McGraw-Hill/Irwin
© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Masood Pervez
B-083325
8th(HRM)
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COMPENSATION
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Determining Externally Competitive Pay Levels and Structures
Set Policy
Define Market
Conduct 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
Define relevant labour market
Design and conduct survey
Interpret and apply results
Design grades and ranges or bands
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Set Competitive Pay Policy
Lead the market with respect to pay
Match average pay of competitors
Lag behind average market pay rates
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Compensation Survey
the systematic process of collecting and making judgments about compensation paid by other employers
provides data for translating pay policy into pay levels and structures
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Purpose of Compensation Survey
Adjust Pay Level – How Much to Pay?
Adjust Pay Mix – What Forms?
Adjust Internal Structure?
Study Special Situations
Estimate Competitors’ Labour Costs
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Define Relevant Market Competitors
employers who compete for the same occupations or skills required
employers who compete for employees within the same geographic area
employers who compete with the same products and services
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Relevant Labour Markets by Geographic and Employee Groups
Geographic Scope
Production Office and Clerical
Technicians Scientists & Engineers
Managerial Professional
Executive
Local: Within relatively small areas such as cities
Most likely Most likely Most likely
Regional: Within a particular area of the province
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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Design the Survey
Who should be involved?
compensation staff and/or
consultants
How many employers should be included?
Can use publicly available data
Can use internet data
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Design the Survey
Which jobs should be included? Benchmark jobs Low-high approach (for person-based plans) Benchmark conversion approach
What information to collect? Base pay Total cash Total compensation
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Advantages and Disadvantages of Measures of Compensation
Base Pay Tells how competitors are valuing the work in similar jobs
Fails to include performance incentives and other forms, so will not give true picture if competitors offer low base but high incentives
Total Cash
(base + bonus)
Tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job.
All employees may not receive incentives, so it may overstate the competitors’ pay; plus, it does not include long-term incentives.
Total Compensation
(base + bonus + stock options + benefits)
Tells the total value competitors place on this work
All employees may not receive all the forms. Be careful; don’t set base equal to competitors’ total compensation. Risks high fixed costs.
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Job Matching
the degree of match between the organization’s jobs and survey jobs must be carefully assessed on job content rather than on the basis of job title only
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Analyzing Survey Data
no single best approach check accuracy of data and anomalies statistical analysis based on two pieces
of data on each benchmark:
Survey data - dollars
Our own data - job evaluation points
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Analyzing Survey Data
frequency distribution organizes data measures of central tendency
averages or meansweighted meansmedians
measures of distribution, or dispersionstandard deviationpercentiles and quartiles range spread
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Age/Trend the Market Data
Pay rates are constantly changingSurvey data represents pay at the date
it was collectedAdjust survey data to represent pay at
the current or future date when pay decisions will be implemented
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Combine Job Evaluation and Market Survey Data
Each benchmark job has:Job evaluation pointsAn average wage paid by survey companies.
Scatterplots are useful to see what the data look like.
Summarize the data further by fitting a line through the points the MARKET PAY LINE
Can “eyeball” data or use regression techniques
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PAY
OUR Job Evaluation Points
Scatterplot
120 160 200 240 280 320 360
SURVEYmonthlysalary($000)
7
6
5
4
3
2
1
80
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PAY
OUR Job Evaluation Points
Scatterplot With Regression Line
120 160 200 240 280 320 360
SURVEYmonthlysalary($000)
7
6
5
4
3
2
1
80
Market Pay Line
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Adjust Market Data to Reflect Organization’s Pay Policy
Lead the Market: pay level above market for the year and equal at year end update factor will be equal to the projected market increase
Match the Market: pay level above market for first half of year and below for
second half update factor will be half of the projected market increase
Lag the Market: pay level below the market for the entire year no adjustment will be made to account for the projected market
increase
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PAY
OUR Job Evaluation Points
Developing a Pay Policy LineDeveloping a Pay Policy Line
120 160 200 240 280 320 360
OURmonthlysalary($000)
7
6
5
4
3
2
1
80
Pay Policy Line :using market-survey data(updated and aged to reflectpay policy)
leadmatch
lag
Market pay line(beginning of year)
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Pay Structure
two components:1. Pay policy line: represents an
adjustment to the market pay line to reflect the organization’s external competitive position in the market
2. Pay ranges: upper and lower limits on pay
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Why Use Pay Ranges?
External Pressures: quality variations (KSAs) among market employees differences in productivity from quality variations differences in the mix of pay forms competitors use
Internal Pressures recognize individual performance variations with pay employees’ expectations that their pay will increase
over time encourage employee retention
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Constructing Ranges:1. Develop Grades
a pay grade is a horizontal grouping of different jobs that are considered substantially equal for pay purposes
all jobs within a single grade will have the same pay range
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PAY
Our Job Evaluation Points
PAY GRADE STRUCTURE
100 150 200 250 300 350
Ourmonthlysalary(000)
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7
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5
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3
2
1
I II III IV V Pay Grades
Pay Policy Line
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Constructing Ranges: 2. Establishing Midpoint, Minimum,
and Maximum pay ranges refer to the vertical
dimension of the pay structure – an upper and lower limit on pay for all jobs in a pay grade
each pay grade has a pay range consisting of a midpoint and a specified minimum and maximum
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PAY
Our Job Evaluation Points
PAY RANGES
100 150 200 250 300 350
Ourmonthlysalary(000)
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7
6
5
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3
2
1Pay Policy LinePay Policy Line
Pay Range
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Range Midpoint,Minimum, and Maximum
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Range Spread
Spread = range maximum – range minimum
e.g., $65,875 - $43,917 = $21,958 Spread percentage = spread/range minimum
e.g., $21,958/$43,917 = 50%
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Range Overlap
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Broadbanding
collapses the number of salary ranges within a traditional salary structure into a few broad bands
purpose is to manage career growth and administer pay
an alternative to traditional salary grade structures
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From Grades to Bands
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Contrasts Between Ranges and Bands
Ranges Support: some flexibility within controls relative stable organization
design recognition via titles or career
progression midpoint controls,
comparatives controls designed into system give managers “freedom with
guidelines” Up to 150 percent range
spread
Bands Support: emphasis on flexibility within
guidelines global organizations cross-functional experience
and lateral progression reference market rates,
shadow ranges controls in budget, few in
system give managers “freedom to
manage” pay 100 – 400 percent spreads
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Market Pricing
establishing pay structure by relying almost exclusively on external market pay rates
market pricing becoming more common in Canada
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Conclusion
most organizations survey other employers’ pay practices to determine the competitors’ rates
survey results used to construct market pay linepay policy line adjusts market pay line based on
the decision to lead, match or lag market paypay grades and ranges/bands designed around
pay policy line to integrate internal and external pressures
increasing interest in broadbanding and market pricing