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Chapt. 11 – Designing a Base Pay Structure

Chapt. 11 – Designing a Base Pay Structure . Major Policy Decisions: Minimum & maximum levels of pay Factors: Ability to pay Profitability Government regulations Union influences Market pressures. General relationships among pay levels Non-exempt vs. exempt

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Chapt. 11 – Designing a Base Pay Structure

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  1. Chapt. 11 – Designing a Base Pay Structure • Major Policy Decisions: • Minimum & maximum levels of pay • Factors: • Ability to pay • Profitability • Government regulations • Union influences • Market pressures

  2. General relationships among pay levels Non-exempt vs. exempt Senior management & operating mgmt. Operatives & supervisors

  3. Lead, lag, or at-market Results of each choice

  4. Total compensation dollar • Base pay • Benefits • Merit pay • Other pay-for-performance

  5. Openness/Secrecy of Communication of compensation information

  6. Major Compensation Decisions • 1. Lowest rate of pay to entice quality job incumbents? • 2. Rate of pay to encourage employee retention efforts? • 3. Recognize seniority and merit through base pay? • 4. More than one rate of pay for identical or similar jobs?

  7. 5. Differences in pay rates among jobs requiring varying levels of KSAs? • 6. Recognition of dangerous or distressing working conditions? • 7. Different job progression in jobs of varying worth? • 8. Opportunity for advancement? If so, differences in pay related to promotion?

  8. 9. Can job holders go higher than max. or lower than min. for jobs? • 10.How will we handle across the board cost-of-living adjustments?

  9. Determining Pay Policy Line • Step 1 – Establish the lowest and highest rates of pay for company • Step 2 – Draw a line connecting the two points Another option – obtain lowest/highest rates of pay from market survey to draw the pay line

  10. Scatter Plots • Plotted job data provide a convenient way to see array of relationships and identify natural groupings of jobs • X Axis – job points, assigned pay grades, or job-worth identification • Y Axis – dollar value for the job

  11. Do We Need More Than One Pay Structure? • 1. What does the company consider to be the appropriate value of each job in relation to other jobs? • 2. What influences alter internal relationships? • 3. How will the company relate pay policy to labor markets? • 4. How do unions influence pay?

  12. Determining Midpoint-to-Midpoint Pay Differences • This is the percentage change in the middle value from one adjacent pay grade to the next • Usually range from 3% to 25% • Lower differences normally found in lower-paid, unskilled, semiskilled, and clerical workers vs. executives/senior managers • Usually determined by going or market rate

  13. Issues for Consideration in Deciding Midpoints • The smaller the differences, the more pay rates are available to assign to specific jobs due to more grades available in pay structure • More pay rates available, greater opportunity for assigning different pay rates for minor differences in jobs

  14. Greater differences in pay rates, the easier for job holders to perceive differences in job worth • Smaller differences may force companies to adopt more than one pay structure

  15. Developing Pay Grades • Pay grades are groupings of jobs that have similar work difficulty and complexity • Top of pay grade signifies this is most important work produced in pay grade • Bottom of pay grade signifies this is the least important work produced in pay grade

  16. Common Characteristics of Pay Grades • Each grade provides a range of pay • Within a pay grade, there is a minimum, midpoint, and maximum • Range from minimum to maximum is usually from 30 – 50% • Most pay grades have from 6 – 7 in-grade steps

  17. The relationship between rate of $$ increase per step and number of steps in grade is usually equally distributed • Midpoint of pay grades normally overlap

  18. Principal Considerations on Pay Grades, Steps, & Progression • 1. Identify the number of different jobs in company receiving different pay rates • 2. Determine number of pay structures used in company --- if only one pay structure, probably have more grades • 3. Use steps within grades to recognize seniority and longevity • 4. Use steps to recognize merit increases

  19. Spread of a Pay Grade • The height of a pay grade is its “spread” • What should be the spread? • Maximum dollar-minimum dollar x 100 = % Minimum dollar

  20. Pay Grade Width • Normally arbitrary --- many times total points (if using a point-factor plan) are just divided by a multiple and all grades are same width • Example – 1000 points total in plan; 20 grades; pay grade width = 50

  21. Within Grade Design • Organizations can choose to have as many steps within each grade as needed • Simple approach: use different steps for employee’s advancement in organization (or can tie to longevity or years of service) • Example – page 343-344

  22. Should Pay Grades Overlap? • Overlapping pay grades allow more productive and senior employees in lower pay grades to make more than new, inexperienced employees in higher pay grades • Drawback in large overlap is that promoted employees moving from lower pay grade to higher grade may not receive much pay increase

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