Copyright © 2017 Pearson Education, Inc.
Part Four
Compensation
Chapter 11
Establishing Strategic Pay Plans
Lecture Outline:
Basic Factors in Determining Pay Rates
Aligning Total Rewards with Strategy
Equity and Its Impact on Pay Rates
Legal Considerations in Compensation
Know Your Employment Law – The Workday
Know Your Employment Law – Independent Contractor
Union Influences on Compensation Decisions
Pay Policies
Improving Performance: The Strategic Context
Improving Performance: HR Practices Around the Globe
Job Evaluation Methods
Compensable Factors
Preparing for the Job Evaluation
Job Evaluation Methods: Ranking
Job Evaluation Methods: Job Classification
Job Evaluation Methods: Point Method
Computerized Job Evaluations
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
Define Each Factor’s Degrees
Determine for Each Factor Its Factor Degree’s Points
Review Job Descriptions and Job Specifications
Evaluate the Jobs
Draw the Current (Internal) Wage Curve
Conduct a Market Analysis: Salary Surveys
Draw the Market (External) Wage Curve
Compare and Adjust Current and Market Wage Rates for Jobs
Developing Pay Grades
Establish Rate Ranges
Address Remaining Jobs
Correcting Out-of-Line Rates
Improving Performance: HR Tools for Line Managers and Small Businesses
Pricing Managerial and Professional Jobs
Chapter 11: Establishing Strategic Pay Plans 11-2
Copyright © 2017 Pearson Education, Inc.
What Determines Executive Pay?
Compensating Executives
Compensating Professional Employees
Improving Performance Through HRIS: Payroll Administration
Contemporary Topics in Compensation
Competency-Based Pay
Improving Performance: HR Practices Around the Globe
Broadbanding
Comparable Worth
Diversity Counts: The Pay Gap
Board Oversight of Executive Pay
Employee Engagement Guide For Managers
Total Rewards Programs
Trends Shaping HR: Digital and Social Media
Total Rewards and Employee Engagement
Chapter Review
Where Are We Now…
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; and contemporary topics in
compensation.
Interesting Issues:
In the grocery business, when Walmart opens a store, the other stores’ usual reaction is to cut
costs, particularly wages and benefits. So as Wegmans Food Markets, Inc., adds more stores and
increasingly competes with Walmart, its management needs to decide this: Should we cut pay to
better compete based on cost, or pursue a different compensation policy? We’ll see how
Wegmans boosted profits by raising pay.
Learning Objectives:
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.
!
Annotated Outline:
Chapter 11: Establishing Strategic Pay Plans 11-3
Copyright © 2017 Pearson Education, Inc.
I. Basic Factors in Determining Pay Rates – employee compensation refers to all forms of
pay or rewards going to employees, which include direct financial payments and indirect
payments. Direct financial payments include wages, salaries, incentives, commissions, and
bonuses. Indirect payments include financial benefits like employer-paid insurance and
vacations.
A. 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.
B. 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. External and
internal equity are crucial in pay rates. External equity refers to how pay
compares with rates in other organizations. Internal equity refers to
employees viewing their pay as equitable given other pay rates in the
organization. Individual equity refers to the fairness of an individual’s pay
as compared with what his/her coworkers are earning for the same or very
similar jobs in the company. Last, procedural equity refers to the perceived
fairness of the processes and procedures used to make decisions regarding
the allocation of pay.
C. Legal Considerations in Compensation – there are many laws that govern
compensation. For example, the Fair Labor Standards Act (FLSA)
regulates the minimum wage and requires that overtime be paid at a rate of
one and one half times the normal rate of pay for hours worked over 40 in a
workweek. Employees are categorized as exempt from the act or non-
exempt from its provisions. Other compensation laws include Davis-Bacon
Act, Walsh-Healey Public Contract Act, and Title VII of the 1964 Civil
Rights Act.
D. 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.
E. Know Your Employment Law – Independent Contractor
F. Union Influences on Compensation Decisions – union 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. Also the Wagner Act was created by the National Labor
Relations Board (NLRB) to oversee employer practices and ensure that
employees receive their rights.
G. Pay Policies – the employer’s compensation strategy will manifest itself in
pay policies. A range of issues such as seniority, high or low performance
can be used.
H. Improving Performance: The Strategic Context
I. Improving Performance: HR Practices Around the Globe
Chapter 11: Establishing Strategic Pay Plans 11-4
Copyright © 2017 Pearson Education, Inc.
II. Job Evaluation Methods – is a formal and systematic comparision of jobs to
determine the work of one job relative to another. The aim is to determine a job’s
relative worth and eventually establish a wage or salary structure. The basic
principle of job evaluation is this: jobs that require greater qualifications, more
responsibilities, and more complex job duties should receive more pay than jobs
with lesser requirements.
A. Compensable Factors – factors that jobs have in common can be used to
establish how the jobs compare to one another. The fundamental,
compensable element of a job, such as skills, effort, responsibility, and
working conditions.
B. Preparing for the Job Evaluation – job evaluation is a judgmental process
and demands close cooperation among supervisors, HR specialists,
employees, and union representatives. The main steps include identifying
the need for the job evaluation, getting cooperation, and then choosing an
evaluation committee. The committee then performs the actual evaluation
which consists of three main functions: 1) identifying 10 to 15 key
benchmark jobs, 2) selecting compensable factors, and 3) evaluating the
worth.
C. 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 survey, and assign a new pay scale.
D. Job Evaluation Methods: Job Classification – this is a simple, widely used
method in which raters categorize jobs into groups; all the jobs in each
group are of roughly the same value for pay purposes. The groups are
called classes if they contain similar jobs or grades if they contain jobs
that are similar in difficulty but otherwise different. Also known as job
grading.
E. Job Evaluation Methods: Point Method – 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 the job, the committee can calculate a total point value for the
job by adding up the corresponding points for each factor. The result is a
quantitative point rating for each job.
F. Computerized Job Evaluations – using quantitative job evaluation
methods such as the point method can be time-consuming. Computer-
aided job evaluation streamlines this process. Most computerized systems
have two main components: structured questionnaires and statistical
models. These elements allow the computer program to price jobs more or
less automatically by assigning points.
Chapter 11: Establishing Strategic Pay Plans 11-5
Copyright © 2017 Pearson Education, Inc.
III. How to Create a Market-Competitive Pay Plan
A. Choose Benchmark Jobs – these are representative of the entire range of
jobs the organization needs to evaluate.
B. 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 to ensure that the evaluation committee members apply
the factors with consistency.
C. Assign Weights to Compensable Factors – this determines the relative
amount of each compensable factor the job contains. Assume there is a
total of 100 percentage points for each job that needs to be allocated
among those compensable factors selected.
D. Convert Percentages to Points for Each Factor – using the provided
formula, percentages weights assigned to each compensable factor are
converted to point values for each factor.
E. Define Each Factor’s Degrees – next, define each of several degrees for
each factor so that raters may judge the amount or degree of a factor
existing in a job. The number of degrees usually does not exceed five or
six, and the actual number depends mostly on judgment.
F. Determine for Each Factor Its Factor Degrees’ Points – the evaluation
committee must be able to determine the number of points each job
contains. To do this, the committee must be able to examine each job and
(from the degree definitions) determine what degree of each compensable
factor that job has. The committee then needs to know how many points
each degree of each compensable factor is worth. To do this, we must first
assign points to each degree of each compensable factor.
G. 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 skill, effort,
responsibility, and working conditions. Those conducting the job
evaluation will frequently do so by reviewing each job’s job description
and job specification.
H. Evaluate the Jobs – the committee determines the degree to which each
compensable factor is present in each job. Knowing the skill, effort, responsibility,
and conditions degrees for each job, and knowing the number of points we
previously assigned to each degree of each compensable factor, we can now
determine how many skill, effort, responsibility, and conditions points each
benchmark job should contain. Finally, we can then add up these degree points to
get a total point value for each benchmark job.
I. Draw the Current (Internal) Wage Curve – plotting each job’s points and
wage rate produces a scatter plot. A wage curve can be drawn through these
plots to show how point values relate to current wage rates.
Chapter 11: Establishing Strategic Pay Plans 11-6
Copyright © 2017 Pearson Education, Inc.
J. Conduct a Market Analysis: Salary Surveys – virtually all employers conduct at
least an informal telephone, newspaper, or Internet salary survey to price benchmark
jobs and benefits.
1. Commercial, Professional, and Government Salary Surveys – many
employers use surveys published by consulting firms, professional
associations, or government agencies. The Bureau of Labor Statistics
(BLS) annually conducts area wage surveys, industry wage surveys, and
professional, administrative, technical, and clerical (PATC) surveys for
the National Compensation Survey.
2. Using the Internet to Do Compensation Surveys – a rapidly expanding
array of Internet-based options makes it fairly easy for anyone to access
published compensation survey information.
K. Draw the Market (External) Wage Curve – the current (internal) wage
curve does not reveal whether our pay rates are too high, or too low, or just
right, relative to what other firms are paying. For this, we need to draw a
market or external wage curve. The market/external wage curve compares
our jobs’ points with market pay rates for these jobs.
L. Compare and Adjust Current and Market Wage Rates for Jobs – next, combine both
the current/internal and market/external wage curves on one graph. The market
wage curve might be higher than our current wage curve or below our current wage
curve. Based on comparing the current/internal wage curve and market/external
wage curve, the company must decide whether to adjust the current pay rates for
our jobs, and if so how.
M. Developing Pay Grades – the committee will probably group similar jobs
into grades for pay purposes, instead of having to deal with hundreds of
pay rates. A pay (or wage) grade is comprised of jobs of approximately
equal difficulty or importance as determined by job evaluation.
N. Establish Rate Ranges – most employers develop vertical pay (rate) ranges
for each horizontal pay grade. These pay ranges may appear as vertical
boxes within each grade, showing minimum, maximum, and midpoint pay
rates for that pay grade. You may depict the pay ranges as steps or levels,
with specific corresponding pay rates for each step within each pay grade.
O. Address Remaining Jobs – once the job evaluation of the benchmark jobs is
complete, the remaining jobs must be added either through a formal process
(like the one described for benchmark jobs) or informally, where the
company feels they fit.
P. Correcting Out-of-Line Rates – the wage rate for a job may fall well off the
wage line or well outside the rate range for its grade. Which means that, the
average pay for the job is currently too high or too low, relative to other
jobs in the firm. If the point falls well below the line, a pay raise for the job
may be required. If the point falls well above the wage line, a pay cut or
freeze may be required.
Q. Improving Performance: HR Tools for Line Managers and Small Businesses
IV. Pricing Managerial and Professional Jobs
Chapter 11: Establishing Strategic Pay Plans 11-7
Copyright © 2017 Pearson Education, Inc.
A. What Determines Executive Pay? – one study concluded that three main
factors account for about two-thirds of executive compensation variance:
job complexity (span of control, the number of functional divisions over
which the executive has direct responsibility, and management level), the
ability to pay (total profit and rate of return) and the executive’s human
capital (educational level, field of study, work experience).
B. Compensating Executives – basic compensation elements for top
executives include: base pay, short-term incentives, long-term incentives,
and executive benefits and perks. Shareholder activism has tightened the
restrictions on what companies pay top executives.
C. Compensating Professional Employees – employers must first ensure that
the person is actually a “professional” under the law. The Fair Labor
Standards Act “provides a professional has to earn at least $455 per week,
and the person’s main duties 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.”
D. Improving Performance through HRIS: 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 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.
V. Contemporary Topics in Compensation
A. Competency-Based Pay
1. What Is Competency-Based Pay? – the company pays for the
employee’s range, depth, and types of skills and knowledge, rather
than for the job title he or she holds. With more companies organizing
around teams, you want to encourage employees to get and to use the
skills required to rotate among jobs.
2. Competency-Based Pay in Practice – these contain five elements: 1) a
system where the employer defines specific required skills; 2) chooses
a method for basing the person’s pay on; 3) a training system for
acquiring skills; 4) a competency testing system; and 5) a work design
that allows employees to move among jobs.
3. The Bottom Line on Competency-Based Pay – there are a variety of
pros and cons that are discussed, as well as implementation pitfalls.
B. Improving Performance: HR Practices Around the Globe
C. Broadbanding – this method involves collapsing salary grades and ranges
into just a few wide levels or bands.
1. Pros and Cons – broadbanding injects greater flexibility into employee
assignments, and it allows an employee to move up or down along the
pay scale without changing pay ranges. Broadbanding can, however,
Chapter 11: Establishing Strategic Pay Plans 11-8
Copyright © 2017 Pearson Education, Inc.
eliminate a sense of permanence in a set of job responsibilities. This is
particularly difficult for new employees.
D. 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. The Gunther Supreme Court
Case involved Washington County, Oregon, prison matrons who claimed
sex discrimination. Washington County finally agreed to pay 35,000
employees in female-dominated jobs almost $500 million in pay raises
over 7 years to settle the suit.
E. Diversity Counts: The Pay Gap – although the gap is narrowing a bit,
women still earn only about 77% as much as men. Education may reduce
the wage gap.
F. Board Oversight of Executive Pay – boards are clamping down on
executive pay. Since 2005, the Financial Accounting Standards Board
(FASB) has required that companies recognize, as an expense, the fair
value of the stock options they grant. The Sarbanes-Oxley Act makes
executives personally liable for lapses in corporate financial oversight.
VI. Employee Engagement Guide For Managers
A. Total Rewards Programs – total rewards encompass the traditional financial
compensation components. However, they also include personal and professional
growth opportunities and a motivating work environment.
B. Trends Shaping HR: Digital and Social Media
C. Total Rewards and Employee Engagement
Chapter Review
Chapter Section Summaries:
11-1: In establishing strategic pay plans, managers first need to understand some basic factors
in determining pay rates.
11-2: Employers use two basic approaches to setting pay rates: market-based approaches and
job evaluation methods.
11-3: We said the process of creating a market-competitive pay plan while ensuring external,
internal, and procedural equity consist of 16 steps.
11-4: Pricing managerial and professional jobs involves some special issues.
11-5: We addressed five important special topics in compensation.
11-6: Research shows that if employee engagement is the aim, it makes sense to emphasize total
rewards, not just financial rewards.
Discussion Questions:
11-1: What is the difference between exempt and nonexempt jobs?