Human Resource Management

Establishing Strategic
Pay Plans
Learning Objectives (1 of 2)
List the basic factors determining pay rates.
Define and give an example of how to conduct a job
evaluation.
Explain in detail how to establish a market-competitive pay
plan.
Learning Objectives (2 of 2)

Explain how to price managerial and professional jobs.

Explain the difference between competency-based and
traditional pay plans.
Describe the importance of total rewards for improving
employee engagement.
List the Basic Factors Determining
Pay Rates.
Basic Factors in Determining Pay Rates
• Employee compensation
– Direct financial payments
▪ wages, salaries, incentives, commissions, and bonuses
– Indirect financial payments
▪ employer-paid insurance and vacations
Aligning Total Rewards With Strategy
• Aligned Reward Strategy—is creating a compensation
package that produces the employee behaviors the firm needs
to achieve its competitive strategy.
• Total Rewards—encompass traditional pay, incentives, and
benefits, but also “rewards” such as more challenging jobs (job
design), career development, and recognition.
Equity and Its Impact on Pay Rates
• Equity Theory of Motivation
– Once a person perceives an inequity a tension or drive will
develop that motivates him or her to reduce the tension
and perceived inequity
– Types of equity
▪ External
▪ Internal
▪ Individual
▪ Procedural: perceived fairness of the processes and
procedures used to make decisions regarding the
allocation of pay
Gig Workers
• Employees or independent contractors?
• Ongoing litigation
Union Influences on Compensation
Decisions

• National Labor Relations Act of 1935

– Wagner Act
– Right to unionize
– Right to bargain collectively
– National Labor Relations Board (NLRB)
Pay Polices
• The employer’s compensation strategy will manifest itself in
pay policies
– Geography
▪ How to account for geographic differences in cost of
living
– Global expatriate employees
▪ Home-based plan
▪ Host-based plan
Define and Give an Example of
How to Conduct a Job Evaluation.
Job Evaluation Methods
• Job evaluation
– Relative work
– Results in a salary structure/hierarchy
• Market-based approach
– Conducting formal or informal salary surveys to determine
what others in the relevant labor markets are paying for
particular jobs
• Market-competitive pay plan
– Internal and external equity
Compensable Factors
• Compensable factors
– A fundamental, compensable element of a job, such as
skill, effort, responsibility, and working conditions
– Establish how jobs compare one to another
Preparing for the Job Evaluation
1. Identify the need
2. Get employees’ cooperation
3. Choose job evaluation committee
4. Perform the evaluation
– Benchmark jobs
Job Evaluation Methods: Ranking (1 of 2)
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 surveys
7. Assign a new pay scale
Job Evaluation Methods: Ranking (2 of 2)
Table 11-2 Job Ranking at Jackson Hospital

Ranking Order Our Current Annual What Others Pay: Our Final Assigned
Pay Scale Salary Survey Pay Pay
1. Office manager $43,000 $45,000 $44,000
2. Chief nurse 42,500 43,000 ​42,750
3. Bookkeeper 34,000 36,000 35,000
4. Nurse 32,500 33,000 32,750
5. Cook 31,000 32,000 31,500
6. Nurse’s aide 28,500 30,500 29,500
7. Orderly 25,500 27,000 27,000

Note: After ranking, it becomes possible to slot additional jobs (based on overall job
difficulty, for instance) between those already ranked and to assign each an appropriate
wage rate.
Job Evaluation Methods: Job
Classification (1 of 2)
• Job classification (or job grading)—a simple, widely used job
evaluation method in which raters categorize jobs into groups;
all the jobs in each group are of roughly the same value for
pay purposes.
– Classes contain similar jobs.
– Grades contain jobs that are similar in difficulty but
otherwise different.
 Job Evaluation Methods: Job
Classification
Figure 11-4 Example of a Grade Definition
Grade Nature of Assignment Level of Responsibility
GS-7 Performs specialized duties in a Work is assigned in terms of
defined functional or program area objectives, priorities, and deadlines;
involving a wide variety of the employee works independently in
problems or situations; develops resolving most conflicts; completed
information, identifies work is evaluated for conformance to
interrelationships, and takes policy; guidelines, such as
actions consistent with objectives regulations, precedent cases, and
of the function or program served. policy statements require
considerable interpretation and
adaptation.

Source: From “Grade Level Guide for Clerical and Assistance Work” from
www.opm.gov/policy-data-oversight/classification-qualifications/classifying-
general-schedulepositions/functional-guides/gscler.pdf
, accessed April 2, 2022.
Job Evaluation Methods: The Point Method
and Computerized Job Evaluations

• The point method

• A job evaluation method in which a number of compensable
factors are identified and then the degree to which each of
these factors is present on the job is determined
• “Packaged” point plans
Explain in Detail How to Establish
a Market-Competitive Pay Plan.
How to Create a Market-Competitive Pay
Plan (1 of 4)

1. Choose benchmark jobs

2. Select compensable factors
3. Assign weights to compensable factors
4. Convert percentages to points for each factor
How to Create a Market-Competitive Pay
Plan (2 of 4)

5. Define each factor’s degrees

6. Determine for each factor its factor degrees’ points
7. Review job descriptions and job specifications
8. Evaluate the jobs
 How to Create a Market-Competitive Pay
Plan (3 of 4)
9. Draw the current (internal)
wage curve
10. Conduct a market analysis:
salary survey
11. Draw the market
(external) wage curve
12. Compare and adjust
current and market rates
for jobs
How to Create a Market-Competitive Pay
Plan (4 of 4)
13. Develop pay grades: each grade might include all those jobs falling between 50
and 100 points, 100 and 150 points, 150 and 200 points, etc.) Since each grade is
the same width, the main issue involves determining how many grades to have.

14. Establish rate ranges: GE Medical won’t want to pay all its accounting
clerks, from beginners to long tenure, at the same rate, though they may all
be in the same pay grade. Instead, employers develop vertical pay (or
“rate”) ranges for each of the horizontal pay grades (or pay classes). These
pay (or rate) ranges often appear as vertical boxes within each grade,
showing minimum, maximum, and midpoint pay rates for that grade,

15. Address remaining job

16. Correct out-of-line rates:

• A pay (or wage) grade is composed of jobs of
approximately equal difficulty or importance as
determined by job evaluation.
• If you used the point method of job evaluation,
the pay grade consists of jobs falling within a
range of points.
• If the rank ing method was used, the grade
consists of a specific number of ranks.
• If you use the classification system, then your jobs
are already categorized into classes (or grades
• There are several reasons to use pay ranges for each pay grade.
First, it lets the employer take a more flexible stance in the labor
market.
• For example, it makes it easier to attract experienced, higher-
paid employees into a pay grade at the top of the range, since
the starting salary for the pay grade’s lowest step may be too low
to attract them.
• Pay ranges also let companies provide for performance
differences between employees within the same grade or
between those with different seniorities.
• Compensation experts sometimes use compa ratios. The
compa ratio equals an employee’s pay rate divided by the pay
range midpoint for his or her pay grade
• divide the employee’s annual salary by the median salary for
similar positions and multiply the result by 100. For example, if
an employee earns $47,000 per year and the median salary for
similar positions is $49,000, the compa-ratio formula is:

• $47,000/$49,000 x 100 = 95%

Compa-ratio percentages generally fall between 80% and 120%, with 100% considered
market value. New hires tend to receive compensation on the lower end of this
spectrum so that they have room to grow, while longer-tenured employees and those
with rare skills sets may earn salaries closer to the top mark. Any results that deviate
from these norms, i.e., a consistent top performer who languishes at 80%, could indicate
an issue that warrants attention.
Explain How to Price Managerial
and Professional Jobs.
Pricing Managerial and Professional
Jobs
• What determines executive pay
• Compensating executives
– Base pay
– Short-term incentives
– Long-term incentives
– Executive benefits and perks
Compensating Professional Employees

• In compensating professionals, employers should first

ensure that the person is actually a “professional” under
the law.
– The Fair Labor Standards Act
Payroll Administration
• Most employers use a payroll processing software
package
• Others outsource to vendors like ADP
Explain the Difference Between
Competency-Based and Traditional Pay
Plans.
Contemporary Topics in Compensation
• Competency-based pay:
• Broadbanding:
• Comparable worth
• Board oversight of executive pay
• Total rewards
Competency-Based Pay
• Competencies are demonstrable personal characteristics such
as knowledge, skills, and personal behaviors.
• Competency-based pay means the company pays for the
employee’s range, depth, and types of skills and knowledge,
rather than for the job title he or she holds.

With competency (generally skill or knowledge-based) pay, you pay the employee for the
skills and knowledge he or she is capable of using rather than for the responsibilities or title
of the job currently held. Competencies are demonstrable personal characteristics such as
knowledge, skills, and personal behaviors such as leadership. Why pay employees based on
the skill levels they achieve, rather than based on the jobs they’re assigned to?
BROADBANDING
• Most firms end up with pay plans that slot jobs into classes or
grades, each with its own vertical pay rate range.
• Broadbanding is a compensation strategy where a company
combines several different job levels or grades into a single,
wider pay band, allowing employees to earn a salary within a
broader range based on their performance and skills, rather
than being strictly limited by their job title;
• for example, a tech company might group all software
engineers, from junior to senior level, into one "Software
Engineer" band, with pay varying based on individual
performance within that band, instead of having separate pay
grades for each level
Broadbanding
Figure 11-11
Broadbanded Structure
and How It Relates to
Traditional Pay Grades
and Ranges
Comparable Worth

• Comparable worth refers to the requirement to pay men and

women equal wages for jobs that are dissimilar but of
comparable value to the employer.
• This may mean comparing dissimilar jobs, such as nurses to
mechanics. The question “comparable worth” seeks to address
is this: Should you pay women who are performing jobs equal
to men’s or just comparable to men’s the same as men?
– County of Washington v s Gunther ersu

It involved Washington County, Oregon, prison matrons, who claimed sex discrimination. The county
had evaluated roughly comparable (but different) men’s jobs as having 5% more “job con tent” (based
on a point evaluation system) than the women’s jobs, but paid the men 35% more.119 Why should
there be such a pay discrepancy for roughly comparable
Diversity Counts
The Gender Pay Gap
Let’s look into it…

• Gender Pay Gap – Women in the U.S. earn about 81% of what men earn,
even among highly trained professionals like doctors.
• Key Reasons – Factors include the "Motherhood Penalty," employer
discrimination, lower job-switching rates among women, and their
concentration in lower-paying departments.
• Employer Response – Companies like Alphabet are addressing pay gaps,
driven by investor pressures, state regulations, and the #MeToo
movement.
• Need for Action – Employers must recognize and tackle these disparities to
ensure fair compensation and workplace equality.
Board Oversight of Executive Pay
• Government regulation/legislation
– The Securities and Exchange Commission (S E C)
– Dodd-Frank Law
– The Sarbanes–Oxley Act

• Shareholder activism

• Board Oversight – The board of directors is responsible for setting and approving
executive pay, closely scrutinized due to legal regulations and shareholder activism.
• Government Regulations – Laws like the SEC disclosure requirements, Dodd-Frank Act,
and Sarbanes-Oxley Act enforce transparency and accountability in executive
compensation.
• Shareholder Concerns – CEO pay has grown significantly compared to average worker
wages, leading to shareholder activism, lawsuits, and stricter reporting requirements.
• Increased Scrutiny – Public companies must now disclose the CEO-to-median-
employee pay ratio, pushing boards to evaluate and justify executive compensation
decisions.
Describe the Importance of Total
Rewards for Improving Employee
Engagement.
Employee Engagement Guide for Managers
•Broad Concept – Total rewards include not just pay and benefits but also
nonfinancial factors like recognition, career growth, and work environment.
•Financial & Nonfinancial Rewards – It covers wages, incentives, benefits,
perks, and intangible elements like appreciation, job quality, and career
development.
•Key Nonfinancial Elements – Organizational justice, trust, involvement,
relationships, and opportunities for promotion enhance total rewards.
•Recognition & Well-being – Programs like job redesign, telecommuting,
health initiatives, and career development contribute to a rewarding work
experience.
•Noncash Rewards – Gift cards, merchandise, and appreciation programs help
recognize and motivate employees beyond monetary compensation.
•Digital Recognition – New tools allow peer-to-peer recognition via online
platforms, improving engagement and morale.
•Examples in Practice – Companies like DuPont and International Fitness
Holdings use digital and social media apps to enable employee recognition and
rewards.
 Company Total Rewards Focus

Mutual trust & respect, stable employment, technical skills

Toyota
development, childcare benefits

Disney Pay, various benefits, career development opportunities

Intangible rewards - Executive calls employees daily to thank

NetApp
them

Employee involvement - Voting on new hires, transparency in

Whole Foods
salaries

Stimulating work, empowering management, flexible work,

SAS
happiness at work