Chapter 11 Establishing Pay Plans

In brief: This chapter covers the basics of compensation. Included are basic considerations in determining pay rates, establishing pay rates, current trends in compensation, pricing managerial and professional jobs, and current issues in compensation management. interesting issues: This chapter lists and discusses many current and controversial issues in compensation management. You may want to incorporate a discussion of the current issues described on pages 421-423.

Lecture Outline
I. Basic Aspects of Compensation
A. Compensation at Work

II.

Basic Factors in Determining Pay Rates

A. Legal Considerations in Compensation 1. 2. 3. 1931 Davis-Bacon Act 1936 Walsh-Healey Public Contract Act 1938 Fair Labor Standards Act a. b. c. d. e. f. 4. 5. 6. 7. 8. B. C. D. overtime pay minimum wage maximum hours equal pay record-keeping child-labor

1963 Equal Pay Act 1964 Civil rights Act 1974 Employee Retirement Income Security Act (ERISA) The Tax Reform Act of 1986 Other Legislation Affecting Compensation

Union Influence on Compensation Decisions Compensation Policies Equity and Its Impact on Pay Rates

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1. Five Step Process: a. b. c. d. e. salary survey job evaluation pay grades wage curves fine tune pay rates

III.

Establishing Pay Rates

A. Step 1. Conduct the Salary Survey 1. 2. 3. B. Introduction Commercial, Professional, and Government Salary Surveys Table 11-1 on page 402 shows a sample compensation survey. Using the Internet to Do Compensation Surveys

Step 2. Determine the Worth of Each Job: Job Evaluation 1. 2. 3. 4. Purpose of Job Evaluation Compensable Factors Planning and Preparation for the Job Evaluation Ranking Method of Job Evaluation Table 11-1 on page 406 gives a sample of job ranking. a. 5. 6. 7. 8. pros and cons

Job Classification (or Grading) Evaluation Method Figure 11-2 on page 407 shows a sample grade definition. Point Method of Job Evaluation Factor Comparison Job Evaluation Method Computerized Job Evaluations

C. D. E.

Step 3. Group Similar Jobs into Pay Grades Step 4. Price Each Pay GradeWage Curves Figure 11-3 on page 409 shows a sample wage curve Step 5. Fine Tune Pay Rates 1. Developing Rate Ranges Table 11-2 on page 410 shows a sample pay schedule. Figure 11-4 on page 410 shows a sample wage structure.

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2.

Correcting Out-of-Line Rates

IV.

Current Trends in Compensation

A. Skill-Based Pay 1. 2. 3. 4. B. Competence Testing Effect of Job Change Seniority and Other Factors Advancement Opportunities

Broadbanding Figure 11-5 on page 414 shows a sample of setting three bands. Figure 11-6 on page 414 shows a sample of assigning values to jobs in bands. Figure 11-7 on page 414 shows a sample of positioning pay within a band. Information Technology and HR page 415 of the text: see Discussion Boxes solutions at end of this chapter Why Job Evaluation Plans Are Still Widely Used The High-Performance Organization: Compensation Management Pages 416-417 of the text: see Discussion Boxes solutions at end of this chapter A Glimpse into the FutureThe New Pay

C. D. E. F.

V.

Pricing Managerial and Professional Jobs

A. Compensating Managers 1. Basic Compensation Elements a. salary b. benefits c. short-term incentives d. long-term incentives e. perquisites Managerial Job Evaluation

2. B.

Compensating Professional Employees

VI.

Current Issues in Compensation Management

A. The Issue of Comparable Worth 1. The Issue

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2. 3. 4. B. C. D. E. The Gunther Supreme Court Case Comparable Worth and Job Evaluation Implications

The Issue of Pay Secrecy The Issue of Cost-of-Living Differentials Global Issues in HR: The Issue of Compensating Expatriate Employees Page 424 of the text: see Discussion Boxes solutions at end of this chapter Small Business Applications: Developing a Pay Plan Pages 425-427 of the text: see Discussion Boxes solutions at end of this chapter 1. 2. 3. Developing a Workable Pay Plan Compensation Policies Legal Issues

Discussion Boxes
Information Technology and HR: Websites for Compensation Management
(page 415) This discussion box gives a list of websites devoted to compensation-related matters. You may want to assign students to look up the sites and report on what is available there, or possibly have them find additional sites as well.

The High-Performance Organization: Compensation Management

(pages 416-417) This box describes how IBM used compensation management as part of the plan to renew the organization. IBM had dominated the industry in the 1970s and early 1980s but lost touch with the customers by the late 1980s. Changing the pay structure played a major role in changing the organization to meet the new needs of the late 1990s.

Global HRM: The Issue of Compensating Expatriate Employees

(page 424) Managers who are placed in other countries face a wide variance of costs of living. The issue of cost-of-living differentials becomes exaggerated with the even larger differences of costs of living between countries. This box describes two basic policies that are popular for dealing with these issues: home-based and host-based policies.

Small Business Applications: Developing a Pay Plan

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(pages 425-427) This box discusses some of the basic approaches that a small business can use to implement the concepts discussed in this chapter. It includes practical direction on developing a workable pay plan, compensation policies, and a discussion of legal issues.

Key Terms
employee compensation Davis-Bacon Act All forms of pay or rewards going to employees and arising from their employment. (page 396) A law passed in 1931 that sets wage rates for laborers employed by contractors working for the federal government. (page 396)

Walsh-Healey Public A law enacted in 1936 that requires minimum-wage and working Contract Act conditions for employees working on any government contract amounting to more than $10,000. (page 397) Fair Labor Standards Act Congress passed this act in 1936 to provide for minimum wages, maximum hours, overtime pay, and child labor protection. The law has been amended many times and covers most employees. (page 397) An amendment to the Fair Labor Standards Act designed to require equal pay for women doing the same work as men. (page 422) This law makes it illegal to discriminate in employment because of race, color, religion, sex, or national origin. (page 398) The law that provides government protection of pensions for all employees with company pension plans. It also regulates vesting rights (employees who leave before retirement may claim compensation from the pension plan). (page 398) A survey aimed at determining prevailing wage rates. A good salary survey provides specific wage rates for specific jobs. Formal written questionnaire surveys are the most comprehensive, but telephone surveys and newspaper ads are also sources of information. (page 400) A job that is used to anchor the employer's pay scale and around which other jobs are arranged in order of relative worth.(page 400) A systematic comparison done in order to determine the worth of one job relative to another. (page 403) A fundamental, compensable element of a job, such as skills, effort, responsibility, and working conditions. (page 404)
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Equal Pay Act of 1963

Civil Rights Act Employee Retirement Income Security Act (ERISA) salary survey

benchmark job job evaluation compensable factor

Chapter 11: Establishing Pay Plans

ranking method

The simplest method of job evaluation that involves ranking each job relative to all other jobs, usually based on overall difficulty. (page 405) A method for categorizing jobs into groups. (page 406) Dividing jobs into classes based on a set of rules for each class, such as amount of independent judgment, skill, physical effort, and so forth, required for each class of jobs. Classes usually contain similar jobs--such as all secretaries. (page 406) A job classification system synonymous with class, although grades often contain dissimilar jobs, such as secretaries, mechanics, and firefighters. Grade descriptions are written based on compensable factors listed in classification systems, such as the federal classification system. (page 406) Written descriptions of the level of, say, responsibility and knowledge required by jobs in each grade. Similar jobs can then be combined into grades or classes. (page 406) The job evaluation method in which a number of compensable factors are identified and then the degree to which each of these factors is present on the job is determined. (page 407) A widely used method of ranking jobs according to a variety of skill and difficulty factors, then adding up these rankings to arrive at an overall numerical rating for each given job. (page 407) A pay grade is comprised of jobs of approximately equal difficulty. (page 408) Shows the relationship between the value of the job and the average wage paid for this job. (page 409) A series of steps or levels within a pay grade, usually based upon years of service. (page 409) The concept by which women who are usually paid less than men can claim that men in comparable rather than strictly equal jobs are paid more. (page 421)

classification (or grading) method classes

grades

grade definition

point method

factor comparison method pay grade wage curve rate ranges comparable worth

Discussion Questions:
1. What is the difference between exempt and non-exempt jobs? Under the Fair Labor Standards Act, certain categories of employees are exempt from the act or certain provisions of the act. Those categories of employees that are exempted from provisions of the act are called "exempt" while those covered by the act are called "non-exempt." Generally
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executives, administrative, managerial, and professional employees are exempt from minimum wage and overtime provisions. (page 397) 2. Should the job evaluation depend on an appraisal of the jobholder's performance? Why or Why not? No. Job evaluation involves comparing jobs to one another based on their content. Individual performance is covered under performance evaluation and does not affect the content of the job. (pages 403-404) 3. What is the relationship between compensable factors and job specifications? Compensable factors include skill, effort, responsibility, working conditions, problem solving, know-how, accountability, and the like. Many of these factors are obtainable from job specifications which are part of the job analysis. (pages 404) 4. What are the pros and cons of the following methods of job evaluation: ranking, classification, factor comparison, point method? The ranking method is the simplest, easiest to explain, and the quickest to implement. The drawbacks to the ranking method are a tendency to rely to heavily on guestimates and it does not provide a yardstick for measuring the relative values of jobs. The classification (or grading) method is simple, and widely used. Most employers usually end up classifying jobs anyway, so this method often makes sense. The disadvantages are that it is difficult to write the class or grade descriptions and considerable judgment is required to apply them. The factor comparison method is considered a refinement of the ranking system, thus it may be considered to be more accurate than others. The disadvantages are the considerable time and effort involved to implement the system and to evaluate jobs. The point method, like the factor comparison method, is a quantitative analysis that is considered accurate. This system is easy to implement, but developing a point manual can be an expensive (pages 405-408) 5. In what respect is the factor comparison method similar to the ranking method? How do they differ? In the factor comparison method, the evaluators rank each job several times, once for each compensable factor. They differ, in that the factor comparison method is a quantitative technique which involves multiple rankings for each job. The ranking method usually uses only one compensable factor and simply involves making a judgment on the ranking of one job relative to others in the firm on that job's worth to the organization. Ranking is the easiest method, although it provides no yardstick for the comparison of one job relative to another. (pages 405-408) 6. What are the pros and cons of broadbanding, and would you recommend your current employer (or some other firm you're familiar with) use it? Why or why not? The advantages are that is injects greater flexibility into employee compensation and it is especially sensible where firms have flattened their organizations. It allows training and rotation of employees with fewer compensation problems. It also facilitates the bondaryless jobs and organizations being embraced by many firms. The negatives are that it may be more difficult to administer and keep track of individuals and to keep pay comparable. (pages 413-415) 7. It was recently reported in the news that the average pay for most university presidents ranged around $200,000 per year, but that a few earned closer to $500,000 per year. What would account for such a disparity in the pay of universities' chief executive officers? The same things that account for the wide range of pay for the chief executive officers of other businesses and organizations in the same industry. Many factors enter into this mix, including, but not limited to: size of the organization, ownership of the

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organization (public or private), focus of the organization (religious or secular, research or teaching), performance of the organization (financial and enrollment), prestige of the organization, and endowment and funding of the organization.

Discussion Questions:
1. Working individually or in groups, conduct salary surveys for the following positions: entry-level accountant and entry-level chemical engineer. What sources did you use, and what conclusions did you reach? If you were the HR manager for a local engineering firm, what would you recommend that you pay for each job? Students should be expected to use several of the resources indicated on pages 400-401 for gathering this information. Results should be checked for bias or contamination such as only surveying the largest firms in the area, or the unwillingness of some firms to provide this information. Student recommendations should be based on sound logic and conclusion from the data they collect. (pages 400-401) 2. Working individually or in groups, use the BLS area wage surveys to determine local area earnings for the following position: File Clerk I, Accounting Clerk II, Secretary V. How do the BLS figures compare with comparable jobs listed in your Sunday newspaper? What do you think accounts for any discrepancy? You should check the BLS listings yourself to assure that students get the correct numbers. Any discrepancies might be explained by: cost of living differentials within the BLS area, company size and competitiveness, actual grade of the position advertised may not coincide with BLS grades, economic changes within the year since publication, and other factors. 8. Working individually or in groups, use the ranking method to evaluate the relative worth of the jobs listed in Question 7, above. (You may use the Dictionary of Occupational Titles as an aid.) To what extent do the local area earnings for these jobs correspond to your evaluations of the jobs? While there may be discrepancies, most rankings would probably be (from lowest to highest): File Clerk I, Secretary V, Accounting Clerk II, although there could be an argument to switch the last two.

Cases and Exercises

Experiential Exercise: Job Evaluations (page 429)
This exercise will give students experience in performing a job evaluation using the ranking method. When students have completed this exercise in their small groups, you should consider comparing results and discussing the similarities and differences.

Case Incident: Salary Inequities at Acme Manufacturing (page 430)

1.

What would you do if you were Blankenship? This should generate lively discussion. Few students will argue for a do nothing approach, as the risk of legal damages is too high. Some students will argue that the discrepancies in salaries will not remain secret. If this is
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true, then women supervisors will discover they are underpaid and may seek additional back pay. Some students will suggest the company inform the supervisors that as a result of a recent compensation study, it was determined that these jobs were underpaid. The women in question will receive a larger raise at the time of their next performance review. Students in favor of this proposal will argue that by making it public but deferring the adjustment, they will signal that it is not a major crisis.
2.

How do you think the company got into a situation like this in the first place? The informal system suggests that the local culture has overly influenced the compensation process. Issues like whether a spouse is working are not part of a professional compensation practice. Why would you suggest Blankenship pursue the alternative you suggested? Students will provide a variety of reasons. Those suggesting back pay as well as a raise will argue that: a. The company needs to maintain fairness (a social justice approach). b. They will signal to employees that unfair practices will not be tolerated. c. They will gain the support of a group of stakeholders. Those suggesting raises but no back pay may argue: a. The women will likely feel their needs have been addressed. b. It will be less expensive. c. It will be less likely to draw a negative response from White males. d. If the women push for back wages, they can be granted later.

3.

Case Application: Salary Administration in the Engineering Department (page 431)

Majestic is a multi-location chemical company. The more than one hundred engineers in the engineering department perform services for many of Majestics locations. The case reviews Majestics compensation package for engineers. Tom Green is concerned that if he rewards new employees based on potential, he will not have sufficient funds for his senior employees.
1.

What do you think of Majestics Salary Administration Policy? How would you change it? There are many obvious benefits to Majestics program. It is well organized, well documented, promotes fairness across divisions, strives for internal as well as external equity and has elements that facilitate management control. It is weak in that the criteria used for new employee evaluation are subjective. With a pool system, experienced engineers end up competing for dollars, matching their performance against the potential of new employees. Would you recommend broadbanding for engineer jobs at Majestic? Why or why not? There will be some disagreement over this as the case has limited information about the other plants. Students opposed to broadbanding will argue that it would need to be applied across all plants to maintain internal equity. Those opposed would argue the merits of broadbanding, including its usefulness as a compensation system when working with selfdirected work teams from differing levels in the organization (a normal occurrence for an engineering group). How would you proceed now if you were Tom Green? There will likely be lively discussion of this decision. Some will suggest that in the short term, Tom needs to make sure that he has more input into the salary distribution system. The salary administrator

2.

3.

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does not have to live with the immediate consequences the salary distribution decision. In the longer term, Tom needs to work with Majestic to develop a system that will allow him to reward high potential employees (based on a more objective criteria) while still being able to reward those who have made career contributions.

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