Chapter 8 Flashcards
The major decisions involved in setting externally competitive pay policy and designing the corresponding pay structures are:
(1) specify the employer’s competitive pay policy,
(2) define the purpose of the compensation survey,
(3) select relevant market competitors,
(4) design the survey,
(5) interpret survey results and construct the market pay line,
(6) construct a pay policy line that reflects external pay policy, and
(7) balance competitiveness with internal alignment through the use of ranges and/or bands.
SOME MAJOR DECISIONS IN PAY LEVEL DETERMINATION:
> Specify pay level policy
Define relevant marketcompetitors
Design and conduct survey
Determinepaypolicyline
Design grades, ranges, or bands
When specifying the external competitive pay policy, employers make that decision based off of:
> make that decision on the basis of whether they want to
(1) be a market leader (lead),
(2) adopt the average pay of competitors (match), or
(3) pay below the average market rates (lag).
In order to translate any external pay policy into practice what is required and how is this done?
> translate any external pay policy into practice requires information on pay rates on the external market.
> Compensation surveys provide the data for translating that policy into pay levels, pay mix, and pay structures.
An employer conducts or participates in a compensation survey for a number of reasons: name 5:
(1) to adjust internal pay level in response to changing competitor pay rates,
(2) to set the internal mix of pay forms relative to those provided by competitors,
(3) to establish or “price” the internal pay structure,
(4) to analyze pay-related problems, or
(5) to estimate the labour costs of product market competitors.
Most organizations make adjustments to employees’ pay on what kind of basis?
> Most organizations make adjustments to employees’ pay on a regular basis.
> Such adjustments may be based on the overall upward movement of pay rates caused by the competition for people in the market.
> Adjustments may also be based on performance, ability to pay, or terms specified in a contract.
The mix of forms and their relative importance make up what?
> the pay package
what components are adjusted less frequently?
> Adjustments to the different forms of pay competitors use (base, bonus, incentives, benefits)
> and the relative importance they give to each form occur less frequently than adjustments to overall pay level.
Many employers use market surveys to validate what?
> their own job evaluation results
Do the job structure results match the pay structures of the external environment?
> Thus, the job structure that results from internal job evaluation may not match the pay structures found in the external market.
> Reconciling these two pay structures is a major issue.
Rather than integrating an internal with an external structure, some employers do what?
> go straight to market surveys to establish their internal structures.
> Such market pricing mimics competitors’ pay structures
As organizations move to more generic work descriptions (associate, leader) that focus on the person more than the job, the need for what?
> accurate market data increases
Information from specialized surveys may shed light on what kind of problems?
> may shed light on specific pay-related problems.
Increasingly, survey data are used as part of employers’ broader efforts to gather what?
> “competitive intelligence.”
> aka: To better understand how competitors achieve their market share and price their products/services, companies are also examining practices, costs, and so forth against their competitors, including in the area of compensation.
The source of publicly available labour cost data includes what?
> statistics canada
> In Canada, Statistics Canada is the major source of publicly available compensation data. It publishes extensive information on pay for various occupations and industries.
In order to make decisions about pay levels, pay mix, and pay structures, what must be defined?
> a relevant labour market must be defined.
A relevant labour market includes employers who compete in one or more of the following areas:
1) The same occupation or skills required;
2) Employees within the same geographic area; and
3) The same products and services
How do qualifications interact with geography to define the scope of relevant labour markets?
> As the importance and complexity of qualifications increase, the geographic limits also increase.
> Competition tends to be national for managerial and professional skills, but local or regional for clerical and production skills.
Some would argue that if skills are tied to a particular industry—as underwriters, actuaries, and claims representatives are to insurance, for example—it makes sense to define the market on what kind of basis? When is this basis not important?
> an industry basis
> However, if accounting, sales, or clerical skills are not limited to one particular industry, then industry considerations are less important
From the perspective of cost control and ability to pay, what must be included in the market?
> including competitors in the product/service market is crucial.
> The pay rates of competitors will affect both costs of operations and financial condition
Even within traditional companies, unique talent is required for:
> unique jobs.
These new organizations and jobs fuse diverse knowledge and experience, so “relevant” markets look more like what?
> fuzzy markets
Organizations with unique jobs and structures face the double bind of
> of finding it hard to get comparable market data while putting more emphasis on external market data.
Few organizations conduct their own what? As a result, who do they turn to in these situations?
> Few organizations conduct their own full-scale surveys.
> Consulting firms offer a wide choice of ongoing compensation surveys covering almost every job family and industry group imaginable.
> Increasingly, consultants offer clients the option of electronically accessing the consultants’ survey database.
Designing a compensation survey requires answering the following questions:
(1) Who should be involved in the survey design?
(2) How many employers should be included?
(3) Which jobs should be included?
(4) What information should be collected?
In most organizations, the responsibility for managing the survey lies with who, but what groups are also involved?
> compensation manager
> But because compensation expenses have a powerful effect on profitability, including employees and managers on the task forces makes sense.
How many employees should be included in a compensation survey?
> There are no firm rules about how many employers to include in a survey.
What is a downside of the compensation data provided by statistics Canada?
> these data are often not particularly useful as tailoring analyses to specific industry segments, select companies, and specific job content is not feasible.
Individual employees used to have a hard time accessing what kind of data?
> Individual employees used to have a hard time accessing salary data.
Although compensation data is readily available, what should be noted about it?
> Unfortunately, the quality of some salary data on the Web is highly suspect. Few of the sites offer any information about how the data were collected, what pay forms were included, and so on.
> Most are based on information volunteered by site users.
> In addition, the data are often not specific enough for pay decisions, and tailoring the analyses to specific industry segments, select companies, and specific job content is not feasible.
What online compensation data comes from consultants?
Whereas most survey data provided by consultants came from employers (the demand side), PayScale and Glassdoor are examples of sources of online compensation data provided by employees working in various organizations (the supply side).
How many compensation surveys do employees use?
> The fact that companies typically use three or more consultant surveys (for all job types) suggests that different surveys do, in fact, imply different pay levels.
> Many firms select one survey as their primary source and use the others to cross-check or “validate” the results.
What is a general guideline of compensation surveys?
> A general guideline is to keep things as simple as possible.
> Select as few employers and jobs as necessary to accomplish the purpose.
> The more complex the survey, the less likely it is that other employers will be inclined to participate.
When is the bench-mark approach used?
> If the company’s purpose in conducting the survey is to price the entire structure, then benchmark jobs can be selected to include the entire job structure, that is, all key functions and all levels.
> To ensure the right information is obtained, the degree of match between the survey’s benchmark jobs and each company’s benchmark jobs needs to be accessed.
What is the simplest low-high approach?
> The simplest approach is to identify the lowest- and highest-paid benchmark jobs for the relevant skills in the relevant market and to use the wages for these jobs as anchors for the skill-based structures.
What organizations cannot use the job based approach?
> If an organization is using skill-based or competency-based structures, or generic job descriptions, it may not be able to match jobs with competitors who use a traditional, job-based approach.
What is the usefulness of the low-high approach?
> The usefulness of this approach depends on how well the extreme benchmark jobs match the organization’s work and whether they really do tap the entire range of skills
Hanging a pay system on two pieces of market data raises the stakes on what?
> Hanging a pay system on two pieces of market data raises the stakes on the accuracy of those data.
When is the BENCHMARK CONVERSION/SURVEY LEVELLING APPROACH used?
In cases where the content (e.g., job description) of an organization’s jobs does not sufficiently match that of jobs in the salary survey, an effort can be made to quantify the difference through benchmark conversion by applying the job evaluation plan to the survey jobs using the description provided
What is used as guidance for adjusting market data in the benchmark conversion/survey levelling approach?
> The magnitude of difference between job evaluation points for internal jobs and survey jobs provides guidance for adjusting the market data.
The three basic types of data typically collected in a survey are what? Is it all included in a survey?
(1) information about the nature of the organization,
(2) information about the total compensation system, and
(3) specific pay data on each incumbent in the jobs under study.
> No survey includes all the data
What does organization data assess?
> This information assesses the similarities and differences among organizations included in the survey.
Surveys of executive and upper-level positions include what kind of organization data?
> Surveys of executive and upper-level positions include more detailed financial and reporting relationships data, because compensation for these jobs is more directly related to the organization’s financial performance.
All the basic forms of pay need to be covered in a survey in order to assess what?
> In order to assess the similarities and differences in the total pay packages and to accurately assess competitors’ practices.
What three alternatives are used most often as measures of compensation? What one is most common and how do these affect the going market rate?
Three alternatives—
(1) base pay,
(2) total cash (base and bonus), and
(3) total compensation (total cash plus stock and benefits)—are the most commonly used measures of compensation
> The “going market rate” varies, depending on what forms are included.
What are advantages and disadvantages to base pay?
A: Tells how competitors are valuing the work in similar jobs.
D: Fails to include performance incentives and other forms, so will not give true picture if competitors offer low base but high incentives.
What are advantages and disadvantages to total cash (base + bonus) pay?
A: Tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job.
D: Not all employees may receive incentives, so it may overstate the competitors’ pay; plus, it does not include long-term incentives.
What are advantages and disadvantages to Total compensation (base + bonus + stock options + benefits)?
A: Tells the total value competitors place on this work.
D: All employees may not receive all the forms. Be careful; don’t set base equal to competitors’ total compensation. Risks high fixed costs.
Misinterpreting competitors’ pay practices can lead to:
> costly mispricing of pay levels and structures.
How is survey data exchanged?
> survey data today are typically exchanged online.
The greatest challenge of total compensation surveys is:
> to understand how to evaluate the information. Ideally, each firm will see the survey as a customizable database where they can specify the characteristics of the employers and the jobs they want to analyze.
After the survey data have been collected, the next step is to:
> analyze the results and use statistics to construct a market pay line.
David Belcher interviewed compensation professionals to discover how survey data are actually being analyzed. He reported:
> Every organization uses its own methods of distilling information from the survey;
> uses different surveys for different purposes;
> and uses different methods for company surveys.
> could not find commonality in these methods of analysis by industry, by firm size, or by union presence
A common first step is to:
> A common first step is to check the accuracy of the job matches, and then check for anomalies (i.e., an employer whose data are substantially out of line with those of others),
age of data, and the nature of the organizations (e.g., industry, size—State Farm Insurance versus Google)
What happens when jobs don’t match?
> In this case, if the company job is sufficiently close to the survey job, especially on the most fundamental aspects, the benchmark conversion/survey levelling approach (discussed earlier) can be used; that is, multiply the survey data by some numerical factor that corresponds to the analyst’s judgment of the differences between the company job and survey job.
What is levelling an example of? How can it be mitigated?
> Levelling is another example of the use of judgment in the survey analysis process.
> One way to mitigate this is to conduct a job evaluation of the organization’s benchmark job and the corresponding survey job and then determine their relative values.
What should organizations review about anomalies?
> Understanding minimums, maximums, and the proportion of the group that actually receive bonuses and/or options is essential. Unfortunately, many surveys provide only summary information, such as company averages.
> One way to answer questions or anomalies is to analyze them alone.
Understanding regression analysis is necessary to make what kind of judgements?
> necessary to make sound compensation judgments.
Frequency distributions help visualize what information?
> Frequency distributions help visualize the information in the survey and may highlight anomalies.
What is an outlier?
> an extreme value that falls outside the majority of the data points.
What can shapes of frequency tell us?
> Unusual shapes may reflect problems with job matches, widely dispersed pay rates, or employers with widely divergent pay policies.
A measure of central tendency does what? What is the mean? What is a weighted mean?
> A measure of central tendency reduces a large amount of data to a single number.
> An overall average (or mean) can be calculated by adding each participating company’s average base wage and dividing by the number of companies - However, this measure may not accurately reflect actual labour market conditions, since the base wage of the largest employer is given the same weight as that of the smallest employer.
> The weighted mean is calculated by adding the base wages for all 585 engineers in the survey and then dividing it by the number of engineers (585) - A weighted mean gives equal weight to each individual employee’s wage.
What does the mode tell us and what’s an advantage/disadvantage?
What it is: Most commonly occurring rate.
D: Must draw frequency distribution to calculate it.
What does the mean tell us and what’s an advantage/disadvantage?
What it is: Sum all rates and divide by number of rates. If only company data (rather than individual data) are available, wage of largest employer is given same weight as that of smallest employer.
D: Commonly understood (also called the “average”). However, if only company data are available, it will not accurately reflect actual labour market conditions.
What does the median tell us and what’s an advantage/disadvantage?
What it is: Order all data points from highest to lowest; the one in the middle is the median.
A: Minimizes distortion caused by outliers.
What does the median tell us and what’s an advantage/disadvantage?
What it is: If only company-wide measures (rather than individual measures) are available, the rate for each company is multiplied by the number of employees in that company. Total of all rates is divided by total number of employees.
A: Gives equal weight to each individual’s wage. Captures size of supply and demand in market.
What does the standard deviation tell us and what’s an advantage/disadvantage?
What it is: How tightly all the rates are clustered around the mean.
A: Tells how similar or dissimilar the market rates are to each other. A small standard deviation means they are tightly bunched at centre; a large standard deviation means rates are more spread out.
What does the quartiles and percentiles tell us and what’s an advantage/disadvantage?
What it is: Order all data points from lowest to highest; then convert to percentages.
A: Common in salary surveys; frequently used to set pay ranges or zones.
The distribution of rates around a measure of central tendency is called:
> variation.
What does variation tell us?
> Variation tells how the rates are spread out. Standard deviation is probably the most common statistical measure of variation, although its use in salary surveys is rare.
Quartiles and percentiles are more common measures of variance in what compensation aspects?
> are more common measures of variance in salary survey analysis.
Because pay reflects decisions of employers, employees, unions, and government agencies, what happens to the pay rates?
> pay rates are constantly changing.
> Additionally, companies adjust their wages at different times of the year
Even though these changes do not occur smoothly and uniformly throughout the year, as a practical matter it is common practice to assume that they do. Therefore what can be said about surveys? What happens to them as a result?
> a survey that requires three months to collect and analyze is probably outdated before it becomes available
> Consequently, the pay data need to be updated in a process often called aging/trending survey data to adjust the data to represent pay levels at current or future dates when the pay decisions will be implemented.
The amount to adjust is based on several factors, including:
> historical trends in market economic forecasts, prospects for the economy in which the employer operates, and the manager’s judgment, among others.
What is a market pay line? How do we show this?
> Consequently, a market pay lineis an upward trending line that links a company’s benchmark jobs on the horizontal axis (how many job evaluation points each job is worth) with the market pay rates paid by competitors on the vertical axis.
> Regression generates a straight line that best fits the data by minimizing the variance around the line.
Why use the regression results rather than the actual survey data?
> Regression “smooths” large amounts of data while minimizing variations in it.
At this point, two parts of the total pay model have merged. How does the internal and external structure display on our chart for regression analysis?
> The internally aligned structure developed in Part I of this book is shown on the horizontal axis. For this illustration, the structure consists of the seven benchmark jobs that have been matched in the compensation survey.
> The salaries paid by relevant competitors for those benchmark jobs, as measured by the survey—the external competitive data—are shown on the vertical axis.
These two components—internal alignment and external competitiveness—come together in the pay structure, which has two aspects:
> the pay policy line and pay ranges.
What does a pay policy line relfect?
> This line reflects the firm’s competitive position in the market.
An approach to translate pay level policy into practice is simply to:
> is simply to specify a percentage above or below the regression line (market line) that an employer intends to match and then draw a new line at this higher (or lower) level.
The first step in building flexibility into the pay structure is to:
> is to group different jobs that are considered substantially equal for pay purposes into a pay grade.
> Base pay data are used here, because base pay reflects the basic value of the work (or relevant skill sets).
> Grades enhance an organization’s ability to move people between jobs within a grade with no change in pay.
The question of which jobs are substantially equal and therefore slotted into one grade requires the analyst to reconsider what?
> requires the analyst to reconsider the original job evaluation results
Jobs that are worth similar number of job evaluation points are grouped into what and what occurs within it?
> are grouped into a grade.
> Each grade will have its own pay range, and all the jobs within a single grade will have the same pay range.
Jobs in different grades (e.g., jobs C, D, E, and F in grade 2) should be what when compared to other grades?
> should be dissimilar to those in other grades (grade 1 jobs A and B) and will have a different pay range.
Although grades permit flexibility, they are what and what is their objective?
> challenging to design.
> The objective is that all jobs that are similar for pay purposes be placed within the same grade.
> If jobs with relatively close job evaluation point totals fall on either side of grade boundaries, the magnitude of difference in salary treatment may be out of proportion to the magnitude of difference in the value of the job content.
Whereas grades group job evaluation data on the horizontal axis, ranges group salary data on:
> the vertical axis
What do pay ranges do?
> Pay ranges set an upper and lower limit between which all wages for all jobs in a particular grade are expected to fall.
A range has three salient features:
> a midpoint, a minimum, and a maximum.
The size of the range, or range spread, is based on:
> is based on some judgment about how the ranges support career paths, promotions, and other organization systems.
The underlying logic is that the larger ranges in the managerial jobs reflect what?
> the greater opportunity for individual discretion and performance variations in the work.
The sizes of the pay ranges will have implications for:
> The sizes of the pay ranges will have implications for the degree of overlap between adjacent pay grades
The size of pay differentials between grades should support
> The size of pay differentials between grades should support career movement though the structure.
Not all employers use grades and ranges. What plans don’t use this and what do they use a result?
> Not all employers use grades and ranges. Skill-based plans establish single flat rates for each skill level regardless of performance or seniority.
> And many collective bargaining contracts establish single flat rates for each job
Pay grades and pay ranges offer managers the flexibility to:
> Pay grades and pay ranges offer managers the flexibility to deal with pressures from external markets and within the organization.
Ranges permit managers to recognize other differences. These include the following:
1) Differences in quality (skills, abilities, experience) between individuals applying for work (e.g., hiring a top-tier new graduate from engineering school versus hiring an engineer with 15 years of experience).
2) Differences in the productivity or value of these quality variations (e.g., software engineers will likely offer different levels of performance/results).
3) Differences in the mix of pay forms (e.g., Oracle uses more stock options than IBM, so IBM managers may need to offer more base pay when competing with Oracle)
A pay range exists whenever :
> A pay range exists whenever two or more rates are paid to employees performing the same job.
Pay ranges provide managers the opportunity to:
1) Recognize individual performance differences with pay;
2) Meet employees’ expectations that their pay will increase over time, even while holding the same job; and
3) Encourage employee commitment to remain with the organization.
From an internal alignment perspective, the range reflects what and what about the external perspective?
> Reflects the differences in performance or experience the employer wishes to recognize with pay.
> . From an external competitiveness perspective, the range acts as a control device
What does a range max do?
> A range maximum sets the ceiling on what the employer is willing to pay for that work; the range minimum sets the floor.
What is broad banding?
> collapses salary grades into only a few broad bands, each with a sizable range.
> This technique, known as broadbanding, consolidates as many as four or five traditional grades into a single band with one minimum and one maximum.
Supporters of broadbands list several advantages over traditional approaches:
> First, they provide flexibility to define job responsibilities more broadly.
> They support redesigned, downsized, or boundary-less organizations that have eliminated layers of managerial jobs.
> They foster cross-functional growth and development in these new organizations. Employees can move laterally across functions within a band to gain depth of experience.
> Companies with global operations use bands to aid in moving managers among worldwide assignments.
> The emphasis on lateral movement with no pay adjustments helps manage the reality of fewer promotion opportunities in flattened organization structures.
> The flexibility of banding eases mergers and acquisitions, because there are not many levels to argue over.
Grades support vs bands support - flexibility:
G: Some flexibility within controls
B: Emphasis on flexibility within guidelines
Grades support vs bands support - stable or global:
G: Relatively stable organization design
B: Global organization
Grades support vs bands support - recognition and progression:
G: Recognition via titles or career progression
B: Cross-functional experience and lateral progression
Grades support vs bands support - logistics of the data:
G: Midpoint controls, comparatives
B: Reference market rates, shadow range
Grades support vs bands support - controls:
G: Controls designed into system
B: Controls in budget, few in system
Grades support vs bands support - managers:
G: Managers’ “freedom with guidelines”
B: Managers’ “freedom to manage” pay
Grades support vs bands support - spread %:
G: Up to 150% range spread
B: 100%–400% range spread
Broadbands are often combined with?
> Broadbands are often combined with more traditional salary administration practices by using midpoints, zones, or other control points within bands
What is the most important difference between grades and broadbanding?
> Perhaps the most important difference between the grades and broadbanding approaches is the location of the controls.
> The grade approach has guidelines and controls designed right into the pay system. Range minimums, maximums, and midpoints ensure consistency across managers.
> Managers using bands have only a total salary budget limiting them.
> But as experience with bands has advanced, guidelines and structure are increasingly designed into them (e.g., reference market rates or shadow ranges).
Bands offer flexibility and may result in less time spent on what? Does that affect anything?
> Bands offer flexibility and may result in less time being spent judging fine distinctions between jobs.
> The time saved by not judging jobs may instead be spent judging individuals, a prospect managers already try to avoid.
Broadbanding takes two steps:
1) Set the number of bands - Surveys report companies are using three to eight bands for pay purposes.
2) Price the bands: reference market rates.
What is the difference between ranges and reference rates?
> The difference is that ranges traditionally serve as controls, whereas reference rates act as guides
According to supporters, the principal payoff of broadbanding is :
> According to supporters, the principal payoff of broadbanding is flexibility. Flexibility is one side of the coin, chaos and favouritism the other.
Broadbanding encourages employees to:
> Broadbanding encourages employees to move cross-functionally (e.g., purchasing to finance) to increase the cross-fertilization of ideas—which will ultimately benefit the organization.
What is the difference between a job structure and a pay structure?
> A job structure orders jobs on the basis of internal organizational factors (reflected in job evaluation or skill/competency certification).
> The pay structure, on the other hand, is anchored by the organization’s external competitive position, reflected in its pay policy lines.
The problem with using both the internal and the external factors to create a structure is that they are:
> they are likely to result in two different structures.
What is market pricing?
> sets pay structures by relying almost exclusively on rates paid by competitors in the external market.
The objective of market pricing is to:
> The objective of market pricing is to base most, if not all, of the internal pay structure on external rates, breaking down the boundaries between the internal organization and external market forces.
Pure market pricing carried to this extreme omits what?
> Pure market pricing carried to this extreme omits internal alignment completely.
> Gone is any attempt to align internal pay structures with the business strategy and the work performed.
> Rather, the internal pay structure is aligned with competitors’ decisions that are reflected in the market
What is deemphasized as a result of market pricing?
> Any unique or difficult-to-imitate aspects of the organization’s pay structure, which may have been based on its unique technology or its unique flow of work, are de-emphasized by market pricers.
