Mgmt Chapter 8

Verify Data

A common first step is to check the accuracy of the job matches, then check for anomalies , age of data, level of abstractness i , and the nature of the organizations

Anomalies

Does any one company dominate? Do all employers show similar patterns? Outliers?

How Many Employers to Survey

Large firms with a lead policy may exchange data with only a few top-paying competitors. SMaller companies may only survey other small companies.

Competitive Intelligence

The collection and analysis of information about external conditions and competitors that will enable an organization to be more competitive.

Promotion Increases Matter

The size of pay differentials between grades should support career movement though the structure.\ managerial job typically would be at least one ne pay range higher than the jobs it supervises.

What Size Should the Range Be?

The size of the range, or range spread, is based on some judgment about how the ranges support career paths, promotions, and other organization sys¬ tems The sizes of the pay ranges will have implications for the degree of overlap between adjacent pay grades.

Age/Trend the Survey Data

adjusting survey data to represent pay at the current or future date when the pay decisions will be implemented

pay range

the range between the upper and lower limits on pay for all jobs in a particular pay grade

i/Vhy Bother with Grades and Ranges?

Grades and ranges offer managers the flexibility to deal with pressures from external markets and within the organization. ranges permit managers to recognize other differences. These include: 1. Differences in quality 2. Differences in the productivity or value of these quality variations 3. Differences in the mix of pay forms competitors use In addition, an organization may desire differences in rates paid to employees performing the same job. A pay range exists whenever two or more rates are paid to employees performing the same job. Hence, ranges provide managers the opportunity to 1. Recognize individual performance differences with pay 2. Meet employees' expectations that their pay will increase over time, even while holding the same job 3. Encourage employee commitment to remain with the organization

Adjusting Pay Level/Mix/Structure

Level: adjust pay on regular basis. may be based on overall upward movement of pay rates caused by competiton for people in the market. may also be based on performance, ability to py, or terms specified in a contract. Mix: Less frequent than level adjustments. the mix of forms and the importance placed on each can lead to different types of employee behaviour. Having accurate info on the total comp, the mix of pay forms competitors use, and the costs are very important Structure: many use market surveys to validate their own job eval results. JOb structure that results from internal job eval may not match the pay structures found in the external market, so employers go straight to Market Pricing

Survey

The systematic process of collecting and making judgements about the compensation paid by other employees

What Information to Collect?

Three types of data are typically collected in a survey: (1) information about the nature of the organization, (2) information about the total compensation system, (3) specific pay data on each incumbent in the jobs under study 1. assess te similarties and differences between survey users. 2. similarities and differences in total pay packages

Market Pricing

establishing a pay structure by relying almost exclusively on external market rates.

pav grade

grouping of jobs considered substantially equal for pay purposes The question of which jobs are substantially equal and therefore slotted into one requires the analyst to reconsider the original job evaluation results. . Each grade will have its own pay range, and all the jobs within a single grade will have the same pay range. Jobs in 1 different grades hould be dissimilar to those in other grades md will have a different pay range.

onstruct a Market Pay Line

market pay line ;a graph that links a com¬ pany's benchmark jobs on the horizontal axis (internal structure) with market rates paid by competitors (market survey) on the vertical axis

reference rates

pay rates from market data used in pricing broad bands

range spread

the size Of a pay range, based T a judgment about how the ranges support career paths, promotions, and other organization systems. Not all employers use ranges. Skill-based plans establish single flat rates for each skill level regardless of performance or seniority. And many collective bargaining contracts establish single flat rates for each job ). This flat rate is often set to correspond to some midpoint on a survey of that job. And increasingly, broad bands (really big ranges) are being adopted. Broad bands ofrer employers even greater flexibility to treat employees differently and to deal with external pressures.

Accuracy of Match

. Does the description match a job at the user organization? If the job is similar but not identical, some companies use survey levelling; that is, they multiply the survey data by some numerical factor that corresponds to the analyst's judgment of the differences between the company and survey job.

Statistical Analysis

Frequency Distributions: Central Tendency: An overall average (or mean) can be calculated by adding each participating company's average base wage and dividing by the number •f companies. ;. How^ever, this measure may not accurately reflect the actual labour market conditions, since the base wage of the largest employer is given the same weight as that of the smallest employer. The weighted mean is calculated by adding the base wages for all 585 engineers in the survey and then dividing by the number of engineers (585). A weighted mean gives equal weight to each individual employee's wage. Variation The distribution of rates around a measure of central tendency is called variation. Variation tells how the rates are spread out.

Fuzzy Markets

More unique jobs that require very unique skillsets, relevant markets become more fuzzy and less defined, as a result of more diverse knowledge and experience

Balancing Internal and External Pressures: Adjusting the Pay Structure

Reconciling Differences: The problem with using two bases (internal and external) to create a structure is that they are likely to result in two different structures. The order in which jobs are ranked on internal and external factors probably will not agree coompletely Differences between market structures/rates and job evaluation rankings warrant a review of the basic decisions in evaluating and pricing that particular job. This may entail a review of the job analysis, the job description, and the evaluation of the iob or ti' ^^^ i^^rket data for the job in question. Often this re-analysis solves the problem. found that managers weigh external market data more heavily than internal job evaluation data.

Broadbanding takes two steps:

Set the number of bands. Surveys report companies are using three to eight bands for pay purposes. Usually bands are established at the major "breaks," or differences in work or skill/competency requirements. >. Titles used to label each band reflect these major breaks. Price the bands: reference market rates.lultiple job families within each band. Each band might include jobs from finance, purchasing, software development and engineering, marketing, and so on. The challenge is how much to pay people who are in the same band but in different functions performing different work. le professional band have different reference rates drawn from survey data.

7 Major Decisions in Determining Externally Competitve Pay Levels and Structures

1) Specify the employer's external pay policy 2) Define the purpose of the compensation survey 3) Select relevant market competitors to survey 4) Design and Conduct the survey 5) Interpret survey results and construct market pay line 6) Construct a pay policy line that reflects external pay policy 7) Balance competitiveness with internal alignment through the use of ranges, flat rates and/or bands

Areas that employers compete in to define a relevant market

1) the same occupation or skills required 2) Qualified individuals in the same geographic area 3) The same products and services Relevant Market COmpetitors for TOp Execs at Microsoft and Google. Microsfot: Technology peer group and DOW 30 Peer Group Google: meet at least 3 criteria: high technology or media company, key talent competitor, high growth, with min of 50% of GOogles revenues and/or headcount growth over the previous two periods, 10 billion or more in annual revenues, 50 billion or more in market capitalization

The Purpose of a Survey

1) to adjust internal pay level in response to changing competitor pay rates 2) to set the internal mix of pay forms relative to those provided by competitors 3) to establish or price the internal pay structure; 4) to analyze pay-related problems 5) to estimate the labour costs of product market competitors

Word of MOuse

All salary information is readily available online, and the ease of access means that managers have to be able to explain and defend the salaries paid to employees. QUality of data online is suspect

Which Jobs to Include

Benchmark jobs approach: have stable job content and are common acros different employers. If the company's purpose in conducting the survey is to price the entire structure, then benchmark jobs can be selected Low-High Approach: JOb-based market data must be converted to fit the skill or competency structure a company has. Look at the Highest and lowest paid benchmark jobs for the relevant skills in the relevant market and to use the wages for these jobs as anchors for the skill-based structures. Benchmark Conversion Approach: apply the job eval plan used to crete internal alignment to the descriptions of surbey jobs. the magnitude of difference between job evaluation points for internal jobs and survey jobs provides guidance for adjusting the market date.

Design the Compensation Strategy

Involves answering the following questions: (1) Who should be involved in the survey design? (2) How many employers should be included? (3) which jobs should be included? and (4) What info should be collected?

Who Should be Involved

Most of the time the survey is handled by the compensation manager. Since compensation has powerful effects on profitability including employees and managers on tasks forces make sense. Hiring an outside consultant is buying expertise and the price of control

MARKET PRICING

Some organizations may adopt pay strategies that emphasize external competitiveness and deemphasize internal alignment. This approach, called market pricing, sets pay structures by relying almost exclusively on rates paid by competitors in the external market. The competitive rates for positions for which external market data are available are first calculated; then the remaining (non-benchmark) jobs are blended into the pay hierarchy created, on the basis of external rates. The objective of market pricing is to base most if not all of the internal pay structure on external rates paid by competitors, breaking down the boundaries between the internal organization in and external market forces,

broadbanding

a large band of jobs containseveral pay grades , consolidates as many as four or five traditional grades into a single band with one minimum and one maximum. Because the band encompasses SO many jobs of differing values, a range midpoint is not usually used Supporters of broad bands list several advantages over traditional approaches. First, they provide flexibility to define job responsibilities more broadly They support redesigned, downsized, or boundary-less organizations that have eliminated layers of managerial jobs. They foster cross-ftinctional growth and development in these new organizations. Employees can move laterally across fianctions within a band in order to gain depth of experience. Companies with global operations use bands to aid in moving managers among worldwide assignments. The emphasis on lateral movement with no pay adjustments helps manage the reality of fewer promotion opportunities in flattened organization strucmres. The flexibility of banding eases mergers and acquisitions, because there are not many levels to argue over

Advantages and Disadvantages of Measures of Compensation

3ase pay Fells 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 jffer low base but high incentives. Total cash (base + bonus) Tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job. All employees may not receive incentives, so it may overstate the competitors' pay; plus, it does H not include long-term incentives. Total compensation ''ells the total value competitors place on this work. All employees may not receive all the forms. Be careful; don't set base equal to competitors' total compensation. Risks high fixed costs.

pay policy line

pay line representing an adjustment to the market pay line to reflect the company's external competitive position in the market (i.e., lead, match, or lag) Choice of Measure:f Colgate practises what it claims at the beginning of the chapter, we would expect the company to use the 50th percentile ftr base pay and the 75th percentile for total compensation as compensation measures in its regression. Updating:The survey data at the beginning of the plan year (following aging/trending) may be updated again to reflect the firm's pay level policy, as shown in Exhibit 8.12. Using the survey data that was previously aged to January 1 of the next year and keeping this rate ($47,250 for Engineer 1 in the earlier example) for the year will constitute a lag policy (on line A in Exhibit 8.12). Policy Line as a Percentage of !\Aarket Line: A third approach to translate pay level policy into practice is simply to specify a percentage above or below the regression line (market line) that an employer intends to match, and then draw a new line at this higher (or lower) level. This would carry out the policy statement "We lead the market by 10 percent." C