8-1
Chapter
8
McGraw-Hill/Irwin
Designing Pay Levels,
Mix, and Pay
Structures
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
8-2
After discussing Chapter 8, students should be able to:
1.
2.
3.
4.
5.
6.
7.
8.
Identify the major decisions in establishing externally
competitive pay.
Describe the purpose(s) of a salary survey.
Discuss the importance of defining the relevant
market in a pay survey.
Explain the steps involved in designing a pay survey.
Describe the key issues involved in interpreting the
results of a pay survey.
Explain how the market pay line combines the
internal structure with external market rates.
Discuss the use of pay grades and pay ranges and
their relationship to internal alignment and external
competitiveness.
Discuss the pros and cons of the market pricing
approach to establishing a pay structure.
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Exhibit 8.1: Determining Externally
Competitive Pay Levels and Structures
External
competitiveness:
Pay relationships
among
organizations
Select
market
Set Policy
Design
survey
Draw
policy
lines
Merge
internal &
external
pressures
8-3
Competitive
pay levels,
mix, and
structures
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
McGraw-Hill/Irwin
and ranges or bands.
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-4
Specify Competitive Pay Policy
Pay with
Competition
(Match)
Lead Policy
Lag Policy
Flexible Policies
Shared Choice
McGraw-Hill/Irwin
Employer of
Choice
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-5
What Is the Purpose of a Salary Survey?
Systematic
process of collecting and
making judgments about compensation
paid by other employers
Provides
 Setting
data for
the pay policy relative to competition
 Translating
that policy into pay levels and
structures
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-6
Why Conduct a Salary Survey?
Adjust
pay level – How much to pay?
Adjust
pay mix – What forms?
Adjust
pay structure?
Analyze
special situations
Estimate
McGraw-Hill/Irwin
competitors’ labor costs
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-7
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
Examples
 Exhibit
8.2: Relevant Labor Markets by
Geographic and Employee Groups
 Exhibit
Fuzzy
McGraw-Hill/Irwin
8.3: Pay Differences by Location
markets
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Exhibit 8.2: Relevant Labor Markets by
Geographic and Employee Groups
Scientists &
Engineers
Managerial
Professional
Likely
Most likely
National:
Across the
country
Most likely
Most likely
Most likely
International:
Across several
countries
Only for
critical skills
or those in
very short
supply
Only for
critical skills
or those in
very short
supply
Sometimes
Geographic
Scope
Office and
Clerical
Technicians
Local: Within Most likely
relatively small
areas such as
cities or MSAs
Most likely
Most likely
Regional:
Within a
particular area
of the state or
several states
Only if in
short
supply or
critical
Most likely
McGraw-Hill/Irwin
Production
Only if in
short
supply or
critical
8-8
Executive
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-9
Exhibit 8.3: Pay Differences by Location
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-10
Design the Survey
Who
should be involved?
How
many employers?
 Publicly
available data
 “Word-of-mouse”
Exhibit
 Where
Which
What
McGraw-Hill/Irwin
8.4: Salary Data on the Web
are the standards?
jobs to include?
information to collect?
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-11
Exhibit 8.4: Salary Data on the Web
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-12
Which Jobs to Include?
Benchmark-job
approach
Low-high
approach
(skill-based)
Benchmark
conversion
approach
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-13
What Information to Collect?
Nature
of organization
Total
compensation
system
Specific
pay data on
incumbents in jobs
under study
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Exhibit 8.6: Possible Survey Data
Elements and Rationale
Nature
of organization
Incumbent
 Financial
 Date
performance
 Size
 Job
 Structure
 Pay
Nature
of total
compensation system
 Cash
forms used
 Non-cash forms used
McGraw-Hill/Irwin
8-14
and job
 Individual
HR
outcomes
 Productivity
 Total
labor costs
 Attraction & retention
 Employee views
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Exhibit 8.7: Advantages and Disadvantages
of Measures of Compensation
Base Pay
Tells how competitors are
valuing the work in similar
jobs
Fails to include performance incentives
and other forms, so will not give true
picture if competitors offer low base but
high incentives
Total Cash
(base + bonus)
Tells how competitors are
valuing work; also tells the
cash pay for performance
opportunity in the job.
All employees may not receive incentives,
so it may overstate the competitors’ pay;
plus, it does not include long-term
incentives.
Total
Compensation
(base + bonus +
stock options +
benefits)
Tells the total value
competitors place on this
work
All employees may not receive all the
forms. Be careful; don’t set base equal to
competitors’ total compensation. Risks high
fixed costs.
McGraw-Hill/Irwin
8-15
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-16
Interpret Survey Results (1 of 2)
No
single best approach
Verify data
 Check
accuracy of job matches
Survey
 Check
leveling
for anomalies
Does
any one company dominate?
Do all employers show similar patterns?
Outliers?
Example
 Exhibit
McGraw-Hill/Irwin
8.9: Survey Data
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-17
Interpret Survey Results (2 of 2)
 Statistical
analysis
 Frequency distribution


Exhibit 8.10: Frequency Distributions
Measures of central tendency
Mode
 Mean
 Median
 Weighted mean


Measures of variation
Standard deviation
 Quartiles and percentiles

Exhibit 8.11: Statistical Measures for Analyzing Survey
Data
 Update survey data
 Exhibit 8.12: Choices for Updating Salary Data Reflect Pay
Policy

McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-18
Construct a Market Pay Line
Exhibit
8.8: Salary Graphs Using
Different Measures of Compensation
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
 Approaches
Freehand
to constructing a market pay line
approach - Exhibit 8.8
Regression
analysis - Exhibit 8.13 and Exhibit
8.14
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Exhibit 8.13: From Regression
Results to a Market Line
McGraw-Hill/Irwin
8-19
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-20
Exhibit 8.14: Understanding Regression
Survey: Salary ($000)
16
14
12
10
8
6
4
2
0
20
40
60
80
100
120
140
160
Mgr 1
Mgr 3
180
Job Evaluation Points
Tech A Sr Tech
McGraw-Hill/Irwin
Eng 1
Eng 3
Eng 5
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Combine Internal Structure
and External Market Rates
8-21
Two
parts of the total pay model have
merged
 Exhibit
8.15
 Internally
 External
Two
competitive data - Vertical axis
aspects of pay structure
 Pay-policy
 Pay
McGraw-Hill/Irwin
aligned structure - Horizontal axis
line
ranges
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-22
External Competitiveness:
Salaries paid by competitors
Exhibit 8.15: Develop Pay Grades
55,000
50,000
45,000
40,000
35,000
Pay Policy Line
30,000
AB
CDEF
GHIJK
LMN
OP
Internal Structure: JE Points
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
From Policy to Practice:
Pay Policy Line
8-23
Approaches
to translate external
competitive policy into practice
 Choice
50th
75th
of measure
percentile for base pay
percentile for total compensation
 Updating
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
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
From Policy to Practice:
Grades and Ranges
Why
8-24
bother with grades and ranges?
 Offer
flexibility to deal with pressures from
external markets and differences among firms
Develop
 Exhibit
grades
8.15
Establish
range midpoints, minimums,
and maximums
Overlap
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-25
Why Bother with Grades and Ranges?
External
pressures
 Differences
in quality (KSAs) 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
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-26
Develop Grades
Grades
group job evaluation data on
horizontal axis
 All
jobs 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
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Establish Range Midpoints,
Minimums, and Maximums (1 of 3)
Ranges
8-27
group salary data on vertical
axis
 Establish
upper and lower pay limits for all
jobs in each grade
 Exhibit 8.16
Midpoints
correspond to competitive pay
policy
 Point
where pay-policy line crosses center of
each grade
 Often represents base pay for a seasoned
employee
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Exhibit 8.16: Range Midpoint,
Minimum, and Maximum
McGraw-Hill/Irwin
8-28
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Establish Range Midpoints,
Minimums, and Maximums (1 of 3)
8-29
Size
of range based on judgment about how
ranges support
 Career
paths
 Promotions
 Other
Typical
organization systems
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
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-30
Overlap
Importance
 Exhibit
of overlap
8.17: Range Overlap
High
degree of overlap and low midpoint
differentials
 Exhibit
Small
ranges with less overlap
 Exhibit
McGraw-Hill/Irwin
8.17(a)
8.17(b)
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-31
Exhibit 8.17: Range Overlap
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
From Policy to Practice:
Broad Banding
Alternative
8-32
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
broadly
 Foster
 Ease
flexibility to define job responsibilities more
cross-functional growth and development
mergers and acquisitions
Example
 Exhibit
McGraw-Hill/Irwin
8.18
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-33
Exhibit 8.18: From Grades to Bands
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Exhibit 8.19: Contrasts Between
Ranges and Bands
Ranges support . . .
 Some flexibility within
controls
 Relatively stable
organization design
 Recognition via titles or
career progression
 Midpoint controls,
comparatives
 Controls designed into
system
 Give managers “freedom
with guidelines”
 Up to 150 percent rangespread
McGraw-Hill/Irwin
8-34
Bands support . . .
 Emphasis on flexibility
within guidelines
 Global organizations
 Cross-functional
experience and lateral
progression
 Reference market rates,
shadow ranges
 Controls in budget, few
in system
 Give managers “freedom
to manage” pay
 100 – 400 % spreads
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-35
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
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-36
Exhibit 8.20: Reference Rates Within Bands
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Balancing Internal and External Pressures:
Adjusting the Pay Structure
Internal Pressures
External Pressures
Job Structure
Pay Structure
McGraw-Hill/Irwin
8-37
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
8-38
Market Pricing
Approach
 Sets
pay structures almost exclusively by relying
on external market rates
 Emphasizes external competitiveness (marketbased 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
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.