Designing compensation system Part III

1. Designing Compensation System: Part III
Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
Professor
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2. Constructing a Pay Structure
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3. Pay Structure
Useful for standardizing compensation practices
Pay structures include several grades
Each grade contains minimum salary/wage and step
increments/grade range
Pay for each job may be pre-determined through collective
bargaining.
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4. Factors Affecting Pay
Structures
Corporate culture and value
Management Philosophy
External Economic Environment
External “Socio-political” environment
(Unions)
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5. Anatomy of a Pay structure
Pay Structure – consists of a series of Pay Ranges, or
“grades”, each with a minimum and maximum pay
rate
Pay Range - has a minimum pay value, maximum pay
value and a “midpoint”
Midpoint of a range – represents the competitive
market value for the job or group of jobs
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6. Range Spread
– Difference between maximum and minimum pay value
- Usually expressed as % of difference between max and
minimum divided by the minimum
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7. Spread on either side of midpoint
Midpoint – Minimum Maximum– Midpoint
Minimum Midpoint
Midpoint = Max + Min
2
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8. Range Spread
-75% 75%
Minimum Midpoint Maximum
200000 350000 612500
Range Spread Width = 206 %
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9. Range Spread
Vary based on level and sophistication of skills
required for a given position
Entry level positions (skills that are quickly
mastered) have narrower pay ranges
Managerial positions will have broader pay
ranges
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10. Typical Range Spreads
20 – 25 % - Lower-level service, production
30 – 40 % - clerical, technical
40 – 50 % - professional, administrative, middle
management
Range spreads 300% or more with Broad banding
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11. Compa - Ratios
A Statistic that expresses the relationship
between base salary and the midpoint, or
between the midpoint and the market average
Compa-Ratio = Base Salary
Midpoint
Companies strive to pay around a compa-ratio of 100
%
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12. Compa - Ratios
Individual C-R vary according to
How long the individual has been in the job
Previous work experience
Job performance
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13. Compa - Ratios
Person 1 Person 2 Person 3 Average
Base Salary 22500 25000 27500 25000 24500
Mkt Avg
Midpoint 25000 25000 25000 25000 25000
Base Salary
Base Salary
Mkt Avg
Midpoint
Midpoint
Compa-Ratio 90% 100% 110% 100% 98%
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14. Building Market Competitive
Compensation System
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15. Pay Structure
Basis of pay programs is a pay structure - a hierarchy
of jobs with pay ranges
Greater worth of job, higher the pay grade and range
Pay program objectives are as follows:
• Internal equity.
• External equity (or competitiveness),
• Individual equity,
• Process equity,
• Performance or productivity incentives,
• Maximum use of financial resources,
• Compliance with laws and regulations, and
• Administrative efficiency
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16. Constructing a Pay Structure
Step 1: Job Evaluation - Deciding number of pay
structures
Step 2: Salary surveys - Determining external market pay
structure
Step 3: Grouping Jobs - Defining pay grades
Step 4: Pricing each pay grade – Establishing wage curve
Step 5: Formulating rate structure

17. Step 1: Job Evaluation
Systematic process of determining relative worth of
jobs in order to establish which jobs should be paid
more than others within an organization.

18. Step 2: Salary Surveys
(Compensation Surveys)
Salary surveys compare an organisation’s salaries to
those offered in other organisations.
Does the organisation want to compare itself
with:
 Organisations in the same or related industries?
 Organisations in the same geographic area?
 ‘Best practice’ companies?
 Domestic companies?
 Multinationals?

19. Step 2: External Market Pay Structure
Pay Structure for Clerk Jobs
26,000
Market Pay Line
24,000
Annual Salary ($)
21,000
18,000
15,000
12,000
250 500 750 1,200
Clerk I Clerk II Clerk III Chief Clerk
Job Evaluation Points

20. Step 3 Grouping Jobs
Group jobs into Pay Grades or Job
Classes
Groups of jobs within a particular class
that are paid the same rate or rate range
jobs of equal difficulty

21. Step 3: Defining Pay Grades (Internal
Job Structure
26,000
Market Pay structure
24,000
21,000
Annual Salary ($)
18,000
15,000
200-300 301-650 651-1,150 1,151-2,000
12,000
Messenger (200) Mail Clerk II (350) Mail Clerk III (675) Mailroom
Mail Clerk I (220) Clerk II (500) Clerk III (750) Super (1,175)
Clerk I (250) Sec.I (650) Sec. II (1,000) Chief Clerk (1,200)
Recep. (300) Exec. Sec. (1,900)
Job Evaluation Points

22. Hierarchy of Clerical Jobs, JE Points and
Pay Grades
JOB Pt. Grd.
Customer Service Rep. 300 5
Executive Secretary/Admin. Asst. 298
Senior Secretary 290
Secretary 230 4
Senior General Clerk 225
Credit and Collection 220
Accounting Clerk 175 3
General Clerk 170
Legal Secretary/Assistant 165
Senior Word Processing Operator 160

23. Step 4 Pricing Each Pay Grade
Price Each Pay Grade and establish Wage Curve
Wage Curve shows pay rates currently paid for
jobs in each pay grade, relative to the points or
rankings assigned to each job or grade by the
job evaluation committee

24. Wage Curve: Integrating Internal Job
Wage Curve: Integrating Internal Job
Structure with External Market Pay Rates
Structure with External Market Pay Rates
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7
6
monthly
salary 5
(Rs.000) 4
PAY
3
Line of Best Fit :
2 using Market-Survey data or
current organization data
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JE Points 40 80 120 160 200 240 280 320
Jobs AB CDEF GHIJ KLM 0P QRS TUV
Grades 1 2 3 4 5 6 7

25. Step 5: Formulating Rate Structure
GR JOBS SALARY (Rs.)
Single Rate I AB 5000
Structure II CDEF 7000
III GHIJ 9000
GR JOBS SALARY (Rs.)
Overlapping I AB 3000–250–4500–500-9000
Rate Range II CDEF 6000–400–8400–750-14400
III GHIJ 10000–600–13600–900-20800

26. Pay Policies Over Time
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