chapter 8 part 2 Flashcards
how to develop salary structures
job analysis/documentation -> job evaluation/worth hierarcy -> gather survey data -> develop pay structures
internal alignment + external competitveness (survey data) = pay structures.
pay structures
a set of pay ranges and associated with a set of specific jobs
some critical aspect to remember about pay grades
The first step is to group different jobs that are considered
substantially equal for pay purposes into a grade (similar job
value based on your job evaluation process)
Each grade will have its own pay range, and all the jobs
within a single grade will have the same pay range
The pay range sets the upper and lower pay limits for all jobs
in a grade (the minimum, midpoint and maximum)
The number of pay or salary ranges a company has varies, but
is generally between 11-17; the larger the company, the more
Designing pay grades and pay ranges is usually done with
base pay data (versus total pay), because base pay reflects
the basic value of the work
lets design pay structures
- Start with your Job Worth Hierarchy: Using the job
analysis, job documentation, and job evaluation process,
determine the relative ranking of jobs according to the
organization’s internal value - Collect Market Data: Incorporate external market values
from salary surveys - Create Salary/Pay Grades: Cluster/group jobs that
have similar internal value and external value (internal
ranking and market pay levels into salary/pay grades or
levels) - Create Pay Ranges: Determine midpoint, then overlay
the range width, then calculate the minimum and maximum
step 1: job worth hierarchy
The first step is to cluster/group different jobs considered
substantially equal for pay purposes into grades
Remember: all the jobs within a single grade will have the
same pay range
These are different jobs but considered equal for pay purposes
All jobs within a single grade will have the same pay range
Use Job Worth Hierarchy
Evaluating company jobs to create a job-worth hierarchy based on external
and internal factors as a means of arranging the jobs from highest to
lowest value; this is the first step for a company to develop its salary
structure once the job-worth hierarchy has been completed
Reconsider the original job evaluation results (internal value)
if external data (market data) is significantly different when
determining which grade a job should be slotted into
job worth hierarchy
Company Jobs to Be Evaluated
– Evaluating company jobs to create a job-worth hierarchy based
on external and internal factors as a means of arranging the jobs
from highest to lowest value; this is the first step for a company
to develop its salary structure once the job-worth hierarchy has
been completed
Evaluated Jobs Arrange in YOUR company’s Job-Worth Hierarchy
– Building the salary structure is a process of
identifying groups of jobs that are clustered
together by virtue of having similar values
3 create job grades by clustering
Building a salary structure is a process of
identifying groups of jobs that cluster together by
virtue of their similar values:
Similar internal job value and similar external value,
based on mapping internal job descriptions to the survey
job descriptions
Positions with similar levels of responsibility
(points if using point factor method) and value
in the organization will be in the same grade
Adjust for internal equity if external market data
significantly different, e.g., my example of the
production planner versus buyer
3 create job grades by clustering
Cluster/group jobs that have similar internal value and external value/
market pay levels into salary/pay grades or levels
grade 1, 2, 3
3. Create Job Grades by Clustering –
Breaking It Down Into Steps
Identifying groups of jobs that cluster together by virtue of
their similar values – similar internal job value and similar
external value
Start with your job worth hierarchy (list of your company jobs in order of
internal value)
Next, collect market data for each position - mapping internal job
descriptions to the survey job descriptions; you will only need the midpoint
of the market data
Next, look for “clustering” of similar internal & external values (Jobs 1-3,
Jobs 4-6 Jobs 7-10); there may be few or many jobs in each grade
(there is no “correct” number of jobs in a grade)
Next you will calculate midpoint of first job grade (see next slide)
4. Create Pay Ranges:
Determining Range Spread/Width
Range spreads or range widths vary based on the
level and the sophistication of the knowledge/skills
required in a particular position
They are narrower for lower level positions and broader
for more senior positions. Why?
KSAs (knowledge, skills and abilities) are acquired faster in lower
level positions so you move through them to the next level faster
In managerial or senior positions there is greater variation and the
skill acquisition takes longer so you stay in those positions (grades)
longer
Other factors influencing range spread/widths:
Number of years incumbents typically stay in the job
How long it takes for new incumbents to reach proficiency in
the position
4. Create Pay Ranges:
Determining Range Spread/Width
Typical Range Spreads:
Lower level service/production:
20%-25%
Professional, technical:
30%-40%
Managerial/executive:
40%-100%
Broadband:
up to 300%
4. Create Pay Ranges
Calculating the Minimum & Maximum
With our midpoint ($32,000 for Grade 1), we now can complete
our pay/salary range by calculating the minimum and maximum
of the pay range by overlaying proper range width and the
formulas below
Minimum (relative to Midpoint) =
Midpoint/(1+(Range Spread/2))
Maximum (relative to Midpoint) =
Minimum *(1+Range Spread)
Calculating the Minimum: if midpoint $32,000, and you want a 25%
range spread
divide $32,000 by 1.xx where xx is range spread/2
$32,000/1.125 = $28,444
Calculating the Maximum: if minimum is $28,444 and you want a 25%
range spread
multiply $28,444 by 1.xx where xx is 1+ the range spread
$28,444 * 1.25 = $35,555
Yay! We have a job grade and
associated pay range!!!
We averaged the
aged midpoints of
the market data
for jobs 1-3 =
$32,000
We determined the
correct range width
based on the jobs
in the range (25%)
We calculated the
minimum and
maximum
calculation examples
What’s the midpoint?
(Max + Min)/2 =
($35,555 + $28,444)/2 = $32,000
What’s the range width/spread?
(Max-Min)/Min =
($35,555-$28,444/$28,444 = 25%
broad banding
Involves collapsing several (3-5) salary grades
into a single band with a minimum and maximum,
and the range is very wide
Advantages over traditional salary range structure
Provide flexibility to broadly define job responsibilities
Support organizations that have eliminated layers of
managerial jobs
Helps manage the reality of fewer promotions in flat
organizations
other key concepts and definitions in developing pay structures
Determining the # of Pay Grades: No fixed rule
for the number of grades/ranges
How to decide how many grades? Consider
Size of organization (generally larger, more grades)
How finely can you define or differentiate skills/
responsibilities between job levels; less specificity, fewer
ranges
Degree of emphasis on career development and
promotions (more emphasis, more levels)
Generally 10 -15 is the right # (larger companies may
have more)
other key concepts and definitions in developing pay structures 2
Definitions or the Anatomy of Pay Structures
Pay/Salary Grades: a label for jobs with similar relative
value within an organization (internal value) and part of a pay
range
Pay/Salary Structure: a series of pay grades which cover a
specific job family or all the jobs in an organization reflecting
jobs having similar internal or external (market) value
Pay/Salary Range: the minimum and a maximum level of
pay
Range “spread” or range “width”: distance from the
salary range minimum to the salary range maximum,
typically expressed as %; (Max-Min/Min)
Range Midpoint: the salary level that is midway between
the minimum and maximum of the salary range; also known
as the market value of the jobs in the grade and considered
pay level associated with fully competent performance in
a job
other key concepts and definitions in developing pay structures 3
- Definitions or the Anatomy of Pay Structures
Mid-point progression: the % increase in the midpoints
from one salary grade to the next, expressed as a % of the
lower midpoint; greater distance means employees stay in
grades longer, but less overlap means promotional
increases greater; smaller progression tends to have
promotions feel more incremental than significant leaps
(Mid B-Mid A/Mid A)
Range overlap: degree to which adjacent salary ranges or
grades in a given salary structure include the same pay;
smaller overlaps means promotional increases greater
market pricing
Market pricing is a pay strategy emphasizing external
competitiveness, deemphasizing internal alignment
Sets pay structures almost exclusively on external market rates
Pure market pricing at its extreme ignores internal alignment
How much or what mix of forms a company pays is no longer a potential
source of competitive advantage
In pure market pricing there are no pay grades - each job is
individually market priced
This is a “core change” in comp in recent years - less concern
about internal alignment (the internal value of how a job impacts
the overall mission and goals of the organization)
Why would organizations do this?
Assumption is there is little value in internal alignment; de-emphasizes
internal value
Time and expense of internal alignment process
Takes pay off the table, not a competitive advantage or disadvantage
Fairness presumed to be reflected by market rates
Defensibility if applied properly
how to use pay ranges
Minimum = new in job,
inexperienced/developing skills,
under-performing or just
underpaid
Midpoint = proficient and
meeting performance
expectations, fully skilled and
competent in all aspects of the
job
Above midpoint = high
performer, long tenure, unique
skills, broader job requirements
than typical for the job, or just
overpaid
Red Circle paid above the maximum of range
Green Circle paid below the minimum of the range
how to use pay ranges - metrics for managing pay ranges
Compa-Ratio: relationship of base
salary to the midpoint
Base salary $75,000
Midpoint $73,500
Compa ratio and range penetration
are indicators of how employees are
performing relative to the ranges and
reflect experience and performance
Companies generally strive to have
compa-ratios between~90%-110%
(~100% is “at market”) and range
penetration close to 50%
Another way to reflect Compa Ratio is:
Range Penetration: how far into
the range the employees pay is:
employee pay-minimum
maximum-minimum
