C4: Base Pay Administration and Pay for Performance
Why should market data be collected for market pricing?
Analyze pay competitiveness by collecting information on the going rate for benchmark jobs. Identify pay trends by watching movement of salaries in the labor market. Identify competitive pay practices by gathering information on practices, programs, policies and procedures.
What are the timing of increases?
Anniversary date and focal date
What is lag the market?
At the beginning of the year, the company will pay equal to current market level, then will lag the market as the year progresses.
What are performance measurement systems?
Balance scorecard, business excellence model, shareholder value added, activity based costing and cost of quality, competitive benchmarking
Which of the following is one of the performance management systems used today?
Balanced Scorecard
What are the three interrelated components of pay structure design considerations?
Base pay policy line, number of pay structures, number of pay grades or bands.
What are the components of base pay structure?
Base pay policy, Pay grade/bands, Midpoint differentials, pay range, Number of pay structures.
What is the data required for the market-based salary budget?
Benchmark job data, historical competitive pay movement, anticipated competitive pay movement, company pay policy, assume you want to pay 5% ahead of competition
What are the reason for geographic differential?
Better fit of pay to local markets, Most commonly used for hourly positions
What is Salary?
Compensation paid on a weekly, biweekly or monthly basis rather than by the hours
Which statement describe best the variable pay?
Compensation that is contingent on discretion, performance or results achieved
Who can conduct the salary audit?
HR and design team, senior management, operations management, employees, outside consultants
Why is it important for HR to be involved early in the M&A process?
HR professionals need to align process and activities to the new organization's business strategy.
What is the reason for Expatriate Pay?
Hardship for working outside of their home country.
What are the reasons to adopt broadbanding in pay structure?
Improve competitive advantage, support a new culture/climate, support flatter organizational structure, promote broader view of work, increase flexibility of pay practices.
What is Broadbanding in pay structure?
It results in a pay structure that consolidates a large number of pay grades and salary ranges into much fewer broadbands with relatively wide salary ranges, typically with 100% differences between minimum and maximum or more.
What is the formula of midpoint?
Maximum+minimum/2
What is the formula of Range Spread?
Maximum-Minimum/minimum
What are the considerations of Single-rate Pay?
May not reflect skill level on job, Does not consider individual performance, Does not consider seniority
What features should be taken into consideration while performing the technical audits?
Measure actual results against intended results, identify sources of malfunctioning, identify potential fixes, review program fairness and pay delivery
What is the formula of midpoint differential?
Midpoint of higher grade - midpoint of lower grade/midpoint of lower grade
What is the formula of minimum range?
Midpoint/1+0.5 range spread Or Maximum/1+range spread
What is the formula of maximum range?
Minimum x (1+range spread)
What are the career stages?
New to role (does not fully meet standards), Emerging (meet standards), Established (exceeds standards), Expert (cosistently outstanding)
Define continuum approach?
No job grades and internal equity is the priority
What are the suggested actions if employees are paid below the range minimum?
Raise pay to new minimum when range moves, raise pay to minimum, separate merit budget from adjustment to minimum, evaluate to see if position is properly graded
How is the Base Pay Policy Line developed?
Plot internal value against current salaries, Plot internal value against market data, Compute the trend lines, Reconcile with compensation strategy
What determines the compensation for the position in point factor approach?
Point value
What are the causes of demotions?
Poor employee performance, Reorganization or reengineering, employee request
What is essential while designing the compensation program?
Program should support the organization's business strategy
What are the examples of Pay Action?
Promotion, merit, general, market adjustment, demotion, reclassification
Why the communication is important in communicating pay actions?
Provide information, improves emotional environment, clarifies expectations, Increase awareness, Reinforce decision to join and remain with the company
What best describes an effective approach to reducing supervisor and subordinate pay compression?
include supervisors in an incentive plan
Define Job Documentation?
includes written info about the job content or functions of the job and required knowledge, skills and abilities (KSA's)
What are the causes that employee is paid below the range minimum?
recent promotion, then range moves, hired at minimum, then range moves, job re-evaluation, reorganization or acquisition
What is compression?
the difference between two grades or in certain instances when the pay difference between two employees is too small
What is market adjustment?
the percentage increase to organization, group or individual pay that is necessary to adjust to the estimated market level
How the audit process is planned?
timetable, collect baseline information, measure results and review survey/other feedback, comprehensive, structured, detailed and planned according to schedule
What is the purpose of grades/bands?
to identify a compensation range within which multiple jobs are grouped that have similar value based on internal comparisons and external market data.
What are the steps for developing pay ranges when integrating market data
1) Incorporate market data, 2) Review market inconsistencies and reassign jobs; compute raw averages and percent differences by grades. 3) smooth out grade averages. 4) Review differences between midpoints and market data. 5) Resolve inconsistencies between internal and external competitiveness. 6) Develop pay ranges around the proposed midpoints.
What is the definition of base pay structure?
A management tool that reflects the collection and organization of internal and external compensation data to support job values. It consists of a series of pay ranges that represent jobs of similar internal and or external worth.
What is a benchmark job?
A standard job used to make pay comparisons. The jobs selected should be easily defined and found in other organization. At least 50% jobs should be benchmarked and it is considered good when it matches 70% of job content.
Which of the following is an accurate statement regarding the job content approach to pay structure development?
After the point system is established, the continuum approach or pay structure approach can be used to develop the pay structure.
What is Range Overlap in pay structure design?
Allows for movement throughout a pay structure (grades and ranges) due to performance, promotion, reclassification, market adjustment, etc.
What is one advantage of delivering a pay action as a periodic increase?
Allows organization to establish a probationary period
What is cost of living adjustment?
An across-the-board wage and salary increase or supplemental payment designed to bring pay in line with cost of living to maintain real purchasing power
What is the general increase?
An identical pay raise either in a flat rate or as a percentage of salary given to all eligible employees
What other factors might need to be considered for salary budget?
Business plans of the company, management style, maturity of the company, industry practices, financial ability of the company, union contracts, past practices, inflation and the state of the economy
Which of the following strategy drives HR and Total rewards strategies?
Business strategy
Which strategy is key to development of HR strategy?
Business strategy
What are the disadvantages of Step rate - Automatic?
Cannot differentiate base on performance, can be discouraging to employees seeking pay awards, Utilize money that could be better spent.
Which calculation can show where an employee is positioned in the range?
Compa-Ratio and control point
What is the basis for Hazard Pay?
Company compensation philosophy, Market data surveys, union specific contracts
What is the basis for differential determination?
Company compensation philosophy, Market data surveys, union specific contracts
What is lead the market?
Company will pay at anticipated market level. Then will lead the market until the start of the next year.
What is lead-lag?
Company will pay at mid-year anticipated market level. Then will lead the market for half of the year and lag the market for the second half.
What are the four steps of Market Pricing approach for the development of pay structure?
Complete a competitive market pricing analysis, Develop a pay structure, Assign benchmark jobs to the pay structure, assign nonbanchmark jobs to the pay structure.
What are the steps for Market-Pricing Approach?
Complete a competitive market pricing analysis, Develop a pay structure, Assign benchmark jobs to the pay structure, assign nonbenchmark jobs to the pay structure.
What are the basis for General or COLA increase?
Consumer Price Index, Wage movement in market, Bargaining, part of collective bargaining agreement
What two approaches can be used to develop the pay structure in Point Factor system?
Continuum approach and Pay structure approach
The total rewards design begins with which process?
Corporate vision and mission
What is the basis for geographic pay differentials?
Cost of living and Cost of labor
What are the objectives of Base Pay Structure?
Create alignment between work and rewards, help achieve organizational objectives, reflect desired competitive position
The midpoint is typically estimated and referred to what?
Current market rate and referred to as the pay policy line, the level at which the organization chooses to set its pay against the external market.
What are the considerations in the amount of merit pay increase?
Current pay level/position in range, performance rating, merit increase guidelines, increase history, performance improvement, scarcity of particular skills, individual potential
What are the causes that employee is paid above the range maximum
Demotion, goldstar - high potential employee, reorganization or acquisition, ranges may need adjusting if many people are above maximum
Define pay structure approach?
Develop job grades, Based on job evaluation or internal value
What is midpoint-to-midpoint differential?
Difference in wage rates paid in the midpoints of two adjacent grades
What is differential?
Different pay given for doing different things. It is also referred to as premium pay
What factors determine different pay structures necessary for the organization?
Diversity of jobs, diversity in grading procedures, internal equity versus external competitiveness, culture.
What are the critical actions for the ongoing success of base pay structure design once designed?
Effective implementation, communication, and maintenance.
What is the advantage of Performance only - increase as percent of base pay?
Employee with same performance receive same percent increase
Which of the following is one of the most common compensation program objective?
Ensuring external competitiveness
What are the stages of pay for performance?
Establish measures, communicate links between measures and assessment, Assess performance against measures
Define Pay Range?
Established to offer competitive ranges of pay for job groupings.
What takes priority in Market-Based approach to pay structure development?
External market pricing or competitiveness
What is one of the considerations of base pay program review and audit?
External/internal equity, job information/job descriptions, salary ranges and broadbands, pay policies
What are the features of Step Rate - Automatic?
Five to seven steps, 3% to 5% points apart, prescribed time schedule, Structure updated to maintain competitive position.
What are the features of Step Rate - Variable?
Five to ten steps, 2% to 5% apart, Prescribed time schedule, Step structure updated for competitive position.
Which of the following best defines base pay?
Fixed compensation paid to an employee for performing specific job responsibilities
Which compensation is nondiscretionary that does not vary according to performance or results achieved?
Fixed pay or base pay
What are the features of Single-Rate Pay?
Fixed pay rate, May be a training rate, Changed based on market
How does an organization assess employees?
Formal, Informal, Performance appraisals, 360 feedback, coaching/mentoring
What are the suggested actions if employees are paid above the range maximum?
Freeze pay, less frequent increase, reduce base pay and make up differences with lump sum, reduce salary, Promote employee to higher level job they can perform, give lump-sum increases in future.
What factors affect the base pay?
Frequency of review due to (inflation, government-imposed pay restraint, cost-of-living adjustment plus variable performance-related pay), Allowances, Government mandates
What are the means for communicating the compensation change organization wide?
Group and individual meetings, FAQ handouts, and online information and ensure message consistency
When would Market adjustments be appropriate?
Incumbent base pay below market, company philosophy is to pay at/above market, Reclassification, addition of responsibilities to job
What are the approaches for geographic differential?
Individual pay adjustment and differentials, Salary structured differences
In order for a merit pay plan to be effective, what is one of the conditions?
Individual performance must be important and measurable.
What takes priority in Point Factor approach to pay structure development?
Internal equity
What are the most common objectives of compensation program?
Internally equitable & externally competitive
What are the compensation program objectives?
Internally equitable, externally competitive, affordable, understandable, legal/defensible, efficient to administer, capable of being reshaped for the future, appropriate for the organization, attract, retain, and motivate employees, create alignment of employee efforts and business objectives.
What is job-based pay?
It is base on the nature and level of a rigidly defined job. Job-based pay typically does not recognize employee skills or knowledge for grade assignment.
Which statement regarding communication of compensation plans during a transaction is most accurate?
It is important to communicate with individual as well as the whole organization
Why is communicating pay actions critical to the success or failure of a base pay program?
It reinforce the decision to join and remain with an employer.
What are the components of Base Pay Structure Design?
Job Analysis, Job Documentation, Job Evaluation, Job Worth Hierarchy
Job analysis and job documentation provide the information needed to complete which process?
Job evaluation
What is the combination of integrating market data into point factor?
Job evaluation-based grades and market rates
What is Single-Rate Pay?
Job has a fixed or flat rate of pay.
What are the disadvantages of Broadbands?
Lack of structure, Just old salary ranges repositioned within new bands, Need for higher level of compensation expertise, Salary increases may be less structured.
What are the disadvantages of Performance only - increase as percent of base pay?
Larger amount go to people higher in the range for the same performance. Employee with same performance receive different amount
What are the midpoint differential considerations?
Level of refinement of job evaluation method, Market competitiveness, Cost of promotions, Midpoint differential guidelines.
What is the essential goal of a merit pay program?
Link pay to performance in a manner that is consistent with the mission of the organization
What are types of Pay Increases?
Lump-sum increase, Periodic Increase and other
What is the alternative to base pay increases?
Lump-sum payments
What is the challenge in market pricing analysis?
Making a sound decision about the data that needs to be extracted from a particular source and then interpret the data appropriately when comparing it to other sources.
What are the two types of Job Change Promotions?
Organizational and growth
Which of the following is not one of the three types of compensation philosophy?
Pay behind the market
What are the component of salary budget?
Pay policy, market-based salary increase budget, recommended salary increase budget
What is the calculation of range penetration?
Pay rate - Minimum / Maximum - Minimum
What are the merit increase guidelines?
Performance Only, Increase as a percent of midpoint, Performance and position in range
What are the approaches for hazard pay?
Permanent base pay adjustments, temporary base pay adjustments
which of the following is the most effective method for maintaining a pay structure?
Re-evaluate jobs that have changed sufficiently to bring grades into question
What are the disadvantages of Step rate - Variable?
Relatively few increase amount/timing choices, Requires justification of performance distinctions.
What are the ways to maintain pay structures?
Review benchmark jobs, re-evaluate jobs, re-evaluate competitive posture, review internal equity and external competitiveness, adjust policy line, evaluate impact, management understanding
How can the salary structure be kept current?
Review compensation strategy and competitive posture, determine competitive pay movement, consider COLA or just market movement, determine the amount for adjustment
What is the first step in setting new hire rates?
Review incumbent salary data
What are the steps for establishing job grades using the point factor evaluation approach?
Review overall job evaluation point differentials by job family, Rank order from high to low, look for logical grouping of jobs, develop point bands (absolute or percent-based), Check intrafamily and supervisor/subordinate relationships.
What is Step Rate - Variable?
Reward employee performance and /or skill acquisition by granting more than one step.
Where can the single-rate pay be best applicable?
Routine jobs/short learning time, Jobs with limited performance variability, Collective bargaining environments, Sales jobs where commission is significant, Summer intern/temporary jobs
What are the types of base pay?
Salary, Nonexempt/hour rate, piece rate
Awarding an employee a 10% increase in base pay for all hours worked after 7:00 p.m. is an example of what type of pay differential?
Shift
What pay differential is paid for undesirable shifts?
Shift differentials
What are the type of differentials?
Shift, Geographic, Hazard pay, Expatriate
What are the characteristics of market pricing and slotting?
Simple to administer, easy to understand, no job evaluation points, responsive to market changes.
What are the examples of Job-based Pay?
Single rate pay, Step rate pay (automatic, variable)
Which type of pay adjustment is based on longevity?
Step rate
What are the considerations of pay structure design?
Strategic issues, competitive practices, the organization's job and workplace design approach, the organization's administrative policies, the funds available for compensation plan, the value the program adds to the organization
Who should communicate compensation information?
Supervisor, manager, HR manager, director
What does the midpoint of the range represent?
The competitive market value for a job or group of jobs.
Which statement is most accurate regarding the range penetration and progression for an employee who consistently "meet standards"?
The employee's range penetration will typically be about 50%
What is the minimum pay level?
The lowest wage for the position
What is a pay approach?
The method an organization's compensation program uses to deliver base pay.
What is pay action?
The movement of any employee's base pay due to either external or internal pressures can be both company and employee generated. And can result in either an increase or a decrease in base pay.
What information should be communicated while communicating compensation changes?
The reasons for the changes, decisions, time frames for changes, any one time pay adjustments, action on part of the employee
What is reclassification?
The reassignment of job to a higher or lower grade in the organization's job worth hierarchy due to a job content reevaluation and /or significant change in the going rate for comparable jobs in the external labor market
What is Range Spread?
The width of a pay range from minimum to maximum.
What is a reason for establishing a job worth hierarchy?
To determine equity among both positions and groups of positions
What best describes an objective of a base pay structure?
To help to achieve organizational objectives
What best describes an objective of a merit pay program?
To link pay to performance in a manner consistent with the mission
Which of the following is a reason to adop broadbanding?
To support a flatter organizational structure
Which of the following would raise a potential red flag during a merger or acquisition?
Unions
How to develop the pay structure?
Use all market rates from market pricing analysis, develop range midpoints to cover the entire hierarchy, use appropriate range spreads.
When should the salary audit be conducted?
Usually after a program cycle is completed
Define integration of market data into point factor?
Value both internal and external relationships, Uses for formal job evaluation system and market data
What is the flow of activities when developing the total rewards design process?
Vision, mission, business strategy & HR strategy
What data is needed to create a market-based salary budget?
company pay policy
What should be included in the criteria or performance standards used to evaluate compensation systems?
compensation costs
Define Base Pay Structure?
created after job evaluation process and JWH and utilized as framework for pay decisions
Define Job Evaluation?
creates a job worth hierarchy using a market data or job content approach
Which of the following is a typical approach used to correct green circle rates?
granting 3% increase every four months until pay equals or exceeds the range minimum
Define Job Worth Hierarchy (JWH)?
illustrates where each job fits relative to other jobs
Which market rate should be taken to assign benchmark jobs to the pay structure?
midpoint rate
What causes compression?
new hire pay rates are higher, supervisor/subordinate total pay, midpoint differentials too close, automatic increase, merit pay inadequacies, unionized environment
