HR Guide to the Internet:

Job Evaluation: Methods: Point Method

Point Method A set of compensable factors are identified as determining the worth of jobs.
Typically the compensable factors include the major categories of:
1. Skill
2. Responsibilities
3. Effort
4. Working Conditions

These factors can then be further defined.

1. Skill
1. Experience
2. Education
3. Ability
2. Responsibilities
1. Fiscal
2. Supervisory
3. Effort
1. Mental
2. Physical
4. Working Conditions
1. Location
2. Hazards
3. Extremes in Environment

The point method is an extension of the factor comparison method.

Each factor is then divided into levels or degrees which are then assigned points. Each job is
rated using the job evaluation instrument. The points for each factor are summed to form a total
point score for the job.

Jobs are then grouped by total point score and assigned to wage/salary grades so that similarly
rated jobs would be placed in the same wage/salary grade.

Advantages Disadvantages
 The value of the job is expressed in  The pay for each factor is based on
monetary terms. judgments that are subjective.
 Can be applied to a wide range of jobs.
 The standard used for determining the
 Can be applied to newly created jobs. pay for each factor may have built-in
biases that would affect certain groups
of employees (females or minorities).

HR Guide to the Internet:

Job Evaluation: Methods: Ranking

Ranking This method is one of the simplest to administer. Jobs are compared to each other
based on the overall worth of the job to the organization. The 'worth' of a job is usually based on
judgements of skill, effort (physical and mental), responsibility (supervisory and fiscal), and
working conditions.
Advantages Disadvantages
 Simple.  Difficult to administer as the number of
jobs increases.
 Very effective when there are relatively  Rank judgements are subjective.
few jobs to be evaluated (less than 30).
 Since there is no standard used for
comparison, new jobs would have to be
compared with the existing jobs to
determine its appropriate rank. In
essence, the ranking process would have
to be repeated each time a new job is
added to the organization.

Ranking Methods
1. Ordering Simply place job titles on 3x5 inch index cards then order the titles by relative
importance to the organization.
2. Weighting
3. Paired Comparison

Grouping
After ranking, the jobs should be grouped to determine the appropriate slary levels.

HR Guide to the Internet:

Job Evaluation: Methods: Classification

Classification Jobs are classified into an existing grade/category structure or hierarchy. Each
level in the grade/category structure has a description and associated job titles. Each job is
assigned to the grade/category providing the closest match to the job. The classification of a
position is decided by comparing the whole job with the appropriate job grading standard. To
ensure equity in job grading and wage rates, a common set of job grading standards and
instructions are used. Because of differences in duties, skills and knowledge, and other aspects of
trades and labor jobs, job grading standards are developed mainly along occupational lines.

The standards do not attempt to describe every work assignment of each position in the
occupation covered. The standards identify and describe those key characteristics of occupations
which are significant for distinguishing different levels of work. They define these key
characteristics in such a way as to provide a basis for assigning the appropriate grade level to all
positions in the occupation to which the standards apply.

Advantages Disadvantages
 Simple.  Classification judgments are subjective.
 The standard used for comparison (the
 The grade/category structure exists grade/category structure) may have built
independent of the jobs. Therefore, new in biases that would affect certain
jobs can be classified more easily than groups of employees (females or
 the Ranking Method. minorities).

 Some jobs may appear to fit within more

than one grade/category.

Tips
Use Well Defined Grades/Categories Attempt to define the grades/categories so that they do
not overlap one another. Overlaps in the descriptions and factors used to identify the grade
would lead to problems when assigning jobs to the grades where there is overlap between them.

Biases Examine the Grades/Categories for inherent biases against females and minorities.

Government Classification

1. Position Classification

2. Defense Civilian Intelligence Personnel System

HR Guide to the Internet:

Job Evaluation: Methods: Factor Comparison

Factor Comparison A set of compensable factors are identified as determining the worth of
jobs. Typically the number of compensable factors is small (4 or 5). Examples of compensable
factors are:
1. Skill
2. Responsibilities
3. Effort
4. Working Conditions

Next, benchmark jobs are identified. Benchmark jobs should be selected as having certain
characteristics.
1. equitable pay (not overpaid or underpaid)
2. range of the factors (for each factor, some jobs would be at the low end of the factor
while others would be at the high end of the factor).

The jobs are then priced and the total pay for each job is divided into pay for each factor. See
example matrix below:
Job Evaluation: Factor Comparison
The hourly rate is divided into pay for each of the following factors:
Hourly Pay for Pay for Pay for Pay for Working
.
Job Rate Skill Effort Responsibility Conditions

Secretary $9.00 4.50 2.00 2.00 0.50

Admin
$11.00 5.50 2.50 2.50 0.50
Assistant
Supervisor $15.00 6.00 3.50 4.00 1.50
Manager $21.00 9.00 3.50 7.00 1.50

This process establishes the rate of pay for each factor for each benchmark job. Slight
adjustments may need o be made to the matrix to ensure equitable dollar weighting of the
factors.

The other jobs in the organization are then compared with the benchmark jobs and rates of pay
for each factor are summed to determine the rates of pay for each of the other jobs.

Advantages Disadvantages
 The value of the job is expressed in  The pay for each factor is based on
monetary terms. judgements that are subjective.
 Can be applied to a wide range of jobs.
 The standard used for determining the
 Can be applied to newly created jobs. pay for each factor may have build in
biases that would affect certain groups
of employees (females or minorities).

HR Guide to the Internet:

Compensation: Outline and Definitions

Compensation is a systematic approach to providing monetary value to employees in exchange

for work performed. Compensation may achieve several purposes assisting in recruitment, job
performance, and job satisfaction.

Chapter Highlights

1. How is compensation used?

2. What are the components of a compensation system?
3. What are different types of compensation?

How is compensation used?

Compensation is a tool used by management for a variety of purposes to further the existance of
the company. Compensation may be adjusted according the the business needs, goals, and
available resources.

Compensation may be used to:

 recruit and retain qualified employees.

 increase or maintain morale/satisfaction.
 reward and encourage peak performance.
 achieve internal and external equity.
 reduce turnover and encourage company loyalty.
 modify (through negotiations) practices of unions.
Recruitment and retention of qualified employees is a common goal shared by many employers.
To some extent, the availability and cost of qualified applicants for open positions is determined
by market factors beyond the control of the employer. While an employer may set compensation
levels for new hires and advertize those salary ranges, it does so in the context of other
employers seeking to hire from the same applicant pool.

Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that
must be reached between the monetary value the employer is willing to pay and the sentiments of
worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries or
salary levels at the expence of satisfaction and morale. Conversely, an employer wishing to
reduce employee turnover may seek to increase salaries and salary levels.

Compensation may also be used as a reward for exceptional job performance. Examples of such
plans include: bonuses, commissions, stock, profit sharing, gain sharing.

What are the components of a compensation system?

Compensation will be perceived by employees as fair if based on systematic components.

Various compensation systems have developed to determine the value of positions. These
systems utilize many similar components including job descriptions, salary ranges/structures,
and written procedures.

The components of a compensation system include:

 Job Descriptions A critical component of both compensation and selection systems, job
descriptions define in writing the responsibilities, requirements, functions, duties,
location, environment, conditions, and other aspects of jobs. Descriptions may be
developed for jobs individually or for entire job families.
 Job Analysis The process of analyzing jobs from which job descriptions are developed.
Job analysis techniques include the use of interviews, questionnaires, and observation.
 Job Evaluation A system for comparing jobs for the purpose of determining appropriate
compensation levels for individual jobs or job elements. There are four main techniques:
Ranking, Classification, Factor Comparison, and Point Method.
 Pay Structures Useful for standardizing compensation practices. Most pay structures
include several grades with each grade containing a minimum salary/wage and either step
increments or grade range. Step increments are common with union positions where the
pay for each job is pre-determined through collective bargaining.
 Salary Surveys Collections of salary and market data. May include average salaries,
inflation indicators, cost of living indicators, salary budget averages. Companies may
purchase results of surveys conducted by survey vendors or may conduct their own salary
surveys. When purchasing the results of salary surveys conducted by other vendors, note
that surveys may be conducted within a specific industry or across industries as well as
within one geographical region or across different geographical regions. Know which
industry or geographic location the salary results pertain to before comparing the results
to your company.
 Policies and Regulations
Principles of Compensation Discussed
Compensation will be perceived as fair if it is comprised of a system of components developed to
maintain internal and external equity.

What are different types of compensation?

Different types of compensation include:

 Base Pay
 Commissions
 Overtime Pay
 Bonuses, Profit Sharing, Merit Pay
 Stock Options
 Travel/Meal/Housing Allowance
 Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes...

What are regulations affecting compensation?

 FLSA

Compensation Plans

Develop a program outline.

 Set an objective for the program.
 Establish target dates for implementation and completion.
 Determine a budget.

Designate an individual to oversee designing the compensation program.

 Determine whether this position will be permanent or temporary.
 Determine who will oversee the program once it is established.
 Determine the cost of going outside versus looking inside.
 Determine the cost of a consultant's review.

Develop a compensation philosophy.

 Form a compensation committee (presumably consisting of officers or at least including
one officer of the company).
 Decide what, if any, differences should exist in pay structures for executives, professional
employees, sales employees, and so on (e.g., hourly versus salaried rates, incentive-based
versus noncontingent pay).
 Determine whether the company should set salaries at, above, or below market.
 Decide the extent to which employee benefits should replace or supplement cash
compensation.

Conduct a job analysis of all positions.

 Conduct a general task analysis by major departments. What tasks must be accomplished
by whom?
  Get input from senior vice presidents of marketing, finance, sales, administration,
production, and other appropriate departments to determine the organizational structure
and primary functions of each.
 Interview department managers and key employees, as necessary, to determine their
specific job functions.
 Decide which job classifications should be exempt and which should be nonexempt.
 Develop model job descriptions for exempt and nonexempt positions and distribute the
models to incumbents for review and comment; adjust job descriptions if necessary.
 Develop a final draft of job descriptions.
 Meet with department managers, as necessary, to review job descriptions.
 Finalize and document all job descriptions.

Evaluate jobs.
 Rank the jobs within each senior vice president's and manager's department, and then
rank jobs between and among departments.
 Verify ranking by comparing it to industry market data concerning the ranking, and
adjust if necessary.
 Prepare a matrix organizational review.
 On the basis of required tasks and forecasted business plans, develop a matrix of jobs
crossing lines and departments.
 Compare the matrix with data from both the company structure and the industrywide
market.
 Prepare flow charts of all ranks for each department for ease of interpretation and
assessment.
 Present data and charts to the compensation committee for review and adjustment.

Determine grades.
 Establish the number of levels - senior, junior, intermediate, and beginner - for each job
family and assign a grade to each level.
 Determine the number of pay grades, or monetary range of a position at a particular level,
within each department.

Establish grade pricing and salary range.

 Establish benchmark (key) jobs.
 Review the market price of benchmark jobs within the industry.
 Establish a trend line in accordance with company philosophy (i.e., where the company
wants to be in relation to salary ranges in the industry).

Determine an appropriate salary structure.

 Determine the difference between each salary step.
 Determine a minimum and a maximum percent spread.
 Slot the remaining jobs.
 Review job descriptions.
 Verify the purpose, necessity, or other reasons for maintaining a position.
 Meet with the compensation committee for review, adjustments, and approval.

Develop a salary administration policy.

 Develop and document the general company policy.
 Develop and document specific policies for selected groups.
  Develop and document a strategy for merit raises and other pay increases, such as cost-
of-living adjustments, bonuses, annual reviews, and promotions.
 Develop and document procedures to justify the policy (e.g., performance appraisal
forms, a merit raise schedule).
 Meet with the compensation committee for review, adjustments, and approval.

Obtain top executives' approval of the basic salary program.

 Develop and present cost impact studies that project the expense of bringing the present
staff up to the proposed levels.
 Present data to the compensation committee for review, adjustment, and approval.
 Present data to the executive operating committee (senior managers and officers) for
review and approval.

Communicate the final program to employees and managers.

 Present the plan to the compensation committee for feedback, adjustments, review, and
approval.
 Make a presentation to executive staff managers for approval or change, and incorporate
necessary changes.
 Develop a plan for communicating the new program to employees, using slide shows or
movies, literature, handouts, etc.
 Make presentations to managers and employees. Implement the program.
 Design and develop detailed systems, procedures, and forms.
 Work with HR information systems staff to establish effective implementation
procedures, to develop appropriate data input forms, and to create effective monitoring
reports for senior managers.
 Have the necessary forms printed.
 Develop and determine format specifications for all reports.
 Execute test runs on the human resources information system.
 Execute the program.

Monitor the program.

 Monitor feedback from managers.
 Make changes where necessary.
 Find flaws or problems in the program and adjust or modify where necessary.

Compensation: Development of Salary Administration Plan

Develop a program outline.

 Set an objective for the program.
 Establish target dates for implementation and completion.
 Determine a budget.

Designate an individual to oversee designing the compensation program.

 Determine whether this position will be permanent or temporary.
 Determine who will oversee the program once it is established.
 Determine the cost of going outside versus looking inside.
 Determine the cost of a consultant's review.

Develop a compensation philosophy.

  Form a compensation committee (presumably consisting of officers or at least including
one officer of the company).
 Decide what, if any, differences should exist in pay structures for executives, professional
employees, sales employees, and so on (e.g., hourly versus salaried rates, incentive-based
versus noncontingent pay).
 Determine whether the company should set salaries at, above, or below market.
 Decide the extent to which employee benefits should replace or supplement cash
compensation.

Conduct a job analysis of all positions.

 Conduct a general task analysis by major departments. What tasks must be accomplished
by whom?
 Get input from senior vice presidents of marketing, finance, sales, administration,
production, and other appropriate departments to determine the organizational structure
and primary functions of each.
 Interview department managers and key employees, as necessary, to determine their
specific job functions.
 Decide which job classifications should be exempt and which should be nonexempt.
 Develop model job descriptions for exempt and nonexempt positions and distribute the
models to incumbents for review and comment; adjust job descriptions if necessary.
 Develop a final draft of job descriptions.
 Meet with department managers, as necessary, to review job descriptions.
 Finalize and document all job descriptions.

Evaluate jobs.
 Rank the jobs within each senior vice president's and manager's department, and then
rank jobs between and among departments.
 Verify ranking by comparing it to industry market data concerning the ranking, and
adjust if necessary.
 Prepare a matrix organizational review.
 On the basis of required tasks and forecasted business plans, develop a matrix of jobs
crossing lines and departments.
 Compare the matrix with data from both the company structure and the industrywide
market.
 Prepare flow charts of all ranks for each department for ease of interpretation and
assessment.
 Present data and charts to the compensation committee for review and adjustment.

Determine grades.
 Establish the number of levels - senior, junior, intermediate, and beginner - for each job
family and assign a grade to each level.
 Determine the number of pay grades, or monetary range of a position at a particular level,
within each department.

Establish grade pricing and salary range.

 Establish benchmark (key) jobs.
 Review the market price of benchmark jobs within the industry.
 Establish a trend line in accordance with company philosophy (i.e., where the company
wants to be in relation to salary ranges in the industry).
Determine an appropriate salary structure.
 Determine the difference between each salary step.
 Determine a minimum and a maximum percent spread.
 Slot the remaining jobs.
 Review job descriptions.
 Verify the purpose, necessity, or other reasons for maintaining a position.
 Meet with the compensation committee for review, adjustments, and approval.

Develop a salary administration policy.

 Develop and document the general company policy.
 Develop and document specific policies for selected groups.
 Develop and document a strategy for merit raises and other pay increases, such as cost-
of-living adjustments, bonuses, annual reviews, and promotions.
 Develop and document procedures to justify the policy (e.g., performance appraisal
forms, a merit raise schedule).
 Meet with the compensation committee for review, adjustments, and approval.

Obtain top executives' approval of the basic salary program.

 Develop and present cost impact studies that project the expense of bringing the present
staff up to the proposed levels.
 Present data to the compensation committee for review, adjustment, and approval.
 Present data to the executive operating committee (senior managers and officers) for
review and approval.

Communicate the final program to employees and managers.

 Present the plan to the compensation committee for feedback, adjustments, review, and
approval.
 Make a presentation to executive staff managers for approval or change, and incorporate
necessary changes.
 Develop a plan for communicating the new program to employees, using slide shows or
movies, literature, handouts, etc.
 Make presentations to managers and employees. Implement the program.
 Design and develop detailed systems, procedures, and forms.
 Work with HR information systems staff to establish effective implementation
procedures, to develop appropriate data input forms, and to create effective monitoring
reports for senior managers.
 Have the necessary forms printed.
 Develop and determine format specifications for all reports.
 Execute test runs on the human resources information system.
 Execute the program.

Monitor the program.

 Monitor feedback from managers.
 Make changes where necessary.
 Find flaws or problems in the program and adjust or modify where necessary.

Compensation: Incentive Plans: Merit Pay

Merit Pay: An incentive plan implemented on an institutional wide basis to give all employees an
equal opportunity for consideration, regardless of funding source. The merit increase program is
implemented when funds are designated for that purpose by the institution's administration,
dependent upon the availability of funds and other constraints. .
Advantages Disadvantages
 Allows the employer to differentiate pay  The pay is subjective.
given to high performers.
 Allows a differentiation between
individual and company performance.

 Allows the employer to satisfactorily

reward an employee for accomplishing a
task that might not be repeated (such as
implementation of new systems).

Compensation: Incentive Plans: Gainsharing

Gainsharing: A technique that compensates workers based on improvements in the company's

productivity.

How does Gainsharing work? A Company shares productivity gains with the workforce.
Workers voluntarily participate in management to accept responsibility for major reforms. This
type of pay is based on factors directly under a worker’s control (i.e., productivity or costs).
Gains are measured and distributions are made frequently through a predetermined formula.
Because this pay is only implemented when gains are achieved, gainsharing plans do not
adversely affect company costs.

What are the 'Gains' that are measured?

 Increases in production with equal or less effort.

 Equal levels of production with less effort.

What are examples of Gainsharing formulas?

 Calculate gain in hours: The actual hours worked minus the expected hours (for the given
level of output) equals the gain in hours.

Advantages Disadvantages
 Helps companies achieve sustained  Adherence to the FLSA requires
increases in productivity. employers to recalculate each worker's
 Employees become more involved the "regular rate" of pay. To overcome this
productivity gains made by the limitation, employers may restrict this
employer. type of compensation to exempt
 Employees can share in the benefits of employees.
employee sponsored improvements.  The formulas and program may be
 Enhances commitment to organizational difficult to understand.
goals.
 Requires a shift to a more team oriented
  Leads to improvements in other management style.
measures of company performance,
including: teamwork, product quality,
lower rates of absenteeism, defects, and
"downtime."

Tips
When does Gainsharing work best? Works best when company performance levels can be
easily quantified. Employee involvement significantly enhances the effectiveness of incentive
pay. When used simultaneously, productivity gains from combining these techniques can exceed
gains achieved separately.

What is the best way to implement Gainsharing? Meet with executives to develop a clear
understanding of Gainsharing. Develop various formulas and models to be used in predicting
future gains and the costs associated with sharing those gains. Prepare rules, presentation
materials, and dissemination of policy. Retrain supervisors and administrators. Teams of
employees are selected by peers to develop cost-saving measures. Through their personal
knowledge about their jobs, employees are able to reduce waste and increase efficiency.

Compensation: Incentive Plans: Profit Sharing

Profit Sharing: An incentive based compensation program to award employees a percentage of

the company's profits.

How does Profit sharing work? The company contributes a portion of its pre-tax profits to a
pool that will be distributed among eligible employees. The amount distributed to each employee
may be weighted by the employee's base salary so that employees with higher base salaries
receive a slightly higher amount of the shared pool of profits. Generally this is done on an annual
basis.

Advantages Disadvantages
 Brings groups of employees to work  The pay for each employee moves up or
together toward a common goal (the down together (no individual differences
success/benefit of the company). for merit or performance).
 Helps employees focus on profitability.  Focuses only on the goal of profitability
 The costs of implementing the plan rise (which may be at the expense of
and fall with the company's revenues. quality).
 For smaller companies, these plans may
 Enhances commitment to organizational result in drastic swings in earnings for
goals. employees which the employees may
find difficult to manage their personal
finances.

 Adherence to the FLSA requires

employers to recalculate each worker's
"regular rate" of pay. To overcome this
limitation, employers may restrict this
 type of compensation to exempt
employees.

Tips
When does Profit sharing work best? When company earnings are relatively stable (or
steadily increasing).

What is the best way to implement Profit sharing? Meet with executives to develop a clear
understanding of profit sharing. Develop various formulas and models to be used in predicting
future gains and the costs associated with sharing those gains. Prepare rules.

Compensation: Incentive Plans: Stock Options

Stock Options: The ‘right’ to purchase stock at a given price at some time in the future.
Stock Options come in two types:
1. Incentive stock options (ISOs) in which the employee is able to defer taxation
until the shares bought with the option are sold. The company does not receive a
tax deduction for this type of option.
2. Nonqualified stock options (NSOs) in which the employee must pay infome tax
on the 'spread' between the value of the stock and the amount paid for the
option. The company may receive a tax deduction on the 'spread'.

How do Stock options work? An option is created that specifies that the owner
of the option may 'exercise' the 'right' to purchase a company’s stock at a certain
price (the 'grant' price) by a certain (expiration) date in the future. Usually the
price of the option (the 'grant' price) is set to the market price of the stock at the
time the option was sold. If the underlying stock increases in value, the option
becomes more valuable. If the underlying stock decreases below the 'grant' price
or stays the same in value as the 'grant' price, then the option becomes
worthless.

They provide employees the right, but not the obligation, to purchase shares of their
employer's stock at a certain price for a certain period of time. Options are usually
granted at the current market price of the stock and last for up to 10 years. To encourage
employees to stick around and help the company grow, options typically carry a four to
five year vesting period, but each company sets its own parameters.

Advantages Disadvantages
o Allows a company to o In a down market,
share ownership with the because they quickly become
employees. valueless
o Dilution of ownership
o Used to align the
interests of the employees with o overstatement of
those of the company. operating income
Nonqualified Stock Options
Grants the option to buy stock at a fixed price for a fixed exercise period; gains from
grant to exercise taxed at income-tax rates

Advantages Disadvantages
o Aligns executive and o Dilutes EPS
shareholder interests. o Executive investment
o Company receives tax is required
deduction.
o May incent short-term
o No charge to earnings. stock-price manipulation

Restricted Stock
Outright grant of shares to executives with restrictions to sale, transfer, or pledging;
shares forfeited if executive terminates employment; value of shares as restrictions lapse
taxed as ordinary income

Advantages Disadvantages
o Aligns executive and o Immediate dilution of
shareholder interests. EPS for total shares granted.
o No executive
investment required. o Fair-market value
charged to earnings over
o If stock appreciates restriction period.
after grant, company's tax
deduction exceeds fixed
charge to earnings.

Performance shares/units
Grants contingent shares of stock or a fixed cash value at beginning of performance
period; executive earns a portion of grant as performance goals are hit

Advantages Disadvantages
 Aligns executives and o Charge to earnings,
shareholders if stock is marked to market.
used.
o Difficulty in setting
o Performance oriented. performance targets.
o No executive
investment required.

o Company receives tax

deduction at payout.
 Tips

When do Stock options work best?

1. Appropriate for small companies where future growth is expected.

2. For publicly owned companies who want to offer some degree of company
ownership to employees.

What are important considerations when implementing Stock Options?

3. How much stock a company be willing to sell.

4. Who will receive the options.
5. How many options are available to be sold in the future.
6. Is this a permanent part of the benefit plan or just an incentive.

Compensation: Incentive Plans: ESOP

Employee Stock Ownership Plan (ESOP): An ESOP is a defined contribution employee benefit
plan that allows employees to become owners of stock in the company they work for. It is an
equity based deferred compensation plan. Several features make ESOPs unique as compared to
other employee benefit plans. First, only an ESOP is required by law to invest primarily in the
securities of the sponsoring employer. Second, an ESOP is unique among qualified employee
benefit plans in its ability to borrow money. As a result, "leveraged ESOPs" may be used as a
technique of corporate finance.

How does ESOP work?

1. The ESOP operates through a trust, setup by the company, that accepts tax
deductible contributions from the company to purchase company stock.
2. The contributions made by the company are distributed to individual employee
accounts within the trust.
3. The amount of stock each individual receives may vary according to pre-established
formulas based on salary, service, or position.
4. The employees may ‘cash out’ after vesting in the program or when they leave the
company. The amount they may cash out may depend on the vesting requirements.
5. When an ESOP employee who has at least ten years of participation in the ESOP
reaches age 55, he or she must be given the option of diversifying his/her ESOP
account up to 25% of the value. This option continues until age sixty, at which time
the employee has a one-time option to diversify up to 50% of his/her account. This
requirement is applicable to ESOP shares allocated to employee's accounts after
December 31, 1986.
6. Employees receive the vested portion of their accounts at either termination,
disability, death, or retirement. These distributions may be made in a lump sum or
in installments over a period of years. If employees become disabled or die, they or
their beneficiaries receive the vested portion of their ESOP accounts right away.

Advantages Disadvantages
 Capital Appreciation. Companies sell  Dilution. If the ESOP is used to finance
 some or all of their equity to employees the company’s growth, the cash flow
and by doing so convert corporate and benefits must be weighed against the
personal taxes into tax-free capital rate of dilution.
appreciation. This allows the owner to  Fiduciary Liability. The plan
sell 100% of his or her company, get committee members who administer the
money out tax-free and still maintain plan are deemed to be fiduciaries, and
control of the company. can be held liable if they knowingly
 Incentive Based Retirement. Provides participate in improper transactions.
a cost-effective plan to motivate  Liquidity. If the value of the stock
employees. After all, who works harder, appreciates substantially, the ESOP
owners or employees? and/or the company may not have
 Tax Advantages. Enables tax sufficient funds to repurchase stock,
advantaged purchasing of stock of a upon employees’ retirement.
retiring company owner. With this
purpose, a company owner may sell  Stock Performance. If the value of the
their shares to the ESOP and incur no company does not increase, the
taxable gain on the sale. A company employees may feel that the ESOP is
owner can sell all or some of the less attractive than a profit sharing plan.
company to the employees cost free. In an extreme case, if the company fails,
Owners who sell 30% or more of their the employees will lose their benefits to
company to an ESOP are allowed to the extent that the ESOP is not
"roll-over" the proceeds into other diversified in other investments
securities and defer taxation on the gain.

 Company reduces it's tax liability. A

company can reduce its corporate
income taxes and increase its cash flow
and net worth by simply issuing treasury
stock or newly issued stock to its ESOP.

Tips
What is the best way to implement ESOP?
1. Determine how you want to use the ESOP. Will it be used as an employee benefit plan?
Or, as an incentive program?
2. Conduct a feasability study to determine the value of the company’s stock and impact of
the contributions that must be made to the trust.
3. An ESOP requires different accounting procedures and a different method of allocating
stocks and other investments among the employees than other types of plans. For this
reason the plan should be designed by an ESOP specialist in order to avoid IRS
difficulties.

What are the alternatives to ESOP?

1. Employee stock options.

2. Profit Sharing. An ESOP differs from a profit sharing plan in that an ESOP is required to
invest primarily in employer securities, while a profit sharing plan is usually prohibited
from investing primarily in employer securities.
 Job Analysis: Overview

Job Analysis is a process to identify and determine in detail the particular job duties and
requirements and the relative importance of these duties for a given job. Job Analysis is a
process where judgements are made about data collected on a job.

The Job; not the person An important concept of Job Analysis is that the analysis is conducted
of the Job, not the person. While Job Analysis data may be collected from incumbents through
interviews or questionnaires, the product of the analysis is a description or specifications of the
job, not a description of the person.

Purpose of Job Analysis

The purpose of Job Analysis is to establish and document the 'job relatedness' of employment
procedures such as training, selection, compensation, and performance appraisal.

Determining Training Needs

Job Analysis can be used in training/"needs assessment" to identify or develop:

 training content
 assessment tests to measure effectiveness of training
 equipment to be used in delivering the training
 methods of training (i.e., small group, computer-based, video, classroom...)

Compensation
Job Analysis can be used in compensation to identify or determine:

 skill levels
 compensable job factors
 work environment (e.g., hazards; attention; physical effort)
 responsibilities (e.g., fiscal; supervisory)
 required level of education (indirectly related to salary level)

Selection Procedures
Job Analysis can be used in selection procedures to identify or develop:

 job duties that should be included in advertisements of vacant positions;

 appropriate salary level for the position to help determine what salary should be offered
to a candidate;
 minimum requirements (education and/or experience) for screening applicants;
 interview questions;
 selection tests/instruments (e.g., written tests; oral tests; job simulations);
 applicant appraisal/evaluation forms;
 orientation materials for applicants/new hires

Performance Review
Job Analysis can be used in performance review to identify or develop:

 goals and objectives

 performance standards
  evaluation criteria
 length of probationary periods
 duties to be evaluated

Methods of Job Analysis

Several methods exist that may be used individually or in combination. These include:
 review of job classification systems
 incumbent interviews
 supervisor interviews
 expert panels
 structured questionnaires
 task inventories
 check lists
 open-ended questionnaires
 observation
 incumbent work logs

A typical method of Job Analysis would be to give the incumbent a simple questionnaire to
identify job duties, responsibilities, equipment used, work relationships, and work environment.
The completed questionnaire would then be used to assist the Job Analyst who would then
conduct an interview of the incumbent(s). A draft of the identified job duties, responsibilities,
equipment, relationships, and work environment would be reviewed with the supervisor for
accuracy. The Job Analyst would then prepare a job description and/or job specifications.

The method that you may use in Job Analysis will depend on practical concerns such as type of
job, number of jobs, number of incumbents, and location of jobs.

What Aspects of a Job Are Analyzed?

Job Analysis should collect information on the following areas:
 Duties and Tasks The basic unit of a job is the performance of specific tasks and duties.
Information to be collected about these items may include: frequency, duration, effort,
skill, complexity, equipment, standards, etc.
 Environment This may have a significant impact on the physical requirements to be able
to perform a job. The work environment may include unpleasant conditions such as
offensive odors and temperature extremes. There may also be definite risks to the
incumbent such as noxious fumes, radioactive substances, hostile and aggressive people,
and dangerous explosives.
 Tools and Equipment Some duties and tasks are performed using specific equipment
and tools. Equipment may include protective clothing. These items need to be specified
in a Job Analysis.
 Relationships Supervision given and received. Relationships with internal or external
people.
 Requirements The knowledges, skills, and abilities (KSA's) required to perform the job.
While an incumbent may have higher KSA's than those required for the job, a Job
Analysis typically only states the minimum requirements to perform the job.

Job Analysis: Job Descriptions

Job descriptions, as a management tool, can greatly simplify an organization's human resource
management.

A job description clarifies work functions and reporting relationships, helping employees
understand their jobs. Job descriptions aid in maintaining a consistent salary structure.
Performance evaluations may be based on job descriptions.

Well written duty statements contain action words which accurately describe what is being done.

Duty statements should focus on primary, current, normal, daily duties and responsibilities of the
position (not incidental duties, an employee’s qualifications or performance, or temporary
assignments). Related or similar duties should be combined and written as one statement.

Each duty statement should be a discreet, identifiable aspect of the work assignment, described
in one to three sentences, and should be outcome-based, allowing for alternate means of
performing the duty, changes in technology, preferences of employees and supervisors, and
accommodations of workers with disabilities, without altering the nature of, and/or the duty
itself.

Examples of duty statements are:

 Compiles reports on a quarterly basis to ...

 Adjusts height of lathe tool ...
 Drives tractor to worksite ...
 Opens valve to flush pipe.
 Listens to customer at counter.
 Compares department expenses with budget...

Duty statements typically contain three parts: 1) the Verb, the Object, and a Purpose. Examples
of these parts of duty statements are shown below:

Verb Object Purpose

Collects financial data to evaluate budget requests.
Conducts analytical studies to support financial planning.
Compiles enrollment data for distribution to administrators.
in conformance with established
Cleans computer equipment
schedules.
pickup truck carrying motor
Drives to job sites.
fuels
Overhauls and repairs equipment daily, or as needed.

A form, such as the one below may help in identifying the necessary information to create duty
statements.

Worksheet for task statements

Who? Performs what To whom or Using what tools, equipment, To achieve what
 action? what? methods? result?
Subject Action Verbs Object of verb Phrase In order to...
the
worker

Task statement

Job Analysis answers the following important questions:

 What tools, materials, and equipment are used to perform the tasks in the job?
 What methods or processes are used to perform the tasks in the job?
 What are the specific duties for the position? This puts the position in context and
spells out broad responsibilities.
 What are the critical tasks and key result areas of the position? The question helps
to isolate the most critical activities that the position holder is expected to perform.
 What are the discrete outcomes of the job for which the person appointed will be
held accountable and evaluated on?
 What behaviors, skills, knowledge and experience are the most important to the
program in achieving the key results and outcomes? This question focuses on the
specific personal qualities that are necessary to best meet the job requirements.

The content of job descriptions should identify and describe:

1. Mental Functions
a. COMPARING - Judging the readily observable functional, structural, or
compositional characteristics (whether similar to or divergent from obvious
standards) of data, people, or things.
b. COPYING - Transcribing, entering, or posting data.
c. COMPUTING - Performing arithmetic operations and reporting on and/or
carrying out a prescribed action in relation to them.
d. COMPILING - Gathering, collating, or classifying information about data,
people, or things. Reporting and/or carrying out a prescribed action in relation to
the evaluation is frequently involved.
e. ANALYZING - Examining and evaluating data. Presenting alternative actions in
relation to the evaluation is frequently involved.
f. COORDINATING - Determining time, place, and sequence of operations or
action to be taken on the basis of analysis of data. May include prioritizing
multiple responsibilities and/or accomplishing them simultaneous-ly.
g. SYNTHESIZING - To combine or integrate data to discover facts and/or develop
knowledge or creative concepts and/or interpretations.
2. Relations with Others
 a. SUPERVISION (given) - Coordinating and directing the activities of one or more
subordinates.
b. SUPERVISION (received) - Independence of actions; authority to determine
methods of operation.
c. NEGOTIATING - Exchanging ideas, information, and opinions with others to
formulate policies and programs and/or jointly arrive at decisions, conclusions,
solutions, or solve disputes.
d. COMMUNICATING - Talking with and/or listening to and/or signaling people to
convey or exchange infor-mation; includes giving/receiving assignments and/or
directions.
e. INSTRUCTING - Teaching subject matter to others, or training others through
explanation, demonstration, and supervised practice; or making recommendations
on the basis of technical disciplines.
f. INTERPERSONAL SKILLS/BEHAVIORS - Dealing with individuals with a
range of moods and behaviors in a tactful, congenial, personal manner so as not to
alienate or antagonize them.
g. CONTROL OF OTHERS - seizing, holding, controlling, and/or otherwise
subduing violent, assaultive, or physically threatening persons to defend oneself
or prevent injury. Body strength and agility of all four limbs is necessary.
3. Physical Demands (strength)
a. SEDENTARY - Exerts up to 10 lbs. of force occa-sionally and/or a negligible
amount of force frequently or constantly to lift, carry, push, pull, or otherwise
move objects, including the human body. involves sitting most of the time, but
may involve walking or standing for brief periods of time.
b. LIGHT - Exert up to 20 lbs. of force occasionally, and/or up to 10 lbs. of force
frequently, and/or a negligi-ble amount of force constantly to move objects.
Physical demands are in excess of those of Sedentary work. Light work usually
requires walking or standing to a significant degree.
c. MEDIUM - Exert up to 50 lbs. of force occasional-ly, and/or up to 20 lbs. of force
frequently, and/or up to 10 lbs. of force constantly to move objects.
d. HEAVY - Exert up to 100 lbs. of force occasionally, and/or up to 50 lbs. of force
frequently, and/or up to 20 lbs. of force constantly to move objects.
e. VERY HEAVY - Exert in excess of 100 lbs. of force occasionally, and/or in
excess of 50 lbs. of force frequently, and/or in excess of 20 lbs. of force
constantly to move objects.
4. Physical Demands (movement)
a. CLIMBING - Ascending or descending using feet and legs and/or hands and
arms. Body agility is emphasized.
b. BALANCING - Maintaining body equilibrium to prevent falling on narrow,
slippery, or erratically moving surfaces; or maintaining body equilibrium when
perform-ing feats of agility.
c. STOOPING - Bending body downward and forward. This factor is important if it
occurs to a considerable degree and requires full use of the lower extremities and
back muscles.
d. KNEELING - Bending legs at knees to come to rest on knee or knees.
e. CROUCHING - Bending body downward and for-ward by bending legs and
spine.
f. CRAWLING - Moving about on hands and knees or hands and feet.
g. REACHING - Extending hand(s) and arm(s) in any direction.
 h. HANDLING - Seizing, holding, grasp-ing, turning, or otherwise working with
hand or hands. Fingers are involved only to the extent that they are an extension
of the hand.
i. FINGERING - Picking, pinching, or otherwise working primarily with fingers
rather than with the whole hand or arm as in handling.
j. FEELING - Perceiving attributes of objects, such as size, shape, temperature, or
texture, by touching with skin, particularly that of fingertips.
5. Physical Demands (auditory)
a. TALKING - Expressing or exchanging ideas by means of the spoken word.
Talking is important for those activities in which workers must impart oral
information to clients or to the public, and in those activities in which they must
convey detailed or important spoken instructions to other workers accurately,
loudly, or quickly.
b. HEARING - perceiving the nature of sounds. Used for those activities which
require ability to receive detailed information through oral communication, and to
make fine discriminations in sounds, such as when making fine adjustments on
running engines.
6. Physical Demands (taste/smell)
a. TASTING/SMELLING - Distinguishing, with a degree of accuracy, differences
or similarities in intensity or quality of flavors and/or odors, or recognizing
particular flavors and/or odors, using tongue and/or nose.
7. Physical Demands (vision)
a. NEAR ACUITY - Clarity of vision at 20 inches or less. Use this factor when
special and minute accuracy is demanded.
b. FAR ACUITY - Clarity of vision at 20 feet or more. Use this factor when visual
efficiency in terms of far acuity is required in day and night/dark conditions.
c. DEPTH PERCEPTION - Three-dimensional vision. Ability to judge distances
and spatial relationships so as to see objects where and as they actually are.
d. ACCOMMODATION - Adjustment of lens of eye to bring an object into sharp
focus. Use this factor when requiring near point work at varying distances.
e. COLOR VISION - Ability to identify and distinguish colors.
f. FIELD OF VISION - Observing an area that can be seen up and down or to right
or left while eyes are fixed on a given point. Use this factor when job performance
re-quires seeing a large area while keeping the eyes fixed.
8. Environmental Conditions and Physical Surroundings - exposure results in marked
bodily discomfort.
a. EXPOSURE TO WEATHER - Exposure to hot, cold, wet, humid, or windy
conditions caused by the weather.
b. EXTREME COLD - Exposure to nonweather-related cold temperatures.
c. EXTREME HEAT - Exposure to nonweather-related hot temperatures.
d. WET AND/OR HUMID - Contact with water or other liquids; or exposure to
nonweather-related humid conditions.
e. NOISE - Exposure to constant or intermittent sounds or a pitch or level sufficient
to cause mark ed distraction or possible hearing loss.
f. VIBRATION - Exposure to a shaking object or surface. This factor is rated
important when vibration causes a strain on the body or extremities.
g. ATMOSPHERIC CONDITIONS - Exposure to conditions such as fumes, noxious
odors, dusts, mists, gases, and poor ventilation, that affect the respiratory system,
eyes or, the skin.
 h. CONFINED/RESTRICTED WORKING ENVI-RONMENT - Work is performed
in a closed or locked facility providing safety and security for clients, inmates, or
fellow workers.
9. Equipment Used
a. office equipment such as computer, typewriter, projector, casette player/recorder.
b. hand tools (e.g., hammer, shovel, screwdriver)
c. power tools (e.g., radial saw, reciprocating saw, drill, pheunomatic hammer)
d. vehicles (e.g., automobile, truck, tractor, lift)
10. Hazards
a. Proximity to moving, mechanical parts.
b. Exposure to electrical shock.
c. Working in high, exposed places.
d. Exposure to radiant energy.
e. Working with explosives.
f. Exposure to toxic or caustic chemicals.