CHAPTER 5
Person-Focused Pay
Learning Objectives
5-1. Define person-focused pay.
5-2. Describe the usage of person-focused pay.
5-3. Name and explain the reasons companies adopt person-focused pay programs.
5-4. Summarize the varieties of person-focused pay programs.
5-5. Contrast person-focused pay with job-based pay.
5-6. Explain the advantages and disadvantages of person-focused pay plans.
Outline
I. Defining Person-Focused Pay: Competency-Based, Pay-for-Knowledge, and Skill-Based
II. Usage of Person-Focused Pay Programs
III. Reasons to Adopt Person-Focused Pay Programs
IV. Varieties of Person-Focused Pay Programs
V. Contrasting Person-Focused Pay with Job-Based Pay
VI. Advantages and Disadvantages of Person-Focused Pay Programs
VII. Key Terms
VIII. Discussion Questions and Suggested Answers
IX. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses
X. Crunch the Numbers! Questions and Suggested Student Responses
XI. Assisted-graded Questions
X. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions
and Suggested Student Responses
Lecture Outline
I. Defining Person-Focused Pay: Competency-Based, Pay-for-Knowledge, and
Skill-Based
A. Person-Focused Pay Plans
1. Rewards employees for acquiring job related, knowledge, skills, or competencies
rather than for demonstrating successful job performance
2. Not compensated for demonstrating successful job performance
B. Pay-for-Knowledge Plans
1. Rewards management, service, or professional employees for increasing and
applying job related knowledge
C. Skill-Based Pay
1. Mainly for employees who perform manual labor
2. Pay increase based on mastery and use of new job skills
D. Types of skills
1. Horizontal skills or horizontal knowledge refer to similar skills or knowledge
2. Vertical skills or vertical knowledge are those skills traditionally considered
supervisory
3. Depth of skills or depth of knowledge refers to the level of specialization or
expertise an employee brings to a particular job
E. Competencies
1. An individual’s capability to orchestrate and apply combinations of knowledge
and skills consistently over time to perform work successfully in the required
work situations
2. Foundational competencies represent the competencies that provide the
foundation for success in school and in the world of work
3. Industry-related competencies are specific to an industry or industry sector
4. Occupational competences are developed to define performance in a workplace,
to design competency-based curriculum, or to articulate the requirements for an
occupational credential
II. Usage of Person-Focused Pay Programs
A. Reported use of person-focused pay
1. Evidence suggests that companies with between 150 and 2000 employees use
person-focused pay, mostly in manufacturing industry
2. One study found that a skilled-based pay plan in a manufacturing setting
increased plant productivity by 58 percent
3. Mostly found in continuous process settings, like manufacturing, in which one
employee’s job depends on the work of at least one other worker
III. Reasons to Adopt Person-Focused Pay Programs
A. Overarching Reasons
1. Remove the view of pay as an entitlement
2. Establish the view of pay as a reward for acquiring and implementing job-relevant
knowledge and skills
B. Technological Innovation
1. Making some jobs obsolete and requiring new and different worker skills
2. Fosters increased autonomy and team-oriented work places which demand
different job-related skills
C. Increased Global Competition
1. U.S. companies must become more productive in response to increased global
competition
2. Foreign workers are better skilled in two ways
a. European Common Market and Pacific Rim economies emphasize learning,
therefore their employees are better skilled and more productive
b. Cultures emphasize and provide better learning and workplace instruction for
non-college-bound students
3. HR managers must tailor compensation programs to the particular skills they wish
to foster
IV. Varieties of Person-Focused Pay Programs
A. Stair-Step Model
1. Each step represents jobs from a particular job family that differ in terms of
complexity
2. Each position differs according to the number of skills needed to perform the job
3. Each “step-up” requires more skills than the position “below” it
4. Training can be conducted either:
a. In-house by the company’s own training department
b. Outsourced to such organizations as: community colleges, vocational schools,
four-year universities, training consulting firms, or suppliers’ client training
programs
B. Skill-Blocks Model
1. Applies to jobs within one job family per model
2. Employees progress to increasingly complex jobs
3. Skills do not necessarily build on each other
4. Emphasizes the development of both horizontal and vertical knowledge and/or
skill depth
C. Job-Point Accrual Model
1. Encourages employees to develop skills and learn to perform jobs from different
job families
a. The number of jobs they can be trained to do is limited
b. Companies want to avoid “jack of all trades” employees
2. The more points an employee accrues, the higher that employee’s compensation
level will be
D. Cross-Departmental Models
1. Promote staffing flexibility by training employees in one department with some of
the critical skills they would need to perform effectively in other departments
2. Can help production companies manage sporadic, short-term staffing shortages
and meet seasonal fluctuations in demands for products or services
3. Similar to the job-point accrual model, except for their intent
a. Job-point accrual models encourage employees to learn skills and acquire
knowledge that bears directly on the competitive advantages of companies
b. Cross-departmental models promote staffing flexibility by training employees
in one department with critical skills they would need to perform effectively
in other departments
V. Contrasting Person-Focused Pay with Job-Based Pay
A. Job-Based Pay
1. Compensates employees for jobs they currently perform
2. Includes seniority pay, merit pay, and incentive pay
a. Seniority pay increases employees pay automatically over time
b. Merit pay awards a permanent addition to base pay, based on performance
c. Incentive pay provides pay raise amounts based on the attainment of
predefined work goals
B. Person-Focused Pay
1. Compensates employees for developing the flexibility and skills to perform a
number of jobs effectively
2. Rewards employees on their potential to make positive contributions to the
workplace, based on the successful acquisition of work-related skills or
knowledge
3. Person-focused pay plans apply in limited contexts, because not all jobs can be
assessed based on skill or knowledge
VI. Advantages and Disadvantages of Person-Focused Pay Programs
A. Advantages
1. Provide job enrichment and job security
a. Job enrichment refers to a job design approach that creates more intrinsically
motivating and interesting work environments
b. Leads to increased employee commitment, enhanced work motivation, and
improved employee satisfaction
c. Job security is enhanced because workers are more flexible
2. Employers like because programs can lead to enhanced job performance
a. Better quality and quantity of work
b. Can rely on leaner staffing because multiskilled employees are better able to
cover for unexpected absenteeism, family or medical leave, and training
sessions that take employees away from work
c. Provide companies with greater flexibility in meeting staffing demands at any
particular time
B. Disadvantages
1. Hourly labor costs, training costs, and overhead costs can all increase
2. May not mesh well with existing incentive pay programs
a. Employees may not want to learn new skills if increase for new skills is less
than incentive award earned for existing skills
3. Depend in large part on well-designed training programs which may be costly
4. Companies struggle with determining the monetary value of skill and knowledge
sets
End of the Chapter
VII. Key Terms
Person-focused pay plans: Reward employees for acquiring job-related, knowledge, skills,
or competencies rather than for demonstrating successful job performance
Pay-for-knowledge: Plans that reward managerial, service, or professional workers for
success fully learning specific curricula
Skill-based pay: Increases the workers’ pay as they master new skills
Horizontal skills: Similar skills or knowledge
Horizontal knowledge: Similar skills or knowledge
Vertical skills: Skills that are traditionally considered supervisory (e.g., scheduling,
coordinating, training, and leading others)
Vertical knowledge: Skills that are traditionally considered supervisory (e.g., scheduling,
coordinating, training, and leading others)
Depth of skills: Skills that are traditionally considered supervisory (e.g., scheduling,
coordinating, training, and leading others)
Depth of knowledge: Skills that are traditionally considered supervisory (e.g., scheduling,
coordinating, training, and leading others)
Competency: An individual’s capability to orchestrate and apply combinations of knowledge
and skills consistently over time to perform work successfully in the required work situations
Stair-step model: Pay structure that resembles a flight of stairs where the steps represent
jobs from a particular job family that differ in terms of complexity
Skill blocks model: Pay structure that resembles the stair-step model, however, the skills do
not necessarily build on each other, instead emphasizing both horizontal and vertical skills
Job-point accrual model: Pay structure that encourages employees to develop skills and learn
to perform jobs from different job families
Cross-departmental models: Pay structure that promotes staffing flexibility by training
employees in one department with critical skills they would need to perform effectively in
other departments
Job-based pay: Compensates employees for jobs they currently perform, which include
seniority pay, merit pay, and incentive pay