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9-1

A Human Resource A Human Resource Management ApproachManagement Approach

STRATEGIC STRATEGIC COMPENSATIONCOMPENSATION

Prepared by David Oakes

Chapter 9Chapter 9

Building Pay Structures That Building Pay Structures That Recognize Individual Recognize Individual

ContributionsContributions

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9-2

Constructing A Pay StructureConstructing A Pay Structure

5 Steps

Decide how many

Determine market pay line

Define pay grades

Calculate pay ranges Evaluate results

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9-3

Common Pay StructuresCommon Pay Structures

Exempt & nonexempt

Based on job families

Based on geography

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9-4

Exempt & Nonexempt Pay Exempt & Nonexempt Pay StructuresStructures

Exempt Not subject to overtime provisions Salaried supervisors, managers, professionals, & executives

Nonexempt Subject to overtime provisions Hourly, non-supervisory

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9-5

Market Pay LinesMarket Pay Lines

Market pay rates relative to company’s job structure

Pay levels corresponding with pay line are market-competitive

Rates promote internal consistency

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9-6

Pay GradesPay Grades

Based on compensable factors, values, management philosophy

Widths Narrow or wide Affects hierarchy & social distance Absolute or percentage-based job evaluation points

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9-7

Pay CompressionPay Compression

When pay spread is small

Threatens competitive advantages Caused by

Failure to raise pay range limits Scarcity of qualified applicants

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9-8

Compa-RatiosCompa-Ratios

Evaluates pay structures Index competitiveness of internal pay rates based on midpoints Divide pay rates by midpoint Compa-ratio meanings

1 = Market match rate < 1 = Market lag rate > 1 = Market lead rate

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9-9

Merit Pay SystemsMerit Pay Systems

Considerations

Communicate link between pay and performance

Use effective appraisal methods

Establish increase amounts & types

Settle on base pay level

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9-10

Merit Increase AmountsMerit Increase Amounts

Reflects prior job performance levels

Needs to motivate

Needs to be meaningful

Influenced by the cost-of-living

Indexed as a % of budget

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9-11

Present Level Present Level of Base Payof Base Pay

Needs to be within limits of pay grade

Consistent with new employees at similar

jobs

Needs to abide by mandates of Title VII, 1964 Civil Rights Act Equal Pay Act of 1963 ADEA of 1967

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9-12

Increases Within BudgetIncreases Within Budget

Determine performance categories and % of employees in each

Place % in quartiles

Put % and quartiles into cells

Estimate performance distribution

Distribute Increase to Each Cell

Ensure total is within budget

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9-13

Sales ObjectivesSales Objectives

Sales volume Sales within a time period

New business Sales to new customers

Retaining sales Higher sales to existing customers

Product mix rewards sales Sales of various products/services

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9-14

Sales Compensation PlansSales Compensation Plans

Sales-only

Salary-plus-bonus

Salary-plus-commission

Commission-plus-draw

Commission-only

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9-15

Salary-Plus-Commission PlansSalary-Plus-Commission Plans

Commissions based on % of price Spreads risks Designed to attract quality sellers Allows employees to do other tasks

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9-16

Commission-Plus Draw PlansCommission-Plus Draw Plans

Draw Advance pay for living expenses Charged against future commissions Recoverable or non-recoverable

Provides strong incentive to excel

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9-17

Commission-OnlyCommission-Only

Straight Based on fixed % of sales price

Graduated Increased percentage rates for higher sales volume

Multi-tiered Increased percentage rates for meeting & exceeding sales goal

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9-18

Fixed Pay & Compensation MixFixed Pay & Compensation Mix

3 Main Factors Salesperson’s influence on decision

Competitive pay standards within industry

Amount of non-sales duties

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9-19

Skill BlocksSkill Blocks Include job descriptions

Skills needed Training required Accurate evaluation process

Organize jobs into family/group List similar skills & tasks per job

Group skills into blocks

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9-20

Transition MattersTransition Matters

Job-based pay to pay-for-knowledge

Assessment of skills Who assesses On what How often

Align pay with knowledge structure

Access to training Equal access to all

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9-21

In-House vs. Outsourced TrainingIn-House vs. Outsourced Training

Expertise Needed & available

Timeliness How soon & how often?

Number of trainees Proprietary nature of topic

Too sensitive to share?

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9-22

BroadbandingBroadbanding

Consolidates pay grades & ranges Flattens corporate hierarchies Emphasizes teamwork Broadens job duties & responsibilities Promotes quicker decision making More latitude in pay rate decisions

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9-23

Two-Tiered PayTwo-Tiered Pay New employees paid less Temporary or permanent rewards

Mainly in unionized companies

May hinder recruiting Can lower employees’ morale

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9-24

Pay RangesPay Ranges Build upon pay grades Represent vertical dimension Include midpoint, minimum & maximum pay rates

Midpoints (market median rates) Set by competitive pay policy Market lead - midpoint higher Market lag - midpoint lower

Green & red circle pay rates