d
I
ll
I
F T
T T George
T Milkovich
Cornell Univeisiry
Jerry Newman Srare Universiry of
NewYork-Buffhlo
Bruce Gerhart Universiry of Visconsin-Ma&son
Nina Cole Ryerson Universiry
Margaret Yap Ryerson Universiry
t
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mffif,.}r::
I
-
d
1 Chapter 2
Chapter
I Chapter 3 Chapter 4 Chapter 5 Chapter 6
The PaY
lnternal Alignment: Determining the Structure 34
Job
AnalYsis 56
Job-Based Structures and Job Person-Based Pay
107
Structures
81
t tI
:
Level 134
Defining Competitiveness 137 Designing Pay Levels, Pay Mix, and Pay Employee
lll Pay
1
60
189
Pay 215
I
for Performance: Performance Appraisal and Plan Design 217
Pay-for-Performance
lV
12 Chapter 13
Benefits
Structures
Employee Gonributions: Determining lndividual
10 Chapter 11
Chapter
Evaluation
Elcernal Competitiveness: Determining the Pay
Chapter
PART
J J
Defining lnternal Alignment 36
PART
PART
1
Strategy: The Totality of Decisions 17
PAHT
Il Chapter 7 Chapter 8 Chapter 9
Model
II II I
Plans
247
Managing the System 28O
F
The Role of Governments and Unions in Compensation 282
Compensation Budgets and Administration 301
Appendix: lnternational Pay Systems 324
Endnotes 347 Glossary 368 Name
lndex
Subject
371
lndex
373
v
I I I I
F
t t T T
I
T
The Pay
r
'Why
Model
Should
\fe
DifferentSuategieswifiin theSameCompany 19 Strategic Choices 19
1
Care about
Stated versus Unstated Strategies 23 Developing a Total Compensation Stratery: Four Sreps 23 Step 1: Assess Total Compensadon. Implications 23 Step 2: Decide on a Total Compensation Suategy 26 .Net\fonh: Nedlix Freedom and Responsibiliry
Stockholders 4 Managers 4 Employees 4
GlobalVews
5
Forms of Pay 5 Cash Compensation: Ba,se Pay 5 Cash Cornpensation: Merit Increases and Cost-
'
T
of-LivingAdjustments 6 Cash Compensation: Incentives Long-Term Incentives 7
,
in Rewards 27
6
Implement the Saategy 27 and Reassess the Source of Competitive Advantage : Three Tbsts 27 Steps 3 and 4:
Benefits: Insurance and Pensions 7 Benefits: \7ork/Life Programs 7 Benefits: Allowances 7 .Net'\florth: What Do Employees Want? 8 Toml Earnings Opponunides: Present Value
T
t
Align
The Organization
A Pay Model
as a
Four Policy Pay
Book
Choices
AddValue
Nerwork of Rerurns 9
Plan
14
T
Review Questions
l5
2
T
9
12
15
Strategy: The Totality of Decisions 17 Similarides and Differences in Strategies 17
Different Strategies within che Same
Industry vt
Case
13
T
19
28
Conclusion 30 Chapter Summary 30 KeyTerms 3l Review Questions 3l
Techniques '13
Conclusion 14 Chapcer Summary KeyTerms 15
Case
Objectives
28
"Best Fit" Versus "Best Practices" 28 Guidance from the Evidence 29 Vmrous and Vicious Circles 29
9
Srrategic Compensation
Fit
DifFerentiare 28
ofa Sueam ofEarnings 8 Relational Rerurns from'Work 9
T
T
The Pay Model Guides Strategic Pay Decisions 22
Sociery 2
I
T
Support HR Strategy 22
\flhar is Compensation? 2
T
T
Suppon Business Suategy L9
Compensation? I
31
PART I lnternal Alignment: Determining the Structure
3
B4
Defining lnternalAlignment 36 Compensation Suategy: Incernal Alignment 37 Suppons Organizacion Strategy 37
i
Concns
-
I
:S,rppottsVorkflo-n' 38 Modvates Behaviour 38 Srructurcs Vary Benreen Organizations 38
Levcls 38 Differeritals
EconorrfF[T0lisures 42
Job Descriprions Summarize the Dau. 68 lJsing Gencric Job Descriptions 68 Describing ManageriaUProfessional Jobs 68 Verify the Description 69 .Net l7onh: Nationd Occupational
GovernmentPolicies, laws, andRegulations 42
"ExternalStakeholders 42
Culturcs and Customs 43 .NetVorth: Molson Coors Executives Thlce Pay
Cut
Classiftcadon 70 Analpis and Glob,li"-rion 72 Job
43
OrganizationStrategy 44
Job Anafruis and
U
Organization's Human Capital Organizadon and rf7ork Design 44
Job
Reliabiliry 72 Validiry 73
Acceptabiliry 73
Currency AJudgment
53 Review Questions 53 Case 54
81
Multiple Plans 85 BenchmarkJobs 85
Both
Common
PerformJobAnalpis?
57
58
58
Procedures 59 \7'hat Information Should be Collectcd? Job Data: Ideffification 6L Employee Data 62 Level ofAnalysis 62
Evaluation
81
Single versus
56
Daa: Content 62
Evaluation
Esrablish the Purpose(s) 84
Structures Based onJobs, People, or
Job
Job-Based Structures and Job
Defining Job Evaluadon: Conrcnc, Valuc, and External Market Links 83 Job Content aodJob Va.lue 83 Linking Content with the Extcmal Market 83 Differenr Perspectives on Job Evaluadon 84 'How to": Major Decisions 84
KeyTerms
Job Analysis
5
Job-Bascd Suucrures: Job
Legal Compliance 52 Conclusion 52 Chaprcr Summary 52
IilZhy
75
76
Case 76
51
Job-BasedApproach: Most
74
Review Questions 76
Fairness 52
Analysis
Call
Condusion 74 Chapter Summary
KeyGrms
ConsequencesofStrucnrres 5l
Job
73
Uscfulness 73
EquityTheory:Fairness 49 ToumamentTheory: Motivation and Performance 49 Insdtutional Theory: Copy Others 50 (More) Guidance Frorn the Evidence 50
4
Borders 72
JudgingJobAnal)rsis 72
Internal Labour Markets: Combining External and Organizational Faccors 45 ErnployeeAcceptance: A KeyFactor 46 PavSuuctures Change 46 Suategic Choices in Designing Intemal Suucn:res 46 Tailored versus Loosely Coupled 47 EgalitarianversusHiirarchical 47 Guidance from the Evidence 48
Efficienry
Susceptibiliryo OGhoriog 72
Andpis Information and C-omparability across
Overdl HR Policies 44
'
65
- 65-
QuantitativeMethods 65
4l
'-'
Conventional Methods
ri7ho Collecr the Infonnation? 67 \7b.o Provides the Information? 67 \Etrat about Discrcpancies? 67
39
Crireria: Content and Vdue 39 Iilflhat Factor*,Shape Intcrnal Strucnrres?
''*'
How Can the Infornation bc Colleqed?
-
6l
Choose berween Methods 86 Job Evaluadon Methods 87 Ranking 87 Classifrcation 88
Point Metlod 89 .Net Worth: Federal Government Classiffcation System
Modernizadon 89
ITho should be involved? 97 Evaluating the Usefulness of Results 98 The Design Process Macers 98
PART
Appeals/Rwiew Procedures 98 Polidcal Influences 98 The Final Result: Job Structure 98 Balancing Chaos and Control 99
Conclusion 100 Chapter Summary KeyTerms 101
External Competitiveness: Determining
the Pay Level fi
100
Review Questions 101
/
0efining Competitiveness 137
.
Compensation Suategy: External
Competitiveness 138 Conuol Costs 138
Case 102
6
Person-Based Pay
Structures
Attract and Retain '!7hat
107
Person-Based Pay Strucnrres: Skill
TypesofSkillPlans
Plans
co
Collecr? Involve? l13
l,abour Demand 142 Marginal Product of labour 142
Iabour Supply 144
111
Modifications to rhe Demand
Establish Cerdffcation Me*rods Ll3 Ourcomes of Skill-Based Pay Plans: Guidance from Research and Experience 1 13 Person-Based PayStructures: Competencies 174
DeftningCompetencies
Compensating
I I
SigndlingTheory
I I I I
, 118
Objective i 19
.
119
Employcr Size 150 Employees'Preferences 150
to Involvel t 19 Btablish Certiffcation Methods L23
I I I
Competencies and Employee Selection andTlaining/Dwelopment 123 Guidelines from rhe Research on Competencies L23 One More Time: Internal Alignment Reflected in Suuctures 125 Managing rhe Plan L25 Evidence of rhe Usefulness of Results
t25
Reliabiliry of Job Evaluadon Techniqucs 126
Conclusion 129 Chapter Summary
Keytrms
130
130
Review Questions 13L
Case
vllt
131
Markea
150
Deffning the Reler"ent Market 150 Competitive Pay Policy Alternatives ltL
Paywith Competition (Match)
151
LeadPolicy I52
LagPolicy 152
. .
Different Policies for Different Employee
Groups 153 Pies L54
Consequences of Pay Level and Pay
Validiry/Usefirlness 126 Gender Bias in Internal Pay Strucrures
Organizarion'sStraregy 150 Relevant
Pidalls of
Mix
Decisions L56
Acceptabiliry 127 ThreeTypesofSructure 128
147
HumanCapitalTheory 147 Product Market Factors 748 A Dose of Realiry: \ftrat Managers Say 148 More Reality: Segrnented Supply of Labour 149 OrganizationFactors 149 Industry andTechnolory 149
.Net \?'onh: Global Leadership Cornpetencies I 18
Collecd
Side
Reservation'WageTheory I47
117
\7h.at Information to 'Whorn
144
146
Modifications to the Supply
ll7
lHowTo": ComperencyAnalysis
Side
DifferentidsTheory 145
Efficiency\TageTheory 145
Purpose of rhe Compercncy-Based
Structure
138
Competitiveness? 141 Iabour Market Factors I41
108
108
\iVhat Information to
Talent
Shapes External
Purpose ofthe Skill-Based Structure 110 "HowTo": Skill Andysis 1l l
I(tom
II
t27
.Net Vonh: Compensation Strategy and Market
Rates L57 Conclusion L57 Chapter Surnrnary 158
I(ryGrms Review
Case
158
Questions 159
159
t'-
F=I
Contencs
8
Governmentlrnpcrus :90
Unions
Designing Pay Levels, Pay-Mix, and-Pay Structures 160
Employer
Major Decisions Specify Competitive PaY ?olicY 161 The Purpose of a Compensation Survey 161 Adjust Pay Level-How Much rc PaY? L62 Adjust Pay Mix-lfhat Forms? 162 Adjust PaY Structurc? 162
TheVdue
Types
Interpret Survey Results and Consuuct a Marker
Childcare Serviccs
I
Rcdur@dcfid[ Jffi
I I I l I
Chapter Summar;r zLA
KeyTerms
2Il
Review Questions 211
Case 271
Vonh:
PAFT
tII
915
Employee Contributions: lndividual Pay
Detarmiilg
185
ChapuSummary KeyTerms 186
185
Review Quesdons 186 187
9*.
1
0
onfor
Design
PerformmceApl*c
217
'What
Behavious de F'.mFlo),cs GlE About? Linking Orgaaizariooal SE to Compensation and Perfolnalc
q[
Analysis I 88
Benefits
Pedormance:
and Plan
Appendix 8-A: Calculating a Market Line Using
Employee
2M
Conclusion 210
From Policy to Practice: Broadbanding t8l
Regression
t
X06
Eldercarc Services 208 Flexible Benefit Plans 208
179
184
(EAFs)
.Net'Worth: Mcnal Illncss
180
Pricing
2fi1
Pbss
Ottrer Bcneffts 206
Eseblish Raage Midpoints, Minimums,
Condusion
f 9S
Retirement Pcnsion
Employee Assistancc Plans
Ratis 176 From Policy to Practice: ttre Pay Policy Line 177 From Policy to Practice: Grades and Ranges 778 '!7hy Bother with Grades and Ranges? L79
Market
198
Medicd lnsurance 2O3 Income Securirp Disabilhf Hmc eD5 Pay forTime Not'WorL'd M
Siatisticd Analpis I73 Age/Tfend the SurveY Dara 174 Consuuct a Market Pay Line 175 Combine Internd Sructure and External Market
ReconcilingDifferences 183
ofBenefits
kg"Xy Requircd Bcocfiu Life Insurance 203
Line 169 Verify Data 170 Pay
183
I I I
Claims Processing 197 Cost Conraiameru 197
\Vhich Jobs to Include? 167
Strucrure
i$A
Employee Prefrreoces L95 Administering de Bcn.f,* kopon i96 Employee Bencfia Coo.uunicrcilo 196
\fh.at Information to Collect? 167
the Pay
:rn'*
Administrarionlssucs I92 Facors ln_fluen.i'g Bcncfir P,hln:ioE ]9 EmployerPrcfercne 193
Design the Compensation Survey 165 \lfho Should Be Involved? 165 How Many EmploYers to SurveY? 165
Second-Generation Banded Salary Sptems L83 Bdancing Internal and External Pressures: Adjusting
lm
Benefir Planairy and Dedgc
EstimateCompetitors'IabourCosts L62 Competitors 163
.Net
Plroling DedS.
andAdministratioo
Select Relevant Market and Fuzzy Markets 165
Overlap
191
Bcocfrs l9t ofEmployecBc,itr igi
Key Issues In Benefirs
" Study Special Situations 162
Maxirnums
t*p.*
Cost-Effectivencss of
161
and
191
t
Management Zl8
189
lntroduction to Employee Benefits 190 lVhy dre Growth in Employee Beneffts? 190
\7hat Does itTake to Get rhesc Bcbzrtwf W&ru TheoryandResearchSaY 2m '\il7hat Does itTake rc Get rhese Bcbeviroud S&m
'
Comperuation Practidoners SzY
W
lI !
--.-..
f
I
t
Conenrs
Total Rewerd System: Orher Reuarrds B€sidcs Money Influence Behaniour! 223 Does Compensation Motivate Behaviour? 226 Do People Join a Firm Because of Pry? 226 Do People Stay in a Firm (or Irave) Because of Pay? 227 , Do Employees More ReadilyAgree rc Develop Job Skills Because
ofPay?
Types of Group
Gain-Sharing Profit-Sharing
.
227
Incentive Plans 262 Explosive lnrerest in Long-Term Incentive Plans 264
227
StockOpdons 265 Broad-Based
(ESOPs) 265 Pay-for-Performance for Specid Employee
Groups 266 Compensation Suategy for Supervisors 267 Compensation Straregy for Corporate
Directors 267 Compensadon Suategy for Compensadon Saategr for Employees 272 Compensation Strategy for Compensation Strategy for
ChaprcrSummary 277
'KeyTerms 277 Review Questions 278
Pay-for-Performance
Case
11
278
280
KeyTerns 242
PAHT IV
Review Questions 242
Managing the System
Case 244
Pay-for-Performance
Plans
247
Salespeople 274 Contingent
\Torkers 276
Tool 24I Conclusion 24L ChaperSummary 242
Execudves 267 Professional
Conclusion 276
Perfornance 240 as a
Option Plans (BBOPs) 265
Employee Stock Ownership Plans
Fairness 240 LegisladveCompliance 240 Linking Pay with Subjectively Appraised Promotional lncreases
261
Group Incentive Plans: Advanmges and Disadvantages 262 Comparing Individual or Grogp In-cpntive i&T::is&:j:: :Plans 262"-The Choice berween Individual and Group
The Role of PerformanceAppraisds in CompensationDecisions 228 Strategies to Better Undersrand and Mcasurc Job ' Performance 228 Suateg;i One: Improve Evaluarion Formats 229 Strategy Two: Select the fught Raters 234 StrategyThree: Undersnnd How Rarers Proces Infornation 235 .Net Worth: Performance Appmisal in a Diverse \Torkforce 237 Strategy Four: Tfain Raters ro Rate More Accurarely 238 Putting it all Together: The Performance Appraisal Process 238 Designing a Pay-for-Performance Plan 239 EfficiencT 239
'
Plaru
Earnings-at-fuskPlans 261
Do Employees Perform Better on rheirJobs Bccause ofPay?
Ini€irtive Plans 258
Plans 258
l2
rn
Role
of Governments and unions
in Compensation 282
\7hat is a Pay-for-Performance Plan? 247 .Net'Wonh: Drivers of Change in Variable
Governmenr as Part of the Employment
PayPlans 249
.
Spaiftc Pay-for-Performance Plarrs: ShonTerm 249 Merit Pay 249 Lump-Sum Bonuses 252
Relationship 283
Supplyoflabour 283 Dernand for Iabour 283 Employment Snndards Acrs 283
IndividualSpotAwards 252
Minimum \ffage 284
Individual Incenrive Plans: Types 253 Individual Incentive Plaos: Advanrages ' and Disadrantages 255 Group Incentive Plans 255 Chdlenges with Group Incentive Plans 258
PaidYacation 285
'
PaidHolidap
?,85
SandardHoursofW'orkandOvenimePay 285 Pay on Termination of
Employment 285
MinimumAge of Employment 286
r
I
Concn:s
Equal Pay for Equd
Vork
bY
Human Rights Iaws 286 PayEquiry 286
Thc Gender\0'age
GaP
Conclusion 319 Chapter Summary 320
KeyGrms
287
PayEquiryLegisladon 289 .Ner
t t
Reengineering and Ouaourcing 319 Balancing Flocibility and-Control - -3 19
Men
and'Wornen 286
\fonh: A 28-Year Quest for
Pay
Equiry at
CanadaPost 290 Condusions 292
Rcview Questions 320 Case 321
Appendix
Pay Equiry
320
1
I
3-A: CompensationWebsites 323
The Impact of Unions on \7age Appendix: lnternational Pay Systems 324
Determination 293
Union Impact on General Wage lcvels 293 Thc Suucnrre of'Vages 294 Union Impacc The Spillover Effect 294 Role of Unions in \fage and Salary Policies
KeyTerms 298 Revicw Quesdons 298
The Global Context 325 The Socid Contract 325 Centralized-Localizcd Dccision 3?3 ^iakng Culture 327 Culture Maners, but So Docs Grla'-l Diversity 328 Tiade Unions and Employee Isvolvmt n9 Ownership and Financid Markca 329 ManageridAutonomy 329 Comparing Cosa 330
aorp.nsation Budgets and Administration
Cornparing Systems 333 ThcTotal Pay Model Suaagic
and Practices 294
Unions and Alternative Rewad Systems 296 Condusion 297 Chaprcr Summary 297
'Case 298
'l 3
Managing and Controlling Labour
Costs
301
Choices 333
3A2
Conuolling Employmenc Number of Employees and Hours 303 ConuollingAverage Cash Cornpensation 304
kvel Top-Down 304 Rise 305 Ability to Pay 305
Conuol Salary
Nadond Sptems: CompantircMindnt !E4 Japanese
Cornpetirive Market Rates 305 Tirrnover Effect 305 Cost ofliving 305 RollingItAllTogerher 307
Conaol Salary Level Bonom-Up 307
'
Ethics: Managing or Manipulating? 309 Embedded Conuols 309 RaageMaximumsandMinimums 309
Compa-Ratios 310
Pay 310 Ana$ngCosts 311 Variable
Communicadon: Managing the Message 314 Amount of Informadon to Communicate 315 .Net \forth: Pay Communicadon Impact on Pay
Satisfaction 317 Pn)" Change Agent in Restructuring 3L7 Suucturing the Compensation Function 318 Cenualizarion-Decenffdization 3i8 Flo
Principles 318
Sysem iY Sysem 337
National
Gerrnan Nationd
Suacegic Comparisons Japar"
C'qr,
Canada 338
CurrentYear's
.
ffi
Smndardofliving: BaskctofGo&
Evolution and Chaage in T.rrditiooal
andGernanModels 339 Strategic Market
Mindsct
F?G
A
Locdizer: "ThinkGlobal,AdL@f fi Exporter: "Headquarters IGom Bcs{h FitsAll" 340 Globdizer: "Think and Art CJohaet
h
W
and locallj" Expatriate Pay 341 Elements of Expauiate Thc Bdance ShcetApproad F,xpatriate Systems' ObjectiteC
Cornpoir :}E #t +-l
Dommage! 345 Bordedes Vorld
+
Bordcdess
Pryi
Globdism 36 Conclusion 346 Endnotes 347 Glossary 368 Name
Index
371 373
Subjectlndex
i
I
T
! I I ! ! I I I ! I
A few books can change your life. This is probably not one of them. However, ifyou read it, you will bener undersend rhat pay matten, After all, you car't pick up a newspaper, power up a comPuter, or read a blog today without someone tdking about pay. The Great Recession (our rerm) has had huge ramificadons for pay. Some employees have had their hours cur or pay reduced. lVhy? Because itt a more effective way to cur costs without laying off workers. \Torkers still left on payroll after all the recent cost-curing moves are the best of the besr Layoffs would mean cutting the hean of the organization. Suryeys suggest workers faced with layoffs or reducdons in hours almost always will choose shorter worhveeks ... at leasr in the shorr run! The recession has also focused attention on executive compensation, In some cases, huge bonuses were paid to execudves of compaaies receiving ftnancial aid from rhe governmenr. Pay also mafters-around rhe globe. For examp.le, if you are a Russian asffonaur, you can earn a bonus of$1,000 for every spacewalk (technically known as "exrravehicular activity," or EVA), up to three, per space tiip. A concract lisdng specific tasl
xi!'
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WHAT,S NEW
Ail
rhe chaprcrs of &is edition bf,t e
been added. This edition
becn
reinfors our
cotrYictioo
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revisd and niofe Canadian eamples hale
dat
beTond how mtrch, how people are paid
mllc how o cnft a oel compcnsadon suategy and examines the really maters. Chapter 2 research on best pracriccs. Thc chapars on pe6rmance&sed pay dig into all forms of variable pay, such as stock oprions, profit shariog gin
The administration has had several company &nples added to -"ke rhe material more realiry-based. twe have dways used internacional examplcs in everF scction; we have also updarcd the appendix on global compensarion. M*y of rf,e Wcb crciscs, cascs, and .Net Won*r features have been updated or replaced.
The book inciudes a margin icon aext to material that is direcdy relevant to rhe 25 compensation-related Required Professional Capabiliria covced in rhe National Knowledge Exam, orie of the requiremenm for thc C-cnificd Ffuman Resourccs Professional (CHR?) designadon from dre Canadian Council of Ffuman Rcsourccs Associadons. A lisr of eJl 250 comlensadon-relarcd sub-capabilities maf bc found on &e Milkovich Compensation Connecr site.
@ fficormect"
T
ORGANIZATION OF THE CANADIAN EDITION Conzpetration, Fourth Canadian Edidon, is 1.
2, J.
4.
t t
dividd into four para:
Part I Internal Aliepment Detetmining the Stnrcture Part II F,xternal Competitiveness: Deternidng the Pay I-wel Part III Emplope Contributions: Determining Individud Pay Part IVl/tanaging the System
The "meat" of each chapter irr these pans (f3 chapters in total) is interspersed with and followed by additional material provided to supplement the chapcert contents and provide both
I I I
con[ext and relevance, as follows:
The PayModel: The unique Milkovich Pay Modd around which the tent is based is introduced up front, and is integrated tluoughour all subsequent chapter discussions.
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.NetVorth boxed feature, which highligha a comprehensive, real-world cxamplc of the material in
Each chapter includes a
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the chaprer.
xiii --..--J.!r
:
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PrcFacc
Keylbas
highlighted in boldface
rype in each chapter are deff.ned in the margins, and a list of drem is provided ar tle end of rhe chaprer and in rhe Glossary
_
with page references.
,.:ija"di.:.:aJ1"r
...
Key Terms allowances compensation cost-of-tiving adjustment
internal alignment merit increase procedufal fairness
external
relational returns
incentives (variable
€ompetitiveness
pay)
salary
total rewards wage
work/life programs
-
Frhibits are interspersed throughout the tent to illushate concepts and provide a visual frameworlc for students.
ExHEn
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Review Questions and Erperiential Earcises are suggestid at the end of
carh c[2pLt In response to instructor sugestions, these real-life exercises Equhe the application of learned concepts and techniques.
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Review Questions 1,
How do differing peEpectives affect ourvlews ofcompensation?
2.
How does the pay model help organize one! thinking about compensation?
3.
What can a pay system do for an organization? For an employee? Are these mutually ex(lusive?
Experiential Exercises 1. What is your deflnition of compensation?
Which meaning ot compensation seems mosi appropriate from an employee's view-return, reward, or entitlement? ComparE your ideas with someone who has more experiencg with someone from another counw, with someone from another field of study.
2.
List all the forms of pay you receive from work. Compare to someone elseS list, Explaln any
differences.
3,
is the "nEt^rork of retums" upon your completion ofthe program at your cur.ent institution? Do you think these are achievable? What are the some o{ the things you can offer your employer?
4.
Answer the two questions in this chaptE/s Conclusion, above (Why do it this way? 50 what?), for any study or business article that tells you how to pay people. Such artlcles can be found inlhe WorldatWork lournal or Compensation and Benefib Review.
.
xtv
what
Pr€&cc
I eernitg,Outcomes have been highlighted at rhe [.gi*itg of .ac! cha.eter, and the Ch3pter Sr'--ary ,Jri"g . ,ho. learning objectives is induded ai the
end of rhe chaPter'
LEARNING OUTCOMES
. .
dfltiry he bur
adil'r
. .
E
Eteps to
bdop
E
btalcompensation stategy,
ElQlain why manag€c ihodd tailor rheir pay 5ysreffi ro support
6e oqad-
straEgy.
Ihsibe $e lhrce EsG used to d€temine wh€th.r a pay snetegy ' of conpetilive adentaga Conrast $e 'b€n fft' pecpecliR on practicE' p€EF€criE
is a
souie
doapsatim wlth $e 'be!t
Chepter Summary
four:cp rc d*lop e onl ompcmr'or rrnapr ae {l) ess oal onFetbn lmplldbE, including bsiru *nrgr ud ompcddx dymkr HR rmcp orlod hh6. Kid ild poli.i6l onrct cmploltdunlo pcFmo rnd ft wtfi odv HR rp. rcm; (2) mrp out r tol @mp.wion rrnrcgt (J) lmplcmcm dr aegn rnd fimlly, (,t) @ lnd Elltn lhG rncFf b msE Ghi*hcnr oldn oliaie !.'Ib imFft 016 nladodl cftcircnc, m!ilt r drold rlign.h€ mpffitiotrecgro dE o$ilir..iont rnkll3. Thc rhrc ur Gcd o darmlnc whahr r p:yrrn!.&. i. snc of ffi Pdilk rdEnaF rE (l) D.s ir ili8it (!) Dos k dlGM.'6E rod (31 D6 ir.dd dlC ,1. Thc -bcr fir" prap
A\Feb F.xercise for each chaprcr can be found on the Milkovich
Compensadon Connect site.'Thc ITeb errcrcise will familiarize the srudenr with the wedrh of compensation-related materid available on rhe Internet. Also induded at ttre end of each chaprcr is a comprehensive C.ase requiring application of the chapter material'
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Prefacc
I
of the icon shown here. Whenever you see dris icon in the margin beside chapter content, simply look to the inside &ont-covrerbf dris book for a link to the required comperency. Note: For rhe sake of brwity and simplicicy, we have included only the Total Compensation competencies fgr which the scudent will be responsible in the CHRP exams; these RPG are not cross-referenced rc other functiond areas. A list of all 250 compensation-rglated sub-capabilities rnay be found on rhe Milkovich Co rnpercation Connect site.
ffiffi"
McGraw-Hill Connect"' is a rtrfleb-based assignmenr and
assessmenr plaforn that gives students the means ro better connect with their coursework, with their insrructors, and with rhe imponant concepn *rat they will need to know for success now and in the future. \7ith Connect, instructors can defiver assignments, quizzes, and tesr online, Instructors can edit existing quesrions and author entirely new problems; uack individual student performance-by question, assignment or in reladon to the class overall-with detailed grade reports; incegrate grade reports easily with Learning Managernent Systems (LMS) such as'\fl'ebCT and Blackboard; and much more! By choosing Connect, instructors are providing their studenrc with a powerftrl tool for improving academic performance and tnrly masteririg course material. Connect allows studena to practise irnportant skills at their own pace and on their own schedule. Importantly, students' assessment results and instructors' feedback are all saned online-so studenm can continually rwiew their.progress and plot their course to success, Connect dso provides 2417 onllne access to an e-book-an online edition of the text-to aid them in successfully complecing rheir work, wherever and whenever they choose.
Insuuctorts Manual 'Western prepared by Narasha Koziol, University of Ontario, contains listing chapter and a oflearning objectives, a detailed lecture oudine, a shorr topic oudine ofrhe answers to review questions, eriperiencial exercises, summary of chapter content and a casc discussion outline.
Thi Insuuctort Mangal,
Computerized Test Bank The computerized version of the Test Bank allows instructors to add and edit questions, save and reload multiple test versions, select questions on the basis of qrpe, &fficulry or keyword, and use password protecdon. Questions test three levels of learning: (1) knowledge of key terms, (2) undersranding ofconcepts and principles, and (3) applicatioa ofprinciples.
Microsoft' PowerPointn Prescntations The slideshows for each chapter, prepared by text authors Nina Cole and Margaret Yap, are built around the learning objecdves and include many of the figures and tables from the coctbook, as well as additional slides that suppon and expand the text discussions. Slides can be modiffed by insuuctors with PowerPoinf .
(lfanagement) Asset Gallery-for Instructors and Students The (Management) Asset Gallery is a one+top shop for a wealth of McGraw-Hill management asseu, making it easier for instructors to locate specific materials to enhance their courses, and for studenm (Student Asset Gallery) to supplement their knowledge. The Insmrctor Asset Gallery iocludes non-text-specifrc rnanagement resources (Self-Assessments, Gst Your Knowledge exercises, videos,* Manager's HotSeat, and additional group and individual exercises) along with suppordng PowerPoinf and Instructor Manual rnaterials.
xl/t
*The 'Managcment in thc Movies" vidcos are not liccnscd for distribution ouaide adopting instrucrors arc able to access the Instructor Notes.
of rhe United
Stetes; however,
I t I
Prcga
The Managert Hodeat is a rcsource within the Asset Gallery that allows srudents to watch apply thglr=years of orperience to confront daily issues such as ethics, diverover l4real man4gers rh. rnirurl workplace. Srudents are prompted for their feedback thioughout ""'*. "r-*orf., "ttl olh r.rnuio and asked to submit a repon cridquing the managert choices, while defending rheir for grouP or classroom discussions. own, Thg Managcrt HotSeat is ided
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Superior Learning Solutions and Support any of our producs, The McGraw-Hill Ryerson team is ready to help you assess and integrate learning teaching and performance' course for optimal technoiogy, and services into your onliire, your entirc couse rheir grades, or putting improve students nflhetheiirt helping your Specidisc you your llearning Sales do it. Contact here to help ream is rhe McGraw-Hill Ryerson roday ro leam how to manimize all of McGraw-Hill Ryersont resourccs!
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For more informadon on rhe latest technology and Learning Solutions offered by McGraw-Hill Rycrson and its panners, please visit us online: www.rncgrawhill.calhe/solutions.
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difference' jl?lE. fits. "
Technotogy that i +::H'i:?&'lif;
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ACKNOWLEDGEMENTS Many people have contributed to our understanding of compensation and to the prepararioa of rhlr io.rbook ln parricular, we thanlc dre following inssuctors whose cornments and suggesrions chroughout the review and development process gready added to the value ofthis four& Canadian editioa: Anna Bortolon, Cone*oga Colhge, School of Business ' Julie Bulmash, George Brown Colhge 'Wenlu Feng, Centennial Colhge, School of Busines Roger Gunn,/R Shau School ofBusines Ying Hong, McMaster Uniaersity DeGroote School of Business Michelle lnnes, [Jniaersity of Albma Sara Mann, Untuenity of Gaelph Jody Merrin, St. Chir College David Morriso n, Durham Colhge, School of Businas, IT and Mailngement Jude Udediba, Crrant McEwan UniaeniE, School of Buines
Jeffrey D. Young, Mount SaintVincent Uniuersity
Finally, we thank the McGraw-Hil[ Ryerson publishing team-Kim Brewster, I\bl:uher; and Lori Mclellan, DelelEnnnl Editon; Graeme Powell, Supenistng Minn Michelle Saddler, Team Lead, Production; and Rodney Rawlings, Copyedinr-for 6eir dedicarcd work in rhis collaboradve undertaking. BeElcy Ranger
d .,-3[.
LEARNING OUTCOMES LO1 Describe how compensation is viewed differently by sociery, sio(iri:':e-: managers, and employees in Canada and around the world'
[02
Define the term compensation.
LO3 Discuss major components of total rewards. LO4 ldentify and explain the three strategic objectives of compensa::-
105
Describe the four strategic policies in the pay model anC associated with them.
r_I
WHY SHOULD WE CARE ABO!.JT COMPENSATION?
lvhy
care abour compensation? Perhaps you find life goes more smoothly when there-is at ieast ofwhy you as much mooey.o*irrg in as going ouL Perhaps you would like to solve dre mystery in the people too, about are curious, you do. Perhaps *rey *.y ,h. paid get yo,, or people aia Beyonci earn $80 million one y€ar, whereas Britney Spears earned news and rheir pay.
Lo*
lfni
$2.2j million?t'\flhy did Jusdn'Bieber earn $53 million and Selena Gomez only $5.5 million?2 'Why did workers ar General Morors in the United States get total compensation of-about
$60 per hour, whereas U.S. workers ar Toyota got $48 per hour? \flhy was the average total comperrsarion per hour in manufacruring$25 in the U.S., but $16 in Korea and $3 in Mexico? !7hy iia Cl.r,b.'Wesron (Execurive Chairman of.Loblaw) earn about $3.9 million in 20i0, wher-' fuchard lfaugh (CEO of RBC) earned almost $14 million? More im'po.tantly, does ir mac[er how much and ho* fiese people get paid] \fle will certainly ta.lk about employee and executive pay in this book. Lett take a brief look at a few examples
in which pay does seem to have mattered' General Mocors (GM) has paid its workers weli for decades-too well perhaps for what it received in rerurn. In 1970, GM had 150 U.S. plants and 395,000 hourlyworkers. In sharp conffasr, GM anricipates having only about 35 plants a$d 38,000 hourly workers in the very near future.3 In June 2009, GM had to file for bankruptcy (avoiding it for a while thanks to giganric loans from the U.S. government-i.e., U.S. taxpayers). Not all of GMt problems were
fte
te r le:
2
Chaptcr
1
|
The Pay
Moltl
compensadon-related- Of course, building vehides that consumers did not want was also a problem. Buc having labour cosa higher than the comperition, without corresponding advantages in efficienqy, qualiry, and customer service, does not seem to have served GM or its stakeholders well. Its stock price, which pealred at$93.62 per share in April 2000, closed recendy at arouad $27 per share. Ia market value was about $60 billion,in 2000. Shaeholder wealth will be wiped our in banlruptcy; the U.S. taxpayers are out billions of dollars; and hundreds of thousands of jobs have been lost wirh concomitant effects on the communicies involved. On thc other hand, Nucor, the l4rgcltproducer of steel in dre United Sates, pays its workers veqF well relative to what other companies inside and outside of the steel industry pay. But the company also has much higher producdviry than is typical in the steel industry. The result: borh the company and its workers do well. Similarly, Google and SAS also pay their worlcers well. Google announced a 10 percent pay raise and $1,000 cash bonus to all its workers in January 2011, went on a hiring spree for over 6,000 googlers and its stock price recendy hit $600 per share. Revenues at SAS, the worldt largest privately owncd software company, have been on the rise since its inceprion ia 1976, despite all the turmoil in the rnarkct. '\?'ould grearer expertise in the dcsign and cxecution of compensation plans have helped? The U.S.'Congress and President Barack Obama seem to think so. They have put into place new legislation, the Troubled Asset Relief Prograrn (TARI), which includes restrictions on executive pay that are designed to discourage er.ecutives from tating "unnecessary and erccessive risks." In Canada, we have "say on pay," which dlows shareholders to hold an annud vote on the pay of an organizarion's executives. In 2011, about 70 major public companies have volunarily offered their shareholdets a "voice'" In a recent opinion piece in the Wall Street Journal, "How Business Schools Have Failed Business," rhe former Director of Corporate Finance Policy at the United States Treasury wrote that "misaligned incentive programs are at tle core of what brought our financial rystem to its 'knees."4 He says rhar we "should ask how many of the business schools amended by Americat CEOs and direcrors educate rheir srudens about che best way to design managerial cornpensation slzstems," His answer: not many. This book, we hope, can play a role in helping to bemer educate you, the reader, abour the design of compensacion systems, both for managers and for workers. How people are paid affecm their behaviour at work, which affects an organization's chances of success.5 For mosr employers, compensation is a major part of total cost of running a business, and often it is the single largest part of operating cost. These wo facts together mean that well-designed compensation q/stems can help an organization achieve and sustain competitive advantage.6 On the other hand, as have recently seen, poorly designed compensation q/stems clur likewise play a major role in undermining organizition success.
T_I
WHAT IS COMPENSATION?
How people view compensation affects how they behave at work, It does not mean the same thing to everyone. Your view probably differs depending on whether you look ar compensation from the perspective of a member of sociery a stockholder, a m,rnager, or an employee. The following is a discussion of these various perspectives on compensation.
LO1
Society Some people view pay as a mff$ur€ of justice. For example, a comparison of earnings of women
with those of men highlighrc inequides in pay decisions. In 2008, women earned 83.3 cents for every dollar earned by mer, up from75.7 cents two decades earlier in 1988.7 Despite this narrowing, and despirc pay equiry legisladon, *rE'gap persists. Economists have identified a number of conuiburing hctors ro w€e deterninadon, including human capial (work e
I
: Chapter
I I
fhe nay Modzl
of establishment, and rype 9f wof). Based on data from iob characterisrics (industry, size .ll'"1,'""*Z*"aa, rhere arc a few.observations that may have contributed to the gender w-age gap: ly to study health and education, whereas men ire more likely to study j""1J"..* :ue more willing th'n men to adjust *reir -ta other technology ffelds; that women children and elderly Parents' and to do young care of to take ordlt hoo* work in sales dJ of r;e "unpaid" housework; and finalln ncarly onc in three lvomen and rranspon, uades, in men are likely to work in construction
..d
il:H;;;mor.lik *d
il"tdff; :";;;;;;
i'
occupations,_whereas
"nJr.*iaa as eq uiPment
-:
'_'
i:j; oPerators'! *re gendel shows 1.1 Exhibit .gap in lo.s Canada do, relative to otfier countries? is definitely Canada countries. oEcD in-various of full+ime employees working France, and Norway' rh:all counuics like l(orea and Japan, but worsc than Ausualia, as e ca'se of loss of are listed countries b.*..tr compensatioo differences in labour costs in orample' For States'9 the United even and China, C"r"ai* jobs to Mexico, in productivirJ'(fie di-fferences when Howwer, Canada. in of those iioi.o rr. "bo,rt 13 percent considerably, fo, .".h dollar of pay) are factored in, the wage advangge
-'tii*
-.d;;i"gs lrt"J."., "*"3;;;;,
;.il; ;6;. i.."*. ftfJ*""" productiviry
ls.5duced
is at only 39 percent of the Canadian level.lo compensation as r-he canse of price increases' They may not believe see sornetimes consumers Yet o*rer consurners have lobbied universides to insist rhar higher labour costs are to their benefrt. in Guarernala who sew shirts and caps bearing the university logo'11
,
".,
ir"i., *"*.,
;;il;;.
for labourers news broke abour working con&dons and pay of vrorkers at Apple's largest to raise its wages by i6 rc 25 percent.r2 if;", *d .5. company ha.
,;:.ndy,
,"ppfr.r],
"gr.J
Gender Gap in Median Earnings of Full-Time Employees, 2OOg*
or latest year available
-
40, I
35t
I
30
520
Ets 10 5
T T
t I
t I
t
HHH
0
{
I
\ is calculated as the.differenct sender wage sap is unadjusted, and
*rg.
b"tt*iT:1?l-1tjli'g::l,T:,::1Y"f:i.?':m:: Il'Jil
o'o.r of t'. sender waee eap. Estimates orlarninss used in the calculations rerer to thddefinition may slightly vary from one country to another' However, workers: ;nJtrlury
#ffi:]o|:;ll3,ll-l*!'i",lrj;i:'#"6.;*il gross earnings of full-time
t t t
I I
s2s (!
*The
;
Source: OECD Family database, www.oecd.org/sociawamily/database,
accessed on
O7nBn012'
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I t
I
4
Chapter
I I Thc Pay Modrl Stockholders From *re perspeccive of the stockholders, thosc who provide equiry for the operation of businesses, compensation mancrs. For ocample, some stockholdca believe that using stock (shares of company) to pay employees creates a sense of ownership that will imBrove performance (think \ilesrJet), which will
in rum
increase stockholder wealdr.
But others argue that grandng employees coo rnuch ownership
dilutes stockholder wealth and sometimes may not incentivize the behavior
as one originally intends. Stockholders also have an interest in cxecutive compensation. Compensation should supposedly be ded to performange. To rhe degree thac the interesc of executives are aligned wirh rhose of stockholdcrs or shareholders (..g., by paying e.:cccutives on the basis of company performance measures such as sharcholder return), the hope is tlat company perfornance will be bemer. There is debate, however, about whether e:(ecutive pay and company performance are suongly linked.l3 In tlre absence of a solid persistent linkagc, concefi$ arise that executives might somehow use their influence to obmin high pay without necessarily perForming well.
Managers From the perspcctive of the managers, compensation direcdy influences their success in rwo ways, First, it is a rnajor o(pense. Competidve pressures, both global and locd, force managers to consider rhe affordabiliry of their compensation decisions. Srudies show that in many enterprises, labour cos$ account for more than 50 pelcent of toral costs,!4 In some indusuies, such as financial or professional services, or in education and governrnent, this figure can be even higher. However, even within an industry (e.g., automotive manufacnrring financial services), labour cosr as a percentage of total cosm varies among individual firms. For example, small neighbourhood grocerystores, with labour costs berween 15 percent and 19 percent, have been driven out of business by supermarkets that delivered the same products at a lower cost of labours (9 to 12 percent). Supermarkets today are losing market share to the warehouse club stores such as Costco and'!V'almarr, which enjoy an even lower cost of labour (4 to 6 percent). In addidon to seeing pay as e major expense that has to be minimized or optimized, a manager uses it to influence employee behaviours and to improve organizational performance. The amount and rhe way pcople ue paid affects the qualiry of their work, their attirude toward cusromers, their willingness to be flexible or learn new skills or sugtest innovations, and even ttreir interesr in unions or pursuing legal action against their employer. This potential to influence
employees'behaviours, and subsequently the productivity and effecdveness ofthe organization, importan! reason co be clear about the meaning of compensation.15
is an
Employees The pay individuals receive in return for the work they perform is usually the major source of their ffnancial security. Hence, pay pl+ a viul role in a person's economic and social well-being. Employees may view conpensation as the return in an exchange between their employei and themselves, as an entideme4t for being an employee of the company, or as a reward for a job well donc. Compensation can bc all of these things. Describing pay as reward may sound far-fetched to anyone who has reluctandy rolled our ^ of bed to go to work Even tlough writers and consultants use the term "reward," no one ever says, "They gave me a reward increase," or "Here is my weekly reward cheque ," Yet, if people see thcir pay as thc return for their contributions and investments rather than as a reward, and if wrirers and consulents persist in trying to convince them that pay is a reward for employees, this disconnect may mislead both employees and managers. Employees invest in education and training; they contribure their time and enerry at the workplace, Compensation is their return on those investments and contributioru.16 In sorne circumstances, employees in large, state-owned countries (e,g., China) and in highly regulated counuies (e.g., Sweden) sometimes believe their pay is an endrlement-their
Chapccr
I I
The Pa1
Mokl
of rheir performance or rh2t of their employers. It is not uncommon for politiunioos, and employer ftderarions in countries such as Sweden and Germany_-uade IJ-L"j"", policies that are zupponive of their country's sociopolirical as well as compensation negodare .t,,e- resardless
ro economic Priorides'r/
GlobalViews *compensation" refersm something that counterbalances, offsets, or makes up for .o-.rhing else. Howwer, if we look at the origin of thc word in different languages,-we get a ,.*. of J. richness of its meaning, which combines enddement, rerurn, and reward.lS In China, the traditiond characters for the word 'compensation" are based on the syrnbols for logs and water-
In English,
reflccs a broader sense ofreturns.l9 Cornpensadon in Japanese is fouyo, which is made up of two separate characters (4u and yo), bogh mcaning "giviag something." I{ya s an honorific used to indicate that the persoa ioing rhe giving is of higfr rank, such as a feudal lord, emperor, or Samurai leader. Tiaditionally, compensadon is rhoughr of as somerling given by onet superior. Today, business consulants in word bou-syu,which means reward and has no association with nodons Japan try ro substinrte the many that are part of Japanese compensation q/stems translate as dlowances The superioriry. of uatc, wltrch means "aking cals 6f ssrngthi ng." Ttatc is regarded as compensation that takes care of emplcyees' financid needs. This concept is consistenr with the hmily, housing, and commuting allowances still used in many Japanese companies.2o
Thesc contrasting perspecdves
on compen$tion-societal, stockholder,
managerial,
employce and even global-add richness to the topic. But these perspectives can also can$e confi.sion unless everyone i5 nlking about the same thing, so a clear definition of compensation is essentid. Compeosaton rders to all forms offtnancial renuns and tangible services and bcncffts that employees rcceive as parr of an employment relationship.
TT
LO2 compensation all fozl:r of financial rewms
and angible xrvka arfr benefra ttat employes reeive as Fftof an emplalment re/atrbnshrp
LO3
FOBMS OF PAY
Exhibit 12 shonn the variery of rerurns people receive from work. They are categorized as rotal compensadon and reladonal rerurns. The relational renuns (learning opportunides, recognition and *atus, challenging work, and so on) are the psychological returru people believe they receive in t}re workplace.2l Totd com;rcruation is more transactional and includes pay received direcdy
merit increases, incentives, cost-of-living adjustments) and indirecdy as benefits (e.g., pensions, heahhcare and life insutance, prografirs to help balance work and life demands). \il7hile tlis book focuses on totd compensation, we mus! not forget that total rewar&
as cash (e.g,, base pay,
'
include cash compensation, beneffrc, and reladonal returns.
,'6@ relational returns psychologial rewrns enpbyees bdieve they
rreive inthe
workplae
total rewards Cash Compensation: Base Pay Base
pay-wage or salary-is rhe ca,sh compensation an employee
receives for dre
work performed.
pay tends to reflect the valtie of the work or skills and generdly ignores differences amibutablc to individual employees. For orample, the base wage for mac.hine operators may be $18 an hour. Howerrer, some individual opera[o6 might receive more because of their experience and/or perforBas.e
mance. Some pay qrcrcms ser base wage as a function of the skill or educadon an employee possesses; this is common for engineers and schoolteachers. A distinction is often made bewreen a wage. aad a sakry, the lamer referring ro pay o(pressed at an annual or monthly rate rather than hourly.
all rewards received by employeet including cash compensation, benefis, and rdational returns
wage pay erpressedatan hatrly
aE
salary pay expressed at an annual or monthl.v .ate
*-.--&!
Chaptcr 1
|
Tltt
PaX
Modet
Learning
Recognition and Status
Employment Life, Health, Disability lnsurance, and Pension Base Pay
MeriVCost
of Living
T T T T
t I
t--
Long-Term lncentives
Security
Opportunities Challenging Work
Allowances
Work/Life Programs
Short-Term lncentives
cash compensation: Merit lncreases and cost-of-Living Adjustments
mrit
increase
itE€'tgtt to
tqnitinof
base
pay in
pa*vwrk
Ddravfur cost-of-livin g adjustment
reerrcge
increment to base
Fy pnnided
rqadlsof
to all employee
pedormance
Ahnost all Canadian ffrms use merit pay increases.22 Merit increases are given as increments to the base pay in recogni-tion of past work behaviour. Some assessment oflast performance is made, with or without a forrnal performanie evduadon progre-m, and the size of the increase is varied according to performance. Thus, outstanding performers could receive a 6 rc 8 percent merit increase 8 monrhs after their last increase, whereas an ever€e performer might receive a 2 to 3 percent increase after 12 or 15 months. By conuasr, a cost-of-livilg adiustment gives the same petcentage increase to ev€rrrone regardless of performance in order to maintain paylevels relative !o increases in the cost ofliving.
Cash Compensation: lncentives incentives (variable pay) ute-time payments for meetirg preaubl is he d pe rformane objxtiva in a fuwrc time
peiod
Incentives (or variable pay) de pay increases direcdy to perfornance. Howwer, incentives differ from merit increases. First, incendves do not increase the base wage, arrd so must be reearned.each gay geriod. Second, the potentid size of the incentive paymenr generally will be known beforehand. \ilfhereas merir pay programs evaluate th. pCIt-p.rfo.*i.. of L nd.irrid,ral an4 rhen decide on the size of the increase, what must happ'en in order to receive the incentive paymenr is called out veryspecifically ahead of rime. For example, an auto sales agent knows the commission tJre sale. Thus, aldrough both merit pay and incendves can influence performance, incentives do so by offering pay to irifluence
on a BMIT versus the commission on a Honda prior to making
fururc behaviour. Merit, on the other hand, recognizes and rewards past behaviours. The distinction is a mamer of timing.
Incentives can be ded to the-performance of an individual employee, a team of employees, a total business unit, or some combinadon of individual, team, andLit. The performanc. ob;.o tive may be expense reducdon, volume increases, custorner satisfacdon, ,*..ua growth, return on investments, or increases in total shareholder value-ttre possibilities errdl.Ir.z3
"r.
Chapter
I I
* The Pat
I I I
Modcl
paymen6, they do no[ have a permanent cffect on labour Becaue incendves are one-dme declines, incentive pay automatically declines, too. Consequendy, p-erformance cosmllflhen are hequendy refened rc x uariable pay'
i""rrrft"
Long'Term Incentives inrcnded to focus employee Incendves may be short- or long-term. Long-term incentives are or options to buy form of stock ownership are in the they Typically resula. mulriy."r ""specified, advantagcous prices. Th-e idea behind stock ownerships is that employees with iro.t "r no-.i4 stake in the organization will focus on such long-term ffnanciel objecdves of *ock " on-iou.*-.or, market share, and rerurn on net assets. Magna Internationd grants shares success. Some ftrmt contribudons to the made outstanding have who employees key ,o ,.L.,.d stock ownership beyond the ranla of managers and professionals. Sun .o*o*i., have erctended 'Wesdet, and Starbucls offer stock opdons. to all their employees. These Mi.roryrr.-r, Google, believe rhat having a stake in the companysuppor$ a culture of ownership. They hope
il
.ff;
* T.*l
.o-o-i.r ,t
",.-ploy.o
n'ill
J J
behave like owners'24
Benefits: lnsurance and Pensions
j
Exhibir 1.2 shows that emplope benefits, induding life/health/disabiliry insurancc and pension, worlc/life programs, and dlowances, are also part of totd compensation. Somc insurance tiqtired by law. For example, in CanadA employcrs (and employees) have to Drograms "t L"i'e .orruibt tions to rhe Canada/Quebec Pension Plan, Employmcnt Insufancc, and Worken Compensation. Differenr counuies have different mandatory benefits. Somc Canadian comPanies also provide rheir employees with a pension plan, in addition to the mandatory Caaada/ pe*ion Plan. In iOOg, Zg.Z percent of working Gnadians benefft from an employer-
*
euebec
sponsored pension plan.25
'
Health insurancg dental insurance, ;rcnsions, and life insurance are cornmon bcnefia. They help protccr employees ftom the financid risk inherent in daily life. Often, companies can prwii. these protections to employecs more.hoply than employees can obtain them for themi.lr"r. Bec**. tle cosr of prwiding benefis has been rising they are regarded as an increasingly imponant form of compcnsation.26
Benefits: Work/Life Programs 'Worl/Efe
progrems that help employees bener integrate their work and life responsibilides from work (e.g., vacations, .iury duty), access to services to meet speciffc include ti*. "*"y (e.g., needs drug counselling, financial planning, referrds for child and elder care), and (e.g., tdecomrnuting, non-ffadidonal schedules, non-paid time flcxiblc -otk "r"-g.ments off). Rcsponding to thc tight labour market for highly skilled employees and the changing
worUlife programs prognmstltat help
..fnplqes betbrintegnte theirwot* and life rsponsibilities
d.mograihio oi th. *otkforce (e.g., two-income families who demand employer floribiliry
thai family obligations can be mec), rnany Canadian employers are gving higher p-rioriry to thcse forms of b-encftts. Buffett Thylor & Associates, a leading wellness consulting ftrm in Vhitby, Ontario, follows its own advice by offering a bcst-in'class wellness Program in its own
so
workplace.2T
Benefits: Allowances Allowances often grow out of whatever is in short supply. In Vietnam and China, housing (dormircries and apanments) and uansportation allowances are frequendy _PaE of the pay package. Some Japanese companies continue to offer a "rice dlowance' based on the number
allowances .
co m
penntion tg Ptovide fot hon atpplY
items that are in
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Chapter
1
|
The Pay
Modd
Findings of the 2010 Global Workforce Study by compensation consultan8 Towers Wa8on showed workers' increasing desire for security and stability in the current recession-battered times. As employers continue to find efficiencies in their operations, workers feel employrnent security is fast disappearing. Employees realize their responsibilities toward their financial well-being as well as their career and performance; how-...ever; they are concerned about current leaders' competencies and ability to inspire. What employees want is managerial support so that they can more freedom and flexibility in doing their work, and contribute to the success of the organization. .
Drawing on findings from this study, fielded with over 20,000 employees in 22 markets between November 2009 and January 2010, and the broad economic. social, and business trends, the emerging "deal" in the employment relationship depends on the organization's ability to create a more personalized work experience for segment of the .workforce, aligned with how people add value to the business. The presures in today's work environment will continue to alter how businesses operate and how employees connect to their organizations and work. Relational returns become all the more impor-
tant to ensure business
success.
Source: @2010 Global Workforce Study. Towers Watson.
ofdependents an employee has, a practice that grew out ofpost-\trorld 1i7ar II food shortages. Almosr dl companies starting operations in China soon discover drat housing, $ansponadon, and other allowances are expected. Companies that resist these allowances have to come up with otler ways to afiract and retain talented employees. In many European counries, managers expect a car to be provided. The issue then becomes which make and model. In Canada, some organizations in Fort McMurray, Alberta, offer their employees housing allowances due to t.he housing shortages and the high cost of accommodadons. The Government of Nunavur provides its employees Norr"r.ot Northern Allowance to make up tlre differences in " the cost of living between Nunavut communities and larger "designated" southern centres, and to egualize the compensation of Government of Nunavut employees across Nunavut who may fue different economic conditions in different communities.2s
Total Earnings Opportunities: Present Value of a Stream of Earnings Up to this point, cornpensation has been treated as something paid or received at a mom€nt in time. But compensadon decisions have a temporal effect. If an employee with a job offer of $50,000 stays with the fum for five years and receives an annual increase of 4 percent, he or she will be earning $60,833 a ye.u at the beginning of the sixth year. The totd coss to clie employer over the ftve years based on the decision to hire turns out to be over $270,816. Ifyou add in an additional 25 percent for beneftts, the decision to hire you irnplies a commitment by the employer of over $338,520. A present value perspective shifis the choice from comparing todays iaicial offers to considerition of future bonuses, merit increases, and.promotions. Some employers claim that rheir reladvely low starting offers will be overcome by larger future pay increases. In effect, they are selLing the present value of the furure stream of earnings. But few candidates apply that same analysis in calculating the furure increases required to offset the lower initial offers,
ChaPw
t I 77x tul Me':
from Work Relational Returns \XArydoGooglemillionairescontinuetoshowupfolrytti*tymorning?Thereisoodo"-r-j-:effect on employees behavio*r Exhibit 1-2 work have a substantii J"r]n"*.lirerurns from recognition and status,
employment securicy, chalieaging to learn. Other Jadonal rerurns mighi include personal sadsfactioa work, and oppo.turri.io rearning with great_co-workers, and the like. Such fac-.orelational retuins such as includes such
;;;;;riily ::;.,Frle *tt Pfr.".'J;
facing new challenges, iompensadon' roral ,.i"rdr, which is a broader umbrella than total of rdadonal retu'rs inportance the box here provides some insighn inro
#;;
environment' in co&Yk "economic
of Returns The Organization as a Network Sometimes
returns ir is useful to rhink of an organization as a nework of
creaced by
all thae is to
and relational rerurns' The chdleoge pay, including rotd "olr,p.ruacion succeed' As in rhe case of rowers prrllirg ro organization th1 hips it &", oBe likely if "tt are pulling in unison rather than worki-og again'sr on rheir oars, success is rnore dardop boauses, if usefirl o.*orl of r.*r.rs is_-or. likely to be another. In che same;; ,ll worlc cogecher. Even drough this book focuses on to=l menr opporilr,i.i.r, -]'p*-oJsos ,o.r.*.rrrb., rhat clompensadon is only one of many facors aftocompensation, i, i, ing icople's decisions about worlc
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I--I
A PAY MODEL
q4as boti a framework for examining alfen! Pay The pay model shown in Exhibit 1.3 serves (1) strategic the blocla: building basic drree It contairu tems and a guid.e to most of tlis boolc policies rlat form the foundadon of t-he compensadcn (2) strarcgic the obl..tiuo, compensadon Because objectives drive the system' thty * sysrem, and (3) .h. .."t-iquo of coripensation. discussed
first'
ro4
Strategic Compensation Objectives
Tte basic objectives' and managed to achieve certain suategic objectives' in Exhibir 1.3, indude efficienry, fairness, and compLiimproving per*f,fr U*r'*a reg,rlations.'Efficiency can be stated more specificalll:.(1) (2) conuolling labour and stockholdels; and formance, increasing qualiqf delighting customefs and \?hole Foods are contrasted in Exhibit 1'4' costs. Compen*.io., oU;."t* ""tutei*ooi. cardiac pacemakers' lts compensaMed.tronic is -.di..l iechnology company that pioneered " minimizing ftxed costs, and anracdog don objectives emph"siz. ferfor#*.e tu.io.ss ,'l..or, grocer' Its qarkcts and energizing top talent.'Vn"[ f""at is a large organicdescribes. ia company The .la wel+taffed.2e celebration of food": irigh,, *.ll-"o.k are responsibiliry' as a.shared fgoi; processed least qualicy and commirment to offering shareholder vdue''l Its first compensation o-b1..,i.rn."1, "committed to increasing objecdves' fairness means Medtronic's In systems. pay of Fairness is * fund*m.ntal objecdve Foods' pay objec*ensure well-being'" family and p.*oo"l .ogot". fair trearment" ""J:t .,shared beyold base wages is^linked fare." In rlei, .gdit"ri* work .itor., pay tives discuss a .*ployto -!"ut 1o*t say about *ho i1 o1 their team' The fairness to team performance, for rll e-ploy..s by recognizing.both employee conuiburions objecdve calls for f"i, needs (e'g'' a (e.e,. hieher oay for greater performance, experientt' ot tt"ittittd and employee to processes the with concerned .used ). ho cdiat fairness k
Pav svstems are designed
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10
Chaprer
II
Th, Pal Modrt
The Pay Model
Work
INTERNAL ALIGNMENT
Analysis
EXTERNAL COMPETITIVEN EsS
EMPLOYEE CONTRIBUTIONS
MANAGEMENT
Evaluation/
INTERNAL
PolicY Lines
PAY STRUCTURE
Descrlptlons certification srRUcruRE
Market Definitioits
Surveys
5eniority- Performance-
Based
Based
Costs Communications
Merit
Guidelines
Change
INCENTIVE PROGRAMS
EVALUATIoN
as important make decisions about pay.30 It suggests that the wey a P^y decision is made may be decision' of the to employees as the result io*pli*.. as a pay objective involves conforming to various federal, provincial, and territorial colpensation la-s "ttd regulations. fu these laws and regulations change, Pay systems might need to be adjusted to .rrr.ri. continued compliance. As companies go global, they musc also comply with the laws of all the counffies in which they operate ' Ther.'"r. probably as many statements of pay objectives as there are employers' In.fact, highly diversifii firrrrr'ru.h as George'S7'eston Ltd. and One< Corp., which comPete in multiple at lin-es of business, mighr have different pay objectives for different business units. Objeccives
Chaper
i I
The Pal
Model
comparison of Pay system objectives at Medtrrnic and whole Foods
MEDTRONIC
WHOLE FOODS'
Support Medtronic mision and increased complexity
We are commit6d to shareholder value.
Minimize increases in fixed coss.
Profits are eamed erery day tfrough voluntary exchange with our o.rtornec
Attract and engage top talent.
Profits are essential to create €apital for grorarth, prosperity, opportunrty job sadsfaction, and job seiurity.
Emphasize personal, team. and Medtronic performance.'
Support team member happiness and excellence.
Recognize personal and family.total well-being.
We share together in our collective tate.
of business.
Ensure
inceaing long-term
I
I
fair treatment.
E
F
6cse companies emphasize dre incrcased complcxiry of rhe business and imponaace of integrity (orsmmers, qualiry), compedtiveness (costs), abiliry to aaiact and rerain qualiry people (pcrforoaoe), and having fun. The tcnsion of working toward all the suaagic objecdves of efficiency, frirness, and ompliaae at times makes it ineviable that managing pa)r creates erhical dilemmas. Manip'bdng resrlts rc ensure execudve bonus payouts, miql5iag (or failing to undersand) sgtisrics uSed to rre:$urc comPetitors' Pay rates, re-pricing or backdadng stock opdons ro increase their nlue, cocouraging employees to invest a portion of their wagcs in compary srock while executiv=s are be.iling out, offering just enough pay to get a new hire in the door while ignoring the relationship o co-wodcers'pay, and shaving dre hours recordcd in employecs'time cards are all-roocommon
rr
t I t
-
*"-ples of erhicd
lapses.
but not ali, compensation proftssionels and consultanrs remain silenr during edical misconduct and outright malfeasance. Absent a professiond code, compensadon rnanagers musr look to their own ethic+and the pay modd, which c.lls for combining the objectives of c& ciency and fair uearmenr of employees as well as compliance.3l Some,
I I
so objecdves serve severd purposcs. Firsc thcT guide the design of the pay rysem- c-oddcr the employer whose objective is to reward s6s6slrling performance. That objective sill mine the pay policy (e,g.ipay for performancc) .. *.ll the elements of pay plans (c g, increases and/or incentives). Another employer's objectives may be to develop a , ootinuously learning workforcc drrough job desip, training and team-building rechniqucs A pcy qystem'digned with thi. s employert objecdves might have a poliry of prying salaries et kzrt oqd
*
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dG*it
I
to those of competitors and that go up with incrcased skills or knowledge. This qlsco -lgl'r be very different &orn our ffrst examplc in which the focus is on p.rform.nce. Thu,s, dffi** objectives guide the design of differenr pay q/stcms. Thcy also ,.-i ,. standards for jr$iog 6c success of the pay $ystem. If the objective is to attract and rctain rhe best and rhe brigbc$, Fr skilled employees are leaving for highcr-paying jobs elsewhere, the system may nor bc pclh@ing effectively. Atrhough drere may be many non-pay reasons for rurnover, objeciwsFilidc
standards for waluadng the effecdveness of a pay qrstem.32 Policies and tcchniques are thc to reach the objecrives.
*r.
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Chapter
1
LO5
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The Pal
Mo&l
Four Policy Choices Every employer must ad&ess rhe suategic policy decisions shown on the left sidc of the pay model in Exhibit 1.3: (1) internd alignment, (2) ocrernal competiriveness, (3) employee.contributions, and (4) management of tie pay s)6tem. These policies form thc foundadon on which pay slzstems are built. They also serye as guidelines for managing pay in ways drat accomplish the system's objectives.
Internal Alignment Internal alignm66 refers to pay comparisons beween jobs or skill levels inside a single organization. Jobs and peoplet skills are compared in rerms of theit relative contribution to the organizationt objecrives. For o
internal alignment pay comparisons jobs
beveen
or skill levels inside a
single organization
lenge facing managels.
.
'
Internal dignment policies, or pay relationships within an organizadon, affect all three compensadon objecdves. They affect employee decisions to stay with the organization, to become more flexible by investing in additional training, or to seek greacer responsibiliry. By motivating employees to choose increased uaining and greater responsibility in deding with customers, pay relationships indirecdy affect the capabilities of rlle workforce and hence the efficiency of the enrire organizadon. Fairness is determined by employees' comparisons of their pay to the pay of others in the organization. Compliance is affected by rhe basis used ro make internal cornparisons. Basic fairness is provided by Canadian human righs laws, which make pay decisions made on the basis of race, gender, age, and other grounds discriminatory and illegal.
extenial competitiveness
Extetnal Gompetitiveness F,xternal competitiveness refers to cornpensation relationships
ernpison of compenmtion
eicternal to rhe organizadon (i.e., compared with competitors). How should an employer position its pay relative to what competitors are payiirg? How much should one employer pay accouncanu '!7hat mix of pay forms-base, i.ncendves, in comparison to what other employers pay them?
with that of competito,s
stock, beneffa-will help achieve t-he compensation objectivcs? Employers have sweral policy opdons. lfhole Foods combines base pay and team incentivcs to offer higher pay if team performance warrants. Medmonic sets iE base pay to match its competitors', but ties bonuses to performance and offers stock to aII employees on the basis of company performance.33 Further, Medtronic believes chat its benefirc, particularly im emphasis on programs that balance work and life, make ir a highly attracdve place to work. It beliEves that how pay is posidoned and what forrns it uses creates an advantage over competitors. Many organizations claim their pay q/stems are market-driven, that is, based on what competitors pay, Howwer, "market-driven' gets translated into practice in differenc ways. Some employers ser their pay levels higher than those of their competition, hoping to acract the best applicants. Of course, this issumes that someone is able to identify and hire the "best" from a pool ofapplicana.
Externd comperidveness decisions-botlr how much and what forms-have a twofold effect on objectives: (l) they ensure that the pay is su-fficient to attract and reain employee*if employees do not perceive their pay as competitive with what other organizations are offering for similar work, they may leave-and (2) thef control labour costs so that the organization rernain comletirive in the global economy. Thus, enernal compctitiveness directly affects both efficiency and fairness, And the organizatlon must respond in a way that complies with rdevant legisladon. Employee Contributions This refers to the relative emphasis placed on performance. Should one programmer be paid more than another because of beaer performance or greater senioriry?
Chaprcr
I I Thc Pay Modcl
should all employees share in rhe organizationt ffnancial success via incentives based on profft? sharing ffnancial losses? Should more-productive t€arns of employees be paid more irfi",
"bou, seams? chan less-Productive
The degree of emphasis placcd on performance is an important policy decision, because ir directly "f[""a *ploy.es' attitudes and work behaviours. Employers with strong pay-forn.rfor**". poiicies pur greater emphasis on incentives and merit pay. Starbucls emphasizes of corporate performance widr its employees. General lcock oprions and sharing the success at the unit, division, and company-wide level. Recognition of performance El..rri.'.-phasizes employees have to understand dre basis for judging contribudons also affects fairness, because their pay is fair' conclude drat to in order performance
Management A policy regarding managernent of the pay system is rhe last building bloclc in the pay model in Exhibit 1.3. Ahhough it is possible to design a qrstem that is based on internal .ligrr-.n., octernal compeddvenes, and employee conffibudoru, the qatem will not achieve its that the obiecdves unless ir is managed properly. Proper management of the pay system ensures right the right way. the objectives in for achieving pay right the get people riehr - 1.l. groqnd under compensation management is shifting. The uaditional focus on how to adminisrer various techniques is long gone, replaced by more strategic drinking-managing Pay parr of rhe business. It goes beyond simply managing pay as an et(pense to beaer understanding and anilyzrngthe impact of pay decisions on people's behaviours and organizations' success. The impact of pay decisions on expenses is one resuh thar is easily measured and well understood' But as
orher mexures, such as pays impact on atuacdng and retaining the right talent, and engaging this elcnt productively, are not yet widely used in the managcment of compensation. Effons to do so are increasing and che perspective is sffiing from "how to" toward "so what."
Pay Techniques The remaining ponion of the pay model in Exhibit 1.3 shows the pay techniques. The exhibit prodroughout the rest of this book. Techniques de the four basic policies to the pay objectives. Uncounted variadons in pay techniques ocisB many are examined in this boolc Many consuldng firms tout lheir surve]'s and techniques on their websites. Informadon on various practices can be obtained simply by surffng dre'Web.
vides an overview only, pay rechnigues are discussed
TL
'
f-
E" E4-
BOOK PI.AN
Compensation is such a broad and compelling topic that several books could be devoted to it. The focus of dris book is on the design and management of compcnsation systems. To aid in understanding how and why pay systems work, our pay model, which emphasizes ttre key strategic objectives, poLicies, and techniques, provides the structure for much of the book ih"pt.r C dir"*ro how to formulate and implement a compensation suategy. It anabzes what it means ro be strategic about how pioplc are paid and how compensation can help achieve and sustain an organizationt competitive advantage. The pay model plays a central role in formulating and implementing an organizationt pay sffatery. The pay model identifies four basic policy decisions that are the core ofthe pay straregf. After suatery is discussed, the next sections of thc book will examine each basic policy decision in detail. The first, internal alignment (Chapters 3 duough 6), examines pay relatiooships within a single organization. Two chapters in the next secdon (Chapten 7 and 8) CI
13
14
Chaprcr
I I rkbModd aad on s/har basis-
E
Conclusion
The model presented in this chaprcr provides a stfl.rdure for undersanding compensation sysrems. The three main components of the model include the objectives of the pay slstem, the policy decisions that provide the qrstemt foundation, and the techniques that link policies and objeccives. The following sections of the book ocamine each of the four policy decisionsinternal dignment, e
Two questions should constandy be in the minds of managers and readcrs of this text. First, it this wry? There is rarely one correct way to design a syst€m or pay an irdividual. Organizations, people, and circumstances are too varied. But a well-uained manag€r can sclect or design a suitable approach. Second, what does this technique do for us? How does it help achieve our organizational goals? If good answers are not apParent, there is no point to the tcchnique. Adapdng the pay q/stem ro meer rhe needs of the employees and helping to achieve the gods of the organization is what this book is all about. The basic premise of this book is that cornpensation systems have a profound impact. Yet, too often, traditional pay systems seem to be designed in response to some historical but longforgotten problern. The practices continue, but the logic underlying them is not alwa;rs clear or
why do
even relevant.
D i.
Chapter SummarY People may have different perspecdves on compensation. From dre socieml perspective, compensadon is viewed as a measure of jusdce as well as a cause of incieased taxes and price increases. Stockholders believe that paying employees in stock creat* a sense ofownership that will improve organizational performance. Managers view cornpensation as a major o(pense and a means to influence employee behaviour. Employees view cornpensation as a rerurn in an exchange with their employer, ar entidement, ot a reward. In other countries,
compensadon relates to being taken care of. Cornpensation refers ro dl forms of financial reuns and tangible services and benefits that ' employees receive as parr of an employment relationship. The rwo major components of total rewards are total compensation and relational reuns. Tord compensadon is composed of cash compensation (base pay and incentives) and benefits. Relationd reffns indude psychological aspects ofwork such as recognition and status, challenging worL,
*d
learning oPPomunides.
Chapar 1
4.
|
compensadon are (1) e{ficiency in performance and qualiry- satThe srraregic objecdves of and conqglling cq$!s, (2) fairness, and (3) compliance irfring .ur-ro*ers and stockholders, wirh laws and reguladoru' cornpetitiveTh. fou, strategic policies in rhe pay model are internd alignment, ecternal associated techniques structure The internal management. and n.rr, .*ptoy.. conuibutions, pay suucture The and evaluarionicenification' job descriptions, analysis, are *i,n Aij"*."r are market definitions, surveys' and pay policy cornpedtiveness wich associated techniqies are senioriry-based, lin.r. th. incentive program techniques associated with contribudons and merit guidelines. The evaluation techniques associared witi man-
o.rfor**..-based,
.g.rn.rr. are planning, budgeting, and communication'
Key Terms allowances comPenSation cost-of-living
adjustment external comPetitiveness
incentives (variable pay)
total rewards
internal alignment merit increase relational returns
wage
work/life programs
salary
Review Questions 1, How do differing perspectives affect our views of compensation? 2. How does the pay model help organize one's thinking about compensation? 3, What can a pay system do for an organization? For an employee? Are these mutualy exclusive?
2.
What is your definition of compensation? Which.meaning of compensation seems most appropriate from an employee's view-return,.reward, or entitlement? compare yow ideas with someone who has more experience, with someone from another country vrll't someone from another field of study' List
allthe forms of pay you receive from work. Compare to someone else's list. Explain any
differences.
3,
What is the "network of returns" upon your completion of the program at your curre.': institution? Do you think these are achievable? What are the some of the things you cz.,' offer your employer?
4.
Answer the two questions in this chapter's Conclusion, above (Why do it this way? Sc what?), for any study or busines article that tells you how to pay people. Such artides ca: be found
l,{&i
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Experiential Exercises 1.
Tfu Pq
inthe wortdatwork lournal or Compensation and Benefits
Review.
Case Inside lnternships Many recent graduates work as interns as they begin to establish their careers. Career Eige organization is a national not-for-profit service provider established in 1996' that arange
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Chaper 1
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paid internships by partnering with leading Canadian host employers including major banks, telecommunications and financial firms, and public-sector employers including
major bank, telecommunications and financial firms and public sestor employees like local and provincial governments. The first online job board in Canada (www,careeredge.ca), Career Edge Organization, to date, has recorded over 11,000 internships, and continues to offer paid internships through the Career Edge, Ability Edge, and Career Bridge paid internship programs.
The Career Edge program provides meaningful entry-level work experience for recent Canadian graduates. lt is designed to help recent graduates launch careers in their chosen field. For employers, Career Edge offers access to a diverse, qualified talent pool via cost effective 4 to
12 month paid internships that does not affect headcount. lt is also a robust option for onboarding recent graduates. For a very reasonable stipend, these interns can help with special projects, add diversity to company operations, and cover temporary staffing shortages. lnterns gain practical work experience, develop employability skills such as teamwork and criticalthinking, benefit from networking and receive a stipend.
Kim Burgess, a business analyst at Bell Systems & Technology, benefited tremendously from Career Edge. She says, "After taking a year off work to return to school, reentering the workforce was difficult. Career Edge gave me the opportunity I needed to apply my new skill set and learn within a working environment. Your internship is what you make of it and Career Edge will provide exactly what you need to excell"
Questions
1. 2. 3.
What do employers receive from summer interns? What retums do recent graduates get from these intemship opportunities? Should interns be paid? lf so, how much? How would you recommend an employer decide
the answers to both these questions? What added information would you like to have before you make your recommendations? How would you use this information?
Source: "lnside lnternships," www.careeredge.calen/job'seekers/testimonials/7
(accessed
February 22,20121.
ffi
Practise and learn online
with Connect.
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F
t F t t il
LEARNING OUTCOMES 101
Explain why managers should tailor their pay systems to support the organi-
zation's strategy.
LO2 ldentify the four steps to develop a total compensation strategy.
103
Describe the three tests used
to determine whether a pay strategy is a
source of competitive advantage.
LO4 Contrast the "best fit" perspective on compensation with the "best practices" perspective,
thcy.let some managers adopt a compensadon sEategy by simply pafing mlket rates; rJrat is, thdt rhe marker d.ecide how rnuch to pay people. Unfortunately, a dose of realiry quickly reveals employers cannot behave so simply.
I--I
SIMILARITIES AND DIFFERENCES
IN STRATEGIES In Exhibir 2.1, compensation scraregies at Google, Medtronic, and Merrill Lynch are compary{. Google is a popular Inrernet serrch engine comPany. Medtronic is a pioneer in implantable medic"l devices such as pacemakers and stents. Merrill Lynch, now part of Bank of America after the meltdown in September 2008, is a financid services organization that advises companies and clienrs around rhe world, All three are innovators in their indusry. Their decisions on the ffve dimensions of compensarion strategy are both similar and different.
All three formulace their
supporr rheir business sffaregy. All *rree emphasize outstanding employee performance and commitment. However, there are also major differences'
pay sraregy ro
Google positions itself as sdll being *re feisry start-uP populated by.nerds and. math whizmilemployees such g.n.iou, stock options that many of them have become (Yes, is a there competitors. lionaires. Its beneftts beyond the basics" compared to its "r.''*"y cash downplays lot.) Google Free lunch, a gym, piano, and roller hockey in the parking co*p.nr"don--(base^grandbon,rs.s), bur it does match its competirors on these pay forms.
zes.
ft offers all its
il,rs
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18
Chaptcr
EXHIBIT
W
2.1 |
Objectives
2|
Snatcg: Thc Totalitl of Dritions
Compensation Strategies at Google, Medtnonic, and Mernill Lynch
ffi GOOGLE
MEDTRONIC
Emphasis on innovation
Focus on customers
Focus on customer
Commitment to cost containment. Recognize contributions Attract and reward the best
Fully present at work and in per-
Attract, motivate, and reGin
.l
MERFULI TYNCH
fl
the best talent
sonal lives Recognize personal accomplishment and share success
Fair, understandable policies
and practices
fl
Attract and engage top talent Control costs
lnternal
Minimize hierarchy
Alignment
Everyone wears several haG Emphasize collaboration
External
Competitiveness
Explore novel ideas in benefits and compensation Generous, unique benefits
Reflect job responsibi lities Support promotional growth opportunities Foster team culture
Job sized on four factors: knowledge/skill, complexity, business impact, stra-
Market value of jobs establishes overall pay parameters Choices in benefits
Market competitive in base and benefits Market leader in bonus and
Pay
fairly within ML
tegic value
stock Employee
Recognize individual
Contributions
contributions Unrivalled stock programs
Management
Love employees. want them
to know it
lncentives directly tied ness goals
to busi-
Opportunity to earn abovemarket pay Recognition of individual and team performance
Clearly understood; open Employee choice
H
fl
fl
Bonus based on individual, unit, and company success
Differentiate on bonuses and stock
ln high-profit years, top bonuses significantly larger ln less-profitable years, top performers' bonuses decrease much less than poorer performers' U
nderstandable, consistent message
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W $ che office holiday parry includes invited guescs whose lives have been prolonged thanks to Meduonic medicd devices. The yearly gathering brings alive to employees thar what they are doing makes a real difference. So it is not surprising that Medcronic's pay strategy
At Medtronic,
seela employees "Toal \7ell Being'-programs designed to ensure that employees are "fully presenr ar their work and in rheir personal lives" in order to focus on the customer. Addidondly rhere is a srrong emphasis on performance-based pay that is based on individual, team, and organization accomplishmena. These programs offer Medtronic employees the opportunitf to earn well above what drey would earn at competitors, Merill Lynch pay objectives are straightforward to atuact, moti te, and retain rhe best talent. Menill Lynch focuses on toral compensation, which indudes compecitive base pay, very aggressive bonuses, and equdly aggressive stock awards based on each individualt accomplishmena. Pay for performance is ,h. k y. Differences in toml pay for top v€rsus poor performers are significant. ln good yeas, roral compensation for top performers is hard rc bear In lean years, the bonuses and stock awards significandy decrease, with greater reductions for poor performers than for top performers. This aggressive pay-for-performance culrure at Merrill Lynch was traditionally seen as a key factor in generating substandal wealth for bodr ics shareholders and rnany ofits ernployees.
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held vicw is rhat this aggressive approach led rc too -,t;[ 65[-plrint and However, a widely by managers, and consequently the economic meltdown in late 2008. behaviours u".r663l are in very diffcrent businesses servi.ng different cusro-ots, and companies threc These So fre differenccs in their pay srategies may trot bc surprising. Pay elenr different ernploying r-ong companies compedng for the sarne talent and similer orstomers.l di$er also can ,rr*.gi.r
Different Strategies within the Same Industry Google, Microsoft, and SAS dl compete for software engineers and marketing professio."ls_. Io its earlier years, Microsoft a&pted a very similar strateg;t to Google's, erccept its employees aacepted
I II I
pay to join a companl whosc srcck value was increasing exponentially.2 But when ics srock quir performing so spcctaorlady, Microsoft shifted irc suategy to increase base and bonus ro rhe 65rh percentile from the 45& percentile of competitors' pay. It still recained its suong emphalug eliminztsd its longstanding broad-based stock opdoa plan s.is on stock-related compensatioa, condnue to lead the marker. Its beoefiqs gran$. stock of in frvour SAS Institute, the world's largest prirzEty owned software company, takes a very different approach. .lc emphasizes ics wodr/lift prograos over cash compensation, and gives only limisgd bonuses and no stock awards. SAS headquaners in Cary, Nonh Carolina, includes fue on-site childcare centres' subsidized privare schools for "hildr* of employees, rwo doctors on site for fi,.e medical care, plus recreation facilities.3 Vo*ing more than 35 hours per week is discounged By removing as many of the frusuations and disuacrions of day-to-day life as possible, SAS, like Medtronic, believes people will focus on workyfien thcy arc at work and wont burn out. Googlc so far retains the excitement of a scart-up, Microsoft has morphed into "the new Boeing-a solid place ro vsork for a great salary,"a and SAS emphasizes its worl:/life balance programs. These examples illusuate rhe rariane in suarcgic penpeccives among companies in differenr industries (Google Medrronic, and Merrill Lynch) and even among companies in the same industry (Google, Microsoft, and SAS). less base
Different Strategies within the Same Company unia wirhin rhe same corporation will ha're very different competidve condidons, adopt different business srrategies, and fius fft diffirent compensation strategies. The Korean company SK Holdings has a wide variery of business units. They indude a gasoline retailer, a cellular phone manufacnrrer, and SK Construction. SK has different compensation suategies aligned to each of its very diffixent $rrsingsses.5 Somerimes different business
Thus a strategic persPecdve on compensadon is more complex'rha. it fust appears, Tlking a strategic perspective requires a focus on compensadon decisions that help the organization gain and susuin competitive advantage.
r_I '
STHATEGIC CHOICES
Strategrrefen to the fundamenul busines decisions that an organization has made in order to achieve its strategic objectives. An organization defines its stratery thrcWh the tradeoft it makes in droosing what (and what not) to do.6 Exhibit 2.2 relztcs these strategic choices to the quest for cornpetitive advanage. At the corporate lwel, the fun&menral srategic choice k: Vhat ba:ines should ue be in?At che business unit level, *re droice shifts to: f/o w do tu gain and suswin comp*itiae ad:uanage in this butizeniAt the fi:nctiond level, the suategic choice is: How should nul compensation help this brsiness gain
andsustain comp*itiue aduannge?'Ilteukimarc pqpose is to gain and sustain competitirrc advantageT
Support Business Strategy A currendy popular rheory found in almost every book and consulrant's report tells managers to' tailor their pay sysrems to align with the business strateg'y. The rationde is based on contingency
I
{
strategic perspective
afons onantcrnrttion drisiots dut Mp the organizatiot gah md atsain comFtitiwafunF/ge
,@ LO1 strategy thefundamenal htsines dxisbns an organization has made to achieve i6 strategic
&jective,
sudr
uwhat
bushess to be rh and how to
obl€i n comFtitive adva ntag e
competltive advantage
ir**
a busin* pnctice or that resuls in better peior-
mance than one's competr'tors
I I I t ;
20
Chaprer
EXHIBIT 2.2
2 | SFeg:
Tbc
foafu of DdAns
Strategic Choices
ffi
ffi . What business should we be in?
. How do we win (gain competitive advantage) in those businesses?
. How should
HR
.#
help us win?
. How should total
compensation '+ help us win?
re notions, That is, differences in a fum's strategy should be supponed by corresponding differences resources strategy, including compensation. The underlying premise is that the grearer the dignment, or.fit, between the organization and the compensation q/stem, the more
in its human
effective the organization. Exhibit 2.3 $va an erample of how compensation systems might be tailored to three general business strategies.S The innovator stresses new products and short response times to markec trends. A supporting compensation approach puts less emphasis on evduadng skills and jobs and more on incentives designed to encourage innovations. The cost curtert effrciency-focused strarery s6esses doing more with less by minimizing costs, encotuaging producdvity increases, and specifring in greater denil oracdy how jobs should be performed. The customer-focused business suategF srresses delighting customers and bases employee pay on how well they do this. Other business strategy frameworla rely on similar ideas. In Mic"hael Poner's model, furns that ' cut costs would be said to follow a cost leadership strarcry, while those that seelc m provide a unique and./or innorative product or sewice at a premium price are said to follow a differentiation strategy. Lit
Chaper
Tailon
STRATEGY
lnnovator: lncrease
Product ComPlexitY and Shorten Product Life
.o:,"
2|
Strateg: The Totahry of Dttitio*
the Compensation System to the Strategy
BUSINESS RESPONSE
HR PROGRAM ALIGNMENT
COMPENSATION SYSTEMS
o Product Leadership Shift to Mass
.
.
.
.
tustomization
Committed to Agile, Risk-Taking, lnnovative .' People
Cycle Time
. .
Reward lnnovation in Products and Processes Market-Based Pay
Flexible-Generic Job Descriptions
Cost Cutter: Focus on EfficiencY
.
. -Operational Excellence
.
Do More
with
Less
Pursue Cost-Effective
. . . .
Solutions
Focus on Competitors' Labour Costs
lncrease Variable Pay Emphasize Productivity Focus on System Control
and Work Specifications Customer-Focused: lncrease Customer ExPectations
. .
Deliver Solutions Customers Speed
to
r
Delight Customer, Exieed Expictations
to Market
. .
Customer Satisfaction lncentives Value of Job and Skiils Based on Customer'
Contact
ffi on cosr, whereas pmspecturt are more focused oo innsvadon, new marke6, and so fonh. These are known is generic ttratqt fnmauozk Conventiond wisdom would b€ that competing on cosl requires lower compensation, whereas compecing tirough ianovation is likely to be more successfi.rl with high-powered incentive or pay for performance progra-ms. Most firms, however, do not have generic strategies. Instead, they tend to have aspects of cost and imovation, Lil
A dassic emphasis on internal alignment (e.g., well-developed job evaluation plan, clear hierarchy for decision making worky'life balance benefits, policy of no layoffs) had served it well during the decades when the company dorninated the marker for high-profir, mainframe computers. But it did not provide flexibiliry to adapt to compeddve changes in rhe new centurf A redesigned IBM now focuses on the high-growth, high-value segmenr of rhe IT induitry and offers a broad mix of businesses and capabilities that provide business insighr and solution for its dients. A new business strategy requires a new com'pensarion suaregy. At IBM, rhis meant streamlining the organization by curting layers of rnanagem€nr, redesigning jobs to build in more fleribiliry, increasing incentive pay to more suongly differentiate on performancq, and keeping a constant eye on costs, IBM changed ie pay strategy ft
also follows thar when business suategies change, pay strategy should change too.
example is IBM'S strategic and cultural transformaeion.
IBMI
and system to supporr im changed business strategy. Towers \fauon and World at Work recendy completed their Nonh American 20 1 1 /20 1 2 Tirlent Management and Rewards Study, The srudy surveyed HR professionals in 21 8 U.S. and 98 Canadian organizadons and found drat organizarions with reward and ta[int management programs that support their business goals are more fian twice as likely to repon being high-performing companies.g
21
Chaptcr
22
2 | erqETb ftab, 6Mbff
Support
HR Strategy
it
is critical thar an organizadon have a compensation strates/ that suppons is It is also imperacive thar there be alignment between its compensation sftaEery and its overall HR suategies. HR systems will be most effecdve when roles are designed o allow employees to be involved in decisioru and have an opportuniry to make an impac, when employee ability is developed through selective hiring and training and development, and when the compensarion system rnotivates employees to act oh their abilides and take advantage ofthe opportuniry ro make a difference. Compensation is the key to attracting, retaining, and motiwting employees with rhe abilities necessary to execute the business strategy and handle greater
As discusse4
business $:rate6r.
,6@
decision-making responsibililies. Consider alignment beween compensation and other aspects of HR at SAS, Rather than being sold in a one-time $ansaction, SAS's softvvare is licensed, This is part of a business strategy bywhich SAS gers ongoing and substantial feedback from customers regarding how produce can be continually improved and also regarding what new products custotners would like, To suppoft rhis long-term customer reladonship, SAS seeks to have low employee turnoyer. Im heavy emphaiis on benefits in compensation helps to reain employees. SAS also gets many job applicarions, which allows it to be very selective in its hiring. The deemphasis on pay for indMdual performance reduces the risk that competition among employees will undermine this objecdve. Hence, alignment of an organizationt cornpensation stratery and ia HR strategy are central to successful. business strategy
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ecicution'
THE PAY MODEL GUIDES STRATEGIT PAY DECISIONS
The competitive advanrage of \il7hole Foods, inuoduced in the previous chapter, is apparent with the ftrst visit to one of its grocery stores, described as "a mouth-watering fadvaj of colors, srnells, and textures; an homage to the appetite."lO !flhat surted out in 7978 as a small heilth food store in Atsdn, Texas, has, through straregic decisions, grown to becorne the worldt leading natural and organic foods supermarkec Along the way, the company has designed a total comPensation sysrem ro support the company's phenomenal growth (from 10,000 team mes.rbers or enlployees and $900 million in sales in 1996 to over 64,000 team members and sales of over 10 billion in 2011) while remaining uue to the foundert vision' Using the pay model discussed in the previous chapter, the following is an analysis of the five suategic compensation decisions facing Whole Foods managers:
1.
Objeaiues: How should compensadon support the business suateg/ and be adaptive to
the cultural and regulatory pressures in a global environment? fWhole Foods: increase shareholder value through proffts and growth;,go to extraordinary lengds to satisfr and delighr customers; seek and engage employees who are going rc help the company make
money--{very new hire must win a two-thirds vote from team members beforc being given
Z. ' 3.
a permanent position.) Interzal alignment: How differendy should the different types and levels of skills and work be paid wi*rin the organization? (Whole Foods: store operations are organized around eight ro ten self-managed tearns; egalitarian, shared-fate philosophy means that executive salaries do not exceed 14 times the everage pay of full-time employees; all full-time employees Sualify for stock opdons; nd 94 percent of the companyt options go to non-execudve
emPloj'ees') competitiveness: How should total compensation be positioned aginst competitors? ($fh.ole Foods: offer a unique deal compared to competitors.) \Vhat forms of compensadon should be used? (!7'hole Foods: provide heahl insurance for all full-time employees and 20 hours of paid dme per year to do volunteer worlc,)
Exirnal
: Chapter
2|
Snaug: Thc Totaliq of Dcctbns
on individual and"/or team perfori, o"experience and,/or condnuous learning on improved skills, on changes in cost of ^in (e.g., housing, uansportation, hedth services), and/or on each busiliuirr*, o1 p.tronal needs (Whole Foods: a shared fate-every four weeks, the performance ness-unirt performance? in terms of revenue per hour worked, which direcdy affects what measured is of each ream why sraff:rl are given a say in who gets hired-
who will help them makc monel) open and uansparent should rle pay decisions be to all employees? Who How Management: in designing and managing the slntem? (lfhole Foods: "no secrets" involved be shodJ mana$ernent-every store has a book listing the prwious yeart pay for wery employee incluJing execudves; employees make decisions-fr.y vote to pick their health insurer
*rn,-ro-.ot.
rarher than having one imposed by maaagement.)
together, These decisions, taken strateg/'
:
Stated versus Unstated Strategies
F :
ri
compensadon suategY at work.
L(}2
DEVELOPING A TOTAL GOMPENSATION STRATEGY: FOUH STEPS Develop.ing a compensation stratery involves four simple steps, shown
in Exhibit 2.4. Vhile rhe
drem is complex. Tbial and error, orperience, and insight play majql ,.3teps are simple, executing
i roles. Research evidence can also help'Iz
Step 1: Assess Total Compensation lmplications The facrors in *re business .environment thar have contributed to a companyt success a-od that are likely to become more (or less) imponant as the company looks ahead are dassified ia Exhibir Z. ,They are: business suategy and cornpecitive dynamics, HR suategr, culcurclvdues, 'i social and polirical context, employee/union needs, and other HR systems.
.,It
ii i,i
i,r,
;
F F F T
form a panem that becomes an organization! coinpensation
AII organizatioru that pay people have a compensatiotr stratery. Some may have written, or state4 cbmplnsarion suaregies for all to see and understand. Othe5s may rrot even realize they have a .omp.ns.rion strategy, daiming that "'We do whatever it m-kes." Their compensadon suategy .-.rgo from the pay decisions they have made. Unstated compensacion suategy is inferred from-.o*pensation practices.ll The point is that managers in all organizations make the frvc suatcgic decisions discussed earlier. Some do it ia a rational, plalned walt; others do it more .haotically-as ad hoc responses to pressures from t.he economic, sociopolidcel, and re.gulatory conrexr in which rhe organization operates. But in any organization that pays people, there is a
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23
\Business Strategy and Competitive Dynamics-Understand the Business This ffnt step includes an undersnnding of *re speciffc industry in which the organizadon operates and how it ilans to compete. To cope with turbulent, compedtive dynamics, fo**g on factors in the business environment (i.e., changing custoirer needs, cornpetitors' actions, changing labour market
'lfhat
conditions, qhanging legislations and regulations, globalization) is important today. will be importanr in rhe future? It is imponant to learn ro gauge the underlying dynamics in a busincis, such as its business srategy, and to consider how the compensation system should change to support and
be part
of rhat suategy. Aligning different compensation
strategies
to
different
business
I
t I
24 EXHIBIT
Chapter
2 | Smry: Tb Toulitl
of &cinorc
2.4 I f"y Steps in Formulating a Total Compensation
Stnategy
T
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T
t I l
t I
;lti;:,
: r:,:,,i.::,:,,';,i'1lr.jillr'l:.:
i{ij
suategi€s-cost-cutter' customer-cetrtred, and innoyator (see Exhibit
2.3)-fu
aheady been
discussed. But realiry is more complex and chaotic. Organizadons ale not necessarily innovators,
cost cutters, or customer-cenued. Instead, th.y iue some of each, and more. So the iational, planned, and orderly image conveyed in Exhib-it 2.3 does not adequately capnrre the turbulent
competitive dynamia underlying this process.
13
comparing pay between counlabour cose and productivity (output per hourly in differences 1, uies is complex. In Chapter in the average length of the differ Counuies also noted. were countries between dollar of wages) the kinds of social holidays, paid of number ,h. worh,yeelc, Programs' and even how pay "u"og" is.detegnined.lS Therefore, mana8ers in muldnationd firms must become knowledgeable about the cornpetitive con&tions and pay practices both globally and locally'
bompetitive
dynamics can be assessed globally.ta However,
lor Ghange? Compensation or this stratery, a HR stracery.'SThatever with the overall pay srrateg)r is influenced by how it fts os in the higha can play supponing role, is critical. Pay it of pay within decision about the role HR Strategy: Does Pay Play a Supporting Role or a Catalyst
performance approach, or
it
can tel
.t'
Chaprer
2|
Strateg: Thc Tonliy of Dn;storu
-r.. nardally influenced by how well ir fia wid o&er HR qFcms ia dre organization. A highly Ilr";1,rraand confidential pay syst - courolled h " f.. people in a corporate unit wi! ncg nexibfg oPetr orBanizadon-'Whatever rhe role, compensadon is
,uoooa a highly decenualized,
."if.aa.a in the total HR
approach'r6
pay rystem reflecc the nlucs th't gurde an employert behaviour and underrreacment of employees. In many orgaoizadons, core values guide employer' behaviours and iie in dte pay qrstems. The pay systern mirron the companyt i-age and reputation. reflected are .Exhibic 2.5 shows Medronic! vdues. The fi.fth rralue recognizes employees'wonh by fostering
Gultulefllalues A
ir
"oersond satisfaccion in work accomplished, securiry, advancement oppomr.niry and means to in ihe company success." Its compensation strategy reflecs this rralue by induding work/ security, incendves, and stock opdons co share in 6c companyt success. Ufe balance programs for But there are somc skeptics out there. One snrdy described mission statements as "an assemOn the other halrd,. Johnson and Johnson considblaee of rire phrases" that impressed no on..17 "recipe for busines success."l8 compass" and "moral its .rr]* ,,",.*arrr
jur.
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t
; ;
Context
Contact refers to a wide range offactors, including legal and reguqhonging workforce d€rnographics, orpectations, and so differences, latory requiiements, cultural is very people-intensive. Consequendy, \fhole Foods its business Foods, on. In thi case of lfhole
Social and Political
25
diverse worldorce and increasingly diverse forms of pay educarional reimbursements, employee assistance counselling, dependency chemical (chilfcare, (other supermarkets) to imitate. competitors difrcult for be and value add may programs)
;
man€ers may find that an increasingly
As governments are major stakeholders in derermining compensation, government relations ro influence laws and reguladons may also be parc of compensation suategies. For orample, the European Uniont 'tocial contracC' becomes a mar[er of interest to managers.l9 And in China,
**y .o-p*ies have discovered rhat building relationships
widr government officids is
essen-
tial. So &om a strategic perspefiive, managers of compensation may try to shape the sociopoliticd environrnent as well as be shaped by ir
Employee Prelerences The simple fact that employees differ is too easily overlooked in formulating a compensarion strategy. Individual employees join the organization, malce investmenr decisions, interact with customers, design new products, assemble componenc, and so on.
EXHIBIT
2,5
Medtrohic Mission and Values
MEDTRONIC VALUES 30 years ago, our mission statement gives purpose
Written more than and is the motivation behind every action we take.
to our worl( describes the values we live by,
;
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3.
.4. 5.
ry
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2.6
Chagter
2 | SW1: Tb Teb, of Dccitiarlt
Individual employees receive the pay. A major lirriitation of contempor{y
PeY
qtste1s is how
ro becer o.i"fy ioaiuiaual needs and preferences. Offering more choice is one approach- Older, highly paid *ork o may wish ro defer to(es by puning their pay into retirement funds, wherea5 y"""g.. employees may have high cash needs to buy a house, support a &mily, or ftnance an Ldrr."tioo. Durl-."r.., couples who have healthcap coverage in bodr workplaces may prefer to use rlore of rheir combined pay fot child care, automobile insurance, financid counselling, or other benefits such as flexible schedules. Employees who have young children or dependent parents may desire dependent care .overage.2o
A number oftontentporary pay systen$ in Canada do offei some choice. Flcxible and. choices among healthcare coverage and choices
ocamples. This approach adds value and is of cornpeddve advantage.
beneftm
in investment funds for retirement plans
diftcult for other companies to
imiste-it
are
is a source
SoLe studies have found tfiat employees do not always choose well. They do not always understand the alternadves, and roo many choices simply confuse them. Thus the value added by offering choices and sadsfring preferences may be offset by the expense of communicating and simply confusing people.2l In addition to possibly confusing employees, offering too many choiceis would also be a challenge to design and manage' Union Preferences Pay strategies also need to be adapted m the nature of the union-management relationship.z2 Union influence on pay systems in Canadaremains significant. In2007, unionized worL.o at Loblaws in Ontario approved pay cuts for one-third of their members cmployees represented by the in order to remain competitivc with \ilalmart.3 Bombardier 'W'orkers recendy negodated a flexible Aerospace and of Machinists Association International forms of pay (e.g., retirement diffcrent for preferences Uoion members.z4 their plan for beneffts and healthcate plans) and their concern widr job securiry also affect Pa)t stratery. For orample, in the last ,ouod of ,r"gotiations bctween Air Canada and its 3,800 customer service staff(repto resenred by *re CA\f)-in 2011, Air Canada was pushing to switch from a deffned benefia vehemendy of course, union was, The ncw hites. a deftned tontribution pension plan for its that opposed to the change and the issue was sent to arbitration, The arbitrator ultimately nrled from their benefit of pan would receive hires New plan. pension Ai, C*"& h"d ,o o1",. hybrid the existing deffned beneffts plan-under a reduced formula, and part from a defined contribution
rc by both workers and the cmployer'
contributed ^plan,Ir,t rn"tionally, the role of unions in pay dctermination
also rtaries gready.z5
In
Europe,
unions are major players in all strategic pay decisions. The point here is that union interests are of the environsrental pressules that help shape compensation strategies. 'part Ir, ,rr*, assessing the compensadon implications of many factors-including the organithe competitive dynamics, its culure and vdues,. the sociopolitical zationt business ,t "Lry, preferences, and how it ffts with other HR slntems-is necessary to conterft, employee/union formulate a compensation strategy'
'
Step 2: Decide on a Total Compensation Strategy The compensation stratery is made up of the five decisions oudined in the pay rnodel: set objecemployee tives and specify rhe fourlotcy choices of internal alignment, external comPetitiveness, It requires strategy. cornpensation a 2 in developing is step This contriburions, and management, noted, already As environment. and business the organization's ih"t fft decisions compensadon decisions should suppon different business strategies. The organization's objective "omp.rrsatior, is to make the right compensarion decisions based on how the organization decides to cornPeteThe .Net Worth box here illustrates this concept. The rest of rhis book discusses *rese compensation decisions in detail. It is important to realize, however, that the decisions in the pay model worh in concert. It is the rctaliry of these decisions that form the compensation suategy'
F'Chaprer
2|
SFat g,t Thc Toutiry of Drcisiotx
Netflix is the world's leading lnternet subscription service for movies and W series. They launched their operations in Canada in September 2010. With more than 27 million streaming members in the United States, Canada, Latin America, the United Kingdom, and lreland, their strategy is all about innovation, and their corporate culture is defined as freedom and responsibility. The strategy requires a high-performance workforce, and therefore they "hire adults and expect adult behaviour." The company has no formal structure, no career paths, no health club, no ping-pong tables, no recognition program, and no performance bonuses. Benefits are traditional. When it comes to rewards, freedom and responsibility rule, The company considers the opportunity to do challenging work to be the greatest reward. Compensation is very generous (9fth percentile). Employees decide at the beginning of each year how to split their compensation between cash and immediately vested stock options. Up to 15 percent of compensation can be used to buy deeply discounted, immediately vested stock through the employee stock purchase plan.
Employees can take as much vacation time as they want as long as their manager and team members agree. Turnover is considered a good thing because they dont want employees to stay with the company unless they really whnt to be there.
The Netflix approach to total rewards is closely aligned with their strategy, and the results have been excellent. The company has been rated the #1 Web site for customer satisfaction five times and their stock price has held strong in the volatile high-tech sector.
C. Fuoce.Karasinski, "Netflix Bucks Traditional Total Rewards," Workspan, August 2007, pp. 38-42.
Sor"irces:
I I I I t-
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poliry decisions) and rhe pay system (procedures for paying people) as well as the imporoF people's percepdons and behaviours is vitd to implementing a pay strategy. The results
(grand
need to be assessed against the objectives.
SOURCE OF COMPETITIVE ADVANTAGE: THBEE TESTS
Designing and implemencing a pay suareg)r that is a source of competitive advanuge is easier Nor all compensation decisions are suaregic or a source of compedtive advantage. Three rests determine whether a pay strategy is a source of competitive advantage: (1) Is it aligned? (2) Does it differentiate? and (3) Does ir add value?26
said than done,
)
This step recognizes that thc compensadon strat-
rc frt changing conditions. Thus, periodic reassessment of the fit is needed to condnuously learn, adapt, and improve. Managing the linla between ttre compensation suategy
egy musr change
. T-tr
t
T
Step 3 is to implement the strategy .hto"gh the design and execution of the compcnsation sysrem. The compcnsation qrsrem cranslates stratesr into practice. Employees infer the underlying strategy based on how they are treated by &eir employer duough compensadon qrutem.
tance
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Steps 3 and 4: lmplement the Strategy and Reassess the Fit
Step 4, reassess and realign, doses the loop.
27
LO3
t t T t
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phaptcr
Align Alignment of the pay stratery includes three aspects: (1) alignment with the busines $raregrr, (2) dignment octerndly wittr the economic and sociopolidcal conditions, and (3) alignment internally with rtre overall HR qystern. Alignment iq. probably the easiest test to pass,
T
Differentiate
t T t
Some people believe thar the only
from everyone elset.27
T
I
*ring that really matters about a strategy is how it is different simple for a cornpetitor to copy, it cannor be
If apay system is relatively
a source of competitive advantage.
The pay suarery is woven into the fabric of the companyt overall HR stmtery. Copying one or another dirnension of a strategy means ripping apart the overall apgroach and patching in a new one. So irr a sense, the alignment test (weaving the fabric) helps ensure passing the differendation test. Microsoft's use of stock awards for all employees, often wonh considerably rnore than base pay, is difficult for its competicors to copy. The SAS work-family balance and Medtronic total-presenceat-the-workplace strategies are difficult ro copy. It might be reladvely ea,sy to copy part of what a compedtor does (e.g., grant stoclc options to more employees, offer more choices in beneffts), but the idea of a straregic perspecdve implies that it is the way the various programs ff.t together and fit the organization; and that is difficult to copy. Simply copying others-blindly benchmarking and following so-called best practices-amounts to trying merely to stay in tJre race, not ro win it.
T T T
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2 | S@E 7b ToEh afffiet
Add Value
.
Organizations today look for the return they are getting from their incentives, benefiu, and even base pay. Compensation often is a companyt largest controllable expense. Because consultants and some researchers treat different forms of pay as investments, t-he task becomes how to come
up with ways ro calculate the return on those investments (ROI). But this is a diffrcult proposition. Costs are €ruy to fit into a spreadsheet, bur any vdue created as a result of those costs is difficult rc specifr, much less measure.Zs Trying to measure an ROI for a compensation strategy implies tlat people are "human capital," just like other factors of production. M*y people ffnd this view dehumanizing. They argue that viewing pa)' as an investment with measurable returns diminishes the importance of ueating people fairly.z9 Of t}re three tests of suatery-align, differentiate, add value-the last is the rnost difficuh arrd services, fust movers (innovators) have well-recognized advanages that can offset the risls involved-high margins, capruring market share and rnindshare (brand recognition).3o But it is not known whether such advantages accrue to innovators in totd compensarion such as Microsoft (one of the first to offer very large stock options to all employees) orAmerican Express (among the fust to offer flenible benefft programs in Canada) now that many competitors are doing the.same thing. It is not known whether a compensation innovator atcracts more and bener talent, induces talent to stay and contribute, or provides cost advantages. Studies are needed to ffnd the answe$.
Ir is known that in products
LO4
I_-I
"BEST FIT" VERSUS "BEST PFACTICES"
premise of any strategic perspective is that if managers align pay decisions with the organizariont stratery and values, are responsive to employees and union relations, and are globdly competitive, the organization will be more likely to achieve competidve advantage.3l The challenge is to design the "fit" with the environment, business suategy, and pay plan. The bener the fit, the greater the competitive advanage.
Tie underlying
Chapter
2 | &raag:
Thc Toulfry of Dccisions
Bur not everyone aSees. tn conErast to the notion of suaregic fit, some believe that ll) a ser ofbesr pay practices exists and (2) thesg pracdces can be applied universally across iiru"rionr. Rarher than a bcner fft between business strategy and compensation plans that f.rr.t performancc, thgy say a set of best practices resula in bercer performance with ,rt.ta. t business strateg;r.32 The chdlenge here is to selecr from various recommended lists l^or, *y nthe" best practices. Research from the past few years is beginning to provide guidance ,hr,
"r. on our "choices"'
:i
rr . . . , ,
Intazal aligztncnt Borh smaller and larger pay differences anong jobs inside an orgaoizadon can affect results. Smaller internal pay differences and larger internal pay differences can both be a'besr" practice. !?hich one depends on the conterct, including the fft with lrrsinsss srarery, other HR pracdces, and organizational culture.33
Extertal com?€titioenest: Paying higher than the aver€e paid by competitors ca-a aftct results. Is higher compedtive pay a "best" practice? Again, it depends on tte conterc.x Ern?lEee conrtbutions: Performance-based pay can affect results. Are performance incentires a "best" pracdce? Once again ir depends on the contoct.35
Managtng compmsation: Rather than focusing on only one dimension of the pay stffcgf, such as pay for performance or internal pay differences, dl dimensions necd to be considcred
sffateg!: Finally, embedding compensadon stratery within the broadcr results. Compensation does no! act done; it is part of the overall affects straregy CompensatioTt
HR HR
So speciffc pay practices appear to be more beneficial in some @ntetcr than othen,s and "best pracdces versus best ftt" does not appear to be a useful way to frame the quesdon. A morc useful question ls: Vhat pmctices pay of best undcr uhat condirtozri Much of the rest of this book is devoted
I
;
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together,36
approach.3T
to this question.
VIRTUOUS AND VICIOUS CIRCLES
Srudies have shown rhat performance-based pay and stock opdors grana may be orarnple of best practices. However, some snrdies suggest tfiat performance-based pay worls best when the organization is performing well. This phenomenon is like a vimrous circle. As depicted in Exhibit 2.6,
with increasing profits or market share is able to pay larger incentives in rhe form of bonuses and *ock awards. And paying these incentives fairly improves employee anitudes '1, and work behaviours, which in turn improves their performance and ulrimately results in bemer an organization
'.
t
GUIDANGE FHOM THE EVIDENCE objectivcs:
i
I ;
There is consisrent rer.earch evidence rhat the following practices do maner to the organization's
T
E
t
organizational performance.3g The cirde gains upward mornenturn.40 Employees receive returns that compensate for rhe risks they Blce. And they behave like owners, since they are sharing in the organization's success. It cannot have escaped your attention that circles can also ga.in momenrum going downward to become a vicious circle. As depiced in Exhibit 2.6, when organization performance declines, say h a recessionary period, perforrnance-based pay plans do not pay oft drere are no bonus'es, and the vdue of srcck dedines-rrith potentidly negacive effecrs on organizational performance.4l Declining organizadonal performance increases the risla facing employeesrisks of demotions, wage cucs, and wen layoB. Unless the increased risks are offset by larger retruns, the risk-return imbdance will reinforce declining employee acitudes and speed the downward spiral.
:
t I I
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t t I t
-z*'. -
ur-
F Chagter
2|
Stmtcg: Thc TouIitT of Decisim
strategic perspective
strategy
Review Questions 1. Read a$anthe values statements
in Exhibit 2.5. Discuss how if at all, these values might be system. Are these values consistent with "letting the market a compensation reflected in
decide"?
2. 3.
What are the three tests used to determine whether a pay strategy is a source of competitive advantage? Discuss whether these three tests are difficult to piss. Can compensation really be a source of competitive advantage? Contrast the essential difference between the "best
fit" and "best practice"
perspectives
on comPensation.
4,
Explain why performance-based pay may not always be a best practice.
Experiential Exercises 1.
lnterview a compensation specialist about his or her organization's compensatjon stta'.egy, specifically the five isues--objectives, internal alignment, external competitive' ness, employee contributions. and management. How does this organization compare to Google? To Whole Foods? \rVhat business strategy does it seem to fit (i.e., cost cutter, customer-centred,
2.
in
novatoc or somethin g else)?
Set
up a debate over the following proposition: "Best practices' is superior to the 'best
fit"
approach when designing a compensation system,
3.
ten people about their total rewards preferences. What conclusions can you dralt from the results?
4.
Set up a debate over the following proposition: Nonfinancial retums (great place to work, opportunities to learn, job security and flexible work schedules) are more important than pay.
Survey
Case Difficult to Copy? One of the best ways to maintain strategic competitive advantage is to have a strategy tf.a: s difficult for competitors to copy. The more the different aspect of a strategy are intere'lated or interconnected, the more difficult it becomes for others to replicate. Consider the compejration strategy at Netflix. discussed in the .Net Worth feature in this chapter. On the face of L this strategy look easy to copy (or at least to articulate). But determining which corrpensatoc strategy best fits an organization's business strategy and culture as well as the exten':al cne5sures it faces may make the strategy more difficult to imitate. lt is the relaionship, the fiC the way a pay system works with other aspects of the organization, that makes h difficuh to lrritate and adds ,value. lt is not the techniques themselves, but their interrelationshlps that make a
strategic perspective successful.
I I
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KeY Terms competitive advantage
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32
Chaptu
t t t t I t I I t I I
2I
Strdr€,:
ruTaah,
"f
Mnons
Questions 1
.
.2,
Spend iome time looking at the website for Netf lix. What can you infer about the business strategy and the organizational culture? 'l
Find some information on does Netflix face?
the moviedW series rental industry. What external
pressures
3.
After you have a sense of what Netflix is like decide whether you think its compensation strategy fits its business strategy, organizational culture, and external pressures.
4.
How would you change compensation at Netflix?
F
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Nothing is routine at a CSl crime scene. And nothing is routine during the creation of the hit TV series, Every yeaL nine writers struggle to come up with a plot for the season finale that
will ensure millions of viewers tune in again next season. Carol Mendelsohn, one of three executive producers and also the "show runner" (the ultimate decision maker), leads the team of creative writers and manages the cast, support
crery and production crew. ln addition to the writers and actors, jobs on the series include director of photography, editor; story editor;'executive story editor; gaffers, and special-effecS makeup (severed heads and other body parts). What determines the pay for all the different types of work involved in creating C5l? Executive story editors get paid more than editors. How much more? Does it matter? Can an editor be promoted to the executive story editor for this or some other series? Writers can become
producers-Ms. Mendelsohn staned her career as a writer-but can stunt coordina-
tors become producers? ls the editor paid more than the stunt coordinator or the gaffer? And
what's a gaffer anywaY? What criteria are used to set pay-the content of the work itseli the value of what is contributed to each episodg the person's skill/experience/reputation? Perhaps the ratings for the show? How do pay differences between jobs in the organization affect behaviour? Do they support the organization's business strategy? Do they help attract and retain employees? Do they motivate employees
to do their best work? 0r are the pay procedures bureau-
that drive away creative talent? 5o many questions! Two of them lie at the core of compensation management (1) How is pay determined for the wide variety of work performed in organizations? and (2) How do the pay differences affect employees' attitudes and work behaviours? These questions are
. cratic burdens
examined within the framework of the pay model introduced in Chapter 1 and shown again
Chaprer
3|
Dcfning
InErul
37
LO1
COMPENSATION STRATEGY INTERNAL ALIGNMENT in a suategic approach. Internal alignmsnl second, addresses relationships inside *te organization- How do ' )i. Lr*.riUilitic of a vine fastener, pruner, or weeder relate to each other? How do they .:PTfd * P: rhe responsibiliries of r}rc cook, the $e ste11a, or.rhe accoun.T, : ;"; jobs inside an o_rganization form a job lir-. fr"*.ftolit Tl. relatioruhips among different behaurhar should suppolt the organization! strategt sa?Port the uorhflow, and motiuate obiecdves was our first pay policy issue
1,,
Ab"wt
"-*i.o i;, i":r"rJl eqniry), our
intemal alignment (inremal eguity) fie rdatfudrix bet*een tln joixwithh a ogan:zathn
'rele
;;r;.
objecdves' ,. ioar toward organization : r:--'' job a structure for the engineering and scientiffc work at an engineering shows 3.-1 Exhibir by rnmDA'v. The suucture indudes six levels that range from entqT to consultant, as evidenced six levels the much to pay how ofworlc Deciding level J. Ja"jonrtrips among rhe ddes for each
.,r 'creates a Pay stfuch[fe'
,r'GD pay shrcture the aray of pay ratrs fot dif-
wo* ot skills within a ingle organization; the number o( leve9 the differentials
ferent
Supports Organization StrategY Internal job strucnrres The organizarion's srategy indicates how it plr"s to achieve its purpose. decided that six levels of company engineering ir. The ro achieve h"lp rhe srrategy Ai"r.4],o *[in..rirrg work would suPPort the companyt stratesr of researching, designing, and developing advanced rcchnologY sYstems'
in pay
belwftn the
levels,
and the criteria used to deter-
nine
these differences
ffeate
th€ sfructure
Job Stnuctune at an Engineening Company
Engineer
Limited use
of basic principles and concepts. Develops solutions to limited problems. Closely
supervised. Senior Engineer Full use of standard principles and concepts. Frovides solutions eral supervision.
to
a variety
of problems. Under gen-
Systems Engineer
knowledge of other related disciplines.. Wide aoolications of principles and concepts, plus working-solutions ale imasinative, thoroush, and p;;;d;";i;ii;;; t" ; wid! variety of difiiculi problems. practicable. Works under only very general direction' Lead Engineer
problems that Aoplies extensive expertise as a generalist or specialist. Develops solutions.to complex direction. appreciable performed wjthout Work is creativity. and ot ins.niity ;J.il; th";;;;i;ft i*lr.ir"t consi-derable latitud-e in dltermining technical objectives of assignment'
Advisor Engineer Aoolies advanted principles, theories, and concepts. contributes to the development of new-prinsolutions thet are h.ighlv Hi-;;;"J;;"pt!. w.it i t" unuruilry complei problems and provides i;;;;"ti"";;Jiig"nious. Works undeiconsultative direction toward predetermined long-range goals. AssignmenB are often self-initiated. Consultant Engineer Applies and/or develops Exhibits an exceptional degree of ingenuity, creativity, and resourcefulness. technolog-ies, scienfrfic principles, theories. and concepts. Develops information ftiifrf" "Ju"n."i iriilii"g 5";;,aaries of icnowiedse in a. given field..often acts independentlv to il:t #;;;;il; .tto.i"t"O with thE develdpment and inlplementation of operational r;il;;"li;t
il;il;ln]
programs.
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PamI I InarnalAligflmcflt: Dcftrmining
38
IT !T
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Smcatrr
Supports Workflow refers to rhe process by which goods and services are created and deiivered to t]re customer. The suucture should support the efficient flow of that work and the design of *re organizadon.3 For example, drug companies traditionally basg t.he size of their sales force on the number of physiciaru to b. .rll.d In p.i a"y and. the number 3f *o.Li.tg days per year. The drug manufac-
V'orlflow
workflow process bywhich goods and
senices are delivered
b
the
customer
rurer Merck decided to mlce a non-tra&tional approach to organizing sales and markedng. Mercki analpis indicated that the abiliry of physicians to choose speci.ffc &ugs was being consuained by governrnenr regulations and company health plan restrictions r-hat conuol access to products for their members. Vith physicians no longer the sole decision makers, Merck created sales teams consisting ofaccount execurives, client representatives, and medical information scientists to serve a broader clienrele ofinsurance companies and physicians. A cross-functional team responsible for a distincr geographic area (rather than a list ofphysician-clients) provides a relationship-building approach ro selling products. Rather than handing out free samples, the Merck teams got to know rhe clienr and provided them witl up-to-date information about trends and research. . They became a source of knowledge useful to the physicians and the insurance companies. The teams keep cliena apprised of regulations and cover drugs for a wider range of medical conditions. One rcam even uanslared brochures that explain a coutse of reatment into Chinese, Russian, and Spanish for a physician whose patients induded non-English-speaking immigrants. (Of course, the ,..o-*.ttd.J ueaunenr did include Merck producrs.) Suci a response would have been beyond the resources of a single sdes representative under Merckt old approach. To suppon rhese new work teams, Merck designed a new compensadon structure. Pay differences binve.n account execulives, customer representatives, and medical information scientists who served on the same r€ams \Mere a major issue-just as tJrey had been for dre vingrard owner described in the parable, and just as they are for the engineers'
r t t t T
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LO2
Motivates Behaviour Internal job and pay suuctures influence employees' behaviour by providing pay increases for promotions, more challenging work, and.greater responsibility u employees move uP in the job 5ru*.. The strucrure should make clear the reladonships between each job and rhe otganiza' tioni objecdves. The abiliry for an employee to see the linkage berween what he or she does and *re organizationt suategic goals is often called line-of-sight. Ernployees should be able to "see" or ,rnd.rJtand links berween their work, the work of ochers, and the organizationt objectives. For example, sales representatives can clearly see how their work is helping to achieve a suategic goal of sales growth. e"a *. sffucrure needs to be fair to employees. The vineyard ownert internal ,*,ro1,rJ might have been aligned with his business strategy, but the employee dissadsfaction raises concerns about its fairness to employees.
I-
I
STRUCTUFES VARY BETWEEN ORGANIZATIONS
An internal pay srrucrure !s deffned by (1) the number of Inek of work, (2) the pay dffirentiah berween the levels, and (3) rhe criteia used to determine those lEvels and differentials. These are the faccors that a manager may varlz ro design a structure that supports ttre workflow and directs employee behaviours toward objectives.
Levels One feature of any pay srrucrure is its hierarchicd nature:the number oF levels and reponing relationships, Because pay srructures rypically reflect the flow of work in the organizadon, some iue more hierarchical wiih multiple levils and others are compressed with few levels.a As noted earlier, in comparison to the engineering companyi six levels for a single job group (Exhibit 3.1)'
a healthcare .o*p*y uses five broad levels, described in Exhibit 3.2, to cover all professional and execudve work,
I
; Chaprer3 | Dfining Intemal Al@mnt
Career Bands at GE Healthcare
BAND Associate professional Lead professional Senior Professional GE
Executive
;
NATURE OFWORK
Front line. administrative and secretarial Developing professionat Team leadqr, supervisor, or bxperienced lndividual contributor
Manager or seasoned professional
f,1"l"Hl|;trofignasement
team and/or indilidual contibutor with major
Driven by job scope, accounhbility, and skills
Source: GE Healthcare'
Differentials The pay difFerences benveen levels are referred to as diffetentials. If an organization has a compensarion budget of a ser amount to disribute among in employees, there are a number of wap lo do ro. It can divide the budger by rhe number ofemployees, giving everyone the same amount. But few organizadons in the world are so egalitarian, and, in most, pay rnries among ernployees. \?'ork that requires more human capitd--knowledge, skills, and/or abilides-that is performed under less desirable working conditions, and./or whose results are more valued is usually paid more than work with lesser requirements.S Exhibit 3.3 shows the differentials amached rc dre engineering company's pay sffucnue. One inrention of these djfferenrials is to motivate people to
srive for promodon to
a
higher-prying le.vel'
Criteria: Content and Value 'Work
content and work rralue are the most cornrnou bases for determining internd structures. Content refers to dre work performed in a job and how it gets don€ (us[s, behaviours, knowledge required, and so on). Value referc to the worth of the worh its relative consibution to the organi; zation objectives. A strucrule based on content typically ranks jobs on the basis ofskills required, complexity of tasks, and/or responsibiliry. By contrast, a strucnre based on the vdue of the work focuses on rhe relative contribution of the skills, tasks, and responsibilides of a job to the orgarrizationt goals. Although rhe resuldng suuctures rnay be the same, there are imporrant differences. ]n addition ro induding relative conuibudon, value may also indude ercternal market pressures (such as skills shonages). Or value rnay include rates that have been agreed upon tluough collective bargaining or even legislation (e.g., minimum wage). Job vdues across all organizations in i Cuba are set by a governmenr agency. The universal $rucrure dictates 8 Ievels for industrial work ' . ers, 16 levels for rechnicd and engineering workers, znd26levels for governrnent employees.
'
39
Ur. value reflects the vdue of goods of services an employee produces in a job. F;cchange value is whatever wage the employer and employee agree on for a job. Jobs such as software engineer mighc have rhe same use value but different exchange vdues if, for example,'one job is located in Bangalore and the other in New York, Job- and Percon-Based Structures A job-baied *ructareLools ar work sensslrs-gaslc, behaviours, responsibilities. Aperson-based ttruct ffe shifts the focus to the employee: rhe shilk, hnowledge, or competencia the employee possesses, whether or not chey are used on the panicular job the employee is doing. The engineering srrucrure (Exhibit 3.1) uses che work perforned as the criterion. The heakhcare suucnre (Exhibir 3.2) uscs the competencies required at each level of work.
differentials pay
job
diffuencu betvtren levels
T T
t
T T T
t T t T T T
t
195,000 185,000
s't82.4s6 Consultant
1
75,000
Engineer
1
55,000
155,000 145,000
$140.3s1
Advisor
135,000
g(!
E o
B o
Engineer
a)
28% Pg o
.Cl
11s,000 $109.649 Lead
J4
Engineer
o
.g
co
26% o
95,o0o $87.023 Systems
85,000
Engineer 75,000
$70.180
Senior Engineer
55,000 $-58.000
45,000
o
co
12s,000
55,000
J4
Engineer
Chaptcr
*a 1",
3|
Defning Intanal Alignmmt
is hard rc describe a job wirlout reference to *re job holder's knowledge In the real world, it it is hard to define a peco-at job.celated knowledge or competencies wir:hrt lUr. Conversely, ,.f*rrt to work content. So ratler than a job- or person-based suucture, realiry includes
borh job and Person'
=
Wl-lAT FACTORS SHAPE
INTERIUAL
Loa
STRUCTUHES?
structures are The maior organizadon facors-borh externd and internal-thar shape incernal facors might better be represented as a web, with all factors convariorx The 3.4. f*ttiLir i" Jfr"*" No single theory n.."a *a inreracdng, Fxacdy how these facors interact is not wdl understood. factors. competing cenain facors; others omit emphasize for all factors. Some rheories
.**"
What Shapes lnternal Stnuctures?
41
J J
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Partl I InernalAligrrne* Damhittg&c Stretwe
42
Economic
Pressures
'i
Adam Smith was ar early advocate of lecdng economic marlcet forces influence pay srructures. Smith ascribed to human resources both an exchange value and a use value. Exchange value is whatever wage the ernployer and the employec agreepn. Use value reflects rhe value of the goods or services labour produces. New technologies associaied with rhe Indusuial Revolution increased the use value of labour virithout a corresponding increase in exchange ra.lue. Karl Marx accused capimlistic economic s)rstems of basing pay structures oq gxchange value.6 He said that employers unfairly pocketed the surplus value creared by rhe difference berween what owners were willing to pay workers and what owners earned from workers' efforts. He urged workers to overthrow capitalistic systems in order to reap the benefits of their labour and become owners themselves. In solne sense, broad-based stock ownership by employees is following Marxt suggestion that employees become owners. marginal productivity
theory the theory that unless an
employeean produce something of value from
hbher job equal to the value received in wags, it will not be wofthwhile for an employu
to
hire that
enployee
In the face of rising wages in the last half of the 19th century, new theories began to examine the demand for labour. Marginal productivity theory says that employers do in fact pay use vdue.7 Unless an employee can produce a value equal to the value received in wages, it will nor be wordrwhile for *re employer to hire that worker. Pay d.lfferences among the job levels reflec differences in use vdue associated with different jobs. One job is paid more or less dran another because of differences in reladve produ$iviry of the job and/or differences in how much a consumer values the output, Hence, differences in productivity provide a rationale for t.he internal pay structtue. In addidon to supply and demand for labour, supply and demand for producu and services aiso affecs internal suuclrues. Rapid, often rurbulent changes, in eirher compecirors' producs and/or services (as in the rise of the Incernet for making purchases) or in cusromers' rastes (as in the populariry of fuel-efficient vehicles) means organizacions must be able to redesign workflow and employees must condnuously learn new skills. fiubulent, unpredictable ocernal conditions require pay srructules that support agile organizarions and flexible people.8 For ocample, jobs requiring concinuous learning may be paid more than others, as thqf are so important for *re achievcment of scrategic goals.
Government Policies, Laws, and Regulations
,@
In Canada, human rights legislation forbids pay systems that discriminate on the basis of gender, race, religion, serual orienation, national origin, arrd many ottrer grounds. Therefore, a benefit plan that provides beneftts only to males over the age of35 is illegal. Pay equity acm require "equal pay for work of egud value," in male- and female-dominated jobs based on a job evaluation process tlat considers the skill, effort, responsibiiity, and working conditions requir.ed for the jobs. For example, male-dominated police jobs and female-doririnated nursing jobs have often been found to require egual skill, effon, responsibility, and working conditions, and the nurses pay has been increased to dre same level a.1 that of police officers. An ioternal $rucrue may contai[ any number of levels, with differentials of any size, as long as the criteria for sening them do not include gender, race, religion, or national origin. Much pay-related legislation attemprs to regulate economic forces to achieve social welfare objectives. The most obvious place to affect an internd sffucnrre is at the minimums (minimum wage legislation) and maximums (special reporting requiremenc for executive pay). But legislation also aims at the differendds. Most countries have various legal standards regulating pay structures. '$Thatever thqz are, organizations operating
within
these countries must abide by them.g
External Stakeholders Unions, stockholders, and even political groups have a stake in establishing internal pay structures. Unions are the most obvious case. Most unions seek smaller pay diffcrenccs among jobs as well as senioriry-based promotions in order to promoti solidariry among members. At a minimum, unions seek to ensure that the interests of their members are well represented in decisions about strucrures.
t.-
Chapra
3 | Dfining InteraalAlignmnt
43
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pay artencion to execudve pay. The linkage (or iack rhereof) between execStockholders also 'Western performance has come under incrasi.ng public scuEiny as organizaion tive oAy
nd
have faced ongoing economic problems in recent years. Boards of direcrors have been reduce executive pay when suategic outcomes ale not being achieved, and panicuro l..rr,rr.d tlrrl' rrrh.n profits have not materielized. Execudvc pay reduccions ar Molson Coon in 2010 are in che 'Net W'onh box'
.r"";i*
fr"nf.a
Cultures and Customs
F F T
Culrure is the shared norms and values that a group of people share in cornmon. Such shared judgment of whar size of pay di-fferenriel is fi.ir. In ancient ,oindr.r, within a society may forrn a :ue strongest when dre richest earned a maximum of four socieries Greece, Plato dedared that a favoured five-times limit. Aristode pay. dmes rhe lowest Western Europe, ctre church endorsed a "just wage" in l4tl-cenrury how describe Hisrorians the exisdng class strucn[e in the sociery. The docthat supported of wages strucrure a docrrine, chaos resulting from ttre death of one-third of and social the economic to end effon an trine was The plague. shonage of workers thar resulted from r-he devastation bubonic from populadon rhe to bid the wages for surviving craftspeople. By allowing the church up landholders and nobles led and royalry ro determine wages, market fories such as scarcity of skills were explicidy denied as appropriate determinants of pay suuctures.
t I
Molson Coors Executives Take Pay Gut The beer industry has faced lower sales volumes due to the impact of the global recession. Despite a slip in sales volume, Molson Coors increased its share of the Canadian
beer market by nearly one percentage point in 2010, and it remained the secondlargest brewer with about 40 percent market share. Coors Light was the top-selling brand with 14 percent market sharg while Canadian was No. 3 with 8 percent the
in its annual report. lncome from continuing operations decreased to $668.1 million from 1729.4 million despite a 7 percent rise in revenues to
brewer said 8.4 percent
$3.2s billion.
ln light of the decrease in profits, Molson Coors Brewing Co. executives took pay cuts amid last year's slump in results, with chief executive Peter Swinburn's total remuneration slipping 18 percentto U5$7.76 million from $9.45 million. Swinburn's base salary increased to $941,667 in 201 0 from $875,000 in 2009, and increased again to $1.07 million
on April 1,2011. Howeve4 stock awards and cash incentives decreased to $a.tg million from $5.5 million a year earlier. Molson Canada CEO David Perkins's remuneration decreased to $3.56 million from to $532,000 but stock awards decreased to $630,000 from $1 million. Non-equity incentives, stock awards and pension changeV deferred compensation all increased. other compensation was down by $574000 from 2009, when he was appointed to head the Canadian division. $4 million in 2009. His base salary increased
Chief financiai officer Stewart Glendinning's
total remuneration
I
decreased to
$2.58 million from $3.15 million in 2009. Source: G. Hughes, "Molson Coors Execs Take Pay Cuts," Ihe Canadian Press, April 18, 201 1.,
T
t T t t T T T T T T T
!I I
tr F
h T
M
Parrl I
,6@
Intetnal
Alignnat Datmining dn
Structure
Even today culu:ral factors continue to shape pay sffucnues around dre world. Pay equiry is a Canadian example in which advocates have been changing societal judgmena about what constitutes a just wage. These judgmens change in response to pressure. For example, many traditional Japanese employers emphasize senioriry in their internal pay structures. But pressures from global compedtors and an aging workforce have made age-based pay strucilres yery expensive. Consequendy, some Japanese employers are shifting older employees ro lower-paying business units, emphasizing perfornance, and downplaying senioriry.l0
Organization Strategy The last chapter explained that organizatioh suatcgics influence internal pay suuctures. Different business suategies may require different pay srucrures to support them. The basic belief of a strategic perspective is that pay strucrures not aligned with the organization strategy may become obstacles to the organizationt success. An empirical study of 449 organizatiors conduded thar "compensation professionais can substantially improve the effecdveness of their pay programs by focusing on aligning their reward philosophy, stratery arrd coinpensation policies, programs and practices with their business stratery"ll 6. il
Organization's Human Capital human capital the education, a
Human capital-the education, experience, knowledge, abilities, and skills that
people major influence on internal sffuctures.12 The suonger the link bemreen these skills and o
possess-is regarded
as a
Organization and Work Design
in
producing goods a4d services influences the organizational design, the to perform tle work. The technolory required ro produce medical i*aging machines differs from that used to manufacture cupets. Such differences conuibute to t'he different strucrures in Exhibits 3.I and 3.2. The dcsign of organizations is undergoing profound changes. A lot of people who work in organizarions are not employees of those organizations. They might be employed by either a supplier (such as an IT supplier) or perhaps a temporary stalf supplier (such as Manpower Services). Or rley might be working under a temporarl conuact for a limited amount of time or on a limircd project. The security guards, software engineers, or accountants rnay be supplied by outsourcing specialisu. Pay for these people is based on the internal sffucture of their own employer. Ano*rer major work design change is delayering. Entire levels of work have disappeared at HP because of complaints about slugish response to customer needs. Levels of managernent wirc cut from 11 ro 8, and custome$ immediately applauded the reducdd response time.l3 Delal'ering can reduce unnecessarywork that does not conribute to strategic objectives. It can also add wo* to other jobs, enlarging them. Through the use of self-managed work teams in production work, entire levels of supendsory jobs are removed and the responsibility for their decisioas is delegated to the teams.14 Self-management changes the vdue ofjobs on the team and hence changes the job structure.
Gchnology used
worlc ro be performed, and the skills/knowledge required
Overall HR Policies The organizationt other human resources policies also influence pay structures. Most organizarions tie money to promotions to induce employees to apply for higherJevel positions. If an organization has more levels, it can offer more promotions, but there may be smaller pay
Chapter
3 | Dfrning
Intenat Alignnuzt
beclreen levels. The belief is that more frequent promotions (even without signiffdjfferendals offer a sense of.career Progress to employees.t5 l^-o, p^y increases)
lnternal Labour Markets: Combining External and Organizational Factors combine borh externd and organizational facrors. Internal labour marInternal labour marhets that (1) determine the pay for t.he different jobs wirhin a sinprocedures and nrles thc ro ke,, refer (2) allocate employees to *rose differenr jobs.t6 fu depicted in Exhibir 3.5, and ol.- orEarizacion and only for specific entry-level jobs (an engineer would be recruited hired to be rend i.',auiiurtr a senior engineer would have a few years' experience), and are later ofuniversity; our right hired jobs. Because the employer competes in the o
internal labour martEts rulaand
g"{,?d,refut
#-
determine tire pyiw fgrentiobs Hrdlrr a slngre
uganbtian
endq$b
ard;larfu.E lhoe
€irfier-
entiofu
inrernd factors'
lEffig.5Tlllu"t
"tion
of
"n
I I I I
lntr.n"l L"bou, M".k"t r;rr'..:.t:,.;...'r.''.'.,.-
-
t t I
T
t t -
-
I
I
Partl I Invnal Aligmax
45
T
I T r
*e Sruenn
Employee Acceptance: A Key Facto
de fairness of their pay through comparisons with the compensation paid orhwork relaied in some fashion to rheir own.l7 Accordingly, an impomanr factor influencing the internd pay strucrure is its acceptabiliry to.che employees involved.ls Employees rnake muldple pay comparisoru to assess the fairncss of an internal pay strucrure. They compare their pay to that for other jobs in the same internal job suucrure and ro the pay for rheir job in the Employees judge crs for
,#@
e:
.
Sally is a soft-spoken, solid citizen and performer who quietly takes what she is
tlat rnight
given-which is
be
less
than she deserves. Hot shot Mark was hired at a ridiculous premium. Deirdre's pot was sweetened when she threatened to quit. Tom's salary was enhanced following the successful completion of an imporunt project-as a kind of thank you. Bart, who is a decent performer, hasn't gotten a raise in two years because of his misfortune of working in an underachieving division. Lionel has been with
f,
t !t
@
the company forever and has proiited through the cumulative effeqts oftime.2o Tryo aspects of fairness are important: the procedures for determining rhe pay strucrure, called.
ju:tica and the results of those procedures-the pay strucrure itself-called dbtribujasrtce. tbe Procedurd justice refers to the process by which a decision is reached. Distributive justice refers to the fairness of t.he decision outcome. Researchers report that employees'percepdons ofprocedural fairness significandy influence cheir acceprance ofdre results. Employees are more willing to accept lower pay if they believe thar the way the decision was made was fair. The research dso suggests riat pay procedures iue more likely to be perceived as fur if (1) rhey are consisrently applied to all employees, (2) employees participate in the process (altlough recent research suggesrs an exception when wages :ue very lo*),21 (3) appeals procedures are included, and (4) the data used are accurate. Appligd ro internd structures, proceduri justice addresses how design and administration decisions are made and whether procedures are applied in a consistent manner. Distribudve justice addresses whether dre acrual pay differences among ernployees are acceptable.
procedural procedural justice faimess of a procas by whidr a deciion is reached
distributive justice faimss of a deciion outcone
Pay Structures Change As previously noted, pay structures change in response to changing external pressures such as skill shortages. Over time, the distorted pay differences become accepted as equitable and customary;
efforts to change them are resisted. Thus, pay structures established for organizational and economic reasons at an earlier time may be maintained for cultural or other political reasons. It may take another economic jolt to overcome the cultural resistance. Then, new norms for emplciyee acceptance are forrned around the new strucrure. This "change and congeal" process does not yet support the continuous change occurring in todayi economy. New norms for employee acceptance probably will need to indude recognition that people must get used to constant cfrange, even in internal pay reladonships. The pay for airpon securiry screeners reladve to other airpon jobs illustrates the change and congeal process. Prior to 9/11, airport screeners were paid minimum wage witJr no beneffts. Today, wages are comparable to police and fire protection jobs. Employees in other airport jobs had to revise their comparisons to the securiry jobs.z2
LO4
IT
STRATEGIC CHOICES IN DESIGNING INTERNAL STRUCTURES
Internally aligned pay structures support the way the work gets done, fft the organizationt business tair to 'employees. Greater internd alignment-ftt-is more likdy to lead ro success. Misdigned strucrures become obsades, They may motivate employee behaviour that is inconsisrent
suetegJr, and are
!4.:
Chapter
J I Dfining IntemalAlignmmt
47
strateg)r. But whar does it mean to ffr or ailor rhe pay suucg111e ro be wirh rhe organizadont suaregic choices are involved: (1) how tailored ro organization design and. Tho aligned? inrernally structurc and (2) how to disqribute pay tluoughout rhe levels in the su!61|lre. woldlow ro rnake the
Taitored versus LooselY CouPled
A low-cost, cusromet-focused business suat€gy such
as chat followed by McDonaldt or !7almarc tailored stmcture, Jobs are well defined, wirh detailed msks or steps 69 follow Anyone going into a McDonaldt in Vancouver, Prague, or Shanghai will find that they all are very similar. Tlejr p1y suuciures are, too. The customer repr€senradve-and the food pr.p*io. jobs are very well defined in orrder to eliminate variabiliry .in how they are performed. The amounc of k ,.}tup that goes on the burger is pre-measured, and even the krys on rhe cash register are labelled wirh menu itcms rather than prices' And the difference io pay benveen jobs is relatively small. In contrast to McDonald's, 3Mt business strategy requires constanr producr innovarion and may be supponed by a dosely
:
short product t'esi8n-m-1a1ket cycle times. Companies ftke 3M need to be very agile, constantly innovadng and adapting. The compedtive environment these organizations face iirurbulent and unpredictable. The.ir engineers may work on several teams developing several producrs at dre same time. 3Mt Pay system needs to accommodate this flexibiliry. Hence, they need a more flexible pay suucrure, often called a loosely coupled structure, in order ro allow for rhe consunt change.
tailored structure pay structure for well4efined iobs with relatively smalt differences in pay
loosely coupled structure
jM
pay structure fu ttlat are fles
Egalitarian versus Hierarchical from egalirarian at one exueme to hierarchical ar the other. Egalitarian suuctures have fewer levels and smaller differentials benveen adjacent levels and between the highest- and the lowest-paid workers. Exhibit 3.6 shows some variations in strucnrres, Structure A has eighr different levels, with relatively small differentials in comparison ro suucrure B, which has only three levels. Strucrure A is hierarchical in comparison to the egalitarian suucture of B; Pay structures can range
the multiple levels rypically indude detailed descriptions of work done at that level and deli11eare who is responsible forwhat. Hierarchic'l structures are consistentwith a belief in the motivadonal effects of frequent promotion. Hierarchies value rhe differences in individual employee skills, responsibilities, and conrriburions to rhe organizarion.z3
Structures Vary in Numben of Levels
STRUCTURE A LAYERED
Chief
STRUCTURE B DELAYERED
Engineer ,
Ctriet Engineer
Engineering Manager' Consulting Engineer
't':
.:
.,
,'
.
Senior Lead Engineer Lead
Engineer
:
Consulting Engineer
Senior Engineer
''.' Engrneer . Engineer
E
:
Trainee
1'
:
Associate Engineer
"I I I I I I I
I
I I I f I I I
I I
t f
48
Den
I I Intanal Aligmtzt
Dccmizhg dx S*act t
"
Struccure B can also be characterized as "dclayered," or compressed. Several lwels of respon_
sibility and supervision are removed so that all employees at all levels become resporuible ior
a
broader range of tasls, but also have greater freedom to determine how best to accomplish what is expected.of them. An egaliurian suucture implies a belief thar more equal tre"t*.r,t improve employee sadsfaction, supporr cooperarion, and therefore improve workers' performance.24 Stantec Inc., an Edmonton-based engineering consuldng company, includes the following in irs compensation objectives:
*i[
Take a one leam Approach-Members of our senior management team are expected to work together to contribute to the success of the Company as a whole. Our compensation program should reward both individual and Company-wide achievement of objectives.
.
. LO5
Accordingly, executives have lirde variance in thet pay; base salary for the highest-paid ffve executives ranged from $275,009 rc $386,366 in 2010.25 There are drawbacla to this approach. Equal treaunenr can resuh in more knowledgeable . employees with more responsible jobs (stars) going unrecognized and uruewarded, which may cause them to leave the organization. They mayleave physically for anodrer job, or thry may simply slack offor tune out and refixe to do anything not specifically required of tlem. Their change irl behaviour will lower overall performance, So a case can be made 51 6ofl1 'gqlitarian and hierarchical suucgtues. Exhibit 3.7 clariffes the differences between egalitarian and hierarchical strucnrres. Keep in mind, though, the choice is not cithcr/or. Rather, the differences are a maner of degree, So levels carr range from many to few; differentials can be large or small, and the criteria can be based on the job, the person, or some combination of the rwo. The question to be resolved is: \Vhat size should the pay differentials be benveen the adjacent enginceiing levels? Exhibit 3.8 shows that the differentials between engineeringjobs range from $10,500 (Engineer to Senior Engineer) to $42,000 ($dvisor Engineer to Consultant). Both the :rmount and.rhe percenrages increase at each level,
I__I
GUIDANCE FHOM THE EVIDENCE
Before rnanagers recommend which pay srrucnue is best for
tleir
organizations, we hope they
wili look not only at r.he hsors in their drganization, such as workflow, what is fait, and how to motivate employee behaviour, but dso look to theory and research for guidance. Bodr psychologisa and economists have something to tell us about the efiFects of rnrious srrucrlues.
EXHIBIT
3.7
Strate gic Choice : Hierarchical vensus Egalitania n
E!r
Chaprcr
3 | Dfiniag InunalAlignc*
Pay Differentials
Dollars (bonus + base)
Job
-
Consultant
$162,000
AdvisorEngineer
$120,000
Lead
Engineer
Senior
$73,000
Engineer
$58,500
Engineer
Percentage
rl
II
$+8,OOO
Equity Theory: Fairness As noted earlicr, employees judge the fairness or equity of their Pzy by comparing it to that for othcr jobs at their own employer (internal equity) arrd to that for jobs at other employers (external cguiry).A recent srudy of 2,000 teachers found that those higher up in the internal pay strucnre perceived the srrucnrre as fair, and that lower-paid teachers perceived it as fair ifthey worked in a highly paid school disuict. The resulm &om these cornparisons depend in part on the accuracy of employee knowledge of other employees' jobs, internd strucnues, and external pay levels.% Ttachers' pay schedules are generally public knowledge, but rhis is seldom the case
-
'1
i
I
II IJ
J
$93,000
Engineer
Systems
Differential
Dollars
49
-
in private organizarions. Past research has shown that employees are often misinformed about their relative standing in the pay structure.27 Thus, equity theory might suppon eirher egditarian or hicrarchical sructures, depending on the cornparisons and the accuracy of information about them.
Tournament Theory: Motivation and PerformancE Ecbnomism have focused rnore direcdy on the motivationd effects of strucrures. Their starting point is a golf tournamenr arwhich *re prizes rotal, say, $100,000. How thar $100,000 is disuibuted affects rhe performance of all players in t[e tournament. Consider three prizewinners, with rhe first-place winner getring over half rhc purse, versus ten prizewinners, widr only slight differbnces in the size of the purse :rmong rhe ten. According to (ournarnent theory all piayers
I I I I I I I I
t t
t
50
Partl I
Internal
Aligwnat Dntubiry
dte Strudurt
play bercer in toumamens in which the prize differentials are sizable.2s Sorne research srp* porrs rorunamenr rheorF. Raising the total prize money by $100,000 in the Professional Golf Association rournament improved each playert score.29 And *re closer the players got to the top prize, the more
&ply*g
tleir
scores improved.
these resule
to organizadons, the grg.ter the differendal berween an employeet
presenr salary and his or her boss's salary, the harder the employee (and everyone else) will worlc. Suppose that the engineering suucture contains ten advisor engineers at the second-to-the-top
$i20,000, and each compering for rwo consultant posirions, forwhich the pay is $162,000. A tournamenr model says that if the consultanrs instead are paid $200,000, everyone will work even harder. Rather than resenting the big bucks paid to the consultants, lerrel, each making
engineers at all levels in the suucture will be motivated by the greater differential to work harder to "wirf' prornotion to the next lwel. But most work is not a round of gol4 nor does it lead to the company presidency. Vinually all the research that supporrs hierarchical structures and tournament theory akes place in situations in which individud performance matters most (e.g., auto racing bowling, golf tournaments), or ar be$ in which the demand for cooperation among a small group of individuals is relatively low (e.g., professors, stoclSrokers). In contrast, team spofts provide a sefting in which both individual players' performance and the cooperative efforts of the entire team make a difference.30 Using eight years of data on majorJeague baseball, one study found that teams with egditarian suucflnres (practically identical player salaries) did better than those witl hierarchical srrucrures (very large differentials bewveen plafrs). In additiou to affecting team perFormance (e.g., games won, gaie receipts, frandrise value, total income), internal suucnrres had a sizable effect on players' individual performance (e.g., batting avcrages, errors, runs baaed in). It may also be that the egdirarian pey sffucture reflec$ a more flecible, supportive organizational culturc in.which players are given the raining and support they need.
lnstitutional Theory: Copy Others Internd pay strucf,ures are sometimes adopted because they bave become so-called "best practices."3l Organizadons simply copy what odrers are doing. Rccent examples of such "benchmarking" behaviour indude outsourcing and competency-based pay q/stems adopted without regard to wherher these practices fft the organization or its employees and wherher they add value. Institutional theory predics t-hat very few fums are 'Erst rnovers." Instead thry copy innovadve practices after innovators have learned how to make the practices worlc The copiers have limle concern for alignment and even less for innovative pay practices.
{More) Guidance From the Evidence Exhibit 3.9 summarizes the effects amibuted to internally aligned
. . .
.
suuco.:.res,
which are:
More hierarchical structures are related to greater performance when the workflow depends more on individual contributors (e.g., consulting and law practices, surgical units, stockbrokers,
wen unii'ersiry researchers).
High performers quit
less under more hierarchical systems when pay is based
on perfor-
mance rather than seniority and when people have knowledge of the structure. More egalitarian suucrurcs are related to grearcr performance when close collaboration and sharing of knowledge is required (e,g,, fireffghting and rescue squads, manufacturing teams, ' hod customer service staff, global software design rcams). The competition fostered in "winner take all" tournament hierarchies appears to have negadve effecs on performance when : the workflow and organization design require the odrer strucnrre on organization affected by internd perforrnance is The impact of any dimensions of rhe pay model pay Ievels (competitiveness), employee performance (conuibutions), and employee knowledge of the pay sffucture (management).
teamwork
t"
Chapter
3 | Dlfuhg i@rd Atglnlu:tr
Some Organizational Outcomes of lntennally Aligned Struch,rre
5lt
I
t
I
-fl Undertake training lncre6se experience Reduce turnover
Facilitate career progression Facilitate performance
-
Reduce pay-related grievances Reduce pay-related work stoppages
E '. . ,
Beyond these points, much ;ggleins to be srudied, There is praccically no research on r.he optimal size of the promotional increase or its effects on behaviours, satisfaction, or performance. Nor is much known about wherher smaller, more frequent promotions are befter (or worse) than fewer, larger, les frequent promodons. Perhaps informal expectations are developed at each workplace. ("You can er.pec to be promoted here after about three years, and a 10 percent raisc usually goes with it.") Lide is known about how these ru.les developed and what rhe origina.l logic was. Buc they do rnat[er, Promodons sooner (or larer) tharr enpe*ed, accompanied by a larger (or
t
-
t
smaller) pay increase, send a powerfirl messag€. So what size should the pay differentials be berween rhe adjacenr levels
within the engineering company? To answer this question, it is necessary to understand how differenrials within the career path support the business suategy aad worlflow, motivate engineers to conuibute to the company's success, arrd are considered fair by the engiaeers. The ne
IT
GONSEOUENCES OF STRUCTURES
LO6
'Why
The "so what?" question and the pay model worry about internd alignment at all? \fhy not simply pay employees whatever it takes to get rhem to take a job and show up for work every day? Why not let external market forces and what competitors are paying determine internal wage differentials? Or why not let a governmetrt agerrq decide?
Efficiency that an aligned pay strucilre can lead to better organizacion performance.32 If ihe structure does not motivate employees to help achieve the organizationb objectives, then ir is a candidate for redesign. lnternal pal strucilres irrply furure rewards. The size of the pay differential between the entry level and rhe highest level in the suucnrre may induce employees to remain widr the organization, increase theiiexperience and training, cooperarc with co-workers, and seek greater responsibiliry.33 Thus, rhe number of levels and tides in a career parh may be rewarding beyond the pay aaached rc the tides. Microsoft added a "distinguished engineer" tide to its strucnrre. The coruulting firm McKinsry and Company added an "associate parmer." Their ruionalc was that cmployecs are morirrated by &eguent steps in the career ladder. These a.re new tides and levels not yct reflected in the cxternal market. Research shows
,@
I I I I
t
I
PanI I IntcnalAlignnc*
52
MhE*Ssltan
Fairness
Vrirers have long agreed thar departures from an accepcable wage structure will result in higher turnover, grier"ances, and diminished motivation.3a But that is where agrcement ends. Onc group if fur (i.e., sizable) diffcrentials .betwecn iobs are not paid, individuals may harbour ill will toward the employer, resist change, change einployment if possible, become depressed, or "lack rhat zest and enthusiasm which makes for high efficiency and personal satisfacdon in work.'35 Others, including labour unioru, arguc for small differendals, in the belief that more egalitarian structures support team cooperation, high commitment to the organization, and argues rhat
improved' performance.
Legal Compliance decision, che design and management of intcrnal pay structures must comply with thc regulations of the countries in which the organization operates. Although the research on internal alignment is informative, there is sdll a lot *rat is not.known.'Sf'hat about tfie
As
,#@
with any pay
appropriate numbcr of levels, thc size of the differentials, and the criteria to advance employees ,hro"Sh a strucrure? It is believed that the answers lie in undersunding the Ectors discussed in rhis chapter: the organization's strategic intent, organization design and worldlow, human capital, and the external condidons, regulations, and customs it faces. It is also bclicned that aligning the pay structures to fit the organizadon and thc surrounding conditions is more likely to lead to
competitive advantage for the organization and a sense of frir trcatment for employees.
E
Gonclusion
This chapter discusses the strategic policy of internd alignment and how it affects employees, managers, and employers. Internd alignment refers to the pay relationships-among jobs, skills, within a single organization. The potential consequence$ of internd Pay struc*d "omper.ncies rures are vital to organizations and individuds. Recent research and ercperience offer guidance concerning the design and management of internal Pay smcrures. Pay sio.turo-rhe array of palz rates for different jobs within an organization-are deffned by levels, differentials, and the criteria for determining these. Pay structures are shaped by socieal, economic, organizational, and other facors. Employees judge the hirness of pay strucrures by comparing their pay to other jobs within the organization and to what competitors Payfor pay differentids between jobs is a key test of an lobs similar to theirs. Accepmnce by employees of eguirable pay srrucrure. Pay structures rue part ofthe network ofreturns offered by organizations. TLey offer career paths to higher-paying jobs and a sense ofachievement. The goals of che entire comperuation system must be kept in mind when thinking about internal p"y rttt-,*.r. Widespread orperience and, increasingly, research suPPort the belief that differences'in internal p"y rtrrr"r,r..r, particularly employee career paths, influence people'i aaicudes and work behaviours,.and therefore the success oforganizations.
tl 1.
2.
Chapter Summary Internal alignment refers to t}le pay relationships between jobs, skills, and competencies wirhin a single organization. The relationships form a suucture rhat supports organizationd srrarery, supporrs t.he worldlow, ald rnocivates ernployee behaviour toward organization objectives. A pay structure is the array of ^pay rates for different work or skills' The three types offactors that define how internal pay structrues are designed are (l) the nurnber of levels of work, (2) rhe pay differentials between the levels, and (3) rhe criteria used to determine these levels and differentials.
Chaptcr
3 | Dfining Incrnal Alignnnt
The Fecors rhar shape inrcmal pay strucrures are: (1) external hctors such as economic pres(2) organizational factors sur€$ goverilnen.r policies, laws, and regulario_ns, and ctlture and 5f .i t "rt.gt, human capital, work design, and employee accePence. Tle rwo snaregic choices involved in designing internd pay srruffures are: (1) how closely to lok ghc paF srruauIe to organization design and worldlow (tailored or loosely coupled) and (?) hwr ro di*ribute pay droughout the levels in the structure (egalimrian or hierarchical). Thrc deoredcal approaches to determ.ioing which pay structure is best for an organization arc equiry 6cory tournament rleory, and the institutional model' Equiry rheory focuses on hcr employees compare their work, qrrrliff64gien5, and pay to those of orhers. Tournament dcory suggcsrs dat the greater rhe differences beween salaries in the pay strucnrre, the harder cmployees will work. Irudrurional theory suggests that organizations copy the "best pracdces" of others. nces
?ho. .o*.q,t
of an internally aligned pay suucnrre are efficiency, fairness, and legal
comPliance.
Key Terms differentials distributive justice
internal labour markets
human caPital
marginal productivity theory pay structure
loosely coupled structure
internal alignment (internal equitY)
Review Questions Why is internal alignment an important compens€tion policy? What happens when a compensation policy is not intemally aligned? Judging from your own experience, which factors shaped the internal pay structure at your most recent employer? Provide examples that support your choice'
Would Researdr ln Motion, makers of the BlackBerry be better served by a tailored pay gtructure or a loosely coupled pay stnrcture? Explain your arlswer. Explain the consequences of internal alignment for competitive advantage, fairness to employees. and legal comPliance.
Experiential Exercises Look into any organizatiot{our university/college, workplace, or the grocery store where you shop. Describe the flow of work. How is the job structure aligned with the organization's business, the workffow and the organization objectives? How do you think
it influences employee behaviours? Prepare a list pay rates.
of at least five Canadian laws at various levels of government that impact
Itlustrate the internal labour market for faculty at your university/college, using Exhibit 3.5 as a guide.
53
II II J
J J
II I I I I I
T
I
T
I f
54
Paml I InnrnatAlignze* Dcterttining
the Structan
Case The Orchestra
f"
Orchestras employ skilled and talented people, joined together as a team to create products anfl services. Job descriptions for orchestras look simple: Play the music. Molins play violin parts; trumpets play trumpet parts. The pay structure for a regional chamber orchestra is shown 'b-elbw. The pay covers six full orchestra concerts, one Carolling by Candlelight event, three Sunday Chamber Series Concerts, several Arts in Education elementary school concerts. two engagements for a flute quartet, and one Ring in the Holidays brass even! as well as regularly scheduled rehearsals. Orchestra Compensation Schedule
INSTRUMENT Concertmaster Principal Bass and Conductor Principal Viola Principal Flute Prlncipal Trumpet Principal Cello Principal Clarinet
Molin,
PAY
$5,790 $5,070 $5,036 $4,337 $4,233 $4181
i4,146
Trumpet
$s,e:e
Principal
$3,615
Oboe Principal violin ll Prirrcipal Horn Keyboard I Cello Principal Percussion Violin I cello Principal Bassoon Violin I Violin I Violin I Violin I Violin ll Violin ll viola Viola oboe Trombone viola Violin ll Violin llA/iola
$s,+as $3,390 $3,361
$3,228 $3,049 $2,899 $2,882 52,824 $2,685 $2,483 $2,483
j2,483 $2,483
iZ,qe3 $2,4s3
i2,212 $2,20G
i2,137 $2,033
$t,szs $1,784
.E,-
Chapter
3 | Defning
latcrnal
Alignmnt
55
Questions
1. Z.
Describe
the orchestral pay structure in terms of
levels, differentialt and
job. or
person-based. Discuss which factors may explain
the structure. Why does a member of Violins I receive
more than the oboist or trombonist? ls
it
because the violins play more notes? Why does
the principal trumpet player earn more than the principal cellist and clarinetist, but less than the principal viola and flute players? what explains these differences? How does the relative supply versus demand for violinists compare to the supply versus demand for trombonists?
3.
How well do equity and tournament models apply?
ffi*
Practise and learn online
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T
I I tI
I I f-
I I I
LEARNING OUTCOMES LOl
Explain job analysis and why
it has been called the cornerstone of human
resources management.
LO2 Describe the step-by-step approach to conducting conventional job analysis.
LO3 Describe the information that must be collected for job analysis and explain recent changes iri how this information is collected.
the differences between job descriptions and job specifications,
LO4
Discuss
105
Explain the pros and cons of job analysis and different ways to judge
job analysis.
Three people sit in front of dreir keyboards scanning their monitors. One is a sales representadve in Montreal, checking fie progress of an order for four dozen smartphones from a retailer ir Vancouver, who has just placed tlre four dozen into his shopping can on the companyk website. A second person is an engineer, logging in to the project design sofrware for the next generation of these phones. Colleagues in China working on the same projeo last night (day in China) sent some suggestions for changes in the new design; tlre team in Canada will work qn the project today and have their work waiting for their Chinese colleagues when they come in to work in the morning. A third employee, in lreland, is using business sofrwa.re recently installed worldwide to analyze the latest sa,les reports. In todayt workplace, people working for the same company need no longer be down the hallway from one another. On-site or overseas, nerworks and business software link them all. And ill these jobs are part of the organization's internal structure.
If pay is to be based on work performed, some systematic method is needed to discover and describl the differences and similarities among drese jobs-observation alone is not enough. Job andysis is that method
E'
Chaprer4 | JobAnaSsit
57
STHUCTUBES BASED ON JOBS, PEOPLE' OF BOTH
ti":T.
::1
!:qt1.t:"f:t 1f:*
;il;;;;r.t*ination
II
ilil;j .lJ J*.
and person-based structures:.(1) collect,an1,T""Tt:t t*t*."t:"i"Sat identiffcs (3) ;,li"J"riri.r"*a differences in jobs, (2) determine *q t: valued about th; lob, quanti$ the (The blank jobs an internd stru€ture' of into (4) vdue relarive uanslate jobs, and *f"rJ.u1u. of and chapter This 6.) get to Chapter in when we frlled will be s*ucrure fI,." f", rhe peison-based job-based struclure' the on next focus
i ffi.,o5.
lhe
Many Ways to Cneate lntennal Job Structure
k
I
t
I
Business and Work-Related
lnternal Structure
/
/
/
Job-based I
\ \
I I
Person-based
/\ /\ /\ Skill (Chapter 6)
ComPetermtus
(ChaPw
61
I
PURPOSE
f f
I
I Collect, summarize
work information
Job analysis Job descriptions (Chapter 4)
I I
* Determine what to value I I I
Y
Assess value I
I
I
I I
Job evaluation: classes or
compensable factors (Chapter 5)
I
Factor degrees and
weighting (Chapter 5)
I
+
Translate into
structure T
I
J tl
job .:-b: 4.1 oudines m1pro.Tr, for constructing a work-related internal. of pav' No,rnatt;r thlaryroach' Pt?:::: ,tfre the people are doing and the expected outcomes; **U. Job-based slrucrures look at the tasls rhe However, the underlying purpose of at person. ", compecency-based structures iook column of the. exhibit) relains,the.tT..Pt (shown left-hand in the of rhe process
*rr,uu
t
I
Job-based structure
(Chapter 5)
'llt'll
t t
I
PartI I Intrnal Aligma*
58
LO1
job analysis the qTstematic process ofcollecting information about the nature of spxifrc jobs
l--I
@
e
Sfractw
JOFBASED APPFOACH: MOST COMMON
Exhibir 4.2 shom how job analysis and the resulting job description are the first steps in the process of creating an internal job structure. Each step is defined and rdated to designing the strucnrre. Job andpis provides the underlying in{ormation for preparing job descriptioru and evaluating jobs. The contenr ofthe job is idendffed via job analysis; this content serves as input for describing and valuing work. Exhibit 4.2 also lisa rhe major decisions in designing a job analysis: (1) \fhy are we colleeling job information? (2) \7hat information do we need? (3) How should we collec it? (4) \fho should be involved? (5) How useful are the results?
Why Perform Job Analysis?
,@
Potential uses for job analpis have been suggested for every major human resources function, The qpc of job analpis data needed varies according to firnction. For enample, job analysis identiffes the skills and experience required to perform the work, which clarifies hiring and promotion standards. Tbaining programs may be designed with job analysis data; jobs may be redesigned based on such data. ln performance evaluation, both employees and supervisors look to the required bchaviours and results expected in a job to help assess performance. An internd structure based on job-related information provides both managers arrd employees wirh a work-related rationale for pay differences. Employees who understand this rationde can bemer direct tfieir behaviour toward organization objectives. Job analysis dara also help managers defend thcir decisions when they are challenged.
In compensation, job
analysis has
two critical uses: (1) It establishes similarities and differ-
ences in the content ofjobs and (2) it helps establish an internally fair and alignedjob strucrure. If jobs have equal cortent, rhen in all lilcelihood, ,h. p"y established for them will be equd. If, on the other hand, thc job content differs, then those differences, along with the market rates paid by compctitors, are part of the rationale for paying jobs differendy. The key issue for compcnsation decision rnakers is still to ensure that the daa collected serve the purpose of rnaking decisions and arc bcceptable to the ernplopes involved. As the arrows in Exhibit 4.2 indrczte, collecting job information is only an interim step, not an end in iaelfi
EXHIBIT
E'
4.2 |
Determining the lnternal Job Sffucture
JOB ANALYSIS
JOB DESCRIPTIONS
I
; '
'
: :summary reioiti that identify, define; and describe the,
.
job as it is actually
:
,re
JOB EVALUATION
JOB STRUCTURE
Cornparison of jobs within an
An oidering of jobs on.the basis of .their content or relative value
.organization. : : ..-
:performed SOME MAJOR ISSUES IN JOB ANALYSIS
.
Why collect information? o What infori-nation is needed?
. . .
How
to colled information
Who should be involved? How useful are the results?
E
-"
Chapter4 | JobAnalsit
JOB ANALYSIS PROCEDURES
LOz
4.3 summarizes some job analysis terms and their relationship ro one anorher. Job analycolleca information about speciftc tasks or behaviours. A group of tasla performed by usually sis up a posidon. Idendcal positions make a job, and broadly similar jobs combine one person makes EyJrtbic
into
a
lob famlY'l
Latge organizadons, often the biggest users ofjob analysis dara, usually follow a srep-by-srep job aaalysis. Snndard procedures, shown in Exhibir 4.4, approach to conducting conventional developing preliminary informadon, interviewing job holders and supervisors, and then to create and verify job descripdons, The piccure rhat emerges from the rhe"information using workPlace where the division from one job m the nexr is clear, widr linle stable a is of exhibit jobs follow a steady progression in a hierarchy ofincreuing responworkplace, this In overiap. sibiliry. The relationship berween jobs is dso clear, and so is what is required to qualify for promodon into a higherJevel job. Alchough some argue that such a uaditional, stable srructure is a shrinking part of*re workplace landscape, such suuctures neverrireless persist, in varying degrees, in many latge organlvations. Thus, this depiction of conventional job analysis provides a usefirl
naua.
descripcion of r-he Process.
EXHIBIT
4.3
Job Analysis Terminology
E
-
I I
T
I I I I I I I I
t
I
f,
'-
-
L I T
I I I I I
60
Pautl I Innnal Aligmnzr
eem;niry $c &racnn
General Procedures for Conventionbf Job Analysis
STEP THINGS TO REMEMBER OR DO r. . 1' Develop ' ' ' Review existing document in order to develop an initial ,,big picture,, familiarity rrv with uv'- the i Pr"eliminaw job-its main ;issio;, iis malor outiei oi run.ii*l, -"tiriiittrJri ;;ti;;;r.'""""or liriirnution ' fJff;tff :*liminary list of duties which wili sertje as.a framework for conductins lplg 'l ' ^. ' ' ' Make a note of major items that are unclear or ambiguous or that need to be clarifieij during the data-gathering-process.
2' conduct initial tour of work site
o The.initial tour is designed to familiarize the job analyst with the work layout, the tools and eouipm.ent used, th-e
the end-to-end
'
leneral conaitions-o?
p"*;;;;il;;f
t-ne
major duties.
*"*o';:",
and the mechanics associated with
th.,:?l*l,l-1uj,I-111i:il?,1v_helpful for those.jobs in which
a first-hand view of a compricated . or untarniliar piece of equipment might save the interviewee the thousand words required to the unfamiliar or technical,
describe.
'
Forcontinuity,.itisrecommended.thatthefirst-level supervisor-intervieweebedesignatedas the guide for the job-site observations.
3' conduct e lt is recommended that the first.intervjew be conducted with the first-level supervisor who is to be. in a better position th;; ihel;b iliiln to provide ,; o;"rvi"* ;l the job .' .:. ,lnt-i"*1,. i?Tidered ; ,,' . . and how :1 '. the major duties fit together. :' , ' l' , ', ' " I For scheduling purposes, it is recommended that no more than two interviews be conducted . per day, each lasting no more than three hours. . , . on ' The interviewees are considered. subject-matter experts by virtue of the fact that they per'votes selection of form the job. (in the case of job interuiewees the case 6f first-level supervisors).inculnbe;tsl; .iJi"ti.nrtur" t"i g;tti"il#jon'aon" 1in .
1
2.
.
The job. incumbent
to be interviewed should represent the typical employee who is knowlthe trainee who is'just tearnins ihe iop"i oi ir,"oui#"naing L!:,19.?,grot memDer ot the work unit). 3. Whenever feasible, the interviewees should be selected with a view toward obtaining an appropriate diversity mix.
'
dg:lll-?:yt
* !^t:111^..- I ]h9lecond tour of.the work site is designed re Lrar clarify, rrv' LU.rrrllr' confirm, alq and ornerwls€ otherwise rerrne =rrY:rEu to refine the intor' infor' . ;: Fgtond to,ur, .:. ;"iil;1i""'Gi l" i-6;i;iiliil. of wgrk.1tu . l 4: y Jh" initiaj,tour, it.is recommended that the same first-level supervisor-interviewee con...::...,.i,'....ductthesecondwalk-through.-.--.-' 5' consolidate ' The consolid.ation phase of the job study involves piecing together into one coherent and comprehensive job description ihe data'obtained iob i.ueiui ior.."r---u"p"riiiiijou n"rainformation ers, on-site touri, and written materiars uuori tl" irom jou. -r Past experience indicates that one minute of consolidation is required for every minute of interviewing' For planning purposes, at least five hours should b'e set ariJ" i.itfr" ..nsolidation phase. A t:!i:,1IA"J_1p1f tP_rld be accessible as a resource person to the job analyst ' during the ' consottdation phase. The supervisor_interviewee fills this role. ' check your initial preliminary list of duties and questions-all must be answered or confirmed. e. verlfu;ob. , description I ,t,]'.,,."f, .,.'' :. . . 1.: " ..,i.
.
1
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,1,
,:r
,;,l',;.i 1';i,
r,,, .i:,1.,'
Chapw4 \ Jo6,{shil
-
i
WHAT INFORMATION SHOULD BE COLLECTED?
a.Jpild fu Erdibir 4.4 suggests,
stafts with a review of informadon alreadylollectidTn ddes, major dudes, task dimensions, and ord., dready exist. may However, this informatiotr may no longer be accurare. workflow informarion exisdng clarifr information, too. must So rhe andyst Generally, a good job andysis collecm sufficient information ro adequately identifr, define, and describe a job. Exhibit 4.5 lists some of the information usually collected. The informarion job" or "related to the employee." is caregorized as'ielated to r"he ,o develop a framcwork for.
T.lni,
funher_an"lfit.
l*
Job Data: ldentification lob tides, deparcmenu, and che nurnber of people who hold the job are enamples of informadon rhar idencifies a job. Although a job tide nury seem pretry suaightforward, it may noc be. For example, the Canadian federal government has hundreds of job tides, some of which are.hard to intcrpret; such as Light Keeper, Scientific lllusuator, Boarswain, Head, Hydrometeorologicd Srreamflow Studies, and so on.2
EXHIBIT
4.5
Typical Data Collected for Job Analysis
LO3
61
t t t t I t t t I I I I I I I I I
I ,\
PutI I h*matAlignmnt:
62
T
I
Job Data: Content This is rhe heart ofjob analysis. Job conrent data llvolve the elemental tasks or units ofworh with emphasis on rhe purpose of each ask. An excerpt from a job analysis questionnaire that collects t"sk d"," is shown in Exhibit 4.6. The inventory denggribes the job aspect of "Communicetion' in terrns of acrud tasks, for enample, "read technicd pirblications" and "consult with co-workers." It akes eight items to cover "obtain rechnical informarion" and another seven for "exchange tecL nical informarion." In fact, the task inventory from which the exhibit is orcerpted contains 250 item'i-ind covers only sysrems and analyst jobs. New task-based questions need to be designed
t I I I I
for each new s€t ofjobs. In addirion to the emphasis on the task, the other distinguishing characteristic of che inventory in the exhibit is the emphasis on the objecdve of the ask, for example, "read technical publications to keep current on'indusry" and 'tonsult with co-workers to exchange ideas and techniques." Task data reveal the acnral work performed as well as its purpose or outcorne. In Canada, it is very important to collect information relating to pay equity legislation. In particular, rhorough information about the skill, effort, responsibiliry and working condidons
ofeach job is essential.
Employee Data
t
Position Analysis
Qu6stionnaire (PAQ) a struciJrcd job anafipis
I I I
L
t
T
Once we have specified the tasks and outcomes' we c;ul lotlk ai the lcinds of behaviours that outcomes. F.xhibit 4.5 categorizes employee data as employee characteristics, internal relationships, and o
will result in rhi
t t t I t
Determining thc Smatun
qustionnake used lor analyz. on the basb of I 94 job elenena that d€e.ribe ing jobs
genericvw*
behaviours
anyone,
Level of Analysis
1i ;r
I I I
li I
I
I
L
The job analpis terms defined in Exhibit 4.3 are arwged in a hierarchy. The level in this hierar job chy at which'an analysis begins may influence whether dre work is similar or dissimilu. At the family level bookkeepers, tilletr, *d accoundng clerks may be considered similar, yet at the job level they are very different. Arr andory might be looking at two grains of salt under a rnicroscopc jobs are similar, as against looking ar ihem as part of a sewing of french fries. If job daa zuggest the jobs mrrst be paid equa$'; if ,iobs are different, they can be paid differendy. In pracdce, many employers are ffnding it difficult to justifr the time and ercpense of collecting task-lwel information, particularly for 0exible jobs with frequendy changing tasls. Thry may
_\
Chaprer4 | lobAnalysts
l.Markthecircleinthe"DoThis"columnfortasksthatyoucurrentlyperform. 2, At the end of the task list, write in any unlisted tasks that you
currentty
/
/ /-
/Timespentlncurrcntposition
a** "E ^C -r**
':::::,taskthatyouperformforrelative.,'",:;*''".*, " the appropriate circle in the "Time Spent" column. Please use a No. 2 pencil and
fill all circles complete
PERFORM COMMUNICATIONS ACTIVITTES
Obtain technica I information 421. Read technical pub lications about competitive products. .
422. Read technical publications 423.
to keep current on industry.
Attend required. recommended, or job-related courses and/or seminars. Study existing operating systems/programs
C oo@@@@o@o
to
gain/maintain familiarity with them. Perform literature searches necessary to the development
of products. Communicate with system software group to see how their recent changes impact current projects. 427. 5tudy and evaluate state-of-the-art techniques
C C ooo@o@o@@ c ooo@o@o@@
to remain
competitive and/or lead the field,
4i0.
is
specified.
Consult with co.workers to exchange ideas and techniques.
431. Consult with members of other technical groups within the company to exchange new ideas and techniques,
432. lnterface with support consultants or organizations to clarify software design or courseware content.
433. Attend meetings to review project status. 434. Attend team meetings to review implementation strategies.
435.
w
Discuss department plans and objectives
;
C
;
C o@o@@@o@@
; ;
429. lnterface with coders to verify that the software design as
T T ;
Exchange technical information
being implemented
t T t t
C
o ooo@@@o@@
Attend industry standards meetings.
63
T
with manager,
C
o o@o@@@@@@ o o@@@o@o@o o o o@@@o@@@@ o o@o@o@@@o C o@@@@@o@@
I t
Partl I lt*naUili'g,on
64
: EXHIEIT
4.7
rt hE ttrtg*c
Sa:acttat
Communications: Behaviour+Jased Data [from the PosiLion Analysis Buestionnairel ''*"
lmportance to This Job Section 4: Relationships with Others This section deals with different
of interaction between people involved in various kinds of work. aspeqts
N Does not apply 1 Very minor 2 Low 3 Average 4 High 5 Extreme
4.1: Communications Rate. the following in terms of how important the activity is to the completion of the job. Some jobs may involve several or all of the items in this section.
4.1.1: Oral (communicating by speaking)
99
100 101
-
1O2
-
103
-
104
-
t05
-
.l06
-
Advising (dealing with individuals in order to counsel and/or guide them with regard to problems that may be resolved by legal, financial, scientific, technical, clinical, spiritual, and/or professional principles)
Negotiating (dealing with others in order to reach an agreement or solution, for example, labour bargaining, diplomatic relations, etc.) Persuading (dealing with others in order to influence them toward some action or point of view, for example, selling, political campaigning, etc.) lnstructing (the teaching of knowledge or skills, in either an informal or a formal manner, to for examplg a public school teacher, a machinist teaching an apprentice, etc.) lnterviewjng (conducting interviews directed toward some specific objective, for example, interviewing job applicants, census taking, etc.) Routine information exchange: job-related (the giving and/or receiving of job-related information of a routine nature, for examplg ticket agent, taxicab dispatcher, receptionist, etc.) Nonroutine information exchange (the giving and/or receiving ol job-related information of a nonroutine or unusual nature, for examplg professional committee meetings, engineers discussing new product design, etc.) others,
Public speaking (making speeches or formal presentations before relatively large audiences, for example, political addresses, radio/TV broadcasting. delivering a sermon, etc.)
4.1.2: Written (communicating by wrifien/printed material) 107
-
Writing (for example, writing or dictating letters, reports, etc., writing copy for ads, writing newspaper articles. etc.; does not include transcribing activities described in item 4.3, but only activhies in which the incumbent creates the written material)
Source: E. J. McCormick, P. R. Jeanneret, and R. C. Mecham, Position Analysis Questionnaire, @ 1969 by Purdue Research Foundation. West Lafayette, lN 47907. Reprinted with permission.
collect only jobJevel data and ernphasize comparisons in the external market in sening wages. Howcvcr, designing career paths, staffing, and legd compliance may also require more detailed information. Using broad, generic descriptions that cover a large number of related tasks doser to the job family level in Exhibit 4.3 is one way to increse floribility. Two employees working in the same broadly defined job may be doing entirely different sets of related tasls. But for pay purposes, they are doing work of equal value. Enrployees working in these broadly defined jobs carr swirch to other tasks thdt fall within the broad range without the bureaucratic burden of making job uansfer requests and wage adjustrnents. Thus, employees c:ln more easily be matched rc changes in the worldlow. Reauiter, compensation analyst, and training specialist could each be analyzed x a separate, distinct job, or could all be combined rnore broadly in the job "HR Associate." !
t.-.*
Chapter4 | lobAnalyt:
view deserves consideration. A promodon to a new job tide is usually Sdll, a counterv"ailing speciffc distinctions among jobs represenr career padrs to-employees. More reward. a finsidered of levels in a sfiucture may.reduce the opponunities to reinforce positive number the il.du.ing .-otou.. behaviour. Reducing ddes or labelling all ernployees as "associates" may signal an egaliiltL .U,ut . But it may also sacri.frce a sense of advancement and oppomrnity.a
!l
HOW CAN THE INFORMATION BE COLLECTED? .r',, Conventional Methods
ii
i,
,
;:,.
i, i,
i.
job information is to ask the people who are doing a job to Thc most cornrnon way to collect Sometimes an analyst will interview the job holdcrs and dreir supervi6U ou, a questionnaire. the questions and that the information is correct. Or the analyst understand rhey sors to be sure work and take notes on what is being done. Exhibit 4.8 shows part of at person rhe inay observe "Give an orample of a panicularly difficult &om quesdonnaire. Questions,range a lob andysis in your work. \Vhy does it occur? face How often does it occur? \Zhat special you thar pioblem to solve this difficult needed problem?" are to "r0[hat is the nature of any resources and/or ikills contact you have with individuals or companies in countries other rian Canada?" These examples are drawn from the "Complexicy of Dudes" section of a job andysis questionnaire used by 3M. Orher secdons of the quesdonnaire are "Skills/Knowledge Applied" (19 to choose ftom), "Impact This Job Has on 3Mt Business," and "\Torking Condicions." The questionnaire condudes by asking respoodents how well they feet rhe andpis has captured their particular job. The adnntage of convendonal questionnaires end interviews is rhat the involvement of employees increases tleir understanding of the process. However, the results are only as good as the people invohcd. If imporant aspecr of a job are onined, or if the job holders rhemselves either do not realize or are unable ro €xpress fie imporance of certain aspeos of the job, the resulting job descriptioos will be hulty. Considering the number of jobs in an organization, ir is unrealisric ro €xpect a single analm o undersand dl the different rypes of work and rhe imporunce of dl job aspecs. Different people have different perceptions, which may result in differences in inrerpretation or emphasis. The whole process is open to bias and favouritism.5 As a resuft of this potendal subjectivity, as well as the huge arnount of dme dre process rakes, convendonal methods have givca way to rnorc quantitative (and systematic) data collection.
Quantitative Methods will direct job holden ro a website where they complete a questionnaire online. (Exhibirs 4.6 and 4.7 are excerpts 6om quandmtive questionnaires.) Such an approach is charactcrized as qurntitatirc job andy:is, because the results can be analpcd arithmedcally. A quancitadve quesdonnairc gpically asks job holders to assess whether each item is or is nor part ',, of rheir job. If it is, drey arc asked to rate how imponant it is, and the amount of job time spenr ion it. The results can be machinc scored like a muldple-choice test (except there are no wrong 'answers), and thc results be used rc develop a profile of the job. Questions can be grouped eround compensable factors (discussed in Chaprcr 5) such as skill and working condidons. Skill can be fi.uther subcategorized as formal qualifrcations, o
ll ll
I I I I T t t I I Il
-.
Some connrlting ffrms have dweloped quantiative inventories they can tailor to the needs of a speciffc orgaaization or to a specfic family ofjobs, such as data/informadon processing jobs.
:
t t t
il ;
Perc
EXHIBIT
4.8
I I Inmnal
Alignment Dettmbzing the Straoure
3M's Structured lntenview Guestionnaine
Chaprcr
4 | lob
and cost-effeccive rc modify these exisdng inventories rather Many org,gr.ruzrLons ffnd it pracdcal p ttreir own analysis &om ground zero. But it must be remembered that dre rcsufts asPec a.*na o" ihe qualiry of che input. The itcms on rhe questionnaire maner._If imporcant &e aspects, certain of jobholders not realize importance do the are omired or if the "it" i"U on arnounts studl the ofstockbrokers In one responses Faulty. will be orulri"g;oU dcscriptioru some msks differed from thosc of low performers. The_implicadon is rhar any oF dme spenr on include good performers to ensure that the work is usefully enAyz.ed"6 to i..d,
,l-'a*!t
."AnO
Who Collects the lnformation? Collecdng
job analpis information rhrough one-on-on€ inerviews can be a thankless raskLo* *.ll ir is done, nor everyone will be happy witl rhe resulting job descriptions.
No -"n.t employee (oftcn justifying the assigoAlhough organizations frequendy assrgn the task to a new new employee become familiar wi*r rhe conpanyi the will help it thar gronnds rhe *n, oi with de organizatioo and its thoroughly hmiliar someone done by is bemer analysis the iobs), *d rained in how to do dre analysis ProPerly'7
;obr,
Who Provides the lnformation? (job holders, supervisors, and/or analyso) hinges on The decision regarding rhe sourcc ofthe data data Experdse about the work resides with the accepnble and acduare, coruisrenr, ensure to how *re principal sources. For key rnanagerid/professional iob holders and supervisors; hence, th.y jobs, sup.rvisors rwo levels above have also been suggested as valuable T*"T, because th.y In other instances, suborjobs the overall organization. fft in i,"u. . -or. macro view of rhe way job also may be involvedunder study with the jobs interface that dinares and employees in other varies with thc probably job collect data which to frorn per The number-of incumbenrs or changAn ill-deftned rhe information. collecdng the ease of job, as with as well subiliry of rhe of careful selection a rnore or more of respondents involvement rhe either job reqoire will ing rhe elgensive and dme-consuming tle rnore involved, people more rhe . Otviously, *-pond.nt
*
-"y
proces (although computerization rnitigates rhese objections).
What about Discrepancies?
'Vh"r h.pp*, if the supervisor and dre ernployces present different picrures of the job? Al.ho"gh in theory-supervisors ought to know fie jobs well, they nay not, parcicularly if the jobs arc changing or ill-defined. People actually worlcing in a job may change it,_perhaps by finding ways a{9 suPto do thingr more cfficiendy, or pcrhaps because they rnay not realize that certain
t+
posed ro b! prrt oftheirjob. The crossffre from differing perspectives on the nature ofajob indicates why conducting a job analnis can be a dangerous activity for a brand-new HR employee' I 3M had an interisting problcm when it collected job information ftom a group of engineers. iThe engineers listed a no*t.t of responsibilities they viewed as pan of their jobs; however, che *.n"g.i realized that those responsibilities actually belonged to a higher level of work. The engienlarged their jobs biyond what they were being paid to d9-. No one wanted to tell this "...rl"d trighly productive group ofemployees to throtde back and slack off, so instead 3M looked for
to recognize and rcward them, ' ways What sf,odd thc managcr do if employecs and their supervisors do not agree on what is parr of rhe job? The answer is: Collecr more data. Enough data are accluare, and acceptable resulu. In general, the morc unusual the
reguild to ensure
consistent,
job, the more sources of &ta required Discussing discrepancies with everyone, rhen asking both employees and supervisors ro sign offon th. analysis, will help ensure agre€ment, or ac least understanding of
the results.
f.opo..d
At
afit
5t
J J J J J J J
J
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Partl I Innnal Alignutt Dutninbg *c
6a
Structura
Top Management {and Union} Support ls Gritical" In eddirion to involvemenr by andysts, job holders, and their supeniisors, support of top managemenr and unions is edsential. They must be alened to the cost of a thorough job andysis, ia time-consuming narure, and rtre fact
that changes may result after it is completed. For example, jobs may be combined or pay rates If top management and unions are not willlng to crury cluough, or ar lea$ ro seriously weigh, any changes suggested by the job analysis, the process probably will not be wonh the adjusted.
drer and
expense.
;i-
LO4
job description written stmmary of a job, itxluding raponsi b iI ities, q u a Iifi c:,ti o n s,
and relationships
job specifications qualifiations requi red to
behirdfora job; naybe included in theiob delrcdgtion
T_T
JOB DESCRIPTIONS SUMMARIZE THE DATA
So now the job information has been collected, maybe even organized. But it still has to be summarized in a way that will be usefi.rl for HR dccisions, induding job evaluation (Chapter 5). That surnmary of the job is the job description. Thc job description provides a word picture of the job.
Exhibit 4.9 gives part of a job description for a registered nurse. fiace the connection job analysis &ta colleced. The job is identiffed by dde ind its reladonships to other jobs. The relationships dernonsuate where rhe job fits into berween different para of the description and the
ttre organization-whom is supervised by this job holdcr, who supervises this job holder, and the nature of any internal and exernal relationships. A job summary consiss of a short paragraph that provides an overview of the job. The section on essendal responsibilitics elaborates on the sunmary. It includes dre tasks. Relaed tasks may be grouped into task dimensions. This particular job dercription also includes very specific standards for judging whether an essential responsibiliry has been met (e.g., "Provides a wrinen assessment of patient within one hour ofadmission and at least once a shift"). A ffnal section lists the qualiffcations nec€ssary to be hired for the job. These are the job speciffcations that can be used as a basis for hiring-the knowledge, skills, and abilities required to adequately perform the tasks. But keep in mind that the summary must be relevant to pay decisions and therefore must focus on similarities and differences in content.
Using Generic Job Descriptions To avoid starting from scratch (if writing a job desciption for the ff.rsr tirne) or as a way to
it can be useful to refer to generic job descriptions tfiat have not yet been tailored to a specific organization. One readily accessible source is rhe National Occuparional cross-check octernally,
Classification (NOC), described in dre
.Net'lforth
box here.
Describing Managerial/Professional Jobs
In addicion to deftniag and describGg jobs,
descripdons of manageriaVprofessional jobs often include more detailed information about the narure of the job, its scope, and accountabilioT. One challenge is that an individual manager may influence the job contenr.8 This is a classic er
Chapter4 | JobAnalyis
EXF1EIIJ:9
|
Contemporary
lol
lescniRtigl fo1 Bes_istered
N_unse
Job Title Registered Nurse
Accountable for the complete spectrum of patient care from admission through transfer or discharge through the nursing process of assessmen! planning. implementation, and evaluation. Each RN has primary authority to fulfill responsibility of the nursing process on the assigned shift and for projecting future needs ofthe patienVfamily. Directs and guides patient teaching and activities for ancillary personnel while maintaining standard of professional nursing. Relationships ReporB to: Head Nurse or Charge Nurse. Supervises.' Responsible
for the care delivered by
LPNs,
nursing assistants, orderlies,
and transcriben. Works with: Ancillary Care Departments. Exter na I re I ationships: Physicians, patients, patients' fam i I ies.
Qualifications Education: Graduate of an accredited school of nursing. Work experiencel Critical care requires one year of recent medical/surgical experience (special
Ability to bend, reach, or assist to transfer up to 23 kilograms. Ability to stand and/or walk 80 percent of 8-hour shift.
C. Visual
and hearing acuity to perform job-related functions..
Essential Responsibilities 1. Assess physical, emotional, and psychosocial dimensions
3.
of patients.
Standard:
Provides a written assessment of patient within.one hour of admission and at least once a shift. Communicates this assessment to other patient care providers in accordance with hospital policies.
Formulates a
written plan of care for patienB from admission through discharge, Develops short-term and long-term goals within 24 hours of admission. Reviews and updates care plans each shift based on ongoing assessment.
Standard:
lmplements plan of care.
Standard:
.
;
I ;
Job Summary
2.
69
I
Dembnstrates skill in performing common nursing procedures in accordance with but not limited to the established written RN skills inventory specific to assigned area, Completes patient care activities in an organized and timely fashion, reas-
sessingprioritiesappropriately.
Note: There are additional responsibilities, omitted from exhibit.
Verify the Description The final step in the job analysis process is rc veri& the accuracy ofthe resuldngjob descriptions (step 6 in Exhibit 4.4). Veri{icarion often involves the interviewees as well as their supervisors to determine whether the proposed job description is accurate and complete. The description
t
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70
PttI I Intnul Aligmtnt Dctrmining th. Smtcturc
National Occupational Classification ln Canada. many companies turn to the federal government's National Occupational
Classification (NOC) for reference when prepJlring job descriptions' The NOC is an excellent source of standardized job information, based on systematic field research by
Human Resources and Skills Development Canada. lt contains comprehensive descriptions and qualifications for over 40.000 occupations. NOC information is available online at wrnrwS.hrsdc.gc.ca/NOOEng lish/NO020 1 lAtVelcome'aSpx'
The NOC classifies occupations into Major Groups based on two key dimensions: skill level and skill type. The Major Groups, identified by two'digit numbers, are further broken down into Minor Groups, with a third digit added, and unit Groups, with a fourth digit. For example, Major Group ll: Professional occupations in business and finance includes Minor Group 112: Human resources and business service professionals, which includes Unit Group 1121: Human Resources Professionals:
1121 Human Flesources Professionals
and Human resources professionals develop, implement and evaluate human resources employers and managers procedures and advise and programs labour relations policies, on human resources matters. Human resources professionals are employed throughout
profes' the private and public sectors, or they may be self-employed. Human resources duties: following the all of or perform some sionals
r
plan, develop, implement and evaluate human resources and labour relations strat' egies including policies, programs and proeedures to address an organization's
human resource requirements
T
r
policies, Advise managers and employees on the interpretation of human resources compensation and benefit programs and collective agreements
I
tabour Negotiate collective agreements on behalf of employers or workers, mediate relations labour and on employee provide advice and grievances disputes and
t T t
r
Research and prepare occupational classifications, and competency appraisal measures and systems
r . r
plan and administer staffing, total compensation, training and career developprograms ment, employee assistance, employment equity and affirmative action Manage programs and maintain human resources information and related records
r T T T
I I
job descriptions, salary scales
systems
r r r
Hire and oversee training of staff
Co-ordinate employee performance and appraisal programs Research employee benefit and health and safety practices and recommend changes or modifications to existing policies'
Adult Source: Current And Forthcoming Minimun Hourly Wage Rates For Experienced H uman workers in canada. httB:/isrv 1 1 6.services.gc.caldimt-wid/sm-mw/rptl aspx? lang=en9 permission of the with the 2012. Reproduced canada, Skills Development and Resources Minister of Public Works and Government Services Canada, 2012'
with the analyst, taking note of any omissions, ambiguides, or needed and fiankless task). Outside sources of job descriptions' (often excruciating an clarifications can be used such as the National OccupationiChssiffcation profiled in the .Net \0'orth box
is discussed, line by iine,
L__.
for reference.
Chaper4 |
NAuIF
Job Description for a Manager
DfiIBIT 4.1O
Title: Nurse Manager
Department
ICU
Date Posted: July 25,
I
r':
Status: OPen
l, I
-
Position Description: Under the direction of the Vice-President of Patient Care Services and Directors of Patient Care Services, the Nurse Manager assumes 24-hour accountability and responsibility for the operations of defined patient specialty services. The Nurse Manager is administratively responsible for the coordination, direction, implementation, evaluation, and management of human resources and services. The Nurse Manager provides leadership in a manner consistent with the corporate mission. values, and philosophy and adheres to policies a4d procedures established by Saint Joseph's Hospital and the Division of Patient Care Services. The Nurse Manager participates in strategic planning and defining future direction for the assigned areas of responsibility and the organization.
l'
-
Qualification: Education: Graduate of accredited school of nursing. A bachelor's degree in Nursing or related field required. Mastert degree preferred. Current licence in the Province of Nova Scotia as a Registered Nurse.
re
Experience: A minimum of three years' clinical nursing is required. Minimum of two years' management experience or equivalent preferred.
have been iareresting to hear the discussion bennecn a nursc from 100 years €o, job is described in Exhibic 4.11, and her supervisor. Thc job description paints a vivid picrure of expeftadons at fiat rime. It is unJikely that she would havc had much opponuniry for input 100 yea$ ago.
ft would
whose
Job Description fon Nurse 1OO Years Ago
EXHIBIT 4.11
-
E']..,.,].:''']''l'.']1',!ii.:E ln addition to caring for your 50 patients, each nune will follow these regulations:
2.
Daily sweep and mop the floors of your ward, dust the patienfs furniture and window sills. Maintain an even temperature in your ward by bringing in a scultle of coal for the day's
3.
business. Light is important
1.
4.
5. 6.
7. 8. 9.
ry
I I I
ff i
71
I
to observe the patient's condition. Therefore, each day, fill kerosene lamps, clean chimneys, and trim wicks. Wash the windows once a week. The'nurse's notes are important in aiding the physician's work. Make your pens carefully; you may whittle nibs to your individual taste. Each nurse on the day duty will report every day at 7 a.m. and leave at 8 p.m..except on the Sabbath, on which day you will be off from 12:00 noon to 2:00 p.m. Graduate nurses in good standing with the director of nurses will be given an evening off each week for courting purposet or two evenings a week if you go regularly to church' Each nurse should lay aside from each pay day a goodly sum of her earnings for her benefits during her declining years, so that she will not become a burden. For example, if you earn $30 a month you should set aside $15. Any nurse who smokel uses liquor in any form, gets her hair done at a beauty shop, or frequents dance halls will give the director good reason to suspect her worth, intentions, and integrity.. The nurse who performs her labours and serves her patients and doctors faithfully and without fault {or a period of five years will be given an increase by the hospital administration of five cents a day, provided there are no hospital debts that are outstanding.
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Partl I IntenalAligrntat Dcerzxitbry{r
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JOB ANALYSIS AND GLOBALIZATION
Job Analysis and Susceptibility
to Offshoring
offshoring refers to *re movement of jobs to
offshoring movemattof iohs ta lcr.a' tions beyond lnme-country
boters
lgcations.
b.yo4.home-couatY
borders.
are subHistoricalf, rnanual, low-skill jobs have been most siuceptible to offshoring, as t-here workers. for rnanufacturing counties across cost cornpensation standal differences in hourly .This reality has played an important role in decisions about where to locate productigt oPlo: have had tioru. Siiar diff.reo..s in iost in other low-skill occupations (e.g', in call centres) as there are producdvity in decisions, such facor one only is cost Labour ramifications. similar cascs be offiet differences across countries as well, rneaning that lower labour cosu may in some is another skills and by lower productiviry. Availabiliry of workers with the required education
pot.oti"l'corrrtraiot,-"s is proximiry to customers. sometimes it makes business
sense
to move
offshore and sometimes it does not. jobs. Irhite-collar Increasingly, susceptibiliry to offshoring is no longer limited to low+kill and outputs can inpua when to outsourcing suscePdble are jobs are ,lro b-.iog outsourced. Jobs litde local required, ii wotkers other with interaction litde electronically, ..rify f. not only jobs include susceptible Highly routinized'g be workcan the knowledge is required, and as data entry oPerators and telemarketers' such and training, education little ,tor",h",,"q,ri* to outsourcing but also *-1u,", programnicrs and toc PreParers' Jobs with low susceptibiliry (e'g', marketing include managerial-pori,iorrr, posidons in nt-hich local knowledge is required or in world), the of regigns o."i ro k ro* .orrso*er preferences in particular is necessary. architects) *hi"h"b.irrg on rhe ground (lircrdly, in ttre case oflandscape
.r*ri.i*d
t.
;;;;;i."
Iob Analysis lnformation and Comparability across Borders need to arnlYzc jobs to As fums spread work across multiple counties, there is an increasing the ways in which jobs are to rneasure be able either maintain consistency in iob iontent or else equdly effe5tivdy work to teatn dwelopment similar and differenr. For e*"-pI., for a software
*a nai",
the job descriptions and job speci-ftcations need to be and is that norms or perceptions regarding what challenge a."rty ,riaorrcod. One potential -is different three of a study Howwer, courtrias. job across vary. may *t i, nor parr of " p"rti"ul*, and computer.programmer) in the united states' g.o.."l gffice jobs". (FusrJine supewisor,-li.* 'Chio", Zealand found that ratings of the imponance and amount of work iorrg Korrg, *d ,!qrrir.*.rrt were 'quite similar" across countries, suggpsting that job andysis activides "rri;oU inforrnadon "is Iikety to ffansPort quite well across countries"'Io
;irt;tdr-mers
in
Canada
cl+
Los
I_-I
JUDGING JOB ANALYSIS
both employees and cmployers' Beyond beliefs about its usefulness, or lack thereof, for sadsfring t!.r" several ways to judge job analysis'
"t
Reliability the meaIf something is measured tomorov/ and the results are the same as those from today, nieasures repeated that is right-only mean it doesnt This reliablc. surement is-considered to be reliability corsist?nq of re5'ultrhom repeated aqqlications of a '-measure
S*
";
,r-.
,.r,rlr. Reliability is a measure of thc consistency of results if tlre same measure
is
repeated many times.
the reliabiliry of job analysis Research findings on employee and supervisor agreement on of a information are mixed. For instance, experience may change an employee's perception supervisor The it' rc tasks have found new wa)ts to do it or may have added new
job-
i"lrt. -"y
Chapter
4 | lobAna$is
cases, the job the employee is actually doing rnay may nor realize rhe ofienr of change. In such noi b. ,h. same as the job originally assigned by rhe supervisor. Obviously, the way to increase job analysis helps reliabiliry in a job analysis is to reduce dle sources of variance. Quantitative
-
T3
-
to be sure that we do not eliminate the richness or the nuances of the variance. eliminating a job while reduce variance. Bu3 we need
ValiditY job analysis m€asures whac it claims to measure. Vatrdity is rhe extent to which a process such as to whether the analysis creates an accurarc portrait of the as the question widr concerned It is statistically the ertent to which an andysis is accurate, no of showing almost way is There work,
oanicularly for cornplex jobs. Consequently, validiry o
hiff.r.n,
AcceptabilitY I6job holders and managers are dissarisfi.ed with the initial data collected or with rhe process, they are nor likely ro buy ilrto either rhe resulUng job sructure or the pay rates evenrually anached to rhat strucure. A-u analpt collecdng informadon through one-on-one inrerviews or observation is not alwap accepced because of rhe potenrid for subjectiviry and favouritism. However, more quanrirative approachcs also may run into difficulty, especially if they give in to the ternptation ro rry to collect too much information for too many PurPoses
Currency To be valid, acceptable, and useful (see bdow), job informadon must be up to date. Sorne jobs rtry relatively stable over dme, wbjle odrers may changc in important wa1n, even ovet short time periods. .As F:xhibit 4.12 shows, most organizations report that tley have up-m-date job informaiiion, but a substantial minoriry reporr rhat job information is not up to date. That can hinder d.crtio.t making but also employe selection, trainin", md not O"ty compensation pracdce
i it
"id
or bi-annual) development.-Mosr organizarions do not engage in any regular G"* * annual when information updatejob to likely more b.ing ,.rpd".irrg of job analysii information, i*tod compensation for job reevaluated is being dae when Puror slgnifr;r .Lrrrgo have occurred job information when for ev"aluating protocol a systematic ro develop pf.er.tl It *"y f,. useful needs to be updated.l2 Usefulness \Jsefulness refers
i :'
to the
usefrrlness
of the information collected. For pay PuPoses' job analysis
job-it
helps deterprovides work-related infognadon to help determine how much to pay for a in a reliable, does this job andysis mine job is similar or dissimilar to other jobs. If nttid, then thetechnique is of pracdcal t'se'13 , ".".ptil.way, such As we have nored, soroe see job analysis information as useful for muldple purposes,
yhJ;;;; *d
u hiring
.
than is required to ar,J toirrlrrg. But multiile puposes rnay require more information
jl-.rr.o-p"tting quantiadve job andpis plans' with their ply. The praciical u*liry of .ompl}'procedures and analysis, remains in doubl Some advocates are so taken nqidl their
*ro,
validity accuracy
ofa
rneas.r'e
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74 EXHIBIT
Pa,n
4.12
I I Intenal
Alignment: Detcrmining the Struaute
Updated Job DescniPtions
t I
tI
judgment mtrst continue to play stitistics and computers that they ignore the role that human todap "I wish to emphasize the in job analysis. A ,t"r.*.ot *"a. *t 30 years ago still holds sa..ri"A -iJ pfayed in all these procedures by human judgment. I know of no methodology, supplement' nor of,' importance the air,i"J *.fuifq"e or objective ,rr.."rr..-.nm that can negate rational judgment."la
A Judgment Call why on earth would you In the face of all rhe difficulties, time, expinse, and dissatishction,
as a
informathat your employer bother with job analpis? Because. work-related ;"g*;J;end is no There pay differences' tion is needed to determine pay, and differences in work deterrnine will or related work will be ,Jra.r"ry r"bstirute th". ."r, .rrr*. tlot the resulting pay structure provide
ii"bl.,
acculate data co make and explain pay decisions'
detail is needed to If work informadon is required, the reJ issue should bel How much
individual employees' Pay' encouragemake these pay decisions? The answer is: enough to help-set *otkfotce, and minimize therisk of th. of tkill conrinuous learning, ir,.r."r. the experience "ia employees who drive awav is dissatisfted detail this of omiuing The risk
;;;;;J;;;;;*".;'.
about managementi inabiliry to justifu their dicidump the andysis; nr. Iawsuim. The response to irr"d.gu"t analysis should not be to
customers with rheir poor service,
,*r, .,
.o-pl"i',
rather, the resPonse should be to do more usefi'rl analysis
E
Conclusion
objectives and fostering Encouraging employee behaviours that help achieve an organization's pay structure' One internal e sense of fairness among employees are *o h"[*"tlt of a usefirl as opposed internally strucrirre a of the frrsr srrategic p"y'a."i.ioi, is how much to align Pay
Clrapter
r.i;,
4 { lo6'azaly;s
is not achieving intcrnal ro aligning it to external markq forces. Do not be misled. The issue with external markct R"th.r, the stategic alignment forces. required. Both are versus alignment the op-timal balance responsive of and externally on susraiiilng internally digned focuses d.Iision help the organization achieve its mission. This section of the book is about Day srruclures that on. of the ffrst decisions you will face in designing pay systems: how much to emphasizc pay srrucrirres that are internally aligned with the work performed, the organizariont structure, and '$7'hatever the choice, it needs to support (and be supponed by) rhe organization's its suategies. overall human resources suatery' Noct, managers must decide whether job and/or individual employee characteristics will bc rhe basic unit of aodysis supponing the pay structure. This is followed by deciding what dae will be colleqed, what method(s) will be used to collect them, and who should be involved in rhe process.
A kry rest of an effecdve and fair pay structue is acceptance of resuks by managers a-nd
employees, The best way to ensure accepunce ofjob analysis results is to involve ernployees as well as supervisors in 6,e process. fu a minimum, all employees should be informed of the purposcs and Progress ofdre accivity. Afthough almost everyoae agrees about rhe importance of job analysis, that does not mean rhat everyone does it. Unfomrnateh, job analpis can be tedious and dme-consuming. Often, the job is given to newly hired compensation analyse, ostensibly ro help them learn about the organizadon; but there may also !s 3 hinl of "rite of passage" in such assignmens. Alternatives to job-based $rucnues, such as skill-based or competency-based qystems, are being experimented wirh in ma:ry ftrms. The premise is that basing strucnues on r"hese ottrer criteria will encourage employees to become more flercible, and fewer workers will be required for r}e same level of ourpuL Bur as ocperience increases with these alternatives, managers are discovering that they can be as timc-consuming and bureaucratic as job analpis. Bear in mind rhat job content remains the coaventiond criterioo for strucnrres.
E L 2. 3.
4. 5.
Chapter SummarY Job analysis is rhc rystematic process of collecting information about the narure of specfic jobs. Job analysis data are used is vimrally every major HR function, lncluding recruitiag and selection, uaining, compensation, and so on. Therc is a six-step approach to job analpis: develop preliminary job information, conduc! initial tour of work site, conduct interviews, conduct second tour of work site, consolidar job ffirmation, and verifr job description. The information that must b€ colleced for job analysis includes job identiffcation &ta job conrcnt data, and data on qualifications nece.ssarl to do the job. Job content data are 6e hearr of job analysis, and indude the tasks involved, their purpose, reponing relitiooship+ working conditions, and otler specifrc job information. Conventional methods of collecdng job analysis data such as qucsdonnaires and interviews are being replaced by o"line qucsdonnaires, because the lattcr are more objective and less time-consuming' Job descriptions provide a wrimen summary of a job, including responsibilities, gualifications, and rclationships. Job specificadons are the qualificacions required to be hired for a
job, and may bg indudcd in the job description. Thc bcnefit of uadidonal job analpis is that it provides the basis for defensible joLrdarcd decisions, and cstablishes a foundation for career paths. However, it is somedmes ossidcred tob rigid for today's more flexible organizations with fluid work assignmena. Job anabrsis can be judged based on reliabiliry (consisrcnry) of the infornation obtained, *lidi.y (acolracf) of rhe information obrained, acceptability of the data and the process by employecs aod managers, and practicaliry (usefulness) of the information collected.
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76
Dererminitg the Smrctun
job analysis job description job specifications
offshoring Position
Analysis
,F.. "
reliability validity
Questionnaire (PAQ)
Review Questions
h
1. 2, 3. 4.
Ir
I t t I t T I
What are the two critical uses of job analysis for compensation decisions? Describe the major decisions involved in job analysis'
Distinguish between task and behavioural data. How should discrepancies between job analysis information provided by employees and supervisors be resolved?
Experiential Exercises 1.
to several managers and find one who claims to have never heard of job analysis' Ask the manager how job descriptions (if there are any) in the organization are developed' Ask whether there are any problems because of jobs that overlap, problems with performance evaluations. and problems with concerns about pay fairness. How might these problems be related to the lack of job analysis information?
Talk
Z, a.
Think of a specific job you presently hold or have held in the past (including a parttime job or volunteer work). use the information in this chapter to develop a job analysis questionnaire that you believe would adequately capture all relevant information about that job. Then complete the questionnaire for your specific job'
b.
pick a teammate (or the instructor will assign one) and exchange questionnaires with your teammate'
c.
Write
d.
Exchange descriptions. Critique the job description written by your teammate. Does it adequately capture all the important job aspects? Does it indicate which aspects are
job description for your teammate's job, Does the questionnaire give you sufficient information? ls there additional information that would be helpful? a
most imPortant?
Case The Customer Service Agent Read the following articl6 on a day in the work life of Bill Ryan. Then write a job description for the job of customer service agent. Use the exhibits in this chapter to guide you in deciding what information in the story is relevant for job analysis.
F
F T
I I Intemat Alignment:
Key Terms
F F
I I I
Part
1. 2. 3..
Does
the day diary include sufficient information?
ldentify the specific information in the article that you found useful.
What additional information do you require? How would the information help you?
pick a teammate (or the instructor will assign one) and exchange job descriptions with your teammate.
I
L
a.:
Chaptcr4 | lobAtalyit
1. 2. 3.
How similar/different are the two descriptions? You and your teammate started with exactly the same information. What might explain any differences?
What process would you go through to understand and minimize the differences? What are some of the relational returns of the job?
Bill Ryan often deals with difficult people. lt's what he gets paid for. He's one of 30 customer service agents at Half.com, an online marketplace owned by eBay Inc., the Internet auction company. Like eBay. Half.com attemptsto match buyers and sellers in a vastflea marketfeaturing millions of products ranging from trading cards to camcorders. But unlike eBay, there! no bidding. Half.com lists items only at a fixed price. lf you see something you like, pay the price and it's yours. The other big difference from eBay is that for most products listed on Half,com, there's no way for buyers and sellers to interact directly. Usually there's no need to. To make a purchase, buyers use their credit cards or chequing accounts to pay Half.com, which then automatically credits the amount to the seller's card or account, minus a transaction fee. Once the payment is made, the seller ships the product. Despite a well-oiled system, however, questions arise. Things can go wrong. A purchased item doesn't arrive, or isn't in the condition the buyer expected. Or maybe an interesting product is listed but its description isn't clear. And that's where Ryan and his colleagues come in, handling the buckets of e-mail and intermittent phone calls from curious, addled. and upset users. They pass information between buyers and sellers, answer questions, and resolve the occasional dispute. Half,com says that fewer than 1 percent of the site's transactions require customer service involvement. But with more than 15 million items for sale-well, you do the math,
In fact, the customer service department receives about 1,500 to 2,000 e-mails per day, of which nearly a third are complainb about transactions. The rest are mostly questions about the goods and how the site work. Ryan himself on a typical day fields between 60 and 100 e-mails and half a dozen phone calls. The calls are the most stres#ul. "People panic and they want answers," says Ryan. "lf they are calling, they're not happy." For Half.com-as well as for mosl other e-commerce companies---customer service agents like Ryan are the crucial link between the faceless website and the consumer. And how they deal with the public can make or break a busines. As Half.com's vice-president for operations says, "lt costs too much to get a new customer only to fumble the relationship away." Half.com won't discuss salaries, brfi Ryan and his colleagues, who are split into two shifts covering 8 a.m. to midnight, seven days a weeh say they're satisfied with their wages, which include quarterly bonuses.
What he likes about his work Ryan says, is the kjnd of customer problem that requires research and deep digging to find the resolution. What he sometimes doesnl like about his work are the routine questions that generate stock responses. Here! a day in Ryan's work life:
The Answer Man the Half.com office in Lethbridge, Alberta, a short drive from his home, The company's single-storey grey building is a former tire factory in this Colonial-era industrial town in the south of Alberta. Ryan works in a low-slung black cubicle toward the back ofthe office. his space sparsely decorated. The atmosphere at Half.com is decidedly young and casual. Jeans are the uniform. Ryan certainly fits in, although at 32 he's a few years older than most of his cubicle mates. 8:00 a.m.: Ryan strolls into
He started doing strictly customer service, answering customer e-mails. Now he also does what the company calls "trust and safety work": investigating fraud and looking for things on the site that are "funky." For instance, when Half.com receives a complaint from a buyer about a seller. itl Bill Ryan's job to contact both parties and niake sure there is no fraud occurring.
This day, because the site has received a high volume of e-mails, he's on regular customer service duty. After checking the few internal e-mail messages he receives each day. he gets right
7t
78
Paml I latenalAlignwc
Dutriniq *c Stnc*rc
Ryan downloads his first batch of ten e-mails for the day. He says it usually takes him about an hour to get through ten messages.
to work.
8:10 a.m.: The first e-mail is from a woman interestedln buying an audio book on CD she saw listed on the site. she wants to know whether the CD will work on her DVD player. But because she doesn't specify the exact lirting, Ryan is stuck. He can't search for it among all the listings or contact the seller. The best he can do is suggest that she send him an item number so that he can contact the seller with her question. comes from a user who sold the Diana Krall CD When I Look in Your but lost the buyer's shipping information. The seller is concerned that a delay in her shipment will give the buyer reason to give her a negative rating on the site. After each irurchase is made, the buyer gets a chance to rate the seller's performance on a scale from 1 to S-"poor" to "excellent." Every rating sellers collect is displayed along with their user name ne)iltto subsequent items they list, Just one negative rating can ruin a sellert reputation, depending on how
8:15
a.m.:lhenext e-mail
Eyes,
many sales he or she has made overall.
trBck down the details on this particular transaction in the Half.com user database. He identifies the buyer and writes an e-mail to explain that the seller lost the shipping address and "wants to let you know they are sorry for the inconvenience," He then e-mails the buyer's shipping address to the seller. Ryan
Ryan says he doesnt find the e-mails tedious. "There is such a variety oftopics to respond to," he says. "l.never get 50 of the same questions in a row." But a few e-mails later, he shrugs with
disapproval. The user! guestion could easily have been answered by going to the help section of the website: "Do I include shipping in the sale price or is it added later?" Says Ryan, "lt's a general question. I like the detailed research questions." He pastes in an answer from a database of stock responses the customer service team has put together. He then tacks onto the end of the email a salutation that he draws from a list of suggested message closers provided by Half.com. The list, the company says, makes it easier for the agents to write so many e-mails. For this message, Ryan chooses, "lt was my pleasure to assist you."
Got Juice 9:30 a.m.: After answering a few more messages, it's time for a coffee break. Ryan says he drinks two cups of coffee a day, a habit he picked up since starting at Half.com. "A year ago I wouldn't have touched the stuff," he says. He heads to the kitchen, which is just down the hall from his desk, The well-lit room is stocked with free cappuccino, juice, pop. cereal, cookies, and other munchies. The cafeteria also doubles as a lounge, with a satellite television playing TSN, a Foosball table, and a ping-pong table. This early in the morning, however, most people are interested in the coffee. 9:48 a.m.: An e-mail arrives from a Half.com colleague in charge of the stock-answer database. He writes that a response Ryan submitted on how users can sign up for direct deposit-linking their Half.com transactions with their chequing account-would be included in the database. "There are so many things we don't have responses to," Ryan says. "lt makes everyone's life easier to have the database."
l0:00 a,m.:The first ten e'mails are done, Ryan downloads ten more. One is from a father who several days earlier ordered the latest Sony Play5tation 3 for his sonS birthday and is concerned because it hasn't arrived yet. Half,com's policy is that if a buyer hasn't received an item within 30 days of purchase, he or she can lodge an official complaint, The PlayStation seller is thus a long way from the delivery deadline. Nevertheless, as a courtesy, Ryan sends the seller and e.mail asking whether he can provide a shipping date and tracking number that Ryan can pass on to the restless father. Half,com believes that help like this-beyond the requirements of its own rules---5eparates its customer service approach from that of other companies. When the company was starting out, says training supervisor Ed Miller, customer service tried to respond to as many messages as it could, as fast as possible. What the company learned, however, is that "customers don't mind if
--'rt
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Chaprer4 | JobAnalyis
79;
I
; I
I
you take a little more time to answer their specific question," Instead of just firing off e-mails, Half.com now sees it as important to personalize each message. Even with the personalization, Half.com says it resPonds to most messages within 24 hours. Communications with customers have a consistent and pleasant tone. E-mail messages conform to the "grandmother rule,,, Each
message should "make sense
to my grandmother."
10:10 a.m.: Washroom break. l0:15 a,m.:"All right," Ryan says eagerly, returning to his desk. He cracks his knuckles and starts typing."A buyer who purchased a video game two months ago but never received it writes to thank Half.com for "hounding" the seller to send him the item. But he wants a refund. Ryan verifies the buyer's version of events in Half.com's records, then refunds the buyer,s money and charges the seller's account for the amount of the sale. Ryan sends e-mails to both parties informing them of his action. Half.com's rules say that when an official complaint has been lodged, the other parlry has five days in which to respond. ln this case, the seller didn't respond, so the buyer won the dispute by default.
10:25 a,m,: Snack time. Ryan breaks into a high-energy Balance
him ready for what comes next.
bar-a little nourishment to get
Wrecking Crew 10:30 a.m.: Time to knock down some walls. Lively human resources worker Alicia Di Ciacco invites Ryan and his colleagues to pick up sledgehammers and knock through a wall at the end of the office. Half.com's staff has doubled in the past yea4 and the company is expanding into adjacent space in the old tire factory. Everyone in the office takes turns whacking at the wall. Some of the younger males dish out screams of "l'm not going to take it anymore!,, and "Where's the Pink Floyd?"-a reference to the 1970s rock album The Wall. Ryan eats up the office energy. "lt's exciting to work here," he says. "We're growing. We had the second launch of the site. (Half.com expanded the product line in April.) We're doing construction. ltt good to come to work when the company is doing well."
with a batch of ten e-mails, Ryan downloads ten more, including two sepafrom customers who can't redeem special introductory coupons Half.com offers to
11:15 a,m,: Finished
lXTi:""::
I 1:47 a.m.: Ryan gets an e-mail from a seller responding to a message from Half.com. A poten tial buyer has asked Half.com whether the sellert 75-cent copy of Carolyn Davidson's Harlequin romance The Midwife is a paperback or hardcover. Half.com forwarded the question to the seller, who now is writing back to say it's a paperback. Ryan sends two e-mails: one to the buyer, answering his question, and one to the seller, thanking him for the information.
l2:10 p.m.: Ryan eats his turkey wrap in the company cafeteria with some colleagues and heads back to his desk by 1 p,m.
p.m.: E-mail from a user who can't find the new Stephen King novel on Half.com, The she supposed to list all new books from major publishers, even if no one is selling them. That way. if a user is interested, he or she can put it on a wish list and the site will automatically e.mail him or her when a copy has been posted for sale. Ryan searches for the book meticulously, checking by title, author, and publisher's ISBN number. Once he! sure the book isn't listed, he e-mails Matt Walsh, who is in charge of fixing catalogue errors. Ryan then e-mails the user and instructs him to check back at the site soon. 1:06
is
1:21 p.m.: First phone call of the day. Because Half.com prefers to conduct customer service on e-mail, to keep its costs down, it doesnt display its phone number on its website. Still, persistent users get the number through directory assistance or other sources. This caller, an agltated buyer of the video Valley Girl, a 1983 comedy starring Nicolas Cage, says she received a damaged tape. She has lodged an official complaint against the seller on the site, brt.t the seller hasn't responded, Ryan tells her that the five days the seller has to respond aren't up yel He assures her that if the seller doesn't respond within the allotted time, he will refund her
I I I I f
r t
80
PanI I InarnalAlignunt Dc*mhing
dtc Stracnrc
money and charge the seller! account. LJntil then, there's nothing Ryan can do except comfort the caller with apologies and explanations. ln the event that the seller disputes the buyer's clairii about the tape. Half.com is still likely to grant.the refund, especially on such an inexpehsive item. Half.com makes it clear; however, that its customer service team keeps a close watch on users'complaints, looking out for fraudulent refund requests. lf Half,com suspects foul play, it doesn't grant refunds so easily. 2:02 p.m.: A seller of the video I Know What You Did Lart Summer got the package returned, marked address unknown. Ryan looks up the buyer's information in the user database and e-mails him, asking for an updated address to forward to the seller. He then e-mails the seller, telling him the address should be on its way shortly. 2:21 p,m.: Ryan downloads ten more e-mails.
Home Stretch 2:30 p,m.: The day is starting to get long, at least to an obseryer. But Ryan says sitting still all day doesn't cramp his style. "Sometimes itt tough to work at a desk, but it doesn't really bother me," he says. "l work out after work, and that really loosens things up." 3:00 p.m.: Washroom break.
p.m.: With the clock ticking toward quifiing time, Ryan works on finishing his last batch lt! more of the same: a user unsure how Half.com works; a seller who wants to list a 1976 edition of The Grapes of Wrath but can't figure out where to put it on the site; a buyer who wants a book shipped second-day air, even though the order was already placed.
3:1 5
of e-mails.
3:30 p.m.: A call from a buyer interrupts Ryan's streak of dispensing e-mails. The buyer felt that the quality of a book she bought was not up to snuff. The book, a $2 copy of Danielle
torn cover, The buyer is upset, but Ryan remains calm, calling on skills he learned in a one-day seminar "Dealing with Difficult People." ln the class, which he took before coming to Half,com, he learned to paraphrase what the customer is saying to make sure he understands the complaint. Ryan also takes care to speak clearly with a strong sense of empathy. At one point he says, "l understand your frustration." When he explains that the buyer will have to wait some time for a final resolution of the matte[ he makes sure to preface it with a heartfelt "l'm sorry to let you know . , ." An observer listening to Ryan gets the sense that he is not acting. Steel's Secre8, apparently had a
"lf you don't understand what they are saying, then you have a problem," he sap. Though he can't satisfy this customer then and there, he promises to talk to his supervisor and to call her back tomorrow with more information. p.m.: The day is done. Ryan finishes his last e-mail, closes up his desk, and heads home. A new shift of workers picks up where Ryan left off, toiling from 4 p.m. to midnight. When they finish, the customer service staff in eBay's facility in Salt Lake City will take over. Tomorrow Ryan will be back on duty at I a.m.. downloading his first ten e-mails.
4:OO
Source: Alex Frangos, The Walt Street Journal,July 16, 2001.
ffi-
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T
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I I I
LEARNING OUTCOMES LO1 Define job evaluation and explain the different perspectives regarding this 'activity.
LO2 Describe the ranking method of job evaluation and explain two specific methods of ranking,
LO3
Discuss
the classification method of job evaluation and how benchrna"ir::r:
are used in this method.
LO4 Explain the six steps involved in the point method of job evaluatlon
a
r
:
describe the three common characteristics of point plans.
105
Discuis who should be involved in job evaluation.
How does any organizacion go about valuing work? Ac a supermarket, there are many rypes of work; store manag€r, produce manager, front-end manager, deli workers, butchers, stock clerks, checkour people, balcers-the lisc is long, and the work surprisiirgly diverse. Specifically, whar rechniques are used to value work, and would the techniques really matter? This chapcer and rhe next discuss techniques used to value work. Both chapters focus on the "how ro"-rhe specific sreps involved. Job eva.luadon techniques are discussed in this chapter; person-based techniques, borh skill-based and competency-based, are discussed in Chapter 6. The objective of all the rechniques is an inrernally aligned job suucture on which to base pay decisions. Uldmacely, the pay srrucrure helps the organization sustain its competirive advancage by infl uencing employee behaviours.
--II
JOB-BASEB STBUCTURES: JOB EVALUATION
Exhibic 5.1 is an elaborarion of Exhibit 4.i in dre previous chapter. It describes the process of building a job structure on which to base the ultimate pay sffucftre. Job analysis and job descriprions (Chaprer 4) collected and summarized work information. In this chapter, the focus is on horv ro derermine what to value in the jbbs, how to quantifr that value, and how to uanslate
LO1
R','
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il I I I I I
f f f I
I II
I
82
Put
I I Inarnal Akgarurt Danizhtg & Stutsz
EXHIBIT 5.1
Many Ways to Create lnternal Structune
Eusiness and Work-Relatej
lnternal Structure
\
\ Person-based
Job-based
/\ /\ Skill (Chapter 5)
Competencies (Chapter 6)
PURPOSE
I Collect,
work
summarize Job analysis
information
lr r
(Chapter4)
it Determine what
to
value I |
Job evaluation: classes or
++
Assess
Job descriptions
value '
compensable factors
(chapter 5) Factor degrees and
weighting (Chapter 5)
into structure
Translate
job structure hierarchy
of
att
johs
basd
'
b the oryaniation; provides the basis for the pay
on value
structure
job evaluation the procas of systematically determining the relative worth of johs to create a job structure for the organization
Job-based structure (Chapter 5)
that value into a job structure. Job evaluation is the process of determining and quantifring potentid to blend internal forces and o..rrrJ marker forces is both a srength and a challenge for job evaluation. Tiadidonal job-based approachcs to creating internal structure (dating back to the 1930s) were predictcd by some to bccome obsolete when newer persqn-based approaches (discussed in Chapter 6) bccamc popular during thc 1990s. However, two decades later, job evaluation is sdll nalue, The
alive and wdl, although jobs themselves have changed considerably.l Exhibit 5.2 shows how job svaluation fits into the process of determining the internd structure. The process begins widr a job analysis, in which information on jobs is collected, and then job descriptions summarize this information and serve irs input for the ev.aluation. The exhibit calls out some of the major decisions in the job waluadon process.
.
Chapter
5
| Job-Ba:el Struintns anlJob Etaluztion
83
Determining an lnternally Aligned Job Stnucture
jOB
ANALYSIS +
JOB
DESCRIPTIONS
+
JOB
EVALUATIoN +
JOB STRUCTURE
EVALUATION SOME MAJOR DECISION5 IN JOB
. .
Establish purpose Decide whether
of evaluation.
to
use single
or multiple plans.
o Chorise among alternative approaches. . Obtain involvement of relevant stakeholders'
o Evaluate plan's usefulness.
DEFINING JOB EVALUATION: CONTENI VALUE, AND EXTERNAL MARKET LINKS Job Content and Job Value
diffcr on whedrer job erraluation is based on job content or job value. A suucnue job conrenr refers to the skills required for the job, irc duties, and its responsibilities. A based on on job vrlue. refers to the relative conuibucion of the skills, dudes, and resporuibased sffucflge bilities of a job to the organizationt goals. But can this suucrure translate direcdy into pay rates, without regard to the enternal market, goveflrment regulations, or any individual negodation process? Mosr people think not. Recall drat internd alignment is just one of the building blocks of the pay modd. Job characteristics matter, but they are noq the only basis for pay. Job value may also include its value in the external nurket and/or its reladonship co some other set of rates that has been agreed upon tbrough collective bargaining or other negotiarion process or to governperspectives
menr lcgislation (minimum wage).
'
Not only may th,e content be described and rralued differendy by different observers, but the work may be more or less in one organization than in another. It wzs
,rnlue. added by t.he same
ftrm by a compensadon specialist whose earnings are through sales of manu6cnrrcd goods or engineering orpenise may differ frorn the vdue added by a spccialist to a consulting ftrm whose revenues come through rhe sale of compensation ocpertise. So, dthough inemd job value (conuibucions to organization objeaives) may be equivalent, orternal market value may differ. There is not a one-to-one correspondence with pay rates.
observcd in Chapter 3 that the vdue added to a generated
\ t inting Conteni with the External Market job evaluation as a process that links job content with external market rates. Aspects job content (e.g., skills required and customer contacts) take on vdue based on their relationship to market weges. Because willingness to work more closely with customers or higher skill levels usually command higher wages in the labour markct, the nature of customer contacts and skill level become usefirl crireria for establishing differences between jobs. If some aspect of job contenr, such as working conditions, is not related to wages paid in tlte octernal labour market, then rhat aspecr is orcluded in the job er"aluation. According to this perspective, the value of job contenr is based on what it can command in the external market; it has no intrinsic value'4
',Some see ,rf
il" il
84
P* I I Inmtal Ahgnu* Wq
* Saleat
But not evertone agrees. A daneloper of the Hay job evaluation plan (widely used by large corporations) states rhat the "measures are independent of the market and encouage rational determination of the basis for priciag job content."3 Hay claims *rat job evaluation establishes the relative nalue ofjobs on the basis of their content, independendy of any link to the market,
Different Perspectives on Job Evaluation
:F.-:tn_-
too, have their own perspectiYe on job ev-aluadon. Some say that if job value can be quantified, then job evduation takes on the rappings of measurement (objecdve, numerical, generalizable, documented, and reliable) and can be judged according to technical standards. Jusr as with employment tests, the reliability and validiry of job evaluation plans can be compared; rescarch will be able to tell us if ten compensable factors is too many, or if three is too few. Those involved in actudly making pay decisions have a different view. They see job evaluResearchers,
ation as a process rhat helps gain acceptance of pay differences between jobs-an adrninistradve procedurc through which the panies become involved and committed. The process invites give aqd take-an orchange of views. Employees, union representatives, and managers haggle wer "the rules of the game" for determining relative worth. As in sports and games, we are more willing ro acccpt the resuft if we accepc the rules and believe they are applied fairb.4 This interpretatiJn is consistent with the history of job evaluation, which was begun :rs a way to bring labour peace and order to the wage-setting process. Some say the content of jobs has intrinsic value rhat the evaluation will uncover; others that jUthough some claim contemrhe only hir measure of job valuc is found in the external rnarket. fot"ry job evaluadon practi"es are just and fair,'others say they are just fur. All these perspectives
will
be caprured
in this chapter.S
"How to": Major Decisions The major job evaluadon decisions are depicred in Exhibit 5.2. They are: (1) establish
the
p,trpose(s), (2) decide on single versus multiple plaas, (3) choose among alternative methods, (<) oUt"i" involvement ofrelevant stakeholders, and (5) evaluate the usefirlness oftle results.
rI
ESTABLISH THE PURPOSEISI Recall Job evaluation is part of tte process For establishing an interndly aligned pay structure' from Chapter 2 that an internally aligned pay suucrure supports organizational sffatery, suPPorts the workflow, is fair to employees, and directs their behaviour roward organization objectives.
Suppotts Qrganizational Strategy Job evaluation aligns with the organizationt suategy by stating*har it is abour a job that adds value.(i.e., conuibutes in pursuit of the organiz:tiont objectives). Job evaluation helps answer the question: How does this job add value? ring cach jobt pay j or changing unigue, pay for new, and by sening to the organization its reladve contribution with i
jobs.
i :1
grierrances over Pay &ffcrences berween jobs by esablishing a workable, agreed-upon structru€ that reduces the nili that chance,
ls Fair to Employees Job evaluation can reduce disputes and
favouritism, and bias may play in secing
pay.
I
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1
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L_,.__
I
Chapter
Obiectives
5 | Job-Bucd Stracnret
and Job
Etalution
spells out for empio,vees
Job evduation Motivates Behaviour towald 0rganization values, it is-they do that,s-rlppgrls the that the-organization and-what rheir-work about ir ,"rr", i, strareg'y and promotes its ultimace success, Job wduarion also can help employees ^r""ni""riottr ,o change by improving cheir understanding of whar is valued in their assignments and
"j""0,that value might change' h^w If che purpose of the evaluation is not spelled out, ir becomes eaq' to get lost in complex The job evaluation process becomes an end in itseL6 .rocedures, negoriadons, and bureaucracy. Establishing the objecdves can help ensure that the achieve an objective. ro means a lnrt.od of is che rational and qystematic process it is meant to be. actually .urluadon
SINGLE VEBSUS MULTIPLE PI.ANS evaluate all jobs in the organization at che same dme. More rypijobs, for example, production, engineering, or marketing, will be of group related calln a design different evaluation plans for different rypes of work employers Many the focus. work content is too diverse to be evaluated adequately by a single rhe believe they because jobs may vary in terms of working conditions, manipulative production example, For olan. ,kills, knowledge of scatisrical control, and working conditions. But these tasks may not jobs do not vary on these factors, nor are these be relevant to engineering, and marketing jobs. Instead, the nature of contacts with customers factors particularly important in finance universal plan may not be acceptable to employees if a single, may be relevant. Consequentiy, there are some plans r-hat have been successfi:lly Even so, diverse. is highly the work covered work. most prominent examples include the The depth of and breadrh a wide applied across is advised when using muldple Caution Analysis Position rhe and Quesdonnaire. Iiry p6" of procedural fairness issues and affect perceptions communication complicate may it as plans,
Rarely
will an ernployer
and internal equitY.
Benchmark Jobs
lo l.
work are included in the evaluation, an organizatibn may jobs. In Exhibit 5.3, benchmark jobs would be identiffed for as . smn with a sample of benchmark many levels in che structure and groups of related jobs (office, production, engineering) as Posjobs. ;r.'sible. The heavy shading in the exhibit indicates t}re benchmark
1,
sure rhat all relevant aspecrc of
Penspectives on Job Evaluation
JOB EVALUATION
l5:
content A measure of relative value A link with external market A measurement device Negotiation
ASSUMPTION
Contqnt has innate valui outside'of externalirmarket.'
A measure of job
Relevant groups can reach consensus on relative value. Job worth cannot be specified
witllout extelnal market info:rrat:'-
Honing instruments will provide objective measures.
.,
Puts face of rationality onto a social/political process. Establ6i:es :-game. lnvites participation. '
s :- :.re
85
A.-
Chapcr
5 | JoFBtd
JOB EVALUATION METHODS of roughly 1,000 mernbers
87
Snucnra and Job Eualuation
LO2
of\forl&r\7ork, fie
association for compensadon professionin their organization. As F-xhibit 5.5 indicares, lJi "I7ell, noc really any job evaluation merhod." Ra*rer, using market lor. "o*on r€sponse'wa.s (67 to 75 percent, depending on the job level) as dre primary chosen ovenr*relmingly ,"ro * ..od of job evduadon. lWhat is market pricing? This topicrdll be covered in more detail in Tr,rrrr 8. In general, market pricing means direcdy matdring iN many of ttre,organization's jobs
Or .t . primary job
ilii"tUf.
ro jobsdescribed
ev-aluacion medrod used
jn theexter:.I
Piy,*T,T
used by the organization. To the
T*..rhT
made, &. P"y rate for a job witl be based on rtre survey dae. lnernal equrty is rnarches can be d..mphrrized (as is the organizadon's strategr-more on this in Chapter 8).
;1v
l-- t,or. thar Exhibit 5,5 does indicate that somewhere beuween I in 3 and 1 in 4 organizadons i-ocinue ro use traditional job evaluation approaches as their primar:r methods. Funher, it is , job evaluation Jn ay 't'., i.re, b"."us. it is usually not possible ro direcdy match all jobs to market survey jobs. Thus, ,h Juadon is sdll needed, and we now discuss three job evaluation merhods, with most of our or point factor approaches' f,rr.nriott given to point
i1.ti:-T:1,I1?f:^l:lciT,fT_1"._':YllT-{:: Hk
,Ranking simply orders the job descripcions from highest to lowesr based on a global definidon of ijrdadve.u"lu. or contribution t1 organization's Ranking is. the simplest, 5he F"t:, :T1T. employees, and explain to the least ocpcnsive mcthod, at lcast initially. and understand .-.Aoa ro ir can crcate problems that require difficult and potentially expensive solutions, because
t.l.Ir;
,lHor*"t,
ft doesnt tell employees specifically what in their jobs is imponant. i. Tro wap of ranking are cornmon: altemation ranking and paircd comparison. The akemation .nnking method orders job descriptions dtemately at edr erueme. Agrecment
is reached among er"al-
which jobs are the most and least valuable, rhen *re next most and least v'aluablc, and so on, dl ;obs have been ordered The paired comparison method uscs a matrix m compare all possible 'nd oflobs. The high€r-rarked job is entered in the cell of dre mauix. 'When all comparisons have been 'pairs .iompl.ted, rhc job mosr frequendy judged "more valuable' becomes drc highest-ranlced job, and so on. Alternacion ranking and paired comparison methods may be more rdiable (produce similar resula imore consistendy) than simple ranking. Nwenheless, ranking has drawbacks. The criteria on which the i jobr rr. ranked usually are so poorly deffned-if they are speciffed at all-that tlre e'raluations become .uators on
il
ranking job evaluation method ttat nnfs jofu from highutto
Iowestbaxdcr,aglobl definition of nlue
alternation ranking method nnking the highest- a'nd Iowst-va lued job s fi rst, then the nextfiighest- and lowestjobs, repeatrhg the
valud
procs untilalljobs hate been nnked
paired comparison method listing all jobs across cdumns and down rows of a matrix, comparing the lwo jobs in each cell and indkating which ol greater value, then
is
nnking
j&s
on the bais of of times
the toal number each is
rankd as fuing of
greater value
t t t t t t T t I t t t ;
EXHIBIT
5.5
Pnimany Method of Job Evaluation
WHAT
METHOD OF JOB EVALUATION USED BY YOUR ORGANIZATION?
IS THE PRIMARY
ALL OTHER
POINT FACTOR
MARKET PRICING
Senior management.
7SVo
14Vo '
11d/o
Middle management
70o/o
18o/o
12'/o
Professional
69%
Salbs
72o/o
16%
12o/o
Administrative
67o/o
19o/o . '
,14o/o
Production
680/o
:' t tQ"zo
-
World at Work, "Job Evaluation and Market'Pricing Practices,u February 2009'
'17 o/o
13Vo i
'
'
15o/o
;
I ; ; ;
t
T T
Partl I IntmalAligrnar Dcurntuag *<
88
Strlcttttc
opiniors that are impossible to juscify in work-relarcd terms. Funhermore, evaluatods) using this merhod mu$ be knowledgeable about every single job under study The numbers alone rum what should be a simple ask into a formidable one-50 jobs require 1,225 compafisons-and as organizations &*ge it is diftcult ro remain knowledgeable about dl jobs, Sorne organizations try to ovelcome this difficulry by ranking jobs within singledepartmenr and merging the results. Howwer, even though ranking appea$ simple, fasg and inexpensivg in rhe long nrn the results are diftcult to defend and cosdy solutions may be required to overcome the problems created. subjecdve
T'
T T T T T T
LO3
Ctassification Picnue a bookcase with many shelves. Each shelf is labdled with a paragraph describing the kinds of an4 perhaps, one or lwo representative ddes. This same approach describes the d""siffcation qrstem ofjob evaluation. A series ofdasses covers the range ofjobs. Class descriptions are the labels. A job description is compared to rhe class descriptions to decide vfiich dass is t.he best fir for that job. Each class is described in suc.h a way that it caprures suficient work detail, yet is general enough to cmrse litde difficulty in sloning a job description into ia appropriate "shelfl or dass. The dxses may be described firther by induding cides of benchrnark jobs that fall into each dass. 'Writing dass descriptioru can be uoublesome when jobs from several job families are covered by a single plan. For cample, dass deffnitions written witfi sales jobs in mind may make it difficult to slot office or adminisuative jobs and vice versa. An examination of the level (dass) descriptions books on thar shelf
classilication job emluation method baxd on
job
dass descriptions into
which jobs are
etegorhd
for the Dpntistry: Scientiffc and Professional Category ofjobs in the federd governmentt dassiffcation system in Exhibit 5.6 indicates that the broad wording of the level desciptions seems to leave a lot of room for judgmenc Including tides of benchmark jobs for each class helps make the descriptions more concrete. So, in practice, not only are the job descriptions compared to the sundard dass descriptions and benchmark jobs, but they also can be compared to one another to ensure rhat jobs within each class are more similar to each other than to jobs in adjacent classes. The ftnal roulr i, a series of classes with a number of jobs in ea&. The jobs within each class are considered to be equal (or similar) work and will be paid equally. Jobs in different classes should be dissimilar.
I
EXHIBIT 5.6
T
Level Descriptions
I I
ttI t l
[: [:
T T T I
!
Source: Classification Standard: Dentistry Scienti{ic and Professional Category Treasury Board of Canada Secretatiat,20lZ. Reproduced with
L.---._
the permission of the Minister of Public Works and Government Services Canada, 2012.
I Chapter
5 | Job-Bued Smtcnrcs
and Job Euahnian
Point Method
LO4
Poiot *.thods have three.o-rnon characreristics: (1) compens"bl. f*.torr, wirh (2) numericdly scaled factor degrees, and (3) weighu reflecting the relative importance of each factor.T Each jobk relative value, arrd hence its location in the pay suucrure, is determined by the cotal poina assigned
89
to it.
Point plans are r}re most commonly used approach to esrablish pay sffucrures in Canada due co pay equiry legislation requirements for rhe evaluadon of skill, ifforr, ,.rporrsibiliry and working conditions in jobs. They represent a significant change from ranlcing and classifflation methods in that they make explicit the criteria for evaluadng jobs-compensable factors. The 'Worth box here illustrates t-he ongoing rnodernization of the classifrcadon qrstem used by .Net rhe federal government toward the point method ofjob evaluation described in t}1e nexr s€crion.
point method job evaluation method that assigns a number of poin6 to each job, based on compensa bl e factos that are numerically scaled and
weighted
,@
FEDERAL GOVERNMENT CLASSIFICATTON SYSTEM MODERNIZATION The office of the chief of Human Resources officer (ocHRo) within the Treasury Boar.d
of canada secretariat was formerly known
as the public service Human Resources Management Agency of canada. ocHRo is modernizing the classification system usec by the Government of Canada to evaluate jobs within the Core public Administratior. A new classification standard for the Border services occupational Group has been cieve oped. This new classification standard is used to evaluate jobs using a point faccr':c evaluation approach; see below.
WEIGHT
FACTOR
Knowledge Analytical skills
MAXIMUM NO. OF DEGREES
POINT VA,].U!5
17%
6
170
J'/o
b
150
I
Communication
': r:: lnteraction
skills
lCO
.
People and
15o/o
operational.
.
,'.t
managemeni't
15o/d'
5
1
tri
t,.''t,t
effort
Sensory
effort
Risk
to
health
.
I ;
I
;
I I I
t I
J
I
.
Work environment (psychological)
Worken'viicinment ,i (nhYlicll),,,, .,,',':
:'
Total:
;
d
Decision making Phvsical
t
:
.: 'li
ififi
Source: Classification Standard: Border Services Group, rvww.ts-s:- !::a/:*, /:i:r.:l EC-eng.pdf, Treasury Board of Canada Secretaial, ZO|Z. Rep=c-"::::,8i.- fllliflr. of the Minister of Public Work and Government Services Car=::
*,:-1* ll l
t il t
1l
Pan
compensable factors those charactefl3tics of the work that the uganization values, that hdp itpursue i6 statey and that achieve ia
objxtives
I I hfiral Akgnst funini4 tk Snaetare Compensable frctors are deffned on the basis of the strategic direction of the business and how &e work contributes to that suatery. The facors are scaled to refleff the degree to which th.f * present io each job, and weighted to reflect their overall importance to rhc organization. Points are then amached to eech facor weight. The point total for each job dercrmines its posi! tion in the job $rucnre. Exhibit 5.7 lists the six steps involved in the design of a point plan.
l. 2. 3. 4. 5. 6.
Conduct job analYsis. Determine compensable factors' Scale the factors' 'Weight the factors according to irnponance and assign poina to each one. Communicate rle plan and train users; prepa.re manual. Apply to non-benchmark jobs.
The end product of this design process is a job scucrure that helps darelop and eglain the Pay $rucnre'
L
Gonduct Job
Analysis Just as with ranking and
classiffcation, point plans begin with job that is, benchrnark jobs, is drawn for andysis. The content of these jobs seryes as the basis for deftning, scaling, and weighdng the compensable analysis.
Tfpi."lly,
a representative sample of jobs,
factors,
EXHIBIT
tr
5.7
The Point Plan Process
Chaprcr
5
| lob-Based Stncturc: andJob &ta&aioa
2. Determine Gompensable Factors Compensable factors play a pivoral role in the point olan. These factors refiect how work adds value to the organizacion. They flow from the work irc.lf .nd from che strategic direction of the business. The four compensable factors required jn pry eqriry legisladon across Canada are slcill, effort, responsibiliry and working condidons, tjr.r.for. rhey are present in virrually all Canadian job evaluation pla:ts. Shill refers to the "nj experience, raining, abiliry, and education required to perform a job. Subfactors indicative of rLill -"y include educational levels, years of experience required, technicd knowledge, specializedknowledge or training, interpersonal skills and many others. Efort referc to the physical, mencal, or ernodond exerdon needed for performance of a job. Common subfacors indude diversity of tasks, complexity of tas[
,H
9.t
il n il
d d
t f
F F
t
F
I I I I I
E]:,''.'.'::':,...'..'::..'.'':':l.''.'.''''..,.''.E FACTORS
skill
Effort
,.''.. Responsibility
:'
'
Working conditions
E h-
Source: @ Queen! Printer for Ontario, 2005. Adapted
t
with permission.
I -
t
Pa;tI I InmnalAligmuar Dannhhg{r Sauast
92 EXHIBIT
5.9 |
kample of Compensable Factor Definition: Human Helations Skills
E
ffi Human Relations Skills are the active, face-to-face skills needed by a job holdel for various relationships with other people within and outside of the organization. Human Relations Skills range fFdm "1" (basic), to "2" (important), to t3" (critical), lt must be kept in mind that "1" is not a "0." lt is assumed that atl jobs require a minimum of common politeness. At the opposite extreme, a job that requires the ability to motivate, convince, or sell others to gain results is a "3." Human Relations Skills are noi synonymous with being a nice person and they are not necessarily interchangeable. Level descriptions follow, EXPLANATION
'1;Basic,
'l
:.
This
is
the base level,of interpersonal skill utilized by
p"*olrning tf'" joU.
Maintaining courteous and effective working relationships with others tq request or transmit ask questions or get clarification.,
informgtioi, 2. lmportant
of interpersonal skill is required in jobs in which understanding and influencing people are important requirements in the job.
This level
Skills of persuasiveness or assbrtiveness as well as sensitivity to the other person's pointof view are often required to influence behavior, change an opinion, 9l tlrn.a situation around. The requirement?or public contact does not necesgarily_demand this level of human relations skills, particularly if the purpose is to provide or solicit information-
ln addition, positions which assign work and/or monitor and review work of other employees (generally sr.ipervising AUPE positions) usually require at least this level of skill.
[eveil, but cotlsideration has
to be
E.'''|','.'''..''''.'.].]w Source: Reproduced with the permission of University of Lethbridge, Human Resources Department.
To be usefi:l, compensable factors should be
. . .
of rhe organization performed Based on the work Acceptable to the stakeholders affected by the resulting Pay strucnue Based on the strategr and values
The leadership of arry organization is the be5t source of information on ttrateg, and ua[ua of the otganization, specifically where the businQss should be going and how it is going to ger there' Clearln leadershipt input into factor selection is crucial. So, for exarnple, ifdre business strategy involves providing innovadve, high-qualiry products and services designed in collaboration with customers and suppliers, then jobs with greater responsibility for produd innovation and customer contacs should be valued more highly. Or if the business suategy is more like Walmartt, "providing goods and services to delight customers at the lowest cost and greatest convenience possible," then compensable factors might include impact on cost containment, customff relations, and so on. Compensable facors reinforce the organizadont culture and values as well as its business
direcrion and the narure of the work,
If rlat direcdon
changes, dren rhe compensable factors
.*' Chaprcr
5 | Job-Bued Strucnra
andJob Eualuation
93
il
ft
,t
t For eample, strategic plans ar many companies call for increased globalization. -.,r also change. (P&G) and 3M include a "multinational resPonsibilities" factor similar c"-bt. & l'.li*p..r.t in Exhibic 5.10 in their managerial job evaluation plan. Multinational responsibilities "". in rerms.of t-h^e rype of responsibiliry, the percentage of time devoted to international
t I
::;. *l.n*a
*a
the number of countries covered' also be eliminated.if they no longer support the busiaess stlategy. One railway its job ev"aluadon plan ro omit the_factor "Number of Subordinates Supervised'" to staif runs counter to t.he organization's objective "o*r^rreuisei i, J.'.ta.a that a factor that values increases Major shifis in &e business strategy are no! efficiency. increasing and of r.au.ing bureaucracy factors should be reexamined to ensure compensable occur, do rhey when o"",rir.".es, but
I
[*.r, '""--F".,or, may
.
Irii" .h"r .re consistent with -'-'
dre new directions' ln the uorh actzally done inany organization-' Hence, it is important E*ploy.o be valued in the work iaelf. Some form of documentation should to whar answers rc ,..k ,h"ir and/or supervisory foc'r" groups) must suPPon the job employee analysis, descriptions, ii,.., iob helps gain acceptancc by employees and managers, documentation f"or6.'WotL-r.1"..d of .-ioi* il.rri., ,o undersrand, and can withsrand a variery ofchallenges to the pay structure' For example, may :ugue thac the salaries of t-heir employees are too low in comparison to those a job candidate is too low. Union lcaders may wonder of o*r".t .roptoy.o, o, ttrat *re salary offered Allegations of pay discrimination may be raised. anorherfrom *hy on. ;ot is pdd differently compensation rnanagers must understand and be and leaders, union nrploy..r, line managers, in factors that obviously are Differences the same. or differendy paid is work Jl. ,o'opt"i" why of challenges arising' qnd likelihood the diminish rhat rationale provide irself work on the are rhe experts
**"*..,
based
Compensable Facton Definition: Multinational Responsibilities
:
t
n
t I I
94
Parr
fuunttfr
It is important thet rhe compensable factors be acceptable to all suhehald.err. Accepance of dre compensable faccors used to slot jobs into the pay structure may depend, at least in parr, oa tradidon. For e:rample, people who work in hospitals, nursing homes, and childcare centres make the poirrr tlat responsibiliry for people is used less often, and valued less, than responsibiJiry for properry,s This deficiency may be a carryovq from..the days when nursing and childcare services were provided by family members, usually women,"without reimbursement. People now doing these jobs for pay say that properly valuing a factor for people responsibiliry would raise their
t
wages,
I I
Although a wide variCry of factors"iii used in standard existing plans, the factors tend to fall into four generic groups: skill, effort, responsibiliry, and working conditions. These four are required in pay equity legislacion across Canada . The Hay Guid.e Chart-Profle Method, used by 5,000 employers worldwide, is perhaps the most widely used. The classic three Hay factorsknowhow, problem solving, and accountabiliry-are also commonly used. A remaining issue to consider is how marry factors should be included in fr. p1"". Some facrors may have overlapping deffnitions or may fail to account for anphing unique in the criterion chosen. One wrirer calls rhis the "illusion of validity'-we want to believe that the factors are capturing divergent aspeca of che job and that all are imporant.g Another problem is cdled'tmall numbers."lo If even qnly one job in our benchrnark sample has a pardcular characteristic, we rend to use that facsor for the endre work domain. A cornmon example is working conditions. If even one job is performed in unpleasant working conditions, ir is tempting to make it a compensable factor and apply it rc all jobs. Once a tactor is part of the sysrem, orhers are likely ro say cheir job has it, too. For ecemple, office staffmay feel that ringing relephones or lcakl toner carcridges constitute unpleasalt or hazardous condidons. In one plan, a senior manager refi.rsed to accept a job evaluadon plan unless some kind of working condirions factor was included. The plant designer, a recent universiry graduate,
t T T T
showed rhrough sralisdcd andysis *rat working conditions did not vary enough between 90 percenr of the jobs to have a meaningful effect on the resuldng pay sffucture. Nevertheless, rhe manager rejected this argument, pointing out thar rhe plan designer had never worked in rhe plantt foundry where working conditions mattered. In order to get the plan and pay decisions based on it accepted by the foundry workers, the plan was redesigned to include working condidons. This situation is nor unusud. In one gtudy, a 2l-factor plan produced the same job sffucture r-har could have been generated using only 7 of the factors. In fact, the jobs could be coruecdy sloned inco classes using only three facors. Yet the company decided rc keep the 2l-factor plan, because it was "accepred and doing the job." Research as far back as the 1940s demonstrares that the skills dimension explains 90 percent or more of the variance in job evaluadon results; three factors generally account for 98 to 99 percenr of the variarice.l I But, as we have seen, other factors often are included to ensure the plan's acceptance.
!
T T T T T T T
I I Internal Aligtnat fuen**g *
Factors Once rhe factors are chosen, scales id.entifring and describing the.differenr degrees within each factor (or subfactor) zue constructed. Each degree may be anchored by rhe rypicd skills, rasks, and behaviours taken from the benchmark jobs that illus*ate each factor degree/level. Exhibir 5.11 shows the federal government's scaling for the subfactor "Research and Analysis Skills" of the factor "Skill" for jobs in che Economics and Social Science Services
3. Scale the factor degree/level description of sevenl
different degrea or levels of a fador in johs; a different number of points will be associated with each level
dqreel
grouP.
A major problem in determining degrees is whether to ma.ke each degree equidismnt frorn the adjacenr degrees (interv"al scaling) in terms of the nurnber of points for each level or delree (assigned in the next step of the process). The following criteria for scaling factors have been suggested: (l) limit the degrees to the number necessary to distinguish between jobs, (2) use understandable terminologr, (l) anchor degree definitions with benchmark job tides, and (4) make ir apperent how the degree applies to the job. Using too many degrees makes it difficult for evaluators ro accurately choose the appropriate degree. This in turn reduces the accepabiliry of the system,
.iE':
Chaptcr
5 | Job-Btd
Strucnrcs and Job Eualuatiotr
E
Se(etariat,2012' Reproduced source: classification standard: Economics and social Science Services, Treasury_Board of Canada per;l;;iln of the Minster of Public Work and Government Services Canada, 2012'
'"ithid"
Once the degrees have been assigned, th1 hctol weights= must be determined. Different weigha reflect differenccs in imponance anached to each factlr by the employer, and may reflect the organizationt suategic objectives and priorities' For erampl., hirring *rrrprry *lght assign greater wdht to working condidons given the requirement for " ro of iL to t. p.tfor*.d in dangerous underground conditions compared to an account-
i4.
Weight the Factors and Assign
-*y
ing firm where
loft *ork is p.rfor*.d
Points
in an office environment,'!?'eights often are.dercrmined through an
adiisorycommiae.,]11.r[ooro l00percentofrhevalueamongthefaaors.l2Theweighsarethem used to disuibute the total number of points (which is arbitrarily determined) among the factors. Then the n'mber ofpoints for each level of each subFacor is determined, as shown in Exhibit 5.12'
factor weights weighting assigned to each factor
to reflxt
differences in
impottance attached to each factor by the emPloYu
Pm
96 EXHIEIT
m
5.12
I I Intcrnal
|
Alignna* Deanbi4
&
Jllzatutt
Factor Weighting and Assignment of Points
ffi SUBFACTOR
FACTOR
POINTs
4
8
12
16
20
4
8
12
16
20
2
4
5
8
10
Mental effort (10%)
2
4
6
8
10
9
12
15
Education (20%) Experience (20%) Physical
Working conditions (10.%)
4
LEVEL 3
skiil (40%)
Responsibility (30%)
1
POI\ITS
(wElGHT)
Effort (20%)
LEVEL
LEVEL 2
WEIGHT)
effort (10%)
POTNTS
LEVEL
POINTS
LEVEL 5 POINTS
For safety (15%)
3
6
For budget (15%)
3
5
9
12
15
Hazards (5%)
1
z
3
4
5
Weather (5%)
I
2
3
4
5
100
E
rc To.illustrate the use of the table shown in Exhibit 5.12, coruider the job of !?'eb Designer. The job might be evaluated at 12 poins for education, 12 points for experience, 2 poinu for physicd effort, 8 poina for mental effort, 3 points for responsibiliry for safeql 6 points for responsibility for budget, 1 point for hazards, and I point for weather; thc job would thus be evduated at 45 poinu. The job of Office Cleaner might be erreluated at 4 points for education, 8 points for enperience, 8 poina for physicd effon, 2 points for mental' effort, 6 points for responsibility for safery, 3 poinrs for responsibiliry for budget, 3 points for hazards, and 1 poinr for weather; *re lob would thus be evduated at 35 points. Contemporary job evaluadon often supplements committee judgment regarding weighrc with staristical analysis. The commimei recommends the criteion pa! ttruch#e they wish to duplicate with the point plan. The criterion structure may be the current rates paid for benchmark jobs, market rates for benchmark jobs, rates for predominandy male jobs (in an afiempt to eliminate gender bias), or union-negotiated rates.l3 Once a criterion strucrure is agreed on, statisdcal modelling techniques such as regression analysis are used to determine the weight of each factor that will best reproduce the chosen suucture. The statistical approach is often labelled poliE capnring to contra$ it to the committce judgrnent epplo^ch. Not only do the weights reflect the relative importance of each factor, but research clearly demonstrates that the weighs influence the resulting pay structure,l4 Th*, selecting ttre appropriate pay rates to use as the criteria is criticd. The job evduation result are based on it.15 Perhaps the clearest illustration can be found in the criterion struclrues used in municipali ties. if only market rates wete used, fireftghters would be paid much less than police. Yet many 'successfully negotiated a link between their pay and police rates. For fuefighters' unions have o
I I
t,
I'
t. t; I.
l! I
I
L
5. Gommunicate the Plan and Train Users Once che job ev-aluation plan is designed, a manual is prepared so that ocher people can apply the plan. The manual desiribcs the method, defines the compensable factors, and provides enough information rc permit us€rs to disdnguish varying degrees of each factor. The point of the manud is to allow users who were not involved in the planb 'denelopment to apply the plan as ia developers intended. Users will require craining on how to apply dre plaa, and background infornation on how the plan is integrated with thc organization's toml pay system. An appeals process may a-lso be included so that employees who feel drat their
-'Chapter
5
| Job-Bascd Strrcturcs andJob Euahation
evaluared have some recourse. Employee accepance of the process is crucial
;^h. are unfairly t"ii^^o""il-ro
h"yg"!y
hope that employeesw-ill *ggp-!
th.,iq!!\!I}c pal
as
if the
fai@ ot{.-:,9
Uifa,l" accePtance, .o*"^ii"tion to allemployttt Yloi'l"l:Tlfl::_f_*fTt:::1: iriJ A. strucrure is required. This communicadon may be done *uough informational meetings,
;;;*,
or other metho&. In some cases,'the cndre job evaluation process is carried out online.
Jobs Recall rhat rhe compensable faccors and weighrc were derived ApOly to Non-benchmark jobs. The final step in the point plan process is to apply the plan to the of benchmark "","i'" a manual is written that describes the method, defines the comusually do so, To i"1..
G.
o-ot J,jiJS-f"oo",
and provides enough information to permit users to disdnguish var)4ng degrees poinr of the manud is to allow users who were not involved in im dcvelopment The iil..f, f"or" require training and background informadon on the total Pay qrstem. Users plan. *re Io ,ooly --'it . fini oor.o*. of the job evaluation process is a job hierarchy based on the number wh.ich to ooints assigned in the job evaluation process. The hierarchy provides the basis upon ^f data to determine system. It will be combined with market pay
"""r"U.
Jr.rj*. irr*r""t equiry in rhe pay rhe pay for
jobs (to "price" the jobs),
as
will descibed in Chapter 8'
r.--A WHO SHOULD BE INVOLVEB?
LO5
and comIf the inrernal srucnrret prupose is to aid managers, and if ensuring high involvement the results in a smke with and employees rnanagers *iorr.o, from employees is imponant, dl *rose cornminees, to use is approlh A common it. desigrring should be involved in the process of gark for..s, or teanN th.at indude representatives from key operating funcdons, induding nongroups role is advisory -.rr"goi"l .*ployees. In some cases, the
only; in others, it designs the evalu-
.Looro compensable factors, and approves all major changes. Organizations with "riorr"rpp.".tr, it advantageous to include union representadon as a source of ideas and to help find uoionr'oft*
differpromote acc€ptance of the resutts. However, some union leaders believe *rat philosophical acdve panicipation. They take the position tlut collective bargaining lields more .qoitrbL resula. As a result, the o
.rr.., pr*.rr,'rh.ir
higher levels such as che compensadon manager) are primarily -responsible for most job ernJuationslAl*rough that holds tro" fot senior rnanagement_ j+ as_weli it is clear that the 'higher-l*.I manager is more likely to be responsible for the job evaluadon in this "o*p.nr".iir .as. that gonsultants also play a much larger role here. "nd also those at
Who Typically Conducts the Job Evaluation?
Note: Number of respondents ranged from 91 1
to
1,1 19 organizations.
Source: World at Work, "Job Evaluation and Mirket-Pricing Practices," February 2009'
97
I I
t t F t t t t
t
98
?*l I InumalAligrnnt:
IT
Dcfiminhrg th? Sxtcr*rc
EVALUATING THE USEFULNESS OF HESI.JLTS
The Design Process Matters to the fairness ofthe design process and the approach chosen (job evduation, skill/cornpetenry-based plan, and harket pricing) rather than focusing solely on the results (the incernal pay structure) is likely to achieve employee arld managemenr commirment, trust, and acceptance of the resula.lTThe absence of participation makes it easier for employees and managers to imagine ways in which the strucrure could have been rearranged to rheir persond liking. If employees do not p.uticipare in decisions, they might easily assume that Research suggests that anending
things would have been better ifthey hadAdditiond research is needed to ascertain whether the payofffrom increased participation offsets rhe potential cost (€.g,, time involved co reach consensus, potendal problems caused by
disrupting cuffent perceptions), For example, in multinational organizations the involvernent of both corporate compensation and country managers raises che potential for conflict due to their differing perspectives. Country managers may wish to focus on the panicular business needs in rheir counrry whereas corporate manaBers may want a qrctem chat operates equally well (or poorl, across all countries. The country manager has operating objectives, does not wanr to lose key individuals, and views compensadon as a mechanism to help accomplish these goals. Corporate managers, on the other hand adopt a worldwide perspective and focus on ensuring that decisions are consistent with the organizationt overall global suategy.
Appeals/Review Procedures No matteq rhe technique, no job evaluation plan anticipates dl situadons. Ir is inevirable that will be evaluated incorrectly, or at least that employees and ma4agers may suspect thar
sdme jobs
ttrey were. Consequendy, rwiew procedures to handle such cases and to help ensure procedural fairness are required, Often the compensation rnanager handles reviews, but peer or team reviews are increasingly being used. Somedmes these reviews take on the trappings of formal grievarce
procedures (e.g., documented complaints. and responses and levels of approvd). Problems rnay also be handled by managers and employee relations generalists through informal discussions
with employees.ls Once the evaluations are completed, approvd by higher levels of management usually is required. An approvd process helps ensure that any changes that result from evaluating work are consistenr with the organizationt operations and directions.
Political lnfluences A recent study found drat more powerfi.rl departments in
a
universitywere more successfi.rl in using
the appeals process to change the pay or the classiffcadon of a job than were weaker depanments.l9 This result is consistent with other research that showed that a powerful member of a job'evalu-
arion commitree could sway the results,2o Consequendy, procedures should be judged for their susceptibiliry rc political influences. "It is *re decision-making process, rather than the instrument irself that seerns to have the greatest influence on pay outcornes," writes one researcher.2l
rT
THE FINAL RESULT JOB STRUCTURE
The ffnal result of the job andysirjob description-job evduation process is a job sffucrure, a hierarchy ofwork. This hierarchy translates inro pracrice the employert internal alignment policy, Exhibit 5.14 shows four hyporherical job suuctures wirhin a single organizadon. These.structures were obtained via differenr approaches to evaluating work. The jobs are arrayed within four basic firnciions: managerial, technical, manufacturing, and adminisuarive. The managerial and
.*',= Chapter
5
| Job-Based Struc*rcs anlJob fuais-cnt
Flesulting lnternal Structures-Job-, Skill-, and Competency-Based
Head/Chief Scientist
Division General Managers Managers
Senior.Associate
'
lcientist,
:
Associate Scientist
Project Leaders
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technical and ad.minisuative strucnues were obrained via a points-based job ev"aluation plan, and plan (Chaprcr manufacnrring the plans person-based O; rwo different via work manufacturing
the union. The exhibir illusuates the resulu of evaluaring vv61k-5u'udures job' th"t ,,r[pon a policy of internd aligirment when detegnining how much to pay for each that approaches multiple Org"rri"*rior6 commonly have *uttipt. structures derived through might one structure in employees some ,pply to- diff.r.nt funcdonal grouPs or units. Although the procedurl us.d in another structure to their own, dre underlying premise in *irt ro "o-p.re pracrice is that interna.l alignrnent is most infiuenced by fair and equitable treatment of employees
was
negotiatei
wit!
doing similar work in the same skill/knowledge group'
t_L
BALANGING CHAOS AND CONTROL
Looking back at rhe material that has been covered in the past three chapters (determining interaligiment, job analysis, job evaluation), it is clear that a lot of time and money has beenspent ,o d.vilop ,o-. .o*pio techniques. But it is still not clear how much to pay each employee' \'/hy botler with all Airl Vfry nor jusr pay whatwer it takes and get on with it? prior to the widespread ur. oflot Juarion in the 1930s and 1940s, employers had irradonal pay srrucnues, th. l.ga.y of decenualized and uncoordinated wage-setdng practices. Pay dif,erences were a major source of uffe$ among workers. Employment and wage.records were rarely kepq only the for.man lcnew with any accruacy how many workers were employed in his dcpan-
,nal
the rates they received. Foremen were thus lfree to manage," often using wage irrforma' tion to vary the day rate for favoured workers or to assign rhem to jobs where piece rates were loose.
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Panl I
Intemal AlAgnnent Dc*nzining dze Stractun
Job evaluation, widr its specified procedures and documentable results, help...d to change thar, The technique provided work-related and business-related order and logic. At the same time, the wodd of work is changing, The work of most people now requires that they figure out whar to do in a given siruarion insread of simply performing a predetermined routine. They must identify problems and oppomrnities, make decisigls, plan courses of action, rnarshal supponr and, in general, design cheir own work methods, teihniques, and tools. The challenge is to ensure that job waluation plans allow for the flexibility to adapr to changing condidons. Some balance between chaos arrd conuol is reguired. History suggests rhat when flexibiliry without guidelioes exisrs, chaodc and irradonal pay rates ftequendy result. Removing inefficient bureaucracy is irnportant, but balanced guidelines are necessary to ensure that employees are rreated fairly and that pay decisions help the organizadon achieve ia objectives.
E
Conclusion
The differences in rhe rates paid for different jobs and skills affect the abiliry of managers to achieve rheir business objectivcs: Differences in pay matter, They matter to employees, because their willingness ro rake on more rcsponsibiliry and training to focus on adding value for customirnproving qualiry ofproducts, and to be flocible enough to adapt to change all depend at DifiFerences in the rates paid for differenr jobs and skills also influence how faidy employees bclieve they arc being treaced Unfair trearment ultimately is counterproductive' So far, rhe rnosr common approach to designing pay diffcrences for different worlc has been er
least
in part on how pay is strucured for different levels ofwork.
acceptable to key stakeholders. Job evaluation has evolved
into many forms and methods. Consequendy wide variations ocist in its use and in the way in which it is perceived. This chapter discussed some of the many views concerning the role of job Ev-aluation and reviewed the criticisms levelled at it. No mafter how job eraluacion is designed, ia ultimate usc is to help design and manage a work-related, business-focrsed, and agreed-upon Pay stnrcture.
Lr
Chapter SummarY
Job evduation is che process of determining and quantifring the value tives regarding job eraluation include dre following
. . . . .
ofjobs. Different
PersP€c-
Job evaluation can determine the innate value of jobs. Job evaluacion can determine the reladve value ofjobs. It is not possible to value jobs without exrernal rnarket information' Job evduation is dependent on objecdve rneasurement insuurnents.
Job evaluation should be conducted participatively.loo"gh a process ofnegotiation.
The ranking rnethod of job eraluadon rank orders the jobs from highe$ to lowest on the basis ofa global deffnicion ofvalue. Two rnethods ofranking are: (1) alternation ranking, in which
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the most- and least-valued jobs are selccted first, then the nent-most- and least-valued jobs, and so on; and (2) paired comparison, in'which each job is ranked againsc dl other jobs. The classiffcadon medrod of job evduation uscs dass descriptions to categorize jobs. Descriptions of benchmark jobs (those that are well known, rclatively stable, and corrmon across differenr employers) are used as part of dre class descriptions for clariffcadon. The find result is a series of classes wirh a number of jobs in each.
E,= Chepcr 5 | Job-BascdStrucnrc andtob Eualuation
The sir steps inrclrcd in
; . .. . . .
frc F inr -'t'd
ofiS
culuation are:
Conduct joFanalTsis Deterrnine comPeasable 6ctors' Scale dre facors' !fleight tie 6son and o"sign Points'
Communicate the Plan' jobeNply thc plan to non-bcnchmark
The three cosrmon characedstics ofpoint plans are compcnsable Gctors, numerically scaled refccring the importancc of arh factor facror degrees/lev-els, and weights Cornminees, task forces, or t€nms induding non-Eanagerial employees should be involved job waluation in an advisoq' or decision-making capacitf. Unioa parricipation may also be
in
desirable.
Key Terms method job classification compensable factors alternation ranking
benchmark
degreey'level weighB job evaluation factor
paired comparison method
factor
point method ranking
job structure
Review Questions 1.
How does job evaluation translate internal alignment policies (loosely coupled versus tight (c) fairness,
fitting) into practice? What do (a) organizational strategy. (b) flow of work, and (d) motivating employee behaviour have to do with job evaluation?
2.
Why are there different approaches to job evaluation? Think of several employers in your area (e.g" hospital, Walmar! manufach.ring plant bank, university/college). What approach would you expect each of them to use? Why?
3.
What are the advantages and disadvantages of using more than one job evaluation plan in any single organization?
4.
Why bother with job evaluation? Why not simply market-price? How can job evaluation link intemal alignment and external market pressures?
Experiential Exercises 1.
Consider your university or college. Develop compensable factors for your institution to evaluate jobs. Would you use one job evaluation plan or multiple plans? Should the school's educational mission be reflected in your factors? Or are generic factors okay? Discuss. Ask your professor to help you identify the actual factors used (this likely will involve contacting the HR department compensation staffl.
2.
you are the manager of ten people in a large organization. All become suspicious and upset when they receive a memo from the HR department saying their jobs are going to be evaluated. What would you say to try to reassure them?
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Case Job Evaluation at Whole
Foods
.f
Rather than wait until you are next in a supermarket to check out the different types of work, we brought some of the jobs at Whole Foods to.you. Now that you have some background in job evaluation, it is time to try it out. As a first step, Whole Foods has conducted job analysis and prepared job descriptions. The results are shown below. Now a job structure needs to be worked out, The manager has assigned this task to you.
1,
Divide into teams of four to six students each. Each team should evaluate the nine jobs and prepare a job structure based on its evaluation. Assign titles to each job, and list your structure by title and job letter. A broad hint: Remember from our discussion of Whole Foods' business and pay strategy in Chapter 2 that teams play an important role.
2,
Each team should describe the process the group went through to arrive at that job structure. Job evaluation techniques and compensable factors used should be described, and the reasons for selecting them should be stated'
3.
Each team should give each job a title and put its job structure on the board. Comparisons can then be made between the job structures of the various teams. Does the job evaluation method used appear to affect the results? Do the compensable factors chosen affect the results? Does the process affect the results?
Evaluate the job descriptions, What partswere most useful? How could they be improved?
tob A KndofWork Provideexcellentcustomerservice-Followandcomplywithall applicablehealthand sanitation procedures. Prepare food items: make sandwiches, slice deli meats and cheeses. Prepare items on station assignment list and as predetermined. Stock and rotate products; stock supplies and paper goods in a timely basis; keep all utensils stocked. Check dates on all products in stock to ensure freshness and rotate when necesary. Use waste sheets properly as directed. Operate and. sanitize all equipment in a safe and proper manner. €omply with and follow Whole Foods Market Safety Procedures. Follow established Weights and Measures procedures. Answer the phone and pages to department quickly and with appropriate phone etiquette. Practise proper use of knives, slicer, trash compactor, box baler, and all other equipment used during food preparation and cleanup. Perform other duties as asigned, and follow through on supervisor requests in a timely manner.
Requiremenfr-
. . . . . . . .
Some deli experience preferred Clear and effective communicator
Patient enjoys working with and mentoring people Ability to perform physical requirements of position Ability to learn proper use of knivet slicer, box baler (must be 18 years of age or older), and all other equipment'used during food preparation and cleanup Ability to work well with others as a team Knowledge of all relevant Whole Foods Market policies and standards Understands and can communicate quality goals to customers
toi p Kind of Work Assist and focus on customers during entire checkout process. Perform all cash register functions according to established procedures. Maintain a positive company image
Chapter
5
| Job-Based Stntcnres andJob Evaharitn
groceries bv providing courteous, friendly, and efficient customer service. Check out customer professional demeanour at a PLU code test. Maintain Pass entry-level accurately. and eificiently procedure. all times. Stock registers with supplies as needed. Follow proper cheque-receiving journal Clean, stock. and detail front-end area with special attention to own register. Change idenof every shift to produce department beginning at the Walk as needed. tapes and ribbon tify and learn new produce codes. Comply with all posted provincial health and safety codes.
Requirements
a a
Excellent communication skills necessary for good customer and team relations Ability to work well with others Ability to learn proper use of box baler (must be 18 years of age or older) Desire to learn and grow Ability to work in a fast-paced environment, with a sense of urgency Understanding the importance of working as a team
Good math skills Patience
lob
C
Kind of Work Reports to rtore team leader and to associate store team leader. Provides overall management and supervision of Prepared Foods Department. Responsible for team member hiring, development, and termination. Also responsible for profitability, expense control, buying/merchandising, regulatory compliance, and special proiects as assigned. Complete accouniability for ail aspects of department operations. Consistently communicate and model Whole FoodJ vision and goals. lnterview, select, train, develop, and counsel team members in a manner that builds and sustains a high-performing team and minimizes turnover. Make hiring and termination decisions with guidance of store team leader. Establish and maintain a positive work environment. Manage inventory to achieve targeted gross profit margin. Manage ihe ordering process to meet Whole Foods Market quality standards. Maintain competitive pricing and lchieve targeted sales. Establish and maintain positive and productive vendor relaiionships. Develop and maintain creative store layout and product merchandising in support of regional and national vision. Establish and maintain collaborative and productive working relatitnships. Model and cultivate effective inter-department and inter-store communication. Provide accurate, complete information in daily, weekly. monthly, annual, and ad hoc management reports. Maintain comprehensive knowledge of, and ensure compliance with, relevant regulatory rules and standards.
Regur'rements
. . . . . .
Two years' relevant experience as a team leader, assistant team leader, supervisol or bqter
Thoroughknowledgeofproducts,buying,pricing,merchandising,andinventorymanagement Excellent verbal and written communication skills Strong organizational skills Knowledge of all relevant Whole Foods Market policies and standards Computer skills
tirh D Kind of Work perform all duties and responsibilities of Prepared Foods team mernber. Pro.ioe excellent customer service. Assist team leader in nightly team operations. Repcrt a:' aeorts ci
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P* I I Intmal /!hgmn* W4
* Sl?eat
team members that violate policies or rtandards to the team leader or associate team leader.
Mentor and train team members. Maintain quality standards in production and counter display. Comply with all applicable health and safety codes.,!elp implement and support all regional programs.
Requiremenfs.
. . . . . .r . .
Minimum six months' retail food production experience or equivalent Overall knowledge of both front- and back-of-the-house operations Comprehensive product knowledge Comprehensive knowledge of quality standards Excellent organizational skills Excellent interpersonal skills and ability to train others Demonstrated decision-making ability and leadership skills Ability to perform physical requirements of position
Joh E Kind of Work Performs all duties related to dishwashing: unloading khchen deliveries and cleaning all dishes, utensils, pots, and pans. May be prep work. Maintain food quality and sanitation in kitchen. Maintain a positive company image by being courteous, friendly, and efficient. Wash and sanitize all dishes, utensilt and containers. Assist with proper storage of all deliveries. Rotate and organize products, Perform prep work as directed. Provide proper ongoing maintenance of eguipment. Maintain health department standards when cleaning and handling food. Perform deep-cleaning tasks on a regular basis. Take out all of the garbage and recycling materials. Sweep and wash floors as needed.
Requircments
. . . . .
Entry-level position
Ability to perform physical requirements of job Practices safe and proper knife skills
Ability to work box baler (must be 18 years of age or older) Work well with others and participates as part of the team
tob F Knd of Work Pertorms all functions related to breaking down deliveries and moving back stock to floor. Assists in organizing a'nd developing promotional displays; maintaining back room; training entry-level groc€ry clerks. Trained and capable of operating any of the subdepartmen8 as needed, Maintains and ensures retail standards during shift. Responsible for implementing team's break schedule, Performs all duties and responsibilities of grocery team member. Builds displays and requests appropriatesignage, Supervises shift to ensure standards are maintained. lmplemenB break schedule for shift. Responsible for problem solving in team leader or associate team leader's absence. Fully responsible for completion of all opening or closing checklists. Responsible for checking in deliveries.
Requircments
. r
Minimum one year! retail grocery experience or equivalent Pqgfcient in math skills (addition, subtraction, multiplication, and division)
E'-
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Chaprer
5 | Job-Bacd
Struc*res andJob
---r-..-a a
a a
Ability Ability Ability Ability
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to perform physical requirements of position to properly use box baler (must be 18 years of age or older) to direct team members and implement break schedule to work well with others
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toh Kind
G
of Work Reports directly to Prepared
Foods team leader. Assists in overall management
and supervision of the Prepared Foods Department. Can be responsible for team member hiring, development, and termination. Also responsible for profhability, expense control, buying/ merchandising. regulatory compliance, and special projects as a55i9ned. Complete accountability
for all aspectiof department operations. Consistently communicate and model Whole Foods' vision and goals. Asiist in the interview selection, training, development, and counselling of team members in a manner that builds and sustains a high-performing team and minimizes turnover. Discuss hiring and termination decisions with guidance of others' Establish and maintain a positive work environment. Manage inventory to achieve targeted gross profit margin. Manage the ordering process to meet Whole Foods Market quality standards, maintain competi-
product tive piicing, and achieve targeted sales. Develop and maintain creative store layout and collaborative maintain and vision. Establish national and merihandising in support oi regional interand produ6ivi working relationships. Modeland cultivate effective inter-department and annual, monthly, daily, weekly, in information complete accurate. Provide store communication. and ad hoc management reports. Maintain comprehensive knowledge of, and ensure compliance with, relevant regulatory rules and standards.
Requirements
. . . r . . .
Over two years of department experience or industry equivalent Analytical ability and proficiency in math needed to calculate margins, monitor profitability, and manage inventory Clear and effective communicator Patient and enjoys working with and mentoring people
Strong organizational skills Knowledge of alt relevant whole Foods Market policies and standards Computer skills
Iob H whh all store Kind of Work Rotate.among stores. Assist and suPport the store team leader functions. lnterview select, evaluate, counsel, and terminate team members' Coordinate and supervise all store products and personnel. Followthrough on all customer and team member' questionsandrequests.Evaluatecustomerserviceandresolvecomplaints.Operatethestorein'
.an efficient and profitable manner. Have a firm understanding of store financials and labour budgets. Establish and achieve sales, labour, and contribution goals. Review department schedules-and research productivity improvements. Order store equipment and supplies in a timely manner. Enforce established iood safety, cleaning. and maintenance procedures' lnspect store, ensure cleanliness, visit off-hours for consistency. Maintain accurate retail pricing and signage. Ensure that product is cross-merchandised in other departments, Coordinate, supervise, and report physiial inventory. Analyze product transfers,_waste, and spoilage. Manage expenses to on all equipment . maximize the bottom line. Provide; maintain, and safety-train team members ensure and tools. Resolve safety violations and hazards immediately. Maintain store security and that opening and closing procedures are followed. Show EVA improvement over a designated
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Pattl I la*ulAhgnnat funrnin;ng
&2
Stutw
period. Leverage sales growth to improve store profitability. Assist in handling liability claims and minimize their occurrence. Establish and maintain good community relations. Create a friendly, productive, and professional working environment. Communicate company goals and information to team members. Ensure and support ieam member development and training. Evaluate team member duties, dialoguet raises, and promotions. Keep regional leadership informed of all major events that affect the store. Ensure that store policies and procedures are followed. Visit the competition on a regular basis and riact to current industry trends.
RequiremenF
. . . ' . . . . . . . . . . ' . . .
A passion for retailing Complete understanding of Whole Foods Market retail operations Strong leadership and creative ability Management and business skills with financial expertise Well organized with excellent follow-through Detail-oriented with a vision and eye for the big picture Self-motivated and solution oriented Excellent merchandising skills and eye for detail Ability to delegate effectively and use available talent to the best advantage Strong communicator and motivator; able to work well with others and convey enthusiasm Ability to maintain good relationships with vendors and the community Ca n train and inspire team members to excellence in all aspects of the store
Ability to make tough decisions Love and knowledge of natural foods Strong computer skills
loh I Knd of Work Performs all functions relilted to breaking down deliveries and moving back stock to floor. May assist in organizing and developing promotional displays; maintains back room. Stock and clean grocery shelves, bulk bins, and frozen and dairy tase. Maintain back stock in good order. Sweep floors and face shelves throughout the store. Comply with all applicable health and safety codes. Provide excellent customer service. Log and expedite customers' special orders. Retrieve special orders for customers by request and offer service out to car, Respond to all grocery pages quickly and efficiently. Build displays and request appropriate signage. Requirements
. . . . . .
ffi-
Retail grocery or natural foods experience a plus Proficient in math skills (addition, iubtraction, multiplication, and division) Ability to learn basic knowledge of all products carried iri department Ability to perform physical requirements of position Proper and safe use of box cutter, bale[ and all equipment AbiliU to work well with others
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f ;
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the Pyrami&' job evaluation was in use when the pharaohs built Hisrorians say fiat.some form of job evaluation' of tsistance l;'Gre"t \f^ll construccion with the Chinese ernperors
**"gJ
Thelogicunderlyingtoday,sjob-basedpaystructuresflowsfromscientificmanagement'champi steps and analped ,fr. .*fy t iObr. \7o.k *", broken into a series of by Frederick Tayl", oned
job (righc perform-every.element of dre
" most efficient way-to besr way"-fte fiac the u. specified. su"t.gi. lly, Taylort apploach fit wid' l.JJ .orl)] ,hor.l to how down co done' ,rone
so
mass
to.revolutionize the way work was production rechnologies that were beginning their rold rhey musr_go beyond the tasks specified in ,i. But in rodays *.rk.i;.,;;;6,;; for responsibiliry ,tr. loul *i rrk P.t:irl job descripdons. They *** r."o* *.r., .lrink *o.. o" participaleaming and improvement, flo
tureshoidoutfiatpromise.Thelogicsupportingperson-based^pp.^t:isthatstrucruresbased agility' be more ftoiuit and thus encourage on differences in peopie's il;;;;;p.iJn.ioiiit chapteq the usefi-rlthe iopic of this. chapter. At the end of this person-based o ness
of the various
"pproo.'t
"r.
"pp..";f];ob-
"na
p.rro.r-bar.i-for determining internal
Pay
strucn''es
will be discussed. underlying;"|:!*td and people-based E*hibit 6.1 points our rhe similarities in the logic is needed co (1) collect and zummarize approaches. No marter rhe basis for the scruccur., ^-*ry is oi u"lt'" to rhe organi don' (3) q@rufy informarion about rhe work, (2) determine what suucture. The previous wvo c,hapters that value, and then (a) ranslate that value into internal This chapter f". j;;;Jl..r.,oro (job analysis and job evaluation). discussed
discusses
*re
process
th. pio..ss for
person-based strucures'
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Purl I IntcnalAlignnnt
108
Denrmhing the Strucnrc
Many Ways to Create lnternal Smucture
EXHIBIT 6.1
ffi Business and Work-Related,r-
lnternal
,/
,/
Job-based I
PURPOSE
I Job analysis Job descriptions
Collect, summarize
T
work information
Structure \
r!
Person-based
,/ .
skill
I
I
+
Skill analysis (Chapter 6)
Core
competencies
(chapter 6)
(chapter 4)
t t I t
Competencies
I
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,l
+
Determine what to value
Job evaluation:
+
Skill blocks
+
Competency sets
classes or'
compensable factors
(chapter 5)
I
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I
*
I
Y
Assess value I
{ Certification
Competency
weighting
process
lndicators
(Chapter 5)
I
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+
Y
Job-based structure (Chapter 5)
Translate into
structure
,t
Factor degrees and
I
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Person-based
Person-based
stru(ture
structure
(Chapter 5)
(Chapter 6)
:
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PERSON.BASED PAY STHUCTURES: SKILL PLANS
I
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skill-based pay structures link pay to the depth or
breadth of the skills, ebilities, and knowledge a person bcquircs that are relevant to the work
Skill-based pay plans are usually applied to so-called blue-collar work and competency-based plans to ro-.dl"d white-collar work The distinctions tue not hard and fast' However, the majoriry of applications of skill-based pay have been in manufacruring and assembly work where the be specified and.defined. The advantage of a skill-based pay strucnrre is that people *ork can be deployed in a way rhat better matches che flow of work, thus avoiding botdenecks as well as idle hands.l Struccures based on skill pay individuals for all the skills for which they have been certifted regardless ofwhether dre work they are doing requires all or just a few ofthose pardcular skills. By contrast, a job-based plan pays employees for the job to which they are assigned, regard-
*"
Iess.ofthe skills they possess.
Types
l._-..
of Skill Plans
Skill plans can focus on depth (e.g., specialisu in corporate law, finance, or welding and hydraulic maintenance) or breadrh (gsneralists with knowledgc in all phases of operations including mar' keting, manufacturinp finance, and human resources).
Chapter
6|
Poson-Bascd Pa1
Specialist Depth The pay.stucnrres fs1 rlmmsT and hig! school teachers are usually based on rheir knqwledge m"q"ured by cducerbr lenet A ryplca[ qaher's con'a". sPqcifi,e-C a r'rles L sreps, with each $ep corresponrling rc a lcr=l ef e.frerios- A bachdor's degree in educadon is srep one and is t-he rnidmum required f61 hirinB To adnnce a $ep to higher pay requires addi.tiond education. For example, the salary scbcdulc indudcd in the case at ttre end of rtris chaprer requires 15 additional credirs beyond the h-rtrlnri degree rc rnove to a higher srep. Each year
wiri a pay iacreasc- The resulc can be thar two teachers may receive for doiag asentidb the =-e FLreaching F.nglisf, rc high school students. rares pay different knowledge of the on the individ'ol doing &e job (measured by the number of is based pay The universiry crediu and years ofteaching €xPcri{:nce) rarher rh:n on job conrent or output (performance of ;tudencs).z The presumprion is .hrt teacbers wirtr rnore knowledge are rirore effecrive and more flexible-able to teach many gradcs. of senioriry also is associaced
GeneralisVMultiskill-Based: Breadth Ai wi& rcachers, employees in a muldskill sysrem earn knowledge but rhe knowledge is qpeciffc to a range of related jobs. Pay increases come with cerd.ffcation of new "l.ill.", rather *ran with job assignments. Employees then can be assigned rc any of the jobs for which rhey are certi.ffed, based on the flow of work.3 An example from Balzer's filel Qs2ring (a global rool maaufacnrrcr induding Oerlikon Balzers Coadng Cenue in Toronto) makes dre point- This compaay coa6 cutting tools by bombarding them wirh, among other things, tiunium nitrate ioss. This coating makes the sharp edge last much longer. Originally, eight differenr jobs were involved in the coating process. Everyone staned ar rhe sarne rate, no maaer the job to which rheywere assigned. Employees received cross-uaining in a variery of lobs, but without a speciffc E"ining path or level. Different locations started new people in different jobs. In order to put some order into its system and make bemer use of its employees, Balzer rnoved to a skill-based plan for all its hourly workers, induding adminisuative and sales employees. Ics new suucture indudes four different levels, from Fundamentd to Advanced. Exhibit 6,2 shows the new suucture and rhe skill blocks io each level. New employees are hired into the Fundamental level. Fundamemal skills indude familiarity with company fonns and procedures, basic product knowledge, safery, basic computer us€e, end so or. Once tley have been cerdffed in all the skills at the Fundarnental level, employees receive a pay increase of $0.50 an hour and move to the Basic skill level, Cenification in each of the four skill blocla (blasting, cleaning, suipping, and degas) in this level is wonh an additional $0.50 an hour. BasicJevel employees can be assigned rc any of the tasfts for which they are certified; pay increases by acquiring new
EXHIBIT
6.2 I
Skill Ladden at Balzer Tool Coating
Strlcttru
r09
110
Pafi
I I Intnnzt
Aligrnaat
Darn*'a6 tb e*wt
*ill be paid vrhatever is their h;ghest certification rate. The same approach is used to rain and certi$ employees ar thc Intermediate andAdvanced levels. A person cenified at the very top of the suucture, who earns at least $10.50 an hour, might be assigned to any of the tasls in the sgucn1;e. The advanage to Balzer is workforce flexibility, and hence stafing assignrnents that can be berer rnatched to rhe worldlow.4 The adranEge to employees is that the more thcy learn, r!ry
*
U:$mBaher
differs ftom the rystem forteachers in rhat rhe responsibilities assigned. system can change drastidy over a shorl period of time' whcreas multiskill .o *.-pioy.e in a do not vary from day to day. Adfitionally, Balzert s,'stcm is job responsibilities reachers' basic designed ro ensrue thar all the skills are dearly job-related. Tiaining improves skills that the company values. In contrasr, a school district has no guarantee that courses taken actually improve teaching skills.
Purpose of the Skilt'Based Structure To e,raluate the usefulness of skill-based structures, we shall use the objectives *lt "dy specified for an internally aligned strucnue supports the organizationt strategy, suPPorB worldlow, is hir to employees, and morh.ates their behaviour toward organizadon objectives. How well do skillbased strucrures perform?
Supports the Strategy and
Obiectives The skills on which a strucnrre is based should
be
related to the organization's objectivel and stratery. In practice, howeve6 the "line of sighf tetween changes in the speciffc work skills (Fundamental to Advanced) required to oPerate the titanium nitrate ion coarers and increased shareholder renuns is difficult to make clear' In some sense, we know that these openting skills mamer, but the link to the plant's performance is
arl.tty
,@
clearer than is the
link to corporate goals.
Workflow One of the main advantages of a skill-based plan is that it
can more easily many of chain moves hotel example, one national For workflow.5 changing a *"t"h p"opl" to in. of check majority guests andT when the 4 p.rn., betweeir desk 6ont hotelt io the its p.oil. Aft;t p.rn., these same employees rnove to the food and beverage service. area to march the demand for room service and dining room seryice, By ensuring that guests do not have to wait long to check in or to eat, the horcl provides a high lwel of service with fewer staff (The tasti nesJ of the resulting food is another matter, reinforcing the point that skill-based systems focus
Supports
i
on inputs, not results.)
ls Fair to Emptoyees Employees like dre potential of higher pay that comes with learning.
And by encouraging employees to take charge of their own development, skill-based plans may give them *ore-.ottttol o.'"r their work lives. Howwer, favouritism and bias maiy plry a role in letermining who gets first crack at the raining necessary to become cenified at higher paying -Emplol'ea complain that rhcy are forced to pid< up the slack for those who are out skill levels. h"u" not yet been asked to nrle on the legality of wo people doing for training. And the "outts the same task for different (skill-based) pay.
,@
Motivates Behaviour toward 0rganization Obiectives Person-based plans have the potential to clarify new standards and behavioural er
u'= Chapcer
6|
111
Pcnan-Ba:ed Pa1 Strumtres
can certainly dalpen their,entfusiasm for skill-based p"y *1 the often related of *i.rg tg11s and aovintlme decisill rlseo*iltry f1m suqlvisors to -rvorke1.8
;idl, *ti"h
'HOW TO": SKILL ANALYSIS
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g.j ,
depicts rhe process for deterrnining a skill-based structure. Ir begins wirh a skill which is similar to the task slatements in a job analysis. Related skills can be grouped block; skill blocla can be arranged by levels into a skill sffucture. To build the srruc-
skill
pro..tt
is needed to describe,
process to I'den-
tW and coile](t infomation
yd:.,m:
:*,9:,,*d :killt.,.. *" 6.3 dso identifies the major skill analysis decisions: (1) !flhat information should g*iriUl
skill analysis
+igdziitrc
be
1$7h.o should be involved? (4) How usefirl are (2) \(rhat methods should be used? (3) ".ed? are exacdy the same decisions These managers face in job analysis. resulcs for pay purposes?
afuut skilh requircd to per-
fom wotk in an organizathn
in the use of terms in person-based plans than in job-based plans. global chemical company Y+ t lanufacnrring faciliry in Prince George, British
far less uniformiry
assigns points and groups skills as foundation, core elecdves, and optional electives:
rllllr include a quality seminar, videos on materials handling and hazardous a macerials, rhree-day safery workshop, and a half-day orientation. All foundation skills are mandarory and must be certiffed to reach the Technician I rate ($ 1 1 per hour). Core electiucs are necessary to thc faciliryt operations (e.g., fabrication, welding, painting, finishing, assembly, inspecdon). Each skill is assigned a point value. Ottional electiaes are additional specidized competencies ranging from computer applica,' r^--r^--L:- and -^-----,,building. consensus k,.illi^tions to tearn leadership -^l
Foundarton
':.
it :,itat ot*.fo, .:"h":.iT'.'-T'. in Exhibit 6.4. St P:Fn.d ($tZ core 40 elecrive points hour), per Ii Technician to-reactr ll iddidon to rhe foundadon competencics. To
reach Technician
III,
(of 370) must be certified in an additional 100 points of
electives must be cerdffed plus three optional electives.
A fully qualified Gchnician tV (e.g., certiffed
foundations, 365 points of core work in a cell at the facility. Technician doing. FMCI approach should look familiar
as mastering
and 5 optiona.l electives) is able to perform all
$17 per hour no matter tJre task.h.y * any college and university student required coutses, required credits chosen among speciffc
s earn
and opdond elecdves.
Determinin g the lnternal Skill-Based Structu re
SKILL
ANALYSIS
+
SKILL
BLOCKS
.+
SKILL
CERTIFICATION
BASrC DECtSTONS
r
. I . .
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lnformation to Collect?
.i; .,
;
What is the objective of the Plan? What information should be collected? What methods should be used to determine and certify skills? Who should be involved? How useful are the results for pay purposes?
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SKILL-BAsED PAY STRUCTURE
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Person-Bard Pa1 Structuns
dc Lind of iribrqarion that underpins the skill-based plans, rhar informadon olr specific ffer)t aspcct of ths production process. This makes rhe plans is,-vrry 'nuous flow tcchnologies for oon suited where employees work in reams. particularly The FMC plan illusaac
Whom
to lnvolve?
Ernployee involvemcnt is almct ahrays built iato skilLbased plans. Employees are the sources of information for dcfning 1f,s -clcilL, arranging them-irrtoia hierarchy, bundling them into skill blocla, and cenifying rfieder a person acn"rally possesses the skills. Ar Balzer and FMC, a commiree compossd 6f managers &om several sircs developed, wir-h input from employees, tle skill Iisring and cerdfication proccss fss Frh of rhe four skill ladders.
Establish Certification Methods Pracrices for cenifying Some organizaciorx use
Sat
cmployees possess dre skills and are able
per rwiew, on$ejob
to apply them vary widely
dernoruuadons, and tes$ for cenfication, similar to rhe nadidonal apprentice/journrymanr/mastcr padr. Honeywell evaluates employees during the six mondrs after rhry haie leamed de sltill". Again, leaders and peers are used in the ccnification pioces. Srill others require s'rccnsfirl completion of formal courses. However, we do not need to point our to a snrdent that siaing in &e clasroom doesnt guarantee that anything is lcarned. School disuica address this issue in a nricry ofwa1,s. Some are more resuictive rhan others about which courses courses; others only for courses in the rcacher's will increase readrers' pal. Some will cenify fot subject area- However, no districts require evidence thac the course makes any difference to results. Newer skill-based applicadons appear to be moving away from an on-demand review and toward scheduling ftxed-rwiew poins during the year. Scheduling makes it easier to budget and conrrol payroll increases. Oder changes indude ongoing recerdffcation, which replaces the uadidond one-dme ceniftcadon process and helps ensure that skills are kepr fresh, and rernovd of ccrtiffcation (and the accompanying pay) when a particular skill is deemed obsolete.e Similarly, the introduction of new skill requirements and the obsolescence of previous skills re quire recertiftcation. For example, HR professionals with the Certiffed Human Resources Professional (CHRP) designation in Canada musr recenify every three yea$, as do forest compliance inspecdon
*y
:
by rhe Ontario Ministry of Natural Resources. Airplane piloa rnust go through an emergency-landing simulation every 12 months. At theAppraisal Institute of Canada,
irroFessionals employed
mandatory requiremencs of designated memberq is participation in the Condnuing li?rofessionil Development (CPD) program. The program requires all designared members to a minimum of si:i continuing professional development credim each year and a rotal of ;,complete I.fO credis over the entire five-year period of the CPD cyde. One credit is equal to one hour offor'hal learning in worlahops, confcrences, seminars as well as through a varieq, of other activiries.lo
i.1one-of tl're
of Skill-Based Pay Plans: Guidance from Research and Experience plaru are generally well accepred by employees, because it is easy to see t-he conneccion plan, the worlq and rhe size of the papheque. Consequendy, thc plans provide suong ion for individuals to increase their skills. "learn to earn' is a popular slogan used in rhese One srudy connected the ease of communication and undersanding of skill-based plans to gpneral perceptions of being treated fairly by the employer.ll The design of the certficaproces is crucid in this perception of fairness. Three studies have related use of a skills qrsrem odycriviry- Two found positive resuls, the other did not.lz Another study found that younger, educated employees with suong growth needs, organizational commitment, and a positive aaitoward worlcplace innovadons were srore succes$:l in acquiring new skills.l3 Nevenhdcss, for not made clear, dre studys auhors recommend allocadng raining opportunities byseniority, r che
113
114
Palt
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Snatttuc
Skill-based plans become increasingly ocpensive as the majoriry of employees become
cenfid
at the highest pay levds. As a result, the employer may have an average wage higher than compedtors who are using conventiond job evaluation. Unless the increased floribiliry peffniEs leanet staffing, the employer may also experience higher labour cos$. Some employers are combafting this by requiring that employees stay at a rate for a g€nain lengh of rime before they can nke the taining to move to a higher rate. Motorola abandoned irs skill-based plan, because, at the end of tfuee years, ev€ryone had topped out (by accumulating *re necessary skill blocks). TRS( too, found that after a fewyears, people ar cwo manufacturing plants on skill-based rysrems all had rcpped out They were flocible and well rained. So now what? tVhat happens in rhe next years out? Does everybody autornatically receive a pay increase? In a ffrm with labour-intensive producs, the increased Iabour costs under skill-based plans may dso become a source of competidve disadvanrage Overall, consultingsuweys show that rhe percentage of firms ruing skill-based pay has been declining,la and a recenr sudy concluded that despie ir advanmges, skill-based pay is underutilized.l5 So what kind ofworkplace seems best suited rc a skill-based plan? Early longitudinal research on skill-based plans found that about 60 percent of the companies in their original sample were still using skill-based plans seven years later. One of the key factors that derermined a plant success wlrs how urell it was aligned with the organization's suategy, Plans were more viable in organizations following a cost-cutter strategy (focusing on operational efficiency-doing more with
The reduced numbers of highly trained, flexible employees chat skill-based pay promises fit this suategy very well. 16 A find quesdon is whether a "jack of dl trades' might really be r-he master of none. Some research suggests that the greatest impact on results occurs after just a small amount of increased flexibility.lT Greater increments in flexibiliry achieve fewer irnprwemenm. So more skills may not necessarily irnprove producdvity. Instead, there may be an optimal number of skills for any indi vidual to possess. Beyond that number, productivity renuns are smalJer than the pay increases. Additionally, some employees maF not be interested in giving up the job they are doing. Such "campers" creare a bordeneck for rotating other employees into thar position to acquire those skills. Organizations should decide in advance whether they are willing ro design a plan to work around carnpers or force them into the system. The bottorn line is that skill-based approaches may be only short-term iniciatives for specific senings. Unfonunately the longitudinal study did not repon on ttre 40 percent of cases in wfuch skill-based pay did not survive beyond six years. less).
competencies undeding, broadly appliable knovvledge, skills, and behaviours that form the foundation for successful wo* performance
LO3 competency-based pay
structure links pay to work-relatd
comptencieis
l r I I I
i
L_,__
'lfhile skill-
and job-based systems focus on information about speciftc asls, a competency-based approach pays for underlying, broadly applicable knowledge, skills, and behaviours that form the foun&tion for successful work performance, called competencies. Exhibit 6.5 shows the.proces of using competencies to address the need for internd alignment by creating a competencybased pay strucnue.
competencis requird fot succssf ul wo* performance in any job in the organization
Core competencies are thosc that form the foundadon for successfirl performance at all jobs rhe organizadon. They are often linked to mission staremen$ that o
spef,jific components of a I
PERSON.BASED PAY STRUCTURES: COMPETENCIES
core competencies
competency sets
I
IT
competency
competency indiiators obseryab le be haviou rs that indicate the levelof ampetency with i n each co m pe-
tenq
set
in
Chapter
6|
Pmon-Based Pay Smlr,tura
coREJcoMPETENcYcoMPETENcYCoMPETENCY-BA5ED + irutiildion'i' + sEri---
115
PAYsTRUcTURE
coMpErENcrEs
BAslc DEClsloNS
. ,.
What ii'the oblective of the Plan? What information should be collected?
. which methods should be used to determine . Who is involved?
and certify competencies?
. How useful for PaY Purposes?
THW Human Resources Competencies
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116
= be -rryected ro reach the highest level in all competencies. Rather, tlre ' it possessed all levels of mastery of all the core competencies HR function would wanr to b. use the model as a guide to whatTRV individuiemployeeswould and group, HRM widrin its values and what capacides it wancs people to develop' th. degrh of a competency required at each level of indicarors
However, nor
dl would
,*.
-- ii. .o*p....r.y
"*hot .o*pl.*i.y of th. *ork. Exhibit 6.7 shows five levels of competency indicators for a generic .o*p.,.rr.y called "Impact and Influence." These behavioural anchors make the comPetency ,ooli
"uses exPerts or other The lgvjs range ftom "uses direct persuasion" at level 1 to include scdes of the anchors tfie behavioural Sometlrnes 5. "tl.*l the amountof effort and/or complexiry irs action, the of impact of orr.don, rhe degree
"o".r.*. p*** ro influence"
,iiri J*r*if
indicators arcsimilar to job analysis quesdonnaires and degrees
*p."JJa. S*f.d
"o-p"rlrr.y colpensable factors, discussed in pievious
of
chapters'
Sample Competency lndicator Description influence to have a specific impact. lt includes the abilhy lmoact and lnfluence: The intention to persuade, convince, or of others' concerns and needs the to ffi;itffi;;nolrespono
"lmpactandlnfluence"isoneofthecompetenciesconsidered"mostcritical'" COMPETENCY INDICATORS
.'
Lets things happen'
.quotespolicyandissuesinstruction':.'''
. . . .
.. .- Triesldifferent tactics when attempting to perzugde.without neceslarily t" the ieveior ihprest of an audience (e's" makins r;H;;;+i;".t i"
21
.....:
.'.:j
#;;;r;
.'
3: Builds trust and fosters win-win mentalitY (expected performance level)
4: lvlultiple actions
. . .
Looks
''
to appeal to the interest and level of other
for the "win-win" opportunities
detecting Demonstrates sensitivity and understanding of others_in to concerns, inierests, or emotions, and uses that understanding Jevetoir e-ffective responses to objections
;;";il"g
by
action to have a sPecific
.1.
' . .
l,
.
Tailors presentations or discussions
I
r.
"liiJt aiguments or points in a discussion) different :
to influente
5: lnfluences through others I
direct persuasion in a discussion or presentation to reason; uses data or concrete examples audience Does not adapt presentation to the interest and level of the opposition with confronted Reiterates the same points when
Uses
Appeals
or other third parties to inJluence with customers, Develops and maintains a planned network of relationships int"rnui peers, and industry colleagues when reouired, assembles "behind the scenes" support for ideas regarding opportunities and/or solving problems Uses experts
I il l!
ll l
t_
Employee Peiormancewilh permission from the American compensation Reprinted from Rarsing the Ba, lJsing competencis to,Enhance USA 85260; tel (602) 483-83s2' @ AcA' M '14040 kottsdale, Blvd., r.ronni'6fti (ACA), r]\r. Association
Chapter
6|
Pmon-Based
Defining ComPetencies competencies are ffylng to get at what underlies work behaviours, rhere is a lot of fuzzines ia defining them. Early conceptions of competencies focused on ffve areas,lS Because
l.
.,
3. 4. 5.
Skills (demonstration of expenise) Ift owledge (accumulared informatiori) Self-concepts (anitudes, vdues, self-image) Tiairs (general disposition to behave in a cenain way) Modves (recurrent thoughts that drive behaviours)
As experience with competencies has grown, organizations seem to be moving away from of self-concepts, traits, and motives. Instead, thcy are puming greater emphasis on business-related descriptions of behaviours that excellent performers exhibit much more consisrendy than averagc performers, Competencies are becoming "a collection of observable behaviours (not a single behaviour) that require no inference, assumption, or interpretation.' rhe vagueness
Purpose
of the Competency-Based Structure
Do competencies help support an internally aligned srructure? Using thc by-now-familiar yardstick How well do competencies suppo$ the organizationi suategy and workflow, trear employees furly, and direct their behaviour toward organizarion objectives?
,.. : ,
Strategy Frito-Lay, which has used competency-based suucrures for over ten four competencies for managerial work:
Organization years, lists
1.
,
Leadingfor rcsulx: lJsinginitiative and influence with orhers to drive resula and promote condtruous improvement Building workforce effectiumesr: Coaching individual development and building capability of operationd, project, or cross-funcdonal teams to achieve business rezults
t. Lnnaging 4.
technical and business slsterrzs: Acquiring and applying a depth and/or breadth knowledge, skills, eirperience to achieve functiond excellence Doing it the ight way: Modelling, teaching and coaching company vdues
,.,There are duee levels of impact
i
of
-4
for each cornpetenqy. Aqthe ffrst level, ochibfuing the ompcoeocT it has an'impact across reams. At the highest leyrl, ii bas an
the team. At the next level, "g.* impact on dre enrire locarion.I9
Workftow
Competencies are chosen !o ensure drat all the britical nee.l* of 6c orqlniurdro it is common practice to write: "These slrill." 31s considcrod imporrrnr 6r all professionals but the weighting of imporrance and the lwel of proficiency varicr positions, organizations, and business condidons." \)(b.ere skill-based plans are tighdy to today's work, competencies apply rnore Ioosely to work requiring morc ecit h-di.+ stated) knowledge and behaviour such as in managerial and professionzl *ud. arc met. For enample,
'-'
; i
i
, '.
;'
'tail to Employees Mvocates of competencies say rhey caa copom of rheir own development. By focusing on optim"m pcrfrm2np E
fr dftrtrr o.'--l - -.
D & t"F -df* IE &il arqF p&-
msiat2in SsirEarllct bllfot'z3ltoGE,."ii-dre worry that the field is going back ro rhe middlc 6f fig Ls ..r*rrF rtrn brdq 1ry o personal characeristics was standard pracdce.2l Basing pay on er c Gr rEE[ @.t'tB tr yct it was $andard pracdce at one dme. B.riog p"y on somcoail idgre d:niil- E aoli iotegriry raises a similar flag. Trying to jusdf)' pq' ditrcrcncs berad m incill ffiSffirr creates risla thac need to be managed. mance, competencies can help employees
petencies
Pq Smrcnrs
117
I I
118
Panl I
t
were three general categories of global leadership competencies, as follows:
1.
Core Global Leadership Competencies and These competencies are fundamental to the development of other characteristics represent global leadership potential:
. . .
I
t t t
2.
I--
Engagement in personal transformation lnquisitiveness
Desired Mental Characteristics of Global Leaders different
issues and
play a major role in guiding concrete actions and behaviour:
i , . . . . . .
3.
optimism Self-regulation Social judgment skills
Empathy
Motivation to work in an international environment Cognitive skills Acceptance of complexity and its contradictions
Behavioural'Level Global Leadership Competencies
These competencies represent more explicit skills and
tangible knowledge that refer to
concrete actions and producing visible results:
. . .
t t
I I
Self-awareness
These competencies affect the ways in which the leader approaches
I I
r
Smcure
A Finnish researcher, Tiina Jokinen, reviewed- and integrated numerous previously suggested frameworks of global leadership competencies. Her work concluded that there
t
I
tbe
Global Leadership Competendes
I
I I
Dcunining
Intcrnal Alignmcat:
Social skills
Networking skills Knowledge
A Review and Source: Adapted from T. Jokinen, "Global Leadership competencies: pli*rion,"'.ro, rnal of European lndustrial Training 29(3) (2005), pp' 199-216'
Motivate Behaviour toward organization
0biectives
competencies provide guidelines for
basis for communicating behaviour and keep people focused. They also can provide a common as organizations important increasingly become has and working.og.rir* Tii, I"tt , possibiliry leadership posi fill experiences and viewpoinu aif.ti"g *ia.ry go global, .-Id.I .*ployees with 'Worth box here summarizes an integrated frame.Net The globaL orianizations.
iioi, in rhese
work of globd leadership competencies'
r-n
"HOW TO": COMPETENCY ANALYSIS
comP€rcncy_-based strucThe bottom part of Exhibit 6.5 shows dre basic decisions in creating a the objective of the plan' clarifr to is imponant, the most far by and decision, first ture. The
Chaptcr
i
6|
Pmon-Based Pa1
Strc*res
119
II
objective been poinred ou! rhar one of rhe
,-hu ayady
pifalls oFcornpetency
systems is
trying to do too
^j"* Ai"*t wirh ill-suited q/srems. Competencies may have value for personal development organization direcrion. However, the vagueness and subjectiviq (lfhat lJ'-*l*icating "oi"rl, u, this persont motives?) continue to make competencies +ry foundation for a pay " of the competency sets and on virtue may orist paper by ilr.*."" The comperency structure limle connection rc tlre work employces do'.In "ol*Tr' only way to gct people to pay attention to them. So the the is competencies ing for perhaPs Pafng analysis to clarify the purpose of the cornpetency system. r; tJconduct
,'J"a U"tt*aural indicators, but have
tirr-,,lri
" "o-p"t"o.y
competencies have been proposed.z3 One of them uses three A number of schemes for dassifring grouPs:
l.
pmonal characteristics: These have r:he aura of the Boy Scouu about them: trusrworthy, lolal, courreous, In business senings, ttre relevant characeristics rnight be persond integriry, maruriry of judgmenr, flecibiliry, and respect for others. Employees are ocpected to come in dre door
with
these characrerisrics and then develop and demonstratc thcm
in increasingly
compiex and arnbiguous job situarions'
Z. -3.
competency analysis a systematic procss to identify and coilert iniiormation about ihe cornpetenobs
What lnformation to Collect?
Visiinary:These are the highest-lwel cornpetencies. They might be enpressed as possessing new direcdons, and a global perspective, taking the initiadve_in moving the o..ganizadon io uen& in the markerplace, in of tf,e organization for the implicadons toarriculare bjrrg "bi. and in the local comrnuniry' *orld.u**, Organization-gecifc: Beween rhese rwo groups are those cornpetencics tied specificdly to the-particular organization and to the panicular funcdon where they are being applied. These g.n"rr[y irr.lode leadership, cusromel orientarion, funcriond o6penise (eg., able rc k3 4 U"ifA"gr and explain the-difference between competencies and compensable 6ctors), and developing others-whatever reflecs the company mlues, cultute, and suategic intent.
rhe leadership competencies that 3M developed internally for its globd cxecutives.24 Behavioural anchors are used to rate an ocecutive on each of these competencies' Exhibit 6.9 shows the behavioural anchon for rhe "Global Perspective" cornPetency' Executives' worldwide. Because 3M ratings on drese cornpetencies are used to assess and orecudve talent for develop help competency radngs within, fiom , r"li.iho.nily on promorion is less clear. to gay the link is dear; to development link the Again, succession planning.
iI
rquired forsuccadulwo* performance
I iI t ; ;
Bfiibir 6.8 shows
dgvelop
Becaur" they stem from each organization's rnission $atestent or irs suategr to achieve compedtive advantage, it might be conduded that r.he core competencies would be unigue to each not. One andpis showed rhat most,organizations aPPear to choose .o*p*y. In faci, th"y competencies (see Exhibit 6.tO7.zs So if rhe competencies do not from thi same list of 20 "ot" differ, how can they be a source of competitive advantage? Vhat does aPPear to differ among related 1 organizacions is the way in which rhey operationalize competencies. This parallels an issue 1 to-r,."t.gyr It is the differ. actions rnay the but in the words, There rnay be only slight differences
*
'.acrions
llVhom .
Jr.a
"r.
th. ,our.e olcornpetitive advanage.
to lnvolve?
Like campensable facors, cornpetencies are derived &om the ocecutive lcadershipt beliefs about rhe organization and its straregic inrent. Howwer, anccdoul evidence indicates that not all employees understand that conneccion. Employees at one bank iasisted that processing studetrt tuirion loans was a different competency from proccssing auto loans. The law department at Polaroid generated a lisr of over 1,000 cornpeteocies they felt were unique to the law depaf,tment and thar created value for the organization-
;
t I
I t
,l :T
-. Chaptc
6|
Pmot-Bascd
Pq
Struc*res
121
Competency lndicatons fon One 3M Competency: Global Perspectives
J
I
GLOBAL PERSPECTIVE: BEHAVIOURS
o Respects, values. and leverages other customs, cultures, and values. Uses a global management team to better understand and grow the total business. Able to leverage the benefits from working in multicultural environments. . Ootimizes and integrates resources on a global basis, including.manufacturing, research, and businesses across countries, and functions to increase 3M's growth and profitability.
. .
Satisfies global customers and markets from anywhere in the world.
Actively stays current on world economies, trade issues, international market trends and opportunities.
"3Mt Leadership Competency Model: An lnternally Developed Solution." Human Resource pp. 133-45. Reprinted by permission of John Wiley & Sons, lnc. Management 39 (Summer/Fall 2000),
Source: Margaret E. Allredge and Kevin J. Nilan,
EXHIBIT 6.1O
The Top
20 Competencies
@
E Concern
I
iI ii f
for quality
lnitiative lnterpersonal understanding Customer-service orientation
lnfluence and impact Organization awareness Networking Directiveness
Teamwork and cooperation Developing others Team leadership Technical expertise
lnformation seeking Analytical thinking Conceptual thinking
Self-control Self-confid'ence Business
iI ri
Achievement orientation
orientation
;
ru Source: P. K. Zingheim. G. E. Ledford, and J.R. Schuster, "Competencies and Competency Models," Raising the 9ar: Using Competencies Enhance Employee Performance (Scottsdale, AZ: American Compensation Association, 1996).
j ;
iI
Exhibit 6,1I shows one of rhe eight competencies used by a major toy cornpany for the marketing depanment, Other depanments have sepaxate competencies. Notice the mind-numbing level of detail. AJthough this approadr may be usefr.rl for career development, it is doubtfuI that dl this informadon is usefirl, much less necessary, for compensation purposes, The initial promise of simpliciry and flexibiliry in person-based systems remairu unfulfilled.
to
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Partl I Intcnal Alignnutt Dta'mbtizg
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Methods Establish Certification plan is that employees get paid br the relevant skills or comp€but not necessarily the ones chey use. Shll-b€sd plans assume that possessto match workflow wifi $afing levels, so whether or not an ine rhese skills will rnake it easier Liiuid"al is using a panicular skill on a particular day is oot an issue. Competenry-based plans are used all the dmd The assumptions are not clear. assume . . . what? Thar all competencies that when people are paid on rhe basis of their comperequiremenr the however,.is \Vhat is clear, to demonstrate or certify to dl concerned that a person posscsses way be some must rency, rhere discuss competencies as .compadble with 360-degree W'hile consultan* competency. of, .harlevel they are quiet about how to objectively certify whether a development, pcrsonal and feedback
th, h."rr of the person-based ,.n.ia dey
possess,
Person Possesses
a comPetency.
Recall that internal pay suucnues are describcd in rerms of rhe number of criteria on which the job suuctrre is based Ia pracdce, comperencybased structures generally are designed wirh relatively few leveLFfop5 16 si1-311d relatively wide differenrials for increased flexibiliry. A generic structure based on four levels would look as Besulting
Structure
levels, pay differentials, and
follows: LEVEL
PHASE
TITLE
4
Expert
Visionary; Champion; Executive
3
Advanced
Coach; Leader
2
Resource
Contributor; kofessional
1
Prof icient
Associate
Such a generic job structure could be applied to almost arryprofessionalwodq even r.he work of universiry faculry. Consequendy, internal alignment using competencies appcars looseb' lhked ro the organizationt suatery.
,
Competencies and Employee Selection and Training/Development In Chapter 2, ir was noted that human resources suategies can be thoughr of as influcocing decriveness .hro"gh their impact on worldorce ability, motivation, and abiliry o conrihute. In the gse of comperencies, there is clear evidence that abiliry ftroadly de6-ued to indudc pcrsonality u"aiu) is related to general competencies. Like Exhibit 6.11, Exhibit 6.12 shows a sct of generic competencies, called rhe Great Eight, which seem to capnue in an efficieotwet &c demes fouod in rhe array of competency ftameworks available. \7hat Exhibit 6.12 ad& are hypodcscs rEgarding how rhese cornpetencies relate to the individual characteristics ofpersonaliry ("Big Frve"), motiration, and abiliry. So, for example, based on Exhibit 6.12, if we wis[ ss bav€ managels vfro are comperent in leading and deciding, we need to select or rain and de'relop people high in inced for povner, need for conuol, and who have exuoverted personalities. Failure to adequatd s66g1 .-Floyees on these individual characteristics would not only put more pressure on trainihg end development, but dso potentially demotivate employees who are seeking'to acquire aad demonstrate these competencies, bur who may not be well suited to do so. Competency-based pay would be less likely to succeed in rhis situation.
Guidelines from the Research on Competencies Although the notion of competencies may have value in idendfring what distinguishes rypical from truly outsanding performance, there is debate on whetlrer cornpetencies can be uanslated rnto a measurable, objective basis for pay. Competencies often morph into compensable factors.
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6|
Pctson-Bascd Pay Stnzctarct
one srudy has analyzed the com-
_l.r.nci.r/p.tformance relationship for managers, and it found that managers' competencies were
Lhr.d ,o rheir performance ratings, but *rat
there was no relationship ro unit performance level.26 with potendal applicadon research to cornpetencies deds with inrellectual capinl of An Viewing tJre management.zT comperencies of an organizationt ernployees as a and knowledge to a divcrsifted,ilvestmenl p:{:* htjhltCh: rhe. facr that not all competensimilar ponfolio ',',,. Li* u" unique nor equally valuable stratcgically.2s The focus then changes to managing erisdng i .o6perencies and developing new ones in wap that maximize the overall success of the organizarion. As organizations globalize, they may need to rebalance their values and perspecdves to allow a global sffategy to funcdon.zg They seek the right balance benveen the range and depth of cultural, functional, and product cornpetencies in the global organization. Bur rhis is speculative and remains to be translated into.pay Practices. The basic question remains whether it is appropriate to pay for what an employee is capable of doing versus what he or she is actually doing. It seems more likely rhat efFectiveness, for pay purposes, relares to focusing on what is easily measurable and direcdy related to organizational -e$ecriveness (i.e., lcnowledge and skills thar are task/performance-related).30 Overall, consult, ing surveys show that the percentage of frms using competency-based pay has been declin'; ing,lr and recent srudies have concluded that despite ia advantages, comperency-based pay is area
i'
underutilized.32
ONE MORE TIME: INTERNAL ALIGNMENT REFLECTED IN STRUCTUBES The purpose of job- and person-based procedures is reallyvery simple-to design and rnanage an internal pay suuctue that helps achieve dre organizatioris objectives. As with job-based evaluadon, rhe ffnal result of the person-based plan is an internal strucnre of work in the organizadon. This strucnue should be aligned with the organization's internal alignment policy, which in turn supports its business operations. Funhermore, managers [rust ensure that the strucnue remains internally digned by reassessing wor!:/skills/comperencies rrhen necessary. Failure to do so risks suuctures that lack work- and performance-related logic and opens the door to bias and misdirected behaviours.
MANAGING THE PLAN 'Whatever
plan is designed, a crucial issue is the fairness of its managcmenr. Details of the plan should be described in a manud that indudes dl information necessarl to apply the plan, such as deffnitions of compensable factors, degrees, or details of skill blocks, competencies, and certiffcation merlods. Increasingly, online tools are available for managers to learn about these plaas and apply rhem.33
hployee acceptance of the process is just as important here as for job analysis and job evaluation. In order to build this acceptance, communication with all employees whose jobs ,ue p.ur ', ofrhe process used to build the pay srnrcrure is required.
\
EVIDENCE OF THE USEFULNESS OF RESULTS There is vast research literature on job evaluation compared rc person-based stuctures. Most of it focuses on the procedures used rarher than its usefiJness in morivating employee behaviours or achieving organizational objectives. In vimrally all the studies, job waluation is ueated as a measurement device; the research assesses ie rdiabiliry, validiry, and costs, as well as its compliance
LOA
126
Partl I I*rnat Akgnmmt: Detfffiining th. Stracarc
with laws and regulations. Any vdue added by job Evaluadon (e.g., reducing pay dissatificdon, improving employees' understanding of how their pay is determined) has been largely ignoredl contrast, research on person-based structures tends to focus on their effecs on behaviours and organization objecdves and ignores questions of reliabiliry and validiry.
ln
't-
Reliability of Job Evaluation Techniques A rcliablc evaluation would be one in which different evaluators produce the.came resuh. Most studies report high agreement when different people rank-order jobs-correlations beween 0.85 and 0.96.3s This is important, because in practice several different people usually evaluThe results should not depend on which person did the evaluation. Reliabiliry can be imprwcd by using evaluators who are familiar with the work and traincd in the job evaluation process. Some organizations use group consensus to increase reliability. Each ev"aluator makes a preliminary indepcndent evaluation. Then, all evaluators in the group discuss their results until consensus emerges, Consensus cerainly appears to make the results more acceptable. However, some snrdies reporr rhat results obtained through consensus were not significandy different from those bbtained either by indcpendcnt waluators or by averaging individud evaluators' results. Orhers reporr that a forcefirl or experienced pcrson on the committee can sway the resula. So ate jobs.
can knowledge about the jobt present salary level.36 A. p*r of efforts to reduce costs, job ev-aluation committees are disappearing; instead, managers do the ev"aluations online as part of the organizationt "HRToolkit" or "shared services." The
reliabilicy and vdidiry of the results obained this way have not been studied.
Validity/Usefulness Validity refers to the degree to which ttre cv'aluadon assesses what it is supposed to-the relative worth of jobs to the organization. Vdidity of job oraluation has been rneasured in two ways:
(1) by agreement, rhat is, the degree of agreement between rankings that resulted from the job evaluation compared to an agreed-upon ranking of benchmarks used as the criterion; and (2) by "hir rates," thar is, the degree to which'the job eraluation plan matches (hits) an agreed-upon ranking or pa)' structure,for benchmark jobs. In both cases, the predetermined, agreed-upon ranking or pay srmctrue is for benchmark jobs. It can be esablished by organization leadenhip or be based on orternal market dan, negotiations with unions, or the rnarket rates for jobs held predominandy by men (to try to elirninate any general discrimination reflected in the market), or some combination of these. Many studies repon that when fifferent job eraluation plans are cornpared to each other, they generate very sirnilar nnkings of jobs but very low hit rates-they disagree on how much to pay the jobs.37 One study that looked at three different job evaluation plans applied to the same set of jobs reponed similar rank order among evaluators using each plan, but substantial differences in dre resultingpey,3s So it is clear that the definition ofvalidiry needs to be broadened rc include impact on pay decisions. How the resulis are judged depends on the standards used. For managing compensation the correct standard is the pay structue-what job holders get paid-rather than simply the jobs' rank order. Srudies ofthe degree to which different job evaluation plans produce the same results surt with the assurnption that if different approaches produce the same resule, then those results rnust be 'cor!ect," that is, valid. But in one study, three plans all gave the same result (they were
t"li"bl.), but all three ranked a police officer higher than a detective. They were not valid.39 \Zh.at accounts for rhe reliabiliry of invalid plans? Either rhe compensable frctors did not pick up something deerned imponant in the detectives' jobs or the detectives havi{hore pow€r to negotiat€ higher wages. So while these three plans gave the same results, they would have litde acceptance among detectives' t
----j--
*._ Chapter
,
6|
Penon-Bascl
Pq Stuctura
irnponant when an organizadon is facing challengcs by dissatisffed MfStftg fiiS point 9qn Pur an orgadz-adon ar risk.4o thei! hvyErs, or employees Such "details" are very
AccePtabilitY and irnprove employee acceptabiliry. Al obvious one is to indude who believe their jobs are evaluated incorrecdy should be " and/or skills reevaluadon. Most ftrms respond to such requesc from re-andysis .bl. tb t.quor the process rc all employees, unless those employees are represented by extend few but nanagers, have negotiated a griwance process.4l Another approach is to use employee artitudc *anl to asscss their perceptions of acceptabiliry. are used Several devices
to
assess
for,nrt appeals process. Employees
*t"
surveys
GENDEB BIAS IN INTERNAL PAY STRUCTURES The condnuing &fferences in jobs held by rnen and women, and thc accompanying pay &fferences, have focused aftenrion on internal strucures as a possible source of discrimination. Much of this attendon has been direced at job evaluation as both a potencial source of bias against women and a mechanism ro reduce bias.az It has been widely speculated dnt job evaluation is susceptible to sender bias; that is, whether jobs held predominandy by women are undervalued rclative to pUi teta predorninandy by men, simply because of the job holder's gender. But evidencc does nor suppon rhe proposirion that the gender of an individual job holder influcnces the evduation of rh. Job.a3 Addidonally, rhere is no evidence that the job evaluatort gender affects the resulu. However, a srudy found rhat compensable factors related to job content (such as contact wirh others and judgmenr) did reflect bias, but that others pertaining to employee requirements
1' , ' ' ,
(such as educadon and experience) did
not.4
second porendd source of bias affecs job ev-aluation indirecdy, through the current wages paid for jobs. In rhis case, job evduation resula may be biased if the jobs held predominantly by women are underpaid. If this is the case, and if the job evaluation is bascd on thc currenr w€es paid, then the job evaluadon results simply mirror any bias in the current pay rates. Considering that many job evaluation plans are puqposely strucured to mirror the existing pay strucrure, ir should nor be surprising that the current wages for jobs influence the resulrs of job
Th.
evaluation. One study of 400 compensation specialisa reveded that market data had a subsundally larger effect on pay decisions than did job ev-aluadons or current pay dza.as This study is a unique look at severd factors rhat may affect pay structures. Several recommcndations seek to ensure that job evduation plans are bias-fue, including rhe following: 1.
.t I
2.
t3.
Deftne the compensable factors and scales to include the content ofjobs held predominantly by women. For ocample, working conditions should indudc the noise and stress of office machines and the repedtive rnovements associated with the use of computers. Ensure that factor weights are not consisrcndy biased against jobs held predominandy by women. fue facors usually associated with these jobs always given less weight? Apply rhe plan in as bias-free a manner as feasible. Ensure that the job descriptions are biasfree, occlude incumbent names ftom the job evduacion process, and train diverse evaluators.
At the risk of poindng out rhe obvior:s, dl issues concerning job evaluation dso apply to borh skilt-based and competency-based plans. For erample, the accepabiliry of the results of skill-based plans can be studied from the perspective of measurement (e.g., rcliabiliry, validity) and administration (e.g., cosrs, simpliciry). The various points in skill cerdfication at which enors and biases may enter into judgment (e.g., different views of skill-block deffnitions, potential favouritism toward ceam members, deffning and assessing skill oStolo"tnce) and whether skill-block poinrs and evaluators make a difference all nccd to bc srudied. In light of the detailed bureaucracy rhat has grown up around job eraluarion, we conffdendy predict a growth of
LO5
127
124
Pan
I I b*rnal
/l&gntftzt
futaA*g
&c Sauctta"
bureaucratic procedures arou.nd person-based plans, too. In addition to bureaucncy to m2n2ge to cenification may be fraught with potential legd vulnerabilities if employees who fail ro be cenified challenge the process. Unfomrnately, no srudies of gender effeca in skill-based or competency-based plans cxist. Litde attention has been paid to assessor training or validating the certificadon processpJust as employmcnt tests used for hiring and proroocioridecisions must be demonstrably frec of illegel bias, it seems logical tlrat ceniff.cation should Face the same requirement. procedures used to cosrs, rhe whole approach
d.**:::strucnues
r-T
THHEE TYPES OF STRUCTURE
Exhibit 6.13 conuasts job-, skill-, and competency-based approaches. Pay increases are gained via promotions ro more responsible jobs under job-based structures or by acquiring more rtalued skills/competencies under person-based suuctrues. Logicdly employees will focus on how to get promoted (e.g., experience, performance) or on how to acquire ttre reguired skills or competencies (e,g., training, learning).
EXHIBIT
6.13
Contrasting Approaches
ffi
ffi What is valued Quantify the value
'
Mechanisms to trdnslate
. . .
Pay structure
Pay increases
Managers'focus
Compensable factors Factor degree weights Assign
point that
. . .
reflect criterion paY structure
into pay
.
Based on
.
job
. .
Promotion
to
Link employees
work
Promotion and
placement
'
Skill blocks Skill levels
Certification and price skills in external market Based on skills
market
performed/market
. .
COMPETENCY-BASED
SKILL-BA5ED
JOB-BA5ED
. . . .
certified/
. . . r
Competency
levels
Based on competency
Skill acquisition
.
Competency development
Utilize skills efficiently
o
Be sure competencies add value
Provide training
.
Control costs via training, certification, and work
r
opportunities Coritrdl costs via certification and assignments
.
Seek competencies
Provide competency-developing
forjob and budget increase
Employee focus Procedures
Advantages
.
Seek promotions
to
.
Seek skills
earn more pay
. Job analysis . Job evaluation . Clear €xpectations . Sense of progress . Pay based on value of
. . . . .
. .
. .
Continuous learnirig Flexibility Reduced workforce
. . . . .
Continuous learning Flexibility Lateral movement
Potential bureaucracy Requires costs controls
. r
Potential bureaucracy Requires cost controls
Skili analysis Skill certification
Competency analysis Competency certification
work performed
Limitations
rc T
Potential bureaucracy Potential inflexibilitY
.
Certification and price competencies in external market
developed/market
.
assignments
Coritrbl costs via pay
Competencies
W
.
Chaprer
6|
Pmon-Bzscd
joffiscd plans focus on placing *re right people in the to skilUcompcrcncy$ased plen-c 16vs1565 r-his procedure. Now, managers musl Aswitch riehr iobs' \et to the work right people, i5, those with the right skills and competencies. right *r" "r]im conrols co*s by only as much as the work performed is worth, paying approach ,q, iJb-based tbe employee maypossess. anygrcatcrslrill.s So as Fxhibit 6,13 suggests, costs are of ,.*rrdl.n job assignments and or work rates via ludgee. #rolled In conuast, skill/comperency-based plans pay employees for rhe highest level of skill/ comperency rhey have achieved, regardless of the work they perform. This maximizes flexibiliry. Bur it also encourages dl employees to become certified at top rates. Unless an employer can Managers whosc employ=a use
either coFtrol the rate at which cmployees can cenify skill/competency mastery or employ fewer people, che organization may experience higher labour costs than competitors using job-based The key is to offset the higher rates with greatcr productiviry. One consuldng firm
"ppio""h.r. .i"ims th"t atr average company switching to
a skill-based system experiences a 15 to 20 percent a 20 to 25 percent increase in training and development costs, and initial rates, wage in increase to allow people to cross-rrain count and move around.46 But a research siudy head in increases found rhat costs were no higher.aT In a.ldidon to porenridly higher rates and higher naining costs, skiJl/compercncy plans rnay have rhe additional disadvantage of becoming as complex and burdensome as job-based plans. Additiona,lly, questions still rernain about a skilUcomperency system's compliance with employmenr sandards legislation. If a female worker has a lower skill-mastery level and lower pay than a male worker who is doing the samc worlq this would appear to violate the requirement in all Canadian jurisdictions for equal pay for equal work. Similarly, pay equiry legislation could be violared ifworkcrs in a femde-dominated job of equal value to a male-dominated job are not paid equally due to a skill/competency system. So whar is the best approach to pay structures? It depends. The best approach may be to permit flocibility to adapt to changing condirions. Too generic an approach may not provide sufficient derail ro make a dear link berween pay, work, and results; too detailed an approach may become rigid. Bases for pay that are too vaguely deffned will have no credibility widr employees, will fail ro signd what is really important for success, and rnay lead ro suspicioru of favouritism
and bias.
This chapter condudes our section on internal dignment. Before moving on to externd consideratioru, lett once again address the issue: So what? SThy bother with a pay structure? The answer should be: because it supporcs improved organization performance. Arl intemally aligned (1) help .. pay srrucrure, whether strategically loosely coupled or tighdy fitting can be designed to i derermine pay for the wide variety ofwork in the organizations and (2) ensure ttrat pay influences peoples' attirudes and work behaviours and directs them toward organization objectives.
fl i::l
..\
,
Gonclusion
This secdon of the book started by examining pay suuctures witlin an organization to ensrue that jobs/people that add more value to the organization will be paid more than jobs/people that :. add les value. The importance put on internd dignment in the pay structures is a basic suategic . issue. The premise underlying internal dignment is lhat internal pay structures need to be aligned with the organizationt business sffategF and values, *re design of the workflow, and a concern for the fair rreatmeor of employees. The work relationships within a single organization are an important part of internal alignment. Suucnrres acceptable to the sakeholders affect sadsfacdon with pay, the willingness to seek and accept prornodon to more responsible jobs, the effort to keep learning and underrake additional training, and the propensiry to remain wirh the employer; "' they also reducc the incidence ofpay-related grievances. The techniques for establishing internally aligned structures include job analysis, job evaluadon, and person-bascd approaches for skilUcompetency-based plans. Although viewed by some
fuy Strucaaa
129
130
Part
I I M'lfunt
brhi4 & kuan
as bureauaatic burd€ns, rhesc rcchniques can aid in achieving the objectives of the pay qrsrcrrl when tbey are propcrty designd and managed. lTithout them, the pay objecdves of improving competitiveness and 6imgs are more difficult to achieve. .Pan I of this book has now been completed. Suategic perspecdves on compensation, the key straregic issues in compensation management, and qfe totd pay model that provides a framework for the book have been discussed Managing compensation reguires creating the pay system ro support the organizadon strategies, its culture and values, and the needs ofindividual employees. The internal dignment of the pay strucnue, the techniques used to esrablish alignrnent, and the effects on compensadon objecdves have also been considered, The noct Part focuses on the ner
n 1.
Ghapter Summary Skill-based pay plans and competency-bascd pay plans are conceptually idencical, but skills are very speciffc and competencies are more general. Skill-based pay plans are usually applied to blue-collar jobs and competency-bascd plaru to white-collar jobs. The four basic steps in skills andysis are (l).decide what information should be collected, (2) decide whatmethods should be used to collect che information, (l) decide who should be involved, and (4) eruure that the resula are usefirl for pay purposes by establishing certifica-
tion methods.
The term comPetenE means the underlying, broadly applicable knowledge, skills, and behaviours that form the foundation for successful work performance at any level of job in the organization. Core competencies are competencies that are linked to the mission sraremenr that ocpresses the organizationt philosophy, values, business strategies, and plans. Competency sets translate the core competencies into speciffc actions. Competency indicators are the observable behaviours that indicate the level of cornpetency in each com4.
Pe[ency set. Employee acceptarce is crucid for person-based plans, beiause it is the key to employees perceprions of fairness regarding the pay smrdrue. Comrnunication with employees during the building of the structure is the most important step to employee acceptance. Other important actions to enhaace acceptabiliry are a formal appeals process, employee attirude surveys, and audiu ofthe pay plan. Two possible soruces of bias in internal pay strucnrxes are (1) bias in the job eraluadon of traditionally female-dominated jobs and (2) bias inlcurrent wages that may be perpetuated when job evaluation plans are suuctured to mirror ecisting pay rates.
Key Terms competencies competency analysis compeiency-based pay structure
I
t_
ompetency competency
indicators sets
core competencies
skill-based pay structures
skill analysis
Chapter
6|
Pnson-Ba:cd
Review Questions 1. 2. 3.
What are the similarities in the logic underlying job-based and person-based plans?
What
is
the difference between specialist skill plans and generalist skill plans?
Why is there not mo,fe varia+ion in core competencies b,,etween organizations? What does differ?
4, lf you were managing
employee compensation, how would you recommend that your
company evaluate the usefulness of its job evaluation or person-based plans?
Experiential Exercises 1. 2, 3.
.
Conduct a skill analysis and design a skill certification plan for payroll administrators. Find the mission statement for an organization with which you are familiar. Define core conipetencies, competency sets, and competency indicators for this organization. David Tyson, author ofthe Canadian Compensation Handbook, states, "There are a number of problems with skill-based pay. A major one is thaf in my opinion, it does not comply with pay equity legislation anywhere in Canada" (p. 27). Familiarize yourself with the basic
components of pay equity legislation by visiting the Ontario Pay Equity Commission wets site (www.payequity.gov.on.ca). Survey the human resources management professors at your educational institution on the question "Do you believe that skill/competency-based pay plans are consistent with pay equity legislation?" Then conduct a debate. starting a summary of
with
the reasons given on both sides of this issue.
Case Targeting Teachers' Pay .The pay schedule shown in Exhibit 5.14 is.typical of many pay plans forteachers; it contains steps by which a teacher's salary increases with each year of experience as well as with addi-
tional university credits beyond a teaching certificate. Say Jane begins teaching in September ofthe current year. She has a bachelor's degree (Group lll) and no experience. She will earn $51,733 during the current school year. Next year. she will move up one step in the new schedule and earn $55,213, a raise of fi3,qlS, or 6.7 percent.
Once she has received her maste/s degree or qualified as a subject specialist, she will "move over" to the next column (Group lV). Otherwise she will stay in the Group lll column and advance one step each year until she reaches step 10 when she "tops out." Note that she will receive the step increase as well as any entire schedule increases that the school board gives each year. So any increase to the entire schedule translates into a larger increase for those teachers currently being paid according to the schedule.
Questions
1.
Although the stepped salary schedule has many features of a knowledge-based pay system, not everyone agrees. ls this a knowledg6-based pay system? How might you change it to make it more like the person-based plans discussed in this chapter? What features would you add/drop?
2.
ln the pay scale in the exhibit, notice that the column differentials increase with years of experience; for instance, the difference between Group lll and Group lV at one year of experience is fi3,197, whereas the difference at year 10 is $5,093. What message do these
Pq Strucnra
-1
132
Partl I In*rnalAlignmmt:
EXH|B|T
Determining rte Strucnre
6.14
Toronto Teachers' Pay Grid [$] as of September 1,2011 ,n
Erm
ffi LEVEL OF EDUCATION
'
GROUP III
GROUP IV
$45,zogi
$47,834
$s1,738
$ss;404'
48,124
51,371
55,213
58,410
Step 2
50,923
.53,297
58,8S7
Step 3
53,722
s6,230
62,5s3
65,573
Step 4
s6;soe
59,532
66,425
qp,736
Step 5
50,089
62,863
70,285
73,899
SteP 5
63,2:73
66,173
74,150
78;oss
Step 7
66,67
69,477
78,015
82,226
SleP 8
59-,552
s5,381
Step 9
72,834
72,7?4 76,107
81,p77
SteP:g Step
.
:
GROUP
GROUP II
NO. OF YEARS TEACHING
1
Step 10
W:
'
I
76;,021,
7g,414
:
'
61,985'
85,746
90,545
89,614
g4,7:07:
Ere
Source: Reproduced with permission of the Ontario Secondary School Teachers' Federation/ F€ddration des enseignantes-enseignants de l'Ontario.
increasing differentials send to teachers? What pay theories address this issue? How would these differentials affect teacher behaviours? How would they affect school district costs? Calculate the size ofthe pay differential for increased seniority versus increased education. What behaviours do you believe these differentials will motivate? ln other words, what pays better, growing older or taking courses? Pay for performance for teachers is a hot topic in many school districts. How might the salary schedule be made compatible with a performance-based pay approach? Evaluate your ideas after you have completed Part lll of this book. which discusses employee
contributions.
;$l
iffi
ffi !
i
t --'
Practise and learn online
with Connect.
Connect allows you to practise important concepts at your own pace and on your own schedule, with 2417 online access to an eBook, Practice Quizzes, Study Tools, and more.
Forbes magazine recently reported the earnings of some well-known people, some of whom are included in Exhibit ll.1.One wasTigerWoods. His golfing prowess is legendary;so are his earnings, David Letterman made $45 million. Jon Stewart, another late-night talk show host, earned only $ 1 4 million. Why does Letterman earn more than Stewaft? Perhaps because Letterman's show brings more viewers (and thus more advertising revenue). There are many more examples of such stories, and the "pot of gold" that comes with suc-
$5.5 million? How come AIex Rodriguez earned $36 million and Dion Phaneuf only $650,000? ls it because more people love baseball than hockey? Because the New York Yankees have a lot more fans and cess, Why did Justin Bieber earn $53 million, whereas Selena Gomez only
theToronto Maple Leafs?Why is itthat Barack 0bama, who runs the United States of America,
only earned
$+Oo,OOO,
while Prime Minister Stephen Harper made slightly over $300,000?
Look
like deans at Canadian business schools made more than our Prime Minister. Executives
seem
to make a lot of money, too. Ed Clark (President &
CE0, Toronto-Dominion Bank) and
William Doyle (President & CEO, Potash Corp. of Saskatchewan) both earned over $t i million. Donald Walker (CEO of Magna lnternational) earned over $'16 million, but another Donald (CEg of Tim Hoftons from 2008 to 2011) only around $:.S million. Michael Jackson seems io be worth more dead than alive. Can Whitney Houston beat Michael Jackson? Apparently one day after her death, 43 of the top
1
00 most-downloaded tracks on iTunes were Houston songs
I
Who decides who gets how much? ls pay determined without apparent reason or justice? Or is there some kind of logic? Can you rationalize the earnings of the people on the list shown in Exhibit ll.1?
'
External competitiveness is the next strategic decision in the total pay model, as shown in Exhibit ll.2.Two aspects of pay translate external competitiveness into practice: (1) how much to pay relative to competitors-whether to pay more than competitorq to match what they pay, or
I
I
t
I
l
I I t t I I I I t I I I
The next
two chapters will explain that a variety of answers exist. Chapter 7 discusses
choosing the external competitiveness policy, the impact of that choice, and related theories
and research, Chapter 8 has two parts: First, it disc.psses how to translate competitiveness policy into pay level and forms. Second, it discusses how to integrate information on pay levels and forms with the internal structure from Part L
EXHIBIT
ll.2 |
The Pay Model
INTERNAL ALIGNMENT
Work Job
Evaluation/
Analysis Descriptions Certification
INTERNAL STRUCTURE
ffiI ffit
li$l
.'ld EXTERNAL COMPETITIVENESs
y#:i|"",
surveys
Policy Lines
PAY STRUCTURE
ffi
':i$,ll
.ait ;"ql .:91
,ft1
#t
.:.",*l
iA{
:,,4
':'fi EMPLOYEE CONTRIBUTIONS
Seniority- Performance-
Based Based
Merit
Guidelines
INCENTIVE
PROGRAMS
E]
:#l '-,i+l
ril!
.,':,Sl
|i{il .iEd lrr-ll
t
.,?rtl
.:.s]
MANAGEMENT
Costs Communications
Change
'.:t]rt
EVALUAIION
,rli1 i;$_i
::qi'l
:ifl
i.:{itl
=
"8il
:l#l
,ffi
ffi
LEARNING OUTCOMES LO1 Describe external competitiveness, and the two specific actions taken in practice that determ ne extema I competitiveness. i
LO2 Discuss the three major factors that shape external competitiveness. LO3 Discuss three labour demand theories and explain their predictions regarding pay.
LO4
Discuss
two supply side theories and explain their predictions regarding
LO5 Explain the three competitive pay policy alternatives.
is always a good rnondr for travel agents in Montreal. In addidon to the permanent PoPularion eager to flee r.he ciry's leaden skies, graduaring students from Monueal's various universides are calvelling ro job interviews with employers across dre country-at comPany expense, full hre, no Sarurday nighc stayovers required.'l?-hen they return from these trips, srudents comPare nores and ffnd *rat even for people receiving the same degree irl rhe same field ftom the same universiry, rhe offers vary from company to comPany. !7hat explains the differences? Location has an effecr: Firms in Toronto and New York Ciry make higher offers dran in some other cities.l The work also has an effecc Jobs in recruitrtent pay a linle less than jobs
J*uaty
in compensation and employee relations. And rhe industry to which the different 6rms belong has eff.cc Pharmaceuticals, compurer software, and peuoieum ffrms tend to offer more than "n and natural resources fums.
computer hardware, telecommunications, Students would like to artribure these differences to rhemselves: differences in grades, courses talcen, interviewing skills, and so on. Bur as drey accept offers and reject ochers, many companies rvhose offers wer. ,elect.d by rheir first candidates now extend the identical of[er to or]rer scudents. So ir is hard to *"k. th. case that an individualt qrrelifisadsns totally explain the offers'
\fhy would companies emend identicd offers to most candidates? And why would different companies .*r.nd diff.r.nt offers? This chapter discusses rhese choices and whar difference chey make
for the organizadon.
The sheer ,r,rmb., of economic rheories related ro coropensation might rnake this chapter heavy going. Another difficuiry is that fie realiry of pay decisioru doesnt necessarily march the theoriei. The key to this chapter is to always ask- So what? How will this informadon help me?
pay.
il ri
Pa*lI I
138
LO1
ll
pay level the avenge I
of the arny of
rata paid by an employer: base + bonuss + beneflB + stock optionslnu mbe r
of
pay forms
nix of
IT
WiE
s Dnnbrtgtk
Pay
hvcl
COMPENSATION STHATEGY EXTERNAL COMPETITIVENESS
In Part I, comparisons insidt the organization wele oemined. In ocernal competitiveness, our second pay policy, comparisons oilbide the organilrtiosl ars pevisnsd-comparisons with other employers who hire the same kinds of employees. A major decision when designing a compensation strategy is whedrer to mirror what competitors are doing with pay. Or is ttrere an advantage in being different? External competitiveness also includes choosing the mix of pay forms (i.e., bonuses, stock options, flexible beneftts) that is right for the business strareg)r. External competitivcness refen to the pay relationships among organizationg-the organizationls pay relative to its competitors. It is ocpressed in practice by (1) sening a paylevd that is above, belorr, or equal to competitors' and (2) by considering the mix of pay foms relative to those of competitors. Borh pay level and pay forms focus on rwo objectives: (1) ro control costs and (2) to anract and retain employees.2
Control Costs
employe*
the
Exurnal
the yaious tYqes
of paymena that
make up
toE,l compensation
Pay lwel decisions have a signiftcant impacr the pay level, the higher the labour coss:
Labour Colts
=
or
Pay Level
expenses. Other things being equal, the higher
X Number of Employees
Furthermore, the higher the pay level relative to what competitors pay, the greacer the relative cosrs ro provide similar products or services. So you might think that all organizations would pay the same job the same rate. However, they do not. A report on graduates of the MBA program ar the Rotman School of Man€ernent at the Universiry ofToronto in 2008 showed thar the average base sdary for investment researchers was $85,000. The range of salaries for t.he sarne job ran from $65,000 to $125,000. Thus, some investmenr researchers were making nearly wice what orhers were paid.3 The same work r paid differendy. !?'hat could justify a pay level above whatever minimum amount is required to anract and retain financial services scaffi
,@
Attract and Retain Talent One company m y peymore because it believes its higher-paid investment researchers are more producdve rhan those at orher companies, They may be beaer trained; maybe they ale more innovative in their rcsearch. Maybe they are less likely to quit, which saves recruiting and training cosrs. Anorher company may pay less because it is differentiating iaelf on non-financial renunsmore challenging and interesting work, superior uaining, more rapid promodons, or even greater job security. Different employers s€t different pay levels; that is, they ddiberately choose to pay above or below what others are paying for the same work, That is why there is no single "going rate" in the labour market for a specific job.a Not only do the rates paid for siinilar jobs vary benrveen employers, a single company may set a different pay lwel for different job 6milies.5 The company in Exhibit 7.1 illusuates the point. The top chart shows that.this panicular company pays about 2 percent above the market for its enffy-level engineer. (Market is set at zero in the exhibit.) However, they are 13 percent above the market for most of their marketing jobs and over 25 percent above the market for rnarkedng managers. Office personnel and technicians are paid below the market. So this company uses very different pay levels for different job families. These data are based on comparisons of base wage. tVhen we look at totd compensation in.the bottom of the orhibit, a different pattern emerges. The company still has a different pay Ievel for different job families. But when bonuses, stock options, and beneftts are included, only markedng managers rernain above the market. Every other job family is now subsmntially below the marker. Engineering managers take *re deepest plunge, from only 2 percert below dre market to over 30 percent below. The exhibit, based on actual company &ta, makes two poinm, First, companies often set differenr pay level policies for different job familia. Second, how a company compares to the
E"
Chaprer
Anatyzing the
7|
Defning Compctitiaenes
Martet Position of a Company's Pay Str"ategy: Base Pay vensus
Base Pay 3Oo/o
25o/o
P
o
JZ
(o
20o/o
E
o {U
15o/o
ctl
(!
P
C
o
H
10o/o
o L o
5o/o
(u
o
o
0o/o
-5o/s
Engineer Engineering Marketing
Manager
AnalYst
Marketing
Office
Manager
5taff
Technician
Total Compensation 15o/o
10% P
+
5o/a
.E
E
Ao/o
7' gl
-sw
fo -rox -1s% 5 o. =E -20o/o 9 o -zsu -30% -35o/o
Engineer Engineering Marketing
Manager
AnalYst
Marketing
Office
Manager
5taff
market depends on the companies rhey compare to and the pay forls lcluded in the comparison. it is ,rot whether this comPany deliberately chose to emphasize markedng managers "1.", and deemphasize engineering in ia pay plan, or if it is paying the price for not hiring one of you readers to desigo thit pl*.dEith"r*"y, rhe point is that even drough people love to talk about "market rates," there is no single "going rate" in the marketplace' ;goirig of pay forms. Exhibit 7.2 cornpares the mix of pay There is also no single (t"tL"tin! manager) at two comPanies in the same geograPhic area' forms for the same
-i*"
;ob
139
I I
t
140 EXHIBIT
re
Panll I Exteraal Compairttnu:
7.P I
Dcerminhg dx
bvel
Two Companies: Same Total Compensation, Different Mixes
re
Company
I I
Pa1
A:
Total Compensation = $h2,349
Benefits 160/o
I I I t
Company
B: Total Compensation
= $112,748
Benefits 17o/o
I I
Benefits 2Oo/o
re
're Both companies offer about the same total compensation. Yer the percentages allocated to bonuses, beneffs, and options are very different.
base,
Chapcer
7 | Defning Competitivcna
WHAT SHAPES DffERNAL COMPETITIVENESS? levd and mix. The facors 7.3 shows r-he facrors drat affect a cornpany's decisions on pay skills; (2) colee.ution for people ort:o.* labour.**., the in competidon T& il-"a. ttl **l'o;r"". andservice markets, which affects the ftnancial condition of the organization; and ili i."**erisrics unique to each organization and its employees, such as its business strategy, and rhe producdvity and experience of its workforce, These factors act in concert to
"_u,tir
.', i '
LO2
1
Xlootogr,
'-' ,onlr**pay
level and mix decisions'
LABOUR MABKET FACTORS .:
of labour markets usually begin with four basic assumpdons: Economic theories 1.
2. 9. 4.
Employers always seek to maximize profrrs' people are homogeneous and rherefore inrerchangeable; for ercample, a business school graduate is aiuciness school graduate is a business school graduate. pay rates reflect all costs associated widr employment (base wage, bonuses, holidays,
The benefis, even uaining). The markets faced by employers are comPedtive, so there is no advantage for a single employer ro pay above or below dre market rate'
oversimpli$ realiry, they provide a framework for undenunding daim to be "market-driven," that is, they pay competitivelywith often l"bour marlirs, Organizations Undersanding how markeis work reguires analysis of the leaders. market are rhe mai.ket or even side focuses on dre actions of the employer: how many demand The labour. of supply demand ancl andwillingto paythem.The supply side loola atporcntial able theyare *plopo,-1.ys..kandwh.t dreir qualiffcations and the pay they are willing to accept in ochange for ttreir services.T
Alhough
chese assumprions
;;;;*,
What Shapes External Competitiveness?
,,
141
I I t I I I T
I I I T
I t I I I I I I
t I
Pann |
142 EXHIBIT
m
T
7.4 I
4,rtu1&nEdidrc
Deetmiaiag &c
Pay
Leut
$upply and Demand for Business School Gnaduates in the Short Flun
re
$too,
I I I
+oo E(E
)
cn q
o .s = .cl L
o o
o-
't
$25,000
Number of busini:ss graduates available
I t I I
E
E gives a simple illustation of demand and supply for business school graduates. vertical axis represents pay rares &om $25,000 to $100,000 a year. The horizontal axis depigts rhe number of business school graduates in the market. The line labelled "demand" is the sum of all employers' hiring preferences for business grad.uates at various pay lwels. At $100,000, only a small number of business graduates will be hired, because only a few ffrms will be able to afford them. Ar $25,000, companies. can afford to hire a large number of business graduates. llowever, the line labelled 'iopply'' indicates that there aren't a large number of business graduates willing to be hired at $25,000, In frct, only a small number are willing to work for $25,000. A" p"y rates rise, more graduates become interested in working, so the labour supply line slopes upward. The market rate is dre point where the lines for labour demand and labour supply cross. ln this illusuation, the interaction among dl employers and all business graduates determines the $50,000 market rate. Because any single ernployer can hire dl the business graduates it wants at $50,000, and all business graduares are ofequal qudiry (assumption 2 above), there is no reason for any wage other than $50,000 to be paid.
'The
t
Exhibit 7 .4
Labour Demand So,
if $50,000 is rhe market-determined rate for business graduatei, how many business graduates
will a speciffc employer hire? To answer this question, an andysis of labour demand is required. In the short rerm, rur employer cannot change any other factor of production (i.e,, technology, marginal product of labour
capital, or natural resources). Thus, its level ofproducdon can change only ifit changes the lcvel of human resources. Under such conditions, a single employert demand for labour coincides with its margind product of labour.
the additional ou@ut associated
of
wiill
the
emplogent
one additional human
rsources unit, with other produaion factos hed constant
L_,__
Marginal Product of Labour Assume thar two business graduates form a consulting fum that provides services to ten clients. The fum hires a third person who brings in four more clients. The margind product of labour
:, Chapter
7|
(rhe change in output associated wirh the addidonal unic of labour) of employing rhe third But adding a founh business graduate generates only try_o, new business graduate is four clienrs. marginal producdviry resula &om the fact that each additional gradudiminishing This clienr, of the orher Factors of producdon with which to work. In smaller share a progressively has are such as office space, number of compurers, level of clerical factors of producdon term, shorr the are ffxed. Unril these factors ofproducrion are changed, each addilines relephone and supporr donal new hire produces less than dre previous hire. The arnount each new hire produces is the margina.l Product of labour. marginal revenue of labour is the money generated by rhe sale of rhe marginal oroduct-the additional output from the employment of one addidonal person. In rhe case of rh. .onsulcing ftrm, it is the revenues generated by each addirional business graduate. If each new dienr generates $25,000 in revenue, then the third employee's four new clients will generate
ihe
$100,000. Bur the fourth employee's nro new cliena will generate only $50,000. This $50,000 is exaccly rhe wage that must be paid ro that founh employee. So the consulting firm will break even on the fourth employee but wili lose money if it hires rnore than that. Recall that the frrst labour marker *reory assumption is thar employers seek to ma.ximize profits. Therefore, the consulting firm.will continue to hire rnore business graduates until the marginal revenue generated by rhat last hire is equal to the costs associared with employing that business graduate. Because orher pocential costs will not change in che shorr run, the level of demand that maximizes proftrs is rhailevel at which rhe marginal revenue of thi last hire is equal to the wage rate for that hire. Exhibic 7.5 shows the connection between the labour market model and condidons facing a singlc employer. On rhe left is the same supply and demand model frorn Exhibit 7.4 showing thar pay level ($50,000) is determined by the interaction of dl employers' demand for busiiress graduates. The right side of *re exhibic shows supply and demand for an individual employer. At rhe market-determined rate ($50,000), the individual employer can hire as many business graduares as it wanrs. Therefore, supply is now an unlimited horizonml line. Howevec the demand line sdll slopes do'arnward. The rwo lines intersect at 4. So for this employer, the market-determined wage rate ($50,000) equals the margina.l revenues of the fourth hire. The marginal revenue of the fifth graduate is less than $50,000 and so will not add enough revenue to cover costs. The point on che graph at which the incremental income generared from an addidonal ernployee equals the wage rete is the marginal r€venue product.S
EXHIBIT
7.5 |
Supply and Demand at the Market and
o o $100,000
P
the
a&itioral
-o
+o $25,000
Number of business graduates available
nn gaw-
other pduaionfucrs constant
the lndividual Employen Level
Marginal revenue
E
$so,ooo
rata
ated @ exh additiulal urit of human remurcer, with
.c
Ol
(t
marginal revenue of labour
(u
L
o-
a
_
:o
(o
o '6 :t
o
t43
Dcfnmg Competinaetzs
o)
P
u Et P o o
123456 Number of business graduates hired
ffi
i
I I I I I I I I I I I I I I I I I
I I
I
I
I !
i
144
Panlt I Etenal CarrF&*ne
T
Waag
&
Pa7
Lcwt
A manager 'sing &e nardnat rsvenue produc model must do only rwo things: (l) deermine the paf lerd ser b). merket forccs and (2) determine the marginal revenue generated by each new hire. This will ell the rnan€er how many people to hire' The model provides a rnluable analpical framework, but it oversirnplfies the red wodd In most organizations, it is rlmcm impossible to q.rtaflEry the goods or services produced by an individual employee, because most production is tluough joint cfforts of cmploy.ees with a variety ofskills. Eves-in serrings that use picce rates (e,g., 50 cenrs for each soccer ball scwn), it is hard to separate dre conuibutions of labour from.tSese-of other resources (e.g., efficient machinery sturdy rnaterials, good lighdng, vcntiladon)' So neirher the marginal product nor thc marginal revenue is diricdy measurable. However, managers do need some mensure rhat reflects vdue. In the preceding two chaprcrs, compensable fa"tori, skills, and competencies wcrc discussed. For orample, if compensable factors deffne what organizadons value in work, then job ev-aluadon reflects the jobt coriribution to the organization
*i -"y
be viewed as a proxy for marginal levenue product. However, compensable facors are (e.g., skills required, problem solving required, resporui-
Gudly defined by organizadons as input bilitied rarher *ran
as the
value of dre output. This same logic applies to skills and conpetencies.
Labour SuPPIY closer look at the assumptions about the behaviour of potendd employee shows that fiis model assumes that many people are seeking jobs, that they possess accurate information about all job openings, and dat no barriers to mobilfty (discrimination, Iicensing provisions, or unioq membership requiremcna) ocist beween jobs'9
A
.
ns in 6e a"alpis of labour deman4 tlese assumptions gready simplify the real world. As the assumpdons change,.so does tfie supply. For example, the upward+loping supply assumes that as p.ople will be willing to take a job. But if unemployment tates ,ue low,_offers pay increases,
-ot"
of high"r pay may aot increase sup--ply;-everyone who lvants to work is already working. If cornpetiton qui"kly march a higher offer, the emFloyer may face a higher pay lwel but no increase in ,"ppln ,o thar it ends up payrry more foJ thc employees it already has, but is sdll shorthanded. .-ployo who dominates the local labour market, such as Essar Stccl Algoma Inc. in Sault Ste. Marie, Ontario, may also ffnd that raising wages doesnt necessarily amract more applicants, simply because the supply has &ied up. People who are conveniendy located and interested there. Any additional applicants must be.induced to enter the labour supply, in work.r. "tt."ay perhaps from schools, retirement, or more distant areas. So a dominant cmployer has a_relatively 'free g:rist. However, hand in determinirig pay levels, bccause ferv local labour market compctitors attract more in the levels may not pay once the local labour supply is exhausted, small increases "step" due shape a firnction upward, but it may takc on the of slopes applicans. The supply still
--;t
to the large pay increases needed to artract.additional peoplc. Although many ffrms find lowering drc job requirements and hiring less-ikilled workers a bettcr choicc than raising wages, this choice incurs increased training costs (which were included in assumption 3 above).
LO3
TI
MODIFICATIONS TO THE DEMAND SIDE
The story is told of the economics professor and the srudentwho were suolling through campus. "Look" the student cried, "theret a $i00 bill on the path!" . "No, that cannot be," the wiser head replied. "lFthere were a $ 100 bill, someone would have Picked
'
it
uP."
The polnt of the story is thatcconornic theories frequendy must be revised to account for r."liry. !7b.n we change our focus from all the employers in an economy to a particular employer, models musr be modiffed to help us understand what actudly occurs. A particularly uoublesome issue for economists is why an ernployer would pay more than what theory states is the
E'-
Chapcer
7|
Defning
Comptdtbre
t4!i
Labour Demand Theories and lmplications
THEORY
50 WHAT?
PREDICTION
Job evaluation and compensable iactors'must
Compensating Workwithnegativechiiacteristics
Jiffe;entials'Efficiency
wage
capture these negativg
Above-market wages will improve efficiency by attracting workers who will leave.
Staffing programs must nave the capability of selecting the best employees; work mr.rst be structured to take advantage of employeet' greater efforts,
Pay policies signal the kinds of behaviour the emPloYer seeks.
with more pay, larger bonuses, and otherforrns
perform better and be less willing to
Siqnaliing .
.?:uotn*cs
requires higher pay to atffact workers;
of compdnsation.
"whole of the advanMore than 200 years ago, Adam Smirh argued that individuals consider the on the alternadve based tages and disadvantages of differen^t employmena" and make decisions if the necessary rhat is, job characteristics, has negative wi-tt tt" grearesr "net advanrage."l0 If a worliing conjob is tenuous-(stockbrokers), (medical security school), uaining iirr.ry op.ntive (professional are low ofsuccess that chances (garbage or the collectors), ditions-are disagreeable his is feacures. these negative for to compensate wages higher offer must spons), dren employers known as the compcnsating dlfferentials theory. Compensatin! differeniials explain the presence of various pay rates in dre market. Although the nocion is appealing, it is hard ro document, due co the difficuldes in measuring and control-
ling all the factors that go into a net-advanage calculation'
I compensating ditrereo-
tials theory
fretdaafr*tt4 srcgEj
m&tcffitolpa-. sate
fwnqgd,e ftmtel
i6
Efficiency Wage Theory
3. 4.
Reduce
5.
Reduce the need to supervise employees
-*ur"d
r.
hishWesmryirog-
effriaryatdlosfur ql.ality4frr6Ydrrfl
say
when they mean "slacking off"), and
hiring better employees or modvating Present employees
to work r*"r,", or harder. The underlying assumption is that pay level decermines effon-agaia, an appeding notion rhat is dif;frcult ro document. Th.r. i. some research on efficiency wage theory.ll One study looked at shi*ing behaviour by e
with lower si'irking,
efficiency wage tbeory
war*tlg,tder
"shirking" (what econornists
So basically, efficienry increases by
efiiciency and acrually
costsWffitttqt*J,E
Anract highernualiry applicanm Lower turnover Increase worker effort
7
-"y irr.r."r.
the number of disciplinary layoffs, Shirkingwas also lower when
T
I
of
1.
I I I
Compensating Differentials Theory
wages
I I I
Pay practices must recognize desired behavior-rs
to tle model rhat address this rnarket-derermined rate. Exhibir 7.6 lools at three modiffcacions and signailing' wage, effi ciency differendals, phenomenon: compensadng
Efficielcy wage theory says that sometimes high lower labour costs if they
I
I I I I
I I I I !
t I I t
146
?afin I
I I t T T
drc Pry Leacl
oftet
Research shows
Signalling Theory signalling theory tl'F- idea that pay levels
aN.pay mix aredeignd to silnal deired enployee behaiiours
T
Dcfrla;nbg
the higher wagc bill.l2 that higher wages actually do anract more qualified applicants.l3 But they applicants. Few companies evaluate their recruiting programs well unqudifted dso arrracc more enough to show whether they do in fact choose only superior applicants frorn the larger applicant pogl. So an above-market wage does not guarantee a more productive workforce. - *..- Does an above-market wage allow an organizadon to operate with fewer supervisors? Some research evidence says yes. For exarnplc, a study ofhospitals found that those d-rat paid high wages to stafFnurses employed fewer nurse supervisors.l4 The researchers did not speculate on wherher the higher wages artracted better nurses or caused average nurses !o work harder, nor whether rhe hospital was able to reduce its overall nursing costs. An organization's abiliry ro pay is related to the efficiency wage model. Firms with greater proffts than competitors are able to share this success with employees. One srudy found thar pay levels ar more profitable firms were about 15 percent greater t5an at firms widr lower profia.l5 'lVhat forms to pay, the mix Nocice that all the discussion so far has dealt with pay level. quesdoil, is vinually ignored in these rheories. The simplifring assumption is that the pay lwel includes rhe ralue of different forms. Abstracted away is rhe distinct possibiliry thar some people find more performance-based bonus pay or bemer health insurance more a$racdye. Signalting theory is more useful in understanding pay mix' enough to
I
T
Wtre
high unemployurent nade it more difficult for fired or disciplined ernployees to find another job. So, aldrough rhe hfher wegcs cut shirking, the authors were unable to say whether it was cut
I I I
E*Et tzl
Signalting theory holds that employers deliberady design pay levels and mix as part of a stratry 16 rhat signals ro borh prospective and current employees what kinds ofbehaviours are sought Vielr€d and a'brand to pay what pay forms are offered esablishes how much lens, a markering .brou$ drat sends a mcssage to prospeccive employees, just like brands of cornpeting products and services.lT A policy of paying below the market for base pay yet offering generous bonuses or training
opponunides sends a different signd, and presumably atuacts different people, than a policy of matching market wage wirh no performance-based pay. An employer who cor^$ines Iower base with high bonuses may be signalling that it walts employees who are risk talers. The proponioo of people within the organization who are eligible for bonuses signds whether the same pay rystem is geared rc all employees or to managers only and helps to communicate performance orpectations. Thke another look at Exhibit 7 .2, vftich shows a breakdown of forms of pay for two competitors, as well as rheir relationship to the markec. The pay mix at company A emphasizes base (84 percent) more than at company B (64 percent) or the market average (67 percend. Company A pays no bonus, no stock options, and somewhat lighter beneffts. Company Bb mix is closer to the market average. \7hat is rhe message that As pay mix is communicating? The astute reader will note thar ar A, one c:rn earn the $1L2,349 with very litde apparent liak to performance; whereas at B, earning the $112,748 requires performance bonuses and stock opdons
as
well.'S7hy
would anyone work at B wjthout extra rerurns for the riskier pay?'\ilfithout a premium, how is B able ro atrracr and recain employees? Perhaps with more interesting projects, flqible schedules, or morc opponuniry for promotion-dl pan of Bt "total pay brand." A srudy of universiry sruden$ approaching graduation found that both pay level and mix affected their job decisions.ls Studenm wanted jobs that offered hgh p"y, but they also showed a preference for indiiidual-based (rather than team-based) pay, fixed (rather than variable) pay, job.-based (rather than skill-based) pay, and flexible benefits. Job seekers were rated on various personal dimensions-rnaterialism, conffdence in their abilities, and risk 2vg13i6n-v/hich were related to pay preferences. Pay level was most irnportant to materialists and less important to rhose who were risk-averse. So applican$ appear to select among job opponunities on the basis of the perceived match between their persond dispositions and the nature of the organization, as signalled by the pay system. Both pay level and pay rnix send a signal.
Chaprer
7 | DSning
147
Compaitiuetza
Laboun Supply Theories and lmplications
I I I I I I
I t
Signallirig works on the supply side of the model, too, as suppliers of labour signal to potendal employers. People who'are becer uained, have higher grades in relevant courses, and/or have related work experience signal to prospective ernployers that they are likely to be berter performers. (Presumably they sigod with dre same degree of accuracy as employers.) So both characterisrics ofthe applicants (degrees, grades, ocperience) and organization decisions about pay lwel (lead, match, lag) and mix (higher bonuses, beneftt choices) acr as signds that help communicate.
r-I
MODIFICATIONS TO THE SUPPLY SIDE
I I I
LO4
Two rheories shown in Exhibit 7.7_tcr,ewaiLon wage and human capial-focus on undermanding employee behaviour rather than employers-the supply side of the model.
Reservation Wage Theory Economists are renowned for their grert sense of humour. So it is not surprising that many describe pay as "non-compensatory," because reservation wage theory says drat job seekers have a reservarion wage level below which they will not accept a job offer, no matter how aruactive the other job attriburcs.te If pay lwel does not meet their minimum standard, no otfier job attributes can make up (i.e., compensatQ for this inadequacy. Other theorists go a step funher and say rhat some job seekerg-satisffers-take the ffrst job offer they get where the pay meets their reservari
reservation wage theory dredee drafFbJee*ers hate a reserrcOon tr,egr
latd|p/orvwf*hWd not acrwt
a
rob,
howatwivetle
tn
rr:glter
dEib
atfibutEs.
Human CapitalTheory Human capital theory, perhaps t'he most influentid economic theory for orplaining pay lwel differences, is based on the premise that higher earnings flow to those who improve their potential productiviry by investing in themselves (by acquiring addicional education, training, and experience).zo The theory assumes rhat people are in fact paid at the vdue of rleir margiod product. Improving producdve abilities by inrresdng in training or even in one's physical hedth will increase onet margind product. The value of an individual's skills and abilities is a funcdon of the time, expense, and resources expended to acquire them. Consequendy, jobs that require long and expensive uaining (engineers, physicians) should receive higher pay lwels chan jobs that require less invcsrment (derical workers' demenury school teachers)'
human capital theory dre Hea
tfut tttgfnr eamiEs
arenadebyrrgp*tttp
hrryweffiFisbt FAr*+tyWqt*E
edcto.t a?*eq,dn
ryiere
I I I I I I I I
I
il
14A
I__I
t* PRODUCT MABKET FACTORS
The supply and demand for labour arc major determinants of an employert pay lwel. Howevel, any organization must generate, ovet time' enortgh revenue to cover exPenses' induding compensation. It follows that an employer's pay level is constrained by its ability to compete in the product/ service market. So product market conditions determine to a large offent what the organization can afford to pay. Product demand and dre degree of competidon are the wo kry product market 6ctors. Both affect the abiliry of the organization to change what it charges for ia producs and services. If prices annnot be chaoged without decreasing sales, then the abiliry of the employer ro ser e
T
T
higher. pay level is coastrained.
I I
Product Demand Although labour market conditions (and legd requirements) put a floor on the pay level required to attract sufficient employees, the product market pua a ceiling on rhe maximum pay level that an emplopr can set If the crnployer pa;ts above the maximum, it must either pass on rhe higher pay level to consumcrs doo"gh price increases or hold prices ffxed and allocate a greater share of total revenue to cover labour costs. Degree ol Gompetition Ernployers in highly competitive markea such as rnanufacturers of automobiles or generic drugs are less able to raise prices without loss of revenues, At the other exrreme, single sellers of a lamborghini or the drug Magra are able to set whaterter price they choose. Howwer, too high a price often invites *re rye of government regulators, Other factors besides product market condidons affect pay level. Some of these have already been discussed. The producdviry oflabour, the technology employed, the level ofproduction reladye ro plant capacity available+ll affect compensation decisions. These factors vary more across than within indusries. The technologies employed and consumer preferences m y vary beween auto manu6cturers, but the differences are relatively small when compared to che technologies and product demand of auto manufacturers v.ersus the oil or financial industry.
I I
I I
A Dose of Reality: What Managers
t I I I
the Pay Leael
A number of additional factors affect the supply of labour. Geographic barriers to mobiliq, betwecn jobs, union requircments, lack of information about job openings, the degree of r;s1g involved, and the degrec of unemployment also influence labour markets.
I
I
Pelrf I FtE nal Coapaitma DetnAhg
I
I I
L
SaY
Discussions with managers provide insight into how all of these economic factors translate into acual pay decisions, In one srudy, a number of scenarios were presented in which unemployrnent, profttabilicy, and labour market conditions varied-2l Managers were asked to make wage adjustment recommendations for several positions. kvel of unemployment made almost no difference. One manager was incredulous at the suggestion: "You mean take advanage of the ftct that ttrere are a lot of people out of work?" The company's profftability was considered a factor for higher rnanagemenr in setdng the overall pay budget but not something manage$ consider for individual pay adjustments. lfhat it boiled down to was "'$7'hatever the chief financial officer says wi c* afford!" They thought it shonsighted to pay less, oren though market conditions would have permirted lower pay. In direct contradiction to efficiency wage thcory managers believed that problems in artracdng and keeping people were the result of poor management rather than inadequate compensation. Thry offered the opinion that 'tupervisors try to solve with money their difficuldes with managing people."u
ChaprerT
I Dd"t"C
Compethtuena
,l :l
149
I
plore Reality: Segmented Supply of Labour
-
shiftiri$ iioniimic
rilso gives insight-into
how
prCssures Observing nianafeii iCfnal ibspoiises'-to into actual pay decisions. Significant differences in wages paid econornic pressures translate companies to cut pay,23 ..ourd ,h. *orld and rle ease of outsourcing work overseas has led many
I I I t I I t
Work Hospitals can staff nursing positions from four sources: regular cemporary-help agencies specializing in nurses, and "ravellers"-11115ssg part-time, .'nilt-ii-., that send them to hospitds around che country for extended perio&, For agencies by employed This segmentcd labour supply means using muldple sources of nurses from rnonchs. six example people Flow to the
muldplelocacions wirl muldple employment reladonships. The level and mix of cash and benefi,s p6d to each nurse depends on rhe source. Regular employees get pay and beneftts; part-timers o., p"y bur no benefirs; agency nurses get pay and bcnefits from the agency; and "uavellers" get iay-benefics, and living expenses from the agency.The hospiral pays a fee to the agency in addi,o th. nurses' compensation. The segmented supply results in nurses working the same jobs side by side but earning different pay. This is a case of people flowing to the work, because a frospitrl cannor send irs nursing tasks off-site to other cities or offshore to other nadons.24
,i*
I
Work Flows to the People{n-Sitq 0tl-Site, 0ffshore A computer sofrware design company (contract can staffa projecr with employees who are on-sire in rheir Canadian head office, off-site employees duoughour Canada), or ofFshore in India or orler countries. To bid on projects, the company needs ro know pay lcvels and mixes of forms not only in Canada, but other locations including Long Beach, California; IGakow, Poland; Shanghai, China; and Bangalore, India.
There are three importaat poinc here:
It is nor rhat our theories are useless. They simply absuact darifiing the underlying Fcors thar help us understand how reality wort
Realiry is complex; rheory abstracts. away the detail, 2. 7,
IT
Theories of market dynamics, rhe interaction ofsupply and demand, form a usefirl foundadon. The segmented sources of labour mean chat determining pay levels and mix increasingly requires undersending marker condidons in different locations worldwide. Managers also need to know the jobs required to do dre work, the tasls to be performed, and the knowledge and behaviours required to perform them (sound likc job analysis?) so t.hat they can bundle the various tasls to send to different locations.
ORGANIZATIONAL FACTORS
Alrhough product and labour market conditions create a range of possibilities within which managers creare a policy on external cornpetitiveness, organizadonal factors influence pay level and mix decisions also.25
.
lndustry and Technology The indusrry in which an organizadon competes influences the technologies used. Labour-intensive indusrries such as education and services tend to pay lower than technology-intensive indusuies such as petroleum or pharmaceuticals. In addirion to differences in technology acrosr indusuies, the inuoduction of new technology uithin an indr.rsry also influences pay levels. For enample, rhe use of universal product codes, scanners, scales built into the counter, and. self-checkout la.oes have red.uccd the skiils reguired of cashiers. As a result, their average pay has dedined over time.6 The imporance of qualificadons and experience cailored co particular technologies is often overlcibked in tleoredcal analpis of labour markers. But machinists and millwrighm who build cars for Gcneral Motors in Oshawa, Ontario, have very different q""lifications from machinists and millwrights who build airplanes for Bombardier in Quebec'27
,
T
I t I I I I I I I !
I 150
I
Pan
il | E*mal @az:c
t I I I T
Pa1
Iatd
There is consistent evidence that large organizations tend to Pay more tha-n small ones' A snrdy of manufrcnging fi1ms found that firms with 100 to 500 workers paid 6 percent higher wages rhan did ,*d1gr 6r-s; ftrms of more rhan 500 workeql paid 12 percent more thall did dre smallest frrms.z8 This reladonship bewreen organization size, ability to pay, and pay level is consistent with economic rheory. Ii says that talented individuds have a higher margind vdue in a larger organization because they can influence more people and decisions, which leads to more proffts. Co'*p.r" the advertising revenue David Lemerman can bring to CBS versus the potenrial revenue ro station CHD( if his late-night show were seen only in Peterborough, Ontario. No matter how cool he is in Peterborough, CHD( could not generate enough revenue to be able to afford to CBS can. However, theories are less usefirl for explaining such as CBS, including janitors and compensadon companies at bigger *iy po"ti.rlly.everyone everyone has Letterman's impact on rcvenues. that unlikely It seems o,r,,"g.rr, is paid more. pay Mr. Lemerrnan $45
hilion; but
EmploYees' Preferences
tvhat pay forcrs (health insurance, vision care, bonuses, pensions) do employees really value? B.n , ,rrrd.rrt nding of employee preferences is increasingly imponant in deterrnining external comperitivenesr. M"lk u, ,it i.ll,-in roL'" both employers and employees' choices'?g {:Y.u.t 'S7ho among us would be so th"re .r. subsrantial &fficulties in reliably measuring preferences. rank. money over cordial co-workers or challenging assignments in response '"Srhat do you value mo$ in your w_ork?" Researchers ftnd that people question, to the survey put more impo*". on Pay than they arc willing to admit'30 crass as
to (publidy)
Organization's StrategY no-services strat-
'
Amriery of pay level and mix suategies exism. Some employers adopt a low-wage, eff; &ey compere by producing goods Td services with as lide toal compensation
as possible.
5ike and Reebok rei.n dty do ttis. Borh rely heavily on outsourcing to manufacture their prodconuacuc$. Nil
-b;,
I_-I
RELEVANT MAHKETS
Econo*ists take
*the
market' for ganted, as in, "the rnarket determines wages." Howev.er, for
to pay' rnandernent, deffning the relerant market a big part of ffguring out how much
I I
T
lx
Employer Size
I I I t
I I I I I I I
Dtlrznhrirs
rh. ooioo of a single homogeneous labour rnarket may be an interesting anal)'trdemand and cal device, each organization opeiates in manylabour rnarlcets, each with unique pay pulposes and for are relevant that markets *re define must supply. Cor,r.q,r.#y, -*"g"r,
i*oogh
I I
coirpetitive positioru for their own markets. The drree faccors usually "ppropri"te,.levant labour markets are the occupadon Gkill/knowledge required), used to deterine'the (other employers in dre geography (willingness ro relocare and/or commure), and competitors
oi"itirf, th.
I
i I
t"*"
l
Defining the Relevant Market
I I I
I
tI
I
L__,_
p-d".t/service and labour
rnarlcets)'
on How do ernployers choose their relevant market? Surprisingly litde-research has been done
rates will this issue. S,rt ii U. markes are incorrectly defined, the estimates of competitors' pay be incorrect and the pay level and mir inappropriately srablished'
E.?
='ChapterT
I D$ni:A
Coaanna
Two srudies do shed some light s11 rhi< issu€-3l Thcy condude that managers look at both locarion, and size-and {re jobr-the skiLls arrd k"gy_Ldgq rheir comperirors-their produc6, to the organizadon's success (e.g., lawyers in law fums, softntare required, and their importance on its locarion and size, a comPany may be deemed a So, depending .niirr..n ac Microsoft). a producr marker competitor. For example, an accounting if it is not even ,r[u*, compruison gs set pay rates for new accountants without be fssli.sh would Marie, Ontario, Sre. frm in Sault its accountants. A nonprofft organizadon like rle Red Cross paying I(PMG is whar knowing will want to lrrrow oficer t.he pay levels of senior finance positions chief financial a for looking across the country, whereas a new local Starbucla for-profit organizations and nonprofir in both only concern itself would wi*r local pay rates. (See Chaptcr 8 cashier/barista a for looking srore defining the relev'ant market,) oq discussion detailed moie for " The data from product market competitors (as opposed to labour market compedtors) are likely to receive greater weight when
1.
2, 3. 4.
-t I
i
! !
Employee skills are specific to the product marker (recdl the differences in General Motors millwrights versus Bombardier millwrigha), Labour costs are a large share oftotal cosu, Product demand is responsive to price changes-that is, people wont pay $20 for a botde VQA winq theyll have Fuzion instead, and The supply of labour is not responsive to changes in pay (jobs drar are low-wage and require
low skill). Compensation dreories offer some help in understanding ttre variations
in pay lwels we
observe beween employers. They are less helpful in understanding ditffi:rences in the rnix of pay forms. Relevant markets are shaped by pressures &om rhe labour and product markets and the organization. But so whar? How, in fact, do managers set pay level and pay mix policy, and what difference does
il
it
make?
In dre remainder of this chaptel
COMPETITIVE PAY POLICY
these rwo issues
will
be discussed.
ALTERNATIVES
Recall drar pay level is rhe average ofthe array ofrates inside an organization. There are three convendonal pay Ievel policies: ro lead, to meet, or to follow competition. Newer policies emphasize flexibiliry: among policies for different employee groups, among pay forms for individud employees, and among elernents of the employee relatiopship they wish to emphasize ia their
.
'1,
i
external competitiveness policy. \ftrar difference does the pay lwel policy make? The basic premise is that the competidveness of pay will affect the organization's abiliry to achieve its compensation objeccives, which in rurn will affecr the organization's performance. The probable effecs of alternative policies are shown in Exhibit 7.8 and. discussed in detail below. The problem wirh much pay level research is that ir focuses on base pay and ignores bonuses, incendves, stock options, employment securiry benefits, or other forms of pay. Yet the exhibits and discussion in this chapter should have convinced you that base p.y r.pr.r.na only a portion of compensation. Comparisons on base don€ can mislead. In fact, managers seem to believe rhey get more bang for the buck by dlocating dollars away from base pay and into variable forms that more effectively shape employee behaviour.3z Pay
with Competition (Match)
Given the choice ro match, lead, or lag, the most common policy is to match rates paid by compedtors.33 Managers historically justify this policy by saying that fulure to match competitors' rates would cause dissadsfaction among present employees and limit the organization's ability to recruit. Many non-unionized companies tend to match or even lead co.mpetition in order rc discouage unionization.3aA pay-with-competition policy uies to ensure that an organizationt wage cosrs are approximately equal to those of its product competitors and that its abiliry to attract Epplicants will be approximately equal to its labour market compedtors. Classical economic
151
LOs
I I t I I t
I I t I I il
I )
I I I I I
I I
152 EXHIBIT
I
Palr\ | Fs*nal A@;ma:
7.8 |
Oa@
d* Pq Letel
Probable Flelationships between External Pay Policies and Objectives
il
models predict that employers will meet competitive wages. Although this policy avoi& placing an employ.t at a disadvantage in pricing products, it may not provide an employer with a compeitive advaatage in its labour markets,
Lead Policy
to anract and reain gudity employees and minimizes It also may offset less attractive feasures of the work Combat with pay. employ"L dissatisfaction gff-set some of rhe risk of being killed. The higher pay personnel miliury to paid pay premiums
A
lead policy maximizes the abiliry
offserc the risk of being ftred when the market anks. As ooted earlier, sometimes an entire industry crn pass high pay mtes on to consumers fal is a relatively low proponion oftotal operating expenses or ifthe industry is highly regulated. But what about spicific ftrms within a high-pay indusry? Do any advantages acnrally eccrue to rhese 6.rms? If all fums in the in&utry have similar operating experues' then the lead policy must provide some competidve advantage rhat offsets the higher costs. A number of researchers have linked high waga ro ease of attraction, reduced vacancy rat€s and training time, and bener-qualiry employees.35 Research also suggests that high pay levels reduce Severd studies found that the use ofvariable pay (bonuses and long-rcrm t*oo"., *d "bsenreeisrn. incentives) is related rc an organizationt improved financid performance, bur dtat pay level is not.36 A lead policy can have negadve efFects, too. It may force the employer ro increase the wages
itr"r.a by brokerage fums
f
of current e*ploy.er to avoid internal misdignment and murmuring among the
employees.
Additionally a lead policy may rnask negative job attributes that contribute to high turnover later on (e.g., lack of challenging assignmenrs or hostile colleagues). Remember the managers'view that hilh rurnover w"s likely to be a managerial rather t'han a compensation problem.sT Lag Policy
A policy
co pay below market rares rnay hinder a
ftrmt abfiry to attract potentid
employees'
go**.., if pay lwel is lagged in return for the promise of higher furure returns (e.g., scock ownership in a irigh+ech starr-up firm), such a promise may increase employee commitmot and
I
L
'-
ChapterT
I D$ning
Competitivmcss
which may increase ptoductiviry. Additionally, it is possible to lag competition l.vel bur co le4d on other returrs from work (e.g., hot assignmenn, desirable location, ouJtanding colleagues, cool tools, work/life balance). tosrer reamwork,
on pay
Different Policies for Different Employee Groups ln praccice, many employers go beyond a single choice among che drree policy options. They may urrv ,h. poliry for different occupational families, as did the,c,ornpany in Exhibit 7.1. Qr rhey rhe policy for different forms of pay, as did rhe companies in Exhibir 7.2. They may also ^iruuy adapr different policies for different business units that face very different cornpetidve condidons. . Similaily to rhe lead, match, or lag options to pay level, there. are various options to pay mix as well. Examples of some obvious alternatives are performance-driuett, marka match, worh/life balance, and secaity. Exhibit 7.9 illusuates these four alternatives. Incentives and stock options make up a greeler percentage of toral compensarion in performance driven than in che orher
EXHIEIT
re
7.9
I I
l I
t I
Pay Mix Policy Altennatives
E Market Match
Options
T
I I T
160/o
T Security (Commitment)
Work/Life Balance
t
t I I
Benefits 20o/o
Base 5Oo/o
options 1Oo/o
Bonus 10o/o
E
-
I
I
tl
154
P*tlI
I E*enul Conpaifitna Dcerniniflg *e
Pay
buel
rhree. The narhet tnatch simply mimics the pay mix competitors are pafing. ally make tiese mir decisions is a ripe issue for more research.
liii
How managers acnr-
How managers position their organizationi pay against competitors is changing. Some alternadves thar are emerging focus on total returns frorn work (beyond ffnancid returns) and offering people choices among rhese returns. Rather than flgxible, perhaps a better term would be "fuzy'
h
policies.
I
Eniployet'.of Ghoice/Shared Ghoice Some companies compete on the basis of dreir overall reputarion"ds a place to work, beyond pay level and mix. For example, IBM competes wirhin the informarion rcchnology marketplace and positioru its pay "among the best" in dris group. Furtherniore, it claims to 'tuongly differentiate based on business and individual resulul It leads the market wirh is srong emphasis on performance. IBM also offers octensive raining oppomrnities, chdlenging work assignments, and the like. In a sense, "employer of choice" corresponds
to the brand or irnage the company Prorects
as
an employer.
The shared choice apprciach begins wirh thetraditional alternatives of lead, meet, or hg. B* it then adds a second part, which is to offer employees choices (within limits) in dre pay mi* This "employee as cusromer" perspective is not all that revoludonary. Many employers offer choices on health insurance (individual versus dependant coverage), retiremenr investmeots (growrh or value), and so on.38 (See information on flexiblc benefis in Chaprcr 9.) More advanced software is making the employee-as-customer approach more feasible. Mass customization-being able ro select anong a variety of feacure*is roudne when purchasing a new laptop or car. It is now possible wich total compensation too. Does offering people choices matter? One risk is that employees might makc choices *rat jeopardize their financial well-being, for example inadequate health insurance. Another is the "24 jars of jam" .dilemma. Supermarlret studies report rhat offerigg consumers a taste ofjust a few different jams increases sales. Bur offering a taste of 24 different jams decreases sales. Consumers feel overwhclmed by too many choices and simply wdk away. Perhaps offiring employees too many choices of differenr kinds of pay will lead to confrrsion, mistakes, and dissatisfacdon.3g
Pitfalls of Pies The pie charts in Exhibir 7.9 contrast various pay-mix policies. However, thinling about the mix of pay forms as pieces in a pie chart has limitacions. These are particularly dear when the valuc of options is volatile. The pie charts in Errhibit 7.10 show a well-known software company's mix before and aftsr a rnajor scock market decline (srcck prices plummeted 50 percent within a month). Note rhe effects on the composition of the pay forms. Base pay went from 47 percent to 55 percenr of toml compensation, whereas the value of stock opdons fell from 28 percent to 16 percent. (The reverse has happened in this company, too.) But wait, it can get worse. One technolory company w.rs forced to disclose that three-quarters of all its stock options were "under warer,' that is, orercisable at prices higher chan their market price. Due to stock markct'voladliry, the options had becorne wortiless to employees. So what is the message to employees? To competirors? Has the compensation strategT changed? Not the cornpany's intended strategy. But in realiry, the mix has changed. So possible volatiliry in the value of different pay forms needs to
I
I
!
i L_____-
be anticipated Some companies prefer to report the mix of pay forms using a "dashboard," as depicted in Exhibit 7. I I . The dashboard changes the focus from emphasizing the relative importance of each form within a single company to comparing each form by itsclf rc the rnarket (many companies). In {re example, the rralue of stock options is 79 percent of competitors' median, base pay is at 95 percent of comperitors' mefian, and overall totd compensation is 103 percent of (or 2 percent above) the rnarket,median. Pies, dashboards-different focus, both recognizing the importance
of the mix of pay forrrs.
=r.
ChaprerT
-'i
=
I Ddning Coftpttitbena
Volatility of Stock Value Changes Total Pay Mix
Stock Value Declines 50%
After
:...
.:..+
Benefits
Benefits
17o/o
19o/o
Base
47a/o
Bas€
+
55%
Options 160/o
Bonus Bonus
10o/o
8o/o
EXHIBIT
7.11
|
Dashboard: Total Fay Mix Breakdown versus Competitors*
il.'..''i:'.]..:li:'.'.].:'.;'.'E Stock Options Base Salary
79o/o
95o/o
Benefits 103%
-
Bonus
Perquisites 122%
113o/o
-
\
1
eo
/
190
r30 140
1O2o/o
*100 = Chosen market position, e.9., market median
E The mix employees receive can also differ at different levels of the internd job structure. Exhibit 7.12 shows rhe different mix of base, cash incentives, and stock opdons Merrill Lynch pap.at differenr organizational levels. Executive leadership posirions receive less than I0 percent io base, about 20 percent in smds and rhe re$ in annual incentives. Compare this to 50 percert in base, 40 percenr in annual incentives, and 10 percent in stock for mid-level manager/professional positions, and 80 percent'base, 20 percent incentives, and no stoik for enry- and lowerJwd jobs. Although rhe percentages vary across organizations, greater emphasis on performance (through
-
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I I I t I t t I t I I I I I I I
t I
t I
I
Partll I E*rnal AnpdXma: Dcrnzaing
156
dtc Pay Lcvel
Pay Mtr Varies within lnternal Job Structure
re
rc
lnternal Job Structure
I I Entry
Mid-level
Level
Manager
Executive
E
E
incentives and stock) at higher levels is corlmon practice. This is based on the belief that jobs at higher levels in the organization have greater oppomrnicy to influence organizationd performance,
rT
CONSEGUENCES OF PAY LEVEL AND PAY MIX DECISIONS
Earlier it was noted that enrernal cornpetitiveness has trnro major conseguences: It affects (1) operating expenses and (2) ernployee aairudis and work behaviours. Exhibit 7.13 summarizes these conseguences, which have been discussed throughout t*ris chapter. The competitiveness policy direcdy affects the compensation objectives of efficiency, fairness, and compliance. The .Net 'Wonh box here summarizes several strategic compensation issues based on a survey of over 200 compensation professionals.
EXHIEIT
7.13
|
Some Consequences of Pay Levels
Contain operating expenses (labour costs) lncrease pool of qualified applicants lncrease quality and experience Reduce voluntary turnover
lncrease probability of union-free status Reduce pay-related work stoppages
Chapter
7|
137
Defning ComPctitims
t
Gompensation Strategy and Market Flates
I
An organization's compensation'strategy should reflect its business sffetegy. St.ate!)' provides the guldeline for various compensation decisions, including how to beiance market pricing data and internal equity. A survey of 227 compensation professicnak raised four strategic concerns regarding market pricing. The most frequenily rais€d issue was how to decide whether internal or external equity should take precedence and whether this might differ by job family. Many respondents would like guidelines helping them determine what a market-pricing poliry should look like, and a means of reolving conflicS between market rate and job evaluation (or other) indicators of job vaiue.
I
A second critical isue for many respondents was determining which market shou:d be piiced against. There is widespread recognition of the existence of different defi:"idons of markeG (e.g., geographic breakouts, Jrom local to global; product market ccmpetitor or industry breakouts; size breakout), but much concern about when each migh: be used. one respondent noted that while the "textbook" answer was available, it didn't s€€rn to match the reality reflected in discussions with colleagues and other professionals.
T
third compensation strategy issue raised by respondents was the deire for guid+ lines on how competitive to be in a variety of different situations, and what a compeiitiveness strategy that delineated these situations would look like. Different breakout
The
groups (e.g., hot jobs, critical jobs, typical jobs, executive jobs) were the focus of cifferent respondents, but the common thread running through comments in this area is how one should best determine the competitive level of rewards The
fourth
issue raised
for
a set of
jobr
with some {requency focused on whether competitiveness in
a
labour market should be based solely on wages, or whether a broader rewarCs measure (e.g., total cash compensation, total compensation, compensation plus worMife baiance) should be used. There appears
to be an unsatisfied need for nrategy
guidelines
on individual- and joint-reward segment competitiveness' There is a clear recognition that the proper use of market data is a critical issue for organizations that are trying to stay competitive in attracting and retaining human capital while staying competitive in product and service markets. Most respondents noted that no ,,one best strategy" exists, but at the same time there is a perceived need for best practices in market pricing strategies taking into account industry organizational, and business strategy characteristics' Source: Adapted from C. H. Fay and M. Tare, "Market Pricing Concerns," WorldatWo* Journal 16(2) (second quarter 2007), pp. 51-69.
'mamer what *re competitive pay pohcy, it needs to be sanslated into practice. The starting No poinr is assesing rhe market through use of a salary survey. For this, we must rurn to the nert ctrapter.
I
I
Conclusion
l
Three importanr conclusions emetge from this chapter: (1) There is no "going rate," and so factors. -*"g.rri".r. ro make conscious pay level and pay mix decisions influenced by severallevel arrd fie pay im_Pact competitors-that market labour (2) Tf,ere are borh producr market-and consequences. different have mix decisions and pay level pay Alt.rrr.rir'. pay mix decisions. ?3)
The pay model used tlrro,rgholrt *ris book emphasizes saategic policy issues: objecdves, internal .lign*..r, ecernal competitive-ness, employee coruibutions, and management. Policies need to be des-igned to achiwe specific pay objecti-ves.
This section
is concerned
with eicternal competitiveness, or
'
T
! t I I I t
I I t t I I t
I I I
I I T
t
158
?ann I hmnal
Campaitiuazas: Dcmmining
tk
Pe1
Lael
In Motion pay irs accountants rhe same wase i that B.C. Hydro pap ia accountan$? Probably not. Different companies pay different rates; fiq ad; age of the overall array of rates in an organizadon consdrutes the pay level. Different companies also r.rse differenr forns of pay to achierre dre objectives sdpuJated for the pay sysrem, both $e pay [evel and mix must be properly posidoned reladve to cor4pecitors. Each integrated job strucnue or career path within the organizadon may harre its own comlLttive posicion in the market. The ne.ct chapter considers the decisions involved and the rariery of technigues available to implemenc decisions. It should be reernphasized here rtrat the major reison for creating an excernal compe,titiveee*: poliqy-pay Ievel and mix of forms-is chat tiey have profound consequences on the organization! objectives. Theories and practical ercperience support dris belief, but more research is needed to guide us in making decisions. It has been dearly established rhat differences beween organizationi competitive policies and their pay levels and forns ercist, and the factors that determine rhese differences Lave been examined. !7hat remains to be beaer understood is the potential effecn ofvarious policies. pa)r comparisons betwecn organizations. Does Research
.
[I
Ghapter SummarY
l. Exernd
3.
competitiveness refers to the reladonship of one organizationt pay rc that of iu comperitors, In practice, er
and signalling theory. Compensating differcntials theory predicts *rat work with negative characreristics will require higher pay to attract workers. Efficicncy wage theory predicts that above-rnarlcet wages will improve cfficiency by atrracting workers who perform betteq say Ionger and require less supervision. Signalling theory predicts that pay policies will signal the kind of behaviour the employer wants (demand side) and what potendal hires bring to the
5.
table (supply side). Two zupply side thcorics are reservalion wage theory and human capital theory. Reservation wage theory predicts thar job seckers will not takc jobs when pay is below a certain levd, no marrer how attractivc the other job atuibutes arc. Human capital theory predicts that people arc paid at the value of apersont skills and abilities which is a firnction of the time and expensc required to acquire them. Three competitive pay level dternatives are: match the market, lag tlre market, and lead the market, Examples of pay mix alternatives are: performance-driven, market match, work/life bdance, and securiqy.
Key Terms compensating differentials theory efficiency wage theory human capital theory
marginal product of labour marginal revenue of labour PaY forms PaY level
reservation wage theory signalling theory
