1. Designing Pay Levels, Mix and Pay Structure
Chapter 8
Designing Pay Levels, Mix and Pay Structure
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2. 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
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3. 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
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4. Exhibit 8.1 - Determining Externally Competitive Pay Levels and Structures
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5. 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
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6. 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
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7. 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
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8. 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
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9. Exhibit 8.3 - Relevant Labor Markets by Geographic and Employee Groups
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10. 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
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11. 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
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12. Exhibit Benchmarks
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13. 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
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14. Exhibit 8.9 - Possible Survey Data Elements and Rationale
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15. Exhibit 8.9 - Possible Survey Data Elements and Rationale
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16. Exhibit 8.10 - Advantages and Disadvantages of Measures of Compensation
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17. 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?
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18. 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
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19. Exhibit 8.13 - Statistical Measures to Analyze Survey Data
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20. 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
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21. Exhibit 8.15 - Choices for Updating Survey Data Reflect Pay Policy
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22. 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
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23. Exhibit 8.16 - From Regression Results to a Market Line
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24. Exhibit 8.17 - Understanding Regression
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25. 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
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26. Exhibit 8.18- Develop Pay Grades
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27. 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
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28. 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
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29. 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
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30. 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
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31. 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
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32. Exhibit 8.19 - Range Midpoint, Minimum, and Maximum
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33. Exhibit 8.20 - Range Overlap
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34. 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
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35. 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
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36. Exhibit 8.21- From Grades to Bands
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37. Exhibit 8.22 - Contrasts Between Ranges and Bands
See Exhibit 8.19, page 267
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38. 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
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39. 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
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40. Balancing Internal and External Pressures: Adjusting the Pay Structure
Reconciling differences
May entail a review of :
Job analysis
Evaluation of the job
Market data
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41. 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
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42. 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
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43. 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
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