A Human Resource Management Approach

STRATEGIC COMPENSATION

Prepared by David OakesChapter 9 Building Pay Structures That Recognize Individual Contributions

Constructing A Pay Structure 5 Steps Decide how many Determine market pay line Define pay grades Calculate pay ranges Evaluate results

Common Pay Structures Exempt & nonexempt

Based on job families

Based on geography

Exempt & Nonexempt Pay Structures Exempt Not subject to overtime provisions Salaried supervisors, managers, professionals, & executives Nonexempt Subject to overtime provisions Hourly, non-supervisory

Market Pay Lines Market pay rates relative to companys job structure Pay levels corresponding with pay line are market-competitive Rates promote internal consistency

Pay Grades Based on compensable factors, values, management philosophy Widths Narrow or wide Affects hierarchy & social distance Absolute or percentage-based job evaluation points

Pay Compression When pay spread is small Threatens competitive advantages Caused by Failure to raise pay range limits Scarcity of qualified applicants

Compa-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

Merit Pay Systems Considerations Communicate link between pay and performance Use effective appraisal methods Establish increase amounts & types Settle on base pay level

Merit 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

Present Level of 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

Increases 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

Sales 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

Sales Compensation Plans Sales-only Salary-plus-bonus Salary-plus-commission Commission-plus-draw Commission-only

Salary-Plus-Commission Plans Commissions based on % of price Spreads risks Designed to attract quality sellers Allows employees to do other tasks

Commission-Plus Draw Plans Draw Advance pay for living expenses Charged against future commissions Recoverable or non-recoverable Provides strong incentive to excel

Commission-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

Fixed Pay & Compensation Mix 3 Main Factors Salespersons influence on decision Competitive pay standards within industry Amount of non-sales duties

Skill 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

Transition 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

In-House vs. Outsourced Training Expertise Needed & available Timeliness How soon & how often? Number of trainees Proprietary nature of topic Too sensitive to share?

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

Two-Tiered Pay New employees paid less Temporary or permanent rewards Mainly in unionized companies May hinder recruiting Can lower employees morale

Pay 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