© 2010 McGraw Hill Ryerson 8-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

© 2010 McGraw Hill Ryerson 8-2 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

© 2010 McGraw Hill Ryerson 8-3 Set Competitive Pay Policy  Lead the market with respect to pay  Match average pay of competitors  Lag behind average market pay rates

© 2010 McGraw Hill Ryerson 8-4 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

© 2010 McGraw Hill Ryerson 8-5 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

© 2010 McGraw Hill Ryerson 8-6 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

© 2010 McGraw Hill Ryerson 8-7 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 Regional: Within a particular area of the province 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

© 2010 McGraw Hill Ryerson 8-8 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

© 2010 McGraw Hill Ryerson 8-9 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

© 2010 McGraw Hill Ryerson 8-10 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.

© 2010 McGraw Hill Ryerson 8-11 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

© 2010 McGraw Hill Ryerson 8-12 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

© 2010 McGraw Hill Ryerson 8-13 Analyzing Survey Data  frequency distribution organizes data  measures of central tendency averages or means weighted means medians  measures of distribution, or dispersion standard deviation percentiles and quartiles range spread

© 2010 McGraw Hill Ryerson 8-14 Age/Trend the Market Data  Pay rates are constantly changing  Survey data represents pay at the date it was collected  Adjust survey data to represent pay at the current or future date when pay decisions will be implemented

© 2010 McGraw Hill Ryerson 8-15 Combine Job Evaluation and Market Survey Data  Each benchmark job has: Job evaluation points An 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

© 2010 McGraw Hill Ryerson 8-16 PAY OUR Job Evaluation Points Scatterplot SURVEY monthly salary ($000)

© 2010 McGraw Hill Ryerson 8-17 PAY OUR Job Evaluation Points Scatterplot With Regression Line SURVEY monthly salary ($000) Market Pay Line

© 2010 McGraw Hill Ryerson 8-18 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

© 2010 McGraw Hill Ryerson 8-19 PAY OUR Job Evaluation Points Developing a Pay Policy Line OUR monthly salary ($000) Pay Policy Line : using market-survey data (updated and aged to reflect pay policy) lead match lag Market pay line (beginning of year)

© 2010 McGraw Hill Ryerson 8-20 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

© 2010 McGraw Hill Ryerson 8-21 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

© 2010 McGraw Hill Ryerson 8-22 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

© 2010 McGraw Hill Ryerson 8-23 PAY Our Job Evaluation Points PAY GRADE STRUCTURE Our monthly salary (000) IIIIIIIVV Pay Grades Pay Policy Line

© 2010 McGraw Hill Ryerson 8-24 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

© 2010 McGraw Hill Ryerson 8-25 PAY Our Job Evaluation Points PAY RANGES Our monthly salary (000) Pay Policy Line Pay Range

© 2010 McGraw Hill Ryerson 8-26 Range Midpoint, Minimum, and Maximum

© 2010 McGraw Hill Ryerson 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% 8-27

© 2010 McGraw Hill Ryerson 8-28 Range Overlap

© 2010 McGraw Hill Ryerson 8-29 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

© 2010 McGraw Hill Ryerson 8-30 From Grades to Bands

© 2010 McGraw Hill Ryerson 8-31 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

© 2010 McGraw Hill Ryerson 8-32 Market Pricing  establishing pay structure by relying almost exclusively on external market pay rates  market pricing becoming more common in Canada

© 2010 McGraw Hill Ryerson 8-33 Conclusion  most organizations survey other employers’ pay practices to determine the competitors’ rates  survey results used to construct market pay line  pay policy line adjusts market pay line based on the decision to lead, match or lag market pay  pay grades and ranges/bands designed around pay policy line to integrate internal and external pressures  increasing interest in broadbanding and market pricing