Masood Pervez

B-083325 8th(HRM)

McGraw-Hill/Irwin

2002 by The McGraw-Hill Companies, Inc. All rights reserved.

COMPENSATION

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Determining Externally Competitive Pay Levels and Structures

Set Policy Define Market Conduct Survey Draw Policy Lines Merge Internal & External Pressures Competitive Pay Levels, Mix and Structures

Some Major Decisions in Pay Level Determination

Determine pay level policy Define purpose of survey Define relevant labour market

Design and conduct survey

Interpret and apply results Design grades and ranges or bands
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Set Competitive Pay Policy

Lead the market with respect to pay
Match average pay of competitors

Lag behind average market pay rates

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Compensation Survey
the systematic process of collecting and making judgments about compensation paid by other employers
provides data for translating pay policy into pay levels and structures

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Purpose of Compensation Survey

Adjust Pay Level How Much to Pay?
Adjust Pay Mix What Forms?

Adjust Internal Structure?

Study Special Situations

Estimate Competitors Labour Costs

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Define Relevant Market Competitors

employers who compete for the same occupations or skills required employers who compete for employees within the same geographic area
employers who compete with the same products and services
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Relevant Labour Markets by Geographic and Employee Groups

Geographic Scope
Local: Within relatively small areas such as cities

Production
Most likely

Office and Clerical

Most likely

Technicians
Most likely

Scientists & Engineers

Managerial Professional

Executive

Regional: Within Only if in a particular area short supply of the province or critical National: Across the country International: Across several countries

Only if in short supply or critical

Most likely

Likely

Most likely

Most likely

Most likely

Most likely

Only for critical Only for critical Sometimes skills or those in skills or those very short supply in very short supply
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Design the Survey

Who should be involved?
compensation staff and/or consultants

How many employers should be included?

Can use publicly available data Can use internet data
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Design the Survey

Which jobs should be included? Benchmark jobs Low-high approach (for person-based plans) Benchmark conversion approach
What information to collect? Base pay Total cash Total compensation
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Advantages and Disadvantages of Measures of Compensation

Base Pay Tells how competitors are Fails to include performance incentives valuing the work in similar and other forms, so will not give true jobs picture if competitors offer low base but high incentives
Tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job. All employees may not receive incentives, so it may overstate the competitors pay; plus, it does not include long-term incentives. All employees may not receive all the forms. Be careful; dont set base equal to competitors total compensation. Risks high fixed costs.

Total Cash (base + bonus)

Total Tells the total value Compensation competitors place on this (base + bonus work + stock options + benefits)

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Job Matching
the degree of match between the organizations jobs and survey jobs must be carefully assessed on job content rather than on the basis of job title only

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Analyzing Survey Data

no single best approach check accuracy of data and anomalies statistical analysis based on two pieces of data on each benchmark: Survey data - dollars Our own data - job evaluation points

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Analyzing Survey Data

frequency distribution organizes data measures of central tendency
averages or means weighted means medians

measures of distribution, or dispersion

standard deviation percentiles and quartiles range spread
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Age/Trend the Market Data

Pay rates are constantly changing Survey data represents pay at the date it was collected Adjust survey data to represent pay at the current or future date when pay decisions will be implemented

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Combine Job Evaluation and Market Survey Data

Each benchmark job has:
Job evaluation points An average wage paid by survey companies.

Scatterplots are useful to see what the data look like. Summarize the data further by fitting a line through the points the MARKET PAY LINE Can eyeball data or use regression techniques
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Scatterplot
7

SURVEY 6 monthly 5 salary ($000) 4

PAY

3 2 1

80

120

160

200

240

280

320

360
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OUR Job Evaluation Points

2010 McGraw Hill Ryerson

Scatterplot With Regression Line

7

SURVEY monthly 5 salary 4 ($000)

PAY

3 2 1 Market Pay Line

80

120

160

200

240

280

320

360
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OUR Job Evaluation Points

2010 McGraw Hill Ryerson

Adjust Market Data to Reflect Organizations Pay Policy

Lead the Market: pay level above market for the year and equal at year end update factor will be equal to the projected market increase Match the Market: pay level above market for first half of year and below for second half update factor will be half of the projected market increase Lag the Market: pay level below the market for the entire year no adjustment will be made to account for the projected market increase
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Developing a Pay Policy Line

lead match 7

lag

OUR monthly salary ($000)

6 5 4

PAY

3
2 1 Market pay line (beginning of year) 80 120 160 200

Pay Policy Line : using market-survey data (updated and aged to reflect pay policy)

240

280

320

360
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OUR Job Evaluation Points

2010 McGraw Hill Ryerson

Pay Structure
two components:

1. Pay policy line: represents an adjustment to the market pay line to reflect the organizations external competitive position in the market 2. Pay ranges: upper and lower limits on pay
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Why Use Pay Ranges?

External Pressures: quality variations (KSAs) among market employees differences in productivity from quality variations differences in the mix of pay forms competitors use

Internal Pressures recognize individual performance variations with pay employees expectations that their pay will increase over time encourage employee retention

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Constructing Ranges: 1. Develop Grades

a pay grade is a horizontal grouping of different jobs that are considered substantially equal for pay purposes all jobs within a single grade will have the same pay range
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PAY GRADE STRUCTURE

8

Our monthly 5 salary 4 (000)

PAY

3 2 1
I II III IV V

Pay Policy Line Pay Grades

350
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100

150

200

250

300

Our Job Evaluation Points

Constructing Ranges: 2. Establishing Midpoint, Minimum, and Maximum

pay ranges refer to the vertical

dimension of the pay structure an upper and lower limit on pay for all jobs in a pay grade each pay grade has a pay range consisting of a midpoint and a specified minimum and maximum
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PAY RANGES
8

Pay Range

Our monthly 5 salary 4 (000)

PAY

3 2 1

Pay Policy Line

100

150

200

250

300

350
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Our Job Evaluation Points

2010 McGraw Hill Ryerson

Range Midpoint, Minimum, and Maximum

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Range Spread
Spread = range maximum range minimum e.g., $65,875 - $43,917 = $21,958 Spread percentage = spread/range minimum e.g., $21,958/$43,917 = 50%

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Range Overlap

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Broadbanding
collapses the number of salary ranges within a traditional salary structure into a few broad bands purpose is to manage career growth and administer pay an alternative to traditional salary grade structures

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From Grades to Bands

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Contrasts Between Ranges and Bands

Ranges Support: some flexibility within controls relative 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 percent spreads
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Market Pricing
establishing pay structure by relying almost exclusively on external market pay rates market pricing becoming more common in Canada

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Conclusion
most organizations survey other employers pay practices to determine the competitors rates survey results used to construct market pay line pay policy line adjusts market pay line based on the decision to lead, match or lag market pay pay grades and ranges/bands designed around pay policy line to integrate internal and external pressures increasing interest in broadbanding and market pricing
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