External Equity: Building Market-Competitive Compensation Systems

Compensation Techniques n INTERNAL: Job Analysis, Job Descriptions, Job Evaluation, Internal Work Structure n EXTERNAL: Market definitions, Market surveys, Policy lines, Pay structures n INDIVIDUAL: Seniority based, Performance based, Incentive guidelines, Incentive programs n ADMINISTRATION: Planning, Budgeting, Communicating, Evaluating

External Equity/Competitiveness n “Refers to the pay relationships among organizations. The organization’s pay relative to its competitors.” n Market-competitive pay systems represent companies’ compensation policies that fit the imperatives of competitive advantage –Attract and retain qualified employees

Competitive Pay Policy Options n Lead n Lag n Match

Match Pay Policy n Determine average market rate n Pay WITH market rate/competitors n Similar ability to attract and retain n Match industry/product market costs

Lead Pay Policy n Determine market rates n Pay ABOVE the average market rate n Maximizes ability to attract and retain quality employees n Minimizes employee dissatisfaction with pay n Offsets less attractive features of work

Lag Pay Policy n Determine market rates n Pay BELOW the average market rate n Hinders ability to attract and retain n Promise of higher future returns n Lead on other aspects

Consequences of Pay Level Decisions n Labor Costs n Attraction – Numbers, quality, experience n Retention – Voluntary Turnover n Pay Satisfaction n Work stoppages, Unionization Competitiveness of Pay Policy

Turnover Rates

Salary Survey n “The systematic process of collecting and making judgments about the compensation paid by other employers.” n The Overpaid Bank Tellers case

Salary Survey Steps n Define the relevant market n Include jobs--Benchmark approach n Collect information n Interpret & apply survey results –Job matches n Build grades and ranges with minimums, maximums and midpoints. – Regression line – Apply competitive pay policy – Design pay grades and ranges

Define the Relevant Market n The fields of potentially qualified candidates for particular jobs. –Occupations/skills –Geographic distance –Same industry, product –Size of competitors –Number of competitors –For project: at least 10 companies

Industry Weekly Earnings

Industry Hourly Earnings

Include Jobs: Benchmark Approach Characteristics of Benchmark Jobs: n Job contents well-known, stable over time, agreed upon by employees involved n Common across a number of different employers n Generally accepted for setting pay levels n Represent entire job structure under study

Benchmark Jobs A B C D E F G H I J K L M N O P B F I L O * * * * *

Collect Info: Survey Sources n Bureau of Labor Statistics – Area and industry surveys (Local Area Wage Survey -- AWS) – National Survey of Professional, Administrative, Technical, and Clerical Workers (PACT) – Employee Benefit Surveys – Current employment statistics survey – Current population survey – Employment Cost Surveys – Compensation per hour – Major union settlements

n Professional Associations –American Compensation Association publishes the Salary Budget Survey, reported by region and industry. –Society for Human Resource Management publishes information on salaries in the human resources field. n Accounting companies – KPMG Peat Marwick; Deloite & Touche; Ernst & Young n Professional, trade organizations n Private published sources n Internet Survey Sources, cont’d

Sources of Compensation Survey Information (cont’d) n 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 n Consulting Firms –Abbott, Langer & Associates –Coopers & Lybrand –Dietrich Associates Inc. –Executive Compensation Service –Hay Management Consultants –Hewitt Associates –Mercer-Meidinger-Hanson –Robert Half Associates –Towers & Perrin –Wyatt Co.

Exhibit 8-4 Engineers’ Pay for Cleveland, Ohio, Metropolitan Area LEVEL Level I Level II Level III Level IV Level V Level VI NUMBER OF WORKERS SURVEYED MEANMEDIANMIDDLE RANGE Source: US Bureau of Labor Statistics, Occupational compensation survey: Pay only. Cleveland, Ohio, Metropolitan Area, August 1995 (Washington, DC: US Government Printing Office, 1996). AVERAGE WEEKLY HOURS WORKED ,559 1, $ 649 $ 752 $ 924 $1,077 $1,257 $1,479 $626 $741 $930 $1,080 $1,254 $1,478 $ $ 712 $ $ 827 $ $1,020 $ $1,165 $1,156 - $1,337 $1,377 - $1,569 WEEKLY PAY

Exhibit 8-5 Summary: Participation in Selected Employee Benefits Programs for Full-Time Employees by Geographic Region BENEFIT Paid time off: Holidays Vacations Personal leave Survivor benefits: Life insurance Survivor income Health care benefits: Medical care Dental care Vision care NORTHEASTSOUTHNORTH-CENTRAL 94% 98% 40% 93% 5% 83% 62% 31% 92% 96% 16% 88% 4% 80% 52% 17% 93% 98% 18% 95% 7% 84% 65% 24% WEST 87% 96% 13% 88% 5% 79% 72% 40% Source: US Bureau of Labor Statistics, Employee benefits in medium and large private establishments, 1993 (Washington, DC: US Government Printing Office, 1994).

1996 Salary Offers to Bachelor’s Degree Candidates by Degree n Accounting29,476 n Business Admin (& MS)27,255 n Distribution27,655 n Econ & Finance (&Bank)29,783 n Hotel/Restaurant24,084 n Human Resources (& LR)25,426 n MIS33,769 n Marketing26,551 n Real Estate27,340 Source: National Association of Colleges and Employers

1996 Salary Offers to Masters’ Degree Candidates by Degree l MBA -Non-tech undergrad l < 1 yr exp40,731 l 1-2 yrs exp46,394 l 2-4 yrs exp54,999 l > 4 yrs exp67,209 l MBA -Tech undergrad l < 1 yr exp39,146 l 1-2 yrs exp43,000 l 2-4 yrs exp51,600 l > 4 yrs exp70,339 l Accounting32,537 l Econ/Finance (Banking) 42,650 l HR (inc LR)39,870 l MIS38,400 l Marketing 41,547 l MS - Business37,237 Source: National Association of Colleges and Employers

1996 Salary Offers to Doctoral Degree Candidates by Degree n Bus Adm & Mgt56,667 n Computer & Info Sciences63,555 n Economics54,333 n Educ Admin43,399 n English33,375 n Psychology31,949 n Social Sciences30,668 l Aerospace 55,547 l Chemical Eng60,161 l Computer Eng65,050 l Elec Eng61,180 l Mech Eng 52,184 l Agriculture48,399 l Bilogical Sci37,661 l Chemistry 54,693 l Math54,125 Source: National Association of Colleges and Employers

Average Salaries of MBA Graduates by Function (1992) n Acct/Audit44,479 n Consulting61,739 n Engineering47,096 n Finance57,729 n Gen Mgt70,593 n H R59,364 l Info Syst47,890 l Marketing 53,208 l Ops/Prod 48,492 l Project Mgt52,713 l Plan/Corp 51,127 l Sales51,644 Source: Association of MBA Executives, Inc.

Human Resources Salaries 1991 n E Benefits Mgr59,500 n Comp Mgr58,200 n EEO Mgr57,900 n Plant HR Mgr57,400 n Grp Ins Mgr55,400 n Mgt Dev Mgr54,100 n HRIS Mgr51,800 n EAP Manager51,800 n Emp&Recr Mgr51,700 n Plant P Mgr50,000 n Emp Tng Mgr48,400 l VP, Admin143,300 l... l Top Comp & Ben75,600 l Exec Comp Mgr73,700 l Top E Relation67,900 l HR Director64,800 l Tng & OD Mgr63,100 l Int’l Comp Mgr63,100 l HR Planning62,400 l LR Supervisor61,300 l Top Safety Mgr60,400 Source: Society for Human Resource Management

Human Resources Avg Salaries n LR Generalist47,100 n Exec Recruit44,500 n Safety Superv44,400 n Safety Specialist42,700 n Generalist41,000 n Benefits Pln An.41,000 n Sr Comp An40,300 n EEO Specialist39,900 n Security Spec39,400 n Sr Tng Spec39,300 n Prof Recruit37,700 l Comp&Ben Ad37,600 l EAP Counselor37,000 l Plant P Admin36,400 l HRIS Specialist35,200 l Benefits Admin33,800 l Comp Analyst31,900 l Jr. Training 31,500 l Entry Generalist30,600 l Recruiter30,500 l Pers Asst23,100 l Benefits Clerk23,000

Internet Sources n Variety of voluntary information n Variety of purchasable information Example sitea: see my webpage n websites

Avg Faculty Salaries All Universities (public and private) American Assoc. of Univ. Professors; The Chronicle of Higher Ed., April 20, 1994

Salary Survey Steps n Define the relevant market n Include jobs--Benchmark approach n Collect information n Interpret & apply survey results –Job matches n Build grades and ranges with minimums, maximums and midpoints. – Regression line – Apply competitive pay policy – Design pay grades and ranges

Interpret & Apply Survey Results Survey Job Acctg Clerk A Acctg Clerk B Acctg Clerk C Pg FastCat Job Intermediate Acctg Clerk Acctg Clerk Sr. Acctg Clerk B Pg l Verify data - Job Matches n Not Job Title only, use job descriptions, duties, etc n Compare survey jobs with MedTech’s n Choose closest match, use as benchmark

Interpret & Apply Survey Results n Matched jobs can be used as benchmarks n Leveling - if nec. for unmatched jobs n Update salary information n Central tendency – Mean, weighted mean, median, mode n Dispersion – Correlation ( > r > 1.00) – r should be >.90

Build Pay Structure - Overview Once you have survey information: n Combine internal structure and external wage rates - regression line n Apply pay policy n Design pay ranges n Balance internal and external pressures

Annual Salary ($) 55,000 50,000 45,000 40,000 35,000 30, ,000 Engineer IEngineer IIEngineer III Job Evaluation Points 44,525 38,420 33,536 Annual salary Predicted annual salary 36,000 34,500 33,000 36,000 43,500 45,000 55,000 Market Pay Line Exhibit 8-15 Regression Analysis Results for the Engineer Survey Data

Apply Pay Policy A B C D E F G H I J K L M N O P B F I L O * * * * * Lead Lag Match

Design Pay Grades and Ranges n Allow for quality, productivity, performance differences, employee expectations n Develop grades - similar jobs paid the same n Develop ranges - wages vary from midpoint n Establish min, mid, max n Determine overlap - mid near min of next grade

Build Pay Grades A B C D E F G H I J K L M N O P B F I L O * * * * * Midpoints

Build Pay Ranges A B C D E F G H I J K L M N O P B F * * Maximum Midpoint Minimum

Salary Structure n Considers relative internal job values n Establishes grades containing like-valued jobs n Reflects prevailing salary levels in the relevant market place n Establishes salary ranges for each job--minimum, midpoint, maximum n Responds to changes in competitive levels n Communicates earnings potentials to employees for current job and jobs to which they aspire

Chapter Eight Building Market-Competitive Compensation Systems

Exhibit 8-1 Economic Activities Indexed by the Federal Government’s Standard Industrial Classification Manual n Agriculture, forestry, fishing, hunting, and trapping n Mining n Construction n Manufacturing n Transportation, communications, electric, gas, and sanitary services n Wholesale trade n Retail trade n Finance, insurance, and real estate n Personal, business, professional, repair, recreation, and other services n Public administration n Nonclassifiable establishments Source: US Office of Mgmt. and Budget, Standard industrial classification manual (Wash.DC: US Office of Mgmt. and Budget, 1987).

Exhibit 8-2 Standard Industrial Classification Code Elements Industry Number: Business and Secretarial Schools 8 Industry Group Number: Vocational Schools Major Group: Educational Services 244 SIC Code 8244

Exhibit 8-3 Sources of Compensation Survey Information (1 of 3) n Professional Associations –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.

Exhibit 8-3 Sources of Compensation Survey Information (2 of 3) n 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

Exhibit 8-3 Sources of Compensation Survey Information (3 of 3) n Consulting Firms –Abbott, Langer & Associates –Coopers & Lybrand –Dietrich Associates Inc. –Executive Compensation Service –Hay Management Consultants –Hewitt Associates –Mercer-Meidinger-Hanson –Robert Half Associates –Towers & Perrin –Wyatt Co.

Exhibit 8-4 Engineers’ Pay for Cleveland, Ohio, Metropolitan Area LEVEL Level I Level II Level III Level IV Level V Level VI NUMBER OF WORKERS SURVEYED MEANMEDIANMIDDLE RANGE Source: US Bureau of Labor Statistics, Occupational compensation survey: Pay only. Cleveland, Ohio, Metropolitan Area, August 1995 (Washington, DC: US Government Printing Office, 1996). AVERAGE WEEKLY HOURS WORKED ,559 1, $ 649 $ 752 $ 924 $1,077 $1,257 $1,479 $626 $741 $930 $1,080 $1,254 $1,478 $ $ 712 $ $ 827 $ $1,020 $ $1,165 $1,156 - $1,337 $1,377 - $1,569 WEEKLY PAY

Exhibit 8-5 Summary: Participation in Selected Employee Benefits Programs for Full-Time Employees by Geographic Region BENEFIT Paid time off: Holidays Vacations Personal leave Survivor benefits: Life insurance Survivor income Health care benefits: Medical care Dental care Vision care NORTHEASTSOUTHNORTH-CENTRAL 94% 98% 40% 93% 5% 83% 62% 31% 92% 96% 16% 88% 4% 80% 52% 17% 93% 98% 18% 95% 7% 84% 65% 24% WEST 87% 96% 13% 88% 5% 79% 72% 40% Source: US Bureau of Labor Statistics, Employee benefits in medium and large private establishments, 1993 (Washington, DC: US Government Printing Office, 1994).

Exhibit 8-9 Histogram of Survey Data for Engineers Annual Salary Frequency (no. of incumbents)

Annual Salary ($) 55,000 50,000 45,000 40,000 35,000 30, ,000 Engineer IEngineer IIEngineer III Job Evaluation Points 44,525 38,420 33,536 Annual salary Predicted annual salary 36,000 34,500 33,000 36,000 43,500 45,000 55,000 Market Pay Line Exhibit 8-15 Regression Analysis Results for the Engineer Survey Data