l9 Pay Planning

Pay planning
Reward chapter 11
Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall 111
Pay Planning
The main purpose of this lecture is to show you how to establish a pay plan. We will examine job evaluationtechniques for finding the evaluation relative worth of a joband how to conduct online and job offline salary surveys. We also consider developing pay grades and an overall pay plan.
Module Website
All the power points we have used to date are on the web site www.uwcentre.ac.cn/hhu -check it out
Examples of HRM ?
One important thing for the exam is you will be asked to illustrate you answers to some written questions using examples of HRM in practice .So you should start looking in the set text and or on the internet for examples of organisations using HRM practices . Think about big organisations - smaller organisations manufacturing organisations - service organisations even universities . Get examples and discuss these with your tutors
Today's tutorial
You need to consider the different methods of job evaluation highlighted in chapter 11 and discuss what are the pros and cons
Tomorrows tutorial
Read and revise chapter 8 Training and Development
Performance management
Ongoing feedback includes both face-to-face and face-tocomputercomputer-based feedback regarding progress toward goals. Coaching and developmental support should be an integral part of the feedback process. Rewards, recognition, and compensation all play a role in providing the consequences needed to keep the employees goal-directed performance on track. goaltrack.
Basic Building Blocks of Performance Management

Ongoing performance monitoring
Direction sharing
Goal alignment
Ongoing feedback
Coaching and development support
Rewards, recognition, and compensation
Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall
98
Reasons
Employers are moving to performance management for three main reasons reasons total quality, appraisal issues, and strategic planning particularly of reward that is what we will examine to day
Employee Compensation
Employee compensation refers to all forms of pay going to employees and arising from their employment.
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Compensation at work
It has two main components, direct financial payments (wages, salaries, incentives, commissions, and bonuses) and indirect financial payments (financial benefits like employeremployer-paid insurance and vacations). There are two basic ways to make direct financial payments to employees: base them on increments of time or on performance.
Basic Factors in Determining Pay Rates
Employee Compensation Components
Direct financial payments
Indirect financial payments
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Compensation Plan
The compensation plan should advance the firms strategic aims aimsmanagement should produce an aligned reward strategy. This means creating a bundle of rewardsa total reward rewards package including wages, incentives, and benefitsthat benefits aims to produce the employee behaviors the firm needs to support and achieve its competitive strategy.
Corporate Policies, Competitive Strategy, and Compensation

Aligned Reward Strategy
The employers basic task:

To create a bundle of rewardsa total reward packagethat rewards package specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy.
The HR or compensation manager along with top management
creates pay policies that are consistent with the firms strategic aims.
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Formulating pay policies
Managers need to formulate pay policies covering a range of issues. With respect to compensation, managers should address four forms of equity: external, Internal, individual, and individual, procedural.
Formulating pay policies
External equity refers to how a jobs pay rate in one company
compares to the jobs pay rate in other companies. Internal equity refers to how fair the jobs pay rate is when compared to other jobs within the same company (for instance, is the sales managers pay fair, when compared to what the production manager is earning?).
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Pay
Individual equity refers to the fairness of an individuals pay as
compared with what his or her coworkers are earning for the same or very similar jobs within the company, based on each individuals performance. Procedural equity refers to the perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay.
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
Equity and Its Impact on Pay Rates
Forms of Compensation Equity
External equity
Internal equity
Individual equity
Procedural equity
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Equity Issues
Managers can use various methods to address equity issues. For example, they use salary surveys (surveys of what other employers are paying) to monitor and maintain external equity. They use job analysis and job evaluation comparisons of each job to maintain internal equity.
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They use performance appraisal and incentive pay to maintain individual equity. And they use communications, grievance mechanisms, and employees participation in developing the companys pay plan to help ensure that employees view the pay process as transparent and procedurally fair.
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Addressing Equity Issues

Area wage and salary surveys
Methods to Address Equity Issues
Job analysis and job evaluation
Performance appraisal and incentive pay
Communications, grievance mechanisms, and employees participation
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5 STEPS
The process of establishing pay rates while ensuring external, internal, and (to some extent) procedural equity consists of five steps. Its difficult to set pay rates if you dont know what others are paying, so salary surveys of what others are paying play a big role in pricing jobs. Virtually every employer conducts at least an informal telephone, newspaper, or Internet salary survey.
Salary
Salary surveys can be formal or informal. Informal phone or Internet surveys are good for checking specific issues. Some large employers can afford to send out their own formal surveys to collect compensation information from other employers. Many employers use surveys published by consulting firms, professional associations, or government agencies.
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Establishing Pay Rates

Steps in Establishing Pay Rates
1
Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity). Determine the worth of each job in your organization through job evaluation (to ensure internal equity). Group similar jobs into pay grades. Price each pay grade by using wave curves. Fine-tune pay rates.
3 4 5
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Step1: The Salary Survey
Uses for Salary Surveys
To price benchmark jobs
To market-price wages for jobs
To make decisions about benefits
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Sources for Salary Surveys
Sources of Wage and Salary Information
SelfConducted Surveys
Consulting Firms
Professional Associations
Government Agencies
The Internet
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Question
Which of the following terms refers to all forms of pay or rewards going to employees and arising from their employment? A) salary B) employee compensation C) wage reimbursement D) employee benefits E) remuneration Answer
Answer
Answer B Explanation: Employee compensation refers to all forms of pay going to employees and arising from their employment. It has two main components, direct financial payments (wages, salaries, incentives, commissions, and bonuses) and indirect financial payments (financial benefits like employeremployer-paid insurance and vacations).
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Question
4) 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 5% commission for every sale he makes. Which of the following terms best describes John's situation? A) performance-based compensation performance B) indirect financial compensation C) time-based compensation time D) salaried plus incentives E) piecework pay Answer:
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Answer
Answer A Explanation: John earns sales commissions, which means he receives performance-based compensation. performancePiecework ties compensation to the number of pieces a worker produces, and John is selling rather than making jewelry.
Job Evaluation
Job evaluation is a formal and systematic comparison of jobs to determine the worth of one job relative to other jobs in the organization. Compensable factors are certain basic factors the jobs have in common that are used to establish how the jobs compare to one another, and that determine the pay for each job.
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Job evaluation is a judgmental process and demands close cooperation among supervisors, HR specialists, and employees and union representatives.
Job Evaluation
The main steps include identifying the need for the program, getting cooperation, and then choosing an evaluation committee. The committee then performs the actual evaluation. Evaluating the worth of each job can be done using one of these methods: ranking, job classification, point method, or factor comparison
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Step 2: Job Evaluation
Identifying Compensable Factors
Skills
Effort
Responsibility
Working conditions
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The Job Evaluation Process

Preparing for the Job Evaluation
1 2 3 4
Identifying the need for the job evaluation Getting the cooperation of employees Choosing an evaluation committee Performing the actual evaluation
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How to Evaluate Jobs
Methods for Evaluating Jobs
Ranking
Job classification
Point method
Factor comparison
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Job Evaluation Methods: Ranking
Ranking each job relative to all other jobs, usually based on some overall factor. Steps in job ranking: 1. Obtain job information. 2. Select and group jobs. 3. Select compensable factors. 4. Rank jobs. 5. Combine ratings.
Evaluating Jobs
Evaluating the worth of each job can be done using one of these methods: ranking, job classification, point method, or factor comparison Table 11-3 which follows illustrates a job ranking. 11 Jobs in this small health facility rank from orderly up to office manager. The corresponding pay scales are on the right. After ranking, it is possible to slot additional jobs between those already ranked and to assign an appropriate wage rate.
TABLE 113
Job Ranking by Olympia Health Care
Ranking Order
1. Office manager 2. Chief nurse 3. Bookkeeper 4. Nurse 5. Cook 6. Nurses aide 7. Orderly
Annual Pay Scale

$43,000 42,500 34,000 32,500 31,000 28,500 25,500
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Job Classification
Job classification (or job grading) is a simple, widely grading) used method in which raters categorize jobs into groups; all the jobs in each group are of roughly the same value for pay purposes. The groups are called classes if they contain similar jobs or grades if they contain jobs that are similar in difficulty but otherwise different.
Job Evaluation Methods: Point Method

A quantitative technique that involves:
Identifying the degree to which each compensable factor is
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.

Groups & classes

Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes.
Classes contain similar jobs.
Administrative assistants Grades are jobs similar in difficulty but otherwise different. Mechanics, welders, electricians, and machinists Jobs are classed by the amount or level of compensable factors they contain.

The point method

The point method is a quantitative technique. It involves identifying (1) several compensable factors, each having several degrees, as well as (2) the degree to which each of these factors is present in the job. A different number of points are assigned to each degree of each factor.
Once the evaluation committee determines the degree to which each compensable factor (like responsibility and effort) is present in the job, it can calculate a total point value for the job by adding up the corresponding points for each factor. The result is a quantitative point rating for each job.
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Step 3: Grouping Jobs
Point Method
Grouping Similar Jobs into Pay Grades
Ranking Method
Classification Methods
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The wage Curve

The wage curve shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings values assigned to each job or grade by the job evaluation. The purpose of the wage curve is to show the relationships between (1) the value of the job as determined by one of the job evaluation methods and (2) the current average pay rates for graded jobs. .
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Wage Curve
The pay rates on the wage curve are traditionally those now paid by the employer. However, if there is reason to believe the current pay rates are out of step with the market rates for these jobs, choose benchmark jobs within each pay grade, and price them via a compensation survey.
These new market-based pay rates then replace the marketcurrent rates on the wage curve. Then slot in your other jobs (and their pay rates) around the benchmark job. Current pay rates falling above the rate range are red circle, flagged, or overrates which will require either freezing the rate, transfer or promotion of employees, or reevaluation of the job.
Step 4: Price Each Pay Grade

The Wage Curve
Shows the pay rates 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.
FIGURE 115
Plotting a Wage Curve
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Fine tuning
Fine-tuning involves Fine(1) developing pay ranges and (2) correcting out-of-line rates. out-of-
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Most employers do not pay just one rate for all jobs in a particular pay grade. Figure 11-6 which follows depicts how most 11employers create a wage structure such that their pay ranges somewhat overlap, so an employee in one grade who has more experience or seniority may earn more than an entry-level position in the next higher pay grade. entry-
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FIGURE 116
Wage Structure
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Step 5: Fine-Tune Pay Rates Fine 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 Out-of 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

HR in Practice: Developing a Workable Pay Plan
Simplified Approach:
Conduct a wage survey Conduct a job evaluation Conduct once-a-year job appraisals once Compile the compensation budget for
upcoming year
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Compensation
Compensation for a companys top executives usually consists of four main elements: base pay, short-term shortincentives, long-term incentives, and executive longbenefits/perquisites or perks.
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Top Executive Jobs

For top executive jobs (especially the CEO), job evaluation typically has little relevance. One recent study concluded that three main factors, job complexity (span of control, the number of functional divisions over which the executive has direct responsibility, and management level), the employers ability to pay (total profit and rate of return), and the executives human capital (educational level, field of study, work experience) accounted for about two-thirds of twoexecutive compensation variance.
Pricing Managerial and Professional Jobs

Compensating Executives and Managers
Base pay
Short-term incentives
Long-term incentives
Executive benefits/perks
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Pricing Managerial and Professional Jobs
What 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 the short and long term.
CEOs can have considerable influence over the boards that
determine their pay.

Firms pay CEOs based on the complexity of the jobs they fill. Shareholder activism and government oversight have tightened the
restrictions on what companies pay top executives.

Boards are reducing the relative importance of base salary while
boosting the emphasis on performance-based pay. performanceCopyright 2011 Pearson Education, Inc. publishing as Prentice Hall 1160
Compensating Professional Employees

Compensating professional employees, like engineers and scientists, presents unique problems. Analytical jobs like these emphasize creativity and problem solving, compensable factors not easily compared or measured. Determining professional compensation presents another question questionhow is performance to be defined and measured?
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 is most popular.
Professional jobs are market-priced to establish the marketvalues for benchmark jobs. Competency-based pay means the company pays for Competencythe employees range, depth, and types of skills and knowledge, rather than for the job title he or she holds. Experts variously call this competency-, knowledge-, or competency- knowledgeskillskill-based pay.
Competency-based pay Competency-
Competency-based pay ties the workers pay to his or her Competencycompetencies competenciespay is more person oriented. Employees here are paid based on what they know or can doeven if, at the do moment, they dont have to do it. Traditional pay plans may backfire if a high-performance work highsystem (HPWS) is the goal. HPWS employees must be enthusiastic about learning and moving among other jobs. In practice, any skill/competency/knowledge-based pay skill/competency/knowledgeprogram generally contains five main elements.
Competency-Based Pay Competency-
Competencies
Demonstrable characteristics of a person, including knowledge,
skills, and behaviors, that enable performance
What is Competency-Based Pay? Competency Paying for the employees range, depth, and types of skills and
knowledge, rather than for the job title he or she holds
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Why Use Competency-Based Pay? Competency-
Competency-Based Pay Supports
High-Performance Work Systems
Strategic Aims
Performance Management
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Competency-Based Pay in Practice Competency-
Main elements of skill/competency/knowledgebased pay skill/competency/knowledge programs:

1. A system that defines specific skills 2. A process for tying the persons pay to his or her skill 3. A training system that lets employees seek and acquire skills 4. A formal competency testing system 5. A work design that lets employees move among jobs to permit work assignment flexibility
Competency-Based Pay: Pros and Cons Competency Pros

Higher quality Lower absenteeism Fewer accidents
Cons
Pay program implementation problems Costs of paying for unused knowledge, skills, and behaviors Complexity of program Uncertainty that the program improves productivity
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Special Topics in Compensation

Broadbanding
Consolidating salary grades and ranges into a few wide levels
or bands, each of which contains a relatively wide range of jobs and salary levels.
Pros and Cons

More flexibility in assigning workers to different job grades Provides support for flatter hierarchies and teams Promotes skills learning and mobility Lack of permanence in job responsibilities can be unsettling to new employees.
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FIGURE 118
Broadbanded Structure and How It Relates to Traditional Pay Grades and Ranges
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Comparable Worth
Concept:
Employers should be required to pay men and women
equal wages for dissimilar jobs that are of comparable (rather than strictly equal) value to the employer. equal)
Basis:
Seeks to address the issue that women have jobs that
are dissimilar to those of men and those jobs are often consistently valued less than mens jobs.
Question at Hand:
Who will get to make final decisions on the comparability
of jobs?

Employers Courts
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The Pay Gap

Factors Lowering the Earnings of Women:
1. Womens starting salaries are traditionally lower. 2. Salary increases for women in professional jobs do not reflect their above-average performance. above3. In white-collar jobs, men change jobs more frequently, whiteenabling them to be promoted to higher-level jobs over higherwomen with more seniority. 4. In blue-collar jobs, women tend to be placed in bluedepartments with lower-paying jobs. lower-
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Executive Pay
There are various reasons why boards are clamping down on executive pay. The economic downturn that began around 2008 exposed the enormous disconnect between what many executives were earning and their performance.
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l9 Pay Planning

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Pay planning

Basic Building Blocks of Performance Management

Coaching and development support

Rewards, recognition, and compensation

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Basic Factors in Determining Pay Rates

Employee Compensation Components

Direct financial payments

Indirect financial payments

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Corporate Policies, Competitive Strategy, and Compensation

 The HR or compensation manager along with top management

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Formulating pay policies

Formulating pay policies

External equity refers to how a jobs pay rate in one company

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Individual equity refers to the fairness of an individuals pay as

Compensation Policy Issues

Equity and Its Impact on Pay Rates

Forms of Compensation Equity

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Addressing Equity Issues

Methods to Address Equity Issues

Job analysis and job evaluation

Performance appraisal and incentive pay

Communications, grievance mechanisms, and employees participation

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Establishing Pay Rates

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Step1: The Salary Survey

Uses for Salary Surveys

To price benchmark jobs

To market-price wages for jobs

To make decisions about benefits

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Sources for Salary Surveys

Sources of Wage and Salary Information

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Step 2: Job Evaluation

Identifying Compensable Factors

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

The Job Evaluation Process

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

How to Evaluate Jobs

Methods for Evaluating Jobs

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Job Evaluation Methods: Ranking

Job Ranking by Olympia Health Care

Annual Pay Scale

Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall

Job Evaluation Methods: Point Method

present in the job.

corresponding points for each factor.

Groups & classes

The HR or compensation manager along with top management