8 - 1

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Chapter
8
8
Designing Pay Levels, Mix
Designing Pay Levels, Mix
and Pay Structures
and Pay Structures
8 - 2
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Learning Objectives
Learning Objectives
After studying Chapter 8, students should be able to:
After studying Chapter 8, students should be able to:
1. 1.
Explain all of the steps in designing and administering
Explain all of the steps in designing and administering
a pay survey.
a pay survey.
2. 2.
Discuss the importance of defining the external
Discuss the importance of defining the external
relevant labor market in a pay survey.
relevant labor market in a pay survey.
3. 3.
Explain how the market pay line combines internal job
Explain how the market pay line combines internal job
structure with external wage rates.
structure with external wage rates.
4. 4.
Discuss the use of pay grades and ranges and their
Discuss the use of pay grades and ranges and their
relationship to internal alignment and external
relationship to internal alignment and external
competitiveness.
competitiveness.
5. 5.
Discuss broad banding as a flexible alternative to pay
Discuss broad banding as a flexible alternative to pay
grades and ranges.
grades and ranges.
8 - 3
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Determining Externally Competitive
Determining Externally Competitive
Pay Levels and Structures
Pay Levels and Structures
External External
competitiveness: competitiveness:
Pay relationships Pay relationships
among among
organizations organizations
Set Policy Set Policy
Define Define
Market Market
Conduct Conduct
Survey Survey
Draw Draw
Policy Policy
Lines Lines
Merge Merge
Internal & Internal &
External External
Pressures Pressures
Competitive Competitive
Pay Levels, Pay Levels,
Mix and Mix and
Structures Structures
Some Major Decisions in Pay Level Determination
!Determine pay level policy
!Define purpose of survey
!Define relevant labor market
!Design and conduct survey
!Interpret and apply results
!Design grades and ranges or bands
Some Major Decisions in Pay Level Determination Some Major Decisions in Pay Level Determination
! ! Determine pay level policy Determine pay level policy
! ! Define purpose of survey Define purpose of survey
! ! Define relevant labor market Define relevant labor market
! ! Design and conduct survey Design and conduct survey
! ! Interpret and apply results Interpret and apply results
! ! Design grades and ranges or bands Design grades and ranges or bands
8 - 4
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Salary Survey
Salary Survey
!
!
A
A
survey
survey
is the systematic process of collecting
is the systematic process of collecting
and making judgments about the compensation
and making judgments about the compensation
paid by other employers.
paid by other employers.
!
!
Surveys provide the data for setting the pay
Surveys provide the data for setting the pay
policy relative to competition and translating that
policy relative to competition and translating that
policy into pay levels and structures.
policy into pay levels and structures.
8 - 5
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Set Competitive Pay Policy
Set Competitive Pay Policy
!
!
Adjust Pay Level
Adjust Pay Level

How Much to Pay?

How Much to Pay?
!
!
Adjust Pay Mix
Adjust Pay Mix

What Forms?
What Forms?
!
!
Adjust Pay Structure?
Adjust Pay Structure?
!
!
Special Situations
Special Situations
!
!
Estimate Competitors Labor Costs
Estimate Competitors Labor Costs
8 - 6
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Define Relevant Market Competitors
Define Relevant Market Competitors
!
!
Employers who compete for the same
Employers who compete for the same
occupations or skills required.
occupations or skills required.
!
!
Employers who compete for employees within
Employers who compete for employees within
the same geographic area.
the same geographic area.
!
!
Employers who compete with the same products
Employers who compete with the same products
and services.
and services.
8 - 7
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Relevant Labor Markets by Geographic
Relevant Labor Markets by Geographic
and Employee Groups
and Employee Groups
Sometimes Sometimes
Only for Only for
critical skills critical skills
or those in or those in
very short very short
supply supply
Only for Only for
critical skills critical skills
or those in or those in
very short very short
supply supply
International: International:
Across several Across several
countries countries
Most likely Most likely Most likely Most likely Most likely Most likely National: National:
Across the Across the
country country
Most likely Most likely Likely Likely Most likely Most likely Only if in Only if in
short short
supply or supply or
critical critical
Only if in Only if in
short supply short supply
or critical or critical
Regional: Regional:
Within a Within a
particular area particular area
of the state or of the state or
several states several states
Most likely Most likely Most likely Most likely Most likely Most likely Local: Local: Within Within
relatively small relatively small
areas such as areas such as
cities or MSAs cities or MSAs
Executive Executive
Managerial Managerial
Professional Professional
Scientists Scientists
& &
Engineers Engineers
Technicians Technicians
Office and Office and
Clerical Clerical
Production Production
Geographic Geographic
Scope Scope
8 - 8
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Design the Survey
Design the Survey
!
!
Who should be involved in the survey design?
Who should be involved in the survey design?
!
!
How many employers should be included?
How many employers should be included?
!
!
Which jobs should be included?
Which jobs should be included?
!
!
What information to collect?
What information to collect?
8 - 9
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Which Jobs to Include?
Which Jobs to Include?
Benchmark Jobs
Approach
Low -High
Approach
Global Approach
Benchmark
Conversion
Approach
Market Basket
Approach
8 - 10
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Characteristics of Benchmark Jobs
Characteristics of Benchmark Jobs
!
!
The contents are well
The contents are well
-
-
known, relatively stable,
known, relatively stable,
and agreed upon by the employees involved
and agreed upon by the employees involved
!
!
The supply and demand for these jobs are
The supply and demand for these jobs are
relatively stable and not subject to recent shifts
relatively stable and not subject to recent shifts
!
!
They represent the entire job structure under
They represent the entire job structure under
study
study
!
!
A majority of the workforce is employed in these
A majority of the workforce is employed in these
jobs
jobs
8 - 11
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Which Market Jobs Match Which
Which Market Jobs Match Which
Company Jobs?
Company Jobs?
!
!
Any match between an organizations jobs and
Any match between an organizations jobs and
survey jobs must be done on job content rather
survey jobs must be done on job content rather
than on the basis of job title only.
than on the basis of job title only.
!
!
Apply your job evaluation system to the survey
Apply your job evaluation system to the survey
job descriptions.
job descriptions.
8 - 12
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Data Elements to Consider for Surveys
Data Elements to Consider for Surveys
! !
Nature of the Organization
Nature of the Organization
! !Financial performance Financial performance
! !Size Size
! !Structure Structure
! !
Nature of Total Compensation System
Nature of Total Compensation System
! !Cash forms used Cash forms used
! !Non Non- -cash forms used cash forms used
! !
Incumbent and Job
Incumbent and Job
! !Date Date
! !Job Job
! !Individual Individual
! !Pay Pay
8 - 13
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Advantages and Disadvantages of
Advantages and Disadvantages of
Measures of Compensation
Measures of Compensation
All employees may not receive all the All employees may not receive all the
forms. Be careful; dont set base equal to forms. Be careful; dont set base equal to
competitors total compensation. Risks competitors total compensation. Risks
high fixed costs. high fixed costs.
Tells the total value Tells the total value
competitors place on this competitors place on this
work work
Total Total
Compensation Compensation
(base +bonus + (base +bonus +
stock options + stock options +
benefits) benefits)
All employees may not receive incentives, All employees may not receive incentives,
so it may overstate the competitors pay; so it may overstate the competitors pay;
plus, it does not include long plus, it does not include long- -term term
incentives. incentives.
Tells how competitors are Tells how competitors are
valuing work; also tells the valuing work; also tells the
cash pay for performance cash pay for performance
opportunity in the job. opportunity in the job.
Total Cash Total Cash
(base +bonus) (base +bonus)
Fails to include performance incentives and Fails to include performance incentives and
other forms, so will not give true picture if other forms, so will not give true picture if
competitors offer low base but high competitors offer low base but high
incentives incentives
Tells how competitors are Tells how competitors are
valuing the work in similar valuing the work in similar
jobs jobs
Base Pay Base Pay
8 - 14
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Analyzing Survey Data
Analyzing Survey Data (1 of 2) (1 of 2)
!
!
No single best approach
No single best approach
!
!
Check accuracy of data
Check accuracy of data
!
!
Two pieces of data on each benchmark:
Two pieces of data on each benchmark:
Survey data
-
-
dollars
dollars
Our own data
-
-
job evaluation points
job evaluation points
!
!
Scatterplot shows relationships
Scatterplot shows relationships
8 - 15
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Analyzing Survey Data
Analyzing Survey Data (2 of 2) (2 of 2)
!
!
Frequency distribution organizes data
Frequency distribution organizes data
!
!
Measures of central tendency
Measures of central tendency
averages or means
weighted means
medians
!
!
Measures of distribution, or dispersion
Measures of distribution, or dispersion
standard deviation
percentiles and quartiles
range spread
8 - 16
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Combine Job Evaluation and Market
Combine Job Evaluation and Market
Survey Data
Survey Data (1 of 2) (1 of 2)
!
!
Scatterplots: for each benchmark job there is a
Scatterplots: for each benchmark job there is a
distribution of wages paid by survey companies.
distribution of wages paid by survey companies.
!
!
Each of these distributions has means, ranges,
Each of these distributions has means, ranges,
etc...
etc...
!
!
Scatterplots are useful to see what the data look
Scatterplots are useful to see what the data look
like.
like.
8 - 17
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PAY
Our J ob Evaluation Points
Scatterplot
Scatterplot
120 160 200 240 280 320 360
survey
monthly
salary
($000)
7
6
5
4
3
2
1
80
8 - 18
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Combine Job Evaluation and
Combine Job Evaluation and
Market Survey Data
Market Survey Data (2 of 2) (2 of 2)
!
!
Summarize the data further by fitting a linear
Summarize the data further by fitting a linear
curve to it.
curve to it.
!
!
Can eyeball data, use midpoints, or other
Can eyeball data, use midpoints, or other
mathematical approaches.
mathematical approaches.
8 - 19
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PAY
Our J ob Evaluation Points
Scatterplot with Linear Curve
Scatterplot with Linear Curve
120 160 200 240 280 320 360
survey
monthly
salary
($000)
7
6
5
4
3
2
1
80
Line of Best Fit
8 - 20
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Adjust The Data to Reflect
Adjust The Data to Reflect
Organizations Pay Policy
Organizations Pay Policy (1 of 3) (1 of 3)
Lead the Market:
Lead the Market:
!
!
pay level should be above the market for the year
pay level should be above the market for the year
and equal at year end
and equal at year end
!
!
update factor will be
update factor will be
equal
equal
to the projected
to the projected
market increase
market increase
8 - 21
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Adjust The Data to Reflect
Adjust The Data to Reflect
Organizations Pay Policy
Organizations Pay Policy (2 of 3) (2 of 3)
Match the Market:
Match the Market:
!
!
pay level will be above the market for the first
pay level will be above the market for the first
half of the year and below for the second half
half of the year and below for the second half
!
!
update factor will be
update factor will be
half
half
of the projected market
of the projected market
increase
increase
8 - 22
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Adjust The Data to Reflect
Adjust The Data to Reflect
Organizations Pay Policy
Organizations Pay Policy (3 of 3) (3 of 3)
Lag the Market:
Lag the Market:
!
!
pay level should be below the market for the
pay level should be below the market for the
entire year
entire year
!
!
no adjustment
no adjustment
will be made to account for the
will be made to account for the
projected market increase
projected market increase
8 - 23
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Least Squares Method
Least Squares Method
! !
The equation for a straight line will be used, since
The equation for a straight line will be used, since
most pay distributions approximate a straight line.
most pay distributions approximate a straight line.
! !
This equation is:
This equation is:
Y = a + bX where
Y = a + bX where
Y
Y
= actual pay rate (from survey data)
= actual pay rate (from survey data)
X
X
= evaluated points for orgn jobs
= evaluated points for orgn jobs
a
a
= Y intercept when X is zero
= Y intercept when X is zero
b
b
= slope of line of best fit
= slope of line of best fit
8 - 24
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PAY
Our J ob Evaluation Points
Developing a Pay Policy Line
Developing a Pay Policy Line
120 160 200 240 280 320 360
survey
monthly
salary
($000)
7
6
5
4
3
2
1
80
Line of Best Fit :
using market-survey data
(updated and aged to reflect
pay policy)
8 - 25
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Why Bother with Ranges?
Why Bother with Ranges?
! !
External Pressures:
External Pressures:
a. a. Quality variations (KSAs) among individuals in the Quality variations (KSAs) among individuals in the
external market external market
b. b. Recognition of differences in the productivity Recognition of differences in the productivity- -related related
value to employers of these quality variations value to employers of these quality variations
! !
Internal Pressures:
Internal Pressures:
a. a. The intention to recognize individual performance The intention to recognize individual performance
variations with pay variations with pay
b. b. Employees expectations that their pay will increase over Employees expectations that their pay will increase over
time time
8 - 26
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Constructing Ranges:
Constructing Ranges:
Develop Grades
Develop Grades (1 of 2) (1 of 2)
!
!
A
A
grade
grade
is a
is a
horizontal
horizontal
grouping of different
grouping of different
jobs that are considered substantially equal for
jobs that are considered substantially equal for
pay purposes.
pay purposes.
!
!
Grades enhance an organizations ability to move
Grades enhance an organizations ability to move
people among jobs within a grade with no change
people among jobs within a grade with no change
in pay.
in pay.
8 - 27
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Constructing Ranges:
Constructing Ranges:
Develop Grades
Develop Grades (2 of 2) (2 of 2)
!
!
The objective is for all the jobs that are similar
The objective is for all the jobs that are similar
for pay purposes to be placed within the same
for pay purposes to be placed within the same
grade.
grade.
!
!
How many pay grades?
How many pay grades?
a. number of jobs
a. number of jobs
b. organization hierarchy
b. organization hierarchy
c. reporting relationships
c. reporting relationships
8 - 28
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Constructing Ranges: Establishing
Constructing Ranges: Establishing
Midpoint, Minimum, and Maximum
Midpoint, Minimum, and Maximum
!
!
Pay ranges refer to the
Pay ranges refer to the
vertical dimension
vertical dimension
of the
of the
pay structure.
pay structure.
!
!
Each pay grade will have associated with it a pay
Each pay grade will have associated with it a pay
range consisting of a midpoint and a specified
range consisting of a midpoint and a specified
minimum and maximum.
minimum and maximum.
8 - 29
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Constructing Ranges: Establishing
Constructing Ranges: Establishing
Midpoint, Minimum, and Maximum
Midpoint, Minimum, and Maximum
!
!
Midpoints correspond to the competitive pay
Midpoints correspond to the competitive pay
policy
policy
!
!
The point where the pay policy line crosses each
The point where the pay policy line crosses each
grade becomes the midpoint of the pay range for
grade becomes the midpoint of the pay range for
that grade
that grade
!
!
Midpoints are the control point of the range
Midpoints are the control point of the range
!
!
The midpoint represents base pay for a
The midpoint represents base pay for a
seasoned
seasoned
employee
employee
8 - 30
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Constructing Ranges: Establishing
Constructing Ranges: Establishing
Midpoint, Minimum, and Maximum
Midpoint, Minimum, and Maximum
!
!
The midpoint can be determined as soon as the
The midpoint can be determined as soon as the
pay grade limits are set.
pay grade limits are set.
!
!
Find the job evaluation point value in the center
Find the job evaluation point value in the center
of the pay grade.
of the pay grade.
!
!
Substitute that point value for
Substitute that point value for
X
X
in your equation
in your equation
of the pay line
of the pay line
!
!
Solve the equation for
Solve the equation for
Y
Y
; this value is the
; this value is the
midpoint of the range
midpoint of the range
8 - 31
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Constructing Ranges: Establishing
Constructing Ranges: Establishing
Midpoint, Minimum, and Maximum
Midpoint, Minimum, and Maximum
!
!
Range spread
Range spread
is based on some judgment about
is based on some judgment about
how the ranges support career paths, promotions,
how the ranges support career paths, promotions,
and other organization systems.
and other organization systems.
!
!
Range spreads vary between 10 to 150 percent.
Range spreads vary between 10 to 150 percent.
!
!
Desired range spread is what makes good sense to
Desired range spread is what makes good sense to
the employer
the employer
8 - 32
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Constructing Ranges: Establishing Midpoint,
Constructing Ranges: Establishing Midpoint,
Minimum, and Maximum
Minimum, and Maximum
!
!
Once the
Once the
midpoint
midpoint
(based on the pay policy line)
(based on the pay policy line)
and the
and the
range spread
range spread
(based on judgment) are
(based on judgment) are
specified, minimums and maximums are calculated.
specified, minimums and maximums are calculated.
! !
Minimum = Midpoint / [1 + (1/2 range spread)]
Minimum = Midpoint / [1 + (1/2 range spread)]
! !
Maximum = Minimum + (range spread x minimum)
Maximum = Minimum + (range spread x minimum)
8 - 33
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Constructing Ranges: Overlap
Constructing Ranges: Overlap
maximum rate grade A
maximum rate grade A
-
-
minimum rate grade B
minimum rate grade B
maximum rate grade A
maximum rate grade A
-
-
minimum rate grade A
minimum rate grade A
8 - 34
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PAY
Our J ob Evaluation Points
PAY GRADE STRUCTURE
PAY GRADE STRUCTURE
100 150 200 250 300 350
our
monthly
salary
(000)
8
7
6
5
4
3
2
1
Pay Policy Line Pay Policy Line
I
II
III
IV
V
8 - 35
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Broadbanding
Broadbanding
!
!
Use of job clusters or tiers of positions into bands
Use of job clusters or tiers of positions into bands
!
!
Purpose is to manage career growth and
Purpose is to manage career growth and
administer pay
administer pay
!
!
An alternative to traditional salary grade
An alternative to traditional salary grade
structures
structures
!
!
Collapses the number of salary ranges within a
Collapses the number of salary ranges within a
traditional salary structure into a few broad bands
traditional salary structure into a few broad bands
8 - 36
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Contrasts Between Ranges and Bands
Contrasts Between Ranges and Bands
Ranges Support: Ranges Support:
! ! Some flexibility within Some flexibility within
controls controls
! ! Relative stable organization Relative stable organization
design design
! ! Recognition via titles or Recognition via titles or
career progression career progression
! ! Midpoint controls, Midpoint controls,
comparatives comparatives
! ! Controls designed into Controls designed into
system system
! ! Give managers freedom Give managers freedom
with guidelines with guidelines
! ! To 150 percent range To 150 percent range- -spread spread
Bands Support: Bands Support:
! ! Emphasis on flexibility Emphasis on flexibility
within guidelines within guidelines
! ! Global organizations Global organizations
! ! Cross Cross- -functional experience functional experience
and lateral progression and lateral progression
! ! Reference market rates, Reference market rates,
shadow ranges shadow ranges
! ! Controls in budget, few in Controls in budget, few in
system system
! ! Give managers freedom to Give managers freedom to
manage pay manage pay
! ! 100 100 400 percent spreads 400 percent spreads
8 - 37
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Broadbanding: Example
Broadbanding: Example (1 of 2) (1 of 2)
!
!
A large technology company reduced the
A large technology company reduced the
number of grade levels for their exempt
number of grade levels for their exempt
professional employees from 12 to 3
professional employees from 12 to 3
!
!
The levels were defined as:
The levels were defined as:
! !
basic, entry
basic, entry
-
-
level contributor
level contributor
! !
seasoned contributor or team leader
seasoned contributor or team leader
! !
business unit / team manager or senior
business unit / team manager or senior
professional contributors
professional contributors
8 - 38
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Broadbanding: Example
Broadbanding: Example (2 of 2) (2 of 2)
! !
Within these levels, managers hired and calibrated
Within these levels, managers hired and calibrated
pay levels based on market information for
pay levels based on market information for
individuals with similar backgrounds and
individuals with similar backgrounds and
responsibilities
responsibilities
! !
Managers given market and charged with the
Managers given market and charged with the
responsibility of making salary adjustments as
responsibility of making salary adjustments as
appropriate to attract, retain, and reward their staff
appropriate to attract, retain, and reward their staff
8 - 39
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Broadbanding:
Broadbanding:
How many bands to create?
How many bands to create? (1 of 2) (1 of 2)
! !
Determine the number of distinct levels of employee
Determine the number of distinct levels of employee
contributions within the organization that actually
contributions within the organization that actually
add value
add value
! !
For example:
For example:
professional positions
professional positions
management positions
management positions
technical positions
technical positions
clerical positions
clerical positions
8 - 40
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Broadbanding:
Broadbanding:
How many bands to create
How many bands to create (2 of 2) (2 of 2)
!
!
For example:
For example:
entry level positions
entry level positions
contributor level positions
contributor level positions
leadership level positions
leadership level positions
8 - 41
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Broadbanding: Placing individual
Broadbanding: Placing individual
jobs or roles in bands
jobs or roles in bands
!
!
Example:
Example:
Basic
Proficient
Mastery
8 - 42
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Pay Compression
Pay Compression
!
!
Results when wages for those jobs filled from
Results when wages for those jobs filled from
outside the organization are increasing faster than
outside the organization are increasing faster than
the wages for jobs filled from within the
the wages for jobs filled from within the
organization
organization
!
!
As pay differentials among jobs become very
As pay differentials among jobs become very
small, the traditional pay structure becomes
small, the traditional pay structure becomes
compressed
compressed
!
!
Compression is an issue in professional work
Compression is an issue in professional work
when new graduates command salaries almost
when new graduates command salaries almost
equal to those of professionals with 3
equal to those of professionals with 3
-
-
5 years
5 years
experience
experience
8 - 43
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Summary
Summary
! !
Most organizations survey other employers pay
Most organizations survey other employers pay
practices to determine the rates competitors pay.
practices to determine the rates competitors pay.
! !
An employer using the survey results considers how it
An employer using the survey results considers how it
wishes to position its total compensation in the market:
wishes to position its total compensation in the market:
! !
To lead
To lead
! !
To match, or
To match, or
! !
To follow competition
To follow competition
! !
This policy decision may be different for different
This policy decision may be different for different
business units and even for different job groups within a
business units and even for different job groups within a
single organization.
single organization.
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Summary
Summary (continued) (continued)
! !
The policy on competitive position is translated into
The policy on competitive position is translated into
practice by setting pay policy lines.
practice by setting pay policy lines.
! !They serve as reference points around which pay grades and They serve as reference points around which pay grades and
ranges or bands are designed. ranges or bands are designed.
! !
The use of grades and ranges recognizes both external
The use of grades and ranges recognizes both external
and internal pressures on pay decisions.
and internal pressures on pay decisions.
! !No single going rate for a job exists in the market; No single going rate for a job exists in the market;
! !Instead, an array of rates exists. Instead, an array of rates exists.
! !
Internally, the use of ranges is consistent with variations
Internally, the use of ranges is consistent with variations
in the discretion present in jobs.
in the discretion present in jobs.
! !
Pay ranges permit employers to value and recognize
Pay ranges permit employers to value and recognize
these differences with pay.
these differences with pay.
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Review Questions
Review Questions
1. 1.
Which competitive pay policy would you
Which competitive pay policy would you
recommend to an employer? Why? Does it depend
recommend to an employer? Why? Does it depend
on circumstances faced by the employer? Which
on circumstances faced by the employer? Which
ones?
ones?
2. 2.
How would you design a survey for setting pay for
How would you design a survey for setting pay for
welders? For financial managers? Do the issues
welders? For financial managers? Do the issues
differ? Will the techniques used and the data
differ? Will the techniques used and the data
collected differ? Why or why not?
collected differ? Why or why not?
3. 3.
What factors determine the relevant market for a
What factors determine the relevant market for a
survey? Why is the definition of the relevant
survey? Why is the definition of the relevant
market so important?
market so important?
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Review Questions
Review Questions (continued) (continued)
4. 4.
What do surveys have to do with pay
What do surveys have to do with pay
discrimination?
discrimination?
5. 5.
Contrast pay ranges and grades with bands. Why
Contrast pay ranges and grades with bands. Why
would you use either? Does their use assist or
would you use either? Does their use assist or
hinder the achievement of internal alignment?
hinder the achievement of internal alignment?
External competitiveness?
External competitiveness?