Chapter 11

Establishing
Strategic Pay
Plans

Part Four | Compensation

Copyright
Copyright ©© 2011
2011 Pearson
Pearson Education,
Education, Inc.
Inc. PowerPoint
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by Charlie
Charlie Cook
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publishing as
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LEARNING OUTCOMES
1. List the basic factors determining pay rates.
2. Define and give an example of how to conduct a job
evaluation.
3. Explain in detail how to establish pay rates.
4. Explain how to price managerial and professional jobs.
5. Explain the difference between competency-based and
traditional pay plans.
6. Explain the importance today of broadbanding,
comparable worth, and board oversight of executive
pay.

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 Basic Factors in Determining
Pay Rates

Employee Compensation
Components

Direct financial Indirect financial

payments payments

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 Legal Considerations in Compensation

Davis-Bacon Act (1931) Equal Pay Act (1963)

Walsh-Healey Public Employee Retirement

Contract Act (1936) Income Security Act

Title VII of the 1964 Employee Age Discrimination in

Civil Rights Act Compensation Employment Act

Fair Labor Standards Act Americans with

(1938) Disabilities Act

The Family and Medical The Social Security Act of

Leave Act 1935 (as amended)

National Labor Relations

Workers’ Compensation
Act of 1935 (Wagner Act)

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Corporate Policies, Competitive Strategy,
and Compensation
• Aligned Reward Strategy
 The employer’s basic task:
 To create a bundle of rewards—a total reward package—
that specifically elicits the employee behaviors that the firm
needs to support and achieve its competitive strategy.
 The HR or compensation manager along with top management
creates pay policies that are consistent with the firm’s strategic
aims.

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Compensation Policy Issues
• Pay for performance
• Pay for seniority
• The pay cycle
• Salary increases and promotions
• Overtime and shift pay
• Probationary pay
• Paid and unpaid leaves
• Paid holidays
• Salary compression
• Geographic costs of living differences

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 Equity and Its Impact on Pay Rates

Forms of Compensation
Equity

External Internal Individual Procedural

equity equity equity equity

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 Addressing Equity Issues

Area wage and salary surveys

Job analysis and job evaluation

Methods to
Address Equity
Issues
Performance appraisal and incentive pay

Communications, grievance mechanisms,

and employees’ participation

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Establishing Pay Rates

Steps in Establishing Pay Rates

1 Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity).

Determine the worth of each job in your organization through job evaluation (to ensure internal
2 equity).

3 Group similar jobs into pay grades.

4 Price each pay grade by using wave curves.

5 Fine-tune pay rates.

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 Step1: The Salary Survey

Uses for Salary Surveys

To make
To price To market-price
decisions about
benchmark jobs wages for jobs
benefits

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 Sources for Salary Surveys

Sources of Wage and

Salary Information

Self-
Consulting Professional Government The
Conducted
Firms Associations Agencies Internet
Surveys

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 TABLE 11–2 Some Pay Data Web Sites

Sponsor Internet Address What It Provides Downside

Salary.com Salary.com Salary by job and zip code, Adapts national
plus job and description, averages by applying
for hundreds of jobs local cost-of-living
differences

Wageweb www.wageweb.com Average salaries for more than Charges for

150 clerical, professional, and breakdowns by
managerial jobs industry, location, etc.

U.S. Office of www.opm.gov/oca/ Salaries and wages for U.S. Limited to U.S.
Personnel 09Tables/index.asp government jobs, by location government jobs
Management

Job Smart http://jobstar.org/tools/ Profession-specific salary Necessary to review

salary/sal-prof.php surveys numerous salary
surveys for each
profession

cnnmoney.com cnnmoney.com Input your current salary and Based on national

city, and this gives you averages adapted
comparable salary in to cost-of-living
destination city differences

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 Step 2: Job Evaluation

Identifying Compensable Factors

Working
Skills Effort Responsibility
conditions

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 The Job Evaluation Process

Preparing for the Job Evaluation

1 Identifying the need for the job evaluation

2 Getting the cooperation of employees

3 Choosing an evaluation committee

4 Performing the actual evaluation

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 How to Evaluate Jobs

Methods for Evaluating Jobs

Job Factor
Ranking Point method
classification comparison

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Job Evaluation Methods: Ranking
• Ranking each job relative to all other jobs, usually
based on some overall factor.
• Steps in job ranking:
1. Obtain job information.

2. Select and group jobs.

3. Select compensable factors.

4. Rank jobs.

5. Combine ratings.

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 TABLE 11–3 Job Ranking by Olympia Health Care

Ranking Order Annual Pay Scale

1. Office manager $43,000

2. Chief nurse 42,500

3. Bookkeeper 34,000

4. Nurse 32,500

5. Cook 31,000

6. Nurse’s aide 28,500

7. Orderly 25,500

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Job Evaluation Methods:
Job Classification
• Raters categorize jobs into groups or classes of jobs that
are of roughly the same value for pay purposes.
 Classes contain similar jobs.
Administrative assistants


 Grades are jobs similar in difficulty but otherwise different.

 Mechanics, welders, electricians, and machinists

 Jobs are classed by the amount or level of compensable factors

they contain.

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Job Evaluation Methods: Point Method
• A quantitative technique that involves:
 Identifying the degree to which each compensable factor is
present in the job.
 Awarding points for each degree of each factor.

 Calculating a total point value for the job by adding up the

corresponding points for each factor.

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 Step 3: Grouping Jobs

Point Method

Grouping
Similar Jobs
Ranking Method
into Pay
Grades
Classification Methods

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Step 4: Price Each Pay Grade
• The Wage Curve
 Shows the pay rates paid for jobs in each pay grade, relative to
the points or rankings assigned to each job or grade by the job
evaluation.
 Shows the relationships between the value of the job as
determined by one of the job evaluation methods and the
current average pay rates for your grades.

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 FIGURE 11–5 Plotting a Wage Curve

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Step 5: Fine-Tune Pay Rates
• Developing Pay Ranges
 Flexibility in meeting external job market rates

 Easier for employees to move into higher pay grades

 Allows for rewarding performance differences and seniority

• Correcting Out-of-Line Rates

 Raising underpaid jobs to the minimum of the rate range
for their pay grade
 Freezing rates or cutting pay rates for overpaid (“red circle”)
jobs to maximum in the pay range for their pay grade

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 FIGURE 11–6 Wage Structure

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HR in Practice:
Developing a Workable Pay Plan
• Simplified Approach:
 Conduct a wage survey
 Conduct a job evaluation
 Conduct once-a-year job appraisals
 Compile the compensation budget
for upcoming year

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 Pricing Managerial and Professional Jobs

Compensating Executives
and Managers

Base Short-term Long-term Executive

pay incentives incentives benefits/perks

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 Competency-Based Pay
• Competencies
 Demonstrable characteristics of a person, including knowledge,
skills, and behaviors, that enable performance
• What is Competency-Based Pay?
 Paying for the employee’s range, depth, and types of skills and
knowledge, rather than for the job title he or she holds

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 Why Use Competency-Based Pay?

Competency-Based Pay Supports

High-Performance Strategic Performance

Work Systems Aims Management

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Competency-Based Pay in Practice
• Main elements of skill/competency/knowledge–based
pay programs:
1. A system that defines specific skills
2. A process for tying the person’s pay to his or her skill
3. A training system that lets employees seek and acquire skills
4. A formal competency testing system
5. A work design that lets employees move among jobs to
permit work assignment flexibility

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Competency-Based Pay: Pros and Cons
• Pros
 Higher quality
 Lower absenteeism
 Fewer accidents

• Cons
 Pay program implementation problems
 Costs of paying for unused knowledge, skills, and behaviors
 Complexity of program
 Uncertainty that the program improves productivity

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Comparable Worth
• Concept:
 Employers should be required to pay men and women
equal wages for dissimilar jobs that are of comparable
(rather than strictly equal) value to the employer.
• Basis:
 Seeks to address the issue that women have jobs that
are dissimilar to those of men and those jobs are often
consistently valued less than men’s jobs.
• Question at Hand:
 Who will get to make final decisions on the comparability
of jobs?
 Employers
 Courts

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The Pay Gap
• Factors Lowering the Earnings of Women:
1. Women’s starting salaries are traditionally lower.

2. Salary increases for women in professional jobs do not

reflect their above-average performance.
3. In white-collar jobs, men change jobs more frequently,
enabling them to be promoted to higher-level jobs over
women with more seniority.
4. In blue-collar jobs, women tend to be placed in
departments with lower-paying jobs.

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KEY TERMS
employee compensation ranking method
direct financial payments job classification (or grading)
indirect financial payments method
Davis-Bacon Act (1931) classes
Walsh-Healey Public Contract grades
Act (1936) grade definition
Title VII of the 1964 Civil Rights Act point method
Fair Labor Standards Act (1938) factor comparison method
Equal Pay Act (1963) pay grade
Employee Retirement Income wage curve
Security Act (ERISA) pay ranges
salary compression competency-based pay
salary survey competencies
benchmark job broadbanding
job evaluation comparable worth
compensable factor

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