Chapter 11: Strategic Pay Plans



Determining Pay Rates:


ØEmployee compensation

All forms of pay or rewards going to employees and arising from their employment.

ØDirect financial payments

Pay in the form of wages, salaries, incentives, commissions, and bonuses.

ØIndirect financial payments

Pay in the form of financial benefits such as insurance.


Overview of Compensation Laws

ØDavis-Bacon Act (1931)

A law that sets wage rates for laborers employed by contractors working for the federal government.


ØWalsh-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.


ØTitle 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.


ØFair 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.


ØEqual 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?


ØEmployee 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).


ØThe 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.


ØThe Americans with Disabilities Act

Prohibits discrimination against qualified persons with disabilities in all aspects of employment, including compensation.


ØThe 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.



Corporate Policies, Competitive Strategy,and Compensation

ØAligned 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.



Compensation Policy Issues

ØPay for performance

ØPay for seniority

ØThe pay cycle

ØSalary increases and promotions

ØOvertime and shift pay

ØProbationary pay

ØPaid and unpaid leaves

ØPaid holidays

ØSalary compression

ØGeographic costs of living differences


ØSalary 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


ØThe 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

ØExternal equity

How a job’s pay rate in one company compares to the job’s pay rate in other companies.

ØInternal equity

How fair the job’s pay rate is, when compared to other jobs within the same company

ØIndividual 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.

ØProcedural equity

The perceived fairness of the process and procedures to make decisions regarding the allocation of pay.


Methods to Address Equity Issues


ØSalary surveys

To monitor and maintain external equity.

ØJob analysis and job evaluation

To maintain internal equity,

ØPerformance appraisal and incentive pay

To maintain individual equity.

ØCommunications, grievance mechanisms, and employees’ participation

To help ensure that employees view the pay process as transparent and fair.


Establishing Pay Rates

ØStep 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

ØConsulting firms

ØProfessional associations

ØGovernment 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


ØStep 2. Job evaluation

A systematic comparison done in order to determine the worth of one job relative to another.

ØCompensable factor

A fundamental, compensable element of a job, such as skills, effort, responsibility, and working conditions.


Preparing for the Job Evaluation

ØIdentifying the need for the job evaluation

ØGetting the cooperation of employees

ØChoosing an evaluation committee.

ØPerforming the actual evaluation.


Job Evaluation Methods: Ranking

ØRanking each job relative to all other jobs, usually based on some overall factor.

ØSteps in job ranking:

Obtain job information.

Select and group jobs.

Select compensable factors.

Rank jobs.

Combine ratings.



Job Evaluation Methods:
Job Classification

ØRaters 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.


Job Evaluation Methods: Point Method

ØA 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

ØEach job is ranked several times—once for each of several compensable factors.

ØThe rankings for each job are combined into an overall numerical rating for the job.

Computerized Job Evaluations

ØA 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


ØStep 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.


ØStep 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


ØStep 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.


Pricing Managerial and Professional Jobs

ØCompensating 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

ØWhat 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

ØEmployers can use job evaluation for professional jobs.

ØCompensable factors focus on problem solving, creativity, job scope, and technical knowledge and expertise.

ØFirms use the point method and factor comparison methods, although job classification seems most popular.

ØProfessional jobs are market-priced to establish the values for benchmark jobs.


What Is Competency-based Pay?

ØCompetency-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.


Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.


Why Use Competency-Based Pay?

ØTraditional pay plans may actually backfire if a high-performance work system is the goal.

ØPaying for skills, knowledge, and competencies is more strategic.

ØMeasurable skills, knowledge, and competencies are the heart of any company’s performance management process.


Competency-Based Pay in Practice

ØMain 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


Higher quality

Lower absenteeism and fewer accidents


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


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


Strategic Compensation

ØStrategic 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..

ØIBM’s strategic compensation plan:

The marketplace rules.

Fewer jobs, evaluated  differently, in broadbands.

Managers manage.

Big stakes for stakeholders.


Comparable Worth

ØComparable 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

ØFactors 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.


Quantitative Job Evaluation Methods

ØFactor 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



The Point Method of Job Evaluation

ØStep 1. Determine clusters of jobs to be        evaluated

ØStep 2. Collect job information

ØStep 3. Select compensable factors

ØStep 4. Define compensable factors

ØStep 5. Define factor degrees

ØStep 6. Determine relative values of factors