Prentice Hall, Inc. © A Human Resource Management Approach STRATEGIC COMPENSATION Prepared by David Oakes Chapter 8 Building Market-Competitive Compensation Systems

Prentice Hall, Inc. © Market - Competitive Pay Systems  Is a company’s compensation policy  Fits imperatives of competitive advantage  Key role in recruitment & retention

Prentice Hall, Inc. © Excessive Pay Levels  Represent undue financial burdens  Undermine lowest-cost strategies  Restrict investments

Prentice Hall, Inc. © Market Competitive Pay Systems  Conduct strategic analyses  Assess competitors’ practices  Integrate internal job structures with external market pay rates  Determine compensation policies

Prentice Hall, Inc. © External Market Factors  Industry profile  Information on competition  Long - term growth prospects

Prentice Hall, Inc. © COMPETITORS’ PAY PRACTICES  Base pay  Incentive awards structure  Mix & level of discretionary benefits

Prentice Hall, Inc. © Custom Developed Surveys  Can be custom tailored  Quality can be monitored by employer  Usually not done in - house  External data not readily accessible  Can be expensive

Prentice Hall, Inc. © Published Surveys Sources  Professional associations  Industry associations  Consulting firms  Bureau of Labor Statistics (BLS)

Prentice Hall, Inc. © BLS Surveys  National Compensation Survey  For wages & benefits  Employment Cost Index  For compensation cost trends  Employer Costs for Employee Compensation  For compensation cost trends

Prentice Hall, Inc. © National Compensation Survey  Pay & benefits for approximately  480 occupations  85 localities  Weekly & annual earnings & hours for full - time workers  Private, local & state employees  Worker characteristics

Prentice Hall, Inc. © NCS Worker Characteristics  Occupation  Employment status  Union status  Company size  Base pay / incentive pay  Job level

Prentice Hall, Inc. © ECI Data  Changes in pay & benefits  Data on all workers & separately  Compensation changes by categories  Are seasonally adjusted  Historical changes in labor costs  Uses fixed weights

Prentice Hall, Inc. © ECEC Compensation Costs Categories  Major occupation  Industry type & size  Region  Union status  Employment status

Prentice Hall, Inc. © NCS Average Benefit Provisions Estimates Published By  Broad occupational groups  Employment status  Union status  Geographic regions & industry sectors

Prentice Hall, Inc. © Relevant Labor Market  Qualified candidates based on  Occupational classification  Geography  Market competitors

Prentice Hall, Inc. © Benchmark Jobs  Used for  Job evaluations  Compensation Surveys  Established, well - known, stable  Common across employers  Entire range of jobs  Accepted for setting pay rates

Prentice Hall, Inc. © Survey Characteristics  They contain a lot of data  Outdated data due to lag time  Statistical analysis needed to integrate internal job structures with external market

Prentice Hall, Inc. © STATISTICAL ANALYSIS 2Descriptive Properties  Central tendency  Represents the fact that a set of data center around a central point  Variation  Represents the amount of spread or dispersion in a data set

Prentice Hall, Inc. © Central Tendency Two Type of Measures  Arithmetic mean (mean, average)  Sum of salaries / number of salaries  Represents typical market salaries  Median (midpoint)  Middle value of sequential numerical data

Prentice Hall, Inc. © Mean  Outliers can distort values  Understated means occur with extremely small outliers  May set salaries to low  Overstated means occur with extremely large outliers  May set salaries too high

Prentice Hall, Inc. © Variation  Standard deviation  Refer to the mean distance of each figure from the mean  Quartile  % of figures below a point  Based on 4 groupings  Percentile  % of figures below a point

Prentice Hall, Inc. © Quartile  Dispersion by % below a set value  Quartile 1 = 25 %  Quartile 2 = 50 %  Quartile 3 = 75 %  Quartile 4 = 100 %

Prentice Hall, Inc. © C P I  Indexes monthly price changes in goods & services  Data collected from  Urban U.S.A.  4 regions  4 population class sizes  27 local metropolitan areas  Published for 2 groups  All urban consumers  Urban wage & clerical earners

Prentice Hall, Inc. © Regression Analysis  Statistical procedure designed to find the best - fitting line between two variables  Formula: Y = a + bX  Y = Predicted salary  X = Job evaluation points  a = Y intercept (X = 0)  b = the slope

Prentice Hall, Inc. © R 2R 2R 2R 2  Explains variations in market pay rates via job structure (JS)  Ranges from  0.0 = 0 % due to JS  = Small variation  = Average variation  = Large variation  1.0 = All variations

Prentice Hall, Inc. © Pay Level Policies  Market lead  Levels above market pay lines  Best for differentiation strategies  Market lag  Levels below market pay lines  Best for Lowest - Cost Strategies  Market match  Pay according to market pay line  Appropriate with differentiation strategy