Designing Pay Levels ch.8

Question 1

how many steps are there in determining externally competitive pay levels and structures?

Answer 1

7 (SDCDICB)

Question 2

what are the 7 steps in determining externally competitive pay levels & structures?

Answer 2

1) Specify external pay policy
2) Define purpose of comp strategy
3) Choose relevant market competitors
4) design and conduct the comp survey
5) interpret survey results and construct market pay line
6) construct an internal pay policy line
7) balance competitiveness with internal alignment through the use of ranges, flat rates and/or bands

Question 3

what is a pay policy line?

Answer 3

how to pay employees based on lead, lag, or match

Question 4

what is the first step to specify external pay policy?

Answer 4

employers must decide if they will lead the market, match the average pay of competitors, or lag behind the average

Question 5

what are compensation surveys?

Answer 5

provide data for translating these policies into pay levels, pay mix, and structures

Question 6

what are systematic processes of collecting information and making judgments about the comp paid by other employers?

Answer 6

comp surveys

Question 7

What are purposes of comp surveys?

Answer 7

5 AAASE

1) adjust pay level - how much to pay? –> based on overall movement of pay rates caused by competition in the mkt
2) adjust pay mix - what forms? –> base, bonus, stock, benefits
3) adjust internal structure –> validate job evaluation results; establish and ‘price’ internal pay structures
4) study special situations –> specific pay-related problems
5) estimate competitors’ labour costs –> ‘competitive intelligence’

Question 8

what is a relevant labour market?

Answer 8

employers who compete:

• with same prod/services
• for same occupations/skills (could be in diff industries)
• for employees in same geographic area

Question 9

what 2 things interact in determining the relevant labour market?

Answer 9

qualifications & geography

- as the importance & complexity of qualifications increase, the geographic limits also increase

Question 10

what are the 4 geographic scopes?

Answer 10

• local, regional, national, international (slide 8, nov 7)

Question 11

who should be involved in the survey design?

Answer 11

• comp manager
• external consulting firms (including online databases)
  e.g., Hay Group PayNet
  pay scale - website to see avg salary for 1000s of jobs

Question 12

how many employers should be included in designing the survey?

Answer 12

• depends on the circumstances of the org

Question 13

what are common problems for firms in designing the survey?

Answer 13

• publicly available data
• word-of-mouse
• unsure of standards

Question 14

which jobs should be included?

Answer 14

only as many that are necessary

• 3 approaches:
  1) benchmark jobs approach
  2) benchmark conversion approach
  3) low-high approach

Question 15

3 basic types of data collected through surveys

Answer 15

1) info about nature of the org -identifying info, financial performance, size & structure
2) info about total comp system -cash & non cash forms used
3) specific pay data on each incumbent in the jobs under study
- job description, compensable factors of incumbent and job, rate of pay

Question 16

why do you need to collect pay data on each incumbent under study?

Answer 16

bc each incumbent could be paid a different amount - want an average - a better picture
ex. chemical engineers paid differently - want the full range

Question 17

3 methods to interpret survey results

Answer 17

1. frequency distribution: organizes data into intervals; can highlight outliers
2. central tendency: reduces a large amount of data to a single number (means, weighted mean)
3. variation: distribution of rates around the central tendency (standard deviation, percentiles)

Question 18

what is the difference between mean and weighted mean?

Answer 18

mean - divided by the number of orgs
weighted mean - divided by the number of job incumbents from the data collected - number is a lot larger - more common so that orgs with a small number of jobs don’t have the same amount of weight as orgs with more jobs

Question 19

what is the way to update survey data?

Answer 19

aging or trending:

• process of updating pay data to forecast the competitive rates for the future when pay decisions will be implemented
• amount depends on historical trends in market economic forecasts, prospects for the economy and managers’ judgments

Question 20

what do market pay lines link?

Answer 20

a company’s benchmark jobs on x-axis (internal structure) with market rates paid by competitors (mkt survey) on y axis

Question 21

what are 2 approaches to constructing a market pay line?

Answer 21

• Free hand approach: connect data points

- Regression analysis: straight line that fits the data best

Question 22

can a market pay line be used to set pay for non-benchmark jobs?

Answer 22

yes

Question 23

Two parts of the total pay model

Answer 23

Internally aligned structure - Horizontal axis

External competitive data - Vertical axis

Question 24

Two aspects of pay structure:

Answer 24

Pay-policy line: Adjustment of the market pay line to reflect a firm’s competitive position in the market; important to update survey data at this point
Pay ranges: create pay grades (group different jobs that are considered substantially equal) to set a range between the upper and lower limits for all jobs in the various grades
Challenging to design

Question 25

Why bother with grades and ranges?

Answer 25

• ->Offers flexibility to deal with pressures from employees, external markets and differences among firms
• Recognize individual performance differences with pay
• Meet employees’ expectations that their pay will increase over time, even in the same job
• Encourage employees to remain with the organization
• Differences in quality among individuals applying for work
• Differences in the productivity or value of these quality variations
• Differences in the mix of pay forms competitors use

Question 26

Pay ranges have three features:

Answer 26

midpoint (where pay policy line crosses each pay grade), minimum, and maximum

Question 27

What size (range spread) should the range be?

Answer 27

Based on judgment about how ranges support career paths, promotions, and other organization systems
Can use the actual survey rates, particularly the 75th and 25th percentiles as maximums and minimums, respectively

Question 28

Why is the degree of overlap among pay ranges important to consider when setting ranges?

Answer 28

Dictates size of pay increase and has implications for promotions (small overlap = larger pay increases; large overlap = smaller pay increases)

Question 29

What is broad banding?

Answer 29

Purpose: provides more flexibility to manage career growth and administer pay
-Involves collapsing salary grades into a few broad bands (up to 4-5 grades per single band), each with a sizable range
One minimum and one maximum
Range midpoint often not used

Question 30

what are the 2 steps in broad banding?

Answer 30

1) Set the number of bands
- Usually established at major breaks or differences in work or skill requirements of jobs
2) Price the bands
- Difficulty in paying different job families within the same band
- Reference market pay rates for each job family within each band

Question 31

what is market pricing?

Answer 31

sets internal structures almost exclusively on external market rates
-To base most of the internal structure on external rates, breaking down the boundaries between the internal organization and the external market forces

Question 32

What does neglecting internal alignment affect?

Answer 32

perceptions of internal equity and inconsistency with organizational culture

Question 33

What does neglecting external competitiveness affect?

Answer 33

ability to attract and retain valued employees and labour costs