Module 4--Base Pay Implementation and Delivery Flashcards
What is a JOB-BASED PAY APPROACH?
A pay approach is the method an organization’s compensation program uses to deliver base pay.
■ Job-based pay
* 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)
What is JOB-BASED - SINGLE RATE OF PAY?
Job-Based Pay – Single-Rate 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
* 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
* 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
* May not reflect skill level on job
* Does not consider individual performance
* Does not consider seniority
Single-Rate
This example shows the single rate of pay per hour for each job. All employees in the machine operator job are paid 23.00 per hour. No variations for individual skill, performance or seniority are
allowed in this approach.
Step Rate – Automatic
■ Features
* Typically five (5) to seven (7) steps, three to five percentage points apart
* Prescribed time schedule
* Structure updated to maintain competitive position
■ Best applications
* 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
* Pay inflation over time adds to labor costs for no corresponding increase in productivity
Step Rate – Variable
Step Rate – Variable
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
* 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
* Step structure updated for competitive position
■ Best applications
* Where step structure is appropriate, but where environment lends itself to performancebased 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
* Relatively few increase amount/timing choices
* Requires justification of performance distinctions (and documentation)
What is a DIFFERENTIAL?
Differentials
■ What is a differential?
* Additional pay made to employees due to a change in work pattern, location or environment.
* Typically used for hourly employees
* Also referred to as premium pay
■ Types of differentials
* Shift
– 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.
* Geographic
– Pay differences established for the same job based on variations in costs of living or costs of labor among two or more geographical areas
* Hazard pay
– A special payment for work environments where violence, physical or political dangers are present because of the job or location of the job
* Expatriate pay
– 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 assignmentlocation- specific conditions or costs
SHIFT DIFFERENTIALS
Shift Differentials
■ 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
– Example
* .75 base pay increase for working the second shift
* 1.25 base pay increase for working the third shift
* Temporary increases
– Temporary base pay increase for all hours worked in the shift
* Example – 1.00 increase for all hours worked after 7:00 p.m.
– Temporary base pay percentage increase for all hours worked in the shift
* Example – 10% increase in base pay for all hours worked after 7:00 p.m.
■ 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
■ 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?
What is HAZARD PAY
Hazard Pay
■ Reasons to use
* Additional compensation for hazardous working conditions
– Examples – 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
* Example – 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
* Example – 2.00/hr for all hours changing the skyscraper antenna lights
– Temporary percentage increase for all hours worked in hazardous conditions
* Example – 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?
* Is hazard pay an industry standard
What is EXPATRIATE PAY?
Expatriate Pay
■ Reasons to use
* Additional compensation for expatriates due to the hardship they might incur for working outside of their home country
– Example – 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)
Consider the goal at hand
Are you trying to target recruit someone?
■ Approaches
* Temporary base pay adjustments – temporary increase for expatriates
– Example – 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?
What are PAY ACTIONS?
Pay Actions
During base pay administration, various pay actions will apply to the employee’s base pay.
■ What is a pay action?
* The movement of an employee‚s base pay due to either external or internal pressures can be either company or employee generated. A pay action can result in either an increase or a decrease in base pay.
■ Company generated
* External influences
– Market adjustments, reclassifications
* Internal influences
– Promotion, demotion
■ Employee generated
* Requested – requested demotion, requested shift change
■ Examples
* Pay increases
– Promotion
– Merit
– General (across the board)
– Market adjustments
* Pay decreases
– Demotion
– Reclassification
What are PAY INCREASES?
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 receives 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
What are the TWO Most Often Used Approached for Timing 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
Anniversary Date Particulars:
Advantages
* Spreads the administrative burden throughout the year
* Payroll increases are staggered, reducing the financial impact
that accompanies a single (company-wide) jump
* Performance evaluation and increase is based on an individual
performance
* Employee believes the process is focused specifically on them
* Allows the manager to spend more time specific to the
employee evaluation
* Internally, in the HR function, the paperwork stream will be
minimal due to spacing of reviews
Disadvantages
* Relative performance is hard to judge
* Occasionally conservative budget management might lead
to lower increases at the beginning of the year, and higher
increases toward the end
* HR function will spend additional time doing projected
spending analysis
FOCAL POINT REVIEWS
Advantages
* Ability to predict budgetary impact
* Consolidates the administrative burden
* Increases can become part of the yearly budgeting process
* Linkage among business-unit performance, individual
performance and merit increases can be clearer
* Allows for the HR function to better utilize budget analysis time, rather than projected spending
Disadvantages
* May put pressure on managers of large departments to
complete all employee reviews at one time
* Workload may be onerous if the timing of the salary increase
program coincides with other major efforts
* Cash-flow implications for the organization may be extreme
when all increases occur simultaneously
* Employee might not get the one-on-one attention needed to
explain and answer any questions that might arise
JOB CHANGE - PROMOTIONS
Job Change – Promotions
■ Promotion types
* Organizational – promotion due to a change in the nature of work, such as from a nonsupervisory to a supervisory position or to a significantly different type of supervisory responsibility
– Examples: Accountant promoted to Accounting Supervisor
* Growth – promotion due to a recognition of personal development and the assumption that growth will continue. There is a smaller change in duties in this type of promotion compared to the organization promotion.
– Examples: Accountant promoted to Senior Accountant
■ Alternative pay policies/actions
* Immediate increase in base pay
– Standard percentage for all promotions
– Standard percentage per grade promoted
* “Take care of it at the next review”
* “It depends”
■ WorldatWork Salary Budget Survey – Typically salary budget surveys, such as this, contain data for promotions.
JOB CHANGE DEMOTION
Job Change – Demotion
■ Causes of demotion – A demotion may occur as a result of:
* Poor employee performance
* Reorganization or reengineering – possibly due to a merger or acquisition
* Employee request – a request from the employee to take a step down
■ Pay actions should be based on the cause of the demotion.
* Take away money
– Immediate to maximum of salary grade
– Periodic – steps over a period of time (e.g., half the first year, half the second year)
* Freeze pay until it falls within the range
What is a GENERAL (Accross-the-Board) Increases / Cost of Living Adjustments (COLA)
General (Across-the-Board) Increases/Cost of Living Adjustments
(COLA)
■ What is a general increase?
* An identical pay raise either in a flat rate or as a percentage of salary given to all eligible employees
■ What is a cost of living adjustment?
* An across-the-board wage and salary increase or supplemental payment designed to bring pay in line with cost of living to maintain real purchasing power
■ Types
* Flat amount
* Same percentage
* Lump sum, does not become part of base
■ Eligibility – all or some employees (e.g., excluding executives)
■ Basis for increase
* Consumer Price Index (CPI in the U.S.)
* Wage movement in market
* Bargaining; part of collective bargaining agreement
■ Timing, such as quarterly, semi-annual, annual
■ Considerations
* General increases normally are used in union and public sector settings.
* Employers who grant general increases regularly will have less money to reward performance.
* Two of the major problems with general increases given to all employees is that they perpetuate salary inequities and can create or reinforce an entitlement mentality.
What is a RECLASSIFICATION (ORGANIZATION-RELATED)?
Reclassification (Organization-Related)
■ What is reclassification?
* The (re)assignment of a job to a higher or lower grade in the organization’s job worth hierarchy due to a job content (re)evaluation and/or significant change in the going rate for comparable jobs in the external labor market
■ Internal/external causes
* Change in job responsibilities (internal)
* Change in market value (external)
■ Grade change
* Could result in higher or lower grade
■ Pay actions
* Increase or decrease pay
* No change
* Freeze pay until it again falls within the range
What is a MARKET ADJUSTMENTS?
Market Adjustments
■ What is a market adjustment?
* The percentage increase to organization, group or individual pay that is necessary to adjust it to the estimated market level
■ When would it be appropriate?
* Incumbent base pay below market
* Company philosophy is to pay at/above market
* Reclassification
– Addition of responsibilities to job
■ Eligibility
* Typically all employees within the organization
* Current trends are more for critical or hot skills
■ Pay actions
* Increase base pay based upon market findings in one step
* Periodic increase in base pay
* Take care of it at next performance review
COMMUNICATING PAY ACTIONS?
Communicating Pay Actions
Communication is a critical element in the success or failure of a base pay program.
■ Why is it important?
* Provides information employees need, when they need it
* Improves emotional environment
– Can increase job satisfaction/morale
– Can promote employee’s feeling of value
– Can decrease stress/anxiety in a changing environment
– Can improve employee focus
* Clarifies expectations about the base pay program
* Increases awareness of what is required in the base pay program
* Reinforces decision to join and remain with the company
* Employees expect honest, thorough, understandable and relevant communication.
* Improve management understanding of how to use pay system
POINTS to REMEMBER
Points to Remember
■ Describe pay simply and briefly from the employee perspective
■ Focus on the main elements
* What is the reason for the pay action/change?
* How will it be processed (how it works)?
* When will it become effective?
* Is the change permanent or temporary?
* Will the change be a lump sum or periodic?
■ Who should communicate the change? This is often identified by the organization philosophy/ structure. Common communicators for pay actions are the following:
* HR manager
* Director
* Manager
* Supervisor
■ Face-to-face
* Typically, for pay actions, best communication is face-to-face
* Could outline pay actions in employee handbook
How to Handle Negative Communication
Communicating negative information to employees such as demotion, reclassification, pay freeze is
always a challenge. Here are some tips to assist in this task.
■ Business rationale – present and explain the business case and how that links to the business strategy
■ Earlier the better – typically, the earlier the better when it comes to negative communication
* Gives the employees time to “vent”
* Allows employee time to adapt to pay change
■ Make a comparison
* Pay freeze better than layoffs or salary reduction
* Compare to similar organizations going through the same process
■ Explain process and be prepared for questions
■ Performance related – if the action is performance related
* Explain reasoning behind the change
* Set realistic goals for employee
* Leave communication lines open for two-way communication
■ Merger/acquisition related – if the action is merger/acquisition related
* Explain reasoning behind the move
* Explain differences between companies and positions and why compensation is different
(maybe offer more work experience benefits)
* Set goals for employee to move up in the range
* Leave communication lines open for employee
■ Company-wide – If the action is a companywide change, have senior management deliver information (CEO, Director, etc.).
NEW HIRE RATES
New Hire Rates
New hire rates have the potential to wreak havoc within a compensation system. It is important to do your research when establishing and communicating new hire rates.
■ Review current compensation for incumbent salary data
* This will allow you to establish a baseline compensation for various positions.
* Please keep in mind, it might “cost” more for a new hire than you are currently paying incumbents.
■ Review most recent market data for potential new hire positions
* Since the market has potential to rapidly change, ensuring you have the most accurate, up-to-date information is vital to any new hire program.
■ Speak with recruiters about their experience
* Recruiters are at the leading edge of current resourcing trends, and they might have additional insight into what new hires are expecting.
■ Set new hire rates and get manager buy-in
* If you do your homework and can create a logical pathway to establishing new hire rates of pay, managers will be more willing to accept your salary ranges.
- Which of the following describes a characteristic of single-rate pay?
A. Increases are based on a prescribed time schedule.
B. Pay rate is based on the acquisition of skills by the individual employee.
C. Each job has a fixed pay rate (one rate for all employees).
D. Employees are paid for skill set, not necessarily for job performed.
C. Each job has a fixed pay rate (one rate for all employees).
- Awarding an employee a 10% increase in base pay for all hours worked after 7:00 p.m. is an example of what type of pay differential?
A. Shift.
B. Geographic.
C. Expatriate.
D. Step rate.
A. Shift.
- What is one advantage of delivering a pay action as a periodic increase?
A. Employee recognizes the entire increase at one time.
B. There is a greater first year cost to the company.
C. Easier administration compared to a lump sum increase.
D. Allows organization to establish a probationary period.
D. Allows organization to establish a probationary period.
- Why is communicating pay actions critical to the success or failure of a base pay program?
A. It allows employees to understand how compensation is related to benefits.
B. It ensures that the information given to employees is always correct.
C. It reinforces the decision to join and remain with an employer.
C. It reinforces the decision to join and remain with an employer.
- What is the first step in setting new hire rates?
A. Ask internal recruiters.
B. Check job postings.
C. Review incumbent salary data.
D. Review market pay studies.
C. Review incumbent salary data.
Why is communicating pay actions critical to the success or failure of a base pay program?
A. It ensures that the information given to employees is always correct.
B. It reinforces the decision to join and remain with an employer.
C. It allows employees to understand how compensation is related to benefits.
B. It reinforces the decision to join and remain with an employer
Awarding an employee a 10% increase in base pay for all hours worked after 7:00 p.m. is an example of what type of pay differential?
A. Expatriate.
B. Step rate.
C. Shift.
D. Geographic
C. Shift.
What is the first step in setting new hire rates?
A. Review incumbent salary data.
B. Review market pay studies.
C. Check job postings.
D. Ask internal recruiters
A. Review incumbent salary data.
What is one advantage of delivering a pay action as a periodic increase?
A. Easier administration compared to a lump sum increase.
B. Employee recognizes the entire increase at one time.
C. There is a greater first year cost to the company.
D. Allows organization to establish a probationary period.
D. Allows organization to establish a probationary period.
Which of the following describes a characteristic of single-rate pay?
A. Each job has a fixed pay rate (one rate for all employees).
B. Increases are based on a prescribed time schedule.
C. Pay rate is based on the acquisition of skills by the individual employee.
D. Employees are paid for skill set, not necessarily for job performed.
A. Each job has a fixed pay rate (one rate for all employees).
