Prentice Hall, Inc. © A Human Resource Management Approach STRATEGIC COMPENSATION Prepared by David Oakes Chapter 4 Traditional Bases for Pay: Seniority and Merit

Prentice Hall, Inc. © Collective Bargaining  Designed to:  Negotiate labor contracts  Provide grievance procedures  Led to:  Job control unionism  Collective bargaining units  Union shops

Prentice Hall, Inc. © Seniority Pay  Designed to award job tenure  Set base pay with time- designated increases  Facilitates administration of pay  Avoids perception of favoritism  Poor fit with most competitive strategies

Prentice Hall, Inc. © Longevity Pay  Designed to  Pay grade maximum for length of service  To reduce employee turnover  Used for most government employees  General Schedule System for federal employees

Prentice Hall, Inc. © General Schedule  Divided into 15 Steps  Based on skills, education, & experience levels  Employees eligible for 10 within-grade pay increases  Step waiting periods of 1-3 years

Prentice Hall, Inc. © Merit Pay Plans  P ay increases based on performance  Reward excellent effort or results  Motivate future performance  Helps retain valued employees  In 2004, raises averaged 3.5 %

Prentice Hall, Inc. © Elements of Merit Pay  Based on objective & subjective indicators of job performance  Periodic performance reviews  Realistic & attainable standards  Pay increases reflect performance

Prentice Hall, Inc. © Performance Appraisal Plans  Trait systems  Comparison systems  Behavioral systems  Goal - oriented systems

Prentice Hall, Inc. © Trait System Characteristics  Work quality  Appearance  Dependability  Cooperation  Initiative  Judgment  Leadership responsibility  Decision-making ability  Creativity

Prentice Hall, Inc. © Comparison Systems  Rates & ranks performance  Pay raises based on ranking  Types  Forced distribution  Paired comparisons

Prentice Hall, Inc. © Behavioral Systems  Critical-incident technique (CIT)  Behaviorally-anchored rating scales (BARS)  Behavioral observation scales (BOS)

Prentice Hall, Inc. © Critical Incident Technique  Employees & supervisors identify & label job behaviors & results  Supervisors observe & record  Requires extensive documentation

Prentice Hall, Inc. © Behaviorally-Anchored Rating Scales  Based on expected job behaviors  Employees rated on ability to perform each behavior  Ratings highly defensible

Prentice Hall, Inc. © Behavioral Observation Scales  Documents positive performance behaviors on job dimensions  Employees rated on exhibited behaviors  Ratings averaged for over-all rating

Prentice Hall, Inc. © Goal - Oriented System Management- by-Objectives  Supervisors & employees set objectives  Highly effective technique  Rated on how well objectives are met  Mainly for professionals & managers

Prentice Hall, Inc. © Performance Appraisal Practices  Conduct a job analysis  Incorporate results into ratings  Trains supervisors on use  Implement Formal appeals process

Prentice Hall, Inc. © Sources of Performance Appraisal Information  Employee  Supervisor  Coworkers  Subordinates  Customers/clients

Prentice Hall, Inc. © Degree Performance Appraisal  Uses more than one appraisal source  Reduces recruiting & hiring costs  Appropriate for work team evaluations

Prentice Hall, Inc. © Common Raters’ Errors  Bias errors  Contrast errors  Errors of central tendency  Errors of leniency or strictness

Prentice Hall, Inc. © Bias Errors  First-impression effect  Positive halo effect  Negative halo effect  Similar-to-me effect  Illegal discriminatory biases

Prentice Hall, Inc. © Contrast Errors  Supervisor compares employees’ performances to other employees, not to explicit performance standards  What if the best employee is average?

Prentice Hall, Inc. © Errors of Central Tendency  Supervisors rate all employees as average  Usually occurs when only extreme behaviors require documentation

Prentice Hall, Inc. © Errors of Leniency  Leniency errors-managers rate employees’ performances more highly than they would rate them using objective criteria  Causes employees to believe they are going to receive larger pay raises than they deserve

Prentice Hall, Inc. © Pay For Performance Link  Link appraisals to business goals  Analyze jobs  Communicate  Establish effective appraisals  Empower employees  Differentiate among performers

Prentice Hall, Inc. © Limitations of Merit Pay Programs  Failure to differentiate  Poor measures  Supervisor biases  Poor communication  Undesirable social structures  Using non-merit factors  Undesirable competition  Motivational value small

Prentice Hall, Inc. © Competitive Strategies  Lowest-Cost  Reduce output costs per employee  Merit pay works if tied to long - term productivity  Differentiation  Make product or service unique  Merit pay can promote creativity and risk-taking