Chapter 8

Questions in designing a compensation survey

- Who should be involved? - How many employers? - Which jobs to include? - What information to collect?

What does a high degree of overlap between pay grades mean?

- indicate small differences in the value of jobs in the adjoining grades - Smaller ranges create less overlap and promotion to a new grade includes a larger pay increase. - Optimal overlap between grades ought to be large enough to induce employees to seek promotion.

Non-benchmark jobs

(jobs for which there is no good match among jobs included in the pay survey): market pay lines are the most useful

Types of data typically requested

1) Information about the organization 2) Information about the total compensation system 3) Specific pay data on each incumbent in the jobs under study

Developing grades

Group jobs that are considered substantially equal for pay purposes into a grade Determine pay range: all jobs within a single pay grade will have the same pay range

Benchmark-job approach

If the purpose of the survey is to price the entire structure, then select benchmark jobs to include the entire structure. The degree of match is assessed by various means.

Why use an outside consulting firm?

Use outside consulting firms as third-party protection against possible "price-fixing" lawsuits.

Survey

a systematic process of collecting and making judgments about the compensation paid by other employers

External competitiveness data

salaries paid by relevant competitors

3 pieces of information in total compensation data

Base pay Total cash Total compensation

Low-high approach

Convert market data to fit the skill - or competency-based structure. Use the lowest- and highest-paid benchmark jobs as anchors.

Why use pay grades and ranges?

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

Variation

Distribution of rates around the central tendency is the variation

Market line

Links benchmark jobs on the horizontal axis (internal structure) with market rates paid by competitors (market survey) on the vertical axis. It summarizes the distribution of going rates paid by competitors in the market.

Why use pay ranges?

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

What is a source of publicly available data?

The Bureau of Labor Statistics (BLS)

frequency distribution

an arrangement of data that indicates how often a particular score or observation occurs

Pay structure

anchored by the organization's external competitive position and reflected in its pay-policy line.

Internally aligned structured

based on job evaluation points

Broadbanding

collapsing a number of salary grades into a smaller number of broad grades with wide ranges

To simplify, many organizations use market pricing for

emphasizing external competitiveness and deemphasizing internal alignment.

Pay range

from min to max set for a pay grade or class. - puts limits on the rates an employer will pay for a particular job

What happens to internal alignment?

gets ignored

Pay grade

one of the classes, levels or groups into which jobs of the same or similar values are grouped for compensation purposes. - all jobs in a pay grade have the same pay range (max, min and midpoint)

Job structure

the relative pay for different jobs within the organization

Anomalies

understand minimums, maximums, and what percent actually receives bonuses and/or options

What is a "fuzzy" market?

New organizations and jobs fuse diverse knowledge and experience, so "relevant" markets appear more "fuzzy."

Benchmark jobs

what other organizations pay and what role the job plays in executing their own organizational strategy

Purposes of a survey

1) To adjust the pay level in response to changing rates paid by competitors. 2) To set the mix of pay forms relative to that paid by competitors. 3) To establish or price a pay structure. (An example of when you may need a special study) 4) To analyze pay-related problems. 5) To estimate the labor costs of product or service market competitors

Questions to ask of survey data

- Does any one company dominate? - Do all employers show similar patterns? - Are there outliers?

Verify data

- Accuracy of match (explain): If a company job is similar, but not identical, some use the benchmark conversion/survey leveling approach. They multiply the survey data by some factor the analyst judges to be the difference between the company job and the survey job.

Advantages of broadbanding compared to pay ranges

- Emphasis on flexibility within guidlines - Global organizations - Cross-functional experience and lateral progression - Reference market rates, shadow ranges - Controls in budget, few in system - Give managers "freedom to manage" pay - 100-400% spread

Benchmark conversion/survey leveling

- When jobs do not match survey jobs, quantify the difference using benchmark conversion. - If an organization uses job evaluation, then apply that system to the survey jobs

Characteristics of benchmark jobs

- contents are well known and - relatively stable over time - common across a number of different employers - a reasonable proportion of the workforce is employed in this job

Translating pay to practice

1) Choice of measures (such as using quartiles of survey data) - A company can use a specific percentile for base pay and another percentile for total compensation. 2) Updating: Lagging (current data) or leading (using data to predict pay later in the year) of survey data - If a company chooses a "match" policy, they will be lagging the market. - Aging the market data to a point halfway through the plan year is called lead/lag. 3) Pay-policy line: Specify a percent above or below the regression line an employer intends to match and draw a new line at this level. - This pay-policy line carries a message.

Major decisions in setting externally competitive pay and designing the pay structure

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

What factors are used to determine relevant market competitors

1) The same occupations or skills. - Microsoft and Google include both product market and labor market competitors. 2) Hiring employees within the same geographic area. - As importance and complexity of qualifications increase, the geographic limits also increase. 3) The same products and services. - If the skills are tied to a particular industry, define the market by industry. - International comparisons are improving, but use judgment.

Central tendency advantages and disadvantages of each:

Mean: is the sum of the base wage of each organization divided by the number of companies. Median: the middle data point when data points are organized from lowest to highest. Mode: the most commonly occurring rate. Weighted mean: the sum of base wages for all employees and dividing by the number of employees.