External Equity:
Building Market-Competitive
Compensation Systems
Compensation Techniques




INTERNAL:
Job Analysis, Job Descriptions, Job Evaluation,
Internal Work Structure
EXTERNAL:
Market definitions, Market surveys, Policy lines,
Pay structures
INDIVIDUAL:
Seniority based, Performance based, Incentive
guidelines, Incentive programs
ADMINISTRATION:
Planning, Budgeting, Communicating, Evaluating
External Equity/Competitiveness
“Refers to the pay relationships among
organizations. The organization’s pay relative
to its competitors.”
 Market-competitive pay systems
represent companies’ compensation
policies that fit the imperatives of
competitive advantage

– Attract and retain qualified employees
Competitive Pay Policy Options
Lead
 Lag
 Match

Match Pay Policy




Determine average market rate
Pay WITH market rate/competitors
Similar ability to attract and retain
Match industry/product market costs
Lead Pay Policy





Determine market rates
Pay ABOVE the average market rate
Maximizes ability to attract and retain quality employees
Minimizes employee dissatisfaction with pay
Offsets less attractive features of work
Lag Pay Policy





Determine market rates
Pay BELOW the average market rate
Hinders ability to attract and retain
Promise of higher future returns
Lead on other aspects
Consequences of Pay Level
Decisions
Labor Costs
 Attraction

–
Competitiveness of
Pay Policy

Numbers, quality,
experience
Retention
–
Voluntary Turnover
Pay Satisfaction
 Work stoppages,
Unionization

Turnover Rates
18
16
14
Manufacturing
Nonmanufact
Finance
Nonbusiness
Health Care
12
10
8
6
4
2
0
1991
AVG
Salary Survey

“The systematic process of collecting and
making judgments about the compensation
paid by other employers.”

The Overpaid
Bank Tellers case
Salary Survey Steps




Define the relevant market
Include jobs--Benchmark approach
Collect information
Interpret & apply survey results
– Job matches

Build grades and ranges with
minimums, maximums and
midpoints.
–
–
–
Regression line
Apply competitive pay policy
Design pay grades and ranges
Define the Relevant Market

The fields of potentially qualified
candidates for particular jobs.
–
–
–
–
–
–
Occupations/skills
Geographic distance
Same industry, product
Size of competitors
Number of competitors
For project: at least 10 companies
Industry Weekly Earnings
600
500
400
300
200
100
0
Wkly
Earn
Total Private
Mining
Construction
Manufacturing
Trans. & Util
Whls Trade
Retail Trade
Fin, Ins, RE
Services
Industry Hourly Earnings
14
Total Private
Mining
Construction
Manufacturing
Trans. & Util
Whls Trade
Retail Trade
Fin, Ins, RE
Services
12
10
8
6
4
2
0
Hrly Earn
Include Jobs: Benchmark Approach
Characteristics of Benchmark Jobs:
 Job contents well-known, stable over time,
agreed upon by employees involved
 Common across a number of different
employers
 Generally accepted for
setting pay levels
 Represent entire job
structure under study
Benchmark Jobs
O
1800
1450
1300
120
0
1000
*
F
*
B
*
*
I
*
L
800
A B C DE F G H I J K L M N O P
120
235
370
450
600
Collect Info: Survey Sources

Bureau of Labor Statistics
–
–
–
Area and industry surveys
(Local Area Wage Survey -AWS)
National Survey of
Professional, Administrative,
Technical, and Clerical
Workers (PACT)
Employee Benefit Surveys
–
–
–
–
–
Current employment
statistics survey
Current population survey
Employment Cost Surveys
Compensation per hour
Major union settlements
Survey Sources, cont’d





Professional Associations
– American Compensation Association
publishes the Salary Budget Survey,
reported by region and industry.
– Society for Human Resource Management
publishes information on salaries in the human
resources field.
Accounting companies
– KPMG Peat Marwick; Deloite &
Touche; Ernst & Young
Professional, trade organizations
Private published sources
Internet
Sources of Compensation Survey Information (cont’d)

Industry Associations
– Administration Management Society
– American Association of University
Professors
– American Banker’s Association
– American Bar Association
– American Electronics Association
– American Mathematical Society
– American Society of Association
Executives
– Association of General Contractors
– National Institute of Business
Management
– National Restaurant Association
– National Retail Federation
– National Society of Engineers
Consulting
Firms
–Abbott, Langer & Associates
–Coopers & Lybrand
–Dietrich Associates Inc.
–Executive Compensation
Service
–Hay Management Consultants
–Hewitt Associates
–Mercer-Meidinger-Hanson
–Robert Half Associates
–Towers & Perrin
–Wyatt Co.
Exhibit 8-4
Engineers’ Pay for Cleveland, Ohio,
Metropolitan Area
LEVEL
Level I
Level II
Level III
Level IV
Level V
Level VI
NUMBER OF
WORKERS
SURVEYED
232
753
1,559
1,332
479
188
AVERAGE
WEEKLY
HOURS
WORKED
MEAN
MEDIAN
MIDDLE RANGE
40.0
40.0
40.0
39.9
39.9
40.0
$ 649
$ 752
$ 924
$1,077
$1,257
$1,479
$626
$741
$930
$1,080
$1,254
$1,478
$ 598 - $ 712
$ 667 - $ 827
$ 827 - $1,020
$ 989 - $1,165
$1,156 - $1,337
$1,377 - $1,569
WEEKLY PAY
Source: US Bureau of Labor Statistics, Occupational compensation survey: Pay only. Cleveland, Ohio,
Metropolitan Area, August 1995 (Washington, DC: US Government Printing Office, 1996).
Exhibit 8-5
Summary: Participation in Selected Employee Benefits Programs
for Full-Time Employees by Geographic Region
BENEFIT
NORTHEAST
Paid time off:
Holidays
Vacations
Personal leave
Survivor benefits:
Life insurance
Survivor income
Health care benefits:
Medical care
Dental care
Vision care
SOUTH
NORTH-CENTRAL
WEST
94%
98%
40%
92%
96%
16%
93%
98%
18%
87%
96%
13%
93%
5%
88%
4%
95%
7%
88%
5%
83%
62%
31%
80%
52%
17%
84%
65%
24%
79%
72%
40%
Source: US Bureau of Labor Statistics, Employee benefits in medium and large private
establishments, 1993 (Washington, DC: US Government Printing Office, 1994).
1996 Salary Offers to Bachelor’s
Degree Candidates by Degree









Accounting
Business Admin (& MS)
Distribution
Econ & Finance (&Bank)
Hotel/Restaurant
Human Resources (& LR)
MIS
Marketing
Real Estate
29,476
27,255
27,655
29,783
24,084
25,426
33,769
26,551
27,340
1996 Salary Offers to Masters’
Degree Candidates by Degree







Accounting
Econ/Finance
(Banking)
42,650
HR (inc LR)
MIS
Marketing
41,547
MS - Business
32,537
39,870
38,400
37,237

MBA -Non-tech undergrad
 < 1 yr exp
40,731
 1-2 yrs exp
46,394
 2-4 yrs exp
54,999
 > 4 yrs exp
67,209
MBA -Tech undergrad
 < 1 yr exp
39,146
 1-2 yrs exp
43,000
 2-4 yrs exp
51,600
 > 4 yrs exp
70,339
Source: National Association of Colleges and Employers
1996 Salary Offers to Doctoral
Degree Candidates by Degree







Aerospace
55,547
 Chemical Eng 60,161
56,667
 Computer Eng 65,050
63,555
 Elec Eng
61,180
54,333
 Mech Eng
52,184
43,399
 Agriculture
48,399
33,375
 Bilogical Sci
37,661
31,949
 Chemistry
30,668
54,693
Source: National Association ofColleges
Math and Employers
54,125
Bus Adm
& Mgt
Computer &
Info Sciences
Economics
Educ Admin
English
Psychology
Social Sciences

Average Salaries of MBA
Graduates by Function (1992)






Acct/Audit
Consulting
Engineering
Finance
Gen Mgt
HR
44,479
61,739
47,096
57,729
70,593
59,364






Info Syst
Marketing
53,208
Ops/Prod
48,492
Project Mgt
Plan/Corp
51,127
Sales
47,890
52,713
51,644
Source: Association of MBA Executives, Inc.
Human Resources Salaries 1991











VP, Admin
143,300
...
Top Comp & Ben 75,600
Exec Comp Mgr 73,700
Top E Relation 67,900
HR Director
64,800
Tng & OD Mgr 63,100
Int’l Comp Mgr 63,100
HR Planning
62,400
LR Supervisor
61,300
Top Safety Mgr 60,400











E Benefits Mgr
Comp Mgr
EEO Mgr
Plant HR Mgr
Grp Ins Mgr
Mgt Dev Mgr
HRIS Mgr
EAP Manager
Emp&Recr Mgr
Plant P Mgr
Emp Tng Mgr
59,500
58,200
57,900
57,400
55,400
54,100
51,800
51,800
51,700
50,000
48,400
Human Resources Avg Salaries











LR Generalist
Exec Recruit
Safety Superv
Safety Specialist
Generalist
Benefits Pln An.
Sr Comp An
EEO Specialist
Security Spec
Sr Tng Spec
Prof Recruit
47,100
44,500
44,400
42,700
41,000
41,000
40,300
39,900
39,400
39,300
37,700











Comp&Ben Ad
EAP Counselor
Plant P Admin
HRIS Specialist
Benefits Admin
Comp Analyst
Jr. Training
31,500
Entry Generalist
Recruiter
Pers Asst
Benefits Clerk
37,600
37,000
36,400
35,200
33,800
31,900
30,600
30,500
23,100
23,000
Internet Sources
Variety of voluntary information
 Variety of purchasable information
Example sitea: see my webpage
 http://wvnvm.wvnet.edu/~mrenard/
websites

Avg Faculty Salaries - 1993-94
70000
60000
50000
40000
Men
Women
30000
20000
10000
0
Prof
Assoc
Asst
Inst
Lect
All Universities (public and private) 1993-94. American Assoc.
of Univ. Professors; The Chronicle of Higher Ed., April 20, 1994
Salary Survey Steps




Define the relevant market
Include jobs--Benchmark approach
Collect information
Interpret & apply survey results
– Job matches

Build grades and ranges with
minimums, maximums and
midpoints.
–
–
–
Regression line
Apply competitive pay policy
Design pay grades and ranges
Interpret & Apply Survey Results
Verify
data - Job
Matches
Not Job Title only, use job descriptions, duties, etc
 Compare survey jobs with MedTech’s
 Choose closest match, use as benchmark
FastCat Job
Survey Job
Intermediate Acctg Clerk
Acctg Clerk A
Acctg Clerk
Acctg Clerk B
Sr. Acctg Clerk B
Acctg Clerk C
Pg. 19-44
Pg. 56-58

Interpret & Apply Survey Results
Matched jobs can be used as benchmarks
 Leveling - if nec. for unmatched jobs
 Update salary information
 Central tendency

–

Mean, weighted mean, median, mode
Dispersion
–
–
Correlation ( -1.00 > r > 1.00)
r should be > .90
Build Pay Structure - Overview
Once you have survey information:
 Combine internal structure and external
wage rates - regression line
 Apply pay policy
 Design pay ranges
 Balance internal and
external pressures
Exhibit 8-15
Regression Analysis Results for the
Engineer Survey Data
55,000
55,000
Annual salary
Predicted annual salary
Annual Salary ($)
50,000
45,000
44,525
45,000
43,500
40,000
38,420
35,000
33,536
Market Pay Line
36,000
34,500
36,000
33,000
30,000
0 100 200
Engineer I
300
400 500 600
Engineer II
700
Job Evaluation Points
800
900 1,000
Engineer III
Apply Pay Policy
1450
1300
120
0
1000
O
Lead
1800
* Match
L
F
*
B
*
*
*
Lag
I
800
A B C DE F G H I J K L M N O P
120
235
370
450
600
Design Pay Grades and Ranges
Allow for quality, productivity, performance
differences, employee expectations
 Develop grades - similar jobs paid the same
 Develop ranges - wages vary from midpoint
 Establish min, mid, max
 Determine overlap mid near min of
next grade

Build Pay Grades
O
1800
1450
1300
120
0
1000
*
F
*
B
*
*
I
*
L
Midpoints
800
A B C DE F G H I J K L M N O P
120
235
370
450
600
Build Pay Ranges
Maximum
1800
1450
1300
120
0
1000
Midpoint
Minimum
F
*
B
*
800
A B C DE F G H I J K L M N O P
120
235
370
450
600
Salary Structure
Considers relative internal job values
 Establishes grades containing like-valued jobs
 Reflects prevailing salary levels in the relevant
market place
 Establishes salary ranges for each job--minimum,
midpoint, maximum
 Responds to changes in competitive levels
 Communicates earnings potentials to employees
for current job and jobs to which they aspire

Chapter Eight
Building Market-Competitive
Compensation Systems
Exhibit 8-1
Economic Activities Indexed by the Federal Government’s Standard
Industrial Classification Manual











Agriculture, forestry, fishing, hunting, and trapping
Mining
Construction
Manufacturing
Transportation, communications, electric, gas, and sanitary services
Wholesale trade
Retail trade
Finance, insurance, and real estate
Personal, business, professional, repair, recreation, and other services
Public administration
Nonclassifiable establishments
Source: US Office of Mgmt. and Budget, Standard industrial classification manual (Wash.DC: US
Office of Mgmt. and Budget, 1987).
Exhibit 8-2
Standard Industrial Classification Code Elements
SIC Code 8244
8
2
Major Group:
Educational Services
Industry Group Number:
Vocational Schools
Industry Number:
Business and Secretarial Schools
4
4
Exhibit 8-3
Sources of Compensation Survey Information (1 of 3)

Professional Associations
– The American Compensation Association publishes the Salary
Budget Survey, reported by region and industry.
– The Society for Human Resource Management publishes
information on salaries in the human resources field.
Exhibit 8-3
Sources of Compensation Survey Information (2 of 3)

Industry Associations
– Administration Management Society
– American Association of University Professors
– American Banker’s Association
– American Bar Association
– American Electronics Association
– American Mathematical Society
– American Society of Association Executives
– Association of General Contractors
– National Institute of Business Management
– National Restaurant Association
– National Retail Federation
– National Society of Engineers
Exhibit 8-3
Sources of Compensation Survey Information (3 of 3)

Consulting Firms
– Abbott, Langer & Associates
– Coopers & Lybrand
– Dietrich Associates Inc.
– Executive Compensation Service
– Hay Management Consultants
– Hewitt Associates
– Mercer-Meidinger-Hanson
– Robert Half Associates
– Towers & Perrin
– Wyatt Co.
Exhibit 8-4
Engineers’ Pay for Cleveland, Ohio,
Metropolitan Area
LEVEL
Level I
Level II
Level III
Level IV
Level V
Level VI
NUMBER OF
WORKERS
SURVEYED
232
753
1,559
1,332
479
188
AVERAGE
WEEKLY
HOURS
WORKED
MEAN
MEDIAN
MIDDLE RANGE
40.0
40.0
40.0
39.9
39.9
40.0
$ 649
$ 752
$ 924
$1,077
$1,257
$1,479
$626
$741
$930
$1,080
$1,254
$1,478
$ 598 - $ 712
$ 667 - $ 827
$ 827 - $1,020
$ 989 - $1,165
$1,156 - $1,337
$1,377 - $1,569
WEEKLY PAY
Source: US Bureau of Labor Statistics, Occupational compensation survey: Pay only. Cleveland, Ohio,
Metropolitan Area, August 1995 (Washington, DC: US Government Printing Office, 1996).
Exhibit 8-5
Summary: Participation in Selected Employee Benefits Programs
for Full-Time Employees by Geographic Region
BENEFIT
NORTHEAST
Paid time off:
Holidays
Vacations
Personal leave
Survivor benefits:
Life insurance
Survivor income
Health care benefits:
Medical care
Dental care
Vision care
SOUTH
NORTH-CENTRAL
WEST
94%
98%
40%
92%
96%
16%
93%
98%
18%
87%
96%
13%
93%
5%
88%
4%
95%
7%
88%
5%
83%
62%
31%
80%
52%
17%
84%
65%
24%
79%
72%
40%
Source: US Bureau of Labor Statistics, Employee benefits in medium and large private establishments,
1993 (Washington, DC: US Government Printing Office, 1994).
Exhibit 8-9
Frequency (no. of incumbents)
Histogram of Survey Data for Engineers
14
12
10
8
6
4
2
0
$30,000$35,000
$35,001$40,000
$40,001$45,000
Annual Salary
$45,001 &
above
Exhibit 8-15
Regression Analysis Results for the
Engineer Survey Data
55,000
55,000
Annual salary
Predicted annual salary
Annual Salary ($)
50,000
45,000
44,525
45,000
43,500
40,000
38,420
35,000
33,536
Market Pay Line
36,000
34,500
36,000
33,000
30,000
0 100 200
Engineer I
300
400 500 600
Engineer II
700
Job Evaluation Points
800
900 1,000
Engineer III