A Roundtable Discussion: Market Based Pay Structures for “Reality Based” Pay July 2005

2 Objectives of Pay Structures Attract, retain, reward, motivate Benchmark to appropriate/comparable “markets”, i.e., external equity Reconcile internal and external equity for “job slotting” in new pay range Remain legally compliant Be easily communicated and understood Be cost effective Reinforce and reflect the mission and values of ABC Remain unbiased and objective Build trust and buy-in

3 Pay Structures in Support of Pay Philosophy Business Strategy: ABC, Inc. requires and expects the best from its creative, energetic, knowledgeable, and capable people. Our first responsibility is to serve our clients. Pay Philosophy: We have developed a compensation program that creates enthusiasm in those who serve so that we will create enthusiasm in those whom we serve. To succeed in this endeavor, all ABC employees will be results-oriented, quality-focused, team-driven, cost-minded, and fulfillment seeking and be rewarded at or above the median of like positions in similar organizations. Pay Structure: ABC Institution’s total compensation program (i.e., pay and benefits) supports our mission and strategy. It provides a competitive and affordable level of compensation for each employee in exchange for expected levels of performance and results. Total cash compensation may exceed that offered by comparable organizations provided individual, team, and/or the organization performance and results are exceptional and the organization realizes superior financial performance.

4 Purpose of Pay Structures Method to determine fair, equitable and competitive salary levels Demonstrate that work levels and salary levels are established fairly Allow ease of compliance with outside agency requirements – thus helping to reduce financial risk to the organization

5 Pay Structures Should Fit Companies in Various Stages in the Business Cycle Company Emphasis Long-term Long-and short-term Short- and long-term Short-term ThresholdGrowth MaturityDecline Cash Situation Acute Shortage All is reinvested Substantial Varies A pay structure that promotes stability has no place in an organization on the threshold of fast growth

6 Pay Structure – fitting into compensation strategy ABC Mission/Vision Business Strategy Total Compensation Strategy Direct Compensation Indirect Compensation (Benefits) Intrinsic Rewards (Individual Determines) Base PayVariable Pay Performance Management Performance Management Pay Structure Having a compensation strategy is THE FIRST AND MOST CRITICAL step to creating an effective pay structure

7 Pay Structure – fitting into compensation strategy Base Pay Strategy Pay “Mix”Pay DeliveryJob Value External Value Internal Value Strategic Value Individual Pay Determination Salary Structure Policies & Procedures Desired Market Position Management Philosophy External Economic Environment Short- vs. Long- term Orientation Pay structures shape base compensation Base compensation influences variable incentive pay Base compensation influences cash-based benefits Base compensation is the “new frontier” for reality based pay

8 Variability in use of market data Job Analysis Position Questionnaire Job Evaluation Job Content Emphasis Job Content Evaluation Labor Market Data Collection and Analysis Market Data Emphasis Labor Market Data Collection and Analysis Job Content Evaluation Reconciliation of Internal and External Considerations Pay Structure Job Worth Hierarchy Reality based pay relies on absolute versus relative measures and baselines In adjusting to reality based pay – internal equity trumps external benchmarks

9 Typical Pay Structures Remain the Basis for Reality Based Pay Grade $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Midpoint Differential Range Spread Midpoint Range Spread = Midpoint Differential = Compa-ratio = Range Penetration = max pay - min pay minimum pay mid-point of higher pay grade mid-point of lower pay grade employee pay range mid-point pay - range minimum range max - range min -1 ) x 100( Maximum Minimum

10 Reality Based Pay Dictate Using Multi-Dimension Based Approach Whole Job Market-Based Approach (JVM) Point-Factor Approach Multi-Dimension Based Approach External Equity Internal Equity One Many Number of Job Characteristics Measured

11 Market Pricing Requires High Flexibility and Agility MARKET PRICING ISSUES Relevant Markets Market Data Sources Data Validity Industry-specific for line jobs General industry for staff jobs Local for nonexempt and lower level exempt jobs Regional/national for middle- management jobs National for executive jobs From whom you hire - or would like to hire - employees To whom you lose - or are likely to lose - employees Whose pay practices you need to know for competitive business reasons

12 Internal Hierarchies Trump External Hierarchies – New Pay Salary Grades Job Value Matrix Slot Jobs with no Market Data Based on Internal Hierarchy External Hierarchy Based on Market Data Reconcile Department A Reconcile Department D Reconcile Department C Reconcile Department B Reconcile Differences Between Departments Final, Organization- wide Job Hierarchy Department A Department B Department C Department D InterdepartmentIntradepartment

13 Questions of the Future  The paradigm (prevailing general theory) shift to “reality based” pay started with –  Demise of Dotcom – followed by  Oversized total executive compensation – expressed by  Overused external compensation surveys  Reality based pay (the “New Pay”) focuses on internal equity more than on external comparisons  Internal performance versus external comparison is what drives increases to share/stake holder investments  Pay structures need to be rethought on the basis of “reality based” pay

Broadway, Suite 400 Denver, Colorado Bill Heck, Managing Principal