Chapter 10
Developing
Compensation Plans
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Learning Objectives
1. List the basic factors determining pay rates.
2. Define and give an example of how to
conduct a job evaluation and set pay rates.
3. Explain how to price managerial and
professional jobs.
4. Explain the difference between competency-
based and traditional pay plans.
5. Explain the importance of total rewards for
improving employee engagement
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What is Employee compensation?
Employee compensation includes all forms of pay or
rewards going to employees and arising from their
employment. It has two main components:
1. Direct financial payments (wages, salaries, incentives,
commissions, and bonuses)
2. Indirect financial payments (financial benefits like
employer-paid insurance and vacations).
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What is Employee compensation?
Based on increments Based on performance
of time
- Blue-collar and clerical - Piecework ties
workers receive hourly compensation to the
or daily wages amount of production
- Managers or Web (or number of “pieces”)
designers, tend to be the worker turns out
salaried and paid - Sales-based
weekly, monthly, or
yearly -> salary
Combine time-based pay plus incentives
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List the basic factors
determining pay rates
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Basic Factors in
Determining Pay Rates
Aligning total rewards with strategy
Equity and Its impact on pay rates
Legal Considerations in Compensation
Union Influences on Compensation Decisions
Pay Policies
Geography
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Basic Factors in Determining Pay Rates
Aligning total rewards with strategy
The compensation plan should first advance the firm’s strategic
aims—management should produce an aligned reward strategy ->
Creating a total pay package that produces the employee behaviors
the firm needs to support and achieve its competitive strategy
Total rewards encompass the traditional pay,
incentives, and benefits, but also things such
as more challenging jobs, career development,
and recognition.
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Basic Factors in Determining Pay Rates
Aligning total rewards with strategy
These questions are helpful in ensuring thought is focused on what
is truly needed in the corporation
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Basic Factors in Determining Pay Rates
Equity and Its impact on pay rates
Equity Theory of Motivation
• how a job’s pay rate in one company compares to the
External Equity
job’s pay rate in other companies.
• how fair a particular job’s pay rate is when compared
Internal Equity
to other jobs within the same company.
• the fairness of an individual’s pay as compared with what his
Individual Equity or her coworkers are earning for the same or very similar
jobs within the company, based on performance.
• the perceived fairness of the process and procedures
Procedural Equity
used to make decisions regarding the allocation of pay
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Basic Factors in Determining Pay Rates
Equity and Its impact on pay rates
Addressing Equity Issues
• Salary surveys
• Job analysis and comparisons of each job (“job evaluation”)
• Performance appraisal and incentive pay
• Communications, grievance mechanisms, and employee
participation
• Surveys to monitor employees’ pay satisfaction
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Basic Factors in Determining Pay Rates
Union Influences on Compensation Decisions
Unions and labor relations laws also influence pay plan design
Pay Policies
Pay policies cover various issues. One is whether to emphasize seniority or
performance. How to distinguish between high and low performers is a related
policy issue. Other pay policies may cover salary increases and promotions,
overtime pay, probationary pay, leaves for military service, jury duty, and holidays.
Pay policies impact profitability.
Geography
Accounting for geographic differences in cost of living is another big pay policy
matter. One way to deal with it is to pay a differential for ongoing costs in addition
to a one-time allocation. Other firms simply raise the employee’s base salary.
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Job Evaluation Methods
Two basic methods for setting pay rates
Market-Based Approach: conducting formal and informal
salary surveys to determine what others in the relevant
labor markets are paying for particular jobs
Job Evaluation Methods: determining the “worth” to the
employer of each of its jobs and then pricing these jobs.
This process helps produce a pay plan in which each job’s
pay is equitable based on what other employers are paying
for these jobs and based on each job’s value to the employer
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Job Evaluation Methods
Job evaluation
• Job evaluation is a systematic comparison done in order
to determine the worth of one job relative to another. Job
evaluation aims to determine a job’s relative worth. This
approach also results in wage or salary structures.
• The basic principle of job evaluation is this: Jobs that
require greater qualifications, more responsibilities, and
more complex job duties should receive more pay than
jobs with lesser requirements.
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Job Evaluation Methods
Market-Competitive Pay System
Market-Competitive Pay System is a pay system in which
the employer’s actual pay rates are competitive with
those in the relevant labor market.
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Job Evaluation Methods
Salary Surveys
Salary Surveys are surveys aimed at determining prevailing wage
rates. A good salary survey provides specific wage rates for
specific jobs. Formal written questionnaire surveys are the most
comprehensive, but telephone surveys and Internet and
newspaper help-wanted ads are also sources of information.
o Commercial, Professional, and Government Salary Surveys: Many
employers use surveys published by consulting firms, professional
associations, or government agencies. The National Compensation Survey
provides comprehensive reports of occupational earnings, compensation
cost trends, and benefits.
o Internet: provides an expanding array of Internet-based options that
makes it easy to access published compensation survey information.
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Pay Data Websites
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Job Evaluation Methods
Compensable Factors
Compensable Factors play a central role in job evaluation.
The compensable factor is a fundamental and compensable
element of a job, such as skills, effort, responsibility, and
working conditions. One usually compares each job with the
firm’s other jobs using the same compensable factors.
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Job Evaluation Methods
Preparing for the Job Evaluation
Job evaluation is a judgmental process and demands close cooperation
among supervisors, HR specialists, and employees and union
representatives. The main steps include:
o Identifying the need for the job evaluation. Dissatisfaction
reflected in high turnover, work stoppages, or arguments may
result from paying employees different rates for similar jobs.
o Getting employees to cooperate in the evaluations.
o Choosing the job evaluation committee that consists of about five
members, most of whom are employees.
The evaluation committee performs three functions: 1) identifies 10 or 15
benchmark jobs, 2) selects the compensable factors, and 3) evaluates the
worth of each job.
A benchmark job is a job that is used to anchor the employer’s pay scale
and around which other jobs are arranged in order of relative worth.
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Job Evaluation Methods: Ranking
1. Obtaining job information. Job analysis is the first step. Here job descriptions
for each job are prepared, and the information they contain about the job’s
duties is the basis for ranking jobs.
2. Selecting and grouping jobs. It is usually not practical to make a single
ranking for all jobs in an organization, thus clustering similar jobs will help in
the number of jobs evaluated.
3. Selecting compensable factors. It is common to use just one factor (such as job
difficulty) and to rank jobs based on the whole job.
4. Ranking jobs. One way to rank jobs is to give each rater a set of index cards,
each of which contains a brief description of a job. Then they rank these cards
from lowest to highest.
5. Combining the ratings. Note that several raters usually rank the jobs
independently. Then the rating committee can simply average the raters’
rankings.
6. Comparing current pay with what others are paying based on salary survey.
7. Assigning a new pay scale. Finally, current pay for each job is compared to
what others are paying.
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Job Evaluation Methods (cont.)
Job Classification
Job classification is a simple, widely used job evaluation method in which raters
categorize jobs into groups; all the jobs in each group are of roughly the same
value for pay purposes. Groups are classes if they contain similar jobs, or grades if
they contain jobs that are similar in difficulty but otherwise different.
Classes Grades
• Classes are grouping jobs based on • Grades are a job classification
a set of rules for each group or system like the class system,
class, such as amount of although grades often contain
independent judgment, skill, dissimilar jobs, such as secretaries,
physical effort, and so forth, mechanics, and firefighters. Grade
required. Classes usually contain descriptions are written based on
similar jobs. compensable factors listed in
classification systems
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Job Evaluation Methods (cont.)
Point Method - Packaged point plans
The Point method is 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.
The overall aim of the point method is to determine the degree to which the jobs
being evaluated contain selected compensable factors.
Several groups (such as the Hay Group, the National Electrical Manufacturer’s
Association, and the National Trade Association) have developed standardized
point plans. They contain ready-made factor and degree definitions and point
assessments for a wide range of jobs.
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Pricing Managerial and
Professional Jobs
Compensative Executives and Managers
Compensation for a company’s top executives usually consists of four main
elements.
1. Base pay includes the person’s fixed salary as well as, often, guaranteed
bonuses such as “10% of pay at the end of the fourth quarter.”
2. Short-term incentives are usually cash or stock bonuses for achieving
short-term goals, such as year-to-year increases in sales revenue.
3. Long-term incentives aim to encourage the executive to take actions that
drive up the value of the company’s stock and include things like stock
options.
4. Executive benefits and perks include things such as supplemental
executive retirement pension plans, supplemental life insurance, and health
insurance without a deductible or coinsurance.
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Pricing Managerial and
Professional Jobs
What Determines Executive Pay?
For top executive jobs, job evaluation typically has little relevance.
Actually, the company size and performance significantly affect top
managers’ salaries.
One recent study concluded that three main factors determine pay:
1) Job complexity (span of control, number of functional divisions, and
management level),
2) the employer’s ability to pay (total profit and rate of return), and
3) the executive’s human capital (education level, field of study, work
experience).
Many employers use job evaluation for pricing managerial jobs. The basic
approach is to classify all executive and management positions into a
series of grades, each with a salary range.
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Pricing Managerial and
Professional Jobs
Compensating Professional Employees
Compensating Professional Employees involves employers first
ensuring that each employee is actually a “professional” under the
law. What to compensate is one issue to resolve.
For example, jobs like an engineer and scientist emphasize
compensable factors such as creativity and problem solving, factors
not easily measured or compared. Because it can be difficult to
measure creativity, employers use a market-pricing approach.
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Pricing Managerial and
Professional Jobs
Payroll administration
Payroll administration is one of the first functions most
employers computerize or outsource. Administering the payroll
system means keeping track of each employee’s worker status,
wage rate, dependents, benefits, overtime, tax status, computing
each paycheck, and then directing the printing of checks or direct
deposits. Many sophisticated software is used to administer
payroll such as Intuit’s Basic Payroll.
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Explain the importance
of total rewards for
improving employee
engagement
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Employee Engagement
Guide for Managers
• Total Rewards Programs
• Total Rewards and Employee
Engagement
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