COMPENSATION
Third Canadian Edition
Milkovich, Newman, Cole
8-1
© 2010 McGraw Hill Ryerson
Determining Externally Competitive
Pay Levels and Structures
Set
Policy
Define
Market
Conduct
Survey
Draw
Policy
Lines
Merge Internal
& External
Pressures
Competitive Pay
Levels, Mix and
Structures
Some Major Decisions in Pay Level Determination
 Determine pay level policy
 Define purpose of survey
 Define relevant labour market
 Design and conduct survey
 Interpret and apply results
 Design grades and ranges or bands
8-2
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Set Competitive Pay Policy
Lead the market with respect to pay
Match average pay of competitors
Lag behind average market pay rates
8-3
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Compensation Survey
 the systematic process of collecting and
making judgments about compensation
paid by other employers
 provides data for translating pay policy
into pay levels and structures
8-4
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Purpose of Compensation
Survey
 Adjust Pay Level – How Much to Pay?
 Adjust Pay Mix – What Forms?
 Adjust Internal Structure?
 Study Special Situations
 Estimate Competitors’ Labour Costs
8-5
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Define Relevant Market
Competitors
 employers who compete for the same
occupations or skills required
 employers who compete for
employees within the same geographic
area
 employers who compete with the same
products and services
8-6
© 2010 McGraw Hill Ryerson
Relevant Labour Markets by Geographic
and Employee Groups
Geographic
Scope
Local: Within
relatively small
areas such as
cities
Production
Most likely
Regional: Within Only if in
a particular area short supply
of the province
or critical
Office and
Clerical
Technicians
Most likely
Most likely
Only if in
short supply
or critical
Most likely
Scientists &
Engineers
Managerial
Professional
Executive
Likely
Most likely
National: Across
the country
Most likely
Most likely
International:
Across several
countries
Only for critical
Only for critical Sometimes
skills or those in skills or those
very short supply in very short
supply
Most likely
8-7
© 2010 McGraw Hill Ryerson
Design the Survey
 Who should be involved?
 compensation staff and/or
 consultants
 How many employers should be included?
 Can use publicly available data
 Can use internet data
8-8
© 2010 McGraw Hill Ryerson
Design the Survey
 Which jobs should be included?
 Benchmark jobs
 Low-high approach (for person-based plans)
 Benchmark conversion approach
 What information to collect?
 Base pay
 Total cash
 Total compensation
8-9
© 2010 McGraw Hill Ryerson
Advantages and Disadvantages
of Measures of Compensation
Base Pay
Tells how competitors are Fails to include performance incentives
valuing the work in similar and other forms, so will not give true
jobs
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.
Total
Tells the total value
Compensation competitors place on this
(base + bonus work
+ stock options
+ benefits)
All employees may not receive
incentives, so it may overstate the
competitors’ pay; plus, it does not
include long-term incentives.
All employees may not receive all the
forms. Be careful; don’t set base equal
to competitors’ total compensation.
Risks high fixed costs.
8-10
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Job Matching
 the degree of match between the
organization’s jobs and survey jobs must
be carefully assessed on job content
rather than on the basis of job title only
8-11
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Analyzing Survey Data
 no single best approach
 check accuracy of data and anomalies
 statistical analysis based on two pieces
of data on each benchmark:
Survey data - dollars
Our own data - job evaluation points
8-12
© 2010 McGraw Hill Ryerson
Analyzing Survey Data
 frequency distribution organizes data
 measures of central tendency
 averages or means
 weighted means
 medians
 measures of distribution, or dispersion
 standard deviation
 percentiles and quartiles
 range spread
8-13
© 2010 McGraw Hill Ryerson
Age/Trend the Market Data
Pay rates are constantly changing
Survey data represents pay at the date
it was collected
Adjust survey data to represent pay at
the current or future date when pay
decisions will be implemented
8-14
© 2010 McGraw Hill Ryerson
Combine Job Evaluation
and Market Survey Data
 Each benchmark job has:
 Job evaluation points
 An average wage paid by survey companies.
 Scatterplots are useful to see what the data
look like.
 Summarize the data further by fitting a line
through the points  the MARKET PAY LINE
 Can “eyeball” data or use regression
techniques
8-15
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Scatterplot
7
SURVEY 6
monthly 5
salary
($000) 4
PAY
3
2
1
80
120
160
200
240
280
320
OUR Job Evaluation Points
360
8-16
© 2010 McGraw Hill Ryerson
Scatterplot With
Regression Line
7
6
SURVEY
monthly 5
salary 4
($000)
PAY
3
2
Market Pay Line
1
80
120
160
200
240
280
320
OUR Job Evaluation Points
360
8-17
© 2010 McGraw Hill Ryerson
Adjust Market Data to Reflect
Organization’s Pay Policy
Lead the Market:
 pay level above market for the year and equal at year end
 update factor will be equal to the projected market increase
Match the Market:
 pay level above market for first half of year and below for
second half
 update factor will be half of the projected market increase
Lag the Market:
 pay level below the market for the entire year
 no adjustment will be made to account for the projected market
increase
8-18
© 2010 McGraw Hill Ryerson
Developing a Pay Policy Line
lead
match
7
lag
6
OUR
monthly 5
salary
4
($000)
PAY
Pay Policy Line :
using market-survey data
(updated and aged to reflect
pay policy)
3
2
1
Market pay line
(beginning of year)
80
120
160
200
240
280
320
OUR Job Evaluation Points
360
8-19
© 2010 McGraw Hill Ryerson
Pay Structure
 two components:
1. Pay policy line: represents an
adjustment to the market pay
line to reflect the organization’s
external competitive position in
the market
2. Pay ranges: upper and lower
limits on pay
8-20
© 2010 McGraw Hill Ryerson
Why Use Pay Ranges?

External Pressures:
 quality variations (KSAs) among market employees
 differences in productivity from quality variations
 differences in the mix of pay forms competitors use

Internal Pressures
 recognize individual performance variations with pay
 employees’ expectations that their pay will increase
over time
 encourage employee retention
8-21
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Constructing Ranges:
1. Develop Grades
a pay grade is a horizontal
grouping of different jobs that are
considered substantially equal
for pay purposes
all jobs within a single grade will
have the same pay range
8-22
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PAY GRADE STRUCTURE
8
7
6
Our
monthly 5
salary 4
(000)
PAY
3
2
Pay Policy Line
1
I
100
II
150
III
200
IV
250
V
300
Pay Grades
350
Our Job Evaluation Points
8-23
© 2010 McGraw Hill Ryerson
Constructing Ranges:
2. Establishing Midpoint, Minimum,
and Maximum
 pay ranges refer to the vertical
dimension of the pay structure – an
upper and lower limit on pay for all
jobs in a pay grade
 each pay grade has a pay range
consisting of a midpoint and a
specified minimum and maximum
8-24
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PAY RANGES
8
7
Pay Range
6
Our
monthly 5
salary 4
(000)
PAY
3
2
Pay Policy Line
1
100
150
200
250
300
350
Our Job Evaluation Points
8-25
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Range Midpoint,
Minimum, and Maximum
8-26
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Range Spread
Spread = range maximum – range minimum
e.g., $65,875 - $43,917 = $21,958
 Spread percentage = spread/range minimum
e.g., $21,958/$43,917 = 50%
8-27
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Range Overlap
8-28
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Broadbanding
 collapses the number of salary ranges
within a traditional salary structure into a
few broad bands
 purpose is to manage career growth
and administer pay
 an alternative to traditional salary grade
structures
8-29
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From Grades to Bands
8-30
© 2010 McGraw Hill Ryerson
Contrasts Between
Ranges and Bands







Ranges Support:
some flexibility within controls
relative 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 range
spread







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 percent spreads
8-31
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Market Pricing
 establishing pay structure by relying
almost exclusively on external market
pay rates
 market pricing becoming more common
in Canada
8-32
© 2010 McGraw Hill Ryerson
Conclusion
 most organizations survey other employers’ pay
practices to determine the competitors’ rates
 survey results used to construct market pay line
 pay policy line adjusts market pay line based on
the decision to lead, match or lag market pay
 pay grades and ranges/bands designed around
pay policy line to integrate internal and external
pressures
 increasing interest in broadbanding and market
pricing
8-33
© 2010 McGraw Hill Ryerson