Chapter Eight
Building Market-Competitive Compensation Systems
An
nu
al S
ala
ry (
$)
20,000
18,000
21,000
16,000
11,000
8,000250
Clerk IJob Evaluation Points
Market Pay Line
500Clerk II
750Clerk III
1,200Chief Clerk
Internally Consistent Pay Structures do not guarantee
External Consistency!
Current Pay Line
Compensation Policies & Strategic Mandates
Policy Strategy
Lead (how much?) 5, 10, 15%?
Differentiation
Match Differentiation
Lag (how much?) Cost
An
nu
al S
ala
ry (
$)
20,000
18,000
21,000
16,000
11,000
8,000250
Clerk IJob Evaluation Points
Market Pay Line
500Clerk II
750Clerk III
1,200Chief Clerk
Testing your applied knowledge:
What is the compensation strategy behind this pay structure?
Current Pay Line
An
nu
al S
alar
y ($
)
20,000
18,000
21,000
16,000
11,000
8,000250
Clerk IJob Evaluation Points
Market Pay Line
500Clerk II
750Clerk III
1,200Chief Clerk
Testing your applied knowledge:What is the compensation strategy behind
this pay structure?
Current Pay Line
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 lower-level jobs.
An
nu
al S
ala
ry (
$)
20,000
18,000
21,000
16,000
11,000
8,000250
Clerk IJob Evaluation Points
Market Pay Line
500Clerk II
750Clerk III
1,200Chief Clerk
Current Pay Line
Testing your applied knowledge:
What is the compensation strategy behind this pay structure?
Answer: Assuming that this company is aware of the pay lag at lower level jobs between their pay structure and the market line, as well as the lead between its pay level and the market line at higher-level jobs, this company has decided not only that lower-level jobs are not the essence of its competitive advantage, but also that higher-level jobs are indeed quite important for its strategy and, therefore, it needs to
pay higher salaries at such higher-level jobs. A
nn
ual
Sal
ary
($)
20,000
18,000
21,000
16,000
11,000
8,000250
Clerk IJob Evaluation Points
Market Pay Line
500Clerk II
750Clerk III
1,200Chief Clerk
Current Pay Line
Testing your applied knowledge:What is the compensation strategy behind
this pay structure?
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 $32.30 167.8
CPI-Miami
182.5
CPI-NYC
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
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
$30,000-$35,000
$35,001-$40,000
$40,001-$45,000
$45,001& above
0
2
4
6
8
10
12
14
$30,000-$35,000
$35,001-$40,000
$40,001-$45,000
$45,001& above
Figure 8-1
Histogram of Survey Data for Engineers
Annual Salary
Fre
qu
en
cy (
no
. of
inc
um
be
nts
)
Forming Pay Structures: Integrating Job Structures with
External Market Pay Rates
Regression analysisBest-fitting line between two variables
Captures relationship between points and salary
An
nu
al S
ala
ry (
$)
55,000
50,000
45,000
40,000
35,000
30,0000 100 200 300 400 500 600 700 800 900 1,000Engineer I Engineer II Engineer III
Job Evaluation Points
44,525
38,420
33,536
Annual salaryPredicted annual salary
36,00034,500
33,000
36,000
43,500
45,000
55,000
Market Pay Line
Figure 8-2
Regression Analysis Results for the Engineer Survey Data
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).
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 8-1
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.
Cost of Living
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
(table continues)
(continued)
Miami Atlanta N.Y. National avg.
Housing
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
Crime
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
(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
Health cost index
101.7 114.9 186.2 100.0