HUMAN RESOURCE

MANAGEMENT
Chapter 5
Establishing Strategic Pay Plans

Prof. Mohamed Wahba

After studying this chapter, you should be
able to:
1. List the basic factors in determining pay
rates.
2. Important of job evaluation
3. Explain in detail how to establish pay rates.
4. Explain how to price managerial and
professional jobs.
5. Discuss current trends in compensation.
© 2005 Prentice Hall Inc. All rights reserved. 11–2
 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.
© 2005 PRENTICE HALL INC. ALL RIGHTS RESERVED. 11–3
 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 differences3

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 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.

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 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.

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 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.
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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.

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 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.
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 Sources for Salary Surveys
Consulting firms
Professional associations
Government agencies
◦ U.S. Department of Labor’s Bureau of Labor Statistics
(BLS) conducts three annual surveys:
◦ Area wage surveys
◦ Industry wage surveys
◦ Professional, administrative, technical, and clerical
(PATC) surveys.

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 Some Pay Data Web Sites

*An alliance between recruiters Korn/Ferry International and the Wall Street Journal.

Table 11–2

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 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.

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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.

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 2- Classification method
jobs are classified into an existing grade/category
structure or hierarchy.
Each level in the grade/category structure has a
description and associated job titles.
Each job is assigned to the grade/category
providing the closest match to the job.
The classification of a position is decided by
comparing the whole job with the appropriate job
grading standard.
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Point Method Meaning & Definition

1. Determining the type of a job: The

jobs range from top senior position to
watchman level. Each involves different
skills, responsibility, efforts and working
conditions. Unskilled jobs have a
separate evaluating programme for
them.

© 2005 PRENTICE HALL INC. ALL RIGHTS RESERVED. 5–24

 Point Method Meaning & Definition
2. Selection of factors: A factor is the differentiating feature of a job. The
following should be kept in consideration for selecting a factor:
a. Factors must be ratable
b. Limited number of factors
c. Factors should not overlap in meaning
d. It must meet both employer and employee standards
There are mainly 4 Main job characteristics:
a. Skills: Education, work experience, training, expertise, judgement.
b. Responsibility: Machinery used, raw material used, work quality,
output quality.
c. Effort: Physical and mental effort.
d. Working conditions: Work environment, accident hazard, discomfort
© 2005 PRENTICE HALL INC. ALL RIGHTS RESERVED. 5–25
Point Method Meaning & Definition
3. Construction of factor scales: The next step is to
construct a factor scale. It will include:
a. Relative value of each factor
b. Degree of each factor
c. Assigned point values to each factor

© 2005 PRENTICE HALL INC. ALL RIGHTS RESERVED. 5–26

Point Method Meaning & Definition
4. Evaluation of jobs: After the construction of
factors scale, the evaluation of tasks can be
started. Job analysis information should be read
carefully and it should be compared with
degree definitions. At which degree the job falls
needs to be decided. It should be done with all
the factors and total points should be added up.

© 2005 PRENTICE HALL INC. ALL RIGHTS RESERVED. 5–27

 Point Method Meaning & Definition

5. Conducting the wage survey: After getting

the worth of jobs in terms of points it should
be converted to money value. A wage survey
must be conducted to know what wages are
being given in the industry.

© 2005 PRENTICE HALL INC. ALL RIGHTS RESERVED. 5–28

 Point Method Meaning & Definition
6. Design the wage structure: After taking the wage
survey the management decided to form a wage
structure. There are 2 types of wage structure:
a. In the first kind, the wages are being paid to each
job falling in any particular job class. The rates do not
vary within a job class.
b. In the second kind, the wage changes not only
between different job classes but also within the job
classes
© 2005 PRENTICE HALL INC. ALL RIGHTS RESERVED. 5–29
Example of Point Method to hourly paid manual staff

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 Computerized Job Evaluations
A computerized system that uses a structured questionnaire and
statistical models to streamline the job evaluation process.
◦ Advantages of computer-aided job evaluation (CAJE)
◦ Simplify job analysis
◦ Help keep job descriptions up to date
◦ Increase evaluation objectivity
◦ Reduce the time spent in committee meetings
◦ Ease the burden of system maintenance

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 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.

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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.

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Plotting a Wage Curve

Figure 11–4

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 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.

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 Wage Structure

Note: This shows overlapping wage classes

and maximum–minimum wage ranges.

Figure 11–5

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 Federal Government Pay Schedule:
Grades GS-8–GS-10,
New York, Northern New Jersey, Long Island,
January 2020

Table 11–4

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 Compensation Administration Checklist

A good compensation administration program is comprehensive and flexible and ensures optimum
performance from employees at all levels. The following checklist may be used to evaluate a company’s
program. The more questions answered “yes,” the more thorough has been the planning for
compensation administration.

Source: Reprinted with permission of the publisher, HRnext.com. Copyright HRnext.com, 2003. Figure 11–6

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Pricing Managerial and Professional Jobs
Compensating managers
◦ Base pay: fixed salary, guaranteed bonuses.
◦ Short-term incentives: cash or stock bonuses
◦ Long-term incentives: stock options
◦ Executive benefits and perks: retirement plans,
life insurance, and health insurance without a
deductible or coinsurance.

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 Pricing Managerial and Professional Jobs
What Really Determines Executive Pay?
◦ CEO pay is set by the board of directors taking into
account factors such as the business strategy, corporate
trends, and where they want to be in a short and long
term.
◦ Firms pay CEOs based on the complexity of the jobs
they filled.
◦ Boards are reducing the relative importance of base
salary while boosting the emphasis on performance-
based pay.
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 Compensating Professional Employees
Employers can use job evaluation for professional jobs.
Compensable factors focus on problem solving,
creativity, job scope, and technical knowledge and
expertise.
Firms use the point method and factor comparison
methods, although job classification seems most
popular.
Professional jobs are market-priced to establish the
values for benchmark jobs.

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What Is Competency-based Pay?
Competency-based pay
◦ Where the company pays for the employee’s
range, depth, and types of skills and knowledge,
rather than for the job title he or she holds.
Competencies
◦ Demonstrable characteristics of a person,
including knowledge, skills, and behaviors, that
enable performance.

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Why Use Competency-Based Pay?
Traditional pay plans may actually backfire if a high-
performance work system is the goal.
Paying for skills, knowledge, and competencies is
more strategic.
Measurable skills, knowledge, and competencies are
the heart of any company’s performance
management process.

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 Competency-Based Pay in
Practice
Main components of skill/competency/ knowledge–based pay
programs:
◦ A system that defines specific skills, and a process for tying
the person’s pay to his or her skill
◦ A training system that lets employees seek and acquire skills
◦ A formal competency testing system
◦ 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 and fewer accidents
Cons
◦ Pay program implementation problems
◦ Cost implications of paying for unused knowledge,
skills and behaviors
◦ Complexity of program
◦ Uncertainty that the program improves
productivity
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 Other Compensation Trends
Broad banding
◦ Consolidating salary grades and ranges into just a
few wide levels or “bands,” each of which contains a
relatively wide range of jobs and salary levels.
◦ Wide bands provide for more flexibility in assigning
workers to different job grades.
◦ Lack of permanence in job responsibilities can be
unsettling to new employees.

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 Broadbanded
Structure and
How It Relates
to Traditional
Pay Grades and
Ranges

Figure 11–7

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Strategic Compensation
Strategic compensation
◦ Using the compensation plan to support the company’s
strategic aims.
◦ Focuses employees’ attention on the values of winning,
execution, and speed, and on being better, faster, and
more competitive..
IBM’s strategic compensation plan:
◦ The marketplace rules.
◦ Fewer jobs, evaluated differently, in broadbands.
◦ Managers manage.
◦ Big stakes for stakeholders.

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 Comparable Worth
Comparable worth
◦ Refers to the requirement to pay men and women
equal wages for jobs that are of comparable (rather
than strictly equal) value to the employer.
◦ Seeks to address the issue that women have jobs
that are dissimilar to those of men and those jobs
often consistently valued less than men’s jobs.

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 Compensation and Women
Factors lowering the earnings of women:
◦ Women’s starting salaries are traditionally lower.
◦ Salary increases for women in professional jobs do not
reflect their above-average performance.
◦ In white-collar jobs, men change jobs more frequently,
enabling them to be promoted to higher-level jobs over
women with more seniority.
◦ In blue-collar jobs, women tend to be placed in
departments with lower-paying jobs.
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