Compensation Management - Chapter 7

Consulting Firms

- Some firms specialize in particular occupations (e.g., engineers) or industries (e.g., financial services) - recently completed surveys or exclusively for client's use Examples: Aon, Hay, Pearl Meyer & Partners

Four activities (market-competitiveness)

1. Conducting strategic analyses 2. Assessing competitors' pay practices with compensation surveys 3. Integrating the internal job structure with external market pay rates 4. Determining compensation policies

Reasons to not develop your own survey

1. Lack employees qualified to undertake this task 2. Reluctancy of rival companies to surrender information about their compensation packages to competitors 3. Custom survey development can be costly

Published compensation survey data (two considerations)

1. Survey focus: core compensation or employee benefits 2. Sources of published compensation surveys

Preliminary considerations (compensation surveys)

1. What companies hope to gain from compensation surveys 2. Custom development versus use of an existing compensation survey

Survey Data Characteristics

1. compensation surveys contain immense amounts of information 2. compensation survey data are outdated because there is a lag between when the data were collected and when employers implement the compensation plan based on the survey data 3. compensation professionals must use statistical analyses to integrate their internal job structures with the external market based on the survey data

Federal government

8 categories of free BLS salary surveys: 1. Employment cost trends 2. National compensation data 3. Wages by area and occupation 4. Earnings by demographics 5. Earnings by industry 6. County wages 7. Employee benefits 8. Compensation costs in other countries

Strategic Analysis

= an examination of a company's external market context (industry profile, information about competitors, long-term growth prospects) and internal factors (financial condition, functional capabilities)

Compensation policies

= balance managing costs and attracting and retaining the best-qualified employees > fit with companies' standing and competitive strategies

Integration of the internal job structure

= pay rates that reflect both the company's and the external market's valuations of jobs > rely on regression analysis

Compensation Surveys

= the collection and subsequent analysis of competitors' compensation data > traditionally focused on competitors' wage and salary practices > employee benefits recently became more important >>> enable compensation professionals to obtain realistic views of competitors' pay practices

Compensation plans

= the selection and implementation of pay level and pay mix policies over a specified time period, usually one year

Regression Analysis

A statistical analysis method designed to find the best fitting line between two variables > predict the value of one variable from another > Compensation professionals use job evaluation points assigned to benchmark jobs (based on the matching process discussed earlier) and the salary survey data for the benchmark jobs

Quartiles and Percentiles

Both quartiles and percentiles describe dispersion by indicating the percentage of figures that fall below certain figures/points.

Updating Survey Data

Changes in the cost of living tend to make survey data obsolete fairly quickly. Over time, the average cost of goods and services usually increases. Failure to adjust pay rates could lead to a situation where real compensation falls below nominal compensation.

Pay Level Policies

Choices that compensation professionals make to promote competitive advantage: - market lead - market lag - market match

Custom development versus use of an existing compensation survey

Decide to develop their own survey instruments and administer them or rely on the results of surveys conducted by others > customized surveys have more tailored questions and selected respondent companies

Market Lag Policy

Distinguishes companies from the competition by compensating employees less than most competitors (25th percentile, beyond market pay line) > best for lowest-cost strategies

Percentiles

Divide the data set into 100 equal parts. An observation at the xth percentile is higher than x percent of all observations.

Survey focus: core compensation or employee benefits

Employers are likely to use compensation surveys to obtain information about competitors' base pay and benefits practices so they can compete effectively for the best candidates > historically competition on the basis of base pay, but benefits costs are now extremely high (greater variability)

Salary.com

Employers: Seek locations with high/low salaries > easier to decrease benefits than salary Job Seeker: See salary but also benefits

Consumer Price Index (CPI)

Indexes monthly price changes in consumer goods and services Most commonly used method for tracking cost changes in United States CPI published monthly by the U.S. Bureau of Labor Statistics

What companies hope to gain from compensation surveys

Is critical to developing effective compensation systems > learn about competitors' compensation practices > learn something about employees' preferences for alternative forms of compensation due to economic changes

Market Pay Line

Is the best fitting line between a company's job structure and benchmark jobs > representative of typical market pay rates, expressed as a mean or median, relative to a company's job structure

Market Match Policy

Most closely follows the typical market pay rates because companies pay according to the market pay line (50th percentile) > appropriate with differentiation strategy

Net change in income

Negative: Nominal compensation rises, real compensation goes down

Quartiles

Quartiles allow compensation professionals to describe the distribution of data—in this case, annual base pay amount—based on four groupings

Point factor leveling

Rating a job based on a standard set of compensable factors that have point values associated with each level of the factor > similar to the point rating job evaluation approach

Job leveling

Refers to corrections that companies can make for differences in duties and scope between their jobs and external benchmark jobs. These corrections are based on SUBJECTIVE judgment rather than on OBJECTIVE criteria.

Variation

Represents the amount of spread or dispersion in a data set

Salary to stay whole

Salary you need to earn in order to maintain your current standard of living

R^2

Shows how well the variation in the company's valuation of jobs based on job evaluation points explains the variation in market pay rates from the compensation survey. R2 = 0 > none (0 percent) of the variation in market pay rates can be explained by the company's job structure R2 = one > all (100 percent) of the variation in market pay rates can be explained by the company's job structure

Relevant labor markets

The fields of potentially qualified candidates for particular jobs based on: - Occupational classification - Geography - Market competitors

Strategic considerations (compensation surveys)

Two essential strategic considerations are: 1. Defining the relevant labor market 2. Choosing benchmark jobs

Benchmark Jobs

Used for: 1. Job evaluations 2. Compensation surveys - Established, well-known, stable over time - Common across employers - Entire range of jobs - Accepted for setting pay rates

Sources of published compensation surveys

Various sources: 1. professional/industry associations 2. consulting firms 3. federal government >

Median

a type of central tendency: is the middle value in an ordered sequence of numerical data. If there is an odd number of data points, the median literally is the middle observation > middle (50th percentile)

Mean

a type of central tendency: We calculate the mean annual salary for accountants by adding all the annual salaries in our data set and then dividing the total by the number of annual salaries in the data set > average

Compensation costs in other countries

comparative hourly compensation costs in national currencies and U.S. dollars for production workers and all employees in manufacturing

National compensation data

comprehensive measures of occupational earnings; compensation cost trends, benefit incidence, and detailed plan provisions

Earnings by demographics

demographic characteristics such as age, sex, race, and Hispanic or Latino ethnicity

County wages

detailed industry for the Nation, states, and many metropolitan areas and counties

Market Lead Policy

distinguishes a company from the competition by compensating employees more highly than most competitors (75th percentile, above market pay line) > best for differentiation strategies

Wages by area and occupation

for the nation, regions, states, and many metropolitan areas

Central Tendency

is a number that represents the typical numerical value in the data set (cluster around the central point)

Nominal Compensation

is the face value (Nominalwert) of a dollar.

Real Compensation

measures the purchasing power of a dollar

Earnings by industry

monthly survey of the payroll records of business establishments that provides national estimates of average weekly hours and average hourly earnings

Employment cost trends

quarterly statistics that measure change in labor costs over time

Pay Mix Policies

refer to the combination of core compensation and employee benefits components that make up an employee's total compensation package > Base wage, benefits, long-term incentives, short-term incentives

Standard Deviation

refers to the mean distance of each salary figure from the mean

Market-competitive pay systems

represent companies' compensation policies that fit the imperatives of competitive advantage > play a significant role in attracting and retaining the most qualified employees > should promote companies' attainment of competitive strategies

Employee benefits

share of workers who participate in specified benefits, such as health care, retirement plans, and paid vacations

Professional/Industry associations

survey members' salaries, compile the information in summary form, and disseminate the results to members > accurate because members benefit themselves > professional associations focus on broader types of employment