1. Chapter 7: Building Market-Competitive Compensation Systems
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2. 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 Discuss compensation survey practices Describe how compensation professionals integrate internal job structures with external market pay rates Explain the basic concepts of compensation policies and strategic mandates: pay mix and pay level.
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3. 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
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4. 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
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5. 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
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6. 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
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7. 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
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8. Competitors’ Pay Practices
LO 7-2
Competitors’ Pay Practices
Base pay
Incentive awards structure
Mix and level of discretionary benefits
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9. 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
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10. Published Survey Sources
LO 7-2
Published Survey Sources
Professional associations
Industry associations
Consulting firms
Federal government (U.S. Bureau of Labor Statistics)
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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LO 7-2
Compensation Surveys
Two essential strategic considerations are:
Defining the relevant labor market
Choosing benchmark jobs
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LO 7-2
Relevant Labor Market
Qualified candidates based on:
Occupational classification
Geography
Market competitors
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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
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19. 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)
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20. Sample Compensable Factor and Point-Level Definitions
LO 7-2
Sample Compensable Factor and Point-Level Definitions
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21. Leveling Instructions and Points
LO 7-2
Leveling Instructions and Points
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22. 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
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23. 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
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24. 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
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25. 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
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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
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LO 7-2
Quartile
Dispersion by % below a set value
Quartile 4 = %
Quartile 3 = 75%
Quartile 2 = 50% (also, the median)
Quartile 1 = 25%
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28. 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 (
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29. 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.
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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
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LO 7-3
Regression Analysis
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LO 7-3
Setting Pay Rates
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33. 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
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34. Compensation Policies and Strategic Mandates
LO 7-4
Compensation Policies and Strategic Mandates
Pay-level policies
Pay mix policies
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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
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36. 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
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37. Copyright © 2017 Pearson Education, Inc.
LO 7-4
Pay Mix Policy Example
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38. Copyright © 2017 Pearson Education, Inc.
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