Compensation Section 2A

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3 Main factors to control in order to manage labor costs

1) Employment (# of workers and the hours they work), 2) Average Cash compensation (wages, bonuses), 3) Managing Policies (benefit costs, etc)

Influencing factors on deciding how much to increase the average pay level for the next period (planned Compa-ration, Top-Down Approach)

1. Ability to pay, 2. Turnover/manpower planning, 3. Competitive market adjustments, 4. Cost of living, 5. Wage inflation, 6. Consumer price index, 7. Product information (service), 8. Current pay practices, 9. Goals/objectives

Parts to total compensation

1. Base Pay, 2. Incentives, 3. Benefits, 4. Intangibles

Point factor method steps

1. Choose compensable factors 2. Establish factor weights 3. Establish factor scales 4. Derive factor weights 5. Evaluate jobs 6. Establish policy line A. Linear regression for the best fit line between the aged wage rates plotted against the job evaluation points for the benchmark jobs. B. Adjust pay policy line for the position and movement policy. 7. Establish pay grades A. Uniform range of job evaluation points 8. Establish pay ranges 9. Assign jobs to pay grades based on the job evaluation points. 10. Update on a regular basis by adjusting the pay structure by changes in the cost of living..

Advantages to Top-Down approach

1. Closely related to organization objectives as a whole, 2. Gives top management control over allocation

Problems with Market Pricing

1. Limited market data 2. Limited logic for differentials, mostly subjective

Why have a pay structure?

1. Supports organization strategy, 2. Internal consistency - support workflow, 3. Control managerial decisions, 4. Allocate resources, 5. Promote fairness, 6. Direct behaviors towards the organization's objectives

Disadvantages of Broad Banding

A. Requires significant change in organization culture and work relationships B. Expected increase in compensation costs due to lack of overlap C. May have little impact on productivity without cultural fit D. Maintains weaknesses of traditional pay systems E. Requires modifications of traditional market pricing, modified jobs may be difficult to price F. Does not address conflicting market forces across jobs

Job specifications

Contains the knowledge, skills, and abilities required to adequately perform the job tasks

Common example of Point Factor Method

Hay Plan: (Used by 5,000 employers world wide) 1. know-how: the sum of what a person must have the capability to do to be effective 2. problem solving: the requirement for and ability to use know-how effectively to develop solutions that improve effectiveness 3. Accountability: the requirement for and ability to achieve desired results

What data should be collected to perform a job analysis?

Information needed for pay decisions focuses on establishing the similarities and differences among jobs.

Design characteristics

Job analysis -> Job descriptions -> Job evaluation (classes or compensable factors) -> Factor degrees and weighting -> job-based structure

Point Factor Method

Job evaluation method; 1. Process of evaluating or scoring jobs based on a predetermined set of characteristics (Compensable factors) to establish a job hierarchy and matching the scores to the market rates to determine the pay grade assignments.

Benchmark Jobs

Key jobs used to develop the pay structure regardless of the system used to design the system.

Skill based pay system-Set pay policy line

Linear regression for the best fit line between the aged wage rates plotted against the skill evaluation points.

Bottom Up approach to controlling salary

Managers determine budget based on aggregated individual decisions

Top-Down approach to individuals

Merit guidelines, uniform(COLA)

Market Based Job Evaluation Structure

Notes

Value to pay plan design (ranking method of job evaluation)

Rank jobs within a department at the start of the project as a reliability check

Job Evaluation

The process of systematically determining the relative pay for job to create a job hierarchy for the organization.

Reliability

The results of the analysis are the same regardless of who is involved in performing the analysis and what methods are used.

Job Analysis

The systematic process of collecting relevant work related information related to the nature of a specific job.

Why perform job analysis?

To maintain internal consistency

Disadvantages to Top-Down approach

Top level management may not know the budgetary needs of the departments as well as the managers

Validity

Validity: All parties agree that the results are accurate.

Problems with point factor method

a. Assumes a constant relationship between job evaluation points and the market rate. b. Time consuming, 3 hours per job. c. Appearance of objectivity but open to subjective scoring.

Value of point factor method to pay plan design

a. Establish rules for non-market jobs based on the logic of the point system and apply to all departments

Top-Down approach allocation

budget is determined, then allocated to the managers

Skill Based structure

link pay to depth or breadth of the skills, abilities, and knowledge a person acquired that are relevant to the work. Pays individuals for all the skill for which they have been certified regardless of whether they work they are doing requires all or just a few of the skills.

When is broad banding successful?

only when used to support changes in job definitions, work relationships, and organizational philosophy of lateral job rotation.

Communication of compensation

signals what is important and what is not

Managing the compensation message:

1. Compensation objectives, 2. Procedures with development of system 3. Work and business related rationale for system, 4. Actual system, a. How system works, b. Calculation of individual pay, c. Future expectations for pay, 5. Appeals/review procedures

Why manage the compensation message?

1. Market the new system, 2. Increase pay satisfaction, 3. Decrease misperceptions, 4. Give employee a clear understanding of the new system

Advantages to Bottom Up salary control

1. More uniform allocation, 2. More closely related to actual individual requirements (managers)

Disadvantages to Bottom Up salary control

1. Pay becomes driven by current policies, 2. More pressure to keep same dollars/system, 3. When comes to percent increase, change is frowned upon

Characteristics of benchmark jobs

1. Reflect the vertical and horizontal mix of jobs in the organization, 2. Be stable, 3. Represent a central job in the job family, 4. Have market data available, 5. Be common in other organizations, and 6. Include jobs that are market sensitive.

How dollars are allocated in the Bottom Up approach

1. Study pay increase guidelines, 2. Distribute forecasting instructions, 3. Provide consultation to managers, 4. Collect forecasts and verify data submitted, 5. Compile statistical data, 6. Analyze forecasts, 7. Review and revise forecasts and budget with management, 8. Provide feedback to management, 9. Monitor budgeted vs. actual increases

General Process: Job Evaluation

1. Work relationships 2. Job Analysis 3. Job Description 4. Job Specifications 5. Job Evaluation 6. Job Structure

Market Pricing Pay Structure Design

A Market Pricing strategy develops a pay structure based on the prevailing wage rate, or estimated wage, rather than the internal value of the jobs in an organization.

Consequences of internal pay structures

A. Competitive Advantage, B. Efficiency, 1. Control, 2. Proper Allocation of Resources, C. Fairness, 1. Consistent Treatment , D. Compliance

What shapes the pay structure?

A. Culture and Custom, B. Economic pressures, C. Government policies and regulations, D. Organizational strategy, E. Organizational structure and job design, F. HR policies

JOB-BASED STRUCTURES: JOB EVALUATION (What are they and what do they focus on?)

A. Design pay structures and assign pay grades based primarily on the characteristics of the job. 1. Focus on internal consistency.

All Salaried Workforce Advantages

A. Discourages unionization B. Reduces turnover and absenteeism C. Lower administrative costs D. Higher levels of commitment E. Supports other decisions

Advantages of Skill-Based Pay System

A. Encourages acquisition of job skills B. More efficient use of labor C. Promotes flexibility in work assignments D. Well adapted to start up organizations in a growth mode

Design specifications in Broad Banding

A. Fewer grade levels (bands) and job titles B. Alternate career tracks (Dual pay system) C. Wider salary ranges with no mid points D. Two or more market based pay ranges per band E. Jobs slotted using traditional techniques

4 types of pay structures and pay grade assignments

A. Job Based (Chapter 5, 8), B. Skill Based (Chapter 6) C. Market Pricing (Notes), D. Market Based Job Evaluation (Notes)

Inherent controls on manager's pay decisions

A. Range minimums and maximums, B. Compa Ratio, C. Variable Pay, D. Analyzing Costs, E. Performance Criteria, F. Salary increase guidelines, G. Reporting, H. Quantitative decision making

Measuring the usefulness of the results of various approaches to designing pay structures

A. Reliability. B. Employee acceptance. C. Validity. D. Fairness of administration.

Disadvantages of Market Pricing

A. Requires extensive wage survey data. B. Requires estimates of market rates for unique jobs, limited research on the accuracy of the estimates that are based on managerial judgments. C. Results in hundreds of pay grades that are sensitive to minor changes in published market rates. D. Requires constant update of structure E. May encounter additional costs to maintain market competitiveness and fight pay compression and inversion due to short term market changes. F. High employee awareness to market data places increased pressure on organizations to maintain competitive position in difficult times. G. Unrealistic to believe that there are market rates for all jobs. H. Does not consider internal labor market factors. I. Assumes complete accuracy of survey data. J. Difficult to defend differentials for unique jobs.

Market Pricing Pay Structure Design process

A. Set pay level policy B. Collect survey data for each job 1. Identify market differentials for jobs without exact market matches (+/- xx% of market) C. Age the data D. Adjust wage data for pay level policy E. Establish pay ranges for each job (+/- market estimate)

Implementation process of Person/Skilled based structure

A. Starting rate for all new employees B. Employees are advanced one pay grade for each new job learned C. Individuals reach top rate after two years in most cases

Advantages of Market Pricing

A. Supports organizational requirements of attracting and retaining employee B. Matches labor costs with those of competitors C. Significantly reduces time needed to design and maintain the pay system

Advantages of Broad Banding

A. Supports organizational trend towards work groups, broadly defined jobs, productivity teams, and lateral transfers B. Promotes lateral career development C. Provides for career development pay D. Increased emphasis on teamwork

Disadvantages of Skill-Based Pay System

A. Topping out when all jobs are learned B. Problems with mature plants that cannot provide for mobility C. Require substantial investment in training D. Creates incentives to become qualified for as many new jobs as possible--not performance E. May conflict with traditional job evaluation plans F. Pay rates may conflict with market rates G. No available skill based salary surveys H. High labor costs

All Salaried Workforce Disadvantages

A. Union response B. Little evidence of productivity increases C. May require change in philosophy

Job analysis and the resulting job description are part of the process of creating what?

Determining the internal job structure

Examples of compensable factors

Education, equivalent experience, and specialized certifications, Experience, Line and staff authority, Number of supervised, Working environment, Level of personal contacts, Nature of personal contacts, Judgment/decision making, Impact on products and services, Budget and program responsibility

Top-down approach in controlling salary

Estimate the pay increase budget for entire organization

Compensable Factors

Job attribute that provide the basis for evaluating a job inside an organization. (See Ex. 5.3)

Classification

Job evaluation method; 1. The Federal Government's General Schedule 2. Flexibility: Balancing Control and Chaos 3. Typically not market based 4. Useful for extremely large and extremely small organizations 5. Value to pay plan design. a. Develop specific classifications for jobs with very similar duties, specifications, compensable factors, and market rates. Assign the classifications to pay grades based on benchmark jobs.

Broad Banding

Modification to traditional pay structure that reduces the number of grade levels to support changing organizational culture, management philosophy and work structure.

Market Pricing Structure

Notes

Information needed for pay decisions which focuses on establishing the similarities and differences among jobs are:

Number Supervised, Tasks, Percent of time on task, Education required, Degree of independence, Compensable factors such as Skill, Effort, Responsibility, Working Conditions

Person/Skill Based Pay Structure Design

Process that links pay structure to the depth and breadth of the skills, abilities, and knowledge a person acquires that is relevant to the work. Pays for all of the job related skills that the employee possesses.

Job analysis provides...

Reliability, Validity, Acceptability, Usefulness

What will override the job description in case of error?

The actual work performed

Pay structure

The array of pay rates for different work or skills within a single organization. It focuses on the pay level, differentials and criteria used to determine pay rates.

The job description is...

the primary source of information when evaluating the similarities and differences between jobs, if it is accurate.

Job-based structure

underwritten by the job evaluation which is the process of systematically determining the relative worth of jobs to create the job structure for the organization.

Midpoint of the pay range

• Average pay in the marketplace, • Theoretical target pay for a fully qualified individual

Demand-Side Theory: Marginal Revenue

• Maximum of pay range

Supply-Side Theories: Efficiency Wage Theory

• Minimum Pay for each range • Within range pay

Supply-Side Theories: Reservation wage

• Minimum pay for each range

Supply-Side Theories: Social Responsibility

• Minimum pay for structure

Classical Theory: Just Price

• Pay grade assignment

Demand-Side Theory: Compensating Differentials (Smith)

• Pay grade assignment

Demand-Side Theory: Internal Labor Market Models

• Pay grade assignment

Market Theory: Market exchange Model

• Pay grade assignment

Classical Theory: Labor Theory of value