MHR 749: CH. 8: DESIGNING PAY LEVELS, PAY MIX, AND PAY STRUCTURE

Internal Pressures

-(through performance appraisals) -recognize individual performance variations with pay -meet employees' expectations that their pay will increase over time -encourages employee retention

PAY STRUCTURE HAS 2 COMPONENTS

-PAY POLICY LINE -PAY RANGES

Balancing internal and external pressures: adjust the pay structure

-a job structure orders jobs on the basis of internal factors: reflected in job evaluation or skill certification -pay structure is anchored by the organization's external competitive position: reflected in its pay-policy line -reconciling differences: may entail a review of: job analysis, job evaluation, and market data; differences may arise due to shortage of a particular skill, driving up market rate

The Purpose of a Survey

-adjust pay level-how much to pay? -adjust pay mix-what forms? -adjust pay structure -study special situations where you have positions that are hard to find someone suitable for -estimate competitors' labour costs

BANDS SUPPORT

-emphasis on flexibility within guidelines -global organizations -cross-functional experience and lateral progression -reference market rates, shadow ranges -controls in budget, few in system -managers' freedom to manage pay -100-400% range spread

FROM POLICT TO PRACTICE: GRADES AND RANGES

-establish range midpoints, minimum, and maximums -what size should the range be? based on judgement about how ranges support career paths, promotions, and other organizational systems; some compensation managers use the actual survey rates (particularly the 75th and 25th PERCENTILES AS MAXIMUMS AND MINIMUMS) -uses RANGE SPREAD (range max-range min) -uses SPREAD PERCENTAGE= spread/range minimum

constructing a market pay line

-have to update the survey data: where AGING or TRENDING is the process of updating pay data to forecast the competitive rates for the future when pay decisions will be implemented; pay rates are CONSTANTLY changing; survey data represents pay at the date it was collected; adjust survey data to represent pay at the current or future date when pay decisions will be implemented

a pay grade

-is a HORIZONTAL grouping of different jobs that are considered SUBSTANTIALLY equal for pay purposes -a pay grade enhances an organization's ability to move people among jobs within a grade with NO CHANGE IN PAY -the number of pay grades varies with: number of jobs, organizational hierarchy (and their work design), and reporting relationships -(to slice the organization into different levels and to have different job evaluation points)

Compensation Survey

-is the systematic process of collecting and making judgement about the compensation paid by other employers -can be done in-house or by consultants (adv.) saves money, quicker to put the questions exactly to what you want to know (cons.) if the company does NOT have individuals capable of doing the analyzing

summary

-most organizations survey other employers' pay practices to determine the competitors' rates -survey results used to construct market pay line -pay policy line adjusts market pay line based on the decision to lead, match, or lag market pay -pay grades and ranges/bands designed around pay policy line to integrate internal and external pressures -increasing interest in broadbanding and market pricing

External Pressures include

-quality variations (KSAs) among individuals; differences in productivity due to these quality variations -differences in the mix of pay forms competitors use

Select relevant market competitors

-relevant labour market includes employers who compete: for same occupations or skills, with employees in same geographic area, and with same products and services -fuzzy markets

RANGES SUPPORT

-some flexibility within controls -relatively stable organizational design -recognition via titles or career progression -midpoint controls and comparatives -controls designed into system -managers freedom with guidelines -up to 150% range spread

Relevant labour markets by geographic and employee groups

-through geographic scope of local, regional, national, and international -where the more complex your skill sets are, the bigger the area for your geographical search will be

Interpret Survey Results-construct a market line

-verify data for accuracy and match (benchmark conversion and survey leveling?) -anomalies (does any one company dominate? do all employers show similar patterns? outliers?)

RANGE OVERLAP

-where promotion increases matters -size of differentials between grades should support career movement through the structure -OVERLAP ought to be LARGE ENOUGH to induce employees to seek promotion into a HIGHER GRADE -SKILL-BASED PLANS establish single flat rates for each level regardless of performance or seniority

Designing the survey

-who should be involved? -how many employers? -which jobs to include? -what information to collect?

ADVANTAGE OF VARIOUS MEASURES OF COMPENSATION

BASE PAY-tells how competitors are valuing the work in similar jobs TOTAL CASH (base + bonus): tells how competitors are valuing work; tells the cash pay for performance opportunity in the job TOTAL COMPENSATION (base + bonus + stock options + benefits) tells the total value competitors place on this work

DISADVANTAGES OF VARIOUS MEASURES OF COMPENSATION

BASE PAY: 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): not all employees may receive incentives, so it may overstate the competitors' pay; does not include long-term incentives TOTAL COMPENSATION (base + bonus+ stock option + benefits): all employees may not receive all the forms-be careful-do NOT set base equal to competitors' total compensation-risks high fixed costs (to lag the market-comparing base pay to total compensation is NOT actually lagging the market)??

WHY BOTHER WITH RANGES?

DUE TO: external pressures and internal pressures (through performance appraisals)

from policy to practice: grades and rangers

GRADES= different jobs which are considered similar for pay purposes are grouped into grades =grades enhances an organization's ability to move people among jobs with no change in pay =each grade will have its own pay range =all the jobs within a single grade will have the same pay range

Specify the competitive pay policy, where the options include

LEAD-the market with respect to pay MATCH-average pay for competitors LAG-behind average market pay rates -survey provide the data for translating policy into pay levels, pay mix, and structures

CONSTRUCTING RANGERS

STEP 1: DEVELOP GRADES

CONSTRUCTING RANGES:

Step 2: ESTABLISHING MIDPOINT, MAXIMUM, MINIMUM -PAY RANGERS=the vertical dimensions of the pay structure-an upper and lower limit on pay for all jobs in a pay grade; -each pay grade will have associated with it a pay range consisting of a midpoint and a specified minimum and maximum -midpoint represents base pay for a seasoned employee [compa ratio=???

Pay Transparency

a continum; everyone knows what everyone else is making within the organziation

adjust pay mix-what forms?

base, bonus, stock option, benefits

adjust pay level-how much to pay?

based on the overall movement of pay rates caused by competition in the market

Market Pricing

emphasizes external competitiveness and deemphasizes internal alignment; sets pay structures almost exclusively on external market rates -objective is to base most of the internal pay structure on external rates, breaking down the boundaries between the internal organization and the external market forces -business strategy is more than just following the leader-there is little value aded through internal alignment, where unique or difficult-to-imitate aspects of the organization's pay structure are deemphasized and fairness is presumed to be reflected by market rates

estimate competitors' labor costs

for competitive intelligence

study special situations

for specific pay-related problems

standard deviation

how tightly all the rates are clustered around the mean; tells how similar or dissimilar the markt rates are to each other; a small standard deviation means they are tightly bunched at centre; a large standard deviation means rates are more spread out

weighted mean

if only company-wide measures (rather than individual measures) are available, the rate for each company is multiplied by the number of employees in that company; total of all rates is divided by total number of employees; gives equal weight to each individual's wage and it captures size of supply and demand in market

BROADBANDING

involves collapsing salary grades into a FEW BROAD BANDS-each with a sizeable range (ONE MINIMUM AND ONE MAXIMUM_ and range midpoint often not used -purpose: provides more flexibility to manage career growth and administer pay -how many bands to create: determine the number of distinct levels of employee contributions within the organization that actually add value;

commonly used statistical measures in survey data analysis involves central tendency which is involved with

mode, mean, median, weighted mean

mode

most commonly occurring rate-must draw frequency distribution to calculate it

pay grades can

motivate and incent employees to work harder to get promoted to the next level

Pay Secrecy

no one know how much you earn besides the high-up managers; this is used to benefit managers so employees can not complain about their pay relative to others

median

order all data points from HIGHEST to LOWEST, where the number in the MIDDLE is the median; this minimizes distortion caused by outliers

quartile and percentiles

orders all data points from LOWEST to HIGHEST; then convert to percentages; common in salary surveys-frequently used to set pay ranges and zones

Fuzzy markets

organizations with UNIQUE JOBS and STRUCTURES find it HARD to get comparable market data; places more emphasis on external market data; ex.: VALVE-home of steam-the world's largest online gaming platform

PAY POLICY LINE

represents an adjustment to the market pay line to reflect the organization's EXTERNAL competitive position in the market

international

search across several countries

national

search from across the country

regional

search within a particular area of the province or several provinces

determining externally competitive pay levels and structure involves

specific pay level policy, define relevant market, design and conduct survey, draw policy lines, merge internal and external pressures, and competitive pay levels, mix, and structures

some major decisions in pay level determination

specify pay level policy, define purpose of survey, define relevant market, design and conduct survey, interpret and apply results, design ranges/grades/bands -it does NOT have to be the same policy for all employees, can be different for each group of people -important to know the market rate and develop a policy line for the compensation amount

commonly used statistical measures in survey data analysis involves variations with is involved with

standard deviation and quartiles and percentiles

Interpret Survey Results

statistical analysis of: frequency distribution (to see the data set illustrate the dispersion of all the data-to spot unusual shapes may reflect problems with job matches, widely dispersed pay rates, and employers with widely divergent pay policy) -central tendency (through the median and mode) -variation with the standard deviation

mean

sum all rates and divide by number of rates; if only company data are available-wage of largest employer given same weight as that of smallest employer; commonly understood as the AVERAGE but if only company data are available, will not accurately reflect actual labour market conditions

JOB MATCHING

the degree of match between the organization's jobs and survey jobs must be carefully assessed on the JOB CONTENT rather than on the basis of JOB TITLE only

scatterplot with regression line indicates

the pay on the vertical line and job evaluation points on the horizontal line--> the line created is the market pay line

updating market pay line to pay policy line involves

the vertical of pay and horizontal of job evaluation points to determine the lead, match, and lag policy lines

market pay line

to age it and then make the pay policy line?

Combine Job Evaluation and Market Survey Data

two pieces of data on each benchmark: SURVEY DATA (dollars), and our own data (job evaluation points) -SCATTERPLOTS are useful to see what the data looks like

PAY RANGERS

upper and lower limits on pay

adjust pay structure

validate job evaluation results; establish internal structures

local

within relatively small areas such as cities or census metropolitan areas