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Designing Pay Levels, Mix, and Pay Structures

Chapter. 8. Designing Pay Levels, Mix, and Pay Structures. Screen graphics created by: Jana F. Kuzmicki, PhD Troy State University-Florida and Western Region. Learning Objectives After discussing Chapter 8, students should be able to:.

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Designing Pay Levels, Mix, and Pay Structures

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  1. Chapter 8 Designing Pay Levels, Mix, and Pay Structures Screen graphics created by: Jana F. Kuzmicki, PhD Troy State University-Florida and Western Region

  2. Learning ObjectivesAfter discussing Chapter 8, students should be able to: • Identify the major decisions in establishing externally competitive pay. • Describe the purpose(s) of a salary survey. • Discuss the importance of defining the relevant market in a pay survey. • Explain the steps involved in designing a pay survey. • Describe the key issues involved in interpreting the results of a pay survey. • Explain how the market pay line combines the internal structure with external market rates. • Discuss the use of pay grades and pay ranges and their relationship to internal alignment and external competitiveness. • Discuss the pros and cons of the market pricing approach to establishing a pay structure.

  3. Chapter Topics • Major Decisions • Set Competitive Pay Policy • Purpose of a Survey • Select Relevant Market Competitors • Design the Survey • Interpret Survey Results and Construct a Market line • From Policy to Practice: Pay-Policy Line • From Policy to Practice: Grades and Ranges • From Policy to Practice: Broad Banding • Balancing Internal and External Pressures: Adjusting the Pay Structure • Market Pricing

  4. Exhibit 8.1: Determining ExternallyCompetitive Pay Levels and Structures External competitiveness: Pay relationships among organizations Merge internal & external pressures Competitive pay levels, mix, and structures Draw policy lines Select market Design survey Set Policy • 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.

  5. Lead Policy Lag Policy Flexible Policies Employer of Choice Specify Competitive Pay Policy Pay with Competition (Match) Shared Choice

  6. What Is the Purpose of a Salary Survey? • 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

  7. Why Conduct a Salary Survey? • Adjust pay level – How much to pay? • Adjust pay mix – What forms? • Adjust pay structure? • Analyze special situations • Estimate competitors’ labor costs

  8. Select Relevant Market Competitors • Relevant labor market includes employers who compete • For same occupations or skills • For employees in same geographic area • With same products or services • Examples • Exhibit 8.2: Relevant Labor Markets by Geographic and Employee Groups • Exhibit 8.3: Pay Differences by Location • Fuzzy markets

  9. Exhibit 8.2: Relevant Labor Markets by Geographic and Employee Groups

  10. Exhibit 8.3: Pay Differences by Location

  11. Design the Survey • Who should be involved? • How many employers? • Publicly available data • “Word-of-mouse” • Exhibit 8.4: Salary Data on the Web • Where are the standards? • Which jobs to include? • What information to collect?

  12. Exhibit 8.4: Salary Data on the Web

  13. Which Jobs to Include? Benchmark-jobapproach Low-highapproach Benchmarkconversionapproach

  14. What Information to Collect? • Nature of organization • Total compensationsystem • Specific pay data onincumbents in jobsunder study

  15. Nature of organization Financial performance Size Structure Nature of total compensation system Cash forms used Non-cash forms used Incumbent and job Date Job Individual Pay HR outcomes Productivity Total labor costs Attraction & retention Employee views Exhibit 8.6: Possible Survey DataElements and Rationale

  16. Exhibit 8.7: Advantages and Disadvantagesof Measures of Compensation

  17. Interpret Survey Results (1 of 2) • No single best approach • Verify data • Check accuracy of job matches • Survey leveling • Check for anomalies • Does any one company dominate? • Do all employers show similar patterns? • Outliers? • Example • Exhibit 8.9: Survey Data

  18. Interpret Survey Results (2 of 2) • Statistical analysis • Frequency distribution • Exhibit 8.10: Frequency Distributions • Measures of central tendency • Mode • Mean • Median • Weighted mean • Measures of variation • Standard deviation • Quartiles and percentiles • Exhibit 8.11: Statistical Measures for Analyzing Survey Data • Update survey data • Exhibit 8.12: Choices for Updating Salary Data Reflect Pay Policy

  19. Construct a Market Pay Line • Exhibit 8.8: Salary Graphs Using Different Measures of Compensation • Definition of market pay line • Links 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 line • Freehand approach - Exhibit 8.8 • Regression analysis - Exhibit 8.13 and Exhibit 8.14

  20. Exhibit 8.13: From RegressionResults to a Market Line

  21. Exhibit 8.14: Understanding Regression 16 14 12 10 Survey: Salary ($000) 8 6 4 2 0 20 120 40 60 80 100 140 160 180 Job Evaluation Points Tech A Sr Tech Eng 1 Eng 3 Eng 5 Mgr 1 Mgr 3

  22. Combine Internal Structureand External Market Rates • Two parts of the total pay model have merged • Exhibit 8.15 • Internally aligned structure - Horizontal axis • External competitive data - Vertical axis • Two aspects of pay structure • Pay-policy line • Pay ranges

  23. 55,000 50,000 45,000 External Competitiveness:Salaries paid by competitors 40,000 35,000 Pay Policy Line 30,000 GHIJK AB CDEF LMN OP Internal Structure: JE Points Exhibit 8.15: Develop Pay Grades

  24. From Policy to Practice:Pay Policy Line • Approaches to translate external competitive policy into practice • Choice of measure • 50th percentile for base pay • 75th percentile for total compensation • Updating • Policy line as percent of market line • Specify a percent above or below market line an employer intends to match • Other options • Pay among the leaders • Lead for some job families and lag for others

  25. From 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 grades • Exhibit 8.15 • Establish range midpoints, minimums, and maximums • Overlap

  26. Why Bother with Grades and Ranges? • External pressures • Differences in quality (KSAs) among individuals in external market • Differences in productivity or value of quality variations • Differences in mix of pay forms of competitors • Internal pressures • Recognize individual performance differences with pay • Meet employees’ expectations that their pay will increase over time • Encourage employees to remain with organization

  27. Develop Grades • Grades group job evaluation data on horizontal axis • All jobs considered substantially equal for pay purposes placed in same grade • Each pay grade has its own pay range and all jobs in a single grade have same pay range • Enhances ability to move people among jobs within a grade with no change in pay • How many pay grades? • Number of jobs • Organization hierarchy • Reporting relationships

  28. Establish Range Midpoints,Minimums, and Maximums (1 of 3) • Ranges group salary data on vertical axis • Establish upper and lower pay limits for all jobs in each grade • Exhibit 8.16 • Midpoints correspond to competitive pay policy • Point where pay-policy line crosses center of each grade • Often represents base pay for a seasoned employee

  29. Exhibit 8.16: Range Midpoint,Minimum, and Maximum

  30. Establish Range Midpoints,Minimums, and Maximums (1 of 3) • 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

  31. Overlap • Importance of overlap • Exhibit 8.17: Range Overlap • High degree of overlap and low midpoint differentials • Exhibit 8.17(a) • Small ranges with less overlap • Exhibit 8.17(b)

  32. Exhibit 8.17: Range Overlap

  33. From Policy to Practice:Broad Banding • Alternative to traditional salary structures • Involves collapsing salary grades into a few broad bands, each with a sizable range • One minimum and one maximum • Range midpoint often not used • Purposes • Provide flexibility to define job responsibilities more broadly • Foster cross-functional growth and development • Ease mergers and acquisitions • Example • Exhibit 8.18

  34. Exhibit 8.18: From Grades to Bands

  35. Ranges support . . . Some flexibility within controls Relatively 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 % spreads Exhibit 8.19: Contrasts BetweenRanges and Bands

  36. Steps Involved in Broad Banding 1. Set number of bands • Determine number of distinct levels of employee contributions within organization that actually add value • Challenge - How much to actually pay people in same band who are performing different functions and work 2. Price bands: Reference market rates • Exhibit 8.20: Reference Rates Within Bands

  37. Exhibit 8.20: Reference Rates Within Bands

  38. Balancing Internal and External Pressures: Adjusting the Pay Structure Internal Pressures External Pressures Job Structure Pay Structure

  39. Market Pricing • Approach • Sets pay structures almost exclusively by relying on external market rates • Emphasizes external competitiveness (market-based factors) and de-emphasizes internal alignment • Issues • Validity of market data • Use of competitors’ pay decisions as primary determinant of pay structure • Lack of value added via internal alignment • Difficult-to-imitate aspects of pay structure are deemphasized • Fairness

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