ESTABLISHING STRATEGIC PAY PLANS

Human Resources Management 12e Gary Dessler List the basic factors determining pay rates. Explain in detail how to establish pay rates. Competency-based plan Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Basic Factors in Determining Pay Rates Human Resources Management 12e Gary Dessler Basic Factors in Determining Pay Rates Direct financial payments Indirect financial payments Employee Compensation Components Employee compensation refers to all forms of pay going to employees and arising from their employment. It has two main components, direct financial payments (wages, salaries, incentives, commissions, and bonuses) and indirect financial payments (financial benefits like employer-paid insurance and vacations). There are two basic ways to make direct financial payments to employees: base them on increments of time or on performance. (wages, salaries, incentives, commissions, and bonuses) (employer-paid insurance and vacations). Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Direct financial payments to employees Increments of time On performance. Time- based- *hourly/daily wages- blue collar *week/month salary- manager On performance * piece rate/work- paid based on amount of production * unit completed- production.\, sales commission

Factors determining the design of any pay plan Legal consideration- Malaysian Act & Law Union – MTUC & CUEPECS Company strategy and policy Aligned Reward Strategy Reward package need to support strategy Compensation pay policies issues Equity

Legal Considerations in Compensation Employment Act 1955- To protect employees from exploitation and ensure they receive basic benefits. Wages Councils Act 1947- To establish Councils which will determine which workers should have a minimum wage and to establish the quantum of that wage Sabah Labour Ordinance (as amended 2005)-& Sarawak Labour Ordinance (as amended 2005)- To protect employees from exploitation and ensure they receive basic benefits.

Forms of Compensation Equity: External equity refers to how a job’s pay rate in one company compares to the job’s pay rate in other companies. Internal equity refers to how fair the job’s pay rate is when compared to other jobs within the same company (for instance, is the sales manager’s pay fair, when compared to what the production manager is earning?). Individual equity refers to the fairness of an individual’s pay as compared with what his or her coworkers are earning for the same or very similar jobs within the company, based on each individual’s performance. Procedural equity refers to the “perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay.”

Establishing Pay Rates Human Resources Management 12e Gary Dessler Establishing Pay Rates Steps in Establishing Pay Rates 1 Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity). 3 2 4 Determine the worth of each job in your organization through job evaluation (to ensure internal equity). 5 Group similar jobs into pay grades. The process of establishing pay rates while ensuring external, internal, and (to some extent) procedural equity consists of five steps. Price each pay grade by using wave curves. Fine-tune pay rates. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Step1: The Salary Survey Human Resources Management 12e Gary Dessler Step1: The Salary Survey Aim at determining the prevailing wage rate Uses- benchmark-job Collect data on benefits It’s difficult to set pay rates if you don’t know what others are paying, so salary surveys of what others are paying play a big role in pricing jobs. Virtually every employer conducts at least an informal telephone, newspaper, or Internet salary survey. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Sources for Salary Surveys Human Resources Management 12e Gary Dessler Sources for Salary Surveys Self-Conducted Surveys Government Agencies Consulting Firms Sources of Wage and Salary Information Professional Associations The Internet Salary surveys can be formal or informal. Informal phone or Internet surveys are good for checking specific issues. Some large employers can afford to send out their own formal surveys to collect compensation information from other employers. Many employers use surveys published by consulting firms, professional associations, or government agencies. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Step 2 : Job evaluation is a formal and systematic comparison of jobs to determine the worth of one job relative to other jobs in the organization. Compensable factors: Skill Effort Responsibility Working condition

Methods for evaluating jobs Human Resources Management 12e Gary Dessler Methods for evaluating jobs Ranking Job classification Point method Evaluating the worth of each job can be done using one of these methods: ranking, job classification, point method, or factor comparison. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Job Evaluation Methods: a. Ranking Human Resources Management 12e Gary Dessler Job Evaluation Methods: a. Ranking Ranking each job relative to all other jobs, usually based on some overall factor. The simplest job evaluation method ranks each job relative to all other jobs, usually based on some overall factor like “job difficulty.” Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Human Resources Management 12e Gary Dessler TABLE 11–3 Job Ranking by Olympia Health Care Ranking Order Annual Pay Scale 1. Office manager $43,000 2. Chief nurse 42,500 3. Bookkeeper 34,000 4. Nurse 32,500 5. Cook 31,000 6. Nurse’s aide 28,500 7. Orderly 25,500 Table 11-3 illustrates a job ranking. Jobs in this small health facility rank from orderly up to office manager. The corresponding pay scales are on the right. After ranking, it is possible to slot additional jobs between those already ranked and to assign an appropriate wage rate. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Job Evaluation Methods: b. Job Classification Human Resources Management 12e Gary Dessler Job Evaluation Methods: b. 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. Administrative assistants Grades in are jobs similar in difficulty but otherwise different. Mechanics, welders, electricians, and machinists Jobs are classed by the amount or level of compensable factors they contain. Job classification (or job grading) is a simple, widely used method in which raters categorize jobs into groups; all the jobs in each group are of roughly the same value for pay purposes. The groups are called classes if they contain similar jobs or grades if they contain jobs that are similar in difficulty but otherwise different. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Human Resources Management 12e Gary Dessler FIGURE 11–4 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. Based on certain compensable factors, raters write a grade definition like that in Figure 11-4. This one shows one grade description (GS-7) for the federal government’s pay grade system. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Job Evaluation Methods: c. Point Method Human Resources Management 12e Gary Dessler Job Evaluation Methods: c. Point Method A number of compensable factors are identified and then the degree to which each of these factors is present on the job is determined A quantitative technique that involves: Identifying the degree to which each compensable factor is 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. The point method is a quantitative technique. It involves identifying (1) several compensable factors, each having several degrees, as well as (2) the degree to which each of these factors is present in the job. A different number of points are assigned to each degree of each factor. Once the evaluation committee determines the degree to which each compensable factor (like “responsibility” and “effort”) is present in the job, it can calculate a total point value for the job by adding up the corresponding points for each factor. The result is a quantitative point rating for each job. 11–17 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–17

Human Resources Management 12e Gary Dessler FIGURE 11–A2 Example of One Factor (Complexity/Problem Solving) in a Point Factor System Level Point Value Description of Characteristics and Measures Seldom confronts problems not covered by job routine or organizational policy; analysis of data is negligible. Benchmark: Telephone operator/ receptionist. 1 40 Follows clearly prescribed standard practice and demonstrates straightforward application of readily understood rules and procedures. Analyzes noncomplicated data by established routine. Benchmark: Statistical clerk, billing clerk. 2 80 Frequently confronts problems not covered by job routine. Independent judgment exercised in making minor decisions where alternatives are limited and standard policies established. Analysis of standardized data for information of or use by others. Benchmark: Social worker, executive secretary. 3 120 Exercises independent judgment in making decisions involving nonroutine problems with general guidance only from higher supervision. Analyzes and evaluates data pertaining to nonroutine problems for solution in conjunction with others. Benchmark: Nurse, accountant, team leader. 4 160 Uses independent judgment in making decisions that are subject to review in the final stages only. Analyzes and solves nonroutine problems involving evaluation of a wide variety of data as a regular part of job duties. Makes decisions involving procedures. Benchmark: Associate director, business manager, park services director. 5 200 Uses independent judgment in making decisions that are not subject to review. Regularly exercises developmental or creative abilities in policy development. Benchmark: Executive director. Definitions for each degree for the compensable factor “complexity” are shown in Figure 11-A2. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–18 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–18

Human Resources Management 12e Gary Dessler TABLE 11–A5 Evaluation Points Assigned to Factors and Degrees First-Degree Points Second-Degree Third-Degree Fourth-Degree Fifth-Degree Decision making 41 82 123 164 204 Problem solving 35 70 105 140 174 Knowledge 24 48 72 96 Once the point manual is complete, the actual evaluations can begin. Raters (usually the committee) use the manual to evaluate jobs. Each job based on its job description and job specification is evaluated factor by factor to determine the number of points that should be assigned to it. First, committee members determine the degree (first degree, second degree, and so on) to which each factor is present in the job. Table 11-A5 shows corresponding points (as shown in) that were previously assigned to each of these degrees. Finally, they add up the points for all factors, arriving at a total point value for the job. Raters generally start with rating key jobs and obtain consensus on these. Then they rate the rest of the jobs in the cluster. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–19 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11–19

Human Resources Management 12e Gary Dessler Step 3: Grouping Jobs Grouping similar jobs into pay grades Ranking method Point method Classification methods Once the committee has used job evaluation to determine the relative worth of each job, it can turn to the task of assigning pay rates to each job; however, it will usually want to first group jobs into pay grades using one of these three methods. A pay grade is comprised of jobs of approximately equal in difficulty or importance as established by job evaluation. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Step 4: Price Each Pay Grade Human Resources Management 12e Gary Dessler Step 4: Price Each Pay Grade The Wage Curve Shows the pay rates 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. The wage curve shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings values assigned to each job or grade by the job evaluation. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Human Resources Management 12e Gary Dessler FIGURE 11–5 Plotting a Wage Curve The 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. The purpose of the wage curve is to show the relationships between (1) the value of the job as determined by one of the job evaluation methods and (2) the current average pay rates for graded jobs. Figure 11-5 presents an example. Note that it shows pay rates on the vertical axis, and pay grades (in terms of points) along the horizontal axis. The pay rates on the wage curve are traditionally those now paid by the employer. However, if there is reason to believe the current pay rates are out of step with the market rates for these jobs, choose benchmark jobs within each pay grade, and price them via a compensation survey. These new market-based pay rates then replace the current rates on the wage curve. Then slot in your other jobs (and their pay rates) around the benchmark job. Current pay rates falling above the rate range are “red circle,” “flagged,” or “overrates” which will require either freezing the rate, transfer or promotion of employees, or reevaluation of the job. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Step 5: Fine-Tune Pay Rates Human Resources Management 12e Gary Dessler 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 Fine-tuning involves (1) developing pay ranges and (2) correcting out-of-line rates. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Human Resources Management 12e Gary Dessler FIGURE 11–6 Wage Structure Most employers do not pay just one rate for all jobs in a particular pay grade. Figure 11-6 depicts how most employers create a wage structure such that their pay ranges somewhat overlap, so an employee in one grade who has more experience or seniority may earn more than an entry-level position in the next higher pay grade. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Pricing Managerial and Professional Jobs Human Resources Management 12e Gary Dessler Pricing Managerial and Professional Jobs Base pay Executive benefits/perks Short-term incentives Long-term incentives Compensating Executives and Managers Compensation for a company’s top executives usually consists of four main elements: base pay, short-term incentives, long-term incentives, and executive benefits/perquisites or “perks.” Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Human Resources Management 12e Gary Dessler Competency-Based Pay Competencies Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance What is Competency-Based Pay? Paying for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds 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. Experts variously call this competency-, knowledge-, or skill-based pay. Competency-based pay ties the worker’s pay to his or her competencies—pay is more person oriented. Employees here are paid based on what they know or can do—even if, at the moment, they don’t have to do it. Traditional pay plans may backfire if a high-performance work system (HPWS) is the goal. HPWS employees must be enthusiastic about learning and moving among other jobs. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Why Use Competency-Based Pay? Human Resources Management 12e Gary Dessler Why Use Competency-Based Pay? High-Performance Work Systems Strategic Aims Competency-Based Pay Supports Performance Management Competency-based pay ties the worker’s pay to his or her competencies—pay is more person oriented. Employees here are paid based on what they know or can do—even if, at the moment, they don’t have to do it. Traditional pay plans may backfire if a high-performance work system (HPWS) is the goal. HPWS employees must be enthusiastic about learning and moving among other jobs. Paying for competencies encourages employees to develop the competencies the companies require to achieve their strategic aims. Paying for measurable and influence-able competencies provides a focus for the employer’s performance management process. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Competency-Based Pay in Practice Human Resources Management 12e Gary Dessler Competency-Based Pay in Practice Main elements of skill/competency/knowledge–based pay programs: A system that defines specific skills 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 In practice, any skill/competency/knowledge-based pay program generally contains these five main elements. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall