A Roundtable Discussion: Market Based Pay Structures for “Reality Based” Pay July 2005

1. A Roundtable Discussion:Market Based Pay Structures for “Reality Based” PayJuly 2005

2. Objectives of Pay Structures • Attract, retain, reward, motivate • Benchmark to appropriate/comparable “markets”, i.e., external equity • Reconcile internal and external equity for “job slotting” in new pay range • Remain legally compliant • Be easily communicated and understood • Be cost effective • Reinforce and reflect the mission and values of ABC • Remain unbiased and objective • Build trust and buy-in

3. Pay Structures in Support of Pay Philosophy • Business Strategy: • ABC, Inc. requires and expects the best from its creative, energetic, knowledgeable, and capable people. Our first responsibility is to serve our clients. • Pay Philosophy: • We have developed a compensation program that creates enthusiasm in those who serve so that we will create enthusiasm in those whom we serve. To succeed in this endeavor, all ABC employees will be results-oriented, quality-focused, team-driven, cost-minded, and fulfillment seeking and be rewarded at or above the median of like positions in similar organizations. • Pay Structure: • ABC Institution’s total compensation program (i.e., pay and benefits) supports our mission and strategy. It provides a competitive and affordable level of compensation for each employee in exchange for expected levels of performance and results. Total cash compensation may exceed that offered by comparable organizations provided individual, team, and/or the organization performance and results are exceptional and the organization realizes superior financial performance.

4. Purpose of Pay Structures • Method to determine fair, equitable and competitive salary levels • Demonstrate that work levels and salary levels are established fairly • Allow ease of compliance with outside agency requirements – thus helping to reduce financial risk to the organization

5. Pay Structures Should Fit Companies in Various Stages in the Business Cycle Company Emphasis Long-term Long-and short-term Short- and long-term Short-term Threshold Growth Maturity Decline Cash Situation Varies Acute Shortage All is reinvested Substantial A pay structure that promotes stability has no place in an organization on the threshold of fast growth

6. Pay Structure – fitting into compensation strategy ABC Mission/Vision Performance Management Business Strategy Total Compensation Strategy Indirect Compensation (Benefits) Performance Management Intrinsic Rewards (Individual Determines) Direct Compensation Base Pay Variable Pay Having a compensation strategy is THE FIRST AND MOST CRITICAL step to creating an effective pay structure Pay Structure

7. Pay Structure – fitting into compensation strategy Base Pay Strategy Job Value Pay “Mix” Pay Delivery Salary Structure External Value Internal Value Policies & Procedures Desired Market Position Management Philosophy External Economic Environment Short- vs. Long-term Orientation Individual Pay Determination Strategic Value Pay structures shape base compensation Base compensation influences variable incentive pay Base compensation influences cash-based benefits Base compensation is the “new frontier” for reality based pay

8. Variability in use of market data Job Analysis Position Questionnaire Market Data Emphasis Job Evaluation Job Content Emphasis Job Content Evaluation Labor Market Data Collection and Analysis Reconciliation of Internal and External Considerations Labor Market Data Collection and Analysis Job Content Evaluation Job Worth Hierarchy Pay Structure Reality based pay relies on absolute versus relative measures and baselines In adjusting to reality based pay – internal equity trumps external benchmarks

9. Typical Pay Structures Remain the Basis for Reality Based Pay max pay - min pay minimum pay Range Spread = Midpoint Differential = Compa-ratio = Range Penetration = mid-point of higher pay grade mid-point of lower pay grade ( -1 ) x 100 $40,000 employee pay range mid-point pay - range minimum range max - range min $35,000 $30,000 Range Spread Midpoint Differential $25,000 $20,000 Maximum Midpoint Minimum $15,000 1 2 3 4 Grade

10. Reality Based Pay Dictate Using Multi-Dimension Based Approach Many Multi-Dimension Based Approach Number of Job Characteristics Measured Point-Factor Approach Whole Job Market-Based Approach (JVM) One External Equity Internal Equity

11. Market Pricing Requires High Flexibility and Agility MARKET PRICING ISSUES Industry-specific for line jobs General industry for staff jobs Local for nonexempt and lower level exempt jobs Regional/national for middle-management jobs National for executive jobs Relevant Markets Data Validity Market Data Sources • From whom you hire - or would like to hire - employees • To whom you lose - or are likely to lose - employees • Whose pay practices you need to know for competitive business reasons

12. Interdepartment Intradepartment Slot Jobs with no Market Data Based on Internal Hierarchy External Hierarchy Based on Market Data Reconcile Differences Between Departments Final, Organization- wide Job Hierarchy Job Value Matrix Salary Grades Reconcile Department A Department A Reconcile Department B Department B Reconcile Department C Department C Department D Reconcile Department D Internal Hierarchies Trump External Hierarchies – New Pay

13. Questions of the Future • The paradigm (prevailing general theory) shift to “reality based” pay started with – • Demise of Dotcom – followed by • Oversized total executive compensation – expressed by • Overused external compensation surveys • Reality based pay (the “New Pay”) focuses on internal equity more than on external comparisons • Internal performance versus external comparison is what drives increases to share/stake holder investments • Pay structures need to be rethought on the basis of “reality based” pay

14. 1801 Broadway, Suite 400 Denver, Colorado 80202 www.harlongroup.com Bill Heck, Managing Principal303.996.5695