Module 8 Flashcards
The major decisions in setting externally competitive pay and designing the corresponding pay structures include:
- Specifying the employer’s external pay policy
- Defining the purpose of the survey
- Choosing relevant market competitors
- Designing the survey
- Interpreting survey results and constructing the market line
- Constructing a pay policy that reflects external pay policy
- Balancing external equity with internal equity through the use of ranges
Specifying Competitive Pay Policy - what do employers do?
> Employers decide if they want to be a market leader, match the average pay of competitors or lag behind the average market rates.
> To translate any external pay policy into practice requires information on pay rates in the external market.
Purpose of a Competitive Survey - what data should be obtained?
> Obtain the data necessary to set an organization’s pay policy relative to its competition. Also allows the organization to adjust its pay level, pay structure, analyze pay problems and estimate competitors labour costs.
What should be adjusted in regards to the Purpose of a Competitive Survey?
> Adjust Pay Levels, relative to competition
Adjust Pay Mix: base, bonus, stock options
Adjust Pay Structure: determine is market rates vary greatly from those obtained in the organization’s job evaluation
What are special studies?
> special studies are required for targeted groups such as patent lawyers, retail sales managers or software engineers; examine turnover rates to determine if changes are occurring
Why do employers estimate competitors labour cost?
> Employers constantly look for ways to decrease costs and increase productivity; salary survey data helps to benchmark against the competition
The relevant labour market is defined by one or more of the following:
The same occupation or skills required;
The same geographical area;
The same products and services.
New organizations fuse diverse knowledge and experience for what?
> New organizations fuse diverse knowledge and experience so relevant markets look more like fuzzy markets (for example: Yahoo uses a mix of teachers, software engineers and sales reps on a single team)
Questions to be asked when designing a compensation survey include:
- Who should be involved in the design? Options include the Compensation Manager or an outside consultant.
- How many employers should be included? It depends on the circumstances. Statistics Canada is a major source of publicly available data; computer research is also a relevant source.
- Which jobs are included? Benchmark jobs have stable content and are common among employers so are often used for comparison. A low/high approach can be used by comparing lowest paid and highest paid benchmark jobs and then use the wages of those jobs to anchor the structures.
- What information is collected?
a) Information about the nature of the organization;
b) The total compensation system: base pay, total cash (base, profit sharing, bonus) and total compensation (total cash, plus benefits and perquisites) are three alternative measures; and
c) Specific pay data on each incumbent in the jobs under study.
Interpreting Survey Results and Constructing a Market Line - why do we verify data?
> Verify Data: Check for quality and accuracy of survey data and correct matches. Data can be examined for patterns. Jobs can be matched based on job descriptions.
Interpreting Survey Results and Constructing a Market Line - what is the accuracy of a match?
> If a job is similar but not identical levelling can be used to weigh the data according to the closeness of the match (multiply by a numerical factor)
Interpreting Survey Results and Constructing a Market Line - what are anomalies?
Anomalies are an atypical data point.
1. Does the company dominate?
2. Do all employers have similar patterns? What are outliers? (Outliers fall outside the majority of the data points)
Interpreting Survey Results and Constructing a Market Line - statistical Analysis includes:
> Frequency distribution (organizes data into intervals);
> central tendency (averages or means and medians); and
> Variation (distribution of rates around central tendency and standard deviation, quartiles and percentiles).
Interpreting Survey Results and Constructing a Market Line - why do we update survey data?
> for comparisons for future time periods and to forecast pay rates when a pay will be implemented. Called aging or trending.
Interpreting Survey Results and Constructing a Market Line - what is regression analysis for?
is used to derive a Market Pay Line and links the company’s benchmark jobs on the horizontal axis (Internal structure) with the market rates paid by competitors (market survey) on the vertical axis.
The Policy Pay Line adjusts the Market Pay Line to construct what? How is this done?
> The Policy Pay Line adjusts the Market Pay Line to construct a pay policy to reflect lead, match or lag policy.
> This is done by drawing a line at the match level first and then determining a new line based on the lead or lag levels chosen.
Grades and Ranges impact what?
> Grades and Ranges impact on both internal and external equity and add flexibility to the system and allow managers to recognize differences in quality (skills, abilities, experience) between applicants; differences in productivity or value of these quality variations and differences in Pay Mix.
Externally, quality variation may translate into:
> Externally, quality variation may translate into difference in productivity; internally employers may want to recognize differences in performance related to pay.
The first step in creating flexibility in the pay structure begins with:
> The first step in creating flexibility in the pay structure begins with grouping different jobs that are substantially equal for pay purposes into pay grades.
What are ranges used for?
> Ranges set an upper and lower limit between which wages for all jobs in that particular grade are expected to fall.
> The size of a range is a senior management decision based on the judgement about how the ranges support career paths, promotions and other organizational systems.
What does an overlap among ranges mean?
> The degree of overlap among ranges is the third step in setting ranges.
> A large degree of overlap suggests jobs are similarly valued between grades and small differentials in pay between grades; a small degree in overlap allows for larger pay increases.
> The overlap between grades should be large enough to encourage employees to seek promotion into a higher grade.
The size of the differentials need to support what?
> The size of the differentials need to support career moves through the structure.
Grades and Ranges provide flexibility for managers/decision makers - Differences can be recognized such as:
- Differences in quality (skills, abilities, experience) in individuals applying for work.
- Differences in productivity or value of these quality variations (performance evaluations)
- Differences in pay forms; some companies use more stock options than others.
Managers can do what with pay?
> Managers can recognize individual performance differences with pay;
> meet employee expectations that their pay will increase over time even while holding the same job;
> and encourage long-term commitment to the organization.
What is broad banding and what does it do?
> Broadbanding is a large band of jobs containing several pay grades.
- Reduces grades to a few and creates wider ranges.
- Work is consolidated into a few levels using this technique.
- Provides more flexibility in moving people among jobs.
What are the steps of broad banding?
- Set the number of bands (usually 3 to 8)
- Price the bands using reference market rates as guides.
Broadbanding encourages employees to:
> Broadbanding encourages employees to move horizontally to increase cross-functional fertilization of ideas. A career move is usually within a band and less frequently between bands.
Internal job evaluation (internal equity) and external market survey results (external equity) may not do what?
> Internal job evaluation (internal equity) and external market survey results (external equity) may not agree and produce two different structures.
> In that instance, a review of the job analysis and job evaluation may be necessary to determine if a job was accurately evaluated vs the market rate and internal rate.
Determining Externally Competitive Pay Levels and Structures - Major Decisions:
Specify the employer’s competitive pay policy
Define the purpose of the survey
Select relevant market competitors
Design the survey
Interpret survey results and construct the market line
Construct a pay policy line that reflects the external pay policy
Balance competitiveness with internal alignment through the use of pay
ranges, flat rates and, or bands
Translating an external pay policy into practice requires information on the external market. How do we get this information?
Surveys provide the data for translating that policy into pay levels, pay mix,
and structures.
A survey is the systematic process of collecting and making judgments about
the compensation paid by other employers
The Purpose of a Survey:
Adjust pay level—how much to pay?
> Based on the changing rates paid by competitors
Adjust pay mix—what forms?
> Base, bonus, stock, benefits relative to that offered by competitors
Adjust pay structure?
> validate job evaluation results; establish internal structures
Study special situations
> To analyze specific pay-related problems
Estimate competitors’ labour costs
> “competitive intelligence”
Relevant labor markets include employers who compete in one or more areas - what are those areas?
the same occupations or skills,
hiring employees within the same geographic area, or
the same products and services
What are fuzzy markets?
> new organizations and/or organizations with unique jobs may fuse diverse factors making relevant markets fuzzy.
Which jobs do we include in a survey (aka what approaches do we use?)
> benchmark job approach, low-high approach, benchmark conversion/survey leveling
What information to collect on surveys?
> organization data, total compensation data, information about
incumbent and job and HR outcomes
Possible Survey Data Elements – Total Compensation - cash and non-cash forms used are:
> Cash forms used: base pay, pay increase schedules, long- and short-term incentives, bonuses, cost of living adjustments, overtime and shift differentials
> Non-cash forms used: composition of benefits and services, particularly the degree of coverage and
contributions to medical and health insurance and pension
What are advantages and disadvantages of 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 of total cash?
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 of 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 - don’t set base pay equal to competitors’ total compensation
Interpret Survey Results - verifying the accuracy of match means you should:
If a company job is similar, but not identical, use the benchmark
conversion / survey leveling approach.
Multiply the survey data by some factor judges to be the difference
between the company job and the survey job
Interpret Survey Results - verifying anomalies means you should consider:
Does any one company dominate?
Do all employers show similar patterns?
Are there outliers?
Frequency distribution – unusual shapes may reflect:
Employers with widely divergent pay rates
Anomalies or outliers
What are central tendencies?
Central tendency – measure to describe a set of date
mode, mean, median and weighted mean
What is variation?
Variation – degree of dispersion of data
standard deviation, quartiles and percentiles
Are survey’s outdated?
Wages paid by competitors is constantly changing, so a survey is
outdated before it is available.
Aging or trending refers to the process of updating pay data to forecast
the competitive rates for the future when pay decisions are implemented
A market pay line links what?
> A market pay line links a company’s benchmark jobs on the horizontal axis with market rates paid by competitors on the vertical axis
Approaches to constructing a market pay line: (what are 2)
Free hand approach
Regression Analysis
Merging the two components on a graph:
Internally aligned structure - Horizontal axis
External competitive data - Vertical axis
What are the two aspects of pay structure?
Pay-policy line
Pay ranges
What are some ways to translate external competitiveness policy into practice?
Choice of measure: a company can use a specific percentile for base pay and another percentile for total compensation.
Specify a percent above or below market line an employer intends to “lead” or “lag”, or simply “match”
Develop Grades - what are the steps?
The first step is to group different jobs considered substantially equal for pay purposes into grades. The objective is for all jobs similar for pay purposes to be in one grade.
Grades enhance an organization’s ability to move people among jobs with no change in pay
All the jobs within a single grade will have the same pay range.
If evaluation points are close and fall on either side of grade boundaries, the difference in salary may be out of proportion to the difference in the value of the job content
A range has three features:
A midpoint where the pay-policy line crosses the center of the grade, a minimum and a maximum
The size of the range is a judgment about:
The size of the range is a judgment about how the range supports career paths, promotions, etc.
Larger ranges in the managerial jobs reflect the greater opportunity for
performance variations in the work.
Some firms use percentiles as maximums and minimums while other
establish them separately.
Pay Ranges provides managers with the opportunity to deal with:
Internal pressures
Recognize individual performance differences with pay,
Meet employees’ expectations that their pay will increase over time, even
in the same job, and
Encourage employees to remain with the organization.
External pressures
Differences in quality among individuals applying for work,
Differences in the productivity or value of these quality variations, and
Differences in the mix of pay forms competitors use.
Range Overlap - what should be considered?
High grade overlap and low midpoint differentials indicate small differences in the value of jobs in adjoining grades.
The size of differentials between grades should support career movement through the structure.
Overlap ought to be large enough to induce employees to seek promotions.
Not all employers use grades and ranges.
Skill-based plans establish a single flat rate for each skill level, regardless of performance or seniority.
Many collective bargaining contracts establish flat rates per job.
Increasingly, broad bands are being adopted for greater flexibility
Broadbanding Involves:
Involves collapsing salary grades into a few broad bands, each with a minimum and a maximum
What are advantages of broad banding?
Provide flexibility to manage career growth and administer pay – broad
banding encourages employees to seek growth by moving cross-
functionally;
Support organizations that have eliminated layers of managerial jobs;
They foster cross-functional growth and development; and
Helps manage the reality of fewer promotions in flat organizations.
Broad bands may be combined with:
> may be combined with traditional practices by using midpoints, zones, or other control points.
Adjusting the Pay Structure
A job structure orders jobs on the basis of internal factors
Reflected in job evaluation or skill certification
Pay structure is anchored by the organization’s external competitive
position
Reflected in its pay-policy line
How do we reconcile differences in a pay structure?
May entail a review of : job analysis, job evaluation and market data
Differences may arise due to shortage of a particular skill, driving up
market rate.
Market pricing considerations:
Market pricing emphasizes external competitiveness and deemphasize
internal alignment.
Sets pay structures almost exclusively on external market rates. Pure
market pricing at its extreme ignores internal alignment
Pay structure aligned with competitors’.
Unique or difficult-to-imitate aspects of the pay structure are
deemphasized.
Fairness is presumed to be reflected by market rates.
