Gary Dessler

Human Resource Management, 16th Edition

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Establishing

Strategic

Pay Plans

11

Learning Objectives

Prepared by Prof. Dr. Ireen Akhter

After studying this chapter, you should be able to:

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.

Basic Factors in Determining Pay Rates

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• Employee compensation includes all forms of pay going to employees and arising from their employment.
• It has two main components, direct financial payments (wages, salaries, incentives, commissions, and bonuses) and indirect financial payments (financial benefits like employer-paid insurance and vacations).
• Direct financial payments based on-
• (1) increments of time or based on performance, and
• (2) pay for performance.
• Many employers’ pay plans combine time-based pay and incentives.

Equity and Its Impact on Pay Rates

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• The equity theory of motivation postulates that people are motivated to maintain a balance between what they perceive as their contributions and their rewards.
• Equity theory states that if a person perceives an inequity, a tension or drive will develop that motivates him or her to reduce the tension and perceived inequity.
• In compensation, four types of equity are:
• External,
• Internal,
• Individual, and
• Procedural equity.

Legal Considerations in Compensation

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• Title VII of the 1964 Civil Rights Act makes it unlawful for employers to discriminate against any individual with respect to hiring, compensation, terms, conditions, or privileges of employment because of race, color, religion, sex, or national origin.
• The 1938 Fair Labor Standards Act - contains minimum wage, maximum hours, overtime pay, equal pay, record-keeping, and child labor provisions that are familiar to most working people.

Know your Employment Law

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• The Workday- Employers should be vigilant for employees who arrive early or leave late, for the extra time spent on the property obligate employers to compensate the employee for that time.
• Exempt/ Nonexempt- Specific categories of employees are exempt from the FLSA, and particularly from the act’s overtime provisions. A person’s exemption depends on his or her responsibilities, duties, and salary. A white-collar worker is ineligible for overtime pay.
• Inequity and the Minimum Wage-
• Union Influences on Compensation Decisions-
• Pay Policies- These would include, how to set base salary (at, below, or above market rates); what employees (if any) can get stock options; how to award salary increases.
• Geography -

Job Evaluation Method

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• Job evaluation is a formal and systematic comparison of jobs to determine the worth of one job relative to another and eventually results in a wage or survey hierarchy.
• Market-competitive pay plan—one where pay rates are equitable both internally (job’s relative value) and externally (when compared with what other employers are paying).
• Compensable Factors- Two approaches: (1), to decide that one job is more important than another (Subjective). (2) by focusing on certain basic factors the jobs have in common (Objective).
• Benchmark Job- A job that is used to anchor the employer’s pay scale and around which other jobs are arranged in order of relative worth.

Job Evaluation Methods: Ranking

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1. Obtain job information-
2. Select and group jobs
3. Select compensable factors
4. Rank jobs
5. Combine ratings
6. Compare current pay with what others are paying based on salary survey.
7. Assign a new pay scale.

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Job Evaluation Methods:

Job Classification (or Job Grading) –

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• Jobs are categorize into groups for pay purposes.
• Write a set of compensable factor–based rules for each class.
• The analysts choose compensable factors and develop short class or grade descriptions for each class (or grade).
• The U.S. government’s uses 8 compensable factors: (1) difficulty and variety of work, (2) supervision received and exercised, (3) judgment exercised, (4) originality required, (5) nature and purpose of interpersonal work relationships, (6) responsibility, (7) experience, and (8) knowledge required.
• Work: Assistant Production Manager (2 per Floor); Production Manager (1 per Floor); Helper (180 per Floor, Manual Work & Thread Cutting); Line Chief (6 per Floor, 1 per 2 Line); Operator (320 per Floor); Floor In Charge (2 per Floor); Team Leader/Supervisor (24 per Floor, 2 per Line)

Job Evaluation Methods: Point Method

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• Identify a number of compensable factors and then determine the degree to which each of these factors is present on the job.
• Assume there are five degrees of the compensable factor “responsibility” a job could contain.
• Further, assigned a different number of points to each degree of each compensable factor. Then calculation is done by a total point value for the job by adding up the corresponding degree points for each factor.

Pricing Managerial and Professional Jobs

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• What Determines Executive Pay?
• It is apparently not always company performance. The best-performing CEOs received the lowest average compensation.
• The three main factors:
• Job complexity (span of control, no. of functional divisions over which the executive has direct responsibility, and management level),
• The employer’s ability to pay (total profit and rate of return), and
• The executive’s human capital (KSAs, work experience), accounted for about two-thirds of executive compensation variance.

Pricing in Practice

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• In practice, external equity plays a big role in setting a top manager’s compensation plan by comparing “peer companies” compensation plan.
• Below the CEO, many employers do use job evaluation for pricing managerial jobs. The basic approach is to classify executive and management positions into grades, each with a salary range.
• Firms also use the job classification and point methods, with compensable factors like position scope, complexity, and difficulty.
• Job analysis, salary surveys, and fine-tuning salary levels around wage curves also play roles.

Contemporary Topics in Compensation

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• Competency-Based Pay
• Competencies are knowledge, skills, and attitude (personal behaviors /leadership).
• With competency based pay, employees are paid for the skills and knowledge s/he is capable of using rather than for the responsibilities or title of the job.
• Employees are paid based on the skill levels they achieve, rather than based on the jobs they’re assigned to.

Contemporary Topics in Compensation

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• Broadbanding
• Most firms slot jobs into classes or grades, each with its own vertical pay rate range.
• Example, Bangladesh government’s pay plan consists of 10 main grades, each with its own pay range.
• As traditional grade pay plans breed inflexibility, some firms broadband their pay plans by collapsing salary grades into just a few wide levels or bands, each of which contains a relatively wide range of jobs and pay levels.

Contemporary Topics in Compensation

Prepared by Prof. Dr. Ireen Akhter