Chapter Eight
Building Market-Competitive
Compensation Systems
Internally Consistent Pay Structures do
not guarantee External Consistency!
Market Pay Line
20,000
Current Pay Line
Annual Salary ($)
18,000
21,000
16,000
11,000
8,000
250
Clerk I
500
Clerk II
750
Clerk III
Job Evaluation Points
1,200
Chief Clerk
Compensation Policies & Strategic Mandates
Policy
Strategy
Lead (how much?)
5, 10, 15%?
Differentiation
Match
Differentiation
Lag (how much?)
Cost
Testing your applied knowledge:
What is the compensation strategy behind
this pay structure?
20,000
Annual Salary ($)
18,000
Market Pay Line
21,000
16,000
11,000
Current Pay Line
8,000
250
Clerk I
500
Clerk II
750
Clerk III
Job Evaluation Points
1,200
Chief Clerk
Answer: Assuming that this company is aware of the pay
lag at lower level jobs between their pay structure and the
market line, this company has decided that lower-level
jobs are not the essence of its competitive advantage and,
therefore, it can afford to pay lower salaries at such lowerlevel jobs.
Testing your applied knowledge:
What is the compensation strategy behind
this pay structure?
20,000
Annual Salary ($)
18,000
Market Pay Line
21,000
16,000
11,000
Current Pay Line
8,000
250
Clerk I
500
Clerk II
750
Clerk III
Job Evaluation Points
1,200
Chief Clerk
Testing your applied knowledge:
What is the compensation strategy behind
this pay structure?
20,000
Market Pay Line
Annual Salary ($)
18,000
21,000
16,000
11,000
Current Pay Line
8,000
250
Clerk I
500
Clerk II
750
Clerk III
Job Evaluation Points
1,200
Chief Clerk
Answer: Assuming that this company is aware of the pay lag at lower
level jobs between their pay structure and the market line, as well as
the lead between its pay level and the market line at higher-level jobs,
this company has decided not only that lower-level jobs are not the
essence of its competitive advantage, but also that higher-level jobs
are indeed quite important for its strategy and, therefore, it needs to
pay higher salaries at such higher-level jobs.
Testing your applied knowledge:
What is the compensation strategy behind
this pay structure?
20,000
Market Pay Line
Annual Salary ($)
18,000
21,000
16,000
11,000
Current Pay Line
8,000
250
Clerk I
500
Clerk II
750
Clerk III
Job Evaluation Points
1,200
Chief Clerk
Competitive Pay Systems:
Building Blocks

Strategic analyses
» Environmental scanning: industry profile, info about
competitors, long-term growth prospect
» Competitive advantage: examination of core competencies,
mission, values.

Compensation surveys
» Competitors’ wage and salary data.
» Competitor’s fringe benefit data.
Compensation Surveys

External equity
» Helps attract and retain talent


Reliance on industry surveys
Sources of published compensation surveys
» Bureau of Labor Statistics visit their web site at
www.bls.gov
–
–
–
–
National Compensation Survey (NCS)
Employee benefits in small private establishments
Employee benefits in medium/large private establishments
Employee benefits in State & Local governments.
Table 8-1
Sources of Compensation Survey Information (1 of 3)

Professional Associations
» Worldatwork (formerly, 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.
» International Foundation of Employee Benefit Plans
Table 8-1
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
Table 8-1
Sources of Compensation Survey Information (3 of 3)

Consulting Firms
» Abbott, Langer & Associates
» Coopers & Lybrand
» Hay Management Consultants
» Hewitt Associates
» Mercer-Meidinger-Hanson
» Robert Half Associates
» Towers & Perrin
» Watson Wyatt Co.
Compensation surveys: Strategic
considerations

Defining relevant labor market
» Occupational Classification. Standard Occupational
Classification: 9 major occupational groups (professional,
executive, sales, administrative support, precision
production, etc.)
» Geographic area (rural/urban)
» Product/service market competitors

Choosing benchmark jobs
»
»
»
»
Well-known, stable, agreed upon.
Common across employers.
Represent entire range of jobs within a company.
Generally accepted in the labor market for this purpose.
Managing Compensation Survey Data

Quickly outdated due to changes in cost of
living, which is typically indexed by the
Consumer Price Index:
» Base period 1982-1984 = 100
» 1999 Chicago CPI-U & CPI-W = 166.6
Example: Hourly Wage Data in Miami-Ft. Lauderdale
vs. NY City (Year 2000) & Consumer Price Index
Professional
$24.38
$32.30
Executive
$27.48
$34.67
Sales
$12.38
$16.06
Administrative support
$12.78
$15.53
Machine operators
$10.02
$11.26
Transportation
$12.99
$16.21
Service occupations
$9.54
$14.02
Full time
$15.99
$22.04
Part time
$8.49
$13.02
100-499 workers
$12.59
$19.64
500 workers or more
$17.77
$23.51
167.8
CPIMiami
182.5
CPINYC
Managing Compensation Survey Data
One should pay attention to:


Central tendency
» Mean & importance of outliers –which
unduly influence mean.
» Median
Variation
» Standard deviation: do companies have
typical salary ranges as compared to the
competition? (companies can have same
mean but very different SD’s
» Quartiles and percentiles
Figure 8-1
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
$45,001
& above
Forming Pay Structures: Integrating Job
Structures with External Market Pay Rates
Regression analysis
Best-fitting line between two variables
Captures relationship between points and salary
Figure 8-2
Regression Analysis Results for the
Engineer Survey Data
55,000
55,000
Annual salary
Predicted annual salary
Annual Salary ($)
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
Comparable worth




Equal pay for work of equal worth.
Is job evaluation biased?
Do compensation systems perpetuate biases and
discrimination?
The comparable worth argument is that typically
female jobs receive lower compensation due to
gender bias, because such jobs are as complex and
important as typically male jobs (e.g., nurses vs.
construction workers).
Discussion Question 8-1
A class-action lawsuit was filed on behalf of all female
employees who worked for a well-known chain of grocery
stores. The plaintiffs argued that females were relegated
to jobs such as cashier, which seldom lead to promotions
such as area or store manager. Instead, males are
usually assigned to stocking, which has traditionally
served as the platform to become area or store manager.
Are cashier jobs less important or complex than stocking
jobs?
Why are females channeled to primarily cashier jobs?
Should this grocery chain modify its employment policy?
How?
Discussion Question 8-2
Relocation to a new area should be preceded by research on factors
such as cost of living, job opportunities, average income, housing
costs, crime, schools, etc. Using a job search engine such as
monster.com or similar, an HR manager currently working in Miami has
gathered data on two additional locations where s/he might relocate.
Study these data to identify the pros and the cons of this manager’s
possible relocation.
Miami
Atlanta
N.Y.
National avg.
Population
379,240
402,068
7,525,022
Not
applicable
County
Dade
Fulton
Kings
Not
applicable
(table continues)
(continued)
Miami
Atlanta
N.Y.
National avg.
Overall
107.9
103.2
234.6
100.0
Housing
113.0
101.8
442.6
100.0
Food
102.9
106.0
142.8
100.0
Transportation
106.8
100.7
120.1
100.0
Utilities
103.0
97.5
178.2
100.0
Health
101.6
109.2
183.6
100.0
Misc.
108.0
104.6
130.4
100.0
Cost of Living
(table continues)
(continued)
Miami
Atlanta
N.Y.
National avg.
Purchase Cost
$135,200
$126,800
$204,600
$128,500
Home
Appreciation
6.3%
9.0%
9.7%
7.2%
Property Tax
Rate
$18.60
$16.10
$15.30
$15.65
Violent Crime
2,105.0
2,729.5
1,063.1
446.1
Property Crime
8,618.8
10,759.0
2,968.5
4,162.2
Housing
Crime
(continued)
Miami
Atlanta
N.Y.
National avg.
Economy
Income per
capita
$13,814
$24,343
$23,966
$21,658
Household
income
$29,269
$38,608
$47,714
$44,958
Unemployment
Rate
6.4%
2.8%
5.8%
4.0%
Recent Job
Growth
-0.1%
3.4%
2.6%
1.3%
Future Job
Growth
13.1%
23.2%
4.5%
15.1%
Sales taxes
6.35%
6.65%
8.25%
6.35
Income taxes
0.00%
6.00%
10.52%
4.60%
(continued)
Miami
Atlanta
N.Y.
National avg.
Education
High school
grad.
59.7%
77.2%
73.4%
79.5%
2 yr college
grad.
6.4%
5.0%
5.8%
7.6%
4 yr college
grad.
11.3%
22.0%
16.1%
17.3%
PhD graduates
7.8%
11.7%
11.3%
8.5%
School expend.
$5,845
$6,588
$7,414
$5,928
(continued)
Miami
Atlanta
N.Y.
National avg.
Health
Air quality(100 =
best)
5
12
12
33
Watershed
quality (100 =
best)
48
49
42
49
Superfund sites
(100 = best)
10
50
60
53
Phys. per cap.
304
410
273
230
101.7
114.9
186.2
100.0
Health cost
index