Chapter 3-1

STRATEGIC COMPENSATION

A Human Resource Management Approach

Chapter 3:

Traditional Bases for Pay: Seniority and Merit

Copyright © 2015 Pearson Education, Inc. 3-1

Learning Objectives

1. Describe seniority and longevity pay practices.

2. List at least three elements of merit pay.

3. Give examples and definitions of performance appraisal methods.

4. Explain at least three ways compensation professionals can strengthen the pay-for-performance link and summarize each one.

5. Discuss three possible limitations of merit pay programs.


Learning Objective 1

Describe seniority and longevity pay practices.


Basis for Seniority Pay

• Employees become more valuable over time

• Good employees may leave if not compensated fairly

• Rationale based on the human capital theory


Seniority Pay

• Designed to award job tenure

• Set base pay with time-designated increases

• Employees perceive that they are treated fairly

• Facilitates administration of pay

• Avoids perception of favoritism

• Poor fit with most competitive strategies


Collective Bargaining

• Designed to:

– Negotiate labor contracts– Provide grievance procedures

• Led to:

– Job control unionism– Collective bargaining units– Union shops


Hourly Wages Rates by Seniority Level


Hourly wages

Classification title

Start 13 months

25 months

37 months

49 months

Staff Nurse I $19.07 $20.19 $21.31 $22.40 $23.49

Nursing Assistant

$9.94 $10.17 $10.53 $10.83 $11.01

Medical Assistant

$14.65 $15.40 $16.13 $16.92 $17.83

Medical Technologist

$17.66 $18.90 $20.13 $21.38 $22.60

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


General Schedule (GS)

• Divided into 15 classifications

• Based on skills, education, and experience levels

• Employees eligible for 10 within-grade pay increases

• Step waiting periods of 1–3 years



List at least three elements of merit pay.


Merit Pay Plans• Pay increases based on performance

• Reward excellent effort or results

• Motivate future performance

• Help retain valued employees

• In 2013, average merit increase ranged between 2.5 and 2.8%

• The lowest performance earned 0.2%, average, 2.6%, and highest 4.6%


Elements of Merit Pay

• Based on objective and subjective indicators of job performance

• Periodic performance reviews

• Realistic and attainable standards

• Pay increases reflect performance



Give examples and definitions of performance appraisal methods.


Performance Appraisal Plans

• 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 (cont’d)

• 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.


Trait System Characteristics

- Quality of work - Judgment

- Quantity of work - Leadership responsibility

- Dependability - Decision-making ability

- Cooperation - Creativity

- Initiative


Trait-Oriented Performance Appraisal Rating Form Example

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. Diligencea. Outstanding b. Above average c. Average d. Below average e.

Poor

2. Cooperation with othersa. Outstanding b. Above average c. Average d. Below average e.

Poor

3. Communication skillsa. Outstanding b. Above average c. Average d. Below average e.

Poor

4. Leadershipa. Outstanding b. Above average c. Average d. Below average e. Poor


Comparison Systems

• Rates and ranks performance • Pay raises based on ranking

• Types– Forced distribution– Paired comparisons


Forced Distribution Performance Appraisal Rating Example


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.

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 ExampleInstructions: Please indicate by placing an X by which employee of each pair has performed most effectively during the past year.

__X__ Bob Brown __X__ Mary Green

Mary Green Jim Smith

__X__ Bob Brown Mary Green

Jim Smith __X__ Allen Jones

Bob Brown Jim Smith

__X__ Allen Jones __X__ Allen Jones


Behavioral Systems

• Critical-incident technique (CIT)

• Behaviorally anchored rating scales (BARS)

• Behavioral observation scales (BOS)


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


Instructions: For each description of work behavior below, circle the number that best describes how frequently the employee engages in that behavior.

1. The incumbent removes manure and unconsumed food from the animal enclosures.

a. Never b. Almost never c. Sometimes d. Fairly often e. Very often

2. The incumbent haphazardly measures the feed items when placing them in the animal enclosures.


3. The incumbent leaves refuse dropped by visitors on and around the public walkways.


4. The incumbent skillfully identifies instances of abnormal behavior among the animals, which represent signs of illness.


Behaviorally Anchored Rating Scales (BARS)

• Based on 8–10 expected job behaviors

• Employees rated on ability to perform each behavior

• Ratings highly defensible

• 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 incumbent could be expected to clean the animal enclosures thoroughly and remove refuse from the public walkways as often as needed.|6|5 The incumbent could be expected to clean the animal enclosures thoroughly and remove refuse from the public walkways twice daily.|4|3 The incumbent could be expected to clean the animal enclosures and remove refuse from the public walkways in a haphazard fashion twice daily.|2|1 The incumbent could be expected rarely to clean the animal enclosures or remove refuse from the public walkways.

Behavioral Observation Scales (BOS)

• Documents positive performance behaviors on job dimensions

• Employees rated on exhibited behaviors

• Ratings averaged for overall rating


Goal-Oriented System

Management-by-objectives

• 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 process


Sources of Performance Appraisal Information

• Employee

• Supervisor

• Coworkers

• Subordinates

• Customers/clients


360 Degree Performance Appraisal

• Uses more than one appraisal source

• Reduces recruiting and hiring costs

• Appropriate for work team evaluations


Major Types of Rater 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’ performances 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 using objective criteria

• Causes employees to believe they are going to receive larger pay raises than they deserve

• Strictness error supervisors rate employees’ performance lower than they would rate them using objective criteria



Explain at least three ways compensation professionals can strengthen the pay-for-performance link and summarize each one.


Pay for Performance Link

• Link appraisals to business goals

• Analyze jobs

• Communicate

• Establish effective appraisals

• Empower employees

• Differentiate among performers



Discuss three possible limitations of merit pay programs.


Limitations of Merit Pay Programs


• Failure to differentiateamong performers

• Poor measures

• Supervisor biases

• Poor communication

• Undesirable social structures

• Using nonmerit factors

• Undesirable competition

• Little motivational value

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