Chapter 8: Designing pay levels, pay mix and pay structure

Balancing Internal and External Pressures: Adjusting 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

Construct a Market Pay Line (definition)

A market line links a company's benchmark jobs on the horizontal axis with market rates paid by competitors on the vertical axis; summarizes the distribution of going rates paid by competitors in the market

Specify Competitive Pay Policy (lead, match, lag, hybrid)

A survey is the systematic process of collecting and making judgments about the compensation paid by other employers Surveys provide the data for translating policy into pay levels, pay mix, and structures

The Purpose of a Survey

Adjust pay level—how much to pay? Based on overall movement of pay rates caused by competition in the market Adjust pay mix—what forms? Base, bonus, stock, benefits Adjust pay structure? Market surveys are used to validate job evaluation results; establish internal structures Study special situations Specific pay-related problems Estimate competitors' labor costs "Competitive intelligence" Employment Cost Index measures quarterly changes in employer costs for compensation

Update the survey data

Aging or trending refers to the process of updating pay data to forecast the competitive rates for the future when pay decisions will be implemented (discuss interpellations and extrapolation)

Construct a Market Pay Line

Approaches to constructing a market pay line: Free hand approach Regression Analysis Setting pay for non-benchmark jobs

Establish range midpoints, minimums, and maximums

Based on judgment about how ranges support career paths, promotions, and other organization systems Some compensation managers use the actual survey rates, particularly the 75th and 25th percentiles, as maximums and minimums

From Policy to Practice: The Pay Policy Line

Choice of measure Updating Aging the market data to a point halfway through the plan year is called lead/lag Policy line as percent of market line Specify a percent above or below market line an employer intends to match Other options Pay among the leaders Lead for some job families and lag for others

Bands support

Emphasis on flexibility within guidelines Global organizations Cross-functional experience and lateral progression Gives managers "freedom to manage" pay

Relevant labor market includes employers who compete:

For same occupations or skills For employees in same geographic area With same products and services

Develop grades

Grades enhance 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

Standard deviation

How tightly all the rates are clustered around the mean. (A small SD means they are tightly bunched at center, a large SD means rates are more spread out)

Weighted mean

If there is only companywide measures (rather than individual measures), 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

From Policy to Practice:Broad Banding

Involves collapsing salary grades into a few broad bands, each with a sizable range One minimum and one maximum Range midpoint often not used

Market Pricing (definition)

Market pricing sets pay structures almost exclusively on external market rates

Reconciling differences

May entail a review of : Job analysis Evaluation of the job Market data

Mode

Most commonly occuring rate. Must draw frequency distribution to calculate it.

From Policy to Practice: Grades and Ranges

Offers flexibility to deal with pressures from external markets and differences among firms Differences in quality among individuals applying for work Differences in the productivity or value of these quality variations Differences in the mix of pay forms competitors use

Median

Order all data points from highest to lowest; the one in the middle is the median

Quartiles & percentages

Order all data points from lowest to highest, then convert to percentages. (frequently used to set pay ranges or zones)

Design the Survey

Organization data Financial data and reporting relationships Turnover and revenues Total compensation data Base pay Total cash (base+incentive=total cash) Total compensation (includes cost of benefits)

Overlap

Promotion increases matter 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 skill level regardless of performance or seniority

A pay range exists whenever two or more rates are paid to employees in the same job

Recognize individual performance differences with pay Meet employees' expectations that their pay will increase over time, even in the same job Encourage employees to remain with the organization

Balancing Internal and External Pressures: Adjusting the Pay Structure

Reconciling differences May entail a review of : Job analysis Evaluation of the job Market data

Banding takes:

Set the number of bands Price the bands: reference market rates

Ranges Support

Some flexibility within controls Relatively stable organization design Recognition via titles or career progression Gives managers "freedom within guidelines"

Major Decisions in Pay-Level Determination

Specific pay-level policy Define purpose of survey Specify relevant market Design and conduct survey Interpret and apply results Design grades and ranges or bands

Mean

Sum all rates and divide by number of rates.

Flexibility-control

Take advantage of flexibility without: Increasing labor costs Leaving the organization vulnerable to charges of inconsistent or illegal practices

Base Pay

Tells how competitors are valuing the work in similar jobs

Total Cash (base+bonus)

Tells how competitors are valuing work; also 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

Market Pricing objective

To base most of the internal pay structure on external rates, breaking down the boundaries between the internal organization and the external market forces

Combine Internal Structure and External Market Rates

Two parts of the total pay model have merged: Internally aligned structure - Horizontal axis External competitive data - Vertical axis Two aspects of pay structure: Pay-policy line Pay ranges

Interpret Survey Results and Construct a Market Line

Verify data Accuracy of match Benchmark conversion/survey leveling Anomalies Does any one company dominate? Do all employers show similar patterns? Outliers? Statistical analysis Frequency distribution Unusual shapes may reflect: Problems with job matches Widely dispersed pay rates Employers with widely divergent pay policies Central tendency Variation

Low-high approach

Wages of lowest- and highest-paid benchmark jobs for the relevant skills in the relevant market are used as anchors for skill-based structures (issue of central tendency and variability/range)

Designing the Survey

Who should be involved? Compensation manager, managers, and employees Outside consulting firms How many employers? No firm rules Publicly available data - Bureau of Labor Statistics Fee for services survey data Towers Watson Mercer CompData Surveys Salary.com Payscale.com

Benchmark-job approach

use mid point to price the entire structure