Chapter 8.doc

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Western University
Management and Organizational Studies
Management and Organizational Studies 3342A/B
Linda Eligh

Chapter 8 – Designing Pay Levels, Mix, and Pay Structures • Major decisions o Specify the employer’s external pay policy o Define the purpose of the compensation survey o Choose relevant market competitors to survey o Design the survey o Interpret survey results and construct the market pay line o Construct an internal pay policy line that reflects external pay policy o Balance competitiveness with internal alignment through the use of ranges, flat rates, and bands • Set competitive pay policy – first decision o Compensation survey – the systematic process of collecting and making judgements about the compensation paid by other employees o Employers decide based on whether they want to lead, meet, or lag behind the avg market pay rates o Compensation surveys provide the data for translating that policy into pay levels, pay mix, and structures • The purpose of a compensation survey o Adjust internal pay level in response to changing competitor pay rates o Set the internal mix of pay forms relative to those paid by competitors o Establish or “price” the internal pay structure o Analyze pay-related problems o Estimate the labour costs of product market competitors o Adjust pay level – how much to pay? Adjustments may be based on the overall upward movement of pay rates caused by competition for people or on performance, ability to pay, or terms specified in contract o Adjust pay mix – what forms? Occur less frequently than adjustments to overall pay level – some pay form may affect employee behaviours more than others – collecting this info is important o Adjust pay structure? Use market surveys to validate their own job evaluation results – job structures found in the internal job evaluation may not match the pay structures found in the external market – some companies just go straight to surveys to establish internal structures “market pricing”  Generic work descriptions that focus on the person more than the job need accurate market data o Study special situations – can shed light on specific pay-related problems o Estimate competitor’s labour costs – surveys help gather competitive intelligence • Select relevant market competitors o The same occupation or skills required o The same geographic area o The same products and services o As the important and complexity of qualifications increase, the geographic limits increase as well o From the perspective of cost control and ability pay, including competitors in the product market is crucial – becomes a problem when major competitors are places in countries with far lower pay rates o Careful judgement of international survey data is required when making pay decisions o Fuzzy markets – unique talent is required for unique jobs – new jobs fuse together diverse knowledge and experience so “relevant” markets appear as “fuzzy” markets • Design the compensation survey o Who should be involved in the survey design?  Responsibility usually lies with the compensation manager – hiring a 3 party consultant can bring expertise but might cause the org to lose control over the decisions of the survey o How many employers should be included? – no set rule  Publicly available data – Statistics Canada  Word-of-Mouse – a click of the mouse makes enormous amounts of data available and so managers must be able to defend the salaries they pay compared to what’s on the internet – a lot of the data online is highly suspect  Where are the standards? – issues of sample design and statistical inference are seldom considered and standards do not exists for market surveys and analysis o Which jobs should be included? – keep things as simple as possible  Benchmark jobs approach – stable job content and are common across different employers  Low-high approach – identify the lowest and highest paid benchmark jobs for the relevant skills in the relevant market and to use the wages for these jobs as anchors for the skill-based structures  Benchmark conversion approach – apply job evaluation plan used to create internal alignment to the descriptions of survey jobs – difference between the two provides guidance for adjustment of pay o What info should be collected?  Info about the nature of the org – assess the similarities and difference between survey users  Info about the total compensation system – assess similarities and differences in total pay packages – can’t assess all forms of pay and usually focus on base pay, total cash, and total compensation  Specific pay data on each incumbent in the jobs under study  Data collected will depend on the purpose of the survey and the jobs and skills included Basic Elements Examples Rationale Nature of organization Identification Company, name, Further contacts address, contact person Financial Assets, sales, profits, Indicates nature of the performance cash flow product market, ability to pay, size, and financial viability Size Profit centres, product Importance of specific job lines groups to business success structure Total number of Impact on labour market, employees, org charts indicates how business is organized and how important managerial jobs are Nature of compensation system Cash forms used Base pay, pay increase Indicate the mix of schedules, long and compensation offered; used short term incentives, to establish a comparable shift differentials base Non-cash forms Composition of benefits used and services, particularly the degree of coverage and contributions to medical and health insurance and pensions Incumbent and job date Date survey data in Need to update rates to effect current date job Match generic job Indicates degree of description similarity with survey’s key Number of employees jobs supervised and reporting Describes scope of levels responsibilities individual Years since degree, Indicates training and education, date of hire tenure of incumbent Pay Actual rates paid to each individual, total earnings, last increase • Advantages and disadvantages of measures of compensation Base pay Tells how competitors Fails to include performance are valuing the work in incentives and other forms, so similar jobs will not give true picture if competitors offer low base but high incentives Total cash Tells how competitors All employees may not (base+bonuses) are valuing work; also receive incentives, so it may tells the cash pay for overstate the competitors’ performance pay plus it does not include opportunity in the job long term incentives Total Tells the total value All employees may not compensation competitors places on receive all the forms – don’t (base+bonus+stoc work set base equal to competitors’ k total compensation – risks options+benefits) high fixed costs • Interpret survey results and construct a market line o David Belcher – every org has its own methods of distilling info from the survey; uses diff surveys; and uses diff methods for company surveys – no commonality in these methods o Verify data – check the accuracy of the job matches and then check for commonalities, age of data, level of abstractness, and nature of the organizations o Accuracy of match – survey levelling – multiplying survey data by a numerical factor to adjust for differences between the company job and the survey job  Anomalies – understanding minimums, maximums and what % actually receive bonuses is essential but many surveys only provide a summary of the averages • Does one company dominate? – do a separate analysis of them to understand their nature • Do all employers show similar patterns? • Outliers? – user might consider dropping these companies or analyze separately  Statistics help us get from pages of raw rata to graphs of actual salaries and then to a market line that reflects a competitive pay policy o
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