Compare and contrast the advantages/disadvantages of a Common Merit Date vs an Anniversary Date for annual merit increases. Which method would you find preferable as an employee receiving an increase and as a manager administering merit reviews? Explain your preferences…
� You will learn some basic concepts of pay structure.
� You will learn how pay and performance appraisal influence employee behavior.
� You will learn ways in which organizations tie pay to performance.
� Readings:Course Materials
Book cover of textbook used in the course
Henderson, Richard I. Compensation Management in a Knowledge-Based World, (Prentice-Hall).
You will read this text as assigned for each module of the course.
� Henderson – Chapters 11, 12 and 13
One key way in which organizations link pay to performance is incentive pay (also called variable pay), which is covered in chapter 14 of your text and Module 4 of this course. For now we’ll focus on another key part of pay for performance which is merit pay, defined as an adjustment in base salary that is directly related to an employee’s performance. Pay for performance, however organizations carry it out, means that employees do not receive increases "just for showing up". In order for raises to be given, the organization must be able to afford them. Most of us have experienced periods where salaries were frozen for various economic reasons and the employee must be viewed as deserving of a higher pay rate.
Appraising performance and providing feedback to employees are challenging aspects of any supervisor’s job. Basing pay decisions on these evaluations raises the stakes even higher. Few organizations have difficulty identifying their top 10-15% performers and managing pay to parallel their contributions to the organization’s goals and successes. Identifying the bottom performers is also fairly clear. This should be a much smaller percentage of workers whose pay is managed in conjunction with programs for performance improvement or performance termination. However, managing pay for the middle group — the large group of solid everyday contributors — is a complex task.
Research studies have found that managers were able to differentiate pay among different levels of performance within this "middle group". The differences were small, but as managers, we know that small dollar amounts and small differences can matter a great deal to an employee’s perceptions and even to lifestyle. It is also important to realize that pay increases compound from year to year. If one employee’s increase is 3% and another’s with comparable performance is 3.5%, the calculation for the second employee’s increase the following year includes that "extra" ½ %, like compound interest on a debt.
In carrying out merit pay programs, the vast majority of organizations (95% in a recent survey) give increases on a Common Merit Date rather than preparing appraisals and awarding increases on the employee’s service anniversary. Common merit date allows managers to compare employee performance at one common time and also allows organizations to set aside and manage an increase budget.
In the light of your new reading and knowledge, think about how you have received pay increases in your past and current jobs. Were they merit pay programs? How was performance evaluated? Were increases given to all employees on a common date or spread throughout the year? Were you eligible for bonuses or commission based on your performance?
It is possible to work as a human resources professional, even as a specialist in compensation, and not be called upon to develop a pay structure or use the technical concepts described in the text. One reason is that most organizations have pay structures in place and revise them year to year without developing a whole new approach. Another reason is that when new pay structures are called for the work is often done by outside experts or consultants.
Still, it is important to understand some basic concepts and types of pay structures. If you’re a manager, you use pay structures to make decisions about employees’ pay. If you’re a compensation professional, you’re accountable for the integrity and operation of the structures. And as an employee, you’ll want to understand pay structures to know how your own pay is determined!
Some pay structures are very basic?they specify a set rate of pay for a job title or type of work. Many government and union jobs are paid on set scales, including jobs covered by the Service Contract Act which we discussed in Module 1. Here’s a sample of some set SCA rates from July 2002?
Key Entry Operator I $ 9.92
Key Entry Operator II 12.25
Truck Driver 15.87
Stock Clerk 13.89
These rates are for Baltimore, Maryland; rates for the same jobs would be higher or lower in other parts of the country based on labor costs for those areas. To differentiate years of experience (which SCA rates do not), some Set-Rate structures such as those in unionized organizations and federal government agencies are designed with 6-month or 1-year "step" increases for training or years of experience.
Most large and mid-size organizations administer pay by classifying jobs into job grades and corresponding pay ranges. In Module 2 we discussed job evaluation and job grades and how they might be tied to pay ranges.
Example: Pay Ranges for Job Grades 04 – 07
Grade Minimum Midpoint Maximum
04 $23,171 $30,118 $37,065
05 $25,480 $33,124 $40,768
06 $26,062 $33,873 $41,683
07 $31,262 $40,643 $50,024
Observe these features of the ranges:
1. The ranges overlap? they’re like terraces or stairs.
[e.g. the annual salary of $39,000 falls in three ranges — grades 05, 06 and 07]
2. Pay rates are higher for higher grades because the jobs in them have been evaluated to be more complex and to require a higher level of experience and education.
3. Each range has a Minimum, Midpoint and Maximum. The Midpoint is halfway between the Minimum and Maximum. Moving from grade to grade, some pay structures have a set percentage interval between the Midpoints. However this is a Market pay structure so the Midpoints are based on average pay rates for comparable jobs in the external job market and the Midpoints are not at equal intervals.
4. Each range has a Width of 60% — that is, the Maximum is 60% higher than the Minimum
[in range 04, $37,065 divided by $23,171 = 1.599, or 60%)
So how do managers determine the pay rate within the range?
� New hires or inexperienced employees are paid near the Minimum.
� An employee paid near Midpoint should be fully proficient at the job.
� An employee paid near the Maximum might have long tenure in the job or might be ready to advance to a higher grade.
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