8-1
Designing Pay Levels,
Mix, and Pay
Structures
McGraw-Hill/Irwin
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8-2
How to Use Local Salary Survey Data
A Presentation to HRACC
April 10, 2012
Rebecca Ellis, Ph.D.
Professor of HRM at Cal Poly
McGraw-Hill/Irwin
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8-3
•Uses of Salary Survey Data
•Interpreting HRACC Survey
Data
•How You Can Help
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8-4
Uses of survey data
to
help develop pay structures
price jobs
adjust structures over time
advise on salary offers
forecast wage movement
formulate performance pay matrices
prepare salary budgets
support labor contract negotiations
perform other work requiring sound
information on competitive pay.
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8-5
Building a Market-Based Pay Structure
Gather
the background information
needed for project success.
Determine your sources of external
market data and get the data ready.
Conduct the market data analysis.
Develop pay structures.
Calculate the costs of the pay structures.
Implement and evaluate the new pay
structures.
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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
8-6
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.
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8-7
What Is the Purpose of a Salary Survey?
A
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
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8-8
Why Conduct a Salary Survey?
Adjust
pay level – How much to pay?
Adjust
pay mix – What forms?
Adjust
your existing pay structureupdate percentage to use?
Analyze
special situations- e.g. hard-tohire; ‘hot jobs’
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8-9
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
Example
 Exhibit
1: Relevant Labor Markets by
Geographic and Employee Groups
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8-10
Exhibit 1: Relevant Labor Markets by
Geographic and Employee Groups
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
National:
Across the
country
Only if in
short
supply or
critical
Most likely
International:
Across several
countries
McGraw-Hill/Irwin
Production
Only if in
short
supply or
critical
Scientists &
Engineers
Managerial
Professional
Likely
Most likely
Most likely
Most likely
Most likely
Only for
critical skills
or those in
very short
supply
Only for
critical skills
or those in
very short
supply
Sometimes
Executive
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8-11
Interpret Survey Results (1 of 2)
No
single best approach
Verify data
 Check
accuracy of job matches
 Check for anomalies
Does
any one company dominate? (Cal Poly)
Do
all employers show similar patterns?
(industry differences)
Outliers?
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8-12
Interpret Survey Results (2 of 2)
 Statistical
analysis
 Measures of central tendency
Average/Mean
 Median
 Weighted mean


Measures of variation

Median = 50th %ile
 Updating/aging
survey data
 Choices for Updating Salary Data include the quarterly
Employment Cost Index (ECI) of the Bureau of Labor
Statistics (BLS) and the annual Salary Budget Survey of
WorldatWork. Some employers use the CPI, particularly in
labor negotiations.
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8-13
Help Desk Support
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8-14
H.R. Assistant
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8-15
Web Salary Data
McGraw-Hill/Irwin
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Why ‘age’ survey data?
8-16
Salary
surveys capture salary data at a
specific point in time in the past. But, the
market continues to move because of pay
increases, market adjustments,
promotions and employee job switches.
Therefore, it is necessary to “age” or
“trend” the data to a common point in
time—e.g., today’s date, the date the pay
plan will go live, the beginning of a new
fiscal year, etc.—using a factor that
reflects market movements.
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8-17
Four Simple Steps to Aging
1.
Determine the starting date for the new
pay structure.
2. Determine wage movement percentages
over the relevant time period (from survey
current date to pay plan starting date)
3. Determine the aging factor
4. Apply the aging factor to bring data up to
date as of the beginning of your plan year.
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8-18
WorldatWork’s 2012 survey projects:
WorldatWork Pay Increase Survey
Actual
Actual
2010 Actual 2010 2011Actual 2011
Mean Median Mean Median
1.4% Mean
1.0% Median1.5%Mean 1.9%
Median
Projected
Projected 2012
2012
Mean
Median
1.7%
2.0%
Mean
Median
COLA
Merit
Other
2.3
0.9
2.5
0.5
2.6
0.9
3.0
0.5
2.8
0.9
3.0
0.5
Total
2.5
2.7
2.8
3.0
2.9
3.0
General
Increase/
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8-19
Construct a 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
 Approaches
Freehand
approach
Regression
McGraw-Hill/Irwin
to constructing a market pay line
analysis
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8-20
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
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Combine Internal Structure
and External Market Rates
8-21
Two
parts of the total pay model have
merged
 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.
Balancing Internal and External Pressures:
Adjusting the Pay Structure
Internal Pressures
External Pressures
Job Structure
Pay Structure
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8-22
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8-23
External Competitiveness:
Salaries paid by competitors
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
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From Policy to Practice:
Pay Policy Line
8-24
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
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8-25
Implementing Pay Level Policy
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From Policy to Practice:
Grades and Ranges
Why
8-26
bother with grades and ranges?
 Offer
flexibility to deal with pressures from
external markets and differences among firms
Develop
grades
Establish
range midpoints, minimums,
and maximums

Examine grade overlap
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8-27
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
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8-28
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
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Establish Range Midpoints,
Minimums, and Maximums
Ranges
8-29
group salary data on vertical
axis
 Establish
upper and lower pay limits for all
jobs in each grade
Midpoints
correspond to competitive pay
policy
 Point
where pay-policy line crosses center of
each grade
 Often represents base pay for a seasoned
employee
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Exhibit 2: Range Midpoint,
Minimum, and Maximum
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8-30
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Establish Range Midpoints,
Minimums, and Maximums
8-31
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
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8-32
Exhibit 3: Range Overlap
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8-33
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
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8-34
Sample Merit Grid
Position in Range
Performance Zone 1
Level
Zone 2
Zone 3
Zone 4
4
6-8%
4-6%
2-4%
1-3%
3
4-6%
2‐4%
1‐3%
0
2
2-4%
0
0
0
1
0
0
0
0
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8-35
Attraction Drivers
Gen Y
Gen X
Boomers
Career Advancement
1
2
8
Competitive Base
2
1
1
Learning/Development
3
6
Challenging Work
4
3
2
Convenient Location
5
4
3
Reputation as Good Employer
6
7
4
Flexible Schedule
7
5
5
PTO
Competitive Benefits
8
9
10
9
Reasonable Workload
10
Organization’s Financial Health
Competitive Retirement
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8
10
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