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Similaire à Designing Pay Structure.pptx
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Designing Pay Structure.pptx
- 3. What is a Survey? • A survey is the systematic process of collecting and making judgments about the compensation paid by other employers.
- 4. 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
- 5. 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
- 6. SELECT RELEVANT MARKET COMPETITORS (cont.) EXHIBIT 8.2
- 7. SELECT RELEVANT MARKET COMPETITORS (cont.)
- 9. 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.)
- 10. 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.
- 11. 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.
- 12. 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.
- 14. 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.
- 15. 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.
- 16. EXHIBIT 8.9
- 17. 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.
- 18. 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.
- 19. EXHIBIT 8.12: SURVEY DATA
- 21. EXHIBIT 8.12: SURVEY DATA
- 22. 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.
- 23. Interpret Survey Results (cont.) Anomalies. • Does any one company dominate? • Do all employers show similar patterns? • Are there outliers?
- 24. Statistical Analysis Frequency Distribution • Help visualize information and may highlight anomalies, or outliers. • Shapes can vary but unusual shapes may reflect problems.
- 26. 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.
- 27. Statistical Analysis (cont.) Variation - Distribution of rates around the central tendency is the variation.
- 28. 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
- 29. Combine Internal Structure and External Market Rates (cont.)
- 30. 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.
- 31. 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.
- 32. Update the Survey Data (cont.)
- 33. 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
- 34. 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.
- 35. 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.
- 36. CONSTRUCTING RANGES: Establish Ranges (midpoints, minimum and maximum). (cont.)
- 37. From Policy to Practice: Broad Banding
- 40. 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.
Notes de l'éditeur
- The major decisions in setting externally competitive pay and designing the corresponding pay structures are shown in Exhibit 8.1. They include (1) specify the employer’s competitive pay policy, (2) define the purpose of the survey, (3) select relevant market competitors, (4) design the survey, (5) interpret survey results and construct the market line, (6) construct a pay policy line that reflects external pay policy, and (7) balance competitiveness with internal alignment through the use of ranges, flat rates, and/or bands. This is a lengthy list. Think of Exhibit 8.1 as a road map through this chapter. The guideposts are the major decisions you face in designing a pay structure. Don’t forget to end with, So what? “So what” means ensuring that pay structures both support business success and treat employees fairly.
- Translating an external pay policy into practice requires information on the external market. Surveys provide the data for translating that policy into pay levels, pay mix, and structures.
- Adjust the Pay Level in response to changing external pay rates. Most organizations adjust pay on a regular basis. Such adjustments can be based on: The overall movement of pay rates caused by competition for people in the market. Performance. Ability to pay: Because these adjustments reflect market pressures which also reflect inflation pressures, and general economic health. Terms specified in a contract. Set the mix of pay forms relative to those paid by competitors. Adjustments to the different forms of pay competitors use (base, bonus, stock, benefits) and the relative importance they place on each form occur less frequently than adjustments to overall pay level. It is not clear (without good research) why changes to the pay mix occur less frequently than changes in the pay level. Perhaps the high costs of redesigning a different mix create a barrier. Perhaps inertia prevails. More likely, insufficient attention has been devoted to mix decisions. That is, the mix organizations use may have been based on external pressures such as health-care costs, stock values, government regulations, union demands, and what others did. Yet some pay forms may affect employee behavior more than others. So good information on total compensation, the mix of pay competitors use, and costs of various pay forms is increasingly important. Adjust Pay Structure Many employers use market surveys to validate their own job evaluation results. For example, job evaluation may place purchasing assistant jobs at the same level in the job structure as some secretarial jobs. But if the market shows vastly different pay rates for the two types of work, most employers will recheck their evaluation process to see whether the jobs have been properly evaluated. Rather than integrating an internal and external structure, some employers go straight to market surveys to establish their internal structures. Such “market pricing” mimics competitors’ pay structures. Accurate market data are increasingly important as organizations move to more generic work descriptions (associate, leader) that focus on the person’s skill as well as the job. Accurate information and informed judgment are vital for making all these decisions. Study Special Situations Information from specialized surveys can shed light on specific pay-related problems. A special study may focus on a targeted group such as patent attorneys, retail sales managers, secretaries, or software engineers. Unusual increases in an employer’s turnover in specific jobs may require focused market surveys to find out if market changes are occurring. Estimate Competitors’ Labor Costs Survey data are used as part of employers’ broader efforts to gather “competitive intelligence.” To better understand how competitors achieve their market share and price their products/services, companies seek to examine (i.e., benchmark) practices, costs, and so forth against competitors, including in the area of compensation. Companies seek benchmark practices, costs, and compensation to better understand competitor’s achievements.
- We are up to the third of our major decisions shown in Exhibit 8.1: Specify relevant markets. To make decisions about pay level, mix, and structures, a relevant labor market must be defined that includes employers who compete in one or more of the following areas: 1. The same occupations or skills 2. Employees within the same geographic area 3. The same products and services A relevant labor market includes employers who compete in: The same occupations or skills. -Microsoft and Google include both product market and labor market competitors. Hiring employees within the same geographic area. -As importance and complexity of qualifications increase, the geographic limits also increase. The same products or services. -If the skills are tied to a particular industry, define the market by industry. -International comparisons are improving, but use judgment. New organizations and jobs fuse diverse knowledge and experience, so “relevant” markets appear more “fuzzy.”
- Exhibit 8.2 shows how Microsoft and Google select relevant market competitors in establishing executive compensation. Both explicitly include product market (“technology”) and labor market competitors. The geographic level is national or international.
- Exhibit 8.3 shows how qualifications interact with geography to define the scope of relevant labor markets. As the importance and the complexity of the qualifications increase, the geographic limits also increase.6 Competition tends to be national or international for managerial and professional skills (as in Exhibit 8.2) but local or regional for clerical and production skills.
- Consulting firms offer a wide choice of ongoing surveys covering almost every job family and industry group imaginable. Their surveys are getting better and better. Increasingly, consultants offer clients the option of electronically accessing the consultants’ survey databases. So, this Exhibit 8.5 provides some factors to consider in designing a pay survey and/or in choosing a pay survey vendor/consultant.
- 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?
- In most organizations, the responsibility for managing the survey lies with the compensation manager. But since compensation expenses have a powerful effect on profitability, including managers and employees on the task forces makes sense. Survey participants may be guilty of price fixing if the overall effect of the information exchange is to interfere with competitive prices and artificially hold down wages. Identifying participants’ data by company name is considered price fixing.
- How may employers in Survey? Usually at least 10 – often more. Surveys by consulting firms often include 100 firms or more. However, these surveys usually come up with a wide range of results for the same job. So what is the average rate for a job? It depends upon what companies are included in the survey. Different samples will produce different results.
- A general guideline is to keep things as simple as possible. Select as few employers and jobs as necessary to accomplish the purpose. The more complex the survey, the less likely employers are inclined to participate. Benchmark-Job Approach In Chapter 5 we noted that benchmark jobs have stable job content, are common across different employers, and include sizable numbers of employees. If the purpose of the survey is to price the entire structure, then benchmark jobs can be selected to include the entire job structure—all key functions and all levels, just as in job evaluation.
- In Exhibit 8.7, the more heavily shaded jobs in the structures are benchmark jobs. Benchmark jobs are chosen from as many levels in each of these structures as can be matched with the descriptions of the benchmark jobs that are included in the survey. Exhibit 8.8 indicates that about one in three organizations are able to match over 80 percent of jobs to salary survey jobs, with the remaining organizations report less success in matching. The degree of match between the survey’s benchmark jobs and each company’s benchmark jobs is assessed by various means.
- Low-High Approach If an organization is using skill-competency-based structures or generic job descriptions, it may not have benchmark jobs to match with jobs at competitors who use a traditional job-based approach. Market data must be converted to fit the skill or competency structure. The simplest way to do this is to identify the 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 can then be slotted between the anchors. For example, if the entry market rate for operator A is $12 per hour and the rate for a team leader is $42 per hour, then the rate for operator B can be somewhere between $12 and $42 per hour.26 The usefulness of this approach depends on how well the extreme benchmark jobs match the organization’s work and whether they really do tap the entire range of skills. Hanging a pay system on two pieces of market data raises the stakes on the accuracy of those data. Benchmark Conversion/Survey Leveling In cases where the content (e.g., job description) of an organization’s jobs does not sufficiently match that of jobs in the salary survey, an effort can be made to quantify the difference via benchmark conversion. If an organization uses job evaluation, then its job evaluation system can be applied to the survey jobs. The magnitude of difference between job evaluation points for internal jobs and survey jobs provides an estimate of their relative value and thus guidance for adjusting the market data. (Again, a judgment.)
- Organization data This information assesses the similarities and differences among survey users. Financial information, size and organization structure are usually included. Surveys of executives and upper-level position include more detailed financial and reporting relationships data. Total Pay System Data All the basic forms of pay need to be covered in a survey to assess the similarities and differences in the entire pay packages and to accurately assess competitor’s practices. Incumbent data The most important data in in the survey are the actual rates paid to each incumbent. Total earnings, hours worked, data and amount of last increase and bonus and incentive payments are included. International Data International competition requires international pay comparisons. Most large consulting firms conduct international surveys.
- Exhibit 8.9 lists the basic data elements and the logic for including them. No survey includes all the data that will be discussed. Rather, the data collected depend on the purpose of the survey and the jobs and skills included.
- Every organization uses its own methods of distilling information from the survey; uses different methods for company surveys. Verify Data A common first step is to check the accuracy of the job matches, and then check for anomalies (i.e., an employer whose data are substantially out of line from data of others), age of data, and the nature of the organizations (e.g., industry, size—State Farm Insurance versus Google).
- Exhibit 8.12 is an excerpt from the survey used to prepare Exhibit 8.13. The survey was conducted at the behest of FastCat, a small start-up familiar to many readers. While there were a number of jobs included in the survey, we use information for just one job—engineer 1—to illustrate. As you can see, surveys do not make light reading. However, they contain a wealth of information. To extract that information, step through the portal . . . to being the FastCat analyst.30
- Accuracy of Match (and Improving the Match) Part A of the survey contains the description of the survey job. For jobs that match perfectly, things are easy. However, in most cases, the match is either poor or not perfect. In the latter case, one does not need to make a yes/no (all or nothing) decision. Rather, if the company job is sufficiently close to the survey job, especially on the most fundamental aspects, the benchmark conversion/survey leveling approach discussed earlier in this chapter can be used; that is, multiply the survey data by some factor that the analyst judges to be the difference between the company job and the survey job. One way to execute this process is to conduct a job evaluation of the organization’s benchmark job and the corresponding survey job and then determine their relative values.
- Anomalies Part B of the survey shows actual engineer 1 salaries. Perusal of salary data gives the analyst a sense of the quality of the data and helps identify any areas for additional consideration. For example, Part B of Exhibit 8.12 shows that no engineer 1 at company 1 receives stock options, and five receive no bonuses. The bonuses range from $500 to $4,000. (Because there are 585 engineer 1s in this survey, we have not included all their salary information.) Individual-level data provide a wealth of information about specific practices. Understanding minimums, maximums, and what percent actually receive bonuses and/or options is essential. Unfortunately, many surveys provide only summary information such as company averages.
- Becoming familiar with the actual data in a survey is a necessary first step to assessing its accuracy and usefulness.
- Exhibit 8.13 shows two frequency distributions created from the data in the Exhibit 8.12 survey. The top one shows the distribution of the base wages for the 585 engineer 1s in increments of $1,000. The second one shows the total compensation for 719 engineer 5s in increments of $10,000. (The wide range of dollars—from under $90,000 to over $900,000—is the reason that many surveys switch to logs of dollars for higher-level positions.) Frequency distributions help visualize information and may highlight anomalies. For example, the base wage above $79,000 may be considered an outlier. Is this a unique person? Or an error in reporting the data? A phone call (or e-mail) to the survey provider may answer the question.
- Central Tendency A measure of central tendency reduces a large amount of data into a single number. Exhibit 8.14 defines commonly used measures. The distinction between “mean” and “weighted mean” is important. If only company averages are reported in the survey, a mean may be calculated by adding each company’s base wage and dividing by the number of companies. While use of the mean is common, it may not accurately reflect actual labor market conditions, since the base wage of the largest employer is given the same weight as that of the smallest employer. Weighted mean is calculated by adding the base wages for all 585 engineers in the survey and then dividing by 585 ($46,085). A weighted mean gives equal weight to each individual employee’s wage.
- Variation The distribution of rates around a measure of central tendency is called variation. The two frequency distributions in Exhibit 8.13 show very different patterns of variation. Variation tells us how the rates are spread out in the market. Standard deviation is probably the most common statistical measure of variation, although its use in salary surveys is rare. Quartiles and percentiles are more common measures in salary survey analysis. Recall from the chapter introduction that someone’s policy was “to be in the 75th percentile nationally.” This means that 75 percent of all pay rates are at or below that point and 25 percent are above. Quartiles (25th and 75th percentiles) are often used to set pay ranges. More on pay ranges later.
- At this point, two parts of the total pay model have merged. Their relationship to each other can be seen in Exhibit 8.18. These two components – internal consistency and external competitiveness – come together in the pay structure. The pay structure has two aspects. One is that actual pay policy, which reflects market rates adjusted to the job structure and pay level policy decisions of the organization. • The internally aligned structure (developed in Chapters 3–6) is shown on the horizontal (x) axis. For this illustration, our structure consists of jobs A through P. Jobs B, F, G, H, J, M, and P are the seven benchmark jobs that have been matched in the survey. Jobs A, C, D, E, I, K, L, N, and O have no direct matching jobs in the salary survey. • The salaries paid by relevant competitors for those benchmark jobs, as measured by the survey—the external competitive data, are shown on the vertical (y) axis. These two components—internal alignment and external competitiveness—come together in the pay structure. The pay structure has two aspects: the pay-policy line and pay ranges.
- Regression generates a straight line that best fits the data by minimizing the variance around the line. Exhibit 8.16 shows the regression lines that use the pay survey data in Exhibit 8.11 as the dependent variable(s) and the job evaluation points of matched FastCat jobs as the independent variable. Compare the data tables in Exhibit 8.11 and Exhibit 8.16. Exhibit 8.11 shows the market rates for survey jobs. Exhibit 8.16 shows the job evaluation points for the FastCat jobs that match these survey jobs plus the regression’s statistical “prediction” of each pay measure for each job. The actual base pay for the survey job Tech A is $22,989 (Exhibit 8.11); the “predicted” base pay for the job is $23,058 (Exhibit 8.16).
- Look again at Exhibit 8.11. It shows the results of the FastCat analyst’s decisions on which salary survey jobs to include that are judged to closely match internal benchmark jobs (the seven jobs on the x [horizontal] axis), which companies to include and which measures of pay to use. For each of the compensation metrics, a line has been drawn connecting the pay for the seven jobs. Jobs are ordered on the horizontal axis according to their position (i.e., number of job evaluation points) in the internal structure. Thus, the line trends upward to create a market line. A market line may be drawn freehand by connecting the data points, as was done in Exhibit 8.11, or statistical techniques such as regression analysis may be used. 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.
- Exhibit 8.15 illustrates updating. In the example, the base pay rate of $45,000 collected in the survey was in effect at January 1 of the current year—already in the past. The compensation manager will use this information for pay decisions that go into effect on January 1 of the plan year. So if base pay has been increasing by approximately 5 percent annually, and we assume that the future will be like the past, the rate is multiplied by 105 percent to account for the change expected by the end of the current year (to $47,250) and then by an additional percentage to estimate pay rates for the plan year.
- Pay grade and ranges are established using base pay data that reflects the basic value of work. Pay grades are established somewhat arbitrarily. A firm must decide how may pay grades it will use to reflect the levels of jobs in the organization. For example, some firms might use 5 pay grades to reflect the various levels of management jobs, while other might use 15 pay grades. These decisions reflect the organizational structure culture and HR strategy. A pay range for each grade allows the firm to recognize: 1. Individual performance differences 2. Length of service 3. Encourages employee to stay with one firm if they can grow their salary by moving through the range. The range minimum sets the floor for pay for a particular range. The range maximum sets the ceiling on what the employer is willing to pay for that work. Two points about range maximum that are not mentioned in the text: 1. Range maximum is often called “top rate” or “job rate”. The term job rate tells us that it’s the rate of pay for fully satisfactory performance. 2. Many firms use “merit pay” and this often includes a “merit maximum” which is a rate of pay above the job rate. If job rate is the rate of pay for fully satisfactory performance, then merit maximum is the rate of pay for outstanding job performance (as established by the performance appraisal process). Pay grades may have a “single rate” e.g. $14.50 per hour where every worker receives the same rate of pay (called a single rate) regardless of seniority or job performance.
- The first step in building flexibility into the pay structure is to group different jobs that are considered substantially equal for pay purposes into a grade. Grades enhance an organization’s ability to move people among jobs with no change in pay. In Exhibit 8.18, the jobs are grouped into five grades on the horizontal axis. The question of which jobs are substantially equal and therefore slotted into one grade requires the analyst to reconsider the original job evaluation results. Each grade will have its own pay range, and all the jobs within a single grade will have the same pay range. Jobs in different grades (e.g., jobs C, D, E, and F in grade 2) should be dissimilar from those in other grades (grade 1 jobs A and B) and will have a different pay range. Although grades permit flexibility, they are challenging to design. The objective is for all jobs that are similar for pay purposes to be placed within the same grade. If jobs with relatively close job evaluation point totals fall on either side of grade boundaries, the magnitude of difference in the salary treatment may be out of proportion to the magnitude of difference in the value of the job content. Resolving such dilemmas requires an understanding of the specific jobs, career paths, and work flow in the organization, as well as considerable judgment.
- The midpoints for each range are usually set to correspond to the competitive pay level established earlier. The point where the pay policy line crosses each grade becomes the midpoint of the of the pay range for that grade. The midpoint of the range is often called the control point. It specifies the pay objective for a fully trained employee who is satisfactorily performing a job within that grade. It also reflects the competitive position in the relevant market.
- Grades group job evaluation data on the horizontal axis; ranges group salary data on the vertical axis. Ranges set upper and lower pay limits for all jobs in each grade. A range has three salient features: a midpoint, a minimum, and a maximum. Exhibit 8.19 is an enlargement of grade 2 in Exhibit 8.18, which contains the engineer 1 job. The midpoint is $54,896. This is the point where the pay-policy line crosses the center ofthe grade. The range for this grade has been set at 20 percent above and 20 percent below the midpoint. Thus, all FastCat engineer 1s are supposed to receive a salary higher than $43,917 but lower than $65,875.35.
- Broad banding involves consolidating a many as four or five traditional grades into a single band with one minimum and one maximum. Exhibit 8.21 collapses salary grades into only a few broad bands, each with a sizable range. This technique, known as broad banding, consolidates as many as four or five traditional grades into a single band with one minimum and one maximum. Because the band encompasses so many jobs of differing values, a range midpoint is usually not used.
- Within these levels, managers hired and calibrated pay levels based on market information for individuals with similar backgrounds and responsibilities.