STRATEGIC HUMAN RESOURCE

MANAGEMENT

Establishing Strategic Pay Plans

Dr. Fetty Poerwita Sary
 Fakultas Ekonomi dan Bisnis
School Economics and Business

Telkom University

Copyright © 2011 Pearson Education, Inc.

2 Creating the great business leaders
publishing as Prentice Hall
 Fakultas Ekonomi dan Bisnis
School Economics and Business Basic Factors in Determining Pay Rates
Telkom University

Employee Compensation
Components

Direct financial
Indirect financial payments
payments

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3 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business
FIGURE 11–3 Who Is Exempt? Who Is Not Exempt?
Telkom University
Step 1:
Salary Basis Test
Is the employee paid at least $455
per week ($23,660 per annum),
*not subject to reduction due to
variations in quantity/quality of
work performed?
*The computer professional
exemption has a salary basis test of
$455 per week or $27.63 per hour.
The outside sales exemption is not
subject to the salary basis test.
No
Employee is Nonexempt
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Step 2: Step 3:
Yes Exemption Applicability Yes Job Analysis
Does the employee perform any A thorough analysis of the job
of the following types of duties/jobs? duties must be performed to
determine exempt status. An
Executive—management is the employee’s primary exempt position must pass both
duty the salary basis and the duties
Administrative—employee performing nonmanual tests.
office work
Professional/creative—employee whose work requires
highly advanced knowledge/education; creative and
artistic professional
Computer professional—employee involved in design
or application of computers and related systems
Outside sales—employee making sales or taking
orders which influence sales outside of the employer's
premises
No
Employee is Nonexempt
11–4
4 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis Corporate Policies, Competitive Strategy,
School Economics and Business and Compensation
Telkom University
 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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5 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Equity and Its Impact on Pay Rates
Telkom University

Forms of Compensation Equity

External Internal Individual Procedural

equity equity equity equity

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6 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Addressing Equity Issues
Telkom University

Area wage and 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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7 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Establishing Pay Rates
Telkom University

Steps in Establishing Pay Rates

Conduct a salary survey of what other employers are paying for comparable
1
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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8 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Step1: The Salary Survey
Telkom University

Uses for Salary Surveys

To price To market-price wages To make decisions

benchmark jobs for jobs about benefits

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9 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Sources for Salary Surveys
Telkom University

Sources of Wage and Salary

Information

Self-Conducted Professional Government The

Consulting Firms
Surveys Associations Agencies Internet

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10 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Step 2: Job Evaluation
Telkom University

Identifying Compensable Factors

Skills Effort Responsibility Working conditions

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11 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business The Job Evaluation Process
Telkom University

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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 Fakultas Ekonomi dan Bisnis
School Economics and Business How to Evaluate Jobs
Telkom University

Methods for Evaluating Jobs

Ranking Job classification Point method Factor comparison

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13 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Job Evaluation Methods: Ranking
Telkom University
 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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14 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business
TABLE 11–3 Job Ranking by Olympia Health Care
Telkom University

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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15 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis Job Evaluation Methods:
School Economics and Business Job Classification
Telkom University
 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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 Fakultas Ekonomi dan Bisnis
School Economics and Business
FIGURE 11–4 Example of a Grade Level Definition
Telkom University

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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17 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Job Evaluation Methods: Point Method
Telkom University
 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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18 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Step 3: Grouping Jobs
Telkom University

Point Method

Grouping Similar
Jobs into Pay Ranking Method
Grades

Classification Methods

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19 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Step 4: Price Each Pay Grade
Telkom University
 The 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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20 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Step 5: Fine-Tune Pay Rates
Telkom University
 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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21 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis HR in Practice:
School Economics and Business Developing a Workable Pay Plan
Telkom University
 Simplified Approach:
 Conduct a wage survey
 Conduct a job evaluation
 Conduct once-a-year job appraisals
 Compile the compensation budget for upcoming year

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22 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Pricing Managerial and Professional Jobs
Telkom University

Compensating Executives and

Managers

Base Executive
Short-term incentives Long-term incentives
pay benefits/perks

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 Fakultas Ekonomi dan Bisnis
School Economics and Business Compensating Professional Employees
Telkom University
 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 is most popular.
 Professional jobs are market-priced to establish the values for
benchmark jobs.

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24 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Competency-Based Pay
Telkom University
 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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25 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Why Use Competency-Based Pay?
Telkom University

Competency-Based Pay Supports

High-Performance Work Strategic

Performance Management
Systems Aims

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26 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Competency-Based Pay in Practice
Telkom University
 Main elements of skill/competency/knowledge–based pay programs:
1. A system that defines specific skills
2. A process for tying the person’s pay to his or her skill
3. A training system that lets employees seek and acquire skills
4. A formal competency testing system
5. A work design that lets employees move among jobs to permit work
assignment flexibility

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27 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business The Pay Gap
Telkom University
 Factors Lowering the Earnings of Women:
1. Women’s starting salaries are traditionally lower.
2. Salary increases for women in professional jobs do not reflect their above-
average performance.
3. In white-collar jobs, men change jobs more frequently, enabling them to be
promoted to higher-level jobs over women with more seniority.
4. In blue-collar jobs, women tend to be placed in departments with lower-
paying jobs.

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28 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Board Oversight of Executive Pay
Telkom University
 Factors Influencing Executive Compensation
 FASB requirements for expensing of stock options
at fair market value.
 U.S. government’s “pay czar” overseeing certain pay awards in firms which had
U.S. treasury loans.
 Increased SEC reporting requirements for compensation-related information.
 Increased executive liability for accuracy in corporate financial reporting under
the Sarbanes Oxley Act.
 Shareholder activism protesting excessive executive compensation due to lack
of independence by executive board compensation committees.

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29 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business
Improving Productivity Through HRIS: Automating Compensation Administration

Telkom University
 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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30 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business

Telkom University

Copyright © 2011 Pearson Education, Inc.

31 Creating the great business leaders
publishing as Prentice Hall
 Fakultas Ekonomi dan Bisnis
School Economics and Business Benefits
Telkom University

Types of Employee Benefits

Supplemental
Insurance benefits Retirement benefits Executive services
pay

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 Fakultas Ekonomi dan Bisnis
School Economics and Business Policy Issues in Designing Benefit Packages
Telkom University

Which benefits to offer Who will be covered

Whether to include retirees Coverage during probation

Policy Issues
How to finance benefits Degree of employee choice

Communicating
Cost containment procedures
benefits options

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33 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Pay For Time Not Worked
Telkom University

Unemployment insurance Vacations and holidays

Supplemental Pay
Sick leave Parental leave
Benefits

Supplemental
Severance pay
unemployment benefits

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34 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Pay for Time Not Worked (cont’d)
Telkom University
 Sick Leave
 Provides pay to an employee when he or she is out of work because of illness.
 Costs for misuse of sick leave
 Pooled paid leave plans

 Parental Leave
 The Family Medical Leave Act of 1993 (FMLA)
 Up to 12 weeks of unpaid leave within a one-year period.
 Employees must take unused paid leave first.
 Employees on leave retain their health benefits.
 Employees have right to return to job or equivalent position.

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35 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Insurance Benefits
Telkom University
 Workers’ Compensation
 Provides income and medical benefits to work-related accident victims or their
dependents, regardless of fault.
 Death or disability: a cash benefit based on earnings per week of employment.
 Specific loss injuries: statutory list of losses.

 Injured workers are protected by ADA provisions.

 Controlling workers’ compensation costs

 Screen out accident-prone workers.
 Make the workplace safer.

 Thoroughly investigate accident claims.

 Use case management to return injured employees to work as soon as possible.

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36 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Insurance Benefits
Telkom University
 Workers’ Compensation
 Provides income and medical benefits to work-related accident victims or their
dependents, regardless of fault.
 Death or disability: a cash benefit based on earnings per week of employment.
 Specific loss injuries: statutory list of losses.

 Injured workers are protected by ADA provisions.

 Controlling workers’ compensation costs

 Screen out accident-prone workers.
 Make the workplace safer.

 Thoroughly investigate accident claims.

 Use case management to return injured employees to work as soon as possible.

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37 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Laws Influencing Health Care Benefits
Telkom University
 Health Services and Insurance
 COBRA notification and insurance continuance requirements
 Health Insurance Portability and Accountability Act of 1996 (HIPAA)
 Retirement and Pension Plans
 Employee Retirement Income Security Act of 1974 (ERISA)
 Mental Health Benefits
 Mental Health Parity Act of 1996
 Family Leave
 Pregnancy Discrimination Act
 Family Medical Leave Act
 The Newborn Mother’s Protection Act of 1996

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38 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Trends in Health Care Cost Controls
Telkom University

Premiums and co-pays

Communication and empowerment

Cost-Control Trends Wellness programs

Health savings accounts

Claim audits

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39 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Other Benefits Issues
Telkom University
 Long-Term Care
 Insurance for older workers is a growing issue.
 Life Insurance
 Types
 Group life insurance
 Accidental death and dismemberment
 Personnel policy considerations
 Benefits-paid schedule
 Supplemental benefits
 Financing (employee contribution)
 Benefits for Part-Time and Contingent Workers
 Leave and health benefits available to part-time workers.
 Benefits for long-term independent contractors.
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40 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Retirement Benefits (cont’d)
Telkom University

Types of Pension Plans

Defined
Defined contribution Qualified
benefit Nonqualified plans
plans plans
plans

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41 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Pension Plans
Telkom University

Policy Issues in
Pension Planning

Membership Plan
Benefit formula Vesting schedule
requirements funding

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42 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Pensions and Early Retirement
Telkom University
 Early Retirement Windows
 Offer specific employees (often age 50-plus) an incentive
to voluntarily retire earlier than usual.
 Offer a combination of improved or liberalized pension benefits plus a cash
payment.
 Require careful program construction to avoid oversubscription and timely
delivery to avoid potential age discrimination claims.
 Older Workers’ Benefit Protection Act (OWBPA)
 Imposes limitations on waivers that purport to release a terminating
employee’s potential claims against the employer based on age discrimination.

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43 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business Family-Friendly (Work–Life) Benefits
Telkom University
 Subsidized child care
 Sick child benefits
 Elder care
 Time off
 Subsidized employee transportation
 Food services
 Educational subsidies
 Fitness and medical facilities
 Flexible work scheduling

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44 Creating the great business leaders