Week 2 D 1

Define the concept of seniority and merit pay plans, including the strengths and limitations of such plans within an organization.  Discuss the job, organizational and/or other factors that should be considered when deciding between the two.  Respond to at least two of your fellow students’ postings.


3-2 Explain the merit pay approach to compensation.

Merit pay programs (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss284) assume that employees’ compensation over time should be determined, at least in part, by differences in job performance.

Employees earn permanent merit increases based on their performance. The increases reward excellent effort or results, motivate future performance, and help employers retain valued employees. Merit increases are usually expressed as a percentage of hourly wages for nonexempt employees and as a percentage of annual salaries for exempt employees. In 2014, employees earned average merit increases of 3.0 percent across all industries, and the projected average increase for 2015 was 3.1 percent. This average increase did not vary significantly across employee groups (exempt vs. nonexempt, nonunion vs. union); however, the average raise differed based on employee performance and industry. Merit increases for high performers averaged 4.1 percent.

The health care and social assistance industry’s average merit increase was 2.5 and 3.8 percent for the mining industry.

Who Participates? Merit pay is one of the most commonly used compensation methods in the United States. In 2014, a survey of WorldatWork members revealed that 72 percent of companies indicated that they use a rating system with a performance score that is tied to pay increases. The rates were 65 percent and 71 percent in 2010 and 2011, respectively.

Merit pay programs occur most often in the private for-profit sector of the economy rather than in such public sector organizations as local and state governments.

Exploring the Elements of Merit Pay Managers rely on objective as well as subjective performance indicators to determine whether an employee will receive a merit increase and the amount of increase warranted. As a rule, supervisors give merit increases to employees based on subjective appraisal of employees’ performance. Supervisors periodically review individual employee performance to evaluate how well each worker is accomplishing assigned duties relative to established standards and goals. Thus, as we will discuss later in this chapter, accurate performance appraisals are key to effective merit pay programs.

For merit pay programs to succeed, employees must know that their efforts in meeting production quotas or quality standards will lead to pay raises. Job requirements must be realistic, and employees must have the skills and abilities to meet job goals. Moreover,



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3.2 Merit Pay

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employees must perceive a strong relationship between attaining performance standards and receiving pay increases.

Furthermore, companies that use merit programs must ensure that the funds needed to fulfill these promises to compensate employees are available. For now, we assume that adequate funding for merit pay programs is in place. We will address the ramifications of insufficient budgets for funding merit pay programs in Chapter 8 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08#ch08) .

Finally, companies should make permanent adjustments to base pay according to changes in the cost of living or inflation before awarding merit pay raises. Then, permanent merit pay raises should always reward employee performance rather than represent adjustments for inflation. Inflation represents rises in the cost of consumer goods and services (e.g., food and health care) that boost the overall cost of living. Over time, inflation erodes the purchasing power of the dollar. You’ve no doubt heard the comment, “It’s harder to stretch a dollar these days.” Employees are concerned about how well merit increases raise purchasing power. Compensation professionals attempt to minimize negative inflationary effects by making permanent increases to base pay, known as cost-of-living adjustments. For now, let’s assume that inflation is not an issue. (As a side note, this principle also applies to seniority pay. Pay increases should reflect additional seniority after making specific adjustments for inflation.)

Although fairly common, merit pay systems are not appropriate for all companies. Compensation professionals should consider two factors—commitment from top management and the design of jobs—before endorsing the use of merit pay systems. Top management must be willing to reward employees’ job performances with meaningful pay differentials that match employee performance differentials. Companies ideally should grant sufficiently large pay increases to reward employees for exemplary job performance and to encourage similar expectations about future good work.

The amount of a merit pay increase should reflect prior job performance levels and motivate employees toward striving for exemplary performance. The pay raise amount should be meaningful to employees. The concept of just-meaningful pay increase (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss242) refers to the minimum pay increase that employees will see as making a meaningful change in compensation. The basic premise of this concept is that a trivial pay increase for average or better employees is not likely to reinforce their performance or to motivate enhanced future performance. In addition to top management’s commitment to merit pay programs, HR professionals must design jobs explicitly enough that employees’ performance can be measured accurately. Merit programs are most appropriate when employees have control over their performance and when conditions outside employees’ control do not substantially affect their performance. Conditions beyond employees’ control that are likely to limit job performance vary by the type of job. For sales professionals, recessionary economic spells generally lead consumers to limit spending on new purchases because they anticipate the possibility of layoffs. Sales professionals certainly do not create recessionary periods nor can they allay consumers’ fears about the future. For production workers, regular equipment breakdowns will lead to lower output.

Furthermore, there must be explicit performance standards that specify the procedures or outcomes against which employees’ job performance can be clearly evaluated. At Pratt & Whitney, HR professionals and employees worked together to rewrite job descriptions. The

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purpose was to define and put into writing the major duties of a job and to specify written performance standards for each duty to ensure that the job requirements provided a useful measurement standard for evaluation. The main performance standards included such factors as quality, quantity, and timeliness of work.

Table 3-3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03lev1sec2#ch03tab03) displays a job description for an Account Clerk II in the California Department of Rehabilitation Services. The description lists the activities the jobholder performs and qualifications necessary to perform the job at an acceptable level. For instance, a successful candidate must demonstrate knowledge of bookkeeping practice.

TABLE 3-3 Account Clerk II

Job: Account Clerk II Agency/Department: California Department of Rehabilitation Services Location: Fresno, CA

Job Summary: Under the supervision of the Supervising Program Technician II (SPTII), the Account Clerk II provides support for the district accounting unit. Follow prescribed procedures involving arith-metical calculations. Compile, investigate and verify numerical or financial information. Follow written and oral instructions. Must be courteous and tactful and work cooperatively with others.

Key Job Duties: Process revolving fund checks and bank drafts Maintain check counterfoils and bank drafts audit file Provide check/bank draft information to staff Ready invoices for processing by auditing invoice for appropriate/necessary information, number of copies/supporting documents, receipts, underscoring participants name, date of services, FEIN #, amount of invoice Verify funds are available/encumbered to make payment.

Qualifications Required: Good communication skills Willingness to learn Ability to use various assistive technology communication devices, and other adaptive re-sources in order to meet the needs of individuals with different abilities and diverse back-grounds Ability to use good judgment and awareness and knowledge of disability conditions to independently act, respond, and assist with various consumer situations Ability to interact in a team environment with consumers and coworkers in a professional manner, and with integrity and respect Ability to follow approved department policies and procedures

Source: State of California, Department of Rehabilitation. Account Clerk II (position number 813- 150-1733-XXX). Available: http://jobs.spb.ca.gov/wvpos/more_info.cfm?recno=512397

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(http://jobs.spb.ca.gov/wvpos/more_info.cfm?recno=512397) , accessed February 1, 2015.

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