Friday, October 28, 2005

Designing Compensation Structure

Wage level decisions are concerned with the labor costs of all jobs in the organization or all jobs in a cluster or family. Wage and salary structures are concerned with the rates for specific jobs and the relationships between these rates; they represent a combination of wage level and job structure decisions. In the last chapter, we explained how job structures are developed through the use of job evaluation. In this chapter, we discuss the development and administration of wage structures.

DEVELOPING A WAGE STRUCTURE

Wage structures result from pricing job structures. Job structures, in turn, result from the application of formal or informal job evaluation to an organization's jobs . In order to price a job structure, it is necessary to use dollar amounts from either current pay rates or the market data collected from wage surveys . A wage structure, then, is a combination of the job structure, the labor market, and the organization's decisions regarding the wage level. The pricing of job structures is subject to the influences discussed in plus some technical ones. For example, the manner in which job relationships were determined may influence job pricing. If a formal job evaluation plan was employed, the type of plan has an effect. The extent of union involvement in a formal job evaluation program may also influence job pricing. If informal job evaluation was used to determine the job structure, the pricing process may be influenced by whether the informally derived job structure makes use of pay grades or separate jobs. Both unions and management tend to favor simplification of pay structures, however, and this agreement reduces the variation in pricing procedures.

The present wage and salary rates in an organization will clearly influence any changes made in its current wage structure. The current rates represent a series of decisions about all aspects of the program, including past market rates, organizational differentials, and customary differences that have survived.

Most often, however, the job structure is priced out through the use of market rates. This means the employment of wage surveys. Wage survey results are often employed as an important, but not the only, consideration in pricing job structures. One reason for this is that surveys usually secure data on a limited number of key jobs that vary in importance and cost significance from one organization to another. A second reason is that evaluated rates may easily be above market rates for certain jobs. Hence, market rates are only one consideration in job pricing. As will be seen, however, if market rates are higher than evaluated rates, market rates are often followed.

The cost consequences of jobs often influence job pricing just as much as market rates do. In most organizations, there is a fairly well defined group of jobs that represents an important segment of the total labor costs of the company.1 It is important to note that although some organizations are more restricted by labor cost considerations than others, prices assigned this group of jobs may greatly affect an organization's competitive position. Rates assigned these jobs during job-structure pricing largely determine the wage level of the firm, and wage structure relationships are built around this cost center.

Pricing a Job Structure

The job structure presents the compensation decision maker with a hierarchy of the jobs in the organization. Ordinarily, this hierarchy has been developed by the use of job evaluation and represents the organization's relative rating of its jobs. A dollar value now needs to be placed on this hierarchy. This dollar value is available in the current wage rates paid for the jobs and in the wage survey data representing the labor market. These two sets of data are combined into a matrix that is used to create a scatter diagram (see figure 15-1).

Figure 15-1. Scatter Diagram for a Wage Structure

The dollar values occupy the vertical axis and the organizational rankings the horizontal axis. Thus, pricing a job structure involves a series of techniques and decisions regarding the vertical, horizontal, and regression-line dimensions of the scatter diagram.

The vertical dimension

The vertical axis of the scatter diagram is simply a set of dollar figures from low to high. This amount may come from either (1) the current pay rate or range for the job within the organization or (2) the value placed upon the job in the market survey.

When current pay rates are used, an initial concern is the exact pay rate to assign to each-job. If there is a single job incumbent and/or a single pay rate for the job, then the particular dollar amount paid the job incumbent could be used, although this person could be paid high in the pay range. But if there is a pay range and a number of incumbents, then the exact figure to use must be determined. If the average pay of the incumbents is used, the pay for the job may be overstated or understated depending on how long the incumbents have been on the job or what their performance has been. The alternative is to use the midpoint of the pay range. This gives a good indication of the relative value of the job and not the incumbents.

Another concern is whether to use the current pay or to adjust current pay to changes that have occurred since that rate was established. All pay rates can be adjusted by multiplying them by a constant percentage reflecting changes in the labor market, cost of living, productivity, or whatever other standard the organization decides to adopt.

When wage survey data are used, the figures need to be adjusted in a number of ways. First, the wage data do not provide a single rate but a range of figures. Therefore the best single figure to use, such as the mean or median, needs to be determined.

Second, any data collected in the wage survey predate the effective date of the wage structure presently being built. Thus, the data need to be updated to the effective date of the new wage structure. This is usually done by multiplying the figures from the wage survey by some constant percentage based upon estimated changes in wage data during the interim or upon changes in a figure such as the cost of living.

Third, the organization's strategy toward the labor market requires a wage level decision, since the new wage structure is going to be in operation over time. This decision involves determining how competitive the organization wishes to be while the wage structure remains in effect. There are three basic strategies: lag the market, lead-lag, and lead the market.

Lag the market. In this strategy, the organization updates the wage survey data to the current date and then installs the new wage structure. If a change in the labor market of 10 percent is assumed for the next year, then the only time the organization will be competitive with the market is at the beginning of the year. By the end of the year any decisions based upon the wage structure will be 10 percent behind the market.

Lead-lag. Here the organization takes account of the 10 percent estimated change in the market but wishes to be on average with the market. It does this by starting the year at 5 percent above the market rate. Provided the increase is steady over the year, this strategy will place the organization ahead of the market the first half of the year and behind it the second half.

Lead the market. In this strategy the organization wishes to pay above the market rate and does so by starting the year at 10 percent above the wage survey data. By the end of the year the organization will be paying the market rate.

These three strategies are illustrated in figure 15-2.

Figure 15-2. Wage Level Strategies for Adjusting Wage Structures

The horizontal dimension

The horizontal axis is the hierarchical ranking of all the organization's jobs. The pricing process may work with either individual jobs or pay grades. In fact, if the organization is to employ rate ranges with differential pay rates for individuals on the same job, it may save time by making decisions on the pay-policy line, pay grades, and rate ranges at the same time. (Discussion of pay grades and rate ranges will start later in this chapter and continue in Chapter 16.) This is especially true if pricing makes use of both present rates and wage survey results, because the latter always represent a sizable range.

The major question involving the horizontal dimension is how the hierarchy of jobs was arrived at. There are three possibilities: market rates, job evaluation rates, and negotiated rates.

Market Rates. The organization may assume that it wishes to pay strictly market rates for its jobs and may therefore place dollar values on both axes, making a totally consistent structure. Clearly this alternative assumes that there is a market rate for all of the organization's jobs and that this rate is satisfactory.

Job Evaluation Rates. The most common alternative for the horizontal axis is the set of ratings developed through job evaluation. Depending upon the method of job evaluation used, these ratings may consist of a ranking of jobs from low to high, a series of classification levels, or a range of points.

Negotiated Rates. Where there is a union, the hierarchy of jobs may be a negotiated ranking based upon custom or the relative power of a group of unions.

Developing the pay-policy line

Once the horizontal and vertical dimensions of the scatter diagram have been settled upon, all the jobs or the key jobs can be plotted by their values on both axes. Figure 15-1 uses the current wage rates of jobs and the average of each pay grade as the plotting points.

To create a smooth progression between pay grades, a pay-policy line is fitted to the plotted points. The line may be straight or curved and may be fitted by a number of different methods. When plotting job structures of single job clusters, a straight line is usually employed. The most frequently used types of lines are the low-high line, the freehand line, and the least-squares line.

Low-high line. This is a straight line connecting the highest and the lowest of the plotted points (these are often called anchor points). The rates of all intervening jobs are made to fall on the line. The low-high line appears especially useful in union bargaining of the wage structure because of its flexibility. When a final bargain is reached, it may be implemented by raising either end or both ends in such a way as to reflect the contract. Figure 15-3 is an example of a low-high line.

Figure 15-3. Low-High Pay Policy Line

Freehand line. After the points have been plotted the trend of the data can often be easily visualized. In this case it is possible to draw a freehand line that best describes the plotted points. In drawing such a line, it is useful to follow the principle that vertical deviations from the line are minimized if the line follows the obvious slope of the data. Although the line may be straight or curved, its advantages are greatest when it is straight. The obvious advantages of using a freehand line are that it is easy to plot and simple to explain. Figure 15-4 is an example of a freehand line.

Figure 15-4. Freehand Straight Line

Least-squares line. The least-squares line follows the principles specified for the freehand line but is determined mathematically. It may be fitted by calculating the equation for the line and plotting the line obtained from the solution. See DLC Course 49: Multiple Regression Used in Compensation Administration for instructions for computing a least-squares line.2

Which line is preferable?

Experience suggests that the additional accuracy of the least-squares line, compared with that of a freehand line, is seldom sufficient to offset the added difficulty of explaining the method involved to the statistically unsophisticated. It may be useful to test wage lines developed by simpler methods against a least-squares line. Professionals or other statistically sophisticated groups, however, may prefer a wage line calculated by least squares.

In most cases, a low-high (anchor-point) line or a freehand line achieves all the accuracy inherent in job evaluation results. Furthermore, both permit adjustment to achieve agreement of committee members or union and management on wage determinations.

In using wage survey results instead of present rates in determining the wage line, it is useful to employ a chart such as the one in figure 15-5, in which survey results have been presented as quartiles representing the pay grades of the organization.

Figure 15-5. Graph of Wage Survey Results

When compared with present rates, such data enable the parties involved to make decisions on the wage structure. The medians (midpoints) or averages of survey results may, of course, be used in place of present wage rates in determining the wage line. But the inevitability of a range of rates (a minimum of 50 percent) raises questions about the usefulness of any single figure. Recognition of this may account for the practice of establishing rate ranges at the same time as standard rates for pay grades when wage survey results are used to price job structures. The starting rate of a pay grade must be sufficient to attract employees to those jobs, and wage survey results provide evidence of what that rate must be.

If the organization already has a series of pay grades in place, jobs may be slotted into the appropriate pay grade on the basis of the market rates that have been determined in the wage survey. This system can be called a rank-to market job evaluation.3 It is similar to the classification method of job evaluation but does not incorporate the rules or grade-level descriptions of the latter.

Multiple Structures

So far in this section we have spoken only of a single wage structure. Actually, of course, an organization may have several wage structures - one for each broad job cluster, for instance. The choice may depend on whether job evaluation is formal or informal and, if the former, on which type of method is used. We saw in Chapter 14 that the ranking, classification, and factor-comparison methods can, if desired, derive one job structure for the organization. Even these plans, however, are often applied to distinct job clusters. The point method is more likely than any of the other three to be designed for a single job cluster.

Organizations with more than one wage structure most commonly have separate structures for exempt and nonexempt groups of jobs. Exempts are often divided into professional and managerial groups, and nonexempts into production workers and office staff. There seem to be two reasons for these breakdowns. One, it may be difficult to compare these different types of jobs, in which case the horizontal axis of the scatter diagram is not useful. Second, and more important, the slope of the pay-policy line for these groups may be very different. At opposite extremes would be the blue-collar workers, with a very flat slope, and the managerial group, with a very steep slope. Further, the pay-policy lines will start and stop at different places, so that there will be little overlap between them.

One problem can occur in constructing these separate structures: discrimination. If one or two of the groups contain all or many of the female or minority-dominated jobs, then the division may appear discriminatory. All job clusters that constitute a wage structure need to be examined for their sex and minority composition. If minorities and women are segregated, then the composition of jobs in all groups will have to be balanced by race and sex.

COMPLETING THE WAGE STRUCTURE

Theoretically, at this point the wage structure consists of a horizontal dimension and a vertical dimension with a pay-policy line derived from the plotting of jobs on them. Every job in the organization could be plotted on the pay-policy line to determine its pay rate. For the sake of convenience and practicality most wage structures group data on both the horizontal and vertical dimensions. On the horizontal dimension, jobs are grouped into pay grades; on the vertical dimension, money is grouped into rate ranges.

Pay Grades

If job structures of individual jobs are developed, as is done through job evaluation, it is possible to assign a dollar value to each job. As pointed out, however, simplified wage and salary structures are being encouraged by both management and unions. One of the results of this trend is a tendency to group jobs that are close together in the hierarchy into grades for pay purposes. This way, in large organizations at least, much time and effort are saved. Dealing with ten pay grades rather than hundreds of job rates is convenient for both unions and management. Where job rates are used, even small changes in duties may require changes in pay rates.

A pay grade is defined as a group of jobs that have been determined by job evaluation to be approximately equal in difficulty or importance. If a point plan is employed in job evaluation, a pay grade consists of jobs falling within a range of points; if factor comparison is used, a range of evaluated rates; if ranking is used, a number of ranks. In the classification method of job evaluation, a pay grade consists of all jobs that are comparable to the level description.

There appears to be no optimum number of pay grades for a particular wage structure. In practice, pay grades vary from as few as 4 to as many as 60. If there are few grades, the number of jobs in each will be relatively large, as will the increments from one grade to another. If, on the other hand, there are many pay grades, the number of jobs in each grade and the increments between grades will be relatively small.

Although organization practice varies greatly, there has been a tendency to reduce the number of pay grades. Ten to 16 grades for a given job structure appears to be common. Ten grades for nonsupervisory factory jobs is typical, as is 13 for clerical job structures.4 Broader wage structures, of course, contain more grades. For example, salary plans that encompass clerical, professional, and administrative employees average 16 grades. Pay distance between grades is commonly 5 to 7 percent for hourly and clerical jobs and 8 to 10 percent for professional and administrative jobs.

The actual establishment of pay grades is a decision-making process designed to (1) place jobs of the same general value in the same pay grade, (2) ensure that jobs of significantly different value are in different pay grades, (3) provide a smooth progression, and (4) ensure that the grades fit the organization and the labor market. Examination of job evaluation results may yield natural cutoff points.

Before determination of pay grades, it may be wise to determine both how many jobs and how many employees are affected by the number of grades and the division chosen. This can be done by plotting each employee on the wage structure matrix and noting whether there is a spread of employees over the matrix. Since large numbers of employees may be affected by small changes in pay grades, great care and fairness must be used in determining pay grades. Grievances can be avoided by seeing that pay grades with large numbers of employees are not placed in a grade that greatly changes their pay rate.

Because jobs in a pay grade are treated as identical for pay purposes, it is extremely important that grade boundaries be accepted. For this reason, it is often useful to move jobs that are very close to the maximum cutoff point into the next higher grade. There are a number of ways of grouping jobs into a limited number of grades. Let's examine four of them.

Cluster approach

The simplest approach is to make a scatter diagram of the organization's jobs, as is done in establishing the pay-policy line. When this is done it can often be observed that the jobs tend to cluster rather than scattering evenly. This effect can be taken advantage of by encasing the clusters horizontally and vertically, as illustrated in figure 15-6. This provides all three dimensions, but none of them is arrived at consistently, nor are they likely to be symmetrical. This may have a negative impact on salary and career progression in the organization.

Figure 15-6. Cluster Approach to Pay Grades

Clustering has the advantages of simplicity and flexibility: it can be changed each time the wage structure is adjusted. It tends to be used with ranking or slotting methods of job evaluation, so small organizations are most likely to use this approach.

Division approach

Another relatively simple approach is to use the horizontal dimension of the wage structure, the job evaluation points, to determine the number of pay grades. This is done most easily by determining a set number of points for each pay grade and, starting with the least number of points, marking off the lines between adjacent grades. In figure 15-7, each pay grade is 40 points "wide."

Figure 15-7. Division Approach to Pay Grades

An alternative to using a set number of points for each grade is to use increasing numbers of points as we move up the scale. This would reflect the difficulty experienced in job evaluation of determining exact differentials between jobs higher in the hierarchy. In the division approach, the job rate for each grade should be set by placing the range midpoint at the point where a vertical line from the point value in the middle of the grade, say 200 points for level 3 in figure 15-7, meets the pay-policy line. This method can be used successfully with a point system of job evaluation and can also be adapted to other systems, such as classification.

Midpoint-progression approach

This method is a little more sophisticated and allows for broader definition at higher grades. It focuses on the pay-policy line and the vertical axis of the wage structure. This time the number of pay grades is obtained by determining a standard distance between the midpoints of adjoining grades. In figure 15-8, 10 percent is the distance decided upon between grades.

Figure 15-8. Midpoint-Progression Approach

Starting at the midpoint of the lowest grade, we place the midpoint for each succeeding grade 10 percent higher than the lower one. The dividing line between grades is halfway between the two midpoints. As can be seen, the horizontal dimension of job evaluation points widens with each higher grade.

This approach is often combined with increasingly broad rate ranges to make the wage structure balloon out at the higher levels. The rationale is that at higher levels, positions are harder to define and evaluate accurately, and greater variation in performance is possible.

Continuum approach

Here, in essence, each job evaluation point on the horizontal axis has its own rate range; there is no grouping of jobs. The pay-policy line constitutes the midpoints. A standard maximum and minimum which are a set percentage above and below the midpoint are defined. As can be seen in figure 15-9, these lines widen as the wage level rises, making the range broader at the top than at the bottom.

Figure 15-9. Continuum Approach to Pay Grades

The continuum approach has gained popularity with the Hay Plan (see Chapter 14), which uses it. As noted, a system such as this requires a lot of confidence in the job evaluation system. It is likely to engender considerable argument over small differences in the number of points assigned to jobs. Small, technically oriented organizations are most likely to use this method.

Rate Ranges

Just as it is useful to group jobs on the horizontal axis, it is useful to use a range of pay for each pay grade created. A range of pay allows an organization to move beyond pay for the job to pay for the person. Since this is the topic of the next part of this book (see Chapters 16 and 17) it will not be covered in depth here. Factors important in rewarding people for other than the job, such as performance, can be accommodated by a rate range. Since the data from which a job rate is taken comprises not a point but a range, using a single job rate may create an aura of accuracy that is unwarranted. Also, since a pay grade incorporates a range of job evaluation points, it is useful to have some range of pay for the grade.

Ordinarily, the midpoint of the range will be the job rate, the mean or median of the wage survey data. The other points to define are the minimum and maximum of the range. The range spread, the distance from minimum to maximum, varies greatly but is usually within a 25 to 60 percent range. Many large wage structures with a variety of jobs are narrow at the bottom and spread out at the higher levels.

Once pay grades and rate ranges are designed, the wage structure is complete (see figure 15-10).

Figure 15-10. Completed Wage Structure

Yet the process described here is not the only way a wage structure can be established. In a study in which one of the authors participated, compensation specialists at 37 organizations were queried about how they went about establishing their wage structures. The findings showed that there were 19 separable approaches, and that only 2 were performed in as many as 5 organizations. These two were a comparison of market benchmarks with an internal ranking of benchmarks and a comparison of job evaluation with market benchmarks.5

ADMINISTERING THE WAGE STRUCTURE

The wage structure developed in the first half of this chapter is designed to take the organization one step closer to the goal of figuring out what to pay the individual employee by defining a pay rate or range to be paid the job. The implementation of the structure involves a number of issues and problems, which we will deal with in the remainder of the chapter.

Administration Issues

Decisions about the design of the wage structure affect the paycheck of all employees. From the standpoint of equity within the organization, it is important that the way in which these decisions were arrived at is clearly understood and accepted by all parties. From an external perspective the organization must deal with the question of its competitiveness in the labor market compared with its values and customs. The issues to be dealt with in this section focus on these two aspects of equity.

Responsibility for wage structure pricing

If the job structure is determined through formal job evaluation, pricing responsibility depends heavily on whether the organization has a union and on how extensively the union participates in the job evaluation program. If job evaluation is a union-management venture, the union is obviously represented on the committee that prices the job structure. If job evaluation is conducted by the employer alone, the union in collective bargaining may accept the job structure developed, accept it in part, or ignore it. In each of these cases the pricing process is the result of collective bargaining, at least on key jobs and possibly on all jobs.

To some organizations the process of pricing a job-evaluated job structure by collective bargaining is disturbing, because the resulting wage structure may perpetuate or produce inequities that the job evaluation plan was designed to eliminate. To others, collective bargaining is seen as introducing needed flexibility into the system. Some organizations insist that they need a logically developed job structure to prepare for bargaining. In nonunion organizations, pricing the job structure derived from formal job evaluation is the responsibility of the committee or individuals charged with the program.
Informal job evaluation is priced through collective bargaining in unionized organizations and by management in nonunion organizations. In fact, pay-grade pricing is usual in both formal and informal arrangements.

Pricing jobs

When pay grades are used, the rate for a job is that attached to the pay grade in which the job is located. A system of code numbers identifying the jobs and their proper pay grade facilitates control and record keeping.

Some organizations prefer to work with a job structure composed of individual jobs rather than pay grades. Such organizations may have difficulty convincing managers that cutoff points are necessary and that efforts to move borderline jobs into higher pay grades destroy the usefulness of the system. And for small organizations in particular, pay grades may result in little savings. In still other cases, the union or unions involved may prefer job-rate structures.

If a job structure of individual jobs is to be priced, the procedures are largely the same as those we have covered. The essential difference is that adjustments are made to accommodate the different job evaluation plans. If a point plan is used, points and rates for separate jobs may be plotted on scatter diagrams. With factor comparison, evaluated rates instead of points are plotted and a choice may be made between plotting only key jobs in the pricing process or plotting all jobs. In a ranking plan, jobs are recorded by rank and job-rate adjustments are made to correspond with the ranking.

Market rates vs. job evaluated rates

Because of the possibilities of conflict between market rates and rates that accord with job evaluation, it may be useful to highlight them here.

Job evaluation is an attempt to substitute rationality for a variety of nonrational influences on wages and salaries by appraising jobs in terms of their contribution to the organization. The process presumably produces a hierarchy of jobs that accords with both organizational requirements and employee values, including customary relationships. This internally developed job structure is logically, at least, somewhat different from that of any other organization.

Market rates, on the other hand, represent an agglomeration of prices paid by organizations of every size and type. Some jobs are never filled from the labor market but rather are occupied by employees trained by the organization. Some organizations are almost completely insulated from most labor markets, except in the case of jobs for which they cannot provide training. Even if jobs in different organizations are identical, the chance of their occupying the same position in the job hierarchy is small. Even highly skilled jobs may vary in importance to the various employing organizations.

Thus no job-evaluated wage structure is immune to conflict with market rates. The only way an organization could avoid such conflict would be to pay at or above the market on every job. But the severity of the conflict varies considerably from one organization to another. Low-wage organizations may experience conflict on many jobs. Organizations employing largely semiskilled workers and promoting from within have less conflict than organizations employing many highly skilled workers who must be hired from the outside for these jobs. If there is unemployment in the local labor market, less conflict between market rates and evaluated rates occurs, even in low-wage organizations.
Geographically isolated organizations or those with large numbers of unique jobs experience less conflict.

That the position and meaning of the same job rate vary from organization to organization makes it easier to solve the conflict. If the job is a hiring-in job, the organization may have no choice but to pay the market rate. If not, the importance of the conflict depends on the position of the job within a job cluster. If the job is related more strongly to associated jobs than to the market, the market rate is much less important. If jobs that are keyed to the market are at or above market rates, internal relationships are likely to prevail.

Some job clusters are market-oriented, usually because the organization cannot provide the training needed or because the union discourages intra-organization comparisons. Other job clusters are essentially insulated from the market, except for hiring-in jobs. But tight labor markets tend to market-orient any job cluster in which the organization does not provide its own labor supply by promotion or transfer from within. Although changes in market rates vary in amount and even direction for separate job clusters, in periods of generally tight labor markets, there is some similarity among these movements.

The basic solution to conflict between market rates and evaluated rates is to develop a number of wage structures. In this way, a job cluster that must be tied closely to the labor market will not seriously disturb other wage and salary structures. A less preferable solution is to exempt certain jobs or job clusters from job evaluation. This approach is difficult to defend and endangers internal relationships. A third solution is the guideline method of job evaluation, which in effect determines internal relationships by market relationships.

Wage structure decisions as outlined in this chapter attempt to balance internal considerations and external considerations (market rates). Most organizations achieve this by developing a number of separate wage structures and by emphasizing flexibility in pricing job structures. Low-wage employers in competitive industries, especially those operating in tight labor markets, may have to abandon their interest in internal relationships and concentrate on keeping jobs filled by paying market rates. In fact, they may have to lower their hiring standards as well.

Solution to conflicts between market rates and evaluated rates may be made easier or more difficult by unionism. If the job evaluation plan is a joint one or if the union is interested in consistent internal relationships, solution is facilitated. Craft unionism, rival unionism, and lack of interest in internal relationships make solution more difficult.

Problems in Administration

Decisions concerning internal wage structures must contend not only with the numerous considerations discussed in this chapter but also with continuous change in employees, jobs, and organizations. Jobs change by the addition or subtraction of tasks according to the needs of the organization. Jobs also change as a result of changes in technology, with consequent changes in method and equipment. New jobs are added and old ones disappear. Employees also change, by leaving the organization and being replaced by others, and through transfer and promotion to different jobs. Organizations also change in response to these internal changes and to changes in the external environment - product markets, labor markets, legal changes, and the union or unions representing employees. Responding to these changes involves wage structure maintenance. This section examines a number of problems related to administering a wage structure.

Occupational differentials

Job evaluation is ostensibly a device for maintaining occupational differentials. Whether this result has been achieved is not known. One study found that job evaluation plans often provide for an increase in skill differentials and suggests that there has been less occupational narrowing where the proportion of skilled workers is high.6 The job evaluation plan in the basic steel industry has maintained occupational differentials. One of the announced purposes of the Dutch national job evaluation plan was to preserve occupational differentials.7

Most economists contend that there has been a long-term tendency for occupational differentials to decline, although it has been pointed out that the facts on this issue are ambiguous. It is generally agreed that in the short run, occupational differentials change little during normal periods but contract sharply during periods of very high employment.8

To the extent that job evaluation serves to maintain relative occupational differentials, it gives employees an incentive for accepting or undergoing training to enhance their skills and in the long run contributes to the supply of skilled people. Although wage differentials are certainly not the sole motive for acquiring additional skills, a latent function of job evaluation may be to preserve occupational differentials, especially during periods when employees, unions, and organizations have little reason for maintaining them.

Job descriptions

Job changes call for changes in job descriptions and job evaluations to ensure that the changed jobs carry the appropriate pay rate. New jobs call for job analysis and job evaluation to determine the appropriate rate. Both cases represent additional effort for busy supervisors and managers, even if the analysis and evaluation are done by others. As such, there may be a tendency for managers to neglect these chores.

However, consistent wage structures require that these changes be made and made promptly. In addition, under union conditions failure to make such changes can foreclose the organization's right to make job changes. In a number of cases, management has lost a considerable portion of its right to make job changes by failing to make prompt changes in job descriptions. By custom and practice, employees may acquire the right to do certain work and to refuse to do work not called for in job descriptions. Major union-management problems have been caused by laxity in wage administration, such that custom has come to limit management's rights to make changes. Much of the problem can be attributed to failure to educate managers on pay administration. Unless managers realize the importance of keeping pay structure changes in tune with job changes, any program of pay structure maintenance is likely to degenerate into detective work.

Reclassification

When employees change jobs and when new employees are assigned to jobs, employee classification determines the job description that applies to the work the employee is doing and the appropriate pay rate. A pay rate cannot be assigned an employee until he or she has been classified as performing a certain job.

Classifying new employees properly and changing classifications when employees change jobs are essential to maintaining consistent pay structures. But, like job changes, they represent additional work for busy managers. Again, unless managers understand that employee misclassification destroys pay relationships and creates vested interests that are difficult to change, they are likely to neglect reporting employee changes and to inappropriately classify employees. The extent of the problem is illustrated by the case of an organization that conducted an employee audit bimonthly and still found mistakes in 2 to 4 percent of the classifications.

Technological change

Technological change affects wage structures by making changes in jobs. As mentioned, when jobs change their place in the job structure, the entire wage structure may change. The issue of whether automation brings an upgrading or downgrading of jobs has become a lively controversy in the literature. It appears to have been established, however, that automation reduces the number of separate job classifications. Broader job classifications take account of the interdependence of automated jobs and the tendency to move people from job to job.9

Broader job classifications mean broader job descriptions and less frequent changes in employee classification. Thus if the broad job descriptions represent reality, problems of maintaining wage structures may be reduced.

In practice, few jobs are actually downgraded as a result of automation. This may mean that job changes resulting from technological change do not reduce job-related contributions. It may also mean that automation creates new rather than changed jobs.

A third possibility is that some jobs do require fewer contributions but organizations do not choose to evaluate them downward. There is no evidence that downgrading is more frequent in nonunion than in unionized organizations.

Technological and other changes over time may require basic revision of the job evaluation plan - in factors, weights, or both. If the model of the employment exchange used in this book is correct in implying that many employees want to make more contributions than organizations have chosen to recognize, these desires plus technological change may require such revision. A careful audit of job evaluation plans and pay structures at least every three years would be a good way to carry this out.

Environmental changes

Product markets, labor markets, legal requirements and union-management relationships also change and require adjustment of job and pay structures. Product-market changes may change the labor cost associated with jobs and force organizations to husband their economic resources. Labor-market changes may produce shortages of certain employee groups and compress pay structures. Changes in unions, in the internal politics of unions, in collective-bargaining agreements, and in union-management relationships may foster or inhibit union interest in internal wage structures and may make wage structure administration easy or difficult. Unions can aid or hinder organizations in making the adjustment in wage structures that environmental changes require.

Today, legal requirements are placed upon the organization to not discriminate against women, racial groups, and, in certain circumstances, age, religious, and handicapped groups. The current pressure today is that of comparable worth, which will be discussed in Chapter 26. As indicated, an organization should be careful that any wage structure it establishes has a balance of sex and racial groups and is not isolating these groups into a wage structure that treats them differently.

Maintenance Procedures

Problems of wage structure administration emphasize the importance of job evaluation maintenance. Maintenance, at a minimum, consists of (1) keeping job descriptions and job ratings up to date and (2) seeing that employees are actually performing the jobs outlined in the job descriptions. The Compensation Department may be assigned to (1) analyze new or changed jobs, (2) see that job changes are reported, (3) see that old descriptions and evaluations are still adequate, (4) see that identical jobs have identical job titles, and (5) receive and process appeals and grievances with respect to job ratings.

Supervisors are normally responsible for advising the Compensation Department of any changes in job content that they are planning to make or have made. They are likewise responsible for seeing that employees are assigned to tasks and duties included in their job descriptions. To facilitate carrying out these responsibilities, supervisors may be required to review regularly with each employee the description of his or her job and, if the job description is not adequate, to request a new analysis and evaluation.
Some organizations require that approval for job changes be obtained before such changes can be made. It is doubtful that this practice can be justified in a dynamic organization. If job changes are reported and consequent reevaluations are made promptly, such rigidity would not seem to be called for. If, however, supervisors are guilty of shifting duties in order to manipulate pay rates, some method must be found to discourage the practice.

In addition to supervisory requests for job restudy, other methods may be used to maintain the job evaluation system. The Compensation Department may be set up to audit jobs in all departments on a continuing basis. Thus, each department's jobs would be subject to regular audit. Interim checks might be made, however, by regularly checking departmental job lists against a list of standard job titles.

Another device is to limit the life of job descriptions. Thus a job description would be valid only for a certain period, after which the job would have to be restudied.

A further check on the adequacy of job information and the correctness of job values is the grievance or appeal procedure. Employees should be encouraged to appeal whenever they believe their job description or job rating is incorrect. If the organization is unionized, the regular grievance procedure may be used. If the organization is nonunion, an appeal procedure may be devised. In either case, a request for restudy of the job is made early in the procedure. If the matter is still not settled after the wage department reevaluates the job, it is sent up the line until agreement is reached

Standard job titles are an essential part of job evaluation maintenance. Such standard titles should apply to all jobs that entail identical duties and responsibilities, wherever they are found in the organization. The compensation group polices the use of these job titles to see that they are used only where they apply.

SUMMARY

The wage structure is a combination of the job structure of the organization and the market rates for those same jobs. A graph representing the wage structure usually starts with the job structure on the horizontal axis, represented by the job evaluation values given to the jobs. The vertical axis represents the market rates expressed in monetary terms. Each job, or those jobs for which there is a market comparison, can be represented by a point on the graph. A line of best fit can then be drawn that creates the pay-policy line for the organization.

The pay-policy line is the starting point for creating the wage structure. The values of both dimensions need to be grouped in order to make compensation administration more manageable. The horizontal axis, the job structure, is grouped into pay grades. This grouping may be done in a number of ways as discussed in this chapter. The vertical axis is grouped for each pay grade into a rate range. The methods for doing this will be discussed further in the next chapter, as this provides the opportunity for the organization to pay differential amounts to people on the same job or on jobs in the same pay grade.

The wage structure is the place in compensation administration where the labor market meets the internal values of the organization. This juncture is not always congruent. Organizations have a structure of jobs that depends not only on market value but on a range of organizational, psychological, and sociological factors. Often these factors are represented in a collective bargaining situation. The requirement of organizations to respond to the labor market differs considerably, so settling any conflict between organizational and market values is a matter of judgment in the organization. Any wage structure is only useful for a limited period of time. Changes in both the labor market and the organization make redoing the process over time a necessity.


1 E. R. Livernash, "The Internal Wage Structure," in New Concepts in Wage Determination, ed. G. W. Taylor and F. C. Pierson (New York: McGraw-Hill, 1957), pp. 140-72.
2 The equation for a straight line is Y = a + bx, where a is a point where the line crosses the Y axis and b is the slope of the line.
3 J. Schuster, Management Compensation in High Technology Companies (Lexington, Mass.: Heath, Lexington Books, 1984).
4 R. M. Story, "Trends in Wage Administration," Business Studies (Denton, Tex.: North Texas State University), Fall 1967, p. 114.
5 D. W. Belcher, N. B. Ferris, and B. R. Dalton, "Building a Pay Structure," (paper presented at the Western Region Conference of the American Compensation Association, San Diego, 1984).
6 S. H. Slicter, J. H. Healy, and E. R. Livernash, The Impact of Collective Bargaining on Management (Washington D.C.: Brookings Institute, 1960), p. 582.
7 H. M. Douty, "The Impact of Trade Unionism on Internal Wage Structures," in Internal Wage Structures, ed. J. L. Meeij (Amsterdam: North-Holland Publishing Co., 1963), p. 238.
8 M. Reder, "Wage Differentials: Theory and Measurement," in Aspects of Labor Economics, (Princeton, N.J.: Universities-National Bureau Committee for Economic Research, 1962) pp. 257-318.
9 J. Bezler, "Effects of Automation on Some Areas of Compensation," Personnel Journal, April 1969, pp. 282-85.

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