M3 - Practical Applications of Base Pay Structure Design

Question 1

Market-pricing approach

Answer 1

Use of market (external) data as a priority to establish pay grades and ranges. Aligns pay structure closer to the external market.

Step 1: Complete a competitive market pricing analysis of benchmark jobs, and create a market-based job worth hierarchy.

Step 2: Develop a pay structure that covers lowest to highest market rates from Step 1, plus an additional grade or two at the top and bottom.

Step 3: Assign benchmark jobs to the pay structure based on the relationship of market rate to midpoint, review benchmarks and modify based on internal equity. Some jobs may be placed at different levels based on internal preferences, if the company does not agree with the market rate.

Step 4: Assign nonbenchmark jobs to the pay structure.

The challenge in market pricing analysis is in making sound decisions about the data that needs to be extracted from a particular source and then to interpret the data appropriately when comparing it to other sources.

Survey data analysis is not a science, it’s more of an art. The key to successfully interpreting data is to understand how statistics are computed in any given survey and blend that information into the organization’s compensation philosophy.

Question 2

Formulas

Answer 2

Minimum:
(mipoint)/( 1+ .5 range spread) or (maximum)/(1 + range spread)

Maximum:
minimum * (1 + range spread)

Midpoint:
(maximum + minimum)/2

Range spread:
(maximum - minimum)/(minimum)

Midpoint differential:
(midpoint of higher grade - midpoint of lower grade)/(midpoint of lower grade)

Question 3

Point factor approach

Answer 3

Use of the job content evaluation (internal) as a priority to establish pay grades and ranges. Aligns pay structure to value internal hierarchy and culture.

Utilizes market data to incorporate external data into the internal job worth hierarchy. Allows the organization to align pay structures to external market components while still valuing the internal hierarchy.

Step 1: Review overall job evaluation point differentials by job family.
Step 2: Rank order from high to low.
Step 3: Look for logical groupings of jobs.
Step 4: Develop point bands (absolute or percent-based).
Step 5: Check intra-family and supervisor / subordinate relationships.

Question 4

Steps for Developing Pay Ranges When Integrating Market Data

Answer 4

Step 1: Incorporate market data.
Step 2: Review market inconsistencies and reassign jobs; compute raw averages and percent differences by grade.
Step 3: Smooth out grade averages.
Step 4: Review differences between midpoints and market data.
Step 5: Resolve inconsistencies between internal and external competitiveness.
Step 6: Develop pay ranges around the proposed midpoints.