Chapter 11 Establishing Pay Plans

In brief: This chapter covers the basics of compensation. Included are basic considerations in determining pay rates, establishing pay rates, current trends in compensation, pricing managerial and professional jobs, and current issues in compensation management. interesting issues: This chapter lists and discusses many current and controversial issues in compensation management. You may want to incorporate a discussion of the current issues described on pages 421 42!.

Lecture Outline
I. Basic Aspects of Compensation
". #ompensation at $or%

II.

Basic Factors in Determining Pay Rates

". &egal #onsiderations in #ompensation 1. 2. !. 1'!1 (avis )acon "ct 1'!* $alsh +ealey ,ublic #ontract "ct 1'!- .air &abor /tandards "ct a. b. c. d. e. f. 4. 3. *. 4. -. ). #. (. overtime pay minimum wage ma0imum hours e1ual pay record %eeping child labor

1'*! 21ual ,ay "ct 1'*4 #ivil rights "ct 1'44 2mployee 5etirement Income /ecurity "ct 625I/"7 The Ta0 5eform "ct of 1'-* 8ther &egislation "ffecting #ompensation

9nion Influence on #ompensation (ecisions #ompensation ,olicies 21uity and Its Impact on ,ay 5ates

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Chapter 11: Establishing Pay Plans

1. .ive /tep ,rocess: a. b. c. d. e. salary survey job evaluation pay grades wage curves fine tune pay rates

III.

Esta lishing Pay Rates

". /tep 1. #onduct the /alary /urvey 1. 2. !. ). Introduction #ommercial, ,rofessional, and ;overnment /alary /urveys Table 11 1 on page 4<2 shows a sample compensation survey. 9sing the Internet to (o #ompensation /urveys

/tep 2. (etermine the $orth of 2ach =ob: =ob 2valuation 1. 2. !. 4. ,urpose of =ob 2valuation #ompensable .actors ,lanning and ,reparation for the =ob 2valuation 5an%ing >ethod of =ob 2valuation Table 11 1 on page 4<* gives a sample of job ran%ing. a. 3. *. 4. -. pros and cons

=ob #lassification 6or ;rading7 2valuation >ethod .igure 11 2 on page 4<4 shows a sample grade definition. ,oint >ethod of =ob 2valuation .actor #omparison =ob 2valuation >ethod #omputeri?ed =ob 2valuations

#. (. 2.

/tep !. ;roup /imilar =obs into ,ay ;rades /tep 4. ,rice 2ach ,ay ;rade@$age #urves .igure 11 ! on page 4<' shows a sample wage curve /tep 3. .ine Tune ,ay 5ates 1. (eveloping 5ate 5anges Table 11 2 on page 41< shows a sample pay schedule. .igure 11 4 on page 41< shows a sample wage structure.

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Human Resource Management

2.

#orrecting 8ut of &ine 5ates

I!.

Current "ren#s in Compensation

". /%ill )ased ,ay 1. 2. !. 4. ). #ompetence Testing 2ffect of =ob #hange /eniority and 8ther .actors "dvancement 8pportunities

)roadbanding .igure 11 3 on page 414 shows a sample of setting three bands. .igure 11 * on page 414 shows a sample of assigning values to jobs in bands. .igure 11 4 on page 414 shows a sample of positioning pay within a band. Information Technology and +5 page 413 of the te0t: see (iscussion )o0es solutions at end of this chapter $hy =ob 2valuation ,lans "re /till $idely 9sed The +igh ,erformance 8rgani?ation: #ompensation >anagement ,ages 41* 414 of the te0t: see (iscussion )o0es solutions at end of this " ;limpse into the .uture@The ABewC ,ay

#. (. 2. chapter ..

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Pricing $anagerial an# Professional %o s

". #ompensating >anagers 1. )asic #ompensation 2lements a. salary b. benefits c. short term incentives d. long term incentives e. per1uisites >anagerial =ob 2valuation

2. ).

#ompensating ,rofessional 2mployees

!I.

Current Issues in Compensation $anagement

". The Issue of #omparable $orth 1. The Issue

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Chapter 11: Establishing Pay Plans

2. !. 4. ). #. (. 2. chapter 1. 2. !.

The ;unther /upreme #ourt #ase #omparable $orth and =ob 2valuation Implications

The Issue of ,ay /ecrecy The Issue of #ost of &iving (ifferentials ;lobal Issues in +5: The Issue of #ompensating 20patriate 2mployees ,age 424 of the te0t: see (iscussion )o0es solutions at end of this chapter /mall )usiness "pplications: (eveloping a ,ay ,lan ,ages 423 424 of the te0t: see (iscussion )o0es solutions at end of this (eveloping a $or%able ,ay ,lan #ompensation ,olicies &egal Issues

Discussion Bo&es
Information "echnology an# 'R( )e sites for Compensation $anagement
6page 4137 This discussion bo0 gives a list of websites devoted to compensation related matters. You may want to assign students to loo% up the sites and report on what is available there, or possibly have them find additional sites as well.

"he 'igh*Performance Organi+ation( Compensation $anagement

6pages 41* 4147 This bo0 describes how I)> used compensation management as part of the plan to renew the organi?ation. I)> had dominated the industry in the 1'4<s and early 1'-<s but lost touch with the customers by the late 1'-<s. #hanging the pay structure played a major role in changing the organi?ation to meet the new needs of the late 1''<s.

,lo al 'R$( "he Issue of Compensating E&patriate Employees

6page 4247 >anagers who are placed in other countries face a wide variance of costs of living. The issue of cost of living differentials becomes e0aggerated with the even larger differences

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Human Resource Management

of costs of living between countries. This bo0 describes two basic policies that are popular for dealing with these issues: home based and host based policies.

-mall Business Applications( De.eloping a Pay Plan

6pages 423 4247 This bo0 discusses some of the basic approaches that a small business can use to implement the concepts discussed in this chapter. It includes practical direction on developing a wor%able pay plan, compensation policies, and a discussion of legal issues.

/ey "erms
employee compensation Da.is*Bacon Act "ll forms of pay or rewards going to employees and arising from their employment. 6page !'*7 " law passed in 1'!1 that sets wage rates for laborers employed by contractors wor%ing for the federal government. 6page !'*7

)alsh*'ealey Pu lic " law enacted in 1'!* that re1uires minimum wage and wor%ing Contract Act conditions for employees wor%ing on any government contract amounting to more than D1<,<<<. 6page !'47 Fair La or -tan#ar#s Act #ongress passed this act in 1'!* to provide for minimum wages, ma0imum hours, overtime pay, and child labor protection. The law has been amended many times and covers most employees. 6page !'47 "n amendment to the .air &abor /tandards "ct designed to re1uire e1ual pay for women doing the same wor% as men. 6page 4227 This law ma%es it illegal to discriminate in employment because of race, color, religion, se0, or national origin. 6page !'-7 The law that provides government protection of pensions for all employees with company pension plans. It also regulates vesting rights 6employees who leave before retirement may claim compensation from the pension plan7. 6page !'-7 " survey aimed at determining prevailing wage rates. " good salary survey provides specific wage rates for specific jobs. .ormal written 1uestionnaire surveys are the most comprehensive, but telephone surveys and newspaper ads are also sources of information. 6page 4<<7 " job that is used to anchor the employerEs pay scale and around which other jobs are arranged in order of relative worth.6page 4<<7
1<<

E0ual Pay Act of 1123

Ci.il Rights Act Employee Retirement Income -ecurity Act 4ERI-A5 salary sur.ey

enchmar6 7o

Chapter 11: Establishing Pay Plans

7o e.aluation compensa le factor ran6ing metho#

" systematic comparison done in order to determine the worth of one job relative to another. 6page 4<!7 " fundamental, compensable element of a job, such as s%ills, effort, responsibility, and wor%ing conditions. 6page 4<47 The simplest method of job evaluation that involves ran%ing each job relative to all other jobs, usually based on overall difficulty. 6page 4<37

classification 4or gra#ing5 " method for categori?ing jobs into groups. 6page 4<*7 metho# classes (ividing jobs into classes based on a set of rules for each class, such as amount of independent judgment, s%ill, physical effort, and so forth, re1uired for each class of jobs. #lasses usually contain similar jobs such as all secretaries. 6page 4<*7 " job classification system synonymous with class, although grades often contain dissimilar jobs, such as secretaries, mechanics, and firefighters. ;rade descriptions are written based on compensable factors listed in classification systems, such as the federal classification system. 6page 4<*7 $ritten descriptions of the level of, say, responsibility and %nowledge re1uired by jobs in each grade. /imilar jobs can then be combined into grades or classes. 6page 4<*7 The job evaluation method in which a number of compensable factors are identified and then the degree to which each of these factors is present on the job is determined. 6page 4<47 " widely used method of ran%ing jobs according to a variety of s%ill and difficulty factors, then adding up these ran%ings to arrive at an overall numerical rating for each given job. 6page 4<47 " pay grade is comprised of jobs of appro0imately e1ual difficulty. 6page 4<-7 /hows the relationship between the value of the job and the average wage paid for this job. 6page 4<'7 " series of steps or levels within a pay grade, usually based upon years of service. 6page 4<'7 The concept by which women who are usually paid less than men can claim that men in comparable rather than strictly e1ual jobs are paid more. 6page 4217

gra#es

gra#e #efinition

point metho#

factor comparison metho# pay gra#e 8age cur.e rate ranges compara le 8orth

Discussion 9uestions(
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Human Resource Management

1. )hat is the #ifference et8een e&empt an# non*e&empt 7o s: 9nder the .air &abor /tandards "ct, certain categories of employees are e0empt from the act or certain provisions of the act. Those categories of employees that are e0empted from provisions of the act are called Fe0emptF while those covered by the act are called Fnon e0empt.F ;enerally e0ecutives, administrative, managerial, and professional employees are e0empt from minimum wage and overtime provisions. 6page !'47 ;. -houl# the 7o e.aluation #epen# on an appraisal of the 7o hol#er<s performance: )hy or )hy not: Bo. =ob evaluation involves comparing jobs to one another based on their content. Individual performance is covered under performance evaluation and does not affect the content of the job. 6pages 4<! 4<47 3. )hat is the relationship et8een compensa le factors an# 7o specifications: #ompensable factors include s%ill, effort, responsibility, wor%ing conditions, problem solving, %now how, accountability, and the li%e. >any of these factors are obtainable from job specifications which are part of the job analysis. 6pages 4<47 =. )hat are the pros an# cons of the follo8ing metho#s of 7o e.aluation( ran6ing> classification> factor comparison> point metho#: The ran%ing method is the simplest, easiest to e0plain, and the 1uic%est to implement. The drawbac%s to the ran%ing method are a tendency to rely to heavily on guestimates and it does not provide a yardstic% for measuring the relative values of jobs. The classification 6or grading7 method is simple, and widely used. >ost employers usually end up classifying jobs anyway, so this method often ma%es sense. The disadvantages are that it is difficult to write the class or grade descriptions and considerable judgment is re1uired to apply them. The factor comparison method is considered a refinement of the ran%ing system, thus it may be considered to be more accurate than others. The disadvantages are the considerable time and effort involved to implement the system and to evaluate jobs. The point method, li%e the factor comparison method, is a 1uantitative analysis that is considered accurate. This system is easy to implement, but developing a point manual can be an e0pensive 6pages 4<3 4<-7 ?. In 8hat respect is the factor comparison metho# similar to the ran6ing metho#: 'o8 #o they #iffer: In the factor comparison method, the evaluators ran% each job several times, once for each compensable factor. They differ, in that the factor comparison method is a 1uantitative techni1ue which involves multiple ran%ings for each job. The ran%ing method usually uses only one compensable factor and simply involves ma%ing a judgment on the ran%ing of one job relative to others in the firm on that jobEs worth to the organi?ation. 5an%ing is the easiest method, although it provides no yardstic% for the comparison of one job relative to another. 6pages 4<3 4<-7 2. )hat are the pros an# cons of roa# an#ing> an# 8oul# you recommen# your current employer 4or some other firm you<re familiar 8ith5 use it: )hy or 8hy not: The advantages are that is injects greater fle0ibility into employee compensation and it is especially sensible where firms have flattened their organi?ations. It allows training and rotation of employees with fewer compensation problems. It also facilitates the bondaryless jobs and organi?ations being embraced by many firms. The negatives are that it may be more difficult to administer and %eep trac% of individuals and to %eep pay comparable. 6pages 41! 4137
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Chapter 11: Establishing Pay Plans

@. It 8as recently reporte# in the ne8s that the a.erage pay for most uni.ersity presi#ents range# aroun# A;BB>BBB per year> ut that a fe8 earne# closer to A?BB>BBB per year. )hat 8oul# account for such a #isparity in the pay of uni.ersities< chief e&ecuti.e officers: The same things that account for the wide range of pay for the chief e0ecutive officers of other businesses and organi?ations in the same industry. >any factors enter into this mi0, including, but not limited to: si?e of the organi?ation, ownership of the organi?ation 6public or private7, focus of the organi?ation 6religious or secular, research or teaching7, performance of the organi?ation 6financial and enrollment7, prestige of the organi?ation, and endowment and funding of the organi?ation.

Discussion 9uestions(
1. )or6ing in#i.i#ually or in groups> con#uct salary sur.eys for the follo8ing positions( entry*le.el accountant an# entry*le.el chemical engineer. )hat sources #i# you use> an# 8hat conclusions #i# you reach: If you 8ere the 'R manager for a local engineering firm> 8hat 8oul# you recommen# that you pay for each 7o : /tudents should be e0pected to use several of the resources indicated on pages 4<< 4<1 for gathering this information. 5esults should be chec%ed for bias or contamination such as only surveying the largest firms in the area, or the unwillingness of some firms to provide this information. /tudent recommendations should be based on sound logic and conclusion from the data they collect. 6pages 4<< 4<17 ;. )or6ing in#i.i#ually or in groups> use the BL- area 8age sur.eys to #etermine local area earnings for the follo8ing position( File Cler6 I> Accounting Cler6 II> -ecretary !. 'o8 #o the BL- figures compare 8ith compara le 7o s liste# in your -un#ay ne8spaper: )hat #o you thin6 accounts for any #iscrepancy: You should chec% the )&/ listings yourself to assure that students get the correct numbers. "ny discrepancies might be e0plained by: cost of living differentials within the )&/ area, company si?e and competitiveness, actual grade of the position advertised may not coincide with )&/ grades, economic changes within the year since publication, and other factors. C. )or6ing in#i.i#ually or in groups> use the ran6ing metho# to e.aluate the relati.e 8orth of the 7o s liste# in 9uestion @> a o.e. 4Dou may use the Dictionary of Occupational "itles as an ai#.5 "o 8hat e&tent #o the local area earnings for these 7o s correspon# to your e.aluations of the 7o s: $hile there may be discrepancies, most ran%ings would probably be 6from lowest to highest7: .ile #ler% I, /ecretary G, "ccounting #ler% II, although there could be an argument to switch the last two.

Cases an# E&ercises

E&periential E&ercise( %o E.aluations 6page 42'7

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Human Resource Management

This e0ercise will give students e0perience in performing a job evaluation using the ran%ing method. $hen students have completed this e0ercise in their small groups, you should consider comparing results and discussing the similarities and differences.

Case Inci#ent( -alary Ine0uities at Acme $anufacturing 6page 4!<7

1. )hat 8oul# you #o if you 8ere Blan6enship: This should generate lively discussion. .ew students will argue for a Ado nothingC approach, as the ris% of legal damages is too high. /ome students will argue that the discrepancies in salaries will not remain secret. If this is true, then women supervisors will discover they are underpaid and may see% additional bac% pay. /ome students will suggest the company inform the supervisors that as a result of a recent compensation study, it was determined that these jobs were underpaid. The women in 1uestion will receive a larger raise at the time of their ne0t performance review. /tudents in favor of this proposal will argue that by ma%ing it public but deferring the adjustment, they will signal that it is not a major crisis. 2. 'o8 #o you thin6 the company got into a situation li6e this in the first place: The informal system suggests that the local culture has overly influenced the compensation process. Issues li%e whether a spouse is wor%ing are not part of a professional compensation practice. !. )hy 8oul# you suggest Blan6enship pursue the alternati.e you suggeste#: /tudents will provide a variety of reasons. Those suggesting bac% pay as well as a raise will argue that: a. The company needs to maintain fairness 6a social justice approach7. b. They will signal to employees that unfair practices will not be tolerated. c. They will gain the support of a group of sta%eholders. Those suggesting raises but no bac% pay may argue: a. The women will li%ely feel their needs have been addressed. b. It will be less e0pensive. c. It will be less li%ely to draw a negative response from $hite males. d. If the women push for bac% wages, they can be granted later.

Case Application( -alary A#ministration in the Engineering Department 6page 4!17

>ajestic is a multi location chemical company. The more than one hundred engineers in the engineering department perform services for many of >ajesticHs locations. The case reviews >ajesticHs compensation pac%age for engineers. Tom ;reen is concerned that if he rewards new employees based on potential, he will not have sufficient funds for his senior employees. 1. )hat #o you thin6 of $a7esticEs -alary A#ministration Policy: 'o8 8oul# you change it: There are many obvious benefits to >ajesticHs program. It is well organi?ed, well documented, promotes fairness across divisions, strives for internal as well as e0ternal e1uity and has elements that facilitate management control. It is wea% in that the criteria used for new employee evaluation are subjective. $ith a ApoolC system, e0perienced engineers end up competing for dollars, matching their performance against the potential of new employees.

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Chapter 11: Establishing Pay Plans

2. )oul# you recommen# roa# an#ing for engineer 7o s at $a7estic: )hy or 8hy not: There will be some disagreement over this as the case has limited information about the other plants. /tudents opposed to broadbanding will argue that it would need to be applied across all plants to maintain internal e1uity. Those opposed would argue the merits of broadbanding, including its usefulness as a compensation system when wor%ing with self directed wor% teams from differing levels in the organi?ation 6a normal occurrence for an engineering group7. !. 'o8 8oul# you procee# no8 if you 8ere "om ,reen: There will li%ely be lively discussion of this decision. /ome will suggest that in the short term, Tom needs to ma%e sure that he has more input into the salary distribution system. The salary administrator does not have to live with the immediate conse1uences the salary distribution decision. In the longer term, Tom needs to wor% with >ajestic to develop a system that will allow him to reward high potential employees 6based on a more objective criteria7 while still being able to reward those who have made career contributions.

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