October 8 Compensation: Determining the worth jobs © 2001 by Prentice Hall & Prof Anne Tsui 10-1.

October 8October 8Compensation:

Determining the worth jobs

© 2001 by Prentice Hall & Prof Anne Tsui

10-1

© 2001 by Prentice Hall & Prof Anne Tsui 10-2

Learning objectives

Be familiar with the nine criteria for designing a compensation system

Know the procedure for establishing the pay of jobs within a company

Understand the concepts of equity and how it affects decisions on establishing pay for different jobs.

Distinguish between job-based and individual-based pay


The Elements of Total Compensation

Total Compensation

PayIncentives

(Chapter 11)

IndirectCompensation/

Benefits (Chapter 12)

BaseCompensation(Chapter 10)


Job-based versus Individual-based Pay Determining the pay (or worth) of jobs

How much is the job worth, relative to other jobs within the company and in other companies, based on the content of the job?

Determining the pay (worth) of individuals How much is the job worth, based on the

knowledge and skills required to do the job? How much is the person in the job worth, based on

knowledge, skills, education, and experience? How much is the person worth, based on his or

her performance and contribution to the company?


The Nine Criteria for Developing a Compensation Plan

1. Internal versus External Equity Will the compensation plan be perceived as fair within the company, or will it be perceived as fair relative to what other employers are paying for the same type of labor?

2. Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis —through base salaries —or will it fluctuate depending on such preestablished criteria as performance and company profits?

3. Performance versus Membership Will compensation emphasize performance and tie pay to individual or group contributions, or will it emphasize membership in the organization —logging in a prescribed number of hours each week and progressing up the organizational ladder?


The Nine Criteria for Developing a Compensation Plan (cont.)

4. Job versus Individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job?

5. Egalitarianism versus Elitism Will the compensation plan place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)?

6. Below-Market versus Above-Market Compensation Will employees be compensated at below-market levels, at market levels, or at above-market levels?


The Nine Criteria for Developing a Compensation Plan (cont.)

7. Monetary versus Nonmonetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security?

8. Open versus Secret Pay Will employees have access to information about other workers’ compensation levels and how compensation decisions are made (open pay) or will this knowledge be withheld from employees (secret pay)?

9. Centralization versus Decentralization of Pay Decisions Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firm’s units?


1. Internal versus External Equity

What is the bases for the comparison for equity or fairness? Other jobs within the company Similar jobs in other companies

Which form of equity do or should companies emphasize? Internal equity for older, larger, stable firms External equity for newer, smaller firms Business objectives and philosophy


2. Fixed versus Variable Pay

What is the range of % of base pay at risk? Range is 0% to 70% across companies Range is 7% to 88% across jobs Variable % increases with job level

When and why is variable pay useful? Dynamic companies use more variable Variability gives company flexibility to manage

payroll but puts employee’s pay at risk Variable pay is more motivating than fixed pay


3. Performance versus Membership When is performance-based pay appropriate?

When pay can be tied to contribution of employee,e.g., sales commission

When business strategy suggests measurable performance, e.g., innovation, e.g. new products

When is membership-based pay appropriate? When performance cannot be easily measured When performance variability is minimum When longevity or attendance is valued, e.g., civil

servants


4. Job versus Individual Pay

When is job-based pay appropriate? It is used in most companies. When job specification can be easily determined Stable organizations tend to favor job-based pay.

When is individual-based pay appropriate? The skills of knowledge of the individual are important

for performing the jobs. When the firm is in high technology and with rapid

changes in skill requirements.


5. Elitist versus Egalitarian Pay System What are the problems with elitist pay system?

Elitist pay plans produce large dispersion between levels, e.g., baseball players or only executives have stock options

Lower level may perceive unfairness when large dispersion does not seem justified

What are the advantages or disadvantages of egalitarian plans? They produce small pay dispersion across employees, e.g.,

Ben & Jerry ice-cream 5 times between top and bottom More flexible because employees can be moved across

jobs without changing pay


6. Below versus Above Market

When do companies pay above or below market? Most large companies in competitive industries pay

above market Most small, new companies in low tech areas pay

below market What decisions affect choice of pay policy?

The company’s ability to pay The company excellent benefits and growth

opportunities to complement a low base pay The company’s philosophy about HR


7. Monetary versus Non-monetary

What are non-monetary pay? It refers to intangibles such as interesting work,

challenging assignments, public recognition, or job security

They are not part of the pay but part of the total compensation.

When is non-monetary pay used? When company wants to reinforce commitment When employees are willing to trade monetary for

good non-monetary rewards When intrinsic motivation is desired


8. Open versus Secret Pay

What are the advantages of open pay? Employees won’t over guess other’s pay Force managers to be fair in pay decision

What are the disadvantages of open pay? Lead to egalitarian pay It is not possible to satisfy all employees Requires a very fair performance evaluation

system


9. Centralized versus Decentralized Decision about Pay When is centralization appropriate?

When efficiency is desirable and all jobs in a company can be measured and compared.

When cost control is necessary When internal equity is important

When is decentralization desirable? When organization is too large When job market changes frequently When external equity is important for attraction and

retention


Percent of Salary in the Form of Bonus and Long-term Income for Various Pay Salary Brackets

88

6560

5550

4540

3225

167

0

10

20

30

40

50

60

70

80

90

Over$750

$550-$750

$450-$550

$350-$450

$250-$350

$200-$250

$165-$200

$135-$165

$105-$135

$65-$105

$25-$65

Per

cen

t o

f B

ase

Sal

ary


The Key Steps in Creating Job-Based Compensation Plans

© 1998 by Prentice Hall

1. Job AnalysisJob Evaluation for Internal Equity

2. Job Descriptions

IdentifyCompensable Factors

3. Job Specifications

4. Rate Worth of All JobsUsing a PredeterminedSystem

5. Job Hierarchy

7. Establish Final PayPolicy

Individual Pay Assignment

6. Classify Jobs byGrade Levels

1. Check Market Value Using Benchmark or Key Jobs

Market Surveys forExternal Equity

Within-Pay-Range Positioning Criteria for Individual Equity

Criteria for Pay Positioning Within Range for Each Job• Experience• Seniority• Performance

© 2001 by Prentice Hall 10-18


MAA National Position Evaluation Plan

1st Degree

Skill1. Knowledge2. Experience3. Initiative and IngenuityEffort4. Physical Demand5. Mental or Visual DemandResponsibility6. Equipment or Process7. Material or Product8. Safety of Others9. Work of OthersJob Conditions10. Working Conditions11. Hazards

142214

105

5555

105

Compensable Factor

2ndDegree

284428

2010

10101010

2010

3rd Degree

426642

3015

15151515

3015

4thDegree

568856

4020

20202020

4020

5thDegree

70110

70

5025

25252525

5025

Points Assigned to Factor Degrees


The Hay Compensable Factors applied to the HR Director job

Know-How Knowledge of technical procedures in a field Ability to organize, direct and control a function or department Ability to advice others on human resource issues

Problem-Solving Able to analyze situation to identify causes and solutions Ability to develop creative approaches to new or old problems

Accountable Degree of freedom to act or make decisions The impact of job results or decisions The $ consequences of good or bad decisions


Applying the Hay Method – example

Compensable Factors

1st degree

2nd

Degree

3rd

Degree

4th degree

5th degree

Technical knowledge 20 40 60 80 90

Organization skills 30 50 70 90 100

Consultation skills 30 40 50 60 80

Problem analysis 40 50 60 80 90

Creative solutions 20 30 40 60 75

Freedom in actions 10 25 40 50 70

Impact of decisions 25 30 50 60 70


Hierarchy of Clerical Jobs, Pay Grades, and Weekly Pay Range for a Hypothetical Office

1Points

2Grade

3Weekly Pay Range

30029829023022522017517016516012512012011595808060

5

4

3

2

1

$500-$650

$450-$550

$425-$475

$390-$430

$350-$400

Customer Service Rep.Executive Secretary/Admin. Asst.Senior SecretarySecretarySenior General ClerkCredit and CollectionAccounting ClerkGeneral ClerkLegal Secretary/AssistantSenior Word Processing OperatorWork Processing OperatorPurchasing ClerkPayroll ClerkClerk-TypistFile ClerkMail ClerkPersonnel ClerkReceptionist


Market Salary Data for Selected Benchmark Office Jobs

Weekly Pay Percentile

1. Customer Service Rep.2. Credit and Collection Clerk3. Accounting Clerk4. Word Processing Operator5. Clerk-Typist

6. HR Director

25thWeekly Pay

Average

$400$400$370$380$330

$1500

50th 75th

$500$450$425$390$350

$1750

$650$550$475$430$400

$2000

$495$455$423$394$343

$1725

Benchmark Jobs


Determining the Pay Policies of Computime

Based on the given facts of the Computime situation, how should the company determine the worth of its jobs?

Propose a set of policies and justification for your proposal.

If you are not able to propose a policy on a particular criterion, indicate what information you need to help you decide.


Suggestions for Implementing Compensation Plans Think strategically in making policy decisions

concerning pay – what are the compensation objectives?

Consider employee input – whether and how they can be involved?

Expand the proportion of employees’ pay that is variable (bonuses, stock plans, and so forth) – gives employee more control over pay but also more risk in the pay.

October 8 Compensation: Determining the worth jobs © 2001 by Prentice Hall & Prof Anne Tsui 10-1.

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Transcript of October 8 Compensation: Determining the worth jobs © 2001 by Prentice Hall & Prof Anne Tsui 10-1.