The document discusses different types of internal pay structures for organizations, including job-based, skill-based, and competency-based structures. Skill-based structures link pay to the depth and breadth of skills employees acquire. Competency-based structures focus on observable behaviors required for success. Effective structures align pay with organizational strategy and support work flow flexibility. However, person-based structures can be more expensive to administer and raise concerns about reliability, validity, and potential bias in implementation. The best approach depends on each organization's specific situation and needs to provide flexibility while ensuring internal alignment.

1. Compensation
Chapter 06
Person-Based Structures
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Introduction
The logic underlying job-based pay structures flows from
scientific management, championed by Frederick Taylor.
• Taylor sought the “one best way” to perform every element of the job.
Today’s work is analyzed with an eye toward increasing
competitiveness and success.
• Transactional work is separated from tacit work.
• Once fragmented, work processes can be re-bundled into new jobs.
Pay structures based on skills, knowledge, or experience offers
flexibility to align talent with redesigned workplaces.

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Person-Based Structures: Skill Plans
Skill-based pay is used mostly in manufacturing.
• An advantage is a better match of people to flow of work, avoiding
bottlenecks and idle hands.
Skill-based structures link pay to the depth or breadth of the
skills, abilities, and knowledge a person acquires relevant to work.
• These structures pay for all the certified skills of the individual,
regardless of whether the work requires all or a few skills.
• The wage attaches to the person.
• In contrast, a job-based plan pays employees for the job, regardless of
the skills they possess.

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Types of Skill Plans
Specialist – Depth
Pay is based on the knowledge
of the individual.
Rather than on job content or
output.
A teacher is an example.
Basic responsibilities do not
vary on a daily basis.
Generalist – Breadth
Those in a multiskill system
earn pay increases by
acquiring new knowledge.
More pay comes from
certification of new skills.
Responsibilities can change
drastically over a short time.

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Exhibit 6.2: Skill Ladder at Balzers Tool Coating
Jump to long image description.

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Purpose of the Skill-Based Structure
Supports the strategy and objectives.
• In practice, the “line of sight” is difficult to make clear.
Supports work flow.
• A main advantage is matching people to changing workflow.
Is fair to employees.
• Skill-based plans may give workers more control over their work life
but favoritism and bias may be a problem.
• The legality of such plans have not been addressed in the courts.
Motivates behavior toward organization objectives.
• Fluid work assignments require less supervision, resulting in labor cost
savings.

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“How-to” – Skill Analysis
The process begins with an analysis of skills.
• Related skills can be grouped into a skill block and skill blocks can be
arranged by levels into a skill structure.
• A process is needed to describe, certify, and value the skills.
The major skill analysis decisions are:
• What is the objective of the plan?
• What information should be collected?
• What methods should be used?
• Who should be involved?
• How useful are the results for pay purposes?
Skill analysis is a systematic process of identifying and collecting
information about skills required to perform work in an
organization.

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Exhibit 6.3: Determining the Internal Skill-Based
Structure
Jump to long image description

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Information and Involvement
There is less uniformity in terms in person-based plan than there
is in a job-based plan.
Skill-based plans have very specific information on every aspect
of the production process.
• Plans are suited for continuous-flow technologies where employees
work in teams.
Employee involvement is almost built into skill-based plans.
• Employees and managers are the source of information for:
• Defining the skills.
• Arranging them into a hierarchy.
• Bundling them into skill blocks.
• And certifying whether a person actually possesses the skills.

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Exhibit 6.4: Determining the Internal Skill-Based Structure
Jump to long image description.

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Establish Certification Methods
Organizations may use peer review, on-the-job demonstrations,
or tests to certify that employees possess and apply skills.
Newer applications are moving to fixed review points in the year.
Scheduling makes it easier to budget and control payroll
increases.
Other changes include:
• Ongoing recertification.
• Removal of certification when a skill is deemed obsolete.

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Outcomes of Skill-Based Pay Plans
Skill-based plans are readily accepted by employees and provide
strong motivation to increase individual skills.
These plans become increasingly expensive if all workers top-out.
• Employers may have an average wage higher than competitors.
• Unless flexibility permits a leaner staff, labor costs will be higher.
• Some employers require employees to stay at a rate for a certain time.
• Labor-intensive products may create a competitive disadvantage.

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Guidance from Research and Experience
Early research showed 60% of companies starting a skill-based
plan continued using the plan after seven years.
• Plans were more viable in firms following a cost-cutter strategy.
These plans may be a better fit in industries where labor costs
are a small share of total costs.
• These plans have an estimated 10-15% higher labor costs.
Are jack-of-all-trades really a master of none?
• Greater increments of flexibility achieve fewer improvements.
• There may be an optimal number of skills per individual.
• Campers create bottlenecks.

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Person-based Structures: Competencies
There are several perspectives on what competencies are and
what they are supposed to accomplish.
• A lack of consensus means competencies can be a number of things
and stand in danger of becoming nothing.
A competency-based structure begins by looking at the work
performed in the organization.
• The underlying knowledge, skills, and behaviors that form success at
any level or job are the core competencies.
• Competency sets translate each core competency into action.
• Competency indicators are observable behaviors.
• They anchor the degree of a competency at each level of complexity of
the work and sometimes include scales.

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Exhibit 6.5: Determining the Internal
Competency-Based Structure

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Defining Competencies
Early conceptions of competencies focused on five areas:
• Skills – demonstration of expertise.
• Knowledge – accumulated information.
• Self-concepts – attitudes, values, self-image.
• Traits – general disposition to behave in a certain way.
• Motives – recurrent thoughts that drive behaviors.
Organizations are now emphasizing business-related
descriptions of behaviors.
Competencies are becoming a collection of observable behaviors
requiring no inference, assumption or interpretation.

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Purpose of the Competency-Based Structure
Organization Strategy.
• The main appeal is the direct link to the organization’s strategy.
Work Flow.
• Competencies may require more tacit knowledge.
Fair to Employees.
• Advocates say they can empower employees.
• Critics worry about basing pay on personal characteristics.
• Justifying pay differences may create risks that need managed.
Motivate Behavior toward Organization Objectives.
• Competencies provide guidelines and keep people focused.
• They are a common means of communicating and working together.

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Exhibit 6.8: Frito-Lay Managerial Competencies

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“How-To” – Competency Analysis
The first decision is to clarify the objective of the plan.
• The structure may exist on paper through competency sets and scaled
behavioral indicators but bear little connection to the actual work.
Core competencies are not unique for each company.
• What differs is how each company applies their competencies.
Competencies derive from leadership’s beliefs about the
organization and its strategic intent.
• Not all employees understand the connection.
If people are paid based on competencies, there must be a way
to certify their possession of that competency.
• There seems to be no objective way of certifying competency.

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Structure, Employee Selection and Training
Competency-based structures have relatively few levels and
wide differentials for increased flexibility.
• Generic structures can be applied to almost any professional work.
There is clear evidence that ability is related to general
competencies.
• The Great Eight captures the themes in competency frameworks.
If employers want competent managers, they need to select or
train and develop people who are:
• High in need for power, need for control, and who have extroverted
personalities.
• Failure to adequately screen employees may lead to de-motivated
employees who seek competencies, but are ill-suited to do so.

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Guidance from the Research on Competencies
Competencies may identify outstanding performance but there
is debate on whether they can be measurable and objective.
Competencies often morph into compensable factors.
There may be potential application when viewing competencies
as a portfolio highlighting returns on competencies.
Only one study has analyzed the competencies/performance
relationship for managers.
Is it appropriate to pay for what a person is believe capable of
doing versus what they are doing?
Are competency-based systems susceptible to discrimination?

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Internal Alignment Reflected in Structures
The internal structure of work in the organization should reflect
the internal alignment policy and support business operations.
Managers must ensure the structure remains internally aligned.
• Failure to do so risks bias and potentially unethical behaviors.
In practice, when evaluating higher-value, nonroutine work, the
distinction between job- and person-based approaches blurs.
• The focus is on what factors create value for the organization.
The person influences the job content in managerial and
professional work.
• Skill-based fits more easily with manufacturing work, but
contemporary manufacturing requires tacit, nonroutine knowledge.

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Administering and Evaluating the Plan
Whatever plan is designed, a crucial issue is the fairness of its
administration.
• Sufficient information should be available to apply the plan.
• Communication and employee involvement are critical for acceptance.
Studies show job-based evaluation is used as a measurement.
• Research assesses its reliability, validity, costs, and compliance.
• Any value added by job evaluation is largely ignored.
Research on person-based structures focus on their effects on
behaviors and organization objectives.
• Ignoring doubts on reliability and validity.

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Reliability of Job Evaluation Techniques
A reliable evaluation has evaluators producing the same results.
• Most organizations now use market pricing to determine salaries,
making job evaluation results less influential on salaries.
• When evaluations do play a role in salary setting, high reliability
between raters may still leave room for different resulting salaries.
Improve reliability with trained evaluators familiar with the work.
• Some organizations use group consensus to increase reliability.
Reliability for job evaluation scores are higher than those for job
analysis ratings.
In efforts to reduce costs, job evaluation committees are
disappearing.

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Validity of Job Evaluation Techniques
Validity refers to the degree to which the job evaluation assesses
what is intended – the relative worth of jobs to the organization.
Validity of the job evaluation has been measured in two ways:
• The degree of agreement between rankings in the evaluation with
agreed-upon ranking of benchmarks used as the criterion.
• By hit rates – the degree to which the evaluation plan matches an
agreed-upon pay structure for benchmark jobs.
Many studies report that when different evaluation plans are
compared, they generate similar rankings but low hit rates.
The definition of validity needs broadened to include the impact
on pay decisions.

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Acceptability
Several methods are used to assess and improve employee
acceptability.
• The formal appeals process allows employees to request a reanalysis
and skills reevaluation if they believe they were incorrectly evaluated.
• Employee attitude surveys can assess perceptions of how useful
evaluation is as a management tool.

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Bias in Internal Structures
Continuing differences in jobs held, and pay differences, focused
attention on internal structures as a source of discrimination.
Attention is directed at job evaluation as a potential source of
bias against women and a mechanism to reduce bias.
• It is widely speculated that job evaluation is susceptible to gender bias.
• Evidence does not support this proposition.
• No evidence shows an evaluator’s gender affects results.
One study found compensable factors related to job content did
reflect bias against work done predominantly by women.
• But factors pertaining to employee requirements did not.

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Wages Criteria Bias
If job evaluation is based on current wages and jobs held by
women are underpaid, then results mirror bias in the pay rates.
Recommendations to ensure bias-free evaluation plans:
• Define the compensable factors and scales to include the content of
jobs held predominantly by women.
• Ensure that factor weights are not biased against jobs held
predominantly by women.
• Apply the plan in as bias-free a manner as feasible.
• Ensure job descriptions are bias-free.
• Exclude incumbent names from the job evaluation process.
• Train diverse evaluators.
All issues apply to skill- and competency-based plans.

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The Perfect Structure
Increase pay through promotions or acquisition of skills.
A job-based approach pays only as much as the work is worth.
The skill- or competency-based plans pay for the highest level of
skill regardless of work performed – maximizing flexibility.
• The employer must control the rate of certification of skills and offset
the higher rates with greater productivity.
The best approach to pay structures depends on the situation.
• Provide sufficient ambiguity to afford flexibility.
Internally aligned pay structures can be designed to:
• Help determine pay for the wide variety of work and ensure that pay
influences attitudes and behaviors and directs toward objectives.

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End of Chapter 06.