Compensation Management2

McGraw-Hill/Irwin

© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Masood Pervez

B-083325

8th(HRM)

© 2010 McGraw Hill Ryerson

8-2

COMPENSATION


8-3

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


8-4

Set Competitive Pay Policy

Lead the market with respect to pay

Match average pay of competitors

Lag behind average market pay rates


8-5

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


8-6

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


8-7

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


8-8

Relevant Labour Markets by Geographic and Employee Groups

Geographic Scope

Production Office and Clerical

Technicians Scientists & Engineers

Managerial Professional

Executive

Local: Within relatively small areas such as cities

Most likely Most likely Most likely

Regional: Within a particular area of the province

Only if in short supply or critical

Only if in short supply or critical

Most likely 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


8-9

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


8-10

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


8-11

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.


8-12

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


8-13

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


8-14

Analyzing Survey Data

frequency distribution organizes data measures of central tendency

averages or meansweighted meansmedians

measures of distribution, or dispersionstandard deviationpercentiles and quartiles range spread


8-15

Age/Trend the Market Data

Pay rates are constantly changingSurvey data represents pay at the date

it was collectedAdjust survey data to represent pay at

the current or future date when pay decisions will be implemented


8-16

Combine Job Evaluation and Market Survey Data

Each benchmark job has:Job evaluation pointsAn 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


8-17

PAY

OUR Job Evaluation Points

Scatterplot

120 160 200 240 280 320 360

SURVEYmonthlysalary($000)

7

6

5

4

3

2

1

80


8-18

PAY


Scatterplot With Regression Line

120 160 200 240 280 320 360

SURVEYmonthlysalary($000)

7

6

5

4

3

2

1

80

Market Pay Line


8-19

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


8-20

PAY


Developing a Pay Policy LineDeveloping a Pay Policy Line

120 160 200 240 280 320 360

OURmonthlysalary($000)

7

6

5

4

3

2

1

80

Pay Policy Line :using market-survey data(updated and aged to reflectpay policy)

leadmatch

lag

Market pay line(beginning of year)


8-21

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


8-22

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


8-23

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


8-24

PAY

Our Job Evaluation Points

PAY GRADE STRUCTURE

100 150 200 250 300 350

Ourmonthlysalary(000)

8

7

6

5

4

3

2

1

I II III IV V Pay Grades

Pay Policy Line


8-25

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


8-26

PAY

Our Job Evaluation Points

PAY RANGES

100 150 200 250 300 350

Ourmonthlysalary(000)

8

7

6

5

4

3

2

1Pay Policy LinePay Policy Line

Pay Range


8-27

Range Midpoint,Minimum, and Maximum


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%

8-28


8-29

Range Overlap


8-30

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


8-31

From Grades to Bands


8-32

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


8-33

Market Pricing

establishing pay structure by relying almost exclusively on external market pay rates

market pricing becoming more common in Canada


8-34

Conclusion

most organizations survey other employers’ pay practices to determine the competitors’ rates

survey results used to construct market pay linepay policy line adjusts market pay line based on

the decision to lead, match or lag market paypay grades and ranges/bands designed around

pay policy line to integrate internal and external pressures

increasing interest in broadbanding and market pricing

Documents

Compensation Management2