2. McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved. Base Wage and Salary Systems Chapter 13

3. Defining the Reward System Organizational reward system is concerned with selection of types of rewards to be offered by organization Organizational rewards includes all types of rewards, both intrinsic and extrinsic Intrinsic rewards – Internal to individual and are normally derived from involvement in certain activities or tasks Examples – Job satisfaction and feelings of accomplishment Extrinsic rewards – Directly controlled and distributed by organization and more tangible than intrinsic rewards Examples – Pay and medical benefits However, intrinsic and extrinsic rewards are closely related Often an extrinsic reward provides recipient with intrinsic rewards

4. Employee Compensation Compensation All extrinsic rewards that employees receive in exchange for their work Composed of base wage or salary, any incentives or bonuses, and any benefits Base wage or salary – Hourly, weekly, or monthly pay employees receive for their work Incentives – Rewards offered in addition to the base wage or salary and are usually directly related to performance Benefits – Rewards employees receive as a result of their employment and position with the organization (Examples: Paid vacations, health insurance, and retirement plans) Pay Refers only to actual dollars employees receive in exchange for work

5. Pay Equity Equity theory of motivation holds that Employees have a strong need to maintain a balance between what they perceive as their inputs to their jobs and what they receive from their jobs in the form of rewards as compared to other people Employees who perceive inequities will take action to eliminate or reduce them For example, if an employee believes he or she is underpaid, that employee will likely reduce effort by working more slowly, taking off early, or being absent Similarly, if an employee believes she or he is being overpaid, that employee is likely to work harder or for longer hours

6. Pay Equity Dimensions of equity to be considered when looking at pay equity External equity – Addresses what employees in other organizations are being paid for performing similar jobs Internal equity – Addresses what an employee is being paid for doing a job compared to what other employees in the same organization are being paid to do their jobs Individual equity – Addresses what an employee is being paid for his or her merits

7. Base Wage and Salaries Regular (or fixed) pay that employees receive for their work Make up largest portion of an employee’s total compensation Total compensation = base wage + incentive + benefits Often the focus of compensation system for employees Form the foundation for most employees’ perceptions of the fairness, or equity, of the pay system If employees do not perceive they are being fairly paid, many possible negative effects may result ▷ wage vs salary 13-7

8. Base Wage and Salary System Primary objective – To establish a structure for equitable compensation of employees, depending on their Jobs Level of skill or knowledge Seniority Level of performance in their jobs Typical base wage system Korea: “pay for seniority” + merit increase -> “annual pay for performance” U. S: “pay for job” 13-8

9. Pay for Seniority_ Sample wage table Job title S. grade ClerkDeputy Section Chief Deputy Head of Department Head of Department 11,500,000Won1,800,0002,300,0003,000,0004,000,000 21,520,0001,830,0002,340,0003,050,0004,060,000 31,540,0001,860,0002,380,0003,100,0004,120,000 41,560,0001,890,0002,420,0003,150,0004,180,000 51,580,0001,920,0002,460,0003,200,0004,240,000 61,600,0001,950,0002,500,0003,250,0004,300,000 71,620,0001,980,0002,540,0003,300,0004,360,000 81,640,0002,010,0002,580,0003,350,0004,420,000 91,660,0002,040,0002,620,0003,400,0004,480,000 101,680,0002,070,0002,660,0003,450,0004,540,000 111,700,0002,100,0002,700,000 121,720,0002,130,0002,740,000 131,740,000 141,760,000 151,780,000

10. Base Wage and Salary System: Pay for Job Establishing pay (“pay for job”) involves two basic phases: Determining relative worth of different jobs to the organization (ensuring internal equity) Job evaluation Pricing the different jobs (ensuring external equity) Wage survey 13-10

11. Job Evaluation Job evaluation – Systematic determination of value of each job in relation to other jobs in the organization Four basic methods: Job ranking method Job classification method Point method Factor comparison method 13-11

12. Job Ranking Method Job evaluation method that ranks jobs in order of their difficulty from simplest to most complex Simplest, oldest, and least often used job evaluation technique Often, evaluator prepares cards with basic information about jobs and then arranges the cards in order of importance of positions Produces only an ordering of jobs and does not indicate relative degree of difference among them For example, a job with a ranking of four is not necessarily twice as difficult as a job with a ranking of two 13-12

13. Job Classification Method (Job Grading) Job evaluation method that determines relative worth of a job by comparing it to a predetermined scale of classes or grades of jobs Certain classes or grades of jobs are defined on the basis of differences in Duties Responsibilities Skills Working conditions Other job-related factors Methods is simple, but not always precise, since it evaluates the job as a whole 5 to 15 classes will suffice U.S. government has used the job classification method to evaluate all civil service jobs 13-13

14. Point Method Job evaluation method in which a quantitative point scale is used to evaluate jobs on a factor-by-factor basis Historically has been most widely used method Advantage Relatively simple and systematic Reasonably objective Steps Selecting compensable factors & subfactors Assigning weights to factors Assigning points to specific jobs 13-14

15. Point Method – Selecting Compensable Factors Compensable factors Characteristics of jobs that organization considers important to the extent that it is willing to pay for them Degree to which a specific job possesses these compensable factors determines its relative worth Different jobs have different set of compensable factors Ex) for production jobs : skill, effort, working conditions for managerial and professional jobs: knowledge, responsibility, decision-making 13-15

16. Point Method – Selecting Compensable Factors Subfactors – Detailed breakdown of a single compensable factor of a job Used to describe compensable factors in more detail Degrees – Detailed levels of a subfactor describing needed requirements for a job 13-16

17. Possible Subfactors and Degrees for the Compensable Factors of Responsibility 13-17

18. Point Method – Assigning Weights to Factors Weights are assigned to each of the factors, subfactors, and degrees to reflect their relative importance Weight assigned varies from job to job Skill is the most important factor in a machinist’s job, while responsibility is the most important in a managerial job Weights are assigned on basis of maximum number of points for any job Maximum number (Ex: 1,000 points) is often decided arbitrarily Total points are then assigned to each factor, subfactor, and degree according to its relative importance 13-18

19. Sample Point Values 13-19

20. Point Method – Assigning Points to Specific Jobs After point scale has been agreed on, point values are derived using the following steps: Examine the job descriptions and job specifications Determine degree statement that best describes each subfactor for each compensable factor Add total number of points across subfactors Drawback Amount of time required to develop a point scale and degree statements 13-20

21. Possible Point Totals for Key Banking Jobs 13-21

22. Factor Comparison Method Job evaluation technique using monetary scale for evaluating jobs Procedures Key jobs are selected Rates of pay of key jobs are viewed as reasonable and fair to all those making evaluations( Compensable factors are then identified Does not break down compensable factors into subfactors and degrees Each compensable factor is ranked according to its importance in each key job Done by assigning a rank to every key job on one factor at a time After each key job has been ranked on a factor-by-factor basis, evaluators allocate total wage or salary for each job into monetary values for each compensable factors of that job 13-22

23. Factor Comparison Method Money allocation and factor rankings must ultimately be consistent If discrepancies occur that cannot be resolved, job in question should be eliminated from list of key jobs Monetary scale is prepared for each compensable factor Nonkey jobs are evaluated by locating appropriate position on the monetary scale for each compensable factor Total worth of a given job is determined by adding dollar amounts assigned to each compensable factor 13-23

24. Factor-by-Factor Ranking of Key Banking Jobs 13-24

25. Sample Allocation Pay for Key Banking Jobs 13-25

26. Monetary Scale for Responsibility Requirements in Banking Jobs 13-26

27. Pricing the Job Information should be gathered to ensure that external factors are recognized in wage scale They include Labor market conditions Living costs Prevailing wage rates The method to collect information on wage and salary of other firms is wage and salary surveys 13-27

28. Wage and Salary Curves Graphical depiction of relationship between relative worth of jobs and their wage rates Jobs in ascending order of difficulty along the x-axis and the wage rate along the y-axis Pay policy line Used to construct overall pay structure Three options Competitive: paying market average Market lead: paying above market average Market lag: paying below market average 13-28

29. Pay policy line

30. Pay Grades and Ranges Pay grades – Classes or grades of jobs that are grouped on the basis of their worth to an organization for pay purposes Use of point method for evaluating jobs – Classes are normally defined within a certain point spread Pay range – Permissible pay range, with a minimum and a maximum, that is assigned to a given pay grade Determined for each grade Two approaches for establishing pay grades and ranges exist To have a relatively large number of grades with identical rates of pay for all jobs within each grade To have a small number of grades with a relatively wide dollar range for each grade Most pay structures fall somewhere between these extremes 13-30

31. Pay Grades and Ranges Ranges within grades are set so that differentiation can be made among employees within grades Ideally, placement of employees within pay grades should be based on performance or merit In practice, distinction is often based solely on seniority On reaching the top of the range for a given grade An employee can increase his or her pay only by moving to a higher grade Not unusual for ranges of adjacent pay grades to overlap Possible for an outstanding performer in a lower grade to earn a higher salary than a below-average performer in a higher grade 13-31

32. Establishment of Pay Grades with Ranges

33. New Approaches to the Base Wage/Salary Structure Some people believe concept of a “job” is outmoded in certain workplaces Where employees frequently redirect their energies to new tasks, using different skills Many believe that narrowly defined job descriptions and pay scales tied to those do not do as well today New models gaining popularity include Broadbanding Skill-based pay Market-based pay 13-33

34. Broadbanding Collapsing job clusters or grades into a few wide bands to have more flexibility in setting pay rates and managing workforce Results in clustering jobs into wide categories or groups of jobs Bands usually have minimum and maximum dollar amounts that overlap and an average width of 130 percent of the minimum For example, Band 1 may cover technicians earning $33,000 to $74,000 and Band 2 may cover those earning $60,000 to $140,000 13-34

35. Broadbanding Advantages Managers have more autonomy in setting pay rates Easier to move employees around due to elimination of unnecessary distinctions among jobs Encourages lateral moves or downgrading Helps improve communication and teamwork by eliminating frequent barriers to communication, namely Level Title Status Works especially well in organizations that are fast moving and undergoing persistent change Provides less formal structure and allows organizations to react quicker 13-35

36. Skill-Based Pay (Knowledge-Based Pay) Compensate employees for skills they bring to the job Effort to develop more versatile employees that are often required in today’s organization where jobs can be rapidly changing Specifically, these pay systems pay employees for Range of knowledge, number of business-related skills mastered, level of those skills or knowledge Typically, companies hire employees at below-market rates As employees gain skills and knowledge, their levels of base pay increase Employees are expected to learn between 5 and 10 skills over a two- to five-year period Number of skill levels and time required vary from organization to organization Employees are eligible for pay increase when a new skill is learned and demonstrated they can progress another step 13-36

37. Skill-Based Pay (Knowledge-Based Pay) Popularity of skill-based pay continues to grow Most skill-based pay systems Focused on nonexempt employees working in manufacturing environments Primarily because it is relatively easy to identify and measure skill sets needed by direct-labor employees 13-37

38. Potential Benefits of a Skill-Based Pay System 13-38

39. Market-Based Pay Focuses on external rather than internal equity and operate without traditional pay grades and ranges It is believed that conducting complex and time- consuming job evaluations is unnecessary when market reality can fairly price jobs Meant to appeal to employees and to help attract and retain them Uses same types of wage/salary surveys Build employee commitment by creating an atmosphere in which employees feel Their pay is logical Is consistent with what market is paying for their skills To achieve the goals of perceived fairness Surveys used should be carefully selected to accurately represent jobs being priced Use of at least three or more survey sources recommended 13-39