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COMPENSATION
Professor Bruce Fortado
MAN 4301/6305
University of North Florida
Compensation is a major cost, it is critical in attracting and maintaining a good work force,
motivation can be enhanced and reinforced, and levels of power and status are conveyed.
Internal Equity Comparisons. This refers to two basic things. First, it encompasses organizational
comparisons among jobs within the operation to assess their relative worth. Second, it can involve
employees selecting an internal figure for comparison (considering both inputs and outcomes) in an
effort to show he/she is underpaid. The employee generally selects very favorable people to
compare with (large pay gaps). Managers tend to select similarly situated people in an attempt to
dissuade the employee. Internal pay comparisons are often more emotional matters than external
comparisons, because the personalized nature of the process and the close proximity of the figures.
External Equity Comparisons. This refers to looking at the market average for the same position
outside of the operation to assess the competitiveness and the relative fairness of current pay levels.
Salary Compression. The salary levels of newcomers are too close to those of their more experienced
coworkers. For instance, Joe was originally paid $34,000. He has worked hard for the organization
for five years and is currently paid $40,000. Jack was just hired for $39,000. This is salary
compression.
Salary Inversion. The salary levels of newcomers are actually higher than those of their more
experienced coworkers. For instance, Joe was originally paid $34,000. He has worked hard for the
organization for five years and is currently paid $40,000. Jack was just hired for $42,000. This is
salary inversion.
Salary Secrecy Policies. Some managers try to avert the aforementioned painful comparisons by
having pay secrecy policies (Dessler, 2013: 190). People may face discipline up to and including
discharge for violating this policy. Superiors may tell everyone: "This is the best raise I can get
you," "You got more than most people," or "Everyone got a similar raise” to circumvent conflict. Of
course, people do still talk among themselves (the grapevine). They cannot, however, really
confront their boss under this policy. Under conditions of restricted information, people often
overestimate the size of peers' raises and underestimate the size of superiors' raises. In short,
motivation with pay is normally damaged with pay secrecy.
Egalitarian Pay Policies. Where rating inflation prevails, there will not be much difference in
individual's raises. In some systems, across the board raises are common. One might also move in
lockstep to the top of the grade based on one's seniority rather than merit. All of these egalitarian
policies may reduce overt conflicts, but ruin motivation with pay.
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Compensation Methods
Rankings . The jobs are ranked from lowest to highest in importance. This is simplest, fastest, and
most inexpensive method. How are the rankings and salary gaps justified? This method is generally
only found in small operations.
Job Classification System. A number of job grades are defined and then positions are placed
into them (e.g. GS-1 to GS-18). It has been said this is like labeling the shelves in your bookcase
and then sorting the texts. This is the reverse of the process most companies follow. One concern
is that people will manipulate new job descriptions to try and get them into a higher classification.
Designing jobs to the pay system rather than based on motivation and logic is an example of meansends reversal. To alleviate these concerns, "desk audits" may be conducted to check on what people
are actually doing and how long they are doing it.
Point System. First, you select compensable factors for each job and weight them. The more points,
the more a person will be paid. Compensable factors generally come under headings like
knowledge and skills (education, experience, etc.), accountability and responsibility (number of
employees, size of the budget, equipment, parts and materials, etc.), mental demands (in some
jobs also the physical demands), work conditions and hazards. The Hay Associates use three
compensable factors: know-how, problem solving, and accountability.
"Job evaluation" is a systematic method used to determine the relative value of jobs. One
compares the similarities and differences in the content and value of jobs. The minimum
qualifications are defined. The EEOC states one should evaluate the job, not the person in it. In
order to enhance employee acceptance and further the perceived fairness, some organizations form a
committee that is composed at least partially of employees to do job evaluation.
Compensable factors are weighted based on past experience and external market surveys.
This method focuses on external equity. Some organizations conduct their own surveys, while
others purchase packages from consultants. Some survey information can be obtained on the Web.
Many times, you can only access external survey data by agreeing to share your own organization's
data.
Wage
Levels
Organization (1)
Labor Market
Organization (2)
Points
Comparing one's own organization to the labor market averages is a central activity in any
point system scheme. What does it mean if the organization is either above (Organization-1) or
below (Organization-2) the line? Does this mean corrective action is in order? The answer to this
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question depends on several things. First, what is the organization's wage strategy? Does the
organization have a high-wage or a low-wage strategy? The corporate strategy should be aligned
with the compensation plan (Dessler, 2013: 190). Have they targeted a percentile and tracked their
position over time? What is the organization's turnover rate? Can adequate numbers of skilled
people be found? Also, who is being lost (the best or the worst people)?
Wage
Levels
Points
Why would points fall off the actual regression line? This can happen for a number of reasons. A
merit band could be drawn above and below the regression line. This band might consist of ten
levels or steps (Dessler, 2013: 195). Off course, seniority rather than merit may be what moves
people up the steps in the salary range. People who are outside the merit band might be examples of
favoritism or discrimination.
Wage
Levels
I
II III IV
Pay Grades
Pay grades are often used to save time and money. Rather than analyzing each job in great
depth, a sample of jobs is used. It is assumed these "benchmark jobs" are similar to the other jobs
grouped together in that grade. On the order of 20% of jobs may be benchmarked (Dessler, 2013:
194). Two major errors are possible here: (1) Are the jobs in the different organizations really the
same? (For example, many positions are labeled "Administrative Assistant," but the duties may vary
considerably. If a survey’s categories are too broad or imprecise, errors can easily arise.), and (2)
Are the jobs lumped together in grades really similar to the positions used as benchmarks?
Perhaps the biggest weakness of point systems lies in the fact it encourages empire building
and inefficiency. Managers are paid more if they supervise a large number of employees, have
large budgets, etc., rather than paying them for maximizing profits, lowering defects, etc. People are
thus encouraged to pad budgets, lobby for added people and resist cuts. Another area of concern is
that the system rewards breadth (doing many different things), but largely ignores productivity
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differences among workers within the same job (if one worker can produce twice as much, but
uses the same basic skills, it may not be possible to get the person much more money).
Skill Based Pay. (Competency Based Pay, Pay for Knowledge or Knowledge Based Pay). Point
systems are often criticized for (a) failing to recognize growth (ongoing education), and (b) not
rewarding people for having a broader range of skills (unless they are currently using them in their
job). In other words, a point system focuses on the job rather than the person in the job. Skill based
pay recognizes growth and breadth of skills. A tradeoff exists between stressing breadth and
flexibility versus stressing depth and stability. Some organizations have explored paying people
according to what they know and can do rather than just what they are doing. Recently, firms like
Proctor and Gamble, TRW, General Foods, and Borg Warner have adopted "pay for knowledge."
More than 50% of Fortune 1000 firms use some form of skill based pay (Dessler, 2004: 232). A
skill-based system has five parts. One must define the skills and have a method for tying an
employee’s pay to his/her skills. A training system must be created to transmit the skills. A
competency testing system must be put in place. Lastly, a work design must be implemented that
allows employees to move between jobs to develop their flexibility (Dessler, 2011: 210).
Some concerns exist. The more senior blue-collar workers may resent having young
people catching up to them via raises keyed to ongoing education. Eventually people will still top
out. Is it worth it for the organization to be paying people for skills they are currently not
using? Certainly it helps when a person is absent or leaves suddenly to have people capable of
filling in. Organizations like Borg Warner decided to go with fewer, but broader, job descriptions
(they went from ten to three). Wait a minute, if people are actually doing more in their current jobs,
a point system would have rewarded them for the increased breadth. Is part of this a question of
dressing up efficiency measures aimed at getting more work done by a smaller work force?
Broadbanding. Some organizations have reorganized and flattened their hierarchies. This means
there are fewer promotion opportunities. In order to compensate for the broader skills that are often
involved, and the longer time horizon one will be in a position, salary ranges have been
“broadbanded.” Whereas one might have had 10 grades with $15,000 salary ranges, these might be
replaced with 3 broadbands of $40,000 (Dessler, 2009: 236).
Factor Comparison. First, the compensable factors of benchmark jobs are ranked in relation to their
specific importance to the organization (exhibit). A sample of jobs is used to set up this system to
save time and money. Benchmark jobs must be representative, definable, and non-controversial.
These jobs should be common in the market, free from discrimination and should not have a massive
surplus or deficit. Once the chart has been constructed with rankings along each factor, dollar
amounts are assigned to each column. Next, other jobs are analyzed along these same lines using the
benchmark jobs as a framework. This system is geared toward internal equity. This analysis is
organization specific. What can be done when a market shortage arises for a specific position?
Since everything is geared toward these internal equity comparisons, little can be done. This
system
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Job Comparison Scale
$ Value
Mental
Requirements
Experience/
Skills
$0.00
$0.20
$0.40
$0.60
$0.80
Punch Press
Operator
Physical
Demands
Supervision
Truck Operator
Parts Attendant
Punch Press
Operator
STOCKER
$1.20
Parts Inspector
$1.60
$1.80
$2.00
$2.20
$2.40
$2.60
$2.80
$3.00
$3.20
$3.40
$3.60
$3.80
$4.00
$4.20
$4.40
$4.60
$4.80
$5.00
Truck Operator
Machine Operator
Punch Press
Operator
Riveter
Truck Operator
$1.00
$1.40
Other
Reponsibilities
STOCKER
STOCKER
Parts Attendant
Punch Press
Operator
STOCKER
Parts Inspector
Machine Operator
Parts Attendant
Parts Attendant
Parts Attendant
Parts Inspector
Riveter
Punch Press
Operator
Riveter
STOCKER
Machine Operator
Riveter
Truck Operator
Parts Attendant
Machine Operator
Truck Operator
Machine Operator
Parts Inspector
Source: George T. Milkovich and Jerry M. Newman, Compensation, 3rd ed. (Homewood, Ill.: BPI Irwin, 1990).
Riveter
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is much more difficult to explain than a point system. When the benchmark jobs change, the
entire system must be reworked. It is costly and time consuming to develop. If the
designers know what the pay levels are, and back their way into the charts and the dollar
distances for the jobs along each factor, the system is a sham.
Market Pricing. This system involves paying the average of what other firms in the labor market
pay for comparable jobs. Few organizations actually adhere to this path. Instead, most firms
only pay newcomers market wages, and salary inversion and compression are rampant.
Supply and Demand vs. Comparable Worth
For many years a considerable discrepancy has existed when one compares female pay levels to
male pay levels. Female pay as a percentage of male pay was 61% in 1960, 59% in 1970, 60% in
1980, 61% in 1984, 77% in 2005 (Dessler, 2005: 418) and 75% in 2011 (Wall Street Journal).
Women have been and remain disproportionately represented in low paying jobs. If one compares
numerous traditional male and female jobs according to the logic of a point system (education,
skills, etc.), discrimination appears to be quite prevalent:
truck drivers
plumbers
liquor clerks



etc.
librarians
nurses
secretaries
Some managers and economists object that such comparable worth comparisons are unfair.
They say apples and oranges cannot be compared. These jobs belong to different labor markets.
We need the sorting and efficient allocation that free market forces provide. Further, it is hard to
quantify the intangible aspects of jobs (e.g. caring for people in nursing).
AFSCME (the American State, County and Municipal Employees), a large public sector
union, has long been advocating comparable worth comparisons. AFSCME filed suit against
County of Washington, Oregon (1981) and settled out of court for $482 million paid to 35,000
employees through 1992. The women argued they were paid 35% less, while the comparison men’s
jobs only had 5% more content according to the logic of a point system (Dessler, 2005: 418). Since
this was an out of court settlement, it does not serve as a legal precedent. Nevertheless, you are quite
likely to see this term again in the future.
At the Democratic National Convention in 2008, mention was made of the party seeking
“equal pay for equal work” in the future. Since this has been the law since 1963, this seemed odd. A
Democratic strategist later explained this reflected the commitment to seek equal pay for jobs of
comparable worth. Apparently, the phrase “equal pay for equal work” resonates better with voters
than “comparable worth.”