Human Resource

Management
TWELFTH EDITION

GARY DESSLER
BIJU VARKKEY

Part 4 | Compensation

Chapter
11
Establishing Strategic Pay Plans
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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
 After studying this chapter, you should be able to:

1. List the basic factors in determining pay rates.

2. Define and give an example of how to conduct a job
evaluation.
3. Explain in detail how to establish pay rates.
4. Explain how to price managerial and professional jobs.
5. Discuss competency-based pay and other current
trends in compensation.
6. Explain the importance today of broadbanding,
comparable worth, and board oversight of executive
pay.
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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–2
 Basic Factors in Determining
Pay Rates

Employee
Compensation

Direct Financial Indirect Financial

Payments Payments

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Resource Management, 12/e
11–3
 Important Compensation Related Acts in India
Minimum Wages Act, 1948
Payment of Wages Act, 1936
Equal Remuneration Act, 1976
Companies Act, 1956
Payment of Bonus Act
Payment of Gratuity Act
Employee Stock Scheme (ESOS)
Employee Stock Purchase (ESPS)

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Resource Management, 12/e
11–4
 Corporate Policies, Competitive Strategy,
and Compensation
• Aligned Reward Strategy
 The employer’s basic task:
 To create a bundle of rewards—a total reward package—
that specifically elicits the employee behaviors that the firm
needs to support and achieve its competitive strategy.
 The HR or compensation manager along with top
management creates pay policies that are consistent
with the firm’s strategic aims.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–5
 Compensation Policy Issues
• Pay for performance
• Pay for seniority
• The pay cycle
• Salary increases and promotions
• Overtime and shift pay
• Probationary pay
• Paid and unpaid leaves
• Paid holidays
• Salary compression
• Geographic costs of living differences
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11–6
 Equity and Its Impact on Pay Rates

Forms of Equity

External Internal Individual Procedural

Equity Equity Equity Equity

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Resource Management, 12/e
11–7
 Addressing Equity Issues

Salary Surveys

Job Analysis and

Job Evaluation
Methods to
Address Equity
Issues Performance Appraisal
and Incentive Pay

Communications, Grievance
Mechanisms, and Employees’
Participation

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Resource Management, 12/e
11–8
 Establishing Pay Rates

Steps in Establishing Pay Rates

1
Conduct a salary survey of what other employers are
paying for comparable jobs (to help ensure external equity).

2 Determine the worth of each job in your organization

through job evaluation (to ensure internal equity).

3 Group similar jobs into pay grades.

4 Price each pay grade by using wave curves.

5 Fine-tune pay rates.

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Resource Management, 12/e
11–9
 The Salary Survey

Step 1. The Wage Survey:

Uses for Salary Surveys

To price To market- To make

benchmark price wages decisions
jobs for jobs about benefits

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Resource Management, 12/e
11–10
 Sources for Salary Surveys

Sources of Wage and

Salary Information

Employer Self-
Consulting Professional Government The
Conducted
Firms Associations Agencies Internet
Surveys

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–11
 TABLE 11–1 Some Pay Data Web Sites

Sponsor Internet Address What It Provides Downside

[Link] [Link] Salary by job and zip code, Adapts national averages
plus job and description, for by applying local cost-of-
hundreds of jobs living differences

Wageweb [Link] Average salaries for more Charges $169 for

than 150 clerical, professional, breakdowns by industry,
and managerial jobs location, etc.

Paycheck India [Link] Input current salary and use Based on gross earnings.
and salary checker
WageIndicator

HT [Link] Salary by job, designation Based on gross earnings

[Link] [Link] Median salaries for thousands Doesn’t consider factors

of jobs, by city like company size or
benefits

[Link] [Link] Input your current salary and Based on national averages
city, and this gives you adapted to cost of living
comparable salary in differences
destination city

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–12
 Establishing Pay Rates (continued)

Skills

Effort
Step 2. Job Evaluation:
Identifying
Compensable Factors
Responsibility

Working Conditions

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Resource Management, 12/e
11–13
 Establishing Pay Rates (continued)

Preparing for the Job Evaluation

1 Identifying the need for the job evaluation

2 Getting the cooperation of employees

3 Choosing an evaluation committee

4 Performing the actual evaluation

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Resource Management, 12/e
11–14
 Establishing Pay Rates (continued)

Methods for
Evaluating Jobs

Job Point Factor

Ranking
Classification Method Comparison

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Resource Management, 12/e
11–15
 Job Evaluation Methods: Ranking
• Ranking each job relative to all other jobs,
usually based on some overall factor.
• Steps in job ranking:
1. Obtain job information.

2. Select and group jobs.

3. Select compensable factors.

4. Rank jobs.

5. Combine ratings.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–16
 TABLE 11–2 Job Ranking by Olympia Health Care

Ranking Order Annual Pay Scale

1. Office manager $43,000

2. Chief nurse 42,500
3. Bookkeeper 34,000
4. Nurse 32,500
5. Cook 31,000
6. Nurse’s aide 28,500
7. Orderly 25,500

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–17
 Job Evaluation Methods:
Job Classification
• Raters categorize jobs into groups or classes of
jobs that are of roughly the same value for pay
purposes.
 Classes contain similar jobs.
 Administrative assistants
 Grades are jobs similar in difficulty but otherwise
different.
 Mechanics, welders, electricians, and machinists
 Jobs are classed by the amount or level of
compensable factors they contain.
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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–18
 FIGURE 11–3 Example of a Grade Level Definition

This is a summary chart of the key grade level criteria for the GS-7 level of clerical and assistance
work. Do not use this chart alone for classification purposes; additional grade level criteria are in
the Web-based chart.

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Authorized adaptation from the United States edition of Human Source: [Link]/fedclass/[Link]. Accessed May 18, 2007.
Resource Management, 12/e
11–19
 Job Evaluation Methods: Point Method
• A quantitative technique that involves:
 Identifying the degree to which each compensable
factor is present in the job.
 Awarding points for each degree of each factor.

 Calculating a total point value for the job by adding

up the corresponding points for each factor.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
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 Establishing Pay Rates (continued)

Point Method

Step 3. Group
Similar Jobs Ranking Method
into Pay Grades

Classification Methods

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–21
 Establishing Pay Rates (continued)
• Step 4. Price Each Pay Grade—Wage Curve
 Shows the pay rates paid for jobs in each pay grade,
relative to the points or rankings assigned to each
job or grade by the job evaluation.
 Shows the relationships between the value of the job
as determined by one of the job evaluation methods
and the current average pay rates for your grades.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–22
 FIGURE 11–4
Plotting a
Wage Curve

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Resource Management, 12/e
11–23
 Establishing Pay Rates (continued)
• Step 5. Fine-Tune Pay Rates
 Developing pay ranges
 Flexibility in meeting external job market rates.
 Easier for employees to move into higher pay grades.
 Allows for rewarding performance differences and seniority.

 Correcting out-of-line rates

 Raising underpaid jobs to the minimum of the rate range for
their pay grade.
 Freezing rates or cutting pay rates for overpaid (“red circle”)
jobs to maximum in the pay range for their pay grade.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–24
 FIGURE 11–5
Wage Structure

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–25
 TABLE 11–3 U.S. Federal Government Pay Scales

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Authorized adaptation from the United States edition of Human Source: [Link] Accessed May 18, 2007.
Resource Management, 12/e
11–26
 FIGURE 11–6
Compensation
Administration
Checklist

Source: Reprinted from [Link]

with permission of the publisher Business
and Legal Reports Inc., 141 Mill Rock
Road East, Old Saybrook, CT © 2004.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
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 Pricing Managerial and Professional Jobs

Compensating Executives
and Managers

Executive
Base Short-term Long-Term
Benefits and
Pay Incentives Incentives
Perks

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Resource Management, 12/e
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 Pricing Managerial and Professional Jobs
• What Really Determines Executive Pay?
 CEO pay is set by the board of directors taking into
account factors such as the business strategy,
corporate trends, and where they want to be in the
short and long term.
 Firms pay CEOs based on the complexity of the jobs
they filled.
 Boards are reducing the relative importance of base
salary while boosting the emphasis on performance-
based pay.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–29
 Compensating Professional Employees
• Employers can use job evaluation for
professional jobs.
• Compensable factors focus on problem solving,
creativity, job scope, and technical knowledge
and expertise.
• Firms use the point method and factor
comparison methods, although job classification
seems most popular.
• Professional jobs are market-priced to establish
the values for benchmark jobs.
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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–30
 Competency-Based Pay
• Competencies
 Demonstrable characteristics of a person, including
knowledge, skills, and behaviors, that enable
performance.
• What is Competency-Based Pay?
 Paying for the employee’s range, depth, and types of
skills and knowledge, rather than for the job title he
or she holds.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–31
 Competency-Based Pay
(continued)
Why Use Competency-
Based Pay?

Support High- Support

Support
Performance Performance
Strategic Aims
Work Systems Management

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Resource Management, 12/e
11–32
 Competency-Based Pay in Practice
• Main elements of skill/competency/knowledge–
based pay programs:
1. A system that defines specific skills, and a process
for tying the person’s pay to his or her skill.
2. A training system that lets employees seek and
acquire skills.
3. A formal competency testing system.
4. A work design that lets employees move among
jobs to permit work assignment flexibility.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–33
 Competency-Based Pay: Pros and Cons
• Pros
 Higher quality
 Lower absenteeism
 Fewer accidents

• Cons
 Pay program implementation problems
 Costs of paying for unused knowledge, skills, and
behaviors
 Complexity of program
 Uncertainty that the program improves productivity
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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–34
 Other Compensation Trends
• Broadbanding
 Consolidating salary grades and ranges into just a
few wide levels or “bands,” each of which contains a
relatively wide range of jobs and salary levels.
 Pro and Cons
 More flexibility in assigning workers to different job grades.
 Provides support for flatter hierarchies and teams.
 Promotes skills learning and mobility.
 Lack of permanence in job responsibilities can be unsettling
to new employees.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–35
 FIGURE 11–7
Broadbanded
Structure and
How It Relates
to Traditional
Pay Grades
and Ranges

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–36
 Other Compensation Trends (continued)
• Comparable Worth
 Refers to the requirement to pay men and women
equal wages for dissimilar jobs that are of
comparable (rather than strictly equal) value to the
employer.
 Seeks to address the issue that women have jobs
that are dissimilar to those of men and those jobs are
often consistently valued less than men’s jobs.

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Resource Management, 12/e
11–37
 The Pay Gap
• Factors Lowering the Earnings of Women:
 Women’s starting salaries are traditionally lower.

 Salary increases for women in professional jobs do

not reflect their above-average performance.
 In white-collar jobs, men change jobs more
frequently, enabling them to be promoted to higher-
level jobs over women with more seniority.
 In blue-collar jobs, women tend to be placed in
departments with lower-paying jobs.

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Resource Management, 12/e
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 Improving Productivity Through HRIS:
Automating Compensation Administration
• Benefits of Compensation Automation:
 Allows for quick updating of compensation programs.

 Eliminates costs of formerly manual processes.

 Coordinates centralized compensation budgets to

prevent overages in compensation and raises.
 Can integrate and automatically administer other pay
actions.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–39
 KEY TERMS

employee compensation compensable factor

direct financial payments ranking method
indirect financial payments job classification (or grading)
Minimum Wages Act, 1948 method
Payment of Wages Act, 1936 classes
Equal Remuneration Act, 1976 grades
Companies Act, 1956 grade definition
Payment of Gratuity Act point method
Payment of Bonus Act factor comparison method
Employee Stock Scheme (ESOS) pay grade
Employee Stock Purchase wage curve
(ESPS) pay ranges
salary compression competency-based pay
salary survey competencies
benchmark job broadbanding
job evaluation comparable worth
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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–40
 Human Resource
Management
TWELFTH EDITION

GARY DESSLER
BIJU VARKKEY

Part 4 | Compensation

Appendix for
Chapter 11
Quantitative Job Evaluation Methods
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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
 Quantitative Job Evaluation Methods
• Factor Comparison Job Evaluation Method
Step 1. Obtain job information
Step 2. Select key benchmark jobs
Step 3. Rank key jobs by factor
Step 4. Distribute wage rates by factors
Step 5. Rank key jobs according to wages
assigned to each factor
Step 6. Compare the two sets of rankings to
screen out unusable key jobs
Step 7. Construct the job-comparison scale
Step 8. Use the job-comparison scale
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Resource Management, 12/e
11–42
 FIGURE 11–A1 Sample Definitions of Five Factors Typically Used in Factor Comparison Method

1. Mental Requirements
Either the possession of and/or the active application of the following:
A. (inherent) Mental traits, such as intelligence, memory, reasoning, facility in verbal expression,
ability to get along with people, and imagination.
B. (acquired) General education, such as grammar and arithmetic; or general information as to sports, world
events, etc.
C. (acquired) Specialized knowledge such as chemistry, engineering, accounting, advertising, etc.

2. Skill Requirements
A. (acquired) Facility in muscular coordination, as in operating machines, repetitive movements, careful
coordinations, dexterity, assembling, sorting, etc.
B. (acquired) Specific job knowledge necessary to the muscular coordination only; acquired by
performance of the work and not to be confused with general education or specialized knowledge.
It is very largely training in the interpretation of sensory impressions.
Examples
1. In operating an adding machine, the knowledge of which key to depress for a subtotal would be skill.
2. In automobile repair, the ability to determine the significance of a knock in the motor would be skill.
3. In hand-firing a boiler, the ability to determine from the appearance of the firebed how coal should be
shoveled over the surface would be skill.

3. Physical Requirements
A. Physical effort, such as sitting, standing, walking, climbing, pulling, lifting, etc.; both the amount
exercised and the degree of the continuity should be taken into account.
B. Physical status, such as age, height, weight, sex, strength, and eyesight.
Copyright © 2011 Dorling Kindersley (India) Pvt. Ltd Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration,
Authorized adaptation from the United States edition of Human p. 181. © 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ.
Resource Management, 12/e
11–43
 FIGURE 11–A1 Sample Definitions of Five Factors (continued)

4. Responsibilities
A. For raw materials, processed materials, tools, equipment, and property.
B. For money or negotiable securities.
C. For profits or loss, savings or methods’ improvement.
D. For public contact.
E. For records.
F. For supervision.
1. Primarily the complexity of supervision given to subordinates; the number of subordinates is a secondary
feature. Planning, direction, coordination, instruction, control, and approval characterize this kind of
supervision.
2. Also, the degree of supervision received. If Jobs A and B gave no supervision to subordinates,
but A received much closer immediate supervision than B, then B would be entitled to a higher rating than A
in the supervision factor.
To summarize the four degrees of supervision:
Highest degree—gives much—gets little
High degree—gives much—gets much
Low degree—gives none—gets little
Lowest degree—gives none—gets much

5. Working Conditions
A. Environmental influences such as atmosphere, ventilation, illumination, noise, congestion,
fellow workers, etc.
B. Hazards—from the work or its surroundings.
C. Hours.
Copyright © 2011 Dorling Kindersley (India) Pvt. Ltd
Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration,
Authorized adaptation from the United States edition of Human
p. 181. © 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ.
Resource Management, 12/e
11–44
 TABLE 11–A1 Ranking Key Jobs by Factors1

Mental Physical Skill Working

Requirements Requirements Requirements Responsibility Conditions
Welder 1 4 1 1 2
Crane operator 3 1 3 4 4
Punch press operator 2 3 2 2 3
Security guard 4 2 4 3 1

1
1 is high, 4 is low.

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Resource Management, 12/e
11–45
 TABLE 11–A2 Ranking Key Jobs by Wage Rates1

Requirements
Hourly Working
Wage Mental Physical Skill Responsibility Conditions
Welder $9.80 4.00(1) 0.40(4) 3.00(1) 2.00(1) 0.40(2)
Crane operator $5.60 1.40(3) 2.00(1) 1.80(3) 0.20(4) 0.20(4)
Punch press operator $6.00 1.60(2) 1.30(3) 2.00(2) 0.80(2) 0.30(3)
Security guard $4.00 1.20(4) 1.40(2) 0.40(4) 0.40(3) 0.60(1)

1
1 is high, 4 is low.

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Authorized adaptation from the United States edition of Human
Resource Management, 12/e
11–46
 TABLE 11–A3 Comparison of Factor and Wage Rankings

Mental Physical Skill Working

Requirements Requirements Requirements Responsibility Conditions

A1 $2 A1 $2 A1 $2 A1 $2 A1 $2

Welder 1 1 4 4 1 1 1 1 2 2

Crane operator 3 3 1 1 3 3 4 4 4 4

Punch press operator 2 2 3 3 2 2 2 2 3 3

Security guard 4 4 2 2 4 4 3 3 1 1

1
Amount of each factor based on step 3.

2
Ratings based on distribution of wages to each factor from step 5.

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Resource Management, 12/e
11–47
 TABLE 11–A4 Job (Factor) Comparison Scale
Mental Requirements Physical Requirements Skill Requirements Responsibility Working Conditions
0.20 Crane Operator Crane Operator

0.30 Punch Press Operator

0.40 Welder Sec. Guard Sec. Guard Welder

0.50

0.60 Sec. Guard

0.70

0.80 Punch Press Operator

0.90

1.00 (Plater)

1.10

1.20 Sec. Guard

1.30 Punch Press Operator

1.40 Crane Operator Sec. Guard (Inspector) (Plater)

1.50 (Inspector) (Inspector)

1.60 Punch Press Operator

1.70 (Plater)

1.80 Crane Operator (Inspector)

1.90

2.00 Crane Operator Punch Press Operator Welder

2.20 (Plater)

2.40 (Inspector) (Plater)

2.60

2.80

3.00 Welder

3.20

3.40

3.60

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3.80
Kindersley (India) Pvt. Ltd
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4.00 from the United States edition of Human
Welder

Resource Management, 12/e

11–48
 The Point Method of Job Evaluation
Step 1. Determine clusters of jobs to be evaluated
Step 2. Collect job information
Step 3. Select compensable factors
Step 4. Define compensable factors
Step 5. Define factor degrees
Step 6. Determine relative values of factors
Step 7. Assign point value to factors and degrees
Step 8. Write the job evaluation manual
Step 9. Rate the jobs
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 TABLE 11–A5 Evaluation Points Assigned to Factors and Degrees

First- Second- Third- Fourth- Fifth-

Degree Degree Degree Degree Degree
Points Points Points Points Points

Decision making 41 82 123 164 204

Problem solving 35 70 105 140 174

Knowledge 24 48 72 96 123

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