The market competitive pay systems refer to a company's compensation

policy. It refers to the imperatives of competitive advantage and the key role
in promoting recruitment and retention of talented employees. There are four
steps that compensation professionals can undertake to develop market
competitive pay systems, and some of these apply as well to other areas of
human resources. So the first, conduct strategic analyses and this is
something that we would hope that other areas of HR are looking at. We
want to then assess competitors’ pay practices and with that information,
integrate our internal job structures, we want to integrate those with
external market pay rates and then we want to conclude with a
determination of compensation policies.

The first is strategic analysis. This is something that you should think about
with regard to your company, your company as context. Also if you're
interested in other companies, you can conduct some research through
Google searches to help gather some of this information to give you a picture
of a company's strategic position. Strategic analysis entails an examination of
the companies’ external market contacts and internal factors. Examples of
external context are industry profile, information on the competitors, long
term industry prospects. We also consider internal factors such as the
company's financial condition and its functional capabilities. That is if it's a
manufacturing organization, does it have sufficiently highly skilled employees
who can function appropriately in high tech manufacturing environment.

With regard to compensation surveys, we’re interested in collecting and

analyzing competitors’ compensation data. Then we want to integrate the
internal structure with the external market pay rates identified through
compensation surveys and this will also require some analysis. And then
compensation professionals recommend pay policies that fit with their
companies standing and competitive strategies.

Compensation professionals devoted a substantial amount of importance to

compensation surveys because these represent the foundation of sound and
effective market competitive pay systems.

So to start off with this, we had one of the main considerations is whether
we want to develop the survey ourselves or use an existing compensation
survey. We also want to make decisions about what information we're
interested in assessing. So typically we are looking to collect data on base
pay, incentive award structure and the mix in level of discretionary
employee benefits. To custom develop these surveys requires a great
amount of expertise and usually this is not something you find within many
companies. So you will see many companies going to external sources to
obtain compensation survey data and what are some of the sources? We
can look toward information from professional associations. Professional
associations often have compensation survey data that they share with its
member organizations and individual members of the organization.
Members are more likely to provide information in anonymous surveys to
their professional associations because they all have a common interest in
understanding what the compensation pay rates and structures are in a
particular profession. Companies are interested in learning this information
to help them structure competitive pay rates to get and keep the best
employees and individuals are interested in learning what the competitive
pay rates are so that as they seek employment, they understand their
market value. There are many different professional associations that we
can find specialized in particular occupational groups, such as engineers and
even more in particular, chemical engineers as an example, and in industry
association whose members are companies. So for example there is the
American iron and steel institute comprised of 31 member companies
including integrated and electric furnace steel makers. You can go to
industryweek.com to find a long list of associations, especially in the
manufacturing industry. Consulting firms represent another source of
compensation survey information. The textbook and slide 11 provide a list
of consulting firms that specialize in compensation. These firms are very
well-known and keep in mind that they are very expensive.

Typically, you find large corporations with the resources to purchase data
and survey results from these consulting firms. Other companies with fewer
resources and even large companies that choose not to pursue the services
of consulting firms might rely on data that are free. And that is we can find
a wealth of information about compensation practices in the U. S. bureau of
labor statistics website. The federal government publishes all things
regarding labor in its US bureau of labor statistics. You may recall from the
statistics course, the data analysis project that I asked you to complete in
groups. I provided data sets which I extracted from various U. S. bureau of
labor statistics surveys. In the area of compensation, there is a wealth of
data. There are data available for wages, earnings and employee benefits.
You can find the surveys on the U. S. bureau of labor statistics website.
Examples are employment cost trends, national compensation, survey data,
wages by area and occupation earnings by demographics, industry, county,
all kinds of information about the prevalence costs and types of employee
benefits offered by companies. And there is some data unfortunately not as
updated as I would like to see, on compensation costs in other countries.
When you have time, you should go to the bureau of labor statistics website
to review what is available, become familiar with it because you may find
that those data are very useful. You'll find in those surveys summary tables
and you will also, in many cases, be able to download the raw data from
those sites at no cost. All of this described within each survey site in the
bureau of labor statistics.

The textbook also provides a brief summary of each of the surveys that I
mentioned. So for example the compensation cost trends survey publishes
quarterly statistics that measure changes in labor costs over time such as
the employment cost index. So what is the change in employment costs
over a quarterly period of time? And you can also find levels of costs per
hours for employee compensation. The best way to learn what these
surveys have to offer is to immerse yourself in them rather than my
describing them in this pre-recorded lecture and of course I'm always happy
to answer your questions about them. As we select surveys we want to give
consideration to the relevant labor market and benchmark jobs. Regarding
the relevant labor market, we're referring to: where do you find the
qualified candidates based on occupational classification, geography, and
market competitors.

Benchmark jobs are used to help us link our internal job structures with
external market pay rates. We're never going to find a job for job match
between any one company's job structure and the external market. So we
rely on these benchmark jobs as established, well-known and stable jobs
that we find in the market that are typically common across employers that
represent the entire range of jobs in different occupational groupings that
we will accept for setting pay rates within our company. And even when we
find benchmark jobs, we have to be very careful not to simply match those
jobs with jobs within our company. Because there are likely to be subtle
and even substantial differences in many cases between how we need to
find a job within our company and how the benchmark jobs tend to be
described in compensation surveys. So this requires going beyond job titles
to looking at job descriptions.

Now in surveys there should job description information and you have job
description information in your company. With that information we need to
engage in a process called job leveling. As I mentioned there are
differences between a company's jobs and benchmark jobs. We need to
make corrections for these differences and we rely on our judgment to do
so. The process for making these corrections is referred to as job leveling
and there is a specific type called point level factor job leveling. You can
find the example of this on slide 20. The U. S. bureau of labor statistics
provides an excellent resource that addresses job leveling in detail. You can
find the reference for the source on slide 20 and in the textbook.

Not surprisingly, surveys contain a lot of data, so much data that eyeballing
it provides no insights into what they mean. Also we have to keep in mind
that when we obtain survey data it's already outdated. We are going to be
interested and planning compensation for some future period and we’ll have
to rely on some techniques to project ways to make the data relevant for
future periods of time. All of this requires that we call on statistical analyses
to make sense of these data and to make these adjustments. I won't
describe them here but we start off with descriptive statistics and that helps
us to summarize the survey data. As you know from the statistics class we
can talk about two descriptive properties of data, central tendency and
variation. You can look at slides 23 through 27 up to refresh your memory
of these descriptive statistics. The textbook also provides information on
these measures. As I mentioned a few moments ago salary survey data are
old, they’re historical data once we get our hands on them. And
compensation professionals are planning for a future period of time. So we
are interested in ensuring that our pay rates are not only current at the
beginning of the plan year, but also over the course of the plan year. And
by the way compensation professionals usually establish compensation
plans for a one-year period.

So on slide 28, There is brief review of the consumer price index, the CPI.
The U. S. bureau of labor statistics publishes the CPI which is an index of
the cost change in goods and services over time. For the entire United
States as well as for regions within the United States. Please look at the
textbook for brief descriptions of the CPI and their calculations that help
you to understand how we can update our salary survey data to project
relevance between the start and end of our compensation plan. As always if
you have questions I'll be glad to answer them. The consumer price index
helps us to make these adjustments. Our interest with it is to consider
inflation. Over time we see that the cost of goods and services increase and
we want compensation to have the same purchasing power over time. But
the CPI is not the only basis for determining adjustments to salary survey
data. For example, I was reading an article in the Wall Street Journal that
talked about how law firms usually agree to a starting pay rate for first year
law associates. For some period of time it was $160,000. Now law firms are
considering increasing that amount $180,000. So information from sources
other than the consumer price index, can help compensation professionals
make adjustments or future pay rates in order to be competitive. I should
note that I said that law firms agree to a starting pay rate and that's not
exactly true and in fact that might be a form of collusion. Rather, a law firm
might decide to increase the rate for a variety of reasons and other law
firms can choose to follow and in many cases law firms will do this in order
to be competitive.

Now that we have collected our compensation survey data and we've been
able to describe it and update it, it's now time to move toward integrating
our internal job structure, based on the job evaluation process with these
external market pay rates. So our goal is to set pay rates based on the
matches between a company's job structure and corresponding benchmark
jobs in the external market. This is learning objectives 3 and slides 29
through 33 contain the information. Descriptive statistics usually focus on
one variable. So average pay rate in the engineering profession. So one
variable, pay rate. Now that we move on to integration, we are introducing
the analysis of multiple variables simultaneously. And we rely on regression
analysis techniques to do this. As you know, regression analysis is the
statistical procedure designed to find the best fitting line between two
variables.

Slide 30shows us the basic formula for simple linear regression, that is one
independent variable. You can see here what the variables are. We are
trying to predict salary based on all kinds of compensation survey data that
we've collected. And we predict salary based on job evaluation points. Two
other elements of regression equations are the Y intercept, that is the value
of Y when x equals 0. In this case when we don’t have a job that's being
captured. No job is worth 0 points. And the slope, which is the pitch of the
regression line.

Slides 31 and 32 give an illustration of the result of a regression analysis.

You could see that for a hypothetical structure involving accounting jobs, so
the horizontal axis, and those numbers are job evaluation points. And the Y
axis or vertical axis shows the market pay rates. And that regression
analysis allows us to summarize the correspondence between our internal
job structure, so the variation in job evaluation points with the variation and
market pay rates for benchmark jobs. The market pay line is the regression
equation that comes from the analysis. And we can predict or say that the
typical pay rate for a job in this example of 500 points, is approximately
$38,000. We can look at like 32 to compute various values to determine
what the typical pay rate should be for a job in our company based on its
job evaluation points.

In the statistics course we also studied the r^2 statistic which goes along
with regression analysis. As you may remember as well r^2 explains the
variation and market pay rates via job structure. So let me back that up,
that's the application here. But we are trying to explain the variation in the
Y variable based on variation in the X variable. So our Y variable, market
pay. Our X variable, job evaluation points. R^2 ranges from 0 to +1, where
0 means that 0 variation and pay rates can be explained by job structure. A
value of 1 indicates that entire variation and market pay rates can be
explained by our job structure. And then we could see values in between.
I've indicated some ranges here and given them labels. So for example 0 to
3.30 for our square represents small variation. These are conventional
interpretations. We don't want to spend time trying to say that there is a
big difference between an r^2 of .36 an r^2 of .38, so we bracket them up
into convenient ranges. The goal in our analysis is to achieve anr^2 that's
as high as possible. If you can find something that's at least 0.7, then
you've done a good job. We want r^2 to be as high as possible because we
are planning to set our pay rates and pay ranges and reference to the
marketplace. If r^2 is low, then we're not finding a very good
correspondence between how we value jobs and how the market is valuing
jobs. Often times, a low r^2 can be the result of poor selection in
benchmark jobs and connecting them with our jobs internally.

Learning objective four, addresses compensation policies and strategic

mandates. This information can be found on slides 34 through 37.
Compensation policies are broken down into two subsets. The first, pay
level policies. And the second, pay mix policies. Pay level policies are
usually described in one of three ways. We can have a market lead policy, a
match, or lag policy. We have to quantify what we mean by those labels
and in compensation typically market lead policies are referenced at the
75th percentile. That means that on average 75% of the salary survey rates
are below the rate that you are setting in your company. Or you could say
that you are in the top 25% of pay. Companies have to make choices based
on how critical jobs are to the company, based on supply and demand when
determining what the pay level policies should be. This is useful information
but when we move to recognizing employee contributions, we’ll be
expanding on pay level policies by building pay ranges.

Pay mixed policies, and you could see an example on slide 37, tells us that
for every dollar that we spend to compensate an employee, and here I'm
referring to total compensation, benefits, wages and the different ways that
we can reward employees such as base pay and incentive pay. So for every
dollar we spend, what percentage of that is going to these various
components. Note that the benefits expenditure is approximately 27%.
That's a fairly typical number. If you were to go to the employer costs for
employee compensation survey on the U. S. bureau of labor statistics
website, you will see that typically companies are spending around 30% of
their compensation dollars to provide employee benefits. When we get to
employee benefits later in the course we will talk about some of the
breakdown in costs of various benefits components. But overall the amount
is roughly 30%. To be competitive, companies will usually start off by
matching the typical benefits expenditure on a per employee per hour
worked basis. Then, in allocating the remaining amount of money, it’s
important for compensation professionals to go back to the job description
and look at the expectations that are being set for the employee and how
can we motivate them to excel. So when we talked about seniority pay for
example, that has the potential to lead to employee complacency because
as long as they're providing a performance at some reasonable level, they
will get a pay increase just because they've been there over time. Merit pay
requires employees to perform and so does incentive pay. We might
consider incentive pay when we can measure job performance objectively
or some part of it objectively. We can find the mix perhaps between merit
pay that will sit well with subjective measures and incentive pay for
objective performance measures.

I should mention that when we discuss pay level policies and pay mixed
policies, we are likely to have more than one set of these within a company.
And oftentimes we will find these paired and attached to different job
structures. As you've read about, we create jobs structures for similar types
of jobs, for example accounting or engineering where we can see a
progression in the degree of fundamental compensable factors across jobs.
And based on those differences and job duties and expectations, we're likely
to see differences and what is needed to attract and retain employees, so
thinking about pay level, and the mix of pay in order to help motivate them
and direct them toward excellence. Well this concludes the pre-recorded
session for internal consistency, that leads to job structures and market
competitiveness. In the next pre-recorded session, we will talk about
structures that help us to recognize employee contributions. We will build
upon everything that we talked about in this pre-recorded session to build
those structures.