Building Market-Competitive Compensation Systems Chapter Eight Building Market-Competitive Compensation Systems

Internally Consistent Pay Structures do not guarantee External Consistency! Market Pay Line 20,000 Current Pay Line 18,000 21,000 Annual Salary ($) 16,000 11,000 8,000 250 Clerk I 500 Clerk II 750 Clerk III 1,200 Chief Clerk Job Evaluation Points

Compensation Policies & Strategic Mandates Policy Strategy Lead (how much?) 5, 10, 15%? Differentiation Match Lag (how much?) Cost

Testing your applied knowledge: What is the compensation strategy behind this pay structure? 20,000 18,000 Market Pay Line 21,000 Annual Salary ($) 16,000 11,000 Current Pay Line 8,000 250 Clerk I 500 Clerk II 750 Clerk III 1,200 Chief Clerk Job Evaluation Points

Answer: Assuming that this company is aware of the pay lag at lower level jobs between their pay structure and the market line, this company has decided that lower-level jobs are not the essence of its competitive advantage and, therefore, it can afford to pay lower salaries at such lower-level jobs.

Testing your applied knowledge: What is the compensation strategy behind this pay structure? 20,000 Market Pay Line 18,000 21,000 Annual Salary ($) 16,000 11,000 Current Pay Line 8,000 250 Clerk I 500 Clerk II 750 Clerk III 1,200 Chief Clerk Job Evaluation Points

Answer: Assuming that this company is aware of the pay lag at lower level jobs between their pay structure and the market line, as well as the lead between its pay level and the market line at higher-level jobs, this company has decided not only that lower-level jobs are not the essence of its competitive advantage, but also that higher-level jobs are indeed quite important for its strategy and, therefore, it needs to pay higher salaries at such higher-level jobs.

Competitive Pay Systems: Building Blocks Strategic analyses Environmental scanning: industry profile, info about competitors, long-term growth prospect Competitive advantage: examination of core competencies, mission, values. Compensation surveys Competitors’ wage and salary data. Competitor’s fringe benefit data.

Compensation Surveys External equity Reliance on industry surveys Helps attract and retain talent Reliance on industry surveys Sources of published compensation surveys Bureau of Labor Statistics visit their web site at www.bls.gov National Compensation Survey (NCS) Employee benefits in small private establishments Employee benefits in medium/large private establishments Employee benefits in State & Local governments.

Table 8-1 Sources of Compensation Survey Information (1 of 3) Professional Associations Worldatwork (formerly, the American Compensation Association) publishes the Salary Budget Survey, reported by region and industry. The Society for Human Resource Management publishes information on salaries in the human resources field. International Foundation of Employee Benefit Plans

Table 8-1 Sources of Compensation Survey Information (2 of 3) Industry Associations Administration Management Society American Association of University Professors American Banker’s Association American Bar Association American Electronics Association American Mathematical Society American Society of Association Executives Association of General Contractors National Institute of Business Management National Restaurant Association National Retail Federation National Society of Engineers

Table 8-1 Sources of Compensation Survey Information (3 of 3) Consulting Firms Abbott, Langer & Associates Coopers & Lybrand Hay Management Consultants Hewitt Associates Mercer-Meidinger-Hanson Robert Half Associates Towers & Perrin Watson Wyatt Co.

Compensation surveys: Strategic considerations Defining relevant labor market Occupational Classification. Standard Occupational Classification: 9 major occupational groups (professional, executive, sales, administrative support, precision production, etc.) Geographic area (rural/urban) Product/service market competitors Choosing benchmark jobs Well-known, stable, agreed upon. Common across employers. Represent entire range of jobs within a company. Generally accepted in the labor market for this purpose.

Managing Compensation Survey Data Quickly outdated due to changes in cost of living, which is typically indexed by the Consumer Price Index: Base period 1982-1984 = 100 1999 Chicago CPI-U & CPI-W = 166.6

Example: Hourly Wage Data in Miami-Ft. Lauderdale vs Example: Hourly Wage Data in Miami-Ft. Lauderdale vs. NY City (Year 2000) & Consumer Price Index Professional $24.38 $32.30 167.8 CPI-Miami 182.5 CPI-NYC Executive $27.48 $34.67 Sales $12.38 $16.06 Administrative support $12.78 $15.53 Machine operators $10.02 $11.26 Transportation $12.99 $16.21 Service occupations $9.54 $14.02 Full time $15.99 $22.04 Part time $8.49 $13.02 100-499 workers $12.59 $19.64 500 workers or more $17.77 $23.51

Managing Compensation Survey Data One should pay attention to: Central tendency Mean & importance of outliers –which unduly influence mean. Median Variation Standard deviation: do companies have typical salary ranges as compared to the competition? (companies can have same mean but very different SD’s Quartiles and percentiles

Figure 8-1 Histogram of Survey Data for Engineers Frequency (no. of incumbents) Annual Salary

Best-fitting line between two variables Forming Pay Structures: Integrating Job Structures with External Market Pay Rates Regression analysis Best-fitting line between two variables Captures relationship between points and salary

Figure 8-2 Regression Analysis Results for the Engineer Survey Data 55,000 Annual salary 55,000 Predicted annual salary 50,000 45,000 45,000 44,525 43,500 Annual Salary ($) 40,000 Market Pay Line 38,420 36,000 36,000 35,000 34,500 33,536 33,000 30,000 0 100 200 300 400 500 600 700 800 900 1,000 Engineer I Engineer II Engineer III Job Evaluation Points

Comparable worth Equal pay for work of equal worth. Is job evaluation biased? Do compensation systems perpetuate biases and discrimination? The comparable worth argument is that typically female jobs receive lower compensation due to gender bias, because such jobs are as complex and important as typically male jobs (e.g., nurses vs. construction workers).

Discussion Question 8-1 A class-action lawsuit was filed on behalf of all female employees who worked for a well-known chain of grocery stores. The plaintiffs argued that females were relegated to jobs such as cashier, which seldom lead to promotions such as area or store manager. Instead, males are usually assigned to stocking, which has traditionally served as the platform to become area or store manager. Are cashier jobs less important or complex than stocking jobs? Why are females channeled to primarily cashier jobs? Should this grocery chain modify its employment policy? How?

Discussion Question 8-2 Relocation to a new area should be preceded by research on factors such as cost of living, job opportunities, average income, housing costs, crime, schools, etc. Using a job search engine such as monster.com or similar, an HR manager currently working in Miami has gathered data on two additional locations where s/he might relocate. Study these data to identify the pros and the cons of this manager’s possible relocation. Miami Atlanta N.Y. National avg. Population 379,240 402,068 7,525,022 Not applicable County Dade Fulton Kings (table continues)

(continued) Miami Atlanta N.Y. National avg. Cost of Living Overall 107.9 103.2 234.6 100.0 Housing 113.0 101.8 442.6 Food 102.9 106.0 142.8 Transportation 106.8 100.7 120.1 Utilities 103.0 97.5 178.2 Health 101.6 109.2 183.6 Misc. 108.0 104.6 130.4   (table continues)

(continued) Miami Atlanta N.Y. National avg. Housing Purchase Cost $135,200 $126,800 $204,600 $128,500 Home Appreciation 6.3% 9.0% 9.7% 7.2% Property Tax Rate $18.60 $16.10 $15.30 $15.65 Crime Violent Crime 2,105.0 2,729.5 1,063.1 446.1 Property Crime 8,618.8 10,759.0 2,968.5 4,162.2  

(continued) Miami Atlanta N.Y. National avg. Economy Income per capita $13,814 $24,343 $23,966 $21,658 Household income $29,269 $38,608 $47,714 $44,958 Unemployment Rate 6.4% 2.8% 5.8% 4.0% Recent Job Growth -0.1% 3.4% 2.6% 1.3% Future Job Growth 13.1% 23.2% 4.5% 15.1% Sales taxes 6.35% 6.65% 8.25% 6.35 Income taxes 0.00% 6.00% 10.52% 4.60%  

(continued) Miami Atlanta N.Y. National avg. Education High school grad. 59.7% 77.2% 73.4% 79.5% 2 yr college grad. 6.4% 5.0% 5.8% 7.6% 4 yr college grad. 11.3% 22.0% 16.1% 17.3% PhD graduates 7.8% 11.7% 8.5% School expend. $5,845 $6,588 $7,414 $5,928  

(continued) Miami Atlanta N.Y. National avg. Health Air quality(100 = best) 5 12 33 Watershed quality (100 = best) 48 49 42 Superfund sites (100 = best) 10 50 60 53 Phys. per cap. 304 410 273 230 Health cost index 101.7 114.9 186.2 100.0