1. Building Market-Competitive Compensation Systems
Chapter Eight
Building Market-Competitive Compensation Systems

2. Internally Consistent Pay Structures do not guarantee External Consistency!
Market Pay Line
20,000
Current Pay Line
18,000
21,000
Annual Salary ($)
16,000
11,000
8,000
250
Clerk I
500
Clerk II
750
Clerk III
1,200
Chief Clerk
Job Evaluation Points

3. Compensation Policies & Strategic Mandates
Policy
Strategy
Lead (how much?) 5, 10, 15%?
Differentiation
Match
Lag (how much?)
Cost

4. Testing your applied knowledge: What is the compensation strategy behind this pay structure?
20,000
18,000
Market Pay Line
21,000
Annual Salary ($)
16,000
11,000
Current Pay Line
8,000
250
Clerk I
500
Clerk II
750
Clerk III
1,200
Chief Clerk
Job Evaluation Points

5. Answer: Assuming that this company is aware of the pay lag at lower level jobs between their pay structure and the market line, this company has decided that lower-level jobs are not the essence of its competitive advantage and, therefore, it can afford to pay lower salaries at such lower-level jobs.

6. Testing your applied knowledge: What is the compensation strategy behind this pay structure?
20,000
Market Pay Line
18,000
21,000
Annual Salary ($)
16,000
11,000
Current Pay Line
8,000
250
Clerk I
500
Clerk II
750
Clerk III
1,200
Chief Clerk
Job Evaluation Points

7. Answer: Assuming that this company is aware of the pay lag at lower level jobs between their pay structure and the market line, as well as the lead between its pay level and the market line at higher-level jobs, this company has decided not only that lower-level jobs are not the essence of its competitive advantage, but also that higher-level jobs are indeed quite important for its strategy and, therefore, it needs to pay higher salaries at such higher-level jobs.

8. Competitive Pay Systems: Building Blocks
Strategic analyses
Environmental scanning: industry profile, info about competitors, long-term growth prospect
Competitive advantage: examination of core competencies, mission, values.
Compensation surveys
Competitors’ wage and salary data.
Competitor’s fringe benefit data.

9. Compensation Surveys External equity Reliance on industry surveys
Helps attract and retain talent
Reliance on industry surveys
Sources of published compensation surveys
Bureau of Labor Statistics visit their web site at
National Compensation Survey (NCS)
Employee benefits in small private establishments
Employee benefits in medium/large private establishments
Employee benefits in State & Local governments.

10. Table 8-1 Sources of Compensation Survey Information (1 of 3)
Professional Associations
Worldatwork (formerly, 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.
International Foundation of Employee Benefit Plans

11. Table 8-1 Sources of Compensation Survey Information (2 of 3)
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

12. Table 8-1 Sources of Compensation Survey Information (3 of 3)
Consulting Firms
Abbott, Langer & Associates
Coopers & Lybrand
Hay Management Consultants
Hewitt Associates
Mercer-Meidinger-Hanson
Robert Half Associates
Towers & Perrin
Watson Wyatt Co.

13. Compensation surveys: Strategic considerations
Defining relevant labor market
Occupational Classification. Standard Occupational Classification: 9 major occupational groups (professional, executive, sales, administrative support, precision production, etc.)
Geographic area (rural/urban)
Product/service market competitors
Choosing benchmark jobs
Well-known, stable, agreed upon.
Common across employers.
Represent entire range of jobs within a company.
Generally accepted in the labor market for this purpose.

14. Managing Compensation Survey Data
Quickly outdated due to changes in cost of living, which is typically indexed by the Consumer Price Index:
Base period = 100
1999 Chicago CPI-U & CPI-W = 166.6

15. Example: Hourly Wage Data in Miami-Ft. Lauderdale vs
Example: Hourly Wage Data in Miami-Ft. Lauderdale vs. NY City (Year 2000) & Consumer Price Index
Professional
$24.38
$32.30
167.8
CPI-Miami
182.5
CPI-NYC
Executive
$27.48
$34.67
Sales
$12.38
$16.06
Administrative support
$12.78
$15.53
Machine operators
$10.02
$11.26
Transportation
$12.99
$16.21
Service occupations
$9.54
$14.02
Full time
$15.99
$22.04
Part time
$8.49
$13.02
workers
$12.59
$19.64
500 workers or more
$17.77
$23.51

16. Managing Compensation Survey Data One should pay attention to:
Central tendency
Mean & importance of outliers –which unduly influence mean.
Median
Variation
Standard deviation: do companies have typical salary ranges as compared to the competition? (companies can have same mean but very different SD’s
Quartiles and percentiles

17. Figure 8-1 Histogram of Survey Data for Engineers
Frequency (no. of incumbents)
Annual Salary

18. Best-fitting line between two variables
Forming Pay Structures: Integrating Job Structures with External Market Pay Rates
Regression analysis
Best-fitting line between two variables
Captures relationship between points and salary

19. Figure 8-2 Regression Analysis Results for the Engineer Survey Data
55,000
Annual salary
55,000
Predicted annual salary
50,000
45,000
45,000
44,525
43,500
Annual Salary ($)
40,000
Market Pay Line
38,420
36,000
36,000
35,000
34,500
33,536
33,000
30,000
,000
Engineer I
Engineer II
Engineer III
Job Evaluation Points

20. Comparable worth Equal pay for work of equal worth.
Is job evaluation biased?
Do compensation systems perpetuate biases and discrimination?
The comparable worth argument is that typically female jobs receive lower compensation due to gender bias, because such jobs are as complex and important as typically male jobs (e.g., nurses vs. construction workers).

21. Discussion Question 8-1
A class-action lawsuit was filed on behalf of all female employees who worked for a well-known chain of grocery stores. The plaintiffs argued that females were relegated to jobs such as cashier, which seldom lead to promotions such as area or store manager. Instead, males are usually assigned to stocking, which has traditionally served as the platform to become area or store manager.
Are cashier jobs less important or complex than stocking jobs?
Why are females channeled to primarily cashier jobs?
Should this grocery chain modify its employment policy? How?

22. Discussion Question 8-2
Relocation to a new area should be preceded by research on factors such as cost of living, job opportunities, average income, housing costs, crime, schools, etc. Using a job search engine such as monster.com or similar, an HR manager currently working in Miami has gathered data on two additional locations where s/he might relocate. Study these data to identify the pros and the cons of this manager’s possible relocation.
Miami
Atlanta
N.Y.
National avg.
Population
379,240
402,068
7,525,022
Not applicable
County
Dade
Fulton
Kings
(table continues)

23. (continued) Miami Atlanta N.Y. National avg. Cost of Living Overall
107.9
103.2
234.6
100.0
Housing
113.0
101.8
442.6
Food
102.9
106.0
142.8
Transportation
106.8
100.7
120.1
Utilities
103.0
97.5
178.2
Health
101.6
109.2
183.6
Misc.
108.0
104.6
130.4
(table continues)

24. (continued) Miami Atlanta N.Y. National avg. Housing Purchase Cost
$135,200
$126,800
$204,600
$128,500
Home Appreciation
6.3%
9.0%
9.7%
7.2%
Property Tax Rate
$18.60
$16.10
$15.30
$15.65
Crime
Violent Crime
2,105.0
2,729.5
1,063.1
446.1
Property Crime
8,618.8
10,759.0
2,968.5
4,162.2

25. (continued) Miami Atlanta N.Y. National avg. Economy Income per capita
$13,814
$24,343
$23,966
$21,658
Household income
$29,269
$38,608
$47,714
$44,958
Unemployment Rate
6.4%
2.8%
5.8%
4.0%
Recent Job Growth
-0.1%
3.4%
2.6%
1.3%
Future Job Growth
13.1%
23.2%
4.5%
15.1%
Sales taxes
6.35%
6.65%
8.25%
6.35
Income taxes
0.00%
6.00%
10.52%
4.60%

26. (continued) Miami Atlanta N.Y. National avg. Education
High school grad.
59.7%
77.2%
73.4%
79.5%
2 yr college grad.
6.4%
5.0%
5.8%
7.6%
4 yr college grad.
11.3%
22.0%
16.1%
17.3%
PhD graduates
7.8%
11.7%
8.5%
School expend.
$5,845
$6,588
$7,414
$5,928

27. (continued) Miami Atlanta N.Y. National avg. Health
Air quality(100 = best) 5 12 33
Watershed quality (100 = best) 48 49 42
Superfund sites (100 = best) 10 50 60 53
Phys. per cap.
304
410
273
230
Health cost index
101.7
114.9
186.2
100.0