UNIT IV STUDY GUIDE External Competitiveness: Determining the Pay Level Course Learning Outcomes for Unit IV Upon completion of this unit, students should be able to: 8. Research the various options to pay plans. 8.1 Identify the three types of pay levels. 8.2 Analyze the pay mix. 8.3 Determine pay-for-performance plans. Course/Unit Learning Outcomes 8.1 8.2 8.3 Learning Activity Unit Lesson Chapter 7, pp. 214–249 Unit IV Assessment Unit Lesson Chapter 8, pp. 263–300 Unit IV Assessment Unit Lesson Chapter 10, pp. 362–363 Unit IV Assessment Reading Assignment Chapter 7: Defining Competitiveness, pp. 214–249 Chapter 8: Designing Pay Levels, Mix, and Pay Structures, pp. 263–300 Chapter 10: Pay-for-Performance Plans, pp. 362–363 Unit Lesson External Competitiveness External competitiveness is viewed as the pay relationships among organizations or the organization’s pay relative to its competitors (Newman, Gerhart, & Milkovich, 2017). You will find that organizations will conduct benchmark efforts to identify external competitiveness. In the process, factors are identified from the following areas: the labor market, the product/service market, and the organization’s unique characteristics. According to Romanoff, Boehm, and Benson (n.d.), the factors below contribute to wage differences among the markets. Geographic location Industry sector Union status Organization size Company prestige Education and experience level of available workforce Licensing or certification requirements required BHR 3301, Compensation and Benefits Product competition 1 The collected data for each will yield the market value for base pay and benefits thatx need to be offered to UNIT STUDY GUIDE attract and retain the best, skilled employees. However, as the efforts of the benchmark process is underway, Title the initiating organization must be able to meet the demands of the results (i.e., ability to pay). The benchmark process is viewed as a measuring tool and/or guide used in determining and creating your competitiveness (i.e., pay plan, pay level[s], and/or pay mix). Total Compensation Total compensation consists of direct and indirect compensations (i.e., base pay and incentives/bonuses). Per the textbook, total compensation is the complete pay package, including all forms of money, bonuses, benefits, services, and stock options (Newman et al., 2017). The direct compensation portion makes up about 70% of the compensation, with indirect compensation making up about 30%. This can vary according to what is being offered via the compensation package. This is where the organization must identify with pay satisfaction. Is the organization going to be an organization that improves attraction and retention of employees with pay satisfaction? Will they lead, lag, or match? It is important that pay is efficient, fair, and compliant. Consider fairness of individual wage rates for people who are doing the same work/job. However, below are three reasons why organizations emphasize eternal equity, according to Romanoff et al. (n.d.).    Failure to match with other companies will lead to a decline in morale and productivity. Below-average pay will reduce the potential to attract and retain the best employees. Inability to pay higher wages is a sign of managerial failure. Of course, pay will change over time due to the changing market concerns and internal business concerns/strategies that are adjusted and applied over time. However, identifying and applying the appropriate pay mix/pay levels helps an organization with profits, expenses, and employees. The following is an illustration of pay breakdown for direct and indirect compensation of a registered nurse’s position. Figure 1, Direct and indirect compensation for a registered nurse (Salary.com, n.d.) With the chart identifying with the 70/30 mix, it is identifying with more of a market match. A market match is where the pay mimics the pay mix of a competitor. Other pay mix alternatives can be viewed via the textbook on page 245 in Exhibit 7.16. When an organization identifies with the pay strategy, levels, and mix, it is able to better plan in attracting and retaining the best employees, controlling cost, and increasing revenue. For example, higher compensation brings about higher pay satisfaction; improves attraction and retention; and BHR 3301, Compensation and Benefits 2 influences higher quality workmanship, effort, and performance from the employees et al., 2017). UNIT x(Newman STUDY GUIDE Employees view their value relative to the pay. Title Pay Levels There are advantages and disadvantages to pay levels. For example, any type of pay level may not gain any competitive advantage. However, there is a possibility for a disadvantage if the wrong pay level is developed. The pay level policies consist of lead, lag, and/or match.    Lead (for critical skills): This is a wage structure that is set to lead the market for the plan year. Note: Lead is utilized to attract and retain the employees and minimize pay concerns. Lag (jobs easily filled): Lag is a wage structure that is set to match the rates at the beginning of the plan year only. Note: This offsets labor costs but will possibly cause problems with attracting and retaining employees. Match (less-critical skills): This option patterns after the pay mix of a competitor. Note: Match can create some issues and concerns with the ability to pay. An organization can utilize an individual approach or a mix combination over only electing one pay level policy. Of course, the various position types, pay levels, rates, and/or grades will affect the approach. For example, the higher the pay level(s), the higher the labor costs will be. This is why you will find some organizations striking a middle ground and utilizing a mix/combination. According to Newman et al. (2017), there are some consequences of various pay levels, which are listed below. Labor costs Increased pool of qualified applicants Increased quality and experience Reduced voluntary turnover Increased probability of union free status Reduced payrelated work stoppages Pay Mix Pay mix involves the various types of payment or pay forms that make up the total compensation package. This would include base pay, benefits, incentives, bonuses, and/or other options (mandatory and nonmandatory). You can refer to Figure 1 in this lesson to identify how the pay mix was completed for the registered nurse’s position. Refer to Exhibit 7.16 on page 245 of the textbook to identify the type of pay mix policy that applies to the registered nurse’s position (i.e., performance driven, market match, work/life balance, or security).     Performance driven is comprised of the 50/50 approach and is focused more on base pay, benefits, and bonuses than other options. Market match is comprised of the 70/30 approach and is focused more on base pay and benefits instead of other options and bonuses. Work/Life Balance is comprised of the 50/50 approach and is focused more the base pay and benefits instead of other options and bonuses. Security is comprised of the 80/20 approach and is focused more on the base pay than the benefits. According to research, it has been identified that the mix should include self-elected options (e.g., cafeteria plans, where the employees are able to select the benefits which works best for their own personal needs/demands) (Newman et al., 2017). In addition, pay mixes can vary according to country, just as it varies in base pay, benefits, bonuses, and other options. With this type of mix, it is a shared choice in which the employer pays more, and the employees are given the option to decide what is best for their needs/demands. BHR 3301, Compensation and Benefits 3 Pay Plans UNIT x STUDY GUIDE Title An organization’s pay plan can vary from pay-for-knowledge to pay-for-performance. Pay-for-knowledge is where the organization pays for knowledge/increased knowledge in various areas of need and/or expertise. Pay-for-performance is based on the ability to fulfill the demands of the position and measure individual performance (i.e., merit pay, bonus plans, skill-based pay, incentive plans, and variable pay plans). Below is a breakdown of each of the pay plans.      Merit pay plans: Recognizes outstanding past performance Bonus plans: Lump sum payment to an employee in recognition of goal achievement Skill-based pay plans: Payment based on knowledge, skills, and abilities (KSAs) of the employees Incentive pay plans: Commission based on future performance Variable pay plans: Pay according to productivity, which varies with the firm’s profitability Each pay plan defines how employees are compensated according to work performed within the workforce. The pay-for-knowledge plan pays on the basis of knowledge, skills, and job variety. The pay-for-performance plan pays based on performance. variety of pay variety of skills Pay-for-performance Pay-for-knowledge merit pay bonus plans skill-based pay incentive plans variable pay plans Overall, the following are some key takeaways for this unit. Pay-for-performance and pay-for-knowledge:        are viewed as the pay relationships among organizations, dictate internal changes, provide a degree of accountability, reduce turnovers, strive to attract and retain talent through lead and match pay levels, identify the effects of quality in the candidate pool, and identify the various types of payment or pay forms that make up the total compensation package. Other takeaways are listed below.       Pay-for-knowledge is where the organization pays for knowledge/increased knowledge in various areas of need and/or expertise. Compensation is affected by supply and demand. Higher compensation will increase labor costs. The lag pay level sends a message of not being valued by the organization. Pay-for-performance is based on the ability to fulfill the demands of the position. Higher compensation brings about higher pay satisfaction; improves attraction and retention; and influences higher quality, effort, and performance from the employees. BHR 3301, Compensation and Benefits 4 Summary UNIT x STUDY GUIDE Title As we move into Unit V, we will explore merit-based and pay-for-performance pay plans. In addition, we will explore and evaluate performance appraisal programs. Areas to focus on with performance appraisals are as follows: (1) improve appraisal formats, (2) select the right raters, (3) understand how raters process information, and (4) train raters to rate more accurately. References Newman, J. M., Gerhart, B., & Milkovich, G. T. (2017). Compensation (12th ed.). New York, NY: McGrawHill/Irwin. Romanoff, K., Boehm, K., & Benson, E. (n.d.). Pay equity: Internal and external considerations. Retrieved from https://theperfectpayplan.typepad.com/pay_equity_article.pdf Salary.com. (n.d.). Staff nurse - RN - Occupational health. Retrieved from https://swz.salary.com/SalaryWizard/Staff-Nurse-RN-Occupational-Health-Salary-Details-36054Millbrook-AL.aspx Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. Refer to page 252 of the textbook, and complete the following “Review Questions” for Chapter 7. 1. Distinguish policies on external competitiveness from policies and internal alignment. Why is external competitiveness so important? 2. What factors shape an organization’s external competitiveness? 6. Can you think of any companies that follow a lag and/or lead policy? Why do they believe it pays to pay differently? Can you think of any companies that follow performance driven and/or work/life balance policies? Refer to page 304 of the textbook, and complete the following, which is one of the “Review Questions” in Chapter 8. 1. Which competitive pay policy would you recommend to an employer? Why? Does it depend on circumstances faced by the employer? Which ones? BHR 3301, Compensation and Benefits 5
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