8-1

Chapter

8 Designing Pay Levels,

Mix, and Pay
Structures

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 8-2

Determining Externally
Competitive Pay Levels and Structures

External
Merge Competitive
competitiveness: Draw policy
Select Design internal & pay levels,
Pay relationships Set Policy lines
market survey external mix, and
among
pressures structures
organizations

Some Major Decisions in Pay Level Determination

 Determine pay-level policy.

 Define purpose of survey.

 Specify relevant labor market.

 Design and conduct survey.

 Interpret and apply results.

 Design grades and ranges or bands.

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 8-3

What Is the Purpose of a Salary

Survey?
Systematic process of collecting and
making judgments about compensation
paid by other employers

Provides data for

 Setting the pay policy relative to competition

 Translating that policy into pay levels and

structures

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 8-4

Why Conduct a Salary Survey?

Adjust pay level – How much to pay?

Adjust pay mix – What forms?

Adjust pay structure?

Analyze special situations

Estimate competitors’ labor costs

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 8-5

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 or services
Fuzzy markets-more attention and focus
needed

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 8-6

Relevant Labor Markets by Geographic and

Employee Groups
Geographic Production Office and Technicians Scientists & Managerial Executive
Scope Clerical Engineers Professional

Local: Within Most likely Most likely Most likely

relatively small
areas such as
communities
(Wakenaan) or
regions/town
(Bartica)
Regional: Within Only if in Only if in Most likely Likely Most likely
a particular area short short
of the state or supply or supply or
several states critical critical

National: Across Most likely Most likely Most likely

the country

International: Only for Only for critical Sometimes

critical skills or skills or those in
Across several those in very very short
countries short supply supply
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 8-7

Elements and Rationale of Survey Data

Nature of organization Incumbent and job

 Financial  Date
performance  Job
 Size  Individual
 Structure  Pay
Nature of total HR outcomes
compensation system  Productivity
 Cash forms used  Total labor costs
 Non-cash forms used  Attraction & retention
 Employee views

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 8-8

Advantages and Disadvantages

of Measures of Compensation
Base Pay Tells how competitors are Fails to include performance incentives
valuing the work in similar jobs and other forms, so will not give true picture if
competitors offer low base but high incentives

Total Cash Tells how competitors are All employees may not receive incentives, so it
(base + bonus) valuing work; also tells the may overstate the competitors’ pay; plus, it
cash pay for performance does not include long-term incentives.
opportunity in the job.

Total Tells the total value All employees may not receive all the forms.
Compensation competitors place on this work Be careful; don’t set base equal to competitors’
(base + bonus + total compensation. Risks high fixed costs.
stock options +
benefits)

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 8-9

Market Pay Line

Definition of market pay line
 Links a company’s benchmark jobs on
horizontal axis (internal structure) with
market rates paid by competitors (market
survey) on vertical axis
 A market pay line is built using the
composite market data points. It allows an
organization to translate the market data
into usable information.

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 8-10

External pressures
 Differences in quality among individuals in
external market
 Differences in productivity or value of quality
variations
 Differences in mix of pay forms of competitors
Internal pressures
 Recognize individual performance differences
with pay
 Meet employees’ expectations that their pay will
increase over time
 Encourage employees to remain with
organization

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 8-11

Develop Grades
Grades
 Alljobs considered substantially equal for pay
purposes placed in same grade
 Each pay grade has its own pay range and all
jobs in a single grade have same pay range
 Enhances ability to move people among jobs
within a grade with no change in pay
How many pay grades?
 Number of jobs
 Organization hierarchy
 Reporting relationships

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 8-12

Size of range based on judgment about how

ranges support
 Career paths
 Promotions
 Other organization systems
Typical range spread
 Top-level management positions – 30 to 60% above
and below midpoint
 Entry to midlevel professional and managerial
positions – 15 to 30% above and below midpoint
 Office and production positions – 5 to 15% above and
below midpoint

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 8-13

Broad Banding
Alternative to traditional salary structures
Involves collapsing salary grades into a few
broad bands, each with a sizable range
 One minimum and one maximum
 Range midpoint often not used
Purposes

 Provide flexibility to define job responsibilities more

broadly
 Foster cross-functional growth and development
 Ease mergers and acquisitions
Example

 Exhibit 8.18
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 8-14

Contrasts Between
Ranges and Bands
Ranges support . . . Bands support . . .
 Some flexibility within  Emphasis on flexibility
controls within guidelines
 Relatively stable  Global organizations
organization design  Cross-functional
 Recognition via titles or experience and lateral
career progression progression
 Midpoint controls,  Reference market rates,
comparatives shadow ranges
 Controls designed into  Controls in budget, few
system in system
 Give managers “freedom  Give managers “freedom
with guidelines” to manage” pay
 Up to 150 percent range-
 100 – 400 % spreads
spread
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 8-15

Steps Involved in Broad Banding

1. Set number of bands
 Determine number of distinct levels of
employee contributions within organization
that actually add value
 Challenge - How much to actually pay
people in same band who are performing
different functions and work

2. Price bands: Reference market rates

 Exhibit 8.20: Reference Rates Within Bands

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 8-16

Market Pricing
Approach
 Sets pay structures almost exclusively by relying
on external market rates
 Emphasizes external competitiveness (market-
based factors) and de-emphasizes internal
alignment
Issues
 Validity of market data
 Use of competitors’ pay decisions as primary
determinant of pay structure
 Lack of value added via internal alignment
 Difficult-to-imitate aspects of pay structure are
deemphasized
 Fairness
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 8-17

Conclusion
Students must review this lecture using
a lens that allows them the privilege of
focusing on both the local environment
and the global environment.

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