9 Establishing Strategic Pay Plans - Awinsjclarke · PDF file9 Establishing Strategic Pay Plans ... Dessler & Tan 2006, p.272 9.3 EQUITY AND ITS IMPACT ON PAY RATES ... Table 9.3 Job

9 Establishing Strategic Pay Plans

Objectives

At the end of this chapter, students should be able to: • List the basic factors in determining pay rates • Explain in detail how to establish pay rates • Describe how to price managerial and

professional jobs • Discuss competency-based pay and other current

trends in compensation

q Introduction q Determining Pay Rates q Corporate Policy, Competitive

Strategy and Compensation

q Equity and Its Impact on Pay Rates q Types of Equity

q Establishing Pay Rates q The Salary Survey q Job Evaluation

o Preparing for the Job Evaluation o Job Evaluation Methods

q Group Similar Jobs into Pay Grades q Price Each Pay Grade – Wages

Curves q Fine-Tune Pay Rates

q Pricing Managerial and Professional Jobs q Compensating Executives q Compensating Professional

Employees

q Competency-Based Pay q Reasons for Using Competency-

Based Pay q Competency-Based Pay in Practice q The Advantages and Disadvantages

of Competency-Based Pay

q Other Compensation Trends q Broadbanding q Strategic Compensation

q Government Guidelines on Wages

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9.1 INTRODUCTION May is the new Compensation Manager with ABC Sdn Bhd. As she was analyzing the payroll of the employees, she noticed that there were some inequities in the salary. For instance, two clerks with the same qualifications and working experience had a thousand dollars difference in salary when they joined the organization. After discussing this issue with the HR Director, she is assigned to develop a new salary structure for the organization. May is lost as she does not know how to develop the new salary structure.

Figure 9.1 May is frustrated with her new challenge Let’s read the chapter to learn how to establish pay rates in an organization so that you can assist May in her new organization.

9.2 DETERMINING PAY RATES

Figure 9.2 Components of Employee Compensation Source: Adapted from Dessler & Tan 2005, p.272

Employee compensation can be defined as all extrinsic rewards that employees receive in exchange for their work. It can be divided into direct financial payments (salary, incentive, commission and bonus) and indirect financial payments (financial benefits such as employer-paid insurance and annual leave). Direct financial payments can be made via on time or on performance basis. Employees who get paid either on an hourly, a daily or monthly basis receive time-based pay. Examples include white-collar workers, part-time workers and others.

Executive

Teacher

Figure 9.3 Examples of jobs where payments are on a time basis

Employee Compensation

Direct Financial Payments Indirect Financial Payments

Arrrrrrrrr!!!!! Someone help me. How am I going to develop the new salary structure?

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On the hand, employees who are paid according to the number of pieces they produce or sell are receiving payments based on performance. Examples include factory assemblers and salesmen.

Assembly workers Figure 9.4 Examples of jobs where payments are on a performance basis

9.2.1 Corporate Policy, Competitive Strategy and Compensation The compensation policy must be aligned to the organization’s competitive strategy and corporate policy. Therefore, the employer must develop a reward package that will encourage employees to display work behaviours that are vital in achieving the organization’s competitive strategy. In order to develop the reward package, the HR manager must discuss with top management the proposed policies to ensure consistency with the organization’s vision and policies.

Figure 9.5 Discussing with management on proposed compensation policies The table below shows the types of questions that need to be addressed in developing an aligned reward strategy. Questions to Ask 1. What are our organization’s key success factors? What must our organization 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?

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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?

Table 9.1 Developing An Aligned Reward Strategy Source: Dessler & Tan 2006, p.272

9.3 EQUITY AND ITS IMPACT ON PAY RATES The equity theory in motivation says that employees want fairness between what they perceive as their contribution and their rewards. Therefore, employees who perceive unfairness will take action to eliminate or reduce the unfairness. For example, if an employee believes that she is underpaid, she will likely reduce her effort by working more slowly, taking off early or being absent.

9.3.1 Types of Equity Pay equity concerns whether employees believe they are being fairly paid. Therefore, managers need to deal with four types of pay equity i.e. external, internal, individual and procedural equity. Types of Equity

Definition Tools to Deal with the Equities

External equity

It deals with what employees in other organizations are being paid for performing similar jobs

Salary Surveys

Internal equity It deals with how fair the job’s pay rate is when compared to other jobs within the same organization

Job analysis and job evaluation

Individual equity

It deals with how fair an individual’s pay is when compared to their co-workers’ pay (same job) based on individual performance

Performance appraisal

Procedural equity

It refers to the perceived fairness of the procedures used to make decisions on pay

Communications, grievance mechanism and employees’ participation in developing the organization’s pay plans

Table 9.2 Types of Equity Source: Adapted from Byars & Rue 2003, p.281 and Dessler & Tan 2006, p.273

9.4 ESTABLISHING PAY RATES There must be external and internal equity when it comes to establishing pay rates. The steps involved in establishing pay rates are as follows:

• Conduct a salary survey • Determine the worth of each job in your organization via job evaluation • Group similar jobs into pay grades • Price each pay grade by using wage curves • Fine-tune pay rates

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9.4.1 The Salary Survey A salary survey aims to get data on what other organizations are paying for specific jobs or job classes in a given geographic location or particular type of industry. The survey may be purchased, outsourced to a consulting firm or be conducted by the organization itself. Employers use these surveys for the following reasons: a. Provide input in developing a budget and compensation package b. Price benchmark jobs which are then used as a basis to price the various jobs in the organization c. Provide a basis for decisions on employee benefits such as insurance, sick leave and annual leave Marketing Director Redmond, WA, U.S. Low Average High Bonus Benefits Total

Compensation Annual 58,693 81,280 116,026 5.2 % 15.3 % 97,210 Monthly 4,891 6,773 9,669 N/A 15.3 % 8,101 Weekly 1,129 1,563 2,231 N/A 15.3 % 1,869 Hourly 28 39 56 N/A 15.3 % 47 United States National Average Low Average High Total

Compensation Annual 52,962 71,549 101,749 86,276 Monthly 4,413 5,962 8,479 7,190 Weekly 1,018 1,376 1,957 1,659 Hourly 25 34 49 41 Currencies shown in United States Dollars Figure 9.6 An example of a salary survey for the position of Marketing Manager A benchmark job is a well-known job in the organization and industry and is performed by a large number of employees. Salary surveys will provide the low, high and average salaries or even the market rates for a given position. For example, a foreign bank in Malaysia prices its employees’ salaries on the 75th percentile range of pay for jobs. The problems faced in salary surveys are: a. Difficult to assess the participating organizations for comparability. We need to consider factors such as size, type of business, prestige, security, growth opportunities and location. b. Difficult to obtain information as organizations will not be willing to share data c. We need to compare the whole total compensation package and not only base salary d. Difficulty in determining comparable jobs e. Inaccuracy of survey data due to adjustment periods.

9.4.2 Job Evaluation Job evaluation is a process that determines the relative value of one job relative to another. The purposes of a job evaluation are: a. To eliminate internal pay inequities b. To determine the worth of each job relative to another c. To produce a salary hierarchy

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9.4.2.1 Compensable Factor An organization can select two basic methods in comparing jobs:

• Intuitive approach • Focus on certain important characteristics of jobs that organizations are willing to pay

for such as skills, effort, responsibility and working conditions. These factors are known as compensable factors.

9.4.2.2 Preparing for the Job Evaluation As job evaluation is a subjective and judgmental process, it needs the cooperation of supervisors, HR specialists, employees and union representatives. The mains steps include: a. Identifying the Need It is simple to identify the need for a job evaluation. For example, employee dissatisfaction can be observed via high absenteeism, turnover or arguments may result from paying employees different rates for similar jobs. b. Getting Cooperation The organization could inform employees about the coming job evaluation program and that no employee’s pay rate will be adversely affected by the result of the job evaluation. c. Choose a Job Evaluation Committee A job evaluation committee comprises five members representing the employees, HR specialist and union representative. Each committee member will receive a manual explaining the job evaluation process and ways to conduct a job evaluation. It is important to form a committee because:

• If you have different people in the committee who are familiar with job, the members may see look at things in different perspectives, thus, enriching the process

• If employees are appointed into the committee, it would be easier to gain employees’ acceptance of the job evaluation results

The main functions perform by the evaluation committee are identifying ten or 15 benchmark jobs, select compensable factors and evaluating the worth each job.

9.4.2.3 Job Evaluation Methods There four methods that can be used to evaluate the worth of each job are: a. Ranking In the job evaluation ranking method, the raters examine the job descriptions of each job and arrange the jobs in order according to their value to the organization. The steps involved in this method are:

• Obtain job information from the job analysis. If there is no job analysis, the HR Department needs to prepare one

• Select and group jobs by ranking job by departments • Select compensable factors. Evaluators need to be briefed on the definition of each

factors to ensure consistency in evaluations

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• Rank jobs by providing each evaluator a set of index cards which contains a brief description of the job. Then, they are required to rank these cards from the lowest to the highest

• Combine the ratings of all evaluators by simply averaging the ratings

Ranking Order Annual Pay Scale 1. Office manager RM43,000 2. Chief nurse RM42,500 3. Bookkeeper RM34,000 4. Nurse RM32,500 5. Cook RM31,000 6. Nurse’s aide RM28,500 7. Orderly RM25,500 Table 9.3 Job Ranking by Hospital ABC The advantages and disadvantages of the job evaluation ranking method are shown in the table below. Advantages Disadvantages Fast and easy to complete It is limited to smaller organizations where

employees are very familiar with various jobs

Relatively inexpensive Provides no yardstick for quantifying the value of one job relative to another

Easy to explain Highly subjective Table 9.4 Advantages and disadvantages of ranking method b. Job Classification It is a job evaluation method that determines the relative worth of a job by comparing it to a predetermined scale of classes or grades of jobs. Each class or grades of jobs are different in terms of duties, responsibilities, skills, working conditions and other job-related factors. Classes refer to groups that contain similar jobs while grades refer to jobs that are similar in difficulty. GRADE NATURE OF ASSIGNMENT LEVEL OF RESPONSIBILITY GS-7 Performs specialized duties in a

defined functional or program area involving a wide variety of problems or situations; develops information, identifies interrelationships, and takes actions consistent with objectives of the function or program served

Work is assigned in terms of objectives, priorities and deadlines; the employee works independently in resolving most conflicts, completed work is evaluated for conformance to policy, guidelines such as regulations, precedent cases and policy statements require considerable interpretation and adaptation.

Table 9.5 Example of a Grade Level Definition

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The advantages and disadvantages of this method are shown in the table below. Advantages Disadvantages Readily accepted by employees The classification descriptions may be so

broad and do not relate to specific jobs, causing employees to question the grades of their respective jobs

Adaptable to large organizations with are geographically dispersed

Job evaluators may abuse the system due to broad and general classifications

The system can last for a long time because the classifications are broad and general

Difficult to write the class or grade descriptions

Highly subjective Table 9.6 Advantages and disadvantages of job classification method c. Point Method The point method is a quantitative method. It involves the following:

• Identifying several compensable factors • Identifying several degrees for each compensable factor • Identify the degree to which each of these factors is present in the job • Calculate the total point value for the job by summing up the corresponding points for

each factor The advantages and disadvantages of the point method are shown in the table below. Advantages Disadvantages Detailed and Specific – jobs are evaluated on a component basis and compared against a predetermined scale

Time-consuming and costly to develop

Generally accepted by employees because of its mathematical nature

Requires significant interaction and decision-making by the different parties involving in conducting the job evaluations

Easy to adapt with the changes in the job Easy to assign monetary values to jobs Table 9.7 Advantages and Disadvantages of Point Method Source: Byars & Rue 2003, p.297 d. Factor Comparison The factor comparison method ranks jobs according to a variety of skills and difficulty factors, then combining the rankings to arrive at an overall numerical ranking for each job (Dessler & Tan 2006, p.278). The steps involved in this method are as follows:

• Obtain job information through the job descriptions and job specifications. The job specification should be developed in terms of compensable factors such as mental requirements, physical requirements, skills requirements, responsibility and working condition.

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Figure 9.7 Sample definitions of five factors typically used in factor comparison method

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• Select 15 to 25 key benchmark jobs • Each committee member will rank individually the key jobs on the each of the five

factors based on job descriptions and job specifications. After that, the committee will meet to develop a consensus on each job. The table below shows how each key job ranks on each of the five compensable factors.

Key Jobs

Mental Requirements

Physical Requirements

Skill Requirements

Responsibility Working Conditions

Welder 1 4 1 1 2 Crane Operator

3 1 3 4 4

Punch Press Operator

2 3 2 2 3

Security Guard

4 2 4 3 1

* 1 is high and 4 is low Table 9.8 Ranking Key Jobs by Factors Source: Dessler & Tan 2006, p.296 • The committee members distribute the wage rates by the compensable factors for each

job independently before meeting as a team to arrive at a consensus. For example, the wage rate for a welder is $9.80 and is divided as follows: $4.00 (mental requirements), $0.40 (physical requirements), $3.00 (skills requirements), $2.00 (responsibility) and $0.40 (working conditions).

• The committee ranks key jobs according to wages assigned to each compensable factor as per the table below.

Types of Jobs

Hourly Wage ($)

Mental Requirements


Skill Requirements


Welder 9.80 4.00(1) 0.40 (4) 3.00(1) 2.00(1) 0.40(2) Crane Operator

5.60 1.40(3) 2.00(1) 1.80(3) 0.20(4) 0.20(4)


6.00 1.60(2) 1.30(3) 2.00(2) 0.80(2) 0.30(3)

Security Guard

4.00 1.20(4) 1.40(2) 0.40(4) 0.40(3) 0.60(1)

* 1 is high and 4 is low Table 9.9 Ranking Key Jobs by Wage Rates Source: Dessler & Tan 2006, p.296

For example, under working conditions, the security guard position is ranked one as it has the highest wage assigned to it i.e. $0.60 while the crane operator received the worst ranking due to the lowest wage assigned to it ($0.20).

• The committee makes a comparison on the two sets of rankings to screen out unusable key jobs. If there is a difference in the ranking for any of the jobs, the particular jobs may not be used as key jobs. Let’s take a look at the table below.

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Types of Jobs

Mental Requirements


Skill Requirements


Step 2 Step 5 Step 2 Step 5 Step 2 Step 5 Step 2 Step 5 Step 2

Step 5

Welder 1 1 4 4 1 1 1 1 2 2 Crane Operator

3 3 1 1 3 3 4 4 4 4


2 2 3 3 2 2 2 2 3 3

Security Guard

4 4 2 2 4 4 3 3 1 1

Table 9.10 Comparison of Factors and Wage Rankings Source: Dessler & Tan 2006, p.296

• Construct the job comparison scale as per the table below Mental Physical Skill Responsibility Work Requirements Requirements Requirements Conditions 0.20 Crane Operator C. Operator 0.30 P.P Operator 0.40 Welder Sec. Guard Sec. Guard Welder 0.50 0.60 Sec. Guard 0.70 0.80 Punch Press Operator 0.90 1.00 (Plater) 1.10 1.20 Sec. Guard 1.30 Punch Press Operator 1.40 C. Operator Sec Guard (Inspector) (Plater) 1.50 (Inspector) (Inspector) 1.60 Punch Press Operator 1.70 (Plater) 1.80 Crane Operator (Inspector) 1.90 2.00 Crane Operator Punch Press Opt. Welder 2.20 (Plater) 2.40 (Inspector) (Plater) 2.60 2.80 3.00 Welder 3.20 3.40 3.60 3.80 4.00 Welder 4.20 4.40 4.60 4.80 Table 9.11 Job (Factor) – Comparision Scale Source: Dessler & Tan 2006, p.297

• Slot all the other jobs to be evaluated, factor by factor into the job-comparison scale.

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The advantages and disadvantages of the factor comparison method are shown in the table below. Advantages Disadvantages It is relatively detailed and specific Relatively difficult to explain to employees Easier to develop than the point method Not easily adapted to changes in the jobs

being evaluated Tied to external market wage rates Using the same factors for all organizations

or for all jobs in an organization may not be appropriate

Table 9.12 Advantages and Disadvantage of the factor comparison method Source: Dessler & Tan 2006, p.298

9.4.3 Group Similar Jobs into Pay Grades The evaluation committee will group similar jobs into grades for pay purposes. A pay grade comprises jobs of equal difficulty or importance as identified by the job evaluation. The table below shows the relationship between the job evaluation method and classification into pay grades. Job Evaluation Method Classification into Pay Grades Point method Consists of jobs falling within a range of points Ranking method Consists of all jobs that fall within two or three ranks Classification method Automatically categorizes jobs into classes or grades Factor comparison method Consists of a specified range of pay rates Table 9.13 Relationship between the job evaluation method and classification into pay grades

9.4.4 Price Each Pay Grade – Wages Curves Organizations need to assign pay rates to each pay grade by using the wage curve. A wage curve shows the relationship between the value of the job and the average wages paid for the job.

Figure 9.8 Plotting a Wave Curve

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The pay rates on the wage curve are the rates currently paid by the employers. If an organization feels that the current pay rates do not reflect the market rates, it is suggested that it selects benchmark jobs for each pay grade and price them as per the salary survey. Then, it can determine others jobs around the benchmark job. The steps involved in pricing jobs with a wage curve are:

• Find the average pay for each pay grade • Plot the pay rates for each pay grade in a graph • Fit a line through the points plotted and that is the wage curve • Look for out-of-line rates and correct them

9.4.5 Fine-Tune Pay Rates Fine-tuning involves developing pay ranges and correcting out-of-line rates.

9.4.5.1 Developing Pay Ranges A pay range shows the minimum and maximum pay rate for a job. There is a huge variance between the two, which allows for a great pay difference. A pay range is good as an organization can compensate employees based on performance and length of service.

Figure 9.9 Wage Structure

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As per the graph above, one can easily determine the minimum, midpoint and maximum pay rates per hour for each pay grade. The minimum rate could be the hiring rate while the maximum rate if the maximum amount an employee can receive for the job regardless of performance. The midpoint is usually the wage line and then the organization may decide on a maximum and minimum rate for each grade, such as 20% above and below the wage line. However, it is important to note that pay ranges are wider at higher levels, reflecting the greater demands, responsibilities and tasks in more complex jobs.

9.4.5.2 Correcting Out-of-Line Rates The average pay for a particular job maybe currently too high or too low compared to other jobs in the organization. In such cases, the organization should increase the wages of underpaid employees to the minimum rate range for their pay grade. On the other hand, the organization can solve the problems of overpaid employees by:

• freezing the rate paid to overpaid employees until a general salary increase bring the other jobs into line

• promote or transfer employees to other jobs that justifies their current pay rates • freeze the rate for 6 months where it tries to transfer or promote the employees. After

6 months, reduce the rate to the maximum in the pay range for their pay grades

9.5 PRICING MANAGERIAL AND PROFESSIONAL JOBS There are similarities and differences in developing compensation packages for managers or professionals against other individuals. The similarities are the purpose of the compensation packages i.e. to attract and recruit talented employees and job evaluation can be applied to managerial and professional jobs in terms of non-salary issues like bonuses, incentives and benefits. The differences are job evaluations can only provide some information on the pricing of managerial and professional jobs as these jobs rely on other factors such as judgment and problem solving. The organization also emphasizes on the manager’s ability to perform when determining their compensation package.

9.5.1 Compensating Executives Executive compensation emphasizes on performance incentives as the performance of the organization reflects the executives’ contribution to the organization. An executive’s compensation comprises five elements i.e. a. Base Pay Salary is important as it determines the executive’s standard of living and provides the basis for other types of compensation such as bonuses and certain benefits. It may also include guaranteed bonuses regardless of the organization’s performance. b. Short-term Incentives Cash and stock bonuses are given to executives who managed to achieve short-term goals such as an increase of 10% in sales revenues.

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c. Long-term Incentives The stock option is a long-term incentive designed to ensure that the management’s interest is similar to the organization. A stock option plan is an incentive plan where managers can purchase a specified amount of stock in the organization in the future at or below the current market price. It is aim to encourage the executive to take actions that will increase the market value of the organization’s stock. d. Executive Benefits and Perks These benefits are special benefits catered for the key executives. Examples include a company car, free parking, limousine service, kidnapping and ransom protection, financial and legal counseling, professional meetings and conferences, use of company plane and yacht, home entertainment allowance, club memberships, special dining privileges, special relocation allowances, use of company credit cards, medical expense reimbursement, reimbursement for children’s college expenses and low interest loans. e. Golden Parachutes A golden parachute contract aims to protect executives in the event of acquisition or the executive is forced to leave the organization for other reasons. As there is an extreme competition for executive talent, their severance package comprises several times an annual salary and bonus and also stock options.

Salary Stocks Company Plane Figure 9.10 Types of compensation for top executives

9.5.2 Compensating Professional Employees Professional employees refer to people whose main duty comprises work requiring advanced knowledge in the field of science or learning. Examples include accountants, scientists and engineers. These people are initially employed for their knowledge. However, as their knowledge become obsolete through time, they will not earn a good salary increment. This causes them to enter management although they may not be suited for a managerial role. In view of this problem, some organizations have created a dual compensation track which provides a separate pay structure for professionals. As it is difficult to measure the compensable factors such as problem solving, creativity and technical expertise, most organizations use a market-pricing approach. Organizations use salary survey data to determine pay levels for the benchmark jobs and subsequently slot the jobs and other jobs into a salary structure.

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9.6 COMPETENCY-BASED PAY Competency-based pay is a person-oriented method where employees are paid for their range, depth and types of skills and knowledge. Competencies include skills, motives, traits, values, attitudes and self-concepts. These job competencies are built through experience on similar jobs.

Figure 9.11 Factors influencing salary under the competency-based pay

9.6.1 Reasons for Using Competency-Based Pay The reasons for using competency-based pay are as follows: a. Organizations who aspire to implement high-performance work systems require employees who are self-motivated and willing to learn via job rotations. Besides, they will also delegate more responsibilities to the employees. b. Enhance strategic plans by paying for skills that are critical for those plans c. Measurable skills, knowledge and competencies are at the heart of performance management system

9.6.2 Competency-Based Pay in Practice In practice, competency-based programs have four main components:

• A system that define specific skills and a process for linking employees’ pay to their skills

• A comprehensive training system that allows employees to acquire skills • A formal competency testing systems • A work design that allows job rotations, increasing the flexibility of work assignment

9.6.3 The Advantages and Disadvantages of Competency-Based Pay

The advantages and disadvantages of competency-based pay are shown in the table below. Advantages Disadvantages Higher productivity and lower absenteeism rates and accidents when combined with team-building and worker empowerment programs

More difficult to evaluate

Table 9.14 Advantages and disadvantages of competency-based pay

Skills

Self-concepts

Attitudes Values

Motives

Traits

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9.7 BROADBANDING Broadbanding is a compensation technique that combines many pay grades into a few wide bands. Each band contains a relatively wide range of jobs, skills and salary levels. The bands usually have wide salary ranges and overlap substantially. Example: Company A has 6 pay grades i.e. 1 to 6. Under broadbanding, it can combine pay grades 1 to 3 into Band A and grades 4 to 6 into Band B. The steps involved in implementing broadbanding are:

• Decide number of bands and how many pay scales they will include • Assign a salary range for each band

Noe & Mondy 2005, p.302 Figure 9.12 Broadbanding and its relationship to traditional pay grades and ranges The advantages and disadvantages of broadbanding are shown in the table below. Advantages Disadvantages Can move employees from job to job within the broadband easily without worrying about the pay scale

Employees holding jobs at the lower end of the band can become overpaid if HR does not monitor the market value of the jobs effectively

Promote lateral development of employees and direct attention away for vertical promotion opportunities

Provides more flexibility in rewarding people

Suitable for flat organizations and self-managing teams

Table 9.16 Advantages and Disadvantages of Broadbanding

9.8 STRATEGIC COMPENSATION Strategic compensation is part of organization change as it involves a change in processes, attitudes and corporate culture. Rewards are linked to the organization’s business goals and workforce needs. The four elements in strategic compensation are:

• Translating business issues into compensation or HR interventions • Designing and delivering them with key objectives • Leading the resultant change process • Reviewing or evaluating the outcomes

Example: IBM was losing its share market in the 1990s and its CEO, Gerstner made a radical change by aligning its compensation plan to support IBM’s strategic aims, thus, changing the corporate culture of the organization. Let’s take a look at how it was done via the table below.

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Elements of Strategic Compensation

Past Practice New Practice in Line with Strategic Compensation

Translating business issues into compensation or HR interventions

In the past, all nonsales employees enjoyed one single salary structure

IBM used a market-oriented approach by implementing different compensation actions for different job families.

Designing and delivering them with key objectives

IBM scrapped its point-factor job evaluation system and traditional salary grades Compensation plan links performance scores to salary increases

The new system has no points and slots new jobs into 10 bands instead of 24 salary grades. Managers get a budget and coaching on how to differentiate pay for star performers and average performers. They need to rank their employees

Leading the resultant change process

The changes tell employees that a market-driven company must watch the market closely and act accordingly. It also communicated that it was a flatter organization that can deliver its goods and services to the market faster

Reviewing or evaluating the outcomes

Compensation is based on 3 performance appraisal ratings. A star performer will receive 2.5 times more than a low performer

Table 9.17 Implementation of Strategic Compensation Source: Adapted from Dessler & Tan 2006

The advantages of strategic compensation is that it contributes to the various forms of competitive advantage such as better business results, more effective performance, higher employee attraction and retention levels, and higher job motivation and employee satisfaction.

When strategic compensation is poorly managed, it can de-motivate employees, creating staff turmoil or push valued people into seeking better prospects elsewhere.

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9.9 MALAYSIAN’S GOVERNMENT GUIDELINES ON WAGES The Employment Act 1955 serves to protect workers from being discriminated. It has a specific section on wages. Among the key points in this section are: a. The wage period cannot exceed one month b. Wages must be paid not later than the 7th day after the last day of service of a wage period c. Employers are prohibited from paying employees a wage advance exceeding one month except for the purpose of purchasing land, motorcar, motorcycle or bicycle and build or improve their houses. d. Deduction from wages should not exceed 50% of the wages earned during the month. Deductions include mandatory deductions such as the Employees’ Provident Fund, Social Security or retirement benefits. However, payment for union subscriptions, debts with cooperatives, life or hospitalization insurance and welfare thrift schemes may be deducted from wages upon employees’ request. e. However, an employee’s wages can be deducted up to 75% if the deduction is for the purpose of a housing loan f. Wages should not be paid in taverns, amusement places, shops or stores except for employees working in such places. There is no national minimum wage in Malaysia. However, the Government may establish Wages Councils for certain non-unionized sectors of the workforce as per the Wages Council Act 1947. The wage councils have the right to submit proposals to the Minister of Human Resources on minimum wage requirements. At the moment, minimum wages have been set up for the catering and hotel sector, stevedores, cinema workers and shop assistants. As for organizations employing foreign workers, they have to pay a foreign levy as per the Workers’ Compensation Act.

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9.10 SUMMARY 1. There are two bases to pay employee compensation i.e. time and volume of production. 2. The five steps involved in establishing pay rates are: 1. conduct salary survey, 2. evaluate jobs, 3. develop pay grades, 4. use wage curves and 5. fine-tune pay rates. 3. Job evaluation determines the relative worth of a job. It compares jobs to one another in terms of compensable factors. The types of job evaluation methods are ranking method, job classification, point method and factor comparison. 4. Most managers group similar jobs into wage or pay grades for pay purposes. These are jobs of similar difficulty or importance as determined by the job evaluation. 5. It is more complicated to develop a compensation plan for executive, managerial and professional employees because it involves dynamic factors such as creativity and performance. Therefore, the best approach is to use market-based pricing. 6. Competency-based pay refers to paying employees based on their skills and knowledge rather than their job titles. 7. Other trends in compensation are broadbanding and strategic compensation.

9.11 CASE STUDY- ACME MANUFACTURING David Gillette was trying to figure out what to do about a problem salary situation he had in his plant. David recently took over as president of Acme Manufacturing. The founder and former president, Bill Tan, had been president for 35 years. The company was family-owned and located in Kota Bahru. It had approximately 250 employees and was the largest employer in the community. David was a member of the family that owned Acme, but he had never worked for the company prior to becoming president. He had an MBA and a law degree, plus 5 years of management experience with a large manufacturing organization, where he was senior vice president for human resources before making his move to Acme. A short time after joining Acme, David started to notice that there was considerable inequity in the pay structure for salaried employees. A discussion with the human resources director led him to believe that salaried employees’ pay was very much a matter of individual bargaining with the past president. Hourly paid factory employees were not part of the problem because they were unionized and their wages were set by collective bargaining. An examination of the salaried payroll showed that there were 25 employees, ranging in pay from that of the president to that of the receptionist. A closer examination showed that 14 of the salaried employees were female. Three of these were front-line factory supervisors and one was the human resources director. The other 10 were nonmanagement. This examination also showed that the human resources director appeared to be underpaid, and that the three female supervisors were paid somewhat less than any of the male supervisors. However, there were no similar supervisory jobs in which there were both male and female incumbents. When asked, the HR director said that she thought the female supervisors may have been paid at a lower rate mainly because they were women, and perhaps Tan, the former president did not think that women needed as much money because they had working husbands. However, she added she personally thought that they were paid less because they supervised less-skilled employees. David was not sure that this was true. The company from which David had moved had a good job evaluation system. Although he was thoroughly familiar with and capable in this compensation tool, David did not have time

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to make a job evaluation study at Acme. Therefore, he decided to hire a compensation consultant from a nearby university to help him. Together, they decided that all 25 salaried jobs should be in the same job evaluation cluster, that a modified ranking method of job evaluation should be used; and that the job descriptions recently completed by the HR director were current, accurate and usable in the study. The job evaluation showed that the HR director and the three female supervisors were being underpaid relative to comparable male salaried employees. David was not sure what to do. He was afraid that if he gave these women an immediate salary increase large enough to bring them up to where they should be, the male supervisors would be upset and the female supervisors might comprehend the total situation and want back pay. The HR director told David that the female supervisors had never complained about pay differences. The HR director agreed to take a sizable salary increase with no back pay, so this part of the problem was solved. David believed that he had four choices relative to the female supervisors: 1. To do nothing 2. To gradually increase the female supervisors’ salaries 3. To increase their salaries immediately 4. To call the three supervisors into his office, discuss the situation with them and joint decide what to do. Questions 1. What would you do if you were David? 2. How do you think the company got into a situation like this in the first place? 3. Why would you suggest David pursue the alternative you suggested?

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9.12 EXERCISES Answer the following questions 1. John is a sales representative in a jewelry store. He typically works 40 hours per week and his pay is completely based on his sales. He earns a commission on every sale he makes. John’s pay is based on ________________.

a. time b. pay c. incentives d. bonuses e. seniority

2. Which of the following factors affects the design of any pay plan?

a. legal b. union c. company policy d. equity e. all of the above

3. When managers ask “how can I construct a total portfolio of reward programs that link to both short and long-term business success, drive shareholder value, encourage desired behaviors and deliver value to about employees,” they are seeking to produce a(n) ______________.

a. wage curve b. strategic compensation package c. labor relations board d. aligned reward strategy e. pay-for-performance program

4. What theory of motivation states that people are strongly motivated to maintain a balance between what they perceive as their inputs or contributions and their rewards?

a. Maslow’s hierarchy of needs b. Two-factor theory c. Equity theory d. Learned needs theory e. Expectancy theory

5. Which of the following is not a form of equity that should be addressed by managers dealing with compensation issues?

a. underreward b. internal c. external d. individual e. procedural

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6. Jason is an information systems technician in a town in Penang. He earns RM35,0000 per year. He recently found out that a nearby town with a similar population pays people in the same position RM40,000 per year. Jason is concerned with the _________.

a. distributive b. procedural c. internal d. external e. individual

7. Audrey is a lawyer in a mid-size firm in Kuala Lumpur. She recently learned that another lawyer who joined the firm at the same time earns a lower salary than she does. Audrey is experiencing the _______________ form of equity.

a. external b. internal c. distributive d. individual e. procedural

8. Which form of equity refers to the perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay?

a. external b. internal c. distributive d. individual e. procedural

9. _____________ is a formal and systematic comparison of jobs to determine the worth of one job relative to another.

a. Job analysis b. Job evaluation c. Benchmark analysis d. Compensable evaluation e. Job ranking

10. Factors that establish how the jobs compare to one another and set the pay for each job are called ___________.

a. compensable factors b. job evaluation factors c. comparison factors d. ranking factors e. analysis factors

11. When using the job classification method of job evaluation, raters categorize jobs into groups of similar jobs called ______________.

a. classes b. grades c. sections d. schedules e. cohorts

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12. The point method of job evaluation entails ______________. a. identifying several compensable factors, each having several degrees, and the degree to which each of these factors is present in the job b. ranking each job relative to all other jobs based on some overall factor c. using raters to categorize jobs into groups d. deciding which jobs have more of the chosen compensable factors e. none of the above

13. The factor comparison method of job evaluation entails _________________.

a. identifying several compensable factors, each having several degrees, and the degree to which each of these factors is present in the job b. ranking each job relative to all other jobs based on some overall factor c. using raters to categorize jobs into groups d. deciding which jobs have more of the chosen compensable factors e. none of the above

14. A ___________ is comprised of jobs of approximately equal difficulty or importance as established by job evaluation.

a. pay group b. benchmark c. pay grade d. class e. wage curve

15. What is the purpose of the wage curve?

a. to show the relationship between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades b. to equate jobs of approximately equal difficulty or importance as established by job evaluation c. to cluster jobs into logical groupings d. to assign pay rates to pay grades e. to choose benchmark jobs within each pay grade

16. If the current rate being paid for a job falls below the wage line, what step should be taken?

a. a pay freeze should be enacted for that job b. a pay decrease should be assessed c. a pay raise should be provided d. no steps are necessary e. a bonus should be offered

17. Which of the following is typically included in compensation packages for a company’s top executives?

a. base pay b. short-term and long-term incentives c. perks d. executive benefits e. all of the above

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18. A company using competency-based pay pays for all of the following except an employee’s _____________.

a. range of skills b. job title c. depth of knowledge d. type of skills e. all of the above are part of competency-based pay plans

19. ___________ means collapsing 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.

a. Comparable worth b. Strategic compensation c. Job evaluation d. Broadbanding e. Job grading

20. When employers set salary for professional employees by pricing professional jobs in the marketplace to establish the values for benchmark jobs, and then develop a salary structure based on benchmarks and their other professional jobs, the employer has used a __________ approach.

a. job evaluation b. job ranking c. market-pricing d. cost e. point

21. How can managers assess and address each equity issue? 22. List the steps used to establish pay rates while ensuring external, internal and procedural equity 23. List the steps used in the job ranking method of job evaluation. 24. Explain the four key differences between competency-based pay and traditional job-based pay. 25. What are the four main components of a competency-based pay plan?

Documents

9 Establishing Strategic Pay Plans - Awinsjclarke · PDF file9 Establishing Strategic Pay Plans ... Dessler & Tan 2006, p.272 9.3 EQUITY AND ITS IMPACT ON PAY RATES ... Table 9.3 Job