STRATEGIC COMPENSATION A Human Resource Management Approach Chapter 5: Person-Focused Pay Person-focused pay programs represent important innovations in the compensation field. Person focused pay systems imply that employees must move away from viewing pay as an 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 and increased global competition. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objectives Explain the concept and practice of person- focused pay. Describe the type of setting in which person- focused pay is most likely to be used. Name and explain the reasons companies adopt person-focused pay programs. In an age of technological innovation in which robots, telecommunications, artificial intelligence, software, and lasers perform routine tasks, some skills have become obsolete. Jobs therefore require new and different worker skills. The skills needed by automobile mechanics, for instance, have changed dramatically. Competent automobile mechanics previously were adept at manually assembling and disassembling carburetors. Since then, electronic fuel injection systems, which are regulated by onboard computers, have replaced carburetors, necessitating that auto mechanics possess different kinds of skills. Auto mechanics specifically must now be able to use computerized diagnostic systems to assess the functioning of fuel injectors. Second, both Western European and some Pacific Rim cultures provide better academic preparation and continuing workplace instruction for the non-college-bound portions of their workforces. Although the United States is well regarded for the quality of education its colleges and universities provide to such skilled professionals as engineers, the Europeans are much better at educating the “vocational” segment of their workforces. Western European workplaces emphasize applied rather than theoretical instruction for vocational employees. Copyright © 2015 Pearson Education, Inc.

Learning Objectives (cont’d) Summarize the varieties of person-focused pay programs. Contrast person-focused pay with job-based pay. Provide an explanation of the advantages and disadvantages of person-focused pay plans. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objective 1 Explain the concept and practice of person-focused pay. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Person-Focused Plans Rewards employees for acquiring job- related Competencies Knowledge Skills Two main types Pay-for-knowledge Skill-based pay Person-focused pay plans rewards employees for acquiring job-related competencies, knowledge, and skills. There are two types of competency-based pay programs such as pay-for-knowledge pay and skill-based pay. Copyright © 2015 Pearson Education, Inc.

Competency-Based Pay Programs Pay-for-knowledge: reward managerial, service, or professional workers for successfully learning specific curricula Skills-based: used mostly for employees who do physical work, increases these workers’ pay as they master new skills Pay-for-knowledge reward managerial, service, or professional workers for successfully learning specific curricula. Skills-based pay is used mostly for employees who do physical work, increases these workers’ pay as they master new skills. Copyright © 2015 Pearson Education, Inc.

Competency-Based Pay Programs Reward employees for improving or acquiring new skills/knowledge 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 Person focused pay systems reward employees for acquiring horizontal skills, vertical skills, and greater depth of knowledge or skills. Horizontal skills represent similar skills. Clerical employees of a retail store trained to perform record-keeping tasks can be given as an example of horizontal skills. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Pay Programs (cont’d) Vertical skills: skills that are traditionally considered supervisory Scheduling, coordinating, training, leading others Depth of skills: level of expertise or specialization an employee possesses HR professionals specialize in compensation: Job evaluation Salary survey analysis Market pay system designs Incentive (merit) pay system design Vertical skills are those skills that are traditionally considered supervisory like scheduling, coordinating, training, and leading others. Depth of skills refer to level of expertise or specialization an employee possesses. For instance, HR professional specializing in compensation should be taking courses on job evaluation, salary survey analysis, market pay system designs, and incentive (merit) pay system design. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Vertical Skills Works well for work teams Service industry Manufacturing industry Employees Learn functional skills Perform managerial tasks Vertical skills works well for self-managed work teams because team members need to learn how to manage one another. These type of teams bring employees together from various functional areas to plan, design, and complete one product or service. Person-focused pay programs that emphasize vertical skills work well at manufacturing companies that organize work flow around high-performance work teams in which employees are expected to learn both functional and managerial tasks (e.g., work scheduling, budgeting, and quality control). This means that groups of employees work together to assemble entire products such as cellular telephones (Motorola) and furniture (Steelcase, a manufacturer of office furniture), and each team member learns how to perform the jobs of other team members. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Competencies Uniquely combined characteristics of the person that enables employees to fulfill job requirements well Core competencies are derived from company’s strategic statements Competencies are uniquely combined characteristics that enable an employee to fulfill job requirements, including, personality, attitudes, knowledge, skills, and behaviors. Core competencies are often derived from companies’ strategic statements. Core competencies are often derived from the overall strategic statements of companies. For example, General Electric (GE) emphasizes three strategic goals for corporate growth: Globalization, Product Services, and Six Sigma (quality improvement). GE’s top management relies on four core competencies to drive business success, which they call the four “Es”: High Energy, the ability to Energize others, Edge (i.e., the ability to make tough calls), and Execute (i.e., the ability to turn vision into results). Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objective 2 Describe the type of setting in which person-focused pay is most likely to be used. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Typical Settings One study found that a skilled-based pay plan in a manufacturing setting increased plant productivity by 58% More than half of the companies that use skilled-based pay plans employ between 150–2,000 employees 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 At Bell Sports, a manufacturer of motorcycle safety helmets, the assembly process includes applying enamel and attaching visors to the helmets. Both tasks clearly require different sets of skills. Applying enamel requires the ability to use automated sprayers. This skill specifically demands that workers possess strong literacy skills so they can interpret readouts from the sprayers that suggest possible problems. Attaching visors to the helmets requires proficient motor skills that involve eye–hand coordination. When employees learn how to perform different jobs, they can cover for absent coworkers. Copyright © 2015 Pearson Education, Inc.

Typical Settings (cont’d) 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 Person-focused pay programs that emphasize vertical skills work well at manufacturing companies that organize work flow around high-performance work teams in which employees are expected to learn both functional and managerial tasks (e.g., work scheduling, budgeting, and quality control). This means that groups of employees work together to assemble entire products such as cellular telephones (Motorola) and furniture (Steelcase, a manufacturer of office furniture), and each team member learns how to perform the jobs of other team members. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objective 3 Name and explain the reasons companies adopt person-focused pay programs. The third learning objective addresses reasons for adopting person-focused pay programs. It removes the view of pay as an entitlement and connects pay to job-related abilities. These programs increase employee autonomy. Employees must learn to manage themselves and their time. Jobs require new and different worker skills and person-focused pay programs foster acquiring these type of skills. To sustain competitive advantage, companies must provide employees with leading-edge skills, and encourage employees to apply their skills proficiently. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Reasons for Adoption Reasons for adoption Removes entitlement label Connects pay to job-related abilities Increases employee autonomy Jobs require new and different worker skills Technological innovations Increased global competition The third learning objective addresses reasons for adopting person-focused pay programs. It removes the view of pay as an entitlement and connects pay to job-related abilities. These programs increase employee autonomy. Employees must learn to manage themselves and their time. Jobs require new and different worker skills and person-focused pay programs foster acquiring these type of skills. To sustain competitive advantage, companies must provide employees with leading-edge skills, and encourage employees to apply their skills proficiently. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objective 4 Summarize the varieties of person-focused pay programs. Copyright © 2015 Pearson Education, Inc.

Person-Focused Pay Program Models Stair step: the steps represent jobs from a particular job family that differ in terms of complexity Skill block: applies to jobs within the same job family, but skills do not necessarily build on one another There are four types of person-focused pay program such as stair-step, skill-block, job-point accrual model, and cross-departmental model. In stair-step model, each step represents jobs from a particular job family that differs in terms of complexity. Skill-block applies to jobs within the same job family, but skills do not necessarily build on each other. Copyright © 2015 Pearson Education, Inc.

Person-Focused Pay Program Models (cont’d) Job-point accrual: encourages employees to develop skills and learn to perform jobs from different job families Cross-departmental: promote staffing flexibility by training employees in one department with critical skills they would need to perform effectively in other departments Job-point accrual model encourages employees to develop skills and learn to perform jobs from different job families. Cross-departmental models promote staffing flexibility by training employees in one department with some of the critical skills they would need to perform effectively in other departments. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. 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 In stair-step model, each step represents jobs from a particular job family that differ in terms of complexity and each position differs according to greater number of skills needed to perform the job. Each “step-up” requires more skills than the position “below” it. Companies use separate models and models are designed to match jobs. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. 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 applies to jobs within one job family per model and employees progress to increasingly complex jobs. Skills do not necessarily build on each other and emphasizes the development of both horizontal and vertical skills. Copyright © 2015 Pearson Education, Inc.

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 Job-point accrual model encourages employees to develop skills and learn to perform jobs from different job families. Creates organizational flexibility and promotes company goals by assigning a relatively greater number of points to skills that address key company concerns. The higher the number of points, the higher the core compensation level. Copyright © 2015 Pearson Education, Inc.

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 In cross-departmental model, employees develop skills usable in other departments. This model can help production companies manage sporadic, short-term staffing shortages. Also, this type of model can help companies meet seasonal fluctuations in demands for their products or services such as holiday shopping rush. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objective 5 Contrast person-focused pay with job-based pay. The fifth learning objective Contrast person-focused pay with job-based pay. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. 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 Person-focused pay compensates employees for developing the flexibility and skills to perform a number of jobs effectively. These programs reward employees for potential contributions based on skills and knowledge. Person-focused pay plans apply in limited contexts and are used for jobs not easily assessed. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. 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 Job-based pay compensates employees for jobs they currently perform. Pay levels are set for each job and evaluations are based on job descriptions and objectives. Job-based pay has two main types such as merit pay and incentive pay. Job-based pay approaches are consistent with the common basis for HR decisions. That basis is judging the status of employees (pay raises, whether to recommend training, promotion) according to how well they perform job duties and tasks. Copyright © 2015 Pearson Education, Inc.

Contrasting Person-Focused Pay With Job-Based Pay Feature Person focused Job based Pay level determination Market basis for skill valuation Market basis for job valuation Base pay Awarded on how much an employee knows or on skill level Awarded on the value of compensable factors Base pay increases Awarded on an employee’s gain in knowledge or skills Awarded on attaining job-defined goal Job promotion Awarded on an employee’s skills base and proficiency on past work Awarded on exceeding job performance standards Key advantage to employees Job variety and enrichment Perform work and receive pay for a defined job Key advantage to employers Work scheduling flexibility Easy pay system administration This table compares person-focused pay with job-based pay in terms of pay level determination, base pay, base pay increases, job promotion, key advantage to employees, and key advantage to employers. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objective 6 Provide an explanation of the advantages and disadvantages of person-focused pay plan. Copyright © 2015 Pearson Education, Inc.

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 These programs can provide job enrichment and job security to employees. Through job enrichment, it creates more intrinsically motivating and interesting work environments. They increase employees' flexibility. At Volvo’s Uddevalla manufacturing facility in Sweden, teams of 7–10 hourly workers produce entire vehicles rather than focusing solely on certain aspects such as installing a drivetrain assembly or attaching upholstery to a car’s interior.16 Contributing to all aspects of manufacturing automobiles expands the horizontal dimensions (skill variety) of workers’ jobs. In some cases, an employer empowers teams to manage themselves and the work they do. These managing duties, including controlling schedules, dividing up tasks, learning multiple jobs, and training one another, represent the vertical dimensions (autonomy) of work. Copyright © 2015 Pearson Education, Inc.

Job Characteristics Theory Employees are more motivated to perform jobs that contain Skill variety: requires using different abilities Task identity: enables employees to do entire job Autonomy: allows employees to choose Feedback: provides clear communications According to the job characteristics theory, employees will be motivated to perform jobs that contain a high degree of four core characteristics namely skill variety, task identity, autonomy, and feedback. Skill variety requires using different abilities, task identity enables employees to do entire job, autonomy allows employees to choose in determining how to do the job, and feedback provides clear communications. Copyright © 2015 Pearson Education, Inc.

Advantages to Employers Leads to enhanced job performance Leads to reduced staffing Leads to greater flexibility Improves quality Increases productivity levels These programs can lead to enhanced job performance with better quality work and more productive workers. This type of pay systems can lead to reduced staffing and greater flexibility by developing employees' vertical and horizontal skills. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Disadvantages Can increase hourly labor costs Can increase training costs Can increase overhead costs May not mesh well with existing incentive pay systems This type of programs can increase hourly labor costs, training costs, and overhead costs. Moreover, they may not mesh well with existing incentive pay programs. In addition, companies have the concern that they may be training employees who will choose to leave for higher paying jobs at competitor companies. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2015 Pearson Education, Inc.