Key Jobs by Factors 1 Mental Requirements Physical Requirements Skill Requirements Responsibility Working Conditions Welder 1 4 1 1 2 Crane operator 3 1 3 4 4 Punch press operator 2 3 2 2 3 Security guard 4 2 4 3 1 11 is high, 4 is low. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 52

TABLE 11–A 2 Ranking Key Jobs by Wage Rates 1 Hourly Wage Requirements Mental Physical Skill Responsibility Working Conditions Welder $9. 80 4. 00 (1) 0. 40 (4) 3. 00 (1) 2. 00 (1) 0. 40 (2) Crane operator $5. 60 1. 40 (3) 2. 00 (1) 1. 80 (3) 0. 20 (4) Punch press operator $6. 00 1. 60 (2) 1. 30 (3) 2. 00 (2) 0. 80 (2) 0. 30 (3) Security guard $4. 00 1. 20 (4) 1. 40 (2) 0. 40 (4) 0. 40 (3) 0. 60 (1) 11 is high, 4 is low. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 53

TABLE 11–A 3 Comparison of Factor and Wage Rankings Mental Requirements Physical Requirements Skill Requirements Responsibility Working Conditions A 1 $2 A 1 $2 Welder 1 1 4 4 1 1 2 2 Crane operator 3 3 1 1 3 3 4 4 Punch press operator 2 2 3 3 Security guard 4 4 2 2 4 4 3 3 1 1 1 Amount of each factor based on step 3. 2 Ratings based on distribution of wages to each factor from step 5. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 54

TABLE 11–A 4 Value Job (Factor)-Comparison Scale Mental Requirements Physical Requirements Skill Requirements 0. 20 Responsibility Working Conditions Crane Operator 0. 30 Punch Press Operator 0. 40 Welder Sec. Guard 0. 60 Sec. Guard 0. 80 Punch Press Operator 1. 00 (Plater) 1. 20 Sec. Guard 1. 30 1. 40 Punch Press Operator Crane Operator 1. 50 Sec. Guard (Inspector) Punch Press Operator 1. 70 (Plater) (Inspector) 1. 80 2. 00 Crane Operator 2. 20 (Plater) Crane Operator (Inspector) Punch Press Operator Welder (Inspector) 3. 00 4. 00 (Plater) (Inspector) 1. 60 2. 40 Welder (Plater) Welder Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 55

The Point Method of Job Evaluation Step 1. Determine clusters of jobs to be evaluated Step 2. Collect job information Step 3. Select compensable factors Step 4. Define compensable factors Step 5. Define factor degrees Step 6. Determine relative values of factors Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 56

FIGURE 11–A 2 Example of One Factor (Complexity/Problem Solving) in a Point Factor System Level Point Value 0 0 1 40 Follows clearly prescribed standard practice and demonstrates straightforward application of readily understood rules and procedures. Analyzes noncomplicated data by established routine. Benchmark: Statistical clerk, billing clerk. 2 80 Frequently confronts problems not covered by job routine. Independent judgment exercised in making minor decisions where alternatives are limited and standard policies established. Analysis of standardized data for information of or use by others. Benchmark: Social worker, executive secretary. 3 120 Exercises independent judgment in making decisions involving nonroutine problems with general guidance only from higher supervision. Analyzes and evaluates data pertaining to nonroutine problems for solution in conjunction with others. Benchmark: Nurse, accountant, team leader. 4 160 Uses independent judgment in making decisions that are subject to review in the final stages only. Analyzes and solves nonroutine problems involving evaluation of a wide variety of data as a regular part of job duties. Makes decisions involving procedures. Benchmark: Associate director, business manager, park services director. 5 200 Uses independent judgment in making decisions that are not subject to review. Regularly exercises developmental or creative abilities in policy development. Benchmark: Executive director. Description of Characteristics and Measures Seldom confronts problems not covered by job routine or organizational policy; analysis of data is negligible. Benchmark: Telephone operator/ receptionist. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 57

TABLE 11–A 5 Evaluation Points Assigned to Factors and Degrees First-Degree Points Second-Degree Points Third-Degree Points Fourth-Degree Points Fifth-Degree Points Decision making 41 82 123 164 204 Problem solving 35 70 105 140 174 Knowledge 24 48 72 96 123 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 58

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11– 59