Base Wage and Salary Systems

2. Base WageandSalary Systems Chapter 13

3. Chapter Overview • Objective of the Base Wage and Salary System • Conventional Job Evaluation • Pricing the Job • Base Wage/Salary Structure • New Approaches to the Base Wage/Salary Structure • Summary of Learning Objectives 13-3

4. Base Wage and Salaries • Hourly, weekly, and monthly pay that employees receive for their work • Make up largest portion of an employee’s total compensation • Often the focus of compensation system for employees • Form the foundation for most employees’ perceptions of the fairness, or equity, of the pay system • If employees do not perceive they are being fairly paid, many possible negative effects may result • Often reflects atmosphere of the entire organization • If perceived as being fair and equitable, organization is usually viewed in the same light • Reverse is also true 13-4

5. Specific Policy Issues in Developing and Implementing a Base Wage and Salary Structure 13-5

6. Objective of the Base Wage and Salary System • Primary objective – To establish a structure for equitable compensation of employees, depending on their • Jobs • Level of performance in their jobs • Most systems establish pay ranges for certain jobs based on relative worth of the job to the organization • An employee’s pay performance on the same job should determine where that employee’s pay falls within the job’s range • Key to a sound base wage and salary system • Pay range for a given job establishes a range of permissible pay, with a minimum and a maximum 13-6

7. Objective of the Base Wage and Salary System • Establishing pay ranges involves two basic phases: • Determining relative worth of different jobs to the organization (ensuring internal equity) • Pricing the different jobs (ensuring external equity) • Job evaluation – Primary method for determining the relative worth of jobs to the organization • Wage surveys represent one of the most commonly used methods for pricing jobs 13-7

8. Conventional Job Evaluation • Job evaluation – Systematic determination of value of each job in relation to other jobs in the organization • Used for designing a pay structure, not for appraising performance of employees holding the jobs • General idea is to • Enumerate requirements of a job • Job’s contribution to organization • Classify it according to its importance • While overriding purpose of job evaluation is to establish relative worth of jobs, it can serve several other purposes 13-8

9. Conventional Job Evaluation • Gather information on the jobs being evaluated • Information is obtained from current job descriptions • If not, it is necessary to analyze jobs and create up-to-date descriptions • Identify factor or factors to be used in determining worth of different jobs to the organization • Frequently used factors are • Knowledge • Responsibility • Working conditions • Develop and implement a plan using chosen factors for evaluating relative worth of different jobs to the organization • Should consistently place jobs requiring more of the factors at a higher level in job hierarchy than jobs requiring fewer of the factors 13-9

10. Conventional Job Evaluation • Evidence of a renewed interest in using job-focused approaches (primarily job evaluations) to compensation exists • Conventional job evaluation plans are variations or combinations of four basic methods: • Job ranking • Job classification • Point comparison • Factor comparison 13-10

11. Potential Uses of Job Evaluations 13-11

12. Job Ranking Method • Job evaluation method that ranks jobs in order of their difficulty from simplest to most complex • Simplest, oldest, and least often used job evaluation technique • Often, evaluator prepares cards with basic information about jobs and then arranges the cards in order of importance of positions • Produces only an ordering of jobs and does not indicate relative degree of difference among them • For example, a job with a ranking of four is not necessarily twice as difficult as a job with a ranking of two 13-12

13. Job Classification Method (Job Grading) • Job evaluation method that determines relative worth of a job by comparing it to a predetermined scale of classes or grades of jobs • Certain classes or grades of jobs are defined on basis of differences in • Duties • Responsibilities • Skills • Working conditions • Other job-related factors • Methods is simple, but not always precise, since it evaluates the job as a whole • 5 to 15 classes will suffice • U.S. government has used the job classification method to evaluate all civil service jobs 13-13

14. Point Method • Job evaluation method in which a quantitative point scale is used to evaluate jobs on a factor-by-factor basis • Historically been most widely used job evaluation plan in the U.S. • Advantage • Relatively simple • Reasonably objective • A quantitative point scale is developed for jobs being evaluated • One scale usually cannot be used to evaluate all types of jobs • The human resource department decides which jobs are to be included in a specific evaluation scale 13-14

15. Point Method – Selection of Key Jobs • Key jobs (benchmark) represent jobs that are common throughout the industry or in general locale under study • Content of key jobs should be commonly understood • General idea is to select a limited number (20 percent is a good guideline) of key jobs that are representative of entire pay structure and the major kinds of work being evaluated • Selection of key jobs should adequately represent • Span of responsibilities • Duties • Work requirements • Key jobs may supply only a limited amount of data • Commonality and widespread acceptance of key jobs provide a basis for sound understanding and agreement • A full and detailed job description is necessary for each key job 13-15

16. Point Method – Selecting Compensable Factors • Characteristics of jobs that organization deems important to the extent that it is willing to pay for them • Degree to which a specific job possesses these compensable factors determines its relative worth • Early approaches to job evaluation proposed a set of universal factors • Given set of factors—usually skill, responsibility, and working conditions—should apply to all jobs • Gradually replaced by approach postulating that each organization must tailor its compensable factors to fit its special requirements • Complete adoption of any set of universal factors is not recommended • Compensable factors selected for unionized jobs must be acceptable to both management and the union 13-16

17. Point Method – Selecting Compensable Factors • Job subfactors – Detailed breakdown of a single compensable factor of a job • Used to describe compensable factors in more detail • Degree statements (profile statements) – Written statements used as a part of the point method of job evaluation to further break down job subfactors • Describe specific requirements of each subfactor • Breaking compensable factors into subfactors and degrees allows for a more precise definition of the job and facilitates evaluation 13-17

18. Possible Subfactors and Degrees for the Compensable Factors of Responsibility, with Sample Jobs 13-18

19. Point Method – Assigning Weights to Factors • Weights are assigned to each of the factors, subfactors, and degrees to reflect their relative importance • Weight assigned varies from job to job • Some systematic and helpful approaches exist for assigning weights, but there is no one best method • Both past experience and judgment play major roles • Weights are assigned on basis of maximum number of points for any job • This number is often decided arbitrarily • Points are then assigned to compensable factors, subfactors, and degrees based on their relative importance 13-19

20. Sample Point Values 13-20

21. Point Method – Assigning Points to Specific Jobs • After point scale has been agreed on, point values are derived for key jobs using the following steps: • Examine the job descriptions • Determine degree statement that best describes each subfactor for each compensable factor • Add total number of points • Point totals should present same general relationships that actual pay scales show for key jobs • Rank ordering of key jobs according to point totals should be approximately equivalent to rank ordering of key jobs according to pay • Serves as a check on appropriateness of points that have been assigned to degrees, subfactors, and factors • Nonkey jobs can be evaluated in the same manner • By determining appropriate points for each factor from the scale and then totaling points 13-21

22. Possible Point Totals for Key Banking Jobs 13-22

23. Point Method - Drawback • Amount of time required to develop point scale • Once a scale has been properly formulated for key jobs, it does not take long to evaluate remaining jobs • Efforts should always be made to keep system simple and easy for employees to understand 13-23

24. Factor Comparison Method • Job evaluation technique using monetary scale for evaluating jobs on a factor-by-factor basis • Key jobs are selected • Rates of pay of key jobs be viewed as reasonable and fair to all those making evaluations • Compensable factors are then identified • Does not break down compensable factors into subfactors and degrees • Each compensable factor is ranked according to its importance in each key job • Done by assigning a rank to every key job on one factor at a time rather than ranking one job at a time on all factors • Proponents suggest that to validate rankings, they should be done once or twice at later dates without reference to previous rankings • After each key job has been ranked on a factor-by-factor basis • Allocate wage or salary for each job according to ranking of factors 13-24

25. Factor Comparison Method • One of the selection criteria of a key job is that evaluators must view pay rate as reasonable and fair • Some proponents say that pay should be allocated without reference to factor rankings; others believe evaluators should refer to factor rankings when apportioning pay • Regardless, money allocation and factor rankings must ultimately be consistent • If discrepancies occur that cannot be resolved, job in question should be eliminated from list of key jobs • Monetary scale is prepared for each compensable factor • Each scale shows rank order of the jobs and establishes their relative differences in pay • Total worth of a given job is determined by adding dollar amounts assigned to each compensable factor 13-25

26. Factor-by-Factor Ranking of Key Banking Jobs 13-26

27. Sample Allocation Pay for Key Banking Jobs 13-27

28. Monetary Scale for Responsibility Requirements in Banking Jobs 13-28

29. Comparison of Job Evaluation Methods • Point and factor comparison methods – Commonly referred to as quantative plans • Since a number or dollar value is ultimately assigned to each job being evaluated • Numbers or dollars are assigned on the basis of degree to which job contains the predetermined compensable factors • Job classification and ranking methods – Called qualitative or nonquantitative techniques, compare whole jobs • Point system and the job classification system have a common feature • They evaluate jobs against a predetermined scale or class • Factor comparison and job ranking methods evaluate jobs only in comparison to other positions in the organization 13-29

30. Advantages and Disadvantages of Different Job Evaluation Methods 13-30

31. Pricing the Job • Factor comparison method of evaluation • Only conventional technique relating work of jobs to a monetary scale • Results are derived primarily from wage scale the organization currently uses • Job evaluation cannot be used to set wage rate • Provides basis for this determination • Information should be gathered to ensure external factors are recognized in wage scale • They include • Labor market conditions • Prevailing wage rates • Living costs 13-31

32. Wage and Salary Surveys • Survey of selected organizations within a geographical area or industry designed to provide a comparison of reliable information on • Policies • Practices • Methods of payment • Advantages • Provide knowledge of market and ensure external equity • Can correct employee misconceptions about certain jobs • Can also have a positive impact on employee motivation • Wage or salary survey information can be obtained in two basic ways: • Conducting your own survey • Purchasing or accessing a wage/salary survey undertaken by another party 13-32

33. Conducting a Wage/Salary Survey • To design a wage survey, jobs, organizations, and area to be studied must be determined, and also method for gathering data • If done in conjunction with either the point or factor comparison method or job evaluation • Key jobs selected are normally the ones that are surveyed • Rule of thumb is that a minimum of 30 percent of jobs in an organization should be surveyed to make a fair evaluation of organization’s pay system • When using the classification or ranking method • Organization should apply same guidelines followed for selecting jobs with point and factor comparison methods in choosing the jobs to be surveyed 13-33

34. Conducting a Wage/Salary Survey • Geographic area, an industry type, or a combination of the two may be surveyed • Factors to be considered when defining scope of survey • Size of geographic area • Cost-of-living index for the area • Similar factors • Organizations to be surveyed are normally competitors or companies that employ similar types of employees • Desirable to survey important and most respected organizations • Three traditional methods of surveying wage data are • Personal interviews • Telephone interviews • Mailed questionnaires 13-34

35. Conducting a Wage/Salary Survey • Personal interview • Most reliable and most expensive method • Mailed questionnaires • Probably used most frequently • Used only to survey jobs having uniform meaning all over industry • Responses may be unreliable if doubts concerning definition of job exist • Can be answered by someone not fully familiar with wage structure • Telephone method • Quick but yields incomplete information • May be used to clarify responses to mailed questionnaires • Internet • Inexpensive and quick • All companies are not reachable on Internet 13-35

36. Possible Topics in a Wage Survey 13-36

37. Purchasing or Accessing Wage/Salary Surveys • Consulting firms such as Mercer, Watson Wyatt, and PricewaterhouseCoopers have sold compensation surveys • These are usually relatively expensive • Potential sources for relatively inexpensive wage/salary • surveys include • The Bureau of Labor Statistics of U.S. Department of Labor • State and local governments • Trade associations • Chambers of commerce • Internet • Surveys available on the Internet fall into two broad categories • Surveys conducted by federal government • Surveys conducted by private research organizations, professional associations, employees’ associations, and consulting firms 13-37

38. Sample of Web Sites for Wage/Salary Survey Data 13-38

39. Pitfalls of Wage and Salary Surveys • If not done properly, they can yield very distorted and inaccurate information • Criticism center on the following points: • Too many surveys are being conducted • The quality of the resultant data is often questionable • Survey data are often difficult to interpret and use • Survey data can have a negative impact on merit pay plans • The use of such data can help fuel inflation 13-39

40. Guidelines to Avoid Problems during Wage and Salary Surveys • Assess participating companies for comparability – Factors to be considered include • Size and type of business • Intangibles, such as • Prestige • Security • Location • Growth opportunity • Compare more than base wage or salary – Total compensation package, including incentives and benefits, should be considered • For example, a company might provide few benefits but compensate for this with high base wages and salaries 13-40

41. Guidelines to Avoid Problems during Wage and Salary Surveys • Consider variations in job descriptions – Most widely acknowledged shortcoming of wage and salary surveys is that it is difficult to find jobs that are directly comparable • Usually more information than a brief job description is needed to properly match jobs in a survey • Correlate survey data with adjustment periods – How recently wages and salaries were adjusted before the survey affects the accuracy of the data • Some companies may have just made adjustments, whereas others may not 13-41

42. Guidelines to Avoid Problems during Wage and Salary Surveys • Comparable worth theory holds that every job should be compensated on • Basis of its value to employer and society • Factors to be disregarded in this theory • Availability of qualified employees • Wage rates paid by other employers • Under this theory, wage surveys would have no value • Ninth Circuit Court of Appeals has ruled that • Value of a particular job to an employer is only one of many factors that should influence rate of compensation for that job 13-42

43. Problems Encountered When Using Salary Survey Data 13-43

44. Wage and Salary Curves • Graphical depiction of relationship between relative worth of jobs and their wage rates • Used to indicate pay classes and ranges for jobs • Regardless of job evaluation method used, a wage curve plots the • Jobs in ascending order of difficulty along the abscissa (x-axis) and the wage rate along the ordinate ( y-axis) • To ensure that final wage structure is consistent with both the job evaluations and the wage survey data, it is desirable to construct and compare • One wage curve based on present wages • One based on survey data • Any discrepancies can be quickly detected and corrected 13-44

45. Wage and Salary Curves • Points of graph not following general trend indicate • Wage rate for that job is too low or too high • The job has been inaccurately evaluated • Green-circle jobs • Underpaid jobs • Red-circle jobs • Wages are overly high • Discrepancies can be remedied by granting above- or below-average pay increases for jobs in question 13-45

46. Wage Curve Using the Point Method 13-46

47. Pay Grades and Ranges • Pay grades – Classes or grades of jobs that for pay purposes are grouped on the basis of their worth to an organization • Use of point method for evaluating jobs – Classes are normally defined within a certain point spread • Factor comparison method for evaluating jobs – A money spread can be used for defining grades • Pay range – Permissible pay range, with a minimum and a maximum, that is assigned to a given pay grade • Determined for each grade • Two approaches foe establishing pay grades and ranges exist • To have a relatively large number of grades with identical rates of pay for all jobs within each grade • To have a small number of grades with a relatively wide dollar range for each grade • Most pay structures fall somewhere between these extremes 13-47

48. Pay Grades and Ranges • Ranges within grades are set so that distinctions can be made among employees within grades • Ideally, placement of employees within pay grades should be based on performance or merit • In practice, distinction is often based solely on seniority • On reaching the top of the range for a given grade • An employee can increase his or her pay only by moving to a higher grade • Not unusual for ranges of adjacent pay grades to overlap • Possible for an outstanding performer in a lower grade to earn a higher salary than a below-average performer in a higher grade 13-48

49. Establishment of Pay Grades with Ranges 13-49

50. Base Wage/Salary Structure • Each step in the process is influenced by organization’s current compensation policies • An organization’s compensation system should produce a base wage/salary structure that is both internally and externally equitable • Job evaluation process • Should ensure internal equity • Wage surveys • Should ensure external equity • Performance appraisal process is then used to position an individual employee within the established range 13-50