Designing Pay Levels,

Mix and Pay Structures

 STRATEGI
STRATEGI
TECHNI C
C
QUES OBJECTIV
POLICIES
ES

Work Descriptions Evaluation/

ALIGNMENT INTERNAL Analysis
Certification STRUCTURE
EFFICIENCY

Performance
COMPETITIVENES
S
Market
Definitions
Surveys Policy
Lines
PAY
 Quality
STRUCTURE

Customers

CONTRIBUTORS
Seniority Performance
INCENTIVE Based
Merit
Based
Stockholders
Guidelines PROGRAMS
 Costs

FAIRNESS
ADMINISTRATION Planning Budgeting Communication
EVALUATION COMPLIANC
E
 Determining Externally
Competitive Pay Levels and
Structures
External
competitive Define Conduc DrawMerge Competitiv
Set Policy
Internal e Pay
ness: Pay Market t
Policy Lines
& Levels,
relationship Survey
s among External Mix and
organizatio Pressure Structures
ns Some Major Decisions in Pay Level
s
Determination
 Determine pay level policy
 Define purpose of survey
 Define relevant labor market
 Design and conduct survey
 Interpret and apply results
 Design grades and ranges or bands
 Pre Survey - Compensation versus Total
Rewards
Common Examples
….
Reward Elements Definition
• Quality-of-Work &
-Life
Intrinsic • Affiliation Other Non-Cash T O T A L
• Development Rewards
• Security of
Employment
• Cars
• Clubs Perquisites
• Company Housing

T O T A L R
• Retirement
• Health & Welfare R E
Extrinsic: Benefits
• Time off w/Pay E W
• Statutory Programs M
All things onto U A
which we can N
assign a rupee TOTAL E R
• Stock
• Stock LTA R
value • Cash D
A
D T
I I
T PA
• Annual Incentive R O
Annual Variable C Y
O E N
T A C
• Basic Salary A S T
• Reimbursement + L H
Allow. Base Cash
• Insurance premiums
 Salary Survey
A survey is the systematic process of
collecting and making judgements
about the compensation paid by other
employers.

 Surveys provide the data for setting the

pay policy relative to competition and
translating that policy into pay levels
and structures.
 Set Competitive Pay Policy
Adjust Pay Level – How Much to Pay?
Adjust Pay Mix – What Forms?
Adjust Pay Structure?
Special Situations
Estimate Competitors’ Labour Costs
 Define Relevant Market
Competitors
Employers who compete for the same
occupations or skills required.

Employers who compete for

employees within the same
geographic area.

Employerswho compete with the

same products and services.
 Advantages and Disadvantages of
Measures of Compensation
Base Pay Tells how competitors Fails to include performance
are valuing the work incentives and other forms, so
in similar jobs will not give true picture if
competitors offer low base but
Total Cash Tells how competitors high incentivesmay not receive
All employees
(base + are valuing work; also incentives, so it may overstate
bonus) tells the cash pay for the competitors’ pay; plus, it does
performance not include long-term incentives.
opportunity in the job.
Total Tells the total value All employees may not receive all
Compensatio competitors place on the forms. Be careful; don’t set
n this work base equal to competitors’ total
(base + compensation. Risks high fixed
bonus + costs.
stock options
+ benefits)
 Combine Job Evaluation and
Market Survey Data (1 of 2)
 Scatterplots: for each benchmark job
there is a distribution of salaries paid
by survey companies.
 Scatterplots are useful to see what the
data look like.
 Scatterplot

7
survey
6
monthly
salary 5
(Rs.0000)
4
PAY 3

80 120 160 200 240 280 320 360

Our Job Evaluation Points
 Scatterplot with Linear
Curve

survey 7
monthly
salary 6
(Rs. 0000)
5
4
PAY 3

2 Line of Best Fit

1

80 120 160 200 240 280 320 360

Our Job Evaluation Points
 Adjust The Data to Reflect
Organization’s Pay Policy
Lead the Market:
 pay level should be above the market
for the year and equal at year end
 update factor will be equal to the
projected market increase
 Adjust The Data to Reflect
Organization’s Pay Policy (2 of 3)
Match the Market:
 pay level will be above the market for
the first half of the year and below for
the second half
 update factor will be half of the
projected market increase
 Adjust The Data to Reflect
Organization’s Pay Policy (3 of 3)
Lag the Market:
 pay level should be below the market
for the entire year
 no adjustment will be made to account
for the projected market increase
 Developing a Pay Policy
Line

survey
monthly 7
salary 6
(Rs. 0000)
5
4
PAY 3 Line of Best Fit :
using market-survey data
2 (updated and aged to reflect
1 pay policy)

80 120 160 200 240 280 320 360

Our Job Evaluation Points
 Why Bother with Ranges?
 External Pressures:
a. Quality variations (KRAs) among individuals in
the external market
b. Recognition of differences in the productivity-
related value to employers of these quality
variations
 Internal Pressures:
a. The intention to recognize individual
performance variations with pay
b. Employees’ expectations that their pay will
increase over time
 Constructing Ranges:
Develop Grades
A grade is a horizontal grouping of
different jobs that are considered
substantially equal for pay purposes.
 Grades enhance an organization’s
ability to move people among jobs
within a grade with no change in pay.
 Constructing Ranges:
Develop Grades

The objective is for all the jobs that

are similar for pay purposes to be
placed within the same grade.
How many pay grades?

a. number of jobs
b. organization hierarchy
c. reporting relationships
 Constructing Ranges:
Establishing Midpoint,
Minimum, and Maximum
 Pay ranges refer to the vertical
dimension of the pay structure.
 Each pay grade will have associated
with it a pay range consisting of a
midpoint and a specified minimum and
maximum.
 Constructing Ranges:
Establishing Midpoint,
Minimum, and Maximum
 Midpoints correspond to the
competitive pay policy
 The point where the pay policy line
crosses each grade becomes the
midpoint of the pay range for that
grade
 Midpoints are the control point of the
range
 PAY GRADE STRUCTURE

8
our 7
monthly
salary 6
(0000) V
5
4 IV
PAY 3 III

2 II Pay Policy Line

1
I

100 150 200 250 300 350

Our Job Evaluation Points
 DIFFERENT PAY
STRUCTURE
Spot Salaries Broad Bands Multiple Grades

x x x
x x
x x
x
x
R x R Rs
s s

Jobs Jobs Jobs

mber Bands  4-5 Bands  6 or more Grades

nge Width  100%  30%-50%

erlap  50%  20% - 40%

ntrol  Market Anchors  Market Anchors  Midpoints based on

 Pay Zones  Pay Zones market rates
 Job Evaluation
 DIFFERENT PAY
STRUCTURE Control
Flexibility
Market Sensitive Internal Equity
Spot Salaries Broad Bands Multiple Grades

xx x x
x
x
R x xxx R R
s s s

Jobs Jobs Jobs

ntages  Flexible  Enhances organisational  Clearly indicates internal

 Responsive to the
market
ks  Could lead to issues with
internal relativities
 Less control over cost
 Requires accurate
benchmarking and data
management
flexibility
 Framework for managing pay
and career development
 Allows for reward for growth
within band
 Emphasis on individual
contribution and market
 Can be used to determine
benefits eligibility
 Could lead to issues with
internal relativities
 Employees may perceive lack
of promotional opportunities
relativities
 Control pay policy and
budgets
 Can be used to determine
benefits eligibility
 Issues with flexibility
 Pay progression only
possible through job
promotion
 Promotion culture
Pay level and mix focus
attention on two objectives:

Control Labour
Costs

Attract and
Retain
Employees
 Pay Mix Policy Alternatives
Performance - Driven Market Match
Benefit Benefit
s 17% s 20%
Options
Option Base 4% Base
s 16% Bonus 70%
50% 6%
Bonus
17%
Work - Life Balance Security
(Commitment)
Benefit
s 20%
Benefit
s 30%
Base
50% Base
Options 80%
10%
Bonus
10%