Market Pricing - Conducting a Competitive Pay Analysis

What is a model?

- A representation of part of reality - A tool used to solve problems - A tool used to understand relationships between data sets

What compensation information should be communicated?

- Accurate information regarding employee compensation - Specific messages that are clear and concise - Information may be more effective if business utilizes "business owners" to deliver messages

Concerns when trimming data

- Amount should be reported- The amount of trimming should be reported, so recipients of the analysis know, understand, and can use the data properly. - Can be biased- Analysis can be biased (an obvious ethical issue) if trimmed means are not calculated correctly. - Swaying the data- One can't trim just the high values or just the low values to sway the data in any fashion.

Long-term Incentive Types: Stock

- Appreciation vehicles - Full-value vehicles

Is it appropriate for organizations to inform their employees of all pay decisions?

- Companies utilize compensation philosophies - Some orgs. feel it is important to openly communicate pay practices - Organizational culture may drive how open communications are

Considerations when weighting data:

- Compensation philosophy and strategy - Quality of surveys - Quality of job matches being used - Sample size

When communicating pay with employees what rules of thumb should be followed?

- Convey a consistent message - Align communication with the corporate mission, vision, strategic business plans and objectives - Encourage feedback by providing a way to receive employee's feedback and questions - Follow up on feedback

Considerations when aging data:

- Different Rates - Market Research - Aging Factor - Salary Increase Movements - Aging Over Multiple Years - Lead or Lag Approach

When conducting your own survey, one should..

- Exercise caution regarding laws and regulations - Decide whether it will be either be a formal comprehensive survey or a quick informal phone survey - Gather data that meets specific needs - Not be offended if other companies won't provide data for you

Factors Influencing Compensation

- External Competitiveness - Pay Competitiveness - Relevant Labor Market - Organizations must be willing and able to pay - In-demand Employees - Internal vs External Equity - Desire Competitive Pay Level vs Market

What are characteristics of a good survey?

- Have an adequate sample size - Should have no secrets. All data is useful/relevant and openly available - Survey participants and sources should always be identified

Long-term Incentive Eligibilities

- Historically has been only for executives - Is now common among middle management - Varies by industry - Company culture may decide who is eligible

By what is the number of pay grades determined?

- Internal value and/or market value - Placement within the pay grades for the organization's pay structure is accomplished by evaluating skill distinctions, supervisor/subordinate relationships, career progression and administrative considerations.

Four parts of Base Pay Structure Design

- Job analysis - Job evaluation - Job worth hierarchy - Base pay structure.

Two methods of Job Evaluation

- Job content approach - Market-based approach

Typical data requested by salary surveys

- Job or incumbent information - Organizational information

Management's Role in Communicating Compensation

- Managers and supervisors have the primary responsibility for communications with employees - Managers must buy-in and support the programs and communications - Keep upper management informed - Management must select the messenger of communications - Management must ensure that the messenger is prepared to answer questions

High Demand Job Concerns

- Market rates may increase rapidly. - Market data may not reflect importance placed on certain jobs internally. - High-demand, hot-skills jobs are measured by shifting focus to specific job -related skills, creating skill and skill-level definitions, determining the premium and acquiring data more frequently - Skill based Pay is driven by supply and demand

When conducting job matches one should

- Match to the closest job description - Match based on survey charts; matching based on titles may be misleading

Market-Based Job Evaluation and Pay Structure Design: Disadvantages

- May be difficult to obtain sufficient data - Any market inequities are built in - Not defensible on job content basis - May not be aligned with internal equity

Key benefits of participating in salary surveys:

- May provide a substantial discount - Enhances survey value/entices others to participate - Provides easier job matching

External Equity

- Pay Levels compared to competitors - Prevailing external rates - Achieving equity - when employees believe compensation is equal to what they would receive if they worked in a similar job at another company.

Information contained in HRIS systems:

- Pay grades - Wages/Salaries - Pay range info - Exempt/Non-exempt status - Individual information

Major disadvantages of open communication:

- Pay philosophy will be open to everyone - Survey sources may be questioned - More questions might arise

Salary Surveys are used to...

- Price jobs and determine market positions - Analyze pay trends - Document budget and structure movement - Make informed decisions gather data on policies and procedures - Diagnose compensation problems - Defend current practices

What is the purpose of communication from the employee perspective?

- Provide education and tools - Provides timely information - Clarifies expectations on compensation programs - Increases awareness and appreciation for compensation programs - Improves the emotional environment - Reinforces decisions to join and remain with the company

Surveys of Data Sources

- Published Surveys (PAID) - Custom third-party surveys (PAID) - Trade and Industry Associations (FREE) - Internet (FREE) - Periodicals and Publications -(FREE) - Professionals recruiters (FREE) - Government Data (FREE)

What is the purpose of communication from the employer perspective?

- Reinforces corporate philosohy, culture, and values - Helps achieve compensation program goals - Streamlines administration - Aids with compliance with legal requirements - Increases the ability to understand and respond - Changes employee attitudes and behavior - Builds employee trust - Improves productivity

When completing a survey, participants should...

- Review data prior to submission - Be sure that data being submitted is actually what is being requested

Factors that impact survey accuracy

- Sample size - Participant base - Statistical analyses - Survey methodology - Job matching procedures.

Market-Based Job Evaluation and Pay Structure Design: Advantages

- Simple to administer and update for currency - Easy to explain - Not overly time-consuming - Responsive to the market - High degree of transparency

Documenting sources and process. What should be documented?

- Specific surveys used and why - Measures of central tendency used - Practice of selecting the most representative survey number to serve as the prevailing market rate - Method of aging the data from multiple surveys to a common point in time - Method of developing market rate composite for each job

Long-term Incentive Types

- Stock - Cash - Combination of stock and cash

Survey Selection - Things to consider

- Support - get the support of management - Reputable high-quality sources -use reputable sources - Labor market- Understanding your labor markets is key to selecting and participating in surveys. Factors to draw upon include: Industry, Organization size, Geographic location (local, regional, national, international), High-demand jobs

Why would an organization communicate the method it uses to determine employee compensation?

- To show it is fair and defensible - Due to increased scrutiny - Policy

What questions should one ask when using web-based and alternative survey sources?

- What is the targeted audience? - What is the source of the data? - Who is the customer? What is the purpose of the data site? - Who maintains the site?

Survey Decision Factors

-Cost - Time - Availability - Reliability - Data format

Data Accuracy - Key Questions to Consider:

-How many participants were involved? -What are the survey scope factors? -How close a match is the job description in the survey? -What is the age of the data?

Submissions - Key Questions to Consider:

-Is the survey vendor reputable? -Which organizations participate? -How clear and concise are the instructions? -How long does the vendor allow for data to be gathered?

Survey Vendor Auditing - Key Items Auditor Should Reveiw:

-Outliers -Incomplete survey submissions -"Odd" data points -Trends -Correlations

Four Stages of Business Life Cycle

1. Start-up 2. Growth 3. Mature 4. Decline

What percent of a benchmark job should match duties?

70%. Serves as an anchor point.

Compensation Philosophy

A broad statement of what the organization believes about how people should be rewarded. It should support the business strategy and be a god fit with the organization's culture. Includes: Desired competitive pay levels versus market; Definition of "Market"; Mix of reward elements; How jobs are valued; What behaviors are rewarded.

Pay Structure

A grouping of job grades and pay ranges established for jobs within an organization. May differ by groups or families of jobs or for diff geographic regions. May have one or many.

Whole Job Comparison

A job evaluation process in which jobs are compared in their entirety against one another, as opposed to breaking jobs down into their respective components and evaluating each component or factor.

Benchmark Jobs

A job that is commonly found in many organizations and used to make pay comparisons. Can be either common within one industry or across many industries Pay data for these jobs are readily available in published surveys. Characteristics: easily defined, representative of breadth and depth, important to org's internal hierarchy.

Summary Statistics

A majority of surveys are reported in this format.

Pay Grade

A numeric, alphanumeric or other label identifying the different levels within the pay structure.

External Competitiveness

A primary objective for most companies; Market pricing assists organizations in remaining competitive by helping companies know what the prevailing rates for jobs are in the current marketplace.

What is regression analysis?

A statistical technique that measures the relationship between two variables- the term "simple" regression is also used when only two variables are analyzed. The output of a regression is a linear equation (y = a + bx)

Job Evaluation

A structured process to determine the value of an organization's positions relative to each other.

Base Pay Structure

After the job worth hierarchy is built, a base pay structure can be created and utilized as a framework for pay decisions.

When aging data over multiple years...

Age one year first then the next. Compounding is important.

Pay Range Maximum

An employee at the maximum of a pay range would typically no longer be eligible for pay increases unless the range is adjusted or the employee gets promoted. Can be reserved for high performers/ highly qualified employees.

Survey data is both _____ and a ______

Art; Science

How many jobs should be benchmarked in an org?

At least 50%

Formula for Total Cash Compensation

Base Pay+Short-term Variable Pay

Types of variable pay NOT typically included in survey data:

Bonuses provided to employees on a case-by-case (Retention, spot, or project completion)

Median (Statistical Data Point)

Central tendency - describes the central tendency of the data to minimize the effect of extreme values Extreme value- These extreme values affect the mean; they do not affect the median. The median answers the question: "What is the middle salary in a set of ranked salaries?"

Internal vs External Equity

Challenges arise from the periodic conflict between the perceived fairness of how employees are compensated internally relative to other employees versus the differences in compensation levels between jobs necessary to achieve external competitiveness outside the organization.

Mature Stage

Characterized by a focus on maintaining/increasing market share, improving productivity and otherwise reducing cost of sales. Improvements to products are more evolutionary than revolutionary.

In-demand Employees

Companies must keep close watch on how competitors are paying their employees and, in particular, hot skills, and identified critical key talent.

Long-term Incentives

Cover performance greater than one year. Driven by individual and business performance. Hold power over executives.

What are outliers?

Data points in an array of data that are anomalies in comparison with other data points.

Job Content Approach (Internal Equity Focus)

Determines internal value of jobs based on the nature and level of work and the organization's value system related to jobs Different methods are available to perform the valuations : Ranking (e.g., simple, paired comparison); Classification method and Point method.

Internal Equity

Each job's relative value - the factor that drives an employer to establish pay rates that correspond to each job's relative value in the organization. Equal pay for equal worth - may be perceived differently by employer and employee.

Equity

Employee's perceptions of fairness and consistency.

What to do with outliers?

First, verify the data, including job matches in the survey sources. If everything has been verified and the outliers still exist: May be appropriate to consider eliminating these outliers and performing the regression analysis again A single outlier, if extreme enough, can dramatically alter the equation for the line of best fit.

Career Progression

How does the organization view an employee's career advancement?

Supervisor/Subordinate Relationships

How many levels of supervision exist? How many grades are there between supervisor and subordinates at each level?

Adding a premium

If market data is unavailable for a component of the hybrid job, an alternative to blending is to use the market rate of the job for which you have data and add a "premium" to account for the additional responsibilities.

Maturity Curves

Illustrates value of time or experience in a career or profession.

What are resellers?

In the business of selling conveninece of access to a number of alternative sources such as newspapers, job postings, other websites, and public sources.

Types of variable pay included in survey data:

Incentive plans such as profit sharing and performance sharing

Total Cash Compensation

Includes base pay plus short-term variable pay

What is usually located in an HRIS?

Information related to individuals

Market-based Approach (External Equity Approach)

Jobs are priced using market data to determine relative value. Jobs without market data are slotted into the hierarchy using job content comparisons. Rates set based on use of relevant salary surveys for benchmark jobs. Market pricing is becoming more prevalent as the primary method of job evaluation and pay structure design in various parts of the world.

What are the three common competitive pay level market positions companies can take?

Lead, lag, lead-lag

Choose the market position that matches the following description: The company's pay philosophy will stay ahead of the market the first half of the year, then fall behind the market

Lead-lag

What is meant by 'Automated Data Submission' in salary surveys?

Many survey vendors provide automated processes to submit data. Once the internal process for collecting data has been set up, ongoing participation may be a simple task of refreshing your organization's data file and submitting.

Pay Competitiveness

Market pricing assists organizations with analyzing pay competitiveness by: Collecting information on the prevailing market rates for benchmark jobs in organizations with whom the organization competes for human resources; Analyzing pay trends by identifying year-to-year movement of salaries and cash compensation in the labor market; Identifying pay practices by gathering information on competitive compensation practices, programs, policies and procedures.

Which statement best describes the term relevant labor market(s)?

Market(s) from which an organization draws and loses its employees.

Trimmed Mean (Statistical Data Point)

Mean of the middle- This is the mean of the middle part of the data. Exclude extreme values- It is typical for surveys to exclude extreme values in order to minimize their impact on final data recommendations.

Administrative Considerations

More grades generally result in more administration.

Survey Sources - How many should you have?

More sources- Some prefer a single source. Some say more is better. Larger database - More sources yield a larger database with more information. Avoiding bias - More sources aid in avoiding any particular bias. Clustering data - More sources tend to yield a pattern or clustering of data. "Muddying the water" - Too many sources may "muddy the water" - the "right" number of sources may depend on the position level in question.

How is stock valued in surveys?

Most surveys report stock awards as a monetary figure based on various valuation methodologies that capture the intended value delivered to the recipient

Growth Stage

Org is highly focused on growing sales, increasing distribution capability and determining how to efficiently produce products or services to meet growing demand. typically generates the need to begin standardizing procedures through policy creation.

Decline Stage

Org's revenues are declining. Decision to reinvest in current products, create new products or maximize profits with current products as long as possible.

Blend and Balance

Organizations may emphasize either internal equity or external competitiveness, but should blend and balance the two to meet their overall pay objectives.

Organizations must be willing and able to pay

Organizations must be both willing and able to pay wages at particular levels in order to be competitive.

Job Value

Organizations need to determine which jobs are of higher value to the organization.

Market Pricing

Powerful tool that directly supports an organization's business strategy by providing key competitive information on how the organization's compensation levels compare to the market.

What is one way market pricing supports an organization's business strategy?

Provides key competitive information on how the organization's compensation levels compare to the market.

Job Analysis

Provides key information about the nature and level of work performed Job documentation - includes written information about job content or the functions of the job and required knowledge, skills and abilities (KSAs)

Unweighted mean (Statistical Data Point)

Reflects companies - The unweighted mean provides each company with equal weight in the calculation. It counteracts situations where one or a few employers have the majority of incumbents, thereby heavily influencing the results. The unweighted mean answers the question: "On average, what are companies paying a particular job?"

Weighted mean (Statistical Data Point)

Reflects incumbents- reflects equally the number of incumbents in a survey Reflects market value- If companies participating are truly representative of the market, the data should reflect the market value of the job. The weighted mean answers the question: "On average, what are incumbents in a particular job paid?"

Pay Range Midpoint

Represents the competitive market value for a job or group of jobs. An employee at the midpoint of the range is someone who is fully competent to complete all the tasks required for that job.

Short-Term Variable Pay

Rewards that are based on the attainment of short-term results of 12 months or less. It includes any form of variable payment tied to performance. Incentive plans, bonuses, and recognition programs are common types. Rewards can be monetary or nonmonetary.

Why should one be wary when using secondary parties as a survey source?

Secondary parties may not ascertain proper authorization and could be held liable for infringement of copyright law.

Compensation Strategy

Specific principles that guide the design, implementation and administration of a compensation program in an organization.

An organization that is new with few or no formal policies or procedures would most likely be at what stage of the business life cycle?

Start-up Stage

A compensation philosophy includes which of the following?

Statement of what the organization believes about how people should be rewarded.

Components that affect survey data integrity?

Submissions - How accurate are the submissions to the survey? Data - How accurate are the data being reported by the survey? Survey Vendor Auditing - How extensively has the survey vendor audited the results of the survey?

General Rule of Market Surveys

Survey data provides a best estimate, based on samples of the population, as to what the "true" rates are in the market. In general, larger sample sizes provide greater confidence in these estimates.

Slotting

The act of placing a job into a job worth hierarchy established by a method other than the organization's primary job evaluation method.

Lead-Lag Market Position

The company will consciously set its pay at mid-year anticipated market level. The company's pay levels will "lead" the market in the first half of the year and "lag" the market in the second half.

Lead the Market

The company will consciously set its pay at year-end anticipated market level, not at the current market levels. The Company will start the year ahead of its competition and remain there until the end of the year, when market rates catch up. Better positioned to attract and retain more experienced and/or higher performing employees by offering above market pay.

Lag the Market

The company will consciously set its pay equal to current market levels at the beginning of the year. The company's pay levels will "lag" the market as the year progresses can be offset using other reward elements.

Total Rewards Design Process

The design process begins with the corporate vision and mission. The human resources strategy builds on the business strategy and serves as a guide in the design of all HR programs

Midpoint Differential

The difference between the midpoints of two adjacent grades.

Relevant Labor Market

The market(s) from which the organization draws or loses employees. It is defined by organizational size, geographic location, and industry.

Start-up Stage

The org is new with few or no formal policies or procedures. The org's focus is on obtaining capital, marketing products or services, initial sales growth and cash conservation.

Aging data

The practice of increasing market survey data by a percentage assumed to be representative of wage movement to bring the data to a consistent point in time. This practice is also known as "advancing" or "trending" the data.

Market Rate

The prevailing pay rate for a job. Hourly rate or salary.

Market Pricing Process

The process of analyzing external pay data to determine the prevailing rates of jobs in the market.

Business Life Cycle

The progression of steps an organization passes through from its creation to its decline.

Pay Range

The range of pay rates, from minimum to maximum, established for a pay grade.

Market Rate Composite

The result of combining market rates for the same job from multiple survey sources.

When discussing survey and survey sources with employees what should be looked at?

The source information that is being used as it can lead to differences in salary figures

Total Direct Compensation

The sum of total cash compensation plus the value of long-term incentives

Pay Range Minimum

The wage that has been determined to be the lowest wage the market (internal structure) will bear for this position. Typically employees who are new to the position or job responsibilities.

Why is it important to attempt to keep a compensation system aligned with an overall pay philosophy and strategy?

To ensure that a company has the appropriate workforce to meet its business objectives. Two methods: Blend and balance; Job Value.

Job Worth Hierarchy

To group or categorize jobs relative to other jobs (e.g., pay grades, bands)

For who is total cash compensation more important?

Total cash compensation becomes more important at higher levels

Simple Linear Regression

Used for scope-sensitive jobs; May also be used to establish base pay line.

Weighting Market Data

Using multiple survey sources for the same job. Creates market rate composite.

Blending

Using the market rate for two or more jobs from a single survey to establish the market rate for a hybrid job.

Percentile (Statistical Data Point)

Value that a given percentage of data is equal to or less than

What is considered a weak match? No match

When job content is 70%. No match is anything less than 70%

What is considered an equal match?

When job content is 75%

What is considered a strong match?

When job content is >80%

Slotting: Key Considerations

When market data is not available for a specific job, companies will typically slot the job. Typically, slotting is used to place and price unique jobs for which there is little or no market data for comparative purposes. Since slotting involves comparing the job to one or more jobs in an already established hierarchy, it cannot be used as a stand-alone method. Supervisor/subordinate jobs- Ensure appropriate distance between supervisor and subordinate jobs (typically 15% to 20%). Consider reporting relationships when job slotting.