Sales Force Compensation

Sales Compensation : Knowledge Index

2006-05-10T20:30:00.000-07:00

This blog exposes sales managers to the challenges in the designing , maintaining & reviewing sales force compensation . This single window knowledge bank encourages both new & experienced sales managers to exchange their learning & experiences . For managers who want detail information about any particular area there is a list of reference books & articles too .

To join the debate & increase your knowledge Index click below on your area of interest .

Sales Force Compensation Basics
Linking Sales Performance Management with Compensation
Designing Salary Structure

Articles on Incentives

Why you need to Review Sales Compensation
Reference Books

Main Page : Sales Knowledge Bank

A Sales Manager Knowledge blog that exposes new sales managers to the challenges in the sales force management

Sales Force Compensation _ Basics

2006-02-27T06:32:00.000-08:00

Salespeople are a company's ambassadors to the world. They actively promote the company and its products and services. They are the front line between the company and its customers, and are typically the driving force of revenues - top-line company growth. These employees have a direct impact on how the marketplace perceives their employer and its products.

The way salespeople conduct themselves is often a reflection of the company's sales compensation program; and how well the company does is often a reflection of the effectiveness of its commission program. A well designed sales compensation program focuses salespeople on activities that support the company's business objectives, and, in turn, rewards those salespeople for their contributions.

Base salary, commissions, and sales prizes make up the bulk of a typical salesperson's compensation package, but the specifics vary by industry. Stock options grants to salespeople are becoming more widespread too.

In a snapshot Sales compensation packages typically comprise one or more of the following components:

Base Salary
Periodic incentives tied to short-term goals
Annual Incentives tied to longer-term sales activities
Commission-based incentives
Perquisites to facilitate sales efforts
Stock options

Base Salaries
Paying a base salary that assures salespeople a steady income is a good idea. A guaranteed salary provides salespeople the comfort of knowing that despite good and bad economies, streaks and slumps, they can maintain their current lifestyle.

A salesperson's commission is typically based on either a percentage of sold revenues or profit margins. Commissions usually account for 30 to 50 percent of a salesperson's cash compensation package, which means that commissions routinely run between 43 and 100 percent of base pay. The percentage that commissions contribute to a salesperson's compensation depends on factors such as required technical knowledge, sales cycle time, product profitability, and whether the sale is dependent on the skill of the salesperson.

Commissions will account for a larger portion of pay when the sales cycle is short, the sales highly profitable, and sales dependent on the skills of the sales person. Commissions play a smaller role when the sale requires greater technical knowledge and when the sales cycle is long.

This is not to say that total compensation is necessarily lower for salespeople with greater technical knowledge or those selling products with slower sales cycles, rather, the mix of pay is weighted more toward base pay and less toward commissions so that the total cash pay earned is reasonable. Companies don't want to penalize salespeople for selling products with less commission potential if those products are an important part of the corporate strategy. Similarly, if a salesperson is responsible for a product that's an easy sell, the company wants to make sure there is the maximum incentive to sell as much as possible - therefore, less emphasis on base pay and more emphasis on commissions.

Commissions can vary within a commission plan, reflecting the priorities of the company. If the company wants to build market share, it may pay larger commissions for selling products to new clients. Commissions are also higher when new products are introduced., especially if they are more profitable. Clearly, commission plans are constructed with great care. A poorly designed plan can have unintended results such as rewarding employees for the sale of new products that cannibalize more profitable ones.

Most commission plans place no limits on what a salesperson can earn. In some instances, if a certain sales threshold has been met, the commission percentage can increase. Regardless, commissions are one of the simplest and most direct forms of pay-for-performance. Underlying the commission plan is one of the appeals of a sales position: unlimited income potential.

The key part is designing this compensation Plan . how does one go about it??

Sales Performance Measurement & Compensation

2005-12-27T06:46:00.000-08:00

Effective compensation plan motivates performing employees at an optimum cost to the company . This compensation plan needs

To effectively seperate performing employees from non performing employees and accordingly compensate
To effectively align with long term & short term company objectives
To understand uncontrollable & non controllable factors at the employee level

A sound sales compensation package enables the organization to focus sales activities towards desired results, and rewards these outcomes with compensation tied directly to the level of achievement.

The key to a successful sales compensation program can be achieved in three steps

Clearly defining sales goals that are realistic but challenging
Tracking and measuring performance against goals
Rewarding achievement with competitive and motivational compensation

In other words before designing any sales compensation plan we need to design a correct sales performance metric . The right metrics designed to measure performance needs can serve as critical measures of success for any organization and, in particular, the sales force can benefit immensely from an understanding of how to identify and track these quantities in a meaningful way.

The primary objective of the dashboard creation process is to identify and implement key performance measures and indicators that will enable managers to quickly and effectively manage the sales organization. This can be accomplished through selecting metrics that support sales objectives, strategy and goals. Some of the benefits that will result from implementing the dashboard include:

Gain a deeper understanding of the drivers of sales productivity
Identify where management action is required to improve sales productivity and effectiveness
Develop a common vehicle for monitoring and improving performance
Understand sales performance from a variety of perspectives
Build consensus on key performance measures and drivers
Clarify accountability around specific measures
Enable performance benchmarking with competitors and best-in-class companies

Approach
Corporate vision guides the development of an organization’s sales objectives, strategy and tactical goals. Metrics are in turn driven by sales strategy and goals. At the tactical level, metrics serve as the primary vehicle for managing performance within the organization. Targets are set for each metric, performance is monitored and interpreted to provide timely feedback and corrective actions are initiated (see Figure 1).

Figure 1

But which metrics should we choose? The sheer abundance of metrics creates a situation in which it may be difficult to properly identify metrics that make the most sense. In answering this question, the first step is to create a framework in which all the available metrics may be organized and prioritized. This framework consists in two dimensions; first, a corporate perspectives dimension and secondly a sales performance dimension.
The corporate approach takes a 360 degree view of the organization from five distinct perspectives: customers, employees, partners, investors and internal processes. This approach is typically utilized in the so called “Balanced Scorecard” approach.

Each of the corporate perspectives should be examined and appropriate individuals identified to provide a list of metrics.
In addition to the corporate perspective, a sales performance dimension must also be included. This breaks sales performance into four elements: readiness, productivity, efficiency and effectiveness. Below we define each of these elements and show a few examples.

The key to the metrics identification process consists in both fact-finding and identifying metrics as well as categorizing metrics according to the above two dimensions, corporate perspective and sales performance. This basically involves the creation of a matrix with these two axes which then may be populated with metrics collected through the fact-finding process.

Dashboard Design Process
The dashboard design process consists in metric selection, design and implementation. Each of these steps involve some basic principles outlined below.
Metric Selection

Supports stated objectives, strategies and goals
Can be directly impacted by sales management
Can be measured in a cost effective and timely fashion
Reflects one of the four key dimensions of sales performance (readiness, productivity, efficiency and effectiveness)
Enables performance benchmarking with industry competitors and best-in-class companies

Dashboard Design Principles

Reflects senior management priorities
Balances internal and external metrics
Includes measures of past performance and indicators of future performance
Minimizes the number of metrics in order to facilitate management interpretation

The actual design process is outlined below along with the detailed steps involved.

	Identify existing and potential metrics by corporate performance perspective (interview process) Categorize metrics into four dimensions of sales performance (efficiency, effectiveness, productivity and readiness) and eliminate unclassifiable metrics Create preliminary scorecard matrix that combines business perspectives with sales performance dimensions Review scorecard matrix for completeness and add metrics based on experience
	Eliminate metrics that cannot be measured or are too costly to measure Eliminate metrics that cannot be significantly impacted by sales management Prioritize metrics based on alignment with stated strategy and goals Select top metric per cell in scorecard matrix based on alternative approaches Evaluate alternative scorecards and select most appropriate metrics
	Assign metric accountability Determine performance targets Obtain available benchmark data Determine monitoring, interpretation and feedback procedures and guidelines Develop corrective action review process

Metrics Matrix Design
To facilitate the dashboard design process, a matrix tool may be created to help classify the various metrics uncovered in the fact finding process. Because each metric can be understood in terms of sales performance as well as a business perspective, a metrics matrix can be created that combines the business perspectives along the horizontal axis with sales performance dimensions along the vertical axis. Each metric is placed in the matrix based on its most appropriate classification with respect to these dimensions. This tool has the following benefits:

Creates a framework around the metrics selection process
Balances business perspectives and sales performance views
Provides a systematic approach
Facilitates prioritization
Allows identification of particular areas of emphasis
Highlights areas with no metric coverage

Example Matrix:

	Customers	Employees	Partners	Processes	Investors
Effective- ness	Win/loss		Number of deals involving partners		Product Revenue as a percent of total Revenue growth Market Share
Efficiency	Ease of doing business	Time allocation		Sales cycle time Frequency of Proposal Letter use Quality of qualification	Expense
Productivity	Deal size	Revenue per head Revenue/ expenseMargin /head	Indirect revenue	Quota $ per rep	Margin
Readiness	Customer satisfaction Customer reference-ability	Turnover % Number of performance appraisals completed Days training per employee		Pipeline coverage Forecasting accuracy Resource capacity

Criteria for Eliminating Metrics
Eliminate metrics that cannot be measured or would be too costly to measure

Partner coverage
Amount of effort exerted on business approvals

Eliminate metrics that cannot be directly impacted by the sales organization

Customer’s growth rates
Customer profitability
Partner satisfaction
Number of deals involving per partner
Share of partner revenue by platform
Partner’s profit margin
Partner churn
Rate of technology transfer
Number of certified consultants
Number of certified partners

Prioritization Decision Rules
Each cell in the metrics matrix may contain many metrics and, as a result, must be prioritized. Some basic rules to follow in that process are as follows:

Alignment with stated strategy and goals – Use metrics that align with strategy or show alignment with strategy the organization
Frequency and intensity of emphasis during fact-finding – Use metrics that different corporate perspectives emphasize
Experience – Use metrics that experience shows are important to measure
Availability of benchmark data – Use metrics for which benchmarks exist

Preliminary Dashboard
After the completion of the matrix a preliminary matrix may be created that graphically represents the top metrics from each cell. Feedback from management can help determine additional changes or alternative metrics that are required.

Implementation Steps
After agreement on dashboard design, the implementation process may begin. Effective dashboards require live data feeds and, hence, the data integration process may be complex because of multiple data sources. Here is a list of the steps involved in implementation.

Select final dashboard metrics
Identify data sources
Assess feasibility
Assign metric accountability
Develop action plan
Create timeline
Populate initial metrics
Establish internal and external benchmarks
Determine targets
Determine monitoring, interpretation, feedback procedures and guidelines
Develop corrective action review process

Best practice allows for online dashboards that may be customized to a users needs. For example, the matrix tool described above might be provided online and the user could select from these metrics those they were interested in and build up there own dashboard. In addition, each user will want the ability to drill down to a level in the organization that is relevant to their position (i.e. a district manager wants to see his district data).

The next step is motivating sales force towards the performance metrics . The crucial task of aligning sales compensation plan with performance metrics is not onetime but an ongoing task . This needs to be reviewed continously as factors stated above change and organisation needs to be responsive

The power of incentive programs

2005-11-28T07:10:00.000-08:00

If you visited the exhibits at SHRM's 2004 Conference & Exposition in New Orleans, you probably noticed that the busiest booths were those where attendees were offered an incentive to stop and have their expo card scanned. Hundreds of attendees waited in line for more than an hour on the final conference day to share their contact information with an exhibitor in exchange for a nifty travel case on wheels.

That's an example of how an incentive can motivate people to do what you want them to do. Most of us are familiar with consumer promotions that use incentives (Ever buy a "happy meal" at a fast-food restaurant?) and sales incentive programs that reward top performers for exceeding quota. But consider the power a properly designed incentive program has to help your organizaton achieve a variety of goals: reduced absenteeism, increased productivity, improved customer service, success in recruiting and keeping top talent, nurturing team work, recognizing loyal employees, etc.

Ability X Motivation = Performance

In an industry that is challenged with recruitment and retention issues, Indiana's LaPorte Regional Health System has a nursing staff turnover rate of 4 percent compared with the national average of 18 percent and an overall workforce turnover is 9 percent compared to a 15 percent industrywide rate. LaPorte's CEO Jonathan Goble credits these impressive numbers to the organization's commitment to motivating and recognizing its 1,400 employees on a constant basis.

A recipient of the National Association for Employee Recognition's 2004 Best Practices Award for a systemwide initiative called "Caught You Caring," LaPorte's recognition team uses public acknowledgment, gift certificates, gift cards, small gifts, department celebrations and a variety of other awards to reward employees for desired behaviors primarily related to patient care. In addition to extraordinary retention rates, LaPorte's culture of recognition and rewards also contributes to a high level of customer satisfaction.

Software giant Microsoft addressed another common business challenge--training--with an incentive program in 2003 called, "Ready, Set, Go," that was, in part, designed to increase voluntary participation in a training program for its distributors. Participants received points redeemable for merchandise, travel and gift certificates for successfully completing a series of online seminars. During the period the program existed, more than 15,000 courses were taken and passed. Microsoft realized a more than 2,000 percent increase in participation rate when compared with its previous e-Learning program.

Bottom-Line Reasons for Incentive Programs

Incentive programs are one of the few business strategies in which cost can be based on actual performance and paid out after the desired results have been realized. And, the desired results make a positive impact on the organization's bottom line.

In addition, a study conducted by the International Society of Performance Improvement, called. "Incentives, Motivation and Workplace Performance: Research & Best Practices," found:

* Incentive programs improve performance. Effectively designed and properly implemented incentive programs increase performance by an average of 22 percent. Team incentives can increase performance by as much as 44 percent.

* Incentive programs engage participants. The research found that incentive programs can increase interest in work. When programs are first offered for completing a task, a 15 percent increase in performance occurs. Asked to persist toward a goal, people increase their performance by 27 percent when motivated by incentive programs. When incentive programs are used to encourage "thinking smarter," performance increases by 26 percent.

* Incentive programs attract quality employees. Organizations that offer properly structured incentive programs can attract and retain higher quality workers than other organizations.

An incentive program will not compensate for lack of training, a poor product or inadequate marketing. However, as a part of an integrated business strategy, well-executed incentive programs motivate people at all levels of the organization. The bottom line is organizations that successfully motivate their workforce to achieve specific goals will realize the greatest financial gains over time.

Nine Basic Steps To Building the Right Incentive Program

2005-11-27T07:14:00.000-08:00

According to the Incentive Marketing Association, there are nine basic steps involved in developing well-designed incentive programs:

#1 Establish Objectives

Identify what goal/objective needs to be accomplished; for example: improve attendance, increase customer satisfaction, foster teamwork and reward long-term employees. The objectives must be specific, measurable and obtainable. Begin with a clear, briefly stated objective and communicate it to all participants.

#2 Outline the Strategy

Build the foundation of the incentive program carefully, expanding on the methodology to be used. The program structure should identify the exact target audience, and anyone else who will be influenced by the program. The size of the group is important to the budget of the program, as well as the ability to communicate clearly and measure the results accurately. Other considerations are geographic boundaries or regions, legal considerations, family issues, the length of the program and timing, individual goals or team goals, and of course, the reward.

#3 Measure Performance

Define both quantifiable and qualitative goals that can be measured, and keep it simple. It might be necessary to look at historical data and come up with an average in order to define a particular goal. The goal needs to be fair to all involved, and obtainable by everyone.

#4 Establish the Budget

In general, the three elements of budgeting include: number of participants; length of program; and expected results.

There are two types of award budgets: 1) closed-ended, and 2) open-ended. You need to determine the maximum costs involved with a closed-ended program, and an estimate of costs involved for an open-ended program. The budget is then determined by the "value" the company will realize from the improvements made by the incentive program.

#5 Budget Elements

There are four main budget items. Each item becomes a percentage of the total program cost as detailed below:

Awards: 80%*

Communication/Promotion: 10%**

Administration: 5%**

Training/Research: 5%**

#6 Select the Perfect Award

It is important to select the correct award because if the individual is not emotionally vested in obtaining the incentive award, he or she will not pursue the goal. Spend some time speaking with the target group and select an award within the framework of the budget that will be important to the group.

#7 Administer the Program

Administration is approximately 20 percent of the program budget, and a good 50 percent of the planner's time. The target group needs clear, consistent communication and timely feedback on measurement of their performance.

#8 Celebrate Success

The end of the program should be celebrated with the target group, and performance measurement by individual or team should be provided at this point. Individuals should then receive their awards.

#9 Analyze the Success

Did the incentive program achieve its objectives? Were the participants motivated to change their behavior? Remember, an incentive program provides a short-term gain, and follow-up programs are important. Start planning the next one today.

* For merchandise awards, this includes shipping (about 10 percent of the cost of the items) and taxes (about 6 percent of cost).

**The last three categories are fixed costs comprising 10-20 percent of incentive program costs.

Is your Sales Compensation Plan aligned with the times?

2005-11-24T07:30:00.000-08:00

At a recent business meeting I was seated next to the president of a local business sharing information about our respective companies. My tablemate explained that his firm had no need for the services of a sales incentive plan consultant, as he had not changed his sales compensation plan for ten years. He felt this was a major accomplishment. Imagine his surprise when I advised him that a sales compensation plan has a three- to five-year life and then requires major overhauling! Using a ten-year-old plan could be costing him significant sales volume and encouraging employee turnover, as sales employees may not be focused on the organization's strategic goals and may not be rewarded appropriately for their efforts.

In today's fast changing world, the three to five year rule may be too long. More and more companies are reviewing their sales compensation plans annually. With the rapid changes in technology, changes in the competitive arena, and changes in strategic planning, presidents and owners of businesses need to review sales plans more frequently to determine if the plans are aligned with the company's objectives.

In the past, product innovations took several years of design and development before coming to market. Chrysler recently developed and brought a new car to market in just eighteen months using computes and other advanced technology. Some products, such as personal computers, are almost out of date by the time they are installed. As product life cycles and innovations change more rapidly, the methods and degree of persuasion change thus the job of the sales employee changes. As the job changes, the method of compensation needs to be reviewed to align the employee's goals with those of the organization. Offering rewards based on a set of selling skills for one type of selling may not provide the appropriate reward, as new and different skills are required as products change.

A review of the sales plan is needed to confirm that the rewards sales employees receive are commensurate for their efforts and skill sets utilized to achieve their sales goals. The Internet has opened new markets and new methods for marketing and selling products. A sales plan designed to pay a sales employee for calling on customers and presenting the product or services in a traditional manner does not pay appropriately for a sales employee who is able to generate sales using the Internet. Companies could find themselves overpaying sales employees if the earnings formulas are based on personal selling while the employee is able to sell significantly more using new technologies. One could argue that more sales result in more profit for the company, but most plans accelerate the earnings rate once the sales target has been achieved. If the target or quota does not reflect differences in selling strategies, sales employees who are able to utilize new technologies will prosper and other sales employees will become de-motivated and possibly leave the organization.

The competitive marketplace is constantly changing. Products once sold by specialty retailers are now appearing in discount stores. The sales employee selling to large discount chains has a different selling job than the sales employee selling to specialty stores. Sales plans should be designed to reflect this difference.

Today, businesses find themselves constantly revising their business plans to be successful in this fast changing environment. The "most important" product this week may not be the same "most important" product from last week. Sales employees tend to sell the products they know best even if they do not exactly align with the company's objectives. A ten-year-old sales plan may not be flexible enough to provide focus for sales employees in these times of product emphasis change.

There may be sections in sales plans which are "bombs" waiting to explode. A few years ago the sales plans for cellular telephone salespeople in Southern Florida provided commission earnings based on units sold. There were step levels where the commission rate increased as sales volume increased above target or quota. Along came Hurricane Andrew and cell phone sales skyrocketed. There was no other means of communication; people had to purchase cell phones to handle daily activities and to communicate. Sales incentive payments also skyrocketed but through no increased effort on the part of the sales employee. That plan was later changed to exclude an amount of sales generated by actions beyond the sales employee's control.

We've found that the director of sales or the president designed most sales compensation plans in smaller companies. The plans were biased toward the designer's interests. Plans often had unrealistic quotas, payment schedules and product goals that focus the sales employee on the designer's interests, not necessarily the interests of the organization.

A sales compensation plan is not a "one size fits all" proposition. The organization needs to review the goals for the organization, each product line, each sales employee's abilities, and desired profit contribution for each product line. Sales compensation plans should align the employee's goals and rewards with the achievement of the organizations goals and strategic objectives.

Companies tend to think of summer as a time for reflection and vacation, but this is the time to review the sales compensation plans. By beginning now, companies can review the plans, model possible changes, cost out changes, design new plan components, and prepare communications programs so that revisions will be ready for introduction before the new year begins. Waiting until November to begin a sales compensation plan review usually results in a quickly formulated, untested, poorly communicated plan, which is not accepted readily or favorably by the sales force.

Craig N. Clive, CCP is a resource to organizations designing and implementing strategically focused, performance based employee pay and rewards programs and is a Principal at Baylights Compensation Consulting, LLC in Ellicott City.

Wage and Salary - Key variables

2005-10-28T01:48:00.000-07:00

Objective : To Understand variables that impact Basic salary & incentives design

From the viewpoint of the employee, the end product of any compensation program is a paycheck. The decision regarding the type of salary administration and/or structure system to be used do not, by themselves, deliver a paycheck to the employee. The wage determination must be personalized by making a further set of decisions.

The first compensation decision, the wage level, is an external organizational decision that determines the organization's competitive posture toward its human resources. The second major compensation decision is an internal organizational decision involving the structuring of the jobs within the organization. Putting these two decisions together in a wage structure provides the wage or range of wages that the organization perceives as equitable for each of its jobs. Although pay rates are determined for jobs, it is people who receive paychecks. So the next decision to be made is whether all people on a particular job are to receive the same pay or different pay; and if different, on what basis and how? These are not trivial questions.

The great majority of workers are paid through systems that provide for variable payment for the jobs. Such systems reflect the realization by management and employees that it is important to reward more than just minimal performance on the job. Thus management seeks to reward performance through merit-based and incentive pay systems, while employees and their unions ( if any) seek to have learning, proficiency and seniority rewarded.

THE DECISION TO PARTICIPATE

The decision to participate assumes maintenance of an equilibrium between the inducements the organization offers and the contributions the person is asked to make. The organization must maintain, as a minimum, a balance of these two in the mind of the person, and, more realistically, a balance in the person's favor.

The ideas of J. G. March and H. A. Simon have been translated into equity theory. Pay system decisions can be regarded as focusing on individual equity. Equity theory states that a person compares his or her inputs or contributions with the outcomes from participation (I/O ratio). When this is hard to do directly, the person compares his or her I/O ratio with some other I/O ratio. Anything the person perceives as relevant goes into these input and output considerations.

Inputs and Outputs

Compensation decisions often focus upon the value of the job, both in the marketplace and within the organization. Although these are critical input factors, neither organizations nor individuals would be satisfied by making the employment exchange solely on this basis. To explain, compensation inputs can be classified into three general areas job, performance and personal.² Pay system decisions must incorporate the performance and personal factors into compensation, in order to provide a regular paycheck perceived as equitable to the employee.

Equity as a Cognitive Process

Experiencing equity is a cognitive process. People's perceptions determine whether their pay situation is equitable. Not all individuals within an organization are likely to perceive their pay situation the same, nor is the organization (through its management) likely to see the situation the same as the employees. This makes the creation of equity in the organization a difficult and recurring problem, not one that is determined once and for all.

Influence

Organizations are not powerless in this cognitive process. They can influence the perceptions of the person in a number of ways. First, they can define clearly the inputs required of the person. This allows the person to accept or decline the exchange in the way that a student stays or leaves a course after the professor hands out a syllabus. Second, organizations can affect (through communication and influence) the inputs and outcomes the person focuses on. Third, they can make certain responses to inequity more likely to occur than others. If an organization wishes to retain people, it may make quitting an unattractive way to solve feelings of inequity.

THE DECISION TO PRODUCE

D. Katz claims that organizations seek three things from employees: (1) membership, (2) role behavior and (3) innovative and spontaneous behavior.³ Membership includes remaining with the organization and being present for work regularly. It provides consistency to the organization's labor force and reduces staffing and training costs.

Role behavior consists of doing the job as it is described and/or assigned. This is also needed for consistency and coordination of activities within the organization. To the extent that role behavior is explicitly spelled out and is seen as the basis for the person's input to the organization, this requirement is also covered under the decision to participate. However, not all required role behavior is easily spelled out in jobs, and all jobs have areas of discretion that allow the person freedom in accomplishing tasks.⁴

Innovative and spontaneous behavior addresses the organization's need for the person to adapt what he or she is doing, and how it is being done, to the constantly changing circumstances within the organization. Clearly this requirement is not covered in the decision to participate.

The decision to produce, then, moves the person beyond the minimum required just to maintain membership. It is what most managers call motivating their employees. A useful framework for this decision is provided by expectancy theory.⁵ This theory has three basic parts: (1) valence, (2) the performance-reward connection and (3) the performance-effort connection.

Valence

In expectancy theory valence means the strength of a reward. Does the person want the reward the organization is offering? Since our subject is pay, we can be confident that the answer is yes ... but not the same size yes for all people. People differ in how valuable money is to them compared with other things on and off the job. Content theories help us understand how people's need for money may be very different. The advantage of pay as reward, though, is that it is seen as a path to many different types of need satisfaction.

How much increase or difference in pay does it take to make the person respond? This is the difficult question of the proper size of a meaningful pay increase (SMPI).⁶ The organization must worry not only about whether pay is a motivator but also about whether it is offering enough to make it worthwhile for the person to produce beyond the minimum. As with the value of pay, the appropriate SMPI differs with a number of characteristics of the person, including current pay, age, experience and type of job.⁷

The Performance-Reward Connection

This may be the most important part of the decision to produce, since if the individual does not see the rewards he or she wants as being contingent on the behaviors or outcomes the organization wants, then the organization is not likely to obtain those outcomes. This connection would seem to be obvious, but in fact it is not. Managers find it difficult to always define the results and behaviors they desire. Also, it is difficult to measure and/or appraise whether these outcomes have occurred. In short, the definition of performance is difficult in and of itself.

The individual must understand what is requested and see its connection with the reward. This, like all understanding based on communication, is hard to realize perfectly. Most organizations claim they have a merit system of pay, but most employees do not perceive that merit is the primary basis on which pay adjustments are made. In some cases this perception is valid in that the organization says it uses merit but does not; in other cases the organization is rewarding merit but is not accurately communicating this fact to the employees.

The Performance-Effort Connection

People must feel that their efforts will affect their performance. This connection may seem obvious but it is not. There are many jobs in which variations in performance are impossible or inconsequential. To try to connect performance to reward in such jobs frustrates the incumbent. Also, individual effort is not a useful gauge in the many jobs whose tasks take two or more people to accomplish. Finally, the effort-performance connection highlights the fact that the person must perceive that he or she can adequately perform the task. All of these subjects should be taken into account in designing a pay system (and will be taken into account in some manner, even if by the default copying of some other organization's design and definitions).

RATE RANGES

The major way in which organizations allow for factors other than the job to enter into the determination of an individual's pay is to develop a range of pay for each job or grade of jobs. A rate range is a range of pay determined by the organization to be appropriate for anyone who occupies a particular job. A rate range consists of a minimum pay rate (the beginning hire rate), a midpoint (the market or job rate), and a maximum (the highest rate the organization is willing to pay for the job). The following sections cover single-rate wage systems, the rationale for rate ranges, two types of rate ranges, the manner in which a pay rate is set for individuals within a range, and the dimensions of range rates.

Single-Rate Wage Systems

Before discussing various aspects of rate ranges we should first consider situation in which there is no range. There a single rate is paid for the job and the individual receives just that rate. This pay rate is the market rate and may be paid to either a job or a pay grade. This is illustrated in figure 16-1, option a.

Figure 16-1. Alternative types of rate ranges

If a job rate is used, the wage line provides the job rate. The individual is paid in accordance with the number of points assigned the job by the job evaluation system, by the competitive value discovered in a review, a salary survey (see SalariesReview.com), or by the competitive value provided by a research analysis product such as ERI's Salary Assessor^® software. Where the grade rate prevails, the individual is paid in accordance with the grade level assigned to the job.

This type of system is useful where performance variation and/or other personal characteristics are nonexistent or unimportant. Not all jobs allow for a significant difference in performance. Some assembly-line positions and lower-level service positions have very little discretion, so concern with differences in output or behavior are minimal. Other circumstances that lead to use of single-rate systems are (1) a strict technology that controls the output and (2) jobs for which the training time is short (a couple of hours or so) thereby making a learning curve inoperative. The individual in this type of system is paid for his or her time on the job and for completion of the job as directed.

Single-rate systems are simple to administer: once the pay rate of a person's job is identified, no further decisions need be made as to how much he or she is to be paid. The system can operate successfully if (1) there is little variation in output and (2) it is acceptable to the parties involved. Unions often like single rates because they eliminate judgment-based differences in pay.

Rationales for Rate Ranges

Any time individuals on the same job differ significantly in performance or personal characteristics that are perceived as relevant to either the organization or the person, differentiation by means of rate ranges may be in order. One study reported that the rationale for rate ranges in most large organizations was the need for performance differences, but in some cases industry practice was a major reason.⁸ Thus labor-market demands may also be a significant factor.

Rate ranges can serve other purposes for organizations. Retention is one of the most important of these. Experienced personnel can be made difficult to hire away by paying them above the market rate for the job. This is seen by the person as a significant reward for membership. Where there is a significant quality variation among people on the job, a rate range may represent an attempt by the organization to retain the best employees by paying them on the basis of quality.

Although performance is the reason most often given for rate ranges, this rationale should be scrutinized. Is movement in the range in fact related to performance? One major study challenged this assumption and found that performance was a very poor predictor of pay rate.⁹ There must be more than just an actual connection between pay rate and performance: there must also be a perception by the individual that this connection exists. The need for this perception makes communication very important in pay systems.

A further rationale for rate ranges is employee expectations. Few people are content to make the same wage and be dependent on changes in the total wage structure. for raises In particular, they may see that length of time on the job is an important input and expect a reward for it. But they may also see a number of factors other than performance as relevant to movement within the range. Personal factors having to do with the job are a good example. For instance, many employees who are going to school part time perceive that they should receive something for this. Employees may also perceive that they should receive more pay for a variety of non-work-related factors. Some of these factors, such as the birth of a new baby may be very important to the person but seen as irrelevant by the organization. Others, such as the person's sex, may be illegal to use as a differentiator of pay. It should also be noted that although some employees perceive the need for a rate range, they do not feel that performance should be the basis for this range.¹⁰

Another rationale for rate ranges may be collective bargaining. In contract negotiation the organization may agree to rate ranges or to an expansion of rate ranges as an alternative to a general increase. The union is likely to bargain for ranges in terms of movement within the range by seniority. The connection of performance and reward is not well served in this case.

Finally, the Internet has produced a wide array of sources by which employees can gain access to information regarding the competitive pay for their positions. While in the 1990's employees knew little about the competitive value of their jobs, the plethora of job/career information freely available on the Internet has changed this. If there were ever a reason for organizations to have a formalized method of administering salaries, it would be to forestall the number of hours wasted by management trying to disprove inflated salary averages reported on free Internet sites. More importantly, management must protect the organizations bottom line by guarding against overpaying employees based upon the high rates reported by Internet sites focused on increasing their visitor hits to enhance their IPO values. The future challenge of compensation managers is clear for the next ten years ... employees walking into their offices with salary increase requests based upon free data from the Internet.

Types of Ranges

Having made the argument that rate ranges are useful and expected, we turn to how to develop rate ranges.

Step ranges

A common form of pay range consists of a series of steps, usually a specified distance apart, either in percentages or flat amounts.¹¹ Step ranges may vary considerably in number of steps and the total range the steps cover. Clearly these two in combination will determine the size of each step. The point is that there are three variables present, and the determination of any two will decide the third.

Two basic types of step ranges are common. The first consists of a starting rate and a job rate (assumed to be the market rate), as in the single-rate system. New employees are brought in at the starting rate and then moved up to the job rate in a series of steps. If done properly, this movement corresponds with the learning curve of the job. The market rate is the maximum, since it is assumed that once the person has learned the job, performance differentials are minimal. This kind of system is illustrated in figure 16-1, option b. In this situation there would be a number of steps, most commonly three, between the starting rate and the job rate. This type of step system is most common in semiskilled blue-collar jobs.

The second type of step system places the market rate not at the top of the range but in the center of it. Other places, such as the one-third point or the two-thirds point, are also possible, but the middle is the most common. Employees are hired at the starting rate, as in the other step system, and progress to the midpoint over time is on the basis of learning job proficiency. Thus, a person at the midpoint of the range is assumed to be a satisfactory performer. Movement above the midpoint is assumed to be for performance, or other characteristics beyond the normal or average. This type of system is illustrated in figure 16-1, option c. It is used in a wide variety of office nonexempt jobs and lower-level exempt jobs where performance is important but not critical.

These two types of rate ranges are not mutually exclusive in an organization. Lower-level pay grades may have the type of range that ends at the midpoint, while higher grades have ranges extending beyond. The rationale for such a system is that the discretion in higher-level jobs in the organization allows for performance differences not permitted in lower-level jobs.

Movement within grades will be discussed later, but one point should be made here. A person who is moved from one step to the next usually retains the new step even when the overall wage structure is changed. In this way, adjusting the wage structure to meet labor-market changes automatically becomes a general increase for employees in a step system.

There is a further consequence of this type of system: all people tend to move to the top of the grade over time. Even if movement is by performance, a person can eventually reach the top and stay there regardless of future performance. This phenomenon in turn has a dramatic effect on the total wage bill. In a period of normal growth and turnover the average wage for the job classification will probably match the market rate as people start to climb the ladder while others leave. But in a low-turnover, no-growth situation the organization may soon be paying above market rate even if it sets the midpoint of the range at the market, because all the employees in the job are in the top steps.

Open ranges

In order to focus more clearly on performance and to avoid the problems of step ranges, more and more organizations are using an open-pay range. In this system the organization defines the midpoint, the maximum and the minimum of the range. Any one employee may be paid anywhere within this defined range. The function of the midpoint, as in the second type of step system, is that the average performer would be paid at this rate. Also as in the second step system, new employees would start at the bottom and move to the midpoint as they learned the job and became average performers. Payment above the midpoint can be reserved for above-average performance.

Unlike the second step system, the person's wage is not automatically adjusted when the wage structure is adjusted. At this point, the person's performance is reviewed and adjustment is made in relation to that performance.

Figure 16-1, options d and e, illustrate two types of open pay ranges. Option d has a series of steps up to the midpoint and an open range above the midpoint; option e has an open range from minimum to maximum.

With the increased emphasis on performance in organizations, open-range systems are becoming more popular. They provide more flexibility than a step system in granting pay increases and are more resistant to automatic increases. Finally, open ranges not only may make it easier to reward performance but are also useful when criteria other than performance are to be used.

Dimensions of Ranges

Any wage structure has a number of rate ranges and pay grades. This number can be a matter of the policy of the organization. Small organizations tend to have a small number of pay grades accompanied by wide pay ranges, broad definition of job titles, a great deal of movement within pay grades, little overlap between grades and limited promotion to higher grades. Some organizations have many grades, which tends to create an opposite set of characteristics.

When examining pay ranges we can determine the total wage structure with the help of three characteristics: the breadth of the rate range, the number of pay grades and the overlap (see figure 16-2). If one knows the bottom and top of the wage structure, the slope of the pay line, and any two of the three characteristics just cited, the third will be determined.

Range breadth

The breadth of the rate range is the distance from the top to the bottom of the range ... a to b in figure 16-2. It is the vertical dimension of the range. The breadth may be stated in dollar amounts or in percentages. The latter is more common and will be used here. The breadth of the range should vary with the criteria for movement within the range. Assuming that performance is the criterion, the breadth would represent the opportunity for performance differences in the job. Where ranges are narrow, the assumption is that performance differences are narrow and vice versa. In practice, hourly jobs have ranges of 10 to 20 percent, office jobs 15 to 35 percent, and managerial jobs 25 to 100 percent.

Figure 16-2. Parts of a wage structure

Factors other than potential performance differences may also affect range breadth. Organizations that promote intentionally fast encourage narrow ranges, since people do not stay within one grade very long. A wide range is encouraged if adjustments need to be large to be noticed by employees. Higher grade levels tend to have broader ranges for this reason. Broad ranges can accommodate a wide variety of jobs, as well as variable starting rates among jobs. These broad ranges indicate that the process of determining the market rate is not a precise one.

Establishing range maximums is particularly difficult. There is some logical maximum value for any job, regardless of how well it is performed. Ideally when this point is reached the person is promoted, either to a new job or by upgrading the tasks of the present job. Unfortunately, this may not be possible at the appropriate time. Realistically the person should be told that this is as high as he or she can go in the rate range and that any further salary adjustments will come from general increases.

Some organizations provide steps beyond the maximum of the range. There are usually two rationales for this ... seniority and recruiting. Long-term employees who will never be promoted and whose performance remains good are sometimes granted longevity increases beyond the maximum of the range. These usually take place after five or ten years at the top of the grade. Trouble in recruiting and retaining professional and managerial employees can be ameliorated by starting these people quite a ways up in the rate range; in order to retain them the organization must go beyond the maximum to provide any significant movement in grade.

Number of grades

The total number of pay grades in the wage structure can be a result of other calculations (mainly range breadth and overlap) or a conscious decision that forces the other two variables to adapt. The number of pay grades is reflected in the horizontal dimension of figure 16-2 (a to c). At one extreme, a structure with a single pay grade would have a minimum and maximum embracing the total wage structure and would include all jobs. At the other extreme, each job evaluation point on the horizontal axis would constitute a separate pay grade. In the latter circumstance two jobs would occupy the same pay grade only if they had identical job evaluation points ... a situation that would assume a very accurate job evaluation plan.

A large number of pay grades often coincides with a narrow range, permitting a large number of promotions and multiple classifications in job families in the organization. A small number of pay grades allows for flexibility, in that it assigns people to a wide range of jobs without changing their pay grade. Not surprisingly, number of pay grades is associated with size and number of levels in the organization. It also seems reasonable that organizations with a fluid, organic structure would have a minimum of pay grades whereas more structured and bureaucratic ones would have more.

Clearly there is no optimum number of pay grades for a particular job structure. In practice, the number of pay grades varies from as few as 4 to as many as 60. But 10 to 16 seems to be most common. With few grades there are many jobs in each grade and the increments from one grade to another are quite large. The presence of many grades has the opposite characteristics.

A number of considerations help to determine the appropriate number of grades. One is organization size: the larger the organization, the more pay grades. A second is the comprehensiveness of the job structure. A structure that covers the whole organization will tend to have more pay grades than one that deals only with one job cluster. Third, the type of jobs in a structure makes a difference. Production jobs whose pay policy line is relatively flat will tend to have fewer pay grades than a managerial structure that has a steep slope. The last determinant is the pay-increase and promotion policy of the organization. A large number of pay grades allows for many promotions but entails narrow ranges and a narrow classification of jobs. A small number of pay grades, accompanied by wide ranges was traditionally thought of as unreasonable in that cost control of salary administration would be lost. In the late 1980's, this reasoning was badly shaken.

Overlap

The final pay range determinant is the degree of overlap between any one pay grade and the adjacent grade (c to d in figure 16-2). Overlap allows people in a lower pay grade to be paid the same as or more than those at a higher grade. The rationale for such a phenomenon is that a person at a lower pay grade whose performance is very good is worth more to the organization than a new person at the higher pay grade who is not yet performing effectively. This reasoning seems to work: seldom are there complaints about overlap.¹²

As with the number of grades, overlap can be either a determining variable or the determined variable. Overlap will work well where there are many wide pay grades. A conscious decision to keep overlap to some maximum (such as 50 percent) will reduce one of the other two variables.

Some overlap is desirable, but there are problems. The main one comes about in promotions. A person high up in a rate range who is promoted may start in the new rate range higher than the job rate of the new grade. But not to give the promoted person a pay raise is hardly to have promoted him or her. Organizations generally set some policy that any promotion be accompanied by some specified minimum increase, such as one step in the new rate range or a specified percentage. The designers of career paths in some organizations reduce this problem by placing the next job in the sequence more than one pay grade above the present one.

MOVING EMPLOYEES THROUGH RATE RANGES

Rate ranges make possible different pay rates for individuals in the same job and/or grade level. Operating such ranges calls for some method that differentiates between employees. Such a method must provide a decision framework for positioning each person within the range.

Open rate ranges facilitate a pay-for-performance approach to individual pay determination. The present section will focus on movement within grades in a step system. It should be noted, though, that an open range system can also accommodate the methods of progression discussed.

Step Rates

Most government and some private organizations divide their entire rate range into a number of steps. (One should always be aware of the influence of government systems in compensation. For example, with half the paychecks in Canada being written by governmental agencies, one cannot overlook these step approaches.) This number is a function of the breadth of the rate range, the time required to achieve proficiency in the job, whether there are to be steps beyond the market rate, and a determination of the size of a meaningful pay increase. At least three steps are almost always used. A general step system is illustrated in option c in Figure 16-1.

Step rates facilitate the granting of pay increases by determining the amount that any increase will take. Of course, it may be possible to move a person two steps, but this is always done in predetermined amounts. Such increases can be considered a disadvantage as well as an advantage. Many organizations prefer to be able to grant a wide variety of increases to better relate pay to their pay-increase policy.

Methods of Progression

All methods of progression specify how a person moves from the bottom of the range to the top of the range. The major difference among them is the criteria for movement. The major methods are automatic progression, a combination of merit and automatic progression and merit progression. An organization does not have to restrict itself to only one method; it may use different methods for different jobs or even different methods for a single job at different parts of the rate range.

Automatic progression

This type of progression (sometimes referred to as scheduled increases) consists of wage increases based automatically on length of service. In some situations, such as basic industries, there are a small number of increases often in rapid succession (every three months) to the maximum rate for the job. These are jobs in which proficiency can be gained in a short time. On the other hand, some governmental organizations may have many steps (five or more) and grant increases once a year. In these situations longevity on the job leads to higher proficiency, and the organization wishes to reward continuity of employment.

A major source of variation in automatic plans is the nature of the maximum rate ... whether it is the market rate or an above-market rate. Organizations that move only to the market rate tend to have rate ranges with a small number of steps and a short time frame for progression. They are interested not so much in rewarding longevity as in encouraging learning the job. Organizations that move beyond the market rate are specifically rewarding longevity on the job; they tend to spread out the progression to the top of the grade over a long period.

Automatic progression does not have to be totally automatic. A fully automatic progression plan is actually a variation of the single-rate or flat-rate system. If all employees can expect to reach the maximum of the rate range after a given period on the job, the assumption is that the maximum is the real rate for the job.

Variation can be introduced in two ways. First the time period may vary from step to step. For instance, some systems move people rapidly to the midpoint and then much more slowly; the extended steps beyond the midpoint are clearly tied to longevity. The second variation introduces a little merit into the system by either denying movement to the next step for poor performance, giving good performers a double-step jump, or shortening the time period between step increases.

Merit considerations in automatic plans should not be overemphasized. The system is designed to be automatic, and variations are seen as exceptions, not the rule. In most systems that allow either movement ahead or denial of increases, these alternatives are rarely used: the problems they pose for administration of the workplace are not perceived by supervisors to be worth the advantages they offer. Unions commonly accept rate ranges but insist on automatic progression and encourage maximum rates that are above the market rate.¹³

Organizations make much more use of automatic progression than might be assumed. Studies indicate that in most areas of the country and in most industries, automatic progression is the norm and not the exception.¹⁴ But this may be changing. The emphasis on productivity in the United States is translating itself into a search for ways to make employees more productive. Focusing on performance instead of longevity is part of this trend.¹⁵

Combinations of automatic and merit progression

We have just seen that some introduction of merit is possible even in automatic progressions that focus on longevity. It is possible also to design progressions that try to balance merit and longevity. These progressings usually let employees focus on different criteria at different places in the pay range.

Probably the usual combination is automatic progression to the midpoint ... the market rate ... and progression beyond the midpoint on the basis of merit. The rationale for this method of progression is that all employees can be expected to reach average proficiency within a certain time on the job; this period matches the automatic movement to the midpoint. However, not all employees exceed average performance on the job, and movement from the midpoint on should be based on performance that is above average. If the organization does a good job of matching time taken to reach the midpoint with time taken to reach proficiency in the job, then labor costs are equalized; if these are out of balance, then labor costs are higher or lower than is optimum.

The rate range can take one of two forms in this case. The first looks like option c in figure 16-1, with a series of steps from bottom to top and the market rate as the middle step. The distinguishing feature of this form is how movement is determined after the midpoint has been reached. In the second form there is a series of steps up to the midpoint but an open range from that point on with movement of any degree possible and decided by merit. This form is illustrated in figure 16-1, option d.

Another method is to combine longevity and merit at all points in the range. Under this arrangement all employees receive an automatic adjustment, but those with above-average performance receive more, such as a two-step jump. It is also possible to hold back those who are not performing well. The latter action is rare but can be effective in probationary situations.

The areas of prevalence of these different methods are hard to determine. It appears that automatic methods are most typical of factory jobs and combination methods most typical in office situations.¹⁶

Automatic-progression methods are simple to administer since they are purely mechanical adjustments made by time in grade. Introducing merit complicates the pay decision by adding a judgment about how well the person is doing the job. Then a way must be developed to incorporate this judgment into a wage increase. This makes administration more complex and, if the judgments are perceived as arbitrary, raises concerns about the equity of the system. The advantage is that a connection is made between performance and reward, and this may be worth the trouble.

Merit progression

A pure merit progression employs an open rate range with only the minimum, maximum, and midpoint defined, as in option e in figure 16-1. Movement within the range is based strictly on performance, and there are no adjustments for general increases. This pay-for-performance system requires an integration of performance appraisal with pay determination. What we cover here is movement between steps of a pay grade, as in figure 16-1, option c, on the basis of merit. The rationale for merit progressions is that the movement to proficiency is actually an improvement in performance and should be treated as such; people differ in their rate of improvement to proficiency, and this should be taken into account; it is performance that the organization wants and should pay for.

In practice, a merit progression is usually a combination of merit and longevity. The initial decision to move a person from say, step 3 to step 4 is based on performance, but from that time on the person retains step 4 when adjustments to the wage structure are made, thereby remaining at the same relative position in the range. If step 4 is one step above the midpoint, the assumption is that this person is always above average in performance, but actually the person needs only to maintain a level of performance that will not result in termination. Further, unless the performance-appraisal system is tied consistently to the merit pay adjustments, either the system tends to be seen as arbitrary or supervisors tend to grant the same increase to all employees and thus destroy the performance-reward connection.

In a bad economy. In all step systems most employees eventually get to the top of the pay range. In a merit progression method the good performer should get there faster than the average or poor performer. This phenomenon of getting to the top of the range tends to be hidden when the organization is growing and times are good. But when growth stops, then promotions slow up, employees stay on their current job, movement to the top of the range is accelerated, and the organization finds that all employees are at the top of the range. Labor costs thus become very high at exactly the time the organization can least afford them. From the employee's perspective, the only pay increases received are those that occur through wage structure adjustments, and these are likely to decrease in these circumstances. This lack of wage increases makes the potential for feelings of inequity increase considerably.

Actual practice. Most organizations and their management claim that they use a merit progression system. But studies show that up to 80 percent of employees are at the top of their rate range.¹⁷ The problem is compounded when management mixes up general pay increases with merit pay. Granting all employees the same pay increase and announcing it as a merit increase destroys the concept of merit. Lower-level supervisors, in particular, find it uncomfortable to deal with merit pay, which requires him or her to make competitive distinctions between employees. For these supervisors it is often cooperation and not competition that is important. Because of the inflation of the late 1970s, annual pay increases are almost institutionalized in organizations today. This makes merit progression something of a misnomer, especially where organizations simply call all pay adjustments merit increases.

Union acceptance. Unions generally do not support merit-progression systems (as was the case in the Year 2000 when the NEA voted against merit pay for teachers). They question the objectivity of performance criteria and see the supervisor rewarding things other than getting the job done. Further, they are interested in getting their members to the top of the rate range as fast as possible. Unions can complicate the merit system through grievances. Some unions will automatically file a grievance if all members do not receive an adjustment or if they do not receive the maximum adjustment. This not only increases administrative costs but considerably burdens the performance-appraisal system.¹⁸

Nonunionized people in the organization look at what happens to union members, and management knows this. Therefore, management tends to give those not in the union what union members received and maybe a little more. Organizations do try to deal with their nonunion sectors more on a merit basis than on a longevity basis, and to the degree that above-average employees receive more, the merit principle does work.¹⁹

Rate Ranges and Recruitment

To this point we have assumed that the organization has been hiring people who are just qualified and moving them up in the range as they learn the job. But what if it hires a person who can do the job from the beginning? Clearly this person should be hired at the market rate (the midpoint). In actuality, then, people are likely to be brought into the organization anywhere up to the midpoint of the range, based upon their qualifications. Thus a system that ends at the market rate has a flat rate for hiring fully qualified employees.

The labor market may complicate the rate range when there is a shortage of applicants. When it is hard to recruit, one way organizations adjust is to raise the starting pay to wherever in the range it must go in order to obtain people. This may result in hiring rates at the top of the rate range or above. This extreme situation makes any upward movement within the grade difficult or impossible for the person. A person who is then expected to stay in the grade for three or more years before promotion can only look forward to general increases.

Correcting Out-of-Line Rates

The rate range defines the minimum and maximum that a person may be paid for a given job. For a number of reasons an individual's pay may be more or less than the prescribed range. The organization needs policies for dealing with these out-of-line rates.²⁰

Terms of the trade

Many a new compensation analyst has been tested by management with the question, "Do you know what a green circle is?" This question separates the college student from the practitioner. It refers to the case in which a person is paid less than the minimum of a grade. This occurs, for example, when a person is promoted into a position in a higher pay grade, but not given a pay increase (because all increases may have been frozen by top corporate management).

Underpaid employees. As stated, a person paid below the minimum of the rate range for his or her job is said to carry a green-circle rate. This situation usually occurs when the wage structure is changed upward and the individual was at the bottom of the rate range. Little question exists regarding the appropriate response: the underpaid employee should have his or her pay raised to the minimum of the range, immediately if possible or in a couple of steps. If the person is performing adequately, the difference between his or her rate and the minimum of the range should be made up by the employer.

Of course it is possible, for a number of reasons, that the employee is not worth the minimum of the range. Even so, there are usually adjustments that can be made. For instance, if the labor market is very tight and marginal workers must be hired and retained, a lower classification involving job redesign to accommodate the person's skills would be in order. This same reasoning could apply to older and handicapped employees who cannot fully carry out their jobs. On the other hand, redesign may be unnecessary where there is already a lower-level job to which the person can be assigned. Or a trainee rate may be appropriate if the employee is still learning the job.

Usually there will be a few underpaid employees, and a policy of bringing their rates into line immediately protects the integrity of the pay system. But if many employees are underpaid, a careful review is required: not only may the costs of adjustments be high but also equity between the newly raised employees and other employees on the job may require a phasing in of increases. Also, all underpay situations should be examined for racial or gender discrimination.

Overpaid employees. A person paid above the maximum of the range for his or her job is said to receive a red-circle rate. Other names for this situation are ringed, flagged, or personal rates, red allowances, overrates, and personal out-of-line differentials. The variety of terminology suggests that this is a common problem in organizations, that it stems from a number of sources, and that it is more difficult to deal with than the problem of underpaid employees.

Solutions to overpay vary from doing nothing to reducing the pay to the top of the range. Both approaches can cause equity problems, both in others and in the person affected.²¹ The most common solutions are the following:

Freeze the pay until general increases catch up with the current pay.
Transfer or promote the person to a job in an appropriate pay grade.
Freeze the pay for a limited period, such as six months. Then attempt either of the previous strategies. If this is unsuccessful, reduce the pay at the end of the period.
Red-circle the job and not the person.
Eliminate the differential after a period such as a year or gradually over time.

A number of less common arrangements also exist. One, the adder, is a payment to the employee in quarterly installments of the difference between his or her rate and the maximum of the range. The employee is given 100 percent of the differential the first year, 75 percent the next year, and so on until there is no differential. The advantage of the adder is that the top rate for the job is made clear and both the person and the organization are aware of the exceptional and temporary character of the differential.

Another possible solution is a lump sum payment. For example, the employee may be paid the difference times 2080 hours and have his or her pay rate brought immediately into line. Any solution to overpay involves questions of equity. Overpayment is usually not the fault of employees, and any reduction in pay will be seen as unfair by them. On the other hand, there is also the perception of equity by other employees, so some action is always called for. All the actions just described try to balance these two perceptions in arriving at an equitable solution. Failure to correct red-circle rates means that range maximums are meaningless; people may be paid more than their job and performance are worth to the organization; and organizational resources are being diverted into paying these rates rather than rewarding others' good performance.

ADMINISTRATION OF INDIVIDUAL PAY DETERMINATION

The pay rate of an individual reflects a number of considerations, of which performance is only one. Other variables found to influence pay are the person's performance appraisal, pay history, present position in the range, and experience; the time since the last pay increase; the amount of that increase; pay relationship within the work area and other parts of the organization; labor-market conditions; the financial condition of the company; and of course the previous decisions regarding wage level and structure. The interaction of these forces determines whether a person receives an increase, and if so the amount of that increase.

Linking Pay to Performance

Judging from this list of variables, it is clear that an organization that claims it uses a merit system is likely to be exaggerating somewhat. Although almost all companies would claim that performance is the primary variable in their determination of individual pay, not many have a system that directly links pay to performance. One study of a large organization showed that "the careers that people make for themselves in large-scale organizations attenuate the role of pure performance in pay."²² However, it is becoming increasingly important that organizations do connect performance with pay.

Linking pay and performance is difficult at certain times. During the late 1970s and 1980s, when inflation was running rampant, an organization had to offer very large increases to be seen as rewarding merit and not just keeping its employees up with inflation. Even if an organization is committed to pay for performance, its employees are the ones who have to perceive the relationship.

Compression

One particularly sticky problem is that of wage compression. This occurs when new people are brought into a pay grade at the same, a higher, or even a somewhat lower rate than people currently in it. This is most obvious in the case of new hires who are brought in at pay rates almost the same as those of employees who have been there a year. Rates for new hires are determined by the external labor market. Unless one pays that amount, the new employee will not accept the job offer. Current employees have their wages set by the internal labor market, which is an administrative decision. As we have noted, the particular pay rate for an individual is determined by a number of factors, of which the market is just one. The result is that new hires make too much in relation to those already working. This was especially true for new college hires in 1999 and 2000, when they were paid historically high rates.

Compression is also likely to occur with first-line supervisors of nonexempt employees who are paid overtime; with sales managers, whose sales staff can make more selling on commission than the manager; and with middle management, who are squeezed between top management and the increases given to lower-level employees. The last is very evident in government jurisdictions. All three examples differ somewhat from the case of new hires, in that they involve a hierarchy, and the perception of unfairness is related to an inadequate distance between organizational levels.

Solutions to compression depend upon what type it is and how serious it appears to management. One obvious solution is to ignore it. This is possible if people are moving rapidly and the problem is mostly one of timing. The person feeling the inequity can be told that it will disappear shortly. A second possible solution is to adjust the internal structure more completely to the external realities. This may be an expensive alternative but is necessary if the organization is experiencing turnover and employee discontent. In the set of three examples just cited, the most likely solution would be a policy statement that a particular distance ... say 15 percent ... be maintained between levels. Rather than change the rate range for the supervisory jobs, however, organizations often pay this differential as a bonus based upon the wages of the subordinates.²³

Integration of The Wage Structure and Individual Pay Determination

Changing the wage structure results in more money being spent on wages by the organization. This usually translates into pay adjustments for employees. But there needs to be some way for these two disparate events to come together. The vehicle for this is the budgeting process. On the wage structure side, what is required is an indication of how much of a change is to be made in the structure and how much money that will take. That money in turn becomes the organizational input data for individual pay determination. The question now is how to allocate the money provided by the wage structure adjustment.

Budget Allocation

The design decisions discussed provide a framework for deciding how the budgeted money is to be spent. Where a single-rate system is used, the pay adjustment is a general increase. The basic question then becomes one of timing. When should the general increase be granted? If an increase is given at the first of the budget period, then the percentage of the wage structure movement is the same as the general increase. But if the general increase is held off, the percentage can be larger and still fall within the budget. Remember, however, that this larger percentage is built into the next year's budget.

In organizations using an automatic-increase system, a change in the wage structure changes all steps in all grades. But there is an additional cost ... the movement of people from one grade to the next. So the total increase in the wage bill will be more than the increase in the wage structure. The exact difference depends on the timing of the step increases and on estimates of turnover. If all step increases are granted at one time then the impact is even, but if they are staggered by some criterion such as anniversary date then the organization needs to prorate the increases depending on when in the year they are granted. For instance, a 5 percent step increase given a person on July 1 is a 2.5 percent change for the year. But again, these adjustments increase the total wage bill beyond the cost of the wage structure adjustment. On the other hand, turnover tends to reduce the total wage bill since replacements are ordinarily hired at steps lower than those occupied by the people who left.

Merit-progression systems add another layer of complexity to the problem. In automatic systems the increases can be planned because the variables are known. Performance ... the merit system variable ... is less predictable. Organizations deal with this by developing a budget for a sector that shows how much it can spend to increase the wage bill in that sector. The same kind of considerations now go into the planning of each of the other sectors. The major complication is that the increase amounts will vary considerably among people. Last, a decision needs to be made as to whether all increase funds will be allocated on the basis of merit or whether there will be a general increase and a merit pool.

Decision Makers

In a merit-progression program the supervisor becomes a key person in the pay decision, for it is he or she who decides upon the performance of the individual. Thus the pool of money available for wage adjustments is ordinarily controlled by the supervisor, to be dispensed within the guidelines provided by the compensation specialist. This supervisor must really believe in the value of a merit program for it to work. There are considerable pressures upon him or her not to allocate this money on the basis of merit. In brief, validating this decision in the minds of employees is difficult and may lead to feelings of inequity. In addition, supervisors are often much more concerned with cooperation than they are with outstanding performance.

An advantage of simpler individual pay determination is that the decision making can be more centralized and does not involve as much judgment. In this way consistency of treatment is maintained, which leads to feelings of equity. In an automatic-progression system the compensation specialist can make all the appropriate decisions and implement the program without having to coordinate their efforts with line management at all. This is convenient, but the program then becomes that of the compensation department. Line management feels divorced from the compensation program, perceiving that they have little ability to motivate their employees.

Even if line management has a say in this determination of the exact amount people are to be paid, there is a series of other decisions framing this decision and limiting its impact. These decisions start with the wage-level determination, the form and shape of the wage structure, and the design of individual pay determination.

SKILL-BASED PLANS

A nontraditional method of compensation that is gaining popularity is that of paying for the job knowledge of the employee rather than the job.²⁴ The focus of these plans is not the specific job the person is currently performing but the range of jobs the person can perform. This form of compensation has been made popular by some of the experiments in quality of work life, such as that undertaken by the Gaines pet food plant in Topeka, Kansas.²⁵ In this type of system, employees are hired at a base rate that is determined by the labor market. Movement in pay then occurs as the employee learns new tasks used in creating the product. The top rate is for those employees who can do all the jobs in the work unit.

There are essentially two types of knowledge-pay systems. The first is a multi-skill plan. Here pay is linked to the number of different skills the employee learns and can perform. The second is an increased-knowledge plan, wherein the employee's pay is related to the increased knowledge required by a particular job category. The latter is a more appropriate plan where the jobs have a progression of difficulty and the employee can learn them over time. Top rates in this type of plan are for those employees who can act as troubleshooters and trainers of others. The increased-knowledge program is similar to the type of compensation system often developed for professionals: skill-based pay plans.

Administrative Issues

A number of issues are important in establishing a pay-for-knowledge compensation plan. Let's briefly consider some of them.

Progression or promotion

When a person learns a new or improved skill, is this to result in a promotion or an in-grade increase? If the latter, then there would have to be very few grade levels and very wide rate ranges to accommodate the number of skills to be learned. If the former, then there would have to be a large number of grade levels since the person would move up a grade with each new skill. Each grade level could be a single rate.

Performance

In a pay-for-knowledge system performance can be considered the same as learning. But what about those who learn better than others? If the progression is by grade and not by promotion, then a range can be included in each grade that can be used for variation in performance, which is defined as doing the task better. Furthermore, a person's skills may deteriorate over time if he or she does not use them. Some organizations provide for retesting or refresher sessions to keep skill levels up.

Whom and what

Deciding employees and jobs to include in the system is always a problem in pay-for-knowledge systems. The ideal situation for such a plan is a clearly defined production unit that produces a discrete product through tasks that all employees can learn. But even here there are positions around the edge, including that of the supervisor, on which inclusion decisions need to be made.²⁶ Even if the whole production unit is included, there may be some tasks that all employees are not able to learn. The tasks that constitute a pay increase must also be delineated.

Maintaining stability

Pay-for-knowledge plans require job rotation. This can unsettle the production process if there are more employees learning new roles than employees well trained in their roles. Also, bottlenecks in rotation can prevent employees from moving up when they desire. In these situation, special rates can be used to hold the person until an opening occurs.

Maxing out

As in all pay systems, there is the problem of the person who reaches the top of the range, or in this case who has learned all the jobs. The only increases available to this person are those granted across the board. There is no real answer to this problem except for those employees who move up from their current roles.

Advantages and disadvantages

Pay-for-knowledge plans can have significant benefits, but they are not suited for all situations. Here are some of the advantages and disadvantages.

Flexibility. It is clear that organizations can obtain increased employee flexibility from this type of plan. The employee looks forward to learning and changing. Changes in demand can be adapted to more readily since employees can be moved to whatever task needs to be done at the moment. Staffing can be leaner since employees can fill in for one another. It is further argued that this flexibility leads to a higher quality of output since the employees know all of the tasks and can therefore focus on the overall product rather than on the specialized task.

Employee satisfaction and commitment. Lawler's studies seem to indicate that employees in a pay-for-knowledge setting have higher levels of job satisfaction, particularly satisfaction with their pay.²⁷ This would seem to reinforce the point that employees emphasize their personal contributions more than the organization does. This higher satisfaction is claimed to lead to lower absenteeism and turnover.

Costs. The disadvantages are basically that the system is more expensive to operate. First, hourly labor costs are higher since the person is being paid for skills not currently being employed. Second, there are training costs, both in the design of the training and in the fact that trainees are performing the tasks. Finally, there are the administrative costs of keeping track of where these employees are and what pay rate they should have, given the training they have received.

Organizational integration. Pay for knowledge has often been associated with a broader program of quality of work life in the organization. These programs are usually considered experiments and as such are separated from the rest of the organization. The success of this type of plan, as with all new ideas, depends in large part on how top management views it. If it is supported, the probabilities of success are increased. But these types of plans are often perceived as threatening by top-level staff, and this can lead to the demise of the program. A major consideration is the equity question with other employee groups, the supervisors, and the labor market. Higher wages of pay-for-knowledge employees may not accord with the equal pay for equal work doctrine. They may also create compression with supervision, and cause companies to pay above-market rates for labor.

SUMMARY

Organizations wish to pay for more than just the job that the employee does. Employees contribute both in terms of membership (staying on the job) and being productive while on the job. Both of these sets of contributions need to be rewarded by the organization. Wage structures deal with rewarding these sets of contributions by establishing rate ranges for jobs. This allows for variable pay rates for employees on the same job and/or in the same pay grade.

The breadth of the rate range (distance from top to bottom) is a matter of judgment for the designer of the wage structure. Further, the decision is interrelated with other factors in the wage structure, namely the distance from top to bottom of the entire wage structure, the number of pay grades, and the amount of overlap between grades.

The design of rate ranges may vary from a structured set of steps a given percentage apart to an open range in which only the minimum, midpoint and maximum are defined. Picking the type of range depends largely on the factors that the organization wishes to reward. Step systems do a good job of rewarding membership and seniority. Open ranges allow the organization to more clearly recognize variable performance. There is an aspect of rewarding both in either case, so the choice is one of emphasis and not of kind.

In administering the movement of employees within rate ranges, compensation specialists face a number of problems. Recruitment in the labor market may require the organization to hire new employees at advanced positions on the range. This in turn can lead to compression, as current employees are paid less than new employees. Keeping employees within the rate range is a constant problem. One of the most pervasive problems is keeping the focus of increases on performance; supervisors and employees alike are more comfortable with seniority increases. Last, while other aspects of compensation administration are often centralized in the hands of compensation staff, the determination of pay increases within grade must involve all supervisors in the organization.

We have also examined a radically different type of pay system, that of skill-based pay. In this system employees are paid for the range of skills that they bring to the job that are useful in performing the job. As employees learn more skills they are paid more. These types of plans can provide the organization with a well-trained work force, flexible as to work assignments and interested in the work. It can also be more costly, require too many people in training, and be difficult to integrate with the traditional wage structure of the organization.

¹	J. G. March and H. A. Simon, Organizations (New York: John Wiley, 1963).
²	D. W. Belcher and T. J. Atchison, "Compensation for Work," in Handbook of Work, Organization, and Society, ed. R. Dubin (Chicago: Rand McNally, 1976).
³	D. Katz, "The Motivational Basis of Organizational Behavior," Behavioral Science, April 1964, pp. 131-33.
⁴	E. Jaques, Equitable Payment (New York: John Wiley, 1961).
⁵	See also V. Vroom, Work and Motivation (New York: John Wiley, 1964).
⁶	L. A. Krefting and T. A. Mahoney, "Determining the Size of a Meaningful Pay Increase," Industrial Relations, 1977, pp. 83-93.
⁷	F. Krzystofiak, F. Newman, and L. Krefting, "Pay Meaning, Satisfaction, and Size of a Meaningful Pay Increase," Psychological Reports, 1982b, pp. 660-62.
⁸	U.S. Department of Labor, Salary Structure Characteristics in Large Firm, Bulletin no. 1417 (1963).
⁹	M. Haire, E. E. Ghiselli, and M. E. Gordon, A Psychological Study of Pay, Journal of Applied Psychology Monograph no. 636 (1967).
¹⁰	L. D. Dyer, D. P. Schwab, and J. A. Fossum, "Impacts of Pay on Employee Behaviors and Attitudes: An Update," Personnel Administrator, January 1978.
¹¹	Much of this discussion of types of rate ranges uses information from R. J. Greene, "Which Pay Delivery System is Best for Your Organization?" Personnel, May-June 1981, pp. 51-57.
¹²	For a discussion of the proper overlap see B. R. Ellig, "Pay Inequities: How Many Exist in Your Organization," Compensation Review, third quarter 1980.
¹³	S. H. Slichter, J. J. Healy, and E. R. Livernash, The Impact of Collective Bargaining on Management (Washington, D.C.: Brookings Institution, 1960).
¹⁴	U.S. Department of Labor, Bulletin no. 1625-90.
¹⁵	E. E. Lawler, Pay and Organizational Development (Reading, Mass.: Addison-Wesley, 1981).
¹⁶	U.S. Department of Labor, Bulletin no. 1417.
¹⁷	B. K. Scanlon, "Is Money Still the Motivator?" Personnel Administrator, July-August 1970, pp. 8-12.
¹⁸	Slichter, Healy, and Livernash, Impact, p. 604.
¹⁹	Ibid.
²⁰	See Ellig, "Pay Inequities."
²¹	G. W. Torrence, "Correcting Out-of-Line Rates of Pay," Management Record, September 1960, pp. 10-13.
²²	T. H. Patten, "Merit Increases and the Facts of Organizational Life," Management of Personnel Quarterly, Summer 1968, pp. 33-38.
^23z	For some problem statements and solutions see R. Kemp, "Salary Compression Workshop," in Regional Conference Proceedings, 1978 (Scottsdale, Ariz.: American Compensation Association, 1978).
²⁴	G.D. Jenkins and N. Gupta, "The Payoffs of Paying for Knowledge," in Labor-Management Cooperation Brief, U.S. Department of Labor, Bureau of Labor-Management Relations and Cooperative Programs, 1985.
²⁵	R. E. Walton, "How to Counter Alienation in the Plant," Harvard Business Review, November-December 1972, pp. 70-81.
²⁶	E. E. Lawler and G. E. Ledford, Skill Based Pay, Working Paper no. 84-18, Center for Effective Organizations, University of Southern California (Los Angeles, 1984).
²⁷	Lawler, Pay and Organizational Development.

Designing Compensation Structure

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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.

Compensation Structure Decision

2005-10-28T01:43:00.000-07:00

Objective : To understand elements that determine overall compensation structure . This is crtical as often organisation has different departments & sales compensations has to be aligned with overall compensation structure

"How many different jobs do we have?"

"How can they decide to pay that job over there more than our job?"

"What criteria should we use to decide what different jobs are worth to us?"

"How do we decide what to pay this job when there is no market rate?"

"How many and what kinds of pay grades should we have, considering the kind of organization this is?"

"I have a lot more responsibility than she does. Why aren't I making as much as she is?"

The wage structure decision has to do with determining the wage rates for jobs. It combines the external marketplace considered in the pay level decision with the relative value that different jobs have to the organization. The organizational value of a job is determined through job evaluation, which in turn relies on job analysis to provide the information required for the evaluation. The organizational and market values of jobs are integrated through the development of a wage structure, which defines job levels or grades, and assigns wage rates to those grades by reference to market rates.

The concepts of the wage structure decision are covered in this chapter. Chapter 14 covers job analysis and job evaluation. Chapter 15 describes how all the information and decisions collected thus far are combined into a wage structure that sets the wage rate or range for each organizational job.

Wage Structure Concepts

In most organizations wage and salary rates are still assigned to jobs. The relationships between the pay for jobs involve pay structure decisions. Although organizations often make pay level decisions (how much to pay) and pay structure decisions (pay relationship) at the same time, these decisions and the process by which they are reached require separate treatment.

Actually, wage structures represent wage relationships of all kinds. Analysis of wage differentials of any kind (geographic, industry, community, or occupation) deals with wage structure issues. But because our primary focus is on pay decisions in organizations, our concern is with pay differences between jobs. In fact, determining the pay structure of an organization may be usefully described as putting dollar signs on jobs. Decisions on wage relationships among jobs within an organization are largely within the control of its decision makers. Wage level decisions are usually influenced more by forces external to the organization than are wage structure decisions.

Some organizations pay for skills possessed by employees rather than for the jobs employees hold. The rationale is usually serious and continual skill shortages experienced by the organization. But most organizations measure employee contributions first in terms of the jobs employees hold. One interesting analysis of organizational compensation decisions is that pay structure decisions are intended to achieve retention of employees through prevention of dissatisfaction and encouragement of employee cooperation.¹ Pay level decisions, in this analysis, are intended to attract employees. To this analysis could be added the statement that wage structure decisions are intended to encourage employees to make a career with the organization and to accept training in preparation for higher-level jobs.

DETERMINANTS OF THE WAGE STRUCTURE

Chapter 3 (economic theories of wages) contained a number of explanations of occupational differentials. Chapter 4 (behavioral theories of compensation) used a number of suggestions from psychologists and sociologists to explain occupational pay differences. This section of the chapter focuses on these factors in wage structure decisions.

Economic Determinants

Adam Smith explains occupational wage differentials in terms of (1) hardship, (2) difficulty of learning the job, (3) stability of employment, (4) responsibility of the job, and (5) chance for success or failure in the work. This is a theory of wage structure.² But his standards of worth are equally useful in explaining the complexity of wage structure decisions. The market value of an item is the price it brings in a market where demand and supply are equal. Use value is the value an individual buyer or seller anticipates through use of the item. Use value obviously varies among individuals and over time.

Job worth
These two concepts of worth and the concept of internal labor markets combine to explain important differences among employers in wage structure decisions. Organizations with relatively open internal labor markets (organizations in which most jobs are filled from outside) make much use of market value. They also make much use of wage and salary surveys in wage structure decisions.

Conversely, organizations with relatively closed internal labor markets (most jobs are filled from inside) emphasize use value. Their analysis of job worth relies more heavily on perceptions of organization members of the relative value of jobs.

Training
Some other wage structure determinants derived from economic analysis may be noted. Training requirements of jobs in terms of length, difficulty, and whether the training is provided by society, employers, or individuals constitute a primary factor in human-capital analysis and thus job worth. The interaction of ability requirements with training requirements can yield different job values depending on the scarcity of the ability required and the number of people who try to make it in the occupation and fail.

Employee tastes
Employee tastes and preferences are another economic factor. People differ in the occupations they like and dislike. In like manner, occupations have non-monetary advantages and disadvantages of many kinds. Worker expectations of future earnings strongly influence occupational choice and thus labor supplies. Unfortunately, labor-market information is far from perfect, and responses to labor-market shortages are likely to be more prompt than responses to oversupplies.

Unions
Industrial as opposed to craft unionism has also been shown by economic analysis to affect wage structures. Industrial unions, with their heavy proportions of semiskilled members, are more likely to favor absolute increases. Although large organizations where employees are represented by industrial unions may have a highly differentiated wage structure, they pay less attention to percentage differentials than they would in the presence of craft unions.

Discrimination
Another economic determinant is discrimination. Although wage differentials based on sex or race are unlawful, they still exist. The extent to which such differences are based on productivity differences or represent discrimination is very much a wage structure issue.

Industrial Relations Explanations

Industrial relations scholars' explanations of wage structures tend to be different from those of labor economists. For instance, an employer concerned with the status of his or her organization as a dependable supplier, a considerate employer, or a wage leader is more likely to base wage structure decisions on organization criteria than on economic forces. A short list of non-economic considerations on wage structures emphasized by industrial relations scholars would include organization goals, the health of employee-management relations, employee attitudes, employee comparisons, communication of pay decisions, and seniority policy. Also emphasized by these analysts is the force of custom.

One powerful analysis of considerations in wage structure decisions argues that wage structures keyed solely to the labor market are likely to be few, to result from very tight labor markets, and to be characteristic of organizations well insulated from product-market competition, unions, and technological change. One author classified organizations as having wage structures that are primarily oriented toward unions, markets, internally, or union-and-product. Union-oriented organizations basically have craft unions, and union-and-product oriented organizations basically have industrial unions. This classification suggests that in only one of the four market-oriented organizations, does the labor market drive the wage structure.³

Social Determinants

In chapter 3, we saw that the just-price theory advocated setting wages in accordance with the pre-established status distribution: wages were to be systematically regulated to keep each class in its customary place in society. The theory emphasized equity, the tying of wages to status, and the preservation of customary relationships.

Although we have described the just-price theory as historical, an eminent contemporary labor economist, E. H. Phelps-Brown, has made a similar argument.⁴ Brown argues further that one determinant of the fair rate is the requirements of the work. He interprets job evaluation as a painstaking application of the way in which people continually think and argue about relative pay.

Another sociological view of wage structure is that different jobs have different statuses to which the structure of pay should conform. Generally a group is ranked according to the difficulty of attaining proficiency in the job. By this reasoning the criterion of a fair wage is that it shall enable the recipient to keep up a position in the class to which the job assigns him or her.

Since both the assessments of the requirements of a job and the esteem due incumbents can only be subjective, in practice they lean much on custom. When rates of pay remain unchanged for a century and differentials between two jobs remain proportionately constant over even longer periods, the force of custom rather than supply and demand seems a better explanation.

In fact, to those involved in pay decisions, social forces may be more apparent than economic ones. The arguments used are mainly ethical. A wage is claimed because it is fair and just. A differential is justified because it is right and proper.

But whereas social forces generally operate to maintain what is customary and accepted, market forces have been operating to narrow differentials. Market forces usually operate through the shifting of labor supplies. One reason that social forces seem to predominate is the slow reaction of supply to price. Supply shortages are more effective in raising pay than supply surpluses are in lowering it.

Organizational Determinants

Organizations develop jobs to get their work done. Labor services acquire specific economic meaning only in relation to the particular jobs in which they are performed. In our economic system, the organization typically designs jobs and selects employees to fill them. The jobs the organization designs are the source of the contributions provided by employees and a primary determinant of their rewards. Through these jobs and pay decisions about them, the organization is structuring the market for labor services.⁵

Other organizations differing in technology, management competence, competitive economics, and collective bargaining are also designing jobs. As a consequence, it is quite unlikely that the jobs designed by one organization will be identical to those of other organizations. Furthermore, the decisions that go into job design are not made once and for all, but are subject to revision, as market conditions, technology, and institutional influences change.

One of the strongest influences on job design is technology. But technology seldom provides rigid job boundaries. Although it may be useful to assume that organizations in the same industry have designed jobs and job structures similarly, they have not necessarily done so. On the other hand, if two quite similar jobs are found in different industries, it would be safe to assume that they hold different significance or value to their respective organizations. In one industry, it may represent an organization's most essential task. In another, the job may be peripheral.

One study queried compensation practitioners in 37 organizations on what information they used to design or adjust wage structures in their organization.⁶ Thirty-one kinds of information were reported, some by all 37 firms, some by only 1. Although the most-used information involved wage surveys and job evaluation data, the balance was almost too varied to classify.

Employee Acceptance

The discussion in chapter 4 of the employment exchange and of equity theory suggests that a primary criterion of organization wage structures is employee acceptance. Both the employment exchange and equity theory strongly suggest that employees' decisions to acquire and retain organization membership are based on their perception of a favorable ratio of rewards to contributions. The most visible employee contribution is the job to which he or she is assigned.

Most organizations base wage structures primarily on the work content of jobs and the value of that work to the organization. Work content is determined by job analysis. Relative value of work is determined by job evaluation. Equity theory postulates that employees must accept both processes as fair if the system is to achieve its purpose.

There is some tendency to equate pay fairness or equity with pay satisfaction. This is unfortunate because, although related, they are quite different concepts. It has been shown that people can believe that their pay is fair but not be satisfied with it. Also, people can be satisfied with their pay but believe it to be unfair.⁷ Pay satisfaction has been shown to be a multidimensional concept in which satisfaction with pay level is independent of satisfaction with benefits. Satisfaction with pay structure, although apparently another dimension, is not independent of administration of compensation.⁸

INFLUENCES ON THE WAGE STRUCTURE

From the last section, it is clear that organizations determine the pay for jobs by taking a number of considerations into account. Furthermore, they have considerable choice as to how much emphasis to place on various determinants. These choices lead in turn to variations in the wage structures that organizations create. But organizations do not have total freedom in the design of wage structures. Besides the determinants so far considered, there are a number of other influences on the design of wage structures that will be considered in this section. These influences are often indirect in that they influence the design of jobs and therefore the way the organization is likely to evaluate it in relation to other organization jobs. These influences are society, the labor market, unions, and the organization structure.

Society

People and institutions both have a hand in designing jobs and wage structures. Craft unions, for example, determine the kinds of work their members do and expect employing organizations to adjust to these decisions. Jobs for clerical workers are structured by the institutions that train them, with the result that clerical jobs are often quite similar in different organizations.

Professional employees and managers insist on having a say in the design of their jobs, and the result is influenced in part by the institutions that train them. At the other extreme are semiskilled factory employees. Organizations employing these workers are subject to little influence on job design by either employees or unions, except in job-redesign decisions. Unions of semiskilled factory workers typically insist, however, on participating in the latter decisions. This participation is guided by customary relationships among and within employee groups. Custom also operates in nonunion situations, causing resistance to change in job design.

A further societal influence on jobs and wage structures is the technology used by the organization and changes in that technology. But technology seldom provides rigid boundaries. It typically provides choices within which management, unions, and competitive pressures can operate in designing jobs and job relationships.

The Labor Market

The labor market influences the wage and salary structure through the supply of labor. But organizations differ greatly on how many of their jobs are highly market-oriented, particularly in those organizations in which the labor supply is mostly provided from within the organization. As discussed in chapter 10, most organizations replace the external labor market with an internal labor market that makes decisions by administrative means rather than according to supply and demand. These organizations have restricted ports of entry, which are highly sensitive to the labor market but rely on the organization's internal labor supply to fill most job openings.⁹ The exception occurs when there is an internal and external shortage of people to fill vacancies for specific skills. In fact, any job for which qualified people are in short supply becomes a market-sensitive job. But given relatively adequate labor supplies, the labor market determines wages only if the labor market: is structured by unions, is otherwise well organized, or is designed to fill openings from outside the organization.

Shortages in the labor market provide those who are qualified to fill the jobs an opportunity to negotiate better terms of employment. A part of this negotiation is for a relative increase in pay greater than other groups are obtaining. This, of course, runs into the problem of customary relationships already discussed. But another part of the negotiations is for a "better job." Workers in jobs where there is a shortage of qualified workers will demand changes in job content that will increase the job's value to the organization and in the eyes of other workers. Computer programmers are an example of a group of workers with a skill in short supply in a new and expanding industry. The independence of action and discretion allowed this group of employees is based, at least partially, on the continuing shortage of this skill.

The product market also affects wage structures through cost-oriented jobs. Such jobs exist where profit margins are sensitive to changes in unit labor cost. If the ratio of unit labor cost to price is critical, the jobs involved become cost-oriented jobs, and organizations will strongly resist changes in their wage rates, especially changes not made by other organizations. Organizations that compete in the same product market, those whose prices are interrelated, or those experiencing or anticipating increased competition or decreased demand may regard any increase in unit labor costs as a threat, especially when labor cost is a significant proportion of total costs. On the other hand, employees in these areas often recognize the advantageous position they are in and seek maximum advantage.

Unions

Unions affect wage structure, but the differential effects of craft and industrial unionism and the type of bargaining relationship are considerable. Craft unions tend to determine craft rates as well as the design of craft jobs for all organizations employing members of the craft. The limit of craft rates is the cost-price resistance of employers. Industrial unions, on the other hand, are more concerned than craft unions with employing organizations, but less concerned with product markets because they often bargain with organizations in many product markets. Thus, industrial unions may attempt to impose a common wage structure on organizations, even if the wage structure clashes with product-market realities.

Within organizations, industrial unions are concerned with equalities and differentials among particular groups of jobs. They often serve to reinforce custom and tradition in jobs and wage structures, while they resist changes that might decrease employee security. If the industrial union deals with organizations in a common product market, it may attempt to impose a common job design and wage structure by comparing rates of a number of reasonably comparable jobs. But even in such cases, the influence of industrial unions on wage structure is light compared with that of craft unions.

Unions also affect wage structures by resisting lower wage rates for jobs downgraded by technological change and by demanding that increased productivity arising from any source results in wage increases. Typically this means that wages of changed jobs are not cut but often increased when the changes result in increased productivity. Such job rates distort rational job and wage structures, and a series of them can so impair an organization's cost-profit position that management is forced to fight for a revised, rational wage structure.¹⁰ Union strategy, with respect to general increases, can also affect wage structures. Flat cents-per-hour or dollars-per-month increases maintain absolute differentials, but compress the structure in relative terms, whereas flat percentage increases maintain relative differentials and increase absolute differentials. Industrial unions especially may follow a policy of cents-per-hour increases because most of their members are in lower-paid groups. But unions cannot maintain this strategy in the face of opposition from higher-paid groups. In fact, worker preferences and resulting labor-supply shortages force restoration of relative differentials in both union and nonunion situations.

But probably the strongest influence of unions on wage structures is the quality of the union-management relationship. As mentioned, some unions take an active part in job evaluation, and their interest in a rational wage structure results in reduced grievances over wage inequities. Other unions, most of them craft unions, seek to preserve customary relationships and job security, resist changes in job content and structure, and are uninterested in the employer's problems of maintaining economic efficiency. Still other unions seem totally uninterested in job designs and the wage structure of the organization and (1) insist on no wage cuts when job content changes, (2) demand wage increases for all increases in job productivity, (3) strongly resist job-content and other changes calculated to increase productivity, and (4) encourage wage-inequity grievances. In such cases job, and wage structures become chaotic, and correcting the irrationalities may require long and bitter strikes, which are often prolonged by political struggles within the union resulting from the wage inequities. ¹¹

The Organization

Organization decisions on job and wage structures represent a balancing of the aforementioned forces. But the strength of these forces varies by organization type and within organizations by job clusters. Organizations made up largely of members of craft unions have wage structures almost completely determined by the union. Organizations in construction, printing and publishing, the railroads, longshoring and maritime work, and entertainment offer examples of union-oriented wage structures.

Organizations whose members come largely from a well-organized and competitive labor market but are not unionized have what might be called market-oriented wage structures. Organizations of this type have only limited choices, because jobs are easily identified and are quite uniform throughout the market. Banks, insurance companies, department stores, and restaurants are organizations with primarily market-oriented wage structures. Professionals are groups of employees whose jobs have been designed largely by the educational process they have been through. This makes for a commonality between organizations in the design of professional jobs.

Organizations having many specialized jobs, dealing in labor markets too disorganized to provide adequate grading and pricing, and lacking unionization have primarily internally determined wage structures. Such wage structures may be influenced by product markets, but only if labor cost is high relative to total cost. Internally determined wage structures result from management decisions and may range from highly rational structures flowing from job evaluation to a system of personal rates. Organizations in small towns, isolated locations, or nonunion communities provide examples, as do unique organizations in larger communities, and government employment.

Most large, unionized organizations have what might be called union-and-product-oriented wage structures. In these organizations, wage structures represent management decisions shaped and restrained by technology, unions, and cost-price relationships, and the product market. Technology provides some uniformity in job structures in organizations engaged in common lines of production. Unions, through their insistence on traditional relationships, establish some key jobs and job clusters and provide an upward thrust to the entire structure. Cost-price relationships and the product market compel the organization to resist this upward push and to make changes in jobs and job relationships in line with such resistance. Low ratios of labor cost to total cost and inelastic product demand, however, reduce competitive pressures on organizations. Organizations in many branches of manufacturing, in mining, and in some service industries are examples of organizations with union-and-product-oriented wage structures. Organizations with this kind of wage structure can eventually get into a competitive bind.¹²

Organizations with internally determined or union-and-product-market-determined wage structures leave large portions of wage structure decisions to management. Wage structure determination in these organizations follows closely Dunlop's theory of key jobs, job clusters, and wage contours (see chapter 3). Key jobs acquire their status from labor markets, product markets, and comparisons with other organizations, often fostered by unions. Job clusters come from technologies and employee skill groupings. Wage contours originate in customary comparisons with other organizations, again often fostered by unions. Custom strongly influences all three. ¹³

But although organizations can be classified as having wage structures that are oriented primarily in one of the four ways just outlined, organizations of any considerable size have job clusters that fall more comfortably into one or more of the other categories. Organizations employing artisans, unless they are members of an industrial union, are usually forced to develop a union-oriented wage structure for this job cluster. All organizations employ clerical workers, and the wage structure of the clerical job cluster is largely market-oriented. Professional employees (such as engineers and scientists) have salary structures that combine market orientation and internal determination, regardless of the major activity of the organization. Managerial salary structures are primarily internally determined except in very tight labor markets, without regard to organization type.

Thus the typical organization develops and administers at least four or five of the following separate wage structures: shop, clerical, craftsmen and technicians, administrators, engineers and scientists, sales, supervision, and executives. Although, obviously, there will be relationships among these separate wage structures, the strength of these relationships varies by organization and over time.

JOB EVALUATION

Organizations usually begin the process of designing a wave structure by determining their job structure. Two often-cited principles of compensation are (1) equal pay for equal work and (2) more pay for more important work. Both imply that organizations pay employees for contributions required by jobs.

Most organizations utilize job assignment as a major determinant of employee contributions. A formal wage structure, defined as a rate or range of rates established for job classifications, seems to be standard organization practice, except in very small organizations. Formal job evaluation or informal comparison of job content is the almost universal base of pay rates.

Job evaluation is the process of methodically establishing a structure of jobs within an organization based on a systematic consideration of job content and requirements. The purpose of the job structure or hierarchy is to provide a basis for the pay structure. The job structure, as seen in previous sections of this chapter, is only one of the determinants of the wage structure. But it is an important one, often used.

Job evaluation is concerned with jobs, not people. A job is a grouping of work tasks. It is an arbitrary concept requiring careful definition in the organization. Job evaluation determines the relative position of the job in the organization hierarchy. It is assumed that as long as job content remains unchanged, it may be performed by individuals of varying ability and proficiency.

The Job Evaluation Process

Although the next chapter (14) spells out the process and procedures involved in job evaluation, it is useful at this point to understand the steps in the process. The first step is a study of the jobs in the organization. Through job analysis, information on job content is obtained, together with an appreciation of worker requirements for successful performance of the job. This information is recorded in the precise, consistent language of a job description.

The next step is deciding what the organization "is paying for" -- that is, what factor or factors place one job at a higher level in the job hierarchy than another. These compensable factors are the yardsticks used to determine the relative position of jobs. In a sense, choosing compensable factors is the heart of job evaluation. Not only do these factors place jobs in the organization's job hierarchy, but they also serve to inform job incumbents which contributions are rewarded.

The third step in job evaluation is to select a method of appraising the organization's jobs according to the factor(s) chosen. The method should permit consistent placement of jobs containing more of the factors higher in the job hierarchy than jobs involving lesser amounts.

The fourth step is comparing jobs to develop a job structure. This involves choosing and assigning decision makers, reaching and recording decisions, and setting up the job hierarchy.

The final step is pricing the job structure to arrive at a wage structure. Strictly speaking, this step is not part of job evaluation. As seen earlier in this chapter, many wage structure determinants are used by organizations. The job structure is only one of these.

This view of job evaluation implies that its major purpose is to classify jobs and establish a job hierarchy based on job content. Other perspectives are that job evaluation (1) links external and internal markets, and (2) is a process used to gain consensus and acceptance of a pay structure.¹⁴ Perhaps these views could all be accommodated by the recognition that job structures and wage structures are separate concepts and that the relationship between them is a decision that varies among organizations.

Objectives of Job Evaluation

The general purpose of job evaluation may include a number of more specific goals, including to provide a/an:

basis for a simpler, more rational wage structure
agreed-upon means of classifying new or changed jobs
means of comparing jobs and pay rates with those of other organizations
base for individual performance measurements
way to reduce pay grievances by reducing their scope and providing an agreed-upon means of resolving disputes
incentive for employees to strive for higher-level jobs
source of information for wage negotiations
data source on job relationships for use in internal and external selection, personnel planning, career management, and other personnel functions

Background of Job Evaluation

Job evaluation developed out of civil service classification practices. Job analysis applied to time study and selection, and some early employer job and pay classification systems. Whether formal job evaluation began with the United States Civil Service Commission in 1871¹⁵ or with Frederick W. Taylor in 1881,¹⁶ it is about 100 years old. The first point system was developed in the 1920s. Employer associations have contributed greatly to the adoption of certain plans. The spread of unionism has influenced the installation of job evaluation in that employers gave more attention to rationalized wage structures as unionism advanced. The War Labor Board during World War II encouraged the expansion of job evaluation as a method of reducing wage inequities.

Job evaluation has received a good deal of attention in recent years as a result of social concern regarding discrimination. A study of job evaluation as a potential source of and/or a potential solution to sex discrimination in pay was made by the National Research Council under a contract from the Equal Employment Opportunity Commission.¹⁷ The study suggested that jobs held predominantly by women and minorities may be undervalued. Such discrimination may result from the use of different plans for different employee groups, from the compensable factors employed, from the weights assigned to factors, and from the stereotypes associated with jobs. Although the preliminary report failed to take a position on job evaluation, the final report concluded that job evaluation holds some potential for solving problems of discrimination.¹⁸

Prevalence of Job Evaluation

Job evaluation is used throughout the world. Although recent evidence is not available, it appears that job evaluation is more prevalent in the United States than elsewhere. However, a 1982 International Labor Office publication states that in centrally controlled economies or in economies where wage or income controls exist, job evaluation is frequently used.¹⁹

Holland has had a national job evaluation plan since 1948 as a basis for its national wages and incomes policy. Sweden and Germany have a number of industry-wide plans. Great Britain, like the United States, usually employs job evaluation at the plant or company level. Australia and some Asian countries have installed some forms of job evaluation. Russia and some of the Eastern European countries make wide use of job classification.

The evidence on use of job evaluation in the United States shows that smaller companies are somewhat less likely to use job evaluation.²¹ Almost all government jurisdictions, however, employ some form of job evaluation.

In the past twenty years job evaluation has come under attack in the United States. This has come about from a change in the American economy and the type of organizations that dominate the new economy of today. Job evaluation works best in large bureaucratic organizations. In the past twenty years these behemoths of the American economy have faced increasing problems remaining competitive. The result is that they have downsized greatly and removed many layers of organization. Vertical movement within organizations has slowed down and employees increasingly move to jobs in other organizations rather than stay with their current employer. The new companies gaining a foothold in the economy are smaller and organizationally flexible. There has also been a demise of unions; individuals now bargain for their own wages. Lastly, organizations are putting more emphasis on employee skills and performance, as opposed to the job.

All this does not mean that organizations ignore the job as a determinant of wages. What has happened is that wage systems have become more flexible and weight skill and performance more heavily. The use of market wage data for more and more jobs is increasing and made more practical as data has become readily available on the Internet. A useful source is www.salariesreview.com. Within organizations, job evaluation systems have become simpler, less formal and have reduced their complexity.

A major trend in this direction has been broadbanding. In broadbanding, the number of levels in the job evaluation plan is reduced, and the width of the grade levels increased dramatically. This allows employees to receive wage increases without having to move up to a new grade level that is tied to a higher organizational level.

Responsibility for Job Evaluation

The installation and operation of job evaluation involves certain responsibilities. Several possibilities for implementing the process are apparent. One or more committees may be selected, a department may be set up or an existing one assigned, or a consulting organization may be brought in. These possibilities are not mutually exclusive.

Support for the program is essential because installation of it involves commitments of time, effort, and money. Such support is usually obtained by securing top management approval and the collaboration of other managers and organization members. Often this approval is obtained through a committee set up for this purpose.

The Committee Approach

This committee is given an explanation of job evaluation, the purposes it is expected to accomplish, a rough time schedule, and perhaps an estimate of the cost of the program. The committee makes the decision to install job evaluation, decides on the scope of the project, and assigns responsibility for the work.

The actual work of job evaluation is usually done in committee in both large and small organizations, whether the task is accomplished by organization members alone or with the help of a consultant. Committees have the advantage of being able to pool the judgment of several individuals. The committee usually selects the compensable factors, determines weighting, chooses the method of comparing jobs, and evaluates jobs.

The chair of the committee is usually a compensation professional, although a consultant, if employed, may assume the chair for part of the work. Other members are typically other managers selected for their analytical ability, fairness, and commitment to the project. Representation of broad areas of the organization aids in communication and in gaining acceptance. But job evaluation committees should be kept small to facilitate decision making. Five members may be optimum, ten a maximum. A common procedure is to invite supervisors to committee meetings when jobs in their department are under study.

In union-management installations, union members are regular members of the committee. Where the union is not involved employee representation is often rotated. Employee representation in committees seems to aid in securing acceptance and in communication.

Committee job ratings are a result of pooled judgments. This usually means either that ratings made individually are averaged or a consensus is reached as a result of discussion.

Committee members must be trained. Much of this training involves following the steps in the process. But it is advisable to train committee members how to guard against personal bias and the common rating errors.

Consultants

Consultants are sometimes employed to install job evaluation plans. Successful consultants are careful to ensure that organization members are deeply involved in installing the plan and are able to operate the plan on their own.

Consultants are most likely to be employed in small organizations where no member has the necessary expertise. They are also more likely to be employed when a complex rather than a simple plan is to be installed. Consultants often have their own ready-made plans. Sometimes consultants are brought in to insure objectivity in union-management installations. It is also common to hire consultants to evaluate management jobs, because the objectivity of committee members rating jobs at levels higher than their own may be questioned.

Compensation Department Involvement

It is quite possible for the organization to assign installation and operation of a job evaluation plan to the compensation department. Sometimes the compensation professional heading the unit and a number of job analysts carry out the task. Those who favor this last approach emphasize the technical nature of the task. They may also be reacting to the difficulty of getting operating managers to devote the time that the program requires. While they may recognize the education and communication advantages of committees, they believe these advantages can be provided in other ways. It is doubtful that this position can be justified, though. Input by operating managers and perhaps employees during job evaluation installation is probably essential to acceptance of the results. Once the program is installed, however, there seems to be no reason why a department cannot operate it with proper provision for settling grievances.

Union Involvement in Job Evaluation

Union involvement has the same rationale as that offered in our discussion of job evaluation committees. Acceptance and understanding are the expected results of involvement.

In practice, union participation in job evaluation has varied greatly. Some unions profess to formally evaluate an organization's jobs independently and then use the information as an aid in collective bargaining. Some job evaluation plans have been installed and maintained as a joint venture. A well-known union-management job evaluation plan exists in the steel industry. Less well-known is the joint plan in the West Coast paper industry. There is evidence that joint plans are more successful than unilateral plans. But this is not always the case.

Many unions in organizations with job evaluation plans review the findings after installation by management and either present grievances on individual jobs or insist on bargaining the wage structure. In the latter case, the bargained wage structure may follow the job structure resulting from job evaluation or represent a compromise.

Some unions have ignored job evaluation plans installed unilaterally by management. Some employers prefer this response, believing that job design and evaluation are management prerogatives. Other employers invite union participation in the hopes of obtaining understanding and acceptance of the plan.

If a union rejects an invitation to participate in job evaluation and ignores the plan, the employer installs the plan unilaterally, recognizing the need for a logical hierarchy of jobs. The findings are used in negotiating the wage structure.

Unions have criticized job evaluation on several grounds: (1) that it restricts collective bargaining on wages, (2) that wages shouldn't be based solely on job content, (3) that supervisors do not or cannot explain the plan to employees, (4) that management doesn't administer the plan the way it explained it, and (5) that it is subjective.

Employee Acceptance

Job evaluation is usually judged successful when employees, unions, and organizations report satisfaction with it. Most surveys report organization satisfaction levels at 90 percent or better. Employee acceptance is the primary criterion organizations use in determining the success of a job evaluation plan. This is reflected in the increasing use of employees on job evaluation committees and in the communication steps accompanying job evaluation installations.

SUMMARY

The discussion in this chapter showed that the development of a wage structure is the result of a number of influences. These factors vary from ones over which management has a great deal of control to ones in which management must simply be responsive. Given the variety of influences, it is also not likely that organizations will always be able to develop optimum structures and that current structures will need adapting in the future.

While the economics of the labor market is a major consideration, it is not the only determinant to influence the design of wage structures. Most organizations also must consider labor-cost ratios, product market competition, and union demands, when determining their wage structure. Furthermore, many labor markets are abstractions that do not provide a close fit for an organization's jobs or wage-paying ability.

Wage structures have to do with the internal alignment of jobs in a wage hierarchy. To do this there must be a hierarchy or structure of jobs within the organization. Determining the internal job structure is the task of job evaluation. This process compares jobs, not people, in terms of a set of criteria, called compensable factors, to establish the job hierarchy. Job evaluation is a major tool that organizations use to make job comparisons when determining the relative equity of jobs within the organization. In job evaluation there is an interesting conflict. On one hand, like wage surveys, this process requires technical expertise of a compensation professional. On the other hand, acceptability of job evaluation results relies on the perceptions of management and workers so that their participation would seem to be a necessity in job evaluation.

¹	T. A. Mahoney, "Compensating for Work," in Personnel Management, ed. K. M. Rowland and G. R. Ferris (Boston: Allyn & Bacon, 1982), p. 227-61.
²	See the discussion of Adam Smith in chapter 3.
³	G. H. Hildebrand, "External Influence and the Determination of the Internal Wage Structure," in Internal Wage Structure, ed. J. L. Meij (Amsterdam: North-Holland Publishing Company, 1963), pp. 260-99.
⁴	E. H. Phelps-Brown, The Economics of Labor (New Haven: Yale University Press, 1962), ch. 5.
⁵	See Hildebrand, "External Influences." op. cit.
⁶	D. W. Belcher, N. B. Ferris, and B. Dalton, "Building or Adjusting a Pay Structure" (working paper, San Diego State University, 1984).
⁷	D. W. Belcher, "Pay Equity or Pay Fairness?" Compensation Review, second quarter 1979, pp. 31-37.
⁸	H. G. Heneman III and D. P. Schwab, "Pay Satisfaction: Its Multidimensional Nature and Measurement," (working papers, University of Wisconsin, 1983).
⁹	O. E. Williamson, M. L. Wachter, and J. E. Harris, "Understanding the Employment Relation: The Analysis of Idiosyncratic Exchange," Bell Journal of Economics, Spring 1975, pp. 250-78.
¹⁰	A. Thomson, "The Structure of Collective Bargaining in Britain," in Handbook of Salary and Wage Systems, 2nd ed., ed. A. M. Bowey (Aldershot, England: Gower Pub. Co. 1982), pp. 37-54.
¹¹	See Thomson, op. cit.
¹²	L. Iacocca, Iacocca (New York: Bantam, 1984).
¹³	J. T. Dunlop, "The Task of Contemporary Wage Theory," in New Concepts in Wage Determination, ed. G. W. Taylor and F. C. Pierson (New York: McGraw-Hill, 1957), pp. 117-39.
¹⁴	G. T. Milkovich and J. M. Newman, Compensation (Plano, Tex.: Business Publications, 1984), pp. 92-95.
¹⁵	J. A. Patton, C. L. Littlefield, and S. A. Self, Job Evaluation: Text and Cases, 3rd ed. (Homewood, Ill.: Richard D. Irwin, 1964).
¹⁶	A. M. Pasquale, A New Dimension to Job Evaluation (New York: American Management Association, 1969).
¹⁷	D. J. Treiman, Job Evaluation: An Analytical Review (Washington, D.C.: National Academy of Sciences, 1979, (mimeographed).
¹⁸	D. J. Treiman and H. I. Hartman, eds., Women, Work, and Wages: Equal Pay far Equal Jobs of Equal Value (Washington, D.C.: National Academy Press, 1981).
¹⁹	H. Pornschlegel, Job Evaluation and the Role of Trade Unions (Geneva: International Labour Office, 1982).
²⁰	M. G. Miner, Job Evaluation Policies and Procedures, Survey No. 113 (Washington, D.C.: Bureau of National Affairs, 1976).
²¹	Personnel Management-Compensation, pp. 152, January 10, 1979 (Englewood Cliffs, N.J.: Prentice-Hall), p. 317.

Sales Compensation Structure

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In most organizations the compensation program for sales personnel is different and separate from that of other employees. This different treatment has to do with the nature of the job, the importance of the job, and the nature of sales personnel. The dominant feature of sales compensation is the use of incentives. Whereas incentive plans are becoming more popular for a wide range of employee groups, the sales group has always been paid on incentive due to the nature of the job.

The Sales Job

Sales work involves working with customers people outside the organization to convince them to order the products or services of the organization. The importance of this activity is obvious. Except in the odd circumstance where the organization's product sells itself, this activity is vital to the continuing operation of the organization. Furthermore, this importance of the job is highly visible in the organization, making the impact of the job even clearer. But an in-depth analysis shows two things about sales work that should be kept in mind: not all of the salesperson's activities are sales work, and not all sales activity is carried out by staff labeled sales personnel.

Sales activity

Most sales jobs include activities such as soliciting orders, servicing customers, seeking out buyers, obtaining information, and performing missionary work such as cold calls and product promotion. Some sales personnel also engage in credit-information collection and analysis, product modification, customer-personnel training, and technical advice and assistance. All sales jobs require that the salesperson perform some administrative work, such as making reports and keeping records. Depending upon the market, the products, and the organization, various aspects of these activities are more or less important in particular sales jobs. Further, although some of these activities are important and necessary, they may not really be sales work, indicating that sales personnel do more than just sell.¹

This variety of sales activities suggests that it is necessary to develop job descriptions for sales jobs that describe clearly the contributions required of the employee. When the salesperson is paid on an incentive basis the non-selling activities can often be neglected unless they are clearly spelled out as a part of the job. These descriptions are most useful where there are a number of different types of sales positions in the organization. Sales job descriptions typically include not only information about activities but also information about number of customers, volume of sales, diversity of products sold, and geographical area covered.

Sales support

The typical picture of the salesperson is someone operating alone with the customer. This is often inaccurate, however. Sales work requires the support of others in the organization. At one level there is administrative support enabling the salesperson to operate in the field. Some of this support is clerical, but a larger part in today's complex economic environment is support of the field sales effort by inside sales personnel. Many sales situations also require help in the form of technical expertise that is available from others in the organization. All of this support both changes the picture of a salesperson as an independent operator and has a considerable impact on developing incentive programs, which assume that it is the activity of the salesperson that brings in the sales orders.²

Characteristics of sales jobs

Despite these complexities, there are a number of dimensions of sales jobs that make establishing incentive programs useful and perhaps necessary. The first of these, importance of the function, has already been discussed. The others are independence, boundary spanning, and measurability.

Independence. As indicated, the typical picture of the salesperson is of someone working one-on-one with a customer outside the organization. For many sales positions this is still an accurate picture. Direct supervision and control of the salesperson in this circumstance is therefore very difficult. The traditional reliance on tools such as performance appraisal does not work as well since the supervisor does not see the salesperson in action. This makes reliance on the outcomes of the job more attractive. It should be noted, however, that the degree of independence of salespeople varies with the job situation. There is a great deal of difference between a salesperson who is on the road and one who operates in a store where the supervisor is present.³

Where the employee is autonomous, control of behavior must be more internalized. One way of doing this is to reward the desired activities or the outcomes of the activities. In the case of sales personnel, rewarding sales volume keeps employees motivated. The problem is to have the salesperson achieve the outcome without doing so in an unacceptable manner.

Boundary spanning. The salesperson represents the organization to the customer. Often it is the salesperson that is the organization to people outside the organization. This makes the sales position an important one for the organization's reputation.

Likewise he or she represents the customer to the organization. This creates a situation within the organization of split loyalties, some to the organization and some to the customer.⁴

Boundary spanners must be able to see both groups' point of view and to collect and transmit information between groups. The salesperson is often seen as giving trouble to other employees inside the organization in order to serve the customer. Thus, the loyalty of the salesperson to the organization is likely to be perceived as less than that of other employees. This puts pressure on the compensation program, since it is compensation that is the major method of maintaining a positive membership decision.⁵

Measurability. These characteristics of sales jobs make incentive programs an attractive way to compensate salespeople. That the results of sales work are highly measured makes the incentive idea possible. Sales volume, either in units or monetary, is easily measurable and is connected with the efforts and ability of the salesperson. There is also considerable variation among salespeople in volume of sales an important consideration in establishing an incentive program. Further, the salesperson expects to be rewarded by the use of an incentive program.

Using sales volume alone, though, can be a problem in rewarding salespeople. Connecting performance with reward focuses the person on the chosen performance factor to the exclusion of other job activities. If the organization wants results other than sales volume, it is not likely to get them if only sales volume is rewarded. Thus, salespeople have a reputation for not doing their paperwork correctly or not doing other things, such as making cold calls or giving product presentations, which do not in the salesperson's eyes clearly lead to more sales volume. So most sales compensation programs need to reward more than just sales volume.

Last, there is the problem of connecting performance with effort. Sales jobs differ greatly in the degree to which the effort of the individual salesperson influences the measured output. If the sales effort is a group affair or the sale takes the efforts of other jobs in the organization, then using simple output measures may not be appropriate.

The Salesperson

Salespeople are often perceived as extroverts who can meet and deal with strangers and friends alike and get them to do what they want them to do. This, of course, is a stereotype. Like all stereotypes it has some truth to it, but overall it is too simplistic. Some sales positions do require the aggressive extrovert. But others require a high degree of technical skill and a great deal of patience to sell highly complex organizational outputs, one order of which may take years to complete. Studies do show, however, that successful salespeople are relatively aggressive, outgoing, self-motivated, and materially oriented.⁶ The sales job does seem to attract people with those distinct characteristics: a tolerance for ambiguity and a high achievement drive.

Tolerance for ambiguity

The rewards of sales work, both extrinsic and intrinsic, are not constant or consistent, as they are in many other organizational jobs. Some days the salesperson comes home feeling that much has been accomplished, since in selling one can see positive results immediately. Other days there is no positive feedback: there have been no successful sales efforts, or other activities have prevented the salesperson from spending time on sales efforts. Thus, the salesperson experiences wide swings of positive and negative feedback. He or she must be able to adapt to this variation in reward structure. In fact this stimulation and uncertainty can act as stimuli to the salesperson.

The nature of sales work also leads to ambiguity. The lack of performance feedback from the supervisor, the focus on outcomes and the consequent uncertainty of how to perform the job, and the lack of participation in decision making all lead to a lack of role clarity for the sales job. The salesperson experiences this as an ambiguous situation.⁷ Added to this is the boundary-spanning aspect of the job, which creates role conflict as well as ambiguity.⁸

Achievement drive

Psychologist D.C. McClelland has studied a number of socially derived needs of individuals.⁹ One of the most-studied of these is the drive to achieve. A person with a high achievement drive has a number of distinctive characteristics. The first of these is a desire to take moderate risks and to decide upon these for oneself. These risks are achievable but not easy to reach, and in this way provide a challenge rather than discouragement. The second characteristic is the need for immediate feedback. The person must be able to see that he or she is moving toward the goal. Third, the high achiever finds the path to the goal as rewarding as the extrinsic reward at the conclusion of the activity. Last, the high achiever is preoccupied with the task, focusing on the goal and keeping at it until it is achieved. If we put the last two together we can see why the high achiever often feels a letdown upon reaching the goal: it was the pursuit and not the product that was stimulating.

These characteristics would seem to fit sales jobs and the compensation program typically developed for sales work. The sales job allows one to set one's own challenging goals, there is immediate feedback, and one can immerse oneself in the process of the sale and enjoy that process. In fact, McClelland found that the most likely place in the organization for high achievement drive to show up is in sales personnel. There appears to be a self-selection process whereby those with a high need for achievement find sales work to be most satisfying.

SALES COMPENSATION PLANS

As indicated, the dominant feature of sales compensation is the use of incentive plans. The purpose is to align the objectives of the organization and those of the sales person. The objectives that may be used in sales compensation incentives include:

1.	Sales Volume. The amount of sales over a specified time period.
2.	New Business. Sales to new customers. This may require a great deal of cold calling.
3.	Retaining Sales. Keeping customers from one time period to another.
4.	Product Mix. The organization may wish to sell a pre-determined mix of products. This will help the competitiveness of the company by selling the whole product line.
5.	Win-back Sales. This is sales to old customers who are regained as clients.

Straight Salary

Some organizations pay sales personnel a straight salary without any incentive. This makes setting wage rates for sales jobs similar to setting wage rates for other jobs in the organization. The positioning of the sales job can be arrived at through job evaluation and the appropriate salary range assigned to the sales job.

Sales pay ranges are affected by the same forces that influence other wages within the organization. The labor market is a major influence. Surveys of sales compensation are made by trade associations, consultants, and the organization itself. Variations in salary rates, however, tend to be larger for sales jobs than for other jobs. The ERI Salary Assessor software has wage survey data for over 150 different positions related to sales work in organizations.

Salary relationships within the organization also influence sales wage rates. The sales-manager position and sales-support positions in the organization often are used as buffer positions; they can be compared with both the sales job and other organizational jobs.

Sales jobs are often more influenced by the incumbent than are other organizational jobs. The skills and abilities of the individual often dictate the particular activities that constitute a particular sales job.

Straight-salary plans do not preclude the use of performance motivation. A pay-for-performance program can be used to focus the salesperson on high performance levels. (See Chapter 17.) The sales job has the advantage of having a more measurable standard than other jobs, so the performance measurement is less judgmental. The danger is that the sales volume alone will be used as the measure of performance when other job factors may also contribute to the definition of performance.

Equity is always a problem in sales compensation. When sales personnel are paid a straight salary, the comparison with other organizational jobs through job evaluation reduces the equity problem within the organization. But it increases the equity problem with other sales jobs that are paid on an incentive basis. It is difficult to compare sales positions paid on a commission and straight salary, for they often involve quite different work.

There are a number of circumstances that make straight salary plans advantageous. These all center in the inability to connect either performance to reward or effort to performance. Where the product is highly complex, the time taken to culminate a sale is long, and/or the sales effort is a team affair, an incentive program is infeasible. In some sales jobs the non-sales aspects are of primary importance to the organization, and the results of these activities are difficult to measure. In general, the less impact the salesperson has upon the sales results, the less argument there is to establish an incentive program. Also, an incentive program may be unfair to new salespeople, who do not know the job or the customers well enough to meet sales goals.

Advantages of straight salary plans

A straight-salary program has certain advantages to the organization, the salesperson, and the customer. From the salesperson's standpoint, a straight salary takes the ambiguity out of how much salary he or she is receiving. Some people are very uncomfortable not knowing how much they will make next month, or are unable to budget the good times to cover the bad times. For the organization, a straight salary plan is much simpler. In addition, it gives the organization more control over the salesperson. One of the aspects of placing a person on incentives is that the person feels much more independent of organizational control. It has also been found that salespeople under a straight salary plan are more willing to perform the non-sales aspects of the sales job.¹⁰ From the standpoint of the customer, the sales person on a straight salary is more likely to provide service and less likely to pressure the person into a sale and move on.

Disadvantages of straight salary plans

The disadvantages of a straight-salary program reverse the advantages above. They center in the lack of connection between performance and reward and therefore suggest that motivation levels among salespeople paid in this manner can be expected to be lower than those of salespeople on incentives.

From the organizational viewpoint, straight salaries are a fixed cost rather than a variable cost, making sales salaries a burden in times of low sales. Furthermore, poor performance must be dealt with administratively, a requirement that is becoming more difficult each year.

Commission Plans

A straight commission plan is like a straight piecework plan in that the salesperson's earnings are in direct proportion to his or her sales. It is probably the oldest form of compensation program for sales personnel.

In theory, a commission plan is very simple. A commission is ordinarily defined as a percentage of the sales price of the product.¹¹ The exact percentage is highly variable with the product being sold, the industry practice, and the organization's economic situation. It also varies with internal organizational factors and the exact nature of the sales job. For instance, the directness of the relationship between the salesperson's efforts and the sales volume usually affects the percentage given to the salesperson.

Two things need to be noted about providing a percentage of the sale to the salesperson. First, the percentage need not be the same at all levels of sales; it may increase or decrease with volume. This increase or decrease can be related to the effort the salesperson must exert to increase the sale's volume. The second point is that sales may be stated as sales price, sales units, or some other measure that reflects the variation in sales. In particular, the point in the sale process when the sale is counted is important. Sales percentages calculated at the point of sale versus the point of delivery are different figures and occur at different times for the salesperson.

The effects of the commission system need to be examined before it is put into operation. The basic calculation that needs to be made is an estimate of what amounts will be paid to sales personnel in the form of commissions. This information should be used in a number of ways. First, it should be used in the pay level sense of determining the total cost of selling the product. Here the concern is whether sales costs are in line with other costs of production. Second, estimates of commissions should be used in a wage structure sense of determining whether wages paid to salespeople are in line with wages paid other jobs in the organization and with those paid sales jobs in other organizations. Third, these estimates should be used to determine the expected income to the sales personnel. An incentive program may look like a good plan, but unless a sufficient percentage of the sales force are likely to make a minimum amount over expectations, the incentive value of the program may be negative.¹²

Performance motivation

The performance-motivation model specifies that for an incentive plan to be effective the following conditions must be met:

1.	Employees must believe that good performance leads to more pay. A commission plan should clearly do this by its construction. This belief is strengthened because the measurement of results is clear and objective. If there is a long time between point of sale and delivery or if many sales are not converted to delivery, this relationship can be weakened.
2.	Employees must desire more pay. This seems obvious, but it is more complex than that. First, people differ in their desire for more pay, although sales personnel are reputed to be a group that strongly desires pay.¹³ Second, the increased pay must be worth the foregone opportunities: if more sales, and therefore more pay, mean more overtime, some people will choose not to pursue more pay. Organizations may be safe in assuming that through self-selection, those who enter sales work highly desire pay, but as sales jobs become more complex and technical this assumption may become less valid.
3.	Employees must believe that good performance will not lead to negative consequences. Unfortunately, this is a likely consequence of commission plans. Sales incentive plans are often changed by the organization. These frequent changes are perceived as ways to solve two opposite problems lack of sales and perceived overpayment of sales personnel. From the salesperson's viewpoint these changes create confusion in the performance-reward connection and a feeling that the organization is cutting the rate. Further, many sales incentive plans are so complex that the salesperson becomes confused as to what will happen if he or she takes certain actions. So some actions are avoided because the salesperson does not know what the consequences of taking action will be. Last, the sales incentive plan can put the salesperson in conflict with the rest of the organization. Difficulties between sales personnel and credit, finance, manufacturing, and shipping are everyday events in many organizations.
4.	Employees must see that desired rewards besides pay result from good performance. Sales incentive plans are mixed on this. Feelings of achievement, esteem, and respect are quite likely to occur along with high incentive pay for most sales personnel.¹⁴ On the other hand, high pay restricts long-term movement within the organization. Sales positions are often perceived as having little career-growth opportunity.¹⁵
5.	Employees must believe that their efforts lead to good performance. This perception varies widely among sales incentive plans. Where certain activities clearly lead to sales then this perception is strengthened. However, there are a number of hindrances to this connection. Since sales are highly affected by the economy, the product, past relationships, and other factors beyond the salesperson's control, the connection is often tenuous. The sales incentive plan itself may be perceived as not rewarding important efforts of the salesperson or rewarding efforts that are of little importance. The problem is that if the plan includes a wide range of relevant efforts, then it becomes so complex that the performance-reward connection is not clear and the dysfunctions of condition 3 operate.

Combination Plans

A little over half of the sales compensation plans surveyed are some sort of combination of base salary and incentive. The reasons given for developing combination plans are that (1) the salesperson is not the only influence on the sales volume, and (2) some parts of the sales job do not involve direct selling and these need to be rewarded also. Done properly, a combination plan should contain the advantages of both straight-salary and incentive plans. On the other hand, such plans can also be seen as management indecision as to what they want of salespeople, and they can confuse the salesperson as to what is important in the job.¹⁶

Sales standards

All combination plans involve the establishment of a sales standard the expected volume of sales for a particular time period. In the sales field this standard is usually called a sales quota. But the standard may be broader than just sales volume: other factors, such as obtaining new customers, retaining customers over time, and doing missionary work, can be included. The advantage of including a number of variables in the standard is that the plan then more clearly covers the whole sales job. The disadvantage is that the complexity of the plan is increased and the salesperson may become confused about what he or she is being paid for.

The basis for developing the standard is the level of sales and other factors that the salesperson can be expected to achieve. Establishing this standard is more difficult here than it is in most incentive plans in a number of ways. Sales jobs tend to be individual, in terms of both the salesperson and the customers dealt with. Also, outside influences can easily affect the sales volume. In setting sales quotas it is useful to consider the past year's performance, economic conditions, technological changes, and competitors' strategies. For these reasons setting the expected volume is more often a figure negotiated with the individual salesperson than a standard for all salespeople to meet.

The standard generally sets the level at which the salesperson's straight salary is considered covered by the sales volume. But this can vary, with the incentive starting after some percentage of the standard has been reached. Straight salary usually constitutes around 75 percent of the total salary in combination plans, but this percentage can be planned as high or as low as desired. The incentive portion will be lower where the direct contribution of the salesperson to sales volume is low, where non-sales activities are valued by management, and where there are considerable variations in sales over time and between sales areas.¹⁷

Payment structure

There are a number of ways of establishing the incentive portion of sales compensation. Probably the simplest system is to use a commission combined with a draw. The salesperson receives a specified salary each payday. At periodic times, such as each quarter, the total commissions due the salesperson are calculated. The amount taken as a draw is deducted from this and the salesperson then receives the remainder. If the draw exceeds the commission, the organization must decide whether to reduce the draw, carry over the deficit, and/or retain the salesperson in the position.

A bonus system provides incentive payments after a given level of sales has been reached. These plans can be quite simple or very complex. Simple ones resemble a commission-draw system with a percentage payment made for sales above a standard. More complex plans have payment schedules that vary with sales volume or payments for a variety of things beyond sales volume, such as obtaining new accounts, reducing sales expenses, improving market penetration, and increasing order size. A variation on the more complex bonus plans is the point plan. Here the salesperson receives points for meeting and exceeding goals or quotas in a number of areas. These points are then converted to monetary values.

Completing the Sales Compensation Package

Sales compensation considerations do not end with the design of the direct pay system. There are other aspects of sales compensation that are unique, including the use of contests and benefits.

Contests

The measurable-output of sales jobs allows the organization to design a short-term reward system that gives prizes for accomplishing certain quotas or selling more than all others. This is often attractive to the type of person who enjoys sales work. The prizes can be either monetary or non-monetary but more often are not direct pay. Most popular are non-monetary prizes such as vacation trips or goods such as golf clubs or other recreational equipment.

These contests have a number of advantages. First, they provide a very visible reward. Records of who is winning what can be placed on bulletin boards and put in the newsletter. It is interesting that this publicity seems natural for a contest but out of place for direct pay. Second, a contest, like any bonus, is a one-shot affair: it does not add to the overall wage costs beyond the time of the contest. This allows the rewards to be large and still not have a detrimental effect on labor costs. Last, contests extend to the salesperson's family more clearly than direct pay. Such awards as vacations are shared with family members, ideally creating company loyalty within the family as well as the salesperson.

Contests also have some disadvantages. The publicity can be very discouraging to those salespeople who perceive they have no chance to accomplish the level of sales necessary to win an award. Not only is one not receiving a reward but all one's colleagues are aware of one's shortfall. This is particularly hard on new sales personnel or those in difficult territories. Contests may also shift the focus from the main job to side issues. If the awards are for selling items that are not important to the overall sales effort, then the total sales of the company may actually decline as a result of the contest.¹⁸

Benefits

Salespeople used to be perceived almost as independent contractors. As such they were not included in benefit programs to the same extent as other employee groups. This situation has changed, and sales personnel are now recipients of regular organizational benefit program and at times more.¹⁹ This inclusion in benefits programs should have the effect of increasing the commitment of the salesperson to the organization.

Sales personnel are usually granted two benefits that are not common to other employees: expense accounts and travel allowances.

Expense Accounts. Typical expenses covered include meals with customers, car phones, pagers, company credit cards, etc. Ordinarily, the only other employees to have these benefit are executives. Because these expense accounts have the potential for abuse, they are watched closely by the IRS.

Travel allowances. Sales people, more than any other group in the organization, travel. Some of this travel is around town from one location to another during the day. Other travel requires the sales person to be "on the road" for some period of time away from home. This creates costs that are business expenses and are ordinarily reimbursed by the organization.

The IRS ( look into your Govt laws) classifies reimbursement plans into two categories, accountable and non-accountable. Accountable plans are classified as a business expense and are not income to the employee. Non-accountable plans are considered income to the employee although he/she may itemize these expenses as deductions on the personal income tax form. This section deals with accountable plans.

The employee may be paid before the expense is incurred, as an advance, or after the expenditure (as a reimbursement or an allowance). In any of these cases, in order to be qualified as an accountable plan:

1.	The expenses must have a business connection, they must have been incurred while performing job duties.
2.	The employee must account for the expenses within a reasonable time period.
3.	The employee must return any excess reimbursement within a reasonable period of time.

The employer may reimburse an employee for travel expenses on the basis of actual expenditures. In this case, the employee must keep and present all expenditures to the employer. The employer may also develop an allowance plan. Under such a plan the employee may be considered to have accounted for travel expenses if the amounts of the allowance do not exceed the rates established by the federal government. For further information go to www.irs.gov.

There are two main types of travel allowances automobile allowances and per diems.

Automobile allowances. There are two methods of calculating rates for automobiles:

The standard mileage plan. This method pays the employee a set rate per mile traveled. For 2001 this rate was 34.5 cents per mile, but it changes periodically.

Fixed and Variable Rate. The employer reimburses the employee for automobile expenses under 2 categories of costs: fixed and variable. The variable costs are the cents per mile costs of running the car and vary depending on the miles driven. In addition, the employer pays a fixed amount to cover costs such as depreciation, maintenance, leasing and insurance. Developing this type of program is highly complex and is taught in ERI DLC Course 38: FAVR Automobile Allowances (currently underdevelopment).

Per diems. A per diem allowance is a fixed amount of daily reimbursement the employer pays the employee for lodging, meals, and incidental expenses.

Federal government per diem rates can be figured by using one of the following methods:

1.	The regular federal per diem rate. This rate varies with location. It includes all the lodging, meals and incidental expenses. These per diem rates can be found online at: www.policyworks.gov/perdiem.
2.	The standard meal allowance. This alternative is used when the employee does not have any lodging expense, such as when the employee stays in a company room or with relatives. It covers only meals and incidental expenses. The above sources also have calculations for this category of expenses.
3.	The high-low rate. This is a simplified computation with one rate for high cost cities and another for regular locations. The amount changes each year. In 2001, it paid $125 a day in most cities for lodging and meals, while it paid $201 for high cost cities. The current amounts and cities may be found in IRS Publication 1542.

SUMMARY

Organizations identify certain groups in order to establish special compensation programs for them. They do this for a number of reasons including organizational tradition, employee expectations, importance and centrality of the job, and the law. This chapter discusses one such group salespeople.

Salespeople are paid primarily on an incentive basis. There are a number of reasons for this, not the least of which is organizational tradition. Sales jobs tend to be central to the organization, are carried out away from direct supervision, have measurable outcomes, require the person to be a boundary-spanner, and attract people who like incentive programs.

Sales compensation plans may be straight salary, straight commission, or a combination of these two. The latter is the most common. Since sales incentive plans are ordinarily individual plans, there is an assumption that it is the sales person's efforts that makes the difference. This assumption is called into question more often as selling becomes more of a team effort. Sales compensation plans also may include competitive contests and special benefits, such as a car.

A second part of sales compensation is the reimbursement for business expenses. Development of a program in this area is tied closely to the demands of the IRS ( Local Govt Law) so that reimbursement [an expense] is not in fact income. The most common program for reimbursement is one that pays for both per diem and automobile expenses tied to federally defined rates.

The Sales Compensation Paradigm

2005-10-28T00:52:00.000-07:00

By Don McNamara

How do you protect cash positions while balancing the seemingly contradictory problem of keeping cost of sales under control and your sales force intact while revenues decrease. Compensating sales efforts appropriately is one solution for protecting margins, profit and cash. Solving this issue may take creating a new paradigm for sales representative compensation.

Longing For the Good Old Days

It was like a feeding frenzy when business was booming, backlogs were steadily increasing and customers were paying regularly. Just like the stock market, everyone was chirping ‘go baby go’. But times have changed; no doubt your business plan has changed too. Now how we compensate a sales force properly is these market conditions needs to be revisited also.

Sales Force Goals

What are the goals of your sales force? Maybe they have only a sales goal. Perhaps they have a sales and revenue goal, where revenue is net sales after returns, adjustments and back charges. Possibly they have a profitability goal too since your organization desires quality, not merely quantity. Regardless of times, determining how to keep sales incentives appropriate without resorting to Draconian measures that annihilate the heart of the sales organization – both literally and psychologically, is vital too.

Let The Incentive Methods Begin

Compensation on Sales Volume

The most traditional of all methods, it carries with it some in-built shortcomings. If the plan pays commission rates based on total dollar value of the orders, then the rep has little incentive to dramatically exceed the established quota. If you will, the rate is the rate, no matter what, no matter how much is sold.

Compensation Rate with Accelerators

In this plan quarterly targets accumulate to an annual quota. When these quarterly quotas are achieved, the next accelerated commission rate gets activated. This strategy does provide additional incentive over the flat commission rate plan though since the rep is striving for the next higher commission rate at all times. Shortcoming: the sales rep is only working toward the average rate.

Accelerators and Year End Bonus

Add a flat amount as a bonus when over quota attainment is reached. This will incrementally incentivize. Shortcoming: the sales force sees the bonus as paid out at plan year-end, which usually is paid after a years worth of effort and energy. It does not give them the ability to earn the bonus in the present.

Net: traditional sales compensation plans are back end loaded, i.e. a payout is awarded after successive sales hurdles are reached or as the plan year ends for over goal performance. That’s wonderful if everyone makes quota every quarter, not a likely scenario – especially in this economy.

Coping with a Few Realities

All businesses, regardless of market space, are seeing declining revenues due to fewer actual orders with lower order value. The fact is cash once collected amounts to less.

We can improve margins and cash by cutting variable sales expenses. On the surface this looks like a no-brainer. However, you could be triggering call reluctance behavior. Customers being paid attention to now will be stronger customers when the economy improves. Besides you risk having your competition fill the void your sales staff is creating by fewer customer and prospect calls.

Less revenue and cash means a staff headcount reduction. Or should it? If you cut sales staff now when business improves you will need to staff up again. The knowledge base of severed employees will take time to be gained back by new sales members resulting in an unproductive learning curve for you and them.

An intelligent sales incentive program is one that compensates for achievement according to the company’s business plan. And in these economic times every company in America has had to modify their business plan.

A New Paradigm

If your goals are to maximize unused plant capacity, optimize your supply chain resources and smooth the bumps in your quarterly business cycles, then the sales compensation plan that follows just might contribute to that end, and help cash flow too. It is based on measuring and compensating sales efforts quarterly.

Baseline Presumption

If your sales team is like most, 80% of the business is generated by the top 20% of your sales force. So why not compensate the star performers and overachievers well for their results every quarter.

Step 1: Take the assigned quota for each individual and break it down to assignment per quarter.

Step 2: Assign a commission rate to that quota as if it were paid at 100% achievement.

Step 3: Determine what reduced rate you would be willing to pay for achievement of quarterly quotas for 70%, 80% and 90% attainment.

Step 4: Decide what graduated commission rate you would be willing to pay for achievement over the quarterly 100% attainment for various levels, e.g. 110%, 120%, etc.

Step 5: Watch the results come in for the first quarter this is implemented.

Step 6: Those sales persons achieving 70% of their quarterly quota, will receive the 70% rate; those at 80%, the 80% rate; those at 90% the 90% rate; those at 100% the 100% rate.

Step 7: Those exceeding 100% in any quarter, receive the effective rate of overachievement.

Why a Floating Commission Plan Works

1.A Floating Compensation Plan can be accommodated to fit any of the ways you measure sales person goal attainment; sales, revenue, sales and revenue or profit.

2.Regardless of the economic fortunes of the enterprise, you keep incentive compensation proportional to measurables like sales, revenue or profits.

3.You conserve outlays of cash; you compensate those contributing higher value to the enterprise by compensating them proportionally higher. To prove the point, investigate your mean sales dollar of revenue and profit for all orders by quarter for the last year. Then contrast the mean percentage rate of commission payout for the entire sales force. You will see that higher commission rates are paid to sales persons that contribute less to the business.

4.You install a measurement mentality in the sales team that is based on quarterly performance, probably the same way you are compensated.

5.You want to keep sales force self-motivation always at peak levels. They will see, especially the 20% mentioned above, that they maximize their income by exceeding quota every quarter. Getting paid in the near term is an incentive too good to ignore.

6.The top 20% rightly will conclude they are being compensated at higher levels than the average and ordinary in the sales force.

7.Psychologically paying immediately following achievement has great motivating effect, especially if your sales force is highly driven for financial reward with near in gratification for their successes.

There are numerous variants, mutations and perturbations to this concept. While we cannot cover all of them here, nonetheless our purpose was to expose a very viable alternative in sales compensation that can be used to drive the sales behavior you wish. It is purely enterprise and situational dependent.

So the real question is can you use it? Before you try it, analyze the financial impact of the new paradigm, or for that matter any new sales compensation would have on the results of the enterprise. Determine if in modifying the plan you influence the type of sales behavior that contributes to your goals and objectives. Then communicate clearly to your sales force how their opportunities will be enhanced, how their earning potentials can be increased with the new plan.

Always remember, nobody likes someone fooling around with his or her compensation plan. When you convey the message thoroughly, the sales force will be more apt to accept the change in a more positive frame of mind. However any change, especially a compensation one, will take time for the sales people to internalize why it is a good thing for them and the company.

Therefore, spend at least two months educating your sales force about the intended changes, what they are expected to do and why it really is in their best interest. Solicit their input; they will feel like they are part of the decision making process instead of having a policy forced on them.

You will see a few unexpected benefits come up immediately. The sales organization will get a mentality that they need to close all available opportunities before the new plan gets implemented. Additionally, you will see prospecting activities rise because they will want to fill up their sales pipelines with new opportunities that will be compensated under the new plan. Net? Everybody wins.

And your best performers (that top 20%) will recognize immediately how they can optimize the compensation schedule and contribute to the company’s goals at the same time. Simply stated, at the end of the day, this plan or any other must coincide and contribute to the business goals of your organization.

Create a compensation strategy

2005-10-28T00:19:00.000-07:00

By Leon Frank

How clear is your compensation agreement for your sales force? Can you recite their commission structure from memory? Can your salespeople?

Too often, businesses create a complex legal document that makes their attorney happy, but does nothing to motivate salespeople because they simply don't understand it. One quick test of your current compensation program is to ask your salespeople to calculate what their commission would be for three different sales scenarios. Compare their calculations to yours. If they can't do it from memory, or there is any discrepancy between their calculations and yours, you have a problem.

And more important, not only is your compensation agreement not functioning as a motivating program — it is guaranteed to cause problems when the salespeople get their paychecks.

Six steps to a stronger compensation program
Here are six steps to creating a compensation program that will effectively motivate your sales force.

Put it in writing — Is your sales force compensation agreement in writing and current, or have you amended it as you've gone along and hoped everyone has the same memory? If you don't put it in writing with a copy for each person, I guarantee you will have disagreements when it's time to pay the commissions. Write it down and keep it handy. Your compensation agreement is the ongoing motivational force you are using to improve sales, and your salespeople should have it at the ready to refer to often.

Make it simple and clear — Simplicity is the key to effective sales compensation packages. Be sure all elements of your compensation package are so straightforward that any three people calculating a commission will come up with the same number. If your salespeople are spending their time calculating their commissions, that's less time that they are out selling your products. To keep it simple, don't try to accomplish every element of their work objectives through the compensation plan. Identify three or four elements that are key and base commissions on them. For example, don't attempt to motivate people to make phone calls, do follow-up and send out letters through the compensation program. These do not bring in revenues to the company and, as such, should not be directly compensated. Compensate salespeople for sales made, with provisions for bonuses when certain goals are met.

Make it consistent — Will all of your salespeople receive the same compensation for the same performance? This is critical to overall accomplishment, teamwork and turnover. Salespeople expect fairness from you. If you are not compensating them equally for the same performance, you'd better have a reason they can understand and accept. Of course, this doesn't mean that all salespeople will receive the same salary. You may pay different people different base salaries based on experience and performance. And different sales successes will yield different individual paychecks. But overall, there should be consistency in your compensation plans for people doing like jobs with like skills. If you are not doing this and believe that the differences are justified, create different job titles so you can match the varied compensation levels with truly different jobs.

Make compensation unlimited — Do you have limits to how much your salespeople can earn? If so, you have limits on how much revenue they will bring in. Your objective should be to help your salespeople earn enormous amounts of money for themselves. If your compensation plan creates resentment for their accomplishments, something is wrong — either with the plan or with your employees' understanding of the value of the sales force. Salespeople bring in the stuff that allows everyone else to have a job. Compensate them for their performance and structure their compensation so when they do well, everyone in the company is happy for the increased revenues.

Align salespeoples' compensation with company goals — Your sales compensation plan is the implementation program for your company's goals. Outline your goals right in the compensation package and then design commissions and bonuses around meeting and exceeding those goals. Put work objectives in the agreement as well, even though salespeople won't be directly compensated for them. Make the list as detailed as possible. Do you want them to call on new customers, answer phone inquiries or help design marketing strategies? Do you want them to increase sales by 10 percent, gain 25 new customers or increase retention by 20 percent? Make a complete list of their work requirements and your accomplishment goals and outline all this in their written compensation agreement.

Get help from others — The primary success element to designing any compensation program — especially a commission-based structure — is to not do it all by yourself. This is the kind of project that deserves a committee, which should include outsiders who are familiar with the industry, people from your management team (including your sales manager), and at least one of the salespeople who will be compensated by the program. Did you just yell "No Way!" when you read that part about a salesperson helping decide his own commission? Sounds a bit like letting the fox help design the lock for the hen house, doesn't it? But who better to understand the challenges facing your sales team? Who better to point out flaws or holes in your program? Who better to provide the insight necessary to create a plan that will actually motivate the sales team to better performance? Assuming you pick someone with a history with your company and who is objective and articulate, a salesperson on your compensation committee will be invaluable. Once you have a committee in place, hold several meetings with the goal of structuring a sales compensation program that will motivate the sales force to reach your corporate goals. Make a huge poster of these and post it in the meeting room. As you try each element of a commission package, test it against reaching the goals.

Elements of compensation
Each salesperson's compensation should consist of three elements: base salary or draw, commission for sales made, and bonuses for goals met. The last is typically a group effort and likely will result in each salesperson splitting an amount of money. These bonuses are frequently key to getting salespeople to work together to help each other's customers. The right commission structure can make a huge difference in your revenues during the next year. Take the time to structure it correctly and then work with your sales force to make sure it is a motivating tool. You'll pocket the results.

Sales Compensation _ Book Reviews

2005-10-27T06:43:00.000-07:00

Compensating the Sales Force: A Practical Guide to Designing Winning Sales Compensation Plans( Click the image for details )

David J. Cichelli

ABOUT THE BOOK

Compensating the Sales Force: A Practical Guide to Designing Winning Sales Compensation Plans

SYNOPSIS

How sales people are paid has an immense impact on their performance. The right sales compensation program can lift a company's sales into the stratosphere and send its bottom line soaring; a poorly constructed plan can be disastrous. How do you find out whether your company's plan is working as well as it should? How can you construct and maintain a program that's tailored to your company's needs and sure to succeed? In Compensating the Sales Force sales compensation guru David Cichelli helps you answer these questions and many more.

While sales compensation is a powerful tool, choosing and structuring the right plan can be confusing. This authoritative, jargon-free handbook guides you through the entire process, from setting target pay, selecting the right performance measures, and establishing quotas to determining the mix and upside opportunities, and constructing the right formula.

In clear, concise language, this unique guide explains the basic concepts of sales compensation design, which apply to every industry; reveals why job content, not industry, is the source of compensation design; and provides a hierarchy of sales compensation formula types. You'll learn how to construct and calculate formulas for payout purposes and establish support programs such as quota allocation, sales crediting, and account assignment.

Cichelli provides a 10-step process for redesigning the sales compensation plans at your company. He presents guidelines for administering and automating your program, rolling out a new plan and explaining it to your sales force, and auditing and assessing your sales compensation program.

Complete with dozens of real-world examples that illustrate important points and demonstrate specific techniques and procedures, Compensating the Sales Force provides all of the cutting-edge tools you need to design, construct, and implement an effective sales compensation plan that maximizes profits and keeps them climbing.

David J. Cichelli has 20 years of experience designing sales compensation packages for companies large and small, including Verizon, Charles Schwab, FedEx, and Hewlett Packard.

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Design a sales compensation plan that sends profits soaring

Sales compensation works! It's the most effective tool managers have for motivating the sales force, improving their performance, and increasing profits. Creating a winning compensation plan, however, requires careful analysis, accurate calculation, and a clear understanding of sales compensation fundamentals.

Compensating the Sales Force provides expert guidance in the strategic, tactical, and technical aspects of sales compensation plan design. It supplies clear guidelines for selecting the right compensation plan for any type of firm, of any size, in any industry, and it offers step-by-step procedures for implementing each approach. This unique, jargon-free handbook gives managers the expertise they need to:

Set target pay
Select the right performance measures
Establish quotas
Determine the mix and upside opportunity
Construct and calculate the most effective formula
Implement support, administration, communication and assessment programs

Book No 2

The Sales Compensation Handbook ( Click the image for details )

Truly a comprehensive resource, The Sales Compensation Handbook, Second Edition is packed with problem-solving advice and insights that will help you keep your reps and your company profitable. Written by experienced analysts from one of the world's leading consulting firms, the book gives you "pearls of wisdom" from years of first-hand experience and reveals a myriad of high-level techniques that show you how to: initiate and reinforce a team selling approach; tie sales compensation packages directly to customer satisfaction, profit, and other company goals; recognize and reward the competencies that underpin effective sales strategy execution; and much more.