Designing Pay Levels, Mix and Pay Structures

46  Download (0)

Full text

(1)

Chapter

8

8

Designing Pay Levels, Mix

Designing Pay Levels, Mix

and Pay Structures

(2)

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.

(3)

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 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 !

(4)

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.

(5)

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

!

(6)

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.

(7)

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)

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?

!

(9)

Which Jobs to Include?

Which Jobs to Include?

Benchmark Jobs

Approach Low - High Approach Global Approach Benchmark Conversion Approach Market Basket Approach

(10)

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

(11)

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.

(12)

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

(13)

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

(14)

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

!

(15)

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

(16)

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.

(17)

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 80

(18)

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.

(19)

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

(20)

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

(21)

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

(22)

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

(23)

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

(24)

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)

(25)

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

(26)

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.

(27)

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

(28)

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.

(29)

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

(30)

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

(31)

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

(32)

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)]

!

(33)

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

(34)

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

(35)

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

(36)

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

!

(37)

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

(38)

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

(39)

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

(40)

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

(41)

Broadbanding: Placing individual

Broadbanding: Placing individual

jobs or roles in bands

jobs or roles in bands

!

!

Example:

Example:

Basic

Proficient

(42)

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

(43)

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.

(44)

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.

(45)

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?

(46)

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?

Figure

Updating...

References

Related subjects :