STRATEGIC COMPENSATION A Human Resource Management Approach

STRATEGIC COMPENSATION A Human Resource Management Approach
Chapter 8: Building Pay Structures That Recognize Employee Contributions Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc.
Learning Objectives Explain the concept of pay structures. Specify and explain the five steps necessary to construct a pay structure. Discuss at least two considerations in designing merit pay systems. Copyright © 2015 Pearson Education, Inc.

Learning Objectives (cont’d)
Explain at least two sales compensation plan design considerations. Describe three main considerations of person-focused pay program design. Present a summary of two pay structure variation practices. Copyright © 2015 Pearson Education, Inc.

Pay Structure Concept Pay structures represent Pay rate differences for jobs of unequal worth The framework for recognizing differences in employee contributions Companies recognize these differences by paying individuals according to their: Credentials Knowledge Job performance Copyright © 2015 Pearson Education, Inc.

Constructing a Pay Structure
Five steps: Decide how many pay structures to construct Determine a market pay line Define pay grades Calculate pay ranges Evaluate results Pay structures are developed based on five steps such as deciding on how many pay structures to construct, determining a market pay line, defining pay grades, calculating pay ranges for each pay grade, and evaluating the results. Copyright © 2015 Pearson Education, Inc.

Common Pay Structures Exempt and nonexempt: companies establish these pay structures for administrative ease Based on job families: executive, managerial, professional, technical, clerical, and craft represent distinct job families Based on geography: companies with multiple, geographically dispersed locations such as sales offices, manufacturing plants, service centers, and corporate offices The first step was deciding on the number of pay structures. Common pay structures include exempt and nonexempt structures, pay structures based on job families, and pay structures based on geography. Pay structures are defined on the basis of job family, which show a distinct pattern in the market like executive, managerial, professional, technical, clerical, and craft represent distinct job families. Pay structures based on geography includes companies with multiple, geographically dispersed locations such as sales offices, manufacturing plants, service centers, and corporate offices. Copyright © 2015 Pearson Education, Inc.

Exempt and Nonexempt Pay Structures
Not subject to overtime provisions Salaried supervisors, managers, professionals, and executives Nonexempt Subject to overtime provisions Hourly, nonsupervisory Most exempt jobs are not subject to the overtime pay provisions in the Fair Labor Standards Act, earn pay in the form of a salary, and are generally supervisory, managerial, or executive in nature. Most nonexempt jobs are subject to the overtime pay provisions in the Fair Labor Standards Act, earn pay in the form of wages, at hourly pay rates, and are generally nonsupervisory, and the duties tend to be narrowly defined. Copyright © 2015 Pearson Education, Inc.

Market Pay Lines Market pay rates relative to company’s job structure Pay levels corresponding with pay line are market competitive Rates promote internal consistency Market pay line is representative of typical market pay rates relative to a company’s job structure. Pay levels that correspond with the market pay line are market-competitive pay rates. These rates promote internal consistency because they increase with the value of jobs. Copyright © 2015 Pearson Education, Inc.

Pay Grades Based on compensable factors, values, management philosophy Widths Narrow or wide Affects hierarchy and social distance Absolute or percentage-based job evaluation points Pay grades group jobs for pay policy application based on similar compensable factors and value. Job groupings are influenced by other factors such as management philosophy, wider pay grades that include a relatively large number of jobs and less hierarchy, narrower pay grades tend to promote hierarchy and social distance. Pay grade widths are based on either absolute or percentage-based job evaluation points. Copyright © 2015 Pearson Education, Inc.

Pay Ranges Build upon pay grades Pay grades represent horizontal dimension Pay ranges represent vertical dimension Pay ranges build upon pay grades. While pay grades represent the horizontal dimension of pay structures, pay ranges represent the vertical dimension. Midpoint, generally represents the competitive market average or median. Copyright © 2015 Pearson Education, Inc.

The Impact of Alternative Range Spreads
Midpoint of $25,000* Range spread 20% 50% 80% 120% Minimum $22,727 $20,000 $17,857 $15,625 Maximum $27,272 $30,000 $32,143 $34,375 Difference between values $4,545 $10,000 $14,286 $18,750 This table shows the impact of alternative range spread values on minimum and maximum values. Copyright © 2015 Pearson Education, Inc.

Pay Compression When pay is small Threatens competitive advantages Caused by: Failure to raise pay range limits Scarcity of qualified applicants Pay compression occurs whenever a company’s pay spread between newly hired or less qualified employees and more qualified job incumbents is small. It is caused by failure to raise pay range limits and scarcity of qualified applicants. It can threaten a companies’ competitive advantage when it results in dysfunctional turnover. Copyright © 2015 Pearson Education, Inc.

Compa-Ratios Evaluates pay structures Index competitiveness of internal pay rates based on midpoints Divide pay rates by midpoint Compa-ratio meanings 1 = market match rate < 1 = market lag rate > 1 = market lead rate Compa-ratios index the relative competitiveness of internal pay rates, based on pay range midpoints. They are calculated by dividing the employee’s pay rate by the pay range midpoint. Compa-ratio of 1 means that the employee’s pay rate equals the pay range midpoint, compa-ratio of less than 1 means the employee’s pay rate falls below the competitive pay rate for the job, and compa-ratio of more than 1 means that the employee’s pay rate exceeds the competitive pay rate for the job. Copyright © 2015 Pearson Education, Inc.

Merit Pay Systems Considerations Communicate link between pay and performance Use effective appraisal methods Establish increase amounts and types Settle on base pay level Companies must insure that employees see definite links between pay and performance. Companies should use effective performance appraisal methods and should avoid poor communication when discussing appraisals. Companies must determine fair merit increase amounts and settle on base pay levels relative to the base pay of functionally similar jobs. Copyright © 2015 Pearson Education, Inc.

Merit Increase Amounts
Reflects prior job performance levels Needs to motivate Needs to be meaningful Influenced by the cost of living Indexed as a percentage of budget Merit increase amounts should reflect prior job performance levels and should motivate employees to perform their best. The minimal amount seen as meaningful is referred to as “just-meaningful pay increases” and the perception of a just-meaningful pay increase depends on an individual’s cost of living, attitude toward the job, and expectation of reward from the job. Copyright © 2015 Pearson Education, Inc.

Timing Companies typically take one of two approaches in timing of pay raises Common review date or common review period Employee’s anniversary date Two main approaches of timing are common review date/period and employee’s anniversary. In common review date/period, all employees get reviewed at a predetermined time each year and best suited for small companies. Employee’s anniversary reviews on anniversary of hiring date. It can be administratively burdensome because of varying dates. Copyright © 2015 Pearson Education, Inc.

Present Level of Base Pay
Needs to be within limits of pay grade Consistent with new employees at similar jobs Needs to abide by mandates of: Title VII, 1964 Civil Rights Act Equal Pay Act of 1963 ADEA of 1967 Pay structures specify acceptable pay ranges for jobs within each pay grade should fall within the minimum and maximum pay grade rates, and should be consistent for new hires with similar qualifications. It should be within federal guidelines of Title VII, 1964 Civil Rights Act, Equal Pay Act of 1963, and ADEA of 1967. Copyright © 2015 Pearson Education, Inc.

The Merit Pay Grid Amounts are determined by two factors Performance ratings Position of employees’ present base pay rates within pay ranges Merit pay amounts are determined by two main factors such as performance ratings and the position of employees’ present base pay rates within pay ranges. Copyright © 2015 Pearson Education, Inc.

Increases within Budget
Determine performance categories and percentage of employees in each Place percent in quartiles Put percent and quartiles into cells Estimate performance distribution Distribute increase to each cell Ensure total is within budget Budgets limit the merit pay increase percentages in each cell. Expressed as a percentage of the sum of employees’ current base pay and varies according to performance level and position in the pay range. There are steps to ensuring that merit pay increases do not exceed the limit. Supervisors and managers determine how many employees fall within each performance category. The second step is to determine the percentage of employees whose pay falls into each quartile. Then they combine both sets of information to determine the percentage of employees who fall into each cell. In the next step, they calculate the expected number of employees in each cell to provide an estimate of the employees’ performance distribution. As the last step, compensation professionals ensure that the total amount is within budget. Copyright © 2015 Pearson Education, Inc.

Sales Objectives Improve sales productivity Improve sales coverage of current customers Grow sales overall Sales objectives include improving sales productivity, improving sales coverage of current customers, and growing sales overall. Copyright © 2015 Pearson Education, Inc.

Sales Compensation Plans
Salary only Salary plus bonus Salary plus commission Commission plus draw Commission only There are five main sales compensation plans such as salary-only, salary-plus-bonus, salary-plus-commission, commission-plus-draw, and commission-only. Copyright © 2015 Pearson Education, Inc.

Salary-Only Plans Fixed base compensation From the employees’ perspective  risk-free From a company’s perspective  burdensome In salary-only plans, sales professionals receive fixed base compensation, which does not vary with level of units sold, increase in market share, and other indicators of sales performance. For employees it is a relatively risk-free compensation, however it is burdensome to employers. Copyright © 2015 Pearson Education, Inc.

Salary-Plus-Bonus Plans
Set salary coupled with a bonus Bonuses usually are single payment Salary-plus-bonus plans offer set base pay with an incentive bonus. Bonuses usually are in single payments. Copyright © 2015 Pearson Education, Inc.

Salary-Plus-Commission Plans
Commissions based on percentage of price Spreads risks Designed to attract quality sellers Allows employees to do other tasks A commission is a form of incentive compensation, based upon a percentage of the products' price or the services' selling price. These plans spread the risk of selling between the company and the sales professional. This plan enhances the company’s ability to attract quality employees and allow the employees to perform essential non sales functions for the company. Copyright © 2015 Pearson Education, Inc.

Commission-Plus Draw Plans
Advance pay for living expenses Charged against future commissions Recoverable or non recoverable Provides strong incentive to excel Commission-plus-draw plans award sales professionals with incentives to excel (commissions), and subsistence pay (draws) to cover basic living expenses. The draws are just advances on the commissions the sales professional will earn in the future. While recoverable draws act as company loans to employees that are carried forward indefinitely until the employee sells enough to repay, non recoverable draws act as salary because employees are not obligated to repay the loans if they do not sell enough. Copyright © 2015 Pearson Education, Inc.

Commission Only Straight Based on fixed percentage of sales price Ex: 10% commission, service sold $100  $10 Graduated Increased percentage rates for higher sales volume Ex: 5% commission, per unit for 100 units  8% commission per unit from 101 to 500, 12% commission per unit in excess of 500 There are three types of commission-only plans. Straight commissions award sales professionals with a fixed percentage of the sales revenue. Graduated commissions award sales professionals with an increased percentage of the sales price as the volume increases. Copyright © 2015 Pearson Education, Inc.

Commission Only (cont’d)
Multi-tiered Increased percentage rates for meeting and exceeding sales goal Ex: 8% if total sales volume < 1,000 units, 12% if total sales volume >1000 units Multiple-tiered commissions award sales professionals with higher percentages of the sales made in a given period and they are earned if the sales level exceeds a predetermined level. For instance, employees might earn only 8% for each item if total sales volume falls short of 1,000 units. If sales exceed 1,000 units, then employees might earn a per-item commission equal to 12%. Copyright © 2015 Pearson Education, Inc.

Fixed Pay and Compensation Mix
Three main factors Salesperson’s influence on decision Competitive pay standards within industry Amount of nonsales duties Determining fixed pay and the compensation mix depends mainly on three factors. These factors are listed as salesperson’s influence on decision, competitive pay standards within industry, and amount of nonsales duties. The more influence sales professionals have on the “buying decisions”, the more the compensation mix will feature incentive pay. The compensation mix must be competitive with market standards to attract and retain quality sales professionals. The more non sales duties sales professionals are required to perform, the more their compensation packages should include a fixed pay component. Copyright © 2015 Pearson Education, Inc.

Skill Blocks Include job descriptions Skills needed Training required Accurate evaluation process Organize jobs into family/group List similar skills and tasks per job Group skills into blocks Job descriptions need to be developed that identify the major skills needed, include the available training programs that will allow employees to acquire horizontal and vertical skills, and identify accurate performance measure that will be used. Individual jobs should be organized into job families or groups and skills should be grouped into blocks. Copyright © 2015 Pearson Education, Inc.

Transition Matters Job-based pay to person-focused pay Assessment of skills Who assesses On what How often Align pay with knowledge structure Access to training Equal access to all The considerations arise due to the transition from using job-based pay to person-focused pay include skill assessment, aligning pay with the knowledge structure, and access to training. Skills assessment centers on who should assess, on what basis assessments should be made, and when assessments should be conducted. Upon implementation, the employees’ core compensation must reflect their knowledge or skills the company incorporates into its person-focused structure. Person-focused systems make training necessary rather than optional for employees motivated towards self-improvement and employees must have equal access to training. Copyright © 2015 Pearson Education, Inc.

In-House vs. Outsourced Training
Expertise Needed and available Timeliness How soon and how often? Number of trainees Proprietary nature of topic Too sensitive to share? Training can be in-house or outsourced depending on four criteria such as expertise, timelines, number of employees needing training, and proprietary nature of topic. While employees turn to in-house trainers to draw on existing expertise, training will be outsourced to fill a direct need. Training will be outsourced if not enough time to develop and deliver it in-house. Large numbers make in-house more cost effective. The more sensitive the subject matter, the more likely the training will be in-house. Copyright © 2015 Pearson Education, Inc.

Learning Objective 6 Present a summary of two pay structure variation practices. Learning objective six addresses pay structure variations (broad banding and two-tier wage structures). Copyright © 2015 Pearson Education, Inc.

Broadbanding Consolidates pay grades and ranges Flattens corporate hierarchies Emphasizes teamwork Broadens job duties and responsibilities Promotes quicker decision making More latitude in pay rate decisions Consolidates existing pay grades and ranges into fewer, wider pay grades. It represents the increasing organizational trend toward flatter, less hierarchical corporate structures that emphasize teamwork. It expands employees’ job duties and responsibilities. When applied to managerial staff, it eliminates management layers and promotes quicker decision making. It gives supervisors greater latitude in setting employees’ pay based on the tasks and duties they perform. Copyright © 2015 Pearson Education, Inc.

Two-Tiered Pay New employees paid less Temporary or permanent rewards Mainly in unionized companies May hinder recruiting Can lower employees’ morale Two-tiered pay structures reward new hires less than established employees on either a temporary or permanent basis. It is mainly used in unionized companies such as in the commercial airline industry and automobile manufacturing industry. The lower pay scale for new hires may restrict a company’s ability to recruit and retain quality employees and can lower employees' morale. Copyright © 2015 Pearson Education, Inc.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2015 Pearson Education, Inc.

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