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8-1

Designing Pay Levels, Mix, and Pay Structures

Chapter

8

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8-2

1. Identify the major decisions in establishing externally competitive pay.

2. Describe the purpose(s) of a salary survey.3. Discuss the importance of defining the relevant

market in a pay survey.4. Explain the steps involved in designing a pay

survey.5. Describe the key issues involved in interpreting

the results of a pay survey.6. Explain how the market pay line combines the

internal structure with external market rates.7. Discuss the use of pay grades and pay ranges and

their relationship to internal alignment and external competitiveness.

8. Discuss the pros and cons of the market pricing approach to establishing a pay structure.

Learning ObjectivesAfter discussing Chapter 8, students

should be able to:

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8-3Exhibit 8.1: Determining Externally

Competitive Pay Levels and Structures

External competitiveness: Pay relationships among organizations

Set PolicySelect market

Design 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.

Specify relevant labor market.

Design and conduct survey.

Interpret and apply results.

Design grades and ranges or bands.

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.

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8-4

Employer of Choice

Lead Policy

Lag Policy

Flexible Policies

Specify Competitive Pay Policy

Pay with Competition

(Match)

Shared Choice

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8-5

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

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8-6

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

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8-7

Select Relevant Market Competitors

Relevant labor market includes employers who compete For same occupations or skillsFor employees in same geographic areaWith same products or services

ExamplesExhibit 8.2: Relevant Labor Markets by

Geographic and Employee GroupsExhibit 8.3: Pay Differences by Location

Fuzzy markets

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8-8Exhibit 8.2: Relevant Labor Markets by Geographic and

Employee GroupsGeographic

ScopeProduction Office and

ClericalTechnicians Scientists &

EngineersManagerial

ProfessionalExecutive

Local: Within relatively small areas such as cities or MSAs

Most likely Most likely Most likely

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

Only if in short supply or critical

Only if in short supply or critical

Most likely Likely Most likely

National: Across the country

Most likely Most likely Most likely

International: Across several countries

Only for critical skills or those in very short supply

Only for critical skills or those in very short supply

Sometimes

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8-9

Exhibit 8.3: Pay Differences by Location

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8-10

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?

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8-11

Exhibit 8.4: Salary Data on the Web

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8-12

Which Jobs to Include?

Benchmark-jobapproach

Low-highapproach

(skill-based)

Benchmarkconversionapproach

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8-13

What Information to Collect?

Nature of organization

Total compensationsystem

Specific pay data onincumbents in jobsunder study

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8-14Exhibit 8.6: Possible Survey Data

Elements and RationaleNature of

organizationFinancial

performanceSizeStructure

Nature of total compensation systemCash forms usedNon-cash forms used

Incumbent and jobDate Job IndividualPay

HR outcomesProductivityTotal labor costsAttraction &

retentionEmployee views

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8-15Exhibit 8.7: Advantages and Disadvantages

of Measures of CompensationBase Pay Tells how competitors are

valuing the work in similar jobs

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

Total Cash

(base + bonus)

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.

Total Compensation

(base + bonus + stock options + benefits)

Tells the total value competitors place on this work

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

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8-16

Interpret Survey Results (1 of 2)

No single best approachVerify data

Check accuracy of job matchesSurvey leveling

Check for anomaliesDoes any one company dominate?Do all employers show similar patterns?Outliers?

ExampleExhibit 8.9: Survey Data

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8-17

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

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8-18

Construct a Market Pay Line

Exhibit 8.8: Salary Graphs Using Different Measures of Compensation

Definition of market pay lineLinks 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 lineFreehand approach - Exhibit 8.8

Regression analysis - Exhibit 8.13 and Exhibit 8.14

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8-19

Exhibit 8.13: From RegressionResults to a Market Line

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8-20

Exhibit 8.14: Understanding Regression

Job Evaluation Points

20 40 60

Su

rvey:

Sala

ry (

$0

00

)

2

080 120100 160140 180

8

6

12

10

14

4

16

Tech A Sr Tech Eng 1 Eng 3 Eng 5 Mgr 1 Mgr 3

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8-21

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

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8-22

AB CDEF

Exte

rnal C

om

peti

tiveness

:Sala

ries

paid

by c

om

peti

tors

Pay Policy Line30,000

35,000

40,000

45,000

50,000

55,000

GHIJK LMN OP

Internal Structure: JE Points

Exhibit 8.15: Develop Pay Grades

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8-23

From Policy to Practice:Pay Policy Line

Approaches to translate external competitive policy into practiceChoice of measure

50th percentile for base pay75th percentile for total compensation

UpdatingPolicy line as percent of market line

Specify a percent above or below market line an employer intends to match

Other optionsPay among the leadersLead for some job families and lag for others

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8-24

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

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8-25

Why Bother with Grades and Ranges?

External pressuresDifferences in quality (KSAs) among

individuals in external marketDifferences in productivity or value of quality

variationsDifferences in mix of pay forms of competitors

Internal pressuresRecognize individual performance differences

with payMeet employees’ expectations that their pay

will increase over timeEncourage employees to remain with

organization

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8-26

Develop Grades

Grades group job evaluation data on horizontal axisAll jobs considered substantially equal for

pay purposes placed in same gradeEach 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 jobsOrganization hierarchyReporting relationships

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8-27Establish Range Midpoints,Minimums, and Maximums (1 of

3)Ranges group salary data on vertical axisEstablish upper and lower pay limits for all

jobs in each gradeExhibit 8.16

Midpoints correspond to competitive pay policyPoint where pay-policy line crosses center of

each gradeOften represents base pay for a seasoned

employee

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8-28

Exhibit 8.16: Range Midpoint,Minimum, and Maximum

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8-29Establish 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

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8-30

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)

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8-31

Exhibit 8.17: Range Overlap

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8-32

From Policy to Practice:Broad Banding

Alternative to traditional salary structuresInvolves 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

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8-33

Exhibit 8.18: From Grades to Bands

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8-34

Exhibit 8.19: Contrasts BetweenRanges and Bands

Ranges support . . . Some flexibility within

controlsRelatively stable

organization designRecognition via titles or

career progressionMidpoint controls,

comparativesControls designed into

systemGive managers

“freedom with guidelines”

Up to 150 percent range-spread

Bands support . . . Emphasis on flexibility

within guidelinesGlobal organizationsCross-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

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8-35

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

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8-36

Exhibit 8.20: Reference Rates Within Bands

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8-37Balancing Internal and External Pressures: Adjusting the Pay

Structure

Internal Pressures External Pressures

Job Structure Pay Structure

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8-38

Market Pricing

ApproachSets pay structures almost exclusively by

relying on external market ratesEmphasizes external competitiveness (market-

based factors) and de-emphasizes internal alignment

IssuesValidity of market dataUse of competitors’ pay decisions as primary

determinant of pay structureLack of value added via internal alignmentDifficult-to-imitate aspects of pay structure are

deemphasizedFairness