1. Compensation: Determining the worth jobs
October 8
Compensation: Determining the worth jobs
Company philosophy determines the spread of the salary disprson
Most difficult topic in HR
© 2001 by Prentice Hall & Prof Anne Tsui
10-1

2. Learning objectives
Be familiar with the nine criteria for designing a compensation system
Know the procedure for establishing the pay of jobs within a company
Understand the concepts of equity and how it affects decisions on establishing pay for different jobs.
Distinguish between job-based and individual-based pay
Variiiiious ocmponent
Varied among individual firms in terms of their pay policy and compensation
What are the consideration of the pay plan/policy

3. The Elements of Total Compensation
Indirect
Compensation/
Benefits
(Chapter 12)
Base
Compensation
(Chapter 10)
This graphic shows that an employee’s total compensation has three components.
The relative proportion of each varies extensively by firm.
Generally, the largest element of total compensation is base compensation,
the fixed pay an employee receives on a regular basis.
Fixed vs variable(pay at risk) component of pay
Another component of total compensation is pay incentives(a system to relate to the level of variable pay ),
which are programs designed to reward employees for good performance.
Benefits is the final component, and encompasses a wide variety of programs; including health insurance, vacations, and unemployment compensation. Still
The fourth piece: non-financial part of compensation which employee appreciate
Empoyeers values
Pay
Incentives
(Chapter 11)

4. Job-based versus Individual-based Pay
Determining the pay (or worth) of jobs
How much is the job worth, relative to other jobs within the company and in other companies, based on the content of the job?
Determining the pay (worth) of individuals
How much is the job worth, based on the knowledge and skills required to do the job?
How much is the person in the job worth, based on knowledge, skills, education, and experience?
How much is the person worth, based on his or her performance and contribution to the company?
How this is determine
1) Of job vs 2) of individuals
1- TDR ie pay according to the content of job responsibility of the job
2) KSA, pay based on the ability, skill of individual which not necessary mean the person can. Will do a betterjobeg such experience
Performance based pay as well which looks at the real performance, the better it is the higher it pays.

5. The Nine Criteria for Developing a Compensation Plan
1. Internal versus External Equity Will the compensation plan be perceived as fair within the company, or will it be perceived as fair relative to what other employers are paying for the same type of labor?
2. Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis —through base salaries —or will it fluctuate depending on such preestablished criteria as performance and company profits?
3. Performance versus Membership Will compensation emphasize performance and tie pay to individual or group contributions, or will it emphasize membership in the organization —logging in a prescribed number of hours each week and progressing up the organizational ladder?
Compensation affects a person economically, sociologically, and psychologically.
For this reason, mishandling compensation issues is likely to have a strong negative impact on employees and, ultimately, on the firm’s performance.
Developing a compensation plan must been done carefully, and with attention paid to the issues highlighted in the next three illustrations.
1) Job pay is based on comparable worth with other jobs ie point systems..
2 % of fixed and variable pay.. Think about the % of variable pay among CEO,
Affect the control the outcome to the effect of the company performance will be in proportion to the varilable that person
3 variable
Value individual as an asset of the to stay on with the company for
5 philosophy elitist (large) vis Egalitarian (small) spread of pay system…
Compensation is critical and a complex issues to look at.
And combines with the overall benefits… not just looking at those dollar value
8 open policy is employee has been informed about the pay decision
Some level of openness
- a lot of guessing
Guess other has high s
External equity local labor mkt and decentralization
Internal equity

6. The Nine Criteria for Developing a Compensation Plan (cont.)
4. Job versus Individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job?
5. Egalitarianism versus Elitism Will the compensation plan place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)?
6. Below-Market versus Above-Market Compensation Will employees be compensated at below-market levels, at market levels, or at above-market levels?

7. The Nine Criteria for Developing a Compensation Plan (cont.)
7. Monetary versus Nonmonetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security?
8. Open versus Secret Pay Will employees have access to information about other workers’ compensation levels and how compensation decisions are made (open pay) or will this knowledge be withheld from employees (secret pay)?
9. Centralization versus Decentralization of Pay Decisions Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firm’s units?

8. 1. Internal versus External Equity
What is the bases for the comparison for equity or fairness?
Other jobs within the company
Similar jobs in other companies
Which form of equity do or should companies emphasize?
Internal equity for older, larger, stable firms
External equity for newer, smaller firms
Business objectives and philosophy

9. 2. Fixed versus Variable Pay
What is the range of % of base pay at risk?
Range is 0% to 70% across companies
Range is 7% to 88% across jobs
Variable % increases with job level
When and why is variable pay useful?
Dynamic companies use more variable
Variability gives company flexibility to manage payroll but puts employee’s pay at risk
Variable pay is more motivating than fixed pay

10. 3. Performance versus Membership
When is performance-based pay appropriate?
When pay can be tied to contribution of employee,e.g., sales commission
When business strategy suggests measurable performance, e.g., innovation, e.g. new products
When is membership-based pay appropriate?
When performance cannot be easily measured
When performance variability is minimum
When longevity or attendance is valued, e.g., civil servants

11. 4. Job versus Individual Pay
When is job-based pay appropriate?
It is used in most companies.
When job specification can be easily determined
Stable organizations tend to favor job-based pay.
When is individual-based pay appropriate?
The skills of knowledge of the individual are important for performing the jobs.
When the firm is in high technology and with rapid changes in skill requirements.

12. 5. Elitist versus Egalitarian Pay System
What are the problems with elitist pay system?
Elitist pay plans produce large dispersion between levels, e.g., baseball players or only executives have stock options
Lower level may perceive unfairness when large dispersion does not seem justified
What are the advantages or disadvantages of egalitarian plans?
They produce small pay dispersion across employees, e.g., Ben & Jerry ice-cream 5 times between top and bottom
More flexible because employees can be moved across jobs without changing pay

13. 6. Below versus Above Market
When do companies pay above or below market?
Most large companies in competitive industries pay above market
Most small, new companies in low tech areas pay below market
What decisions affect choice of pay policy?
The company’s ability to pay
The company excellent benefits and growth opportunities to complement a low base pay
The company’s philosophy about HR

14. 7. Monetary versus Non-monetary
What are non-monetary pay?
It refers to intangibles such as interesting work, challenging assignments, public recognition, or job security
They are not part of the pay but part of the total compensation.
When is non-monetary pay used?
When company wants to reinforce commitment
When employees are willing to trade monetary for good non-monetary rewards
When intrinsic motivation is desired

15. 8. Open versus Secret Pay What are the advantages of open pay?
Employees won’t over guess other’s pay
Force managers to be fair in pay decision
What are the disadvantages of open pay?
Lead to egalitarian pay
It is not possible to satisfy all employees
Requires a very fair performance evaluation system

16. 9. Centralized versus Decentralized Decision about Pay
When is centralization appropriate?
When efficiency is desirable and all jobs in a company can be measured and compared.
When cost control is necessary
When internal equity is important
When is decentralization desirable?
When organization is too large
When job market changes frequently
When external equity is important for attraction and retention

17. Percent of Salary in the Form of Bonus and Long-term Income for Various Pay Salary Brackets
Percent of Base Salary
Firms can choose to pay a high proportion of total compensation in the form of base pay or in the form of variable pay that fluctuates according to some preestablished criterion. There is a great deal of variation in the way firms answer the fixed versus variable pay question. As this illustration shows, as salary increases, so does the percentage of the salary which is received in the form of bonuses and long-term income.

18. The Key Steps in Creating Job-Based Compensation Plans
Job Evaluation for Internal Equity
1. Job Analysis
2. Job Descriptions
3. Job Specifications
Identify
Compensable Factors
4. Rate Worth of All Jobs
Using a Predetermined
System
5. Job Hierarchy
There are three key components of developing job-based compensations plans: achieving internal equity, achieving external equity, and achieving individual equity. This illustration summarizes how these are interrelated and the steps involved in each component. The large majority of U.S. firms rely on this or a similar scheme to compensate their work force.
6. Classify Jobs by
Grade Levels
1. Check Market Value Using Benchmark or Key Jobs
Market Surveys for
External Equity
Criteria for Pay
Positioning Within
Range for Each Job
Experience
Seniority
Performance
7. Establish Final Pay
Policy
Within-Pay-Range Positioning Criteria for Individual Equity
Individual Pay
Assignment
© 1998 by Prentice Hall
© 2001 by Prentice Hall
10-18

19. MAA National Position Evaluation Plan
Points Assigned to Factor Degrees
Compensable Factor
1st
Degree
2nd
Degree
3rd
Degree
4th
Degree
5th
Degree
Skill
1. Knowledge
2. Experience
3. Initiative and Ingenuity
Effort
4. Physical Demand
5. Mental or Visual Demand
Responsibility
6. Equipment or Process
7. Material or Product
8. Safety of Others
9. Work of Others
Job Conditions
10. Working Conditions
11. Hazards 14 22 10 5 28 44 20 10 42 66 30 15 56 88 40 20 70
110 50 25
The point factor system uses compensable factors to evaluate jobs. Compensable factors are work-related criteria that the organization considers most important in assessing the relative value of different jobs. The MAA plan has three separate units: Unit 1 for hourly blue-collar jobs; Unit 2 for nonexempt clerical, technical, and service positions; and Unit 3 for exempt supervisory, professional, and management-level positions. The MAA plan includes 11 factors divided into four broad categories. The Unit 1 plan is shown here, with the points assigned to factor degrees.

20. The Hay Compensable Factors applied to the HR Director job
Know-How
Knowledge of technical procedures in a field
Ability to organize, direct and control a function or department
Ability to advice others on human resource issues
Problem-Solving
Able to analyze situation to identify causes and solutions
Ability to develop creative approaches to new or old problems
Accountable
Degree of freedom to act or make decisions
The impact of job results or decisions
The $ consequences of good or bad decisions

21. Applying the Hay Method – example
Compensable Factors
1st degree
2nd
Degree
3rd
4th degree
5th degree
Technical knowledge 20 40 60 80 90
Organization skills 30 50 70
100
Consultation skills
Problem analysis
Creative solutions 75
Freedom in actions 10 25
Impact of decisions

22. Hierarchy of Clerical Jobs, Pay Grades, and Weekly Pay Range for a Hypothetical Office1
Points 2
Grade 3
Weekly Pay Range
Customer Service Rep.
Executive Secretary/Admin. Asst.
Senior Secretary
Secretary
Senior General Clerk
Credit and Collection
Accounting Clerk
General Clerk
Legal Secretary/Assistant
Senior Word Processing Operator
Work Processing Operator
Purchasing Clerk
Payroll Clerk
Clerk-Typist
File Clerk
Mail Clerk
Personnel Clerk
Receptionist
300
298
290
230
225
220
175
170
165
160
125
120
115 95 80 60 5 4 3 2 1
$500-$650
$450-$550
$425-$475
$390-$430
$350-$400
For the sake of simplicity, most large organizations classify jobs into grades as the last step in the job-evaluation process. Typically, the job hierarchy is reduced to a manageable number of grade levels, with the assigned points used to determine where to set up dividing lines between grades. For example, this graphic shows how the hierarchy of 18 clerical jobs is divided into five grade levels.

23. Market Salary Data for Selected Benchmark Office Jobs
Weekly Pay Percentile
Weekly Pay
Average
Benchmark Jobs
25th
50th
75th
1. Customer Service Rep.
2. Credit and Collection Clerk
3. Accounting Clerk
4. Word Processing Operator
5. Clerk-Typist
6. HR Director
$400
$370
$380
$330
$1500
$500
$450
$425
$390
$350
$1750
$650
$550
$475
$430
$400
$2000
$495
$455
$423
$394
$343
$1725
Because market wages and salaries vary widely, the organization needs to decide whether to lead, lag, or pay the going rate. A firm’s pay policy is determined by how it chooses to position itself in the pay market. This graphic presents data which indicates into which percentile a given salary for a given job falls.

24. Determining the Pay Policies of Computime
Based on the given facts of the Computime situation, how should the company determine the worth of its jobs?
Propose a set of policies and justification for your proposal.
If you are not able to propose a policy on a particular criterion, indicate what information you need to help you decide.

25. Suggestions for Implementing Compensation Plans
Think strategically in making policy decisions concerning pay – what are the compensation objectives?
Consider employee input – whether and how they can be involved?
Expand the proportion of employees’ pay that is variable (bonuses, stock plans, and so forth) – gives employee more control over pay but also more risk in the pay.
Despite criticisms, job-based compensation plans continue to be widely used, probably because there are no alternative systems that are both cost efficient and generally applicable. Rather than dismissing job-based compensation plans completely, it is more realistic to take steps to reduce the potential problems associated with them. Recommendations for developing a job-based pay plan are presented here.