Page 266 - Encyclopedia of Business and Finance

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Employee Compensation

retaining competent employees. Compensation has to be
fair and equitable among all workers in the same company Wage curve
(internal equity). Internal equity can be achieved when
BASED ON THE JOB POINT METHOD
pay is proportionate to the individual employee’s qualifi-
cations and contributions to a company. On the other
hand, compensation also has to be fair and equitable in 9.0 *
comparison to the external market (external equity). If a 8.5 *
company pays its employees below the market rate, it may 8.0 ****
lose competent employees. In determining adequate pay 7.5 * * **
for employees, a manager must consider the three major Hourly 7.0
Pay * * *
factors: the labor market, the nature and scope of the job,
Rate 6.5 * ***
and characteristics of the individual employee. 6.0 * *
Potential employees are recruited from a certain geo- 5.5 * * *
graphic area—the labor market. The actual boundary of a 5.0 * *
labor market varies depending on the type of job, com-
10 20 30 40 50
pany, and industry. For example, an opening for a systems
Points
analyst at IBM may attract candidates from across the
country, whereas a secretarial position at an elementary
school may attract candidates only from the immediate Figure 1
local area of the school.
Pay for a job even within the same labor market may
vary widely because of many factors, such as the industry, results in discriminatory practices, which violates Title VII
type of job, cost of living, and location of the job. Com- of the Civil Rights Act, and job-based compensation is the
pensation managers must be aware of these differences. To employer’s most powerful defense in court. For job-based
help compensation managers understand the market rate compensation, management must conduct a systematic
of labor, a compensation survey is conducted. A compen- job analysis, identifying and describing what is happening
sation survey obtains data regarding what other firms pay on the job. Each job must be carefully examined to list the
for specific jobs or job classes in a given geographic mar- necessary tasks and actions, identify skills and abilities
ket. Large companies periodically conduct compensation required, and establish desirable behaviors for successful
surveys and review their compensation system to assure completion of the job.
external equity. There are professional organizations that With complete and comprehensive data about all the
conduct compensation surveys and provide their analysis jobs, job analysts must conduct systematic comparisons of
to smaller companies for a fee. them and determine their relative worth. Numerous tech-
Several factors are generally considered in evaluating niques have been developed for the analysis of relative
the market rate of a job. They include the cost of living of worth, including the simple point method, job classifica-
the area, union contracts, and broader economic condi- tion method, job ranking method, and the factor compar-
tions. Urban or metropolitan areas generally have a higher ison method.
cost of living than rural areas. Usually, in calculating the Information resulting from the comprehensive job
real pay, a cost-of-living allowance (COLA) is added to analysis will be used for establishing pay or wage grades.
the base wage or salary. Cost-of-living indexes are pub- Assume that twenty-five jobs range from 10 to 50 points
lished periodically in major business journals. During an in their job scores based on the job point method. All
economically depressed period, the labor supply usually twenty-five of these jobs are reviewed carefully for their
exceeds the demand in the labor market, resulting in lower relative worth and plotted on Figure 1. The x-axis repre-
labor rates. sents job points and the ordinate (y-axis) represents rela-
The characteristics of an individual employee are also tive worth or wage rates. Once a manager can identify fair
important in determining compensation. An individual’s and realistic wages of two or more jobs, desirably top and
job qualifications, abilities and skills, prior experiences, bottom ones, then all the rest can be prorated along the
and even willingness to work in hardship conditions are wage curve in the diagram.
determining factors. Within the reasonable range of a In order to simplify the administration of a wage
market rate, companies offer additional compensation to structure, similar jobs in the approximate cluster are
attract and retain competent employees. grouped together into a class or grade for pay purpose.
In principle, compensation must be designed around Figure 2 shows how twenty-five jobs are grouped into five
the job, not the person. Person-based pay frequently pay grades. Employees move up in their pay within each

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 243