IMPLEMENTING AND MANAGING PAY SYSTEM

1. CHAPTER 6
IMPLEMENTING AND MANAGING PAY
SYSTEM

2. 8-2
Determining Externally Competitive Pay
Levels and Structures
Set
Policy
Define
Market
Conduct
Survey
Draw
Policy
Lines
Merge Internal
& External
Pressures
Competitive Pay
Levels, Mix and
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

3. 8-3
Set Competitive Pay Policy
 Lead the market with respect to pay
 Match average pay of competitors
 Lag behind average market pay rates

4. 8-4
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

5. 8-5
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

6. 8-6
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

7. 8-7
Relevant Labour Markets by Geographic and
Employee Groups
Geographic
Scope
Production Office and
Clerical
Technicians Scientists &
Engineers
Managerial
Professional
Executive
Local: Within
relatively small
areas such as
cities
Most likely Most likely Most likely
Regional: Within
a particular area
of the province
Only if in
short supply
or critical
Only if in
short supply
or critical
Most likely Likely Most likely
National: Across
the country
Most likely Most likely Most likely
International:
Across several
countries
Only for critical
skills or those in
very short supply
Only for critical
skills or those
in very short
supply
Sometimes

8. 8-8
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

9. 8-9
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

10. 8-10
Advantages and Disadvantages of
Measures of Compensation
Base Pay Tells how competitors are
valuing the work in similar
jobs
Fails to include performance incentives
and other forms, so will not give true
picture if competitors offer low base
but high incentives
Total Cash
(base + bonus)
Tells how competitors are
valuing work; also tells
the cash pay for
performance opportunity
in the job.
All employees may not receive
incentives, so it may overstate the
competitors’ pay; plus, it does not
include long-term incentives.
Total
Compensation
(base + bonus
+ stock options
+ benefits)
Tells the total value
competitors place on this
work
All employees may not receive all the
forms. Be careful; don’t set base equal
to competitors’ total compensation.
Risks high fixed costs.

11. 8-11
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

12. 8-12
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

13. 8-13
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

14. 8-14
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

15. 8-15
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

16. 8-16
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

17. 8-17
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

18. 8-18
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

19. 8-19
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

20. 8-20
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

21. 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%
8-21

22. 8-22
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

23. 8-23
Contrasts Between Ranges and
Bands
Ranges Support:
 some flexibility within controls
 relative stable organization
design
 recognition via titles or career
progression
 midpoint controls, comparatives
 controls designed into system
 give managers “freedom with
guidelines”
 Up to 150 percent range spread
Bands Support:
 emphasis on flexibility within
guidelines
 global organizations
 cross-functional experience and
lateral progression
 reference market rates, shadow
ranges
 controls in budget, few in
system
 give managers “freedom to
manage” pay
 100 – 400 percent spreads

24. 8-24
Market Pricing
 establishing pay structure by relying almost
exclusively on external market pay rates
 market pricing becoming more common in
Canada

25. 8-25
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