Designing Pay Levels, Designing Pay Levels, Mix and Pay StructuresMix and Pay Structures

STRATEGIC

POLICIESTECHNIQUES

STRATEGIC

OBJECTIVES

EFFICIENCY Performance Quality Customers Stockholders CostsFAIRNESSCOMPLIANCE

ALIGNMENTALIGNMENT

COMPETITIVENESCOMPETITIVENESSS

CONTRIBUTORSCONTRIBUTORS

ADMINISTRATIONADMINISTRATION

Work Descriptions Evaluation/ INTERNAL Analysis Certification STRUCTURE

Market Surveys Policy PAY Definitions Lines STRUCTURE

Seniority Performance Merit INCENTIVE Based Based Guidelines PROGRAMS

Planning Budgeting Communication EVALUATION

Determining Externally Determining Externally Competitive Pay Levels and Competitive Pay Levels and

StructuresStructuresExternal External competitivecompetitiveness: Pay ness: Pay relationshiprelationships among s among organizatioorganizationsns

Set Set PolicyPolicy

Define Define MarketMarket

ConducConduct t SurveySurvey

Draw Draw Policy Policy LinesLines

Merge Merge Internal Internal & & External External PressurePressuress

CompetitivCompetitive Pay e Pay Levels, Levels, Mix and Mix and StructuresStructures

Some Major Decisions in Pay Level Some Major Decisions in Pay Level DeterminationDetermination

Determine pay level policyDetermine pay level policy Define purpose of surveyDefine purpose of survey Define relevant labor marketDefine relevant labor market Design and conduct surveyDesign and conduct survey Interpret and apply resultsInterpret and apply results Design grades and ranges or bandsDesign grades and ranges or bands

Pre Survey - Compensation versus Total Pre Survey - Compensation versus Total Rewards ….Rewards ….Common Examples Reward Elements Definition

• Stock• Cash

R

E

W

A

R

D

• Quality-of-Work & -Life

• Affiliation• Development• Security of

Employment

Other Non-Cash Rewards T O T A L

REMUNERATION

• Cars• Clubs• Company Housing

• Retirement• Health & Welfare• Time off w/Pay• Statutory Programs

Perquisites

Benefits

T O T A L

Intrinsic

Extrinsic:All things onto which we can

assign a rupee value

• Annual Incentive

• Basic Salary• Reimbursement +

Allow.• Insurance premiums

Annual Variable

Base Cash

TOTAL

CASH

LTATOTAL

DIRECT

PAY

• Stock

Salary SurveySalary SurveyA A surveysurvey is the systematic process of is the systematic process of

collecting and making judgements collecting and making judgements about the compensation paid by other about the compensation paid by other employers.employers.

Surveys provide the data for setting the Surveys provide the data for setting the pay policy relative to competition and pay policy relative to competition and translating that policy into pay levels translating that policy into pay levels and structures.and structures.

Set Competitive Pay PolicySet Competitive Pay PolicyAdjust Pay Level – How Much to Pay?Adjust Pay Level – How Much to Pay?Adjust Pay Mix – What Forms?Adjust Pay Mix – What Forms?Adjust Pay Structure?Adjust Pay Structure?Special SituationsSpecial SituationsEstimate Competitors’ Labour CostsEstimate Competitors’ Labour Costs

Define Relevant Market Define Relevant Market CompetitorsCompetitors

Employers who compete for the same Employers who compete for the same occupations or skills required.occupations or skills required.

Employers who compete for Employers who compete for employees within the same employees within the same geographic area.geographic area.

Employers who compete with the Employers who compete with the same products and services.same products and services.

Advantages and Disadvantages of Advantages and Disadvantages of Measures of CompensationMeasures of Compensation

All employees may not receive all All employees may not receive all the forms. Be careful; don’t set the forms. Be careful; don’t set base equal to competitors’ total base equal to competitors’ total compensation. Risks high fixed compensation. Risks high fixed costs.costs.

Tells the total value Tells the total value competitors place on competitors place on this workthis work

Total Total CompensatioCompensationn(base + (base + bonus + bonus + stock options stock options + benefits)+ benefits)

All employees may not receive All employees may not receive incentives, so it may overstate incentives, so it may overstate the competitors’ pay; plus, it does the competitors’ pay; plus, it does not include long-term incentives.not include long-term incentives.

Tells how competitors Tells how competitors are valuing work; also are valuing work; also tells the cash pay for tells the cash pay for performance performance opportunity in the job.opportunity in the job.

Total CashTotal Cash(base + (base + bonus)bonus)

Fails to include performance Fails to include performance incentives and other forms, so incentives and other forms, so will not give true picture if will not give true picture if competitors offer low base but competitors offer low base but high incentives high incentives

Tells how competitors Tells how competitors are valuing the work are valuing the work in similar jobsin similar jobs

Base PayBase Pay

Combine Job Evaluation and Combine Job Evaluation and Market Survey Data Market Survey Data (1 of 2)(1 of 2)

Scatterplots: for each benchmark job Scatterplots: for each benchmark job there is a distribution of salaries paid there is a distribution of salaries paid by survey companies.by survey companies.

Scatterplots are useful to see what the Scatterplots are useful to see what the data look like.data look like.

PAY

Our Job Evaluation Points

ScatterplotScatterplot

120 160 200 240 280 320 360

surveymonthlysalary

(Rs.0000)

7654321

80

PAY

Our Job Evaluation Points

Scatterplot with Linear Scatterplot with Linear CurveCurve

120 160 200 240 280 320 360

surveymonthlysalary

(Rs. 0000)

7654321

80

Line of Best Fit

Adjust The Data to Reflect Adjust The Data to Reflect Organization’s Pay Policy Organization’s Pay Policy

Lead the Market:Lead the Market:pay level should be above the market pay level should be above the market

for the year and equal at year endfor the year and equal at year endupdate factor will be update factor will be equalequal to the to the

projected market increaseprojected market increase

Adjust The Data to Reflect Adjust The Data to Reflect Organization’s Pay Policy Organization’s Pay Policy (2 of 3)(2 of 3)

Match the Market:Match the Market:pay level will be above the market for pay level will be above the market for

the first half of the year and below for the first half of the year and below for the second halfthe second half

update factor will be update factor will be half half of the of the projected market increaseprojected market increase

Adjust The Data to Reflect Adjust The Data to Reflect Organization’s Pay Policy Organization’s Pay Policy (3 of 3)(3 of 3)

Lag the Market:Lag the Market:pay level should be below the market pay level should be below the market

for the entire yearfor the entire yearno adjustmentno adjustment will be made to account will be made to account

for the projected market increasefor the projected market increase

PAY

Our Job Evaluation Points

Developing a Pay Policy Developing a Pay Policy LineLine

120 160 200 240 280 320 360

surveymonthlysalary

(Rs. 0000)

7654321

80

Line of Best Fit :using market-survey data(updated and aged to reflectpay policy)

Why Bother with Ranges?Why Bother with Ranges? External Pressures:External Pressures:

a.a. Quality variations (KRAs) among individuals in Quality variations (KRAs) among individuals in the external marketthe external market

b.b. Recognition of differences in the productivity-Recognition of differences in the productivity-related value to employers of these quality related value to employers of these quality variationsvariations

Internal Pressures:Internal Pressures:a.a. The intention to recognize individual The intention to recognize individual

performance variations with payperformance variations with payb.b. Employees’ expectations that their pay will Employees’ expectations that their pay will

increase over timeincrease over time

Constructing Ranges:Constructing Ranges:Develop Grades Develop Grades

A A gradegrade is a is a horizontalhorizontal grouping of grouping of different jobs that are considered different jobs that are considered substantially equal for pay purposes.substantially equal for pay purposes.

Grades enhance an organization’s Grades enhance an organization’s ability to move people among jobs ability to move people among jobs within a grade with no change in pay.within a grade with no change in pay.

Constructing Ranges:Constructing Ranges:Develop GradesDevelop Grades

The objective is for all the jobs that The objective is for all the jobs that are similar for pay purposes to be are similar for pay purposes to be placed within the same grade.placed within the same grade.

How many pay grades?How many pay grades?a. number of jobsa. number of jobsb. organization hierarchyb. organization hierarchyc. reporting relationshipsc. reporting relationships

Constructing Ranges: Constructing Ranges: Establishing Midpoint, Establishing Midpoint,

Minimum, and MaximumMinimum, and MaximumPay ranges refer to the Pay ranges refer to the vertical vertical

dimensiondimension of the pay structure. of the pay structure.Each pay grade will have associated Each pay grade will have associated

with it a pay range consisting of a with it a pay range consisting of a midpoint and a specified minimum and midpoint and a specified minimum and maximum.maximum.

Constructing Ranges: Constructing Ranges: Establishing Midpoint, Establishing Midpoint,

Minimum, and MaximumMinimum, and MaximumMidpoints correspond to the Midpoints correspond to the competitive pay policycompetitive pay policy

The point where the pay policy line The point where the pay policy line crosses each grade becomes the crosses each grade becomes the midpoint of the pay range for that midpoint of the pay range for that gradegrade

Midpoints are the control point of the Midpoints are the control point of the rangerange

PAY

Our Job Evaluation Points

PAY GRADE STRUCTUREPAY GRADE STRUCTURE

100 150 200 250 300 350

ourmonthlysalary(0000)

87654321

Pay Policy LinePay Policy LineI

II

III

IV

V

Broad Bands

Jobs

Rs

Multiple Grades

Jobs

Rsx

Spot Salaries

x xx

x

x

xx x

x

Jobs

Rs

30%-50% 100%Range Width

20% - 40% 50%Overlap

6 or more Grades 4-5 BandsNumber Bands

Midpoints based on market rates

Job Evaluation

Market Anchors Pay Zones

Control Market Anchors Pay Zones

DIFFERENT PAY DIFFERENT PAY STRUCTURESTRUCTURE

Broad Bands

Jobs

Rs

Multiple Grades

Jobs

Rs

x

Spot Salaries

x xx

xx

xx xx

Jobs

Rs

Clearly indicates internal relativities

Control pay policy and budgets

Can be used to determine benefits eligibility

Enhances organisational flexibility

Framework for managing pay and career development

Allows for reward for growth within band

Emphasis on individual contribution and market

Can be used to determine benefits eligibility

Advantages Flexible Responsive to the

market

Risks Could lead to issues with internal relativities

Less control over cost Requires accurate

benchmarking and data management

Issues with flexibility Pay progression only

possible through job promotion

Promotion culture

FlexibilityMarket Sensitive

ControlInternal Equity

Could lead to issues with internal relativities

Employees may perceive lack of promotional opportunities

DIFFERENT PAY DIFFERENT PAY STRUCTURESTRUCTURE

Pay level and mix focus Pay level and mix focus attention on two objectives:attention on two objectives:

Control Labour Control Labour CostsCosts

Attract and Attract and Retain Retain

EmployeesEmployees

Pay Mix Policy AlternativesPay Mix Policy Alternatives

Base 50%

Bonus 17%

Options 16%

Benefits 17%

Performance - Driven

Base 70%Bonus

6%

Options 4%

Benefits 20%

Market Match

Base 50%

Bonus 10%

Options 10%

Benefits 30%

Work - Life Balance

Base 80%

Benefits 20%

Security (Commitment)