Compensation System
Development
Determining Pay Rates
Employee compensation
All forms of pay or rewards going to employees
and arising from their employment.
Direct financial payments
Pay in the form of wages, salaries, incentives,
commissions, and bonuses.
Indirect financial payments
Pay in the form of financial benefits such as
insurance.
Strategy,
and Compensation
Aligned reward strategy
The employer’s basic task is to create a bundle
of rewards specifically aimed at the employee
behaviors the firm needs to support and
achieve its competitive strategy.
Compensation Policy Issues
Pay for performance
Pay for seniority
Salary increases and promotions
Overtime and shift pay
Probationary pay
Paid and unpaid leaves
Paid holidays
Salary compression
Geographic costs of living differences
Compensation Policy Issues
(cont’d)
Salary compression
A salary inequity problem, generally caused by
inflation, resulting in longer-term employees in
a position earning less than workers entering
the firm today.
Equity and Its Impact on Pay Rates
The equity theory of motivation
States that if a person perceives an inequity,
the person will be motivated to reduce or
eliminate the tension and perceived inequity.
Forms of Equity
External equity
How a job’s pay rate in one company compares to the job’s
pay rate in other companies.
Internal equity
How fair the job’s pay rate is, when compared to other jobs
within the same company
Individual equity
How fair an individual’s pay as compared with what his or
her co-workers are earning for the same or very similar jobs
within the company.
Procedural equity
The perceived fairness of the process and procedures to
make decisions regarding the allocation of pay.
Methods to Address Equity Issues
Salary surveys
To monitor and maintain external equity.
Job analysis and job evaluation
To maintain internal equity,
Performance appraisal and incentive pay
To maintain individual equity.
Communications, grievance mechanisms,
and employees’ participation
To help ensure that employees view the pay
process as transparent and fair.
Establishing Pay Rates
Step 1. The salary 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.
Benchmark job: A job that is used to anchor the
employer’s pay scale and around which other jobs
are arranged in order of relative worth.
Establishing Pay Rates (cont’d)
Step 2. Job evaluation
A systematic comparison done in order to
determine the worth of one job relative to
another.
Compensable factor
A fundamental, compensable element of a job,
such as skills, effort, responsibility, and
working conditions.
Preparing for the Job Evaluation
Identifying the need for the job evaluation
Getting the cooperation of employees
Choosing an evaluation committee.
Performing the actual evaluation.
Job evaluation methods
The five most frequently used job evaluation methods are:
(1) Job ranking
(2) Job grading or classification
(3) The point method
(4) The Hay plan
(5) Factor comparison.
Job Evaluation Methods: Ranking
Ranking each job relative to all other jobs,
usually based on some overall factor.
Steps in job ranking:
Obtain job information.
Select and group jobs.
Select compensable factors.
Rank jobs.
Combine ratings.
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.
Grades are jobs that are similar in difficulty but
otherwise different.
Jobs are classed by the amount or level of
compensable factors they contain.
Job Evaluation Methods: Point
Method
A quantitative technique that involves:
Identifying the degree to which each
compensable factors are 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.
Job Evaluation Methods: The Hay
Plan
A version of the point method which uses
following factors to evaluate the jobs:
Know-how
Problem solving
accountability
Job Evaluation Methods:
Factor Comparison
Each job is ranked several times—once for
each of several compensable factors.
The rankings for each job are combined
into an overall numerical rating for the
job.
Computerized Job Evaluations
A computerized system that uses a
structured questionnaire and statistical
models to streamline the job evaluation
process.
Establishing Pay Rates (cont’d)
Step 3. Group Similar Jobs into Pay
Grades
A pay grade is comprised of jobs of
approximately equal difficulty or importance as
established by job evaluation.
Point method: the pay grade consists of jobs falling
within a range of points.
Ranking method: the grade consists of all jobs that
fall within two or three ranks.
Classification method: automatically categorizes jobs
into classes or grades.
Establishing Pay Rates (cont’d)
Step 4. Price Each Pay Grade
— Wage Curve
Shows the pay rates currently 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.
Plotting a Wage Curve
Figure 11–4
Establishing Pay Rates (cont’d)
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.
Wage
Structure
Note: This shows overlapping wage classes
and maximum–minimum wage ranges.
Figure 11–5
