Milkovich/Newman: Compensation, Ninth Edition

Chapter 8

Designing Pay Levels, Mix, and Pay Structures

McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Topics
Major Decisions Specify Competitive Pay Policy The Purpose of a Survey Select Relevant Market Competitors Design the Survey Interpret Survey Results and Construct a Market

line From Policy to Practice: The Pay-Policy Line

8-2

Chapter Topics (cont.)

From Policy to Practice:

Ranges From Policy to Practice: Broad Banding Balancing Internal and External Pressures: Adjusting the Pay Structure Market Pricing Review
Your

Grades and

Turn: Comparisons

8-3

Exhibit 8.1 Determining Externally Competitive Pay Levels and Structures

8-4

Specify Competitive Pay Policy

A survey is the systematic process of collecting

and making judgments about the compensation paid by other employers into pay levels, pay mix, and structures

Surveys provide the data for translating policy

8-5

The Purpose of a Survey

An employer conducts or participates in a

survey for a number of reasons:

Adjust the pay level in response to changing rates paid by competitors Set the mix of pay forms relative to that paid by competitors Establish or price a pay structure Analyze pay-related problems Estimate the labor costs of product/service market competitors
8-6

Exhibit 8.2 Competitive Intelligence

8-7

Select Relevant Market Competitors

Relevant labor market includes employers who

compete

For same occupations or skills For employees in same geographic area With same products and services

Fuzzy markets

8-8

Exhibit 8.3: Relevant Labor Markets by Geographic and Employee Groups

8-9

Exhibit 8.4: Pay Differences by Location

8-10

Design the Survey

Who should be involved? How many employers?

Publicly Available Data Word-of-mouse Where are the standards?

8-11

Exhibit 8.5: Free Information on the Web

8-12

Design the Survey (cont.)

Which Jobs to include?

Benchmark-job approach
Exhibit 8.6: Benchmarks

Low-High approach Benchmark conversion approach

8-13

Exhibit 8.6: Benchmarks

8-14

Design the Survey (cont.)

What information to collect?

Organization data Total compensation data

8-15

Exhibit 8.7: Possible Survey Data Elements and Rationale

8-16

Exhibit 8.8: Advantages and Disadvantages of Measures of Compensation

8-17

Exhibit 8.9: Salary Graphs Using Different Measures of Compensation

8-18

 Verify data

Interpret Survey Results and Construct a Market Line

Check accuracy of job matches
Survey leveling

Check for anomalies

Does any one company dominate? Do all employers show similar patterns? Outliers?

8-19

Exhibit 8.10 Survey Data

8-20

Exhibit 8.10 Survey Data (cont)

8-21

Exhibit 8.10 Survey Data (cont)

8-22

Interpret Survey Results and Construct a Market Line (cont.)

Statistical analysis

Frequency distribution Measures of central tendency

Mode Mean Median Weighted mean

Measures of variation
Standard deviation Quartiles and percentiles
8-23

Exhibit 8.11 Frequency Distributions

8-24

Interpret Survey Results and Construct a Market Line (cont.)

Update the survey data

Aging or trending : Pay data is updated to forecast the competitive rates for the future date when the pay decisions will be implemented

8-25

Exhibit 8.13 Choices for Updating Survey Data Reflect Pay Policy

8-26

Construct a Market Pay Line

A market line links a company's benchmark jobs

on the horizontal axis with market rates paid by competitors on the vertical axis. It summarizes the distribution of going rates paid by competitors in the market
Free hand approach Regression Analysis

Approaches to constructing a market pay line

8-27

Exhibit 8.14: From Regression Results to a Market Line

8-28

Exhibit 8.15: Understanding Regression

8-29

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

8-30

Exhibit 8.16: Develop Pay Grades

8-31

From Policy to Practice: The Pay Policy Line

Approaches to translate external competitive

policy into practice

Choice of measure

50th percentile for base pay 75th percentile for total compensation

Updating

8-32

From Policy to Practice: The Pay Policy Line (cont.)

Policy line as percent of market line

Specify a percent above or below market line an employer intends to match Other options
Pay among the leaders Lead for some job families and lag for others

8-33

From Policy to Practice: Grades and Ranges

Why bother with grades and ranges?

Offer flexibility to deal with pressures from external markets and differences among firms
Differences in quality among individuals applying for work Differences in the productivity or value of these quality variations Differences in the mix of pay forms competitors use

8-34

 A pay range exists whenever two or more rates

From Policy to Practice: Grades and Ranges (cont.)

are paid to employees in the same job

Recognize individual performance differences with pay Meet employees' expectations that their pay will increase over time, even in the same job Encourage employees to remain with the organization

8-35

From Policy to Practice: Grades and Ranges (cont.)

Develop grades

Grades enhance an organization's ability to move people among jobs with no change in pay Each grade will have its own pay range All the jobs within a single grade will have the same pay range

8-36

From Policy to Practice: Grades and Ranges (cont.)

Establish range midpoints, minimums, and

maximums

What size should the range be?

Size of range based on judgment about how ranges support Career paths Promotions Other organization systems

8-37

Exhibit 8.17: Range Midpoint, Minimum, and Maximum

8-38

Typical range spread

From Policy to Practice: Grades and Ranges (cont.)

Top-level management positions 30 to 60% above and below midpoint Midlevel professional and managerial positions 15 to 30% above and below midpoint Office and production positions 5 to 15% above and below midpoint

8-39

Overlap
Importance of Overlap High degree of overlap and low midpoint

differentials

Small ranges with less overlap

8-40

Exhibit 8.18: Range Overlap

8-41

From Policy to Practice: Broad Banding

Involves collapsing salary grades into a few

broad bands, each with a sizable range

One minimum and one maximum Range midpoint often not used

8-42

From Policy to Practice: Broad Banding (cont.)

Purposes

Provide flexibility to define job responsibilities more broadly Foster cross-functional growth and development Ease mergers and acquisitions

8-43

Exhibit 8.19: From Grades to Bands

8-44

Exhibit 8.20: Contrasts Between Ranges and Bands

8-45

Steps Involved in Broad Banding

Set the number of bands Reference market rates

Reference rates

Price the bands:

Flexibility-Control

8-46

Exhibit 8.21: Reference Rates Within Bands

8-47

Balancing Internal and External Pressures: Adjusting the Pay Structure

Internal Pressures
Job Structure

External Pressures
Pay Structure

8-48

Market Pricing
Issues

Validity of market data Use of competitors pay decisions as primary determinant of pay structure Lack of value added via internal alignment Difficult-to-imitate aspects of pay structure are deemphasized Fairness

8-49

Market Pricing (cont.)

Market pricing: pay strategies that emphasize

external competitiveness and deemphasize internal alignment

Sets pay structures almost exclusively on external market rates

Objective

Is to base most of the internal pay structure on external rates, breaking down the boundaries between the internal organization and the external market forces
8-50