Building market competitive compensation system


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Building Market Competitive Compensation System – Integrating Internal Job Structure with External Market Pay Rates: Compensation Surveys, Choosing Compensation Survey Conducted by Third Parties

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Building market competitive compensation system

  1. 1. Building Market Competitive Compensation System By Dr. G C Mohanta, BE, MSc (Engg.), MBA, PhD (Mgt.), Professor, Al-Qurmoshi Institute of Business Management, Hyderabad, India Compensation Surveys In compensation surveys salary and market data are collected. These may include average salaries, inflation indicators, cost of living indicators, salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing the results of compensation surveys conducted by other vendors, it should be noted that surveys have been conducted within a specific industry or across industries as well as within one geographical region or across different geographical regions. One should know which industry or geographic location - the salary results pertain to before comparing the results to one’s company. It is extremely useful to refer compensation surveys when determining salaries. The surveys lend tremendous credibility and fairness to the process of determining compensation. The surveys should be current. Reference should be made to them to find the salaries for the job roles that are the closest match to the roles one is deciding the compensation for. The closer one can match the role to the type of services, locale and job title of the role one is deciding compensation for, the more useful the survey is likely to be. Compensation surveys are carried out: - To gather and summarize information to monitor movement and developments in the labour 'market'. – To provide a means for comparison of salaries at the institution. Types of data gathered in a salary survey include: - Base salaries - Salary Ranges - Starting Salary - Incentives/Bonuses - Allowances and Benefits - Working Hours - Working Conditions Choosing Compensation Survey Conducted by Third Parties The results of compensation surveys conducted by third parties (e.g., associations, consultants, survey vendors) can be relatively inexpensive compared to the cost of developing the same results. Surveys conducted by associations and vendors are often have a large number of participants which results in a more accurate analysis. Before purchasing survey results, one should make sure the results contain: (i) Appropriate Job Titles - Industry-specific occupational titles, - Little overlap in job titles, - Use of titles that don't differentiate/specify the duties performed (ii) Summary
  2. 2. (iii) Methodology: Is there a minimum number of responses needed before reporting results? Data should not be reported for too few incumbents. Need to report median salary as well as averages. The mean is the average of all numbers divided by the number of responses. The 'mean' can be affected by extreme values. The median is the mid-point with half of the responses are above that number and half fall below. Please note that in salary data, the median tends to be lower than the mean due to the fact that there is no upper limit to the rates that can be paid for a job. However, the lower limit is zero. Therefore, the distribution of salaries tends to be skewed with a few salaries at the extreme high end of the range. Fact: In salary data, the median will almost always be lower than the mean. Explanation. (iv) Tabulation of results by Job Title, public/private, industry, geographic region (v) Breakdowns by size/location/industry (vi) Data from comparable institutions (size/location/industry) One should use survey results that will match jobs at one’s organization within the same industry and/or geographic location. Integrating Internal Job Structure with External Market Pay Rates The job evaluation establishes the relative worth of all the jobs in an organization or group from which a hierarchy of jobs is produced. The pay structure (salary structure) that follows - sets out the pay grades (or levels) and the pay ranges, along with the criteria for salary movement within the pay structure. There are two basic approaches to constructing a pay structure. In the first, every job that has a different total of job evaluation points will be treated separately and will, in effect, become a particular pay grade. The other approach is to group jobs that have similar value in the organization (certain range of point values) into pay grades. 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. Some may even establish a separate structure for different types of work (finance, engineering, law). For an organization to be able to recruit and retain employees who have the skills required and who perform well, compensation levels need to be competitive with those in the broader marketplace. An effective pay structure will reflect the values of the organization as expressed in the job hierarchy and the market rates of comparable jobs. It is important that companies set pay rates by using market pay rates as reference points, as paying well below or well above the typical market rates can create competitive disadvantage for companies.