Sharon Walls has been transferred to manage the Troy division of Montgomery Sharp Pencil Accountants Anonymous. She must allocate $33,000 in salary increases among her 9 subordinates. Factors she must consider include performance ratings, promotions/equity adjustments, cost of living increases, and maintaining competitive salaries based on exit interviews. She is advised to justify all adjustments objectively to avoid past grievances. The employees' profiles provide details on their qualifications, experience, and compensation history to aid Sharon's allocation decisions.
QUALITY IN SALARY ADMINISTRATION A COMPENSATION补偿 报酬 EXERCI.docx
1. QUALITY IN SALARY ADMINISTRATION: A
COMPENSATION补偿 报酬 EXERCISEIntroduction
Students in human resource management programs receive a
great deal of training in the design of various salary
compensation programs. However, comparatively little
direction has been provided students as to the proper
administration of the day to day or year to year administration
of individual salaries under such programs and the attendant
salary administration problems that often arise.
This salary administration exercise is intended to provide
students with just such experience in conducting a fair and
motivational salary system. This exercise will include both a
discussion of salary administration theory and its application to
common salary problems salary administrators will encounter in
industry within the confines of a traditional compensation
program (all cases are based on actual industry situations).
Students should have had prior instruction in designing a
conventional compensation program to include job evaluation,
designing salary ranges, policy lines, external/internal
competitiveness issues, etc.
Review of Salary Administration Theory
The basic philosophy of salary administration is to motivate,
enhance perceptions of fairness by preventing or correcting
salary inequities, and controlling compensation costs by not
over paying for the value of individual employee contribution to
firm performance. To that end, conventional salary
administration as practiced in industry has a variety of
principles and directives:
2. General Merit Raises Guidelines
· Where there is no change in a person’s performance from one
budget year to the next, then the person in question should
under normal conditions receive the same % merit raise from
one year to the next.
· When there is a performance increase from one performance
level to another, then the person in question should normally
receive a higher % merit raise in order to recognize and reward
the increased contribution by the employee to the company.
This % raise should be sustainable for the foreseeable future at
the higher level of performance.
· Likewise when there is a performance drop from one
performance level to another, then the person in question should
normally receive a lower % merit raise in order reflect the lower
contribution to the firm by the individual and to call attention to
the drop in performance. This lower % raise should also be a
sustainable amount for the foreseeable future.
· The % merit raise given to a particular employee should be
sustainable (that is the same % given from year to year in
relation to the range maximum or when there is no range
maximum in relation to external competition based on a
professionally conducted salary survey; this assumes no change
in performance) for the foreseeable future (approximately five
years).
· In those situations where the % merit raise contemplated is not
sustainable for a given performance level, then the % merit
raise must be reduced to a level that is sustainable for the given
% merit raise. Situations that are not sustainable include those
that take a person’s salary to one that is at or above his or her
performance band or classification maximum in the near term
(usually less than five years).
3. · Merit raises are usually provided on an annual basis.
However, many firms stagger the date of the merit raise based
on performance. Top performers usually receive their raises the
quickest (12 months or less) with average performers taking the
longest to obtain their merit raise (usually 15-18 months). In is
important to note that this latter practice allows firms to better
sustain merit raises as in some years a person will receive no
raise but due to the cost of living and competitive adjustments
salary range bands will usually have been adjusted upward by so
some %, thereby allowing additional room for a merit raise for a
such an individual.
Salary Band Issues Guidelines
· From time to time certain individual salaries may be above
their allowable salary range maximum. This often occurs due to
several factors. First, a person’s performance level will
commonly decline for various reasons. As a result their
corresponding performance maximum salary range band falls as
well. Sometimes, supervision grants raises that bring a person’s
salary above its range maximum without the proper authorities
noticing or preventing the action. At other times, the
company’s compensation scheme may be above competitive
levels or the pay policy is changed to one that is lower than the
previous policy. Consequently, a number of individual salaries
will fall above their revised range maximums.
· Nevertheless, once a person’s salary is above it’s range
maximum, it is normally frozen or “red circled” until the
person’s salary somehow falls below the range maximum.
There are several ways this could occur. Management could
choose to lower the individual’s salary. However, this should
not be done except in extreme circumstances due to the adverse
affects on motivation and morale. Other viable options,
depending upon the circumstances, which may help resolve the
4. problem, are promotion, an increase in performance, or waiting
until the range maximum rises above the person’s salary due to
cost of living and/or competitive adjustments.
· Salary bands/ranges are often adjusted on a periodic basis
(usually annually). In order to hold the purchasing power of a
given salary level constant salary bands must be adjusted
upward or lower based on the annual change in the CPI. Salary
bands/ranges may also be adjusted upward or downward based
on the company’s salary levels (policy line) as compared to
relevant competitive salary levels.
Promotional Guidelines
· Promotions may be made to recognize experience and
contribution in the current position by a promotion in the
current job (sometimes called a step or recognition promotion).
Promotions may also entail a physical move/promotion to some
higher-level vacant position.
· Normally promotions are linked in some manner to current
performance levels and a person’s capacity to handle higher
levels or responsibility. This is often affected by shortages in
talent (in which case people are promoted faster than normal),
by a surplus in personnel (in which case workers are promoted
less often), compensation levels are lower than competition (in
which case workers are promoted faster), or when compensation
levels are above competitive levels (in which case promotions
are often slowed).
· Absent the above exception individuals should be promoted at
a rate to where they are at their highest level of potential (so as
to obtain their best work at their highest level of ability) about
ten years before normal retirement age. Rules of thumb based
on performance levels at large firms during normal economic
times are as follows:
5. Average performance-about three promotions in a career- about
one every 7-8 years
Above average performance-about five promotions in a career-
about one every 5-6 years
Excellent performance-about eight promotions in a career-about
once every 3-4 years
Outstanding performance-unlimited but about once every 1-2
years.
· Promotional raises normally vary from zero to 5% per
promotion level. Industry practice is to grant a 5% raise (to
maximize motivation/recognition) unless it would mean raising
an individual’s salary so high in his or her salary band that
normal merit raises would not be sustainable and/or they would
be so small as not to motivate.
· Promotions should not be allowed for individuals experiencing
a drop in performance.
· Above entry levels many firms require that performance be
sustained for at least two years before being eligible for
promotion.
· Related experience outside company service may be counted
toward promotion on the same basis as company service.
Related degrees above bachelor’s may also be counted as
experience on a year for year basis, with a master’s counting no
more than two year’s related experience and a PhD. counting as
no more than four year’s experience.
Retirement Issues
6. · Those individuals nearing retirement should be brought to
their highest level of potential and salary band at least three
years before retirement. This is done for several reasons. One,
to recognize their many years of dedication and commitment to
the company. Two, many retirement plans base their benefits
and pension calculations on employee salaries. Third, it should
enhance retention levels since the remaining workforce observes
that someone staying a career with the company is treated well.
Special Adjustments
Special adjustments are granted when normal salary treatment
(merit and promotional raises will not rectify a particular salary
problem). Normally, salary adjustments above 10% are not
allowed except in extreme circumstances. When there is a
rather large salary equity discrepancy, the individual involved
may receive (up to 10%) special adjustments for several years
before the problem is corrected. There are several common
situations in which special adjustments are used to correct
salary problems:
· For whatever reason, sometimes some employee salaries will
be below the classification range minimum. In effect, the
company is paying the person below the amount the company
itself says the job is worth. In such cases the individual’s
salary should be raised to or above the classification range
minimum not only for motivational reasons but for legal ones as
well. It is important to note that in such cases the individual
involved could receive a special adjustment in excess of 10%.
Due to the seriousness of the problem, it is not spread over
several years as previously discussed.
· In some situations, usually industry boom periods, external
salaries rise at a rapid rate. As a result some employees (often-
short service employees) are paid a lower salary than those paid
7. new hires). This is an obvious inequity (salary compression)
that must be corrected. If normal salary treatment does not
correct the problem then a salary adjustment is warranted. The
normal rule of thumb is to have current employees at least $100
a month above new hire or potential new hire salaries.
· Under other conditions, particularly in most firms with no set
salary structure (as in the this compensation case) salary
administrators must closely monitor relevant salary surveys to
ensue that their employee salaries stay in line with competition
based on the company’s pay policy. Hence salary adjustments
may be necessary to bring an individual up to competitive
levels.
· It is important to ensure internal equity as well. In general, a
person with higher performance and/or experience (and
education) should be making more than someone with lower
performance and or experience.
Raise Communication
· When communicating raises to employees it is important to
explain what portion of the total increase is merit, promotional,
and/or adjustment. Otherwise, employees will usually assume
they will continue to receive the same total % raise in the future
(assuming no change in performance). When an equity
adjustment as been included in the raise this could mistakenly
result in a demotivated employees. For this reason, many
companies actually grant equity adjustment at times other than
when the merit raise is awarded. However, for case purpose they
will all be awarded at the same time.
Exceptions to policy
· Exceptions to company compensation policy and guidelines
may be allowed under extreme circumstances. However, these
8. should be rather rare events and must be approved by the
highest levels of company management.
IT TAKES A SHARP PENCIL
Montgomery Sharp Pencil Accountants Anonymous is a regional
accounting firm that has offices in Troy, Mobile, Montgomery,
Huntsville, Athens, Auburn, Decatur, and Dothan. It’s
headquarters is located in Montgomery, Alabama. Montgomery
Pencil employees a total of 125 employees. It has been in
business 30 years and over the last five years has experienced
an annual growth rate 25% as compared to an industry average
of only 10%.
Sharon Walls has just been transferred to the Troy division
replacing Joe Cool (encouraged resignation), who had been the
branch accounting manager. Sharon currently earns an annual
salary of $75000 and the last raise that she received amounted
to 15% of her salary. Sharon was given the job due to the
company losing several major accounts in the area. In fact, in
the year 2000 this division lost $50000. In recent years this
division has been plagued by high turnover. HQ human
resources was able to get the last top three performers who
resigned to provide a confidential exit interview. These
interviews revealed that three top employees who recently
resigned did so because of poor/unfair management and below
market compensation as their primary reasons for leaving (they
would not provide any further details) Sharon has been in the
job now for 8 months. During this time Sharon has not only
recouped the lost business, she has also had time to reorganize
the office to make it more efficient. This reorganization
included laying 7 marginal employees after the company’s
annual appraisal evaluation and making better use of relevant
computer technology. Ms. Hudson has been budgeted $33000 to
allocate among her nine subordinates as pay raises (high level
company management rarely grant proposals above the amounts
9. allocated). This amount includes money for promotions and any
equity adjustments that are needed to rectify any internal or
external inequities that might exist (particularly in view of the
evidence gained from the recent exit interviews). Cost of living
for 2002 is expected to rise at an annual 2.0%. There have been
some ugly grievances at this branch over pay raises in the past,
so Sharon has been strictly advised to base all of her allocations
on purely objective reasons. No increase recommendation will
be granted without an appropriate justification.
Salary recommendation should show the total amount proposed
and its % of the salary. Salary increases must be distinguished
based on merit adjustments (coded M), promotional adjustments
(coded P), increases for promotion may be up to 5%. Equity
adjustments (coded A) while all equity adjustments must be
justified (this includes any communications that you would also
provide the employee when giving the increase) any equity
adjustment over 10% must carry additional extraordinary
justifications. Round salary adjustments for CL 20 and above to
the nearest $100 and round salary adjustments for the levels
below CL 20 to the nearest $50.
1
2
3
4
5 6 7 8 9 10 11 12
Name*
EEO Stat
Cur Sal
Last Inc%
Ratings
PT
Job Title
CL
10. Serv
Hi Ed
Exp
Personal Data in file
Paul
H
52500
4%, 2/01
AA 2001
26
Sr
25
29
MA
41
Nearing Retirement, wife
NI 2000
25
Acct
25. Hist
very precise; never
NA
21
makes an error; work volume could be better
7 yr related exp
* columns reading left to right-column 1-employee name;
column 2-Equal Employment Opportunity Status: W=white,
B=black, H=Hispanic; column 3-current salary; column 4-% and
date of last merit increase; column 5-perforamnce rating last
four years: O=outstanding, E=excellent, AA=above average,
A=average, NI=needs improvement, I=inadequate; column 6-
highest level person is seen attaining in the firm or potential
(PT); column 7-current job title, column 8-numerial job
classification (CL), column 9-company service, column 10-
26. highest level of education attained, acct=accounting,
eng=English, hist=history; column 11-number of years of
experience since age 18 (Exp plus 18 gives one a person’s age),
and column 12-additional information about the person.
Best Relevant Salary Data:
2001 Regional Accounting Salary Survey
Salary
Salary
Accountants
Accountants
All companies
Big Six Firms
By experience
32. INSTRUCTOR’S GUIDE
The first issue that students must address in this exercise is to
decide on the maximum amount of a merit raise for each
performance level and the timing of each raise. For the sake of
simplicity raises in the case should be awarded on a 12-month
basis.As can be seen from a review of last year’s salary merit
increases there is no consistency across individuals with the
same performance in terms of merit raises. Based on judgment,
experience, budget limitations, accounting for inflation, and
some attempt to be consistent with previous year the following
merit guide is a good starting point (instructor may want to
provide this to the students):
MAXINUM MERIT RAISE GUIDE
O - Outstanding
12%
E - Excellent
9
AA- Above Average
7
33. A - Average
5
NI - Needs Improvement 0
I - Inadequate
0
A pay policy must be chosen as well. This is not a major
accounting firm, however, it is a rising regional star. A good
choice in this case would be to choose a pay policy that puts
accountants at or near the top quartile of all companies and
below but not too far below the average (within 5-7 %) for the
big six firms.
Salary case one-Paul
Background
Paul is loyal career employee and has been with the firm nearly
his entire career. Apparently, his wife had a terminal illness
and as a result his performance suffered in recent years due to
caring for her. The instructor should note that Paul was not let
go, as were other marginal performers. In other words the
company “carried” him during his wife’s illness. It should also
be noted that his performance before the illness was likely to
have been excellent (was excellent in 1998) and it appears to be
returning to that level now. Most employees consider it fair and
motivational for an employer to take care of a good worker
34. during times of personal crisis.
While Crystal is above him salary wise with less experience,
there is no internal equity problem, since Crystal had a history
of being an outstanding performer (and his performance had
been sub-par for several years).
While there are no salary bands for the salary administrator by
which to compare his salary, there are external surveys that may
be used to determine if his compensation is in line with
competition. Based on the surveys, He is way below
competition, in part due to his recent poor performance and in
part due to poor salary administration.
Paul is also approaching normal retirement age. He is 59.
Resulting Salary
Justification
Merit (M) 7% 3700 $56,200
He is way below competition but there are other severe equity
Equity (A) 5% 2600 58,800
problems that need addressing. Performance likely to rise
again next year. Will promote next year and give needed equity
adjustments. Don’t forget part of his low salary was due to his
performance being down due to wife’s illness. Also, being a
loyal company employee he is not likely to quit. In fact he is
likely to be very grateful for the company carrying him during
his time of family crisis. However, he is nearing
retirement and the company will need to get his salary as
35. high as it can
prior to normal retirement age (65). May even
tell him that
the company knows he is low and will rectify this
problem (this
depends on the individual personality involved)
and get his
salary up for retirement. Assuming his
performance
stays constant or rises, he will be the first
person the you
“take care of” next year.
Salary case two-Crystal
Background
Crystal has been an outstanding performer in the past but her
performance has dropped dramatically this year. Often when
there is such a change in performance levels it is due to a new
supervisor. It may also be due in part to her romance. In this
particular case, you also suspect that it is due to poor
management (favoritism) by the pervious unit manager.
Particularly, since she is way over paid relative to competition.
Resulting Salary
Justification
36. Merit (M) 2% 1400 $71,400
Technically she should receive no raise. However,
since the
average raise is 7.5 % for all firms. The
average salary for all
firms should rise by a like amount
minimizing the difference.
Additionally, by giving her at least cost of
living, perhaps she
will get her performance back up. Due to
many customers
liking her it could adversely affect your
business if she were
to leave. However, given that she is so
overpaid, this is
unlikely. Providing at least cost of living
and telling her where
she is relative to competition should soften
the blow and
hopefully prevent her from becoming too
demotivated.
Salary case three-Tonya
Background
37. Tonya is a new hire. She is a little below the top quartile of all
companies but not enough to worry about at this point. If she
had received a higher performance rating there might be more
cause for worry. Besides her salary after her merit raise brings
her above the average for the top quartile of all companies for
accountants with less than two year’s experience. The fact that
Tonya is pro union is an irrelevant comment. It is Illegal to use
this information to adversely affect a person’s employment in
any way.
Resulting Salary Justification
Merit (M) 7% 2400 $36400
Normal merit raise. No significant equity problems
with
external competition.
Salary case four-Scott
Background
Scott is clearly an excellent performer both under the new
manager and the old supervision. He is maintaining his
performance while working on a master’s degree so he can sit
for the CPA exam. However, due to the rapid rise in staring
salaries he is way under paid relative to those just being hired
such as Tonya.
This not an employee that the company would want to lose.
38. Resulting Salary
Justification
Merit (M) 9% 2800 $34300
Normal merit raise. Promote in recognition of his
Promotion (P) 5% 1600 35900
good performance and experience in current job.
Equity (A) 5.5% 1700 37600
Equity adjustment so that he is at least $1200 above
Tonya. Will want closely monitor over next several
years. Likely provide another adjustment next year assuming
significant difference in his and her performance.
Case five-Tim
Background
Scott is an average performer. This likely due to having such a
large family. He also is likely to be very interested in making
much more money. He should be told that if he raises his
performance that will happen. It is important to note that he is
now the lowest performer in the unit. Should the firm/unit be
on a force distribution rating system, and then he will be rated
39. needs improvement next year and be on the verge of
termination. He is underpaid relative to the top quartile of all
companies but not that far below the average of all firms. Given
that he is an average (and lowest performer as well) performer,
he is not that far out of line.
Resulting Salary
Justification
Merit 5% (M) 2200 46200
Normal merit raise. Given his performance level not
much out of line with competition. Besides there are
budget constraints and other more serious equity problems to
deal with. Must raise performance. If he leaves for other
employment will allow firm opportunity to recruit a better
worker (non-regretted resignation).
Case six-Stacy
Stacy illustrates a situation not uncommon in many businesses.
Her job does not really fit any job listed in a salary survey. She
was an administrative assistant who with the advent of the PC,
quickly embraced the new technology and became proficient
through self-instruction (programming using software but not in
cobalt, C, etc), etc. As a result, she is more than an
administrative assistant but not a “true” computer programmer
(no degree in field). However, her major contribution to the unit
derives from her PC/Tech skills. Students should inquire if the
degree is related and how long she has been PC proficient?
40. Degree related to administrative work and she has been PC
proficient for four years. She is somewhat under paid relative
to the administrative assistant survey (looking at the top
quartile), however, she is only above average performer, so this
not too much of a concern. However, relative to computer
specialists (degreed) she is way under paid. Given that she has
no degree in the area, no need to bring her up that level,
however, an equity adjustment is warranted due to her skill and
contribution based on the related expertise.
Resulting Salary
Justification
Merit (M) 7% 2300 35300
Normal merit. While does not posses a computer degree
Equity (A) 10% 3300 38600
has many of the skills of a degreed professional. Could not
afford to lose said individual. Based on four years experience
in area the survey average for professionals is $65000.
Clearly, she should not be brought to this level but conversely
for her skill she is well underpaid. Should recommend to
Headquarters (or do on own) that PC proficient employees
(nondegreed) be included in next salary survey so that
management can get a better fix on their appropriate salary
41. level.
Case seven-Rodney
Rodney has the most severe salary inequity. First, it can be
inferred from his 2001 rating and the client comments he has
been doing well for quite while and hence was unfairly rated
down in the past. This is sure to be a sore spot with Rodney(it is
also likely that he feels that Crystal was overrated in the past).
It is likely that he is looking for other employment or will leave
as soon as he finishes his PhD.
Resulting Salary
Justification
Merit (M) 12% 4300
40300 The industry average for all companies is
$54000
Promotion (P) 5% 1800
42100 (19 years related experience) and the top
quartile
Adjustment (A)
15% 5400
47500
for all companies is 62500. So Rodney is grossly
underpaid. Students need to request an exception
to policy in this case. First, for the promotion
42. (performance is not sustained for two or more
consecutive years) and for the equity adjustment
is 5% above policy. Justification is that he has
been unfairly rated in the past (can provide
evidence of his excellent performance from
clients) and he is likely to leave unless the
problem is addressed. Besides he will need
another 15% equity adjustment in addition to his
normal merit next year to get him even near
competitive levels. In this situation assuming your
salary recommendation is approved, you might
consider informing him in advance of his likely
total raise to prevent him from resigning,
particularly in a hot job market.
Case eight-Max
Background
Max’s problem is not external equity but a perceived inequity
between him and Warren. Max is a better performer (and likely
to realize it) than Warren but is being paid less. While it may
43. appear that there is a potential race discrimination case, there is
none since Warren had a degree. The difference in their
salaries is the money the company paid for degree and
experience at the time of hire. It is not uncommon in industry to
hire someone with experience and a degree at the clerk level
and then have him or her turn out to be not as good as performer
as the company had originally hoped. When this occurs it can
cause motivational problems with other lower level employees
who are better performers but do not possess a degree.
Resulting Salary
Justification
Merit (M) 9% 1250 16250 Normal merit
raise. Not out of line with competition. Should
Promotion (P) 5% 750
17000
encourage him to go back to school and work on his degree
(hopefully company has some form of tuition reimbursement
program) should he complain about the difference in his
salary and Warren’s. However, a step promotion should
solve most of the problem and over time assuming no
change in performance by either employee the remaining
difference will disappear.
Case nine-Warren
Background
44. Good worker but volume of work suffers. Should continue to
counsel him on this.
Resulting Salary
Justification
Merit (M) 7% 1100 17100
Normal merit raise. No external or internal equity problems.
Budget
The budget amount for raises, promotions, and equity
adjustments is $33,000.
Recommendation increases total $38,600. Must request an
exception to policy. Remember if unit manager doesn’t request
it and good workers leave upper management is likely to say
that they might have granted the raise if it had been requested.
Assuming the over budget amount is not allowed then
recommend scaling back Rodney’s Adjustment by $2700(cut in
half), Stacy’s adjustment by $1500 (nearly half), and
eliminating Crystal’s raise of $1400 which eliminates the
difference of $5600.