C&B CHAPTER 4: Components of Compensation Strategy.

What are 3 methods for base pay?

1. MARKET PRICING: establishing base pay by determining the average amount of pay other employers are offering for a given job (the "market rate" or "going rate") 2. JOB EVALUATION: establishing base pay by ranking all jobs in a firm according to their value to that firm, and then calibrating the resulting system to the labour market • Used by the majority of medium to large Canadian firms • PAY-FOR-KNOWLEDGE SYSTEM(PKS): establishing base pay according to the total value of the skills and competencies an employee has acquired.

What are 2 key questions to ask when designing a compensation strategy?

1. What role (if any) should each of the three compensation components (base pay, performance pay, indirect pay) play in the compensation mix, and how should each component be structured? 2. What total level of compensation should be offered?

What is base pay?what are the two types?

The portion of an individual's compensation that is based on a unit of time worked. • Base pay is referred to as TIME-BASED or INPUT-BASED pay Two types: • WAGE: pay based on an hourly time period • SALARY: pay based on a weekly, monthly, or annual time period

What is indirect pay & how to benefits systems vary?

Any type of employer-provided reward (or "benefit") that serves an employee need but is not part of base or performance pay. Benefits systems vary in several ways: • Specific items included (see next slide) • Employee choice (fixed vs. flexible benefits systems) • Responsibility for the costs (only employer vs. shared) • Variation in coverage for different employee groups

What is performance pay & what are the three main types?

Any type of financial reward provided only when certain specified performance results occur • Aka variable pay or at-risk pay. Three main types: • INDIVIDUAL PERFORMANCE PAY: piece rates, commissions, merit pay, special-purpose incentives • GROUP (TEAM) PERFORMANCE PAY: gain-sharing plans, goal-sharing plans, other group bonus plans. • ORGANIZATION PERFORMANCE PAY: profit sharing, employee stock plans, other org performance plans.

What is pay for knowledge & what are the 2 types?

Pay is based on the capabilities of individuals rather than on the characteristics of jobs. Two main types: • SKILL-BASED PAY (SBP): PKS applied to operational-level employees (proven pay practice) • COMPETENCY-BASED PAY: PKS applied to managerial or professional employees (questionable pay practice) - Competencies are "fuzzy" constructs

When is performance (or output-based) pay feasible?

When output is: • Easy to measure • Easy to price in terms of its value to the employer • Easy to attribute to individual employees • Controllable by the individual employee • Relatively stable

What are the disadvantages of market pricing?

• "Going rate" not always easy to identify • Job definitions may vary from the market data • Getting a definitive market rate for a job may not be possible • Does not address internal equity • Lack of control of compensation strategy • May violate pay equity legislation

What are components of designing skill blocks?

• A SKILL BLOCK is the basic component of an SBP system, containing a bundle of skills or knowledge necessary to carry out a specific production or service delivery task • Skill blocks are set out in a SKILL GRID, in which the horizontal dimension represents different TYPES of skills, and the vertical dimension the DEPTH of each skill, • More successful systems have a slightly higher number of skill blocks (an average of 11) than less successful ones (an average of 9)

What is the typical compensation mix?

• Base pay accounts for about 75 to 80% of total comp • Performance pay accounts for 5 to 10% of total comp • Indirect pay accounts for about 15% of total comp • However, these proportions vary considerably across firms (and across occupational and/or employee groups), with some firms providing no base pay, and other firms providing no performance pay

What are major categories of indirect pay benefits?

• Benefits mandated by law (employer contributions to the Canada Pension Plan, Employment Insurance, and Workers' Compensation Benefits) • Deferred income plans (retirement or pension plans) • Life, medical, dental, and disability insurance, and other types of health benefits • Pay for time not worked (paid holidays and leaves) • Employee services (counselling, food services, etc.) • Other benefits (company cars, discounts on company products and services, etc.)

What are the advantages of job evaluation?

• Centralized control of compensation costs • Signals importance of jobs • Promotes internal equity • Makes market calibration easier • Systematic way to determine pay for new jobs • Availability of packaged plans from consultants • Fits well with classical and human relations strategies

What are the 5 main issues of developing a skill-based pay system?

• Deciding which employee groups to include - The system works well for operational-level employees in organizations that need high-level and diverse employee skills and could benefit from high employee flexibility • Designing the skill blocks • Linking the skill blocks to pay (pricing the skill blocks) • Providing learning/training opportunities • Certifying skill block achievement - SKILL CERTIFICATION: the testing process that determines whether an individual has mastered a given skill block and should be granted the pay raise associated with that skill block

What are the steps in pricing skill blocks?

• Find market data for jobs that match the entry-level and top-level skill sets in the skill grid • Decide whether to lead, lag, or match the market - Entry-level pay has to at least match the market in order to attract employees with the necessary learning abilities, but it will probably be advisable to lead the market to some degree in order to attract employees with high learning potential - Top-level pay should definitely lead the market • Calculate the difference between the entry-level pay and the top-level pay, and allocate it across skill blocks according to their relative importance

What are the disadvantages of skill-based pay?

• May raise labour costs • "Topping out" problem • Resistance to rotation by seniors • Higher training costs • Complex to administer (and jobbased system may still be needed) • Market calibration difficult • Not all employees may have the desire or capability to learn • Union resistance (seniority rules) • May violate pay equity legislation

What are the disadvantages of job evaluation?

• More costly to develop and maintain than market pricing • Need for job descriptions • May become an adversarial process • Can inhibit change, flexibility, and skill development • May impede high involvement

What are reasons for using base pay?

• Output-based pay is not feasible • Output-based pay is feasible, but undesirable due to unintended consequences (e.g., safety issues, quantityquality tradeoffs, competition between workers, etc.) • Output based pay is feasible and desirable from the employer's point of view, but employees don't like it - In general, people prefer certainty in their rewards - Higher total pay may be necessary to induce employees to accept jobs in which all pay is performance-based.

What are the advantages of skill-based pay ?

• Provides major incentive for employee skill development • No disincentive to movement (high workforce flexibility) • Does not require job descriptions • Jobs are broader, with more intrinsic rewards (which may improve customer service) • Smaller workforce • Supports high-involvement management

What are other types of pay for skill-based pay employees?

• Seniority pay? - No - contradicts SBP progression • Individual merit pay? - Only if each employee works separately and independently of other employees (which is usually not the case) • Group performance pay? - Yes - gain sharing and/or goal sharing plans • Organization performance pay? - Yes - profit sharing and/or stock ownership plans

What are the advantages of market pricing?

• Simplicity and cost • Keeps jobs aligned with market conditions

How do you go about pricing the skill blocks?

• The RELATIVE AMOUNT of increase for each skill block should depend on how difficult the skill block is and/or how long it usually takes for an employee to master it, and on the value of that skill block to the company • The ABSOLUTE AMOUNT of pay for each skill block is usually determined using the HIGH-LOW METHOD - determines skill-block pay amounts by pricing comparable entry-level and top-level jobs in the market and then allocating the difference to the various skill blocks