Human Resource Management

Sixteenth Edition

Compensation

Establishing Strategic Pay

Plans

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Learning Objectives (1 of 2)
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.

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Learning Objectives (2 of 2)
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.

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Learning Objective 11.1: List the Basic
Factors Determining Pay Rates

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 Employee Compensation
Basic Factors in Determining Pay Rates
Employee compensation refers to all forms of pay or rewards
going to employees, which include direct financial payments
and indirect payments.
• Direct financial payments include wages, salaries,
incentives, commissions, and bonuses.
• Indirect payments include financial benefits like employer-
paid insurance and vacations.

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Aligning Total Rewards with Organizational Strategy

Aligning Total Rewards with Strategy – the

compensation plan should first advance the firm’s
strategic aims – management should produce an
aligned reward strategy.

This means creating a compensation package that

produces the employee behaviors the firm needs to
achieve its competitive strategy

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 11–7

Equity and Its Impact on Pay Rates

Equity and Its Impact on Pay Rates – the equity theory of motivation
postulates that people are motivated to maintain a balance between what
they perceive as their contributions and their rewards.

External and internal equity is crucial in pay rates.

Contd…

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 11–8

Equity and Its Impact on Pay Rates

– External equity refers to how pay compares with rates in other
organizations.
– Internal equity refers to employees viewing their pay as equitable given
other pay rates in the organization.

– Individual equity refers to the fairness of an individual’s pay as

compared with what his/her coworkers are earning for the same or very
similar jobs.

– Procedural equity refers to the perceived fairness of the processes and

procedures used to make decisions regarding the allocation of pay.

External and internal equity are crucial in pay rates

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 11–9

Equity and Its Impact on Pay Rates

Managers use various means to address equity issues.

For eg:
– External Equity – Use salary surveys (surveys of what other employers
are paying) to monitor and maintain external equity
– Internal equity - use job analysis and comparisons of each job (job
evaluation ) to maintain internal equity.
– Individual equity – Use performance appraisal and incentive pay to
maintain individual equity.
– Procedural equity – Use communications, grievance mechanisms and
employees participation to help ensure that employees view the pay
process as procedurally fair.

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 11–10

Establishing Pay Rates

• Step 1. The salary survey
– Aimed at determining prevailing wage rates.
▪ A good salary survey provides specific wage rates for specific jobs.
– Formal written questionnaire surveys are the most comprehensive, but telephone
surveys and newspaper ads are also sources of information.
▪ 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.

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 11–11

Sources for Salary Surveys

• Consulting firms

• Professional associations

• Government agencies
– U.S. Department of Labor’s Bureau of Labor Statistics (BLS) conducts three
annual surveys:
▪ Area wage surveys
▪ Industry wage surveys
▪ Professional, administrative, technical, and clerical (PATC) surveys.

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 11–12

Establishing Pay Rates (cont’d)

• Step 2. Job evaluation
– A systematic comparison done in order to determine the worth of
one job relative to another.
The basic principle of job evaluation is:
Jobs that require greater qualifications, more responsibilities and
more complex duties should receive more pay than jobs with lesser
requirements.
• Compensable factor
– A fundamental, compensable element of a job, such as skills, effort,
responsibility, and working conditions.
Basically you compare the jobs by focusing on certain basic factors the jobs have in common.

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 11–13

Preparing for the Job Evaluation

• Identifying the need for the job evaluation
(For example, dissatisfaction reflected in high turnover, work stoppages, or arguments may result from paying
employees different rates for similar jobs. Managers may express uneasiness with an informal way of assigning pay
rates)

• Getting the cooperation of employees

(For example, you can tell employees that because of the impending job evaluation program, pay rate decisions will no
longer be made just by management whim, and that no current employee’s rate will be adversely affected because of
the job evaluation)

• Performing the actual evaluation.

(Choosing an evaluation committee. The committee usually consists of about five members, most of whom are
employees)

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 11–14

Job Evaluation Methods:

1)Ranking

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

• Steps in job ranking:

– Obtain job information.
– Select and group jobs.
– Select compensable factors.
– Rank jobs.
– Combine ratings.

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Job Ranking by Olympia Health Care

11–15
Table 11–3

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 11–16

Job Evaluation Methods:

2)Job Classification

• Raters categorize jobs into groups or classes of jobs that are of roughly the same
value for pay purposes.
– Classes contain similar jobs.
– Grades are jobs that are similar in difficulty but otherwise different.
– Jobs are classed by the amount or level of compensable factors they
contain.

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reserved.

Example of A Grade Level Definition

This is a summary chart of the key grade level criteria for the GS-7
level of clerical and assistance work. Do not use this chart alone for
classification purposes; additional grade level criteria are in the Web-
based chart.

11–17
Source: http://www.opm.gov/fedclass. gscler.pdf. August 29, 2001. Figure 11–3

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 11–18

Job Evaluation Methods:

3)Point Method

• A quantitative technique that involves:

– Identifying the degree to which each compensable factors are present in the job.
– Awarding points for each degree of each factor.
– Calculating a total point value for the job by adding up the corresponding points
for each factor.

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 11–19

Job Evaluation Methods:

4)Factor Comparison

• Each job is ranked several times—once for each of several compensable factors.

• The rankings for each job are combined into an overall numerical rating for the
job.

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 11–20

Computerized Job Evaluations

• A computerized system that uses a structured questionnaire and statistical models to
streamline the job evaluation process.
– Advantages of computer-aided job evaluation (CAJE)
▪ Simplify job analysis
▪ Help keep job descriptions up to date
▪ Increase evaluation objectivity
▪ Reduce the time spent in committee meetings
▪ Ease the burden of system maintenance

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 11–21

Establishing Pay Rates (cont’d)

• Step 3. Group Similar Jobs into Pay Grades
– A pay grade is comprised of jobs of approximately equal difficulty or importance
as established by job evaluation.
▪ Point method: the pay grade consists of jobs falling within a range of points.
▪ Ranking method: the grade consists of all jobs that fall within two or three
ranks.
▪ Classification method: automatically categorizes jobs into classes or grades.

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 11–22

Establishing Pay Rates (cont’d)

• Step 4. Price Each Pay Grade
— Wage Curve
– Shows the pay rates currently paid for jobs in each pay grade, relative to the
points or rankings assigned to each job or grade by the job evaluation.
– Shows the relationships between the value of the job as determined by one of
the job evaluation methods and the current average pay rates for your grades.

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Plotting a Wage Curve

11–23
Figure 11–4

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 11–24

Establishing Pay Rates (cont’d)

• Step 5. Fine-tune pay rates
– Developing pay ranges
▪ Flexibility in meeting external job market rates
▪ Easier for employees to move into higher pay grades
▪ Allows for rewarding performance differences and seniority
– Correcting out-of-line rates
▪ Raising underpaid jobs to the minimum of the rate range for their pay grade.
▪ Freezing rates or cutting pay rates for overpaid (“red circle”) jobs to
maximum in the pay range for their pay grade.

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Wage
Structure

Note: This shows overlapping wage classes and

maximum–minimum wage ranges.

11–25
Figure 11–5

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 11–26

Pricing Managerial and Professional Jobs

• Compensating managers
– Base pay: fixed salary, guaranteed bonuses.
– Short-term incentives: cash or stock bonuses
– Long-term incentives: stock options
– Executive benefits and perks: retirement plans, life insurance, and health
insurance without a deductible or coinsurance.

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 11–27

Pricing Managerial and Professional Jobs

• What Really Determines Executive Pay?
– CEO pay is set by the board of directors taking into account factors such as the
business strategy, corporate trends, and where they want to be in a short and
long term.
– Firms pay CEOs based on the complexity of the jobs they filled.
– Boards are reducing the relative importance of base salary while boosting the
emphasis on performance-based pay.

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 11–28

Compensating Professional Employees

• Employers can use job evaluation for professional jobs.
• Compensable factors focus on problem solving, creativity, job scope, and technical
knowledge and expertise.
• Firms use the point method and factor comparison methods, although job
classification seems most popular.
• Professional jobs are market-priced to establish the values for benchmark jobs.

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 11–29

What Is Competency-based Pay?

• Competency-based pay
– Where 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.
• Competencies
– Demonstrable characteristics of a person, including knowledge, skills, and
behaviors, that enable performance.

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 11–30

Why Use Competency-Based Pay?

• Traditional pay plans may actually backfire if a high-performance work system is the
goal.
• Paying for skills, knowledge, and competencies is more strategic.
• Measurable skills, knowledge, and competencies are the heart of any company’s
performance management process.

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 11–31

Competency-Based Pay in Practice

• Main components of skill/competency/ knowledge–based pay programs:
– A system that defines specific skills, and a process for tying the person’s pay to
his or her skill
– A training system that lets employees seek and acquire skills
– A formal competency testing system
– A work design that lets employees move among jobs to permit work assignment
flexibility.

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 11–32

Competency-Based Pay: Pros and Cons

• Pros
– Higher quality
– Lower absenteeism and fewer accidents

• Cons
– Pay program implementation problems
– Cost implications of paying for unused knowledge, skills and behaviors
– Complexity of program
– Uncertainty that the program improves productivity

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 11–33

Other Compensation Trends

• Broadbanding
– Consolidating salary grades and ranges into just a few wide levels or
“bands,” each of which contains a relatively wide range of jobs and
salary levels.
▪ Wide bands provide more flexibility in assigning workers to different job
grades.
▪ Lack of permanence in job responsibilities can be unsettling to new
employees.

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reserved.

Broadbanded
Structure and How It
Relates to Traditional
Pay Grades and
Ranges

11–34
Figure 11–7

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 11–35

Strategic Compensation
• Strategic compensation
– Using the compensation plan to support the company’s strategic aims.
– Focuses employees’ attention on the values of winning, execution, and speed,
and on being better, faster, and more competitive..

• IBM’s strategic compensation plan:

– The marketplace rules.
– Fewer jobs, evaluated differently, in broadbands.
– Managers manage.
– Big stakes for stakeholders.

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 11–36

Comparable Worth
• Comparable worth
– Refers to the requirement to pay men and women equal wages for jobs that are
of comparable (rather than strictly equal) value to the employer.
– Seeks to address the issue that women have jobs that are dissimilar to those of
men and those jobs often consistently valued less than men’s jobs.

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 11–37

Compensation and Women

• Factors lowering the earnings of women:
– Women’s starting salaries are traditionally lower.
– Salary increases for women in professional jobs do not reflect their above-
average performance.
– In white-collar jobs, men change jobs more frequently, enabling them to be
promoted to higher-level jobs over women with more seniority.
– In blue-collar jobs, women tend to be placed in departments with lower-paying
jobs.

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Human Resource Management
Sixteenth Edition

Pay for Performance and

Financial Incentives

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Learning Objectives (1 of 2)
12.1 Explain how you would apply four motivation theories
in formulating an incentive plan.
12.2 Discuss the main incentives for individual employees.
12.3 Discuss the pros and cons of commissions versus
straight pay for salespeople.

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Learning Objectives (2 of 2)
12.4 Describe the main incentives for managers and
executives.
12.5 Name and describe the most popular organization-wide
incentive plans.
12.6 Explain how to use incentives to improve employee
engagement.

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Money’s Role in Motivation

$$$
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Incentive Pay Terminology
• Pay-for Performance
– Tie employees’ pay to the employees’ performance
• Variable Pay
– Performance-based incentive plan

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Linking Strategy, Performance, and
Incentive Pay
• Frederick Taylor made three contributions in the late 1800s:
• 1) formulating a “fair day’s work,” namely precise output
standards for each job
• 2) the scientific management movement, which emphasized
improvement of work through observation and analysis,
3) using incentives pay to reward employees who produce
over standards.
Don’t motivate everyone - – the law of individual differences means that people
differ in personality, abilities, values, and needs. They therefore react to different
incentives in different ways.

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Motivation and Incentives
Theories that have relevance to designing incentive plans
• Motivators and Fredrick Herzberg
• Hygiene-motivator theory divides needs into two
factors.
1. Hygiene factors include such things as working
conditions, salary, and incentives.

2. Motivators factors include those factors that

make the job more intrinsically motivating, like
challenge, feedback, and recognition.

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Pay for Performance Plan
The term “pay-for-performance compensation”
refers to performance-based pay programs where
an employee is incentivized and rewarded for
achieving goals or objectives.

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Pay for Performance Plan
Objectives /Goals of Pay for performance plans:

➢ To motivate employees as they will see that their rewards are directly related to their
efforts.
➢ To increase employees’ focus on and commitment to corporate objectives.
➢ To help develop a performance culture or to reinforce the existing culture.
➢ To reward the contribution made by individuals to the organization’s success.

➢ To ensure that rewards are in line with organization’s performance

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Pay for Performance Plan
Advantages/ Benefits of Pay for performance plans:

• Incentivized Employees are More Engaged

• It Can Help Reduce Employee Turnover
• The Company's Culture Will Improve
• Reduces Micromanagement

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Individual Employee Incentive and
Recognition Programs
A) Piecework
– piecework involves paying the worker a sum (piece rate)
for each unit he/she produces. Straight piecework entails a
strict proportionality between results and rewards regardless
of output.. -
– Earnings tied directly to what the worker produces
– Straight piecework
– Standard hour plan

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Merit Pay as an Incentive
B. Merit pay as an incentive
– Based on performance
– Evidence is mixed
• Merit pay options
– Lump-sum merit increases
– Tied to individual and organizational performance

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3. Incentive for Professional
Employees
• Making incentive pay decisions for professional
employees is challenging
• Dual-career ladders
– One path for managers and another for technical
experts

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Non-Financial and Recognition-Base
Awards
• Recognition program
• Social recognition program
• Performance feedback
– Qualitative information
– Quantitative information

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List of Recognition
Figure 12-1 Social Recognition and Related Positive Reinforcement Managers
Can Use
• Challenging work assignments • Being provided with ample
• Freedom to choose own work activity encouragement
• Having fun built into work • Being allowed to set own goals
• More of preferred task • Compliments
• Role as boss’s stand-in when he or • Expression of appreciation in front of
she is away others
• Role in presentations to top • Note of thanks
management • Employee-of-the-month award
• Job rotation • Special commendation
• Encouragement of learning and • Bigger desk
continuous improvement • Bigger office or cubicle
Source: Based on Bob Nelson, 1001 Ways to Reward Employees (New York: Workman Pub, 1994), p age

19; Sunny C. L. Fong and Margaret A. Shaffer, "The Dimensionality and Determinants of Pay
Satisfaction: A Cross-Cultural Investigation of a Group Incentive Plan," International Journal of Human
Resource Management 14, no. 4 (June 2003), p 559 (22).
age

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Job Design
Job design is the division of work tasks assigned to an
individual in an organization that specifies what the worker
does, how, and why.
• Can significantly impact employee motivation and retention
• Primary driver of employee engagement
• Useful part of an employer’s total rewards program

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Incentives for Salespeople
• Align:
– how they measure and reward their salespeople
– with their firms’ strategic goals.

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Types of Sales Incentive Plans
• Salary plan
– When the main task involves prospecting or account
serving
• Commission plan
– Pays only for results
• Combination plan
– 60-70% base salary with 30-40% incentive

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Maximizing Sales Force Results
• In setting sales quotas and commission rates, the goal is to
motivate sales activity but avoid excessive commissions
– Set Effective Quotas
– Distinguish Among Performers
• Enterprise Incentive Management (EIM)

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Incentives for Managers and Executives
• Managers play a crucial role in divisional and company-
wide profitability, and employers therefore put
considerable thought into how to reward them. Most
managers get short-term and long-term incentives in
addition to salary.
– Short-term Incentives
– Long-term Incentives

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Strategy and the Executive’s Long-Term
and Total Rewards Package (2 of 4)
• Short-term incentives and the annual bonus
– Eligibility
– Fund size
– Individual awards

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Strategy and the Executive’s Long-Term
and Total Rewards Package (3 of 4)
• Long-term incentives
– Stock options
▪ right to purchase a specific number of shares of
company stock at a specific price during a specific
period

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Strategy and the Executive’s Long-Term
and Total Rewards Package (4 of 4)
• Potential Problems
– Short termism
– Lack of range
• Ethics
– “People put their efforts where they know they’ll be
rewarded.”

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Team and Organization-Wide Incentive
Plans
• How to Design Team Incentives
– Pay incentives to the team based on the team’s
performance
• Evidence-Based HR: Inequities That Undercut Team
Incentives
– Often counterproductive

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Organization-Wide Incentive Plans
• Profit-sharing plans
• Scanlon plans - The basic features of the plan
include: philosophy of cooperation, identity,
competence, involvement system, and sharing of
benefits formula.
• Other gainsharing plans
• At-Risk pay plans
• Employee Stock Ownership Plans (ESOPs)
• Broad-based stock options

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