1. Chapter 3: Traditional Bases for Pay
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Learning Objectives
3-1. Describe seniority and longevity pay practices Explain the merit pay approach to compensation Explore a variety of performance appraisal methods Discuss how compensation professionals can strengthen the pay-for-performance link Summarize the possible limitations of merit pay programs.
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LO 3-1
Seniority Pay
Seniority and longevity pay systems reward employees
with permanent additions to base pay
according to employees’ length of service in performing their jobs
According to human capital theory, employees become more valuable over time
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LO 3-1
Historical Overview
As an outcome of labor and management negotiations, codified in collective bargaining agreements
Labor unions sought to ensure consistent treatment of employees, including
pay rates
pay increase amounts
frequency of pay increase awards
Political pressures in the public sector
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5. Example: Hourly Wages Rates by Seniority Level
LO 3-1
Example: Hourly Wages Rates by Seniority Level
Hourly wages
Classification title
Start
13 months
25 months
37 months 49
months
Staff Nurse I
$19.07
$20.19
$21.31
$22.40
$23.49
Nursing Assistant
$9.94
$10.17
$10.53
$10.83
$11.01
Medical Assistant
$14.65
$15.40
$16.13
$16.92
$17.83
Medical Technologist
$17.66
$18.90
$20.13
$21.38
$22.60
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6. Longevity Pay Characteristics
Same principles as seniority pay
Longevity pay designed to:
Addresses pay of employees who reach maximum pay grade rates based on seniority
Rewards employees with periodic pay increases that do not become part of base pay
Used for most government employees
General Schedule system for federal employees
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LO 3-1
General Schedule (GS)
Divided into 15 classifications
Classifications based on skills, education, and experience levels
Employees eligible for 10 within-grade pay increases (WGI)
Waiting period within steps varies between 1 and 3 years, taking 18 years to progress from step 1 to step 10
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LO 3-1
General Schedule (GS)
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9. Advantages and Disadvantages of Seniority Pay
LO 3-1
Advantages and Disadvantages of Seniority Pay
Designed to award job tenure
Set base pay with time-designated increases
Employees perceive that they are treated fairly
Facilitates administration of pay
Avoids perception of favoritism
Poor fit with most competitive strategies
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LO 3-2
Merit Pay Plans
Award permanent pay increases for performance
Reward excellent effort or results
Motivate future performance
Help retain valued employees
In 2014, average merit increase was 3.0%
Highest performers earned 4.1%
Health care and social support averaged 2.5% and 3.8% for mining
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11. Participants in Merit Pay Plans
LO 3-2
Participants in Merit Pay Plans
In 2014, approximately 72% of companies used merit pay plans
In 2010 and 2011, 65% and 71%, respectively
Most often adopted in the private for-profit sector
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12. Elements of Effective Merit Pay Programs
LO 3-2
Elements of Effective Merit Pay Programs
Based on objective and subjective indicators of job performance
Periodic performance reviews
Realistic and attainable standards
Pay increases reflect performance
Just-meaningful pay increases: amounts that employees will see as making a meaningful change in compensation for their performance
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13. Performance Appraisal Plans
LO 3-3
Performance Appraisal Plans
Trait systems: Ask raters to evaluate each employee’s traits or characteristics
Comparison systems: Evaluate a given employee’s performance against the performance of other employees
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14. Performance Appraisal Plans (cont’d)
LO 3-3
Performance Appraisal Plans (cont’d)
Behavioral systems: Rate employees on the extent to which they display successful job performance behaviors
Goal-oriented systems: Used mainly for managerial and professional employees and typically evaluate employees’ progress toward strategic planning objectives
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LO 3-3
Sample Traits
Judgment
Leadership
Dependability
Cooperation
Initiative
Creativity
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LO 3-3
Trait Rating Form
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LO 3-3
Comparison Systems
Rates and ranks performance
Pay raises based on ranking
Types
Forced distribution
Paired comparisons
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18. Forced Distribution Performance Appraisal Rating Example
LO 3-3
Forced Distribution Performance Appraisal Rating Example
Instructions: You are required to rate the performance for the previous 3 months of the 15 workers employed as animal keepers to conform with the following performance distribution:
• 15 percent of the animal keepers will be rated as having exhibited poor performance.
• 20 percent of the animal keepers will be rated as having exhibited below-average
performance.
• 35 percent of the animal keepers will be rated as having exhibited average performance.
• 20 percent of the animal keepers will be rated as having exhibited above-average
• 10 percent of the animal keepers will be rated as having exhibited superior performance.
Use the following guidelines for rating performance. On the basis of the five duties listed in the job description for animal keeper, the employee’s performance is characterized as:
• Poor if the incumbent performs only one of the duties well.
• Below average if the incumbent performs only two of the duties well.
• Average if the incumbent performs only three of the duties well.
• Above average if the incumbent performs only four of the duties well.
• Superior if the incumbent performs all five of the duties well.
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19. Paired Comparison Performance Appraisal Rating Form Example
LO 3-3
Paired Comparison Performance Appraisal Rating Form Example
Instructions: Please indicate by placing an X by which employee of each pair has performed most effectively during the past year.
__X__
Bob Brown
Mary Green
Jim Smith
Allen Jones
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LO 3-3
Behavioral Systems
Critical-incident technique (CIT)
Behaviorally anchored rating scales (BARS)
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21. Critical Incident Technique (CIT)
LO 3-3
Critical Incident Technique (CIT)
Employees and supervisors identify and label job behaviors and results
Supervisors observe and record
Requires extensive documentation
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22. Critical Incidents Performance Appraisal Rating Form Example
LO 3-3
Critical Incidents Performance Appraisal Rating Form Example
Instructions: For each description of work behavior below, circle the
number that best describes how frequently the employee engages in
that behavior.
The incumbent removes manure and unconsumed food from the animal enclosures.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often
The incumbent haphazardly measures the feed items when placing them in the animal enclosures.
The incumbent leaves refuse dropped by visitors on and around the public walkways.
The incumbent skillfully identifies instances of abnormal behavior among the animals, which represent signs of illness.
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23. Behaviorally Anchored Rating Scales (BARS)
LO 3-3
Behaviorally Anchored Rating Scales (BARS)
Based on 8–10 expected job behaviors
Employees rated on ability to perform each behavior
Ratings highly defensible
Encourages all raters to make evaluations in similar ways
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24. Behaviorally Anchored Rating Scale Example
LO 3-3
Behaviorally Anchored Rating Scale Example
Instructions: On the scale below, from 7 to 1, circle the number that best describes how frequently the employee engages in that behavior.
7 The incumbent could be expected to clean the animal enclosures thoroughly and remove refuse from the public walkways as often as needed. | 6
5 The incumbent could be expected to clean the animal enclosures thoroughly and remove refuse from the public walkways twice daily. 4
3 The incumbent could be expected to clean the animal enclosures and remove refuse from the public walkways in a haphazard fashion twice daily. 2
1 The incumbent could be expected rarely to clean the animal enclosures or remove refuse from the public walkways.
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LO 3-3
Goal-Oriented System
Management-by-objectives
Supervisors and employees set objectives
Highly effective technique
Rated on how well objectives are met
Mainly for professionals and managers
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26. Performance Appraisal Practices
LO 3-3
Performance Appraisal Practices
Conduct a job analysis
Incorporate results into ratings
Trains supervisors on use
Implement formal appeals process
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27. Sources of Performance Appraisal Information
LO 3-3
Sources of Performance Appraisal Information
Employee
Supervisor
Coworkers
Subordinates
Customers/clients
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28. 360 Degree Performance Appraisal
LO 3-3
360 Degree Performance Appraisal
Uses more than one appraisal source
Reduces recruiting and hiring costs
Appropriate for work team evaluations
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29. Major Types of Rater Errors
LO 3-3
Major Types of Rater Errors
Bias errors
Contrast errors
Errors of central tendency
Errors of leniency or strictness
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LO 3-3
Bias Errors
First-impression effect
Positive halo effect
Negative halo effect
Similar-to-me effect
Illegal discriminatory biases
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LO 3-3
Contrast Errors
Supervisor compares employees’ performance to other employees not to explicit performance standards
What if the best employee is average
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32. Errors of Central Tendency
LO 3-3
Errors of Central Tendency
Supervisors rate all employees as average
Usually occurs when only extreme behaviors require documentation
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33. Errors of Leniency or Strictness
LO 3-3
Errors of Leniency or Strictness
Leniency errors  managers rate employees’ performances more highly than they would rate them compared against objective criteria
Causes employees to believe they are going to receive larger pay raises than they deserve
Strictness error supervisors rate employees’ performance lower than they would rate them if compared against objective criteria
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34. Pay for Performance Link
LO 3-4
Pay for Performance Link
Link appraisals to business goals
Analyze jobs
Establish effective appraisals
Empower employees
Differentiate among performers
Communicate expectations (next slide)
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35. Communicate Expectations
LO 3-4
Communicate Expectations
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36. Limitations of Merit Pay Programs
LO 3-5
Limitations of Merit Pay Programs
Failure to differentiate among performers
Poor measures
Supervisor biases
Poor communication
Using non merit factors
Undesirable competition
Little motivational value
Undesirable social structures (next slide)
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37. Undesirable Social Structure
LO 3-5
Undesirable Social Structure
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