Managing Employee Performance and Reward Concepts, Practices, Strategies 2nd edition

Job-based base pay What is ‘base pay’? Options for base pay: pay the position or pay the person? Job-based pay structures Market pricing (for ‘external competitiveness’) Job evaluation (for ‘internal equity’) Job-based pay – pros and cons

What is ‘base pay’? Base pay is: The foundational and generally largest component of total remuneration The ‘fixed’ or ‘guaranteed’ portion of pay Time-based wage or salary Advantages: Compliance with minimum pay requirements Attraction and retention; membership behaviour Demonstrates employer commitment to meeting basic human needs Relational psychological contract elicits organisational citizenship behaviour (OCB) ‘Efficiency wage’ Can be integrated with performance pay

What is ‘base pay’? Drawbacks: Commits employer to fixed payments irrespective of performance contributed Unlikely to motivate task behaviour Unlikely to discourage underperformers from remaining with the organisation Roles without base pay: Commission-only sales roles Pure payment by results

Options for base pay Competency zones/levels Competency assessment Broad bands Competency-based/related pay Seniority and/or ‘merit’ based increments and promotion Market surveys and/or job evaluation Job-based/position-based pay Modes of pay progression Evaluation techniques Structures Options: Position-based systems: Person-based systems: Skill sets Skill assessment Broad grades/job families Skill-based pay 1. Pay spine/ladders 2. Narrow grades

Position-based base pay Position or person? Rewards performance capacities rather than results Reinforces KSA development Pay progression based on KSA development Evaluation methods: skill and/or competency assessment Indirect external market pricing (disaggregated job pay rates) Time-based payment according to KSA levels Different rates of pay depending on assessed capacity (KSAs) Pay for each individual’s capacity to perform (i.e. KSAs) Pay for individual worth Individuals add value Person-based base pay Rewards job ownership not (primarily) performance in the job Reinforces promotional hierarchy Pay progression and promotion based on seniority or merit Evaluation method: job evaluation Direct external market pricing Time-based payment according to time on the job Standard rate for the job, irrespective of KSA differences between job holders Pay for the ‘size’ of the job occupied Pay for job worth Jobs add value Position-based base pay

Pay scale (or spine) ladder B C D E Level (promotion) 1 ↑ 2 ↑ 3 ↑ 4 ↑ 5 Step (increment for seniority, service and/or ‘merit’) Pay scale (or spine) ladder

Narrow graded structures ‘Job size’

Narrow graded structures Range maximum Payment for performance/experience above the mid- point standard Midpoint (= Market-related pay level for proficient job performance) Developing job competence and performance proficiency Range minimum 20–30% pay range or ‘spread’

Market pricing/‘salary surveys’ Focus is on external competitiveness. Six steps: Deciding which jobs to survey Determining which organisations to survey: Labour markets Industry Size Locality Determining what information to collect on each job: Base wage or salary Superannuation Benefits Performance pay Total remuneration Determining the method of data collection: Interviews Questionnaires Telephone interviews

Market pricing/‘salary surveys’ Summarising and analysing the data obtained: Deciding a policy on pay level relative to external market rates: Pay at range midpoint/median Pay over range median Pay under range median Market pricing/‘salary surveys’ 4th quartile Top 25% of range 3rd quartile Third 25% of range 2nd quartile Second 25% of range 1st quartile Bottom 25% of range 75th percentile  50th percentile (= range median) 25th percentile

Example of market data presentation format: sample aggregates

Market pricing Advantages: Neither costly nor administratively complex (compared to job evaluation) Automatic means of keeping job rates in line with market conditions Supports focus on competitive external recruitment

Market pricing Disadvantages: Surveys are necessarily selective and susceptible to sampling error Pay surveys do not capture the full range of rewards offered by organisations and may give a false reading of competitor strategies Jobs are rarely perfectly matched between organisations, so still need some form of job evaluation to establish comparability Market pricing involves a ‘surrender’ of control to external forces Market rates are rarely a pure reflection of job worth. They usually reflect both job value and job-holder characteristics and contribution

Market pricing Disadvantages: External markets do not always value jobs fairly. ‘Going rates’ are usually ‘contaminated’ by historical value judgements about the worth of the ‘person’ holding the job Market pricing does not address the issue of internal fairness. It rules out the possibility of building a base pay system which prices jobs according to their specific value to the organisation There are no market rates for new or changed jobs There is no such thing as a single market rate; surveys only capture the range of rates for the same job; still have to choose a price point in the range (= strategic choice)

What is job evaluation? Job evaluation involves determining pay rates by measuring the content or ‘size’ of each job within the organisation with a view to rewarding each job according to its ‘value’ or importance to the organisation. Job evaluation focuses on: 1. Measuring job content/size/value: Inputs: skill, knowledge, education, training, experience Throughputs: mental effort, physical effort, decision-making, accountability, communication, planning, innovation, supervision Outputs: accuracy, consequences of error, responsibility for cash, assets, people Conditions: work environment, hazards, stress 2. Maintaining ‘internal equity’, i.e. equal pay for jobs of equal size/value

What is job evaluation? Four main steps: Undertake a job analysis Produce job descriptions Choose and apply evaluation method Create a base pay structure base on job evaluation scores

Job evaluation methods Non-analytical: Ranking Job classification/grading Single-factor (e.g. Elliot Jacques’ ‘time span of discretion’) Analytical/multifactor: Points-factor method Hay Group guide chart profile method: 1. ‘Know-how’ 2. ‘Problem-solving’ 3. ‘Accountability’ 4. ‘Working context’

Points-factor job evaluation Main steps: Factors: identifying ‘compensable’ factors and sub-factors Degrees: developing ‘degrees’ or levels (i.e. rating scales) for these factors Points: assigning numerical values to each factor level. Progression – arithmetic or geometric? Weights: assigning weights to the factors (i.e. ‘capturing’ policy priorities)

Points-factor job evaluation 1000 800 600 400 200 25 20 15 10 5 Interpersonal relations 100 Hazards/risks 50 40 30 Work environment WORKING CONDITIONS: 16 12 8 4 Security Record keeping 60 48 36 24 Decision-making Care of materials and equipment 80 64 32 Supervision of others RESPONSIBILITY: 18 6 Hours 300 Mental demands 70 56 42 28 14 Physical demands Complexity WORK CONTENT: Initiative Education Qualifications 160 120 Work experience SKILL: E D C B A Factor weights (total points) Degrees Factors Difficulty of work Points-factor job evaluation

Developing job grades using points-factor scores 1. Plotting point scores and existing pay practice line

2. Developing a new pay policy line

3. Establishing grade boundaries and pay ranges

Points-factor job evaluation: strengths Provides clearly defined absolute and relative measures of job size (i.e. common standards); hence has high reliability Has the appearance of objectivity, rationality and consistency and helps to create pay relationships between jobs which employees perceive as being fair Useful in valuing new and changed jobs (for which no direct market rates are available) Can help to identify and eliminate inequities in the existing pay structure Lends itself to employee involvement in system design and the evaluation process itself

Points-factor job evaluation: weaknesses May be too inflexible to cope with rapid changes in technology and job content Reinforces bureaucracy and hierarchy and is incompatible with the trend to ‘flat’ organisational structures Emphasises job size over job-holder contribution Does not take account of external market situation (e.g. scarcity) One set of factors may not fit all jobs Ritualised impression management: ‘pay equity’ a social construct (Townley; Quaid) Bias and politics may still intrude – in factor selection, in enumerating the degrees of factor presence, in establishing weightings between factors, and in interpretation of job descriptions in relation to factors and factor levels

Job-based pay: for and against Advantages: Allows direct comparison with pay rates in external labour market Offers considerable certainty as to future labour costs because actual costs per job are known in advance A formula for fair pay based on the equality norm, i.e. ‘equal pay for equal work’ Minimises interpersonal conflict over minor differences in personal contribution which can be a major source of employee dissatisfaction Is supported by unions because it allows for the maintenance of common pay standards both within and between organisations; hence supports industrial harmony

Job-based pay: for and against Disadvantages: No direct incentive to improve individual contribution or performance Downplays skill development. Employees pursue promotion rather than personal skill enhancement Reinforces organisational hierarchy Incompatible with task interdependence and teamwork Is too inflexible to accommodate rapid changes in technology, work processes and product/service market requirements