Chapter 7: Building Market-Competitive Compensation Systems Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. Learning Objectives 7-1. Explain the concept of market-competitive compensation systems and summarize the four activities compensation professionals engage in to create these systems. 7-2. Discuss compensation survey practices. 7-3. Describe how compensation professionals integrate internal job structures with external market pay rates. 7-4. Explain the basic concepts of compensation policies and strategic mandates: pay mix and pay level. Copyright © 2017 Pearson Education, Inc.

Market-Competitive Pay Systems LO 7-1 Market-Competitive Pay Systems Market-competitive pay systems refer to: A company’s compensation policy The imperatives of competitive advantage The key role in promoting recruitment and retention of talented employees Copyright © 2017 Pearson Education, Inc.

Market Competitive Pay Systems LO 7-1 Market Competitive Pay Systems Conduct strategic analyses Assess competitors’ practices Integrate internal job structures with external market pay rates Determine compensation policies Copyright © 2017 Pearson Education, Inc.

Four Activities of Market Competitive Pay Systems LO 7-1 Four Activities of Market Competitive Pay Systems Strategic analysis entails an examination of a company’s external market context and internal factors External market context: industry profile, information on competition, long-term prospects Internal factors: financial condition, functional capabilities Compensation surveys involve the collection and subsequent analysis of competitors’ compensation data Copyright © 2017 Pearson Education, Inc.

Four Activities of Market Competitive Pay Systems (cont’d) LO 7-1 Four Activities of Market Competitive Pay Systems (cont’d) Compensation professionals integrate the internal job structure with the external market pay rates identified through compensation surveys Compensation professionals recommend pay policies that fit with their companies’ standing and competitive strategies Copyright © 2017 Pearson Education, Inc.

Preliminary Considerations LO 7-2 Preliminary Considerations Two preliminary considerations before investing time and money into compensation surveys: What companies hope to gain from compensation surveys Custom development versus use of an existing compensation survey Copyright © 2017 Pearson Education, Inc.

Competitors’ Pay Practices LO 7-2 Competitors’ Pay Practices Base pay Incentive awards structure Mix and level of discretionary benefits Copyright © 2017 Pearson Education, Inc.

Custom Developed Surveys Can be custom tailored Quality can be monitored by employer Usually not done in-house External data not readily accessible Can be expensive Copyright © 2017 Pearson Education, Inc.

Published Survey Sources LO 7-2 Published Survey Sources Professional associations Industry associations Consulting firms Federal government (U.S. Bureau of Labor Statistics) Copyright © 2017 Pearson Education, Inc.

Published Survey Sources LO 7-2 Published Survey Sources Examples of consulting firms: Aon Frederic W. Cook & Company Hay Group Pearl Meyer & Partners Towers Watson William M. Mercer Xerox-Buck Consultants Copyright © 2017 Pearson Education, Inc.

U.S. Bureau of Labor Statistics Surveys LO 7-2 U.S. Bureau of Labor Statistics Surveys The BLS publishes information on the wages, earnings, and benefits of workers: Employment cost trends National compensation data Wages by area and occupation Earnings by demographics Earnings by industry County wages Employee benefits Compensation costs in other countries Copyright © 2017 Pearson Education, Inc.

Compensation Cost Trends LO 7-2 Compensation Cost Trends This program publishes quarterly statistics that measure: Changes in labor costs over time Employment Cost Index Levels of costs per hour Employer Costs for Employee Compensation Copyright © 2017 Pearson Education, Inc.

National Compensation Survey LO 7-2 National Compensation Survey Weekly and annual earnings and hours for full-time workers Data at three levels: localities, broad regions, and the nation Private, local, and state employees Copyright © 2017 Pearson Education, Inc.

National Compensation Survey LO 7-2 National Compensation Survey Wage data are shown by: Industry Occupational group Full-time and part-time status Union status Establishment size Time and incentive status Job level Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-2 Compensation Surveys Two essential strategic considerations are: Defining the relevant labor market Choosing benchmark jobs Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-2 Relevant Labor Market Qualified candidates based on: Occupational classification Geography Market competitors Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-2 Benchmark Jobs Used for: Job evaluations Compensation surveys Established, well-known, stable Common across employers Entire range of jobs Accepted for setting pay rates Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-2 Job Leveling Typically, there are differences between a company’s jobs and benchmark jobs Corrections for these differences are based on subjective judgment The process for making these corrections is referred to as job leveling Point level factor refers to one job leveling process (illustration follows) Copyright © 2017 Pearson Education, Inc.

Sample Compensable Factor and Point-Level Definitions LO 7-2 Sample Compensable Factor and Point-Level Definitions Copyright © 2017 Pearson Education, Inc.

Leveling Instructions and Points LO 7-2 Leveling Instructions and Points Copyright © 2017 Pearson Education, Inc.

Survey Data Characteristics LO 7-2 Survey Data Characteristics They contain a lot of data Outdated data due to lag time Statistical analysis needed to integrate internal job structures with external market Copyright © 2017 Pearson Education, Inc.

Summarizing Survey Data LO 7-2 Summarizing Survey Data Two descriptive properties Central tendency Represents the fact that a set of data center around a central point Variation Represents the amount of spread or dispersion in a data set Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-2 Central Tendency Two types of measures Arithmetic mean (mean, average) Sum of salaries/number of salaries Represents typical market salaries Median (midpoint) Middle value of sequential numerical data Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-2 Mean Outliers can distort values Understated means occur with extremely small outliers May set salaries too low Overstated means occur with extremely large outliers May set salaries too high Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-2 Variation Standard deviation Refer to the mean distance of each figure from the mean Quartile Percentile of figures below a point based on four groupings Percentile Percentage of figures below a point based on 100 groupings Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-2 Quartile Dispersion by % below a set value Quartile 4 = 100% Quartile 3 = 75% Quartile 2 = 50% (also, the median) Quartile 1 = 25% Copyright © 2017 Pearson Education, Inc.

Updating Survey Data: Consumer Price Index (CPI) LO 7-2 Updating Survey Data: Consumer Price Index (CPI) Indexes monthly price changes in consumer goods and services Most commonly used method for tracking cost changes in United States CPI published monthly by the U.S. Bureau of Labor Statistics (http://www.bls.gov) Copyright © 2017 Pearson Education, Inc.

Integrating The Internal Job Structure With External Market Pay Rates LO 7-3 Integrating The Internal Job Structure With External Market Pay Rates The goal is to set pay rates based on the matches between a company’s jobs (job structure) and corresponding benchmark jobs. Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-3 Regression Analysis Statistical procedure designed to find the best-fitting line between two variables Formula: Y = predicted salary X = job evaluation points a = Y intercept (X = 0) b = the slope Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-3 Regression Analysis Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-3 Setting Pay Rates Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-3 R2 Explains variation in market pay rates via job structure Ranges from 0.0 to 1.0 0.0 = 0% variation in pay rates due to job structure 0.0–.30 = small variation .31–.70 = average variation .71–.99 = large variation 1.0 = 100% variation Copyright © 2017 Pearson Education, Inc.

Compensation Policies and Strategic Mandates LO 7-4 Compensation Policies and Strategic Mandates Pay-level policies Pay mix policies Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-4 Pay-Level Policies Market lead (75th percentile) Levels above market pay lines Best for differentiation strategies Market match (50th percentile) Pay according to market pay line Appropriate with differentiation strategy Market lag (25th percentile) Levels below market pay lines Best for lowest-cost strategies Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-4 Pay Mix Policies Pay mix policies refer to the combination of core compensation and employee benefits components that make up an employee’s total compensation package Pay policy mix may be expressed in dollars (or other currency as relevant) or as a percentage of total dollars allocated for an employee’s total compensation Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 7-4 Pay Mix Policy Example Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2017 Pearson Education, Inc.