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Designing Pay Levels, Mix, and Pay Structures

Chapter. 8. Designing Pay Levels, Mix, and Pay Structures. Exhibit 8.1: Determining Externally Competitive Pay Levels and Structures. External competitiveness: Pay relationships among organizations. Merge internal & external pressures. Competitive pay levels, mix, and structures.

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Designing Pay Levels, Mix, and Pay Structures

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  1. Chapter 8 Designing Pay Levels, Mix, and Pay Structures

  2. Exhibit 8.1: 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.

  3. What Is the Purpose of a Salary Survey? • 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

  4. Why Conduct a Salary Survey? • Adjust pay level – How much to pay? • Adjust pay mix – What forms? • Adjust pay structure? • Analyze special situations • Estimate competitors’ labor costs

  5. 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 • Examples • Exhibit 8.2: Relevant Labor Markets by Geographic and Employee Groups • Exhibit 8.3: Pay Differences by Location • Fuzzy markets

  6. Exhibit 8.2: Relevant Labor Markets by Geographic and Employee Groups

  7. Exhibit 8.3: Pay Differences by Location

  8. Exhibit 8.4: Salary Data on the Web

  9. Salary Data on the Web • Assignment for 3/15/07: • Go to www.salary.com, select a job for which you could be a candidate upon graduation, and locate the salary information for the locality in which you intend to live. Submit both the job description and salary info. • Review Question 11 • If you were a manager, how would you justify paying one of your ees either higher or lower than the results shown on this website?

  10. Nature of organization Financial performance Size Structure Nature of total compensation system Cash forms used Non-cash forms used Incumbent and job Date Job Individual Pay HR outcomes Productivity Total labor costs Attraction & retention Employee views Exhibit 8.6: Possible Survey DataElements and Rationale

  11. Exhibit 8.7: Advantages and Disadvantagesof Measures of Compensation

  12. Construct a Market Pay Line • Exhibit 8.8: Salary Graphs Using Different Measures of Compensation • 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 - Exhibit 8.8 • Regression analysis - Exhibit 8.13 and Exhibit 8.14

  13. Exhibit 8.13: From RegressionResults to a Market Line

  14. Exhibit 8.14: 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

  15. 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 Exhibit 8.15: Develop Pay Grades

  16. 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 • Exhibit 8.15 • Establish range midpoints, minimums, and maximums • Overlap

  17. 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

  18. 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

  19. Exhibit 8.16: Range Midpoint,Minimum, and Maximum

  20. Establish Range Midpoints,Minimums, and Maximums (1 of 3) • 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

  21. Exhibit 8.17: Range Overlap

  22. From Policy to Practice:Broad Banding • Alternative to traditional salary structures • Involves collapsing salary grades into a few broad bands, each with a sizable range • One minimum and one maximum • Range midpoint often not used • Purposes • Provide flexibility to define job responsibilities more broadly • Foster cross-functional growth and development • Ease mergers and acquisitions • Example • Exhibit 8.18

  23. Exhibit 8.18: From Grades to Bands

  24. Ranges support . . . Some flexibility within controls Relatively 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 % spreads Exhibit 8.19: Contrasts BetweenRanges and Bands

  25. Steps Involved in Broad Banding 1. Set number of bands • Determine number of distinct levels of employee contributions within organization that actually add value • Challenge - How much to actually pay people in same band who are performing different functions and work 2. Price bands: Reference market rates • Exhibit 8.20: Reference Rates Within Bands

  26. Exhibit 8.20: Reference Rates Within Bands

  27. 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

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