Chap 008

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

Milkovich/Newman: Compensation, Ninth EditionMilkovich/Newman: Compensation, Ninth Edition

Chapter 8Chapter 8Designing Pay Designing Pay

Levels, Mix, and Levels, Mix, and Pay StructuresPay Structures

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Chapter TopicsChapter TopicsMajor DecisionsMajor DecisionsSpecify Competitive Pay PolicySpecify Competitive Pay PolicyThe Purpose of a SurveyThe Purpose of a SurveySelect Relevant Market CompetitorsSelect Relevant Market CompetitorsDesign the SurveyDesign the SurveyInterpret Survey Results and Construct a Market Interpret Survey Results and Construct a Market

line lineFrom Policy to Practice: The Pay-Policy LineFrom Policy to Practice: The Pay-Policy Line

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Chapter Topics (cont.)Chapter Topics (cont.) From Policy to Practice: Grades and From Policy to Practice: Grades and

RangesRanges From Policy to Practice: Broad BandingFrom Policy to Practice: Broad Banding Balancing Internal and External Pressures: Balancing Internal and External Pressures:

Adjusting the Pay StructureAdjusting the Pay Structure Market PricingMarket Pricing ReviewReview Your Turn: Comparisons

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Exhibit 8.1 Determining Externally Exhibit 8.1 Determining Externally Competitive Pay Levels and StructuresCompetitive Pay Levels and Structures

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Specify Competitive Pay PolicySpecify Competitive Pay Policy

A survey is the systematic process of collecting A survey is the systematic process of collecting and making judgments about the compensation and making judgments about the compensation paid by other employerspaid by other employers

Surveys provide the data for translating policy Surveys provide the data for translating policy into pay levels, pay mix, and structuresinto pay levels, pay mix, and structures

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The Purpose of a SurveyThe Purpose of a Survey An employer conducts or participates in a survey An employer conducts or participates in a survey

for a number of reasons: for a number of reasons: – Adjust the pay level in response to changing rates Adjust the pay level in response to changing rates

paid by competitors paid by competitors

– Set the mix of pay forms relative to that paid by Set the mix of pay forms relative to that paid by competitorscompetitors

– Establish or price a pay structureEstablish or price a pay structure

– Analyze pay-related problems Analyze pay-related problems

– Estimate the labor costs of product/service market Estimate the labor costs of product/service market competitorscompetitors

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Exhibit 8.2 Competitive IntelligenceExhibit 8.2 Competitive Intelligence

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Select Relevant Market CompetitorsSelect Relevant Market Competitors Relevant labor market includes employers who Relevant labor market includes employers who

compete compete – For same occupations or skillsFor same occupations or skills– For employees in same geographic areaFor employees in same geographic area– With same products andWith same products and servicesservices

Fuzzy marketsFuzzy markets

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Exhibit 8.3: Relevant Labor Markets by Exhibit 8.3: Relevant Labor Markets by Geographic and Employee GroupsGeographic and Employee Groups

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Exhibit 8.4: Pay Differences by LocationExhibit 8.4: Pay Differences by Location

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Design the SurveyDesign the Survey Who should be involved?Who should be involved?

How many employers?How many employers?

– Publicly Available DataPublicly Available Data

– ““Word-of-mouse”Word-of-mouse”

– Where are the standards?Where are the standards?

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Exhibit 8.5: Free Information on the WebExhibit 8.5: Free Information on the Web

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Design the Survey (cont.)Design the Survey (cont.) Which Jobs to include?Which Jobs to include?

– Benchmark-job approachBenchmark-job approach Exhibit 8.6: BenchmarksExhibit 8.6: Benchmarks

– Low-High approachLow-High approach

– Benchmark conversion approachBenchmark conversion approach

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Exhibit 8.6: BenchmarksExhibit 8.6: Benchmarks

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Design the Survey (cont.)Design the Survey (cont.) What information to collect?What information to collect?

– Organization dataOrganization data

– Total compensation dataTotal compensation data

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Exhibit 8.7: Possible Survey Data Elements and RationaleExhibit 8.7: Possible Survey Data Elements and Rationale

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Exhibit 8.8: Advantages and Exhibit 8.8: Advantages and Disadvantages of Measures of Disadvantages of Measures of

CompensationCompensation

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Exhibit 8.9: Salary Graphs Using Different Measures of Exhibit 8.9: Salary Graphs Using Different Measures of CompensationCompensation

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Interpret Survey Results and Construct a Interpret Survey Results and Construct a Market LineMarket Line

Verify dataVerify data– Check accuracy of job matchesCheck accuracy of job matches

Survey levelingSurvey leveling– Check for anomaliesCheck for anomalies

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

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Exhibit 8.10 Survey DataExhibit 8.10 Survey Data

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Exhibit 8.10 Survey Data (con’t)Exhibit 8.10 Survey Data (con’t)

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Exhibit 8.10 Survey Data (con’t)Exhibit 8.10 Survey Data (con’t)

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

Statistical analysisStatistical analysis– Frequency distributionFrequency distribution– Measures of central tendencyMeasures of central tendency

ModeMode MeanMean MedianMedian Weighted meanWeighted mean

– Measures of variationMeasures of variation Standard deviationStandard deviation Quartiles and percentilesQuartiles and percentiles

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Exhibit 8.11 Frequency DistributionsExhibit 8.11 Frequency Distributions

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

Update theUpdate the survey datasurvey data– Aging or trending : Pay data is updated to forecast Aging or trending : Pay data is updated to forecast

the competitive rates for the future date when the the competitive rates for the future date when the pay decisions will be implementedpay decisions will be implemented

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Exhibit 8.13 Choices for Updating Survey Data Reflect Exhibit 8.13 Choices for Updating Survey Data Reflect Pay PolicyPay Policy

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Construct a Market Pay LineConstruct a Market Pay Line A market line links a company's benchmark jobs A market line links a company's benchmark jobs

on the horizontal axis with market rates paid by on the horizontal axis with market rates paid by competitors on the vertical axis. It summarizes competitors on the vertical axis. It summarizes the distribution of going rates paid by the distribution of going rates paid by competitors in the market competitors in the market

Approaches to constructing a market pay lineApproaches to constructing a market pay line

– Free hand approachFree hand approach

– Regression AnalysisRegression Analysis

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Exhibit 8.14: From RegressionExhibit 8.14: From RegressionResults to a Market LineResults to a Market Line

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Exhibit 8.15: Understanding RegressionExhibit 8.15: Understanding Regression

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Combine Internal Structure and External Combine Internal Structure and External Market RatesMarket Rates

Two parts of the total pay model have mergedTwo parts of the total pay model have merged

– Internally aligned structure - Horizontal axisInternally aligned structure - Horizontal axis

– External competitive data - Vertical axisExternal competitive data - Vertical axis

Two aspects of pay structureTwo aspects of pay structure

– Pay-policy linePay-policy line

– Pay rangesPay ranges

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Exhibit 8.16: Develop Pay GradesExhibit 8.16: Develop Pay Grades

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From Policy to Practice: The Pay From Policy to Practice: The Pay Policy LinePolicy Line

Approaches to translate external competitive Approaches to translate external competitive policy into practicepolicy into practice– Choice of measureChoice of measure

5050thth percentile for base pay percentile for base pay 7575thth percentile for total compensation percentile for total compensation

– UpdatingUpdating

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

Policy line as percent of market linePolicy line as percent of market line– Specify a percent above or below market line an Specify a percent above or below market line an

employer intends to matchemployer intends to match– Other optionsOther options

Pay among the leadersPay among the leaders Lead for some job families and lag for othersLead for some job families and lag for others

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From Policy to Practice: Grades and From Policy to Practice: Grades and RangesRanges

Why bother with grades and ranges?Why bother with grades and ranges?

– Offer flexibility to deal with pressures from external Offer flexibility to deal with pressures from external markets and differences among firmsmarkets and differences among firms

Differences in quality among individuals applying for Differences in quality among individuals applying for workwork

Differences in the productivity or value of these quality Differences in the productivity or value of these quality variationsvariations

Differences in the mix of pay forms competitors useDifferences in the mix of pay forms competitors use

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

A pay range exists whenever two or more rates A pay range exists whenever two or more rates are paid to employees in the same jobare paid to employees in the same job

– Recognize individual performance differences with Recognize individual performance differences with paypay

– Meet employees' expectations that their pay will Meet employees' expectations that their pay will increase over time, even in the same jobincrease over time, even in the same job

– Encourage employees to remain with the Encourage employees to remain with the organizationorganization

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

Develop gradesDevelop grades

– Grades enhance an organization's ability to move Grades enhance an organization's ability to move people among jobs with no change in paypeople among jobs with no change in pay

– Each grade will have its own pay rangeEach grade will have its own pay range

– All the jobs within a single grade will have the same All the jobs within a single grade will have the same pay rangepay range

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

Establish range midpoints, minimums, and Establish range midpoints, minimums, and maximumsmaximums

– What size should the range be?What size should the range be?

Size of range based on judgment about how ranges Size of range based on judgment about how ranges support support

Career pathsCareer paths

PromotionsPromotions

Other organization systemsOther organization systems

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Exhibit 8.17: Range Midpoint,Exhibit 8.17: Range Midpoint,Minimum, and MaximumMinimum, and Maximum

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

Typical Typical range spreadrange spread Top-level management positions – 30 to 60% Top-level management positions – 30 to 60%

above and below midpointabove and below midpoint Midlevel professional and managerial positions – Midlevel professional and managerial positions –

15 to 30% above and below midpoint15 to 30% above and below midpoint Office and production positions – 5 to 15% above Office and production positions – 5 to 15% above

and below midpoint and below midpoint

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OverlapOverlap

Importance of OImportance of Overlapverlap

High degree of overlap and low midpoint High degree of overlap and low midpoint differentialsdifferentials

Small ranges with less overlapSmall ranges with less overlap

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Exhibit 8.18: Range OverlapExhibit 8.18: Range Overlap

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From Policy to Practice:From Policy to Practice:Broad BandingBroad Banding

Involves collapsing salary grades into a few Involves collapsing salary grades into a few broad bands, each with a sizable rangebroad bands, each with a sizable range

– One minimum and one maximumOne minimum and one maximum

– Range midpoint often not usedRange midpoint often not used

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From Policy to Practice:From Policy to Practice:Broad Banding (cont.)Broad Banding (cont.)

PurposesPurposes

– Provide flexibility to define job responsibilities more Provide flexibility to define job responsibilities more broadlybroadly

– Foster cross-functional growth and developmentFoster cross-functional growth and development

– Ease mergers and acquisitionsEase mergers and acquisitions

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Exhibit 8.19: From Grades to BandsExhibit 8.19: From Grades to Bands

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Exhibit 8.20: Contrasts BetweenExhibit 8.20: Contrasts BetweenRanges and BandsRanges and Bands

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Steps Involved in Broad BandingSteps Involved in Broad Banding Set the number of bandsSet the number of bands

Price the bands: Reference market ratesPrice the bands: Reference market rates

– Reference ratesReference rates

Flexibility-ControlFlexibility-Control

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Exhibit 8.21: Exhibit 8.21: Reference Rates Within BandsReference Rates Within Bands

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Balancing Internal and External Pressures: Balancing Internal and External Pressures: Adjusting the Pay StructureAdjusting the Pay Structure

Internal Pressures External Pressures

Job Structure Pay Structure

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Market PricingMarket Pricing

IssuesIssues– Validity of market dataValidity of market data– Use of competitors’ pay decisions as primary Use of competitors’ pay decisions as primary

determinant of pay structuredeterminant of pay structure– Lack of value added via internal alignmentLack of value added via internal alignment– Difficult-to-imitate aspects of pay structure are Difficult-to-imitate aspects of pay structure are

deemphasizeddeemphasized– FairnessFairness

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Market Pricing (cont.)Market Pricing (cont.) Market pricing: pay strategies that emphasize Market pricing: pay strategies that emphasize

external competitiveness and deemphasize external competitiveness and deemphasize internal alignmentinternal alignment– Sets pay structures almost exclusively on external Sets pay structures almost exclusively on external

market ratesmarket 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