STRATEGIC COMPENSATION

A Human Resource
Management Approach

Chapter 4
Traditional Bases for Pay:
Seniority and Merit

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Prentice Hall, Inc. © 2006 Prepared by David Oakes

 Collective Bargaining

 Designed to:
 Negotiate labor contracts
 Provide grievance procedures
 Led to:
 Job control unionism
 Collective bargaining units
 Union shops
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 Seniority Pay

 Designed to award job tenure

 Set base pay with time- designated
increases
 Facilitates administration of pay
 Avoids perception of favoritism
 Poor fit with most competitive strategies

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 Longevity Pay

 Designed to
 Pay grade maximum for length of service
 To reduce employee turnover

 Used for most government employees

 General Schedule System for federal
employees

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 General Schedule
 Divided into 15 Steps
 Based on skills, education, &
experience levels
 Employees eligible for 10
within-grade pay increases
 Step waiting periods of 1-3 years

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 Merit Pay Plans

 Pay increases based on performance

 Reward excellent effort or results
 Motivate future performance
 Helps retain valued employees
 In 2004, raises averaged 3.5%

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 Elements of Merit Pay

 Based on objective & subjective

indicators of job performance
 Periodic performance reviews

 Realistic & attainable standards

 Pay increases reflect performance

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 Performance Appraisal Plans

 Trait systems

 Comparison systems

 Behavioral systems

 Goal - oriented systems

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 Trait System Characteristics
 Work quality  Judgment

 Appearance  Leadership responsibility

 Dependability  Decision-making ability

 Cooperation  Creativity
 Initiative

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 Comparison Systems

 Rates & ranks performance

 Pay raises based on ranking
 Types
 Forced distribution
 Paired comparisons

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 Behavioral Systems
 Critical-incident technique
(CIT)
 Behaviorally-anchored rating scales
(BARS)

 Behavioral observation scales

(BOS)

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 Critical Incident Technique

 Employees & supervisors identify

& label job behaviors & results
 Supervisors observe & record

 Requires extensive documentation

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 Behaviorally-Anchored Rating
Scales
 Based on 8 - 10 expected job
behaviors
 Employees rated on ability to
perform each behavior

 Ratings highly defensible

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 Behavioral Observation Scales

 Documents positive performance

behaviors on job dimensions
 Employees rated on exhibited behaviors

 Ratings averaged for over-all rating

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 Goal - Oriented System

Management- by-Objectives
 Supervisors & employees set objectives
 Highly effective technique
 Rated on how well objectives are met
 Mainly for professionals & managers

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 Performance Appraisal Practices

 Conduct a job analysis

 Incorporate results into ratings
 Trains supervisors on use
 Implement Formal appeals process

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 Sources of Performance Appraisal
Information

 Employee
 Supervisor
 Coworkers
 Subordinates
 Customers/clients
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 360 Degree Performance Appraisal

 Uses more than one appraisal source

 Reduces recruiting & hiring costs
 Appropriate for work team evaluations

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 Common Raters’ Errors

 Bias errors
 Contrast errors
 Errors of central tendency
 Errors of leniency or strictness

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 Bias Errors

 First-impression effect
 Positive halo effect
 Negative halo effect
 Similar-to-me effect
 Illegal discriminatory biases

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 Contrast Errors

 Supervisor compares employees’

performances to other employees, not
to explicit performance standards

 What if the best employee is average?

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 Errors of Central Tendency

 Supervisors rate all employees as

average

 Usually occurs when only extreme

behaviors require documentation

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 Errors of Leniency
 Leniency errors-managers rate
employees’ performances more
highly than they would rate them
using objective criteria

 Causes employees to believe they

are going to receive larger pay
raises than they deserve
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 Pay For Performance Link

 Link appraisals to business goals

 Analyze jobs
 Communicate
 Establish effective appraisals
 Empower employees
 Differentiate among performers
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 Limitations of Merit Pay Programs
 Failure to differentiate  Undesirable social
structures
 Poor measures  Using non-merit factors

 Supervisor biases  Undesirable competition

 Poor communication  Motivational value small

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 Competitive Strategies
 Lowest-Cost
 Reduce output costs per employee
 Merit pay works if tied to long -
term productivity
 Differentiation
 Make product or service unique
 Merit pay can promote creativity
and risk-taking

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