Chapter
8
8
Designing Pay Levels, Mix
Designing Pay Levels, Mix
and Pay Structures
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.
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 PolicySet 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 policyDetermine pay level policy !
!Define purpose of surveyDefine purpose of survey !
!Define relevant labor marketDefine relevant labor market !
!Design and conduct surveyDesign and conduct survey !
!Interpret and apply resultsInterpret and apply results !
Salary Survey
Salary Survey
!!A A surveysurvey 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.
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
!
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.
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
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?
!
Which Jobs to Include?
Which Jobs to Include?
Benchmark Jobs
Approach Low - High Approach Global Approach Benchmark Conversion Approach Market Basket Approach
Characteristics of Benchmark Jobs
Characteristics of Benchmark Jobs
!!The contents are wellThe 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
Which Market Jobs Match Which
Which Market Jobs Match Which
Company Jobs?
Company Jobs?
!!Any match between an organization’s jobs and Any match between an organization’s 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.
Data Elements to Consider for Surveys Data Elements to Consider for Surveys
!
! Nature of the OrganizationNature of the Organization
!
!Financial performanceFinancial performance
!
!SizeSize
!
!StructureStructure !
! Nature of Total Compensation SystemNature of Total Compensation System
!
!Cash forms usedCash forms used
!
!NonNon--cash forms usedcash forms used !
! Incumbent and JobIncumbent and Job
! !DateDate ! !JobJob ! !IndividualIndividual ! !PayPay
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; don’t set base equal to
forms. Be careful; don’t 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
Analyzing Survey Data
Analyzing Survey Data
(1 of 2)(1 of 2)!
!No single best approachNo single best approach
!
!Check accuracy of dataCheck accuracy of data
!
!Two pieces of data on each benchmark:Two pieces of data on each benchmark:
Survey data -- dollarsdollars
Our own data -- job evaluation pointsjob evaluation points
!
Analyzing Survey Data
Analyzing Survey Data
(2 of 2)(2 of 2)!
!Frequency distribution organizes dataFrequency distribution organizes data
!
!Measures of central tendencyMeasures of central tendency
averages or means weighted means
medians
!
!Measures of distribution, or dispersionMeasures of distribution, or dispersion
standard deviation
percentiles and quartiles range spread
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.
PAY
Our Job Evaluation Points
Scatterplot
Scatterplot
120 160 200 240 280 320 360 survey monthly salary ($000) 7 6 5 4 3 2 1 80Combine 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.
PAY
Our Job 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
Adjust The Data to Reflect
Adjust The Data to Reflect
Organization’s Pay Policy
Organization’s 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 equalequal to the projected to the projected market increase
Adjust The Data to Reflect
Adjust The Data to Reflect
Organization’s Pay Policy
Organization’s 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
Adjust The Data to Reflect
Adjust The Data to Reflect
Organization’s Pay Policy
Organization’s 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 adjustmentno adjustment will be made to account for the will be made to account for the projected market increase
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 org’n jobs= evaluated points for org’n jobs
a
a = Y intercept when X is zero= Y intercept when X is zero
b
PAY
Our Job Evaluation Points
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)
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 productivityRecognition 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
Constructing Ranges:
Constructing Ranges:
Develop Grades
Develop Grades
(1 of 2)(1 of 2)!
!A A gradegrade is a is a horizontalhorizontal 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 organization’s ability to move Grades enhance an organization’s ability to move
people among jobs within a grade with no change
people among jobs within a grade with no change
in pay.
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
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 dimensionvertical 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.
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 rangeMidpoints are the control point of the range !
!The midpoint represents base pay for a seasoned The midpoint represents base pay for a seasoned employee
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 XX in your equation in your equation of the pay line
of the pay line !
!Solve the equation for Solve the equation for YY; this value is the ; this value is the midpoint of the range
Constructing Ranges: Establishing
Constructing Ranges: Establishing
Midpoint, Minimum, and Maximum
Midpoint, Minimum, and Maximum
!!Range spreadRange 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
Constructing Ranges: Establishing Midpoint, Constructing Ranges: Establishing Midpoint,
Minimum, and Maximum Minimum, and Maximum
!
!Once theOnce the midpointmidpoint (based on the pay policy line) (based on the pay policy line) and the
and the range spreadrange 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)]
!
Constructing Ranges: Overlap
Constructing Ranges: Overlap
maximum rate grade A
maximum rate grade A -- minimum rate grade Bminimum rate grade B maximum rate grade A
PAY
Our Job 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
Broadbanding
Broadbanding
!!Use of job clusters or tiers of positions into bandsUse 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
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-spread
Bands Support:
Bands Support:
!
! Emphasis on flexibility Emphasis on flexibility
within guidelines
within guidelines
!
! Global organizationsGlobal organizations
!
! CrossCross--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
!
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, entrybasic, entry--level contributorlevel contributor
!
! seasoned contributor or team leaderseasoned contributor or team leader
!
! business unit / team manager or senior business unit / team manager or senior
professional contributors
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
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
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
Broadbanding: Placing individual
Broadbanding: Placing individual
jobs or roles in bands
jobs or roles in bands
!
!
Example:
Example:
Basic
Proficient
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
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 leadTo lead
!
!To match, orTo match, or
!
!To follow competitionTo 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.
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.
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?
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?