Building an Effective. A Step by Step Guide

Building an Effective 

Organizational Pay Structure

Organizational Pay Structure

About Jennifer Loftus

Astron Solutions. Her primary areas of expertise are total rewards, customized market surveys, employee opinion surveys, and technology-based HR solutions. Jennifer has y , p y p y , gy fourteen years of experience garnered at organizations including the Hay Group, Parsons Brinckerhoff, Eagle Electric Manufacturing Company, and Harcourt General.

A member of SHRM’s Total Rewards Special Expertise Panel Jennifer is President Elect of A member of SHRM s Total Rewards Special Expertise Panel, Jennifer is President-Elect of HR/NY and a volunteer article reviewer for WorldatWork and SHRM. She is a subject matter expert to the SHRM Learning System. Jennifer is a sought-after HR speaker, appearing on local and national television, radio, and conferences. She has also been published in local and national periodicals

and national periodicals.

Jennifer has an MBA in Human Resource Management from Pace University and a BS in Accounting from Rutgers University.

Today’s Agenda

• Establish the Foundation

• Execute Preparatory Activities

• Benchmark Key Positions

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• Develop the Pay Structure

• Conduct a Reality Check

• Conduct a Reality Check

• Avoid These Pitfalls

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I’m Jennifer Loftus, your guide

for today’s journey.

Establish the Foundation:

The Five Elements of Total Rewards

Cash Compensation

Work / Life Balance

Benefits

Performance Management and Recognition

Career Advancement and Development

Establish the Foundation:

Compensation System Goals

• Sensitive to the external market

• Reflective of internal equity

• Motivating to employees

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• Supportive of recruitment and retention activities

• Effectively and easily administered in a timely fashion

• Flexible

• Flexible

• Logical

• Easily explained

Easily explained

• Supportive of organizational mission and strategy

• Legally defensible

Execute Preparatory Activities:

The Compensation Philosophy

ti b fit d th t t l d

compensation, benefit, and other total rewards programs. • Serves as the blueprint for all rewards-related decisions.

• Tailored according to employee group or key positions.

> Addresses rewards for “mission critical” positions / employees > Addresses rewards for mission critical positions / employees.

• Impacted by organizational mission, culture, location, and growth.

• Revisited and refreshed as needed or as the organizational strategic plan changes to ensure positive organizational contribution and support.

Execute Preparatory Activities:

The Compensation Philosophy (2)

• Total Rewards elements’

• Human Resource

• Total Rewards elements

roles

• Human Resource

constraints

• Internal job equity

• External market

• Employee morale

• Fiscal sensitivity

• External market

competitiveness

• Fiscal sensitivity

• Organizational values

• Specific peer

organizations and

Execute Preparatory Activities:

Park Engineering

• 228 employee firm

• 26 job titles

• Headquartered in New York City

• Founded in 1974

• $50 million in annual revenue$50 million in annual revenue

• Wants a market driven pay system

• Will use job ranking for job evaluation

• Has a compensation philosophy of

M t hi th N Y k Cit i i k t f t h i l iti – Matching the New York City engineering market for technical positions – Matching the broad New York City market for non-technical positions

Execute Preparatory Activities:

Determine Survey Sources

• A variety of survey sources

• Published survey data processed by a neutral third party • Data no more than two years old

• Data no more than two years old

• Surveys that are reflective of your organization’s compensation

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philosophy

Benchmark Key Positions

• Select benchmark positions that – Have relatively stable job content

– Represent the entire range of jobs to be evaluated

– Cover a sizable portion of the organization’s workforcep g – Have readily available market data

– Are sensitive to external market trends

• Strive to benchmark at least 50% of your total job titles.

• Gather accurate, current job descriptions for the benchmark positions.

Benchmark Key Positions (2)

• Match your benchmark positions to the job descriptions provided in the survey.

• Look for at least an 80% match of your benchmark’s essential functions to the survey job description’s essential functions.

• For positions with greater or lesser responsibilities, consider leveling the p g p , g

market data.

– Your position does more than the survey description? Consider increasing the market data 10 – 20%.g

– Your position does less than the survey description? Consider decreasing the market data 10 – 20%.

Benchmark Key Positions:

Ties to The Compensation Philosophy

Salary Survey Data? Pros Cons

P50– “Middle of the Half the respondents pay More statistically accurate May lose talent if total P50– Middle of the

road” position

Half the respondents pay below the P50 rate. Half the respondents pay above the P50 rate.

More statistically accurate

compensation value, as it tends to reduce the influence of extreme values. Should position the organization

sufficiently to recruit and retain most

May lose talent if total rewards program is not robust.

staff. P25– “Market lag”

position

25% of the respondents pay below the P25 rate.

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Selected by organizations with strong variable compensation and / or benefits programs.

Will lose talent if total rewards program is not robust.

75% of the respondents pay

above the P25 rate. A safe position for organizations encountering financial difficulties. Relatively low cost to support. P75– “Market leader”

position

75% of the respondents pay below the P75 rate.

25% of the respondents pay above the P75 rate.

Good when competing for employees with specialized skill sets.

Good when competing for employees in a tight labor market.

Costly to develop and maintain.

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Beneficial if offering less robust variable compensation and / or benefits

Benchmark Key Positions:

Engineer II Sample Base Pay Market Data

Survey 1 Survey 2 Survey 3 Survey 4

New York City Effective 1/1/10 SIC Code 8711

New York City Effective 3/1/09 All US Effective 2/1/09 Engineering Services All US Effective 1/1/09 Small Engineering Firms P25 P50 P75 P25 P50 P75 P25 P50 P75 P25 P50 P75 $65 9 $71.0 $78 4 $75 6 $80.6 $94 6 $57 1 $64.4 $71 1 $56 3 $62.4 $68 8 $65.9 $71.0 $78.4 $75.6 $80.6 $94.6 $57.1 $64.4 $71.1 $56.3 $62.4 $68.8

A variety of recent third party produced survey sources • A variety of recent, third party produced survey sources • Reflective of the compensation philosophy

Benchmark Key Positions:

Engineer II Sample Base Pay Market Data (2)

Survey 1 Survey 2 Survey 3 Survey 4

New York Cityy New York City All US All US Effective 1/1/10 SIC Code 8711 y Effective 3/1/09 Effective 2/1/09 Engineering Services Effective 1/1/09 Small Engineering Firms P25 P50 P75 P25 P50 P75 P25 P50 P75 P25 P50 P75 $65.9 $71.0 $78.4 $75.6 $80.6 $94.6 $57.1 $64.4 $71.1 $56.3 $62.4 $68.8

Adjusted Market Data: Aged to 7/1/10, geographic factored for New York City (US data only)

$66.9 $72.1 $79.6 $78.6 $83.8 $98.4 $73.2 $82.6 $91.2 $75.1 $83.2 $91.7

Then…

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• Review market data for skew.

Develop the Pay Structure

• There’s no one right way.

• Factors to consider include the following:

– The influence of external and internal equityq y – Organizational size

– Number of organizational levels Distinctions between job content – Distinctions between job content – Pay increase and promotion policy – Administrative efficiency

• First set the grades, then develop the ranges.

Develop the Pay Structure:

Park Engineering Base Pay Market Data

Position P50

Market Data

Position P50

Market Data

Market Data Market Data

Engineer I $61.2 Recruiter $62.9 Engineer II $80.4 HR Generalist $62.2

$ $

Engineer III $95.7 HR Manager $106.1 Engineering Manager $128.3 Receptionist $33.2 Architect $68.1 Office Clerk $38.3 Drafter $57.5 Executive Secretary to the CEO $72.4 Accounting Clerk $39.2 Chief Operating Officer $296.0 Accounting Manager $103 2 Chief Executive Officer $414 8 Accounting Manager $103.2 Chief Executive Officer $414.8

Develop the Pay Structure:

Determine Natural Breaks for Grades

• Group positions with similar target market data into a grade. • 15% breakpoint approach as a start.

– (Target market data * .85)

• Use the average target market data for each grade as the range midpoint.

Develop the Pay Structure:

Park Engineering Grades

Title P50 Market Potential New Grade Breakpoint

Chief Executive Officer $414.8 Chief Operating Officer $296.0

Engineering Manager $128.3 $109.1 ($128.3 *.85) HR M $106 1 $90 2 HR Manager $106.1 $90.2 Accounting Manager $103.2 Engineer III $95.7 Engineer II g $80.4 $68.3

Executive Secretary to the CEO $72.4

Architect $68.1 $57.9 Recruiter $62.9 HR Generalist $62 2 HR Generalist $62.2 Engineer I $61.2 Drafter $57.5 $48.9 Accounting Clerk $39 2 $33 3 Accounting Clerk $39.2 $33.3 Office Clerk $38.3 Receptionist $33.2

Develop the Pay Structure:

Range Elements to Consider

• Pay range spreads [(maximum – minimum) / minimum] – Non-exempt = 40%

– Exempt = 50% – Executive = 60%

• Midpoint progressions [(midpoint 2 – midpoint 1) / midpoint 1] – Consistent or varying?

– Phantom grades if consistent midpoint progressions

• Amount of range overlap – Consider compression – Consider promotional policy

• Internal equity

– Reslot positions to reflect internal value of job – Slot positions not benchmarked into the system

Develop the Pay Structure:

Park Engineering Ranges

Title P50 Market Data Grade Range Minimum P50 Range Midpoint Range Maximum

Chief Executive Officer $414.8 50 $319.1 $414.8 $510.6

Chief Operating Officer $296.0 45 $227.7 $296.0 $364.3

Engineering Manager $128.3 40 $102.6 $128.3 $153.9 HR Manager $106 1 35 $83 8 $104 7 $125 6 HR Manager $106.1 35 $83.8 $104.7 $125.6 Accounting Manager $103.2 35 Engineer III $95.7 30 $76.6 $95.7 $114.9 Engineer II $80 4 25 $61 1 $76 4 $91 7 Engineer II $80.4 25 $61.1 $76.4 $91.7 Executive Secretary to the CEO $72.4 25

Architect $68.1 20 $50.9 $63.6 $76.4 Recruiter $62.9 20 HR Generalist $62.2 20 HR Generalist $62.2 20 Engineer I $61.2 20 Planner N/A 20 Drafter $57.5 15 $47.9 $57.5 $67.1 Accounting Clerk $39.2 10 $32.3 $38.8 $45.2 Office Clerk $38.3 10 Receptionist $33.2 5 $27.7 $33.2 $38.8

Conduct a Reality Check

• Green Circle Rates

– Bring to minimum adjustmentsBring to minimum adjustments • Isolated or consistent?

• Red Circle RatesRed Circle Rates

– Freeze pay rates – Grandfather

– PromotePromote – Reduce pay

• Isolated or consistent?

• Compa Ratios

– [Employee Pay / Range Midpoint]

Conduct a Reality Check:

Park Engineering Ranges

Title Grade Range Minimum P50 Range Midpoint Range Maximum

Architect 20 $50.9 $63.6 $76.4 Recruiter 20 Recruiter 20 HR Generalist 20 Engineer I 20 Planner 20 Drafter 15 $47 9 $57 5 $67 1 Drafter 15 $47.9 $57.5 $67.1 Accounting Clerk 10 $32.3 $38.8 $45.2 Office Clerk 10 Receptionist 5 $27 7 $33 2 $38 8 Receptionist 5 $27.7 $33.2 $38.8 Consider…

• The HR Generalist earning $47,000 a year. − Compa ratio of 0 74Compa ratio of 0.74.

• The Drafter earning $72,000 a year. − Compa ratio of 1.25.

Conduct a Reality Check (2)

– Pay rates for new vs long-service employees – Pay rates for new vs. long-service employees

– Pay rates for union employees vs. non-union supervisor – Pay rates for non-exempt employees vs. supervisor

• Can you hire with these pay rates?

Avoid These Pitfalls

• Using “free” survey data. –Free ≠ Good

–Internet ≠ TrueInternet ≠ True

• Using only one survey source.

• Calling competitors for market data. • Working with old job descriptions.

• Matching to surveys based on job titleMatching to surveys based on job title.

Jennifer Loftus’ Contact Information

Questions? You can reach me at

Email: [email protected]

Facebook User ID: 1050838080

Twitter Feed: @AstronSolutions

Twitter Feed: @AstronSolutions