Business Research Report
Manufacturing Compensation Strategies

Assessment Code: RWT1
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Table of Contents
Executive Summary 3
Introduction 4
Research Findings 4
Merit Pay 5
Job Based Pay 6
Skill Based Pay 7
Recommendations 8
Conclusion 8
References 9

Executive Summary

After examining several distinct compensation strategies utilized in the manufacturing industry, I have prepared this report to explore three specific plans; Merit Pay, Job Based Pay and Skill Based Pay. When considering a compensation plan, more than just pay should be included. No compensation strategy would be complete without including all forms of compensation from pay, health benefits, retirement savings options and time off.

Merit Pay is increasingly becoming prominent in manufacturing. Employers that use Merit Pay bestow pay increases and incentives to employees based on individual performance. This maybe a good way to reward high performers and publicize those behaviors that the organization values.

Job Based Pay is a structured pay system that compensates according to the position instead of the employee’s ability or adeptness to do the job. This job based strategy can reduce the likelihood of gender discrimination in pay. Also, it ensures that the employee is being paid a fair market value for the work they perform.

Finally, Skill Based Pay focuses on the exact opposite of Job Based Pay by compensating employees on their individual development and contribution. Companies that adopt this strategy have success with a more flexible workforce.

Each plan has its own advantages, by adopting and strictly adhering to only one we risk missing out on the benefits of the others. My recommendation is to take a blended approach in developing our own compensation strategy and incorporating elements from each of these proven systems. I have provided specific steps in the recommendations section below to ensure success.

Introduction

As the manufacturing industry shifts over this next decade, it will be critical for our organization to remain competitive in the marketplace. In order to do so, we must successfully manage our greatest asset, human capital. How we compensate our employees will define the quality of our products, the level of service our customers receive, and ultimately our profit margins.

As a small to mid-size organization, with 120 employees, we compete regularly with larger conglomerates for talent. Successfully adopting a strong compensation strategy will aid in positioning us as an employer of choice in our region. Additionally, research has shown that well targeted compensation plans are linked to reduced turnover, increase productivity and a reduction in workplace injuries.

As requested, I have thoroughly researched available compensation strategies and have prepared my findings on Merit Pay, Job Based Pay and Skill Based Pay. I have compared and contrasted each strategy and closely examined the benefits and drawbacks associated with their implementation.

Research Findings

After reviewing existing research, I believe the following three compensation plans offer several valid options:

Merit Pay

Merit Pay, sometimes referred to as performance pay or pay-for-performance, is a compensation strategy that that links pay and potentially other forms of compensation such as bonuses, benefits, and vacation time to an employee’s measured output or overall performance.

The theory behind this approach implies that employees are motivated by compensation and that employers can increase productivity and performance by paying for it. By placing a market driven value range on each specific position, the employer determines the level of opportunity for each employee. The employee’s production or performance determines the exact pay rate within that range that they will receive (Greene, 2010).

Merit Pay has been widely utilized in organizations for years throughout the United States. Despite complaints that it is difficult to administer, many of the Malcolm Baldrige Award winners employ Merit Pay as their principal form of compensation (Greene, 2010).

This form of pay can be modified to reflect the overall goal or mission of the company. As an example, rewarding employees for increasing productivity, valuing time and doing their part to ensure a safe work environment (McPhie, 2006). Furthermore, companies can fine tune struggling departments by providing incentives for improvements in meeting quotas and building stronger teams. They can highlight the traits and qualities they value in their employees by providing higher pay to those employees that exhibit them and not to those who don’t.

When implementing, it’s important to establish specific, measurable goals or key indicators of the desired output an organization is seeking. Furthermore, they must ensure that each employee is provided with equal opportunity to meet those goals or indicators. Research has demonstrated that there is a connection between wage inequalities and performance pay systems (Lemieux, MacLeod, & Parent, 2007).

Analysis:

The wide spread use of Merit Pay among leading corporations validates it for serious consideration within our organization. If adapted properly, we could enjoy a stronger, productive staff that better represents our mission and values. Additionally, we could utilize this strategy to quickly respond to changes within in the industry by reformulating our goals and providing additional incentives to team members who meet them.

Job Based Pay

Job Based pay provides employees with compensation based on the job they are assigned to, apart from the skills they hold. Compensation is decided before an employee is hired for the position and pay increases are standardized as well. Regardless of the employee’s proficiency or adeptness, pay increases continue as scheduled.

One of the benefits of this payment system is that companies can control their labor costs. By paying based on the job, companies can forecast their estimated labor and develop a pay schedule that meets that demand. This allows them to stay within budget, and keep improving profit margins (Kokemuller, n.d).

In a job based pay environment, employees have less opportunity to feel resentful or bitter towards the employer over their compensation. The employer remains objective and can potentially avoid discrimination lawsuits that can occur when employees believe their compensation is unfair (Kokemuller, n.d ).

The challenge with adopting a job based pay strategy is that it does not foster an environment of learning. As mentioned in A Skills Based Approach to Human Resource Management, Lawler and Ledford state that “advocates of organization learning argue that firms which are better at learning will be more effective over time” (Lawler & Ledford, 1992).

Also, in the event a company cannot pay above or at market value the employer risks losing employees to competitors that can. While that is a possibility at all organizations, those that have adopted the Job Based Pay have made it easy for employees to compare salary to those at other organizations (Kokemuller, n.d ).

Analysis:

While this bureaucratic approach does offer cost savings by reducing the opportunities for litigation and by allowing us to accurately assess overall labor costs, research does not suggest that it offers proper employee motivation. Additionally, it does not offer a competitive edge to those organizations that lack the finances to pay at or above market. However, the steadiness of pay increases could be attractive to those employees looking for stability.

Skill Based Pay

Skill based pay, or pay-for-knowledge rewards employees for the skills they master. Employers that utilize this system, focus on heavily on training their employees in specific competencies most closely associated the organization’s agenda.

The advantage of a skill based pay system is that an employee’s focus is settled on obtaining skills and certifications that represent value to the company as opposed to seeking out a higher paying position such as in a Job Based Pay environment (Lawler & Ledford, 1992).

It’s important when implementing a skill based pay system to determine the skills and competencies that directly relate to their job and the overall mission. Paying for training in an area that does not benefit the company defeats the purpose and benefits of a skill based compensation strategy. Also, the pay increase given should be compatible with the difficulty of the skill acquired. Regular testing of the proficiency of the skill can aide in accuracy (Dierdorff & Surface, 2008).

Some of the advantages of Skill Based Pay are better position coverage, forward thinking employees and a higher commitment to company objectives (Barkman, 2002). By encouraging skill based training across an entire team, a production environment can minimize the downtime from absenteeism, by shifting job responsibilities to other cross trained employees. Plus, paired with strong management support a skill based compensation plan can establish a culture focused on employee development and raise staff engagement.

Difficulties in establishing a relationship between skills and pay can be a disadvantage of Skill Based Pay. Ultimately, the skill acquired needs to relate to production or performance of the employee. If the employer is unable to determine what skill is needed, a fair and objective pay cannot be established. If left open to the interpretation of management personnel, the subjectivity and favoritism can be introduced (Joseph, n.d.).
Research published in the Strategic Management Journal found that in order for skill based pay to be successful specific skills and processes that did require frequent modification, such as in manufacturing environments, were necessary. "Because skill-based pay plans require considerable investment in all of the areas, frequent modifications would be too expensive", Gupta said (Gupta, 2000, as cited in "Study shows skill-based pay works well for manufacturers", n.d.).
Analysis:

A Skill Based pay system may increase the knowledge of employees that would benefit a manufacturing organization that does not rely heavily on innovated change. Some of those benefits could improve the available coverage for positions and produce a higher employee commitment level.

Recommendations

After reviewing the available research on Merit Pay, Job Based Pay and Skills Based Pay, I have concluded that there are many advantages and disadvantages of each strategy. By mixing the stability of Job Based Pay with the productivity associated in Merit Pay and the forward thinking of Skills Based pay, I believe we could marry the best of each strategy and remain competitive for many years to come.

These are my recommendations:

Recommendation One: Research market value data for each position and establish an acceptable base pay range for each position. This will provide stability to our employees and ensure that we have an objective foundation on which to compensate.

Recommendation Two: Develop a list of competencies and certifications that will add value to each position and team throughout our organization. Put a plan in place to begin cross training employees on other positions and reward their proficiency in these skills with appropriate pay increases. By linking pay increases to knowledge and adeptness at certain skills, we will cultivate a learning environment that will push our organization forward.

Recommendation Three: Identify behaviors that directly impact productivity, cost savings and workplace safety. Once those factors are identified, create an incentive program that rewards employees that exhibit these behaviors on a quarterly basis. Rewards do not need to be solely monetary, but could also include additional vacation days, stock options or office perks.

Conclusion

In conclusion, I recommend all three strategies blended to meet our organization’s challenges. By smartly combining Merit Pay, Job Based Pay and Skills Based Pay we can target areas for improvement within our company while reducing costs and treating our employees with fairness and respect. Furthermore, with an environment that focuses on investing in our staff we will reap efficiency by retaining employees and increasing our knowledge base.

References

Barkman, Donald F. (2002). Skill-Based Pay: Design and Implementation. Oak Ridge, TN. The Business Center

Dierdorff, E. C., & Surface, E. A. (2008). If you pay for skills, will they learn? Skill change and maintenance under a skill-based pay system. Journal of Management, 34(4), 723-724. doi: 10.1177/0149206307312507 or http://jom.sagepub.com/content/34/4/721.full.pdf+html

Greene, Robert J., Ph.D. (2010). Effectively Managing Base Pay: Strategies for Success Retrieved from http://www.shrm.org/hrdisciplines/compensation/Articles/Pages/CMS_005592.aspx

Joseph, Chris. (n.d.). Pros & Cons of Competency Based Pay Plans. Demand Media. Retrieved from http://smallbusiness.chron.com/pros-cons-competency-based-pay-plans-2827.html Kokemuller, Neil. (n.d.). What Are the Advantages of a Job-Based Compensation Structure? Demand Media. Retrieved from http://woman.thenest.com/advantages-jobbased-compensation-structure-19791.html

Lawler, E. E., and Ledford, G. E. (1992). A SKILL-BASED APPROACH TO HUMAN RESOURCE MANAGEMENT. In CEO PUBLICATION G 92-15 (218),. Retrieved from http://ceo.usc.edu/pdf/G9215218.pdf

Lemieux, T., MacLeod, W. B., Parent, D. (2009). Performance Pay and Wage Inequality. The Quarterly Journal of Economics (2009) 124 (1): 1-49. doi: 10.1162/qjec.2009.124.1.1. Retrieved from http://qje.oxfordjournals.org/content/124/1/1.short

McPhie, Neil A.G. (2006). Designing an Effective Pay for Performance Compensation System.
Retrieved from http://www.mspb.gov/netsearch/viewdocs.aspx?docnumber=224104&version=224323&application=ACROBAT

Study shows skill-based pay works well for manufacturers. Retrieved from http://www.reliableplant.com/Read/3959/skill-based-pay-manufacturers