Human Resources Chapter 6 Wages Criteria Bias The Second Potential Source Bias Affects Job Evaluation Indirectly

Unlock access to all the studying documents.

View Full Document

Chapter Six: Person-Based Structures 6 – 12

Education.

Great Eight, that seem to capture in an efficient way the themes found in the

array of competency frameworks.

• What Exhibit 6.12 adds are hypotheses regarding how these competencies relate

to the individual characteristics of personality (“Big five”), motivation, and

ability.

• Based on Exhibit 6.12, if employers wish to have managers who are competent

in leading and deciding, they need to select or train and develop people high in

need for power, need for control, and who have extroverted personalities.

o Failure to adequately screen employees on these individual characteristics

G. Guidance (and Caution) from the Research on Competencies

• While the notion of competencies may have value in identifying what

distinguishes typical from truly outstanding performance, there is debate on

whether competencies can be translated into a measurable, objective basis for

pay.

• Competencies often morph into compensable factors. But, that can cause

difficulties if they are not developed for that purpose.

• An area of research with potential application to competencies deals with

human capital and knowledge management.

o Viewing the competencies of employees as a portfolio similar to a

• Only one study has analyzed the competencies/performances relationship for

managers. Manager’s competencies are related to their performance ratings, but

there is no relationship to unit-level performance.

V. One More Time: Internal Alignment Reflected in Structures (Person-Based or Job-

Based)

• The purpose of job- and person-based procedures is to design and manage an internal

pay structure that helps the organization succeed.

• As with job-based evaluation, the final result of the person-based plan is an internal

6 – 13 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

structure of work in the organization. This structure should reflect the organization’s

internal alignment policy (loosely versus tightly linked, egalitarian versus hierarchical)

VI. Administering and Evaluating the Plan

• Whatever plan is designed, whether job-based or person-based, a crucial issue is the

fairness of its administration.

• Sufficient information should be available to apply the plan, such as definitions of

compensable factors, degrees, or details of skill blocks, competencies, and certification

methods.

• Communication and employee involvement are crucial for acceptance of the resulting

pay structures.

A. Reliability of Job Evaluation Techniques

• A reliable evaluation would be one where different evaluators produce the same

results.

• An important caveat is that, most organizations now use market pricing, where

many jobs are matched directly to jobs in pay surveys to determine salaries. In

Chapter Six: Person-Based Structures 6 – 14

Education.

setting, even seemingly high reliability between different raters may still

leave room for very different resulting salaries.

• Reliability can be improved by using evaluators who are familiar with the work

and trained in the job evaluation process.

• Some organizations use group consensus to increase reliability.

o Each evaluator makes a preliminary independent evaluation. Then, they

discuss their results until consensus emerges.

• The reliabilities for job evaluation scores are higher than those for job analysis

ratings.

o One possible reason is that those conducting job evaluation may already

know the pay for the jobs, which may result in greater consistency across

raters.

B. Validity

• Validity refers to the degree to which the job evaluation assesses what it is

supposed to—the relative worth of jobs to the organization.

• Validity of job evaluation has been measured in two ways:

1. The degree of agreement between rankings that resulted from job

• In both cases, the predetermined, agreed-upon ranking or pay structure is for

benchmark jobs. It can be established by organization leadership or be based on

external market data, negotiations with unions, or the market rates for

6 – 15 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

Education.

benchmarks held predominantly by men (to try to eliminate any gender

discrimination reflected in the market), or some combination of these.

• Many studies report that when different job evaluation plans are compared to

each other, they generate very similar rankings of jobs but very low hit rates—

they disagree on how much to pay the jobs.

• The definition of validity needs to be broadened to include the impact on pay

decisions. How the results are judged depends on the standards used. For

managing compensation, the correct standard is the pay structure—what job

holders get paid—rather than simply the jobs’ rank order.

C. Acceptability

• Several methods are used to assess and improve employee acceptability.

o Formal appeals process—employees who believe their jobs are evaluated

VII. Bias in Internal Structures

• The continuing differences in jobs held by men, women, and people of color, and the

accompanying pay differences, have focused attention on internal structures as a

possible source of discrimination.

• Much of this attention has been directed at job evaluation as both a potential source of

A. Wages Criteria Bias

• The second potential source of bias affects job evaluation indirectly, through the

current wages paid for jobs.

• If job evaluation is based on the current wages paid and the jobs held

1. Define the compensable factors and scales to include the content of jobs

held predominantly by women.

• All issues concerning job evaluation also apply to skill- and competency-based

plans. Unfortunately, no studies of gender effects in skill-based or competency-

based plans exist.

VIII. The Perfect Structure

• Exhibit 6.14 contrasts job-, skill-, and competency-based approaches.

• Pay increases are gained via promotions to more responsible jobs under job-based

structures or via the acquisition of more-valued skills/competencies under the person-

based structures.

• Skill-/competency-based plans pay employees for the highest level of skill/competency

they have achieved regardless of the work they perform. This maximizes flexibility.

o But it also encourages all employees to become certified at top rates.

o Unless an employer can either control the rate at which employees can certify skill/

competency mastery or employ fewer people, the organization may experience

• The best approach to pay structures depends on the situation.

o The best approach may be to provide sufficient ambiguity (loosely linked internal

alignment) to afford flexibility to adapt to changing conditions.

6 – 17 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

favoritism and bias.

• internally aligned pay structure, whether strategically loosely linked or tightly fitting,

can be designed to:

IX. Your Turn: Climb the Legal Ladder

Summary of Case

Students are provided with an example of a typical pay schedule for law school graduates,

associate attorneys, and partners in Sullivan and Cromwell, a large law firm in New York. The

case challenges students to analyze if the pay structures used in the firm are justifiable according

to their interpretations, and apply relevant pay structures to changes in salary levels among

employees in the firm, keeping in mind the decrease in the demand from corporate clients due to

the current economic downturn.

Learning Objective

Demonstrate how to apply several key concepts associated with developing a person-based pay

structure to the profession of law.

Teaching Guidelines

Use this case to help students analyze the changes in the pay structure in the legal profession and

discuss the issue of fairness regarding the person-based pay structure.

Discussion of Case Questions

1. Think about the research evidence discussed in the book. Would you expect the

Sullivan & Cromwell associates to feel their pay structure is fair? What comparisons

would they likely make? What work behaviors would you expect Sullivan &

Cromwell’s pay structure to motivate? Explain.

Chapter Six: Person-Based Structures 6 – 18

Based on the characteristics of a knowledge-based pay system, this pay system closely

mirrors a performance-based pay plan, with emphasis given on performance measured

through billable hours. The plan specifies a series of steps, with each step corresponding to a

level of experience and performance. Associates who meet or exceed the specified billable

2. What about associates who joined the firm four years ago? If the salaries for new

associates increased by $20,000, what would you recommend for other levels in the

structure? Explain.

Pay based on experience and performance validates an associated increase in the salaries of

associates who joined four years ago, in the event of increase in the starting salary of law

school graduates. This can also be supported by the fact that associates four years into the

3. Partners make around 10 times the highest-paid associates. A Wall Street Journal

writer laments that law firms form “giant pyramids… (in which) associates at the

bottom funnel money to partners at the top.” What is missing from the writer’s

analysis? Hint: Speculate about the likely differences in content and value of the work

performed by partners compared to associates. Any parallels to Merrill Lynch’s FAs

and SVPIs?

The job content of a partner at a law firm will likely be highly more specialized than that of

an associate. The idea behind the large pay differential can be substantiated by the effort and

Education.

4. A few years ago, Sullivan & Cromwell announced that year-end bonuses would be cut

in half, with a maximum of $17,500 for early-career associates and $32,500 for eighth-

year associates. In the following two years, bonuses were cut further. However, the

trend was then reversed with bonuses subsequently being increased (to range from

$30,000 to $65,000 for associates) and more recently, Exhibit 1 shows further increases

in bonuses. What drives these bonus decisions and how they vary over time? How

does this bonus variability over time compare to variability in salaries over time at

Cromwell & Sullivan? What explains the difference in the way salaries and bonuses

are managed over time?

From Exhibit 1, Pay Structure at a Law Firm, it appears bonuses are determined by seniority

5. How does the Sullivan & Cromwell approach to compensation differ from that of

Dewy & LeBoeuf? What are the advantages and disadvantages of each approach?

Sullivan & Cromwell uses pay structures with six to eight levels from associate to partner.

The associate’s level is typically based on experience plus performance (see Exhibit 1). In

the world of associate attorneys, performance is measured as billable hours. So the

Chapter Six: Person-Based Structures 6 – 20

Education.

them.

• Also, this approach creates a lot of stress among lawyers.

Advantages of Dewy & LeBoeuf’s approach to compensation include:

• This approach helps top partners earn larger amounts compared to other partners.

Disadvantages of Dewy & LeBoeuf’s approach to compensation include:

• The method of appointing attorneys from other firms by offering large, multiyear,

guaranteed pay packages can result a firm in being filed for bankruptcy.

• Also, this approach can result in a business decline with large fixed compensation costs

and a weak organizational culture.

Answers to Review Questions

1. What are the pros and cons of having employees involved in compensation decisions?

What forms can employee involvement take?

The advantages include enhanced employee acceptance of decisions, increased trust and

commitment, possible improvements in turnover and satisfaction with pay and

administration, increased employee perceptions of equity, and the possibility of reducing

2. Why does the process used in the design of the internal pay structure matter?

Distinguish between the process used to design and administer a person-based and a

job-based approach.

The top portion of Exhibit 5.3 (Chapter 5) and Exhibits 6.3 and 6.5 provides the process,

along with the essential components, for the job- and person-based approaches to designing

an internal pay structure. The basic decisions which focus on techniques and mechanics used

6 – 21 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

Education.

resulting structure. For example, if certification methods of skills were not included, the

resulting internal structure would most likely contain inequities that will have a negative

impact on employees’ equity perceptions of the pay structure. In addition, if managers and

employees with a stake in the results are not involved in the process of designing the internal

structure, negative perceptions of the pay structure are likely to exist.

An advantage of a skill-based plan is that people can be deployed in a way that better

matches the flow of work, thus avoiding bottlenecks as well as idle hands. Skill plans can

focus on depth and/or breadth. Skill-based structures can be evaluated using the objectives

specified for an internally aligned structure:

• Supports the organization strategy

• Supports work flow, is fair to employees

• Directs their behavior toward organization objectives

3. If you were managing employee compensation, how would you recommend that your

company evaluate the usefulness of its job evaluation or person-based plans?

The usefulness of the different approaches to designing pay structures should first be judged

in terms of how well an approach achieves its objectives. In addition, there are other criteria

to evaluate the usefulness of either a job- or person-based pay system.

• Reliability—reflects consistency of results achieved by different evaluators using the

same approach.

• Validity—reflects the degree to which the evaluation measures the relative worth of the

jobs. Does the approach achieve the desired results (i.e. a high percent of correct

4. Based on the research on job evaluation, what are the sources of possible gender bias in

skill-/competency-based plans?

Many of the bias issues associated with job evaluation are also issues for skill-/competency

plans. The gender of the jobholder may unconsciously influence the evaluator. Also, the

5. How can a manager ensure that job evaluation or skill-/competency-based plans

support a customer-centered strategy?

Several approaches can be used to ensure that a job evaluation or a skill/competency-based

plan supports a customer-centered strategy:

• Communication of the objectives associated with achieving a customer-centered strategy

must be made to the employees.