1. Chapter 9 Wage and Salary Classification 1. Computing a Pay Formula.  Least Squares Method  Outliers  Red Circle and Green Circle Jobs 2. Developing Pay Classes. 3. Pay Progression Rules.

2. 1. Pay Formula The Pay Formula, also called the “Pay Policy Formula”, is a mathematical algorithm linking Job Evaluation ratings with Market Wage Rates for a sample of benchmark jobs. The formula is used to determine equitable wage rates for all jobs. Benchmark Jobs Pay Formula All Jobs

3. a. Least Squares Method The Least Squares Method, which is the conceptual underpinning of Correlation-Regression Analysis, uses the following logic: 1. When using any variable x to predict any variable y in a sample of data, there will always be a range of y-values for any given level of the x-value. 2. The question then becomes: In computing an algorithm (i.e., prediction formula), what value of Y should be predicted based on a given value of X ?

4. 3. If we chose the middle y-value within the range as our most likely occurring value based on a given level of x, we would minimize the total squared differences between the predicted y-values and the original y-values. That is, we will minimize our errors of estimating y-values based on x-values.

5. Job Evaluation Ratings Market Wage Rates Y X Predicted Y-values Trend Line Based on Least Squares Equation: Y= a + b [x] Benchmark Jobs

6. Computation Table JOBSxyxy x²y² 1450$30.1013545202500906.01 2410$26.4010824168100696.96 3360$22.308028129600497.29 4320$20.506560102400420.25 5300$19.60588090000384.16 6260$18.40478467600338.56 7240$17.70424857600313.29 8200$15.40308040000237.16 9180$14.50261032400210.25 10150$13.80207022500190.44 Σ 2870$198.7061,629912,7004194.37

7. Regression Equation (i.e., Pay Formula): Ŷ = a + b (X) b = [N (Σxy)] – [(Σx) × (Σ y)] ÷ [N (Σx²)] – (Σx) ² a = (Σy) – [b(Σx)]

8. Pay Formula based on data given b = [10 × (61629)] – [2870 × 198.70] ÷ [10 × (912700) – (2870) ²] b =.052 a = 198.70 – [.052 × 2870] ÷ 10 a = $4.95

9. Validity (i.e., accuracy) of the Pay Formula is equal to the correlation between x and y, or, R xy = [N × (Σxy)] – [(Σx) × (Σy)] ÷ √ [ [N × (Σx ²)] – (Σx) ² ] × [[ N × (Σy ²)] – (Σy) ² ]

10. which is, [10 × (61629)] – [2870 × 198.70] ÷ √[(10 × 912700) – (2870) ² ] × [(10 × 4194.37) – (198.70) ²] Rxy =.98

11. Abbreviated Method b = [ Y 1 (High Wage Job) – Y 2 (Low Wage Job)] ÷ [X 1 (High Job Points) – Y 2 (Low Job Points)] a = Lowest Wage – b (X)

12. Abbreviated Method b = [($30.10) – ($13.80)] ÷ [(450) – (150)] b =.054 a = $13.80 –.054 (150) a = $5.70

13. b. Outliers Outliers are benchmark jobs that have wage rates greater than 15%-20% above or below the pay Trend Line. Outliers Outlier

14. Possible Reasons for Outliers Above the trend line: 1. Inaccurate match in wage survey. 2. Job underrated in the job evaluation. 3. Market wage inflated due to seniority. 4. Labor shortage pushing wage up.

15. Possible Reasons for Outliers Below the trend line: 1. Inaccurate match in wage survey. 2. Job overrated in the job evaluation. 3. Market wage deflated due to turnover. 4. Possible wage discrimination.

16. Dealing with Outliers  If adjustments can be made to outlier wage rates, the jobs can be retained as benchmarks, but the Pay Formula must be re-computed after the adjustments.  If adjustments cannot be logically made, the jobs should be deleted as benchmarks and the Pay Formula re-computed. Note: Outliers may qualify as “Red Circle” or “Green Circle” jobs – that is, jobs in which the incumbents are either overpaid or underpaid in relation to their duties.

17. c. Red Circle and Green Circle Jobs  Red Circle jobs are those whose incumbents (i.e., employees) are currently paid higher than is justified by the Pay Classification guidelines. Typically, these jobs have been affected by technology change that has reduced the responsibility and skill requirements.  Green Circle jobs are those whose incumbents are currently paid lower than the Pay Classification guidelines suggest. Typically, these jobs have been affected by technology in a manner that has increased the responsibility and skill requirements.

18. Dealing with Red and Green Circle Jobs Red Circle Jobs Attrition - Overpaid employees retain their current salary until they leave through normal attrition. Establish a “two-tier” wage structure in which new employees are paid according to the revised pay classification guidelines. (Usually labor agreements). Freeze red circle wages until new rates “catch-up” in the revised pay classification rules. Allow a “grace” period of 1 to 2 years, after which red circle rates will be set at the new appropriate levels.

19. Dealing with Red and Green Circle Jobs Green Circle Jobs  Immediately increase the wage rate for employees in these jobs based on their tenure and merit.  Increase the wage rate for employees in these jobs over a short time span, unless a substantial portion of the jobs are female dominated – which may indicate pay discrimination.

20. 2. Designing Pay Classes A. Rationale for Pay Classes/Grades 1. Difficulty in defending small differences in pay rates among jobs with similar responsibility and skill requirements. 2. Ensure employee perceptions of equity and procedural justice. 3. Simplify payroll administration. 4. Provide flexibility when assigning employees to different jobs.

21. B. Design Parameters of Pay Classes 1. Mid-point Range – Percentage difference between the pay rates of adjacent pay grades. 2. Grade Range (or, Spread) – Percentage difference between the minimum and maximum wage rates in a pay grade. 3. Grade Overlap – Percentage of pay in a lower grade which overlaps with a higher grade.

22. Parameters Illustrated Mid-point Range Min Max Grade Range 1 2 3 4 5 6 Pay Grades Stop Start Overlap Trend Line Y2Y2 Y3Y3 $ Job Points %

23. C. Recommended Parameters Job CategoriesMid-point RangeGrade Range Unskilled to Semiskilled 7%-10%25%-40% Skilled10%-16%30%-45% Lower Exempt15%-20%40%-50% Mid-Mgt/ Professional 20%-30%50%-70% Executive25%-35%80%-150%

24. D. Constructing Pay Classes 1.Equal point ranges for different grades will result in a declining mid-point range between adjacent grades when applying the Pay Formula. 2. Differential point ranges (i.e. geometric increases) for different grades will result in a constant mid-point range between adjacent grades when using the Pay Formula to determine the grade point ranges. 3. Mixed point ranges may also be used – as seen in the federal government GS pay system.

25. Example: Geometric Point Pay Classes Step 1: Decide on the mid-point ranges and grade ranges for different skill categories. Step 2: As a starting point, use the Pay Formula to compute the middle pay rate for the job with the lowest evaluation points. Step 3: To establish a point range for the starting grade that coincides with a “constant” percentage difference in wage rates between grades, find the point value that is at the border between adjacent grades.

26. Example: Using data from the preceding Least Squares computational table, the lowest rated job has 150 points. The middle wage value for a grade with 150 points as the middle points would be: Ŷ = $4.95 +.052 (150) = $12.75. Assume that this job fits the “Unskilled to Semi-skilled” category. An appropriate mid-point range might be 9%. The starting points for this grade would be at the border between $12.75 and a hypothetical grade 9% below, or $11.70 ($12.75 – 9%). Next, find the points for a wage rate that is half-way between $12.75 and $11.70, which is $12.23. The points for a rate of $12.23 are found through the pay formula: $12.23 = $4.95 +.052 (X). Solving for (X) gives X = ($12.23 - $4.95) ÷.052 = 140 points.

27. Proposed Pay Classes GradesPoint RangeMid-point Range (%) Mid-Wage 1(102) 100 – 1199%$10.73 2120 - 1399%$11.70 3 (Start)140 - 1619%$12.75 4162 - 1849%$13.90 5185 - 2099%$15.15 6210 - 2369%$16.51 7237 - 29214%$18.82 8293 -14%$21.45

28. (cont) Assume that the lowest possible points in the Job Evaluation plan are 100. The Pay Classification table indicates that grades have been constructed down to 100 points – i.e., see Grade 1.  To find the ending points for a grade, use the Pay Formula to compute points (X) for a pay rate that is half-way between the current grade and the next higher grade.  Grades are constructed to cover all the jobs in a particular skill category (e.g., “Unskilled to Semi- skilled”). After the last grade is built for this category, select a new mid-point range (%) and begin building grades for the next higher skill category of jobs.

29. E. Broadbands See Figure 9-6, p. 296 textbook. Broadbands are large pay classes that encompass multiple pay grades found in traditional pay systems. A broadband will have a much larger pay range than a traditional pay grade.

30. Comparing traditional and broadband pay ranges: $8.00 $9.00 $10.00 $11.25 $11.00 $13.75 25% Traditional Broadband 72% Pay Range

31. Rationale (pros) for broadbanding 1. Allows more flexibility and faster response in rewarding employees as they: Take on more responsibility. Show ability to perform a wider range of duties and tasks. Demonstrate greater skill and competence. 2. Decentralizes pay decision making, giving more responsibility for wage determination with supervisors. 3. Encourages broader job responsibilities (i.e. job descriptions) and development of cross-functional skills. 4. Applicable to team and project organizational structures. 5. Applicable to changing technological environments.

32. Limitations (cons) of broadbanding 1. Decentralization of pay decisions without sufficient guidelines may lead to favoritism and other inequities. 2. Employees may experience “role ambiguity” in an environment with very broad job responsibilities. 3. Employees may lose the sense of accomplishment associated with traditional promotions and pay grade movement. 4. Broadbanding will most likely increase total compensation due to larger pay ranges. 5. Potential for pay discrimination complaints.

33. Survey of Usage G. E. has been highlighted in the media as a noteworthy company that implemented broadbanding – going from 24 traditional pay grades to 5 bands. I.B.M. is another company spotlighted for broadbanding – going from 24 grades to 10 bands and from 5,000 to 1,200 job titles. A 2000 BNA (Bureau of National Affairs) survey of 783 large employers found 15% had adopted some form of broadbanding – See BNA Bulletin to Management, January 13, 2000, p.11. Broadbanding appears to be more prevalent in globally competitive companies, high technology companies, and for managerial-professional jobs, especially IT.

34. 3. Pay Progression Rules 1. Traditional annual percentage adjustment. 2. Merit Grid Chart 3. Structured Step System

35. 1. Traditional Percentage Raise Advantages Provides more flexibility to supervisors in rewarding employees. Disadvantages Susceptible to bias and other inequities. Causes pay inflation. Size of raise is related to current salary.

36. Preventing Seniority Effects in Annual Raises Employee Ratings and Current Pay Justin (4.4) - $30,000 Lisa (3.8) - $34,000 Joseph (4.5) - $50,000 Vivian (4.3) - $30,000 Travis (4.8) - $40,000 Sum Performance Ratings 4.4 + 3.8 + 4.5 + 4.3 + 4.8 SUM = 21.8 Divide Employee Ratings by Sum Justin 4.4/21.8 = 20% Lisa 3.8/21.8 = 17% Joseph 4.5/21.8 = 21% Vivian 4.3/21.8 = 20% Travis 4.8/21.8 = 22% Multiply Total Merit Budget by Each Employee’s % Justin = 20% * $10,000 = $2,000 or 6.7% Raise versus Joseph = 21% * $10,000 = $2,100 or 4.2% Raise

37. 2. Merit Grid (See textbook Figure 9-2, p.282.) Advantages Helps control inequities in raises. Controls pay inflation. Controls for seniority effects. Disadvantages Limits supervisor flexibility in awarding raises.

38. 3. Structured Step System Typical system rules in a 15-step plan: 1. Steps 1-5: Adequate performance plus 1-year in step. 2. Steps 6-10: Good performance plus 2-years in step. 3. Steps 11-15: Excellent performance plus 3-years in step.

39. Advantages Helps control inequities in raises. Controls pay inflation. Controls for seniority effects. Disadvantages Less supervisor flexibility in awarding pay raises.