Managing Employee Performance and Reward Concepts, Practices, Strategies 2nd edition

1. Managing Employee Performance and Reward Concepts, Practices, Strategies 2nd edition

2. Job-based base pay • What is ‘base pay’? • Options for base pay: pay the position or pay the person? • Job-based pay structures • Market pricing (for ‘external competitiveness’) • Job evaluation (for ‘internal equity’) • Job-based pay – pros and cons

3. What is ‘base pay’? Base pay is: • The foundational and generally largest component of total remuneration • The ‘fixed’ or ‘guaranteed’ portion of pay • Time-based wage or salary Advantages: • Compliance with minimum pay requirements • Attraction and retention; membership behaviour • Demonstrates employer commitment to meeting basic human needs • Relational psychological contract elicits organisational citizenship behaviour (OCB) • ‘Efficiency wage’ • Can be integrated with performance pay

4. What is ‘base pay’? Drawbacks: • Commits employer to fixed payments irrespective of performance contributed • Unlikely to motivate task behaviour • Unlikely to discourage underperformers from remaining with the organisation Roles without base pay: • Commission-only sales roles • Pure payment by results

5. Options: Structures Evaluation techniques Modes of pay progression Position-based systems: 1. Pay spine/ladders 2. Narrow grades • Job-based/position-based pay Market surveys and/or job evaluation Seniority and/or ‘merit’ based increments and promotion Person-based systems: • Skill-based pay Broad grades/job families Skill assessment Skill sets • Competency-based/related pay Broad bands Competency assessment Competency zones/levels Options for base pay

6. Position-based base pay Person-based base pay • Jobs add value • Individuals add value • Pay for job worth • Pay for individual worth • Pay for the ‘size’ of the job occupied • Pay for each individual’s capacity to perform (i.e. KSAs) • Standard rate for the job, irrespective of KSA differences between job holders • Different rates of pay depending on assessed capacity (KSAs) • Time-based payment according to time on the job • Time-based payment according to KSA levels • Direct external market pricing • Indirect external market pricing (disaggregated job pay rates) • Evaluation method: job evaluation • Evaluation methods: skill and/or competency assessment • Pay progression and promotion based on seniority or merit • Pay progression based on KSA development • Reinforces promotional hierarchy • Reinforces KSA development • Rewards job ownership not (primarily) performance in the job • Rewards performance capacities rather than results Position or person?

7. Step (increment for seniority, service and/or ‘merit’) Level (promotion) 5 E 4 ↑ 3 ↑ 2 ↑ 1 ↑ 5 D 4 ↑ 3 ↑ 2 ↑ 1 ↑ 5 C 4 ↑ 3 ↑ 2 ↑ 1 ↑ 5 B 4 ↑ 3 ↑ 2 ↑ 1 ↑ 5 A 4 ↑ 3 ↑ 2 ↑ 1 ↑ Pay scale (or spine) ladder

8. Narrow graded structures ‘Job size’

9. Range maximum Payment for performance/experience above the mid- point standard Midpoint (= Market-related pay level for proficient job performance) Developing job competence and performance proficiency Range minimum 20–30% pay range or‘spread’ Narrow graded structures

10. Market pricing/‘salary surveys’ Focus is on external competitiveness. Six steps: • Deciding which jobs to survey • Determining which organisations to survey: • Labour markets • Industry • Size • Locality • Determining what information to collect on each job: • Base wage or salary • Superannuation • Benefits • Performance pay • Total remuneration • Determining the method of data collection: • Interviews • Questionnaires • Telephone interviews

11. 25th percentile  50th percentile (= range median)  75th percentile  1st quartile Bottom 25% of range 2nd quartile Second 25% of range 3rd quartile Third 25% of range 4th quartile Top 25% of range Market pricing/‘salary surveys’ • Summarising and analysing the data obtained: • Deciding a policy on pay level relative to external market rates: • Pay at range midpoint/median • Pay over range median • Pay under range median

12. Example of market data presentation format: sample aggregates

13. Market pricing Advantages: • Neither costly nor administratively complex (compared to job evaluation) • Automatic means of keeping job rates in line with market conditions • Supports focus on competitive external recruitment

14. Market pricing Disadvantages: • Surveys are necessarily selective and susceptible to sampling error • Pay surveys do not capture the full range of rewards offered by organisations and may give a false reading of competitor strategies • Jobs are rarely perfectly matched between organisations, so still need some form of job evaluation to establish comparability • Market pricing involves a ‘surrender’ of control to external forces • Market rates are rarely a pure reflection of job worth. They usually reflect both job value and job-holder characteristics and contribution

15. Market pricing Disadvantages: • External markets do not always value jobs fairly. ‘Going rates’ are usually ‘contaminated’ by historical value judgements about the worth of the ‘person’ holding the job • Market pricing does not address the issue of internal fairness. It rules out the possibility of building a base pay system which prices jobs according to their specific value to the organisation • There are no market rates for new or changed jobs • There is no such thing as a single market rate; surveys only capture the range of rates for the same job; still have to choose a price point in the range (= strategic choice)

16. What is job evaluation? Job evaluation involves determining pay rates by measuring the content or ‘size’ of each job within the organisation with a view to rewarding each job according to its ‘value’ or importance to the organisation. Job evaluation focuses on: 1. Measuring job content/size/value: • Inputs: skill, knowledge, education, training, experience • Throughputs: mental effort, physical effort, decision-making, accountability, communication, planning, innovation, supervision • Outputs: accuracy, consequences of error, responsibility for cash, assets, people • Conditions: work environment, hazards, stress 2. Maintaining ‘internal equity’, i.e. equal pay for jobs of equal size/value

17. What is job evaluation? Four main steps: • Undertake a job analysis • Produce job descriptions • Choose and apply evaluation method • Create a base pay structure base on job evaluation scores

18. Job evaluation methods Non-analytical: • Ranking • Job classification/grading • Single-factor (e.g. Elliot Jacques’‘time span of discretion’) Analytical/multifactor: • Points-factor method • Hay Group guide chart profile method: 1. ‘Know-how’ 2. ‘Problem-solving’ 3. ‘Accountability’ 4. ‘Working context’

19. Points-factor job evaluation Main steps: • Factors: identifying ‘compensable’ factors and sub-factors • Degrees: developing ‘degrees’ or levels (i.e. rating scales) for these factors • Points: assigning numerical values to each factor level. Progression – arithmetic or geometric? • Weights: assigning weights to the factors (i.e. ‘capturing’ policy priorities)

20. Factors Degrees Factor weights (total points) A B C D E SKILL: Work experience 40 80 120 160 200 Qualifications 20 40 60 80 100 Education 8 16 24 32 40 400 Initiative 12 24 36 48 60 WORK CONTENT: Difficulty of work 10 20 30 40 50 Complexity 20 40 60 80 100 Physical demands 14 28 42 56 70 Mental demands 10 20 30 40 50 300 Hours 6 12 18 24 30 RESPONSIBILITY: Supervision of others 16 32 48 64 80 Care of materials and equipment 4 8 12 16 20 Decision-making 12 24 36 48 60 Record keeping 4 8 12 16 20 200 Security 4 8 12 16 20 WORKING CONDITIONS: Work environment 10 20 30 40 50 Hazards/risks 5 10 15 20 25 100 Interpersonal relations 5 10 15 20 25 200 400 600 800 1000 1000 Points-factor job evaluation

21. Developing job grades using points-factor scores 1. Plotting point scores and existing pay practice line

22. 2. Developing a new pay policy line

23. 3. Establishing grade boundaries and pay ranges

24. Points-factor job evaluation: strengths • Provides clearly defined absolute and relative measures of job size (i.e. common standards); hence has high reliability • Has the appearance of objectivity, rationality and consistency and helps to create pay relationships between jobs which employees perceive as being fair • Useful in valuing new and changed jobs (for which no direct market rates are available) • Can help to identify and eliminate inequities in the existing pay structure • Lends itself to employee involvement in system design and the evaluation process itself

25. Points-factor job evaluation: weaknesses • May be too inflexible to cope with rapid changes in technology and job content • Reinforces bureaucracy and hierarchy and is incompatible with the trend to ‘flat’ organisational structures • Emphasises job size over job-holder contribution • Does not take account of external market situation (e.g. scarcity) • One set of factors may not fit all jobs • Ritualised impression management: ‘pay equity’ a social construct (Townley; Quaid) • Bias and politics may still intrude – in factor selection, in enumerating the degrees of factor presence, in establishing weightings between factors, and in interpretation of job descriptions in relation to factors and factor levels

26. Job-based pay: for and against Advantages: • Allows direct comparison with pay rates in external labour market • Offers considerable certainty as to future labour costs because actual costs per job are known in advance • A formula for fair pay based on the equality norm, i.e. ‘equal pay for equal work’ • Minimises interpersonal conflict over minor differences in personal contribution which can be a major source of employee dissatisfaction • Is supported by unions because it allows for the maintenance of common pay standards both within and between organisations; hence supports industrial harmony

27. Job-based pay: for and against Disadvantages: • No direct incentive to improve individual contribution or performance • Downplays skill development. Employees pursue promotion rather than personal skill enhancement • Reinforces organisational hierarchy • Incompatible with task interdependence and teamwork • Is too inflexible to accommodate rapid changes in technology, work processes and product/service market requirements