COMP EXAM 3

Bottom up budgeting

(Line item budgeting, Precise) Most org.'s don't have this. A. Managers determine budget based on aggregated individual decisions B. How allocate dollars 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 C. Disadvantages 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 D. Advantages 1. More uniform allocation 2. More closely related to actual individual requirements (managers)

Top-down budgeting

(came from the 1940's everyone gets the same) A. Estimate the pay increase budget for entire organization B. Increase Decisions (Planned Compa-Ratio) 1. Ability to pay 2. Turnover/manpower planning 3. Competitive market adjustments 4. Cost of living (40's, personal life is none of employers business) 5. Consumer price index 6. Wage inflation 7. Product information (service) 8. Current pay practices 9. Goals/objectives C. Allocation - budget is determined, then allocated to the managers 1. Department 2. Function 3. Size 4. Uniform D. Allocate to individuals 1. Merit guidelines 2. Uniform - COLA E. Advantages 1. Closely related to organization objectives as a whole 2. Gives top management control over allocation F. Disadvantages 1. Top level management may not know the budgetary needs of the departments as well as the managers

Formula foraging survey data

1. Determine the implementation date for the revised pay system, 2. Estimate the wage inflation for the previous year, 3. Determine the effective date of the wage data, A. Correct the wage data using the following formula: *** Adjusted wage = Reported wage x (1+ (Inflation x (age of the data in months/12))) B. Wage data from different sources should aged to the same point in time. C. The proper adjustment rate is wage inflation, not general inflation (CPI).

Midpoint differentials

1. Elastic a. Lower level pay grades b. More pay grades - lower differentials c. Compression 2. Inelastic a. Upper level jobs b. Fewer pay grades 3. Options 1. Lower for lower level pay grades 2. Higher for upper level pay grades 3. A constant differential between each pay grade • The typical differential is between 8% and 10%. These differentials allow for sufficient increases to induce employees to take on additional responsibilities through promotions. The differentials also create a sufficient number of pay grades to accommodate most future growth and changes within the organization. 4. A changing differential based on the jobs at various levels of the organization. 4. Effects 1. Ability to motivate training, promotions 2. Cost control 3. Manage minor fluctuations in market conditions and/or changes in job duties.

Benchmark jobs - Characteristics

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.

Compensable factors - Samples

1. Responsibility 2. Working conditions 3. Education required for the job 4. Experience 5. Number supervised, etc. *image*

Pay compression

A decrease in the pay differentials between newly hired employees and those at the next level

Job Classifications

A grouping of jobs that are considered substantially similar (similar duties, specifications, compensable factors, and market rates) for pay purposes 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. (looks for similarities in jobs) (Problem: Not Market based) (Useful for extremely large and extremely small organizations)

Department of Justice Guidelines for wage surveys

A. Based on recent the Justice Department interpretation of wage survey practices and price fixing, organizations should not: 1. Conduct phone surveys, or a. Participate in surveys where organizations receive actual, organization specific, identifiable information. B. The Dept. of Justice also requires that surveys: 1. Be conducted by an independent party 2. Report data that includes at least 5 respondents 3. Not report data where a single organization represents over 20% of the sample. 4. Data at least three months old. 5. No future data or anticipated policy. 6. Summated data only. *extra* C. Sources of wage data 1. Hay, Mercer, Wyatt, Towers Perrin 2. Werling Associates, Inc.

Purpose of communication

A. Communicate the pay system with understandable terminology B. Managing the 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 C. Why? 1. Market the new system 2. Increase pay satisfaction 3. Decrease misperceptions 4. Give employee a clear understanding of the new system

Controlling compensation costs

A. Controlling Employment B. Controlling Average Cash Compensation C. Managing Policies (Normal Process of cutting back is cutting people.) (Promote internally- training cost goes down, recruitment cost goes down, compensation goes down) (Internal promotions are usually farther behind not with market) (Give benefits over wage no taxation, more benefits to the company) *look at book*

How is data collected for job analysis?

A. Conventional Methods B. Quantitative Methods C. Pre-developed Quantitative Inventories D. Tailoring a Plan

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 A. Employee acceptance B. External stakeholders *image*

Why perform Job analysis?

A. Internal Consistency B. Compensation C. Additional Applications of Job Analysis Data

Embedded control of compensation costs

A. Range minimums and maximums 1. Red circle rates B. Compa Ratio 1. Pay/midpoint C. Variable Pay D. Analyzing Costs and value added E. Performance Criteria F. Salary increase guidelines G. Reporting H. Quantitative decision making I. Promotions v. external hires

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

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

Criteria for evaluating job analysis usefulness

A. Reliability: The results of the analysis are the same regardless of who is involved in performing the analysis and what methods are used. B. Validity: All parties agree that the results are accurate. C. Acceptability D. Current E. Useful D. Fairness of Administration

What data to collect for job analysis?

A. Task Data B. Behavioral Data C. Abilities Data D. Level of Analysis E. Information needed for pay decisions focuses on establishing the similarities and differences among jobs. 1. No. Supervised 2. Tasks 3. Percent of time on task 4. Education required 5. Degree of independence 6. Compensable factors (Skill, Effort, Responsibility, Working Conditions)

Formula for adjusting for geographical differences

A. Wages differ across geographical locations. Organizations should adjust national data to reflect the wage differentials in relevant labor market. Adjusted wage = National wage * Wage differential for local market

Adjusting the pay structure

Adjust by changes in cost of living; update on a regular basis. Adjust for geographical location, age data, based on rate inflation, etc.

Annual adjustment of pay structure and pay grades

Adjustments should be made annually when new job surveys are published, takes into account rate of wage inflation. This allows the organization to remain competitive.

Red circle rate

An employee's pay that is above the maximum of the pay grade is called a red circle rate. Organizations use several policies to deal with employees whose pay is over the grade maximums. A. Freeze wages until the structure catches the individual's pay. B. Give employees ½ of their expected increase. C. Provide a bonus equal to the expected increase.

Green circle rate

An employee's pay that is below the minimum of the pay grade is called a green circle rate. On the official implementation date all employees whose pay is under the minimum of the new pay grades should receive an increase to the minimum of the new pay grade.

Compa ratio

An index that helps assess how managers actually pay employees in relation to the midpoint of the pay range establish for jobs. It eliminates how well actual practices correspond to intended policy. Calculated as average rates actually paid divided by range midpoint.

Theoretical support for pay structure decisions

Classical Theories Just Price • Pay grade assignment Labor Theory of Value • Pay grade assignment • Within range pay Market Theory Market Exchange Model • Pay grade assignment Demand-Side Theory • Marginal Revenue • Maximum of pay range Thurow's Job Competition Model • Within range pay Compensating Differentials (Smith) • Pay grade assignment Internal Labor Market Models • Pay grade assignment Supply-Side Theories Labor Scarcity Models • Pay grade assignment • Within range pay Reservation wage • Minimum pay for each range Human Capital Models • Pay grade assignment • Within range pay Labor Capacity Models • Within range pay Efficiency Wage Theory • Minimum Pay for each range • Within range pay Distributive/Procedural Justice • Pay grade assignment • Within range pay • Minimum pay for structure • Maximum of pay range Institutional Theory • Pay grade assignment • Within range pay • Minimum pay • Maximum of pay range Social Responsibility • Minimum pay for structure Signaling Theory • Pay grade assignment • Within range pay Motivational Theories All • Pay grade assignment • Within range pay (PG. 14)

Matching jobs to survey information

Compare the organization's job duties to those described in the survey 1. Do not use job titles to determine job match 2. Match to at least 75% of job 3. Match to lowest level of required education 4. Compare the organization's job duties to those described in the survey

Job specifications

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

Factors that shape an organization's pay structure

Culture and Custom Economic Pressures Government policies and regulations Organizational strategy Organizational structure and job design HR Policies Employee acceptance External stakeholders

Factor weights in point factor method

Establish weights for factors being used in point factor method. For how much they contribute to the company EX: Additional education or additional experience added responsibility or differential for working conditions

Compensable factors - Definition

Job attribute that provide the basis for evaluating a job inside an organization. Factors must be work related and acceptable to the parties.

Benchmark jobs- Definition

Key jobs used to develop the pay structure regardless of the system used to design the system. A prototypical job, or group of jobs, used as a reference point for making pay comparisons within or without the organization. Benchmark jobs have well-known and stable contents; their current pay rates are generally acceptable, and the pay differentials among them are relatively stable. A group of benchmark jobs, taken together, contains the entire range of compensable factors and is accepted in the external labor market for setting wages

Formulas for implementing pay level policies

Lead- (1 + inflation) Lead/Lag- (1 + (inflation/2)) Lag- (1 + 0%) Implementation equation: (aged market data) * (1 + policy)

Broad banding

Modification to traditional pay structure that reduces the number of grade levels to support changing organizational culture, management philosophy, and work structure. Broad Banding is successful only when used to support changes in job definitions, work relationships, and organizational philosophy of lateral job rotation. Design specifications include: (Collapsing a number of salary grades into a smaller number of broad grades with wide ranges) 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 Advantages 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 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

Pay grade

One of the classes, levels, or groups into which jobs of the same or similar values are grouped for compensation purposes. All jobs in a pay grade have the same pay range- maximum, minimum, and midpoint

Ranking

Ordering jobs from lowest to highest within an organization or department based on a global definition of relative value, contribution to the organization, or expected pay. a. Alternation b. Paired Comparison

Pay level position policy

Organization's desired position relative to compensation (meet or not)

Pay level movement policy

Organization's stated response to wage inflation (lead, lag, lead-lag)

Point method process

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. or A job evaluation method that employs (1) compensable factors. (2) factor degrees numerically scaled, and (3) weights reflecting the relative importance of each factor. Once scaled degrees and weights are established for each factor and a total score is calculated for each job. The total points assigned to a job determine the job's relative value and hence its location in the pay structure. *image*

Skill based pay structure

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.

Factors used in determining job worth

Responsibility Working Conditions Education required for the job Experience Number supervised, etc.

Internal labor market rules

Rules applied when the internal labor market is evaluated and accounts for additional factors that may impact compensation Largely determined by the specificity of the jobs. If the work requires specialized skills that are not easily transferrable to other workers, organizations can help reduce the external flow of specialized labor by created internal hierarchies that allow a carrier with advancement and increased earnings and incentives

Value of a pay structure

Supports organization strategy Internal Consistency- support workflow Control managerial decisions Allocate resources Promote fairness Direct behaviors towards the organization's objectives

Job analysis for compensation purposes

Task Data Behavioral Data Abilities Data Level of Analysis Data is collected for jobs to outline the job and make sure that it is being compensated fairly. Information needed for pay purposes: Number of subordinates, tasks, percent of time on task, education required, degree of independence, compensable factors

Compa ratio analysis

The analysis evaluates the individual compa ratio which is the employee's current and projected base pay as compared to the recommended pay grade midpoint, which represents our pay level policy. A ratio of 1.00 indicates that the employee's base pay is at the pay grade midpoint. A ratio below 1.00 indicates the employee's base pay is below the pay grade midpoint. A ratio above 1.00 indicates that the employee's base pay is above the recommended pay grade midpoint. A ratio above 1.00 does not indicate that the base pay is unreasonable. Employees with long tenure in the organization and high performance should have a ratio above 1.00. .8-1.2 is considered reasonable. In addition to the individual compa ratio, the analysis may use the following: Average compa ratio: Average pay/average midpoint (By group, dept, job, etc) Individual competitive compa ratio: Individual pay/market average Average competitive compa ratio: Average pay/market average (By group, dept, job, etc)

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. OR The array of pay rates for different jobs within a single organization; they focus attention on differential compensation paid for work of unequal worth

Merit pay and budgets

The merit system is deisnged to reward employee peformance based on current pay and performance A budget is typically increased annually by the average percentage of merit increase

Factors that determine the relevant labor market

The occupation or skill required. The grographic distance the employees are willing to commute Employers who compete for the same skills Employers who compete with the same products EEO Considerations

Pay level policy

The pay level policy is the stated position of the organization's average wage to the average wage in the marketplace

Job evaluation

The process of systematically determining the relative pay for job to create a job hierarchy for the organization. A systematic procedure designed to aid in establishing pay differentials among jobs within a single company. It includes: Classification Comparison of the relative worth of jobs Blending internal and external market forces Measures Negotiation Judgement

Profile based pay model

The profile based pay model combines multiple job-related factors into a weighted equation to determine the appropriate pay within a competitive pay range. In practice, the model assumes that midpoint of the pay grade matches the market rate for a fully qualified employee, and that the minimum of the pay range is the pay for a minimally qualified employee. The model then attempts to move the employee's pay through the range at the same rate as the employee gains competence in the job and has increased marketability. The profile based model provides the most accurate target pay based on the organization's overall compensation strategy, the employee characteristics, and the market conditions.

Pay range

The range of pay rates from minimum ti maximum set for a pay grade or class. It puts limites on the rates of an employer will pay for a particular job The pay range is the percentage differential from the minimum to the maximum of the range. The bottom of the range reflects the typical hiring range while the grade maximum reflects the maximum value of the job to the organization. In keeping with the compensation philosophy, the minimum and maximum values reflect the targeted compensation for the jobs. The pay range provides flexibility in establishing employee wage rates based on individual differences and some differences in job expectations. The range spread also provides flexibility in dealing with changing market forces. The range spread, when combined with the eight- percent grade differentials, also provides sufficient overlap in pay grades to accommodate the establishment of work teams and cross training. Organizations have several options in establishing pay ranges. The organization may use increasing range spreads or a constant spread between the minimum and maximum pay. Typically, organizations set the pay range for the lower level jobs between 30 and 40 percent, while upper level grades may use 50 to 60 percent ranges. A. Why 1. Deals with market differences 2. Provides flexibility 3. Deals with individual differences 4. Meets employee expectations for pay increases B. Range design 1. Select range (minimum to maximum) (Maximum - Minimum)/Minimum a. Options 1. 5-15 - office and production 2. 20-30 - mid level 3. 40 - 80 upper management b. Rationale 1. Match market minimum/maximum 2. Match current pay 3. Value to organization 4. Importance of base pay differentials 5. Mix of base pay to bonus a. Variable pay 6. Cost 7. Overlap a. Few rules b. No more than 2-3 pay grades b. Equation • Minimum = Midpoint/(1 + range %) • Maximum = Minimum * range %

Job analysis

The systematic process of collecting relevant work related information related to the nature of a specific job. The demise of the "job" *look at image*

Advantages/Disadvantages of market based job evaluation

There are several advantages to the market based job evaluation process. • Focuses on the market rate as the primary basis for assigning pay grades • Establishes consistent rules to maintain internal and individual equity • Uses organizational relationships and relative job responsibilities to assign non-benchmark jobs to pay grades • Supports organizational requirements of attracting and retaining employees • Matches labor costs with those of competitors • Significantly reduces time needed to design and maintain the pay system • Fits the current trend of broadening job requirements and expectations • Administratively easy to explain and maintain There are several disadvantages to the market based process. • Requires extensive wage survey data on at least 50% of the effected jobs • Requires constant update of structure • High employee awareness to market data places increased pressure on organizations to maintain competitive position in difficult times • Requires increased attention to detail and communication

Market based job evaluation advantages and disadvantages

There are several advantages to the market based job evaluation process. • Focuses on the market rate as the primary basis for assigning pay grades • Establishes consistent rules to maintain internal and individual equity • Uses organizational relationships and relative job responsibilities to assign non-benchmark jobs to pay grades • Supports organizational requirements of attracting and retaining employees • Matches labor costs with those of competitors • Significantly reduces time needed to design and maintain the pay system • Fits the current trend of broadening job requirements and expectations • Administratively easy to explain and maintain There are several disadvantages to the market based process. • Requires extensive wage survey data on at least 50% of the effected jobs • Requires constant update of structure • High employee awareness to market data places increased pressure on organizations to maintain competitive position in difficult times • Requires increased attention to detail and communication The modified market based classification process uses the following steps in designing a base pay system.

total compensation

Total compensation = Base Pay + Incentives + Benefits + Intangibles

Matching survey data

Use benchmark jobs. Select salary survey, determine proper statistics, age the data, adjust for geographical location, and determine job matches

Usefulness of Consumer Price Index

Useful. The proper adjustment rate is wage inflation, not general inflation (CPI)

base pay

Wage = (w) Market + (w) (Job) + (w) (Individual + (w) Organization

Purpose of a pay structure

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

Market pricing

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

Job description

is the primary source of information when evaluating the similarities and differences between jobs, if it is accurate. The actual work performed will override the job description in case of error.

Samples of job evaluation processes

ranking, classification, point factor method

Theoretical meaning of pay range minimum, midpoint and maximum

• The current Federal or state minimum wage, currently $7.25 as described in the Fair Labor Standards Act. • The reservation wage for the lowest paying job in the organization. • A social concern such as the "Living Wage". o Wage at which a family of four is at the poverty level set by the U. S. Government. Not adjusted by any local cost of living differentials. The midpoint separation between pay grades represents the average differential that the organization expects to maintain between jobs in adjoining pay grades. The differential reflects the organization's treatment of pay differentials in the marketplace as well as differences in job duties and responsibilities. The bottom of the range reflects the typical hiring range while the grade maximum reflects the maximum value of the job to the organization. In keeping with the compensation philosophy, the minimum and maximum values reflect the targeted compensation for the jobs. 12.00 The maximum we are willing to pay an employee 10.00 Midpoint of the pay range • Average pay in the marketplace • Theoretical target pay for a fully qualified individual 9.00 Beginning of 2nd quartile Top of the typical hiring range for a new employee 8.00 Minimum pay for an employee in the job