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8-1

Designing Pay Levels, Mix, and Pay Structures

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8-2

How to Use Local Salary Survey DataA Presentation to HRACC

April 10, 2012

Rebecca Ellis, Ph.D.Professor of HRM at Cal Poly

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8-3

•Uses of Salary Survey Data

•Interpreting HRACC Survey Data

•How You Can Help

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8-4

Uses of survey datato help develop pay structuresprice jobs adjust structures over timeadvise on salary offersforecast wage movementformulate performance pay matricesprepare salary budgetssupport labor contract negotiationsperform other work requiring sound information on competitive pay.

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8-5Building a Market-Based Pay Structure

Gather the background information needed for project success.

Determine your sources of external market data and get the data ready.

Conduct the market data analysis. Develop pay structures. Calculate the costs of the pay structures.

Implement and evaluate the new pay structures.

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8-6Determining ExternallyCompetitive Pay Levels and

StructuresExternal competitiveness: Pay relationships among organizations

Set Policy Select market

Design survey

Draw policy lines

Merge internal & external pressures

Competitive pay levels, mix, and structures

Some Major Decisions in Pay Level Determination Determine pay-level policy. Define purpose of survey. Specify relevant labor market. Design and conduct survey. Interpret and apply results. Design grades and ranges or bands.

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8-7What Is the Purpose of a Salary Survey?

A systematic process of collecting and making judgments about compensation paid by other employers

Provides data for:

Setting the pay policy relative to competition

Translating that policy into pay levels and structures

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8-8Why Conduct a Salary Survey?

Adjust pay level – How much to pay?

Adjust pay mix – What forms?

Adjust your existing pay structure-update percentage to use?

Analyze special situations- e.g. hard-to- hire; ‘hot jobs’

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8-9 Select Relevant Market Competitors

Relevant labor market includes employers who compete For same occupations or skillsFor employees in same geographic areaWith same products or services

ExampleExhibit 1: Relevant Labor Markets by

Geographic and Employee Groups

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8-10Exhibit 1: Relevant Labor Markets by Geographic and Employee

GroupsGeographic

ScopeProduction Office and

ClericalTechnicians Scientists &

EngineersManagerial

ProfessionalExecutive

Local: Within relatively small areas such as cities or MSAs

Most likely Most likely Most likely

Regional: Within a particular area of the state or several states

Only if in short supply or critical

Only if in short supply or critical

Most likely Likely Most likely

National: Across the country

Most likely Most likely Most likely

International: Across several countries

Only for critical skills or those in very short supply

Only for critical skills or those in very short supply

Sometimes

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8-11Interpret Survey Results (1 of 2)

No single best approachVerify data

Check accuracy of job matchesCheck for anomalies

Does any one company dominate? (Cal Poly)Do all employers show similar patterns?

(industry differences)Outliers?

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8-12Interpret Survey Results (2 of 2)

Statistical analysis Measures of central tendency

Average/Mean Median Weighted mean

Measures of variation Median = 50th %ile

Updating/aging survey data Choices for Updating Salary Data include the quarterly

Employment Cost Index (ECI) of the Bureau of Labor Statistics (BLS) and the annual Salary Budget Survey of WorldatWork. Some employers use the CPI, particularly in labor negotiations.

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8-13

Help Desk Support

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8-14

H.R. Assistant

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8-15

Web Salary Data

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8-16Why ‘age’ survey data?

Salary surveys capture salary data at a specific point in time in the past. But, the market continues to move because of pay increases, market adjustments, promotions and employee job switches.

Therefore, it is necessary to “age” or “trend” the data to a common point in time—e.g., today’s date, the date the pay plan will go live, the beginning of a new fiscal year, etc.—using a factor that reflects market movements.

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8-17

Four Simple Steps to Aging1. Determine the starting date for the new pay structure.

2. Determine wage movement percentages over the relevant time period (from survey current date to pay plan starting date)

3. Determine the aging factor4. Apply the aging factor to bring data up to date as of the beginning of your plan year.

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8-18

Actual 2010 Actual 2011 Projected 2012

Mean Median Mean Median Mean Median

WorldatWork’s 2012 survey projects: WorldatWork Pay Increase Survey

Actual 2010

Actual 2011

Projected 2012

Mean Median Mean Median Mean MedianGeneral Increase/

COLA

1.4% 1.0% 1.5% 1.9% 1.7% 2.0%

Merit 2.3 2.5 2.6 3.0 2.8 3.0Other 0.9 0.5 0.9 0.5 0.9 0.5Total 2.5 2.7 2.8 3.0 2.9 3.0

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8-19

Construct a Market Pay Line

Definition of market pay lineLinks a company’s benchmark jobs on

horizontal axis (internal structure) with market rates paid by competitors (market survey) on vertical axis

Approaches to constructing a market pay lineFreehand approachRegression analysis

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8-20

Understanding Regression

Job Evaluation Points20 40 60

Surv

ey:

Sala

ry ($

000)

2

0 80 120100 160140 180

86

1210

14

4

16

Tech A Sr Tech Eng 1 Eng 3 Eng 5 Mgr 1 Mgr 3

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8-21Combine Internal Structureand External Market Rates

Two parts of the total pay model have mergedInternally aligned structure - Horizontal axisExternal competitive data - Vertical axis

Two aspects of pay structurePay-policy linePay ranges

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8-22Balancing Internal and External Pressures: Adjusting the Pay

Structure

Internal Pressures External Pressures

Job Structure Pay Structure

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8-23

AB CDEF

Exte

rnal

Com

petit

iven

ess:

Sala

ries p

aid

by c

ompe

titor

s

Pay Policy Line30,000

35,000

40,000

45,000

50,000

55,000

GHIJK LMN OPInternal Structure: JE Points

Develop Pay Grades

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8-24From Policy to Practice:Pay Policy Line

Approaches to translate external competitive policy into practiceChoice of measure

50th percentile for base pay75th percentile for total compensation

UpdatingPolicy line as percent of market line

Specify a percent above or below market line an employer intends to match

Other optionsPay among the leadersLead for some job families and lag for others

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8-25Implementing Pay Level Policy

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8-26From Policy to Practice:Grades and Ranges

Why bother with grades and ranges?Offer flexibility to deal with pressures from

external markets and differences among firms

Develop gradesEstablish range midpoints, minimums, and maximums

Examine grade overlap

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8-27Why Bother with Grades and Ranges?

External pressuresDifferences in quality (KSAs) among

individuals in external marketDifferences in productivity or value of quality

variationsDifferences in mix of pay forms of competitors

Internal pressuresRecognize individual performance differences

with payMeet employees’ expectations that their pay

will increase over timeEncourage employees to remain with

organization

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8-28

Develop GradesGrades group job evaluation data on horizontal axisAll jobs considered substantially equal for

pay purposes placed in same gradeEach pay grade has its own pay range and all

jobs in a single grade have same pay rangeEnhances ability to move people among jobs

within a grade with no change in payHow many pay grades?

Number of jobsOrganization hierarchyReporting relationships

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8-29Establish Range Midpoints,Minimums, and Maximums

Ranges group salary data on vertical axisEstablish upper and lower pay limits for all

jobs in each gradeMidpoints correspond to competitive pay policyPoint where pay-policy line crosses center of

each gradeOften represents base pay for a seasoned

employee

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8-30

Exhibit 2: Range Midpoint,Minimum, and Maximum

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8-31Establish Range Midpoints,Minimums, and Maximums

Size of range based on judgment about how ranges support Career paths Promotions Other organization systems

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

and below midpoint Entry to midlevel professional and managerial

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

and below midpoint

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8-32

Exhibit 3: Range Overlap

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Market PricingApproach

Sets pay structures almost exclusively by relying on external market rates

Emphasizes external competitiveness (market-based factors) and de-emphasizes internal alignment

IssuesValidity of market dataUse of competitors’ pay decisions as primary

determinant of pay structureLack of value added via internal alignmentDifficult-to-imitate aspects of pay structure are

deemphasizedFairness

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8-34

Sample Merit Grid

  Position in Range

Performance Level

Zone 1 Zone 2 Zone 3 Zone 4

4 6-8% 4-6% 2-4% 1-3%

3 4-6% 2‐4% 1‐3% 0

2 2-4% 0 0 0

1 0 0 0 0

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8-35

Attraction Drivers Gen Y Gen X Boomers

Career Advancement 1 2 8

Competitive Base 2 1 1Learning/Development 3 6Challenging Work 4 3 2Convenient Location 5 4 3Reputation as Good Employer 6 7 4

Flexible Schedule 7 5 5PTO 8 10Competitive Benefits 9 9Reasonable Workload 10Organization’s Financial Health 8

Competitive Retirement 10