Designing Pay Structure.pptx

designing pay structure

1. Designing Pay Structure

2. What is a Survey? A survey is the systematic process of collecting and making judgments about the compensation paid by other employers.

3. THE PURPOSE OF A SURVEY To adjust the pay level relative to competitors To estimate the labor costs of competitors To analyze pay related problems To establish or price a pay structure To set the mix of pay forms relative to competitors

4. SELECT RELEVANT MARKET COMPETITORS Relevant labor market includes employers who compete: For same occupations or skills For employees in same geographic area With same products and services

5. SELECT RELEVANT MARKET COMPETITORS (cont.) EXHIBIT 8.2

6. SELECT RELEVANT MARKET COMPETITORS (cont.)

7. Design the Survey

8. Designing a survey requires answering the following questions Who should be involved in the survey design? How many employers should be included? Which jobs should be included? What information should be collected? Design the Survey (cont.)

9. Who Should Be Involved? Usually the compensation manager is responsible for the survey, but including managers and employees makes sense. Use outside consulting firms as third-party protection against possible “price-fixing” lawsuits. Price Fixing happens if survey participants interfere with competitive prices and artificially hold down wages. Identifying participants’ data by company name is considered price fixing.

10. How Many Employers? There are no firm rules on how many employers to include in a survey. Large firms with a lead policy may exchange data with only a few (6 to 10) top paying competitors. A small organization in an area dominated by two or three employers may decide to survey only smaller competitors.

11. Which Jobs to Include? There are several approaches to selecting jobs for inclusion. Benchmark-Job Approach. If the purpose of the survey is to price the entire structure, then select benchmark jobs to include the entire structure. The degree of match is assessed by various means.

12. Benchmark-Job Approach (cont.)

13. Which Jobs to Include? (cont.) Low-High Approach. Convert market data to fit the skill - or competency-based structure. Use the lowest- and highest-paid benchmark jobs as anchors. Benchmark Conversion / Survey Leveling. When jobs do not match survey jobs, quantify the difference using benchmark conversion. If an organization uses job evaluation, then apply that system to the survey jobs.

14. What Information to Collect? Information about the organization. Competitors’ data has not been used to compare competitors’ productivity (revenues to compensation) or labor costs. But this is changing. Information about the total compensation system. Base pay, total cash, and total compensation are the most commonly used measures of compensation. Misinterpreting competitors’ pay practices can lead to costly mispricing of pay levels and structures. Specific pay data on each incumbent in the jobs under study.

15. EXHIBIT 8.9

16. How to collect the data? Two basic methods are used to collect the data: Interviews (in person or by phone) and mailed questionnaires. The purpose of the survey and the expensiveness of the data required usually determine the method.

17. Interpret Survey Results Verifying Data. A common first step is to check the accuracy of the job matches. Then check for anomalies age of data, and nature of the organizations.

18. EXHIBIT 8.12: SURVEY DATA

19. EXHIBIT 8.12: SURVEY DATA

20. Interpret Survey Results (cont.) Accuracy of Match (and Improving the Match). If a company job is similar, but not identical, some use the benchmark conversion / survey leveling approach.

21. Interpret Survey Results (cont.) Anomalies. Does any one company dominate? Do all employers show similar patterns? Are there outliers?

22. Statistical Analysis Frequency Distribution Help visualize information and may highlight anomalies, or outliers. Shapes can vary but unusual shapes may reflect problems.

23. Statistical Analysis (cont.) Central Tendency A measure reducing a large amount of data into a single number. Calculate a mean by adding each company’s base wage and dividing by the number of companies. Calculate a weighted mean by adding base wages for all employees and dividing by the number of employees.

24. Statistical Analysis (cont.) Variation - Distribution of rates around the central tendency is the variation.

25. Combine Internal Structure and External Market Rates Two parts of the total pay model have merged Internally aligned structure - Horizontal axis External competitive data - Vertical axis Two aspects of pay structure Pay-policy line Pay ranges Exhibit 8.18

26. Combine Internal Structure and External Market Rates (cont.)

27. Construct a Market Pay Line A market 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. It summarizes the distribution of going rates paid by competitors in the market.

28. Update the Survey Data Making adjustments to survey data to reflect the fact that the data has different effective dates. (Aging the data) Some respondents may have recently adjusted their data while other respondents may report rates that have not been adjusted for nearly a year and may be adjusted soon.

29. Update the Survey Data (cont.)

30. FROM POLICY TO PRACTICE: GRADES AND RANGES The next step is to design pay grades and pay ranges. These analyses are usually done with base pay data, since base pay reflects the basic value of the work rather than performance levels of employees

31. CONSTRUCTING RANGES: Develop Grades A grade is a grouping of different jobs that are considered substantially equal for pay purposes. Grades enhance an organization’s ability to move people among jobs within a grade with no change in pay.

32. CONSTRUCTING RANGES: Establish Ranges (midpoints, minimum and maximum). Pay ranges refer to the vertical dimension of the pay structure. Each pay grade will have associated with it a pay range consisting with a midpoint and a specified minimum and maximum.

33. CONSTRUCTING RANGES: Establish Ranges (midpoints, minimum and maximum). (cont.)

34. From Policy to Practice: Broad Banding

35. Broad Banding Examples

36. Pricing a Band Rather than a saving, broad banding has the potential to be more expensive because the band deemphasize minimums, midpoints and maximums as control points for managing salary treatment.