Base Wage and Salary Systems Chapter 13

Learning Objectives Define base wages and salaries and state the objective of any base wage and salary system. Define job evaluation. Name and briefly discuss the four basic conventional methods of job evaluation. Explain the concepts of key jobs and compensable factors. Differentiate between subfactors and degrees.

Learning Objectives (cont.) Explain the purpose of wage and salary surveys. Discuss wage and salary curves. Define pay grades and pay ranges. Explain the concepts of broadbanding, skill-based pay, competency-based pay, market-based pay, and total rewards.

Base Wage and Salaries Base wages and salaries Hourly, weekly, and monthly pay that employees receive for their work. make up the largest portion of an employee’s total compensation

Specific Policy Issues in Developing and Implementing a Base Wage and Salary Structure Figure 13.1

Objective of the Base Wage and Salary System Primary objective To establish a structure for equitable compensation of employees, depending on their jobs and level of performance in their jobs

Objective of the Base Wage and Salary System Establishing pay ranges involves two basic phases: Determining relative worth of different jobs to the organization (ensuring internal equity) Pricing the different jobs (ensuring external equity)

Conventional Job Evaluation Systematic determination of value of each job in relation to other jobs in the organization Used for designing a pay structure General idea is to Enumerate requirements of a job Job’s contribution to organization Classify it according to its importance While overriding purpose of job evaluation is to establish relative worth of jobs, it can serve several other purposes

Conventional Job Evaluation Gather information on the jobs being evaluated Identify factor or factors to be used in determining worth of different jobs to the organization Develop and implement a plan using chosen factors for evaluating relative worth of different jobs to the organization Gather information on the jobs being evaluated Information is obtained from current job descriptions If not, it is necessary to analyze jobs and create up-to-date descriptions Identify factor or factors to be used in determining worth of different jobs to the organization Frequently used factors are Knowledge Responsibility Working conditions Develop and implement a plan using chosen factors for evaluating relative worth of different jobs to the organization Should consistently place jobs requiring more of the factors at a higher level in job hierarchy than jobs requiring fewer of the factors

Job Evaluation Methods Job ranking Job classification Point comparison Factor comparison

Potential Uses of Job Evaluations Figure 13.2

Job Ranking Method Job ranking method Job evaluation method that ranks jobs in order of their difficulty from simplest to most complex. Often, evaluator prepares cards with basic information about jobs and then arranges the cards in order of importance of positions Produces only an ordering of jobs and does not indicate relative degree of difference among them For example, a job with a ranking of four is not necessarily twice as difficult as a job with a ranking of two

Job Classification Method method that determines the relative worth of a job by comparing it to a predetermined scale of classes or grades of jobs Also called job grading defined on basis of differences in duties, responsibilities, skills, working conditions

Point Method Point method method in which a quantitative point scale is used to evaluate jobs on a factor-by-factor basis. simple to use and reasonably objective.

Selection of Key Jobs Key jobs (benchmark) represent jobs that are common throughout the industry or in general locale under study Content of key jobs should be commonly understood General idea is to select a limited number of key jobs that are representative of entire pay structure and the major kinds of work being evaluated

Selection of Key Jobs Selection of key jobs should adequately represent Span of responsibilities Duties Work requirements

Selecting Compensable Factors Characteristics of jobs that the organization deems important to the extent that it is willing to pay for them.

Selecting Compensable Factors Job subfactor Detailed breakdown of a single compensable factor of a job. Degree statements Written statements used as a part of the point method of job evaluation to further break down job subfactors.

Possible Subfactors and Degrees for the Compensable Factors of Responsibility, with Sample Jobs Table 13.1

Assigning Weights to Factors Weights are assigned to each of the factors, subfactors, and degrees to reflect their relative importance Weight assigned varies from job to job

Assigning Weights to Factors Weights are assigned on basis of maximum number of points for any job Points are then assigned to compensable factors, subfactors, and degrees based on their relative importance

Sample Point Values Table 13.2

Assigning Points to Specific Jobs After point scale has been agreed on, point values are derived for key jobs using the following steps: Examine the job descriptions Determine degree statement that best describes each subfactor for each compensable factor Add total number of points Point totals should present same general relationships that actual pay scales show for key jobs Rank ordering of key jobs according to point totals should be approximately equivalent to rank ordering of key jobs according to pay Serves as a check on appropriateness of points that have been assigned to degrees, subfactors, and factors Nonkey jobs can be evaluated in the same manner By determining appropriate points for each factor from the scale and then totaling points

Possible Point Totals for Key Banking Jobs Table 13.3

Factor Comparison Method Job evaluation technique that uses a monetary scale for evaluating jobs on a factor-by-factor basis.

Factor Comparison Method Each compensable factor is ranked according to its importance in each key job Done by assigning a rank to every key job on one factor at a time rather than ranking one job at a time on all factors After each key job has been ranked on a factor-by-factor basis allocate wage or salary for each job according to ranking of factors Monetary scale is prepared for each compensable factor

Factor-by-Factor Ranking of Key Banking Jobs Table 13.4

Sample Allocation Pay for Key Banking Jobs Table 13.5

Monetary Scale for Responsibility Requirements in Banking Jobs Table 13.6

Advantages and Disadvantages of Different Job Evaluation Methods Table 13.7

Labor market conditions Pricing the Job Labor market conditions Prevailing wage rates Living costs Information should be gathered to ensure external factors are recognized in wage scale They include Labor market conditions Prevailing wage rates Living costs

Wage and Salary Surveys Survey of selected organizations within a geographical area or industry designed to provide a comparison of reliable information on policies, practices, and methods of payment.

Wage and Salary Surveys Advantages Provides knowledge of market and ensure external equity Corrects employee misconceptions about certain jobs Has a positive impact on employee motivation

Wage and Salary Surveys Wage or salary survey information can be obtained in two basic ways: Conducting your own survey Purchasing or accessing a wage/salary survey undertaken by another party

Conducting a Wage/Salary Survey Personal interviews Telephone interviews Mailed questionnaires Internet

Conducting a Wage/Salary Survey Personal interview Most reliable and most expensive method Mailed questionnaires Probably used most frequently Used only to survey jobs having uniform meaning all over industry Can be answered by someone not fully familiar with wage structure

Conducting a Wage/Salary Survey Telephone method Quick but yields incomplete information May be used to clarify responses to mailed questionnaires Internet Inexpensive and quick All companies are not reachable on Internet

Possible Topics in a Wage Survey Figure 13.3

Purchasing or Accessing Wage/Salary Surveys Potential sources for relatively inexpensive wage/salary surveys include The Bureau of Labor Statistics of U.S. Department of Labor State and local governments Trade associations Chambers of commerce Internet

Purchasing or Accessing Wage/Salary Surveys Surveys available on the Internet fall into two broad categories: Surveys conducted by federal government Surveys conducted by private research organizations, professional associations, employees’ associations, and consulting firms

Sample of Web Sites for Wage/Salary Survey Data Figure 13.4

Guidelines to Avoid Problems during Wage and Salary Surveys Assess the participating companies for comparability Compare more than base wage or salary Consider variations in job descriptions Correlate survey data with adjustment periods 1. Assess the participating companies for comparability. Not only should factors such as size and type of business be considered, but intangibles, such as prestige, security, growth opportunity, and location, are also important. 2. Compare more than base wage or salary. The total compensation package, including incentives and benefi ts, should be considered. For example, a company might provide few benefi ts but compensate for this with high base wages and salaries. 3. Consider variations in job descriptions. The most widely acknowledged shortcoming of wage and salary surveys is that it is difficult to find jobs that are directly comparable. Usually more information than a brief job description is needed to properly match jobs in a survey. 4. Correlate survey data with adjustment periods. How recently wages and salaries were adjusted before the survey affects the accuracy of the data. Some companies may have just made adjustments, whereas others may not.9

Problems Encountered When Using Salary Survey Data Figure 13.5

Wage and Salary Curves Wage and salary curves Graphical depiction of the relationship between the relative worth of jobs and their wage rates can be used to indicate pay classes and ranges for the jobs

Wage Curve Using the Point Method Figure 13.6

Wage and Salary Curves Points of graph not following general trend indicate Wage rate for that job is too low or too high The job has been inaccurately evaluated Green-circle jobs Underpaid jobs Red-circle jobs Wages are overly high

Pay Grades and Ranges Pay grades Pay range Classes or grades of jobs that for pay purposes are grouped on the basis of their worth to an organization. Pay range Range of permissible pay, with a minimum and a maximum, that is assigned to a given pay grade.

Pay Grades and Ranges Two approaches for establishing pay grades and ranges To have a relatively large number of grades with identical rates of pay for all jobs within each grade To have a small number of grades with a relatively wide dollar range for each grade

Establishment of Pay Grades with Ranges Figure 13.7

Developing the Base Wage Salary Structure Figure 13.8 illustrates how the various segments of the compensation process fi t together to establish the base wage or salary structure for an organization. Compensation policies are shown on all sides of the figure to emphasize the fact that each step in the process is influenced by the organization’s current compensation policies. Ideally, an organization’s compensation system should produce a base wage/salary structure that is both internally and externally equitable. The job evaluation process should ensure internal equity, while wage surveys should ensure external equity. Figure 13.8

New Approaches to the Base Wage/Salary Structure Broadbanding Skills-based pay Competency-based pay Market-based pay Total rewards

Broadbanding Broadbanding Collapsing job clusters or tiers of positions into a few wide bands to manage career growth and deliver pay bands usually have minimum and maximum dollar amounts that overlap

Broadbanding Advantages Managers have more autonomy in setting pay rates Easier to move employees around Encourages lateral moves or downgrading in flat organizations Helps improve communication teamwork

Skill-based Pay Skill-based pay systems Systems that compensate employees for the skills they bring to the job.

Skill-Based Pay Employees are paid for Range of knowledge Number of business-related skills mastered Level of those skills or knowledge Some combination of level and range

Skill-Based Pay – Potential Concerns Increased labor costs Topped-out employees False expectations Union agreements Increased labor costs – Direct labor and training costs do often rise Usually offset by a reduced labor force and therefore lower total labor costs Topped-out employees – Those who have nowhere else to go Not new to managers and arises in most organizations regardless of pay system used Expose topped-out employees to broader jobs in other departments False expectations – Occur when no vacancies in the job areas for which employees have been newly trained exist Key is be realistic about current or near-term future needs of organization Unrealistic expectations can lead to increased turnover due to disillusioned employees Union agreements – Pay systems are based largely on seniority

Potential Benefits of a Skill-Based Pay System

Competency-Based Pay Competency-based pay system Rewarding employees based on knowledge, skills, and behaviors that result in performance.

Designing Competency-Based Pay Figure 13.9

Market-Based Pay Market-based pay systems Systems that focus on external rather than internal equity and operate without traditional pay ranges.

Total Rewards Total Rewards include everything the employee perceives to be of value resulting from the employment relationship.” basic idea is to consider all aspects of the work experience

Performance and recognition Development and career opportunities Total Rewards Compensation, Benefits Work–life balance Performance and recognition Development and career opportunities