Another type of job evaluation system is the point-factor system, which determines the value of a job by calculating the total points assigned to it. The points given to a specific job are called compensable factors. These can range from leadership ability to specific responsibilities and skills required for the job. Once the compensable factors are determined, each is given a weight compared to the importance of this skill or ability to the organization. Some of their compensable factors include the following:
- Psychological demands
- Interpersonal skills
- Internal and external contacts
In this point-factor system, autonomy ranks the highest and is given a weight of twenty-nine, while knowledge is given a rate of twenty, for example. Each of the compensable factors has a narrative that explains how points should be distributed for each factor. In this system, one hundred points are given for knowledge for a bachelor‘s degree and two to three years of experience, and eighty points are given if an employee has an associate‘s degree or high school diploma and two to three years of experience. The points are then multiplied by the weight (for knowledge, the weight is twenty) to give a final score on that compensable factor. After a score is developed for each, the employee is placed on the appropriate pay level for his or her score. Another option for job evaluation is called the Hay profile method. This proprietary job evaluation method focuses on three factors called know-how, problem solving, and accountability. Within these factors are specific statements such as ―procedural proficiency.‖ Each of these statements is given a point value in each category of know-how, problem solving, and accountability. Then job descriptions are reviewed and assigned a set of statements that most accurately reflect the job. The point values for each of the statements are added for each job description, providing a quantitative basis for job evaluation and eventually, compensation. An advantage of this method is its quantitative nature, but a disadvantage is the expense of performing an elaborate job evaluation.
Once you have performed a job evaluation, you can move to the third step, which we call pay grading. This is the process of setting the pay scale for specific jobs or types of jobs.
The first method to pay grade is to develop a variety of pay grade levels. Organizations that operate in several cities might use the second method, pay grade scales, but they may add percentages based on where someone lives. Thirdly, some organizations have moved to a delayering and banding process, which cuts down the number of pay levels within an organization. Pay Grade Scale:Once the levels are developed, each job is assigned a pay grade. When employees receive raises, their raises stay within the range of their individual pay grade, until they receive a promotion that may result in a higher pay grade. The advantage of this type of system is fairness. Everyone performing the same job is within a given range and there is little room for pay discrimination to occur. Pay Grade Scale: For example, the cost of living in a particular geographical area, is lower than another part. If an organization has offices in both places, it may choose to add a percentage pay adjustment for people within a geographic area where cost of living is high.One of the disadvantages to pay grading is the possible lack of motivation for employees to work harder. They know even if they perform tasks outside their job description, their pay level or pay grade will be the same. This can incubate a stagnant environment. Sometimes this system can also create too many levels of hierarchy. For large companies, this may work fine, but smaller, more agile organization may use other methods to determine pay structure. Delaying: Delayed pay grade occurs when an organization founds its employees less likely to take reassignment that was at lower pay grade, even though the assignment might have been good development opportunity. Rather than use a pay grade scale, some organizations use a going rate model. In this model, analysis of the going rate for a particular job at a particular time is considered when creating the compensation package. This model can work well if market pressures or labor supply-and-demand pressures greatly impact your particular business. For example, if you need to attract the best project managers, but more are already employed (lack of supply)—and most companies are paying $75,000 for this position—you will likely need to pay the same or more, because of labor supply and demand.
Another pay model is the management fit model. In this model, each manager makes a decision about who should be paid what when that person is hired. The downside to this model may be potential discrimination, halo effects, and resentment within the organization. Of course, these factors can create morale issues, the exact thing we want to avoid when compensating employees. In addition to the pay level models we just looked at, other considerations might include the following:
- Skill-based pay. With a skill-based pay system, salary levels are based on an employee‘s skills, as opposed to job title. This method is implemented similarly to the pay grade model, but rather than job title, a set of skills is assigned a particular pay grade.
- Competency-based pay. Rather than looking at specific skills, the competency-based approach looks at the employee‘s traits or characteristics as opposed to a specific skills set. This model focuses more on what the employee can become as opposed to the skills he or she already has.
- Broadbanding. This is similar to a pay grade system, except all jobs in a particular category are assigned a specific pay category. For example, everyone working in customer service, or all administrative assistants (regardless of department), are paid within the same general band.
- Variable pay system. This type of system provides employees with a pay basis but then links the attainment of certain goals or achievements directly to their pay. For example, a salesperson may receive a certain base pay but earn more if he or she meets the sales quota.
Pay Theories Now that we have discussed pay systems, it is important to look at some theories on pay that can be helpful to know when choosing the type of pay system your organization will use. Equity theory is concerned with the relational satisfaction employees get from pay and inputs they provide to the organization.
It says that people will evaluate their own compensation by comparing their compensation to others‘ compensation and their inputs to others‘ inputs. In other words, people will look at their own compensation packages and at their own inputs (the work performed) and compare that with others. If they perceive this to be unfair, in that another person is paid more but they believe that person is doing less work, motivational issues can occur. In HR, we need to look at two factors related to pay equity: external pay equity and internal pay equity. 1. External pay equity: External pay equity refers to what other people in similar organizations are being paid for a similar job. 2. Internal pay equity: Internal pay equity focuses on employees within the same organization. Within the same organization, employees may look at higher level jobs, lower level jobs, and years with the organization to make their decision on pay equity. Expectancy theory is another key theory in relation to pay. The expectancy theory says that employees will put in as much work as they expect to receive. In other words, if the employee perceives they are going to be paid favorably, they will work to achieve the outcomes. If they believe the rewards do not equal the amount of effort, they may not work as hard. Reinforcement theory, developed by Edward L. Thorndike, says that if high performance is followed by some reward, that desired behavior will likely occur in the future. Likewise, if high performance isn‘t followed by a reward, it is less likely the high performance will occur in the future. All these theories provide us information to make better decisions when developing our own pay systems. Other considerations are discussed next.
Pay Decision Considerations
Besides the motivational aspect of creating a pay structure, there are some other considerations.
First, the size of the organization and the expected expansion of the organization will be a factor. For example, if you are the HR manager for a ten-person company, you likely use a going rate or management fit model. While this is appropriate for your company today, as your organization grows, it may be prudent to develop a more formal pay structure.
If your organization also operates overseas, a consideration is how domestic workers will be paid in comparison to the global market. One strategy is to develop a centralized compensation system, which would be one pay system for all employees, regardless of where they live. How you communicate your pay system is extremely important to enhance the motivation that can be created by fair and equitable wage. In addition, where possible, asking for participation from your employees through the use of pay attitude surveys, for example, can create a transparent compensation process, resulting in higher performing employees. Organizations should develop market pay surveys and review their wages constantly to ensure the organization is within expected ranges for the industry. Types of Pay After a pay system has been developed, we can begin to look at specific methods of paying our employees. Remember that when we talk about compensation, we are referring to not only an actual paycheck but additional types of compensation, such as incentive plans that include bonuses and profit sharing. We can divide our total pay system into three categories: pay, incentives, and other types of compensation.
- Pay is the hourly, weekly, or monthly salary an employee earns.
- An incentive, often called a pay-for-performance incentive, is given for meeting certain performance standards, such as meeting sales targets. The advantage to incentive pay is that company goals can be linked directly to employee goals, resulting in higher pay for the employee and goal achievement by the organization.
- Medical insurance, holiday pay, social welfare payments are all aspect of other types of compensation.
2 thoughts on “How To Calculate How Much You Should Charge Employers”
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What are the doubts?