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Total Rewards Management > Pay Structures > Flashcards

Pay Structures Flashcards

1
Q

How to develop an equitable salary structure?

A

Internal equity + External Equity

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2
Q

Explain internal equity. (technique used + explanation)

A

Job evaluation- Arranges jobs into a hierarchy either in a descending or ascending order of importance to the organisation

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3
Q

Explain external equity. (technique used + explanation)

A

Job values are then compared with those of other organisations to obtain external equity

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4
Q

What is a salary structure?

A

A salary structure is a method by which an organisation distributes the salaries to its employees.

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5
Q

What is a salary structure for?

A

(1) to help the company or members of leadership determine how much an employee should get paid
(2) helps employees know the salary range they can expect for their role, with a minimum, maximum and midpoint

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6
Q

Do new employees always start at the bottom of a pay scale? Are there any exceptions?

A

Yes- no seniority and would work a non-management role. Others might come with a lot of experience- would work in a leadership position and get a higher pay.

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7
Q

What does a salary structure consist of? (2)

A

(1) salary scales/ranges for jobs/groups of jobs

(2) grading of jobs

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8
Q

What is the salary scale for?

A

To provide a framework that determines how much an employee is paid.

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9
Q

Why is there grading of jobs?

A

It is impossible to establish individual salary scales for each job (where a large number of jobs exist).

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10
Q

How do grades and ranges help?

A

Help to deal with pressures from external market and differences among organizations.

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11
Q

How are organizations different from one another?

A

(1) quality among individuals applying for work (JD may seem identical but the requirements/skills, abilities and experiences are stricter)
(2) productivity
(3) pay mix forms

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12
Q

When does pay range also exist?

A

When 2 or more rates are paid to employees with the same job.

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13
Q

Why would employees have 2 or more rates paid to employees in the same job. (3)

A

(1) recognize individual performance
(2) meet employees expectations that pay will increase over time even in the same job
(3) encourage employees to remain with the organization

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14
Q

What are the types of salary structures? (3)

A

(1) graded salary structure
(2) individual job ranges
(3) single/fixed rate system

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15
Q

Which salary structure is the most common and systematic?

A

Graded salary structure.

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16
Q

What is a graded salary structure?

A

A series of salary grades, each of which has a specified minimum and maximum salary called a salary scale.

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17
Q

Salary increases are relatively ___ jumps between pay grades (Graded salary structure).

A

Small

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18
Q

What is the purpose of a graded salary structure?

A

(1) employers can prevent employees from capping out at the maximum salary too quickly
(2) employers can maintain more control over salaries
(3) employees see are motivated to produce good work when they move up within their salary range, even if they remain in the same position

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19
Q

How to produce a graded salary structure?

A

(1) set the minimum and maximum salary range for each employee or employee group.
(2) determine the number of pay grades within the structure
(3) decide what an employee needs to do to move onto the next pay grade by using metrics

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20
Q

What is the grade in a graded SS?

A

(1) an identifier of a pay range

(2) multiple jobs can be grouped in a pay grade

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21
Q

What is the range in a graded SS?

A

(1) a lower and upper limit associated with a pay grade

(2) has a max, midpoint and min

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22
Q

What are individual job ranges?

A

(1) loose salary structure
(2) salary scales/ranges for each job
(3) no grades specified

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23
Q

Who are individual job ranges suitable for?

A

(1) more senior jobs where there may be problems recruiting and retaining top managers and trying to place them in certain job grades
(2) hot jobs- market prices always move quickly with increased demand
(3) high emphasis on market competitiveness
(4) ability to accurately match and price jobs within the organization

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24
Q

What is a single rate system?

A

(1) assigns a specific salary rate for a job
(2) no salary scales
(3) every employee in that job, no matter how senior he is, will be paid the same salary
(4) the salary (rate) for the job may be fixed by negotiation with unions or based on market rates

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25
Q

Who are single rate systems suitable for?

A

Manual jobs where skill levels are more important than length of service

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26
Q

What does the choice of salary structure used depend on?

A

(1) type of organisation and industry it is in

(2) jobs to be covered

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27
Q

In terms of size, how should companies choose their salary structure?

A

large- graded SS
small with rapid changes- individual job ranges
large and manual- single rate system

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28
Q

Can companies change the salary structure that they use?

A

Yes, as long as it is aligned with their strategy.

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29
Q

What is job pricing?

A

Placing a dollar value on the job’s worth

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30
Q

What do firms use in the job pricing process?

A

(1) pay grades

(2) pay ranges

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31
Q

What is the purpose of pay grades?

A

(1) to group similar jobs to simplify the pricing of jobs

(2) to enhance a company’s ability to move people among jobs, with no change in pay

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32
Q

How should pay grades be established?

A

(1) typically group jobs into pay grades based on similar compensable factors and value
(2) no one correct formula
(3) jobs in the same job grade will have similar pay range

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33
Q

What is a pay range?

A

Includes a min and max pay rate with enough variance between the two to allow for a significant pay difference. It is expressed as a percentage.

34
Q

What does 50% pay range mean?

A

The max is 50% higher than the min pay.

35
Q

What is the purpose of pay range?

A

Recognise difference in individual performance with pay.

36
Q

What are the features of a salary range?

A

(1) midpoint
(2) minimum
(3) maximum

37
Q

What is the purpose of (1) max and min (2) midpoint in a pay range?

A

(1) to set the upper and lower pay limit

(2) where the market line/pay policy line crosses the center

38
Q

How large should the range be?

A

(1) top level management- 30-60% above and below midpoint
(2) entry level and managerial- 15-30%
(3) office production- 5-15%

39
Q

What does a large pay range reflect?

A

Greater opportunity for indiv discretion and performance variations at work

40
Q

What does the size of the pay range depend on?

A

Judgement about how the range supports career paths, promotion and other org considerations.

41
Q

What is the formula for range spread?

A

[(max-min)/min] x 100%

42
Q

What is a range overlap?

A

When the maximum of a salary scale is higher than the minimum of the salary scale in the grade just above it.

43
Q

What does an organization with an overlapping salary range recognize?

A

An experienced employee doing a good job is more valuable than a newcomer to a job in a higher grade

44
Q

Overlap provides some form of _____ in the salary scale.

A

flexibility

45
Q

What does a high degree of overlap and low midpoint differentials indicate?

A

Small differences in the value of jobs in the adjourning grades – being promoted from one grade to another may include title change but not much change in pay

46
Q

What does a small range with less overlap indicate?

A

Promotion into a new grade involves a larger pay increase. However, opportunities may be limited.

47
Q

what is the optimal overlap between grades?

A

Ought to be large enough to induce employees to seek promotion into a higher grade

48
Q

What if there is a small pay increment only?

A

Employees won’t care about the salary grade

49
Q

What is the calculation of pay range overlap

A

[(max A-min B)/(max A-min B)] x 100%

50
Q

What is a pay policy line?

A

The line connecting the midpoint salaries.

51
Q

What does the pay policy line reflect?

A

External competitive position in the market.

52
Q

How to express policy line as percent of market line? Give an example of a policy statement.

A

Specify a percent above or below market line an employer intends to match. “We lead the market by 10%”

53
Q

What if your policy statement is false- practice does not match?

A

Employees receive the wrong message.

54
Q

How to design a graded salary structure?

A

(1) scatter graph
(2) trend line
(3) determine a pay grade
(4) develop a pay range
(5) define salary scales

55
Q

What is a scatter graph

A

Points given for the various jobs are plotted against current salaries earned by employees

56
Q

What is a Trend Line?

A

(1) A trend line is drawn through the scatter of points.

(2) Line of best fit

57
Q

How to determine pay grade?

A

(1) Group jobs of similar value into pay grades

(2) Decide on the number of grades

58
Q

How to develop a pay range?

A

(1) Determine grade midpoint (average of the benchmark job’s pay in each grade)
(2) Calculate minimum and maximum pay for each grade

59
Q

How to define salary scales?

A

(1) take into account policies on differentials and overlap.
(2) pay ranges are typically narrower for junior levels, and wider for managerial levels as their contributions can vary substantially among
individuals

60
Q

What is broad banding?

A

Involves collapsing salary grades into a few broad bands, each with a sizable range.

61
Q

How is broadbanding carried out?

A

(1) consolidates 4-5 traditional grades into a single band
(2) one minimum and one maximum
(3) range midpoint often not used

62
Q

What are the advantages to broadbanding?

A

(1) more emphasis on long-term career development over promotion
(2) faster communication between the top and the bottom level of employees because of the flat hierarchy, allowing them to be agile and effective
(3) employees also benefit from being able to move laterally in the business more easily. It prevents concerns on salary changes if they remain in the same grade.
(4) staff have a very clear path to their next pay increase which is extremely effective for motivation
(5) performance or evaluation-driven pay systems enables employers to quickly calculate remuneration and rewards for effective performance

63
Q

What are the disadvantages to broadbanding?

A

(1) demotivation- it is possible for individuals to move into a more challenging job role without receiving a pay increase, simply because the job is categorised as being in the same band.
(2) for broadbanding systems which reward loyalty, there is a chance that staff who stay in the same job role are overpaid if there is no maximum salary for their pay grade. This can be unhealthy from a business finance perspective and can lead to a feeling of injustice between employees who do not understand why they do not have parity of pay.
(3) broadbanding demands responsiveness and awareness from managers to increase pay appropriately based on market data. If pay grades remain stagnant and are not adapted to market trends, then it can quickly lead to underpaid staff and high employee turnover

64
Q

What are the purposes of broadbanding?

A

(1) provide flexibility to define job responsibilities more broadly
(2) foster cross-functional growth and development
(3) ease mergers and acquisitions

65
Q

How does broadbanding ease mergers and acquisitions?

A

(1) emphasis on lateral movement with no pay adjustments but more exposure
(2) less levels to argue over; can also move managers on world-wide assignments across companies easily

66
Q

What is a compa ratio?

A

The ratio of the average of all salaries within a grade as compared to the target salary, defined as the salary which should be earned by a fully competent individual in a job.

67
Q

Typically, what is the target salary equivalent to?

A

The midpoint of the salary scale for that grade

68
Q

What is the purpose of compa ratio?

A

Help companies to determine the competitiveness of their salaries.

69
Q

What can companies do when they determine the competitiveness of their salaries?

A

(1) overpaid- freese base salary

(2) underpaid- raise their salary in the next performance review cycle or immediately to prevent a loss of morale

70
Q

How to calculate compa ratio?

A

compa ratio = average rate of actual pay/range midpoint

71
Q

What does a compa ratio of 1 indicate?

A

The average salary of employees within that grade is equal to the midpoint.

72
Q

What does a compa ratio of less than 1 indicate?

A

On average, employees in a range are paid below the midpoint. That is, managers are paying less than the intended policy.

73
Q

Why would the compa ratio be less than 1?

A

(1) majority of the employees may be new or recent hires
(2) they may be poor performers
(3) promotion may be so rapid that few employees stay in the job long enough to get into the high end of the range

74
Q

What does a compa ratio of more than 1 indicate?

A

On average, the rates exceed the intended policy. These workers are drawing salaries close to the top of the range.

75
Q

Why would the compa ratio be more than 1?

A

(1) there are a majority of workers with high seniority, high performance, low turnover
(2) few new hires
(3) low promotion rates

76
Q

What is market pricing?

A

(1) pay strategies that emphasise external competitiveness and de-emphasize internal alignment
(2) sets pay structures almost exclusively on external market rates

77
Q

What is the objective of market pricing?

A

To base most of the internal pay structure on external rates.

78
Q

What is business strategy?

A

(1) pure market pricing carried to this extreme ignores internal alignment completely
(2) internal pay structure is aligned with competitors decision as reflected in the market
(3) choose to differentiate by having own pay strategy- pay above or below market

79
Q

Weigh balancing internal versus external pressures.

A

(1) de-emphasizing internal alignment may lead to unfair treatment among employees and inconsistency with the strategy and fundamental culture of the organization
(2) neglecting external competitive pay practices will affect both ability to attract applicants and ability to retain valued employees. External pay relationships also directly impact labor costs and hence ability to compete in product/service market.

80
Q

What does differentiating pay strategy from competitors lead to?

A

Competitive advantage.

81
Q

What to take note of when differentiating pay strategy from competitors?

A

The reasons for being different must be clearly reasoned and articulated. Otherwise, being different may only lead to lack of competitiveness in the product market or labor market, hindering org success and strategy and execution.

Total Rewards Management (10 decks)

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