Creating a Competitive Salary Structure by AntonioFarelli

VIEWS: 396 PAGES: 20

									                              Creating a Competitive Salary Structure


INTRODUCTION

Each employee in an organization is paid a salary. Salaries vary greatly, with executives earning as much as
(or greater than) 100 times an entry-level employee's salary. This variation is not by chance. It is rationally
established through a salary structure – a hierarchy of salaries.

Organizations develop this structure based upon internal factors (such as current rates, job relationships,
and custom) and external factors (such as labor markets and laws). Salary structures integrate these factors
to create a hierarchy, in which every job of the organization has its place.

Before establishing a salary structure, you must first have a job structure: a hierarchy of your organization's
jobs based upon their value to the company. Distance Learning Center Courses 33 ( Conducting Job
Analysis) and Course 34 (Installing Job Evaluation in Your Organization) teach you how to create a job
structure. For the purposes of this course, we will assume that you have conducted job evaluation for your
company, established a job structure, and are now ready to create a salary structure.

We will teach you how to do this by:

    plotting your organization's jobs on a matrix drawing a line through the scattering of dots
    using this line to determine median salary rates, with which you can establish salary ranges

You will then learn how to administer and maintain this salary structure, including how to audit it using
research software.

DEVELOPING A SALARY STRUCTURE

The job structure (covered in DLC Course 34 on Job Evaluation) presents the compensation decision maker
with a hierarchy of the jobs in the organization. A dollar value now needs to be placed on this hierarchy.
This value is available from either:

    the jobs' current salary rates

OR

    market data collected from salary surveys

Current Rates

The present wage and salary rates in an organization will clearly influence any changes made in its current
salary structure.

In most organizations there is a fairly well-defined group of jobs that represents an important segment of
the total labor costs of the company.1 Prices assigned to this group of jobs may greatly affect an
organization's competitive position. Rates assigned to these jobs during job-structure pricing largely
determine the competitive salary level of the firm, and salary structure relationships are built around this
cost center.
Market Rates

Most often, however, the job structure is priced out through the use of market rates. This means the
employment of salary surveys. (See DLC Course 73: Analyzing Salary Surveys for information on wage
surveys.) One such source of salary survey data is SalariesReview.com, which provides median pay data for
4,000 positions in 6,000 cities worldwide.

When you use salary survey data, you must adjust the figures for:

    single rate determination
    planning date
    organization policy

Single rate determination

The salary data do not provide a single rate but a range of figures. Therefore the best single rate to use,
such as the mean or median, needs to be determined. (This set of decisions is dealt with in DLC Course 19:
Quantitative Methods Used in Salary Administration.)

Planning date

Salary survey data predates the effective date of the salary structure you are building. Therefore, you will
need to update (age or trend) the data by multiplying the salary figures by a constant percentage,
representing the salary increase of the interim.

Example: If the data was collected one year ago, you may want to age the data by a percentage of 2%.

Organizational policy

Your organization must decide whether it will pay:

    above
    below

OR

    at market rate

Most organizations choose to meet the market rate. Those that wish to pay above market hope to recruite
and retain the best talent. Those that pay below usually do so because their budgets are constrained, or
industry (such as nonprofit) dictates this position.

The organization's strategy toward the labor market also requires a salary level policy decision, since the
new salary structure is going to be in operation over time. This decision involves determining how
competitive the organization wishes to be while the salary structure remains in effect.

There are three basic strategies for an organization's salary policy:

    lag the market
    lead the market
    lead-lag
Lag the market. In this strategy, update the salary survey data to the beginning of your next
compensation year (calendar year, fiscal year, or another appropriate date) and then install the new salary
structure. If a change in the labor market of 10% is assumed for the next year, then the only time the
organization will be competitive with the market is at the beginning of the year. By the end of the year, any
decisions based upon the salary structure will lag the market by 10%.

Lead the market. In this strategy, the organization wishes to pay above the market rate. Start the year at
10% above the salary survey data. By the end of the year, the organization will be paying the market rate.

Lead-lag. Here the organization takes account of the 10% estimated change in the market but wishes to
meet the market at midyear. You can do this by starting the year at 5% above the market rate. Provided
the increase is steady over the year, this strategy will place the organization ahead of the market the first
half of the year and behind it the second half.

These three strategies are illustrated below.
Salary Level Strategies for Adjusting Salary Structures

Pricing a Job Structure

Once you have the job structure (from job evaluation) and the salary rates (from current rates and/or
market rates), you can create a salary structure. The first step is to plot these 2 sets of data on a grid, in
order to create a scatter diagram.




Scatter Diagram

Vertical axis

The dollar value (market rate) for each job occupies the vertical axis.

Horizontal axis

The organizational rankings are on the horizontal axis. There are 3 possibilities for the horizontal axis:

   market (salary) rate
   job evaluation rates
   negotiated rates
Market rates. Assuming that the organization wishes to pay competitive market rates for jobs, you
will place dollar values on both axes, making a totally consistent structure. Clearly this alternative assumes
that there is a market rate for all (or most) of the organization's jobs and that this rate is satisfactory.

Job evaluation rates. The most common alternative for the horizontal axis is the set of ratings developed
through job evaluation. Depending upon the method of job evaluation you used, these ratings may consist
of a ranking of jobs from low to high, a series of classification levels, or a range of points. In the case of the
graph above, the job evaluation system placed jobs into grades of 20 points.

Negotiated rates. Where there is a union, the hierarchy of jobs may be a negotiated ranking based upon
custom or the relative power of a group of unions.

Developing the Pay-Policy Line

To create a smooth progression, you will need to fit a pay-policy line to the plotted points. The line may be
straight or curved, and may fit a number of different methods.

Methods

When plotting job structures of single job clusters, a straight line is usually employed. Types of lines
include:

   low-high
   freehand
   least-square

Low-high line. This is a straight line connecting the highest and the lowest of the plotted points (often
called anchor points). The rates of all intervening jobs are made to fall on the line. The low-high line
appears especially useful in union bargaining of the salary structure because of its flexibility. When a final
bargain is reached, you may implement it by raising either end or both ends in such a way that reflects the
contract. Below is an example of a low-high line.

Multiple Salary Structures

An organization may have several salary structures, one for each broad job cluster, for instance. The choice
may depend on whether job evaluation is formal or informal; if formal, the choice further depends on which
type of method is used.

   The ranking, classification, and factor-comparison methods lend themselves to a single job structure for
    the organization. Even these plans, however, are often applied to distinct job clusters.
   The point method is more likely than any of the other three to be designed for a single job cluster.


REVIEW OF JOB EVALUATION METHODS

Ranking               Rank the jobs in the organization from highest to lowest.

Classification        Define classes or grades of jobs and fit the organization's jobs into them.

Factor
                      Compare jobs on several factors to obtain a numerical value for each job.
Comparison

                      Rate each job on several compensable factors. Add the scores of each factor to obtain
Point Plan
                      a total point score for each job.
(These methods are reviewed in DLC Course 34: Installing Job Evaluation in Your Organization.)

Exempt vs. nonexempt jobs

Organizations with more than one salary structure usually have separate structures for exempt and
nonexempt groups of jobs.

    Exempt structures are often divided into professional and managerial groups.
    Non-exempt structures are usually divided into production (or manufacturing) workers and office
     (administrative) staff.

There seem to be 2 reasons for these breakdowns:

1.   It may be difficult to compare these different types of jobs, in which case the horizontal axis of the
     scatter diagram is not useful.
2.   More importantly, the slope of the pay-policy line for these groups may be very different. At opposite
     extremes are physical laborers, with a very flat slope, and the managerial group, with a very steep
     slope. Further, the pay-policy lines will start and stop at different places, so that there will be little
     overlap between them.

Discrimination

One problem that can occur in constructing separate structures is discrimination. If a structure contains
most of the female or minority-dominated jobs, then the structure may appear discriminatory. Therefore, all
job clusters that constitute a salary structure need to be examined for their gender and racial composition.
If women and minorities are segregated, then the composition of jobs in all groups will have to be balanced
by gender and race.




Low-High Pay-Policy Line
Freehand line. After you plot the points, you can visualize the trend of the data. In this case, it is possible
for you to draw a freehand line that best describes the plotted points. A freehand line is not commonly used
since software programs are able to quickly calculate the least-squares line. Below is an example of a
freehand straight line.




Freehand Straight Line

Least-squares line. The least-squares line minimizes the overall vertical distance from the points to the
line. Spreadsheets and other software can automatically add such trend lines, or the slope and intercept of
the least-squares can be calculated from the points and the resulting line plotted. (See DLC Course 49:
Regression Analysis Used in Compensation Administration for instructions for computing a least-squares
line.)

Which line should you use?

In most cases, a low-high (anchor-point) line or a freehand line achieves the level of accuracy inherent in
job evaluation results. Furthermore, both permit adjustment to achieve agreement of committee members,
or union and management, on salary determinations.

Professionals or other statistically sophisticated groups, however, may prefer a wage line calculated by least
squares. Experience suggests that the additional accuracy of the least-squares line (compared with that of a
freehand line) is seldom sufficient to offset the added difficulty of explaining the method involved to the
statistically unsophisticated.

COMPLETING THE SALARY STRUCTURE

At this point the salary structure consists of a horizontal dimension and a vertical dimension, with a pay-
policy line derived from the plotting of jobs. You could plot every job in the organization on the pay-policy
line to determine its salary. For the sake of convenience and practicality though, most salary structures
group data on both the horizontal and vertical dimensions.

        On the horizontal dimension, group jobs into salary grades.
        On the vertical dimension, group money into salary ranges.
Salary Grades

If job structures of individual jobs are developed, as is done through job evaluation, it is possible to assign
an individual dollar value to each and every job. However, simplified wage and salary structures are easier
to administer. On the job side, this means grouping jobs that are close together in the hierarchy into
"grades" for pay purposes.


              A salary grade is a group of jobs that have been determined by job evaluation
              to be approximately equal in difficulty or importance to the company.




Using grades, large organizations can save much time and effort. Dealing with 10 salary grades rather than
100's of job rates is much more convenient. When individual job rates are used, even small changes in
duties may require changes in salary.

Job evaluation method

The following job evaluation methods dictate the type of salary grades you will use.


              Point Plan            grade contains jobs that fall within a range of points

              Factor
                                    grade is a range of evaluated rates
              Comparison

              Ranking               grades are a number of ranks

                                    a grade consists of all jobs that are comparable to the
              Classification
                                    level description


How many salary grades should you use?

There appears to be no optimum number of grades for a particular salary structure, and in practice, grades
vary from as few as 4 to as many as 60. If there are few grades, the number of jobs in each will be
relatively large, as will the increments (midpoint-to-midpoint differential) from one grade to another. If, on
the other hand, there are many pay grades, the number of jobs in each grade and the increments between
grades will be relatively small.

In the end, most organizations use 10-16 grades for a given job structure. Broader salary structures, of
course, contain more grades. For example, salary plans that encompass clerical, professional, and
administrative employees may average 16 grades.

Pay distance between grades is commonly calculated using a midpoint-to-midpoint differential and they
typically reflect:

        7 – 9% for hourly and clerical jobs
        10– 12 % for professional and administrative jobs
        Managerial structures may have differentials between grades 20% and higher

The actual establishment of salary grades is a decision-making process designed to:

        ensure that the grades fit the organization and the labor market
        place jobs of the same general value in the same salary grade
        ensure that jobs of significantly different value are in different salary grades
        provide a smooth progression




Broadbanding

Recently, there has been a trend toward reducing the number of grades in
a salary structure. This movement is called broadbanding. The impetus for
this movement has been the fact that organizations are becoming smaller
and the workers must be more flexible, reducing the number of
management levels and degrees of bureaucracy.




              Broadbanding results in reducing the number of salary grades and making
              them "fatter." The minimums and maximums for salary rates are increased, and
              the number of points covered in the job structure is increased.



Some companies use broadbanding with the traditional controls inherent in salary grades, such as midpoints,
minimums and maximums. Organizations that use broadbanding in this manner tend to reduce the number
of grades until they are about twice as wide as they used to be.

Advantages. It is claimed that broadbanding increases the prospects for cross-functional growth and
employee development in the organization. Broadbanding helps employees to move laterally in an era in
which promotion prospects have been reduced.

Easier to administer? Whether broadbanding is easier to administer or not is a matter of your point of
view. It is clearly more flexible and gives supervisors a greater ability to reward their employees without the
continuous need to promote in order to provide more financial incentive.

On the other hand, it can create a much more chaotic system. It also can lead to inconsistency and feelings
of favoritism. Both employees and supervisors have ambivalent feelings when the supervisor uses personal
discretion for something as important as pay.




How to set salary grades

Before determining salary grades, it may be wise to assess how many jobs and how many employees are
affected by the number of grades and the division chosen. This can be done by plotting each employee on
the salary structure matrix and noting whether there is a spread of employees over the matrix.

Employee acceptance. Since large numbers of employees may be affected by small changes in salary
grades, great care and fairness must be used in determining salary grades. Grievances can be avoided by
seeing that salary grades with large numbers of employees are not placed in a grade that greatly changes
their pay rate.

Because jobs in a salary grade are treated as identical for pay purposes, it is extremely important that
employees accept grade boundaries. For this reason, it is often useful to move jobs that are very close to
the maximum cutoff point into the next higher grade.
Methods

There are a number of ways of grouping jobs into a limited number of grades. We will examine 4 of these
approaches:

        cluster
        division
        midpoint-progression
        continuum

Cluster approach

The simplest approach is to make a scatter diagram of the organization's jobs, as is done in establishing the
pay-policy line. When you do this, you can often observe that the jobs tend to cluster rather than scatter
evenly. You can take advantage of this effect by encasing the clusters horizontally and vertically, as
illustrated in the figure below.




Cluster Approach to Salary Grades

Advantage. Clustering has the advantages of simplicity and flexibility: it can be changed each time the
salary structure is adjusted. It tends to be used with ranking or slotting methods of job evaluation, so small
organizations are more likely to use this approach.
Disadvantage. This provides all three dimensions, but none of them is arrived at consistently, nor are they
likely to be symmetrical. This may have a negative impact on salary and career progression in the
organization.

Division approach

Another relatively simple approach is to use the horizontal dimension of the salary structure – the job
evaluation points – to determine the number of salary grades. This is done most easily by determining a set
number of points for each salary grade. Then, starting with the least number of points, you mark off the
lines between adjacent grades. In the figure below, each salary grade is 40 points wide.




Division Approach to Salary Grades

An alternative to using a set number of points for each grade is to use increasing numbers of points as you
move up the scale. This would answer the difficulty experienced in job evaluation of determining exact
differentials between jobs higher in the hierarchy.

Market rate. In the division approach, the market rate for each grade should be set by placing the range
midpoint at the point where a vertical line from the point value in the middle of the grade meets the pay-
policy line. For the figure above, this is 200 points for level 3.
Job evaluation. This method can be used successfully with a point system of job evaluation and can also
be adapted to other systems, such as classification.

Midpoint-progression approach

This method is a little more sophisticated and allows for broader definition at higher grades. It focuses on
the pay-policy line and the vertical axis of the salary structure.

In this example, the number of salary grades is obtained by determining a standard distance between the
midpoints of adjoining grades. In the figure below, 10% is the distance decided upon between grades.
Starting at the midpoint of the lowest grade, we place the midpoint for each succeeding grade 10% higher
than the lower one. The dividing line between grades is halfway between the two midpoints. As can be seen,
the horizontal-dimension job evaluation points widen with each higher grade.




Midpoint-Progression Approach

This approach is often combined with increasingly broad rate ranges to make the salary structure balloon
out at the higher levels. The rationale is that at higher levels, positions are harder to define and evaluate
accurately, and greater variation in performance is possible.

Continuum approach
Here, in essence, each job evaluation point on the horizontal axis has its own rate range; there is no
grouping of jobs. The pay-policy line constitutes the midpoints. A standard maximum and minimum, which
are a set percentage above and below the midpoint, are defined. As can be seen in the figure below, these
lines widen as the salary level rises, making the range broader at the top than at the bottom.




Continuum Approach to Salary Grades

A system such as this requires a lot of confidence in the job evaluation method. It is likely to engender
considerable argument over small differences in the number of points assigned to jobs. Small technically
oriented organizations are more likely to use this method.

Salary Ranges

Just as it is useful to group jobs on the horizontal axis, it is also useful to use a range of salary for each
salary grade created. This range of salary allows an organization to hire less experienced employees at
lower level within the range and reward employees for better-than-average performance.

The points to define in the range are the:

        minimum
        midpoint
        maximum
Ordinarily the midpoint of the range will be the market rate, the mean or median of the salary survey data.
The range spread – the distance from minimum to maximum – varies greatly but is usually within a 25 to 60
percent range. Many large salary structures with a variety of jobs have smaller ranges at the bottom of the
graph and wider ranges at the higher levels.

Final Result

Once salary grades and salary ranges are designed, the salary structure is complete. This is depicted below.




Completed Salary Structure

Review of how to create this graph

The horizontal axis is the hierarchical ranking of the organization's jobs as derived through internal
mechanisms, mostly job evaluation. It is arrayed from low to high.

        The vertical axis is an array of financial salary rates, from low to high.
        When these two sets of data are plotted, it creates a scatter diagram.
        A pay-policy line is drawn through the diagram, using either a hand-drawn line or a line of least-
         squares.
        Around this pay-policy line, salary grades are developed using the horizontal dimension.
        Salary ranges are developed using the vertical dimension.
Any one job can now be assigned to the appropriate salary grade. The actual salary then lies within the
range designated for that salary grade. The midpoint of the salary grade is considered to be the market rate
for the jobs within that salary grade. Movement within the grade is determined by the organization's pay
system policies.

Other Options

The process described here is, of course, not the only method for establishing a salary structure. In a salary
structure study, compensation specialists at 37 organizations were queried about how they went about
establishing their wage structures. The findings showed that 19 distinct approaches were used, and that
only two were performed in as many as 5 organizations. These two were a comparison of market
benchmarks with an internal ranking of benchmarks, and a comparison of job evaluation with market
benchmarks.2

ADMINISTERING THE SALARY STRUCTURE

The salary structure is designed to take the organization one step closer to determining what to pay an
individual employee, by defining a market rate or range to be paid for the job. The implementation of this
structure involves a number of issues and problems, which we will deal with in the remainder of this course.

Administration Issues

Decisions about the design of the salary structure affect the paycheck of all employees. From the standpoint
of equity within the organization, it is important that all parties clearly understand and accept the method in
which these salary structure decisions are made. From an external perspective, the organization must deal
with the question of its competitiveness in the labor market compared with its values and customs.

We will now examine the conflict between labor market and organizational rates.

Pricing Jobs

When salary grades are used, the rate for a job should be within the range of the salary grade in which the
job is located. A system of code numbers identifying the jobs and their proper salary grade facilitates control
and record keeping.

Some organizations prefer to work with a job structure composed of individual jobs rather than salary
grades. For small organizations (with less than 500 employees), salary grades may be more challenging to
maintain than the benefit provided.

If your company desires to create a job structure of individual jobs (not grades), the procedures are largely
the same as those we have covered. The essential difference is that adjustments are made to accommodate
the different job evaluation plans.


               Job    Evaluation
                                      Adjustment
               Method

                                      Plot points and rates for separate jobs on scatter
               Point Plan
                                      diagrams.

                                      Plot evaluated rates. You may choose to plot all jobs or
               Factor Comparison
                                      only key jobs.

                                      Record jobs by rank. Then make rate adjustments to
               Ranking
                                      correspond with the ranking.
Market vs. Evaluated Rates

Job evaluation is an attempt to substitute rationality for a variety of non-rational influences on wages and
salaries, by appraising jobs in terms of their contribution to the organization. The process presumably
produces a hierarchy of jobs that accords with both organizational requirements and employee values,
including customary relationships. This internally developed job structure is unique to each organization.

Conflict

Market rates, on the other hand, represent an agglomeration of prices paid by organizations of every size
and type within the competitive labor market.

Organizational rates may conflict with market rates because of the following reasons.

          Some jobs are never filled from the labor market but rather are occupied by employees trained
           within the organization.
          Some organizations are almost completely insulated from most labor markets, except in the case of
           jobs for which they cannot provide training in-house.
          Even if jobs in different organizations are identical, it is unlikely that the job will occupy the same
           position within the job hierarchy.
          Even highly skilled jobs may vary in importance to the various employing organizations.

Severity

The severity of the conflict varies considerably from one organization to another.

          Low-wage organizations may experience conflict on many jobs.
          Organizations employing largely semi-skilled workers, and promoting from within, have less conflict
           than organizations employing many highly skilled workers who must be hired from outside the
           organization.
          If there is high unemployment in the local labor market, less conflict between market rates and
           evaluated rates occurs, even in low-wage organizations.
          Geographically isolated organizations, or those with large numbers of unique jobs, experience less
           conflict.

In the end, no job-evaluated salary structure is immune to conflict with market rates.

Solutions

There are various solutions to this conflict.

    1.     One way an organization could completely avoid such conflict would be to pay at or above the
           market on every job.
    2.     Another basic solution is to develop a number of salary structures. With this strategy, a job cluster
           that must be tied closely to the labor market (because it is filled from outside the organization) will
           not seriously disturb other salary structures. However, this alternative may create discrimination in
           pay that violates the law.
    3.     A less preferable solution is to exempt certain jobs or job clusters from job evaluation. This
           approach is difficult to defend and endangers internal relationships.
    4.     You could use the guideline method of job evaluation, which in effect determines internal
           relationships by market relationships. (See DLC Course 34: Installing Job Evaluation in Your
           Organization for more information on this method.)

Salary Structure Maintenance
Internal salary structures face continuous change. Change may occur due to:

        the addition or subtraction of tasks within jobs, according to the needs of the organization
        changes in technology, with consequent changes in methodology and various equipment used
        employees leaving the organization and being replaced by others
        employees being transferred and promoted to different jobs

Responding to these changes involves salary structure maintenance. Your organization must pay particular
attention to:

        reclassification
        job descriptions and titles
        unions

Reclassification

Classifying new employees properly and changing classifications when employees change jobs are essential
to maintaining consistent salary structures. Employee misclassification destroys pay relationships and
creates vested interests that are difficult to change. Misclassified employees may grow to feel entitled to
their current salaries and place in the organizational wage structure, even when the positions they hold do
not merit these rewards.

Job descriptions and titles

Job changes call for changes in job descriptions and re-evaluation to ensure that the jobs carry the
appropriate salary rate. New jobs call for job analysis and job evaluation to determine the appropriate
rate. Both cases represent additional effort for busy supervisors and managers, even if the analysis and
evaluation are done by others. As such, there may be a tendency for managers to neglect these important
chores. However, consistent salary structures require that updated descriptions and evaluations are
maintained.

Standard job titles are also an essential part of job evaluation maintenance. Such standard titles should
apply to all jobs that entail identical duties and responsibilities, wherever they are found in the organization.

Unions

Under union conditions, failure to make such changes can limit the organization's right to make job
changes. In a number of cases, management has lost a considerable portion of its right to make job
changes by failing to make prompt changes in job descriptions. By custom and practice, employees may
acquire the right to do certain work and to refuse to do work not called for in job descriptions. Major union-
management problems have been caused by laxity in salary administration.

Maintenance procedures

Problems of salary structure administration emphasize the importance of job evaluation maintenance.
Maintenance, at a minimum, consists of:

    1.   maintaining updated job descriptions and job ratings
    2.   insuring that employees are actually performing the jobs outlined in the job descriptions

Human Resources may be assigned the tasks of:

    1.   analyzing new or changed jobs
    2.   insuring that job changes are reported
    3.   monitoring the description and evaluation files to assess their adequacy
    4.   verifying that identical jobs have identical job titles
    5.   receiving and processing appeals and grievances with respect to job ratings

Supervisors. Supervisors are normally responsible for advising Human Resources of any changes in job
content that they are planning to make or have made. They are likewise responsible for seeing that
employees are assigned to tasks and duties included in their job descriptions. To facilitate carrying out
these responsibilities, supervisors may be required to meet regularly with each employee to review his or
her job description and, if the job description is not adequate, to request a new analysis and evaluation.

Audits. In addition to supervisory requests for job restudy, other methods may be used to maintain the job
evaluation system. Human Resources may be set up to audit jobs in all departments on a continual
basis. Thus, each department's jobs would be subject to regular audit. Interim checks might be made, in
addition, by regularly checking departmental job lists against a list of standard job titles.

Another device is to limit the life of job descriptions. Thus a job description would be valid only for a certain
period, after which the job would have to be restudied.

Appeals. A further check on the adequacy of job information and the correctness of job values is the
grievance or appeal procedure. Employees should be encouraged to appeal whenever they believe their job
description or job rating is incorrect. If the organization is unionized, the regular grievance procedure may
be used. If the organization is nonunion, an appeal procedure may be devised. In either case, a request
for restudy of the job is made early in the procedure.

An organization's salary structure should be both internally consistent and externally competitive. It is
internally consistent if it replicates the hierarchy and flow of the work. Pay differentials between levels will
then reflect differences in skills and responsibility.

To determine external competitiveness, you must compare the salary structure to the labor market. Firms
that compete on a cost basis, where labor costs must be kept low, will set their salary structure below
market levels. Firms that need to recruit top-level talent will set their salary structure above market levels.

Benchmarks

Thus, all organizations need to understand how their pay relates to competitive levels. Rather than examine
every job in the organization, the focus is typically on key jobs, or benchmark positions.


              Benchmark positions are a representative sample of important jobs.


They are:

        well-defined
        stable across organizations
        jobs for which market data is readily available

The salary ranges for benchmark positions are pegged to the market, establishing the framework for the
salary structure. Then, the salary ranges for the rest of the organization's jobs can be slotted into position,
based on their relative value compared to the benchmarks or based on their job evaluation points.

Research Software

ERI's Salary Assessor® (SA) software database collects and analyzes available wage survey data. It provides
pay range information for over 5,000 titles in 298 U.S. and Canadian metropolitan areas. (This expands to
7,200 North American cities, when used in conjunction with ERI's Geographic Assessor® software.)
Using SA, you can compare your organization's entire salary structure against the market. The following
problem statement will teach you how to use this software to audit an organization's salary structure.

Problem Statement

The Bank of Sunrise in Tallahassee, Florida has several branches in the Tallahassee area. The bank's salary
structure has 8 levels below the top executives. The table below displays a benchmark job (one that is
representative of positions at that level) for each job level.


LEVEL    JOB TITLE                               AVERAGE ACTUAL PAY            RANGE      MID- EXPE-
                                                                               POINT           RIENCE

1        Branch Manager 2, Banking               $41,753                       $42,000            6

2        Mortgage Loan Officer                   $39,075                       $38,000            8

3        Credit Analyst                          $28,975                       $28,000            5

4        Assistant Branch Manager 2, Bank        $27,750                       $25,600            6

5        Customer         Service        Repre- $23,950                        $25,400            4
         sentative 1

6        Loan Processor                          $29,000                       $18,750            6

7        Loan Clerk 1                            $18,075                       $16,900            3

8        Teller                                  $14,750                       $14,575            3


The table gives the:

        current average base pay for that job
        midpoint of the base salary range
        average experience of the people in each position

Bank's Pay Policy

You've just been named the new Compensation Analyst for the Bank, a position that has been vacant for
the past year. Salaries have not been adjusted for the past 2 years. You have been asked to review the
salary structure and make any recommendations concerning necessary adjustments. Recruitment and
retention have not traditionally been a problem because of the bank's prestigious reputation and the good
working conditions within the bank. Consequently, management has established a compensation policy of
paying slightly (5% or less) below market rates.

Complaints

While preparing data for your evaluation, you receive an email from a Branch Manager indicating that he is
having difficulty hiring experienced Loan Clerks. You also receive a phone call from another manager stating
that several of her Customer Service Representatives were complaining that their pay is, "worse than that of
the Loan Processors," even though the position entails more responsibility. So while you are determining
whether the bank's salary structure is in-line with compensation policy and market rates, you are also asked
to see if the salaries for Customer Service Representatives and Loan Processors are commensurate with the
bank's pay policy.

Instructions
Click on the Load Step-by-Step button to follow along with this analysis. You may wish to print out this
PDF tutorial (which will open in a new window).

After you have read this PDF, click on the Next button to try your hand at using this research software to
adjust a salary structure.

SUMMARY

This course explained how to create a rational salary structure. The salary structure is a combination of the
job structure of the organization and the market rates for those same jobs.

Graph

A graph representing the salary structure usually starts with the job structure on the horizontal axis,
represented by the job evaluation values given to the jobs. The vertical axis represents the market rates
expressed in monetary terms. You can plot each job or use only benchmark jobs on the graph.

Pay-policy line

A line of best fit can then be drawn that creates the pay-policy line for the organization.

The pay-policy line is the starting point for creating the salary structure. The values of both dimensions
need to be grouped in order to make compensation administration more manageable.

        The horizontal axis, the job structure, is grouped into salary grades. This grouping may be done in
         a number of ways as discussed in this course.
        The vertical axis is grouped for each salary grade into a salary range.

This provides the opportunity for the organization to pay differential amounts to people on the same job or
on jobs in the same salary grade.

Multiple Structures

Salary structure decisions, as outlined in this course, attempt to balance internal considerations and external
considerations (market rates). Most organizations achieve this by developing a number of separate salary
structures and by emphasizing flexibility in pricing job structures. Low-wage employers in competitive
industries, especially those operating in tight labor markets, may have to abandon their interest in internal
relationships and concentrate on keeping jobs filled by paying market rates. In fact, they may have to lower
their hiring standards as well.

Maintenance

Any salary structure is only useful for a limited period of time. Changes in both the labor market and the
organization make redoing the process over time a necessity. You may now test your competence in these
areas by proceeding to the final exam.

								
To top