Establishing Strategic Pay Plans

Gary Dessler
tenth edition
Chapter 11 Part 4 Compensation
Establishing Strategic Pay Plans
© 2005 Prentice Hall Inc. PowerPoint Presentation by Charlie Cook

All rights reserved. The University of West Alabama
After
After studying
studying this
this chapter,
chapter,
you
you should
should be
be able
able to:
to:
1. List the basic factors in determining pay rates.
2. Explain in detail how to establish pay rates.
3. Explain how to price managerial and professional
jobs.
4. Discuss current trends in compensation.
©
© 2005
2005 Prentice
Prentice Hall
Hall Inc.
Inc. All
All rights
rights reserved.
reserved. 11–2
11–2
11–
11–2
Determining Pay Rates
 Employee compensation
– All forms of pay or rewards going to employees
and arising from their employment.
 Direct financial payments
– Pay in the form of wages, salaries, incentives,
commissions, and bonuses.
 Indirect financial payments
– Pay in the form of financial benefits such as
insurance.
© 2005 Prentice Hall Inc. All rights reserved. 11–3

Overview of Compensation Laws
 Davis-Bacon Act (1931)
– A law that sets wage rates for laborers employed
by contractors working for the federal
government.
 Walsh-Healey Public Contract Act (1936)
– A law that requires minimum wage and working
conditions for employees working on any
government contract amounting to more than
$10,000.

Overview of Compensation Laws (cont’d)
 Title VII of the 1964 Civil Rights Act
– This act makes it unlawful for employers to
discriminate against any individual with respect to
hiring, compensation, terms, conditions, or
privileges of employment because of race, color,
religion, sex, or national origin.

 Fair Labor Standards Act (1938)
– This act provides for minimum wages, maximum
hours, overtime pay for nonexempt employees
after 40 hours worked per week, and child labor
protection. The law has been amended many
times and covers most employees.
 Equal Pay Act (1963)
– An amendment to the Fair Labor Standards Act
designed to require equal pay for women doing
the same work as men.

Who Is Exempt? Who Is Not Exempt?
Exempt Professionals Exempt Administrators
Attorneys Executive assistant to the president
Physicians Personnel directors
Dentists Credit managers
Pharmacists Purchasing agents
Optometrists Nonexempt
Architects Paralegals
Engineers Nonlicensed accountants
Teachers Accounting clerks
Certified public accountants Newspaper writers
Scientists Working foreman/forewoman
Computer systems analysts Working supervisor
Exempt Executives Lead worker
Corporate officers Management trainees
Department heads Secretaries
Superintendents Clerical employees
General managers Inspectors
Individual who is in sole charge of an Statisticians
“independent establishment” or branch
Note: These lists are general in nature, and exceptions
exist. Any questionable allocation of exemption status
should be reviewed by labor legal counsel.
Source: Jeffrey Friedman, “The Fair Labor Standards Act Today: A Primer,”
Figure 11–1
Compensation, January/February 2002, p. 53.
 Employee Retirement Income Security Act
(ERISA)
– The law that provides government protection of
pensions for all employees with company pension
plans. It also regulates vesting rights (employees
who leave before retirement may claim
compensation from the pension plan).
 The Age Discrimination in Employment Act
– Prohibits age discrimination against employees
who are 40 years of age and older in all aspects of
employment, including compensation.

 The Americans with Disabilities Act
– Prohibits discrimination against qualified persons
with disabilities in all aspects of employment,
including compensation.
 The Family and Medical Leave Act
– Entitles eligible employees, both men and women,
to take up to 12 weeks of unpaid, job-protected
leave for the birth of a child or for the care of a
child, spouse, or parent.

Independent
Contractor
Source: Reprinted with permission

of the publisher, HRnext.com.
Copyright HRnext.com, 2003.
Figure 11–2
Corporate Policies, Competitive Strategy,
and Compensation
 Aligned reward strategy
– The employer’s basic task is to create a bundle of
rewards—a total reward package—specifically
aimed at eliciting the employee behaviors the firm
needs to support and achieve its competitive
strategy.
– The HR or compensation manager will write the
policies in conjunction with top management, in a
manner such that the policies are consistent with
the firm’s strategic aims.

Developing an Aligned Reward Strategy
Questions to Ask:
1. What are our company’s key success factors?

What must our company do to be successful in fulfilling its mission or achieving its
desired competitive position?
2. What are the employee behaviors or actions necessary to successfully implement this
competitive strategy?
3. What compensation programs should we use to reinforce those behaviors? What should
be the purpose of each program in reinforcing each desired behavior?
4. What measurable requirements should each compensation program meet to be deemed

successful in fulfilling its purpose?
5. How well do our current compensation programs match these requirements?
Source: Jack Dolmat-Connell, “Developing a Reward Strategy that Delivers Shareholder

and Employee Value,” Compensation and Benefits Review, March–April 1999, p. 51.
Table 11–1
Compensation Policy Issues
 Pay for performance
 Pay for seniority
 The pay cycle
 Salary increases and promotions
 Overtime and shift pay
 Probationary pay
 Paid and unpaid leaves
 Paid holidays
 Salary compression
 Geographic costs of living differences
Compensation Policy Issues (cont’d)
 Salary compression
– A salary inequity problem, generally caused by
inflation, resulting in longer-term employees in a
position earning less than workers entering the
firm today.

Equity and Its Impact on Pay Rates
 The equity theory of motivation
– States that if a person perceives an inequity, the
person will be motivated to reduce or eliminate
the tension and perceived inequity.

Forms of Equity
 External equity
– How a job’s pay rate in one company compares to the job’s
pay rate in other companies.
 Internal equity
– How fair the job’s pay rate is, when compared to other jobs
within the same company
 Individual equity
– How fair an individual’s pay as compared with what his or
her co-workers are earning for the same or very similar jobs
within the company.
 Procedural equity
– The perceived fairness of the process and procedures to
make decisions regarding the allocation of pay.

Methods to Address Equity Issues
 Salary surveys
– To monitor and maintain external equity.
 Job analysis and job evaluation
– To maintain internal equity,
 Performance appraisal and incentive pay
– To maintain individual equity.
 Communications, grievance mechanisms,
and employees’ participation
– To help ensure that employees view the pay
process as transparent and fair.

Establishing Pay Rates
 Step 1. The salary survey
– 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
newspaper ads are also sources of information.
• Benchmark job: A job that is used to anchor the
employer’s pay scale and around which other jobs are
arranged in order of relative worth.

Sources for Salary Surveys
 Consulting firms
 Professional associations
 Government agencies
– U.S. Department of Labor’s Bureau of Labor
Statistics (BLS) conducts three annual surveys:
• Area wage surveys
• Industry wage surveys
• Professional, administrative, technical, and clerical
(PATC) surveys.

Some Pay Data Web Sites
*An alliance between recruiters Korn/Ferry International and the Wall Street Journal.
Table 11–2
Establishing Pay Rates (cont’d)
 Step 2. Job evaluation
– A systematic comparison done in order to
determine the worth of one job relative to
another.
 Compensable factor
– A fundamental, compensable element of a job,
such as skills, effort, responsibility, and working
conditions.

Preparing for the Job Evaluation
 Identifying the need for the job evaluation
 Getting the cooperation of employees
 Choosing an evaluation committee.
 Performing the actual evaluation.

Job Evaluation Methods: Ranking
 Ranking each job relative to all other jobs,
usually based on some overall factor.
 Steps in job ranking:
– Obtain job information.
– Select and group jobs.
– Select compensable factors.
– Rank jobs.
– Combine ratings.

Job Ranking by Olympia Health Care
Table 11–3
Job Evaluation Methods:
Job Classification
 Raters categorize jobs into groups or classes
of jobs that are of roughly the same value for
pay purposes.
– Classes contain similar jobs.
– Grades are jobs that are similar in difficulty but
otherwise different.
– Jobs are classed by the amount or level of
compensable factors they contain.

Example of A Grade Level Definition
This is a summary chart of the key grade level criteria for the GS-7
level of clerical and assistance work. Do not use this chart alone for
classification purposes; additional grade level criteria are in the Web-
based chart.
Source: http://www.opm.gov/fedclass. gscler.pdf. August 29, 2001. Figure 11–3

Job Evaluation Methods: Point Method
 A quantitative technique that involves:
– Identifying the degree to which each compensable
factors are present in the job.
– Awarding points for each degree of each factor.
– Calculating a total point value for the job by
adding up the corresponding points for each
factor.

Job Evaluation Methods:
Factor Comparison
 Each job is ranked several times—once for
each of several compensable factors.
 The rankings for each job are combined into
an overall numerical rating for the job.

Computerized Job Evaluations
 A computerized system that uses a structured
questionnaire and statistical models to
streamline the job evaluation process.
– Advantages of computer-aided job evaluation
(CAJE)
• Simplify job analysis
• Help keep job descriptions up to date
• Increase evaluation objectivity
• Reduce the time spent in committee meetings
• Ease the burden of system maintenance

 Step 3. Group Similar Jobs into Pay Grades
– A pay grade is comprised of jobs of approximately
equal difficulty or importance as established by
job evaluation.
• Point method: the pay grade consists of jobs falling
within a range of points.
• Ranking method: the grade consists of all jobs that fall
within two or three ranks.
• Classification method: automatically categorizes jobs into
classes or grades.

 Step 4. Price Each Pay Grade
— Wage Curve
– Shows the pay rates currently paid for jobs in
each pay grade, relative to the points or rankings
assigned to each job or grade by the job
evaluation.
– Shows the relationships between the value of the
job as determined by one of the job evaluation
methods and the current average pay rates for
your grades.

Plotting a Wage Curve
Figure 11–4
 Step 5. Fine-tune pay rates
– Developing pay ranges
• Flexibility in meeting external job market rates
• Easier for employees to move into higher pay grades
• Allows for rewarding performance differences and
seniority
– Correcting out-of-line rates
• Raising underpaid jobs to the minimum of the rate range
for their pay grade.
• Freezing rates or cutting pay rates for overpaid (“red
circle”) jobs to maximum in the pay range for their pay
grade.

Wage
Structure
Note: This shows overlapping wage classes

and maximum–minimum wage ranges.
Figure 11–5
Federal Government Pay Schedule:
Grades GS-8–GS-10,
New York, Northern New Jersey, Long Island,
January 2000
Source: [email protected]. Table 11–4

Compensation Administration Checklist
A good compensation administration program is comprehensive and flexible and ensures optimum
performance from employees at all levels. The following checklist may be used to evaluate a company’s
program. The more questions answered “yes,” the more thorough has been the planning for
compensation administration.
Source: Reprinted with permission of the publisher, HRnext.com. Copyright HRnext.com, 2003. Figure 11–6
Pricing Managerial and Professional Jobs
 Compensating managers
– Base pay: fixed salary, guaranteed bonuses.
– Short-term incentives: cash or stock bonuses
– Long-term incentives: stock options
– Executive benefits and perks: retirement plans,
life insurance, and health insurance without a
deductible or coinsurance.

Pricing Managerial and Professional Jobs
 What Really Determines Executive Pay?
– CEO pay is set by the board of directors taking
into account factors such as the business strategy,
corporate trends, and where they want to be in a
short and long term.
– Firms pay CEOs based on the complexity of the
jobs they filled.
– Boards are reducing the relative importance of
base salary while boosting the emphasis on
performance-based pay.

Compensating Professional Employees
 Employers can use job evaluation for
professional jobs.
 Compensable factors focus on problem
solving, creativity, job scope, and technical
knowledge and expertise.
 Firms use the point method and factor
comparison methods, although job
classification seems most popular.
 Professional jobs are market-priced to
establish the values for benchmark jobs.
What Is Competency-based Pay?
 Competency-based pay
– Where the company pays for the employee’s
range, depth, and types of skills and knowledge,
rather than for the job title he or she holds.
 Competencies
– Demonstrable characteristics of a person,
including knowledge, skills, and behaviors, that
enable performance.

Why Use Competency-Based Pay?
 Traditional pay plans may actually backfire if
a high-performance work system is the goal.
 Paying for skills, knowledge, and
competencies is more strategic.
 Measurable skills, knowledge, and
competencies are the heart of any company’s
performance management process.

Competency-Based Pay in Practice
 Main components of skill/competency/
knowledge–based pay programs:
– A system that defines specific skills, and a process
for tying the person’s pay to his or her skill
– A training system that lets employees seek and
acquire skills
– A formal competency testing system
– A work design that lets employees move among
jobs to permit work assignment flexibility.

Competency-Based Pay: Pros and Cons
 Pros
– Higher quality
– Lower absenteeism and fewer accidents
 Cons
– Pay program implementation problems
– Cost implications of paying for unused knowledge,
skills and behaviors
– Complexity of program
– Uncertainty that the program improves
productivity

Other Compensation Trends
 Broadbanding
– Consolidating salary grades and ranges into just a
few wide levels or “bands,” each of which contains
a relatively wide range of jobs and salary levels.
• Wide bands provide for more flexibility in assigning
workers to different job grades.
• Lack of permanence in job responsibilities can be
unsettling to new employees.

Broadbanded Structure
and How It Relates to
Traditional Pay Grades
and Ranges
Figure 11–7
Strategic Compensation
 Strategic compensation
– Using the compensation plan to support the
company’s strategic aims.
– Focuses employees’ attention on the values of
winning, execution, and speed, and on being
better, faster, and more competitive..
 IBM’s strategic compensation plan:
– The marketplace rules.
– Fewer jobs, evaluated differently, in broadbands.
– Managers manage.
– Big stakes for stakeholders.

Comparable Worth
 Comparable worth
– Refers to the requirement to pay men and women
equal wages for jobs that are of comparable
(rather than strictly equal) value to the employer.
– Seeks to address the issue that women have jobs
that are dissimilar to those of men and those jobs
often consistently valued less than men’s jobs.

Compensation and Women
 Factors lowering the earnings of women:
– Women’s starting salaries are traditionally lower.
– Salary increases for women in professional jobs do
not reflect their above-average performance.
– In white-collar jobs, men change jobs more
frequently, enabling them to be promoted to
higher-level jobs over women with more seniority.
– In blue-collar jobs, women tend to be placed in
departments with lower-paying jobs.

HR Scorecard
for Hotel Paris
International
Corporation*
Note: *(An abbreviated example showing selected

HR practices and outcomes aimed at implementing
the competitive strategy, “To use superior guest
services to differentiate the Hotel Paris properties
and thus increase the length of stays and the return
rate of guests and thus boost revenues and
profitability”)
Figure 11–8
Key Terms
employee compensation ranking method
direct financial payments job classification (or grading)
indirect financial payments method
Davis-Bacon Act (1931) classes
Walsh-Healey Public Contract Act (1936) grades
Title VII of the 1964 Civil Rights Act grade definition
Fair Labor Standards Act (1938) point method
Equal Pay Act (1963) factor comparison method
Employee Retirement Income pay grade
Security Act (ERISA) wage curve
salary compression pay ranges
salary survey competency-based pay
benchmark job competencies
job evaluation broadbanding
compensable factor comparable worth

Gary Dessler
tenth edition
Chapter 11 Appendix Part 4 Compensation
Quantitative Job Evaluation Methods
© 2005 Prentice Hall Inc. PowerPoint Presentation by Charlie Cook

All rights reserved. The University of West Alabama
Quantitative Job Evaluation Methods
 Factor Comparison Job Evaluation Method
– Step 1.
Obtain job information
– Step 2.
Select key benchmark jobs
– Step 3.
Rank key jobs by factor
– Step 4.
Distribute wage rates by factors
– Step 5.
Rank key jobs according to wages
assigned to each factor
– Step 6. Compare the two sets of rankings to
screen out unusable key jobs
– Step 7. Construct the job-comparison scale
– Step 8. Use the job-comparison scale

Sample Definitions of Factors Typically Used in
the Factor Comparison Method
1. Mental Requirements
Either the possession of and/or the active application of the following:
A. (inherent) Mental traits, such as intelligence, memory, reasoning, facility in verbal expression,
ability to get along with people, and imagination.
B. (acquired) General education, such as grammar and arithmetic; or general information as to
sports, world events, etc.
C. (acquired) Specialized knowledge such as chemistry, engineering, accounting, advertising, etc.
2. Skill
A. (acquired) Facility in muscular coordination, as in operating machines, repetitive movements, careful
coordinations, dexterity, assembling, sorting, etc.
B. (acquired) Specific job knowledge necessary to the muscular coordination only; acquired by
performance of the work and not to be confused with general education or specialized knowledge.
It is very largely training in the interpretation of sensory impressions.
Examples
1. In operating an adding machine, the knowledge of which key to depress for a subtotal would be skill.
2. In automobile repair, the ability to determine the significance of a knock in the motor would be skill.
3. In hand-firing a boiler, the ability to determine from the appearance of the firebed how coal should be
shoveled over the surface would be skill.
3. Physical Requirements
A. Physical effort, such as sitting, standing, walking, climbing, pulling, lifting, etc.; both the amount
exercised and the degree of the continuity should be taken into account.
B. Physical status, such as age, height, weight, sex, strength, and eyesight.
Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration, Figure 11–A1
p. 181.© 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ.
Sample Definitions of Five Factors Typically
Used in the Factor Comparison Method
4. Responsibilities
A. For raw materials, processed materials, tools, equipment, and property.
B. For money or negotiable securities.
C. For profits or loss, savings or methods’ improvement.
D. For public contact.
E. For records.
F. For supervision.
1. Primarily the complexity of supervision given to subordinates; the number of subordinates is a
secondary feature. Planning, direction, coordination, instruction, control, and approval
characterize this kind of supervision.
2. Also, the degree of supervision received. If Jobs A and B gave no supervision to subordinates,
but A received much closer immediate supervision than B, then B would be entitled to a higher
rating than A in the supervision factor.
To summarize the four degrees of supervision:
Highest degree—gives much—gets little
High degree—gives much—gets much
Low degree—gives none—gets little
Lowest degree—gives none—gets much
5. Working Conditions
A. Environmental influences such as atmosphere, ventilation, illumination, noise, congestion,
fellow workers, etc.
B. Hazards—from the work or its surroundings.
C. Hours.
Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration, Figure 11–A1 (cont’d)
p. 181.© 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ.
Ranking Key Jobs by Factors1
Table 11–A1
Ranking Key Jobs by Wage Rates1
Figure 11–A2
Comparison of Factor and Wage Rankings
Figure 11–A3
Job (Factor)-Comparison Scale
Figure 11–A4
The Point Method of Job Evaluation
 Step 1. Determine clusters of jobs to be
evaluated
 Step 2. Collect job information
 Step 3. Select compensable factors
 Step 4. Define compensable factors
 Step 5. Define factor degrees
 Step 6. Determine relative values of factors

Example of One Factor (Complexity/Problem Solving) in
a Point Factor System
Source: Richard W. Beatty and James R. Beatty,“Job Evaluation,” in Ronald A. Berk (ed.), Performance
Assessment: Methods and Applications (Baltimore, MD: Johns Hopkins University Press, 1986), p. 322.
Figure 11–A2
Evaluation Points Assigned to
Factors and Degrees
Figure 11–A5

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Gary Dessler

Chapter 11 Part 4 Compensation

Establishing Strategic Pay Plans

© 2005 Prentice Hall Inc. PowerPoint Presentation by Charlie Cook

© 2005 Prentice Hall Inc. All rights reserved. 11–3

© 2005 Prentice Hall Inc. All rights reserved. 11–4

© 2005 Prentice Hall Inc. All rights reserved. 11–5

© 2005 Prentice Hall Inc. All rights reserved. 11–6

© 2005 Prentice Hall Inc. All rights reserved. 11–8

© 2005 Prentice Hall Inc. All rights reserved. 11–9

Source: Reprinted with permission

© 2005 Prentice Hall Inc. All rights reserved. 11–11

1. What are our company’s key success factors?

4. What measurable requirements should each compensation program meet to be deemed

5. How well do our current compensation programs match these requirements?

Source: Jack Dolmat-Connell, “Developing a Reward Strategy that Delivers Shareholder

© 2005 Prentice Hall Inc. All rights reserved. 11–14

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Source: http://www.opm.gov/fedclass. gscler.pdf. August 29, 2001. Figure 11–3

© 2005 Prentice Hall Inc. All rights reserved. 11–27

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Note: This shows overlapping wage classes

Source: [email protected]. Table 11–4

© 2005 Prentice Hall Inc. All rights reserved. 11–37

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Note: *(An abbreviated example showing selected

© 2005 Prentice Hall Inc. All rights reserved. 11–50

Chapter 11 Appendix Part 4 Compensation

Quantitative Job Evaluation Methods

© 2005 Prentice Hall Inc. PowerPoint Presentation by Charlie Cook

© 2005 Prentice Hall Inc. All rights reserved. 11–52

© 2005 Prentice Hall Inc. All rights reserved. 11–59

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