1. Designing pay levels, mix and pay structures
Chapter 9

2. Contents Purpose of a survey Select relevant market competitors
Design the survey
Interpret survey results and construct a market line
Pay-policy line
Grades and ranges
Broad banding
Balancing internal and external pressures

3. Some major decisions in pay-level determination
Specify competitive pay-level policy
Define purpose of survey
Specify relevant market
Design and conduct survey
Interpret and apply result
Design grades and ranges or bands

4. Competitive pay policy
Translating external pay policy into practice requires information on the external market.
Surveys provide the data for translating that policy into pay levels, pay mix, and structures.
A survey is the systematic process of collecting and making judgments about the compensation paid by other employers

5. Purpose of a survey
An employer conducts or participates in a survey for a number of reasons:
Adjust to the pay level in response to changing rates paid by competitors
To set the mix of pay forms relative to that paid by competitors
To establish or price a pay structure
To analyze pay related problems
To estimate the labor costs of product/service market competitors

6. Select relevant market competitors
The same occupations or skills
Employees within the same geographic area
The same products and services.

7. Design the survey Who should be involved? (Price fixing)
How many employers?
Publicly available data
Word of mouse
Where are the standards?
Which jobs should be included?
Benchmark job approach
Low-high approach
Benchmark conversion approach
What information should be collected?
Organization data
Total compensation data

8. Advantages and disadvantages of measures of compensation
Base pay
Tells how competitors are valuing the work in similar jobs
Fails to include performance incentives and other forms, so will not give true picture if competitors offer low base but high incentives
Total cash (base + bonus)
Tells how competitors are valuing the work: also tells the cash pay for performance opportunity in the job
All employees may not receive incentives, so it may overstate the competitor’s pay; plus, it does not include long term incentives
Total compensation (base + bonus + stock options+ benefits)
Tells the total value competitors place on this work
All employees may not receive all the forms. Don’t set base equal to competitors’ total compensation. Risks high fixed costs.

9. Interpret survey results and construct market line
Verify data
Accuracy of match
Anomalies
Statistical analysis
Frequency distribution
Central tendency
Variation
Update the survey data
Construct a market pay line
Combine internal structure and external market rates

10. Choices for updating survey data reflect pay policy
January 1: Current year
Lag
Lead/lag
Lead
Surveys completed. Participants report actual rates in effect last Jan. 1
Median base
Engineer I = Rs. 45,000
Today:
Analyze survey, make recommendations
Implement plan
Forecast 5% increase by end of current year
January 1: Plan year begins
Update up to here.
Pay Rs during plan year
Forecasted rate = Rs. 47, 250
Resurvey
Forecast 5% increase by end of plan year
Update up to here.
Pay Rs during plan year
December 31: plan year ends
Forecasted rate = Rs. 49,612
Update up to here.
Pay Rs during plan year

11. Combine internal structure and external market rates
Maximum
Maximum
Midpoint
Midpoint
Maximum
Minimum
Salary
Minimum
Maximum
Pay-policy line
Midpoint
Maximum
Minimum
Midpoint
Grades
Minimum
Minimum
Contain jobs 1 2 3 4 5 AB
CDEF
GHIJK
LMN OP
Pay structure

12. Grades and ranges They offer flexibility….
Differences in quality (skills, abilities and experience) among individuals applying for work
Differences in the productivity or value of these quality variations
Differences in the mix of pay forms competitors use

13. Develop grades
Establish range midpoints, minimums, and maximums
Overlap

14. Broad banding
Consolidating as many as four or five traditional grades into a single band with one minimum and one maximum.

15. Contrast between ranges and bands
Ranges support
Bands support
Some flexibility within controls
Relatively stable organization design
Recognition via titles or career progression
Midpoint controls, comparatives
Controls designed into system
Give managers “freedom with guidelines”
150 percent range-spread
Emphasis on flexibility within guidelines
Global organizations
Cross-functional experience and lateral progression
Reference market rates, shadow ranges
Controls in budget, few in system
Give managers ‘freedom to manage” pay
percent spread