1. Prentice Hall, Inc. © 2006 9-1 A Human Resource Management Approach STRATEGIC COMPENSATION Prepared by David Oakes Chapter 9 Building Pay Structures That Recognize Individual Contributions

2. Prentice Hall, Inc. © 2006 9-2 Constructing A Pay Structure 5 Steps  Decide how many  Determine market pay line  Define pay grades  Calculate pay ranges  Evaluate results

3. Prentice Hall, Inc. © 2006 9-3 Common Pay Structures  Exempt & nonexempt  Based on job families  Based on geography

4. Prentice Hall, Inc. © 2006 9-4 Exempt & Nonexempt Pay Structures  Exempt  Not subject to overtime provisions  Salaried supervisors, managers, professionals, & executives  Nonexempt  Subject to overtime provisions  Hourly, non-supervisory

5. Prentice Hall, Inc. © 2006 9-5 Market Pay Lines  Market pay rates relative to company’s job structure  Pay levels corresponding with pay line are market-competitive  Rates promote internal consistency

6. Prentice Hall, Inc. © 2006 9-6 Pay Grades  Based on compensable factors, values, management philosophy  Widths  Narrow or wide  Affects hierarchy & social distance  Absolute or percentage-based job evaluation points

7. Prentice Hall, Inc. © 2006 9-7 Pay Compression  When pay spread is small  Threatens competitive advantages  Caused by  Failure to raise pay range limits  Scarcity of qualified applicants

8. Prentice Hall, Inc. © 2006 9-8Compa-Ratios  Evaluates pay structures  Index competitiveness of internal pay rates based on midpoints  Divide pay rates by midpoint  Compa-ratio meanings  1 = Market match rate  < 1 = Market lag rate  > 1 = Market lead rate

9. Prentice Hall, Inc. © 2006 9-9 Merit Pay Systems Considerations  Communicate link between pay and performance  Use effective appraisal methods  Establish increase amounts & types  Settle on base pay level

10. Prentice Hall, Inc. © 2006 9-10 Merit Increase Amounts  Reflects prior job performance levels  Needs to motivate  Needs to be meaningful  Influenced by the cost-of-living  Indexed as a % of budget

11. Prentice Hall, Inc. © 2006 9-11 Present Level of Base Pay  Needs to be within limits of pay grade  Consistent with new employees at similar jobs  Needs to abide by mandates of  Title VII, 1964 Civil Rights Act  Equal Pay Act of 1963  ADEA of 1967

12. Prentice Hall, Inc. © 2006 9-12 Increases Within Budget  Determine performance categories and % of employees in each  Place % in quartiles  Put % and quartiles into cells  Estimate performance distribution  Distribute Increase to Each Cell  Ensure total is within budget

13. Prentice Hall, Inc. © 2006 9-13 Sales Objectives  Sales volume  Sales within a time period  New business  Sales to new customers  Retaining sales  Higher sales to existing customers  Product mix rewards sales  Sales of various products/services

14. Prentice Hall, Inc. © 2006 9-14 Sales Compensation Plans  Sales-only  Salary-plus-bonus  Salary-plus-commission  Commission-plus-draw  Commission-only

15. Prentice Hall, Inc. © 2006 9-15 Salary-Plus-Commission Plans  Commissions based on % of price  Spreads risks  Designed to attract quality sellers  Allows employees to do other tasks

16. Prentice Hall, Inc. © 2006 9-16 Commission-Plus Draw Plans  Draw  Advance pay for living expenses  Charged against future commissions  Recoverable or non-recoverable  Provides strong incentive to excel

17. Prentice Hall, Inc. © 2006 9-17Commission-Only  Straight  Based on fixed % of sales price  Graduated  Increased percentage rates for higher sales volume  Multi-tiered  Increased percentage rates for meeting & exceeding sales goal

18. Prentice Hall, Inc. © 2006 9-18 Fixed Pay & Compensation Mix 3 Main Factors  Salesperson’s influence on decision  Competitive pay standards within industry  Amount of non-sales duties

19. Prentice Hall, Inc. © 2006 9-19 Skill Blocks  Include job descriptions  Skills needed  Training required  Accurate evaluation process  Organize jobs into family/group  List similar skills & tasks per job  Group skills into blocks

20. Prentice Hall, Inc. © 2006 9-20 Transition Matters Job-based pay to pay-for-knowledge  Assessment of skills  Who assesses  On what  How often  Align pay with knowledge structure  Access to training  Equal access to all

21. Prentice Hall, Inc. © 2006 9-21 In-House vs. Outsourced Training  Expertise  Needed & available  Timeliness  How soon & how often?  Number of trainees  Proprietary nature of topic  Too sensitive to share?

22. Prentice Hall, Inc. © 2006 9-22Broadbanding  Consolidates pay grades & ranges  Flattens corporate hierarchies  Emphasizes teamwork  Broadens job duties & responsibilities  Promotes quicker decision making  More latitude in pay rate decisions

23. Prentice Hall, Inc. © 2006 9-23 Two-Tiered Pay  New employees paid less  Temporary or permanent rewards  Mainly in unionized companies  May hinder recruiting  Can lower employees’ morale

24. Prentice Hall, Inc. © 2006 9-24 Pay Ranges  Build upon pay grades  Represent vertical dimension  Include midpoint, minimum & maximum pay rates  Midpoints (market median rates)  Set by competitive pay policy  Market lead - midpoint higher  Market lag - midpoint lower  Green & red circle pay rates