M4 - Base Pay Implementation and Delivery Flashcards
Pay Approaches
A pay approach is the method an organization’s compensation program uses to deliver base pay.
Job-Based Pay Approach
Based on nature and level of defined job.
Job-based pay programs base an employee’s pay on the nature and level of a rigidly defined job. Job-based pay typically does not recognize employee skills or knowledge for grade assignment.
Examples:
- Single rate
- Step rate (automatic, variable)
Single Pay Rate method of job based pay
A single rate of pay is one of the easiest approaches to pay delivery. Essentially, each job has a fixed or flat rate of pay. No differences in pay are made for employee skill, knowledge, performance or time in the job.
Features, Best Applications, and Considerations of Single Pay Rate
Features:
- Fixed pay rate: Each job has a fixed pay rate (one rate for all).
- May be a training rate
- Changed based on market: The rate is changed in response to the market or collective bargaining.
Best applications of single pay rate:
- Routine jobs / short learning time
- Jobs with limited performance variability
- Collective bargaining environments (unionized jobs)
- Sales jobs where commission is significant
- Summer intern / temporary jobs
Considerations of single pay rate:
- May not reflect skill level on job
- Does not consider individual performance
- Does not consider seniority
Step Rate - Automatic method of job based pay
Features of Step Rate Automatic:
- Typically five to seven steps, three to five percentage points apart
- Prescribed time schedule
- Structure updated to maintain competitive position
Best applications of step rate automatic:
- With routine jobs where limited performance variability is possible and performance is not measured
- When the desire to acknowledge seniority exists
- In an organization culture where desire for stability and security is high
- Collective bargaining agreements
- Public sector
Potential Disadvantages:
- Cannot acknowledge different rates of progress of skill attainment
- Cannot differentiate based on performance
- Can be discouraging to employees seeking pay awards
- Utilizes money that could be better spent
Step Rate - Variable method of job based pay
In step rate-variable, many of the same principles apply as in step rate-automatic. The key difference is the opportunity to reward employee performance and/or skill acquisition by granting more than one step. In addition to the number of steps varying, the time frame for granting the step increase may also vary.
Features of step rate variable:
- Step structure updated for competitive position
- Five to ten steps, 2% to 5% apart
- Prescribed time schedule:
- Outstanding: Two steps
- Expected: One step
- Marginal: Zero or one step with delay
- Unacceptable: Terminated, demoted: no increase
Best applications of step rate variable:
- Where step structure is appropriate, but where environment lends itself to performance- based differences in pay levels
- In repetitive jobs, but where it is possible to measure performance differences
- In an employee relations environment such that differences in pay due to performance occur in exceptional cases
Potential disadvantages of step rate variable:
- Relatively few increase amount / timing choices
- Requires justification of performance distinctions
Differential - what is it?
Differential:
- Additional pay made to employees due to a change in cost of living or as a hardship
- Typically used for hourly employees
- Also referred to as premium pay
Types of Differentials
Types of Differentials:
- shift
- geographic
- hazard pay
- expatriate pay
Shift Differentials
Shift Differentials:
Extra pay made to employees who work on a shift other than a regular day shift (e.g., 9 a.m. to 5 p.m., Monday through Friday) if the shift is thought to represent a hardship, or if competitive organizations provide a similar premium. Shift differentials usually are expressed as a percentage of pay or a flat rate in cents per hour.
Reasons to use:
- Additional amount to base pay for evening and overnight shifts
- Could help to fill undesirable shifts
Basis for differential determination
- Philosophy: Company compensation philosophy
- Market data (surveys)
- Union specific contracts
Approaches:
-Permanent base pay adjustments
Ex: .75 base pay increase for working the second shift; 1.25 base pay increase for working the third shift
-Temporary increases like a temp base pay increase for all hours worked in the shift or temp base pay percentage increase for all hours worked in the shift.
Ex: 1.00 increase for all hours worked after 7:00 p.m.
Ex: 10% increase in base pay for all hours worked after 7pm
Considerations:
- Does the company want to pay extra for shift work?
- What does the competition pay for shift work?
- Is this required by a union contract?
Geographic Differentials
Geographic Differentials:
Pay differences established for the same job based on variations in costs of living or costs of labor among two or more geographical areas
Reasons to Use:
- Better fit of pay to local markets
- Most commonly used for hourly positions
Basis for differential determination:
- Cost of living
- Market basket of goods in specific metropolitan area
- Consumer Price Index
- Supply and demand for food, transportation and housing
- Cost of labor
- Competitive market pay rates in specific metropolitan area or region (per salary surveys)
- Supply and demand for skills / employees
Approaches:
- Individual pay adjustments and differentials
- Base pay adjustments
- Temporary pay
- Supplemental payments
- Salary structured differences – structural recognition of differences in average pay levels for locations:
- Separate pay structures for separate locations
- Managing different control points
- Slotting jobs into a lower or higher salary grade on the basis of local market data
Considerations
- Does the company want to maintain an employee’s lifestyle when the person moves?
- Does the company pay for cost of living or cost of labor?
Hazard Pay Differentials
Hazard Pay Differentials:
A special payment for work environments where violence, physical or political dangers are present because of the job or location of the job
Reasons to Use:
-Additional compensation for hazardous working conditions
Ex: outside window cleaners for a skyscraper, minesweeper
-Could help to fill undesirable jobs
Basis for differential determination
- Compensation philosophy of the company
- Market data (surveys)
- Union contracts
Approaches
*Permanent base pay adjustments
Ex: 2.00 / hr hazard pay for cleaning the windows outside of the skyscraper
*Temporary base pay adjustments
Temporary increase for all hours worked in hazardous conditions
Ex: 2.00 / hr for all hours changing the skyscraper antenna lights
Temporary percentage increase for all hours worked in hazardous conditions
Ex: 15% increase in base pay for all hours worked in the underground water tunnels
Considerations:
- Does the company want to pay for hazardous conditions?
- Is this required by a union contract?
Expatriate Pay Differentials
Expatriate Pay Differentials:
One or more supplemental payments made to expatriates to compensate for hardship, the education of an expatriate’s children in their native language or other assignment-location- specific conditions or costs
Reasons to Use:
Additional compensation for expatriates due to the hardship they might incur for working outside of their home country
Ex: extra compensation for education (in home country language) for the child of an expatriate
Basis for differential determination
- Compensation philosophy of company
- Market data (surveys)
Approaches
Temporary base pay adjustments: temporary increase for expatriates
Ex: additional 7,000 per year hardship allowance for all expatriates working in countries where dangerous conditions exist
Considerations:
- What additional costs will the expatriate incur?
- Where would the company find such information?
Pay Action - what is it?
Pay Action: The movement of an employee’s base pay due to either external or internal pressures can be both company and employee generated. And can result in either an increase or a decrease in base pay.
Company generated:
- External influences like market adjustments or reclassifications
- Internal influences like promotion or demotion
Employee Generated:
-Requested like a requested demotion or shift change
Examples Pay increases -promotion -merit -general (across the board) -market adjustments Pay Decreases -demotion -reclassification
Pay Increases
Pay actions typically are delivered in the form of a pay increase. This action can take place several different ways and in several different forms.
Lump-sum increase is when the employee receives the entire increase at one time.
Advantages:
-Not an increase of base pay, so no “rollup” cost as with increase in base pay
-Employee recognizes the entire increase at one time
-Ease of administration, due to one time increase
Disadvantages:
-Greater first year cost to the company
-Employee may leave after increase (costs more than if spread throughout year)
Periodic increase is when the employee receives a portion of the increase at one time, and an additional portion at a later date. Advantages: -Lower first year cost to the company -Better control of pay action -Allows for a “probationary period” Disadvantages: -Employee wonders why not the entire increase -More difficult to administer
Other:
- Take care of it at next review
- “It depends”
- Immediate adjustment to minimum of new range if below
- Size of increase (if any) based on employee’s rate being significantly below where it should be
Timing of Increases
The two most often-used approaches for timing increases are:
- To give increases to each employee on the anniversary date of employment or last pay action (e.g., promotion)
- To give all increases on a common (focal) date
