Chapter 2 Traditional Bases For Pay

Strategic Compensation: A Human Resource
Management Approach
Tenth Edition
Chapter 2
Traditional Bases for Pay
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Learning Objectives
3.1 Describe seniority and longevity pay practices.
3.2 Explain the merit pay approach to compensation.
3.3 Explore a variety of performance appraisal methods.
3.4 Discuss how compensation professionals can strengthen
the pay-for-performance link.
3.5 Summarize the possible limitations of merit pay programs.
Learning Objective 3.1
• Describe seniority and longevity pay practices.
Seniority Pay
• Seniority and longevity pay systems reward employees
– with periodic additions to base pay
– according to employees’ length of service in performing
their jobs
• According to human capital theory, employees become
more valuable over time – employees’ knowledge and skills
generate productive capital known as Human Capital
Traditional Bases for Pay
• Seniority Pay
Seniority pay systems are those in which the primary basis
for pay increases is the employee's tenure. It should be
noted that seniority-based pay systems can take into
account performance, but the main factor is tenure.
• Longevity Pay
Longevity pay is a contractual agreement to pay an
employee based on the length of their employment with the
same company. Longevity pay is often used when an
employee has reached the maximum amount at which the
pay for their position can go.
Historical Overview
• As an outcome of labor and management negotiations,
codified in collective bargaining agreements
• Labor unions sought to ensure consistent treatment of
employees, including
– pay rates
– pay increase amounts
– frequency of pay increase awards
• Political pressures in the public sector
Example: Hourly Wage Rates by
Seniority Level
Table 3.1 Hourly Wage Rates by Seniority Level
Hourly wages blank blank blank blank

Classification
Title Start 13 Months 25 Months 37 Months
Staff Nurse I $23.19 $24.47 $25.77 $27.03
Nursing Assistant $11.50 $11.77 $12.18 $12.54
Medical Assistant $16.95 $17.82 $18.67 $18.67
Medical $20.42 $21.86 $23.29 $24.73
Technologist
Source: Based on Agreement between the Board of Trustees of the University

of Illinois and Local 698 of The American Federation of State, County, and
Municipal Employees, A F L-C I O.
Longevity Pay Characteristics
• Same principles as seniority pay
• Longevity pay designed to:
– Address pay of employees who reach maximum pay
grade rates based on seniority
– Rewards employees with periodic pay increases that
do not become part of base pay
• Used for most government employees
• General Schedule system for federal employees
General Schedule (GS) (1 of 3)
• Divided into 15 classifications
• Classifications based on skills, education, and
experience levels
• Employees eligible for 10 within-grade pay increases
(WGI)
• Waiting period within steps varies between 1 and 3
years, taking 18 years to progress from step 1 to step
10
Table 3.2 Salary Table 2018-GS (Annual Rates by Grade and Step)
Grade Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Step 10 WGI
1 18785 19414 20039 20660 21285 21650 22267 22891 22915 23502 VARIES
2 21121 21624 22323 22915 23175 23857 24539 25221 25903 26585 VARIES
3 23045 23813 24581 25349 26117 26885 27653 28421 29189 29957 768
4 25871 26733 27595 28475 29319 30181 31043 31905 32767 33629 862
5 28945 29910 30875 31840 32805 33770 34735 35700 36665 37630 965
6 32264 33339 34414 35489 36564 37639 38714 39789 40864 41939 1075
7 35854 37049 38244 39439 40634 41829 43024 44219 45414 46609 1195
8 39707 41031 42355 43679 45003 46327 47651 48975 50299 51623 1324
Table 3.2 [continued]
Grade Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Step 10 WG I
9 43857 45319 46781 48243 49705 51167 52629 54091 55553 57015 1462
10 48297 49907 51517 53127 54737 56347 57957 59567 61177 62787 1610
11 53062 54831 56600 58369 60138 61907 63676 65445 67214 68983 1769
12 63600 65720 67840 69960 72080 74200 76320 78440 80560 82680 2120
13 75628 78149 80670 83191 85712 88233 90754 93275 95796 98317 2521
10426 10724
14 89370 92349 95328 98307 101286 110223 113202 116181 2979
5 4
10512 11563 12264 12614

15 108627 112131 119139 129651 133155 136659 3504
3 5 3 7
Source: U.S. Office of Personnel Management. Available: www.opm.gov, accessed January 17, 2018
Advantages and Disadvantages of
Seniority Pay
• Advantages:
– Employees perceive that they are treated fairly
– Facilitates administration of pay
– Avoids perception of favoritism
• Disadvantages:
– Poor fit with most competitive strategies
– No incentives to improve
– Growing costs
• Explain the merit pay approach to compensation.
Merit Pay Plans
• Award permanent pay increases for performance
• Reward excellent effort or results
• Motivate future performance
• Help retain valued employees
• In 2017, average merit increase was 3.0%
• Highest performers earned 4.5%
Merit Pay
• Merit pay is when salary or compensation is dependant
upon merit or performance.
• This is also known as
Participants in Merit Pay Plans
• In 2017, approximately 65% of companies used merit pay
plans
• In 2010 and 2014, 65% and 72%, respectively
• Most often adopted in the private for-profit sector
Elements of Effective Merit Pay
Programs
• Based on objective and subjective indicators of job
performance
• Periodic performance reviews
• Realistic and attainable standards
• Pay increases reflect performance
• Just-meaningful pay increases: amounts that employees
will see as making a meaningful change in compensation
for their performance
• Explore a variety of performance appraisal methods.
Performance Appraisal Plans (1 of 2)
• Trait systems: Ask raters to evaluate each employee’s
traits or characteristics
• Comparison systems: Evaluate a given employee’s
performance against the performance of other employees
Performance Appraisal Plans (2 of 2)
• Behavioral systems: Rate employees on the extent to
which they display successful job performance behaviors
• Goal-oriented systems: Used mainly for managerial and
professional employees and typically evaluate employees’
progress toward strategic planning objectives
Sample Traits
• Judgment
• Leadership
• Dependability
• Cooperation
• Initiative
• Creativity
Trait Rating Form
Table 3.4 A Trait-Oriented Performance Appraisal Rating Form
Employee’s Name: Employee’s Position:
Supervisor’s Name: Review Period:
Instructions: For each trait below, circle the phrase that best represents the employee.
1. Diligence
a. outstanding b. above average c. average d. below average e. poor
2. Cooperation with others
3. Communication skills
4. Leadership
5. Decisiveness
Comparison Systems
• Rates and ranks performance
• Pay raises based on ranking
• Types
– Forced distribution
– Paired comparisons
Forced Distribution Performance Appraisal
Rating Example (1 of 2)
Table 3.5 A Forced Distribution Performance Appraisal Rating Form
Instructions: You are required to rate the performance for the previous 3 months
of the 15 workers employed as animal keepers to conform with the following
performance distribution:
• 15 percent of the animal keepers will be rated as having exhibited poor
performance.
• 20 percent of the animal keepers will be rated as having exhibited below-
average performance.
• 35 percent of the animal keepers will be rated as having exhibited average
performance.
• 20 percent of the animal keepers will be rated as having exhibited above-
average performance.
• 10 percent of the animal keepers will be rated as having exhibited superior
performance.
Forced Distribution Performance Appraisal
Rating Example (2 of 2)
Table 3.5 [continued]
Use the following guidelines for rating performance. On the basis of the five duties
listed in the job description for animal keeper, the employee’s performance is
characterized as:
• Poor if the incumbent performs only one of the duties well.
• Below average if the incumbent performs only two of the duties well.
• Average if the incumbent performs only three of the duties well.
• Above average if the incumbent performs only four of the duties well.
• Superior if the incumbent performs all five of the duties well.
Paired Comparison Performance Appraisal
Rating Form Example
Table 3.6 A Paired Comparison Performance Appraisal Rating Form
Instructions: Please indicate by placing an X by which employee of
each pair has performed most effectively during the past year.
__X__ Bob Brown Blank __X__ Mary Green

Blank Mary Green Blank Blank Jim Smith
__X__ Bob Brown Blank Blank Mary Green
Blank Jim Smith Blank __X__ Allen Jones
Blank Bob Brown Blank Blank Jim Smith
__X__ Allen Jones Blank __X__ Allen Jones
Behavioral Systems
• Critical-incident technique (CIT)
• Behaviorally anchored rating scales (BARS)
Critical Incident Technique (CIT)
• Employees and supervisors identify and label job
behaviors and results
• Supervisors observe and record
• Requires extensive documentation
Critical Incidents Performance Appraisal
Rating Form Example (1 of 2)
Instructions: For each description of work behavior below,
circle the number that best describes how frequently the
employee engages in that behavior.
1. The employee removes manure and unconsumed food
from the animal enclosures.
a. Never b. Almost never c. Sometimes d. Fairly often
e. Very often
2. The employee haphazardly measures the feed items
when placing them in the animal enclosures.
e. Very often
Critical Incidents Performance Appraisal
Rating Form Example (2 of 2)
3. The incumbent leaves refuse dropped by visitors on and
around the public walkways.
e. Very often
4. The incumbent skillfully identifies instances of
abnormal behavior among the animals, which
represent signs of illness.
e. Very often
Behaviorally Anchored Rating Scales
(BARS)
• Based on 8–10 expected job behaviors
• Employees rated on ability to perform each behavior
• Ratings highly defensible in court
• Encourages all raters to make evaluations in similar ways
Behaviorally Anchored Rating Scale
Example
Instructions: On the scale below, from 7 to 1, circle the number that best describes how
frequently the employee engages in that behavior.
7 The employee could be expected to clean the animal enclosures thoroughly and remove
refuse from the public walkways as often as needed.
|
6
|
5 The employee could be expected to clean the animal enclosures thoroughly and remove
refuse from the public walkways twice daily.
|
4
|
3 The employee could be expected to clean the animal enclosures and remove refuse from
the public walkways in a haphazard fashion twice daily.
|
2
|
1 The employee could be expected rarely to clean the animal enclosures or remove refuse
from the public walkways.
Goal-Oriented System
• Management-by-objectives (MBO)
– Supervisors and employees set objectives
– Highly effective technique
– Rated on how well objectives are met
– Mainly for professionals and managers
Performance Appraisal Practices
• Conduct a job analysis
• Incorporate results into ratings
• Trains supervisors on use
• Implement formal appeals and review of ratings processes
Sources of Performance Appraisal
Information
• Employee
• Supervisor
• Coworkers
• Subordinates
• Customers/clients
360 Degree Performance Appraisal
• Uses more than one appraisal source
• Reduces common appraisal errors
• Results in a more comprehensive and fair view of
performance
Major Types of Rating Errors
• Bias errors
• Contrast errors
• Errors of central tendency
• Errors of leniency or strictness
Bias Errors
• First-impression effect
• Positive halo effect
• Negative halo effect
• Similar-to-me effect
• Illegal discriminatory biases
Contrast Errors
• Supervisor compares employees’ performance to other
employees not to explicit performance standards
• What if the best employee is average
Errors of Central Tendency
• Supervisors rate all employees as average
• Usually occurs when only extreme behaviors require
documentation
Errors of Leniency or Strictness
• Leniency errors → managers rate employees’
performances more highly than they would rate them
compared against objective criteria
• Strictness error → supervisors rate employees’
performance lower than they would rate them if compared
against objective criteria
• Summarize the possible limitations of merit pay programs.
Limitations of Merit Pay Programs
• Failure to differentiate among performers
• Poor performance measures
• Supervisor biases
• Poor communication
• Using non merit factors
• Undesirable competition
• Little motivational value
• Undesirable social structures
• Mounting costs

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Strategic Compensation: A Human Resource

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Hourly wages blank blank blank blank

Source: Based on Agreement between the Board of Trustees of the University

10512 11563 12264 12614

• Average if the incumbent performs only three of the duties well.

• Superior if the incumbent performs all five of the duties well.

X Bob Brown Blank X Mary Green

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