OTMT Ch 11 - Base Pay Structures

Two types of within-range (step) increases....

1. Step Increase 2. Merit Increase

Broadbanding was developed to ______________

1. develop broader workforce skills 2. encourage career development among employees 3. reduce administration with job evaluation, salary structure, and merit pay

4 types of measures utilized in some combination during pay program audits

1. process measures 2. policy compliance measures 3. documentation adequacy measures 4. overall results measures

There are _______ approaches to developing midpoints

3

Higher-level managerial, executive, technical positions typically have the following range spread...

50% and above

______________ is a key element in pay administration

Midpoints

Range Penetration Formula

Penetration = (incumbent salary- range min)/(range max-range min)

External economic environment

Varied supply & demand for certain skills may necessitate a multi-structured pay program ex. Tech professionals like engineers may have special pay structures for when there is high demand for their skills, but these structures can/may be merged into the general structure when there is an increase in supply for those engineers in the market

Minimums that are too low will result in...

a company needing to pay an employee higher in the range to pay competitively narrowing the positions long term earning potential

Overpay leads to

a higher cost than necessary in providing your product or service

Pay Ranges have...

a min pay value, max pay value, and midpoint/central value. The difference between max and min is the "range spread" or "width" of the range. Range is generally expressed as a percentage of the difference between min and max divided by the min.

Range is generally expressed as

a percentage of the difference between min and max divided by the min.

Midpoints are often used as....

a reference point in salary administration decisions as a point or "target" because they are typically set to equal the market average or median but it SHOULD NOT be the organizations only market reference point.

Minimums and maximums usually fall within....

adjoining ranges

Related to the midpoint is the....

compra-ratio

The company's base pay policy line...

connects the midpoints of various pay ranges in the pay structure

Broadbanding can be defined as a pay structure that _______________

consolidates a large number of pay grades and salary ranges into much fewer "broadbands" with relatively wide salary ranges typically w/ 100% or more differences between min and max.

If the % difference between midpoints is too high, the result could be....

costly promotional increases

Policy compliance measures are used to

determine if the pay program is being administered in accordance with policy

Process measures are used to

determine the extent to which the pay program is being smoothly and efficiently administered

Documentation adequacy measures are used to

determine the extent to which the program is committed to putting it into writing

Grade overlap is minimal when midpoint differentials are _______________ and range widths are _____________

large ; small

High maximums will result in

long term earnings opportunities higher and more costly than what is needed to remain competitive

An organization may have ___________pay structures within its overall structure

many

As ranges get wider, the maximums _______ the minimums _________ and the midpoints are ___________

max increase, min decease, and mid are constant

One approach to developing midpoints is the Present value-future value formula which....

may be used to determine the % between midpoints assuming the highest and lowest midpoints and number of grades are known

Different labor markets with different levels of supply and demand may necessitate ____________

multiple pay structures

Range penetration is often a ____________________

preferred tool bc it does not focus on one number alone (the midpoint) but instead refers to how far into the range a particular individuals salary has penetrated

Broadbanding supports this evolving organizational dynamic by ________________

providing less formal structure than the traditional structure

Businesses monitor compra-ratios because they ________________________

recognize them as an important tool for managing comp costs

If the % difference is relatively low, the result could be....

salary compression problems between supervisor and subordinate positions and difficulty in matching promotions with appropriate comp rewards

Internal equity refers to _____________

the relative values assigned to different jobs w/in and organization and how reasonable those values are both within job families, and among comparable jobs throughout the org.

General increases....

those that are granted in equal percentages or dollar amounts to all employees in an eligible group

Range penetration is calculated by

using the minimum and maximum of a salary range

Merit increases

usually administered in the form of a range of percentages for varying levels of performance

Pay structures will actually burden a company unless the following issues are considered...

1. Competitive posture - how much above or below the market should the company pay or can afford to pay 2.Decision making - who will make the decision 3. Monitoring - how frequently will the structure be assessed for currency and appropriateness 4. Flexibility - is it flexible enough to handle dynamic situations? 5. Resources - can the company afford to allocate sufficient resources to build and maintain the current and relative pay structures 6. Communication - is the company willing to allocate required effort to communicate/educate employees

5 steps to prepare for and conduct pay program audits

1. Decide what to audit 2. Select participants 3. Develop a data collection and analysis plan 4. Assemble necessary data to support the analysis 5. Analyze collected data and develop findings & recommendations

Reasons to broadband include....

1. Paying for performance while allowing managers greater flexibility in salary administration 2. Ease of moving people within the org 3. Reduction of demands of job evaluation as well as time and effort required to make org changes

Performance Appraisal Considerations

1. Performance appraised on basis of direct measurement of each employees output/results 2. Supervisors are trained on concepts and the process to appraise performance 3. Measures/criteria used are as objective and quantitative as possible 4. Objective performance standards are established for various levels of employee performance when practical 5. The relative importance (weight) of each performance criteria is established 6. when practical employees are involved in determining criteria to ensure acceptance 7. Criteria is communicated to employee at the beginning of the appraisal period and periodically reviewed/updated for timeliness and relevance 8. The appraisal is written and discussed by the employee and supervisor 9. The appraisal process is audited routinely and frequently to identify and eliminate potential problems.

What are the key steps to designing an effective pay structure

1. Review overall point differentials 2. Rank order jobs by total evaluations points 3. Develop job groupings 4. Develop preliminary point bands 5. Check intrafamily and supervisory relationships 6. Incorporate market data 7. Review market inconsistencies 8. Smooth out grade averages 9. Review differences btwn midpoints and market averages 10. Resolve inconsistencies btwn internal and external equity

5 Keys to successful pay program maintenance

1. clearly stated objectives, policies, and procedures are established and communicated 2. proper controls are operative to ensure policies and procedures are consistently applied 3. There is adequate support for the comp function itself including provision of sufficient staff and resources as well as top management support necessary to ensure the pay program is administered with fairness and integrity 4. comp staff properly perform administrative activities 5. the pay program is routinely audited for efficiency and effectiveness

Maintenence of pay programes is inherently difficult bc of the continual changes in _______________

1. content of various jobs w/in an org 2. going market rate for jobs 3. org structure and staffing levels 4. regulatory framework governing pay programs 5. inevitable turnover w/in the comp function itself

Types of base pay increases

1. general (or "across the board") increases 2. cost of living increases 3. promotional increases 4. step increases 5. merit increases

Merit based increases must have the following characteristics to be successful...

1. individual differences in job performance is measurable 2. individual differences in job performance must be significant to warrant the time and effort required to measure them and related pay to them 3. the pay range must be sufficiently broad (35-50%) to allow for adequate differentiation of pay based upon performance and/or level of experience and skill 4. supervisors and managers must be trained in employee performance planning and appraisal 5. management must be committed and employees must be receptive to making distinctions in pay based upon performance 6. managers must be adequately skilled in managing pay 7. sufficient control systems must be implemented to ensure that merit increase guidelines are followed

Managements role w/audit reports in step 5 is to _______________

1. review results and recommendations 2. prioritize improvements required 3. allocate necessary resources 4. follow up to ensure the work is completed

Most companies strive to have the overall workforce paid at or around a compra-ratio of ________________.

100%

Lower-level service, production, and maintenance positions typically have the following range spread...

20-25%

Overlapping more than _________________ pay grades should generally be avoided

3-4

Clerical, technical, and paraprofessional positions typically have the following range spread...

30-40%

Higher-level professional, administrative, middle management positions typically have the following range spread...

40-50%

Short term vs long term orientation

A company with long-term orientation is most likely to have well-designed pay structures with career-path capabilities and smooth transitions from range to range while short term or "temporary" problems will be taken care or with temporary solutions which can be difficult to undo despite external factors leading to those decisions no longer existing.

Centralized compensation policies

A corporate comp policy may call for an organizations overall competitive posture to always be leading the market which will be reflected by the pay policy line being higher than the market at every point on the salary range

Decentralized compensation policies

An organizations goal may be to compete within the top quartile of its competitors in a particular function or product segment in which case pay structure would be specific in those areas of the organization.

Corporate culture & values

An organizations pay structure usually reflects the way its employees work is valued... ex. Orgs that look for the best and brightest means the pay line would be positioned to lead the market, whereas valuing prudent risk taking the total pay line may have an additional risk/reward component

Range Penetration is....

Another way of tracking an organizations compensation by viewing employee pay in relationship to the total pay range.

External equity/ External competitiveness refers to ________

Businesses competing in a free market for products and services and the costs of these products and services includes labor which is never constant so they most closely monitor labor casts to not over or under pay.

Specific factors influencing pay structure include...

Centralized compensation policies Decentralized compensation policies Short term vs long term orientation

General factors influencing pay structure include...

Corporate culture & values Management philosophy External economic environment External sociopolitical & legal environments

The spread _______________ throughout the pay strructure

Does not have to be uniform

Exercising salary judgements w/in a segment is often _______________________ than focusing rigidly on a single point w/in the salary range such as the midpoint.

Easier and more practical

Compensation deals with...

Establishing meaningful and acceptable relationship between work and rewards

Management philosophy

Narrow pay ranges and more grades allow for more frequent promotions and thus a greater perception of growth and advancement than wider ranges with fewer grades.

The Present Value-Future Value Formula...

PV = FV/(1+i)^n PV = present value - midpoint of lowest pay grade FV = future value - midpoint of highest pay grade n = # of desired grade intervals (one less than the total number of grades in the structure) i = Percentage difference between midpoints

External sociopolitical & legal environments

Steps in the pay structure are likely to be more narrow and rigidly administered in a union environment than non-union environments. They are also affected by regulations such as the FLSA which mandates min wage for most jobs thereby determining the lowest possible pay scales

A pay structure consists of...

a series of pay ranges (or "grades") each with a minimum and maximum pay rate... jobs are grouped together in ranges that represent similar internal and external worth.

Compra-ratio is ....

a statistic that expresses the relationship between base salary and the midpoint, or between the midpoint and market average.

Companies in the late 80's and early 90's were driven to adopt broadbanding by the need to _________________

adapt salary administration systems and procedures to meet a new business climate and create flatter organizations

Overall results measures are used to

assess how well pay programs establish the established goals

In broadbanding, there is no _________________

automatic progression to the midpoint bc there is no midpoint.

In recent years, pay policy lines have been developed to reflect

base salary mid-points and take into consideration variable compensation

The purpose of pay grades is to ....

be able to refer to a comp range that groups together multiple jobs with similar value based on internal evaluations and external market data

When designed and administered appropriately, a company's compensation program is an...

effective management tool for supporting the organizations overall business strategy

It is important for a company to be able to __________________________for its compra-ratio

explain the reasons for the current compra-ratio

The labor market is subject to the same _____________

external pressures as the products and services market

Broadbanding typically appeals to ________________

fast moving orgs undergoing persistent change

Promotion increases

granted to employees who are promoted from one job to another with a higher pay grade and range

In a pay-for-performance or "merit system" grade overlap allows ____________________

high performers in lower pay ranges with longer time-in-grade to be paid more than a relatively new (and/or lower) performer in a higher pay range.

A mature, long-service workforce will tend to have a ______________compra-ratio than a younger group of employees w/a shorter service record

higher

Underpay can lead to

higher turnover which can harm productivity

Compra-ratio's can be calculated for...

individuals, groups of individuals, or even the company as a whole

Two basic considerations to factor into the design and development of pay structures are ________________

internal equity external competitiveness

In broadbanding, the marketplace for talent is no longer represented by highly defined salary structures, but rather _______________________

mirrored by loosely defined ambiguous broadbands that do not apply directly to an employees position

Using segments w/in a pay range instead of only midpoints provides __________________

more flexibility to managers in pay related decisions as they serve as mini ranges within the main range

To perform the calculation _________________ needs to specified along with the range width

one of the 3 points (min, mid, or max) on the pay range

Maintenance of pay programs is __________________

one of the most critical elements of sound base pay administration

Within Range Increases/Step increases

pay increases that move employees forward in the pay range assigned to their jobs which are virtually always determined by some combo of employees length of service and tenure

Step increases

pay ranges are divided into a number of pay rates with increases related to length of service - the concept is used most commonly for nonexempt employees

Cost of living increases

specific type of general increase that is typically awarded in equal centers per hour or percentage terms to all employees in a pay program or structure

Ranges should be designed to provide midpoints that reflect....

the "going rate" and are reasonably close to what the market establishes as the min and max for the job

The difference between max and min is known as...

the "range spread" or "width" of the range.

The width of the pay grade and midpoint differentials determine ___________________

the amount of overlap between adjoining grades

Another approach to developing midpoints is to use .....

the average of the market pay rate for different jobs within benchmark-job groupings .... the resulting midpoint progression would have varying percentage differences between midpoints which reflect the market more closely than constant differences

Broadbanding

the combining of existing pay ranges by expanding range width and reducing number of grades

Too much overlap limits_______________________

the difference between midpoints which in turn places limits on potential earning ability and can cause differentiation problems between supervisor and subordinate pay

The larger the midpoint progression.....

the fewer the number of grades within a pay structure

The smaller the midpoint progressions...

the larger the number of pay grades within the pay structure

Range spreads vary based on...

the level and sophistication of skills required for a given position

The number of structures is primarily a function of __________

the market and the company's comp philosophy

Assuming a constant mid-point, changing range spreads also changes....

the minimum and maximum

Pay grades usually overlap except for ________________

the minimum of the lowest grade and the maximum of the highest grade

Midpoint progression refers to...

the percentage difference between pay-grade midpoints

Pay grades may be segmented many ways, they may or may not overlap, and serve as a reference point for cost control and pay administration, and the number of segments w/in a pay grade _______________________

varies by company but often reflects the company's merit pay process and pay administration philosophy