Designing Pay Levels, Mix, and Pay Structures

1. Designing Pay Levels, Mix, and Pay Structures

2. How to Use Local Salary Survey Data A Presentation to HRACC April 10, 2012 Rebecca Ellis, Ph.D. Professor of HRM at Cal Poly

3. Uses of Salary Survey Data • Interpreting HRACC Survey Data • How You Can Help

4. Uses of survey data • to help develop pay structures • price jobs • adjust structures over time • advise on salary offers • forecast wage movement • formulate performance pay matrices • prepare salary budgets • support labor contract negotiations • perform other work requiring sound information on competitive pay.

5. Building a Market-Based Pay Structure • Gather the background information needed for project success. • Determine your sources of external market data and get the data ready. • Conduct the market data analysis. • Develop pay structures. • Calculate the costs of the pay structures. • Implement and evaluate the new pay structures.

6. Determining ExternallyCompetitive Pay Levels and Structures External competitiveness: Pay relationships among organizations Merge internal & external pressures Competitive pay levels, mix, and structures Draw policy lines Select market Design survey Set Policy • Some Major Decisions in Pay Level Determination • Determine pay-level policy. • Define purpose of survey. • Specify relevant labor market. • Design and conduct survey. • Interpret and apply results. • Design grades and ranges or bands.

7. What Is the Purpose of a Salary Survey? • A systematic process of collecting and making judgments about compensation paid by other employers • Provides data for: • Setting the pay policy relative to competition • Translating that policy into pay levels and structures

8. Why Conduct a Salary Survey? • Adjust pay level – How much to pay? • Adjust pay mix – What forms? • Adjust your existing pay structure-update percentage to use? • Analyze special situations- e.g. hard-to- hire; ‘hot jobs’

9. Select Relevant Market Competitors • Relevant labor market includes employers who compete • For same occupations or skills • For employees in same geographic area • With same products or services • Example • Exhibit 1: Relevant Labor Markets by Geographic and Employee Groups

10. Exhibit 1: Relevant Labor Markets by Geographic and Employee Groups

11. Interpret Survey Results (1 of 2) • No single best approach • Verify data • Check accuracy of job matches • Check for anomalies • Does any one company dominate? (Cal Poly) • Do all employers show similar patterns? (industry differences) • Outliers?

12. Interpret Survey Results (2 of 2) • Statistical analysis • Measures of central tendency • Average/Mean • Median • Weighted mean • Measures of variation • Median = 50th %ile • Updating/aging survey data • Choices for Updating Salary Data include the quarterly Employment Cost Index (ECI) of the Bureau of Labor Statistics (BLS) and the annual Salary Budget Survey of WorldatWork. Some employers use the CPI, particularly in labor negotiations.

13. Help Desk Support

14. H.R. Assistant

15. Web Salary Data

16. Why ‘age’ survey data? • Salary surveys capture salary data at a specific point in time in the past. But, the market continues to move because of pay increases, market adjustments, promotions and employee job switches. • Therefore, it is necessary to “age” or “trend” the data to a common point in time—e.g., today’s date, the date the pay plan will go live, the beginning of a new fiscal year, etc.—using a factor that reflects market movements.

17. Four Simple Steps to Aging • 1. Determine the starting date for the new pay structure. • 2. Determine wage movement percentages over the relevant time period (from survey current date to pay plan starting date) • 3. Determine the aging factor • 4. Apply the aging factor to bring data up to date as of the beginning of your plan year.

18. WorldatWork’s 2012 survey projects: WorldatWork Pay Increase Survey

19. Construct a Market Pay Line • Definition of market pay line • Links a company’s benchmark jobs on horizontal axis (internal structure) with market rates paid by competitors (market survey) on vertical axis • Approaches to constructing a market pay line • Freehand approach • Regression analysis

20. Understanding Regression 16 14 12 10 Survey: Salary ($000) 8 6 4 2 0 20 120 40 60 80 100 140 160 180 Job Evaluation Points Tech A Sr Tech Eng 1 Eng 3 Eng 5 Mgr 1 Mgr 3

21. Combine Internal Structureand External Market Rates • Two parts of the total pay model have merged • Internally aligned structure - Horizontal axis • External competitive data - Vertical axis • Two aspects of pay structure • Pay-policy line • Pay ranges

22. Balancing Internal and External Pressures: Adjusting the Pay Structure Internal Pressures External Pressures Job Structure Pay Structure

23. 55,000 50,000 45,000 External Competitiveness:Salaries paid by competitors 40,000 35,000 Pay Policy Line 30,000 GHIJK AB CDEF LMN OP Internal Structure: JE Points Develop Pay Grades

24. From Policy to Practice:Pay Policy Line • Approaches to translate external competitive policy into practice • Choice of measure • 50th percentile for base pay • 75th percentile for total compensation • Updating • Policy line as percent of market line • Specify a percent above or below market line an employer intends to match • Other options • Pay among the leaders • Lead for some job families and lag for others

25. Implementing Pay Level Policy

26. From Policy to Practice:Grades and Ranges • Why bother with grades and ranges? • Offer flexibility to deal with pressures from external markets and differences among firms • Develop grades • Establish range midpoints, minimums, and maximums • Examine grade overlap

27. Why Bother with Grades and Ranges? • External pressures • Differences in quality (KSAs) among individuals in external market • Differences in productivity or value of quality variations • Differences in mix of pay forms of competitors • Internal pressures • Recognize individual performance differences with pay • Meet employees’ expectations that their pay will increase over time • Encourage employees to remain with organization

28. Develop Grades • Grades group job evaluation data on horizontal axis • All jobs considered substantially equal for pay purposes placed in same grade • Each pay grade has its own pay range and all jobs in a single grade have same pay range • Enhances ability to move people among jobs within a grade with no change in pay • How many pay grades? • Number of jobs • Organization hierarchy • Reporting relationships

29. Establish Range Midpoints,Minimums, and Maximums • Ranges group salary data on vertical axis • Establish upper and lower pay limits for all jobs in each grade • Midpoints correspond to competitive pay policy • Point where pay-policy line crosses center of each grade • Often represents base pay for a seasoned employee

30. Exhibit 2: Range Midpoint,Minimum, and Maximum

31. Establish Range Midpoints,Minimums, and Maximums • Size of range based on judgment about how ranges support • Career paths • Promotions • Other organization systems • Typical range spread • Top-level management positions – 30 to 60% above and below midpoint • Entry to midlevel professional and managerial positions – 15 to 30% above and below midpoint • Office and production positions – 5 to 15% above and below midpoint

32. Exhibit 3: Range Overlap

33. Market Pricing • Approach • Sets pay structures almost exclusively by relying on external market rates • Emphasizes external competitiveness (market-based factors) and de-emphasizes internal alignment • Issues • Validity of market data • Use of competitors’ pay decisions as primary determinant of pay structure • Lack of value added via internal alignment • Difficult-to-imitate aspects of pay structure are deemphasized • Fairness

34. Sample Merit Grid