McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 8-1 Designing Pay Levels, Mix, and Pay Structures Chapter 8

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 8-2 Exhibit 8.1: Determining Externally Competitive Pay Levels and Structures External competitiveness: Pay relationships among organizations Set Policy Select market Design 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.  Specify relevant labor market.  Design and conduct survey.  Interpret and apply results.  Design grades and ranges or bands. 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 and ranges or bands.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 8-3 What Is the Purpose of a Salary Survey?  Systematic process of collecting and making judgments about compensation paid by other employers  Provides data for  Setting the pay policy relative to competition  Translating that policy into pay levels and structures

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 8-4 Why Conduct a Salary Survey?  Adjust pay level – How much to pay?  Adjust pay mix – What forms?  Adjust pay structure?  Analyze special situations  Estimate competitors’ labor costs

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 8-5 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  Examples  Exhibit 8.2: Relevant Labor Markets by Geographic and Employee Groups  Exhibit 8.3: Pay Differences by Location  Fuzzy markets

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 8-6 Exhibit 8.2: Relevant Labor 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 or MSAs Most likely Regional: Within a particular area of the state or several states Only if in short supply or critical Most likelyLikelyMost likely National: Across the country Most likely International: Across several countries Only for critical skills or those in very short supply Sometimes

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 8-7 Exhibit 8.3: Pay Differences by Location

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 8-8 Exhibit 8.4: Salary Data on the Web

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 8-9 Salary Data on the Web  Assignment for 3/15/07:  Go to select a job for which you could be a candidate upon graduation, and locate the salary information for the locality in which you intend to live. Submit both the job description and salary info.  Review Question 11  If you were a manager, how would you justify paying one of your ees either higher or lower than the results shown on this website?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 8.6: Possible Survey Data Elements and Rationale  Nature of organization  Financial performance  Size  Structure  Nature of total compensation system  Cash forms used  Non-cash forms used  Incumbent and job  Date  Job  Individual  Pay  HR outcomes  Productivity  Total labor costs  Attraction & retention  Employee views

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 8.7: Advantages and Disadvantages of Measures of Compensation Base PayTells 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.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Construct a Market Pay Line  Exhibit 8.8: Salary Graphs Using Different Measures of Compensation  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 to constructing a market pay line  Freehand approach - Exhibit 8.8  Regression analysis - Exhibit 8.13 and Exhibit 8.14

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 8.13: From Regression Results to a Market Line

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 8.14: Understanding Regression Job Evaluation Points Survey: Salary ($000) Tech A Sr Tech Eng 1 Eng 3 Eng 5 Mgr 1 Mgr 3

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved ABCDEF External Competitiveness: Salaries paid by competitors Pay Policy Line 30,000 35,000 40,000 45,000 50,000 55,000 GHIJK LMNOP Internal Structure: JE Points Exhibit 8.15: Develop Pay Grades

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved From Policy to Practice: Grades and Ranges  Why bother with grades and ranges?  Offer flexibility to deal with pressures from external markets and differences among firms  Develop grades  Exhibit 8.15  Establish range midpoints, minimums, and maximums  Overlap

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 8.16: Range Midpoint, Minimum, and Maximum

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Establish Range Midpoints, Minimums, and Maximums (1 of 3)  Size of range based on judgment about how ranges support  Career paths  Promotions  Other organization systems  Typical 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

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 8.17: Range Overlap

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved From Policy to Practice: Broad Banding  Alternative to traditional salary structures  Involves collapsing salary grades into a few broad bands, each with a sizable range  One minimum and one maximum  Range midpoint often not used  Purposes  Provide flexibility to define job responsibilities more broadly  Foster cross-functional growth and development  Ease mergers and acquisitions  Example  Exhibit 8.18

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 8.18: From Grades to Bands

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 8.19: Contrasts Between Ranges and Bands Ranges 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”  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 % spreads

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Steps Involved in Broad Banding 1. Set number of bands  Determine number of distinct levels of employee contributions within organization that actually add value  Challenge - How much to actually pay people in same band who are performing different functions and work 2. Price bands: Reference market rates  Exhibit 8.20: Reference Rates Within Bands

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 8.20: Reference Rates Within Bands

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Market Pricing  Approach  Sets pay structures almost exclusively by relying on external market rates  Emphasizes external competitiveness (market- based 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