IPPTChap 008

Chapter 8
Designing Pay Levels, Mix and

Pay Structure
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may
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Learning Objectives
• Major decisions
• Specify competitive pay policy
• The purpose of a survey
• Select relevant market competitors
• Design the survey
• Interpret survey results and construct a market
line
• From policy to practice: The pay-policy line
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may 8-0
Learning Objectives
• From policy to practice: Grades and ranges
• From policy to practice: Broad banding
• Balancing internal and external Pressures:
Adjusting the pay structure
• Market pricing
Exhibit 8.1 - Determining Externally
Competitive Pay Levels and Structures
Specify Competitive Pay Policy
• Information on external markets
• Survey
• Process of collecting and making judgments about the
compensation paid by others
• Provides the data for translating policy into pay levels,
pay mix, and structures
The Purpose of a Survey
• Adjust pay level—how much to pay?
• Based on overall movement of pay rates caused
by competition in the market
• Adjust pay mix—what forms?
• Base, bonus, stock, and benefits
• Adjust pay structure?
• Validate job evaluation results
• Establish internal structures
The Purpose of a Survey
• Study special situations
• Specific pay-related problems
• Estimate competitors’ labor costs
• Competitive intelligence
• Employment Cost Index
• Measures quarterly changes in employer costs for
compensation
Select Relevant Market Competitors
• Relevant labor market includes employers
who compete:
• For same occupations or skills
• For employees in same geographic area
• With same products and services
• Fuzzy markets
• Organizations with unique jobs and structures
find it hard to get comparable market data
• Place more emphasis on external market data
Exhibit 8.3 - Relevant Labor Markets by
Geographic and Employee Groups
Design the Survey
• Who should be involved?
• Compensation manager, managers, and
employees
• Outside consulting firms
• How many employers?
• No firm rules
• Publicly available data – Bureau of Labor
Statistics
Design the Survey
• Word-of-mouse – Online salary information
• Many surveys (but few that are validated)
• Which jobs to include?
• Benchmark-job approach
• Low-high approach
• Wages of lowest- and highest-paid benchmark jobs for are
used as anchors for skill-based structures
• Benchmark conversion/survey leveling
• Differences are quantified when job content does not
sufficiently match survey jobs
Exhibit 8.7 - Benchmarks
Design the Survey
• What information to collect?
• Organization data
• Financial data and reporting relationships
• Turnover and revenues
• Total compensation data
• Base pay
• Total cash
• Total compensation
Exhibit 8.9 - Possible Survey Data
Elements and Rationale
Exhibit 8.9 - Possible Survey Data
Elements and Rationale
Exhibit 8.10 - Advantages and Disadvantages
of Measures of Compensation
Interpret Survey Results and Construct
a Market Line
• Verify data
• Accuracy of match
• Benchmark conversion/survey leveling
• Anomalies
• Does any one company dominate?
• Do all employers show similar patterns?
• Outliers?
a Market Line
• Statistical analysis
• Frequency distribution- Unusual shapes may
reflect:
• Problems with job matches
• Widely dispersed pay rates
• Employers with widely divergent pay policies
• Central tendency
• Reduces a large amount of data into a single number
• Variation
Exhibit 8.13 - Statistical Measures to
Analyze Survey Data
a Market Line
• Update the survey data
• Aging or trending
• Process of updating pay data to forecast the
competitive rates for the
• Market line
• Summarizes the distribution of going rates paid
by competitors in the market
Exhibit 8.15 - Choices for Updating
Survey Data Reflect Pay Policy
Construct a Market Pay Line
• Approaches to constructing a market pay line:
• Free hand approach
• Regression Analysis
• Setting pay for benchmark and non-
benchmark jobs
Exhibit 8.16 - From Regression Results
to a Market Line
Exhibit 8.17 - Understanding
Regression
Combine Internal Structure and
External Market Rates
• Two parts of the total pay model have merged:
• Internally aligned structure - Horizontal axis
• External competitive data - Vertical axis
• Two aspects of pay structure:
• Pay-policy line
• Pay ranges
Exhibit 8.18- Develop Pay Grades
From Policy to Practice: The Pay Policy
Line
• Choice of measure
• Updating
• Aging the market data to a point halfway through
the plan year is called lead/lag
• Policy line as percent of market line
• Specify a percent above or below market line an
employer intends to match
• Other options
• Pay among the leaders
• Lead for some job families and lag for others
From Policy to Practice: Grades and
Ranges
• Grades and ranges offer flexibility to:
• Deal with pressures from external markets
• Differences among firms regarding:
• Quality of individuals applying for work
• Productivity or value of these quality variations
• The mix of pay forms competitors use
Ranges
• Pay range
• Exists whenever two or more rates are paid to
employees in the same job
• Provides managers with the opportunity to:
• Recognize individual performance differences with
pay
• Meet employees' expectations that their pay will
increase over time, even in the same job
• Encourage employees to remain with the organization
Ranges
• Grades
• Enhance an organization's ability to move people
among jobs with no change in pay
• Have their own pay range
• Jobs within a single grade will have the same pay
range
Ranges
• Establish range midpoints, minimums, and
maximums
• Size of the range should be based on:
• How ranges support career paths, promotions, and
other organization systems
Exhibit 8.19 - Range Midpoint,
Minimum, and Maximum
Exhibit 8.20 - Range Overlap
Overlap
• Promotion increases matter
• Size of differentials between grades should
support career movement
• Overlap ought to be large enough to induce
employees to seek promotion
• Skill-based plans:
• Establish single flat rates for each skill level regardless
of performance or seniority
From Policy to Practice:
Broad Banding
• Broad banding
• Consolidates salary grades into a few broad
bands, each with:
• A sizable range
• One minimum and one maximum
• Range midpoint often not used
Exhibit 8.21- From Grades to Bands
Exhibit 8.22 - Contrasts Between
Ranges and Bands
From Policy to Practice:
Broad Banding
• Steps in banding
• Set the number of bands
• Price the bands: reference market rates
• Flexibility-control
• Take advantage of flexibility without:
• Increasing labor costs
• Leaving the organization vulnerable to charges of
inconsistent or illegal practices
Balancing Internal and External Pressures:
Adjusting the Pay Structure
• Job structure: Orders jobs on the basis of
internal factors:
• Reflected in job evaluation or skill certification
• Pay structure: Anchored by the external
competitive position
• Reflected in pay-policy line
Balancing Internal and External Pressures:
Adjusting the Pay Structure
• Reconciling differences
• May entail a review of :
• Job analysis
• Evaluation of the job
• Market data
Market Pricing
• Sets pay structures almost exclusively on
external market rates
• Competitive rates for jobs for which external
market data are available are calculated
• Remaining jobs are blended into pay
hierarchy
Market Pricing
• Objective
• To base most of the internal pay structure on
external rates
• To break down the boundaries between:
• The internal organization and the external market
forces
Market Pricing
• Business strategy
• Internal pay structure is aligned with competitors’
decisions
• Little value is added through internal alignment
• Unique or difficult-to-imitate aspects of the pay
structure are deemphasized
• Fairness is presumed to be reflected by market
rates

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Chapter 8

Designing Pay Levels, Mix and

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