Establishing Strategic

Pay Plans
 SALARY & WAGES
WAGES:
Generally Refer to hourly compensation
paid to operating employees,
the basis of wage is time.
SALARY:
Is income that is paid to an
individual not on the basis of
time, but on the basis of
performance.
 Strategy Aligned Pay
The employer’s basic task is to create a
bundle of rewards—a total reward
package—specifically aimed at eliciting
the employee behaviors the firm needs
to support and achieve its competitive
strategy.
 POLICIES AFFECTING
STRATEGIC PAY PLANS
 Decision will the firm be a leader or
follower in Salaries.
 Whether to emphasize Seniority or
Performance
 What should be the Pay Cycle.
 Salary Compression
 Geography
 Equity and its impact
 SALARY
COMPRESSION

A salary inequity problem,

generally caused by inflation,
resulting in longer-term
employees in a position earning
less than workers entering the
firm today.
 Equity and Its Impact on Pay Rates

 EQUITY
 People have a need and desire for fairness at
work.
 People are strongly motivated to maintain a
balance between what they perceive as their
inputs or contributions, and their rewards.
 Types of Equity Managers Have
to Deal with
 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.
ESTABLISHING PAY
RATES
 STEP 1.
 SALARY SURVEYS
 Almost Every Employer conducts at least an
informal telephone, newspaper, or Internet
Survey
 Formal written questionnaire surveys are the
most comprehensive, but telephone surveys
and newspaper ads are also sources of
information.
 Sources could be Consulting firms,
Government Agencies
SOME PAY DATA WEBSITES
 SECOND STEP

JOB
EVALUATION
• PROCESS FOR ENSURING
INTERNAL EQUITY (JOBS OF
COMPARABLE WORTH RECEIVE
COMPARABLE WAGES)

SYSTEMATICALLY DETERMINING
RELATIVE WORTH OF JOBS TO
CREATE JOB STRUCTURE
 AN ATTEMPT TO IDENTIFY INPUTS
THAT ARE MOST VALUABLE TO THE
ORGANIZATION & TO DEVELOP JOB
HIERARCHY BASED ON WHICH JOBS
HAVE MORE OR LESS OF THOSE
DIMENSIONS.
SO…….
The Comparison results in a
wage or salary hierarchy.
 PREPARING FOR JOB
EVALUATION
 Identifying the need for the job
evaluation
 Getting the cooperation of
employees
 Choosing an evaluation committee.
 Performing the actual evaluation.
 CHOOSING A JOB
EVALUATION METHOD
 RANKING METHOD
 CLASSIFICATION METHOD
 FACTOR COMPARISON
 POINT FACTOR
 RANKING METHOD
 SIMPLEST METHOD
 RATERS EXAMINE DESCRIPTION OF
EACH JOB
 JOBS ARRANGED IN ORDER
ACCORDING TO VALUE
 MUST CONDUCT JOB ANALYSIS AND
WRITE JOB DESCRIPTIONS.
Job Ranking by Olympia Health
Care

Table 11–3
 EXAMPLE: ARRAY OF JOBS
ACCORDING TO RANKING
METHOD
RANK MONTHLY SALARIES
1.Accountant $ 3,000
2.Accounts Clerk 1,800
3.Purchase Assistant 1,700
4.Machine Operator 1,400
5.Typist 900
6.Office Boy 600
 CLASSIFICATION METHOD
 Determine How many Categories.
 Define Categories- the standards of
Comparison.
 Rate all Categories into Groups
 Groups are called classes if jobs are
similar
 Groups are Called Grades if groups
contain different jobs of Similar
difficulty
 COMPARE JOBS TO BE EVALUATED WITH
CLASS DEFINITIONS
 PLACE JOBS IN APPROPRIATE
CLASSIFICATIONS
 WRITE UP CLASS OR GRADE
DESCRIPTIONS
 DRAW UP A SET OF GUIDELINES
 CHOSE COMPENSABLE FACTORS AND
DEVELOP CLASS OR GRADE DEFINITIONS.
 Compensable Factor

Definition
 Common element of different jobs (such
as hours worked or number of goods
produced) on the basis of which
remuneration of the employees may be
computed.
 EXAMPLE
CLERICAL WORKER
 CLERICAL WORKER
 CLASS I-Simple work, no supervisory
responsibility, no public contact.
 CLASS II-Simple work, no
supervisory responsibility, public
contact.
 CLASS III- Work of medium
complexity, no supervisory
responsibility, public contact
 CLASS IV-Work of medium
complexity, supervisory
responsibility, public contact.
 CLASS V-Complex work, supervisory
responsibility, public contact.
 Example of A Grade Level
Definition

This is a summary chart of the key grade level criteria for the GS-7
level of clerical and assistance work. Do not use this chart alone for
classification purposes; additional grade level criteria are in the Web-
based chart.

Source: http://www.opm.gov/fedclass. gscler.pdf. August 29, 2001. Figure 11–3

FACTOR COMPARISON
METHOD
 FACTOR COMPARISON IS A WIDELY
USED METHOD TO RANK JOBS BY A
VARIETY OF SKILLS AND
DIFFICULTIES THEN ADDING THESE
TO OBTAIN A NUMERICAL RATING
FOR EACH JOB
 STEPS
 SELECT KEY JOBS(15-
20),Representing Wage/Salary levels
across the organization. The selected
jobs must represent as many
departments as possible.
 Find the Factors in terms of which
jobs are evaluated( such as skill,
mental effort, responsibility, physical
effort, working conditions)
 STEPS
 Rank the selected jobs under each
factor( by each and every member of the
job evaluation committee) independently.
 Assign money value to each factor and
determine wage rates for each key job.
 The wage rate for a job is apportioned
along the identified factors
 All other jobs are compared with the list of
Key jobs and wage rates are determined.
 Quantitative Job Evaluation
Methods
 Factor Comparison Job Evaluation Method
 Step 1. Obtain job information
 Careful, complete job analysis, First Job
descriptions are written.
 Job Specifications are developed, preferably in
terms of compensable factors the job evaluation
committee has decided to use.
 They usually are 1. Mental Requirements 2.
Physical requirements 3. Skill Requirements 4.
Responsibility 5.Working Conditions
 Sample Definitions of Factors
Typically Used in the Factor
Comparison Method
1. Mental Requirements
Either the possession of and/or the active application of the following:
A. (inherent) Mental traits, such as intelligence, memory, reasoning, facility in verbal expression,
ability to get along with people, and imagination.
B. (acquired) General education, such as grammar and arithmetic; or general information as to
sports, world events, etc.
C. (acquired) Specialized knowledge such as chemistry, engineering, accounting, advertising, etc.

2. Skill
A. (acquired) Facility in muscular coordination, as in operating machines, repetitive movements, careful
coordinations, dexterity, assembling, sorting, etc.
B. (acquired) Specific job knowledge necessary to the muscular coordination only; acquired by
performance of the work and not to be confused with general education or specialized knowledge.
It is very largely training in the interpretation of sensory impressions.
Examples
1. In operating an adding machine, the knowledge of which key to depress for a subtotal would be skill.
2. In automobile repair, the ability to determine the significance of a knock in the motor would be skill.
3. In hand-firing a boiler, the ability to determine from the appearance of the firebed how coal should be
shoveled over the surface would be skill.

3. Physical Requirements
A. Physical effort, such as sitting, standing, walking, climbing, pulling, lifting, etc.; both the amount
exercised and the degree of the continuity should be taken into account.
B. Physical status, such as age, height, weight, sex, strength, and eyesight.

Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration, Figure 11–A1
p. 181.© 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ.
 Sample Definitions of Five Factors
Typically Used in the Factor
Comparison Method
4. Responsibilities
A. For raw materials, processed materials, tools, equipment, and property.
B. For money or negotiable securities.
C. For profits or loss, savings or methods’ improvement.
D. For public contact.
E. For records.
F. For supervision.
1. Primarily the complexity of supervision given to subordinates; the number of subordinates is a
secondary feature. Planning, direction, coordination, instruction, control, and approval
characterize this kind of supervision.
2. Also, the degree of supervision received. If Jobs A and B gave no supervision to subordinates,
but A received much closer immediate supervision than B, then B would be entitled to a higher
rating than A in the supervision factor.
To summarize the four degrees of supervision:
Highest degree—gives much—gets little
High degree—gives much—gets much
Low degree—gives none—gets little
Lowest degree—gives none—gets much

5. Working Conditions
A. Environmental influences such as atmosphere, ventilation, illumination, noise, congestion,
fellow workers, etc.
B. Hazards—from the work or its surroundings.
C. Hours.
Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration, Figure 11–A1 (cont’d)
p. 181.© 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ.
Step 2. Select key benchmark jobs

 SELECT KEY JOBS(15-20),Representing

Wage/Salary levels across the organization. The
selected jobs must represent as many departments
as possible.
Step 3. Rank key jobs by factor

 Evaluators are asked to rank the key jobs on each

of the five factors.
 The Ranking is based on each of the five factors
 Each Committee member make this ranking
individually and then a meeting is held to develop
a consensus on each job.
Ranking Key Jobs by Factors1

Table 11–A1
Step 4. Distribute wage rates by
factors
 The committee members have to divide up the present wage
being paid for each key job, dividing it among 5 compensable
factors.
 They do this in accordance with their judgments about the
importance to the job of each factor.
 EXAMPLE:
 If the present wage rate for the job of a laborer is $ 4.26,the
evaluators might distribute this wage as follow:
 Mental Requirements 0.36
 Physical Requirements 2.20
 Skill Requirements 0.42
 Responsibility 0.28
 Working conditions 1.00
TOTAL $4.26
Step 5. Rank key jobs according to wages
Assigned to each factor

 The Ranking is done again by the committee

but monetary value is assigned to the
compensable factors.
 Each Member of the Committee first makes
this distribution working independently.
 Then the committee meets and arrives at a
consensus concerning the money to be
assigned to each factor for each job.
 Step 6. Compare the two sets of rankings to
screen out unusable key jobs
Ranking Key Jobs by Wage
Rates1

Figure 11–A2
 Step 6. Compare the two sets of rankings to
screen out unusable key jobs

 Now we have two sets of ranking.

 The Second ranking reflects for each
job the wages assigned to each
factor.
Comparison of Factor and Wage
Rankings

Figure 11–A3
Step 7. Construct the job-comparison scale

 Once the true key jobs are identified, you

have to set up the comparison job scale.
 To develop this we need assigned wages for
compensable factors.
 Write the appropriate job next to the wage
rate.

 Step 8. Use the job-comparison scale

Job (Factor)-Comparison Scale

Figure 11–A4
POINT METHOD
 The point method is widely used.
 Jobs are expressed in terms of key
Factors.
 These Key Factors each such as skills
and responsibility have different
degrees and also the degree to which
they are present in a job.
 Points are given to each degree and
then summed up to arrive at an
overall point value.
 Step 1. Determine clusters of jobs to be
evaluated

 Because jobs vary widely by

department you usually will not use
one point-rating plan for all jobs in
the organisation.
 Example:
 Shop Jobs
 Clerical Jobs
 Sales Jobs
 Step 2. Collect job information

 Performing Job analysis and writing

Job descriptions and Job
Specifications.
Step 3. Select compensable factors

•Select compensable factors such as.

•Problem Solving
•Physical requirements
•Skills
•Each Cluster of jobs may require its
own compensable factors
 Step 4. Define compensable
factors
•Carefully define each Compensable
Factor.
•This is done to ensure that the evaluation
committee members will each apply the
factors with consistency
 Step 5. Define factor degrees

 Define each of several degrees for each

compensable factor. So that Raters may
judge the amount of degree of a factor
existing in a job.
 Thus for the Factor ” COMPLEXITY” you
might choose to have six degrees, ranging
form “SELDOM CONFRONTS NEW
PROBLEMS” through “USES INDEPENDENT
JUDGEMENT”.
 The number of Degrees should not exceed
five or six.
 Example of One Factor
(Complexity/Problem Solving) in a
Point Factor System

Source: Richard W. Beatty and James R. Beatty,“Job Evaluation,” in Ronald A. Berk (ed.), Performance
Assessment: Methods and Applications (Baltimore, MD: Johns Hopkins University Press, 1986), p. 322.
Figure 11–A2
Step 6. Determine Relative Values of
Factors
 Decide how much weight (or how many
total points) to assign to each factor.
 This is important because for each
cluster of jobs some factors are bound
to be more important than others.
 Example: Mental Requirement factor
would carry far more weight for
executives than would Physical
Requirements.
 Step 6. Determine Relative
Values of Factors
 The process of determining the relative
values or weights that should be
assigned to each factor should be done
by the evaluation committee.
 They should carefully study factor and
degree definitions and then determine
the relative value of the factors for the
cluster of jobs under consideration.
EXAMPLE
 FIRST ASSIGN 100% TO THE HIGHEST
RANKING FACTOR
 THEN ASSIGN A VALUE TO THE NEXT
HIGHEST FACTOR AS THE PERCENTAGE OF
ITS IMPORTANCE
 Decision Making 100%
 Problem Solving 85%
 Knowledge 60%
 NEXT SUM UP THE TOTAL PERCENTAGE
100% + 85% + 60% = 245%
 Then Convert this 245% to a 100%
system
Decision Making 100÷245=40.82 =40.8%
Problem Solving 85÷245=34.69 =34.7%
Knowledge 60÷245=24.49=24.5%
TOTAL 100%
 STEP 7. ASSIGN POINT VALUES
TO FACTORS AND DEGREES
 Now total weights are assigned to
each factor in step 6.
 Now assign points to each factor
 EXAMPLE:

 Suppose it is decided to use a total

of 500 points in the point plan.
 Because the factor Decision Making =
40.8% it would be assigned total of
 40.8% X 500= 204 points
 Now Divide 204 by 5 to create 5 degrees
 So lowest will be 40.8 or 41
 The Second degree will be 41 +41 =
82
 The Third degree will be 82 + 41
=123
 The Fourth degree will be
=164
 The Fifth Degree would carry
204 points.
Evaluation Points Assigned to
Factors and Degrees

Figure 11–A5
STEP 8. Write the Job Evaluation
Point Manual
 This culminates in a point manual or
job evaluation manual.
 STEP 9 RATING THE JOBS &
Conversion of Job points into
Monetary value
Point Range Daily Wage Rate Job Grade
500-600 300-400 Officer
600-700 400-500 Accountant
700-800 500-600 Manager I
800-900 600-700 Manager II
900-1,000 700-800 Manager III
Pay for Performance and
Financial Incentives
 COMPENSATION
Monetary Hourly Wages
Salary
Bonuses
Commissions
Rewards
Extrinsic
Rewards
Benefits Insurance
Retirement
Compensation Paid Vacations
Of Food Coupons
Employees Corporate Credit
Recreation

Intrinsic Recognition
Promotion Opportunities
Working Conditions
Interesting Work
Rewards
 Psychological Insights for
Managers Devising Incentive
Plan
Law of individual differences
 The fact that people differ in personality,
abilities, values, and needs.
 Different people react to different incentives
in different ways.
 Managers should be aware of employee needs
and fine-tune the incentives offered to meets
their needs.
 Money is not the only motivator.
 Employee Preferences for Non
cash Incentives

*The survey polled a random nationwide sample of 1,004 American adults. Among those polled, 851 were working or retired
Americans, whose responses represent the percentage cited in this release. The survey was conducted June 4–7, 1999, by
Wirthlin Worldwide. The margin of error is ±3.1%. Responses total less than 100 because 4% responded “something else”.

Source: Darryl Hutson, “Shopping for Incentives,” Compensation and Benefits Review, March/April 2002, p. 76.
Figure 12–1
Maslow theory of Hierarchy of Needs
Fredrick Herzberg hygiene-Motivation
Theory
TYPES OF INCENTIVE
PLANS
Individual Incentive Plan Piecework
Plans
 The worker is paid a sum (called a piece rate)
for each unit he or she produces.
 Straight piecework: A fixed sum is paid for each
unit the worker produces under an established
piece rate standard. An incentive may be paid for
exceeding the piece rate standard.
 Standard hour plan: The worker gets a premium
equal to the percent by which his or her work
performance exceeds the established standard.
 Individual Incentives
 Incentives for professional employees
 Professional employees are those whose work
involves the application of learned knowledge to the
solution of the employer’s problems.
 Lawyers, doctors, economists, and engineers.
 Possible incentives
 Bonuses, stock options and grants, profit sharing
 Better vacations, more flexible work hours
 improved pension plans
 Equipment for home offices
 Individual Incentives
 Recognition-based awards
 Recognition has a positive impact on
performance, either alone or in conjunction
with financial rewards.
 Combining financial rewards with non-financial
ones produced performance improvement in
service firms almost twice the effect of using each
reward alone.
 Day-to-day recognition from supervisors,
peers, and team members is important
 Individual Incentives
 ONLINE AWARD PROGRAMS:
 Online award programs
 Programs offered by online incentives firms
that improve and expedite the awards
process.
 Broaderrange of awards
 More immediate rewards
 www.giveanything.com
 www.incentivecity.com
 INCENTIVES FOR
SALESPEOPLE
 Commission plan
 Pay is only a percentage of sales
 Keeps sales costs proportionate to sales revenues.
 May cause a neglect of non-selling duties.
 Can create wide variation in salesperson’s income.
 Likelihood of sales success may linked to external
factors rather than to salesperson’s performance.
 Can increase turnover of salespeople.
 INCENTIVES FOR SALES
People
 Commission-plus-drawing-account plan
 Commissions are paid but a draw on future
earnings helps the salesperson to get through
low sales periods.
 Commission-plus-bonus plan
 Pay is mostly based on commissions.
 Small bonuses are paid for directed activities
like selling slow-moving items
 Team/Group Variable Pay
Incentive Plans
 Team or group incentive plan
A plan in which a production standard is set
for a specific work group, and its members
are paid incentives if the group exceeds the
production standard.
 Short-Term Incentives for
Managers And Executives
 Annual bonus
 Plans
that are designed to motivate short-
term performance of managers and are tied
to company profitability.
 Eligibility
basis: job level, base salary, and impact
on profitability
 Individual
awards: personal
performance/contribution
Long-Term Incentives for Managers
And Executives
 Stock option
 The right to purchase a specific number of
shares of company stock at a specific price
during a specific period of time.
 Options have no value (go “underwater”) if
the price of the stock drops below the option’s
strike price (the option’s stock purchase
price).
 Other Executive Incentives
 Golden parachutes
 Payments companies make to departing
executives in connection with a change in
ownership or control of a company.
 Guaranteed loans to directors
 Loans provided to buy company stock.
 A highly risky and now frowned upon practice.
 Why Incentive Plans Fail?
 Performance pay can’t replace good
management.
 You get what you pay for.
 “Pay is not a motivator.”
 Rewards punish.
 Rewards rupture relationships.
 Rewards can have unintended
consequences.
 Rewards undermine intrinsic motivation.
 WHEN BARRY MET SAMMY
 VIDEO