978-0134320540 Chapter 3 Lecture Notes

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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