designing pay levels mix and pay structures

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

Chapter

88

Designing Pay Levels, Mix Designing Pay Levels, Mix and Pay Structuresand Pay Structures

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Learning ObjectivesLearning ObjectivesAfter studying Chapter 8, students should be able to:After studying Chapter 8, students should be able to:1.1. Explain all of the steps in designing and administering Explain all of the steps in designing and administering

a pay survey.a pay survey.2.2. Discuss the importance of defining the external Discuss the importance of defining the external

relevant labor market in a pay survey.relevant labor market in a pay survey.3.3. Explain how the market pay line combines internal job Explain how the market pay line combines internal job

structure with external wage rates.structure with external wage rates.4.4. Discuss the use of pay grades and ranges and their Discuss the use of pay grades and ranges and their

relationship to internal alignment and external relationship to internal alignment and external competitiveness.competitiveness.

5.5. Discuss broad banding as a flexible alternative to pay Discuss broad banding as a flexible alternative to pay grades and ranges. grades and ranges.

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Determining Externally Competitive Determining Externally Competitive Pay Levels and StructuresPay Levels and Structures

External External competitiveness: competitiveness: Pay relationships Pay relationships among among organizationsorganizations

Set PolicySet Policy Define Define MarketMarket

Conduct Conduct SurveySurvey

Draw Draw Policy Policy LinesLines

Merge Merge Internal & Internal & External External PressuresPressures

Competitive Competitive Pay Levels, Pay Levels, Mix and Mix and StructuresStructures

Some Major Decisions in Pay Level Determination

! Determine pay level policy

! Define purpose of survey

! Define relevant labor market

! Design and conduct survey

! Interpret and apply results

! Design grades and ranges or bands

Some Major Decisions in Pay Level DeterminationSome Major Decisions in Pay Level Determination

!! Determine pay level policyDetermine pay level policy

!! Define purpose of surveyDefine purpose of survey

!! Define relevant labor marketDefine relevant labor market

!! Design and conduct surveyDesign and conduct survey

!! Interpret and apply resultsInterpret and apply results

!! Design grades and ranges or bandsDesign grades and ranges or bands

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Salary SurveySalary Survey!!A A surveysurvey is the systematic process of collecting is the systematic process of collecting

and making judgments about the compensation and making judgments about the compensation paid by other employers.paid by other employers.

!!Surveys provide the data for setting the pay Surveys provide the data for setting the pay policy relative to competition and translating that policy relative to competition and translating that policy into pay levels and structures.policy into pay levels and structures.

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Set Competitive Pay PolicySet Competitive Pay Policy

!!Adjust Pay Level Adjust Pay Level –– How Much to Pay?How Much to Pay?

!!Adjust Pay Mix Adjust Pay Mix –– What Forms?What Forms?

!!Adjust Pay Structure?Adjust Pay Structure?

!!Special SituationsSpecial Situations

!!Estimate Competitors’ Labor CostsEstimate Competitors’ Labor Costs

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Define Relevant Market CompetitorsDefine Relevant Market Competitors

!!Employers who compete for the same Employers who compete for the same occupations or skills required.occupations or skills required.

!!Employers who compete for employees within Employers who compete for employees within the same geographic area.the same geographic area.

!!Employers who compete with the same products Employers who compete with the same products and services.and services.

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Relevant Labor Markets by Geographic Relevant Labor Markets by Geographic and Employee Groupsand Employee Groups

SometimesSometimesOnly for Only for critical skills critical skills or those in or those in very short very short supplysupply

Only for Only for critical skills critical skills or those in or those in very short very short supplysupply

International:International:Across several Across several countriescountries

Most likelyMost likelyMost likelyMost likelyMost likelyMost likelyNational:National:Across the Across the countrycountry

Most likelyMost likelyLikelyLikelyMost likelyMost likelyOnly if in Only if in short short supply or supply or criticalcritical

Only if in Only if in short supply short supply or criticalor critical

Regional:Regional:Within a Within a particular area particular area of the state or of the state or several statesseveral states

Most likelyMost likelyMost likelyMost likelyMost likelyMost likelyLocal:Local: Within Within relatively small relatively small areas such as areas such as cities or MSAscities or MSAs

ExecutiveExecutiveManagerial Managerial ProfessionalProfessional

Scientists Scientists & &

EngineersEngineersTechniciansTechniciansOffice and Office and

ClericalClericalProductionProductionGeographic Geographic

ScopeScope

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Design the SurveyDesign the Survey

!!Who should be involved in the survey design?Who should be involved in the survey design?

!!How many employers should be included?How many employers should be included?

!!Which jobs should be included?Which jobs should be included?

!!What information to collect?What information to collect?

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Which Jobs to Include?Which Jobs to Include?

Benchmark Jobs Approach Low - High

Approach

Global Approach

Benchmark Conversion ApproachMarket Basket

Approach

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Characteristics of Benchmark JobsCharacteristics of Benchmark Jobs!!The contents are wellThe contents are well--known, relatively stable, known, relatively stable,

and agreed upon by the employees involvedand agreed upon by the employees involved!!The supply and demand for these jobs are The supply and demand for these jobs are

relatively stable and not subject to recent shiftsrelatively stable and not subject to recent shifts!!They represent the entire job structure under They represent the entire job structure under

studystudy!!A majority of the workforce is employed in these A majority of the workforce is employed in these

jobsjobs

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Which Market Jobs Match Which Which Market Jobs Match Which Company Jobs?Company Jobs?

!!Any match between an organization’s jobs and Any match between an organization’s jobs and survey jobs must be done on job content rather survey jobs must be done on job content rather than on the basis of job title only.than on the basis of job title only.

!!Apply your job evaluation system to the survey Apply your job evaluation system to the survey job descriptions.job descriptions.

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Data Elements to Consider for SurveysData Elements to Consider for Surveys

!! Nature of the OrganizationNature of the Organization!! Financial performanceFinancial performance!! SizeSize!! StructureStructure

!! Nature of Total Compensation SystemNature of Total Compensation System!! Cash forms usedCash forms used!! NonNon--cash forms usedcash forms used

!! Incumbent and JobIncumbent and Job!! DateDate!! JobJob!! IndividualIndividual!! PayPay

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Advantages and Disadvantages of Advantages and Disadvantages of Measures of CompensationMeasures of Compensation

All employees may not receive all the All employees may not receive all the forms. Be careful; don’t set base equal to forms. Be careful; don’t set base equal to competitors’ total compensation. Risks competitors’ total compensation. Risks high fixed costs.high fixed costs.

Tells the total value Tells the total value competitors place on this competitors place on this workwork

Total Total CompensationCompensation(base + bonus + (base + bonus + stock options + stock options + benefits)benefits)

All employees may not receive incentives, All employees may not receive incentives, so it may overstate the competitors’ pay; so it may overstate the competitors’ pay; plus, it does not include longplus, it does not include long--term term incentives.incentives.

Tells how competitors are Tells how competitors are valuing work; also tells the valuing work; also tells the cash pay for performance cash pay for performance opportunity in the job.opportunity in the job.

Total CashTotal Cash(base + bonus)(base + bonus)

Fails to include performance incentives and Fails to include performance incentives and other forms, so will not give true picture if other forms, so will not give true picture if competitors offer low base but high competitors offer low base but high incentives incentives

Tells how competitors are Tells how competitors are valuing the work in similar valuing the work in similar jobsjobs

Base PayBase Pay

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Analyzing Survey Data Analyzing Survey Data (1 of 2)(1 of 2)

!!No single best approachNo single best approach!!Check accuracy of dataCheck accuracy of data!!Two pieces of data on each benchmark:Two pieces of data on each benchmark:

Survey data -- dollarsdollarsOur own data -- job evaluation pointsjob evaluation points

!!Scatterplot shows relationshipsScatterplot shows relationships

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Analyzing Survey Data Analyzing Survey Data (2 of 2)(2 of 2)

!!Frequency distribution organizes dataFrequency distribution organizes data!!Measures of central tendencyMeasures of central tendency

averages or meansweighted meansmedians

!!Measures of distribution, or dispersionMeasures of distribution, or dispersionstandard deviationpercentiles and quartilesrange spread

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Combine Job Evaluation and Market Combine Job Evaluation and Market Survey Data Survey Data (1 of 2)(1 of 2)

!!Scatterplots: for each benchmark job there is a Scatterplots: for each benchmark job there is a distribution of wages paid by survey companies.distribution of wages paid by survey companies.

!!Each of these distributions has means, ranges, Each of these distributions has means, ranges, etc...etc...

!!Scatterplots are useful to see what the data look Scatterplots are useful to see what the data look like.like.

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PAY

Our Job Evaluation Points

ScatterplotScatterplot

120 160 200 240 280 320 360

surveymonthlysalary($000)

7

6

5

4

3

2

1

80

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Combine Job Evaluation andCombine Job Evaluation andMarket Survey Data Market Survey Data (2 of 2)(2 of 2)

!!Summarize the data further by fitting a linear Summarize the data further by fitting a linear curve to it.curve to it.

!!Can “eyeball” data, use midpoints, or other Can “eyeball” data, use midpoints, or other mathematical approaches.mathematical approaches.

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PAY


Scatterplot with Linear CurveScatterplot with Linear Curve

120 160 200 240 280 320 360


7

6

5

4

3

2

1

80

Line of Best Fit

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Adjust The Data to Reflect Adjust The Data to Reflect Organization’s Pay Policy Organization’s Pay Policy (1 of 3)(1 of 3)

Lead the Market:Lead the Market:!!pay level should be above the market for the year pay level should be above the market for the year

and equal at year endand equal at year end!!update factor will be update factor will be equalequal to the projected to the projected

market increasemarket increase

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Match the Market:Match the Market:!!pay level will be above the market for the first pay level will be above the market for the first

half of the year and below for the second halfhalf of the year and below for the second half!!update factor will be update factor will be half half of the projected market of the projected market

increaseincrease

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Lag the Market:Lag the Market:!!pay level should be below the market for the pay level should be below the market for the

entire yearentire year!!no adjustmentno adjustment will be made to account for the will be made to account for the

projected market increaseprojected market increase

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Least Squares MethodLeast Squares Method

!!The equation for a straight line will be used, since The equation for a straight line will be used, since most pay distributions approximate a straight line.most pay distributions approximate a straight line.

!!This equation is:This equation is:Y = a + bX whereY = a + bX where

YY = actual pay rate (from survey data)= actual pay rate (from survey data)XX = evaluated points for org’n jobs= evaluated points for org’n jobsaa = Y intercept when X is zero= Y intercept when X is zerobb = slope of line of best fit= slope of line of best fit

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PAY


Developing a Pay Policy LineDeveloping a Pay Policy Line

120 160 200 240 280 320 360


7

6

5

4

3

2

1

80

Line of Best Fit :using market-survey data(updated and aged to reflectpay policy)

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Why Bother with Ranges?Why Bother with Ranges?

!! External Pressures:External Pressures:a.a. Quality variations (KSAs) among individuals in the Quality variations (KSAs) among individuals in the

external marketexternal marketb.b. Recognition of differences in the productivityRecognition of differences in the productivity--related related

value to employers of these quality variationsvalue to employers of these quality variations

!! Internal Pressures:Internal Pressures:a.a. The intention to recognize individual performance The intention to recognize individual performance

variations with payvariations with payb.b. Employees’ expectations that their pay will increase over Employees’ expectations that their pay will increase over

timetime

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Constructing Ranges:Constructing Ranges:Develop Grades Develop Grades (1 of 2)(1 of 2)

!!A A gradegrade is a is a horizontalhorizontal grouping of different grouping of different jobs that are considered substantially equal for jobs that are considered substantially equal for pay purposes.pay purposes.

!!Grades enhance an organization’s ability to move Grades enhance an organization’s ability to move people among jobs within a grade with no change people among jobs within a grade with no change in pay.in pay.

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Constructing Ranges:Constructing Ranges:Develop GradesDevelop Grades (2 of 2)(2 of 2)

!!The objective is for all the jobs that are similar The objective is for all the jobs that are similar for pay purposes to be placed within the same for pay purposes to be placed within the same grade.grade.

!!How many pay grades?How many pay grades?a. number of jobsa. number of jobsb. organization hierarchyb. organization hierarchyc. reporting relationshipsc. reporting relationships

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Constructing Ranges: Establishing Constructing Ranges: Establishing Midpoint, Minimum, and MaximumMidpoint, Minimum, and Maximum

!!Pay ranges refer to the Pay ranges refer to the vertical dimensionvertical dimension of the of the pay structure.pay structure.

!!Each pay grade will have associated with it a pay Each pay grade will have associated with it a pay range consisting of a midpoint and a specified range consisting of a midpoint and a specified minimum and maximum.minimum and maximum.

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!!Midpoints correspond to the competitive pay Midpoints correspond to the competitive pay policypolicy

!!The point where the pay policy line crosses each The point where the pay policy line crosses each grade becomes the midpoint of the pay range for grade becomes the midpoint of the pay range for that gradethat grade

!!Midpoints are the control point of the rangeMidpoints are the control point of the range!!The midpoint represents base pay for a The midpoint represents base pay for a seasoned seasoned

employeeemployee

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!!The midpoint can be determined as soon as the The midpoint can be determined as soon as the pay grade limits are set.pay grade limits are set.

!!Find the job evaluation point value in the center Find the job evaluation point value in the center of the pay grade.of the pay grade.

!!Substitute that point value for Substitute that point value for XX in your equation in your equation of the pay lineof the pay line

!!Solve the equation for Solve the equation for YY; this value is the ; this value is the midpoint of the rangemidpoint of the range

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!!Range spreadRange spread is based on some judgment about is based on some judgment about how the ranges support career paths, promotions, how the ranges support career paths, promotions, and other organization systems.and other organization systems.

!!Range spreads vary between 10 to 150 percent.Range spreads vary between 10 to 150 percent.!!Desired range spread is what makes good sense to Desired range spread is what makes good sense to

the employerthe employer

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Constructing Ranges: Establishing Midpoint, Constructing Ranges: Establishing Midpoint, Minimum, and MaximumMinimum, and Maximum

!!Once theOnce the midpointmidpoint (based on the pay policy line) (based on the pay policy line) and the and the range spreadrange spread (based on judgment) are (based on judgment) are specified, minimums and maximums are calculated.specified, minimums and maximums are calculated.

!! Minimum = Midpoint / [1 + (1/2 range spread)]Minimum = Midpoint / [1 + (1/2 range spread)]

!! Maximum = Minimum + (range spread x minimum)Maximum = Minimum + (range spread x minimum)

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Constructing Ranges: OverlapConstructing Ranges: Overlap

maximum rate grade A maximum rate grade A -- minimum rate grade Bminimum rate grade Bmaximum rate grade A maximum rate grade A -- minimum rate grade Aminimum rate grade A

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PAY


PAY GRADE STRUCTUREPAY GRADE STRUCTURE

100 150 200 250 300 350

ourmonthlysalary(000)

8

7

6

5

4

3

2

1Pay Policy LinePay Policy Line

I

II

III

IV

V

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BroadbandingBroadbanding!!Use of job clusters or tiers of positions into bandsUse of job clusters or tiers of positions into bands!!Purpose is to manage career growth and Purpose is to manage career growth and

administer payadminister pay!!An alternative to traditional salary grade An alternative to traditional salary grade

structuresstructures!!Collapses the number of salary ranges within a Collapses the number of salary ranges within a

traditional salary structure into a few broad bandstraditional salary structure into a few broad bands

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Contrasts Between Ranges and BandsContrasts Between Ranges and BandsRanges Support:Ranges Support:

!! Some flexibility within Some flexibility within controlscontrols

!! Relative stable organization Relative stable organization designdesign

!! Recognition via titles or Recognition via titles or career progressioncareer progression

!! Midpoint controls, Midpoint controls, comparativescomparatives

!! Controls designed into Controls designed into systemsystem

!! Give managers “freedom Give managers “freedom with guidelines”with guidelines”

!! To 150 percent rangeTo 150 percent range--spreadspread

Bands Support:Bands Support:!! Emphasis on flexibility Emphasis on flexibility

within guidelineswithin guidelines!! Global organizationsGlobal organizations!! CrossCross--functional experience functional experience

and lateral progressionand lateral progression!! Reference market rates, Reference market rates,

shadow rangesshadow ranges!! Controls in budget, few in Controls in budget, few in

systemsystem!! Give managers “freedom to Give managers “freedom to

manage” paymanage” pay!! 100 100 –– 400 percent spreads400 percent spreads

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Broadbanding: ExampleBroadbanding: Example (1 of 2)(1 of 2)

!!A large technology company reduced the A large technology company reduced the number of grade levels for their exempt number of grade levels for their exempt professional employees from 12 to 3professional employees from 12 to 3

!!The levels were defined as:The levels were defined as:!! basic, entrybasic, entry--level contributorlevel contributor!! seasoned contributor or team leaderseasoned contributor or team leader!! business unit / team manager or senior business unit / team manager or senior

professional contributorsprofessional contributors

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Broadbanding: ExampleBroadbanding: Example (2 of 2)(2 of 2)

!!Within these levels, managers hired and calibrated Within these levels, managers hired and calibrated pay levels based on market information for pay levels based on market information for individuals with similar backgrounds and individuals with similar backgrounds and responsibilitiesresponsibilities

!!Managers given market and charged with the Managers given market and charged with the responsibility of making salary adjustments as responsibility of making salary adjustments as appropriate to attract, retain, and reward their staffappropriate to attract, retain, and reward their staff

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Broadbanding:Broadbanding:How many bands to create?How many bands to create? (1 of 2)(1 of 2)

!!Determine the number of distinct levels of employee Determine the number of distinct levels of employee contributions within the organization that actually contributions within the organization that actually add valueadd value

!!For example:For example:professional positionsprofessional positionsmanagement positionsmanagement positionstechnical positionstechnical positionsclerical positionsclerical positions

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Broadbanding:Broadbanding:How many bands to createHow many bands to create (2 of 2)(2 of 2)

!!For example:For example:entry level positionsentry level positionscontributor level positionscontributor level positionsleadership level positionsleadership level positions

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Broadbanding: Placing individualBroadbanding: Placing individualjobs or roles in bandsjobs or roles in bands

!!Example:Example:BasicProficientMastery

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Pay CompressionPay Compression!!Results when wages for those jobs filled from Results when wages for those jobs filled from

outside the organization are increasing faster than outside the organization are increasing faster than the wages for jobs filled from within the the wages for jobs filled from within the organizationorganization

!!As pay differentials among jobs become very As pay differentials among jobs become very small, the traditional pay structure becomes small, the traditional pay structure becomes compressedcompressed

!!Compression is an issue in professional work Compression is an issue in professional work when new graduates command salaries almost when new graduates command salaries almost equal to those of professionals with 3 equal to those of professionals with 3 -- 5 years 5 years experienceexperience

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SummarySummary!! Most organizations survey other employers’ pay Most organizations survey other employers’ pay

practices to determine the rates competitors pay.practices to determine the rates competitors pay.!! An employer using the survey results considers how it An employer using the survey results considers how it

wishes to position its total compensation in the market:wishes to position its total compensation in the market:!!To leadTo lead!!To match, orTo match, or!!To follow competitionTo follow competition

!! This policy decision may be different for different This policy decision may be different for different business units and even for different job groups within a business units and even for different job groups within a single organization.single organization.

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Summary Summary (continued)(continued)

!! The policy on competitive position is translated into The policy on competitive position is translated into practice by setting pay policy lines.practice by setting pay policy lines.!! They serve as reference points around which pay grades and They serve as reference points around which pay grades and

ranges or bands are designed.ranges or bands are designed.!! The use of grades and ranges recognizes both external The use of grades and ranges recognizes both external

and internal pressures on pay decisions.and internal pressures on pay decisions.!! No single “going rate” for a job exists in the market;No single “going rate” for a job exists in the market;!! Instead, an array of rates exists.Instead, an array of rates exists.

!! Internally, the use of ranges is consistent with variations Internally, the use of ranges is consistent with variations in the discretion present in jobs.in the discretion present in jobs.

!! Pay ranges permit employers to value and recognize Pay ranges permit employers to value and recognize these differences with pay.these differences with pay.

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Review QuestionsReview Questions

1.1. Which competitive pay policy would you Which competitive pay policy would you recommend to an employer? Why? Does it depend recommend to an employer? Why? Does it depend on circumstances faced by the employer? Which on circumstances faced by the employer? Which ones?ones?

2.2. How would you design a survey for setting pay for How would you design a survey for setting pay for welders? For financial managers? Do the issues welders? For financial managers? Do the issues differ? Will the techniques used and the data differ? Will the techniques used and the data collected differ? Why or why not?collected differ? Why or why not?

3.3. What factors determine the relevant market for a What factors determine the relevant market for a survey? Why is the definition of the relevant survey? Why is the definition of the relevant market so important?market so important?

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Review Questions Review Questions (continued)(continued)

4.4. What do surveys have to do with pay What do surveys have to do with pay discrimination?discrimination?

5.5. Contrast pay ranges and grades with bands. Why Contrast pay ranges and grades with bands. Why would you use either? Does their use assist or would you use either? Does their use assist or hinder the achievement of internal alignment? hinder the achievement of internal alignment? External competitiveness?External competitiveness?

designing pay levels mix and pay structures

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