Designing pay levels, mix and pay structures

1. Designing pay levels, mix and pay structures Chapter 9

2. Contents Purpose of a survey Select relevant market competitors Design the survey Interpret survey results and construct a market line Pay-policy line Grades and ranges Broad banding Balancing internal and external pressures

3. Some major decisions in pay-level determination Specify competitive pay-level policy Define purpose of survey Specify relevant market Design and conduct survey Interpret and apply result Design grades and ranges or bands

4. Competitive pay policy Translating external pay policy into practice requires information on the external market. Surveys provide the data for translating that policy into pay levels, pay mix, and structures. A survey is the systematic process of collecting and making judgments about the compensation paid by other employers

5. Purpose of a survey • An employer conducts or participates in a survey for a number of reasons: • Adjust to the pay level in response to changing rates paid by competitors • To set the mix of pay forms relative to that paid by competitors • To establish or price a pay structure • To analyze pay related problems • To estimate the labor costs of product/service market competitors

6. Select relevant market competitors The same occupations or skills Employees within the same geographic area The same products and services.

7. Design the survey • Who should be involved? (Price fixing) • How many employers? • Publicly available data • Word of mouse • Where are the standards? • Which jobs should be included? • Benchmark job approach • Low-high approach • Benchmark conversion approach • What information should be collected? • Organization data • Total compensation data

8. Advantages and disadvantages of measures of compensation

9. Interpret survey results and construct market line • Verify data • Accuracy of match • Anomalies • Statistical analysis • Frequency distribution • Central tendency • Variation • Update the survey data • Construct a market pay line • Combine internal structure and external market rates

10. Choices for updating survey data reflect pay policy January 1: Current year Lag Lead/lag Lead Surveys completed. Participants report actual rates in effect last Jan. 1 Median base Engineer I = Rs. 45,000 Today: Analyze survey, make recommendations Implement plan Forecast 5% increase by end of current year January 1: Plan year begins Update up to here. Pay Rs. 47250 during plan year Forecasted rate = Rs. 47, 250 Resurvey Forecast 5% increase by end of plan year Update up to here. Pay Rs. 48431 during plan year December 31: plan year ends Forecasted rate = Rs. 49,612 Update up to here. Pay Rs. 49612 during plan year

11. Combine internal structure and external market rates Maximum Maximum Midpoint Midpoint Maximum Minimum Salary Minimum Maximum Pay-policy line Midpoint Maximum Minimum Midpoint Grades Minimum Minimum Contain jobs 1 2 3 4 5 AB CDEF GHIJK LMN OP Pay structure

12. Grades and ranges • They offer flexibility…. • Differences in quality (skills, abilities and experience) among individuals applying for work • Differences in the productivity or value of these quality variations • Differences in the mix of pay forms competitors use

13. Develop grades Establish range midpoints, minimums, and maximums Overlap

14. Broad banding Consolidating as many as four or five traditional grades into a single band with one minimum and one maximum.

15. Contrast between ranges and bands Ranges support Bands 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” • 150 percent range-spread • 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 percent spread