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Chapter Eight
Establishing Strategic Reward Plans
© 2007 Pearson Education Canada 8-1
Dessler, Cole, Goodman, and SutherlandIn-Class Edition
Management of Human ResourcesSecond Canadian Edition
© 2007 Pearson Education Canada 8-2
Strategic Aspects of Total Rewards
–pay for skills and competencies
–pay for performance
–flexible pay systems
–pay for skills and competencies
–pay for performance
–flexible pay systems
Three Strategic Approaches
© 2007 Pearson Education Canada 8-3
Direct
Payments
(pay)
Direct
Payments
(pay)
Two Main Components of Pay
Indirect
Payments
(benefits)
Indirect
Payments
(benefits)
Strategic Aspects of Total Rewards
© 2007 Pearson Education Canada 8-4
Basic Considerations in Determining Pay Rates
Legal –employment/labour standards–pay equity–human rights–Canada/Quebec Pension Plan–Workers’ Compensation–Employment Insurance
Union –collective bargaining
Compensation policies –leader or follower in pay
Equity –internal and external
Legal –employment/labour standards–pay equity–human rights–Canada/Quebec Pension Plan–Workers’ Compensation–Employment Insurance
Union –collective bargaining
Compensation policies –leader or follower in pay
Equity –internal and external
© 2007 Pearson Education Canada 8-5
Establishing Pay Rates
Step 1. Conduct job evaluation—for internal equity
Step 2. Group similar jobs into pay grades
Step 3. Conduct salary survey—for external equity
Step 4. Price each pay grade using wage curves
Step 5. Fine-tune pay rates
Step 1. Conduct job evaluation—for internal equity
Step 2. Group similar jobs into pay grades
Step 3. Conduct salary survey—for external equity
Step 4. Price each pay grade using wage curves
Step 5. Fine-tune pay rates
© 2007 Pearson Education Canada 8-6
Establishing Pay Rates
Job Evaluation–systematic comparison of jobs to determine their relative worth
Benchmark Job–job commonly found in organizations–critical to firm’s operations
Compensable Factor–fundamental compensable aspect of a job; eg. skill, effort, responsibility, working conditions
Job Evaluation–systematic comparison of jobs to determine their relative worth
Benchmark Job–job commonly found in organizations–critical to firm’s operations
Compensable Factor–fundamental compensable aspect of a job; eg. skill, effort, responsibility, working conditions
Step 1. Job Evaluation
© 2007 Pearson Education Canada 8-7
Establishing Pay Rates
Step 1. Job Evaluation
Classification/grading methodClassification/grading method
Ranking methodRanking method
Point methodPoint method
© 2007 Pearson Education Canada 8-8
Establishing Pay Rates
Ranking Method
1. Obtain job information
2. Group jobs to be rated
3. Select compensable factors
4. Rank jobs
5. Combine ratings
Ranking Method
1. Obtain job information
2. Group jobs to be rated
3. Select compensable factors
4. Rank jobs
5. Combine ratings
Step 1. Job Evaluation
© 2007 Pearson Education Canada 8-9
Establishing Pay Rates
Ranking Order Annual Pay• Office manager $60,000• Chief nurse 54,000• Bookkeeper 50,000• Nurse 40,000• Cook 26,000• Nurse’s aide 24,000• Maid 20,000
Ranking Order Annual Pay• Office manager $60,000• Chief nurse 54,000• Bookkeeper 50,000• Nurse 40,000• Cook 26,000• Nurse’s aide 24,000• Maid 20,000
Step 1. Job Evaluation
© 2007 Pearson Education Canada 8-10
Establishing Pay Rates
Classification/Grading Method
–categorize jobs into groups (classes or grades)
–classes contain similar jobs
–grades contain dissimilar jobs of equal difficulty
Classification/Grading Method
–categorize jobs into groups (classes or grades)
–classes contain similar jobs
–grades contain dissimilar jobs of equal difficulty
Step 1. Job Evaluation
© 2007 Pearson Education Canada 8-11
Establishing Pay Rates
Point Method
–identify compensable factors
–determine the degree to which each factor
is present in each job
Point Method
–identify compensable factors
–determine the degree to which each factor
is present in each job
Step 1. Job Evaluation
© 2007 Pearson Education Canada 8-12
Establishing Pay Rates
Point Method (1 of 2)
1. determine clusters of jobs to be evaluated
2. collect job information
3. select and define compensable factors
4. define factor degrees
Point Method (1 of 2)
1. determine clusters of jobs to be evaluated
2. collect job information
3. select and define compensable factors
4. define factor degrees
Step 1. Job Evaluation
© 2007 Pearson Education Canada 8-13
Establishing Pay Rates
Point Method (2 of 2)
5. determine factor weights
6. assign point values to factors and degrees
7. write the job evaluation manual
8. rate the jobs
Point Method (2 of 2)
5. determine factor weights
6. assign point values to factors and degrees
7. write the job evaluation manual
8. rate the jobs
Step 1. Job Evaluation
© 2007 Pearson Education Canada 8-14
Point System – XYZ Company
Possible Points WeightSkillTechnical Skill/Education 1-10Job-Related Experience 1-10Updating of Knowledge 1-5 25%
EffortPhysical Effort 1-5Visual Effort 1-5Mental Effort 1-10 20%
ResponsibilityAutonomy 1-10Supervisory Responsibility 0-15Internal/External Contacts 1-15 40%
Working ConditionsWork Environment 1-5Travel 0-10 15%
9-100 100%
© 2007 Pearson Education Canada 8-15
Point System – ABC Company
Factor Level (I-IV)Min. Low Mod. High WeightI II III IV
SkillExperience 45 90 135 180Education/Training 25 50 75 100 28%
EffortPhysical 25 50 75 100Mental 35 70 105 150 25%
ResponsibilitySafety of Others 25 50 75 100Equipment and Materials 20 40 60 80Assisting Trainees 5 20 35 50Product/Service Quality 20 40 60 80 31%
Working ConditionsUnpleasant Conditions 20 40 60 80Hazards 20 40 60 80 16%
220 1000 100%
© 2007 Pearson Education Canada 8-16
Establishing Pay Rates
Pay Grade
– jobs of approximately equal value, eg.:
• point: jobs falling within a range of points
• ranking: all jobs falling within 2-3 ranks
• classification: jobs already in classes/grades
• factor comparison: specified range of pay
rates
Pay Grade
– jobs of approximately equal value, eg.:
• point: jobs falling within a range of points
• ranking: all jobs falling within 2-3 ranks
• classification: jobs already in classes/grades
• factor comparison: specified range of pay
rates
Step 2. Group Similar Jobs into Pay Grades
© 2007 Pearson Education Canada 8-17
Establishing Pay Rates
–formal or informal survey by employer
–commercial, professional, and government
salary surveys
–formal or informal survey by employer
–commercial, professional, and government
salary surveys
Step 3. Conduct a Wage/Salary Survey
© 2007 Pearson Education Canada 8-18
Establishing Pay Rates
–find average pay for each pay grade
–plot pay rates for each pay grade
–fit a wage line through points (regression)
–price jobs
–find average pay for each pay grade
–plot pay rates for each pay grade
–fit a wage line through points (regression)
–price jobs
Step 4. Price Each Pay Grade—Wage Curves
© 2007 Pearson Education Canada 8-19
Establishing Pay Rates
Job Evaluation Points
AverageWageRates
* * * * *
* ** *
* * **
WageCurve
Step 4. Price Each Pay Grade—Wage Curves
© 2007 Pearson Education Canada 8-20
Establishing Pay Rates
Step 5. Fine-Tune Pay Rates
I II III IV V VI
WageStructure
© 2007 Pearson Education Canada 8-21
Establishing Pay Rates
Step 5. Fine-Tune Pay Rates
Broadbanding$200,000
$175,000
$150,000
$125,000
$100,000
$75,000
$50,000
$35,000
Band 1
Trainee
Band 2
Independent
Contributor
Band 3
Senior
Specialist
Band 4
Expert
Represents organization to
external groups
Provides strategic direction and advice
Serves as a mentor or resource for ideas
Represents work group in meetingsWork is checked
regularly by supervisor
Develops credibility and reputation
Works under close supervision
Learning how things are done
© 2007 Pearson Education Canada 8-22
Current Trends in Compensation
Skill/competency-based paySkill/competency-based pay
Customized job evaluation plansCustomized job evaluation plans
© 2007 Pearson Education Canada 8-23
Current Trends in Compensation
–to eliminate systemic pay discrimination by
providing equal pay to:
• male-dominated job classes
• female-dominated job classes
of equal value
–to eliminate systemic pay discrimination by
providing equal pay to:
• male-dominated job classes
• female-dominated job classes
of equal value
Pay Equity
© 2007 Pearson Education Canada 8-24
Current Trends in Compensation
–must ensure no gender bias in job evaluation
–long-term solution is women and men equally
represented in all jobs; i.e. no male or female-
dominated jobs (occupational segregation)
–must ensure no gender bias in job evaluation
–long-term solution is women and men equally
represented in all jobs; i.e. no male or female-
dominated jobs (occupational segregation)
Pay Equity
© 2007 Pearson Education Canada 8-25
Pay for Managerial and Professional Jobs
–pay based on performance as well as the value
of the job
Compensating managers:
-salary, benefits, short-term incentives, long-term
incentives, perquisites
Compensating professional employees:
-market pricing as difficult to identify compensable
factors
–pay based on performance as well as the value
of the job
Compensating managers:
-salary, benefits, short-term incentives, long-term
incentives, perquisites
Compensating professional employees:
-market pricing as difficult to identify compensable
factors
© 2007 Pearson Education Canada 8-26
Incentive Plans
Variable Pay
–plan that links pay to productivity or profitability
Variable Pay
–plan that links pay to productivity or profitability
© 2007 Pearson Education Canada 8-27
Incentive Plans
Spot Bonus
–spontaneous incentive awarded to individuals
for accomplishments not easily measured by a
standard
Spot Bonus
–spontaneous incentive awarded to individuals
for accomplishments not easily measured by a
standard
© 2007 Pearson Education Canada 8-28
Incentives for Operations Employees
–piecework plans—straight; guaranteed
–team or group incentive plan
–piecework plans—straight; guaranteed
–team or group incentive plan
© 2007 Pearson Education Canada 8-29
Incentives for Managers and Executives
Short-term Incentives
annual bonus
Short-term Incentives
annual bonus
Long-term Incentives
capital accumulation plans
Long-term Incentives
capital accumulation plans
© 2007 Pearson Education Canada 8-30
Incentives for Managers and Executives
–eligibility
–fund size
–determining individual awards
–eligibility
–fund size
–determining individual awards
Annual Bonus—Decisions
© 2007 Pearson Education Canada 8-31
Incentives for Managers and Executives
Stock options – right to purchase a
stated number of shares of a company’s
stock at today’s price at some time in
the future
Stock options – right to purchase a
stated number of shares of a company’s
stock at today’s price at some time in
the future
Long-Term Incentives
© 2007 Pearson Education Canada 8-32
Incentives for Salespeople
Salary
Plan
(fixed salary)
Salary
Plan
(fixed salary)
Commission
Plan
(pay in direct
proportion
to sales)
Commission
Plan
(pay in direct
proportion
to sales)
Combination
Plan
(salary plus
commission)
Combination
Plan
(salary plus
commission)
© 2007 Pearson Education Canada 8-33
Organization-Wide Incentive Plans
–profit sharing plans
–employee share purchase/stock ownership plans
–gainsharing plans
–profit sharing plans
–employee share purchase/stock ownership plans
–gainsharing plans
© 2007 Pearson Education Canada 8-34
Developing Effective Incentive Plans
Employee Recognition Programs
Lack of recognition and praise
is the #1 cause of
employee turnover
Lack of recognition and praise
is the #1 cause of
employee turnover