Designing compensation system Part III

Designing Compensation System: Part IIIDr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)

Professor

1

Constructing a Pay Structure

2

Pay Structure

Useful for standardizing compensation practicesPay structures include several grades Each grade contains minimum salary/wage and

step increments/grade rangePay for each job may be pre-determined through

collective bargaining.

3

Factors Affecting Pay Structures

Corporate culture and value

Management Philosophy

External Economic Environment

External “Socio-political”

environment (Unions)Sunday, April 9, 2023 4

Anatomy of a Pay structurePay Structure – consists of a series of Pay

Ranges, or “grades”, each with a minimum and maximum pay rate

Pay Range - has a minimum pay value, maximum pay value and a “midpoint”

Midpoint of a range – represents the competitive market value for the job or group of jobs

Sunday, April 9, 2023 5

Range Spread – Difference between maximum and minimum pay value

- Usually expressed as % of difference between max and minimum divided by the minimum


Spread on either side of midpoint


Midpoint – Minimum Maximum– Midpoint Minimum Midpoint

Midpoint = Max + Min 2

Range Spread


Minimum Midpoint Maximum

200000 350000 612500

Range Spread Width = 206 %

-75% 75%

Range Spread

Vary based on level and sophistication of skills required for a given position

Entry level positions (skills that are quickly mastered) have narrower pay ranges

Managerial positions will have broader pay ranges


Typical Range Spreads

20 – 25 % - Lower-level service, production

30 – 40 % - clerical, technical

40 – 50 % - professional, administrative, middle management

Range spreads 300% or more with Broad banding


Compa - RatiosA Statistic that expresses the

relationship between base salary and the midpoint, or between the midpoint and the market average

Compa-Ratio = Base Salary MidpointCompanies strive to pay around a compa-

ratio of 100 %


Compa - RatiosIndividual C-R vary according to

How long the individual has been in the

jobPrevious work experienceJob performance


Compa - Ratios


22500

25000

90%

25000

25000

100%

27500

25000

110%

25000

25000

100%

24500

Mkt Avg

25000

Mkt Avg

98%

Person 1 Person 3 AveragePerson 2

Base Salary

Midpoint

Compa-Ratio

Base SalaryMidpoint

Base SalaryMidpoint

Building Market Competitive Compensation

System

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Pay StructureBasis of pay programs is a pay structure - a

hierarchy of jobs with pay ranges Greater worth of job, higher the pay grade and

range Pay program objectives are as follows:

• Internal equity. • External equity (or competitiveness), • Individual equity, • Process equity, • Performance or productivity incentives, • Maximum use of financial resources, • Compliance with laws and regulations, and • Administrative efficiency 15

Constructing a Pay Structure

Step 1: Job Evaluation - Deciding number of pay structures

Step 2: Salary surveys - Determining external market pay structure

Step 3: Grouping Jobs - Defining pay gradesStep 4: Pricing each pay grade – Establishing

wage curveStep 5: Formulating rate structure

Step 1: Job EvaluationSystematic process of determining relative worth of jobs in order to establish which jobs should be paid more than others within an organization.

Salary surveys compare an organisation’s salaries to those offered in other organisations.

Does the organisation want to compare itself with:

Organisations in the same or related industries?Organisations in the same geographic area?‘Best practice’ companies?Domestic companies?Multinationals?

Step 2: Salary Surveys (Compensation Surveys)

An

nu

al S

ala

ry (

$)

26,000

24,000

21,000

18,000

15,000

12,000250

Clerk IJob Evaluation Points

Market Pay Line

500Clerk II

750Clerk III

1,200Chief Clerk

Step 2: External Market Pay StructurePay Structure for Clerk Jobs

Group jobs into Pay Grades or Job Classes

Groups of jobs within a particular class that are paid the same rate or rate rangejobs of equal difficulty

Step 3 Grouping Jobs

An

nu

al S

ala

ry (

$)

26,000

24,000

21,000

18,000

15,000

12,000

Messenger (200)Mail Clerk I (220)Clerk I (250)Recep. (300)

Job Evaluation Points

Market Pay structure

Step 3: Defining Pay Grades (Internal Job Structure

Mail Clerk II (350)Clerk II (500)Sec.I (650)

Mail Clerk III (675)Clerk III (750)Sec. II (1,000)

MailroomSuper (1,175)Chief Clerk (1,200)Exec. Sec. (1,900)

200-300 301-650 651-1,150 1,151-2,000

Hierarchy of Clerical Jobs, JE Points and Pay Grades

JOB Pt. Grd.

Customer Service Rep.Executive Secretary/Admin.

Asst.Senior Secretary

300298290

5

SecretarySenior General ClerkCredit and Collection

230225220

4

Accounting ClerkGeneral ClerkLegal Secretary/AssistantSenior Word Processing

Operator

175170165160

3

Step 4 Pricing Each Pay Grade

Price Each Pay Grade and establish Wage Curve

Wage Curve shows pay rates currently paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation committee

PAY

JE Points

Wage Curve: Integrating Internal Job Structure with External Market Pay Rates

Wage Curve: Integrating Internal Job Structure with External Market Pay Rates

80 120

monthlysalary(Rs.000)

8

7

6

5

4

3

2

1

40

Line of Best Fit :using Market-Survey data or current organization data

Jobs AB CDEF GHIJ KLM 0P QRS TUV

Grades 1 2 3 4 5 6 7

160 200 240 280 320

Step 5: Formulating Rate Structure

GR JOBS SALARY (Rs.)

I AB 5000

II CDEF 7000

III GHIJ 9000

Single Rate Structure

GR JOBS SALARY (Rs.)

I AB 3000–250–4500–500-9000

II CDEF 6000–400–8400–750-14400

III GHIJ 10000–600–13600–900-20800

Overlapping Rate Range

Pay Policies Over Time

26

Business

Designing compensation system Part III