Designing Pay Levels, Mix and Pay Structure Chapter 8 Designing Pay Levels, Mix and Pay Structure © 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

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 8-2

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 8-3

Exhibit 8.1 - Determining Externally Competitive Pay Levels and Structures 8-4

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 8-5

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 8-6

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 8-7

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 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 8-8

Exhibit 8.3 - Relevant Labor Markets by Geographic and Employee Groups 8-9

Design the Survey Who should be involved? How many employers? Compensation manager, managers, and employees Outside consulting firms How many employers? No firm rules Publicly available data – Bureau of Labor Statistics 8-10

Design the Survey Which jobs to include? Word-of-mouse – Online salary information Many surveys (but few that 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 8-11

Exhibit 8.7 - Benchmarks 8-12

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 8-13

Exhibit 8.9 - Possible Survey Data Elements and Rationale 8-14

Exhibit 8.9 - Possible Survey Data Elements and Rationale 8-15

Exhibit 8.10 - Advantages and Disadvantages of Measures of Compensation 8-16

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? 8-17

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 8-18

Exhibit 8.13 - Statistical Measures to Analyze Survey Data 8-19

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 for the Market line Summarizes the distribution of going rates paid by competitors in the market 8-20

Exhibit 8.15 - Choices for Updating Survey Data Reflect Pay Policy 8-21

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 8-22

Exhibit 8.16 - From Regression Results to a Market Line 8-23

Exhibit 8.17 - Understanding Regression 8-24

Combine Internal Structure and External Market Rates Two parts of the total pay model have merged: Internally aligned structure - Horizontal axis External competitive data - Vertical axis Two aspects of pay structure: Pay-policy line Pay ranges 8-25

Exhibit 8.18- Develop Pay Grades 8-26

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 8-27

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 8-28

From Policy to Practice: Grades and Ranges 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 Encourage employees to remain with the organization 8-29

From Policy to Practice: Grades and Ranges 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 8-30

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 8-31

Exhibit 8.19 - Range Midpoint, Minimum, and Maximum 8-32

Exhibit 8.20 - Range Overlap 8-33

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 8-34

From Policy to Practice: Broad Banding Consolidates salary grades into a few broad bands, each with: A sizable range One minimum and one maximum Range midpoint often not used 8-35

Exhibit 8.21- From Grades to Bands 8-36

Exhibit 8.22 - Contrasts Between Ranges and Bands See Exhibit 8.19, page 267 8-37

From Policy to Practice: Broad Banding Steps in banding Set the 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 8-38

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 8-39

Balancing Internal and External Pressures: Adjusting the Pay Structure Reconciling differences May entail a review of : Job analysis Evaluation of the job Market data 8-40

Market Pricing Sets pay structures 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 8-41

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 8-42

Market Pricing Business strategy Internal pay structure is aligned with competitors’ decisions Little value is added through internal alignment Unique or difficult-to-imitate aspects of the pay structure are deemphasized Fairness is presumed to be reflected by market rates 8-43