1. 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.
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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.
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3. 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.
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Learning Objective 1
Explain the concept and practice of person-focused pay.
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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.
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6. 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.
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7. 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.
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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.
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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.
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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).
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Learning Objective 2
Describe the type of setting in which person-focused pay is most likely to be used.
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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.
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13. 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.
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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.
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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.
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Learning Objective 4
Summarize the varieties of person-focused pay programs.
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17. 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.
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18. 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.
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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.
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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.
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21. 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.
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22. 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.
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Learning Objective 5
Contrast person-focused pay with job-based pay.
The fifth learning objective
Contrast person-focused pay with job-based pay.
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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.
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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.
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26. 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.
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Learning Objective 6
Provide an explanation of the advantages and disadvantages of person-focused pay plan.
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28. 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.
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29. 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.
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30. 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.
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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.
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