STRATEGIC

COMPENSATION
A Human Resource Management Approach

Chapter 5:
Person-Focused Pay

© Pearson Education Limited 2015 5-1

 Learning Objectives
1. Explain the concept and practice of person-
focused pay.
2. Describe the type of setting in which person-
focused pay is most likely to be used.
3. Name and explain the reasons companies
adopt person-focused pay programs.

© Pearson Education Limited 2015 5-2

 Learning Objectives (cont’d)
4. Summarize the varieties of person-focused pay
programs.
5. Contrast person-focused pay with job-based
pay.
6. Provide an explanation of the advantages and
disadvantages of person-focused pay plans.

© Pearson Education Limited 2015 5-3

 Learning Objective 1

Explain the concept and practice of person-

focused pay.

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 Person-Focused Plans
• Rewards employees for acquiring job-
related
– Competencies
– Knowledge
– Skills
• Two main types
– Pay-for-knowledge
– Skill-based pay

© Pearson Education Limited 2015 5-5

 Competency-Based Pay
Programs

• Pay-for-knowledge: reward managerial,

service, or professional workers for
successfully learning specific curricula
• Skills-based: used mostly for employees
who do physical work, increases these
workers’ pay as they master new skills

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 Competency-Based Pay
Programs
• Reward employees for improving or
acquiring new skills/knowledge
• Horizontal skills: skills at the same level
of responsibility or difficulty
– Ex: clerical employees of a retail store trained
to perform record-keeping tasks
• Employee attendance records
• Schedule salesperson’s work shifts
• Master the use of office supplies for reordering

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 Pay Programs (cont’d)
• Vertical skills: skills that are traditionally
considered supervisory
– Scheduling, coordinating, training, leading
others
• Depth of skills: level of expertise or
specialization an employee possesses
– HR professionals specialize in compensation:
• Job evaluation
• Salary survey analysis
• Market pay system designs
• Incentive (merit) pay system design
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 Vertical Skills
• Works well for work teams
– Service industry
– Manufacturing industry

• Employees
– Learn functional skills
– Perform managerial tasks

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 Competencies
• Uniquely combined characteristics of the
person that enables employees to fulfill job
requirements well
• Core competencies are derived from
company’s strategic statements

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 Learning Objective 2

Describe the type of setting in which person-

focused pay is most likely to be used.

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 Typical Settings
• One study found that a skilled-based pay
plan in a manufacturing setting increased
plant productivity by 58%
• More than half of the companies that use
skilled-based pay plans employ between
150–2,000 employees
• Mostly found in continuous process settings,
like manufacturing in which:
• Assembly lines are used
• One employee’s job depends on the work of at
least one other worker
© Pearson Education Limited 2015 5-12
 Typical Settings (cont’d)
• Work well in manufacturing companies
that organize work flow around high-
performance work teams where
employees are expected to:
• Perform managerial tasks like:
– Work scheduling
– Budgeting
– Quality control

© Pearson Education Limited 2015 5-13

 Learning Objective 3

Name and explain the reasons companies

adopt person-focused pay programs.

© Pearson Education Limited 2015 5-14

 Reasons for Adoption
Reasons for adoption
– Removes entitlement label
– Connects pay to job-related abilities
– Increases employee autonomy
– Jobs require new and different worker skills
– Technological innovations
– Increased global competition

© Pearson Education Limited 2015 5-15

 Learning Objective 4

Summarize the varieties of person-focused

pay programs.

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Person-Focused Pay Program
Models
• Stair step: the steps represent jobs from a
particular job family that differ in terms of
complexity
• Skill block: applies to jobs within the
same job family, but skills do not
necessarily build on one another

© Pearson Education Limited 2015 5-17

Person-Focused Pay Program
Models (cont’d)
• Job-point accrual: encourages
employees to develop skills and learn to
perform jobs from different job families
• Cross-departmental: promote staffing
flexibility by training employees in one
department with critical skills they would
need to perform effectively in other
departments
© Pearson Education Limited 2015 5-18
 Stair-Step Model
• Jobs from same job family
• Jobs differ in complexity
• Higher the step, greater the skills
• Companies use separate models
• Models designed to match jobs

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 Skill-Block Model
• Applies to jobs in same job family
• Employees expected to progress to
increasingly complex jobs
• Skills may not build on one another
• Emphasizes horizontal and vertical skills

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 Job-Point Accrual Model
• Applies to jobs from different job families
• Creates organizational flexibility
• Points are assigned to various skills
• The higher the number of points, the
higher the core compensation level

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 Cross-Departmental Model
• Employees develop skills usable in other
departments
• Helps manage sporadic, short-term
staffing shortages
• Helps meet seasonal fluctuations
– Ex: Holiday shopping rush

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 Learning Objective 5

Contrast person-focused pay with job-based

pay.

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 Person-Focused Pay

• Compensates employees for flexibility

• Compensated for potential contributions
– Based on skills and knowledge

• Used for jobs not easily assessed

– For skills and knowledge

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 Job-Based Pay
• Compensates employees for current jobs
• Pay limits set for each job
• Evaluations based on job descriptions and
objectives
• Two main types
– Merit pay
– Incentive pay
© Pearson Education Limited 2015 5-25
 Contrasting Person-Focused Pay
With Job-Based Pay
Feature Person focused Job based
Pay level Market basis for skill Market basis for job
determination valuation valuation
Base pay Awarded on how much an Awarded on the value of
employee knows or on skill compensable factors
level
Base pay increases Awarded on an employee’s Awarded on attaining job-
gain in knowledge or skills defined goal
Job promotion Awarded on an employee’s Awarded on exceeding
skills base and proficiency on job performance
past work standards
Key advantage to Job variety and enrichment Perform work and receive
employees pay for a defined job
Key advantage to Work scheduling flexibility Easy pay system
employers administration

© Pearson Education Limited 2015 5-26

 Learning Objective 6

Provide an explanation of the advantages

and disadvantages of person-focused pay
plan.

© Pearson Education Limited 2015 5-27

 Advantages to Employees
• Can provide job enrichment
• Can provide job security
• Can make jobs more intrinsically
motivating
• Can make jobs more interesting
• Increases employees’ flexibility

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 Job Characteristics Theory
Employees are more motivated to perform
jobs that contain
• Skill variety: requires using different abilities
• Task identity: enables employees to do
entire job
• Autonomy: allows employees to choose
• Feedback: provides clear communications

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 Advantages to Employers

• Leads to enhanced job performance

• Leads to reduced staffing
• Leads to greater flexibility
• Improves quality
• Increases productivity levels

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 Disadvantages
• Can increase hourly labor costs
• Can increase training costs
• Can increase overhead costs
• May not mesh well with existing incentive
pay systems

© Pearson Education Limited 2015 5-31