Designing Compensation System: Part IIIDr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
Professor
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Constructing a Pay Structure
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Pay Structure
Useful for standardizing compensation practicesPay structures include several grades Each grade contains minimum salary/wage and
step increments/grade rangePay for each job may be pre-determined through
collective bargaining.
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Factors Affecting Pay Structures
Corporate culture and value
Management Philosophy
External Economic Environment
External “Socio-political”
environment (Unions)Sunday, April 9, 2023 4
Anatomy of a Pay structurePay Structure – consists of a series of Pay
Ranges, or “grades”, each with a minimum and maximum pay rate
Pay Range - has a minimum pay value, maximum pay value and a “midpoint”
Midpoint of a range – represents the competitive market value for the job or group of jobs
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Range Spread – Difference between maximum and minimum pay value
- Usually expressed as % of difference between max and minimum divided by the minimum
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Spread on either side of midpoint
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Midpoint – Minimum Maximum– Midpoint Minimum Midpoint
Midpoint = Max + Min 2
Range Spread
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Minimum Midpoint Maximum
200000 350000 612500
Range Spread Width = 206 %
-75% 75%
Range Spread
Vary based on level and sophistication of skills required for a given position
Entry level positions (skills that are quickly mastered) have narrower pay ranges
Managerial positions will have broader pay ranges
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Typical Range Spreads
20 – 25 % - Lower-level service, production
30 – 40 % - clerical, technical
40 – 50 % - professional, administrative, middle management
Range spreads 300% or more with Broad banding
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Compa - RatiosA Statistic that expresses the
relationship between base salary and the midpoint, or between the midpoint and the market average
Compa-Ratio = Base Salary MidpointCompanies strive to pay around a compa-
ratio of 100 %
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Compa - RatiosIndividual C-R vary according to
How long the individual has been in the
jobPrevious work experienceJob performance
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Compa - Ratios
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22500
25000
90%
25000
25000
100%
27500
25000
110%
25000
25000
100%
24500
Mkt Avg
25000
Mkt Avg
98%
Person 1 Person 3 AveragePerson 2
Base Salary
Midpoint
Compa-Ratio
Base SalaryMidpoint
Base SalaryMidpoint
Building Market Competitive Compensation
System
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Pay StructureBasis of pay programs is a pay structure - a
hierarchy of jobs with pay ranges Greater worth of job, higher the pay grade and
range Pay program objectives are as follows:
• Internal equity. • External equity (or competitiveness), • Individual equity, • Process equity, • Performance or productivity incentives, • Maximum use of financial resources, • Compliance with laws and regulations, and • Administrative efficiency 15
Constructing a Pay Structure
Step 1: Job Evaluation - Deciding number of pay structures
Step 2: Salary surveys - Determining external market pay structure
Step 3: Grouping Jobs - Defining pay gradesStep 4: Pricing each pay grade – Establishing
wage curveStep 5: Formulating rate structure
Step 1: Job EvaluationSystematic process of determining relative worth of jobs in order to establish which jobs should be paid more than others within an organization.
Salary surveys compare an organisation’s salaries to those offered in other organisations.
Does the organisation want to compare itself with:
Organisations in the same or related industries?Organisations in the same geographic area?‘Best practice’ companies?Domestic companies?Multinationals?
Step 2: Salary Surveys (Compensation Surveys)
An
nu
al S
ala
ry (
$)
26,000
24,000
21,000
18,000
15,000
12,000250
Clerk IJob Evaluation Points
Market Pay Line
500Clerk II
750Clerk III
1,200Chief Clerk
Step 2: External Market Pay StructurePay Structure for Clerk Jobs
Group jobs into Pay Grades or Job Classes
Groups of jobs within a particular class that are paid the same rate or rate rangejobs of equal difficulty
Step 3 Grouping Jobs
An
nu
al S
ala
ry (
$)
26,000
24,000
21,000
18,000
15,000
12,000
Messenger (200)Mail Clerk I (220)Clerk I (250)Recep. (300)
Job Evaluation Points
Market Pay structure
Step 3: Defining Pay Grades (Internal Job Structure
Mail Clerk II (350)Clerk II (500)Sec.I (650)
Mail Clerk III (675)Clerk III (750)Sec. II (1,000)
MailroomSuper (1,175)Chief Clerk (1,200)Exec. Sec. (1,900)
200-300 301-650 651-1,150 1,151-2,000
Hierarchy of Clerical Jobs, JE Points and Pay Grades
JOB Pt. Grd.
Customer Service Rep.Executive Secretary/Admin.
Asst.Senior Secretary
300298290
5
SecretarySenior General ClerkCredit and Collection
230225220
4
Accounting ClerkGeneral ClerkLegal Secretary/AssistantSenior Word Processing
Operator
175170165160
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Step 4 Pricing Each Pay Grade
Price Each Pay Grade and establish Wage Curve
Wage Curve shows pay rates currently paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation committee
PAY
JE Points
Wage Curve: Integrating Internal Job Structure with External Market Pay Rates
Wage Curve: Integrating Internal Job Structure with External Market Pay Rates
80 120
monthlysalary(Rs.000)
8
7
6
5
4
3
2
1
40
Line of Best Fit :using Market-Survey data or current organization data
Jobs AB CDEF GHIJ KLM 0P QRS TUV
Grades 1 2 3 4 5 6 7
160 200 240 280 320
Step 5: Formulating Rate Structure
GR JOBS SALARY (Rs.)
I AB 5000
II CDEF 7000
III GHIJ 9000
Single Rate Structure
GR JOBS SALARY (Rs.)
I AB 3000–250–4500–500-9000
II CDEF 6000–400–8400–750-14400
III GHIJ 10000–600–13600–900-20800
Overlapping Rate Range
Pay Policies Over Time
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