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Prentice Hall, Inc. © 2006
8-1
A Human Resource A Human Resource Management ApproachManagement Approach
STRATEGIC STRATEGIC COMPENSATIONCOMPENSATION
Prepared by David Oakes
Chapter 8Chapter 8
Building Market-Competitive Building Market-Competitive Compensation SystemsCompensation Systems
Prentice Hall, Inc. © 2006
8-2
Market - CompetitiveMarket - CompetitivePay Systems Pay Systems
Is a company’s compensation policy
Fits imperatives of competitive advantage
Key role in recruitment & retention
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8-3
Excessive Pay LevelsExcessive Pay Levels
Represent undue financial burdens
Undermine lowest-cost strategies
Restrict investments
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Market Competitive Pay SystemsMarket Competitive Pay Systems
Conduct strategic analyses
Assess competitors’ practices
Integrate internal job structures with external market pay rates
Determine compensation policies
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8-5
External Market External Market FactorsFactors
Industry profile
Information on competition
Long - term growth prospects
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COMPETITORS’COMPETITORS’PAY PRACTICESPAY PRACTICES
Base pay
Incentive awards structure
Mix & level of discretionary benefits
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Custom Developed SurveysCustom Developed Surveys
Can be custom tailored
Quality can be monitored by employer
Usually not done in - house
External data not readily accessible
Can be expensive
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8-8
Published Surveys SourcesPublished Surveys Sources
Professional associations
Industry associations
Consulting firms
Bureau of Labor Statistics (BLS)
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BLS SurveysBLS Surveys
National Compensation Survey For wages & benefits
Employment Cost Index For compensation cost trends
Employer Costs for Employee Compensation For compensation cost trends
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National Compensation SurveyNational Compensation Survey
Pay & benefits for approximately 480 occupations 85 localities
Weekly & annual earnings & hours for full - time workers
Private, local & state employees
Worker characteristics
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8-11
NCS Worker CharacteristicsNCS Worker Characteristics
Occupation
Employment status
Union status
Company size
Base pay / incentive pay
Job level
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8-12
ECI DataECI Data Changes in pay & benefits
Data on all workers & separately
Compensation changes by categories
Are seasonally adjusted
Historical changes in labor costs
Uses fixed weights
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8-13
ECEC Compensation Costs ECEC Compensation Costs CategoriesCategories
Major occupation
Industry type & size
Region
Union status
Employment status
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8-14
NCS Average Benefit ProvisionsNCS Average Benefit Provisions
Estimates Published By
Broad occupational groups Employment status
Union status
Geographic regions & industry sectors
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8-15
Relevant Labor MarketRelevant Labor Market
Qualified candidates based on
Occupational classification
Geography
Market competitors
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Benchmark JobsBenchmark Jobs Used for
Job evaluations Compensation Surveys
Established, well - known, stable
Common across employers
Entire range of jobs
Accepted for setting pay rates
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8-17
Survey CharacteristicsSurvey Characteristics
They contain a lot of data
Outdated data due to lag time
Statistical analysis needed to integrate internal job structures with external market
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8-18
STATISTICAL ANALYSISSTATISTICAL ANALYSIS
2 Descriptive Properties
Central tendency Represents the fact that a set of
data center around a central point
Variation Represents the amount of spread
or dispersion in a data set
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Central TendencyCentral Tendency
Two Type of Measures
Arithmetic mean (mean, average) Sum of salaries / number of salaries Represents typical market salaries
Median (midpoint) Middle value of sequential numerical data
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8-20
MeanMean
Outliers can distort values
Understated means occur with extremely small outliers
May set salaries to low
Overstated means occur with extremely large outliers
May set salaries too high
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8-21
Variation Variation
Standard deviation Refer to the mean distance of each figure from the mean
Quartile % of figures below a point Based on 4 groupings
Percentile % of figures below a point
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8-22
QuartileQuartile
Dispersion by % below a set value
Quartile 1 = 25 %
Quartile 2 = 50 %
Quartile 3 = 75 %
Quartile 4 = 100 %
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8-23
C P IC P I Indexes monthly price changes in goods & services
Data collected from Urban U.S.A. 4 regions 4 population class sizes 27 local metropolitan areas
Published for 2 groups All urban consumers Urban wage & clerical earners
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8-24
Regression AnalysisRegression Analysis
Statistical procedure designed to find the best - fitting line between two variables
Formula: Y = a + bX Y = Predicted salary X = Job evaluation points a = Y intercept (X = 0) b = the slope
Prentice Hall, Inc. © 2006
8-25
RR 2 2
Explains variations in market pay rates via job structure (JS)
Ranges from 0.0 - 1.0 0.0 = 0 % due to JS 0.0 - .30 = Small variation .31 - .70 = Average variation .71 - .99 = Large variation 1.0 = All variations
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8-26
Pay Level PoliciesPay Level Policies
Market lead Levels above market pay lines Best for differentiation strategies
Market lag Levels below market pay lines Best for Lowest - Cost Strategies
Market match Pay according to market pay line Appropriate with differentiation strategy
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