Chapter Eight

Building Market-Competitive Compensation Systems

An

nu

al S

ala

ry (

$)

20,000

18,000

21,000

16,000

11,000

8,000250

Clerk IJob Evaluation Points

Market Pay Line

500Clerk II

750Clerk III

1,200Chief Clerk

Internally Consistent Pay Structures do not guarantee

External Consistency!

Current Pay Line

Compensation Policies & Strategic Mandates

Policy Strategy

Lead (how much?) 5, 10, 15%?

Differentiation

Match Differentiation

Lag (how much?) Cost

An

nu

al S

ala

ry (

$)

20,000

18,000

21,000

16,000

11,000

8,000250

Clerk IJob Evaluation Points

Market Pay Line

500Clerk II

750Clerk III

1,200Chief Clerk

Testing your applied knowledge:

What is the compensation strategy behind this pay structure?

Current Pay Line

An

nu

al S

alar

y ($

)

20,000

18,000

21,000

16,000

11,000

8,000250

Clerk IJob Evaluation Points

Market Pay Line

500Clerk II

750Clerk III

1,200Chief Clerk

Testing your applied knowledge:What is the compensation strategy behind

this pay structure?

Current Pay Line

Answer: Assuming that this company is aware of the pay lag at lower level jobs between their pay structure and the market line, this company has decided that lower-level jobs are not the essence of its competitive advantage and, therefore, it can afford to pay lower salaries at such lower-level jobs.

An

nu

al S

ala

ry (

$)

20,000

18,000

21,000

16,000

11,000

8,000250

Clerk IJob Evaluation Points

Market Pay Line

500Clerk II

750Clerk III

1,200Chief Clerk

Current Pay Line

Testing your applied knowledge:

What is the compensation strategy behind this pay structure?

Answer: Assuming that this company is aware of the pay lag at lower level jobs between their pay structure and the market line, as well as the lead between its pay level and the market line at higher-level jobs, this company has decided not only that lower-level jobs are not the essence of its competitive advantage, but also that higher-level jobs are indeed quite important for its strategy and, therefore, it needs to

pay higher salaries at such higher-level jobs. A

nn

ual

Sal

ary

($)

20,000

18,000

21,000

16,000

11,000

8,000250

Clerk IJob Evaluation Points

Market Pay Line

500Clerk II

750Clerk III

1,200Chief Clerk

Current Pay Line

Testing your applied knowledge:What is the compensation strategy behind

this pay structure?

Competitive Pay Systems:Building Blocks

Strategic analyses» Environmental scanning: industry profile, info about

competitors, long-term growth prospect» Competitive advantage: examination of core competencies,

mission, values.

Compensation surveys» Competitors’ wage and salary data.» Competitor’s fringe benefit data.

Compensation Surveys

External equity» Helps attract and retain talent

Reliance on industry surveys Sources of published compensation surveys

» Bureau of Labor Statistics visit their web site at

www.bls.gov– National Compensation Survey (NCS)

– Employee benefits in small private establishments

– Employee benefits in medium/large private establishments

– Employee benefits in State & Local governments.

Table 8-1

Sources of Compensation Survey Information (1 of 3)

Professional Associations» Worldatwork (formerly, the American Compensation

Association) publishes the Salary Budget Survey, reported by region and industry.

» The Society for Human Resource Management publishes information on salaries in the human resources field.

» International Foundation of Employee Benefit Plans

Table 8-1

Sources of Compensation Survey Information (2 of 3)

Industry Associations» Administration Management Society» American Association of University Professors» American Banker’s Association» American Bar Association» American Electronics Association» American Mathematical Society» American Society of Association Executives» Association of General Contractors» National Institute of Business Management» National Restaurant Association» National Retail Federation» National Society of Engineers

Table 8-1

Sources of Compensation Survey Information (3 of 3)

Consulting Firms» Abbott, Langer & Associates

» Coopers & Lybrand

» Hay Management Consultants

» Hewitt Associates

» Mercer-Meidinger-Hanson

» Robert Half Associates

» Towers & Perrin

» Watson Wyatt Co.

Compensation surveys: Strategic considerations

Defining relevant labor market» Occupational Classification. Standard Occupational

Classification: 9 major occupational groups (professional, executive, sales, administrative support, precision production, etc.)

» Geographic area (rural/urban)» Product/service market competitors

Choosing benchmark jobs» Well-known, stable, agreed upon.» Common across employers.» Represent entire range of jobs within a company.» Generally accepted in the labor market for this purpose.

Managing Compensation Survey Data

Quickly outdated due to changes in cost of living, which is typically indexed by the Consumer Price Index:» Base period 1982-1984 = 100» 1999 Chicago CPI-U & CPI-W = 166.6

Example: Hourly Wage Data in Miami-Ft. Lauderdale vs. NY City (Year 2000) & Consumer

Price Index

Professional $24.38 $32.30 167.8

CPI-Miami

182.5

CPI-NYC

Executive $27.48 $34.67

Sales $12.38 $16.06

Administrative support $12.78 $15.53

Machine operators $10.02 $11.26

Transportation $12.99 $16.21

Service occupations $9.54 $14.02

Full time $15.99 $22.04

Part time $8.49 $13.02

100-499 workers $12.59 $19.64

500 workers or more $17.77 $23.51

Managing Compensation Survey Data

One should pay attention to: Central tendency

» Mean & importance of outliers –which unduly influence mean.

» Median Variation

» Standard deviation: do companies have typical salary ranges as compared to the competition? (companies can have same mean but very different SD’s

» Quartiles and percentiles

$30,000-$35,000

$35,001-$40,000

$40,001-$45,000

$45,001& above

0

2

4

6

8

10

12

14

$30,000-$35,000

$35,001-$40,000

$40,001-$45,000

$45,001& above

Figure 8-1

Histogram of Survey Data for Engineers

Annual Salary

Fre

qu

en

cy (

no

. of

inc

um

be

nts

)

Forming Pay Structures: Integrating Job Structures with

External Market Pay Rates

Regression analysisBest-fitting line between two variables

Captures relationship between points and salary

An

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$)

55,000

50,000

45,000

40,000

35,000

30,0000 100 200 300 400 500 600 700 800 900 1,000Engineer I Engineer II Engineer III

Job Evaluation Points

44,525

38,420

33,536

Annual salaryPredicted annual salary

36,00034,500

33,000

36,000

43,500

45,000

55,000

Market Pay Line

Figure 8-2

Regression Analysis Results for the Engineer Survey Data

Comparable worth

Equal pay for work of equal worth. Is job evaluation biased? Do compensation systems perpetuate biases and

discrimination? The comparable worth argument is that typically

female jobs receive lower compensation due to gender bias, because such jobs are as complex and important as typically male jobs (e.g., nurses vs. construction workers).

A class-action lawsuit was filed on behalf of all female employees who worked for a well-known chain of grocery stores. The plaintiffs argued that females were relegated to jobs such as cashier, which seldom lead to promotions such as area or store manager. Instead, males are usually assigned to stocking, which has traditionally served as the platform to become area or store manager.

Are cashier jobs less important or complex than stocking jobs?

Why are females channeled to primarily cashier jobs?

Should this grocery chain modify its employment policy? How?

Discussion Question 8-1

Discussion Question 8-2

Relocation to a new area should be preceded by research on factors such as cost of living, job opportunities, average income, housing costs, crime, schools, etc. Using a job search engine such as monster.com or similar, an HR manager currently working in Miami has gathered data on two additional locations where s/he might relocate. Study these data to identify the pros and the cons of this manager’s possible relocation.

Miami Atlanta N.Y. National avg.

Population 379,240 402,068 7,525,022 Not applicable

County Dade Fulton Kings Not applicable

(table continues)

(continued)

 

Miami Atlanta N.Y. National avg.

Cost of Living

Overall 107.9 103.2 234.6 100.0

Housing 113.0 101.8 442.6 100.0

Food 102.9 106.0 142.8 100.0

Transportation 106.8 100.7 120.1 100.0

Utilities 103.0 97.5 178.2 100.0

Health 101.6 109.2 183.6 100.0

Misc. 108.0 104.6 130.4 100.0

(table continues)

(continued)

 

Miami Atlanta N.Y. National avg.

Housing

Purchase Cost $135,200 $126,800 $204,600 $128,500

Home Appreciation

6.3% 9.0% 9.7% 7.2%

Property Tax Rate

$18.60 $16.10 $15.30 $15.65

Crime

Violent Crime 2,105.0 2,729.5 1,063.1 446.1

Property Crime 8,618.8 10,759.0 2,968.5 4,162.2

(continued)

 

Miami Atlanta N.Y. National avg.

Economy

Income per capita

$13,814 $24,343 $23,966 $21,658

Household income

$29,269 $38,608 $47,714 $44,958

Unemployment Rate

6.4% 2.8% 5.8% 4.0%

Recent Job Growth

-0.1% 3.4% 2.6% 1.3%

Future Job Growth

13.1% 23.2% 4.5% 15.1%

Sales taxes 6.35% 6.65% 8.25% 6.35

Income taxes 0.00% 6.00% 10.52% 4.60%

(continued)

 

Miami Atlanta N.Y. National avg.

Education

High school grad.

59.7% 77.2% 73.4% 79.5%

2 yr college grad.

6.4% 5.0% 5.8% 7.6%

4 yr college grad.

11.3% 22.0% 16.1% 17.3%

PhD graduates 7.8% 11.7% 11.3% 8.5%

School expend. $5,845 $6,588 $7,414 $5,928

(continued)

 

Miami Atlanta N.Y. National avg.

Health

Air quality(100 = best)

5 12 12 33

Watershed quality (100 = best)

48 49 42 49

Superfund sites (100 = best)

10 50 60 53

Phys. per cap. 304 410 273 230

Health cost index

101.7 114.9 186.2 100.0