1. 8-1Chap rte 8Designing Pay Levels, Mixand Pay Structures McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 8-2 Learning ObjectivesAfter studying Chapter 8, students should be able to:1.Explain all of the steps in designing and administeringa pay survey.2.Discuss the importance of defining the externalrelevant labor market in a pay survey.3.Explain how the market pay line combines internal jobstructure with external wage rates.4.Discuss the use of pay grades and ranges and theirrelationship to internal alignment and externalcompetitiveness.5.Discuss broad banding as a flexible alternative to paygrades and ranges. McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3. 8-3Determining Externally CompetitivePay Levels and StructuresExternalcompetitiveness:DefineConductDrawMergeCompetitiveSet Policy PolicyInternal & Pay Levels,Pay relationships MarketSurveyamongLines External Mix andorganizationsPressuresStructuresSome Major Decisions in Pay Level DeterminationSome Major Decisions in Pay Level Determination! Determine pay level policy! Determine pay level policy! Define purpose of survey! Define purpose of survey! Define relevant labor market! Define relevant labor market! Design and conduct survey! Design and conduct survey! Interpret and apply results! Interpret and apply results! Design grades and ranges or bands! Design grades and ranges or bandsMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4. 8-4Salary Survey! A survey is the systematic process of collectingand making judgments about the compensationpaid by other employers.! Surveys provide the data for setting the paypolicy relative to competition and translating thatpolicy into pay levels and structures.McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5. 8-5 Set Competitive Pay Policy!Adjust Pay Level How Much to Pay?!Adjust Pay Mix What Forms?!Adjust Pay Structure?!Special Situations!Estimate Competitors Labor CostsMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6. 8-6 Define Relevant Market Competitors! Employers who compete for the same occupations or skills required.! Employers who compete for employees within the same geographic area.! Employers who compete with the same products and services.McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 7. 8-7Relevant Labor Markets by Geographic and Employee Groups GeographicProduction Office and Technicians ScientistsManagerial Executive Scope Clerical&Professional EngineersLocal: WithinMost likely Most likely Most likelyrelatively smallareas such ascities or MSAsRegional:Only if in Only if in Most likelyLikelyMost likelyWithin a short supply shortparticular areaor criticalsupply orof the state or criticalseveral statesNational: Most likely Most likelyMost likelyAcross thecountryInternational:Only forOnly for SometimesAcross severalcritical skills critical skillscountries or those in or those invery shortvery shortsupplysupplyMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8. 8-8Design the Survey! Who should be involved in the survey design?! How many employers should be included?! Which jobs should be included?! What information to collect?McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 9. 8-9 Which Jobs to Include?Benchmark Jobs ApproachLow - High ApproachGlobal ApproachBenchmarkConversion Approach Market BasketApproachMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 10. 8 - 10Characteristics of Benchmark Jobs! The contents are well-known, relatively stable,and agreed upon by the employees involved! The supply and demand for these jobs arerelatively stable and not subject to recent shifts! They represent the entire job structure understudy! A majority of the workforce is employed in thesejobsMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11. 8 - 11Which Market Jobs Match Which Company Jobs?! Any match between an organizations jobs andsurvey jobs must be done on job content ratherthan on the basis of job title only.! Apply your job evaluation system to the surveyjob descriptions.McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 12. 8 - 12 Data Elements to Consider for Surveys! Nature of the Organization! Financial performance! Size! Structure! Nature of Total Compensation System! Cash forms used! Non-cash forms used! Incumbent and Job! Date! Job! Individual! PayMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 13. 8 - 13 Advantages and Disadvantages of Measures of CompensationBase PayTells how competitors are Fails to include performance incentives andvaluing the work in similar other forms, so will not give true picture ifjobscompetitors offer low base but highincentivesTotal CashTells how competitors are All employees may not receive incentives,(base + bonus)valuing work; also tells theso it may overstate the competitors pay;cash pay for performanceplus, it does not include long-termopportunity in the job. incentives.Total Tells the total value All employees may not receive all theCompensationcompetitors place on this forms. Be careful; dont set base equal to(base + bonus + workcompetitors total compensation. Risksstock options + high fixed costs.benefits)McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 14. 8 - 14Analyzing Survey Data (1 of 2)! No single best approach! Check accuracy of data! Two pieces of data on each benchmark: Survey data - dollars Our own data - job evaluation points! Scatterplot shows relationshipsMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 15. 8 - 15Analyzing Survey Data (2 of 2)! Frequency distribution organizes data! Measures of central tendencyaverages or meansweighted meansmedians! Measures of distribution, or dispersionstandard deviationpercentiles and quartilesrange spreadMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16. 8 - 16 Combine Job Evaluation and MarketSurvey Data (1 of 2)! Scatterplots: for each benchmark job there is adistribution of wages paid by survey companies.! Each of these distributions has means, ranges,etc...! Scatterplots are useful to see what the data looklike.McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 17. 8 - 17 Scatterplot76surveymonthly 5salary($000)4PAY 32180 120 160 200 240 280320360 Our Job Evaluation Points McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 18. 8 - 18 Combine Job Evaluation andMarket Survey Data (2 of 2)! Summarize the data further by fitting a linearcurve to it.! Can eyeball data, use midpoints, or othermathematical approaches.McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 19. 8 - 19Scatterplot with Linear Curve76surveymonthly 5salary($000)4PAY 32Line of Best Fit180 120 160 200 240 280320360 Our Job Evaluation Points McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 20. 8 - 20Adjust The Data to ReflectOrganizations Pay Policy (1 of 3)Lead the Market:! pay level should be above the market for the yearand equal at year end! update factor will be equal to the projectedmarket increaseMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 21. 8 - 21Adjust The Data to ReflectOrganizations Pay Policy (2 of 3)Match the Market:! pay level will be above the market for the firsthalf of the year and below for the second half! update factor will be half of the projected marketincreaseMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 22. 8 - 22 Adjust The Data to Reflect Organizations Pay Policy (3 of 3)Lag the Market:! pay level should be below the market for theentire year! no adjustment will be made to account for theprojected market increase McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 23. 8 - 23 Least Squares Method! The equation for a straight line will be used, sincemost pay distributions approximate a straight line.! This equation is:Y = a + bX whereY = actual pay rate (from survey data)X = evaluated points for orgn jobsa = Y intercept when X is zerob = slope of line of best fit McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 24. 8 - 24Developing a Pay Policy Line7survey6monthly 5salary($000)4PAY 3Line of Best Fit : using market-survey data2(updated and aged to reflect1pay policy) 80120 160 200 240 280320360 Our Job Evaluation Points McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 25. 8 - 25Why Bother with Ranges?!External Pressures:a. Quality variations (KSAs) among individuals in the external marketb. Recognition of differences in the productivity-related value to employers of these quality variations!Internal Pressures:a. The intention to recognize individual performance variations with payb. Employees expectations that their pay will increase over timeMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 26. 8 - 26 Constructing Ranges: Develop Grades (1 of 2)! A grade is a horizontal grouping of differentjobs that are considered substantially equal forpay purposes.! Grades enhance an organizations ability to movepeople among jobs within a grade with no changein pay.McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 27. 8 - 27 Constructing Ranges:Develop Grades (2 of 2)! The objective is for all the jobs that are similarfor pay purposes to be placed within the samegrade.! How many pay grades?a. number of jobsb. organization hierarchyc. reporting relationshipsMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 28. 8 - 28Constructing Ranges: EstablishingMidpoint, Minimum, and Maximum! Pay ranges refer to the vertical dimension of thepay structure.! Each pay grade will have associated with it a payrange consisting of a midpoint and a specifiedminimum and maximum.McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 29. 8 - 29Constructing Ranges: EstablishingMidpoint, Minimum, and Maximum! Midpoints correspond to the competitive paypolicy! The point where the pay policy line crosses eachgrade becomes the midpoint of the pay range forthat grade! Midpoints are the control point of the range! The midpoint represents base pay for a seasonedemployeeMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 30. 8 - 30Constructing Ranges: EstablishingMidpoint, Minimum, and Maximum! The midpoint can be determined as soon as thepay grade limits are set.! Find the job evaluation point value in the centerof the pay grade.! Substitute that point value for X in your equationof the pay line! Solve the equation for Y; this value is themidpoint of the rangeMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 31. 8 - 31Constructing Ranges: EstablishingMidpoint, Minimum, and Maximum! Range spread is based on some judgment abouthow the ranges support career paths, promotions,and other organization systems.! Range spreads vary between 10 to 150 percent.! Desired range spread is what makes good sense tothe employerMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 32. 8 - 32Constructing Ranges: Establishing Midpoint,Minimum, and Maximum! Once the midpoint (based on the pay policy line)and the range spread (based on judgment) arespecified, minimums and maximums are calculated.! Minimum = Midpoint / [1 + (1/2 range spread)]! Maximum = Minimum + (range spread x minimum)McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 33. 8 - 33 Constructing Ranges: Overlapmaximum rate grade A - minimum rate grade Bmaximum rate grade A - minimum rate grade AMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 34. 8 - 34PAY GRADE STRUCTURE876ourmonthly 5Vsalary (000)4IVPAY 3 III2II Pay Policy Line1 I 100 150200 250 300350 Our Job Evaluation Points McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 35. 8 - 35Broadbanding! Use of job clusters or tiers of positions into bands! Purpose is to manage career growth andadminister pay! An alternative to traditional salary gradestructures! Collapses the number of salary ranges within atraditional salary structure into a few broad bandsMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 36. 8 - 36 Contrasts Between Ranges and BandsRanges Support:Bands Support:! Some flexibility within ! Emphasis on flexibilitycontrolswithin guidelines! Relative stable organization! Global organizationsdesign! Cross-functional experience! Recognition via titles or and lateral progressioncareer progression! Reference market rates,! Midpoint controls,shadow rangescomparatives! Controls in budget, few in! Controls designed intosystemsystem! Give managers freedom to! Give managers freedommanage paywith guidelines! 100 400 percent spreads! To 150 percent range-spread McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 37. 8 - 37 Broadbanding: Example (1 of 2)!A large technology company reduced the number of grade levels for their exempt professional employees from 12 to 3!The levels were defined as:! basic, entry-level contributor! seasoned contributor or team leader! business unit / team manager or seniorprofessional contributorsMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 38. 8 - 38Broadbanding: Example (2 of 2)! Within these levels, managers hired and calibratedpay levels based on market information forindividuals with similar backgrounds andresponsibilities! Managers given market and charged with theresponsibility of making salary adjustments asappropriate to attract, retain, and reward their staff McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 39. 8 - 39Broadbanding:How many bands to create? (1 of 2)! Determine the number of distinct levels of employeecontributions within the organization that actuallyadd value! For example: professional positions management positions technical positions clerical positions McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 40. 8 - 40 Broadbanding: How many bands to create (2 of 2)!For example:entry level positionscontributor level positionsleadership level positions McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 41. 8 - 41 Broadbanding: Placing individualjobs or roles in bands!Example:BasicProficientMasteryMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 42. 8 - 42Pay Compression! Results when wages for those jobs filled fromoutside the organization are increasing faster thanthe wages for jobs filled from within theorganization! As pay differentials among jobs become verysmall, the traditional pay structure becomescompressed! Compression is an issue in professional workwhen new graduates command salaries almostequal to those of professionals with 3 - 5 yearsexperienceMcGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 43. 8 - 43 Summary! Most organizations survey other employers paypractices to determine the rates competitors pay.! An employer using the survey results considers how itwishes to position its total compensation in the market: ! To lead ! To match, or ! To follow competition! This policy decision may be different for differentbusiness units and even for different job groups within asingle organization. McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 44. 8 - 44 Summary (continued)! The policy on competitive position is translated intopractice by setting pay policy lines. ! They serve as reference points around which pay grades andranges or bands are designed.! The use of grades and ranges recognizes both externaland internal pressures on pay decisions. ! No single going rate for a job exists in the market; ! Instead, an array of rates exists.! Internally, the use of ranges is consistent with variationsin the discretion present in jobs.! Pay ranges permit employers to value and recognizethese differences with pay. McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 45. 8 - 45 Review Questions1. Which competitive pay policy would you recommend to an employer? Why? Does it depend on circumstances faced by the employer? Which ones?2. How would you design a survey for setting pay for welders? For financial managers? Do the issues differ? Will the techniques used and the data collected differ? Why or why not?3. What factors determine the relevant market for a survey? Why is the definition of the relevant market so important? McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 46. 8 - 46 Review Questions (continued)4. What do surveys have to do with pay discrimination?5. Contrast pay ranges and grades with bands. Why would you use either? Does their use assist or hinder the achievement of internal alignment? External competitiveness? McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All rights reserved.