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Designing Pay Levels, Mix, and Pay Structures

External Competitiveness: Determining the Pay Level

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COMPENSATION

TWELFTH EDITION

Part Three

Chapter Eight

MILKOVICH │ NEWMAN │ GERHART

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Overview

This chapter examines the purpose, design, and interpretation of surveys.

The chapter looks at policy to practice for:

the pay-policy line,

grades and ranges, and

broad banding.

The end of the chapter covers adjusting the pay structure and market pricing.

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EXHIBIT 8.1

Determining Externally Competitive Pay Levels and Structures

These are the major decisions in setting externally competitive pay and designing the corresponding pay structures.

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Translating an external pay policy into practice requires information on the external market.

Surveys provide the data for translating that policy into pay levels, pay mix, and structures.

Specify Competitive Pay Policy

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A survey

Is the systematic process of collecting and making judgments about the compensation paid by other employers.

The Purpose of a Survey

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To adjust the pay level relative to competitors

To set the mix of pay forms relative to competitors

To establish or price a pay structure

To analyze pay-related problems

To estimate the labor costs of competitors

Purpose of a Survey

Adjust pay level – how much to pay?

The overall movement of pay rates caused by competition for people in the market.

Adjust pay mix – what forms?

Base, bonus, stock, and benefits.

Adjust pay structure.

Validate job evaluation results.

Establish internal structures.

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Purpose of a Survey

Study special situations.

Specific pay-related problems.

Estimate competitors labor costs.

Competitive intelligence.

Employment Cost Index (ECI)

measures quarterly changes in employer costs for compensation.

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Select Relevant Market Competitors

Relevant labor markets include employers who compete in one or more areas:

the same occupations or skills,

employees within the same geographic area, or

the same products and services.

Fuzzy markets.

New organizations and unique jobs may fuse diverse factors making relevant markets fuzzy.

Place more emphasis on external market data.

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EXHIBIT 8.3

Relevant Labor Markets by Geographic and Employee Groups

As the importance and complexity of the qualifications increase, the geographic limits also increase.

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Design the Survey

Who should be involved?

The compensation manager is responsible for the survey.

Outside consulting firms protect against lawsuits.

How many employers?

No firm rules on how many to include.

Publicly available data – Bureau of Labor Statistics (BLS).

Online salary information – highly suspect.

Many surveys but few are validated.

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Design the Survey

Which jobs to include?

Benchmark-Job Approach:

Benchmark jobs have stable job content, are common, and include sizable numbers of employees

Low-high approach:

Wages of lowest- and highest-paid benchmark jobs used as anchors for skill-based structures.

Benchmark conversion/survey leveling:

Differences are quantified when job content does not sufficiently match survey jobs.

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EXHIBIT 8.7

Benchmarks

The more heavily shaded jobs in the structures are benchmark jobs.

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Design the Survey

What information to collect?

Organization data includes:

financial data and reporting relationships,

turnover and revenues.

Total compensation data includes:

base pay,

total cash, and

total compensation.

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EXHIBIT 8.10

Advantages and Disadvantages of Measures of Compensation

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Interpret Survey Results and Construct a Market Line

Verify data for accuracy and anomalies.

Accuracy of match.

Some use the benchmark conversion/survey leveling approach.

Anomalies.

Does any one company dominate?

Do all employers show similar patterns?

Outliers?

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Interpret Survey Results and Construct a Market Line

Statistical analysis.

Frequency distribution.

Unusual shapes may reflect problems.

Central tendency.

Reduces a large amount of data into a single number.

Variation.

Quartiles and percentiles are a common measure.

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EXHIBIT 8.14

Statistical Measures to Analyze Survey Data

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EXHIBIT 8.14

Statistical Measures to Analyze Survey Data

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EXHIBIT 8.15

Choices for Updating Survey Data Reflect Pay Policy

Use aging or trending updates to forecast rates for a future date.

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Interpret Survey Results and Construct a Market Line

Construct a market pay line.

A market line links a company’s benchmark jobs on the horizontal axis with market rates paid by competitors on the vertical axis.

Can be freehand or regression analysis.

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EXHIBIT 8.16

From Regression Results to a Market Line

For nonbenchmark jobs, the market pay lines are especially useful.

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EXHIBIT 8.17

Understanding Regression

The diamonds are actual results and the line is the regression result.

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Interpret Survey Results and Construct a Market Line

Combine internal structure and external market rates.

Two parts of the total pay model have merged:

internally aligned structure (horizontal axis), and

external competitive data (vertical axis)

Two aspects of pay structure:

pay-policy line, and

pay ranges.

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EXHIBIT 8.18

Develop Pay Grades

The pay policy line and pay ranges have merged.

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The Pay-Policy Line

Choice of measure.

Updating.

Aging the market data to a point halfway through the plan year is called lead/lag.

Policy line as percent of market line.

Specify a percent above or below market line an employer intends to match.

There are many options but practice must match policy to avoid confusion.

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Grades and Ranges

Grades and ranges offer flexibility to:

deal with pressures from external markets, and

differences among firms regarding:

quality of individuals applying for work,

productivity or value of these quality variations, and

the mix of pay forms competitors use.

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Grades and Ranges

A pay range:

exists whenever two or more rates are paid to employees in the same job.

provides managers with the opportunity to:

recognize individual performance differences with pay.

meet employees' expectations that their pay will increase over time, even in the same job, and

encourage employees to remain with the organization.

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Grades and Ranges

Group jobs into grades.

These are different jobs but considered equal for pay purposes.

All jobs within a single grade will have the same pay range.

Grades permit flexibility but are challenging to design.

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Grades and Ranges

Establish range midpoints, minimums, and maximums.

Size of the range is based on judgment about how the ranges support:

career paths,

promotions, and

other organization systems.

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EXHIBIT 8.19

Range Midpoint, Minimum, and Maximum

The range for this grade has been set at 20% above and 20% below the midpoint.

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EXHIBIT 8.20

Range Overlap

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Grades and Ranges

Overlap.

Promotion increases matter.

The size of differentials between grades should support career movement through the structure.

Overlap ought to be large enough to induce employees to seek promotions.

Not all employers use grades and ranges.

Skill-based plans establish a single flat rate for each skill level, regardless of performance or seniority.

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EXHIBIT 8.21

From Grades to Bands

Broad banding collapses salary grades into only a few broad bands, each with a sizable range.

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EXHIBIT 8.22

Contrasts between Ranges and Bands

Perhaps the most important difference is in the location of controls.

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Broad Banding

Banding takes two steps:

set the number of bands, and

price the bands (reference market rates).

Flexibility and Control.

Career moves within bands are more common than between bands.

Take advantage of the flexibility without increasing labor costs or opening the organization up for illegal practices.

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Adjusting the Pay Structure

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Job structure

Orders jobs on the basis of internal factors (reflected in job evaluation or skill certification).

Pay structure

Is anchored by the organization’s external competitive position and reflected in its pay-policy line.

Adjusting the Pay Structure

Reconciling differences.

May entail a review of:

Job analysis.

Evaluation of the job.

Market data.

Differences may arise due to shortage of a particular skill, driving up market rate.

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Market Pricing

Some organizations use market pricing

which emphasize external competitiveness and deemphasize internal alignment.

Sets pay structures almost exclusively on external market rates.

The objective is to:

base most of the internal pay structure on external rates, and

break down the boundaries between the internal organization and the external market forces.

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Market Pricing

Business strategy.

Pay structure aligned with competitors’.

Unique or difficult-to-imitate aspects of the pay structure are deemphasized.

Fairness is presumed to be reflected by market rates.

Organizations may choose to differentiate their pay strategy.

Balancing internal and external pressures is a matter of judgment.

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Summary

This chapter examined the purpose, design, and interpretation of surveys.

The chapter looked at policy to practice for:

the pay-policy line,

grades and ranges

broad banding.

The end of the chapter covered adjusting the pay structure and market pricing.

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