Compensation: Chapter 8: Designing Pay Levels, Mix, and Pay Structures

Pay above market (lead) Pay with market (match) Pay below market (lag) Hybrid policy

1. Specify the employers pay policy.

Translating an external pay policy into practice requires information on the external market. Surveys provide the necessary data and information. Survey: systematic process of collecting and making judgments about the compensation paid by other employers.

2. What is the purpose of surveys?

1. To adjust the pay level relative to competitors 2. To set the mix of pay forms relative to competitors. (Pieces of pie) 3. To establish or price a pay structure (pt. 3 of project) 4. To analyze pay-related problems (retention, recruit) 5. To estimate the labor costs of competitors (competitive intelligence)

2. What is the purpose of surveys? (2)

Relevant labor market must be defined including competitors in one or more of the following areas: Occupation - skill/knowledge required More relevant than industry when job is not limited to one particular industry (e.g., accounting, sales, clerical skills, etc.) Geography - recruitment population As complexity of qualifications increase, so does geographic limits Managerial/professional = national or international Clerical/production = local or regional Competitors - same product/service market Particularly important when skills are specific to an industry

3. How do you select a relevant market?

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

4. Design the a survey

1. check the accuracy of the job matches, and then check for anomalies, age of data, and the nature of the organizations. Accuracy of match Job similar but not identical? (conversion/survey leveling) Anomalies Does any one company dominate? Do all employers show similar patterns? Any outliers?

5. Interpreting the results.

Jobs ordered on the horizontal axis (x) Pay ordered on the vertical axis (y).

6. construct a pay policy line?

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

How do you balance with internal alignment?

Grouping jobs into grades allows different jobs to be considered equal for pay purposes. different jobs considered equal per pay policy system

How do you develop grades?

Choice of measure: align with chosen pay-policy. (lag, lead, match) Updating: Aging the market data to a point halfway through the plan year is called lead/lag (see 8.15 again) Policy line as % of market line: Specify % above or below market line

How do you go from policy to practice?

Wages are constantly changing. Data is usually outdated before it is available. The pay data are usually updated (a process often called aging or trending) to forecast the competitive rates for the future date when the pay decisions will be implemented. Consider: Historical trends in labor market Economy Manager's judgment

How do you update the survey results when interpreting the results?

Looking at three things: 1. Frequency distribution Look for unusual shapes to identify problems with job matches, widely dispersed pay rates, or employers with widely divergent pay policies 2. Central tendency Reduces large amount of data into a single number 3. Variation Distribution of rates around a measure of central tendency

How do you use statistical evidence when interpreting the results?

No firm rules - differs drastically by size of firm, pay policy of firm, and if it is administered by firm or consultant . Key considerations: First look for publically available data (e.g., BLS) "Word of Mouse" - wealth of data available from individually supplied inputs Have to consider quality of information Validation of surveys - different surveys imply different pay levels

How many competitors should you use when designing a survey?

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 the pay policy line that reflects external policy 7. Balance competitiveness with internal alignment (ranges, flat rates, and/or bands)

Road Map

Generalizations do not always hold true - requires a great deal of judgement. No rules used to define market. Fuzzy markets make it harder, and occur when new organizations and unique jobs fuse diverse factors making relevant markets even harder to define.

What are fuzzy markets in regards to selecting relevant markets?

Exist whenever two or more rates are paid to employees in the same job. Provides managers the ability to: - Recognize individual performance differences - Meet employee expectations of remuneration growth (even in the same job) - Help with retention - create flexibily

What are pay ranges?

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

What do bands support

Compensation Data: Base pay - amount of cash each job and incumbent is worth Total cash - base plus bonus Total compensation - total cash plus stock options and benefits

What information should be collected when designing a survey?

Collapsing salary grades into only a few broad bands, each with a sizeable range. Bands add flexibility and require two steps: 1. Set the number of bands 2. Price the bands - reference market rates person based structures

What is broad banding?

Small ranges = less overlap = promotion more meaningful Promotion increases matter! Key considerations: -Should support career movement -Should induce employees to seek promotion/higher grade -Different for skill-based structures, which usually have flat rate for skills regardless of performance or seniority

What is overlap in pay?

Benchmark-Job Approach: Must have stable content, be common across different employers, and include sizable numbers of employees Low-High Approach: Necessary when organization is using person-based or generic job descriptions Identify the lowest and highest paid for the relevant skills and compare wages as anchors Converted to fit the person based structure Benchmark Conversation/Survey Leveling: Needed when job description does not sufficiently match the jobs in the salary survey

What jobs should be included when designing a survey?

Usually responsibility of compensation manager. Outsides consulting firms are typically used as third-party protection from possible "price fixing" law suites. Legal considerations: May violate Section 1 of the Sherman Act (outlaws conspiracies in restraint of trade) Illegal if overall effect of information is to interfere with the competitive prices and artificially holds down wages Cannot identify participants' data by company name

Who should be involved in designing a survey?

Allows you to effectively deal with pressures from external markets. Handle differences among firms regarding: -Quality of individuals applying for work -Productivity or value of these quality variations -The mix of pay forms competitors use

Why should you offer flexibility?

orders job on basis of internal factors. internal alignment outcome

job structure

anchored by the organizations external competitive position and reflected in pay policy external competitiveness

pay structure