CMS 2 Assignment 7: Designing Pay Levels, Mix, and Pay Structures
Designing a survey requires answering the following questions:
(1) Who should be involved in the survey design? (2) How many employers should be included? (3) Which jobs should be included? (4) What information should be collected?
In relation to pay ranges, what is the size of pay differentials between managers and the employees they manage?
A managerial job would typically be at least one pay range removed from the job it supervises. Although a 15% pay differential has been offered as a rule of thumb, large range overlap, combined with possible overtime or incentive pay available in some jobs but not in managerial jobs, can make it difficult to maintain such a differential. On the other hand, some argue that differentials are counterproductive if they force good technical talent to become managers solely because managers command higher incomes.
What questions should be answered in designing a survey?
Designing a survey requires answering the following questions: (a) Who should be involved in the survey design? (b) How many employers should be included? (c) Which jobs should be included? (d) What information should be collected?
Explain who should be involved in designing the survey and how the Sherman Act affects the decision process.
In most organizations, the responsibility for managing the survey lies with the compensation manager. But since compensation expenses have a powerful effect on profitability, including managers and employees on task forces makes sense. Outside consulting firms typically are used as third-party protection from possible price-fixing lawsuits. Courts interpret the Sherman Act to find survey participants guilty of price fixing if the overall effect of the information exchange is to interfere with competitive prices and to artificially hold down wages. (Hiring a third-party consultant instead of managing the survey internally buys legal protection but may trade off some control over the decisions that determine the quality and usefulness of the data. A consent decree prohibiting exchange of industry data eliminates the ability to make industry or product market comparisons. This might not be important in clerical jobs, but industry groups are important when making comparisons for wages for other skills/competencies and jobs.)
What are some major decisions in pay-level determination?
Some major decisions in pay-level determination are: (a) Specify pay-level policy. (b) Define purpose of survey. (c) Specify relevant market. (d) Design and conduct survey. (e) Interpret and apply results. (f) Design grades and ranges or bands.
A _____________ is the systematic process of collecting and making judgements about the compensation paid by other employers.
survey
A market line...
... links a company's benchmark jobs on the horizontal axis (internal structure) with the market rates paid by competitors (market survey), which are on the vertical axis. A market line may be drawn freehand by connecting the data points, or statistical techniques such as regression analysis may be used. Regression generates a straight line that best fits the data by minimizing the variance around the line.
How does a job analyst establish range midpoints, minimums and maximums?
Grades group job evaluation data on the horizontal axis while ranges group salary data on the vertical axis. Ranges set an upper and lower limit between which all wages for jobs in that particular grade are expected to fall. A range has three salient features: a midpoint, a minimum and a maximum. The midpoint for each range usually corresponds to the point where the pay policy line crosses the center of each grade.
A __________ orders jobs on the basis of internal factors (reflected in job evaluation or skill certification). The ____________, on the other hand, is anchored by the organization's external competitive position and reflected in its pay-policy line.
job structure pay structure
A _______________ links a company's 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.
market line
Most firms conduct or participate in a survey for a number of reasons:
(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 (4) to analyze pay-related problems, or (5) to estimate the labor costs of product/service market competitors.
Explain the advantages and disadvantages of base pay, total cash, and total compensation as measures of compensation.
Base pay tells how competitors are valuing the work in similar jobs. Base pay fails to include performance incentives and other forms, so it will not give a true picture if competitors offer low base pay but high incentives. Total cash is the base plus bonus. It tells how competitors are valuing work. It also tells the cash pay for performance opportunity in the job. However, all employees may not receive incentives, so total cash may overstate the competitors' pay. Plus, it does not include long term incentives. Total compensation includes base plus bonus, plus stock options, plus benefits. It tells the total value that competitors place on this work. Again, all employees may not receive all the different types listed here. One needs to be careful and not set base equal to the competitor's total compensation.
What different adjustments do organizations make in relation to their (a) pay level, (b) pay mix, and (c) pay structure? Explain.
(a) Most organizations make adjustments to employees' pay on a regular basis. Such adjustments can be based on the overall upward movement of pay rates caused by the competition for people in the market. Or, adjustments may be based on performance, ability to pay, or terms specified in a contract. Monitoring the changes in rates paid by competitors is necessary to maintain or adjust how much a firm pays. (b) The second type of adjustment is to the pay mix. Adjustments to the different forms of pay that competitors use (base, bonus, stock, benefits) and the relative importance they place on each form occur less frequently than adjustments to overall pay level. The mix of forms and their relative importance make up the pay package. The mix organizations use is based on external pressures, such as government regulations, union demands and copying other organizations. Managers today recognize that total compensation involves many types of pay, and some pay forms may affect employee behavior more than others. (c) The third form of adjustment has to do with the pay structure. Many employers use market surveys to validate their own job evaluation results. The job structure that results from internal job evaluation may not match the pay structures found in the external market. Reconciling these two pay structures is a major issue. Informed judgment and accurate information are vital for making these judgments. As organizations move to more generic jobs that focus on the person's skill as well as the job, the need for accurate market data increases.
Some major problems that restrict the gathering and analysis of data useful for making pay decisions that relate to competitive market conditions are:
(1) obtaining a proper mix (2) collecting useful pay data (3) ensuring an acceptable sample of organizations and jobs (4) relating data to organizational pay policies (5) integrating market pay data with internally generated job worth data and pay structure design data (6) recognizing the goals of pay survey data designers and implementers (7) analyzing and making inferences from collected pay data (8) recognizing pay is but one component of the total compensation or even total reward system of the organization (9) using third-party data vs. performing a survey
The major decisions in setting externally competitive pay and designing the corresponding pay structures include:
(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 external pay policy (7) balance competitiveness with internal alignment through the use of ranges, flat rates, and/or bands
An employer conducts or participates in a survey for a number of reasons:
(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 (4) to analyze pay-related problems (5) to estimate the labor costs of product/service market competitors
Explain (a) frequency distributions, (b) measures of central tendency, (c) variation and (d) quartiles and percentiles.
(a) Frequency distributions help visualize the information in the survey and may highlight nonconformities. Frequency distributions can vary in their shape. Unusual shapes may reflect problems with job matches, widely dispersed pay rates or employers with widely divergent pay policies. (b) A measure of central tendency reduces a large amount of data into a single number. The measure of central tendency, called the mode, is the single number that occurs most frequently. As a measure of central tendency, the mode is of limited value, in part because it will not always appear near the middle of the distribution, and in part because it is not very stable from sample to sample. However, the mode is the only appropriate measure of central tendency for nominal data. For example, if you have the numbers 2, 3, 3, 4, the mode is 3. The mode is 3 because it appears two times in this set of data. The median is the numerical center of a set of data, with exactly as many scores above the median point as below it. A median can also be visualized as the middle of all reported scores or rates. Medians dampen the effect of outliers. Outliers would be scores or numbers that are greatly exaggerated from how the tendency of a set of data might be. The mean is another measure of central tendency. Mathematically, the mean is the arithmetic average of the scores within the data set. When only company averages are reported in the survey, the use of the mean may not accurately reflect actual labor market conditions, since the base wage of the largest employer is given the same weight as that of the smallest employer. The weighted mean, on the other hand, gives equal weight to each individual employee's wage. In general, a weighted mean is a fairly accurate picture of actual labor conditions, since it captures the size of supply and demand. (c) Variation is the distribution of rates around a measure of central tendency. Standard deviation is probably the most common statistical measure of variation. The use of the concept standard deviation is very rare in salary surveys. Standard deviation refers to how far from the weighted mean each of the items in a frequency distribution is located. For example, one standard deviation above the mean and one standard deviation below the mean represents 68% of the area under the bell-shaped curve. Information about variation indicates how similar or dissimilar competitors' pay is in the marketplace. (d) Quartiles and percentiles are more common measures of dispersion in salary survey analysis. A 75th percentile means that 75% of all pay rates are at or below that point, and 25% are above it. To calculate percentiles, the measures are ordered from lowest to highest, then converted to percentages.
Describe how survey data are updated.
Because they reflect decisions of employers, employees, unions and government agencies, wages paid by competitors are constantly changing. And competitors adjust their wages at different times. Even though these changes do not occur smoothly and uniformly throughout the year, as a practical matter it is common practice today to assume that they do. Therefore, a survey that requires three months to collect, code and analyze is probably outdated before it is available. Consequently, the pay data are usually updated to forecast the competitive rates for the future date when the pay decisions will be implemented. The amount to update, also called aging or trending, is based on several factors, including historical trends in the labor market, prospects for the economy in which the employer operates and the manager's judgment, among others.
Compare and contrast ranges with broad banding to set pay structures.
Broad banding collapses salary grades into only a few broad bands, each with a sizable range. This technique consolidates as many as four or five traditional grades into a single broad band with one minimum and one maximum. Because the band encompasses so many jobs of different values, a range midpoint is usually not used. Shadow ranges, or zones, may be designed to keep all jobs from floating to the maximum pay. Ranges support the following: (a) Some flexibility within controls (b) Relatively stable organization design (c) Recognition via titles or career progression (d) Midpoint controls, comparatives (e) Controls designed into the system (f) Gives managers "freedom with guidelines" (g) To 150% range-spread. Bands support the following: (a) Emphasis on flexibility within guidelines (b) Global organizations (c) Cross-functional experience and lateral progression (d) Reference market rates and shadow ranges (e) Controls in total salary budget, few in the pay system (f) Gives managers "freedom to manage pay" (g) They go from 100% to 400% spreads in the pay. Broad banding takes two steps. These two steps are: (1) Set the number of bands. There are usually three to eight bands for pay purposes. Usually bands are established at the major breaks, or differences in work or skill/competency requirements. For example, an organization may use four bands: associates, professionals, lead professionals and senior professionals. The challenge is how much to actually pay people who are in the same band but in different functions performing different work. (2) Price the bands: Reference market rates. Different market rates may be identified within each band for each job family.
To make decisions about pay level, mix, and structures, a relevant labor market must be defined that includes employers who compete in one or more of the following areas:
1. The same occupations or skills 2. Employees within the same geographic area 3. The same products and services
Describe the process of verifying data gathered from a survey.
A common first step in verifying data is to check the accuracy of the job matches. The quality of the survey data also needs to be looked at. Data can be examined for patterns. Jobs can be matched for similarity with job descriptions. If the job is similar but not identical, some companies use benchmark conversion/survey leveling; that is, multiply the survey data by some factor that corresponds to the analyst's judgment of the differences between the company and survey job. Leveling is another example of the use of judgment in the survey analysis process. The leveling process is used to weight the data according to the closeness of the match. Perusal of the actual salary data gives the analyst an initial sense for the nature and quality of the data and helps identify any areas for additional consideration. Individual level data provide a wealth of information about specific practices. Unfortunately, many surveys provide only summary information about specific practices. Data like this present the analyst with many different anomalies. An anomaly may be defined as an employer whose data are substantially out of line with those from others, age of the data, level of abstractness and other factors.
Describe the various approaches to determine which jobs to include in the survey.
Different approaches can be used to select jobs for inclusion. They are: (1) Benchmark-Jobs Approach—Benchmark jobs have stable job content, are common across different employers, and include sizable numbers of employees. If the purpose of the survey is to price the entire structure, then benchmark jobs can be selected to include the entire job structure. This includes all key functions and all levels. Benchmark jobs are chosen from as many levels in each of these structures as can be matched with the descriptions of the benchmark jobs that are included in the survey. The degree of match between the survey's benchmark jobs and each company's benchmark jobs is assessed by various means. Consequently, jobs in different organizations can be compared on their job evaluation points and the distribution of points among the compensable factors. (2) Low-High Approach—If an organization is using skill/competency-based structures or generic job descriptions, it may not be able to match jobs with competitors who use a traditional job-based approach. Job-based market data may be converted to fit the skill or competency structure. The simplest approach is to identify the lowest and highest paid benchmark jobs for the relevant skills in the relevant market and to use the wages for these jobs as anchors for the skill-based structures. Work at various levels within the structure can then be slotted between anchors. The usefulness of this approach depends on how well the extreme benchmark jobs match the organization's work and whether they really do tap the entire range of skills. Placing a pay system on two pieces of market data raises the stakes on the accuracy of those data. (3) Benchmark Conversion/Survey Leveling Approach—If an employer is finding it hard to match survey jobs, it can apply its plan for creating internal alignment to the descriptions of survey jobs. The magnitude of difference between the job evaluation points for internal jobs and survey jobs provides a guideline for adjusting the market data. Again, this is based on judgment. So, the real issue is to ensure that the survey data will be useful. Depending on the purpose of the survey, either the benchmark, the low-high, or benchmark conversion approach can help.
Explain how adjusting the pay structure balances internal and external pressures.
Establishing the pay ranges/bands for work reflects a balance between competitive pressures and pressures for internal alignment and fairness. A job structure orders jobs on the basis of internal organizational factors. The pay structure, on the other hand, is anchored by the organization's external competitive position, reflected in its base pay policy lines. The problem with using two bases, that is, internal and external, to create a structure is that they are likely to result in two different structures. The order in which jobs are ranked on internal and external factors probably will not completely agree. Differences between market structures and rates and job evaluation rankings warrant a review of the basic decisions in evaluating and pricing that particular job. This may entail a review of the job analysis, the job description and the evaluation of the job, or the market data for the job in question. Often this reanalysis solves the problem. Sometimes, however, discrepancies persist, and sometimes survey data are discarded. Sometimes benchmark-job matches are changed. Differences sometimes arise because a shortage of a particular job skill has driven up the market rates. Reclassifying a market-sensitive job into a higher salary grade, where it will remain long after the imbalance has been corrected, creates additional problems. Creating a special range clearly designated as market-responsive may be a better approach. However, decisions made on the basis of expediency run the risk of undermining the integrity of the pay decisions.
Explain why an organization should consider grades and ranges in pay decisions.
Grades and ranges offer managers the flexibility to deal with pressures from external markets and within the organization. Ranges permit managers to recognize many differences. These include: (a) Differences in quality among individuals applying for work (b) Differences in the productivity or value of these quality variations (c) Differences in the mix of pay forms competitors use. In addition to offering flexibility to deal with these external differences in rates, an organization may desire differences in rates paid to employees on the same job. A pay range exists whenever two or more rates are paid to employees in the same job. Therefore, ranges provide managers the opportunity to: (a) Recognize individual differences with pay (b) Meet employees' expectations that their pay may increase over time, even while holding the same job (c) Encourage employee commitment to remain with the organization. From an internal alignment perspective, the range reflects the differences in performance or experience the employer wishes to pay for a given level of work. From an external competitiveness perspective, the range also acts as a control device. A range maximum sets the ceiling on what the employer is willing to pay for that work. The range minimum sets the floor. Not all employers use ranges. Skill-based plans establish flat rates for each skill level regardless of performance or seniority. This flat rate is often set to correspond to some midpoint on a survey of that job. And increasingly, broad bands are being adopted for even greater flexibility.
Briefly describe how specialized surveys may help an employer with pay-related problems.
Information from specialized surveys may provide help on specific pay-related problems. Many special studies appraise the starting salary offers or current pay practices for targeted groups, such as patent attorneys, retail sales managers or software engineers. Managers must decide whether they are going to match or exceed their competitors or use other returns to lure or retain particular employees. Some firms, particularly those in highly competitive businesses, use salary survey data to benchmark against competitors' product pricing and manufacturing practices. Industry wide labor cost estimates are reported in the Employment Cost Index, one of the four types of salary surveys published regularly by the Department of Labor on its website. The Employment Cost Index measures quarterly changes in employer costs for compensation. It allows a firm to compare changes in its average costs to an all-industry or specific-industry average. However, this comparison may have limited value because industry averages may not reflect relevant competitors.
Discuss market pricing as a pay strategy.
Some organizations in the United States are adopting pay strategies that emphasize external competitiveness and de emphasize internal alignment. This is called market pricing. This approach sets pay structures almost exclusively by relying on rates paid by competitors in the external market. Organizations that fill a large portion of the job vacancies with hires from the outside may also become market pricers. Market pricers match a large percentage of their jobs with market data and collect as much market data as possible. They "rank to market" to determine the pay for jobs unique to their firms. The competitive rates for positions for which external market data are available are first calculated based on external rates. Market pricing goes beyond the use of benchmark jobs and then slotting non benchmarks. The objective of market pricing is to base most if not all of the internal pay structure on external rates paid by competitors, breaking down the boundaries between the internal organization and external market forces. Some companies even match all forms of pay for each job to its competitors in the market. Pure market pricing carried to this extreme deemphasizes internal alignment completely. Gone is any attempt to align internal pay structures with the business strategy and the work performed. Rather, the internal pay structure is aligned with competitors' decisions that are reflected in the market. In a very real sense, the decisions of its competitors determine an organization's pay structure.
What are the major decisions involved in setting externally competitive pay and designing the corresponding pay structures?
The major decisions involved in setting externally competitive pay and designing the corresponding pay structures are: (a) Specify the employer's competitive pay policy. (b) Define the purpose of the survey. (c) Select relevant market competitors. (d) Design the survey. (e) Interpret survey results and construct the market line. (f) Construct a pay policy line that reflects external pay policy. (g) Balance competitiveness with internal alignment through the use of ranges, flat rates and/or bands.
How many employers should be included in a survey?
There are no firm rules on how many employers to include in a survey. Large firms with a lead policy may exchange data with only a few (six to ten) top-paying competitors. A small organization in an area dominated by two or three employers may decide to survey only smaller competitors. In the United States, the Bureau of Labor Statistics, the major source of publicly available compensation data, is recognized as the main authority on compensation. The Bureau of Labor Statistics publishes extensive information on various occupations. Public sector employers seem to use the Bureau of Labor Statistics data more than do private sector employers. While some private firms may track the rate of change in Bureau of Labor Statistics data as a cross-check on other surveys, they find the data are not specific enough to be used alone. The Internet makes a wealth of data available to everyone, and this easy access means that managers must be ready to explain differences in salaries between their workforce and their competitors' workforce. Opinions about the value of consultant surveys are numerous. Research is not. Many firms select one survey as their primary source and use others to cross-check or validate the results. For staffing decisions, employment test designers report the test's performance against a set of standards. Issues of sample design and statistical inference are seldom considered. Some employers routinely combine the results of several surveys and weight each survey in this composite according to some person's judgment of the quality of the data reported. No systematic study of differences in market definition, participating firms, types of data collected, quality of data, analysis performed and/or results is available.
Explain three types of information to collect in a survey.
Three basic types of data typically are requested. The first is information about the nature of the organization. This includes size, structure and financial information. The collection process is changing with the increased gathering of "competitive intelligence." Metrics of organizational performance such as turnover, recruiting and revenues are being collected from various sources including publicly available websites. The second type of data is information about the total compensation system. It is necessary to assess competitors' complete pay packages, including base pay; total cash, which includes bonuses and profit sharing; and total compensation, which includes total cash plus benefits and perquisites. The third type of information is the incumbent data. This includes actual pay rates paid to employees in surveyed jobs, as well as personal data on incumbents.
