COMPENSATION

Third Canadian Edition

Milkovich, Newman, Cole

8-1

© 2010 McGraw Hill Ryerson

 Determining Externally Competitive
Pay Levels and Structures

Draw Merge Internal & Competitive Pay

Set Define Conduct
Policy External Levels, Mix and
Policy Market Survey
Lines Pressures Structures
Some Major Decisions in Pay Level Determination
 Determine pay level policy

 Define purpose of survey

 Define relevant labour market

 Design and conduct survey

 Interpret and apply results

 Design grades and ranges or bands

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 Set Competitive Pay Policy

Lead the market with respect to pay

Match average pay of competitors
Lag behind average market pay rates

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 Compensation Survey
 the systematic process of collecting and
making judgments about compensation
paid by other employers

 provides data for translating pay policy

into pay levels and structures

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 Purpose of Compensation
Survey
 Adjust Pay Level – How Much to Pay?
 Adjust Pay Mix – What Forms?
 Adjust Internal Structure?
 Study Special Situations
 Estimate Competitors’ Labour Costs

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 Define Relevant Market
Competitors
 employers who compete for the same
occupations or skills required

 employers who compete for

employees within the same geographic
area

 employers who compete with the

same products and services
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 Relevant Labour Markets by
Geographic and Employee Groups
Geographic Production Office and Technicians Scientists & Managerial Executive
Scope Clerical Engineers Professional
Local: Within Most likely Most likely Most likely
relatively small
areas such as
cities
Regional: Within Only if in Only if in Most likely Likely Most likely
a particular area short supply short supply
of the province or critical or critical
National: Across Most likely Most likely Most likely
the country

International: Only for critical Only for critical Sometimes

Across several skills or those in skills or those
countries very short supply in very short
supply

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 Design the Survey

 Who should be involved?

 compensation staff and/or
 consultants

 How many employers should be included?

 Can use publicly available data
 Can use internet data

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© 2010 McGraw Hill Ryerson

 Design the Survey
 Which jobs should be included?
 Benchmark jobs
 Low-high approach (for person-based plans)
 Benchmark conversion approach

 What information to collect?

 Base pay
 Total cash
 Total compensation
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 Advantages and Disadvantages
of Measures of Compensation
Base Pay Tells how competitors are Fails to include performance incentives
valuing the work in similar and other forms, so will not give true
jobs picture if competitors offer low base but
high incentives
Total Cash Tells how competitors are All employees may not receive incentives,
(base + bonus) valuing work; also tells the so it may overstate the competitors’ pay;
cash pay for performance plus, it does not include long-term
opportunity in the job. incentives.

Total Tells the total value All employees may not receive all the
Compensation competitors place on this forms. Be careful; don’t set base equal to
(base + bonus + work competitors’ total compensation. Risks
stock options + high fixed costs.
benefits)

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 Job Matching

 the degree of match between the

organization’s jobs and survey jobs must
be carefully assessed on job content
rather than on the basis of job title only

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 Analyzing Survey Data

 no single best approach

 check accuracy of data and anomalies
 statistical analysis based on two pieces
of data on each benchmark:
Survey data - dollars
Our own data - job evaluation points

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© 2010 McGraw Hill Ryerson

 Analyzing Survey Data
 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
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© 2010 McGraw Hill Ryerson

Age/Trend the Market Data

Pay rates are constantly changing

Survey data represents pay at the date
it was collected
Adjust survey data to represent pay at
the current or future date when pay
decisions will be implemented

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 Combine Job Evaluation
and Market Survey Data
 Each benchmark job has:
 Job evaluation points
 An average wage paid by survey companies.
 Scatterplots are useful to see what the data
look like.
 Summarize the data further by fitting a line
through the points  the MARKET PAY LINE
 Can “eyeball” data or use regression
techniques
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 Scatterplot

SURVEY 6
monthly 5
salary
($000) 4
PAY 3

80 120 160 200 240 280 320 360

OUR Job Evaluation Points
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 Scatterplot With
Regression Line
7

6
SURVEY
monthly 5
salary 4
($000)
PAY 3

2 Market Pay Line

1

80 120 160 200 240 280 320 360

OUR Job Evaluation Points
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Adjust Market Data to Reflect
Organization’s 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
 update factor will be half of the projected market increase

Lag the Market:

 pay level below the market for the entire year
 no adjustment will be made to account for the projected market
increase
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© 2010 McGraw Hill Ryerson

 Developing a Pay Policy Line
lead
match
7
lag
6
OUR
monthly 5
salary
4
($000)
3 Pay Policy Line :
PAY using market-survey data
2 (updated and aged to reflect
Market pay line pay policy)
1 (beginning of year)

80 120 160 200 240 280 320 360

OUR Job Evaluation Points
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© 2010 McGraw Hill Ryerson

 Pay Structure
 two components:
1. Pay policy line: represents an
adjustment to the market pay
line to reflect the organization’s
external competitive position in
the market
2. Pay ranges: upper and lower
limits on pay
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 Why Use Pay Ranges?
 External Pressures:
 quality variations (KSAs) among market employees
 differences in productivity from quality variations
 differences in the mix of pay forms competitors use

 Internal Pressures
 recognize individual performance variations with pay
 employees’ expectations that their pay will increase
over time
 encourage employee retention

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© 2010 McGraw Hill Ryerson

 Constructing Ranges:
1. Develop Grades
a pay grade is a horizontal
grouping of different jobs that are
considered substantially equal
for pay purposes
all jobs within a single grade will
have the same pay range

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 PAY GRADE STRUCTURE
8

6
Our
monthly 5
salary 4
(000)
PAY 3

2
Pay Policy Line
1

I II III IV V Pay Grades

100 150 200 250 300 350
Our Job Evaluation Points
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© 2010 McGraw Hill Ryerson

 Constructing Ranges:
2. Establishing Midpoint, Minimum,
and Maximum
 pay ranges refer to the vertical
dimension of the pay structure – an
upper and lower limit on pay for all
jobs in a pay grade
 each pay grade has a pay range
consisting of a midpoint and a
specified minimum and maximum

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© 2010 McGraw Hill Ryerson

 PAY RANGES
8

7
Pay Range
6
Our
monthly 5
salary 4
(000)
PAY 3

2
Pay Policy Line
1

100 150 200 250 300 350

Our Job Evaluation Points
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 Range Midpoint,
Minimum, and Maximum

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 Range Spread
 Spread = range maximum – range minimum
e.g., $65,875 - $43,917 = $21,958
 Spread percentage = spread/range minimum
e.g., $21,958/$43,917 = 50%

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Range Overlap

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 Broadbanding
 collapses the number of salary ranges
within a traditional salary structure into a
few broad bands
 purpose is to manage career growth
and administer pay
 an alternative to traditional salary grade
structures

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From Grades to Bands

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 Contrasts Between
Ranges and Bands
Ranges Support: Bands Support:
 some flexibility within controls  emphasis on flexibility within
 relative stable organization guidelines
design  global organizations
 recognition via titles or career  cross-functional experience
progression and lateral progression
 midpoint controls,  reference market rates,
comparatives shadow ranges
 controls designed into system  controls in budget, few in
 give managers “freedom with system
guidelines”  give managers “freedom to
 Up to 150 percent range manage” pay
spread  100 – 400 percent spreads
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 Market Pricing
 establishing pay structure by relying
almost exclusively on external market
pay rates
 market pricing becoming more common
in Canada

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© 2010 McGraw Hill Ryerson

 Conclusion
 most organizations survey other employers’ pay
practices to determine the competitors’ rates
 survey results used to construct market pay line
 pay policy line adjusts market pay line based on
the decision to lead, match or lag market pay
 pay grades and ranges/bands designed around
pay policy line to integrate internal and external
pressures
 increasing interest in broadbanding and market
pricing
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© 2010 McGraw Hill Ryerson