A7 - Designing Pay Levels, Mix, and Pay Structures

Question 1

systematic process of collecting and making judgments about the compensation paid by other ERs

Answer 1

survey

Question 2

the distribution of rates around a measure of central tendency

Answer 2

variation

Question 3

the major source of pubicly available compensation data in the U.S.

Answer 3

Bureau of Labor Statistics

Question 4

the numerical center of a set of data

Answer 4

median

Question 5

jobs that have stable job content, are common across different ERs, and include sizable #s of EEs

Answer 5

benchmark jobs

Question 6

Major decisions in setting externally competitve pay and designing the corresponding pay struct.

Answer 6

1. specify the ER’s competitive pay policy
2. define the purpose of the survey
3. select relevant mkt competitors
4. design and conduct the survey
5. interpret survey results and construct the mkt line
6. construct a pay policy line that reflects external pay policy
7. balance competitiveness w/ internal alignment through the use of ranges/grades, flat rates, and/or bands.

Question 7

major decisions in pay-level determination

Answer 7

1. specify pay-level policy
2. define purpose of survey
3. specify relevant mkt
4. design and conduct survey
5. interpret and apply results
6. design grades and ranges or bands

Question 8

• the range of pay rates from the min to max set for a pay grade or class
• puts limits on the rates an ER will pay for a particular job

Answer 8

pay ranges

Question 9

the systematic process of collecting and making judgments about the compensation paid by other ERs

Answer 9

survey

Question 10

SPECIFY COMPETITIVE PAY POLICY

Answer 10

• determining the ext. competitive pay policy
• translating any ext. pay policy into practice requires info on the ext. mkt - provided by surveys
  
  • provide data for translating that policy into pay levels, pay mix, and structures

Question 11

DEFINE THE PURPOSE OF THE SURVEY

Answer 11

• ER conducts or participates in a survey for # of reasons:
  
  1. to adjust the pay level in response to changing rates paid by competitors
  2. to set the mix of pay forms relative to that paid by competitors
  3. to estab. or price a pay struct.
  4. to analyze pay-related probs
  5. to estimate the labor costs of product/service mkt competitors

Question 12

The Purpose of a Survey

Adjust pay level

Answer 12

• most orgs make adjmts to EEs’ pay on a reg. basis
  
  • may be based on the normal mkt raises or on perf., ability to pay, or terms of a contract
  • monitoring the chgs in rates paid by competitors is necessary to maintain or adjst how much a firm pays

Question 13

The Purpose of a Survey

Adjust Pay Mix - What Forms?

Answer 13

• adjmnts to overall pay levels occur more frequently than adjmnts to the diff. forms of pay competitors use and the relative importance they have on each form
• mix orgs. use may have been based on ext. pressures such as health-care costs, stk values, gov’t regs, unions, and what others did
• some pay forms may affect EE behavior more than others
• good info on total comp., the mix of pay competitors use, and costs of various pay forms is increasingly important

Question 14

The Purpose of a Survey

Adjust Pay Struct?

Answer 14

• use mkt surveys to validate their own job eval. results
  
  • may not match competitors - reconciling these two pay structs. is a major issue
• informed judgment and accurate info are vital for making these judgments
• some ERs will go straight to mkt surveys to estab. thier internal structs. - “mkt pricing” which mimics competitors’ pay structs.
  
  • data from mkt must be accurate

Question 15

The Purpose of a Survey

Study Special Situations

Answer 15

• shed light on specific pay-related probs.
• special study may focus on targeted group
• unusual incr. in an ER’s turnover in specific jobs may require focused mkt surveys to find out if mkt chgs are occurring

Question 16

The Purpose of a Survey

Estimate Competitors’ Labor Costs

Answer 16

• used as a part of ERs’ broader efforts to gather “competitive intelligence”
  
  • better understand how competitors achieve their mkt share and price their prods/services - seek to examine practices (benchmarks) costs, against competitors including the area of compensation
• Employment Cost Index (ECI) - Dept. of Labor

Question 17

SELECT RELEVANT MKT COMPETITORS

Answer 17

• 3rd major decision
• in order to make pay level, mix, and struct. decisions, relevant labor mkt must be defined that includes ERs who compete in one or more of the following areas:
  
  1. the same occupations or skills
  2. EEs w/in the same geographic area
  3. the same prod./services

Question 18

DESIGN THE SURVEY

Answer 18

Answers these questions:

• Who s/b involved in the survey design?
• How many ERs s/b included?
• Which jobs s/b included?
• What info s/b collected?

Question 19

DESIGN THE SURVEY

Who S/B Involved?

Answer 19

• responsibility is usually w/ the comp. mgr
• should involve mgrs and EEs on task forces too
• some use outside consulting firms
  
  • protect against “price-fixing” lawsuits in violation of Section 1 of Sherman Act (outlaws conspiracies in restraint of trade)
  • may be guilty of price fixing if the overall effect of the info exchg is to interfere w/ competitive prices and artificially hold down wages
  • ID’g participants’ data by company name is considered price fixing

Question 20

DESIGN THE SURVEY

How many ERs?

Answer 20

• no firm rules on how many ERs to include in a survey
• Lg firms w/ lead policy may exchg data w/ only a few top-paying competitors (6-10)
• sm. orgs in an area dominated by 2 or 3 ERs may decide to survey only smaller competitors
• Nat’l surveys conducted by consulting firms often include more than 100 ERs
  
  • public ERs seem to use it more than private ERs
  • clients usually stipulate special analyses that report pay rates by selected industry groups, geog. area, and/or pay levels

Question 21

How Many ERs?

Publicly Available Data

Answer 21

• Bureau of Labor Statistics (BLS) - major source of publicly available comp. data (cash, bonus, and benefits, but not stk ownership)
  
  • publishes extensive info on various occupations in different geog. areas
  • used more by public sector ERs than private sector ERs

Question 22

How Many ERs?

“word of mouse”

Answer 22

• instead of the past “word of mouth”, now info about companies is at the click of a mouse
• wealth of data available to everyone
• ease of access means that mgrs must be able to explain the salaries paid to EEs compared to those a mouse click away.
• alot of sites don’t offer any info on how the data was coll’d, what pay forms are included, and so on
• most based on info volunteered by site users

Question 23

How Many ERs?

Many Surveys (but few that are validated)

Answer 23

• opinions are many, research is few
• many firms use multiple surveys for all job types does suggest that different surveys imply different pay levels
• many will select one to be their main survey, but then use a couple more to validate that survey or cross-check the results
• some will combine the surveys and then weight each survey
• no reliability or validity metrics exist for these surveys

Question 24

DESIGN THE SURVEY

Which Jobs To Include?

Answer 24

• general guideline is to select as few ERs and jobs as necessary to accomplish the purpose
  
  • more complex - the less likely other ERs will participate
• types:
  
  • benchmark-job approach
  • low-high approach
  • benchmark conversion/survey leveling

Question 25

Which Jobs To Include?

Benchmark-Job Approach

Answer 25

• BM jobs have stable job content, are common across different ERs, and include sizable #s of EEs
• if purpose of survey is to price the entire struct., then BM jobs can be selected to include the entire job struct.
  
  • all key functions and all levels, just as in job evals.
• BM jobs are chosen from as many levels in each of these structs. as can be matched w/ the descripts. of the BM jobs that are included in the survey
• The degree of match b/w the survey’s BM jobs and each company’s BM jobs is assessed by various means
• if the firm is using skill-competency-based structs. or generic job descripts, it may not have BM jobs to match w/ jobs at competitors who use a tradit’l job-based approach

Question 26

Which Jobs To Include?

Low-High Approach

Answer 26

• use this if you need to convert the mkt data to fit the skill or competency struct in a tradit’l job-based approach
• ID the lowest- and highest-paid BM jobs for the relevant skills in the relevant mkt and to use the wages for these jobs as anchors for the skill-based structs.
  
  • simplest way
  • work at various levels w/in the struct. can then be slotted b/w the anchors
• usefulness of this approach depends on how well the extreme BM jobs match the org’s work and whether they really do tap the entire range of skills

Question 27

Which Jobs To Include?

BM Conversion/Survey Leveling

Answer 27

• where the content of an org’s jobs doesn’t sufficiently match that of jobs in the salary survey, an effort can be made to quantify the difference with BM conversion
• if org uses job evals, then the job eval system can be applied to the survey jobs
• the magnitude of difference b/w job eval points for internal jobs and survey jobs provides an estimate of their relative value and thus guidance for adjusting the mkt data

Question 28

DESIGN THE SURVEY

What Info to Collect?

Answer 28

• (3) types
  
  • info about the org
  • info about the total comp system
  • specific pay data on each incumbent in the jobs under the study
• Data coll’d depends on the purpose of the survey and the jobs and skills included

Question 29

What Info to Collect?

Org Data

Answer 29

• the nature of the org - size, structure and financial info
• info reflects the similarities and differences b/w the orgs in the survey
• incr’d gathering of “competitive intelligence” is changing the type of org. data coll’d and the way it is used
  
  • metris of org. perf. such as turnover and revs. are being coll’d
  • others may include - earnings per share, mkt share, cust. staisfaction, EE pay satisfaction, and recurtiing yield ratios

Question 30

What Info to Collect?

Total Comp. Data

Answer 30

• info on all types of pay forms is requ’d to assess the total pay pkg and competitors’ practices
• hard to include all forms of pay
• too much detail on benefits can make a survey too cumbersome (like including deductibles and flexible work scheds.)
  
  • could do brief descript of BM benefit expenses as a %age of total albor costs
• (3) most common forms to measure comp:
  
  • base pay
  • total cash (base, profit sharing, bonuses)
  • total comp. (total cash + benefs. and perqs.)
• if total comp is used, it is usually higher than base pay and total cash combined
  
  • the difference can be very significant especially in higher up jobs.
• measure of comp. is an important decision
  
  • misinterpreting competitors’ pay practices can lead to costly mispricing of pay levels and structs.

Question 31

• inducements offered in advance to influence longer-rate (multiyear) results
• usually offered to top mgrs and profs. to get them to focus on L/T org. objs.

Answer 31

long-term incentives

Question 32

• inducements offered in advance to influence shorter-rate (annual) results
• usually very specific perf. standards are estab’d.

Answer 32

short-term incentives

Question 33

Base Pay

Answer 33

• amt of cash the competitors decided each job and incumbent is worth
• a company may use this info for its initial obs. of how “good” the data appear to fit a range of jobs
• Tells how competitors are valuing the work in similar jobs
• LIMITATIONS:
  
  • fails to include perf. incentitives and other forms
  • will not give true pic if competitors offer low base but high incentives

Question 34

Total Cash (base+bonus)

Answer 34

• measures reveal competitors’ use of perf.-based cash pmts
• = base + bonus
• tells how competitors are valuing work
• also tells the cash pay for perf. opp. in the job
• LIMITATIONS:
  
  • all EEs may not receive incentives
  • may overstate the competitors’ pay
  • it doesn’t include L/T incentives

Question 35

Total Comp

(base+bonus+stk options+benefits)

Answer 35

• reflects the total overall value of the EE (perf., experience, skills, etc) plus the value of the work itself
• tells the total value competitors place on this work
• LIMITATIONS:
  
  • all EEs may not receive all the forms
  • don’t set base = to competitors’ total comp.
  • risks high fixed costs

Question 36

INTERPRET SURVEY RESULTS

AND

CONSTRUCT A MKT LINE

Answer 36

• greatest challenge of total comp. surveys - understanding how to eval. the info.
• see survey as customizable database where they can specify the characteristics of the ERs and jobs to analyze
• after data is all coll’d, next step is to analyze the results and use stats. to construct a mkt pay line
• common first step - Verifying data for accuracy of job matches
  
  • then check for any anomalies, age of data, and the nature of the orgs.
  • may be best to examine them alone to answer the questions on these anomalies
• learning more about competitors that differentiate can offer valuable insights in why they do that

Question 37

market pay (policy) line

Answer 37

• using key/BM jobs, a mkt pay policy line can be constructed that shows ext. mkt pay survey data as a function of internal job eval. points
• many times, this is obtained by using regression analysis, which yields an equation of the form “mkt pay = intercept + slope X job eval. points”
• by plugging the job eval. points for any job (both BM and non-BM jobs) into the equation, the predicted pay for each job can be obtained

Question 38

an extreme value that may distort some measures of central tendancy

Answer 38

outlier

Question 39

Statistical Analysis

Answer 39

• regression analysis
• freq. distrib.
• central tendency
• variation

Question 40

Statistical Analysis

regression analysis

Answer 40

• used for relating present-pay differentials to some criterion
  
  • pay rates in the ext. mkt, rates for jobs held predominantly by men, or factor weights that duplicate present rates for all jobs in the org.

Question 41

Statistical Analysis

_Frequency Distrib. _

Answer 41

• help visualize info and may highlight anomalies
• shapes of the graph can vary
  
  • unusual shapes may reflect probs. w/ job matches, widely dispersed pay rates, or ERs w/ widely divergent pay policies
  • this is always a possibility that 2 lg errors can offset each other

Question 42

Statistical Analysis

Central Tendency

Answer 42

• a midpoint in a group of measures
• reduces a lg amt of data into a single #
• Common Terms
  
  • mode
  • mean
  • median
  • weighted mean
• distinction b/w “mean” and “weighted mean” is important
  
  • if only comp. avg’s are reported in the survey, a mean may be calc’d by adding each comp’s base wage and dividing by the # of companies (common, but may not reflect actual labor mkt conditions since base wage of a lg ER is given same weight as a sm ER)

Question 43

type of Central Tendency

Mode

Answer 43

• most commonly occuring rate
• adv/disadv:
  
  • must draw frequency distrib. to calc. it

Question 44

type of Central Tendency

mean

Answer 44

• sum all rates and divide by # of rates
• if have only company (rather than indiv. ) data, wage of largest ER given same weight as smallest ER
• adv/disadv
  
  • commonly understood (also called average)
  • if have only company data, will not accurately reflect actual labor mkt conditions

Question 45

type of Central Tendency

Median

Answer 45

• order all data points from highest to lowest
  
  • one in the middle is the median
• adv/disadv:
  
  • minimizes distortion caused by outliers

Question 46

type of Central Tendency

Weighted Mean

Answer 46

• if have only companywide measures (rather than indiv. measures), the rate for each company is mulitplied by the # of EEs in that company
• total of all rates is divided by # of EEs
• adv/disadv:
  
  • give equal weight to each indiv’s wage
  • captures size of supply and demand in mkt

Question 47

type of Central Tendency

Variation

Answer 47

• a distrib. of rates around a measure of central tendency
• variation tells us how the rates are spread out in the mkt
• standard deviation is the most common statistical measure of variation
  
  • use of the concept standard deviation is very rare in slry surveys
  • refers to how far from the weighted mean each of the items in a frequency distrib. is located
• _quartiles and percentiles_ are the most common measures in salary survey analysis
  
  • to calc - the measures are ordered from lowest to highest, then converted to %ages
  • “to be in the 75th percentile” = 75% of all pay rates are at or below that point and 25% are above
  • Quartiles (25th and 75th percentiles) are often used to set pay ranges

Question 48

Update the Survey Data

Answer 48

• wages paid by competitors are constantly chg’g
• competitors also adjust wages are different times
• easy for data to get outdated before it is even done getting coll’d
  
  • since ERs chg at different times in the year or anniversary year
• pay data is usually updated to forecast the competitive rates for the future date when the pay decisions will be implemented (aging or trending)
  
  • based on several factors - historical trends in labor mkt, prospects for the econ. in which the ER operates, the mgr’s judgment
  • some recommend using CPI (writers don’t)

Question 49

Construct a Mkt Pay Line

Answer 49

• mkt line links a company’s BM jobs on the horizontal axis (internal struct.) w/ mkt rates paid by competitors (mkt survey) on the vertical axis
• summarizes the distrib. of going rates paid by competitors in the mkt

Question 50

Setting Pay for Non-BM Jobs

Answer 50

• mkt pay lines are also useful for helping set pay for non-BM jobs
  
  • for jobs that there is no good match among jobs included in teh pay survey
• mkt line is very valuable
  
  • allows us to estimate the mkt pay for non-BM jobs

Question 51

Computing a Mkt Line Using Regression Analysis

Answer 51

y = a + bx

y = $$s

x = job eval. points

a = the y value (in $) at which x = 0 (i.e., the straight line acrosses the y axis)

b = slope of the regression line

Question 52

FROM POLICY TO PRACTICE:

THE PAY-POLICY LINE

Answer 52

• translating ext. competitive policy into practice
• rep. of org’s pay-level policy relative to what competitors pay for similar jobs
• aging the mkt data to a point halfway through the plan year = lead/lag
• specifying a percent above or below the regression line (mkt line) that an ER intends to match and then draw a new line at this higher (or lower) level.

Question 53

FROM POLICY TO PRACTICE: GRADES AND RANGES

Answer 53

• next step is to design pay grades and pay ranges
• usually done w/ base pay data, since it reflects the basic value of the work rather than perf. levels of EEs

Question 54

• one of the classes, levels, or groups into which jobs of the same or similar values are grouped for compensation purpose
• all jobs in this level have the same pay range - max, min, and midpoint

Answer 54

pay grades

Question 55

• the range of pay rates from min. to max. set for a pay grade or class
• it puts limits on the rates an ER will pay for particular job

Answer 55

pay ranges

Question 56

Why bother w/ Grades and Ranges?

Answer 56

• flexibility allows for:
  
  • differences in quality (skills, abilities, experience) among indivs. applying for work
  • differences in the productivity or value of these quality variations
  • differences in the mix of pay forms competitors use
• ranges allow mgrs to:
  
  • recognize indiv. perf. differences w/ pay
  • meet EEs’ expectations that their pay will incr. over time, even in the same job
  • encourage EEs to remain w/ the org

Question 57

• the slry midway b/w the min and max rates of a slry range
• usually set to correspond to the pay-policy line and reps the rate paid for satisfactory perf. on the job
  
  • EE w/ continued avg perf. s/b be rated near this
  • EE w/ high perf. ratings should move above this

Answer 57

range midpoint

Question 58

Developing Grades

Answer 58

• building flexiblity into the pay struct. is to group differ. jobs that are considered substantially equal for pay purposes into a grade
  
  • enhances org’s ability to move ppl among jobs w/ no chg in pay
  • requires org’s to reconsider the original job eval. results
• each grade will have its own pay range
• all the jobs w/in a single grade will have the same pay range.

Question 59

Establish Range Midpoints, Mins, and Maxs

Answer 59

• grades group job eval. data on the horizontal axis ranges group salary data on the vertical axis
• ranges set upper and lower pay limits for all jobs in each grade
  
  • based on some judgment about how the ranges support career paths, promos, and other org. systems
  • top-level mgmt - ranges are usually bigger
  • larger ranges in managerial jobs reflect the greater opp. for indiv. discretion and perf. variations in the work
  • some mgrs use actual survey rates to set maxs and mins
• what size?

Question 60

Overlap in grades

Answer 60

• high degree of overlap and low midpoint differentials indicate small differences in the value of jobs in the adjoining grades
  
  • being promoted from one grade to the next may include a title chg but not much chg in pay
• smaller ranges create less overlap, which permits the mgr to reinforce a promo into a new grade w/ a larger incr.
  
  • may be fewer opps. for promos

Question 61

Promotions Matter

Answer 61

• size of differentials b/w grades should support career movement through the struct.
  
  • managerial job would typically be at least one grade higher than the jobs its supers
• what is the optimal overlap??
  
  • lg enough to induce EEs to seek promo into ahigher grade
  • virtually no reserach to indicate how much of a differential is necessary to influence EEs to do so

Question 62

supporters of Ranges

Answer 62

• some flexibility w/in controls
• relatively stable org. design
• recogn. via title or career progression
• midpoint controls, comparatives
• controls designed into system
• give mgrs “freedom w/ guidelines”
• to 150% range-spread

Question 63

FROM POLICY TO PRACTICE:

BROAD BRANDING

Answer 63

• collapsing a # of slry grades into a smaller # of broad grades w/ wide ranges
• consolidates as many as 4 to 5 traditional grades into a single band w/ 1 min and 1 max
• midpoint is generally not used - due to the band encompassing so many jobs of differing values
• often combined w/ more tradit’l slry admin. practices by using midpoints, “zones”, or other control points w/in bands
• only limited by a total slry budget

Question 64

supporters of bands

Answer 64

• emphasis on flexibility w/in guidelines
• global orgs
• cross-functional experience and lateral progression
• reference mkt rates, shadow ranges
• controls in budget, few in system
• give mgrs “freedom to manage” pay
• 100-400% spread

Question 65

(2) steps of broad banding

Answer 65

1. set the # of bands:

• 3-8 bands usually
• estab’d at major breaks, or differences in work or skill/competency requirements
• titles used to name each band reflect these major breaks (associate, prof., leader, director, coach…)
• challenge is how to pay ppl who are in the same band but in diff. functions perf’g diff. work

1. price the bands: reference mkt rates

• includes multiple job families w/in each band
• diff. functions or groups w/in bands are priced differently due to ext. mkt differences

Question 66

• relationship among jobs inside an org., based on work content and each job’s relative contrib. to achieving the org’s objectives
• orders jobs on the basis of internal factors
  
  • reflected in job evals. or skill certifs.

Answer 66

job structure

Question 67

• the array of pay rates for different jobs w/in a single org.
• focuses attention on differential comp. paid for work of unequal worth
• anchored by the org’s external competitive position and reflected in its pay-policy line

Answer 67

pay structures

Question 68

BALANCING INTERNAL AND EXTERNAL PRESSURES:

ADJUSTING THE PAY STRUCTURE

Answer 68

• problems w/ using 2 standards (int. and ext.) likely to result in 2 different structures
  
  • order in which jobs are ranked may not agree
  • diff. b/w mkt structs and rates/job eval. rankings warrant a review of basic decisions in evaluting and pricing a particular job
• mgrs may weigh ext. mkt data more heavily than int. job eval. data
  
  • mkt data is considered to be more obj. which still may not be true
• differences may arise b/c a shortage of a particular skill has driven up the mkt rate
  
  • but making adjmnts to a higher slry grade still can create additional probs.

Question 69

Market Pricing

Answer 69

• adopting pay strats. that emphasize external competitiveness and deemphasize internal alighnment
• this approach sets pay structs. almost exclusively on ext. mkt rates
  
  • match a lg %age of jobs w/ mkt data and collect as much mkt data as possible
  • competitive rates for the jobs for which ext. mkt data is available are calc’d
  • then remaining (non-BM) jobs are blended into the pay hierarchy created by the ext. rates (“rank to mkt”)
• can go beyond using BM jobs and slotting nonBMs
  
  • primary purpose - base most, if not all, of the int. pay struct. on ext. rates, breaking down the boundaries b/w the int. org and the ext. mkt forces
  • some orgs. match all forms of pay for each job to its competitors in the mkt

Question 70

Market Pricing as a form of Business Strat.

Answer 70

• pure mkt pricing carried to this extreme ignores int. alignment completely
  
  • ignores any attempt to align pay policy w/ bus. strat
  • bases all pay struct. on competitors’ decisions