CMS3 - Assignment 3 Salary
Describe three approaches to the frequency of salary reviews.
(1) Determined by job grade—Some companies vary the time interval among salary reviews, normally stretching out the period for upper-level positions. Thus, while entry-level positions may be reviewed every six months during the first several years of employment, middle-management positions would be on an annual basis or 18-month basis and the very senior executives would be once every two years. (2) Determined by position in job grade—This approach increases the normal time interval as the executive progresses within a salary range. The percentages are the annual target amounts. Thus, an outstanding performer below range minimum might receive anything from about 20% five to eight months after the last change to about 13% after eight to twelve months if in the middle one-third of the range. An acceptable performer is not expected to move above the lower one-third. Furthermore, the two highest performance ratings permit token increases for those above range maximum, but on less than a yearly basis. Another possibility is to hold the percentage increase constant and simply vary the frequency of adjustment based on performance. (3) De-emphasizing salary—The classic problem with the salary program is the difficulty of truly rewarding performance with a large salary increase. This is especially a problem with companies that have limited incentive plan opportunities. One approach is to employ a lump sum. Rather than build the increase into the ongoing salary, the amount is annualized and paid as a one-time award. A variation is to build in a portion of the award as a salary increase. Where incentives are available, many de-emphasize salary by placing more emphasis on the annual and long-term incentives. However, companies make a major mistake if they disallow promotional increases or salary adjustments for expanded responsibilities. Freezing the salaries of these people perpetuates a salary inequity and underpays the incentives.
Describe three ways of developing a merit budget.
(1) One way to develop a merit budget is a projection of the most recent actual performance rating that assumes each individual will have the same rating as last year. Repeating the process for all employees generates a total that can be increased or decreased by top management depending on willingness and ability to pay. (2) A second approach in developing the control total is assigning probable performance weights to each individual in accordance with a desired distribution of performance. Repeating the process for other employees and summing the dollar increases would generate a raw control table. (3) The third approach in developing a control total is an extension of the second. However, rather than assigning probable weightings to each performance rating, the expected mean value is used. Following this approach, one might conclude that "very good" is the average performance rating. To calculate the control total, identify the appropriate percentage based on each person's position within the salary range and multiply it by the person's salary and then sum the dollar increases for each person, resulting in a control total dollar of salary increases.
Input-based performance appraisals consist of what a person has or possesses. Output- or performance-based appraisals can be one of three types (1) what, (2) how and (3) a combination of the two. List the (a) advantages and (b) disadvantages of an output- or performance-based appraisal.
(a) Advantages of a performance-based measurement include: (1) Outcome expectations can be clearly defined for the person. (2) The organization's strategy can be parceled out to individuals so that the composite constitutes the entire strategy. (b) The disadvantages of a performance-based measurement include: (1) Goals may be unrealistic and not of comparable difficulty with others. (2) The attainment of goals may be dependent on the performance of others. (3) Changing conditions require frequent adjustments to goals and timetables. (4) Routine responsibilities of a job may not be included and, therefore, not appraised. (5) Expected behavior is typically absent.
Identify the questions that need to be asked about a performance management process to see if it needs adjusting.
(a) Is there sufficient discussion in setting goals and objectives? (b) Are objectives and goals clear? (c) Are developmental expectations specified for behavior and competencies? (d) Are objectives and goals appropriately linked vertically and horizontally to others? (e) Are the right people involved at the right time? (f) Are there milestone dates with specific deliverables? (g) Are the metrics appropriate for measuring both quantitative and qualitative targets? (h) Are multiyear targets set where appropriate? (i) Is there sufficient discussion in reviewing the results?
Briefly describe (a) the ranking method of job evaluation and (b) the advantages and disadvantages of the ranking method in general and in terms of executive positions in particular.
(a) Ranking is a nonquantitative method of arraying jobs in order of importance and is the simplest job evaluation approach. The array begins by comparing two jobs to determine which is more important. Then a third job is compared with the first two, and its position with respect to them is determined. The process is repeated until all jobs have been placed in the array. (b) The simplicity of the ranking approach to job evaluation is its biggest advantage. Little preparation is required and it works well when only a few jobs are involved. Its simplicity is also its greatest disadvantage. Because of the difficulty of taking into consideration all of the individual tasks of each job, it is a natural tendency to rate each job on the basis of its dominant characteristic. With regard to using the ranking system to evaluate executive positions, one difficulty would be in deciding whether a group executive with four different divisions, each with, say, $50 million in sales, should be worth more than a division head with $200 million of sales. Another problem is that the array reflects absolute rather than relative differences. For example, there would be no way of knowing whether the difference between the jobs of vice president of human resources and director of compensation and benefits is equal to, greater than or less than the difference between the jobs of director of compensation and benefits and the manager of compensation. The ranking method simply reports the sequence in the ascending order. It does not give the relative differences among the various jobs.
Briefly describe indexing pay relationships.
A frequently employed survey-reporting format is a percentage relationship of pay for the top three executives. The top paid executive would be given an index number such as 100. The other executives would have a number such as a 90 or 75. Unfortunately, there is very little value in this format in viewing the competitiveness of these three executives if only the index values are reported, since they can mask very significant differences. Furthermore, these numbers only express pay relationships. They do not indicate anything about level of pay unless the actual pay values are also reported. If the absolute pay levels are not known, the relative percentage relationships are of little value. Furthermore, remember that it is also unlikely that the second and third highest paid positions are the same in the survey community.
Describe the leveling process.
A variation to determining what companies pay for comparable jobs is to determine what they would pay if they had jobs similar to the ones in the survey. This requires identifying those positions most similar to the survey for each company and then evaluating these positions using a common job evaluation plan, probably a version of the point factor plan. This is simply a more refined version of the leveling process described in job matching.
What is a variation to the indexing method?
A variation to the indexing method is aggregating the pay for the top three, four or five executives of a company and comparing it with one's peer group. Since job matches for other than the CEO are spurious at best among the top paid executives, the aggregate method addresses the cost of managing the company by the top three, four or five individuals.
Explain different approaches to adjusting merit increase guidelines.
Although merit increases normally are at least equal to the annual rate of inflation, they provide decreasing opportunity to reward superior performance as inflation increases. This places great pressure on pay planners to devise effective pay delivery systems that maximize the utilization of available dollars in times of high inflation. During inflationary periods, increased pressure tends to restrain growth in executive pay. By holding executive pay increases to slightly below the average, a greater portion of the remaining exempt employees receive higher pay percentage increases. Each year, the matrix has to be reexamined in terms of appropriateness. The matrix quite often might reflect a position that a very good performer in the middle of the salary range should keep pace with the increase of competitive pay in the marketplace. The remaining matrix might be expanded on the double premise that (1) those lower in range should move faster than those higher up, and (2) increases should vary directly with performance. After the matrix is constructed, it has to be tested under varying structural increase assumptions to track the rate at which different level performers move through the salary range. Salary ranges get wider as one progresses through the organization in recognition of the fact that it will take longer to attain a level of fully satisfactory performance. There are four ways to improve this rate of progression. These are (1) lower the structural increase percentage, (2) increase the merit percentage amounts, (3) narrow the range and (4) shorten the interval between increases.
Explain the problems associated with using average increases in pay in analysis of executive pay levels.
Apparent conflicts in average increases in executive pay salaries as reported by different surveys can be confusing. For example, three different studies might report figures of 8%, 9% and 10% and yet be completely comparable. Taking them in reverse order, the last study may have examined the average increases of only those who received adjustments, whereas the second might have examined the average increase in all salaries. Thus, if 90% received an increase of 10%, the data might be comparable to the 10% reported by the first. Finally, the first study might have been looking at the increase in payroll after one year. This is similar to the second study except that it is net of all additions and terminations to payroll as well as measuring the promotional adjustments. Therefore, when examining reported average increases in pay, it is important to understand what definitions are used. In the above example, results were comparable. However, a different company mix, the timing of the study and poor survey techniques might have resulted in widely divergent data in apparently comparable studies.
Explain how to develop the structure of a point factor plan in a job evaluation.
By examining a job factor by factor and assigning the correct number of points to the most appropriate degree statement within the factor, it is possible to sum the points assigned and array the jobs on their point value. These point totals, along with the current pay of each person in that job, are typically displayed in a scattergram using an X axis, which is job points, and a Y axis, which is a pay axis. This data is then converted into grades by first identifying the cutoffs on the X axis, which would seem consistent given any clustering of similarly valued jobs. Next, a regression analysis is performed on the data to describe the line of best fit. This may be either a linear formula or a nonlinear formula. A nonlinear formula will result in a straight line only if all the plots truly describe a straight line. The formula for a linear regression analysis is Y 5 a 1 bX. The a is the value on the vertical or Y axis when X equals zero. The b describes the slope of the curve; in other words, the extent of increase in the Y axis, for example, compensation, resulting from a stated change in the value of the X axis, in this case job points. The nonlinear formula is Y 5 a 1 bX 1 cX2. The value of c indicates the rate of change in the slope of the curve. A positive value indicates an increasing rate of change. A negative or minus c indicates a decreasing rate of change. The difference between the plot points and the curve line is measured vertically and is identified as the deviation. The line of best fit will, by definition, minimize the degree of deviation existing. The sum of the squares of these deviations will not only be equal above and below the line, but the sum of the squares of these deviations will be the lowest possible value. This is called the least squares method. While ranges of plus and minus 15% from the midpoint might be appropriate to construct the range minimum and maximum at the bottom of the structure, ranges of plus or minus 25% may be appropriate at the top. Ranges of plus and minus 33.3% or more may be necessary in the absence of short- and long-term incentives. Thus, a plus and minus deviation from the midpoint of 16.7% will construct a range with a maximum over minimum spread of 40%.
Briefly discuss position vs. survey community.
In developing a structural adjustment, consider where the company wants to be positioned competitively and at what point in time. Many companies simply indicate that they want to be competitive or about equal to the average with the companies in their surveys. Others will take a more aggressive posture, such as in the 75th or the 90th percentile. The importance of the salary element should be factored in as outlined in the introduction of this assignment when determining position in regard to the community.
Briefly discuss the timing of salary actions.
In many companies, pay review takes place on the anniversary of employment, but in some, it occurs at a specific time of the year that is common to all employees or employees in particular portions of the company. The advantages of a common review date include (1) maximum utilization of management time in the review process, (2) minimal need for separate budgetary controls, (3) easy adjustment to economic conditions and (4) promotion of internal equity. The disadvantages are that such a system is less personalized in nature and it enables individuals to make easier comparisons on how well they did. The advantages and disadvantages of distributed adjustments are essentially the mirror image of the common-date system. The advantages are that management can be more personalized in deciding on and communicating adjustments, and that the making of pay comparisons among employees is diffused. The disadvantages include (1) demands on management time are greater since the manager must come up to speed on each occasion, (2) budgetary game playing is made possible, (3) it is more difficult to respond equitably to rapidly changing economic situations and (4) it is more difficult to ensure equitable pay treatment throughout the organization.
Discuss the characteristics of individual pay actions.
Job analysis, job evaluation, salary surveys and structural adjustments are all keyed to determining how much to pay for a particular job, and individual pay actions are determined within this set of parameters. The range may be open or have incremental values. The increments may be either reference points for merit increase values or fixed rates for pay increases. If the latter is used, there is no opportunity to use nonlisted values. In some situations, the two approaches may be combined. Fixed increments are more likely to be found in nonprofits. Typically, executive pay is determined in relation to performance over a period of time and position within the salary range. An indication of how these two interrelate is given in the compa-ratio. The compa-ratio is actual pay divided by structural control point or midpoint of the range for most organizations. The ratio allows one to relate one executive in a given range to another.
Describe job comparability in terms of the job matching method.
Job matching is the most common method of ensuring comparability of data. It requires matching jobs to ensure that similar responsibilities exist. This is important because job content can vary significantly between two organizations even though the jobs may have the same title. For this reason, organization charts showing reporting relationships along with job descriptions are included to maximize good job matches. Nonetheless, it becomes increasingly difficult to find companies with similar positions at senior levels. In many instances, the differences in job content for the same job with the same title in different companies are as great as, if not greater than, those for jobs with dissimilar titles. Further, the implicit assumption is that like responsibilities will be valued comparably by other organizations. Unfortunately, there are too many instances where this simply is not true. Thus, even if two jobs in two different companies were identical, the pay practices of the companies would differ if they placed different values on the position. Another difficulty many companies have is matching up to a company with either fewer or more management levels. How does a company with different levels relate to this data? The answer is by matching first those most comparable, and then interpolating (between group and division for multidivision companies). Obviously, less confidence should be placed in data that has to be massaged in this manner than the data that match well. Another technique that may be employed in job matching is adjusting for degree of deviation. This technique is typically called survey leveling. A variation is to adjust the reported compensation based on the match. Some job evaluation plans have built values around 15% multiples, believing that the difference in responsibilities between two jobs is recognizable in multiples of 15%. A technique that may be employed to test the possible existence of lack of comparability is the survey ratio. This is simply the division of the lowest salary reported for a position into the highest. If this value is much above 1.5, it is appropriate to examine the data more closely, since it indicates that there is over a 50% difference in the amount being paid to individuals allegedly performing the same job. Another refinement in job matching is to stratify the data based on a meaningful measurement of scope. Whenever this is done, it is important to be certain the measurement is essentially meaningful. An extension of the stratified example is where the actual data are given along with the compensation data.
Briefly describe performance management systems that are either consequence- or development-oriented.
Performance management systems can be structured for either consequences or development. In addition, for use in determining pay, a consequence objective can result in action to terminate, retrain or promote. A development objective would focus on performance improvement and possible preparation for positions of greater responsibility. A 360 review is useful when the objective is development. However, it is not ideal for pay actions because of the possible impact of favoritism or perceived favoritism. Performance management systems can assess a single individual, a defined group or the entire company. Team type, ad hoc or longstanding, as well as project vs. process may definegroups. Salary actions are typically based only on the individual's performance, while short-term incentives are based on individual, group and corporate performance appraisals. Long-term incentives typically use only corporate performance. Another appraisal method is called the critical incident approach, which is a look back on a specific event with feedback on the extent to which performance met or did not meet expectations. Regardless of the method used, the process must lead to an overall rating for pay purposes. Typically, this means giving a weight to each performance objective. By multiplying the performance rating by the assigned weighting for each objective and dividing by the total number of points, it is possible to calculate an overall performance rating.
Describe the point factor approach to job evaluation.
Point factor plans are similar to the classification method in that they require the comparison of a job to a predetermined measure rather than directly to other jobs. Unlike the classification method, instead of using grade-level standards as the benchmark, the point factor method indicates the separate tasks (compensable factors) that make up the job and assigns each a number of points depending on its importance. Most factor plans focus on responsibilities and the knowledge needed to perform each task. Within these two major categories, a number of separate factors can be constructed. Such plans typically have five to ten factors. The more factors, the more suspect the evaluation plan, as it is very likely that several factors are measuring the same value in only a slightly different manner.
Describe the term 'Salary'.
Salary is the cornerstone of the compensation program. It is the base upon which the other elements of compensation are built. This justifies its other name, which is base pay. Some refer to base salary, which would suggest that there are other parts of salary. However, with the possible exception of lump-sum merit increases and geographical differences, the term is redundant. Salary is the base. Typically, the amount of salary an executive is paid is a function of the value of the individual's responsibilities to the organization and how well the individual is discharging these responsibilities. The value of an individual's responsibilities generally is determined by job analysis, job evaluation, salary surveys and the resulting salary structure adjustments.
Briefly describe the maturity approach of job evaluation.
Similar to the point factor approach, the maturity method of job evaluation uses only one measurement of value—time. Thus, the X axis is defined as time. This method of job evaluation is rarely used for executives, since its greatest appeal is in those instances where there are a large number of employees who are performing essentially the same work, and it is almost impossible to draw lines of distinction establishing separate jobs. Frequently, this method is used for engineers and chemists, with separate curves for each discipline as well as separate curves for supervisors and nonsupervisors.
Briefly discuss geographical differences in surveys to show a difference in the level of pay.
Some surveys demonstrate a definite difference in the level of pay for comparable positions in different parts of the country, and some organizations have adopted area pay differential policies to ensure that they are not overpaying in lower pay areas or underpaying in higher pay areas. The main reason for not adopting such a policy is that there is usually insufficient data on the level of pay in different areas to warrant adopting geographic differentials and, therefore, the company must switch from a level-of-pay basis to a cost-of-living basis. This works on the presumption that level of pay will follow the cost of living, but it brings the cost of living into prime focus. This is a difficult point for those working hard to sever any linkage of their pay program with this factor. Geographical differences seem to be diminishing over time, but even where they exist, pay differentials are likely to be found only in lower grade levels. The exception is country-paid differentials for overseas assignments of executives.
Explain the classification method of job evaluation.
The classification method compares each job with a set of written standards. In this approach grade levels are predetermined, and identifying the grade for a job simply requires matching the most appropriate descriptors. However, determining the grade levels, which must be sufficiently generic to be usable with any type of job and yet sufficiently specific to allow direct comparison with a particular position, takes significant time and effort. Another problem with the classification method is the number of grades used. As organizations mature and more levels of management are introduced, it may not be possible to categorize all the levels into existing grades, and additional grades may need to be added, or the standards may need to be completely rewritten.
How is multiple regression analysis used in job comparability?
The power of the computer has made possible the use of multiple regression analysis. Instead of simply comparing compensation to one independent variable, it is possible to compare to two or more. While single regression results can be plotted using typical X and Y axes, it is not possible to plot three or more. It is even more difficult attempting to visualize more than a three-dimensional chart. By employing a step progression analysis, the computer orders the independent variables studied in terms of single regression analysis values and picks the one which, when combined with the first analysis, will produce the highest two measurement predictions. This is not simply the single regression analysis with the second highest value, since it could be accounting essentially for the same values as the first if they are strongly related. Some suspect that this approach brings a level of analysis to the issue far greater than the data warrants or than the executive is interested in attempting to absorb.
How does the process of job analysis apply to executive positions?
The purpose of any job analysis is to gather specific information about a job and summarize it in a manner that sets the job apart from other jobs within an organization. For executive positions, this information can be obtained through an interview with the executive or a questionnaire completed by a job incumbent. The focus of the job analysis should be on principal responsibilities and also on reporting relationships within the organization structure.
Describe surveys pitfalls and careful consideration that must be used when looking at data.
Traditional job evaluation methods begin by establishing job value based on some method of internal equity. The hierarchy is then measured in terms of survey data to determine the competitive level of pay for comparable positions, in order to establish external equity. The problem is that any attempt to measure items using two different methods stands a very good chance of reaching dissimilar conclusions. Invariably, the survey results will suggest that several jobs are either overgraded or undergraded by one or more levels under the internally-oriented job evaluation plan. This places the company in the uncomfortable position of knowingly either underpaying or overpaying certain jobs in relation to the market, or overriding the job evaluation plan based on market results. In the market pricing method, the labor market is used as the basis for evaluating jobs. Jobs for which no survey data exists are then evaluated by the ranking method. It can be argued that more precision and accuracy exists in classifying jobs using this method at the lower end of the structure where there is a greater likelihood of similar jobs existing in other companies. A problem in market pricing executive positions is that, with the possible exception of functional division heads, there is a great divergence in specific responsibilities. While this may make job matching more suspect, it may be possible to obtain meaningful data through multiple regression studies. After the initial structuring, the need for extensive surveys is minimized, since the structure is adjusted periodically on assessment of the rate of compensation growth over the previous period. Therefore, only those jobs that have not moved at the same rate would be regraded, probably by not more than a grade.
Explain the market pricing method of job evaluation.
Traditional job evaluation methods begin by establishing job value based on some method of internal equity. The hierarchy is then measured in terms of survey data to determine the competitive level of pay for comparable positions, in order to establish external equity. The problem is that any attempt to measure items using two different methods stands a very good chance of reaching dissimilar conclusions. Invariably, the survey results will suggest that several jobs are either overgraded or undergraded by one or more levels under the internally-orientedjob evaluation plan. This places the company in the uncomfortable position of knowingly either underpaying or overpaying certain jobs in relation to the market, or overriding the job evaluation plan based on market results. In the market pricing method, the labor market is used as the basis for evaluating jobs. Jobs for which no survey data exists are then evaluated by the ranking method. It can be argued that more precision and accuracy exists in classifying jobs using this method at the lower end of the structure where there is a greater likelihood of similar jobs existing in other companies. A problem in market pricing executive positions is that, with the possible exception of functional division heads, there is a great divergence in specific responsibilities. While this may make job matching more suspect, it may be possible to obtain meaningful data through multiple regression studies. After the initial structuring, the need for extensive surveys is minimized, since the structure is adjusted periodically on assessment of the rate of compensation growth over the previous period. Therefore, only those jobs that have not moved at the same rate would be regraded, probably by not more than a grade.