1. Prentice Hall, Inc. © 2006 8-1 A Human Resource Management Approach STRATEGIC COMPENSATION Prepared by David Oakes Chapter 8 Building Market-Competitive Compensation Systems

2. Prentice Hall, Inc. © 2006 8-2 Market - Competitive Pay Systems  Is a company’s compensation policy  Fits imperatives of competitive advantage  Key role in recruitment & retention

3. Prentice Hall, Inc. © 2006 8-3 Excessive Pay Levels  Represent undue financial burdens  Undermine lowest-cost strategies  Restrict investments

4. Prentice Hall, Inc. © 2006 8-4 Market Competitive Pay Systems  Conduct strategic analyses  Assess competitors’ practices  Integrate internal job structures with external market pay rates  Determine compensation policies

5. Prentice Hall, Inc. © 2006 8-5 External Market Factors  Industry profile  Information on competition  Long - term growth prospects

6. Prentice Hall, Inc. © 2006 8-6 COMPETITORS’ PAY PRACTICES  Base pay  Incentive awards structure  Mix & level of discretionary benefits

7. Prentice Hall, Inc. © 2006 8-7 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

8. Prentice Hall, Inc. © 2006 8-8 Published Surveys Sources  Professional associations  Industry associations  Consulting firms  Bureau of Labor Statistics (BLS)

9. Prentice Hall, Inc. © 2006 8-9 BLS Surveys  National Compensation Survey  For wages & benefits  Employment Cost Index  For compensation cost trends  Employer Costs for Employee Compensation  For compensation cost trends

10. Prentice Hall, Inc. © 2006 8-10 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

11. Prentice Hall, Inc. © 2006 8-11 NCS Worker Characteristics  Occupation  Employment status  Union status  Company size  Base pay / incentive pay  Job level

12. Prentice Hall, Inc. © 2006 8-12 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

13. Prentice Hall, Inc. © 2006 8-13 ECEC Compensation Costs Categories  Major occupation  Industry type & size  Region  Union status  Employment status

14. Prentice Hall, Inc. © 2006 8-14 NCS Average Benefit Provisions Estimates Published By  Broad occupational groups  Employment status  Union status  Geographic regions & industry sectors

15. Prentice Hall, Inc. © 2006 8-15 Relevant Labor Market  Qualified candidates based on  Occupational classification  Geography  Market competitors

16. Prentice Hall, Inc. © 2006 8-16 Benchmark Jobs  Used for  Job evaluations  Compensation Surveys  Established, well - known, stable  Common across employers  Entire range of jobs  Accepted for setting pay rates

17. Prentice Hall, Inc. © 2006 8-17 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

18. Prentice Hall, Inc. © 2006 8-18 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

19. Prentice Hall, Inc. © 2006 8-19 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

20. Prentice Hall, Inc. © 2006 8-20Mean  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

21. Prentice Hall, Inc. © 2006 8-21Variation  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

22. Prentice Hall, Inc. © 2006 8-22Quartile  Dispersion by % below a set value  Quartile 1 = 25 %  Quartile 2 = 50 %  Quartile 3 = 75 %  Quartile 4 = 100 %

23. Prentice Hall, Inc. © 2006 8-23 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

24. Prentice Hall, Inc. © 2006 8-24 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

25. Prentice Hall, Inc. © 2006 8-25 R 2R 2R 2R 2  Explains variations in market pay rates via job structure (JS)  Ranges from 0.0 - 1.0  0.0 = 0 % due to JS  0.0 -.30 = Small variation .31 -.70 = Average variation .71 -.99 = Large variation  1.0 = All variations

26. Prentice Hall, Inc. © 2006 8-26 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