Compensation Section 2A- Test Questions Discussed in Class

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Job Analysis

The systematic process of collecting relevant work related information related to the nature of a specific job.

Job analysis and the resulting job description are part of the process of creating what?

Determining the internal job structure

What data should be collected to perform a job analysis?

Information needed for pay decisions which specifically focuses on establishing the similarities and differences among jobs.

Job analysis is useful and provides:

Reliability,
Validity,
Acceptability,
Usefulness

Reliability

The results of the analysis are the same regardless of who is involved in performing the analysis and what methods are used.

The job description in job analysis is:

the primary source of information when evaluating the similarities and differences between jobs, if it is accurate.

Job specifications

Contains the knowledge, skills, and abilities required to adequately perform the job tasks

Top-down approach in controlling salary

Estimate the pay increase budget for entire organization

Bottom Up approach to controlling salary

Managers determine budget based on aggregated individual decisions

Inherent controls on manager's pay decisions

A. Range minimums and maximums,
B. Compa Ratio,
C. Performance Criteria,
D. External factors are not controls

Why manage the compensation message?

1. Market the new system,
2. Increase pay satisfaction,
3. Decrease misperceptions,
4. Give employee a clear understanding of the new system

Parts to total compensation

1. Base Pay,
2. Incentives,
3. Benefits,
4. Intangibles

4 types of pay structures and pay grade assignments

A. Job Based (Chapter 5, 8),
B. Skill Based (Chapter 6)
C. Market Pricing (Notes),
D. Market Based Job Evaluation (Notes)

Job-based structure

Designs pay structures and assigns pay grades based primarily on the characteristics of the job. Underwritten by the job evaluation which is the process of systematically determining the relative worth of jobs to create the job structure for the organization.

Skill Based structure

Process that links pay to depth or breadth of the skills, abilities, and knowledge a person acquired that are relevant to the work. Pays individuals for all the skill for which they have been certified regardless of whether the work they are doing requires all or just a few of the skills.

Market Based Job Evaluation Structure

The modified market based process establishes a base pay structure using two sets of information. The market data provide the benchmarks for the systems, while the job characteristics portion of the process accommodates career ladders, internal labor market and unique jobs for which there is no market data.

Pay structure

The array of pay rates for different work or skills within a single organization. It focuses on the pay level, differentials and criteria used to determine pay rates.

Why have a pay structure?

1. Supports organization strategy,
2. Internal consistency - support workflow,
3. Control managerial decisions,
4. Allocate resources,
5. Promote fairness,
6. Direct behaviors towards the organization's objectives

What shapes the pay structure?

A. Culture and Custom,
B. Economic pressures,
C. Government policies and regulations,
D. Organizational strategy,
E. Organizational structure and job design,
F. HR policies

Consequences of internal pay structures

A. Competitive Advantage,
B. Efficiency,
1. Control,
2. Proper Allocation of Resources,
C. Fairness,
1. Consistent Treatment ,
D. Compliance

Midpoint of the pay range

• Average pay in the marketplace,
• Theoretical target pay for a fully qualified individual

Market Theory: Market exchange Model

• Pay grade assignment

Demand-Side Theory: Marginal Revenue

• Maximum of pay range

Demand-Side Theory: Thurow's Job Competition Model

• Within range pay

Demand-Side Theory: Compensating Differentials (Smith)

• Pay grade assignment

Demand-Side Theory: Internal Labor Market Models

• Pay grade assignment

Supply-Side Theories: Reservation wage

• Minimum pay for each range

Supply-Side Theories: Efficiency Wage Theory

• Minimum Pay for each range
• Within range pay

Job Evaluation

The process of systematically determining the relative pay for job to create a job hierarchy for the organization.

General Process: Job Evaluation

1. Job Analysis
2. Job Description
3. Job Specifications
4. Job Evaluation
5. Job Structure

Classification

Job evaluation method;
1. The Federal Government's General Schedule
2. Useful for extremely large and extremely small organizations
3. Value to pay plan design.
a. Develop specific classifications for jobs with very similar duties, specifications, compensable factors, and market rates. Assign the classifications to pay grades based on benchmark jobs.

Point Factor Method-Job evaluation method

Process of evaluating or scoring jobs based on a predetermined set of characteristics (Compensable factors) to establish a job hierarchy and matching the scores to the market rates to determine the pay grade assignments.

Point factor method steps

1. Choose compensable factors
2. Establish factor weights
3. Establish factor scales
4. Derive factor weights
5. Evaluate jobs
6. Establish policy line
A. Linear regression for the best fit line between the aged wage rates plotted against the job evaluation points for the benchmark jobs.
B. Adjust pay policy line for the position and movement policy.
7. Establish pay grades
A. Uniform range of job evaluation points
8. Establish pay ranges
9. Assign jobs to pay grades based on the job evaluation points.
10. Update on a regular basis by adjusting the pay structure by changes in the cost of living..

Compensable Factors

Job attribute that provide the basis for evaluating a job inside an organization. (See Ex. 5.3)

Examples of compensable factors

Education, equivalent experience, and specialized certifications,
Experience,
Line and staff authority,
Number of supervised,
Working environment,
Level of personal contacts,
Nature of personal contacts,
Judgment/decision making,
Impact on products and services,
Budget and program responsibility

Benchmark Jobs

Key jobs used to develop the pay structure regardless of the system used to design the system.

Characteristics of benchmark jobs

1. Reflect the vertical and horizontal mix of jobs in the organization,
2. Be stable,
3. Represent a central job in the job family,
4. Have market data available,
5. Be common in other organizations, and
6. Include jobs that are market sensitive.

Value of point factor method to pay plan design

a. Establish rules for non-market jobs based on the logic of the point system and apply to all departments

Advantages of Skill-Based Pay System

A. Encourages acquisition of job skills
B. More efficient use of labor
C. Promotes flexibility in work assignments
D. Well adapted to start up organizations in a growth mode

Value of skill based to pay plan design

Identifies the logic for establishing rules of progression within a job family or paying for additional education or skills

Skill based pay system-Set pay policy line

1. Linear regression for the best fit line between the aged wage rates plotted against the skill evaluation points, and
2. Adjust pay policy line for the position and movement policy

Market Pricing Pay Structure Design

A Market Pricing strategy develops a pay structure based on the prevailing wage rate, or estimated wage, rather than the internal value of the jobs in an organization.

Market Pricing Pay Structure Design process

A. Set pay level policy
B. Collect survey data for each job
1. Identify market differentials for jobs without exact market matches (+/- xx% of market)
C. Age the data
D. Adjust wage data for pay level policy
E. Establish pay ranges for each job (+/- market estimate)

Advantages of Market Pricing

A. Supports organizational requirements of attracting and retaining employee
B. Matches labor costs with those of competitors
C. Significantly reduces time needed to design and maintain the pay system

Disadvantages of Market Pricing

A. Requires extensive wage survey data.
B. Requires estimates of market rates for unique jobs, limited research on the accuracy of the estimates that are based on managerial judgments.
C. Results in hundreds of pay grades that are sensitive to minor changes in published market rates.
D. Requires constant update of structure
E. May encounter additional costs to maintain market competitiveness and fight pay compression and inversion due to short term market changes.
F. High employee awareness to market data places increased pressure on organizations to maintain competitive position in difficult times.
G. Unrealistic to believe that there are market rates for all jobs.
H. Does not consider internal labor market factors.
I. Assumes complete accuracy of survey data.
J. Difficult to defend differentials for unique jobs.

Broad Banding

Modification to traditional pay structure that reduces the number of grade levels to support changing organizational culture, management philosophy and work structure.

When is broad banding successful?

only when used to support changes in job definitions, work relationships, and organizational philosophy of lateral job rotation.

Job Analysis

The systematic process of collecting information related to the nature of a specific job. It provides the knowledge needed to define jobs and conduct job evaluation.

Job Description

a summary of the most important features of a job. It identifies the job and describes the general nature of the work, specific task responsibilities, outcomes, and the employee characteristics required to perform the job.

Job Specifications

The knowledge, skills, and abilities needed to successfully perform a job. The job specifications that can be used as a basis for hiring are knowledge, skills, and abilities required to adequately perform the tasks.

Job Evaluation

a systematic procedure designed to aid in establishing pay differentials among jobs within a single company. It includes classification, comparison of relative worth of jobs, blending internal and external market forces, measurement, negotiation, and judgment.

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