STRATEGIC

COMPENSATION
A Human Resource Management Approach

Chapter 3:
Traditional Bases for
Pay: Seniority and
Merit

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Learning Objectives
1. Describe seniority and longevity pay practices.
2. List at least three elements of merit pay.
3. Give examples and definitions of performance
appraisal methods.
4. Explain at least three ways compensation
professionals can strengthen the pay-forperformance link and summarize each one.
5. Discuss three possible limitations of merit pay
programs.
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Learning Objective 1
Describe seniority and longevity pay
practices.

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Basis for Seniority Pay

Employees become more valuable over
time
Good employees may leave if not
compensated fairly
Rationale based on the human capital
theory

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Seniority Pay
Designed to award job tenure
Set base pay with time-designated increases
Employees perceive that they are treated
fairly
Facilitates administration of pay
Avoids perception of favoritism
Poor fit with most competitive strategies
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Collective Bargaining
Designed to:
Negotiate labor contracts
Provide grievance procedures

Led to:
Job control unionism
Collective bargaining units
Union shops

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Hourly Wages Rates by

Seniority Level
Hourly wages
Classification
title

Start

Staff Nurse I

$19.07

13
25
37
49
months month months months
s
$20.19 $21.31 $22.40 $23.49

Nursing
Assistant
Medical
Assistant
Medical
Technologist

$9.94

$10.17

$10.53 $10.83

$11.01

$14.65

$15.40

$16.13 $16.92

$17.83

$17.66

$18.90

$20.13 $21.38

$22.60

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Longevity Pay
Designed to:
Pay grade maximum for length of service
To reduce employee turnover

Used for most government employees

General Schedule system for federal
employees

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General Schedule (GS)

Divided into 15 classifications
Based on skills, education, and experience
levels
Employees eligible for 10 within-grade pay
increases
Step waiting periods of 13 years

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Learning Objective 2

List at least three elements of merit pay.

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Merit Pay Plans

Pay increases based on performance
Reward excellent effort or results
Motivate future performance
Help retain valued employees
In 2013, average merit increase ranged
between 2.5 and 2.8%
The lowest performance earned 0.2%,
average, 2.6%, and highest 4.6%
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Elements of Merit Pay

Based on objective and subjective indicators
of job performance
Periodic performance reviews
Realistic and attainable standards
Pay increases reflect performance

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Learning Objective 3

Give examples and definitions of

performance appraisal methods.

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Performance Appraisal Plans

Trait systems: ask raters to evaluate each
employees traits or characteristics.
Comparison systems: evaluate a given
employees performance against the
performance of other employees.

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Performance Appraisal Plans

(contd)
Behavioral systems: rate employees on the
extent to which they display successful job
performance behaviors.
Goal-oriented systems: used mainly for
managerial and professional employees and
typically evaluate employees progress toward
strategic planning objectives.

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Trait System Characteristics

- Quality of work

- Judgment

- Quantity of work

- Leadership responsibility

- Dependability

- Decision-making ability

- Cooperation

- Creativity

- Initiative

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Trait-Oriented Performance
Appraisal Rating Form Example
Employees name:
Employees position:
Supervisors name:
Review period:
Instructions: For each trait below, circle the phrase that best represents
the employee.
1. Diligence
a. Outstanding b. Above average c. Average d. Below average e. Poor

2. Cooperation with others

a. Outstanding b. Above average c. Average d. Below average e. Poor

3. Communication skills
a. Outstanding b. Above average c. Average d. Below average e. Poor

4. Leadership
a. Outstanding

b. Above average c. Average d. Below average e. Poor

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Comparison Systems
Rates and ranks performance
Pay raises based on ranking
Types
Forced distribution
Paired comparisons

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Forced Distribution Performance

Appraisal Rating Example
Instructions: You are required to rate the performance for the previous 3 months of the 15
workers employed as animal keepers to conform with the following performance
distribution:
15 percent of the animal keepers will be rated as having exhibited poor performance.
20 percent of the animal keepers will be rated as having exhibited below-average
performance.
35 percent of the animal keepers will be rated as having exhibited average performance.
20 percent of the animal keepers will be rated as having exhibited above-average
performance.
10 percent of the animal keepers will be rated as having exhibited superior performance.
Use the following guidelines for rating performance. On the basis of the five duties listed in
the job description for animal keeper, the employees performance is characterized as:
Poor if the incumbent performs only one of the duties well.
Below average if the incumbent performs only two of the duties well.
Average if the incumbent performs only three of the duties well.
Above average if the incumbent performs only four of the duties well.
Superior if the incumbent performs all five of the duties well.
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Paired Comparison Performance

Appraisal Rating Form Example
Instructions: Please indicate by placing an X by which employee of each
pair has performed most effectively during the past year.

__X__

__X__

Bob Brown

__X__

Mary Green

Jim Smith

Bob Brown

Mary Green

Jim Smith

__X__

Bob Brown
__X__

Mary Green

Allen Jones

Allen Jones
Jim Smith

__X__

Allen Jones

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Behavioral Systems
Critical-incident technique (CIT)
Behaviorally anchored rating scales
(BARS)
Behavioral observation scales (BOS)

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Critical Incident Technique

(CIT)
Employees and supervisors identify and
label job behaviors and results
Supervisors observe and record
Requires extensive documentation

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Critical Incidents Performance

Appraisal Rating Form Example
Instructions: For each description of work behavior below, circle the
number that best describes how frequently the employee engages in
that behavior.
1. The incumbent removes manure and unconsumed food from the animal
enclosures.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often
2. The incumbent haphazardly measures the feed items when placing them in the
animal enclosures.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often
3. The incumbent leaves refuse dropped by visitors on and around the public
walkways.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often
4. The incumbent skillfully identifies instances of abnormal behavior among the
animals, which represent signs of illness.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often
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Behaviorally Anchored Rating

Scales (BARS)
Based on 810 expected job behaviors
Employees rated on ability to perform
each behavior
Ratings highly defensible
Encourages all raters to make evaluations
in similar ways
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Behaviorally Anchored Rating

Scale Example
Instructions: On the scale below, from 7 to 1, circle the number that best describes how
frequently the employee engages in that behavior.
7 The incumbent could be expected to clean the animal enclosures thoroughly and remove
refuse from the public walkways as often as needed.
|
6
|
5 The incumbent could be expected to clean the animal enclosures thoroughly and remove
refuse from the public walkways twice daily.
|
4
|
3 The incumbent could be expected to clean the animal enclosures and remove refuse from
the public walkways in a haphazard fashion twice daily.
|
2
|
1 The incumbent could be expected rarely to clean the animal enclosures or remove refuse
from the public walkways.
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Behavioral Observation
Scales (BOS)
Documents positive performance
behaviors on job dimensions
Employees rated on exhibited behaviors
Ratings averaged for overall rating

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Goal-Oriented System
Management-by-objectives

Supervisors and employees set objectives

Highly effective technique
Rated on how well objectives are met
Mainly for professionals and managers

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Performance Appraisal
Practices
Conduct a job analysis
Incorporate results into ratings
Trains supervisors on use
Implement formal appeals process
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Sources of Performance
Appraisal Information
Employee
Supervisor
Coworkers
Subordinates
Customers/clients
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360 Degree Performance

Appraisal
Uses more than one appraisal source
Reduces recruiting and hiring costs
Appropriate for work team evaluations

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Major Types of Rater Errors

Bias errors
Contrast errors
Errors of central tendency
Errors of leniency or strictness

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Bias Errors
First-impression effect
Positive halo effect
Negative halo effect
Similar-to-me effect
Illegal discriminatory biases
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Contrast Errors
Supervisor compares employees
performances to other employees not to
explicit performance standards
What if the best employee is average?

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Errors of Central Tendency

Supervisors rate all employees as
average
Usually occurs when only extreme
behaviors require documentation

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Errors of Leniency or
Strictness
Leniency errors managers rate employees
performances more highly than they would rate
them using objective criteria
Causes employees to believe they are going to
receive larger pay raises than they deserve
Strictness error supervisors rate employees
performance lower than they would rate them
using objective criteria

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Learning Objective 4

Explain at least three ways compensation

professionals can strengthen the pay-forperformance link and summarize each one.

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Pay for Performance Link

Link appraisals to business goals
Analyze jobs
Communicate
Establish effective appraisals
Empower employees
Differentiate among performers
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Learning Objective 5

Discuss three possible limitations of merit

pay programs.

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Limitations of Merit Pay Programs

Failure to differentiate
among performers

Undesirable social
structures
Using nonmerit factors

Poor measures

Undesirable competition

Supervisor biases

Little motivational value

Poor communication
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