l9 Pay Planning

Pay planning Pay planning

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–1

• Reward Reward • chapter 11chapter 11

Pay Planning Pay Planning

• The main purpose of this lecture is to show you how to The main purpose of this lecture is to show you how to establish a pay plan. establish a pay plan.

• We will examine job evaluation—techniques for finding the We will examine job evaluation—techniques for finding the relative worth of a job—and how to conduct online and relative worth of a job—and how to conduct online and offline salary surveys. offline salary surveys.

• We also consider developing pay grades and an overall We also consider developing pay grades and an overall pay plan.pay plan.


Module Website Module Website

• All the power points we have used to date are on the All the power points we have used to date are on the web site web site www.uwcentre.ac.cn/hhu -check it out -check it out


http://www.uwcentre.ac.cn/hhu

Examples of HRM ? Examples of HRM ?

• One important thing for the exam is you will be asked to One important thing for the exam is you will be asked to illustrate you answers to some written questions using illustrate you answers to some written questions using examples of HRM in practice .So you should start looking in examples of HRM in practice .So you should start looking in the set text and or on the internet for examples of the set text and or on the internet for examples of organisations using HRM practices .organisations using HRM practices .

• Think about big organisations - smaller organisations Think about big organisations - smaller organisations manufacturing organisations - service organisations even manufacturing organisations - service organisations even universities . Get examples and discuss these with your tutors universities . Get examples and discuss these with your tutors


Today's tutorial Today's tutorial

• You need to consider the different methods of job You need to consider the different methods of job evaluation highlighted in chapter 11 and discuss what evaluation highlighted in chapter 11 and discuss what are the pros and cons are the pros and cons


Tomorrows tutorial Tomorrows tutorial

• Read and revise chapter 8 Training and Development Read and revise chapter 8 Training and Development


Performance management Performance management • Ongoing feedback Ongoing feedback includes both face-to-face and includes both face-to-face and

computer-based feedback regarding progress toward computer-based feedback regarding progress toward goals.goals.

• Coaching and developmental support Coaching and developmental support should be an should be an integral part of the feedback process.integral part of the feedback process.

• Rewards, recognition, and compensation Rewards, recognition, and compensation all play a role in all play a role in providing the consequences needed to keep the providing the consequences needed to keep the employee’s goal-directed performance on trackemployee’s goal-directed performance on track..



Basic Building Blocks of Basic Building Blocks of Performance ManagementPerformance Management

Direction sharing

Goal alignment

Ongoing performance monitoring

Rewards, recognition,

and compensation

Coaching and development

support

Ongoingfeedback

ReasonsReasons

• Employers are moving to performance management for Employers are moving to performance management for three main reasons—three main reasons—

• total quality,total quality,

• appraisal issues, appraisal issues,

and and

• strategic planning particularly of rewardstrategic planning particularly of reward that is what we that is what we will examine to day will examine to day


Employee Compensation Employee Compensation

• Employee compensation refers to all forms of pay going to Employee compensation refers to all forms of pay going to employees and arising from their employment. employees and arising from their employment.


Compensation at workCompensation at work

• It has two main components, It has two main components, direct direct financial payments financial payments (wages, salaries, incentives, commissions, and bonuses) (wages, salaries, incentives, commissions, and bonuses) and and indirectindirect financial payments (financial benefits like financial payments (financial benefits like employer-paid insurance and vacations).employer-paid insurance and vacations).

• There are two basic ways to make There are two basic ways to make direct direct financial financial payments to employees: base them on increments of payments to employees: base them on increments of timetime or on or on performance.performance.



Basic Factors in Basic Factors in Determining Pay RatesDetermining Pay Rates

Direct financial payments

Indirect financial payments

Employee Compensation Components

Compensation Plan Compensation Plan

• The compensation plan should advance the firm’s strategic The compensation plan should advance the firm’s strategic aims—management should produce an aims—management should produce an aligned reward aligned reward strategy. strategy.

• This means creating a bundle of rewards—a total reward This means creating a bundle of rewards—a total reward package including wages, incentives, and benefits—that package including wages, incentives, and benefits—that aims to produce the employee behaviors the firm needs to aims to produce the employee behaviors the firm needs to support and achieve its competitive strategy.support and achieve its competitive strategy.



Corporate Policies, Competitive Corporate Policies, Competitive Strategy,Strategy,and Compensationand Compensation• Aligned Reward StrategyAligned Reward Strategy

The employer’s basic task:The employer’s basic task:

To create a bundle of rewards—a total reward package—that To create a bundle of rewards—a total reward package—that specifically elicits the employee behaviors that the firm needs specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy.to support and achieve its competitive strategy.

The HR or compensation manager along with top management The HR or compensation manager along with top management creates pay policies that are consistent with the firm’s strategic creates pay policies that are consistent with the firm’s strategic aims.aims.

Formulating pay policies Formulating pay policies

• Managers need to formulate pay policies covering a range of Managers need to formulate pay policies covering a range of issues.issues.

• With respect to compensation, managers should address four With respect to compensation, managers should address four forms of equity: forms of equity:

• external, external, • Internal, Internal, • individualindividual, and , and • procedural.procedural.


Formulating pay policies Formulating pay policies

• External equity External equity refers to how a job’s pay rate in one company refers to how a job’s pay rate in one company compares to the job’s pay rate in other companies.compares to the job’s pay rate in other companies.

• Internal equity Internal equity refers to how fair the job’s pay rate is when refers to how fair the job’s pay rate is when compared to other jobs within the same company (for instance, is compared to other jobs within the same company (for instance, is the sales manager’s pay fair, when compared to what the the sales manager’s pay fair, when compared to what the production manager is earning?).production manager is earning?).


PayPay

• Individual equity Individual equity refers to the fairness of an individual’s pay as refers to the fairness of an individual’s pay as compared with what his or her coworkers are earning for the same compared with what his or her coworkers are earning for the same or very similar jobs within the company, based on each individual’s or very similar jobs within the company, based on each individual’s performance.performance.

• Procedural equity Procedural equity refers to the “perceived fairness of the processes refers to the “perceived fairness of the processes and procedures used to make decisions regarding the allocation of and procedures used to make decisions regarding the allocation of pay.”pay.”



Compensation Policy IssuesCompensation Policy Issues

• Pay for performancePay for performance

• Pay for seniorityPay for seniority

• The pay cycleThe pay cycle

• Salary increases and promotionsSalary increases and promotions

• Overtime and shift payOvertime and shift pay

• Probationary payProbationary pay

• Paid and unpaid leavesPaid and unpaid leaves

• Paid holidaysPaid holidays

• Salary compressionSalary compression

• Geographic costs of living differencesGeographic costs of living differences


Equity and Its Impact on Pay Equity and Its Impact on Pay RatesRates

External equity

Proceduralequity

Internal equity

Individualequity

Forms of Compensation Equity

Equity Issues Equity Issues

• Managers can use various methods to address equity Managers can use various methods to address equity issues. issues.

• For example, they use salary surveys (surveys of what For example, they use salary surveys (surveys of what other employers are paying) to monitor and maintain other employers are paying) to monitor and maintain external equity. external equity.

• They use job analysis and They use job analysis and job evaluation job evaluation comparisons of comparisons of each job to maintain internal equity. each job to maintain internal equity.


• They use performance appraisal and incentive pay to They use performance appraisal and incentive pay to maintain individual equity. maintain individual equity.

• And they use communications, grievance mechanisms, And they use communications, grievance mechanisms, and employees’ participation in developing the and employees’ participation in developing the company’s pay plan to help ensure that employees view company’s pay plan to help ensure that employees view the pay process as transparent and procedurally fair.the pay process as transparent and procedurally fair.



Addressing Equity IssuesAddressing Equity Issues

Area wage and salary surveys

Job analysis and job evaluation

Performance appraisal and incentive pay

Communications, grievance mechanisms, and employees’

participation

Methods to Address

Equity Issues

5 STEPS 5 STEPS

• The process of establishing pay rates while ensuring external, The process of establishing pay rates while ensuring external, internal, and (to some extent) procedural equity consists of five internal, and (to some extent) procedural equity consists of five steps.steps.

• It’s difficult to set pay rates if you don’t know what others are It’s difficult to set pay rates if you don’t know what others are paying, so paying, so salary surveyssalary surveys of what others are paying play a big of what others are paying play a big role in pricing jobs. role in pricing jobs.

• Virtually every employer conducts at least an informal telephone, Virtually every employer conducts at least an informal telephone, newspaper, or Internet salary survey.newspaper, or Internet salary survey.


SalarySalary

• Salary surveys can be formal or informal. Salary surveys can be formal or informal. Informal Informal phone phone or Internet surveys are good for checking specific issues. or Internet surveys are good for checking specific issues.

• Some large employers can afford to send out their own Some large employers can afford to send out their own formal formal surveys to collect compensation information from surveys to collect compensation information from other employers. Many employers use surveys published other employers. Many employers use surveys published by consulting firms, professional associations, or by consulting firms, professional associations, or government agencies.government agencies.



Establishing Pay RatesEstablishing Pay Rates

1

2

3

4

5

Steps in Establishing Pay Rates

Determine the worth of each job in your organization through job evaluation (to ensure internal equity).

Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity).

Group similar jobs into pay grades.

Price each pay grade by using wave curves.

Fine-tune pay rates.


Step1: The Salary SurveyStep1: The Salary Survey

To price benchmark

jobs

To make decisions

about benefits

Uses for Salary Surveys

To market-price wages

for jobs


Sources for Salary Sources for Salary SurveysSurveys

Self-Conducted

Surveys

Government Agencies

Consulting Firms

Sources of Wage and Salary Information

Professional

Associations

The Internet

Question Question

Which of the following terms refers to all forms of pay or rewards Which of the following terms refers to all forms of pay or rewards going to employees and arising from their employment?going to employees and arising from their employment?

• A) salary A) salary • B) employee compensationB) employee compensation• C) wage reimbursementC) wage reimbursement• D) employee benefitsD) employee benefits• E) remunerationE) remuneration• AnswerAnswer


Answer Answer

• Answer BAnswer B• Explanation: Employee compensation refers to all forms of Explanation: Employee compensation refers to all forms of

pay going to employees and arising from their employment. pay going to employees and arising from their employment. It has two main components, direct financial payments It has two main components, direct financial payments (wages, salaries, incentives, commissions, and bonuses) (wages, salaries, incentives, commissions, and bonuses) and indirect financial payments (financial benefits like and indirect financial payments (financial benefits like employer-paid insurance and vacations).employer-paid insurance and vacations).


Question Question • 4) John is a sales representative in a jewelry store. He 4) John is a sales representative in a jewelry store. He

typically works 40 hours per week and his pay is typically works 40 hours per week and his pay is completely based on his sales. He earns a 5% completely based on his sales. He earns a 5% commission for every sale he makes. Which of the commission for every sale he makes. Which of the following terms best describes John's situation? following terms best describes John's situation?

• A) performance-based compensationA) performance-based compensation• B) indirect financial compensationB) indirect financial compensation• C) time-based compensationC) time-based compensation• D) salaried plus incentivesD) salaried plus incentives• E) piecework payE) piecework pay• Answer:Answer:


Answer Answer

• Answer AAnswer A• Explanation: John earns sales commissions, which Explanation: John earns sales commissions, which

means he receives performance-based compensation. means he receives performance-based compensation. Piecework ties compensation to the number of pieces a Piecework ties compensation to the number of pieces a worker produces, and John is selling rather than making worker produces, and John is selling rather than making jewelry.jewelry.


Job Evaluation Job Evaluation

• Job evaluation Job evaluation is a formal and systematic comparison of jobs is a formal and systematic comparison of jobs to determine the worth of one job relative to other jobs in the to determine the worth of one job relative to other jobs in the organization.organization.

• Compensable factorsCompensable factors are certain basic factors the jobs have are certain basic factors the jobs have in common that are used to establish how the jobs compare to in common that are used to establish how the jobs compare to one another, and that determine the pay for each job.one another, and that determine the pay for each job.


• Job evaluation is a judgmental process and demands Job evaluation is a judgmental process and demands close cooperation among supervisors, HR specialists, close cooperation among supervisors, HR specialists, and employees and union representatives. and employees and union representatives.


Job Evaluation Job Evaluation

• The main steps include identifying the need for the The main steps include identifying the need for the program, getting cooperation, and then choosing an program, getting cooperation, and then choosing an evaluation committee. evaluation committee.

• The committee then performs the actual evaluation.The committee then performs the actual evaluation.• Evaluating the worth of each job can be done using one of Evaluating the worth of each job can be done using one of

these methods: ranking, job classification, point method, these methods: ranking, job classification, point method, or factor comparisonor factor comparison



Step 2: Job EvaluationStep 2: Job Evaluation

Skills EffortResponsibilit

y

Identifying Compensable Factors

Working conditions


The Job Evaluation ProcessThe Job Evaluation Process

1

Performing the actual evaluation

Getting the cooperation of employees

Preparing for the Job Evaluation

Identifying the need for the job evaluation

Choosing an evaluation committee

2

3

4


How to Evaluate JobsHow to Evaluate Jobs

RankingJob

classificationPoint

method

Methods for Evaluating Jobs

Factor comparison


Job Evaluation Methods: RankingJob Evaluation Methods: Ranking

• Ranking each job relative to all other jobs, usually based on Ranking each job relative to all other jobs, usually based on some overall factor.some overall factor.

• Steps in job ranking:Steps in job ranking:

1.1. Obtain job information.Obtain job information.

2.2. Select and group jobs.Select and group jobs.

3.3. Select compensable factors.Select compensable factors.

4.4. Rank jobs.Rank jobs.

5.5. Combine ratings.Combine ratings.

Evaluating Jobs Evaluating Jobs

• Evaluating the worth of each job can be done using one of Evaluating the worth of each job can be done using one of these methods: ranking, job classification, point method, or these methods: ranking, job classification, point method, or factor comparisonfactor comparison

• Table 11-3Table 11-3 which follows illustrates a which follows illustrates a job ranking. job ranking. • Jobs in this small health facility rank from orderly up to Jobs in this small health facility rank from orderly up to

office manager. office manager. • The corresponding pay scales are on the right. The corresponding pay scales are on the right. • After ranking, it is possible to slot additional jobs between After ranking, it is possible to slot additional jobs between

those already ranked and to assign an appropriate wage those already ranked and to assign an appropriate wage rate.rate.



TABLE 11–3 Job Ranking by Olympia Health Care

Ranking Order Annual Pay Scale

1. Office manager $43,000

2. Chief nurse 42,500

3. Bookkeeper 34,000

4. Nurse 32,500

5. Cook 31,000

6. Nurse’s aide 28,500

7. Orderly 25,500

Job Classification Job Classification

• Job classification Job classification (or (or job gradingjob grading) is a simple, widely ) is a simple, widely used method in which raters categorize jobs into groups; used method in which raters categorize jobs into groups; all the jobs in each group are of roughly the same value all the jobs in each group are of roughly the same value for pay purposes. for pay purposes.

• The groups are called The groups are called classes classes if they contain similar jobs if they contain similar jobs or or grades grades if they contain jobs that are similar in difficulty if they contain jobs that are similar in difficulty but otherwise different.but otherwise different.



Job Evaluation Methods: Job Evaluation Methods: Point Point MethodMethod• A quantitative technique that involves:A quantitative technique that involves:

Identifying the degree to which each compensable factor is Identifying the degree to which each compensable factor is present in the job.present in the job.

Awarding points for each degree of each factor.Awarding points for each degree of each factor.

Calculating a total point value for the job by adding up the Calculating a total point value for the job by adding up the corresponding points for each factor.corresponding points for each factor.

Groups & classes Groups & classes

• Raters categorize jobs into groups or classes of jobs that Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes.are of roughly the same value for pay purposes. Classes contain similar jobs.Classes contain similar jobs.

Administrative assistantsAdministrative assistants Grades are jobs similar in difficulty but otherwise different.Grades are jobs similar in difficulty but otherwise different.

Mechanics, welders, electricians, and machinistsMechanics, welders, electricians, and machinists Jobs are classed by the amount or level of compensable factors Jobs are classed by the amount or level of compensable factors

they contain.they contain.


The point methodThe point method

• The The point method point method is a quantitative technique. is a quantitative technique.

• It involves identifying It involves identifying

• (1) several compensable factors, each having several degrees, (1) several compensable factors, each having several degrees,

as well as as well as

• (2) the degree to which each of these factors is present in the job. (2) the degree to which each of these factors is present in the job. A different number of points are assigned to each degree of each A different number of points are assigned to each degree of each factor.factor.


• Once the evaluation committee determines the degree Once the evaluation committee determines the degree to which each compensable factor (like “responsibility” to which each compensable factor (like “responsibility” and “effort”) is present in the job, it can calculate a total and “effort”) is present in the job, it can calculate a total point value for the job by adding up the corresponding point value for the job by adding up the corresponding points for each factor. points for each factor.

The result is a quantitative point rating for each job.The result is a quantitative point rating for each job.



Step 3: Grouping JobsStep 3: Grouping Jobs

Point Method

Ranking Method

Classification Methods

Grouping Similar

Jobs into Pay

Grades

The wage Curve The wage Curve

• The The wage curve wage curve shows the pay rates currently paid for shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings jobs in each pay grade, relative to the points or rankings values assigned to each job or grade by the job evaluation.values assigned to each job or grade by the job evaluation.

• The purpose of the wage curve is to show the relationships The purpose of the wage curve is to show the relationships between (1) the value of the job as determined by one of between (1) the value of the job as determined by one of the job evaluation methods and (2) the current average pay the job evaluation methods and (2) the current average pay rates for graded jobs.rates for graded jobs.

• . . Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–47

Wage Curve Wage Curve

• The pay rates on the wage curve are traditionally those The pay rates on the wage curve are traditionally those now paid by the employer. now paid by the employer.

• However, if there is reason to believe the current pay However, if there is reason to believe the current pay rates are out of step with the market rates for these jobs, rates are out of step with the market rates for these jobs, choose benchmark jobs within each pay grade, and price choose benchmark jobs within each pay grade, and price them via a compensation survey. them via a compensation survey.


• These new market-based pay rates then replace the These new market-based pay rates then replace the current rates on the wage curve. current rates on the wage curve.

• Then slot in your other jobs (and their pay rates) around Then slot in your other jobs (and their pay rates) around the benchmark job.the benchmark job.

• Current pay rates falling above the rate range are “red Current pay rates falling above the rate range are “red circle,” “flagged,” or “overrates” which will require either circle,” “flagged,” or “overrates” which will require either freezing the rate, transfer or promotion of employees, or freezing the rate, transfer or promotion of employees, or reevaluation of the job.reevaluation of the job.



Step 4: Price Each Pay GradeStep 4: Price Each Pay Grade

• The Wage Curve The Wage Curve

Shows the pay rates paid for jobs in each pay grade, relative to Shows the pay rates paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job the points or rankings assigned to each job or grade by the job evaluation.evaluation.

Shows the relationships between the value of the job as Shows the relationships between the value of the job as determined by one of the job evaluation methods and the determined by one of the job evaluation methods and the current average pay rates for your grades.current average pay rates for your grades.


FIGURE 11–5 Plotting a Wage Curve

Fine tuning Fine tuning

• Fine-tuning involves Fine-tuning involves

(1) developing (1) developing pay ranges pay ranges

and and

(2) correcting (2) correcting out-of-line rates.out-of-line rates.


• Most employers do not pay just one rate for all jobs in a Most employers do not pay just one rate for all jobs in a particular pay grade. particular pay grade.

• Figure 11-6 which follows Figure 11-6 which follows depicts how most depicts how most employers create a wage structure such that their pay employers create a wage structure such that their pay ranges somewhat overlap, so an employee in one grade ranges somewhat overlap, so an employee in one grade who has more experience or seniority may earn more who has more experience or seniority may earn more than an entry-level position in the next higher pay grade.than an entry-level position in the next higher pay grade.



FIGURE 11–6 Wage Structure

Step 5: Fine-Tune Pay RatesStep 5: Fine-Tune Pay Rates

• Developing Pay RangesDeveloping Pay Ranges

Flexibility in meeting external job market ratesFlexibility in meeting external job market rates

Easier for employees to move into higher pay gradesEasier for employees to move into higher pay grades

Allows for rewarding performance differences and seniorityAllows for rewarding performance differences and seniority

• Correcting Out-of-Line RatesCorrecting Out-of-Line Rates

Raising underpaid jobs to the minimum of the rate range Raising underpaid jobs to the minimum of the rate range for their pay gradefor their pay grade

Freezing rates or cutting pay rates for overpaid (“red circle”) jobs Freezing rates or cutting pay rates for overpaid (“red circle”) jobs to maximum in the pay range for their pay gradeto maximum in the pay range for their pay grade



HR in Practice: HR in Practice: Developing a Workable Pay PlanDeveloping a Workable Pay Plan

• Simplified Approach:Simplified Approach: Conduct a wage surveyConduct a wage survey

Conduct a job evaluationConduct a job evaluation

Conduct once-a-year job appraisalsConduct once-a-year job appraisals

Compile the compensation budget for Compile the compensation budget for upcoming yearupcoming year

Compensation Compensation

• Compensation for a company’s top executives usually Compensation for a company’s top executives usually consists of four main elements: base pay, short-term consists of four main elements: base pay, short-term incentives, long-term incentives, and executive incentives, long-term incentives, and executive benefits/perquisites or “perks.”benefits/perquisites or “perks.”


Top Executive Jobs Top Executive Jobs

• For top executive jobs (especially the CEO), job For top executive jobs (especially the CEO), job evaluation typically has little relevance. evaluation typically has little relevance.

• One recent study concluded that three main factors, One recent study concluded that three main factors, job job complexity complexity (span of control, the number of functional (span of control, the number of functional divisions over which the executive has direct divisions over which the executive has direct responsibility, and management level), the employer’s responsibility, and management level), the employer’s ability to pay ability to pay (total profit and rate of return), and the (total profit and rate of return), and the executive’s executive’s human capital human capital (educational level, field of (educational level, field of study, work experience) accounted for about two-thirds of study, work experience) accounted for about two-thirds of executive compensation variance.executive compensation variance.



Pricing Managerial and Pricing Managerial and Professional JobsProfessional Jobs

Base pay

Executive benefits/perk

s

Short-term incentives

Long-term incentives

Compensating Executives and

Managers


Pricing Managerial and Pricing Managerial and Professional JobsProfessional Jobs

• What Determines Executive Pay?What Determines Executive Pay? CEO pay is set by the board of directors taking into account factors CEO pay is set by the board of directors taking into account factors

such as the business strategy, corporate trends, and where they want such as the business strategy, corporate trends, and where they want to be in the short and long term.to be in the short and long term.

CEOs can have considerable influence over the boards that CEOs can have considerable influence over the boards that determine their pay.determine their pay.

Firms pay CEOs based on the complexity of the jobs they fill.Firms pay CEOs based on the complexity of the jobs they fill.

Shareholder activism and government oversight have tightened the Shareholder activism and government oversight have tightened the restrictions on what companies pay top executives.restrictions on what companies pay top executives.

Boards are reducing the relative importance of base salary while Boards are reducing the relative importance of base salary while boosting the emphasis on performance-based pay.boosting the emphasis on performance-based pay.

Compensating Professional Compensating Professional EmployeesEmployees

• Compensating professional employees, like engineers and Compensating professional employees, like engineers and scientists, presents unique problems. scientists, presents unique problems.

• Analytical jobs like these emphasize creativity and problem Analytical jobs like these emphasize creativity and problem solving, compensable factors not easily compared or solving, compensable factors not easily compared or measured. measured.

• Determining professional compensation presents another Determining professional compensation presents another questionquestion——how is “performance” to be defined and how is “performance” to be defined and measured?measured?



Compensating Professional Compensating Professional EmployeesEmployees

• Employers can use job evaluation for professional jobs.Employers can use job evaluation for professional jobs.

• Compensable factors focus on problem solving, creativity, Compensable factors focus on problem solving, creativity, job scope, and technical knowledge and expertise. job scope, and technical knowledge and expertise.

• Firms use the point method and factor comparison Firms use the point method and factor comparison methods, although job classification is most popular.methods, although job classification is most popular.

• Professional jobs are market-priced to establish the Professional jobs are market-priced to establish the values for benchmark jobs.values for benchmark jobs.

• Competency-based pay Competency-based pay means the company pays for means the company pays for the employee’s range, depth, and types of skills and the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds. knowledge, rather than for the job title he or she holds. Experts variously call this competency-, knowledge-, or Experts variously call this competency-, knowledge-, or skill-based pay.skill-based pay.


Competency-based payCompetency-based pay

• Competency-based pay ties the worker’s pay to his or her Competency-based pay ties the worker’s pay to his or her competencies—pay is more competencies—pay is more person oriented. person oriented. Employees here Employees here are paid based on what they know or can do—even if, at the are paid based on what they know or can do—even if, at the moment, they don’t have to do it.moment, they don’t have to do it.

• Traditional pay plans may backfire if a Traditional pay plans may backfire if a high-performance work high-performance work system (HPWS) system (HPWS) is the goal. is the goal.

• HPWS employees must be enthusiastic about learning and HPWS employees must be enthusiastic about learning and moving among other jobs.moving among other jobs.

• In practice, any skill/competency/knowledge-based pay In practice, any skill/competency/knowledge-based pay program generally contains five main elements.program generally contains five main elements.



Competency-Based PayCompetency-Based Pay

• CompetenciesCompetencies Demonstrable characteristics of a person, including knowledge, Demonstrable characteristics of a person, including knowledge,

skills, and behaviors, that enable performanceskills, and behaviors, that enable performance

• What is Competency-Based Pay?What is Competency-Based Pay? Paying for the employee’s range, depth, and types of skills and Paying for the employee’s range, depth, and types of skills and

knowledge, rather than for the job title he or she holdsknowledge, rather than for the job title he or she holds


Why Use Competency-Based Why Use Competency-Based Pay?Pay?

High-Performance Work Systems

StrategicAims

Competency-Based Pay Supports

Performance Management


Competency-Based Pay in PracticeCompetency-Based Pay in Practice

• Main elements of skill/competency/knowledge–based pay Main elements of skill/competency/knowledge–based pay programs:programs:

1.1. A system that defines specific skillsA system that defines specific skills

2.2. A process for tying the person’s pay to his or her skillA process for tying the person’s pay to his or her skill

3.3. A training system that lets employees seek and acquire skillsA training system that lets employees seek and acquire skills

4.4. A formal competency testing systemA formal competency testing system

5.5. A work design that lets employees move among jobs to permit A work design that lets employees move among jobs to permit work assignment flexibilitywork assignment flexibility


Competency-Based Pay: Pros and Competency-Based Pay: Pros and ConsCons• ProsPros

Higher qualityHigher quality

Lower absenteeismLower absenteeism

Fewer accidentsFewer accidents

• ConsCons Pay program implementation problemsPay program implementation problems

Costs of paying for unused knowledge, skills, and behaviorsCosts of paying for unused knowledge, skills, and behaviors

Complexity of programComplexity of program

Uncertainty that the program improves productivityUncertainty that the program improves productivity


Special Topics in CompensationSpecial Topics in Compensation• BroadbandingBroadbanding

Consolidating salary grades and ranges into a few wide levels Consolidating salary grades and ranges into a few wide levels or “bands,” each of which contains a relatively wide range of or “bands,” each of which contains a relatively wide range of jobs and salary levels.jobs and salary levels.

Pros and ConsPros and Cons

More flexibility in assigning workers to different job gradesMore flexibility in assigning workers to different job grades

Provides support for flatter hierarchies and teamsProvides support for flatter hierarchies and teams

Promotes skills learning and mobilityPromotes skills learning and mobility

Lack of permanence in job responsibilities can be unsettling Lack of permanence in job responsibilities can be unsettling to new employees.to new employees.


FIGURE 11–8 Broadbanded Structure and How It Relates to Traditional Pay Grades and Ranges


Comparable WorthComparable Worth• Concept:Concept:

Employers should be required to pay men and women Employers should be required to pay men and women equal wages for dissimilar jobs that are of equal wages for dissimilar jobs that are of comparablecomparable (rather than strictly (rather than strictly equalequal) value to the employer.) value to the employer.

• Basis:Basis: Seeks to address the issue that women have jobs that Seeks to address the issue that women have jobs that

are dissimilar to those of men and those jobs are often are dissimilar to those of men and those jobs are often consistently valued less than men’s jobs.consistently valued less than men’s jobs.

• Question at Hand:Question at Hand: Who will get to make final decisions on the comparability Who will get to make final decisions on the comparability

of jobs?of jobs? EmployersEmployers CourtsCourts


The Pay GapThe Pay Gap• Factors Lowering the Earnings of Women:Factors Lowering the Earnings of Women:

1.1. Women’s starting salaries are traditionally lower.Women’s starting salaries are traditionally lower.

2.2. Salary increases for women in professional jobs do not Salary increases for women in professional jobs do not reflect their above-average performance.reflect their above-average performance.

3.3. In white-collar jobs, men change jobs more frequently, In white-collar jobs, men change jobs more frequently, enabling them to be promoted to higher-level jobs over enabling them to be promoted to higher-level jobs over women with more seniority.women with more seniority.

4.4. In blue-collar jobs, women tend to be placed in In blue-collar jobs, women tend to be placed in departments with lower-paying jobs.departments with lower-paying jobs.

Executive Pay Executive Pay

• There are various reasons why boards are clamping There are various reasons why boards are clamping down on executive pay. down on executive pay.

• The economic downturn that began around 2008 The economic downturn that began around 2008 exposed the enormous disconnect between what many exposed the enormous disconnect between what many executives were earning and their performance.executives were earning and their performance.


l9 Pay Planning

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