Compensation Presentation MBA-2011

COMPENSATION

PowerPoint Presentation by Charlie CookCopyright © 2002 South-Western. All rights reserved

Copyright © 2002 South-Western. All rights reserved. 11–2

The Importance of CompensationThe Importance of CompensationThe Importance of CompensationThe Importance of Compensation

• Impacts an employer’s ability to attract and retain Impacts an employer’s ability to attract and retain employees.employees.

• Ensure optimal levels of employee performance in Ensure optimal levels of employee performance in meeting the organization’s strategic objectives.meeting the organization’s strategic objectives.

• Compensation’s componentsCompensation’s components– Direct compensation in the form of wages or salaryDirect compensation in the form of wages or salary

• Base pay (hourly, weekly, and monthly)Base pay (hourly, weekly, and monthly)

• Incentives (sales bonuses and or commissions)Incentives (sales bonuses and or commissions)

– Indirect compensation in the form of benefitsIndirect compensation in the form of benefits• Legally required benefits (e.g., Social Security)Legally required benefits (e.g., Social Security)

• Optional (e.g., group health benefits)Optional (e.g., group health benefits)

• Impacts an employer’s ability to attract and retain Impacts an employer’s ability to attract and retain employees.employees.

• Ensure optimal levels of employee performance in Ensure optimal levels of employee performance in meeting the organization’s strategic objectives.meeting the organization’s strategic objectives.

• Compensation’s componentsCompensation’s components– Direct compensation in the form of wages or salaryDirect compensation in the form of wages or salary

• Base pay (hourly, weekly, and monthly)Base pay (hourly, weekly, and monthly)

• Incentives (sales bonuses and or commissions)Incentives (sales bonuses and or commissions)

– Indirect compensation in the form of benefitsIndirect compensation in the form of benefits• Legally required benefits (e.g., Social Security)Legally required benefits (e.g., Social Security)

• Optional (e.g., group health benefits)Optional (e.g., group health benefits)



Equity TheoryEquity TheoryEquity TheoryEquity Theory

• Internal equityInternal equity– Fairness of pay differentials between different jobs in the Fairness of pay differentials between different jobs in the

organization can be established by job ranking, job organization can be established by job ranking, job classification, point systems and factor comparisons.classification, point systems and factor comparisons.

• External equityExternal equity– Fairness of organizational compensation levels relative to Fairness of organizational compensation levels relative to

external compensation is assessed by collecting wage and external compensation is assessed by collecting wage and salary information to guide in setting the organization’s pay salary information to guide in setting the organization’s pay strategy to lead, meet or lag labor market wages.strategy to lead, meet or lag labor market wages.

• Internal equityInternal equity– Fairness of pay differentials between different jobs in the Fairness of pay differentials between different jobs in the

organization can be established by job ranking, job organization can be established by job ranking, job classification, point systems and factor comparisons.classification, point systems and factor comparisons.

• External equityExternal equity– Fairness of organizational compensation levels relative to Fairness of organizational compensation levels relative to

external compensation is assessed by collecting wage and external compensation is assessed by collecting wage and salary information to guide in setting the organization’s pay salary information to guide in setting the organization’s pay strategy to lead, meet or lag labor market wages.strategy to lead, meet or lag labor market wages.


Equity Theory (cont’d)Equity Theory (cont’d)Equity Theory (cont’d)Equity Theory (cont’d)

• Individual EquityIndividual Equity– Fairness about pay differentials among individuals who hold Fairness about pay differentials among individuals who hold

the same job in the organization is established by using:the same job in the organization is established by using:• Seniority-based pay systems that reward longevity with the Seniority-based pay systems that reward longevity with the

organization.organization.

• Merit-based pay systems that reward employee performance.Merit-based pay systems that reward employee performance.

• Incentive plans that allow employees to receive part of their Incentive plans that allow employees to receive part of their compensation based on their job performance.compensation based on their job performance.

• Skills-based pay systems where compensation is based on Skills-based pay systems where compensation is based on employees possessing skills that the firm values.employees possessing skills that the firm values.

• Team-based pay plans that encourage cooperation and Team-based pay plans that encourage cooperation and flexibility in employees.flexibility in employees.

• Individual EquityIndividual Equity– Fairness about pay differentials among individuals who hold Fairness about pay differentials among individuals who hold

the same job in the organization is established by using:the same job in the organization is established by using:• Seniority-based pay systems that reward longevity with the Seniority-based pay systems that reward longevity with the

organization.organization.

• Merit-based pay systems that reward employee performance.Merit-based pay systems that reward employee performance.

• Incentive plans that allow employees to receive part of their Incentive plans that allow employees to receive part of their compensation based on their job performance.compensation based on their job performance.

• Skills-based pay systems where compensation is based on Skills-based pay systems where compensation is based on employees possessing skills that the firm values.employees possessing skills that the firm values.

• Team-based pay plans that encourage cooperation and Team-based pay plans that encourage cooperation and flexibility in employees.flexibility in employees.

Compensation Equity IssuesCompensation Equity IssuesCompensation Equity IssuesCompensation Equity Issues

• Compensation equity:Compensation equity: Is compensation judged to Is compensation judged to be fair?be fair?

• 3 Compensation equity issues3 Compensation equity issues– #1: Individual equity:#1: Individual equity: compare the pay of individuals who do compare the pay of individuals who do

the same job in the same organization and judge if it is fairthe same job in the same organization and judge if it is fair• Example: A retail store has 2 Assistant Store Managers (2 Example: A retail store has 2 Assistant Store Managers (2

people doing the same job in the same organization)people doing the same job in the same organization)

– If they are paid the same, is that perceived as being fair?If they are paid the same, is that perceived as being fair?

– If they are paid differently, is the pay difference perceived If they are paid differently, is the pay difference perceived as being fair?as being fair?

• Compensation equity:Compensation equity: Is compensation judged to Is compensation judged to be fair?be fair?

• 3 Compensation equity issues3 Compensation equity issues– #1: Individual equity:#1: Individual equity: compare the pay of individuals who do compare the pay of individuals who do

the same job in the same organization and judge if it is fairthe same job in the same organization and judge if it is fair• Example: A retail store has 2 Assistant Store Managers (2 Example: A retail store has 2 Assistant Store Managers (2

people doing the same job in the same organization)people doing the same job in the same organization)



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• 3 Compensation equity issues (more)3 Compensation equity issues (more)– #2: Internal equity:#2: Internal equity: compare the pay of different jobs in the compare the pay of different jobs in the

same organization and judge if it is fairsame organization and judge if it is fair• Example: A retail store has an Assistant Store Manager and a Example: A retail store has an Assistant Store Manager and a

Store Manager (2 different jobs in the same organization)Store Manager (2 different jobs in the same organization)



• 3 Compensation equity issues (more)3 Compensation equity issues (more)– #2: Internal equity:#2: Internal equity: compare the pay of different jobs in the compare the pay of different jobs in the

same organization and judge if it is fairsame organization and judge if it is fair• Example: A retail store has an Assistant Store Manager and a Example: A retail store has an Assistant Store Manager and a

Store Manager (2 different jobs in the same organization)Store Manager (2 different jobs in the same organization)



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• 3 Compensation equity issues (more)3 Compensation equity issues (more)– #3: External equity:#3: External equity: compare the pay of the same job in compare the pay of the same job in

different organizations and judge if it is fairdifferent organizations and judge if it is fair• Example: Retail store X has a Store Manager and retail store Y Example: Retail store X has a Store Manager and retail store Y

has a store manager (the same job in two different has a store manager (the same job in two different organizations)organizations)

– Do the two stores pay their store managers the same or Do the two stores pay their store managers the same or not?not?

• 3 Compensation equity issues (more)3 Compensation equity issues (more)– #3: External equity:#3: External equity: compare the pay of the same job in compare the pay of the same job in

different organizations and judge if it is fairdifferent organizations and judge if it is fair• Example: Retail store X has a Store Manager and retail store Y Example: Retail store X has a Store Manager and retail store Y

has a store manager (the same job in two different has a store manager (the same job in two different organizations)organizations)

– Do the two stores pay their store managers the same or Do the two stores pay their store managers the same or not?not?

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• 3 Compensation equity issues (more)3 Compensation equity issues (more)– #3: External equity (more)#3: External equity (more)

• External equity pay policies: External equity pay policies:

– Match the market Match the market (match the competition): the (match the competition): the organization sets pay for some of its jobs to be about the organization sets pay for some of its jobs to be about the same as what other organizations pay for the same jobssame as what other organizations pay for the same jobs

» No advantage or disadvantage in costs or in attracting No advantage or disadvantage in costs or in attracting and retaining employeesand retaining employees

• 3 Compensation equity issues (more)3 Compensation equity issues (more)– #3: External equity (more)#3: External equity (more)

• External equity pay policies: External equity pay policies:

– Match the market Match the market (match the competition): the (match the competition): the organization sets pay for some of its jobs to be about the organization sets pay for some of its jobs to be about the same as what other organizations pay for the same jobssame as what other organizations pay for the same jobs

» No advantage or disadvantage in costs or in attracting No advantage or disadvantage in costs or in attracting and retaining employeesand retaining employees

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• Equity theoryEquity theory describes how an employee describes how an employee determines if his or her pay is fairdetermines if his or her pay is fair

– An employee judges if his or her pay is fair by examining 4 An employee judges if his or her pay is fair by examining 4 factors:factors:

• The employee’s pay (and other rewards)The employee’s pay (and other rewards)

• The employee’s contributionsThe employee’s contributions

• Other employees’ pay (and other rewards)Other employees’ pay (and other rewards)

• Other employees’ contributionsOther employees’ contributions

• Equity theoryEquity theory describes how an employee describes how an employee determines if his or her pay is fairdetermines if his or her pay is fair

– An employee judges if his or her pay is fair by examining 4 An employee judges if his or her pay is fair by examining 4 factors:factors:

• The employee’s pay (and other rewards)The employee’s pay (and other rewards)

• The employee’s contributionsThe employee’s contributions

• Other employees’ pay (and other rewards)Other employees’ pay (and other rewards)

• Other employees’ contributionsOther employees’ contributions

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I’d feel I’d feel underpaid if:underpaid if:My contributions My contributions

are the same as my are the same as my co-workers’, but I’m co-workers’, but I’m paid lesspaid less

I’m paid the same I’m paid the same as my co-workers, as my co-workers, but my but my contributions are contributions are greater than my co-greater than my co-workers’ workers’ contributionscontributions

Figure adapted from: Fisher, Figure adapted from: Fisher, Schoenfeldt, & Shaw (2006), Schoenfeldt, & Shaw (2006), Figure 11.2, p. 487Figure 11.2, p. 487

I’d feel I’d feel underpaid if:underpaid if:My contributions My contributions

are the same as my are the same as my co-workers’, but I’m co-workers’, but I’m paid lesspaid less

I’m paid the same I’m paid the same as my co-workers, as my co-workers, but my but my contributions are contributions are greater than my co-greater than my co-workers’ workers’ contributionscontributions

Figure adapted from: Fisher, Figure adapted from: Fisher, Schoenfeldt, & Shaw (2006), Schoenfeldt, & Shaw (2006), Figure 11.2, p. 487Figure 11.2, p. 487

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Pay SystemsPay SystemsPay SystemsPay Systems

• We want to set pay in a way that takes into We want to set pay in a way that takes into consideration the 3 compensation equity issues:consideration the 3 compensation equity issues:

• We want pay t0:We want pay t0:

– Implement the organization’s external equity pay policyImplement the organization’s external equity pay policy

» Match, lead, or lag the marketMatch, lead, or lag the market

– Achieve internal equityAchieve internal equity

» Appropriate pay differences across the jobs in the Appropriate pay differences across the jobs in the organizationorganization

– Achieve individual equityAchieve individual equity

» Appropriate pay differences across employees who Appropriate pay differences across employees who perform the same jobperform the same job

• We want to set pay in a way that takes into We want to set pay in a way that takes into consideration the 3 compensation equity issues:consideration the 3 compensation equity issues:

• We want pay t0:We want pay t0:

– Implement the organization’s external equity pay policyImplement the organization’s external equity pay policy

» Match, lead, or lag the marketMatch, lead, or lag the market

– Achieve internal equityAchieve internal equity

» Appropriate pay differences across the jobs in the Appropriate pay differences across the jobs in the organizationorganization

– Achieve individual equityAchieve individual equity

» Appropriate pay differences across employees who Appropriate pay differences across employees who perform the same jobperform the same job

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Pay SystemsPay SystemsPay SystemsPay Systems

Methods of determining a range of pay for each Methods of determining a range of pay for each job in an organization:job in an organization:Market-Based PayMarket-Based PayJob Evaluation Pay SystemsJob Evaluation Pay Systems

Job RankingJob RankingJob Grading (Job Classification)Job Grading (Job Classification)Factor ComparisonFactor ComparisonPoint MethodPoint Method

Once we have a pay range for each job, then we Once we have a pay range for each job, then we can figure out where inside the pay ranges each can figure out where inside the pay ranges each employee should fallemployee should fall

Methods of determining a range of pay for each Methods of determining a range of pay for each job in an organization:job in an organization:Market-Based PayMarket-Based PayJob Evaluation Pay SystemsJob Evaluation Pay Systems

Job RankingJob RankingJob Grading (Job Classification)Job Grading (Job Classification)Factor ComparisonFactor ComparisonPoint MethodPoint Method

Once we have a pay range for each job, then we Once we have a pay range for each job, then we can figure out where inside the pay ranges each can figure out where inside the pay ranges each employee should fallemployee should fall

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Market-Based PayMarket-Based PayMarket-Based PayMarket-Based Pay

Alternative names: Market-Based Pay = Market Alternative names: Market-Based Pay = Market Pricing = Rank to MarketPricing = Rank to Market

Method (for each job title):Method (for each job title):Identify the relevant labor marketIdentify the relevant labor market

Local, regional, national, or internationalLocal, regional, national, or international

Obtain market pay data in the relevant labor marketObtain market pay data in the relevant labor marketEither use pay data collected by others:Either use pay data collected by others:http://www.salary.com/ http://www.bls.gov/bls/blswage.htm http://www.google.com/Top/Business/Human_Resources/Co

mpensation_and_Benefits/Compensation/

Alternative names: Market-Based Pay = Market Alternative names: Market-Based Pay = Market Pricing = Rank to MarketPricing = Rank to Market

Method (for each job title):Method (for each job title):Identify the relevant labor marketIdentify the relevant labor market

Local, regional, national, or internationalLocal, regional, national, or international

Obtain market pay data in the relevant labor marketObtain market pay data in the relevant labor marketEither use pay data collected by others:Either use pay data collected by others:http://www.salary.com/ http://www.bls.gov/bls/blswage.htm http://www.google.com/Top/Business/Human_Resources/Co

mpensation_and_Benefits/Compensation/

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http://www.salary.com/

http://www.bls.gov/bls/blswage.htm

http://www.google.com/Top/Business/Human_Resources/Compensation_and_Benefits/Compensation/


http://www.salary.com/

http://www.bls.gov/bls/blswage.htm




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• Method (more):Method (more):– Use the market pay data on the average minimum pay and Use the market pay data on the average minimum pay and

the average maximum pay directly to set the pay range (min the average maximum pay directly to set the pay range (min to max) for the job titleto max) for the job title

• If the external pay policy is:If the external pay policy is:

– Match the market, then set the pay range for the job to be Match the market, then set the pay range for the job to be about the same as the market pay range for the jobabout the same as the market pay range for the job

– Lead the market, then set the pay range for the job to be a Lead the market, then set the pay range for the job to be a bit higher than the market pay range for the jobbit higher than the market pay range for the job

– Lag the market, then set the pay range for the job to be a Lag the market, then set the pay range for the job to be a bit lower than the market pay range for the jobbit lower than the market pay range for the job

• Method (more):Method (more):– Use the market pay data on the average minimum pay and Use the market pay data on the average minimum pay and

the average maximum pay directly to set the pay range (min the average maximum pay directly to set the pay range (min to max) for the job titleto max) for the job title

• If the external pay policy is:If the external pay policy is:

– Match the market, then set the pay range for the job to be Match the market, then set the pay range for the job to be about the same as the market pay range for the jobabout the same as the market pay range for the job

– Lead the market, then set the pay range for the job to be a Lead the market, then set the pay range for the job to be a bit higher than the market pay range for the jobbit higher than the market pay range for the job

– Lag the market, then set the pay range for the job to be a Lag the market, then set the pay range for the job to be a bit lower than the market pay range for the jobbit lower than the market pay range for the job

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Strengths:Strengths:Not too complicatedNot too complicated

Weaknesses:Weaknesses:Assumes all jobs with the same job title in different organizations are Assumes all jobs with the same job title in different organizations are

truly identicaltruly identicalExample: We have to assume that all Store Manager jobs in every Example: We have to assume that all Store Manager jobs in every

retail store are identicalretail store are identicalAssumes market pay differences correctly capture internal equity Assumes market pay differences correctly capture internal equity

issuesissuesExample: We have to assume that we want the pay difference Example: We have to assume that we want the pay difference

between our Store Managers and Assistant Store Managers to be between our Store Managers and Assistant Store Managers to be the same as in other retail storesthe same as in other retail stores

Hard to use with unique jobsHard to use with unique jobsIf the job is unique to our organization, then we can’t find If the job is unique to our organization, then we can’t find

comparable jobs in other organizations, so we can’t get market comparable jobs in other organizations, so we can’t get market pay datapay data

Strengths:Strengths:Not too complicatedNot too complicated

Weaknesses:Weaknesses:Assumes all jobs with the same job title in different organizations are Assumes all jobs with the same job title in different organizations are

truly identicaltruly identicalExample: We have to assume that all Store Manager jobs in every Example: We have to assume that all Store Manager jobs in every

retail store are identicalretail store are identicalAssumes market pay differences correctly capture internal equity Assumes market pay differences correctly capture internal equity

issuesissuesExample: We have to assume that we want the pay difference Example: We have to assume that we want the pay difference

between our Store Managers and Assistant Store Managers to be between our Store Managers and Assistant Store Managers to be the same as in other retail storesthe same as in other retail stores

Hard to use with unique jobsHard to use with unique jobsIf the job is unique to our organization, then we can’t find If the job is unique to our organization, then we can’t find

comparable jobs in other organizations, so we can’t get market comparable jobs in other organizations, so we can’t get market pay datapay data

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Job Evaluation Pay SystemsJob Evaluation Pay SystemsJob Evaluation Pay SystemsJob Evaluation Pay Systems

An alternative to market-based pay is to use a pay An alternative to market-based pay is to use a pay system based on job evaluationsystem based on job evaluation

Job evaluation:Job evaluation: systematically determine the relative systematically determine the relative value of jobs with an organization to create an internal value of jobs with an organization to create an internal hierarchy of jobs, and then use the hierarchy to set pay hierarchy of jobs, and then use the hierarchy to set pay ranges for the jobsranges for the jobsWhich job has the highest value to the organization and so should Which job has the highest value to the organization and so should

be paid the most?be paid the most?Which job has the second highest value and so should be paid Which job has the second highest value and so should be paid

second highest?second highest?Etc.Etc.

There are 4 job evaluation pay systemsThere are 4 job evaluation pay systems

An alternative to market-based pay is to use a pay An alternative to market-based pay is to use a pay system based on job evaluationsystem based on job evaluation

Job evaluation:Job evaluation: systematically determine the relative systematically determine the relative value of jobs with an organization to create an internal value of jobs with an organization to create an internal hierarchy of jobs, and then use the hierarchy to set pay hierarchy of jobs, and then use the hierarchy to set pay ranges for the jobsranges for the jobsWhich job has the highest value to the organization and so should Which job has the highest value to the organization and so should

be paid the most?be paid the most?Which job has the second highest value and so should be paid Which job has the second highest value and so should be paid

second highest?second highest?Etc.Etc.

There are 4 job evaluation pay systemsThere are 4 job evaluation pay systems

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Source of figure: Fisher, Schoenfeldt, & Shaw (2006), Figure 11.3, p. 490Source of figure: Fisher, Schoenfeldt, & Shaw (2006), Figure 11.3, p. 490Source of figure: Fisher, Schoenfeldt, & Shaw (2006), Figure 11.3, p. 490Source of figure: Fisher, Schoenfeldt, & Shaw (2006), Figure 11.3, p. 490

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Job Evaluation: Job Evaluation: Job RankingJob Ranking

Job Evaluation: Job Evaluation: Job RankingJob Ranking

Method:Method:Review the job descriptionsReview the job descriptionsRank the jobs in order of relative worth or importance to the Rank the jobs in order of relative worth or importance to the

organizationorganizationFrequently done by a committee of managersFrequently done by a committee of managers

Use the rank ordering to set pay for each jobUse the rank ordering to set pay for each jobPay the highest ranked job the most, etc.Pay the highest ranked job the most, etc.

Weaknesses:Weaknesses:The rank ordering tells us that one job is worth more than The rank ordering tells us that one job is worth more than

another, but not how much moreanother, but not how much moreWhile the ranking takes care of internal equity, it’s not obvious While the ranking takes care of internal equity, it’s not obvious

how to take into consideration external equityhow to take into consideration external equity

Method:Method:Review the job descriptionsReview the job descriptionsRank the jobs in order of relative worth or importance to the Rank the jobs in order of relative worth or importance to the

organizationorganizationFrequently done by a committee of managersFrequently done by a committee of managers

Use the rank ordering to set pay for each jobUse the rank ordering to set pay for each jobPay the highest ranked job the most, etc.Pay the highest ranked job the most, etc.

Weaknesses:Weaknesses:The rank ordering tells us that one job is worth more than The rank ordering tells us that one job is worth more than

another, but not how much moreanother, but not how much moreWhile the ranking takes care of internal equity, it’s not obvious While the ranking takes care of internal equity, it’s not obvious

how to take into consideration external equityhow to take into consideration external equity

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Job Evaluation: Job Evaluation: Job Grading (Job Classification)Job Grading (Job Classification)


Method:Method:Create a sequence of job gradesCreate a sequence of job grades

Example: US Government GS system has 15 job grades: GS1 … Example: US Government GS system has 15 job grades: GS1 … GS15GS15

For each job grade, define the job grade in wordsFor each job grade, define the job grade in wordsExample: Define each job grade in terms of:Example: Define each job grade in terms of:Skill & knowledgeSkill & knowledgeResponsibilitiesResponsibilitiesPhysical effortPhysical effortWorking conditionsWorking conditions

Use the job descriptions to classify each job into one job gradeUse the job descriptions to classify each job into one job gradeExample (from the US Government GS pay system):Example (from the US Government GS pay system):Carpenter = GS9Carpenter = GS9

Method:Method:Create a sequence of job gradesCreate a sequence of job grades

Example: US Government GS system has 15 job grades: GS1 … Example: US Government GS system has 15 job grades: GS1 … GS15GS15

For each job grade, define the job grade in wordsFor each job grade, define the job grade in wordsExample: Define each job grade in terms of:Example: Define each job grade in terms of:Skill & knowledgeSkill & knowledgeResponsibilitiesResponsibilitiesPhysical effortPhysical effortWorking conditionsWorking conditions

Use the job descriptions to classify each job into one job gradeUse the job descriptions to classify each job into one job gradeExample (from the US Government GS pay system):Example (from the US Government GS pay system):Carpenter = GS9Carpenter = GS9

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• Method (more)Method (more)– Select a set of benchmark (key) jobsSelect a set of benchmark (key) jobs

• Jobs with well-known, stable job contentJobs with well-known, stable job content

• Jobs that are common in many organizationsJobs that are common in many organizations

• Jobs that represent the full range of job gradesJobs that represent the full range of job grades

• Jobs for which market pay data is availableJobs for which market pay data is available

– Collect market pay data for the benchmark jobsCollect market pay data for the benchmark jobs– Use the market pay data to set the pay range for the job Use the market pay data to set the pay range for the job

gradesgrades• Example: Example: http://www.opm.gov/oca/08tables/html/gs.asp

• Method (more)Method (more)– Select a set of benchmark (key) jobsSelect a set of benchmark (key) jobs

• Jobs with well-known, stable job contentJobs with well-known, stable job content

• Jobs that are common in many organizationsJobs that are common in many organizations

• Jobs that represent the full range of job gradesJobs that represent the full range of job grades

• Jobs for which market pay data is availableJobs for which market pay data is available

– Collect market pay data for the benchmark jobsCollect market pay data for the benchmark jobs– Use the market pay data to set the pay range for the job Use the market pay data to set the pay range for the job

gradesgrades• Example: Example: http://www.opm.gov/oca/08tables/html/gs.asp

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http://www.opm.gov/oca/08tables/html/gs.asp

http://www.opm.gov/oca/08tables/html/gs.asp



Strengths:Strengths:The sequence of job grades allows us to deal with internal The sequence of job grades allows us to deal with internal

equityequityThe use of market pay data to set the pay range for each job The use of market pay data to set the pay range for each job

grade allows us to deal with external equitygrade allows us to deal with external equityWeaknesses:Weaknesses:

The classification of jobs into pay grades is subjectiveThe classification of jobs into pay grades is subjectiveExample: Carpenter = GS9, not GS8 or GS10 (are we sure?) Example: Carpenter = GS9, not GS8 or GS10 (are we sure?)

The method relies heavily on job titles in setting payThe method relies heavily on job titles in setting payExample: We have to assume that all Carpenter jobs are Example: We have to assume that all Carpenter jobs are

identicalidentical

Strengths:Strengths:The sequence of job grades allows us to deal with internal The sequence of job grades allows us to deal with internal

equityequityThe use of market pay data to set the pay range for each job The use of market pay data to set the pay range for each job

grade allows us to deal with external equitygrade allows us to deal with external equityWeaknesses:Weaknesses:

The classification of jobs into pay grades is subjectiveThe classification of jobs into pay grades is subjectiveExample: Carpenter = GS9, not GS8 or GS10 (are we sure?) Example: Carpenter = GS9, not GS8 or GS10 (are we sure?)

The method relies heavily on job titles in setting payThe method relies heavily on job titles in setting payExample: We have to assume that all Carpenter jobs are Example: We have to assume that all Carpenter jobs are

identicalidentical

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Job Evaluation: Job Evaluation: Factor ComparisonFactor ComparisonJob Evaluation: Job Evaluation:

Factor ComparisonFactor Comparison

Method:Method:Define a set of compensable factorsDefine a set of compensable factors

Compensable factors: Compensable factors: the characteristics about jobs that are the characteristics about jobs that are used to set payused to set pay

Example: skill, effort, responsibility, & working conditionsExample: skill, effort, responsibility, & working conditions

Select a set of benchmark (key) jobsSelect a set of benchmark (key) jobsJobs with well-known, stable job contentJobs with well-known, stable job contentJobs that are common in many organizationsJobs that are common in many organizationsJobs that represent the full range of jobs being evaluatedJobs that represent the full range of jobs being evaluatedJobs that represent the range of each compensable factorJobs that represent the range of each compensable factorExample: jobs with various skill levels, effort levels, etc.Example: jobs with various skill levels, effort levels, etc.Jobs for which market pay data is availableJobs for which market pay data is available


Compensable factors: Compensable factors: the characteristics about jobs that are the characteristics about jobs that are used to set payused to set pay

Example: skill, effort, responsibility, & working conditionsExample: skill, effort, responsibility, & working conditions

Select a set of benchmark (key) jobsSelect a set of benchmark (key) jobsJobs with well-known, stable job contentJobs with well-known, stable job contentJobs that are common in many organizationsJobs that are common in many organizationsJobs that represent the full range of jobs being evaluatedJobs that represent the full range of jobs being evaluatedJobs that represent the range of each compensable factorJobs that represent the range of each compensable factorExample: jobs with various skill levels, effort levels, etc.Example: jobs with various skill levels, effort levels, etc.Jobs for which market pay data is availableJobs for which market pay data is available

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• Method:Method:– Rank the benchmark jobs on the basis of each compensable Rank the benchmark jobs on the basis of each compensable

factorfactor• Example: Rank the jobs from least skilled to most skilledExample: Rank the jobs from least skilled to most skilled

– Collect market pay data for the benchmark jobsCollect market pay data for the benchmark jobs– For each benchmark job, allocate market pay across the For each benchmark job, allocate market pay across the

compensable factorscompensable factors• Example: If market pay for a benchmark job is $15, how much Example: If market pay for a benchmark job is $15, how much

of that $15 is for skill, how much for effort, how much for of that $15 is for skill, how much for effort, how much for responsibilities, and how much for working conditions?responsibilities, and how much for working conditions?

• Method:Method:– Rank the benchmark jobs on the basis of each compensable Rank the benchmark jobs on the basis of each compensable

factorfactor• Example: Rank the jobs from least skilled to most skilledExample: Rank the jobs from least skilled to most skilled

– Collect market pay data for the benchmark jobsCollect market pay data for the benchmark jobs– For each benchmark job, allocate market pay across the For each benchmark job, allocate market pay across the

compensable factorscompensable factors• Example: If market pay for a benchmark job is $15, how much Example: If market pay for a benchmark job is $15, how much

of that $15 is for skill, how much for effort, how much for of that $15 is for skill, how much for effort, how much for responsibilities, and how much for working conditions?responsibilities, and how much for working conditions?

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Method (more)Method (more)For each benchmark job, compare the factor rankings to the For each benchmark job, compare the factor rankings to the

pay rankings & make adjustments as needed to bring the pay rankings & make adjustments as needed to bring the rankings into agreementrankings into agreement

Example: Make sure that the job ranked as having the greatest Example: Make sure that the job ranked as having the greatest skill requirements also has the greatest amount of pay for the skill requirements also has the greatest amount of pay for the skill compensable factorskill compensable factor

Construct a job comparison scale, and slot the benchmark Construct a job comparison scale, and slot the benchmark jobs onto the pay scale for each compensable factorjobs onto the pay scale for each compensable factor

Example: For the skill compensable factor, create a “skill” pay Example: For the skill compensable factor, create a “skill” pay scale that shows where each benchmark job falls on the scalescale that shows where each benchmark job falls on the scale

Method (more)Method (more)For each benchmark job, compare the factor rankings to the For each benchmark job, compare the factor rankings to the

pay rankings & make adjustments as needed to bring the pay rankings & make adjustments as needed to bring the rankings into agreementrankings into agreement

Example: Make sure that the job ranked as having the greatest Example: Make sure that the job ranked as having the greatest skill requirements also has the greatest amount of pay for the skill requirements also has the greatest amount of pay for the skill compensable factorskill compensable factor

Construct a job comparison scale, and slot the benchmark Construct a job comparison scale, and slot the benchmark jobs onto the pay scale for each compensable factorjobs onto the pay scale for each compensable factor

Example: For the skill compensable factor, create a “skill” pay Example: For the skill compensable factor, create a “skill” pay scale that shows where each benchmark job falls on the scalescale that shows where each benchmark job falls on the scale

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• Method (more)Method (more)– Slot all the non-benchmark jobs into their proper places on Slot all the non-benchmark jobs into their proper places on

the pay scale for each compensable factorthe pay scale for each compensable factor– Determine the pay for each job by adding up the pay from Determine the pay for each job by adding up the pay from

each compensable factoreach compensable factor• Example: Pay = pay from skill + pay from effort + pay from Example: Pay = pay from skill + pay from effort + pay from

responsibility + pay from working conditionsresponsibility + pay from working conditions

• Example: Fisher, Schoenfeldt, & Shaw (2006), Table 11.7, p. Example: Fisher, Schoenfeldt, & Shaw (2006), Table 11.7, p. 498498

– Job 4: Pay = $3.50 for skill + $2.50 for effort + $3.75 for Job 4: Pay = $3.50 for skill + $2.50 for effort + $3.75 for responsibilities + $1.25 for working conditions = $11.00responsibilities + $1.25 for working conditions = $11.00

• Method (more)Method (more)– Slot all the non-benchmark jobs into their proper places on Slot all the non-benchmark jobs into their proper places on

the pay scale for each compensable factorthe pay scale for each compensable factor– Determine the pay for each job by adding up the pay from Determine the pay for each job by adding up the pay from

each compensable factoreach compensable factor• Example: Pay = pay from skill + pay from effort + pay from Example: Pay = pay from skill + pay from effort + pay from

responsibility + pay from working conditionsresponsibility + pay from working conditions

• Example: Fisher, Schoenfeldt, & Shaw (2006), Table 11.7, p. Example: Fisher, Schoenfeldt, & Shaw (2006), Table 11.7, p. 498498

– Job 4: Pay = $3.50 for skill + $2.50 for effort + $3.75 for Job 4: Pay = $3.50 for skill + $2.50 for effort + $3.75 for responsibilities + $1.25 for working conditions = $11.00responsibilities + $1.25 for working conditions = $11.00

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34

Job Evaluation: Job Evaluation: Point MethodPoint Method



Compensable factors: Compensable factors: the characteristics about jobs that are used the characteristics about jobs that are used to set payto set pay

Example: 11 compensable factors:Example: 11 compensable factors:(1) Education(1) Education(2) Experience(2) Experience(3) Knowledge(3) Knowledge(4) Physical demands(4) Physical demands(5) Mental demands(5) Mental demands(6) Responsibility for equipment & work processes(6) Responsibility for equipment & work processes(7) Responsibility for materials & products(7) Responsibility for materials & products(8) Responsibility for safety(8) Responsibility for safety(9) Responsibility for the work of others(9) Responsibility for the work of others(10) Working conditions(10) Working conditions(11) Job hazards(11) Job hazards


Compensable factors: Compensable factors: the characteristics about jobs that are used the characteristics about jobs that are used to set payto set pay

Example: 11 compensable factors:Example: 11 compensable factors:(1) Education(1) Education(2) Experience(2) Experience(3) Knowledge(3) Knowledge(4) Physical demands(4) Physical demands(5) Mental demands(5) Mental demands(6) Responsibility for equipment & work processes(6) Responsibility for equipment & work processes(7) Responsibility for materials & products(7) Responsibility for materials & products(8) Responsibility for safety(8) Responsibility for safety(9) Responsibility for the work of others(9) Responsibility for the work of others(10) Working conditions(10) Working conditions(11) Job hazards(11) Job hazards

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Method (more)Method (more)Define a factor scale for each compensable factorDefine a factor scale for each compensable factor

Factor scale: Factor scale: define in words the different levels (or degrees) of define in words the different levels (or degrees) of the compensable factorthe compensable factor

Example: Factor scale for the “Knowledge” factor:Example: Factor scale for the “Knowledge” factor:11stst Degree Knowledge: reading & writing; simple arithmetic Degree Knowledge: reading & writing; simple arithmetic

with whole numbers only; following instructionswith whole numbers only; following instructions22ndnd Degree Knowledge: arithmetic with decimals & fractions; Degree Knowledge: arithmetic with decimals & fractions;

use of formulas, charts, graphs, or diagramsuse of formulas, charts, graphs, or diagrams33rdrd Degree Knowledge: mathematics with complex formulas, Degree Knowledge: mathematics with complex formulas,

drawings, or diagrams; precision measuring instrumentsdrawings, or diagrams; precision measuring instruments44thth Degree Knowledge: advanced trades mathematics; Degree Knowledge: advanced trades mathematics;

advanced use of complex formulas, drawings, or diagramsadvanced use of complex formulas, drawings, or diagrams55thth Degree Knowledge: higher-level engineering math; Degree Knowledge: higher-level engineering math;

advanced use of complex engineering theories & practicesadvanced use of complex engineering theories & practices

Method (more)Method (more)Define a factor scale for each compensable factorDefine a factor scale for each compensable factor

Factor scale: Factor scale: define in words the different levels (or degrees) of define in words the different levels (or degrees) of the compensable factorthe compensable factor

Example: Factor scale for the “Knowledge” factor:Example: Factor scale for the “Knowledge” factor:11stst Degree Knowledge: reading & writing; simple arithmetic Degree Knowledge: reading & writing; simple arithmetic

with whole numbers only; following instructionswith whole numbers only; following instructions22ndnd Degree Knowledge: arithmetic with decimals & fractions; Degree Knowledge: arithmetic with decimals & fractions;

use of formulas, charts, graphs, or diagramsuse of formulas, charts, graphs, or diagrams33rdrd Degree Knowledge: mathematics with complex formulas, Degree Knowledge: mathematics with complex formulas,

drawings, or diagrams; precision measuring instrumentsdrawings, or diagrams; precision measuring instruments44thth Degree Knowledge: advanced trades mathematics; Degree Knowledge: advanced trades mathematics;

advanced use of complex formulas, drawings, or diagramsadvanced use of complex formulas, drawings, or diagrams55thth Degree Knowledge: higher-level engineering math; Degree Knowledge: higher-level engineering math;

advanced use of complex engineering theories & practicesadvanced use of complex engineering theories & practices

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• Method (more)Method (more)– Assign points to Assign points to

each degree of each degree of each each compensable compensable factorfactor

• Example:Example:

Source of table: Fisher, Schoenfeldt, & Source of table: Fisher, Schoenfeldt, & Shaw (2006), Table 11.4, p. 495Shaw (2006), Table 11.4, p. 495

• Method (more)Method (more)– Assign points to Assign points to

each degree of each degree of each each compensable compensable factorfactor

• Example:Example:

Source of table: Fisher, Schoenfeldt, & Source of table: Fisher, Schoenfeldt, & Shaw (2006), Table 11.4, p. 495Shaw (2006), Table 11.4, p. 495

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• Method (more)Method (more)– Perform the job evaluation: evaluate each job to determine Perform the job evaluation: evaluate each job to determine

the number of points to assign to that job on each the number of points to assign to that job on each compensable factorcompensable factor

• Usually done by a committee of managersUsually done by a committee of managers

• Use the job descriptions as the source of job informationUse the job descriptions as the source of job information

• Add up the number of points from each compensable factor to Add up the number of points from each compensable factor to get the total points for the jobget the total points for the job

– Jobs with more total points have more of the things we Jobs with more total points have more of the things we value in setting payvalue in setting pay

» This should take care of internal equityThis should take care of internal equity

• Method (more)Method (more)– Perform the job evaluation: evaluate each job to determine Perform the job evaluation: evaluate each job to determine

the number of points to assign to that job on each the number of points to assign to that job on each compensable factorcompensable factor

• Usually done by a committee of managersUsually done by a committee of managers

• Use the job descriptions as the source of job informationUse the job descriptions as the source of job information

• Add up the number of points from each compensable factor to Add up the number of points from each compensable factor to get the total points for the jobget the total points for the job

– Jobs with more total points have more of the things we Jobs with more total points have more of the things we value in setting payvalue in setting pay

» This should take care of internal equityThis should take care of internal equity

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Method (more)Method (more)Select a set of benchmark (key) jobs:Select a set of benchmark (key) jobs:

Jobs with stable job contentJobs with stable job contentJobs that are common in lots of organizationsJobs that are common in lots of organizationsJobs that can be defined with precisionJobs that can be defined with precisionJobs that are performed similarly across different Jobs that are performed similarly across different

organizationsorganizationsJobs that represent the range of jobs being evaluatedJobs that represent the range of jobs being evaluatedJobs for which market pay data is availableJobs for which market pay data is available

Identify the relevant labor market for each benchmark jobIdentify the relevant labor market for each benchmark jobLocal, regional, national, or internationalLocal, regional, national, or international





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40



41



Method (more)Method (more)Estimate the market pay linesEstimate the market pay lines

Estimate 2 simple regressions using the benchmark jobs as the Estimate 2 simple regressions using the benchmark jobs as the data pointsdata points

Minimum pay line: regress minimum pay (dependent Minimum pay line: regress minimum pay (dependent variable) on points (independent variable)variable) on points (independent variable)

Maximum pay line: regress maximum pay (dependent Maximum pay line: regress maximum pay (dependent variable) on points (independent variable)variable) on points (independent variable)

Use the market pay lines to determine the pay ranges for Use the market pay lines to determine the pay ranges for each job (both benchmark & non-benchmark jobs)each job (both benchmark & non-benchmark jobs)

This takes care of external equityThis takes care of external equity

Optional: create pay gradesOptional: create pay grades

Method (more)Method (more)Estimate the market pay linesEstimate the market pay lines

Estimate 2 simple regressions using the benchmark jobs as the Estimate 2 simple regressions using the benchmark jobs as the data pointsdata points

Minimum pay line: regress minimum pay (dependent Minimum pay line: regress minimum pay (dependent variable) on points (independent variable)variable) on points (independent variable)

Maximum pay line: regress maximum pay (dependent Maximum pay line: regress maximum pay (dependent variable) on points (independent variable)variable) on points (independent variable)

Use the market pay lines to determine the pay ranges for Use the market pay lines to determine the pay ranges for each job (both benchmark & non-benchmark jobs)each job (both benchmark & non-benchmark jobs)

This takes care of external equityThis takes care of external equity

Optional: create pay gradesOptional: create pay grades

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43

Pay Policy IssuesPay Policy IssuesPay Policy IssuesPay Policy Issues

Periodically update the pay rangesPeriodically update the pay rangesJobs above or below the desired pay range:Jobs above or below the desired pay range:

Green circle jobs: Green circle jobs: jobs whose current pay is below the pay range for jobs whose current pay is below the pay range for the jobthe job

Develop & implement a plan to give these jobs slightly larger pay Develop & implement a plan to give these jobs slightly larger pay increases to catch the job up with the pay rangeincreases to catch the job up with the pay range

Red circle jobs: Red circle jobs: jobs whose current pay is above the pay range for jobs whose current pay is above the pay range for the jobthe job

Develop & implement a plan to give these jobs slightly smaller Develop & implement a plan to give these jobs slightly smaller pay increases to allow the pay range to catch up with the jobpay increases to allow the pay range to catch up with the job

Compression: Compression: the pay differences across jobs shrink the pay differences across jobs shrink over timeover timeCan mess up internal equity because the pay differences across Can mess up internal equity because the pay differences across

jobs gets too smalljobs gets too small

Periodically update the pay rangesPeriodically update the pay rangesJobs above or below the desired pay range:Jobs above or below the desired pay range:

Green circle jobs: Green circle jobs: jobs whose current pay is below the pay range for jobs whose current pay is below the pay range for the jobthe job

Develop & implement a plan to give these jobs slightly larger pay Develop & implement a plan to give these jobs slightly larger pay increases to catch the job up with the pay rangeincreases to catch the job up with the pay range

Red circle jobs: Red circle jobs: jobs whose current pay is above the pay range for jobs whose current pay is above the pay range for the jobthe job

Develop & implement a plan to give these jobs slightly smaller Develop & implement a plan to give these jobs slightly smaller pay increases to allow the pay range to catch up with the jobpay increases to allow the pay range to catch up with the job

Compression: Compression: the pay differences across jobs shrink the pay differences across jobs shrink over timeover timeCan mess up internal equity because the pay differences across Can mess up internal equity because the pay differences across

jobs gets too smalljobs gets too small

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45

Broadbanding: Broadbanding: combine adjacent pay combine adjacent pay ranges to create a ranges to create a smaller number of pay smaller number of pay ranges in which each ranges in which each pay range is widerpay range is widerMay help with red & May help with red &

green circle jobs & with green circle jobs & with compressioncompression

Frequently implemented Frequently implemented as part of restructuring & as part of restructuring & downsizingdownsizing

Source of figure: Fisher, Schoenfeldt, & Shaw Source of figure: Fisher, Schoenfeldt, & Shaw (2006), Figure 11.7, p. 511(2006), Figure 11.7, p. 511

Broadbanding: Broadbanding: combine adjacent pay combine adjacent pay ranges to create a ranges to create a smaller number of pay smaller number of pay ranges in which each ranges in which each pay range is widerpay range is widerMay help with red & May help with red &

green circle jobs & with green circle jobs & with compressioncompression

Frequently implemented Frequently implemented as part of restructuring & as part of restructuring & downsizingdownsizing

Source of figure: Fisher, Schoenfeldt, & Shaw Source of figure: Fisher, Schoenfeldt, & Shaw (2006), Figure 11.7, p. 511(2006), Figure 11.7, p. 511


Set the pay for each employee doing each job (where Set the pay for each employee doing each job (where the employee falls inside the pay range for the the employee falls inside the pay range for the employee’s job)employee’s job)Methods:Methods:

Seniority: Each employee moves up their pay range by the same Seniority: Each employee moves up their pay range by the same amount (usually determined as a percentage pay increase)amount (usually determined as a percentage pay increase)

Creates incentives for a stable, experienced workforceCreates incentives for a stable, experienced workforceTypically used with unionized jobs, when merit pay isn’t Typically used with unionized jobs, when merit pay isn’t

accepted by employees, when it is hard to measure job accepted by employees, when it is hard to measure job performance, or when there are very minor differences in job performance, or when there are very minor differences in job performance across employees (e.g., assembly line)performance across employees (e.g., assembly line)

Merit Pay: Each employee moves up their pay range based on Merit Pay: Each employee moves up their pay range based on their job performance (creates incentives for improved job their job performance (creates incentives for improved job performance)performance)

Skill-based Pay: Each employee moves up their pay range based Skill-based Pay: Each employee moves up their pay range based on the skills & knowledge mastered by the employee (incentives on the skills & knowledge mastered by the employee (incentives to add skills)to add skills)

Set the pay for each employee doing each job (where Set the pay for each employee doing each job (where the employee falls inside the pay range for the the employee falls inside the pay range for the employee’s job)employee’s job)Methods:Methods:

Seniority: Each employee moves up their pay range by the same Seniority: Each employee moves up their pay range by the same amount (usually determined as a percentage pay increase)amount (usually determined as a percentage pay increase)

Creates incentives for a stable, experienced workforceCreates incentives for a stable, experienced workforceTypically used with unionized jobs, when merit pay isn’t Typically used with unionized jobs, when merit pay isn’t

accepted by employees, when it is hard to measure job accepted by employees, when it is hard to measure job performance, or when there are very minor differences in job performance, or when there are very minor differences in job performance across employees (e.g., assembly line)performance across employees (e.g., assembly line)

Merit Pay: Each employee moves up their pay range based on Merit Pay: Each employee moves up their pay range based on their job performance (creates incentives for improved job their job performance (creates incentives for improved job performance)performance)

Skill-based Pay: Each employee moves up their pay range based Skill-based Pay: Each employee moves up their pay range based on the skills & knowledge mastered by the employee (incentives on the skills & knowledge mastered by the employee (incentives to add skills)to add skills)

46


Legal issues in payLegal issues in payFair Labor Standards Act (FLSA)Fair Labor Standards Act (FLSA)

4 Primary provisions:4 Primary provisions:Minimum wage:Minimum wage:

9/1/97: $5.159/1/97: $5.157/24/07: $5.857/24/07: $5.857/24/08: $6.557/24/08: $6.557/24/09: $7.257/24/09: $7.25

Overtime payOvertime payRestrictions on employment of childrenRestrictions on employment of childrenRecordkeeping requirementsRecordkeeping requirementshttp://www.dol.gov/esa/whd/flsa/

Minimum wage set by state lawsMinimum wage set by state lawshttp://www.dol.gov/esa/minwage/america.htm Example: Minnesota (for large employers): $6.15Example: Minnesota (for large employers): $6.15

Legal issues in payLegal issues in payFair Labor Standards Act (FLSA)Fair Labor Standards Act (FLSA)

4 Primary provisions:4 Primary provisions:Minimum wage:Minimum wage:

9/1/97: $5.159/1/97: $5.157/24/07: $5.857/24/07: $5.857/24/08: $6.557/24/08: $6.557/24/09: $7.257/24/09: $7.25

Overtime payOvertime payRestrictions on employment of childrenRestrictions on employment of childrenRecordkeeping requirementsRecordkeeping requirementshttp://www.dol.gov/esa/whd/flsa/

Minimum wage set by state lawsMinimum wage set by state lawshttp://www.dol.gov/esa/minwage/america.htm Example: Minnesota (for large employers): $6.15Example: Minnesota (for large employers): $6.15

47

http://www.dol.gov/esa/whd/flsa/

http://www.dol.gov/esa/minwage/america.htm

http://www.dol.gov/esa/whd/flsa/

http://www.dol.gov/esa/minwage/america.htm


Equal Pay Act: “equal pay for equal work”Equal Pay Act: “equal pay for equal work”Forbids sex discrimination in pay when the employees perform the Forbids sex discrimination in pay when the employees perform the

same job in the same organizationsame job in the same organizationIf a man and a woman are both doing the same job in the same If a man and a woman are both doing the same job in the same

organization, don’t pay them differently because of their sexesorganization, don’t pay them differently because of their sexesPay differences based on other factors is okay (e.g., seniority, job Pay differences based on other factors is okay (e.g., seniority, job

performance, etc.)performance, etc.)

Comparable worth: “equal pay for equal worth”Comparable worth: “equal pay for equal worth”If a man and a women are doing different jobs, but the company If a man and a women are doing different jobs, but the company

evaluates that both jobs are of equal value to the company, then evaluates that both jobs are of equal value to the company, then they should be paid the samethey should be paid the same

Example: If a company’s job evaluation determines that a Example: If a company’s job evaluation determines that a secretarial job (held mostly by women) and a maintenance job secretarial job (held mostly by women) and a maintenance job (held mostly by men) make contributions of equal value to the (held mostly by men) make contributions of equal value to the company, then the two jobs should be paid the samecompany, then the two jobs should be paid the same

Equal Pay Act: “equal pay for equal work”Equal Pay Act: “equal pay for equal work”Forbids sex discrimination in pay when the employees perform the Forbids sex discrimination in pay when the employees perform the

same job in the same organizationsame job in the same organizationIf a man and a woman are both doing the same job in the same If a man and a woman are both doing the same job in the same

organization, don’t pay them differently because of their sexesorganization, don’t pay them differently because of their sexesPay differences based on other factors is okay (e.g., seniority, job Pay differences based on other factors is okay (e.g., seniority, job

performance, etc.)performance, etc.)

Comparable worth: “equal pay for equal worth”Comparable worth: “equal pay for equal worth”If a man and a women are doing different jobs, but the company If a man and a women are doing different jobs, but the company

evaluates that both jobs are of equal value to the company, then evaluates that both jobs are of equal value to the company, then they should be paid the samethey should be paid the same

Example: If a company’s job evaluation determines that a Example: If a company’s job evaluation determines that a secretarial job (held mostly by women) and a maintenance job secretarial job (held mostly by women) and a maintenance job (held mostly by men) make contributions of equal value to the (held mostly by men) make contributions of equal value to the company, then the two jobs should be paid the samecompany, then the two jobs should be paid the same

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Job Evaluation: Point System MethodJob Evaluation: Point System MethodJob Evaluation: Point System MethodJob Evaluation: Point System Method


Five Levels of the Compensable Factor “Technical Skills”



Job Evaluation MethodsJob Evaluation MethodsJob Evaluation MethodsJob Evaluation Methods


Legal Issues in CompensationLegal Issues in CompensationLegal Issues in CompensationLegal Issues in Compensation

• Title VII of Civil Rights Act of 1964Title VII of Civil Rights Act of 1964– Protects workers rights to fair treatment.Protects workers rights to fair treatment.

• Equal Pay Act of 1963Equal Pay Act of 1963– Requires equal pay for equal work.Requires equal pay for equal work.

• Comparable WorthComparable Worth– Argues that standards of equal pay for equal work should be Argues that standards of equal pay for equal work should be

replaced with the doctrine of equal pay for equal value.replaced with the doctrine of equal pay for equal value.– Objective, measurable data to support an assessment of the Objective, measurable data to support an assessment of the

value of different jobs is lacking.value of different jobs is lacking.– There is no basis in current law for the arguments of There is no basis in current law for the arguments of

comparable worth.comparable worth.

• Title VII of Civil Rights Act of 1964Title VII of Civil Rights Act of 1964– Protects workers rights to fair treatment.Protects workers rights to fair treatment.

• Equal Pay Act of 1963Equal Pay Act of 1963– Requires equal pay for equal work.Requires equal pay for equal work.

• Comparable WorthComparable Worth– Argues that standards of equal pay for equal work should be Argues that standards of equal pay for equal work should be

replaced with the doctrine of equal pay for equal value.replaced with the doctrine of equal pay for equal value.– Objective, measurable data to support an assessment of the Objective, measurable data to support an assessment of the

value of different jobs is lacking.value of different jobs is lacking.– There is no basis in current law for the arguments of There is no basis in current law for the arguments of

comparable worth.comparable worth.


Legal Issues in Compensation Legal Issues in Compensation (cont’d)(cont’d)

Legal Issues in Compensation Legal Issues in Compensation (cont’d)(cont’d)

• Fair Labor Standards Fair Labor Standards Act of 1938Act of 1938– Regulates the minimum Regulates the minimum

wagewage– Sets overtime policy (time Sets overtime policy (time

and one-half after forty and one-half after forty hours)hours)

– Establishes exempt Establishes exempt classes for managers and classes for managers and other professional other professional employees.employees.

• Fair Labor Standards Fair Labor Standards Act of 1938Act of 1938– Regulates the minimum Regulates the minimum

wagewage– Sets overtime policy (time Sets overtime policy (time

and one-half after forty and one-half after forty hours)hours)

– Establishes exempt Establishes exempt classes for managers and classes for managers and other professional other professional employees.employees.


Key Strategic Issues in Key Strategic Issues in CompensationCompensation

Key Strategic Issues in Key Strategic Issues in CompensationCompensation

• Determining compensation relative to the market.Determining compensation relative to the market.• Striking a balance between fixed and variable Striking a balance between fixed and variable

compensation.compensation.• Deciding whether or not to utilize team-based Deciding whether or not to utilize team-based

versus individual pay.versus individual pay.• Creating the appropriate mix of financial and non-Creating the appropriate mix of financial and non-

financial compensation.financial compensation.• Developing a cost-effective compensation program Developing a cost-effective compensation program

that results in high performance.that results in high performance.

• Determining compensation relative to the market.Determining compensation relative to the market.• Striking a balance between fixed and variable Striking a balance between fixed and variable

compensation.compensation.• Deciding whether or not to utilize team-based Deciding whether or not to utilize team-based

versus individual pay.versus individual pay.• Creating the appropriate mix of financial and non-Creating the appropriate mix of financial and non-

financial compensation.financial compensation.• Developing a cost-effective compensation program Developing a cost-effective compensation program

that results in high performance.that results in high performance.


Reading 11.1: Compensating TeamsReading 11.1: Compensating TeamsReading 11.1: Compensating TeamsReading 11.1: Compensating Teams

• Reasons for tailoring compensation to individuals:Reasons for tailoring compensation to individuals:– Motivation comes from within the individual as opposed to the Motivation comes from within the individual as opposed to the

group.group.– The development of skills and behaviors is an individual The development of skills and behaviors is an individual

undertaking.undertaking.– Fairness in dealing with teams does not mean equal pay for Fairness in dealing with teams does not mean equal pay for

all.all.– Team compensation is not a payoff but a means of nurturing Team compensation is not a payoff but a means of nurturing

behavior that benefits the team.behavior that benefits the team.

• Reasons for tailoring compensation to individuals:Reasons for tailoring compensation to individuals:– Motivation comes from within the individual as opposed to the Motivation comes from within the individual as opposed to the

group.group.– The development of skills and behaviors is an individual The development of skills and behaviors is an individual

undertaking.undertaking.– Fairness in dealing with teams does not mean equal pay for Fairness in dealing with teams does not mean equal pay for

all.all.– Team compensation is not a payoff but a means of nurturing Team compensation is not a payoff but a means of nurturing

behavior that benefits the team.behavior that benefits the team.


Reading 11.2:Reading 11.2:New Thinking for the New MillenniumNew Thinking for the New Millennium

Reading 11.2:Reading 11.2:New Thinking for the New MillenniumNew Thinking for the New Millennium

• Strategic approaches to may compensation (pay) Strategic approaches to may compensation (pay) systems more responsive:systems more responsive:

– Pay the personPay the person for individual worth (knowledge, skills and for individual worth (knowledge, skills and competencies) rather than for the value of a job they perform.competencies) rather than for the value of a job they perform.

– Reward excellenceReward excellence through a pay for performance through a pay for performance compensation that establishes a clear relationship between a compensation that establishes a clear relationship between a significant amount of pay and attainment of organizational significant amount of pay and attainment of organizational objectives.objectives.

– Individualize the pay systemIndividualize the pay system to give employees choices in to give employees choices in how they are rewarded and what reward they receive.how they are rewarded and what reward they receive.

• Strategic approaches to may compensation (pay) Strategic approaches to may compensation (pay) systems more responsive:systems more responsive:

– Pay the personPay the person for individual worth (knowledge, skills and for individual worth (knowledge, skills and competencies) rather than for the value of a job they perform.competencies) rather than for the value of a job they perform.

– Reward excellenceReward excellence through a pay for performance through a pay for performance compensation that establishes a clear relationship between a compensation that establishes a clear relationship between a significant amount of pay and attainment of organizational significant amount of pay and attainment of organizational objectives.objectives.

– Individualize the pay systemIndividualize the pay system to give employees choices in to give employees choices in how they are rewarded and what reward they receive.how they are rewarded and what reward they receive.

Compensation Presentation MBA-2011

Documents

point method

pay data collected

factor comparison

relevant labor

based pay

average minimum

average maximum

market pay