Establishing Salary Structure
There are two bases on which to pay employees compensation: increments of time and volume of production. The former includes hourly or daily wages and salaries. Basing pay on volume of production ties compensation directly to the amount of production (or number of units that the worker produces)
Establishing pay rates involves five steps: conduct a salary survey, evaluate jobs, develop pay grades, use wage curves, and fine tune pay rates.
Job evaluation is aimed at determining the relative worth of a job. It compares jobs one to another based on their content, which is usually defined in terms of compensable factors like skills, effort, responsibility, and working conditions.
The ranking method of job evaluation has five steps:
- Obtain job information,
- Select clusters of jobs to be rated,
- Select compensable factors,
- Rank jobs,
- Combine ratings if several raters.
This is a simple method to use, but there is a tendency to rely too heavily on guesstimates. The classification (or grading) method is a second qualitative approach that categorizes jobs based on a clas of description or classification rules for each class.
The point method of job evaluation requires identifying a number of compensable factors and then determining the degree to which each of the factors is present in the job.
The factor comparison method, is a quantitative evaluation technique that entails deciding which jobs have more certain compensable factors than others.
Most managers groups similar jobs into wage or pay grades for pay purposes. These are comprised of jobs of approximately equal difficulty or importance as determined by job evaluation.
The wage curve or line shows the average target wage for each pay grade or job. It can help show you what the average wage for each grade should be, and whether any present wages or salary are out of the line. Developing a wage curve involves four steps: a. finding the average pay for each grade, b. plot these wage rates for each pay grade, c. draw the wage line and d. price jobs after plotting present wage rate.
Developing a compensation plan for executive, managerial and professional personnel is complicated by the fact that factors like performance and creativity must take precedence over static factors like working conditions. Market rates, performance and incentives and benefits thus play a much greater role than does job evaluation for these employees.
Broadbanding means collapsing salary grades and ranges into just a few wide levels or bands, each of which then contains a relatively wide range of jobs and salary levels.
Four main compensation issues that need to be addressed are comparable worth, pay secrecy, inflation and cost of living differentials.
Performance pay and incentives
The scientific use of financial incentives can be traced back to Frederick Taylor. While such incentives became somewhat less popular during the humsn relations era, most writers agree that they can be most effective.
Piece work is the oldest type of incentive plan. Here a worker is paid a piece rate for each unit he or she produces. With a straight piece work plan, workers are paid on the basis of the number of units produced. With a guaranteed piecework plan, each worker receives his or her rate (such as a minimum wage) regardless of how many units he or she produces.
Other useful incentive plans for plant personnel include the standard hour plan and group incentive plans. The former rewards workers by a percent premium that equals the percent by which their performance is above standard. Group incentive plans are useful where the workers jobs are highly interrelated.
Most sales personnel are paid on some type of salary plus commission (incentive) basis. The trouble with straight commission is that there is a tendency to focus on big ticket or quick sell items to disregard long term customer building . Management employees are often paid according to a bonus formula that ties the bonus to, for example, increased sales. Stock options are one of the most popular executive incentive plans.
Profit sharing and the scanlon plan are examples of organization-wide incentive plans. The problem with such plans is that the link between a persons efforts and rewards is sometimes unclear. On the other hand, such plans may contribute to developing a sense of commitment among employees. Gainsharing and merit plans are two other popular plans.
When incentive plans fail, it is usually because a. the worker does not believe that effort on his or her part will lead to obtaining the reward, or b. the reward is not important to the person. Specific incentive plan problems, therefore, include unfair standards, fear of a rate cut, group restrictions, lack of understanding and lack of required tools for training.
We suggest using incentive plans when units of output are easily measured, employees can control output, the effort reward relationship is clear, work delays are under employees control, quality is not paramount, and organizations must know precise labour costs to stay competitive.
Benefits and Services
The financial incentive that were discussed are paid to specific employees whose work is above the standard. Employee benefits on the other hand are available to all employees of the organization. There are four types of benefit plans. They are pay supplements, insurance, retirement benefits, and services.
Supplemental pay benefits provides pay for time not worked. They inlude unemployment insurance, vacation and holiday pay, severance pay and supplemental unemployment benefits.
Insurance benefits are another type of employee benefit. Workers compensation, for axample is aimed at ensuring prompt income and medical benefits to work accident victims or their dependents regardless of fault. Most employers also provide group life insurance and group hospitalization, accident and disability insurance.
Two types of retirement benefits were discussed: social security and pensions. Social security does not only cover retirement benefits but survivors and disability benefits as well. There are three basic type of pensions plans: group, deferred profit sharing and savings plans. One of the critical issues in pension planning is vesting the money that employer and employee have placed in the latter’s pension fund, which cannot be forfeited for any reason. ERISA basically ensures that pension rights become vested and protected after a reasonable amount of time.
Most employees also provide benefits in the form of employee services. These include food services, recreational opportunities, legal advice, credit unions, and counseling.
Survey suggests two conclusions regarding employee’s preference for benefits. First, time off (such as two extra weeks vacation) seems to be the most preferred benefit. Second, employees age, marital status, ans sex clearly influence his or her choice of benefits. (For example younger employees were significantly in favour of a dental plan than were the older employees) This suggests the need for individualizing the organizations benefit plans.
The criteria approach allows the employee to put together his or her own benefit plan, subject to total cost limits and the inclusion of certain nonoptional items. Several firms have installed cafeteria plans; they require considerable planning and computer assistance.