Chapter 7: Pay Level and Pay Mix Comparisons

Compensation Surveys

- Two essential strategic considerations are: 1. Defining the relevant labor market 2. Choosing benchmark jobs

Published Compensation Survey Data

- Two important considerations 1. Survey Focus: base pay and fringe benefits 2. Sources of published surveys: professional associations, industry associations, consulting firm, federal governments survey sources

Custom Developed Surveys

- can be custom tailored - quality can be monitored by employer - usually not done in-hour - external data not readily accessible - can be expensive

Market Lead Policy

- levels above market pay lines - best for differentiation strategies

Compensation Policies and Strategic Mandates

Companies can choose from three pay policies: 1. Market lead policy 2. Market Lag Policy 3. Market Match policy 4. Policies in Combination Market match-market lead policies for professional and managerial employees; contribute most to companies' competitive advantage Market match-market lag policies for clerical, administrative, and unskilled employees, because of abundance of available workers and less contribution to attainment of competitive advantage

Employment Cost Index (ECI)

- for compensation cost trends - used to estimate historical changes in cost of employment - quarterly measure of changes in labor costs, including: ages and salaries, benefits, changes in total compensation

Market Lag Policy

- levels below market pay lines - best for lowest-cost strategies - may cause more turnover

Market Match Policy

- pay according to market pay line - appropriate with differentiation strategy

Employer Costs of Employee Compensation (ECEC)

- quarterly survey - for compensation cost trends, shows employers average hourly cost for total compensation

Excessive Pay Levels

- represent undue financial burden - undermined lowest-cost strategies - restrict a companies ability to invest in other strategic activities

Updating Survey Data

- updating is necessary because of lag-time between data collection and use - factors that influence the update include: changes in economic forecasts - changes in costs of consumer goods and services

Mean

-outliers can distort values - understated mean occur with extremely small outliers: may set salaries too low - overstated means occur with extremely large outliers: may set salaries too high

Compensation Survey Data

1. Survey Data Characteristics - they contain a lot of data which makes it difficult to build market-competitive pay systems - statistical analysis used to integrate internal job structures with external market 2. Data Analysis - begins with basic tabulation of survey data 3. Twp properties that describe numerical data sets - central tendency - variation

Integrating Internal Job Structures with External Market Pay Rates

1. To attract and retain most qualified workers 2. To keep compensation policies in-line with company's competitive strategy - paying well above or below typical market rate can create competitive disadvantage for companies - companies should set pay rates by using market pay rates as reference points 3. Regression analysis used to establish pay rates 4. Regression analysis - use market pay rates as reference points to determine internal pay structures - find the best fitting line (market pay line) between two variables (job evaluation points calculated for benchmark jobs/salary survey data for the benchmark jobs)

Strategic Analysis

Entails an examination of a company's external market context and internal factors

Competitors Pay Practices

Information to learn about a competitors compensation practices include - base pay - incentive awards structure - mix and level of discretionary benefits (mix= percentage of employer compensation costs to provide compensation and benefits) (Level= amounts actually or potentially paid to employees or their beneficiaries)

Compensation Surveys

Involve the collection and subsequent analysis of competitors compensation data - compensation professionals integrate the internal job structure with the external market pay rates identified through compensation surveys

Bureau of Labor Statistics Surveys

National Compensation Survey - for wages and benefits for over 400 occupations in multiple locations - provide incidence and extensive provisions data for health insurance and retirement benefits

R^2

R= strength of relationship between job evaluation points and market pay rates (salaries) R^2= tells how well variation or differences among jobs in terms of job evaluation points (the company's job evaluation structure) explains the variations in market pay rates for those jobs obtained from a compensation survey ** represents percentage of variation in pay (Y values) that can be explained by the jobs evaluation points (X values) **R^2= 1.00 or 100%, means all variation in market pay rates can be explained by the company's job structure based on the job evaluation

Market Competitive Pay Systems

Represents companies compensation policies that fit the needs of their competitive advantage - help be competitive - help attain and retain the most qualified employees

Variation

Represents the amount of spread or dispersion in a data set - standard deviation - percentile - quartile

Relevant Labor Market (RLM)

Represents the fields of potentially qualified candidates for specific jobs RLM is defined on the basis of: - Occupational classification or job family (ex.sales) - geography - competitors

Regression Analysis

Statistical procedure designed to find the best-fitting line between two variables Y=a+bX - y: predicted salary - X: job evaluation points - a: Y intercept (X=0) - b: the slope

Statistical Analysis

Two descriptive properties - Central tendency: represents a set of data that centers around a central point -- two central tendency measures: mean and median

Benchmark Jobs

Used to conduct effective job evaluations, compensation surveys, determine pay levels based on typical market pay 4 Characteristics: 1. Job content is well known, fairly stable, and agreed upon by employees involved 2. jobs are common across employers 3. jobs represent entire range of jobs being evaluated 4. jobs are accepted in labor market for setting pay rates ** benchmark jobs are necessary

Pay Mix Policies

refer to a combination of core compensation and employee benefits components to make up an employee's total compensation package - may be expressed in dollars or as a percentage of total dollars allocated for an employees total compensation