Chapter 8 Designing Pay Levels, Mix, and Pay Structures

Transcription

1 Chapter 8 Designing Pay Levels, Mix, and Pay Structures Major Decisions -Some major decisions in pay level determination: -determine pay level policy (specify employers external pay policy) -define purpose of survey (define purpose of compensation survey) -define relevant market (choose relevant market competitors to survey) -design and conduct survey -interpret and apply results (interpret survey results and construct market pay line) -design grades and ranges or bands (balance competitiveness with internal alignment through the use of ranges, flat rates, and/or bands) - Set Competitive Pay Compensation survey- the systematic process of collecting and making judgments about the compensation paid by other employees -provide data translating policy into pay levels, pay mix, and structures The Purpose of a Compensation Survey -employer conducts or participates in compensation survey because: 1. to adjust internal pay level in response to changing competitor pay rates 2. to set the internal mix of pay forms relative to those paid by competitors 3. to establish or price the internal pay structure 4. to analyze pay-related problems 5. to estimate labour costs of product market competitors - Determining externally competitive pay levels and structures: Set policy Define market Conduct survey Draw policy lines Merge internal and external pressures Competitve pay levels, mix, and structures - Adjust Pay Level- How Much To Pay? -most firms make adjustments to employees pay on regular basis based on overall upward movement of pay rates caused by competition for people in the market or on performance, ability to pay, or terms specified in contract Adjust Pay Mix- What Forms? -adjustments to different forms of pay competitors use (base, bonuses, incentives, benefits) and relative importance they place on each form occur less frequently than adjustments to overall pay level -mix of forms and their relative importance makes up the pay package -managers recognize total compensation involves many types of pay and some pay forms may affect employee behavior more than others

2 Adjust Pay Structure? -many employers use market surveys to validate their own job evaluation results (ie. If market shows different pay rates then determined by organizations job evaluation) Study Special Situations -information from specialized surveys (focused on targeted groups) may help find out if market changes are occurring Estimate Competitors Labour Costs -increasingly, survey data is used as part of employers efforts to gather competitive intelligence -employers may use salary survey data to benchmark against competitors product pricing and manufacturing practices Select Relevant Market Competitors -to make decisions about pay levels, mix and structures, a relevant labour market must be defined that includes employers who compete in one or more of the following areas: 1. the same occupation or skills required 2. the same geographic area 3. the same products and services -if skills are tied to particular industry (underwriters, actuaries, claims representative are tied to insurance) it can make sense to define the market on an industry basis -if skills are not limited to particular industry (clerical accounting, sales) considerations are less important -pay rates of competitors will affect costs of operations and financial condition (ability to pay) -problem when major competitors are based in countries with far lower pay rates (China) creates complexities because legal regulations, tax policies, customs -if company possesses good international survey data, careful judgment is required Relevant labour markets by geographic and employee groups: Geographic Scope Production Office and Clerical Technicians Local: within relatively small areas (cities, metropolitan areas) Regional: within a particular area or several provinces (wheatproducing region of most likely Most likely Most likely Only if in short supply or critical Only if in short supply or critical Scientists and Engineers Managerial Professional Most likely Likely Most likely Executive

3 western Canada) National: across the country International: across several countries Most likely Most likely Most likely Only if critical skills or those in very short supply Only if critical skills or those in very short supply Sometimes Design the Compensation Survey -designing compensation survey requires answering following questions: 1. Who should be involved in survey design? -in most organizations, responsibility for managing survey lies with compensation manger -since compensation expenses has effect on profitability, including employees and managers makes sense -hiring third-party consultant instead of managing survey internally buys expertise but may trade off some control over the decision that determine the quality and usefulness of data 2. How many employers should be included? -no firm rules about how many employers to include in survey -large firms with lead policy may exchange data only with few top-paying competitors -small organization in an area dominated by two or three employers may decide to survey only smaller competitors 3. What jobs should be included? -select as few employers and jobs as necessary to accomplish the purpose -more complex the survey, the less likely other employers are inclined to participate -benchmark-job approach- benchmark jobs have stable job content and are common across different employers -if company s purpose in conducting survey is to price the entire structure, then benchmark jobs can be selected -low-high approach-if an organization is using skill/competency-based structures or generic job descriptions, it may not be able to match jobs with competitors who use a traditional job-based approach -job-based market data must be converted to fit the skill or competency structured -simplest approach is to identify lowest and highest paid benchmark jobs for the relevant skills in the relevant market and to use the wages for these jobs as anchors for the skill based structures -work at various levels within the structure then can be slotted between anchors -benchmark conversion approach-alternative approach to job-matching difficulties is to apply the job evaluation plan used to create internal alignment to the descriptions of the survey jobs -magnitude of difference between job evaluation points for internal job and survey jobs provides guidance for adjusting the market data

4 4. What information should be collected? -three basic types of data are typically requested: 1. information about the natural of the organization assesses similarities and differences between survey users -identification (company name, address, contact person) -financial performance (assets, sales, profits (after taxes), cash flow) -size (profit centers, product lines) -structure (total number of employees, organizational charts) 2. information about the total compensation system- all basic forms of pay need to be covered in a survey to assess similarities and differences in total pay packages and to accurately assess competitors practices -cash forms used (base pay, pay increase schedules, long- and short- term incentives, bonuses, cost of living adjustments, overtime, shift differentials) -non-cash forms used (composition of benefits and services, particularly the degree of coverage and contributions to medical and health insurance and pensions) 3. specific pay data on each incumbent in the jobs under study -date (date survey data in effect) -job (match generic job descriptions) -individual (number of employees supervised and reporting levels, years since degree, education, date of hire Advantages and Disadvantages of Measures of Compensation: Base Pay amount of cash the Tells how competitors are competitors decided each job is valuing the work in similar jobs worth Total Cash (base + bonus) reflects the cash value of the job bonuses paid to incumbents Total Compensation (base + bonus + stock options + benefits) reflects the total overall value of the employee plus the value of the work itself Tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job Tells the total value competitors place on this work Fails to include performance incentives and other forms, so will not give true picture if competitors offer low base but high incentives All employees may not receive incentives, so it may overstate the competitors pay plus, it does not include long-term incentives All employees may not receive all the forms. Be careful you don t set base equal to competitors total compensation. Risks high fixed costs incentives) -pay (actual rates paid to each individual, total earnings, last increase, bonuses, Job matching- the degree of match between the organizations jobs and survey jobs must be carefully assessed on job content rather than on the basis of job title only

5 Interpret Survey Results and Construct A Market Line -after survey data is collected, results have to be analyzed and use statistics to construct a market line -every organization uses its own methods of distilling information from the survey, uses different surveys for different purposes, and uses different methods for company surveys -no single best approach -verify data: check accuracy data and anomalies Survey leveling- multiplying survey data by a numerical factor to adjust for differences between the company job and the survey job -two pieces of data on each benchmark: -survey data dollars -on own data job evaluation points -scatterplot shows relationships -frequency distribution organizes data -measures of central tendency -averages or means -weighted means -medians -measures of distribution or dispersion -standard deviation -percentiles and quartiles -range spread Age/trending survey data- adjusting survey data to represent pay at the current or future date when the pay decisions will be implemented Market pay line- links a company s benchmark jobs on the horizontal axis (internal structure) with market rates paid by competitors (market survey) on the vertical axis Combine Job Evaluation and Market Survey Data Scatterplots: for each benchmark job there is a distribution of wages paid by survey companies -useful to see what data looks like -summarize the data further by fitting a line through the points ( eyeball data or use regression techniques) The Pay Policy Line -pay structure has two components: 1. Pay policy line- pay line representing an adjustment to the market pay line to reflect the company s external competitive position in the market (ie. Lead, match, lag) -line reflects firms competitive position in the market 2. Pay ranges- upper and lower limits on pay Adjust the Data To Reflect Organizations Pay Policy: Lead the Market: -pay level above market for the year and equal at year end -update factor will be equal to the projected market increase Match the Market: -pay level above market for first half of year and below for second half

6 -update factor will be half of the projected market increase Lag the Market: -pay level below market for entire year -no adjustment will be made to account for the projected market increase Grades and Ranges Pay grade- grouping of jobs considered substantially equal for pay purposes -base pay data are used here because it reflects the basic value of the work (or relevant skills sets) -horizontal grouping of different jobs that are considered substantially equal for pay purposes -pay grades enhance an organization s ability to move people among jobs within a grade with no change in pay -number of pay grades varies with: number of jobs, organization hierarchy, and reporting relationships -grades enhance organizations ability to move people between jobs within a grade with no change in pay -all jobs within a single grade will have the same pay range -grades permit flexibility -grades and ranges offer managers flexibility to deal with pressures from external markets and within organization -ranges permit managers to recognize: -differences in quality (skills, abilities, experience)-between individuals applying for work -differences in productivity or value of these quality variations -differences in the mix of pay forms competitors use -organization may desire differences in rates paid to employees performing the same job -pay range exists whenever two or more rates are paid to employees performing same job -ranges provide managers the opportunity to: -recognize individual performance differences with pay -meet employees expectations that their pay will increase over time, even while holding the same job -encourage employee commitment to remain with the organization -from internal alignment perspective, the range reflects the differences in performance or experience the employer wishes to pay for a given level of work -from external competitiveness perspective, the range also acts as control device -range maximum sets the ceiling on what the employer is willing to pay for that work: range minimum sets floor -not all employers use ranges -skill based plans establish flat rates for each skill level, regardless of performance or seniority -many collective bargaining contracts establish single flat rates for each job -broad bands offer employers even greater flexibility to treat employees differently and to deal with external pressures -external pressures: =quality variations (KSA s) among individuals in the external market =recognition of differences in the productivity-related value to employers of these quality variations -internal pressures:

7 -the intention to recognize individual performance variations with pay -employees expectations that their pay will increase overtime Establish Range Midpoints, Minimums, and Maximums Pay range-an upper and lower limit on pay for all jobs in a pay grade -vertical dimension of pay structure -each pay grade will have associated with it a pay range consisting of a midpoint and a specified minimum and maximum -midpoint represents base pay for a seasoned employee Broadbanding Broadbanding-a large band of jobs containing several pay grades -collapses the number of salary ranges within traditional salary structure into a few broad bands -purpose is to manage career growth and administer pay -alternative to traditional salary grade structures -broadbanding takes two steps: 1. set the number of bands- surveys report companies are using 3-8 bands for pay purposes 2.price the bands reference rates- Reference rates-pay rates from market data used in pricing broadbands *ranges traditionally serve as controls, whereas reference rates act as guides Ranges Support: -some flexibility within controls -relative stable organization design -recognition via titles or career progression -midpoint controls, comparatives -controls designed into system -give managers freedom with guidelines -up to 150% range spread Bands Support: -emphasis on flexibility within guidelines -global organizations -cross-functional experience and lateral progression -reference market rates, shadow ranges -controls in budget, few in system -give managers freedom to manage pay % spreads Balancing Internal and External Pressures: Adjusting Pay Structure -job structure orders hobs on basis of internal organizational factors (reflected in job evaluation or skill certification) -pay structure is anchored by organizations external competitive position, reflected in base pay policy lines Reconciling Differences -problem with using two bases (internal and external) to create a structure is that they are likely to result in two different structures -order in which jobs are ranked on internal and external factors probability will not agree completely

8 -differences between market structures/rates and job evaluation rankings warrant a review of the basic decisions in evaluating and pricing that particular job (may entail a review of the job analysis, the job description, and the evaluation of the job, or the market data for the job in question) Market Pricing -many organizations in Canada are adopting pay strategies Market pricing-establishing pay structure by relying almost exclusively on external market pay rates