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Compensation and Rewards by 6nO4T2


									Compensation and Rewards

           Business 158
           Spring Semester 2007
           Tim Brown

               Session 7

   Speaker Evaluation Due
   Project Due
   To this point in the course
    –   External competitiveness, summarized
   Break
   Project Two introduced
   Job Structures
To This Point in the Discussion

   Set the tone with the strategy and philosophy
   Define the work and gather insight through
    job analysis
   Document job content and role definition
    through job descriptions
   Determine the relative value of jobs through
    a project of job evaluation (rank/slotting,
    point factor)
   Determining Internal Job Structure

       analysis           description        evaluation       structure

   Collect information   Identify, define, and Compare jobs   Order jobs
   about specific jobs   describe the job      within the     based on
                         that is actually      organization   content or
                         performed                            relative value
Internal job structure

   What is the relative value of jobs within the
    –   Answer leads to career path opportunities
    –   Structure design impacts how workers view
        internal opportunity
    –   Structures impact how managers behave
        (promote or hire from outside)
   How do you translate internal values to the
    external market place?
External Competitiveness

   Labor Market Factors
     –   Modifications to Demand Side
     –   Modifications to Supply Side
   Product Market Factors and Ability to Pay
   Organization Factors
     –   Competitive Pay Policy Alternatives
     –   Consequences of Pay-Level and Mix Decisions
   Definition of Relevant Markets
What About External

    External competitiveness
    refers to the relationship of
    pay levels relative to other
    organizations (usually key
    competitors for talent)
What Is Pay Level? Pay Forms?

 Pay level refers to comparing
 average rates paid by employers

 Pay forms refer to the mix of
 various forms of pay/rewards used
 in total compensation package
Economic Theory

   Labor market assumptions
   Labor demand assumptions
   Market elasticity assumptions
   Product demand assumptions
   Competitive assumptions
   Efficiency assumptions
Let’s look at practical applications

   Employer’s market or employee’s market?
    (answer: it depends)
    –   Location
    –   Economy
    –   Talent pool
    –   Company’s ability to pay
   Job requirements
    –   Level of technical knowledge required
    –   Attractiveness factors (Google café vs chemical plant)
Relevant Markets

   Three factors determine labor markets
    –   Occupation
    –   Geography
    –   Competitors
   Issues related to defining the market
    –   Competitors – Products, location, and size
    –   Jobs – Skills and knowledge required and their
        importance to organizational success
Pay Policy Question

   How should we compensate our employees?
    –   What methods (mix of vehicles) to use?
   Who can get each type of pay?
    –   Egalitarian vs hierarchical
   How should pay be delivered/administered?
    –   Communication decisions
   How should pay be targeted?
    –   Lead, lag or match the market
Pay Policy Options:
Match the Competition

   Ensure an organization’s wage costs approximate
    those of product competitors
    –   Ability to attract potential employees approximates
        those of labor market competitors
   Issues
    –   Avoids placing employer at a disadvantage in pricing
        products or in maintaining a qualified work force
    –   May not provide an employer with a competitive
        advantage in its labor markets
Pay Policy Options: Lead Policy

   Maximizes ability to attract and retain quality employees

     –   Minimizes employee dissatisfaction with pay

     –   May offset less attractive features of work

   Issues

     –   If used only to hire new employees, may lead to dissatisfaction of current
         employees or pay compression

     –   Expensive, may lead to cost/profitability issues
Pay Policy Options: Lag Policy

   Paying less than competitors saves on payroll but
    may cost more in other areas

   Issues

    –   Hinders ability to attract potential employees
    –   Risks higher turnover, lower productivity

   If pay comes in another form (relational rewards) or
    later on (long-term incentives) it may be ok to pay
    less in salary
Pay Policy Options: Flexible Policies

   Employers can have multiple pay policies
   Vary by job, location/country, product line
    –   Above market for critical skill groups
    –   Below or at market for others
   Vary by pay element
    –   Above market in total compensation
    –   Below market in base pay
    –   Above market in incentives and rewards
    –   At or above market in benefits
Pay-Mix Policy Alternatives

                               Performance - Driven

                                           Base 50%
                           Options 16%

     Work - Life Balance
                              Bonus 17%
   Benefits                                           Benefits
    30%                                                20%
               Base 50%
                                                                 Base 80%
How do you know if you’re comparable?

   In a word…BENCHMARK!
   Market data surveys
   Market position analysis
   Cost of labor analysis
   Distribution of employees by level

   Measure your success…internal metrics
Market Analysis

   Surveys allow you to find out what/how other
    key competitors for talent reward their staffs
    –   Salary, Bonus, Stock
    –   Benefits, Perquisites
    –   Practices (means of delivering rewards)
   Key measurement definitions
    –   Mean (average), simple vs weighted
    –   Impact of zeros: diluted vs undiluted
    –   Percentiles

   Next up…Chapter 8
Learning Objectives                    Chapter 8

1.   Identify key decisions in establishing external competitiveness
2.   Describe the purpose and design features of a salary survey
3.   Discuss the importance of defining the relevant market
4.   Describe key issues when interpreting pay survey results
5.   Explain how the market pay line combines the internal
     structure with external market rates.
6.   Discuss the use of pay grades and pay ranges and their
     relationship to internal alignment and external competitiveness
7.   Discuss the pros and cons of the market pricing approach to
     establishing a pay structure
                                                                           Exhibit 8.1

 Determining Externally
 Competitive Pay Levels and Structures

External                                                             Merge           Competitive
competitiveness:                                           Draw
                                Select        Design                 internal &      pay levels,
                   Set Policy                              policy
Pay relationships               market        survey                 external        mix, and
among organizations                                                  pressures       structures

           Some Major Decisions in Pay
            Level Determination
                                                    Design and conduct survey.
            Determine    pay-level policy.
                                                    Interpret and apply results.
            Define purpose of survey.
                                                    Design grades   and ranges or
            Specify   relevant labor market.          bands.
What Is the Purpose of a Salary

   Systematic process of collecting and making
    judgments about compensation paid by other

   Data can be used for hiring, promotions,
    setting pay ranges
Why Conduct a Salary Survey?

   Adjust pay level – How much to pay?

   Adjust pay mix – What forms?

   Adjust pay structure?

   Analyze special situations

   Estimate competitors’ labor costs
Select Relevant Competitors

   Relevant labor market includes employers
    who compete for same skills, in the same
    geographic area, and produce same types of
    products or services
   One company may select different markets
    for different types of jobs
Surveys: Make vs Buy

   Can you get what you need from an available
    survey or do you need to create your own?

   Are key competitors included in published
    –   Will be participate in a custom survey?
What Information do you need?

   Matching jobs (family and level)
   Organizational metrics
    – Firms matching company demographics

   Include key competitors
   Comprehensive data elements (types of pay)
    – Salary, Bonus, Equity
    – Practices
Interpreting Survey Results

   No single best approach
   Verify the data for relevance
   Check accuracy of job matches
    –   Survey leveling
   Check for anomalies
    –   Does any one company dominate?
    –   Do all employers show similar patterns?
    –   Outliers?
Interpret Survey Results

   Statistical analysis
    – Frequency distribution
    – Measures of central tendency
          median   vs average; simple vs weighed
    –   Measures of variation
          Standard   deviation; Quartiles and percentiles
   Updating (aging) survey data
    –   How would results differ if the survey was
        conducted again (now)?
Construct a Market Pay Line

   Links a company’s benchmark jobs on
    horizontal axis (internal structure) with
    market rates paid by competitors (market
    survey) on vertical axis
   Approaches to constructing a market pay line
    –   Freehand approach - Exhibit 8.8
    –   Regression analysis - Exhibit 8.13 and 8.14
                        Understanding Regression

Survey: Salary ($000)


                                 20   40   60   80   100    120     140   160   180
                                            Job Evaluation Points
Combine Internal Structure
and External Market Rates

   Two parts of the total pay model merge
    –   Internally aligned structure - Horizontal axis
    –   External competitive data - Vertical axis

   Two aspects of pay structure
    –   Pay-policy line
    –   Pay ranges
                                                                     Exhibit 8.15

What Pay Grades Look Like
Salaries paid by competitors
 External Competitiveness:





                                                                   Pay Policy Line

                                        AB   CDEF      GHIJK       LMN       OP
                                             Internal Structure: JE Points
Practical Considerations

   Midpoints: center of the range
   Range spread: width of each range
   Rise: difference between midpoints
   Target position: midpoint relative to market
     – Should we pay high compared to everyone
       or pay average among top paying firms?
   Timing: target position date (lead/lag)
Market Data in Practice

   Salary Grades offer flexibility and guidance:
    – Pay ranges offer managers a road map
      for specific jobs based on the data for a
      group of similarly valued jobs

   Some prefer using data for a single job
    – But what if there is no market data?
    – What if the data moves down?
Why Bother with Grades and Ranges?

   External pressures
    –   Differences in quality (KSAs) among individuals in
        external market
    –   Differences in productivity or value of quality
    –   Differences in mix of pay forms of competitors
   Internal pressures
    –   Recognize individual performance differences
    –   Meet employees’ expectations that their pay will
        increase over time
    –   Encourage employees to remain with organization
    –   Offer title growth and responsibility recognition
What a Grade Offers

   Grades group jobs considered substantially
    equal for pay purposes
   Each pay grade has its own pay range and
    all jobs in a single grade have same range
   Enhances ability to move people among jobs
    within a grade with no change in pay
   How many pay grades you need depends on
    jobs, organization hierarchy, market data
Pay Range within a Grade

   Ranges establish the upper and lower pay
    limits for all jobs in each grade
   Midpoints correspond to competitive pay point
    –   Often represents base pay for a seasoned
    –   Generally those above midpoint are considered
        “well paid” by the market and should be strong
        performers to warrant additional increases
Range Midpoint, Minimum, and Maximum
Range Characteristics

   Size of range based on judgment
    –   Support career paths, promotions, ability to hire/retain
   Typical range spread
    –   Top-level management positions – 30 to 60% above and
        below midpoint
    –   Entry to midlevel professional and managerial positions –
        15 to 30% above and below midpoint
    –   Office and production positions – 5 to 15% above and below
Broad Banding

   Alternative to traditional salary structures
   Involves collapsing salary grades into a few
    broad bands, each with a sizable range
   Purposes
     – Provide flexibility to define job responsibilities
       more broadly
     – Foster cross-functional growth
     – Ease mergers and acquisitions
Broad Banding
 Issues include lack of promotional
  recognition, consistency in application,
  translation of market data to band
 Still need market pay points for
 Offers flexibility for companies with
  stable organization design
Steps Involved in Broad Banding

1. Set number of bands
   –   Determine number of distinct levels of employee
       contributions that actually add value

   –   Challenge - How much to actually pay people in
       same band who are performing different
       functions and work

2. Price bands: Reference market rates
Reference Rates Within Bands
    Market Pricing

   Approach
    –   Sets pay structures almost exclusively by relying on
        market rates
    –   Emphasizes external competitiveness (market-based
        factors) and de-emphasizes internal alignment
   Issues
    –   Validity of market data
    –   Use of competitors’ pay decisions as primary determinant
        of pay structure
    –   Market may not reward the way you want to (e.g., quality)
    –   Fairness (reinforces other’s biases)

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