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Reward Systems


Employers who compete for employees in the same geographic area ... The range of jobs included in the structure is an influence. ... – PowerPoint PPT presentation

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Title: Reward Systems

Reward Systems
Compensation Theory, Job Evaluation and Pay
  • Why is compensation important to organizations?
  • Need to control costs to remain solvent and
  • Need to remain competitive with internal and
    external labor markets
  • Need to use pay to motivate employees
  • The basic problem a limited pie to divide among
    all employees

Compensation Costs Per Hour
Information from DoL, Bureau of Labor Statistics
What is a Job Worth?
  • Market price willing seller and willing buyer
  • Issues of justice and equity
  • Male/female wage differentials
  • U.S. wages vs. wages in less developed countries
  • Gaps between executive and rank-and-file employee
  • Currently in US around 400x rank-and-file pay
    (20x for most of 20th century -- comparable to
    Canada UK)
  • Especially an issue in the current environment
    (Fall 2008)
  • But....does CEO incentive pay lead to
    performance? Who knows?

Womens Pay Equality
The Basic Pay Model
  • Compensation plan efficiency based on
  • Internal consistency
  • External competitiveness
  • Employee contributions to the firm
  • Compensation
  • All forms of financial returns and tangible
    services and benefits employees receive as part
    of an employment relationship

A Basic Question
  • Can we satisfy everybody?
  • Perceptions of fairness come from
  • Actual pay amounts
  • Relative pay amounts on internal basis
  • Relative pay amounts on external basis
  • Pay administration

Job Evaluation
  • Determining the relative value of jobs within the
  • General basis
  • Effort
  • Skill
  • Responsibility
  • Working conditions
  • Approaches
  • Whole job (ranking, classification)
  • Decomposed (point factor)

Equal Pay Act
  • How to
  • Order the jobs from highest to lowest
  • Pro and con
  • Easy to use and to explain to employees
  • Cumbersome for any but the small organization
  • Very difficult to add jobs / re-evaluate jobs
  • Very subjective it is difficult to say what
    criteria are being used, so difficult to
    justify/explain to employees or courts

  • How to
  • Set up grades or categories with descriptions of
    the necessary responsibility, skill, effort and
    working conditions (or other factors as desired)
  • Include benchmark or representative jobs to serve
    as anchors these should be
  • Common and well-known
  • Stable content
  • Truly representative of grade
  • Can be priced on external market

U.S. Government General Schedule
  • Used since 1923
  • Includes 18 classes or grades
  • Uses 9 factors to develop grades
  • These factors fit into the four categories of
    skill, effort, responsibility and working

GS Factors
  • Knowledge required by the position
  • Nature or kind of knowledge and skills needed
  • How the knowledge and skills are used in doing
    the work
  • Supervisory controls
  • How the work is assigned
  • The employees responsibility for carrying out
    the work
  • How the work is reviewed
  • Guidelines
  • The nature of guidelines for performing the work
  • The judgement needed to apply the guidelines or
    develop new guides
  • Complexity
  • The nature of the assignment
  • The difficulty in identifying what needs to be
  • The difficulty and originality involved in
    performing the work
  • Scope and effort
  • The purpose of the work
  • The impact of the work product or service
  • Personal contacts
  • Purpose of contacts
  • Physical demands
  • Work environment

Classification Pro and Con
  • Used by U.S. government (not necessarily a
    positive factor, but some evidence that it works)
  • Relatively easy to develop and administer
  • Can be difficult to write grades for jobs from
    multiple job families

Point-Factor Plans
  • The most commonly used type of job evaluation
  • Make the criteria for comparisons explicit,
    unlike ranking and classification
  • The criteria for classification (the compensable
    factors) are related to the strategy of the
    business they are the factors valued by or of
    high worth to the firm

Point-Factor How it Works
  • Point factor plans all include three elements
  • Compensable factors are defined
  • Degrees or level of each factor are given
    numerical rankings
  • Factors weighted as to their relative value to
    the organization
  • Job worth is measured by the total number of
  • The steps to follow
  • Job analysis
  • Determine compensable factors
  • Scale the factors
  • Weight the factors
  • Communications and documentation
  • Apply the plan

Compensable Factors Characteristics in the work
that the organization values, that help it pursue
its strategy and achieve its objectives
Selecting Compensable Factors
  • These should be
  • Based on the work performed
  • Based on the strategy and values of the
  • Acceptable and considered to be fair by all
    concerned parties
  • As a result, compensable factors should be
    developed by each organization, rather than using
    an off-the-shelf plan
  • Basic group of compensable factors
  • Skill
  • Effort
  • Responsibility
  • Working conditions

The Hay Plan
  • A widely used plan developed by a consulting
    firm, Hay Associates, and aimed toward management
  • It includes
  • Know-how
  • Functional expertise
  • Managerial skills
  • Human relations
  • Problem solving
  • Environment
  • Challenge
  • Accountability
  • Freedom to act
  • Impact of end results
  • Magnitude

Other Plans
  • J.C. Penney looks at
  • Decision making impact on the companys
  • Communications
  • Supervision and management
  • Knowledge requirements
  • Internal customers
  • External customers
  • Many firms (i.e., 3M, TRW) add a factor for
    International Responsibilities

Weighting Compensable Factors
  • Each factor contributes a different amount
    towards the total score for the job, depending on
    the importance of the factor to the organization.
    These weights can be arrived at in two ways
  • Committee judgments (compensation committee,
    which is made up of management representatives)
  • Statistical analysis the weights are chosen so
    that the factor scores for a selected group of
    benchmark jobs will predict market prices or
    current rates for those jobs
  • When compensable factors are weighted and the
    total number of points determined, points
    assigned to each level of the factors

Point-Factor Pro and Con
  • Point-factor systems orderly, rational, and make
    criteria for evaluating jobs explicit
  • Time consuming to set up (and they do need to be
    periodically updated), but very simple to add new
  • Job evaluations may still be affected by what the
    evaluator already knows or believes the market
    value of the job to be

Why Conduct Salary Surveys?
  • To create and adjust pay structure
  • Adjust actual pay in response to the market
  • All jobs on scheduled basis (almost a COLA) be
    careful this doesnt become an entitlement
  • Jobs for which supply or demand has changed
  • Monitor other forms of pay, such as shift
    differentials, bonuses, incentives, overtime
  • Estimate competitors labor costs
  • However, we cannot market price every job

What Is The Market?
  • Who?
  • Employers who compete for the same occupations
    and skills
  • Employers who compete for employees in the same
    geographic area
  • Employers who compete with the same products
  • How to determine this?
  • Who are our competitors?
  • Where do we recruit?
  • Where are employees going?
  • Interaction of skill/place/product
  • If labor market is rich in a particular skill,
    may recruit/price locally
  • If labor market does not include skills,
    recruiting and pricing are on a wider scale
  • Commuting time within a market may also be a

Guidelines for Salary Surveys (I)
  • How many firms to include
  • Include fewer firms if you are a major employer
    and make the market
  • Commercial surveys often include several hundred
    firms (but they make money by getting
    participants and selling them surveys)
  • Price fixing issues
  • Under the Sherman Act, surveys can be viewed as a
    conspiracy in restraint of trade
  • Having a third party conduct the survey protects
    you, but you lose control

Guidelines for Salary Surveys (II)
  • Make or buy
  • For national data, may need to buy from a
  • Some firms may be reluctant to respond to your
    survey, but will participate in third-party
  • More control with own survey
  • Purchasing a survey means you get what they want
    to report
  • Running your own survey takes more time, but may
    be less expensive
  • Odd jobs, local jobs may not be available
  • Free data from Department of Labor...but you get
    what you pay for (useful in general terms)

Guidelines for Salary Surveys (III)
  • What jobs to survey
  • Benchmark jobs
  • Well-known and stable content
  • Stable pricing (stable supply/demand)
  • Represent entire structure
  • Represent majority of covered positions
  • Market sensitive jobs

What Data to Collect
  • Basic company information, for comparability,
    weighting of results
  • How closely surveyed jobs match your jobs
  • Salary range
  • Actual pay (individuals, range or average) may
    include actual pay and tenure/experience
  • Other forms of compensation
  • Benefits (optional)

How to Survey
  • Mail surveys cheapest, but may not be as accurate
  • Interviews are more accurate (allow you to verify
    content) but are very time consuming
  • Compromises may be phone verification or
    interviews every second or third year (DoL

Putting it Together The Pay Regression Line
  • Job evaluation (internal equity) gives us
    relative value of jobs within the organization
  • Salary surveys (external equity) gives us dollar
    value of selected jobs outside the organization
  • The pay regression line combines the two sources
    of information

Basic Information
The Pay Regression Line
Legal Secty
Dept. Secty
Developing Pay Grades
  • Pay grades are convenient groupings of a wide
    variety of jobs...similar in work difficulty and
    responsibility requirements but possibly having
    nothing else in common
  • Pay grades allow compensation to be administered
    for a group of jobs that are worth approximately
    the same
  • A pay grade can be a single rate or a range of
  • An administrative convenience

Basic Characteristics of Pay Grades
  • Grades normally provide for a range of pay rates,
    though single rates are possible
  • Pay grades contain a minimum, midpoint and
  • The range from minimum to maximum can be from 20
    to 100, with 30 to 35 being most common
  • The midpoint of pay grades increase in a constant
    percentage, normally 5 to 15. However, the
    percentage increase may be larger at the top of
    the pay structure
  • There is normally some overlap between pay
    grades. If there is a 30 range within a pay
    grade and there is a 10 difference between
    midpoints, there will be a 67 overlap

Developing Pay Grades
  • How many grades? Differences between grades?
    Grade width?
  • The range of jobs included in the structure is an
    influence. A wider range of jobs requires more
    grades, possibly wider grades (to cover a wider
    range of pay) or less overlap between grades
  • Fewer pay grades will normally be wider pay
    grades, allowing the organization to place more
    emphasis on recognizing time in job
  • Can be argued that differences between grades
    should increase as one advances through the pay
    structure the value of incumbents in higher
    level jobs increases more with time and wider
    variation in performance is possible. In lower
    level jobs, the learning curve levels off much
    sooner and there is less scope for harming or
    contributing to the organization
  • Small increments between pay grades reduces the
    effect of an error in assigning a job to a pay

Other Issues
  • Single rate pay grade?
  • Is there a single market rate for the job, or
    are there a variety of rates?
  • How do you then reward seniority or performance?
  • Often found in union settings
  • What is the midpoint?
  • Midpoint is the market rate for the job
  • However, firm may determine their market rate
    as being higher or lower than the survey average

Other Pay Plan Issues
  • Who evaluates jobs?
  • Moving individuals through pay structures
  • Merit vs. seniority
  • Special situations
  • Pay differentials
  • Compression between employees and supervisors
  • Compression between old and new employees

Moving Individuals Through Pay Structures
  • Merit vs. seniority
  • Faster progression to the midpoint, then slow
  • Grade maximum what then?
  • Special situations
  • Red circled jobs
  • Green circled jobs

Pay Compression
  • Between employees and supervisors
  • May occur if employees are very senior and
    supervisors brought in from outside
  • Also possible if employees work significant
    overtime or have shift pay
  • May also happen with commission sales and sales
  • Solutions
  • Ensure sufficient distance between pay ranges for
    employees and supervisors (10) and watch actual
  • Pay commissions to sales managers or select sales
    management staff who are motivated by security
    rather than money
  • Compression between current and newly hired
  • Happens when market rates change faster than
    employees move through grade
  • What happens if an employee can quit and be
    rehired at a higher salary?
  • Solution Adjust rate of progression through grade