Compensation

Chap 8

Designing Pay Levels, Mix

and Pay Structure Mgmt 474

CSULA – Spring 2014

Learning Objectives

 Major decisions

 Specify competitive pay policy

 The purpose of a survey

 Select relevant market competitors

 Design the survey

 Interpret survey results and construct a market line

 From policy to practice: The pay-policy line

Learning Objectives

 From policy to practice: Grades and ranges

 From policy to practice: Broad banding

 Balancing internal and external pressures: Adjusting the pay

structure

 Market pricing

Exhibit 8.1 - Determining Externally

Competitive Pay Levels and Structures

Specify Competitive Pay Policy

 Information on external markets

 Survey

Process of collecting and making judgments about the

compensation paid by others

Provides the data for translating policy into pay levels, pay

mix, and structures

The Purpose of a Survey

 Adjust Pay Level – How much to pay?

 Based on overall movement of pay rates caused by competition

in the market

 Adjust Pay Mix – What forms?

 Base, bonus, stock and benefits

 Adjust Pay Structure?

 Validate job evaluation results

 Establish internal structures

The Purpose of a Survey

 Study special situations

 Specific pay-related problems

 Estimate competitors’ labor costs

Competitive intelligence

 Employment Cost Index

Measures quarterly changes in employer costs for

compensation

Select Relevant Market Competitors

 Relevant labor market includes employers who compete:

 For same occupations or skills

 For employees in the same geographic area

With same products and services

 Fuzzy Markets

Organizations with unique jobs and structures find it hard to get

comparable market data

 Place more emphasis on external market data

Exhibit 8.3 – Relevant Labor Markets by

Geographic and Employee Groups

Design the Survey

 Who should be involved?

Compensation manager, managers, and employees

Outside consulting firms

 How many employers?

No firm rules

Publicly available data – Bureau of Labor Statistics

Design the Survey

Word-of-mouse – Online survey information

Many surveys (but few are validated)

 Which jobs to include?

 Benchmark-job approach

 Low-high approach

Wages of lowest and highest paid benchmark jobs for, are

used as anchors for skill-based structures

 Benchmark conversion/survey leveling

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

Exhibit 8.7 - Benchmarks

Design the Survey

 What information to collect?

Organization data

Financial data and reporting relationships

Turnover and revenues

 Total Compensation Data

Base pay

Total Cash

Total Compensation

Exhibit 8.9 - Possible Survey Data

Elements and Rationale

Exhibit 8.9 - Possible Survey Data

Elements and Rationale

Exhibit 8.10 - Advantages and Disadvantages

of Measures of Compensation

Interpret Survey Results and Construct

a Market Line

 Verify data

 Accuracy of match

 Benchmark conversion/survey leveling

 Anomalies

 Does any one company dominate?

 Do all employers show similar patterns?

 Outliers?

Interpret Survey Results and Construct

a Market Line

 Statistical Analysis

Frequency distribution: Unusual shapes may reflect:

Problems with job matches

Widely dispersed pay rates

Employers with widely divergent pay policies

Central tendency

Reduces a large amount of data into a single number

Variation

Exhibit 8.13 - Statistical Measures to

Analyze Survey Data

Interpret Survey Results and Construct

a Market Line

 Update the survey data

Aging or trending

Process of updating pay data to forecast the

competitive rates

 Market line

Summarizes the distribution of going rates paid by

competitors in the market

Exhibit 8.15 - Choices for Updating

Survey Data Reflect Pay Policy

Construct a Market Pay Line

 Approaches to constructing a market pay line:

Free hand approach

Regression analysis

 Setting pay for benchmark and non-benchmark jobs

Exhibit 8.16 - From Regression Results to

a Market Line

Exhibit 8.17 - Understanding Regression

Combine Internal Structure and

External Market Rates

 Two parts of the total pay model have merged:

 Internally aligned structure – Horizontal axis

Externally aligned structure – Vertical axis

 Two aspects of pay structure:

Pay-policy line

Pay ranges

Exhibit 8.18- Develop Pay Grades

From Policy to Practice: 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

Other options

Pay among the leaders

Lead for some job families and lag for others

From Policy to Practice: Grades and

Ranges

 Grades and ranges offer flexibility to:

Deal with pressures from external markets

Differences among firms regarding:

Quality of individuals applying for work

Productivity or value of these quality variations

The mix of pay forms competitors use

From Policy to Practice: Grades and

Ranges

 Pay Range

 Exists wherever two or more rates are paid to employees in the

same job

 Provides mangers 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

Encourage employees to remain with the organization

From Policy to Practice: Grades and

Ranges

 Grades

 Enhance an organization’s ability to move people among jobs

with no change in pay

 Have their own pay range

 Jobs within a single grade will have the same pay range

From Policy to Practice: Grades and

Ranges

 Establish range midpoints, minimums and maximums

Size of the range should be based on:

How ranges support career paths, promotions, and

other organization systems

Exhibit 8.19 - Range Midpoint,

Minimum, and Maximum

Exhibit 8.20 - Range Overlap

Overlap

 Promotion increases matter

 Size of differentials between grades should support career

movement

Overlap ought to be large enough to induce employees to seek

promotion

 Skill-based plans

Establish single flat rates for each skill level regardless of

performance or seniority

From Policy to Practice:

Broad Banding

 Broad banding

Consolidates salary grades into a few broad bands, each

with:

A sizeable range

One minimum and one maximum

Range midpoint often not used

Exhibit 8.21- From Grades to Bands

Exhibit 8.22 - Contrasts Between

Ranges and Bands

From Policy to Practice:

Broad Banding

 Steps in banding

Set number of bands

Price the bands: reference market rates

 Flexibility-control

 Take advantage of flexibility without:

Increasing labor costs

Leaving the organization vulnerable to charges of

inconsistent or illegal practices

Balancing Internal and External

Pressures: Adjusting the Pay Structure

 Job Structure: Orders jobs on the basis of internal factors:

Reflected in job evaluation or skill certification

 Pay Structure: Anchored by the external competitive position

Reflected in pay-policy line

Balancing Internal and External

Pressures: Adjusting the Pay Structure

 Reconciling differences

May entail a review of:

Job analysis

Evaluation of the job

Market data

Market Pricing

 Sets pay structure almost exclusively on external market

rates

Competitive rates for jobs for which external market

data are available, are calculated

 Remaining jobs are blended into pay hierarchy

Market Pricing

 Objective:

 To base most of the internal pay structure on external rates

 To break down the boundaries between:

The internal organization and the external market forces

Market Pricing

 Business Strategy

Internal pay structure is aligned with competitor’s

decisions

Little value is added through internal alignment

Unique or difficult-to-imitate aspects of the pay

structure are de-emphasized

Fairness is presumed to be reflected by market

rates