Pay Plans
& Rewards
Management
Determining Pay Rates
Employee compensation refers to all forms of
pay or rewards going to employees and arising
from their employment.
It consists of 2 parts:


Direct financial payments
Indirect financial payments
Employee Compensation
Direct or Indirect compensation is given based
on:

Increments of time



Hourly
Salaried
Performance


Piecework
Commission
Factors Influencing Pay
Legal considerations
 Union membership
 Company policy
 Competitive strategy
 Equity

Legal Considerations

The Labour act defines the minimum wage and
employment conditions

Basic labor standards
Maximum hours
Safety/health standards


Corporate Policies and
Competitive Strategy
To remain competitive, compensation plans
must reward strategy that furthers the firm’s
strategy aims by asking:
1.
2.
3.
4.
5.
What are our key competitive success factors?
What actions implement this competitive strategy?
What compensation program reinforces those behaviors?
What requirement should each pay element meet?
How well do the current reward programs match these requirements?
Important Policy Issues
In writing the pay plan, ask the following:
1.
2.
3.
Will we be a pay leader or a follower?
Will we emphasize seniority or performance?
What pay cycle?
Important Policy Issues
4.
5.
6.
How do we fix salary compression?
How should we compensate based on
geography or overseas employees?
Is the pay rate equitable with rates in other
organizations outside the firm?
Salary Inequities
How satisfied are you with your pay?
 What criteria were used for your recent pay
increase?”
 What factors do you believe are used when your
pay is determined?

Establishing Pay Plans
The 5 step process:
The salary
survey
Job
evaluation
Pay grade
grouping
Price pay gradewage curves
Fine tune
pay rates
1. The Salary Survey
The salary survey is a survey aimed at
determining prevailing wage rates which
include:


Formal
Informal
Uses of Salary Surveys
Benchmark jobs
 Employers price 20% or more of their positions
currently in the job market
 Surveys collect data on benefits

2. Job Evaluation

Job evaluation is the formal and systematic
comparison of jobs in order to determine the
worth of one job relative to another


The comparison results in a wage or salary hierarchy
Compensable factors are fundamental elements
of a job
Compensable
Factors



Two approaches in comparing jobs – Intuitive or via
compensable factors
Intuitive based on decision that one job is more
important than another
Compensability determined arbitrarily but some metrics
include:
Skill
Equal Pay
Act factors
Know-how
Effort
Responsibility
Work
conditions
Accountability
Problem
solving
Hay
Consulting
Preparing for the Job
Evaluation
Its mostly a judgmental process which requires
cooperation among managers
 Identify the need for the program
 Get cooperation
 Choose an evaluation committee who will do the
evaluation

Job Evaluation Committees

Performs 3 main functions:



Identifies 10-15 key benchmarks
Selects some compensable factors
Evaluate the worth of each job via one
of the methods on the following slides
Job Evaluation
Method 1:Ranking
Obtain job information
 Select raters and jobs
 Select compensable factors
 Rank jobs
 Combine ratings

Method 2: Job
Classification
Rates categories of jobs into groups
 Groups called classes if jobs are similar
 Called grades if groups contain different jobs of
similar difficulty
 Example:
 Grade 10 may deputy director and the managing
director

Method 3: Point
The point method is more quantitative
 Identifies compensable factors
 The degree to which each of these factors is
present

Method 4: Factor Comparison
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
 With this method you rank each job several
times—once for each of several compensable
factors

3. Group Similar Jobs
Into Pay Grades


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A pay grade is composed of equally difficult jobs
Committee will assign pay rates to each job based on one
of the job methods
Ranking method grades fall in to a point range
Point method grades fall within two-three ranks
Factor comparison grades pay rate range
Classification method puts into classes or grades
4. Price Each Pay Grade Wage Curves

Developing a wage curve involves the following:




Find the average pay for each pay grade
Plot the pay rates for each pay grade
Fit the line called a wage line through the points just
plotted
Price the jobs
5. Fine Tune Pay Rates
Pay ranges are a series of steps
or levels in a pay grade, usually
based on years of service
Pricing Managerial and
professional Jobs
Goal is to attract and keep
 Harder to quantify evaluation
 Paid on basis of ability
 More complex and stress incentives over
evaluation

Compensating Managers
Top executives compensated by:
 Base pay + guaranteed bonus
 Short term incentives
 Long term incentives
 Perks
What Really Determines
Executive Pay?






Company size and performance
Industry CEO average pay
May emphasize 25% performance incentive
Board sets CEO pay
Shareholders may affect pay
Complexity of the job
Compensating
Professionals
Job emphasizes creativity and problem solving
 Job evaluation is useful
 Some disciplines result in 4-6 grades with a
broad salary range

Why Pay Employees
by Skill Levels?
 The
differentiation may bring about
satisfaction and a basis for
discriminate action
Skill-based Pay versus
Evaluation-based Pay
Competence testing
 Effect of job change
 Seniority and other factors
 Advancement opportunities
 SBP may increase productivity and lower labor
costs over JBP

Money and Motivation
Incentives motivate workers
 Taylor standardized a fair day’s work
 Which led to the scientific management
movement
 Which in turn led to modern day HR practices

Performance and Pay
Competition, shareholder value, and turbulence
 Businesses need an edge



Achieving employee satisfaction
Paying attention
Types of Incentive Plans
Individual
 Group
 Profit sharing
 Employee group
 Variable pay

Incentives for Operations
Employees
Piecework
 Straight piecework
 Standard hour plan
 All must guarantee minimum
wage
 Can create quality problems

Incentives for Operations
Employees

Team or group incentive plans



All members receive the pay earned by the highest
producer
Members receive pay equal to the average pay
earned by the group
All members receive the pay earned by the lowest
producer
The Annual Bonus
A bonus is aimed at motivating short term
performance with three issues to consider
when awarding them:



Eligibility – based on job level and salary
Fund size – use a formula
Individual awards – based on performance
Manager’s Performance
Bonus




Bonus for managers is either individual or corporate
performance based or both
Split it with part based on individual performance rest
on corporate performance
Never give outstanding performers too little
Never give poor performers normal or average awards
Long Term Incentives
Stock options
 Different stock option plans
 Performance plans
 Cash plans

Long Term Incentives (Cont.)

Other Plans

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Stock appreciation
Performance achievement
Stock options
Performance Plans
 Cash Versus Stock Options

Performance Plans
Executives do not prosper unless the company
does
 Executives have some “skin in the game”
 Value is contingent on financial performance

Cash Versus Stock Options
Which do you think is a better
motivator?
Steps to a Compensation
Package

Include external and internal issues



What are our long term goals?
How can compensation support them?
What defines the work culture and how can
the package be molded to it?


What are our competitive challenges?
What are our specific business objectives?
Steps to a Compensation
Package (Cont.)
Shape components into balanced plan
 Meet unique company and strategic needs
 Legal and tax effective
 Install a review and evaluation process

Incentives for Salespeople
- Salaries
Sales compensation can be salaried,
commission-based or hybrid
 Salaries make sense when job is primarily
prospecting or servicing clients
 Useful when relocating to new territories
 Can de-motivate very productive workers

Incentives for Salespeople
- Commissions
Pay only for results
 Easy to understand and compute
 Focus only on high volume items
 May ignore non-selling aspects
 Performance is a product of ability
 May result in high turnover

Example - Auto Dealer
Commissions
Insight into why auto salespersons behave
the way they do:



Some are 100% commission based
Others get commissions and small base salary
Net profit of car
Professional and Nonmanagerial Incentives

Merit pay or a merit raise is any salary increase
awarded to an employee based on individual
performance
Merit Pay Options
Lump sum raises are not cumulative; traditional
raise is
 Lump sum can be a bigger motivator

Incentives for
professionals



Determining this type of incentive is challenging
Professionals are well-paid and driven
Keep highly motivated professionals by using:
 Stock options and profit sharing
 Better vacations
Organization Wide Variable
Pay Plans

Variable pay plans include:



Profit sharing
Employee Stock Ownership Program (ESOP)
Scanlon or gain-sharing plans
Profit Sharing
Employees share in some part of profits
 In cash plans
 Lincoln incentive plan
 Deferred plans

ESOP
Builds a sense of commitment and ownership
in company
 Positive tax advantages for company and
employee
 Allows firm to borrow against stock held in trust

Scanlon Plan

An incentive plan developed in 1937 by Joseph
Scanlon and designed to encourage
cooperation, involvement, and sharing of
benefits
Philosophy of
cooperation
Identity
Involvement
system
Competence
Benefits sharing
formula
Gainsharing

A modern Scanlon type plan where cost
savings are shared
 Eight
basic steps:
Establish plan
Choose
performance
objectives
UseMethod
a funding
measures
for
formula share
distributing
of gains
Payout must be
large
enough
to of
Choose
form
motivate
Decide
bonus
payout
Develop
frequency
an
involvement
system
Making Gainsharing Work

Use multiple measures

Productivity cost performance, product damage,
customer complaints, shipping errors, safety, and
attendance
Committed managers
 Straightforward formula
 Employee involvement

At Risk Plans
Some portion of weekly pay at risk
 Exceed goals and get extra pay
 Miss goals and lose some pay
 Employees become committed partners
 Relies on trust, respect, communication and
opportunities for advancement

Why Incentive
Plans Can Fail
Performance pay can’t replace good
management
 You get what you pay for
 Pay is not a motivator
 Rewards punish
 Rewards rupture relationships

Why Incentive
Plans Can Fail
Rewards can unduly restrict performance
 Rewards may undermine responsiveness
 Rewards undermine intrinsic motivation
 People work for more than money

Implementing Incentive Plans



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Use common sense
Incentive linked to strategy
Effort linked to reward
Easily understood
Set effective standards
Standard is a contract

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Get support
Use accurate
measurement
Long and short view
Consider corporate
culture
Comprehensive
commitment oriented
approach