Compensation Management - Chapter 7
Consulting Firms
- Some firms specialize in particular occupations (e.g., engineers) or industries (e.g., financial services) - recently completed surveys or exclusively for client's use Examples: Aon, Hay, Pearl Meyer & Partners
Four activities (market-competitiveness)
1. Conducting strategic analyses 2. Assessing competitors' pay practices with compensation surveys 3. Integrating the internal job structure with external market pay rates 4. Determining compensation policies
Reasons to not develop your own survey
1. Lack employees qualified to undertake this task 2. Reluctancy of rival companies to surrender information about their compensation packages to competitors 3. Custom survey development can be costly
Published compensation survey data (two considerations)
1. Survey focus: core compensation or employee benefits 2. Sources of published compensation surveys
Preliminary considerations (compensation surveys)
1. What companies hope to gain from compensation surveys 2. Custom development versus use of an existing compensation survey
Survey Data Characteristics
1. compensation surveys contain immense amounts of information 2. compensation survey data are outdated because there is a lag between when the data were collected and when employers implement the compensation plan based on the survey data 3. compensation professionals must use statistical analyses to integrate their internal job structures with the external market based on the survey data
Federal government
8 categories of free BLS salary surveys: 1. Employment cost trends 2. National compensation data 3. Wages by area and occupation 4. Earnings by demographics 5. Earnings by industry 6. County wages 7. Employee benefits 8. Compensation costs in other countries
Strategic Analysis
= an examination of a company's external market context (industry profile, information about competitors, long-term growth prospects) and internal factors (financial condition, functional capabilities)
Compensation policies
= balance managing costs and attracting and retaining the best-qualified employees > fit with companies' standing and competitive strategies
Integration of the internal job structure
= pay rates that reflect both the company's and the external market's valuations of jobs > rely on regression analysis
Compensation Surveys
= the collection and subsequent analysis of competitors' compensation data > traditionally focused on competitors' wage and salary practices > employee benefits recently became more important >>> enable compensation professionals to obtain realistic views of competitors' pay practices
Compensation plans
= the selection and implementation of pay level and pay mix policies over a specified time period, usually one year
Regression Analysis
A statistical analysis method designed to find the best fitting line between two variables > predict the value of one variable from another > Compensation professionals use job evaluation points assigned to benchmark jobs (based on the matching process discussed earlier) and the salary survey data for the benchmark jobs
Quartiles and Percentiles
Both quartiles and percentiles describe dispersion by indicating the percentage of figures that fall below certain figures/points.
Updating Survey Data
Changes in the cost of living tend to make survey data obsolete fairly quickly. Over time, the average cost of goods and services usually increases. Failure to adjust pay rates could lead to a situation where real compensation falls below nominal compensation.
Pay Level Policies
Choices that compensation professionals make to promote competitive advantage: - market lead - market lag - market match
Custom development versus use of an existing compensation survey
Decide to develop their own survey instruments and administer them or rely on the results of surveys conducted by others > customized surveys have more tailored questions and selected respondent companies
Market Lag Policy
Distinguishes companies from the competition by compensating employees less than most competitors (25th percentile, beyond market pay line) > best for lowest-cost strategies
Percentiles
Divide the data set into 100 equal parts. An observation at the xth percentile is higher than x percent of all observations.
Survey focus: core compensation or employee benefits
Employers are likely to use compensation surveys to obtain information about competitors' base pay and benefits practices so they can compete effectively for the best candidates > historically competition on the basis of base pay, but benefits costs are now extremely high (greater variability)
Salary.com
Employers: Seek locations with high/low salaries > easier to decrease benefits than salary Job Seeker: See salary but also benefits
Consumer Price Index (CPI)
Indexes monthly price changes in consumer goods and services Most commonly used method for tracking cost changes in United States CPI published monthly by the U.S. Bureau of Labor Statistics
What companies hope to gain from compensation surveys
Is critical to developing effective compensation systems > learn about competitors' compensation practices > learn something about employees' preferences for alternative forms of compensation due to economic changes
Market Pay Line
Is the best fitting line between a company's job structure and benchmark jobs > representative of typical market pay rates, expressed as a mean or median, relative to a company's job structure
Market Match Policy
Most closely follows the typical market pay rates because companies pay according to the market pay line (50th percentile) > appropriate with differentiation strategy
Net change in income
Negative: Nominal compensation rises, real compensation goes down
Quartiles
Quartiles allow compensation professionals to describe the distribution of data—in this case, annual base pay amount—based on four groupings
Point factor leveling
Rating a job based on a standard set of compensable factors that have point values associated with each level of the factor > similar to the point rating job evaluation approach
Job leveling
Refers to corrections that companies can make for differences in duties and scope between their jobs and external benchmark jobs. These corrections are based on SUBJECTIVE judgment rather than on OBJECTIVE criteria.
Variation
Represents the amount of spread or dispersion in a data set
Salary to stay whole
Salary you need to earn in order to maintain your current standard of living
R^2
Shows how well the variation in the company's valuation of jobs based on job evaluation points explains the variation in market pay rates from the compensation survey. R2 = 0 > none (0 percent) of the variation in market pay rates can be explained by the company's job structure R2 = one > all (100 percent) of the variation in market pay rates can be explained by the company's job structure
Relevant labor markets
The fields of potentially qualified candidates for particular jobs based on: - Occupational classification - Geography - Market competitors
Strategic considerations (compensation surveys)
Two essential strategic considerations are: 1. Defining the relevant labor market 2. Choosing benchmark jobs
Benchmark Jobs
Used for: 1. Job evaluations 2. Compensation surveys - Established, well-known, stable over time - Common across employers - Entire range of jobs - Accepted for setting pay rates
Sources of published compensation surveys
Various sources: 1. professional/industry associations 2. consulting firms 3. federal government >
Median
a type of central tendency: is the middle value in an ordered sequence of numerical data. If there is an odd number of data points, the median literally is the middle observation > middle (50th percentile)
Mean
a type of central tendency: We calculate the mean annual salary for accountants by adding all the annual salaries in our data set and then dividing the total by the number of annual salaries in the data set > average
Compensation costs in other countries
comparative hourly compensation costs in national currencies and U.S. dollars for production workers and all employees in manufacturing
National compensation data
comprehensive measures of occupational earnings; compensation cost trends, benefit incidence, and detailed plan provisions
Earnings by demographics
demographic characteristics such as age, sex, race, and Hispanic or Latino ethnicity
County wages
detailed industry for the Nation, states, and many metropolitan areas and counties
Market Lead Policy
distinguishes a company from the competition by compensating employees more highly than most competitors (75th percentile, above market pay line) > best for differentiation strategies
Wages by area and occupation
for the nation, regions, states, and many metropolitan areas
Central Tendency
is a number that represents the typical numerical value in the data set (cluster around the central point)
Nominal Compensation
is the face value (Nominalwert) of a dollar.
Real Compensation
measures the purchasing power of a dollar
Earnings by industry
monthly survey of the payroll records of business establishments that provides national estimates of average weekly hours and average hourly earnings
Employment cost trends
quarterly statistics that measure change in labor costs over time
Pay Mix Policies
refer to the combination of core compensation and employee benefits components that make up an employee's total compensation package > Base wage, benefits, long-term incentives, short-term incentives
Standard Deviation
refers to the mean distance of each salary figure from the mean
Market-competitive pay systems
represent companies' compensation policies that fit the imperatives of competitive advantage > play a significant role in attracting and retaining the most qualified employees > should promote companies' attainment of competitive strategies
Employee benefits
share of workers who participate in specified benefits, such as health care, retirement plans, and paid vacations
Professional/Industry associations
survey members' salaries, compile the information in summary form, and disseminate the results to members > accurate because members benefit themselves > professional associations focus on broader types of employment