CHAPTER 5 Person Focused Pay

Strategic Compensation: A Human
Resource Management Approach

Ninth Edition
Chapter 5
Person-Focused
Pay
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved.
Learning Objective 5.1
• Define person-focused pay.
Person-Focused Pay
• Person-Focused Pay Plans
• 1. Rewards employees for acquiring job related,
knowledge, skills, or competencies rather than for
demonstrating successful job performance
• 2. Not compensated for demonstrating successful
job performance
Person-Focused Plans
• Rewards employees for acquiring job-related
– Knowledge
– Skills
• Two main types
– Pay-for-knowledge
– Skill-based pay
Pay-for-knowledge: reward managerial, service, or
professional workers for successfully learning specific
curricula
A system of payment where employees are compensated based on
their individual skill level and education attainment. Under this system,
employees are rewarded for reaching certain goals in education, training
and skill development. Knowledge-based pay systems provide incentive
for employees to improve their skill set and education.
• Skills-based: used mostly for employees who do physical
work, increases these workers’ pay as they master new
skills
Remuneration system in which employees are paid
wages on the basis of number of job skills they have
acquired.
• Reward employees for improving or acquiring new
skills/knowledge
Types of skills:
• Horizontal skills: skills at the same level of responsibility
or difficulty
– Ex: Clerical employees of a retail store trained to
perform record-keeping tasks.
 Employee attendance records
 Schedule salesperson’s work shifts
 Master the use of office supplies for reordering
Horizontal skills development involves training an employee
to handle multiple tasks of a similar type or level of difficulty.
• For example, a factory manager might reassign a machine
operator to a different department, where he will learn how
to operate a different machine. The key difference is that
the skills the operator gains won’t elevate him into the
company’s power hierarchy.
• Vertical skills: skills that are traditionally considered
supervisory
– Scheduling, coordinating, training, leading
– These types of supervisory skills are often emphasized
in person-focused pay plans designed for self-
managed work teams because team members often
need to learn how to manage one another
Vertical Skills
• Works well for work teams
– Service industry
– Manufacturing industry
• Employees
– Learn functional skills
– Perform managerial tasks
Vertical Skills
Vertical skills development refers to training employees to
handle increased responsibilities.
• For example, a factory manager might promote an
experienced machine operator to oversee an entire
department.
• After some time, the next step might be to promote him to
oversee several departments, and so on.
• The worker moves up through the chain of command,
acquiring management skills along the way.
• Depth of skills: level of expertise or specialization an
employee possesses or brings to a particular job.
– Human resource professionals may choose to
specialize in managing a particular aspect of the HR
function: Compensation Specialists:
 Job evaluation
 Salary survey analysis
 Market pay system designs
 Incentive (merit) pay system design
What is Competency?
• Many HR professional typically refer to
competencies as uniquely combined
characteristics of the person, including
personality, attitudes, knowledge, skills, and
behaviors that enable an employee to fulfill
job requirement well.
Competencies
• Refer to an individual’s capability to orchestrate and apply
combinations of knowledge and skills consistently over
time to perform work successfully in the required work
situations
• Core competencies are derived from company’s strategic
statements
• Describe the usage of person-focused pay.
Usage of Person-Focused Pay (2 of 2)
• Mostly found in continuous process settings, like
manufacturing in which:
– Assembly lines are used
– One employee’s job depends on the work of at least
one other worker
• Work well in manufacturing companies that organize work
flow around high-performance work teams where
employees are expected to perform managerial tasks like:
– Work scheduling
– Budgeting
– Quality control
• Name and explain the reasons companies adopt person-
focused pay programs.
Reasons for Adopting Person-Focused Pay
• Person-focused pay program represent important innovations in the
compensation filed.
• Person-focused pay systems imply that employees must move away
from viewing pay as entitlement. Instead these systems treat
compensation as a reward earned for acquiring and implementing job-
relevant knowledge and skills.
• Advocates of person-focused pay programs offer two key reasons that
firms seeking competitive advantage should adopt this form of
compensation:
– Technological innovation.
– Increased global competition.
Reasons for Adopting Person-Focused
Pay
Technological innovation:
• Connects pay to job-related abilities. Establish the view of
pay as a reward for acquiring and implementing job-
relevant knowledge and skills.
• Technological changes have fostered increased employee
autonomy and team-oriented workplaces, which also
demand different job-related skills than employees needed
previously. (technicians must be able to manage
themselves and their time)
Technological innovation:
• As technology lead to the automation of more tasks,

employers combine jobs and confer broader
responsibilities on workers. Jobs require new and different
worker skills
Increased Global Competition:
• To sustain competitive advantage, companies must provide their
employees with leading-edge skills and encourage employees to apply
their skills proficiently.
• Employers uses classes and instruction as proactive tools for
responding to strategic change.
• To establish and maintaining competitive advantage, companies
should carefully consider person-focused pay systems. They must
tailor compensation programs to the particular kinds of skills they wish
to foster.
• Training lies at the heart of person-focused pay programs.
• Summarize the varieties of person-focused pay programs.
Person-Focused Pay Program
Models
• Stair step: The steps represent jobs from a particular job
family that differ in terms of complexity.
• Each position differs according to the number of skills
needed to perform the job.
• Each “step-up” requires more skills than the position
“below it”
• Training can be conducted either:
– In house by the company’s own training department.
– Outsourced to specialized organizations.
Stair-Step Model
Stair-Step Model
• Jobs from same job family
• Jobs differ in complexity
• Higher the step, greater the skills
• Companies use separate models
• Models designed to match jobs
Stair-Step Model
• Stair Step Model – the steps on this model
are actually different jobs from a specific job
family. The jobs differ in complexity and a
person can climb the stairwell by obtaining
the necessary skills and knowledge. The
skills build on one another.
Models (2 of 3)
• Skill block: Applies to jobs within the same job family, but
skills do not necessarily build on one another.
• Employees progress to increasingly complex jobs.
• Emphasizes the development of both horizontal and
vertical knowledge and /or skill depth.
Skill Block Model
Skill-Block Model
• Applies to jobs in same job family
• Employees expected to progress to increasingly complex
jobs
• Skills may not build on one another
• Emphasizes horizontal and vertical skills
Skill-Block Model
• Skills Block Model – the skills block model
operates in the same way as the stair step
model, but the skills do not build on one
another. The employee can progress
quicker by learning the necessary skills and
not necessarily in order. Employees can
skip a level if they have the skills.
Models (3 of 3)
• Job-point accrual: encourages employees to develop
skills and learn to perform jobs from different job families
• Cross-departmental: promotes staffing flexibility by
training employees in one department with critical skills
they would need to perform effectively in other
departments
Job-Point Accrual Model
• Applies to jobs from different job families
• Creates organizational flexibility
• Points are assigned to various skills
• The higher the number of points, the higher the core
compensation level
Cross-Departmental Model
• Employees develop skills usable in other departments
• Helps manage sporadic, short-term staffing shortages
• Helps meet seasonal fluctuations
– Ex: Holiday shopping rush.
• Contrast person-focused pay with job-based pay.
Contrasting Person-Focused Pay
with Job-Based Pay (1 of 3)
• Person-Focused Pay:
– Compensates employees for flexibility
– Compensated for potential contributions
 Based on skills and knowledge
– Used for jobs not easily assessed
 For skills and knowledge
• Job-Based Pay:
– Compensates employees for current jobs
– Pay limits set for each job
– Evaluations based on job descriptions and objectives
– Two main types:
 Merit pay
 Incentive pay
Feature Person focused Job based
Pay level determination Market basis for skill Market basis for job
valuation valuation
Base pay Awarded on how much an Awarded on the value of
employee knows or on skill compensable factors
level
Base pay increases Awarded on an employee’s Awarded on attaining job-
gain in knowledge or skills defined goal
Job promotion Awarded on an employee’s Awarded on exceeding job
skills base and proficiency performance standards
on past work
Key advantage to Job variety and enrichment Perform work and receive
employees pay for a defined job
Key advantage to Work scheduling flexibility Easy pay system
employers administration
• Explain the advantages and disadvantages of person-
focused pay plans.
Advantages to Employees
• Can provide job enrichment:
• Can provide job security
• Can make jobs more intrinsically motivating
• Can make jobs more interesting
• Increases employees’ flexibility
Advantages to Employers
• Leads to enhanced job performance
• Leads to reduced staffing
• Leads to greater flexibility
• Improves quality
• Increases productivity levels
Disadvantages
• Can increase hourly labor costs
• Can increase training costs
• Can increase overhead costs
• May not mesh well with existing incentive pay systems
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CHAPTER 5 Person Focused Pay

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Strategic Compensation: A Human

Resource Management Approach

• As technology lead to the automation of more tasks,

• Training lies at the heart of person-focused pay programs.

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