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CHAPTER 3
Traditional Bases for Pay: Seniority and Merit
Learning Objectives
3-1. Describe seniority and longevity pay practices.
3-2. Explain the merit pay approach to compensation.
3-3. Explore a variety of performance appraisal methods.
3-4. Discuss how compensation professionals can strengthen the pay-for-performance
link.
3-5. Summarize the possible limitations of merit pay programs.
Outline
I. Seniority and Longevity Pay
II. Merit Pay
III. Performance Appraisal
IV. Strengthening the Pay-for-Performance Link
V. Possible Limitations of Merit Pay Programs
VI. Key Terms
VII. Discussion Questions and Suggested Answers
VII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses
VIII. Crunch the Numbers! Questions and Suggested Student Responses
IX. Assisted-graded Questions
X. Additional Case from the MyManagementLab Website; Instructor Notes, and Questions
and Suggested Student Responses
Lecture Outline
I. Seniority and Longevity Pay
A. Overview
1. Reward employees with periodic additions to base pay according to length of
service
2. Rationale based on the human capital theory
3. Human capital theory based on belief that employees’ knowledge and skills
generate productive capital and that they can be developed through formal
education and training
B. Historical Overview
1. National Labor Relations Act of 1935 (NLRA)
a. President Franklin D. Roosevelt’s response to:
i. Economic disaster caused by the Great Depression of 1929
ii. Desire for balance of power between labor and management
b. Established the collective bargaining system
2. Collective Bargaining
a. Led to job control unionism in which collective bargaining units negotiate
formal contracts with employees and provide quasi-judicial grievance
procedures
3. Seniority pay systems
a. Essentially provide automatic pay increases
b. Performance assessments tend to be subjective
c. The automatic pay adjustments were used to protect public sector employees
from political quirks
C. Who Participates?
1. Most unionized private and public sector organizations
a. Union rank-and-file and clerical workers
2. Public employers include municipal governments, state governments and the
federal government
D. Effectiveness of Seniority Pay Systems
1. Virtually no systematic research demonstrating seniority pay system plans’
effectiveness or prevalence in the private sector
2. Will probably disappear from for-profit companies in the future due to:
a. Increased global competition
b. Rapid technological advances
c. Skill deficits of new and current workers
3. Federal government has considered moving beyond seniority-based pay
E. Design of Seniority Pay and Longevity Pay Plans
1. Seniority pay
a. Object is to reward job tenure through permanent increases to base salary
b. Employees start at set base pay then receive time-designated pay increases
c. Employees can reach a maximum pay level for a position, but are expected to
be promoted and qualify for a new, higher pay structure
2. Longevity pay
a. Rewards employees who have reached pay grade maximums and who are not
likely to move into higher grades
b. Federal employees are subject to longevity pay via the General Schedule (GS)
system
i. Classifies federal government jobs into 15 steps (GS 1 through GS 15)
ii. Is based on such factors as skill, education, and experience levels
iii. Jobs that require high levels of specialized education, have significant
influence on public policy, or require executive decision making are
classified separately (e.g., Senior Level, Scientific and Professional,
Senior Executive Service)
iv. Employees are eligible for 10 within-grade step pay increases
v. Waiting periods within each step are: Steps 1–3 = 1 year per step;
Steps 4–6 = 2 years per step; Steps 7–9 = 3 years per step
F. Advantages of Seniority Pay Plans
1. Employees may perceive that they are treated fairly because they earn pay
increases by an objective standard instead of supervisory judgment
2. Set pay increases facilitate the administration of pay programs for employers
3. Avoids the perception, by employees, of favoritism
G. Fitting Seniority Pay with Competitive Strategies
1. Seniority pay does not fit well with the imperatives of competitive strategies
because employees can count on receiving the same pay raises regardless of
performance or if companies meet their competitive objectives
II. Merit Pay
A. Overview
1. Pay programs that assume that employees’ compensation over time should be
determined, at least in part, by differences in job performance
2. Permanent increases are based on performance
B. Who Participates?
1. Merit pay is one of the most common compensation methods in the U.S.
2. Occur most often in the private for-profit sector of economy
C. Exploring the Elements of Merit Pay
1. Based on objective and subjective indicators of an employee’s job performance
2. Employees must perceive a strong relationship between attaining performance
standards and pay increases
3. Adequate funds should be available to fulfill promises to compensate employees
4. Adjustments to base pay should be made according to changes in the cost of living
or inflation before awarding merit pay raises
5. Just-meaningful pay increase refers to the minimum pay increase that employees
will see as making a meaningful change in compensation
6. Must set explicit performance standards that specify the procedures or outcomes
against which employees’ job performance can be clearly evaluated
III. Performance Appraisal
A. Types of Performance Appraisal Plans
1. Trait systems
2. Comparison systems
3. Behavioral systems
4. Goal-oriented systems
B. Trait Systems
1. Are based on having raters evaluate each employee’s traits or characteristics
2. Appraisals are typically scored using descriptors ranging from unsatisfactory to
outstanding
3. They are easy to construct, use, and apply to a wide range of jobs
4. They are easy to quantify
5. They are common in companies that rely on customer service
6. Drawbacks
a. Can be highly subjective
b. These systems rate individuals on subjective personality factors rather than
objective job performance data
C. Comparison Systems
1. Evaluate a given employee’s performance against that of other employees
2. Forced distribution is an alternate approach that assigns employees to a groups that
represent an entire range of performance (such as best, moderate, and poor
performers)
a. Not popular with managers because it fosters cutthroat competition
b. Can distort ratings because employee performance may not fall into
predetermined distributions
3. Paired comparisons
a. Each employee is compared to all others
b. Each employee is ranked according to the number of times they are identified
as being the better performer
c. This method is best suited for small groups of employees who perform the
same or similar jobs
D. Behavioral Systems
1. Rate employees on the extent to which they display successful job performance
behaviors
2. These objective job behavioral methods, when developed and applied correctly,
provide results that are relatively free of rater errors and biases
3. Critical incident technique (CIT)
a. Requires job incumbents and their supervisors to identify performance
incidents that distinguish successful performance from unsuccessful ones
b. Supervisors then observe employees and record their performance on these
critical job aspects
4. Behaviorally anchored rating scale (BARS)
a. Similar to CIT, except the incidents are written as expectations instead of
achieved behaviors
b. Advantages
i. Most highly defensible in court because it is based on actual observable
job behaviors
ii. Encourages all raters to make evaluations in similar ways
c. Disadvantages
i. Difficult to maintain the volume of data
ii. Each job must have distinct appraisal documents
iii. As jobs change, so must documentation
E. Goal-Oriented Systems
1. Management by objectives (MBO) perhaps is the most effective performance
appraisal technique because:
a. Supervisors and employees determine objectives for employees to meet
b. Employees rate themselves on how well they think they met the objectives
2. Evaluates employees’ progress toward strategic planning objectives
3. Drawbacks
a. Companies generally do not fully describe the scope of managerial positions
b. Time consuming
c. Requires extensive communication between supervisor and employee
d. Focuses on specific goals at the exclusion of other vital outcomes, which is
referred to as a “results at any cost” mentality
F. Exploring the Performance Appraisal Process
1. Purposes
a. Represents a company’s way of telling employees the company’s expectations
of them
b. Informs employees how well they are meeting those goals
2. Merit pay increases based on factors other than job performance can lead to
charges of illegal pay discrimination (violation of the Equal Pay Act of 1963)
3. In Brito v. Zia Company the court found that the Zia Company violated Title VII
when a disproportionate number of protected class individuals were laid off on the
basis of low performance appraisal scores
4. Four activities to promote nondiscriminatory performance appraisal practices
a. Conduct job analyses to ascertain characteristics necessary for a content valid
performance appraisal system
b. Incorporate these characteristics into a rating instrument
c. Train supervisors to use the rating instrument properly
d. Set up formal appeal mechanisms and have upper-level personnel review the
ratings to insure accuracy and effectiveness
5. Sources of performance appraisal information
a. Five main sources are the employee’s:
i. Self
ii. Supervisor
iii. Coworkers
iv. Subordinates (if applicable)
v. Customers or clients (if applicable)
b. 360-degree performance appraisals are performance appraisal systems that
rely on many appropriate sources of performance related information
6. Errors in the performance appraisal process
a. Rating errors reflect differences between human judgment processes versus
objective, accurate assessments uncolored by bias, prejudice, or other
subjective, extraneous influences
b. Bias errors
i. Happen when rater evaluates employees based on a negative or positive
opinion of the employee rather than on the employee’s actual performance
ii. First-impression effect—a manager would have a tendency to make an
initial judgment about an employee, and allows that to affect their
appraisal
iii. Halo effects—rater generalizes behavior on one aspect of the job to all
aspects of the job
iv. Similar-to-me effect—tendency on the part of raters to favorably judge
employees whom they perceive as similar to themselves
v. Illegal discriminatory bias occurs when supervisors allow an employee’s
race, gender, nationality, or religion influence their performance ratings
e. Contrast errors take place when the rater compares the employee to other
employees rather than to specific performance standards
f. Errors of central tendency occur when a supervisor rates all employees as
average or close to average
g. Errors of leniency or strictness
i. Reflect the tendency to rate every employee at the high end or low end of
the scale, regardless of actual performance
ii. With a leniency error, managers rate employees’ performances more
highly than they would rate them using objective criteria
iii. The opposite occurs with errors of strictness
IV. Strengthening the Pay-for-Performance Link
A. Link Performance Appraisals to Business Goals
1. Employee performance should be linked to the company’s competitive strategy
B. Analyze Jobs
1. Job analysis is important for establishing internally consistent compensation
systems
2. Supervisors should match the employees’ performance to the job description
C. Communicate
1. Employees must clearly understand the link between performance and
D. Establish Effective Appraisals
1. Should be tied to employee’s future performance goals and career plans
2. Deficiencies in performance should include methods to remedy
3. Performance standards should be used for establishing performance targets
E. Empower Employees
1. Encourage employee self-appraisals between formal sessions
F. Differentiate Among Performers
1. Merit increases should consist of meaningful increments
2. Merit increases should clearly reflect differences in actual job performance
V. Possible Limitations of Merit Pay Programs
A. Failure to Differentiate among Performers
1. Poor performers may receive merit increases even though they’re not warranted
B. Poor Performance Measures
1. May be too subjective
2. Developing performance measures for every job is difficult and expensive
C. Supervisors’ Biased Ratings of Employee Job Performance
1. Supervisors are subject to a number of errors when they make subjective
assessments
D. Lack of Open Communication between Management and Employees
1. Lack of good communication can lead employees to mistrust the performance
appraisal process
E. Undesirable Social Structures
1. Pay grades can reflect status differentials
2. Permanent merit increases may rigidify the relative pay status of employees over
time
F. Mounting Costs
1. Merit pay presents an escalating cost burden to companies
G. Factors Other Than Merit
1. Supervisors may subconsciously use age or seniority instead of merit
2. Supervisors may let personal feeling determine pay increases
3. Company politics that puts focus on supervisors’ agendas or goals instead of work
goals
H. Undesirable Competition
1. Between individual employees for limited funds
2. Between individuals in team settings, which may hinder teamwork
I. Little Motivational Value
1. When employers and employees disagree on what is a “large enough” increase
2. When the yearly increase seems negligible on each paycheck
End of the Chapter
VI. Key Terms
Seniority pay: System that rewards employees with periodic additions to base pay according to
employees’ length of service in performing their jobs
Longevity pay: Systems that rewards employees with periodic additions to base pay according
to employees’ length of service in performing their jobs
Human capital theory: States that employees’ knowledge and skills generate productive capital
known as human capital
Job control unionism: Collective bargaining units negotiate formal contracts with employees
and provide quasi-judicial grievance procedures to adjudicate disputes between union members
and employers
General Schedule (GS): Classifies federal government jobs into 15 classifications (GS-1
through GS-15) based on such factors as skill, education, and experience levels
Merit pay programs: Assume that employees’ compensation over time should be determined,
at least in part, by differences in job performance
Just-meaningful pay increase: Minimum pay increase that employees will see as making a
meaningful change in compensation
Trait systems: Ask raters to evaluate each employee’s traits or characteristics
Comparison systems: Evaluate a given employee’s performance against that of other
employees
Forced distribution: Assigns employees to groups that represent the entire range of
performance
Paired comparisons: Supervisors compare each employee to every other employee, identifying
the better performer in each pair
Behavioral systems: Rate employees on the extent to which they display successful job
performance behaviors
Critical incident technique (CIT): Requires job incumbents and their supervisors to identify
performance incidents (e.g., on-the-job behaviors and behavioral outcomes) that distinguish
successful performance from unsuccessful ones
Behaviorally anchored rating scales (BARS): Performance assessment tool where incidents
are written as expectations to emphasize the fact that the employee does not have to demonstrate
the exact behavior that is used as an anchor in order to be rated at that level
Management by objectives (MBO): Supervisors and employees determine objectives for
employees to meet during the rating period and employees appraise how well they have achieved
their objectives
Brito v. Zia Company: The court found that the Zia Company violated Title VII when a
disproportionate number of protected class individuals were laid off on the basis of low
performance appraisal scores
360-degree performance appraisal methods: Performance appraisal systems that rely on
many appropriate sources of information
Rating errors: Reflect differences between human judgment processes versus objective,
accurate assessments uncolored by bias, prejudice, or other subjective, extraneous influences
Bias errors: When the rater evaluates the employee based on a personal negative or positive
opinion of the employee rather than on the employee’s actual performance
First-impression effect: When a rater makes an initial favorable or unfavorable judgment about
an employee and then ignores or distorts the employee’s actual performance based on this
impression
Positive halo effect: When a rater generalizes an employee’s good behavior on one aspect of the
job to all aspects of the job
Negative halo effect: When a rater generalizes an employee’s bad behavior on one aspect of the
job to all aspects of the job
Similar-to-me effect: Refers to the tendency on the part of raters to judge favorably employees
whom they perceive as similar to themselves
Illegal discriminatory bias: When a supervisor rates members of his or her race, sex,
nationality, or religion more favorably than members of other classes
Contrast errors: when the rater compares an employee with other employees rather than to
specific, explicit performance standards
Errors of central tendency: When supervisors rate all employees as average or close to
average
Leniency error: When a rater appraises employees’ performance more highly than they really
rate compared with objective criteria
Strictness errors: When a supervisor rates an employee’s performance lower than it would be if
compared against objective criteria
Internally consistent compensation systems: Job analysis is vital in establishing these systems
in order to clarify the standards against which employees’ performance is judged
