Market-Competitive Pay Systems

LO 7-1
Market-Competitive Pay Systems
Market-competitive pay systems refer to:
A company’s compensation policy
The imperatives of competitive advantage
The key role in promoting recruitment and

retention of talented employees
Copyright © 2017 Pearson Education, Inc. 7-1

LO 7-1
Market Competitive Pay Systems
Conduct strategic analyses

Assess competitors’ practices
Integrate internal job structures with
external market pay rates
Determine compensation policies

LO 7-1
Four Activities of
Market Competitive Pay Systems
Strategic analysis entails an examination of

a company’s external market context and
internal factors
 External market context: industry profile,
information on competition, long-term prospects
 Internal factors: financial condition, functional
capabilities
Compensation surveys involve the
collection and subsequent analysis of
competitors’ compensation data
LO 7-1
Four Activities of
Market Competitive Pay Systems (cont’d)
Compensation professionals integrate the

internal job structure with the external
market pay rates identified through
compensation surveys
Compensation professionals recommend
pay policies that fit with their companies’
standing and competitive strategies

LO 7-2
Preliminary Considerations
Two preliminary considerations before

investing time and money into compensation
surveys:
 What companies hope to gain from
compensation surveys
 Custom development versus use of an
existing compensation survey

LO 7-2
Competitors’ Pay Practices
Base pay
Incentive awards structure
Mix and level of discretionary benefits

LO 7-2
Custom Developed Surveys
Can be custom tailored
Quality can be monitored by employer
Usually not done in-house
External data not readily accessible
Can be expensive

LO 7-2
Published Survey Sources
Professional associations
Industry associations
Consulting firms
Federal government (U.S. Bureau of Labor

Statistics)

LO 7-2
Published Survey Sources
Examples of consulting firms:

Aon
Frederic W. Cook & Company
Hay Group
Pearl Meyer & Partners
Towers Watson
William M. Mercer
Xerox-Buck Consultants
LO 7-2
U.S. Bureau of Labor Statistics Surveys
The BLS publishes information on the wages,
earnings, and benefits of workers:
 Employment cost trends
 National compensation data
 Wages by area and occupation
 Earnings by demographics
 Earnings by industry
 County wages
 Employee benefits
 Compensation costs in other countries
LO 7-2
Compensation Cost Trends
This program publishes quarterly statistics

that measure:
Changes in labor costs over time
 Employment Cost Index
Levels of costs per hour
 Employer Costs for Employee
Compensation

LO 7-2
National Compensation Survey
Weekly and annual earnings and hours for

full-time workers
Data at three levels: localities, broad
regions, and the nation
Private, local, and state employees

LO 7-2
National Compensation Survey
Wage data are shown by:

 Industry
 Occupational group
 Full-time and part-time status
 Union status
 Establishment size
 Time and incentive status
 Job level
LO 7-2
Compensation Surveys
Two essential strategic considerations are:

Defining the relevant labor market
Choosing benchmark jobs

LO 7-2
Relevant Labor Market
Qualified candidates based on:
Occupational classification
Geography
Market competitors

LO 7-2
Benchmark Jobs
Used for:
 Job evaluations
 Compensation surveys
Established, well-known, stable

Common across employers
Entire range of jobs
Accepted for setting pay rates
LO 7-2
Job Leveling
Typically, there are differences between a

company’s jobs and benchmark jobs
Corrections for these differences are
based on subjective judgment
The process for making these corrections
is referred to as job leveling
Point level factor refers to one job leveling
process (illustration follows)
LO 7-2
Sample Compensable Factor and
Point-Level Definitions

LO 7-2
Leveling Instructions and Points

LO 7-2
Survey Data Characteristics
They contain a lot of data
Outdated data due to lag time
Statistical analysis needed to integrate

internal job structures with external market

LO 7-2
Summarizing Survey Data
Two descriptive properties
Central tendency
 Represents the fact that a set of data center
around a central point
Variation
 Represents the amount of spread or
dispersion in a data set

LO 7-2
Central Tendency
Two types of measures
Arithmetic mean (mean, average)

 Sum of salaries/number of salaries
 Represents typical market salaries
Median (midpoint)
 Middle value of sequential numerical data

LO 7-2
Mean
 Outliers can distort values

 Understated means occur with extremely
small outliers
 May set salaries too low
 Overstated means occur with extremely

large outliers
 May set salaries too high

LO 7-2
Variation
 Standard deviation
 Refer to the mean distance of each figure
from the mean
 Quartile
 Percentile of figures below a point based on
four groupings
 Percentile
 Percentage of figures below a point based
on 100 groupings
LO 7-2
Quartile
Dispersion by % below a set value

 Quartile 4 = 100%
 Quartile 2 = 50% (also, the median)

LO 7-2 Updating Survey Data:
Consumer Price Index (CPI)
 Indexes monthly price changes in
consumer goods and services
 Most commonly used method for tracking
cost changes in United States
 CPI published monthly by the U.S.
Bureau of Labor Statistics
(http://www.bls.gov)

LO 7-3
Integrating The Internal Job Structure
With External Market Pay Rates
The goal is to set pay rates based on the

matches between a company’s jobs (job
structure) and corresponding benchmark
jobs.

LO 7-3
Regression Analysis
 Statistical procedure designed to find the

best-fitting line between two variables
 Formula: Yˆ  a  bX
 Y = predicted salary
 X = job evaluation points
 a = Y intercept (X = 0)
 b = the slope

LO 7-3
Regression Analysis

LO 7-3
Setting Pay Rates

LO 7-3
R2
 Explains variation in market pay rates via job
structure
 Ranges from 0.0 to 1.0
 0.0 = 0% variation in pay rates due
to job structure
 0.0–.30 = small variation
 .31–.70 = average variation
 .71–.99 = large variation
 1.0 = 100% variation
LO 7-4
Compensation Policies and
Strategic Mandates
Pay-level policies
Pay mix policies

LO 7-4
Pay-Level Policies
Market lead (75th percentile)
 Levels above market pay lines
 Best for differentiation strategies
 Market match (50th percentile)
 Pay according to market pay line
 Appropriate with differentiation strategy
Market lag (25th percentile)
 Levels below market pay lines
 Best for lowest-cost strategies
LO 7-4
Pay Mix Policies

Pay mix policies refer to the combination
of core compensation and employee
benefits components that make up an
employee’s total compensation package
Pay policy mix may be expressed in
dollars (or other currency as relevant) or as
a percentage of total dollars allocated for
an employee’s total compensation

LO 7-4
Pay Mix Policy Example

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LO 7-1

Market-Competitive Pay Systems

Market-competitive pay systems refer to:

A company’s compensation policy

The imperatives of competitive advantage

The key role in promoting recruitment and

Copyright © 2017 Pearson Education, Inc. 7-1

Conduct strategic analyses

Copyright © 2017 Pearson Education, Inc. 7-2

Strategic analysis entails an examination of

Compensation professionals integrate the

Copyright © 2017 Pearson Education, Inc. 7-4

Two preliminary considerations before

Copyright © 2017 Pearson Education, Inc. 7-5

Incentive awards structure

Mix and level of discretionary benefits

Copyright © 2017 Pearson Education, Inc. 7-6

Can be custom tailored

Quality can be monitored by employer

Usually not done in-house

External data not readily accessible

Copyright © 2017 Pearson Education, Inc. 7-7

Federal government (U.S. Bureau of Labor

Copyright © 2017 Pearson Education, Inc. 7-8

Examples of consulting firms:

This program publishes quarterly statistics

Copyright © 2017 Pearson Education, Inc. 7-11

Weekly and annual earnings and hours for

Copyright © 2017 Pearson Education, Inc. 7-12

Wage data are shown by:

Two essential strategic considerations are:

Copyright © 2017 Pearson Education, Inc. 7-14

Qualified candidates based on:

Copyright © 2017 Pearson Education, Inc. 7-15

Established, well-known, stable

Typically, there are differences between a

Copyright © 2017 Pearson Education, Inc. 7-18

Copyright © 2017 Pearson Education, Inc. 7-19

They contain a lot of data

Outdated data due to lag time

Statistical analysis needed to integrate

Copyright © 2017 Pearson Education, Inc. 7-20

Two descriptive properties

Copyright © 2017 Pearson Education, Inc. 7-21

Two types of measures

Arithmetic mean (mean, average)

Copyright © 2017 Pearson Education, Inc. 7-22

 Outliers can distort values

 Overstated means occur with extremely

Copyright © 2017 Pearson Education, Inc. 7-23

Dispersion by % below a set value

Copyright © 2017 Pearson Education, Inc. 7-25

Copyright © 2017 Pearson Education, Inc. 7-26

The goal is to set pay rates based on the

Copyright © 2017 Pearson Education, Inc. 7-27

 Statistical procedure designed to find the

Copyright © 2017 Pearson Education, Inc. 7-28

Copyright © 2017 Pearson Education, Inc. 7-29

Copyright © 2017 Pearson Education, Inc. 7-30

Copyright © 2017 Pearson Education, Inc. 7-32

Pay Mix Policies

Copyright © 2017 Pearson Education, Inc. 7-34

Copyright © 2017 Pearson Education, Inc. 7-35