Solution Manual for Strategic Compensation 10th Edition Joseph J.

Martocchio

Solution Manual for Strategic Compensation 10th

Edition Joseph J. Martocchio

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 CHAPTER 7
Building Market-Competitive Compensation Systems

Learning Objectives
7-1. Explain the concept of market-competitive compensation systems and summarize
the four activities compensation professionals engage in to create these systems.
7-2. Discuss compensation survey practices.
7-3. Describe how compensation professionals integrate internal job structures with
external market pay rates.
7-4. Explain the basic concepts of compensation policies and strategic mandates: pay
level and pay mix.

Outline
I. Market-Competitive Pay Systems: The Basic Building Blocks
II. Compensation Surveys
III. Integrating Internal Job Structures with External Market Pay Rates
IV. Compensation Policies and Strategic Mandates
V. Key Terms
VI. Discussion Questions and Suggested Answers
VII. Preparing for My Career: Compensation in Action
VIII. End of Chapter Cases: Instructor Notes, and Questions and Suggested Student
Responses
IX. Crunch the Numbers! Questions and Suggested Student Responses
X. Working Together: Team Exercise with Suggested Student Responses
XI. Assisted-Graded Questions
XII. Additional Cases from the MyLab Management Website; Instructor Notes, and
Questions and Suggested Student Responses

Lecture Outline

I. Market-Competitive Pay Systems: The Basic Building Blocks

A. Definition
1. Market-competitive pay systems represent companies’ compensation
policies that fit the imperatives of their competitive advantage
2. These systems play a significant role in attracting and retaining the most
qualified employees

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 3. Based on four activities
a. Conducting strategic analyses which entails an examination of a
company’s external market factors
b. Assessments of competitors’ pay practices with compensation surveys
c. Integrating the internal job structure with external market pay rates
d. Determining compensation policies
II. Compensation Surveys
A. Preliminary Considerations
1. Main considerations
a. What companies hope to gain from compensation surveys
b. Which type of survey to use
2. What companies hope to gain from compensation surveys
a. Competitors’ compensation practices
b. Employee’s preferences for alternative forms of compensation due to
economic changes
3. Custom development versus use of an existing compensation survey
a. Custom surveys preferable because the questions can be tailored
specifically for each company
b. Most companies choose not to develop own survey for three reasons:
i. Not always practical because of the specialized knowledge and
skills needed to develop effective ones
ii. Not always effective because businesses are reluctant to give
information directly to competitors
iii. The staffing and design costs can be prohibitive
B. Using Published Compensation Survey Data
1. Two important considerations
a. Survey focus: Core compensation or employee benefits
b. Sources of published compensation surveys
2. Survey focus: Core Compensation or Employee Benefits
a. Must decide on obtaining information about base pay, employee
benefits, or both
b. Because benefit costs are now high, employers more likely to obtain
information about both
3. Sources of published surveys
a. Professional associations that survey members
b. Industry associations
c. Consulting firms who provide data from recently completed surveys or
create surveys from scratch for clients
d. Federal government through the Bureau of Labor Statistics

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 i. Employment cost trends: Program publishes quarterly statistics
that measure change in labor costs
ii. National compensation data: National Compensations Survey
(NCS) provides comprehensive measures of occupational earnings;
compensation cost trends, benefit incidence, and detailed plan
provisions
iii. Wages by area and occupation: Available for the nation, regions,
states, and many metropolitan areas
iv. Earnings by demographics: Available for characteristics such as
age, sex, race, and Hispanic or Latino ethnicity
v. Earnings by industry: Current Employment Statistics survey is
monthly and provides estimates of average weekly hours and
average hourly earnings for the private sector for all employees
and for production and nonsupervisory employees
vi. County wages (quarterly census of employment and wages):
Annual and quarterly wage data are available
vii. Employee benefits national compensation survey: Provides
information on the share of workers who participate in specified
benefits
C. Compensation Surveys: Strategic Considerations
1. Two essential strategic considerations
a. Defining the relevant labor market
b. Choosing benchmark jobs
2. Defining the relevant labor market
a. Relevant labor markets represent the fields of potentially qualified
candidates for particular jobs
b. Defined on the basis of occupational classification, geography, and
product or service market competitors
c. Occupational classification refers to a group of two or more jobs that
are based on similar work characteristics and responsibilities
d. Companies search a wider geographic area for candidates for jobs that
require specialized skills or skills that are low in supply
e. Companies use product or service market competitors to define the
relevant labor market when industry specific knowledge is key and
competition for market share is keen

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 3. Choosing benchmark jobs
a. Used as reference points for setting pay levels
b. Four characteristics
i. The contents are well-known, relatively stable over time, and
agreed upon by the employees involved
ii. The jobs are common across a number of different employers
iii. The jobs represent the entire range of jobs that are being evaluated
within a company
iv. The jobs are generally accepted in the labor market for the
purposes of setting pay levels

c. Necessary because matches between a company’s position to a

position in a survey is not always possible since:
i. Large companies may have hundreds of unique jobs
ii. Companies adapt job duties and scope to fit their specific needs
d. Companies use job leveling to make corrections for differences
between their jobs and external benchmark jobs
i. Point factor leveling is a job leveling approach where participants
rate a job based on a standard set of compensable factors that
have point values associated with each level of the factor
D. Compensation Survey Data
1. Three compensation survey data characteristics
a. Contains immense amounts of information
i. May be a wide variety of pay rates across companies, making it
hard to build market-competitive pay systems
ii. Statistics needed to describe large sets of data
b. The data is generally outdated because of the lag time between data
collection and use
c. Statistical analysis should be used to integrate internal job structures
(based on job evaluation points) with the external market (based on the
survey data)
2. Data analysis
1. Begins with basic tabulation of survey data which helps organize data,
promotes decision makers’ familiarization with the data and reveals
outliers
3. Using the appropriate statistics to summarize survey data
a. Central tendency represents the fact that a set of data cluster (or center)
around a central point

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 b. Two central tendency measures
i. Arithmetic mean which is calculated by adding all the salaries
together and dividing by the sum of number of salaries added
ii. Median is the middle value in an ordered sequence of numerical
data
c. Variation represents the amount of spread or dispersion in a set of data
d. Standard deviation refers to the mean distance of each salary from the
mean
i. Used as a reference point to judge whether employees’
compensation is below or above the market
ii. Indicates the range for the majority of salaries, so it can be used to
judge how a company’s salary range compares to the market
e. Quartile
i. Describe dispersion by indicating the percentage of figures that fall
below certain points
ii. Allows compensation professionals to describe the distribution of
data based on four points
• Quartile 1 at 25%
• Quartile 2 at 50%
• Quartile 3 at 75%
• Quartile 4 at 100%
d. Percentiles
ii. Describe dispersion by indicating the percentage of figures that fall
below certain points
ii. Based on 100 points
5. Updating the survey data
a. Necessary because of the lag-time between data collection and data
use
b. Failure to adjust could lead to real compensation (purchasing power of
dollar) falling below nominal compensation (face value of dollar)
c. Consumer Price Index (CPI) which is the most commonly used method
to track cost changes can be used to update salary survey data
III. Integrating Internal Job Structures with External Market Pay Rates
A. Overview
1. Differences in the internal value of jobs should correspond to pay
differences based on compensation survey data

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 2. Regression analysis
a. Uses market pay rates as reference points for determining internal pay
structures
b. Enables compensation professionals to predict the values of one
variable from another
c. Finds the best fitting line (market pay line) between two variables
i. Job evaluation points of benchmark jobs
ii. Salary survey data for the benchmark jobs
d. Equation
i. Y = a + bX
ii. Y = predicted salary
iii. X = job evaluation points
iv. a = the Y intercept: The Y value at which X = 0
v. b = the slope
• Represents the change in Y for every change in the job
evaluation points
• Represents the dollar value of each job evaluation point
2
e. R
i. Tells how well the variation of jobs based on job evaluation points
explains the variation in market pay rates from the survey
ii. Ranges from 0 to 1
iii. Represents the percentage variation in Y values that can be
explained by the X values
• Y = market pay rates
• X = job evaluation points
iv. Values
• R2 = 0 means that none of the variation in market pay rates can
be explained by the company’s job structure
• R2 = 1 means that all the variation in market pay rates can be
explained by the company’s job structure
• R2 between 0 and .30 represents a small amount of variation
• R2 between .31 and .70 represents a medium amount of
variation
• R2 above .71 represents a large amount of variation
IV. Compensation Policies and Strategic Mandates
A. Pay level policies
1. Companies can choose from three pay level policies
a. Market lead
b. Market lag
c. Market match

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 2. Market lead policy distinguishes companies from the competition by
compensating employees more highly than most competitors
3. Market lag policy distinguishes from competition by compensating less
than most competitors
4. Market match policy most closely follows the typical market pay rates
because companies pay according to the market pay line
B. Pay mix policies
1. Pay mix policies refer to the combination of core compensation and
employee benefits components that make up an employee’s total
compensation package
2. Pay mix may policies may be expressed in dollars (or other currency as
relevant) or as a percentage of total dollars allocated for an employee’s
total compensation
3. What is an appropriate pay mix?
a. For policy purposes, it makes sense to consider guidelines for jobs
within a particular structure (for example, managerial, administrative,
or sales) because of the common job content and worker requirements
of jobs within a particular structure

End of Chapter

V. Key Terms

Market-competitive pay systems: Represent companies’ compensation policies that fit

the imperatives of competitive advantage
Strategic analysis: Entails an examination of a company’s external market context and
internal factors
Compensation surveys: Involve the collection and subsequent analysis of competitors’
compensation data
Compensation plans: Represent the selection and implementation of pay level and pay
mix policies over a specified time period, usually on year
Relevant labor markets: Represent the fields of potentially qualified candidates for
particular jobs
Job leveling: Process of making corrections for differences between their jobs and
external benchmark jobs
Point factor leveling: Job leveling approach where participants rate a job based on a
standard set of compensable factors that have point values associated with each level of
the factor
Central tendency: Represents the fact that a set of data clusters or centers around a
central point
Mean: Average of salaries used as a reference point to judge whether employees’
compensation is below or above the market
Median: Is the middle value in an ordered sequence of numerical data. If there is an odd
number of data points
Variation: Represents the amount of spread or dispersion in a set of data

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Standard deviation: Refers to the mean distance of each salary figure from the mean
Quartiles: Allow compensation professionals to describe the distribution of data based
on four groupings
Percentiles: There are one hundred percentiles ranging from the first percentile to the
100th percentile
Real compensation: Measures the purchasing power of a dollar
Nominal compensation: Is the face value of a dollar
Consumer Price Index (CPI): The most commonly used method for tracking cost
changes, or consumer inflation, throughout the United States
Regression analysis: A statistical analysis technique that enables compensation
professionals to establish pay rates for a set of jobs that are consistent with typical pay
rates for jobs in the external market
Market pay line: Representative of typical market pay rates, expressed as a mean or
median, relative to a company’s job structure
Market lead policy: Distinguishes a company from the competition by compensating
employees more highly than most competitors
Market lag policy: Appears to fit well with lowest-cost strategies because companies
realize cost savings by paying lower than the market pay line
Market match policy: Represents a safe approach for companies because they generally
are spending no more or less on compensation (per employee) than competitors

VI. Discussion Questions and Suggested Answers

7-1. You are a compensation analyst for a pharmaceuticals company, which is

located in Los Angeles, California. What is the scope of the relevant labor
markets for chemists and for data entry clerks? Describe the rationale for
your definitions.

Relevant labor markets represent the fields of potentially qualified candidates for
particular jobs. Companies collect compensation survey data from the appropriate
relevant labor markets. Relevant labor markets are defined on the basis of occupational
classification, geography, and product or service market competitors. The relevant labor
market for chemists might be the entire state of California and other pharmaceutical
companies employing chemists as these jobs are specialized. The relevant labor market
for data entry clerks might be just the city of Los Angeles and any company employing
data entry clerks.

Learning Objective: 7-3. Describe how compensation professionals integrate internal

job structures with external market pay rates.
AACSB: Application of knowledge

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7-2. Can companies easily develop compensation systems that are both internally
consistent and market competitive? What are some of the challenges to this
goal? Explain.

Yes, it is important for companies to develop compensation systems that are both
internally consistent and market competitive. The internal valuation differences in jobs
within an organization should correspond to pay differences based on compensation
survey data. If companies are unable to do this, they may create a competitive
disadvantage by paying well above or below the typical market rate for a job. One
challenge to this process is that internal jobs may not align with the jobs available in
compensation surveys. It can also be challenging to determine if they are going to lead,
lag, or match the market.

Learning Objective: 7-3. Describe how compensation professionals integrate internal

job structures with external market pay rates.
AACSB: Analytical thinking

7-3. Which do you believe is most important for a company’s competitive

advantage: Internal consistency or market competitiveness? Explain.

Market competitiveness is important to meet the growing demands of the market and stay
ahead of the competition in order to make the most profit for the company.

Learning Objective: 7-1. Explain the concept of market-competitive compensation

systems and summarize the four activities compensation professionals engage in to create
these systems.
AACSB: Analytical thinking

7-4. Refer to the regression equation presented earlier in this chapter. When b =
0, the market pay line is parallel to the x-axis (i.e. job evaluation point scale).
What does this result indicate?

If b = 0, the market pay line is parallel to the x-axis. This means that the market pays the
same annual salary, regardless of the job evaluation points. To illustrate with the
example in the chapter, it means that an Accountant I, II, or III has the same market value
annual salary.

Learning Objective: 7-3. Describe how compensation professionals integrate internal

job structures with external market pay rates.
AACSB: Analytical thinking

7-5. Refer to Table 7-3. Cross out salaries for Company F and Company G.
What is the mean and median for the set of Companies A through E?

Mean: 37,840 Median: 36,000

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Learning Objective: 7-2. Discuss compensation survey practices.
AACSB: Application of knowledge

VII. Preparing for My Career: Compensation in Action

Instructor Notes:

This section outlines the role human resources professionals and line managers take in
staying current with the external market and attracting the right employees through
offering competitive pay. HR professionals work with compensation specialists to access
external pay and benefit data and analyze that data to make pay decisions. Line managers
must identify the resources needed to carry out a company’s strategy, including those to
offer compensation to attract workers. This section can help students understand the
importance of understanding compensation practices whether they pursue a career as a
human resources professional or a line manager.

VIII. End of Chapter Cases; Instructor Notes, and Questions and Suggested
Student Responses

Case 1: Nutriment’s New Hires

Instructor Notes:
Nutriment is pursuing a differentiation strategy in order to create product that is not
offered by their competitors. In order to successfully attract the right staff to ensure
Nutriment has a competitive advantage, the company must ensure that their pay structure
is competitive in the local market while also managing costs. Nutriment has different job
categories that may require different pay strategies. The administrative positions only
require Nutriment to match the compensation of their competitors. However, the
scientists will be more difficult to attract. As such, it is likely that they will need to take
a pay lead strategy for their scientist. Nutriment may also have some concerns with
internal consistency of compensation as the market will likely drive them to offer the
scientists pay that is significantly more than that of the administrative staff members.

Questions and Suggested Student Responses:

7-6. What are some strategic considerations in establishing a pay structure at

Nutriment?

In considering a pay structure that is competitive in the market place, Nutriment should
consider their industry, competitors and other external market factors. They must also
consider their financial resources. Nutriment’s business strategy is a differentiation
strategy as they are looking to develop a unique product. As such, recruiting and
retaining talented staff members, particularly the scientists, will be essential in order for
the business to succeed. They currently have an edge in the market place because of their
scientific discoveries; however, it is a competitive market place for talent.

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Learning Objective: 7-1. Explain the concept of market-competitive compensation
systems and summarize the four activities compensation professionals engage in to create
these systems.
AACSB: Analytical thinking

7-7. Should Jack suggest a pay policy to lead, lag or match the market? Explain
your recommendation.

Jack should suggest two different strategies for Nutriment. For the administrative staff, a
match strategy is appropriate. Because it is not necessary to pay higher salaries in order
to attract the administrative staff, pursuing a match strategy can offer some cost savings.
However, the company should most likely take a lead strategy in order to create a
compensation package that is attractive to scientists. There are few qualified scientists
available and their skills are in demand.
Learning Objective: 7-4. Explain the basic concepts of compensation policies and
strategic mandates: pay level and pay mix.
AACSB: Analytical thinking

Case 2: Ethics Dilemma: A Slanted Wage Proposal

Instructor Notes:

Mandy, the Director of Labor Relations, has asked Roberta, the lead compensation
analyst, for a market wage analysis to take to the bargaining table to negotiate with the
union. The analysis includes both the market mean and median wages. Due to some
outliers, as well as some employers illegally paying workers lower than minimum wage,
the mean wages are lower than the median wages. Mandy decides only to share the
lower mean wage data with the union.

Questions and Suggested Student Responses:

7-8. As a compensation professional, what would you do?

It is important for the compensation professional to make sure the Director of Labor
Relations has accurate information. In this case, Roberta could recalculate the mean
wage rates after removing the outliers. She should communicate to Mandy that she is
trying to assure that Mandy approaches the negotiation in the best position possible by
having accurate information. She should note that the union could access market data as
well and that presenting misleading wage data could hurt the company’s position in
negotiations.

Learning Objective: 7-2 Discuss compensation survey practices.

AACSB: Ethical understanding and reasoning

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7-9. What factor(s) in this ethical dilemma might influence a person to make a
less-than-ethical decision?

Previous union negotiations might influence Mandy’s approach. If the company had not
been successful in previous negotiations, Mandy might feel pressure to improve the
company’s position in the negotiations.

Learning Objective: 7-2 Discuss compensation survey practices.

AACSB: Ethical understanding and reasoning

IX. Crunch the Numbers! Questions and Suggested Student Responses

Updating Salary Survey Data

7-10. By what percent did the cost of goods and services change between December
2016 and June 2017?

December 2016 = 242.78

June 2017 = 244.03

% Change = (244.03-242.78) / 242.78 = .0515% increase

Learning Objective: 7-2. Discuss compensation survey practices.

AACSB: Application of knowledge

7-11. (a) By what percent might you expect the average cost of goods and services
to change over the second 6-month period of 2017? Hint: First, calculate the
percentage cost change for the period July through December for each of the
previous years: 2012 through 2016. Second, take the average of these five
figures. This calculation gives us the average percent cost change. Estimates
based on multiple years give us a more stable picture of percent cost changes.
(b) What is the estimated average salary for December 31, 2017? Hint:
[(initial average salary × average percent cost change) + initial average
salary]

a) July through December change:

2012 = (231.22 – 228.59) / 228.59 = 1.15%
2013 = (234.71 – 232.90) / 232.90 = .78%
2014 = (236.27 – 237.48) / 237.48 = –.51%
2015 = (237.82 – 237.99) / 237.99 = –.071%
2016 = (242.78 – 240.05) / 240.05 = 1.14%

Average % change = .498%

b) ($50,000 x .0498) + $50,000 = $52,490

Learning Objective: 7-2. Discuss compensation survey practices.

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AACSB: Application of knowledge

7-12. (a) By what percent might you expect the average cost of goods and services
to change between January 1, 2018 and December 31, 2018? Hint: First,
calculate the percent cost change for the period January through December
for each of the previous years: 2012 through 2016. Second, take the average
of these five figures to calculate the average percent cost change. (b) What is
the estimated average salary for December 31, 2018? Hint: [(December 2017
average salary × average percentage cost change) + December 2017 average
salary].
a)
2012 = (231.22 – 227.84) / 227.84 = 1.48%
2013 = (234.71– 231.67) / 231.67 = 1.31%
2014 = (236.27– 235.34) / 235.34 = .395%
2015 = (237.82 – 234.83) / 234.83 = 1.27%
2016 = (242.78 – 237.99) / 237.99 = 2.01%
Average % change: 1.293%

b) ($52,490 x 1.293%) + $52,490 = $53,186.70

Learning Objective: 7-2. Discuss compensation survey practices.

AACSB: Application of knowledge

X. Working Together: Team Exercise with Suggested Student Responses

Instructor Notes:

Students should explore the FAQ section for the National Compensation survey
respondents to learn more about seven survey program areas published by the U.S.
Bureau of Labor Statistics.

Questions and Suggested Student Responses:

7-13. What are two questions that you found most interesting and what
recommendations do you have for clarifying answers to those questions?
Explain. (Note: Answer these questions from the perspective of a possible first-
time survey participant.)

Student responses will vary based on what each team finds most interesting.

Learning Objective: 7-2. Discuss compensation survey practices.

AACSB: Reflective thinking

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7-14. FAQs usually don’t cover every possible question. As a prospective survey
participant, what is an additional question or two you’d like to see included
in the FAQ section? Explain.

Student responses will vary, but should indicate that they have read and understand the
purpose of the survey.

Learning Objective: 7-2. Discuss compensation survey practices.

AACSB: Reflective thinking

XI. Assisted-Graded Questions

7-15. Is it appropriate to utilize the same pay mix arrangement for clerical
employees and sales professionals? Explain your answer and how the pay
mix arrangements might differ.

Answer to this question can be found in the MyLab Management

7-16. Explain what the market pay line is. How is it used in the context of pay
level policies such as market lead, market lag, and market match

Answer to this question can be found in the MyLab Management

7-17. MyLab Management Only – comprehensive writing assignment for this

chapter.

Answer to this question can be found in the MyLab Management

XII. Additional Cases from the MyLab Management Website; Instructor Notes,
and Questions and Suggested Student Responses

Case Name: Analyzing Jobs at Custom Carpet Cleaning

Instructor Notes:
Many smaller companies must manage their staff with limited human resource
management expertise. In this case, the company is making an effort to create written job
descriptions, which will be useful in developing an internally consistent compensation
system that is competitive in the market. However, it is unlikely that the process here
will result in a valid and reliable job analysis. Developing job descriptions that are not
thorough or entirely accurate will not effectively support the development of a
compensation system. Many managers in small companies rely upon the Internet for
information. In this case, it might be a good investment for the company to utilize an
outside consultant or find an opportunity for formal training for the Office Manager in
order to conduct an effective job analysis.

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Solution Manual for Strategic Compensation 10th Edition Joseph J. Martocchio

Questions and Suggested Student Responses:

7-14. Do you think Bob’s approach to job analysis will be effective in creating
useful job descriptions?

While Bob has established a good starting point, overall the process will not provide
him with full information. He is only collecting information from one employee at
each location. Further, his questionnaire lacks detail. This process will only provide
him with a limited view of the jobs within the company.
AACSB: Analytical thinking

7-15. What can be done to improve this job analysis process?

Bob should expand his data collection in several ways. First, he could create a more
detailed questionnaire that could be distributed to more than one employee in each
location. Because it is a small company, he could realistically collect information
from all employees. Further, he may want to supplement the questionnaires through
an additional data collection technique such as observation or follow-up interviews
with employees. He should also collect information from another source such as the
supervisors or possibly customers.

AACSB: Analytical thinking

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