1. Designing Pay Levels, Mix, and Pay Structures
Chapter 8
Designing Pay Levels, Mix, and Pay Structures

2. Learning Objectives After discussing Chapter 8, students should be able to:
Identify the major decisions in establishing externally competitive pay.
Describe the purpose(s) of a salary survey.
Discuss the importance of defining the relevant market in a pay survey.
Explain the steps involved in designing a pay survey.
Describe the key issues involved in interpreting the results of a pay survey.
Explain how the market pay line combines the internal structure with external market rates.
Discuss the use of pay grades and pay ranges and their relationship to internal alignment and external competitiveness.
Discuss the pros and cons of the market pricing approach to establishing a pay structure.

3. Exhibit 8.1: Determining Externally Competitive Pay Levels and Structures
External competitiveness: Pay relationships among organizations
Merge internal & external pressures
Competitive pay levels, mix, and structures
Draw policy lines
Select market
Design survey
Set Policy
Some Major Decisions in Pay Level Determination
Determine pay-level policy.
Define purpose of survey.
Specify relevant labor market.
Design and conduct survey.
Interpret and apply results.
Design grades and ranges or bands.

4. Specify Competitive Pay Policy
Pay with Competition (Match)
Lead Policy
Lag Policy
Flexible Policies
For a discussion of the competitive pay policy options, see text, pages
Employer of Choice
Shared Choice

5. What Is the Purpose of a Salary Survey?
Systematic process of collecting and making judgments about compensation paid by other employers
Provides data for
Setting the pay policy relative to competition
Translating that policy into pay levels and structures

6. Why Conduct a Salary Survey?
Adjust pay level – How much to pay?
Adjust pay mix – What forms?
Adjust pay structure?
Analyze special situations
Estimate competitors’ labor costs

7. Select Relevant Market Competitors
Relevant labor market includes employers who compete
For same occupations or skills
For employees in same geographic area
With same products or services
Examples
Exhibit 8.2: Relevant Labor Markets by Geographic and Employee Groups
Exhibit 8.3: Pay Differences by Location
Fuzzy markets

8. Exhibit 8.2: Relevant Labor Markets by Geographic and Employee Groups
Geographic Scope
Production
Office and Clerical
Technicians
Scientists & Engineers
Managerial Professional
Executive
Local: Within relatively small areas such as cities or MSAs
Most likely
Regional: Within a particular area of the state or several states
Only if in short supply or critical
Likely
National: Across the country
International: Across several countries
Only for critical skills or those in very short supply
Sometimes

9. Exhibit 8.3: Pay Differences by Location

10. Design the Survey Who should be involved? How many employers?
Publicly available data
“Word-of-mouse”
Exhibit 8.4: Salary Data on the Web
Where are the standards?
Which jobs to include?
What information to collect?

11. Exhibit 8.4: Salary Data on the Web

12. Benchmark-job approach Benchmark conversion approach
Which Jobs to Include?
Benchmark-job approach
Low-high approach
(skill-based)
See the Lawler article, PP for details on these points.
Benchmark conversion approach

13. What Information to Collect?
Nature of organization
Total compensation system
Specific pay data on incumbents in jobs under study

14. Exhibit 8.6: Possible Survey Data Elements and Rationale
Nature of organization
Financial performance
Size
Structure
Nature of total compensation system
Cash forms used
Non-cash forms used
Incumbent and job
Date
Job
Individual
Pay
HR outcomes
Productivity
Total labor costs
Attraction & retention
Employee views
See Exhibit 8.9, page 247

15. Exhibit 8.7: Advantages and Disadvantages of Measures of Compensation
Base Pay
Tells how competitors are valuing the work in similar jobs
Fails to include performance incentives and other forms, so will not give true picture if competitors offer low base but high incentives
Total Cash
(base + bonus)
Tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job.
All employees may not receive incentives, so it may overstate the competitors’ pay; plus, it does not include long-term incentives.
Total Compensation
(base + bonus + stock options + benefits)
Tells the total value competitors place on this work
All employees may not receive all the forms. Be careful; don’t set base equal to competitors’ total compensation. Risks high fixed costs.

16. Interpret Survey Results (1 of 2)
No single best approach
Verify data
Check accuracy of job matches
Survey leveling
Check for anomalies
Does any one company dominate?
Do all employers show similar patterns?
Outliers?
Example
Exhibit 8.9: Survey Data

17. Interpret Survey Results (2 of 2)
Statistical analysis
Frequency distribution
Exhibit 8.10: Frequency Distributions
Measures of central tendency
Mode
Mean
Median
Weighted mean
Measures of variation
Standard deviation
Quartiles and percentiles
Exhibit 8.11: Statistical Measures for Analyzing Survey Data
Update survey data
Exhibit 8.12: Choices for Updating Salary Data Reflect Pay Policy

18. Construct a Market Pay Line
Exhibit 8.8: Salary Graphs Using Different Measures of Compensation
Definition of market pay line
Links a company’s benchmark jobs on horizontal axis (internal structure) with market rates paid by competitors (market survey) on vertical axis
Approaches to constructing a market pay line
Freehand approach - Exhibit 8.8
Regression analysis - Exhibit 8.13 and Exhibit 8.14

19. Exhibit 8.13: From Regression Results to a Market Line

20. Exhibit 8.14: Understanding Regression16 14 12 10
Survey: Salary ($000) 8 6 4 2 20 40 60 80
100
120
140
160
180
Job Evaluation Points
Tech A Sr Tech Eng 1 Eng 3 Eng 5 Mgr 1 Mgr 3

21. Combine Internal Structure and External Market Rates
Two parts of the total pay model have merged
Exhibit 8.15
Internally aligned structure - Horizontal axis
External competitive data - Vertical axis
Two aspects of pay structure
Pay-policy line
Pay ranges

22. Exhibit 8.15: Develop Pay GradesAB
CDEF
External Competitiveness: Salaries paid by competitors
Pay Policy Line
30,000
35,000
40,000
45,000
50,000
55,000
GHIJK
LMN OP
Internal Structure: JE Points

23. From Policy to Practice: Pay Policy Line
Approaches to translate external competitive policy into practice
Choice of measure
50th percentile for base pay
75th percentile for total compensation
Updating
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

24. From Policy to Practice: Grades and Ranges
Why bother with grades and ranges?
Offer flexibility to deal with pressures from external markets and differences among firms
Develop grades
Exhibit 8.15
Establish range midpoints, minimums, and maximums
Overlap

25. Why Bother with Grades and Ranges?
External pressures
Differences in quality (KSAs) among individuals in external market
Differences in productivity or value of quality variations
Differences in mix of pay forms of competitors
Internal pressures
Recognize individual performance differences with pay
Meet employees’ expectations that their pay will increase over time
Encourage employees to remain with organization

26. Develop Grades Grades group job evaluation data on horizontal axis
All jobs considered substantially equal for pay purposes placed in same grade
Each pay grade has its own pay range and all jobs in a single grade have same pay range
Enhances ability to move people among jobs within a grade with no change in pay
How many pay grades?
Number of jobs
Organization hierarchy
Reporting relationships

27. Establish Range Midpoints, Minimums, and Maximums (1 of 3)
Ranges group salary data on vertical axis
Establish upper and lower pay limits for all jobs in each grade
Exhibit 8.16
Midpoints correspond to competitive pay policy
Point where pay-policy line crosses center of each grade
Often represents base pay for a seasoned employee

28. Exhibit 8.16: Range Midpoint, Minimum, and Maximum

29. Establish Range Midpoints, Minimums, and Maximums (1 of 3)
Size of range based on judgment about how ranges support
Career paths
Promotions
Other organization systems
Typical range spread
Top-level management positions – 30 to 60% above and below midpoint
Entry to midlevel professional and managerial positions – 15 to 30% above and below midpoint
Office and production positions – 5 to 15% above and below midpoint

30. Overlap Importance of overlap
Exhibit 8.17: Range Overlap
High degree of overlap and low midpoint differentials
Exhibit 8.17(a)
Small ranges with less overlap
Exhibit 8.17(b)

31. Exhibit 8.17: Range Overlap

32. From Policy to Practice: Broad Banding
Alternative to traditional salary structures
Involves collapsing salary grades into a few broad bands, each with a sizable range
One minimum and one maximum
Range midpoint often not used
Purposes
Provide flexibility to define job responsibilities more broadly
Foster cross-functional growth and development
Ease mergers and acquisitions
Example
Exhibit 8.18

33. Exhibit 8.18: From Grades to Bands

34. Exhibit 8.19: Contrasts Between Ranges and Bands
Ranges support . . .
Some flexibility within controls
Relatively stable organization design
Recognition via titles or career progression
Midpoint controls, comparatives
Controls designed into system
Give managers “freedom with guidelines”
Up to 150 percent range-spread
Bands support . . .
Emphasis on flexibility within guidelines
Global organizations
Cross-functional experience and lateral progression
Reference market rates, shadow ranges
Controls in budget, few in system
Give managers “freedom to manage” pay
100 – 400 % spreads
See Exhibit 8.19, page 267

35. Steps Involved in Broad Banding
1. Set number of bands
Determine number of distinct levels of employee contributions within organization that actually add value
Challenge - How much to actually pay people in same band who are performing different functions and work
2. Price bands: Reference market rates
Exhibit 8.20: Reference Rates Within Bands

36. Exhibit 8.20: Reference Rates Within Bands

37. Balancing Internal and External Pressures: Adjusting the Pay Structure
Internal Pressures
External Pressures
Job Structure
Pay Structure

38. Market Pricing Approach Issues
Sets pay structures almost exclusively by relying on external market rates
Emphasizes external competitiveness (market-based factors) and de-emphasizes internal alignment
Issues
Validity of market data
Use of competitors’ pay decisions as primary determinant of pay structure
Lack of value added via internal alignment
Difficult-to-imitate aspects of pay structure are deemphasized
Fairness