Designing pay levels, mix and pay structures Chapter 9

Contents Purpose of a survey Select relevant market competitors Design the survey Interpret survey results and construct a market line Pay-policy line Grades and ranges Broad banding Balancing internal and external pressures

Some major decisions in pay-level determination Specify competitive pay-level policy Define purpose of survey Specify relevant market Design and conduct survey Interpret and apply result Design grades and ranges or bands

Competitive pay policy Translating external pay policy into practice requires information on the external market. Surveys provide the data for translating that policy into pay levels, pay mix, and structures. A survey is the systematic process of collecting and making judgments about the compensation paid by other employers

Purpose of a survey An employer conducts or participates in a survey for a number of reasons: Adjust to the pay level in response to changing rates paid by competitors To set the mix of pay forms relative to that paid by competitors To establish or price a pay structure To analyze pay related problems To estimate the labor costs of product/service market competitors

Select relevant market competitors The same occupations or skills Employees within the same geographic area The same products and services.

Design the survey Who should be involved? (Price fixing) How many employers? Publicly available data Word of mouse Where are the standards? Which jobs should be included? Benchmark job approach Low-high approach Benchmark conversion approach What information should be collected? Organization data Total compensation data

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 the work: also tells the cash pay for performance opportunity in the job All employees may not receive incentives, so it may overstate the competitor’s 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. Don’t set base equal to competitors’ total compensation. Risks high fixed costs.

Interpret survey results and construct market line Verify data Accuracy of match Anomalies Statistical analysis Frequency distribution Central tendency Variation Update the survey data Construct a market pay line Combine internal structure and external market rates

Choices for updating survey data reflect pay policy January 1: Current year Lag Lead/lag Lead Surveys completed. Participants report actual rates in effect last Jan. 1 Median base Engineer I = Rs. 45,000 Today: Analyze survey, make recommendations Implement plan Forecast 5% increase by end of current year January 1: Plan year begins Update up to here. Pay Rs. 47250 during plan year Forecasted rate = Rs. 47, 250 Resurvey Forecast 5% increase by end of plan year Update up to here. Pay Rs. 48431 during plan year December 31: plan year ends Forecasted rate = Rs. 49,612 Update up to here. Pay Rs. 49612 during plan year

Combine internal structure and external market rates Maximum Maximum Midpoint Midpoint Maximum Minimum Salary Minimum Maximum Pay-policy line Midpoint Maximum Minimum Midpoint Grades Minimum Minimum Contain jobs 1 2 3 4 5 AB CDEF GHIJK LMN OP Pay structure

Grades and ranges They offer flexibility…. Differences in quality (skills, abilities and experience) among individuals applying for work Differences in the productivity or value of these quality variations Differences in the mix of pay forms competitors use

Develop grades Establish range midpoints, minimums, and maximums Overlap

Broad banding Consolidating as many as four or five traditional grades into a single band with one minimum and one maximum.

Contrast between ranges and bands Ranges support Bands support Some flexibility within controls Relatively stable organization design Recognition via titles or career progression Midpoint controls, comparatives Controls designed into system Give managers “freedom with guidelines” 150 percent range-spread 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 spread