Compensation Tools
Compensation tools can be grouped into two broad categories depending on the unit of analysis used to make pay decisions: job-based approaches and skill-based approaches.
Job-based approaches include the most traditional and widely used types of compensation programs.62 These plans assume that work gets done by people who are paid to perform well-defined jobs (for example, secretary, bookkeeper). Each job is designed to accomplish specific tasks (for example, coding, recordkeeping) and is normally performed by several people. Because all jobs are not equally important to the firm and the labor market puts a greater value on some jobs than on others, the compensation system’s primary objective is to allocate pay so that the most important jobs pay the most.
A simplified example of a typical job-based pay structure appears in Figure 10.4. It shows the pay structure of a hypothetical large restaurant with 87 employees performing 18 different jobs. These 18 jobs are grouped into six pay grades , with pay levels ranging from $8.50 an hour for jobs in the lowest grades to a maximum of $34.00 an hour for the job in the highest grade (chef). Employees are paid within the range established for the grade at which their job is classified. Thus, a dishwasher or a busser would be paid between $8.50 and $9.25 an hour (Grade 1).
The skill-based approach is far less common. It assumes that workers should be paid not according to the job they hold, but rather by how flexible or capable they are at performing multiple tasks. Under this type of plan, the greater the variety of job-related skills workers possess, the more they are paid. Figure 10.5 shows a simple example of a skill-based approach that could be used as an alternative to the job-based approach depicted in Figure 10.4. Workers who master the first set of skills (Block 1) receive $9 an hour; those who learn the skills in Block 2 (in addition to those in Block 1) receive $10.50 an hour; those who acquire the skills in Block 3 (in addition to those in Blocks 1 and 2) are paid $13.50 an hour; and so on.
In the sections that follow, we discuss these two major types of compensation programs in greater depth. Because compensation tools and pay plans can be very complex, we avoid many of the operational details, focusing instead on these programs’ intended uses and their relative strengths and weaknesses. Excellent sources that provide step-by-step procedures to implement such programs are available elsewhere.63
Job-Based Compensation Plans
There are three key components of developing job-based compensation plans: achieving internal equity, achieving external equity, and achieving individual equity. Figure 10.6 summarizes how these are interrelated and the steps involved in each component. The large majority of U.S. firms rely on this or a similar scheme to compensate their workforce.64
Jobs Number of Positions Pay GRADE 6 Chef 2 $23.50–$34.00/hr. GRADE 5 Manager 1 $14.50–$24.00/hr. Sous-Chef 1 GRADE 4 Assistant Manager 2 $10.50–$15.00/hr. Lead Cook 2 Office Manager 1 GRADE 3 General Cook 5 $9.50–$11.00/hr. Short-Order Cook 2 Assistant to Lead Cook 2 Clerk 1 GRADE 2 Server 45 $9.00–$10.00/hr. Hostess 4 Cashier 4 GRADE 1 Kitchen Helper 2 $8.50–$9.25/hr. Dishwasher 3 Janitor 2 Busser 6 Security Guard 2
FIGURE 10.4
Pay Structure of a Large Restaurant Developed Using a Job-Based Approach
Skill Block Skills Pay 5
Create new items for menu
Find different uses for leftovers (e.g., hot dishes, buffets)
Coordinate and control work of all employees upon manager’s absence
$26.00/hr. 4
Cook existing menu items following recipe
Supervise kitchen help
Prepare payroll
Ensure quality of food and adherence to standards
$20.00/hr. 3
Schedule servers and assign workstations
Conduct inventory
Organize work flow on restaurant floor
$13.50/hr. 2
Greet customers and organize tables
Take orders from customers
Bring food to tables
Assist in kitchen with food preparations
Perform security checks
Help with delivery
$10.50/hr. 1
Use dishwashing equipment
Use chemicals/disinfectants to clean premises
Use vacuum cleaner, mop, waxer, and other cleaning equipment
Clean and set up tables
Perform routine kitchen chores (e.g., making coffee)
$9.00/hr.
FIGURE 10.5
Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach
FIGURE 10.6
The Key Steps in Creating Job-Based Compensation Plans
Achieving Internal Equity: Job Evaluation
Job-based compensation assesses the relative value or contribution of different jobs (not individual employees) to an organization. The first part of this process, referred to as job evaluation , is composed of six steps intended to provide a rational, orderly, and systematic judgment of how important each job is to the firm. The ultimate goal of job evaluation is to achieve internal equity in the pay structure.
Step 1: Conduct Job Analysis
As we discussed in Chapter 2, j ob analysis is the gathering and organization of information concerning the tasks, duties, and responsibilities of specific jobs. In this first step in the job-evaluation process, information is gathered about the duties, tasks, and responsibilities of all jobs being evaluated. Job analysts can use personal interviews with workers, questionnaires completed by employees and/or supervisors, and business records (for example, cost of equipment operated and annual budgets) to study the what, how, and why of various tasks that make up the job. Sample items from a commonly used job analysis questionnaire, the Position Analysis Questionnaire, appear in Figure 10.7. For each question, the job analyst considers what is known about the job and decides which of the five descriptions is most appropriate.
Step 2: Write Job Descriptions
In the second step in the job-evaluation process, the job-analysis data are boiled down into a written document that identifies, defines, and describes each job in terms of its duties, responsibilities, working conditions, and specifications. This document is called a job description. (You will recall this term from Chapter 2.)
Step 3: Determine Job Specifications
Job specifications consist of the worker characteristics that an employee must have to perform the job successfully. These prerequisites are drawn from the job analysis, although in some cases they are legally mandated (for example, plumbers must have a plumbing license). Job specifications are typically very concrete in terms of necessary years and type of prior work experience, level and type of education, certificates, vocational training, and so forth. They are usually included on job descriptions.
Mental Processes
Decision Making, Reasoning, and Planning/Scheduling
36. Decision making
Using the response scale below, indicate the level of decision making typically involved in the job, considering the number and complexity of the factors that must be taken into account, the variety of alternatives available, the consequences and importance of the decisions, the background experience, education, and training required, the precedents available for guidance, and other relevant considerations.
Level of Decision
Very limited (e.g., decisions such as those in selecting parts in routine assembly, shelving items in a warehouse, cleaning furniture, or handling automatic machines)
Limited (e.g., decisions such as those in operating a wood planer, dispatching a taxi, or lubricating an automobile)
Intermediate (e.g., decisions such as those in setting up machines for operation, diagnosing mechanical disorders of aircraft, reporting news, or supervising auto service workers)
Substantial (e.g., decisions such as those in determining production quotas or making promoting and hiring decisions)
Very substantial (e.g., decisions such as those in approving an annual corporate budget, recommending major surgery, or selecting the location for a new plant)
37. Reasoning in problem solving
Using the response scale below, indicate the level of reasoning required in applying knowledge, experience, and judgment to problems.
Level of Reasoning in Problem Solving
Very limited (use of common sense to carry out simple or relatively uninvolved instructions, e.g., hand assembler or mixing machine operator)
Limited (use of some training and/or experience to select from a limited number of solutions the most appropriate action or procedure in performing the job, e.g., sales clerk, electrician apprentice, or library assistant)
Intermediate (use of relevant principles to solve practical problems and to deal with a variety of concrete variables in situations where only limited standardization exists, such as that used by supervisors or technicians)
Substantial (use of logic or scientific thinking to define problems, collect information, establish facts, and draw valid conclusions, such as that used by petroleum engineers, personnel directors, or chain store managers)
Very substantial (use of logical or scientific thinking to solve a wide range of intellectual and practical problems, such as that used by research chemists, nuclear physicists, corporate presidents, or managers of a large branch or plant)
FIGURE 10.7
Sample Items from Position Analysis Questionnaire
Source:Purdue Research Foundation, West Lafayette, IN 47907-1650. Used with permission.
Step 4: Rate Worth of All Jobs Using a Predetermined System
After job descriptions and job specifications have been finalized, they help determine the relative value or contributions of different jobs to the organization. This job evaluation is normally done by a three- to seven-person committee that may include supervisors, managers, HR department staff, and outside consultants. Several well-known evaluation procedures have evolved over the years, but the point factor system is used by the vast majority of firms.65
The point factor system uses compensable factors to evaluate jobs. Compensable factors are work-related criteria that the organization considers most important in assessing the relative value of different jobs. One commonly used compensable factor is knowledge. Jobs that require more knowledge (acquired either through formal education or through informal experience) receive a higher rating and, thus, more compensation. Although each firm can determine its own compensable factors, or even create compensable factors suitable to various occupational groups or job families (clerical, technical, managerial, and so on), most firms adopt compensable factors from well-established job-evaluation systems. Two point-factor systems that are almost universally accepted are the Hay Guide Chart Profile Method and the Management Association of America (MAA) National Position Evaluation Plan (formerly known as the NMTA point factor system). The Hay Method, which is summarized in Figure 10.8, uses three compensable factors to evaluate jobs: know-how, problem solving, and accountability. The MAA (NMTA) plan has three separate units: Unit I for hourly blue-collar jobs; Unit II for nonexempt clerical, technical, and service positions; and Unit III for exempt supervisory, professional, and management-level positions. The MAA (NMTA) plan includes 11 factors divided into four broad categories (skill, effort, responsibility, and working conditions).66
Know-How
Know-how is the sum total of every kind of skill, however acquired, necessary for acceptable job performance. This sum total, which comprises the necessary overall “fund of knowledge” an employee needs, has three dimensions:
Knowledge of practical procedures, specialized techniques, and learned disciplines.
The ability to integrate and harmonize the diversified functions involved in managerial situations (operating, supporting, and administrative). This know-how may be exercised consultatively as well as executively and involves in some combination the areas of organizing, planning, executing, controlling, and evaluating.
Active, practicing skills in the area of human relationships.
Problem Solving
Problem solving is the original “self-starting” thinking required by the job for analyzing, evaluating, creating, reasoning, and arriving at conclusions. To the extent that thinking is circumscribed by standards, covered by precedents, or referred to others, problem solving is diminished and the emphasis correspondingly is on know-how.
Problem solving has two dimensions:
The environment in which the thinking takes place.
The challenge presented by the thinking to be done.
Accountability
Accountability is the answerability for an action and for the consequences thereof. It is the measured effect of the job on end results. It has three dimensions:
Freedom to act—the degree of personal or procedural control and guidance.
Job impact on end results.
Magnitude—indicated by the general dollar size of the areas(s) most clearly or primarily affected by the job (on an annual basis).
FIGURE 10.8
Hay Compensable Factors
Source:Courtesy of Hay Group © 2011 Hay Group. All rights reserved.
In both systems, each compensable factor is assigned a scale of numbers and degrees. The more important factors are given higher point values and the less important factors lower values. For instance, the highest possible points under the MAA (NMTA) system are earned for experience, with each degree of experience being worth 22 points. The value of the other two MAA (NMTA) skill factors is 14 points per degree. All other factors are worth either 5 or 10 points per degree.
This scale allows the evaluation and compensation committee to assign a number of points to each job on the basis of each factor degree. For example, let us assume that job X is rated at the fifth degree for physical demand (50 points), equipment or process (25 points), material or product (25 points), safety of others (25 points), and work of others (25 points); at the fourth degree for mental or visual demand (20 points), working conditions (40 points), and hazards (20 points); at the second degree for experience (44 points); and at the first degree for knowledge (14 points) and initiative and ingenuity (14 points). The total points for this job across all 11 MAA (NMTA) compensable factors is, thus, 302.
Step 5: Create a Job Hierarchy
The four steps described thus far produce a job hierarchy , a listing of jobs in terms of their relative assessed value (from highest to lowest). Figure 10.9 illustrates a job hierarchy for office jobs in a typical large organization. Column 1 of the figure shows the total points assigned to each job in descending order. These range from a high of 300 for customer-service representative to a low of 60 for receptionist.
1 Points 2 Grade 3 Weekly Pay Range Customer Service Representative 300 5 $600–$750 Executive Secretary/Administrative Assistant 298 Senior Secretary 290 Secretary 230 4 $550–$650 Senior General Clerk 225 Credit and Collection Clerk 220 Accounting Clerk 175 3 $525–$575 General Clerk 170 Legal Secretary/Assistant 165 Senior Word Processing Operator 160 Word Processing Operator 125 2 $490–$530 Purchasing Clerk 120 Payroll Clerk 120 Clerk-Typist 115 File Clerk 95 1 $450–$500 Mail Clerk 80 Personnel Clerk 80 Receptionist 60
FIGURE 10.9
Hierarchy of Clerical Jobs, Pay Grades, and Weekly Pay Range for a Hypothetical Office
Step 6: Classify Jobs by Grade Levels
For the sake of simplicity, most large organizations classify jobs into grades as the last step in the job-evaluation process. Typically, the job hierarchy is reduced to a manageable number of grade levels, with the assigned points used to determine where to set up dividing lines between grades. For example, column 2 in Figure 10.9 shows how the hierarchy of 18 clerical jobs is divided into five grade levels. All jobs in a given grade are judged to be essentially the same in terms of importance because the points assigned to each are very close in number.
Other job-evaluation systems are the ranking system (in which the evaluation committee puts together a hierarchy of job descriptions from highest to lowest based on an overall judgment of value); the classification system (in which the committee sorts job descriptions into grades without using a point system, as in the federal civil service job classification system); factor comparison (a complex and seldom-used variation of the point and ranking systems); and policy capturing (in which mathematical analysis is used to estimate the relative value of each job based on the firm’s existing practices).
You should keep two key aspects of our discussion so far in mind. First, job evaluation is performed internally and does not take into account the wage rates in the marketplace or what other firms are doing. Second, job evaluation focuses only on the value of the tasks that make up each job, not the people performing them. The MAA (NMTA) booklet distributed to all employees whose jobs are evaluated under that system makes this very explicit: “The plan rates each job based on compensable factors used to assess the contributions of each job to the organization and does not judge the performance of any given individual employee.”67
Achieving External Equity: Market Surveys
To achieve external equity, firms often conduct market surveys. The purpose of these surveys is to determine the pay ranges for each grade level. An organization may conduct its own salary surveys, but most purchase commercially available surveys. Consulting firms conduct literally hundreds of such surveys each year for almost every type of job and geographic area. Users can create customized reports based on position, job family, geographic area, industry classification, organization size, and the like by using simple pull-down menus and point-and-click technology. For additional salary survey sources that are user friendly and instantly available to HR professionals and line managers via the Web, see the Manager’s Notebook, “How Much Is a Position Worth in the Marketplace?” You might want to try some of these online sources and check the salary range of a job of interest to you by state, metropolitan area, and even zip code.
MANAGER’S NOTEBOOK How Much Is a Position Worth in the Marketplace?
Customer-Driven HR
Salary survey data were commonly obtained by the HR department. But technology is making this process almost obsolete. Line managers can now instantly access salary data analyzed by location, by industry, and by work experience for hundreds of positions. This is possible through online compensation surveys; three of them are Comp Quest Online, Global Directory of Salary Surveys, and Survey Finder.
Comp Quest Online ( www.towerswatson.com )
Towers Watson Comp Quest Online is a powerful Web-based service that helps managers and HR professionals conduct competitive pay assessments (both domestically and internationally) over the Internet. It allows users to generate custom reports. For example, users can:
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▪ Create their own peer groups of companies by selecting specific companies by name, industry, size, or performance measure.
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▪ Access new data as it is submitted to the database throughout the year.
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▪ Customize report formats and content (for example, select preferred percentiles and currencies, show incumbent’s data, and tailor report titles and labels).
Global Directory of Salary Surveys (http://jobmob.co.il)
This site will connect you to more than 100 salary surveys around the world. You can click on the home Web page (for instance, India, the Philippines, the United Kingdom, or South Africa) and it will take you to the appropriate site.
Survey Finder (hrcom.salary.com)
The Survey Finder enables HR professionals and line managers to search a database of hundreds of up-to-date compensation surveys offered from more than 100 independent vendors, including major human resource consulting firms, compensation consulting firms, survey companies, and industry associations. To make searches easier, the Survey Finder catalogs every survey according to industrial, geographic, and employee population.
Similarly, the federal government regularly conducts salary surveys on a regional and national basis for close to 800 occupations. The results are currently available for free on the Internet (Bureau of Labor Statistics, 2014, National Employment and Wage Estimates by Occupation and Industry,
www.bls.gov/
Why spend time and money on internal job evaluations when market data can be used to determine the value of jobs? First, most companies have jobs that are unique to the firm and therefore cannot be easily matched to market data.68 For instance, the job of “administrative assistant” in Company Y may involve supporting top management in important tasks (such as making public appearances for an executive when he or she is not available), whereas in Company Z it may involve only routine clerical duties. Second, the importance of a job can vary from firm to firm. For example, the job of “scientist” in a high-tech firm (where new-product creation is a key to competitive advantage) is usually far more important than in a mature manufacturing company (where scientists are often expected to perform only routine tests).
Using market surveys to link job-evaluation results to external wage/salary data generally requires two steps: benchmarking and establishing a pay policy.
Step 1: Identify Benchmark or Key Jobs
To link the internal job-evaluation hierarchy or grade-level classification to market salaries, most firms identify benchmark or key jobs —that is, jobs that are similar or comparable in content across firms—and check salary surveys to determine how much these key jobs are worth to other employers. The company then sets pay rates for nonkey jobs (for which market data are not available) by assigning them the same pay range as key jobs that fall into the same grade level.
An example will help here. Let’s say five of the jobs in our office example in Figure 10.9 are identified as key. (These are briefly described in Figure 10.10.) The company purchases a salary survey for office workers in the area showing both average weekly pay and the 25th, 50th, and 75th percentiles in weekly pay for these key jobs. For example, Figure 10.11 shows that 25 percent of the customer-service representatives in organizations included in the survey earn $500 per week or less, 50 percent earn $600 or less, and 75 percent earn $750 or less. The average weekly salary in the area for this job is $595. The company uses these market data to assign a pay range for all jobs that were evaluated as being at the same grade level as the key job of customer-service representative—in this case, executive secretary and senior secretary. But first it needs to establish a pay policy.
Customer Service Representative Establishes and maintains good customer relations and provides advice and assistance on customer problems.
Credit and Collection Clerk Performs clerical tasks related to credit and collection activities; performs routine credit checks, obtains supplementary information, investigates overdue accounts, follows up by mail and/or telephone to customers on delinquent payments.
Accounting Clerk Performs a variety of routine accounting clerical work such as maintaining journals, subsidiary ledgers, and related reports according to well-defined procedures or detailed instructions.
Word Processing Operator Operates word processing equipment to enter or search, select, and merge text from a storage device or internal memory for continuous or repetitive production of copy.
Clerk-Typist Performs routine clerical and typing work; follows established procedures and detailed written or oral instructions; may operate simple types of office machines and equipment.
FIGURE 10.10
Sample Benchmark Jobs for Office Personnel
Sources:AMS Foundation. Office, Secretarial, Professional, Data Processing and Management Salary Report, AMS Foundation, 550 W. Jackson Blvd., Suite 360, Chicago, IL 60661; see also Salary Wizard. (2012). Salary report for administrative support, and clerical job categories. www.sw2.salary.com .
|
Weekly Pay Percentile
|
||||
|---|---|---|---|---|
| Benchmark Jobs | 25th | 50th | 75th | Weekly Pay Average |
| 1. Customer Service Representative | $500 | $600 | $750 | $595 |
| 2. Credit and Collection Clerk | $500 | $550 | $650 | $555 |
| 3. Accounting Clerk | $470 | $525 | $575 | $523 |
| 4. Word Processing Operator | $480 | $490 | $530 | $494 |
| 5. Clerk-Typist | $430 | $450 | $500 | $443 |
FIGURE 10.11
Market Salary Data for Selected Benchmark Office Jobs
Step 2: Establish a Pay Policy
Because market wages and salaries vary widely (look again at Figure 10.11), the organization needs to decide whether to lead, lag, or pay the going rate (which is normally defined as the midpoint of the wage/salary distribution in the survey). A firm’s pay policy is determined by how it chooses to position itself in the pay market. The hypothetical firm shown in Figure 10.11, for example, decided to set a pay policy pegging the minimum pay for each grade to the 50th percentile and the maximum pay to the 75th percentile in the market (see column 3 of Figure 10.11). Some firms use more complex methods to achieve the same objective.
Achieving Individual Equity: Within-Pay-Range Positioning Criteria
After the firm has finalized its pay structure by determining pay ranges for each job, it must perform one last task: Assign each employee a pay rate within the range established for his of her job. Companies frequently use previous experience, seniority, and performance appraisal ratings to determine how much an employee is to be paid within the stipulated range for his or her job. The objective of this last step is to achieve individual equity. Individual equity refers to fairness in pay decisions for employees holding the same job.
Evaluating Job-Based Compensation Plans
Job-based compensation programs are rational, objective, and systematic, all features that minimize employee complaints. They are also relatively easy to set up and administer. However, they have several significant drawbacks:
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▪ Job-based compensation plans do not take into account the nature of the business and its unique problems. For example, jobs are harder to define and change more rapidly in small, growing companies than in larger, more stable companies (such as those in the insurance industry).
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▪ The process of establishing job-based compensation plans is much more subjective and arbitrary than its proponents suggest.
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▪ Job-based systems are less appropriate at higher levels of an organization, where it is more difficult to separate individual contributions from the job itself. To force people to conform to a narrowly defined job description robs the organization of much-needed creativity.
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▪ As the economy has become more service oriented and the manufacturing sector has continued to shrink, jobs have become more broadly defined. As a result, job descriptions are often awash in generalities. This makes it more difficult to evaluate the relative importance of jobs.
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▪ Job-based compensation plans tend to be bureaucratic, mechanistic, and inflexible. Thus, firms cannot easily adapt their pay structure to a rapidly changing economic environment. In addition, because they rely on fixed salary and benefits associated with each level in the hierarchy, these plans tend to result in layoffs to save on costs during economic downturns. Japanese firms often provide 20 to 30 percent of their employees’ pay in variable form and have greater flexibility to absorb the economy’s ups and downs.
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▪ The job-evaluation process is biased against those occupations traditionally filled by women (clerical, elementary school teaching, nursing, and the like). Although empirical studies are inconclusive on this issue, critics often use vivid examples to make their point, such as sanitation jobs (garbage collection) in New York City being evaluated higher than teaching jobs.
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▪ Wage and salary data obtained from market surveys are not definitive. After adjusting for job content, company size, firm performance, and geographic location, differences ranging from 35 to 300 percent in the pay of identical jobs within the same industry are not uncommon.69
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▪ In determining internal and external equity, it is the employees’ perceptions of equity that count, not the assessments of job-evaluation committees and paid consultants. Job-based compensation plans assume that the employer can decide what is equitable for the employee. Because equity is in the eye of the beholder, this approach may simply rationalize an employer’s pay practices rather than compensate employees according to their contributions.
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▪ In a knowledge-based economy, workers—particularly those who work in scientific and technical fields—may compete for work in an open market; hence, they are not tied to a particular organization. They may not want to be constrained by salaries that are set by a job-evaluation procedure. They are more loyal to the profession than to the firm. As a result, they may see themselves as “freelancers” and may resent organizational controls on their earnings.
Despite all these criticisms, job-based compensation plans continue to be widely used, probably because no alternative systems are both cost-efficient and generally applicable.
Suggestions for Practice
Rather than dismissing job-based compensation plans completely, it is more realistic to take steps to reduce the potential problems associated with them:
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▪ Think strategically in making policy decisions concerning pay For example, it may be in the firm’s best interests to design a certain number of jobs very broadly and flexibly. The firm may also find it advantageous to pay at the top of the market for critical jobs that are central to its mission and at the low end of the market for jobs it considers less important. In short, the firm’s business and HR strategy should drive the use of compensation tools rather than the other way around.
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▪ Secure employee input Employee dissatisfaction will be reduced to the extent that employees have a voice in the design and management of the compensation plan. Computer-assisted job-evaluation systems allow employees to describe their jobs in a way that can be synthesized, displayed, rearranged, and easily compared. This tends to improve the acceptability of job-evaluation results and offers an inexpensive way to update job descriptions regularly.
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▪ Increase each job’s range of pay while expanding its scope of responsibility This approach, commonly called job banding , entails replacing narrowly defined job descriptions with broader categories (bands) of related jobs.70 For instance, Fine Products, Inc., a consumer products company, collapsed 13 separate plant, regional, and production manager job titles down to four jobs with increased responsibility. The maximum salary in a range is set at 90 percent greater than the minimum within each band (from $28,500 to $54,500 for “Band C,” for instance).71
Job banding permits employees to receive a substantial pay raise without having to change jobs or get promoted. It has three potential benefits. First, it gives the firm more flexibility because jobs are not narrowly defined. Second, during periods of slow growth, the firm can reward top performers without having to promote them. Third, the firm may save on administrative costs because with banding there are fewer layers of staff and management. However, banding needs to be monitored, because managers enjoy substantial discretion in “slotting” an employee within a large allowable salary range. Over time, this flexibility may create unjustifiable salary inequities from one unit to another and from one employee to another.
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▪ Examine statistical evidence periodically to ensure that the job-evaluation system is doing what it is supposed to For instance, high turnover or difficulty in hiring employees in certain job classifications may be a good indicator that job evaluation is not working properly.
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▪ Expand the proportion of employees’ pay that is variable (bonuses, stock plans, and so forth) Variable-pay programs provide the firm with the flexibility to reduce costs without resorting to layoffs.
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▪ Develop policies for so-called knowledge workers that specify the types of paid external opportunities they may pursue while still remaining employed by the firm For example, many universities stipulate that faculty can devote an average of eight hours per week to consulting activities, although they need to file a report listing the external organizations for which they provide services.
Band Managerial Individual Contributor 13 President 12 Executive Vice President Vice President for Research 11 Vice President Executive Consultant 10 Assistant Vice President Senior Consultant 9 Director Consultant 8 Senior Manager Senior Adviser 7 Manager Adviser 6 Senior Specialist 5 Specialist 4 Senior Technician 3 Senior Administrative Support, Technician 2 Administrative Support Senior Manufacturing Associate 1 Clerical Support, Manufacturing Associate FIGURE 10.12
Example of a Dual-Career Ladder
Sources:LeBlanc, P. Banding the new pay structure for the transformed organization. Perspectives in Total Compensation, 2014, 3(8). WorldatWork. Scottsdale, AZ. Used with permission of WorldatWork.
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Establish dual-career ladders for different types of employees so that moving into management ranks or up the organizational hierarchy is not the only way to receive a substantial increase in pay In some situations, such as in a large organization with multiple business units and several layers of management, a tall job hierarchy is appropriate; in others, a relatively flat hierarchy with much room for salary growth (based, for instance, on performance and seniority) makes more sense. Figure 10.12 is an example of a dual-career ladder. The Manager’s Notebook, “Go Your Own Way,” discusses how more companies are adopting this practice.
MANAGER’S NOTEBOOK Go Your Own Way
Emerging Trends
Despite the job title and pay, not everyone wants to be a manager. But for many years, companies offered few other paths to advancement for highly skilled and technical workers, even their star performers.
Now, however, valued employees who love their work rather than the idea of managing other people have more options than ever before. Firms are creating new paths, both formal and informal, to help these employees continue to achieve, improve, and win recognition without having to assume a management role they don’t want and in which they might not do well. And companies are finding that these programs help them retain critical employees, too.
At Abbott Laboratories, for example, Dale Kempf advanced through the ranks for several years thanks to his work as a research chemist in the pharmaceutical discovery division. Then his manager nominated him for membership in a prestigious honorary society of Abbott’s 200 top scientists, where he continues to win recognition and rewards.
At PricewaterhouseCoopers, Tania Chebli fills the highly regarded and well-paid role of managing director, where her expertise in matters of risk and credit quality is well respected. She mentors other employees, but has no direct reports to manage. Earning the spot required the support of her boss and other colleagues and a formal presentation to a committee. “It was a huge process,” Ms. Chebli says now, but “I feel rewarded, I feel recognized.”
Johnson Controls offers nonmanagerial technical career tracks, but it also offers technical workers a chance to try a management role without the risk of derailing their careers. “They might say, ‘I’m not 100 percent sure, but I want to try it,’” said the company’s CIO. “Afterward, they can at least say we tried. We allow for that freedom.” To give these technical workers every opportunity to succeed, the company reviews their performance as managers every 30 days. If the job isn’t a good match, they return to the technical track, where each position has a three-level salary range and room for advancement.
Other firms that offer nonmanagement tracks for skilled individuals include organizations as diverse as Microsoft, Chevron, Nordstrom, and the Mayo Clinic.
Skill-Based Compensation Plans
Unlike job-based compensation plans, skill-based compensation plans use skills as the basis of pay.72 All employees start at the same pay rate and advance one pay level for each new skill they master.73
Three types of skills may be rewarded. Employees acquire depth skills when they learn more about a specialized area or become expert in a given field. They acquire horizontal or breadth skills when they learn more and more jobs or tasks within the firm and vertical skills when they acquire “self-management” abilities, such as scheduling, coordinating, training, and leadership. Skill-based pay has been adopted by a wide range of industries, such as telecommunications (AT&T and Northern Telecom), insurance (Shenandoah Life Insurance), hotels (Embassy Suites), and retailing (Target).74
Skill-based pay offers several potential advantages to the firm.75 First, it creates a more flexible workforce that is not straitjacketed by job descriptions specifying work assignments for a given job title. Second, it promotes cross-training, thus preventing absenteeism and turnover from disrupting the work unit’s ability to meet deadlines. Third, it calls for fewer supervisors, so management layers can be cut to produce a leaner organization. Fourth, it increases employees’ control over their compensation because they know in advance what it takes to receive a pay raise (learning new skills).
Skill-based pay does pose some risks to the organization, and this may help explain why only a relatively small proportion (5% to 7%) of all firms use it.76 First, it may lead to higher compensation and training costs that are not offset by greater productivity or cost savings. This can happen when many employees master many or all the skills and thus receive a higher wage than they would under a job-based pay rate. Second, unless employees have the opportunity to use all the skills they have acquired, they may become “rusty.” Third, when employees hit the top of the pay structure, they may become frustrated and leave the firm because they have no further opportunity to receive a pay raise. Fourth, attaching monetary values to skills can become a guessing game unless external comparable pay data are available. Finally, skill-based pay may become part of the problem it is intended to solve (extensive bureaucracy and inflexibility) if an elaborate and time-consuming process is required to monitor and certify employee skills.
One final observation about skill-based pay: This is the pay system that many new and small businesses use by default. Because flexibility is crucial for continued growth, flexible employees are more highly valued and paid accordingly. When a business is fairly new, of course, there is no formalized system relating specific skills to specific compensation values. However, at some point the company must systematize its compensation structure. It is then that the design issues described earlier become critical.
Special Compensation Issues in Small Firms
Smaller firms can seldom implement the more elaborate compensation plans discussed in this chapter. First, they may not have enough positions to justify a pay structure such as the one in our hypothetical restaurant (see Figure 10.6). Second, they may not have the time or the employees in place to create and administer a complex compensation program. Third, in many small firms, jobs are broadly defined so that employees are expected to perform multiple tasks and hence, job descriptions are not very meaningful. That is, the value of contributions tends to reside more in the person than in a job title or job content. With these caveats in mind, small firms still face most of the issues discussed in this chapter and need to find effective ways to deal with them. An employee who feels that he or she is treated inequitably with pay is more likely to leave. A good candidate who receives a job offer that is far below the compensation offered by other alternative employers is unlikely to take the lowest bid. Employees who believe that salary and salary raises are given arbitrarily without taking into account responsibility and performance are likely to become demoralized. In short, small firms must provide sufficient inducements to have a qualified and motivated workforce. Even if done more informally, the pay system should be administered so that employees believe pay decisions have adequate distributive and procedural justice.
Small firms can appoint committees that give employees some voice; thus, managers and/or owners can take corrective action if needed based on employee feedback. It is also critical for smaller firms to have a good sense of what other similar firms in the community pay for similar jobs. Hiring underqualified applicants “on the cheap side” or losing key contributors may be devastating to these firms. Online salary surveys can be helpful, although (as discussed earlier) most surveys show a big salary range for various positions, so the firm still needs to choose the most appropriate compensation level. Depending on the strategic needs of the company, this might involve paying above market for some positions (to attract the “cream of the crop”) and below market for other positions. For instance, some startup high-technology firms pay above market to engineers and scientists in key positions. Smaller firms often rely on nonmonetary rewards as a substitute for high compensation that the company can’t afford (see the You Manage It! feature titled “Helping Employees Take Care of Home Tasks” near the end of this chapter). In some growing sectors, it is common to offer stock to employees in lieu of higher salaries. Most frequently, smaller firms offer substantial bonuses to employees depending on how well the company has performed during the year. Employees may feel that it is fair to receive lower assured compensation (in the form of a fixed salary) in return for the potential to earn additional income in the form of bonuses and stock appreciation.
Many small firms are owned and managed by families. Nonfamily employees who work alongside family employees can sometimes feel an inequity in their positions as nonfamily members. Favoritism toward family employees could prove disastrous to the morale of the workforce. To prevent this problem, family-owned firms should seek the advice of an impartial, external compensation consultant. If the company can afford it, hiring some professional managers and nonfamily supervisors can also be helpful in creating more objectivity in the system. Establishing clear expectations (in terms of scheduling, workloads, tasks, and so on) that are applied equally to all employees—family and nonfamily alike—may also help establish a climate of fairness.
Source:© ZUMA Press, Inc./Alamy.