External Equity: Building Market-Competitive Compensation Systems

External Equity: External Equity:

Building Market-Competitive Building Market-Competitive Compensation SystemsCompensation Systems

Compensation TechniquesCompensation Techniques

INTERNAL: INTERNAL: Job Analysis, Job Descriptions, Job Evaluation, Job Analysis, Job Descriptions, Job Evaluation, Internal Work StructureInternal Work Structure

EXTERNAL: EXTERNAL: Market definitions, Market surveys, Policy lines, Market definitions, Market surveys, Policy lines, Pay structuresPay structures

INDIVIDUAL: INDIVIDUAL: Seniority based, Performance based, Incentive Seniority based, Performance based, Incentive guidelines, Incentive programsguidelines, Incentive programs

ADMINISTRATION: ADMINISTRATION: Planning, Budgeting, Communicating, EvaluatingPlanning, Budgeting, Communicating, Evaluating

External Equity/CompetitivenessExternal Equity/Competitiveness

““Refers to the pay relationships among Refers to the pay relationships among organizations. The organization’s pay relative organizations. The organization’s pay relative to its competitors.”to its competitors.”

Market-competitive pay systems Market-competitive pay systems represent companies’ compensation represent companies’ compensation policies that fit the imperatives of policies that fit the imperatives of competitive advantagecompetitive advantage– Attract and retain qualified employeesAttract and retain qualified employees

Competitive Pay Policy OptionsCompetitive Pay Policy Options

LeadLead LagLag MatchMatch

Match Pay PolicyMatch Pay Policy

Determine average market rateDetermine average market rate Pay WITH market rate/competitorsPay WITH market rate/competitors Similar ability to attract and retainSimilar ability to attract and retain Match industry/product market costsMatch industry/product market costs

Lead Pay PolicyLead Pay Policy

Determine market ratesDetermine market rates Pay ABOVE the average market ratePay ABOVE the average market rate Maximizes ability to attract and retain quality employeesMaximizes ability to attract and retain quality employees Minimizes employee dissatisfaction with payMinimizes employee dissatisfaction with pay Offsets less attractive features of workOffsets less attractive features of work

Lag Pay Policy Lag Pay Policy

Determine market ratesDetermine market rates Pay BELOW the average market ratePay BELOW the average market rate Hinders ability to attract and retainHinders ability to attract and retain Promise of higher future returnsPromise of higher future returns Lead on other aspectsLead on other aspects

Consequences of Pay Level Consequences of Pay Level DecisionsDecisions

Labor CostsLabor Costs AttractionAttraction

– Numbers, quality, Numbers, quality, experienceexperience

RetentionRetention– Voluntary TurnoverVoluntary Turnover

Pay SatisfactionPay Satisfaction Work stoppages, Work stoppages,

UnionizationUnionization

Competitiveness of Competitiveness of Pay PolicyPay Policy

Turnover RatesTurnover Rates

1991 AVG0

2

4

6

8

10

12

14

16

18

1991 AVG

Manufacturing

Nonmanufact

Finance

Nonbusiness

Health Care

Salary SurveySalary Survey

““The systematic process of collecting and The systematic process of collecting and making judgments about the compensation making judgments about the compensation paid by other employers.”paid by other employers.”

The Overpaid The Overpaid

Bank Tellers caseBank Tellers case

Salary Survey StepsSalary Survey Steps

Define the relevant marketDefine the relevant market Include jobs--Benchmark approachInclude jobs--Benchmark approach Collect informationCollect information Interpret & apply survey resultsInterpret & apply survey results

– Job matchesJob matches

Build grades and ranges withBuild grades and ranges withminimums, maximums andminimums, maximums andmidpoints.midpoints.– Regression lineRegression line

– Apply competitive pay policyApply competitive pay policy

– Design pay grades and rangesDesign pay grades and ranges

Define the Relevant MarketDefine the Relevant Market

The fields of potentially qualified The fields of potentially qualified candidates for particular jobs.candidates for particular jobs.– Occupations/skillsOccupations/skills– Geographic distanceGeographic distance– Same industry, productSame industry, product– Size of competitorsSize of competitors– Number of competitorsNumber of competitors– For project: at least 10 companiesFor project: at least 10 companies

Industry Weekly EarningsIndustry Weekly Earnings

WklyEarn

0

100

200

300

400

500

600

WklyEarn

Total Private

Mining

Construction

Manufacturing

Trans. & Util

Whls Trade

Retail Trade

Fin, Ins, RE

Services

Industry Hourly EarningsIndustry Hourly Earnings

Hrly Earn0

2

4

6

8

10

12

14

Hrly Earn

Total Private

Mining

Construction

Manufacturing

Trans. & Util

Whls Trade

Retail Trade

Fin, Ins, RE

Services

Include Jobs: Benchmark ApproachInclude Jobs: Benchmark Approach

Characteristics of Benchmark Jobs:Characteristics of Benchmark Jobs: Job contents well-known, stable over time, Job contents well-known, stable over time,

agreed upon by employees involvedagreed upon by employees involved Common across a number of different Common across a number of different

employersemployers Generally accepted for Generally accepted for

setting pay levelssetting pay levels Represent entire job Represent entire job

structure under studystructure under study

Benchmark JobsBenchmark Jobs

A B C D E F G H I J K L M N O P120 235 370 450 600

B

F IL

O

**

**

800

1000

1200

13001450

1800 *

Collect Info: Survey SourcesCollect Info: Survey Sources

Bureau of Labor StatisticsBureau of Labor Statistics– Area and industry surveys Area and industry surveys

(Local Area Wage Survey --(Local Area Wage Survey --AWS)AWS)

– National Survey of National Survey of Professional, Administrative, Professional, Administrative, Technical, and Clerical Technical, and Clerical Workers (PACT)Workers (PACT)

– Employee Benefit SurveysEmployee Benefit Surveys

– Current employment Current employment statistics surveystatistics survey

– Current population surveyCurrent population survey

– Employment Cost Employment Cost SurveysSurveys

– Compensation per hourCompensation per hour

– Major union settlementsMajor union settlements

Professional AssociationsProfessional Associations– American Compensation Association American Compensation Association

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

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

Accounting companiesAccounting companies– KPMG Peat Marwick; Deloite & KPMG Peat Marwick; Deloite &

Touche; Ernst & YoungTouche; Ernst & Young Professional, trade organizationsProfessional, trade organizations Private published sourcesPrivate published sources InternetInternet

Survey Sources, cont’dSurvey Sources, cont’d

Sources of Compensation Survey Information Sources of Compensation Survey Information (cont’d)(cont’d)

Industry AssociationsIndustry Associations– Administration Management SocietyAdministration Management Society– American Association of University American Association of University

ProfessorsProfessors– American Banker’s AssociationAmerican Banker’s Association– American Bar AssociationAmerican Bar Association– American Electronics AssociationAmerican Electronics Association– American Mathematical SocietyAmerican Mathematical Society– American Society of Association American Society of Association

ExecutivesExecutives– Association of General ContractorsAssociation of General Contractors– National Institute of Business National Institute of Business

ManagementManagement– National Restaurant AssociationNational Restaurant Association– National Retail FederationNational Retail Federation– National Society of EngineersNational Society of Engineers

Consulting FirmsConsulting Firms

–Abbott, Langer & AssociatesAbbott, Langer & Associates

–Coopers & LybrandCoopers & Lybrand

–Dietrich Associates Inc.Dietrich Associates Inc.

–Executive Compensation Executive Compensation ServiceService

–Hay Management ConsultantsHay Management Consultants

–Hewitt AssociatesHewitt Associates

–Mercer-Meidinger-HansonMercer-Meidinger-Hanson

–Robert Half AssociatesRobert Half Associates

–Towers & PerrinTowers & Perrin

–Wyatt Co.Wyatt Co.

Exhibit 8-4Exhibit 8-4

Engineers’ Pay for Cleveland, Ohio, Engineers’ Pay for Cleveland, Ohio, Metropolitan AreaMetropolitan Area

LEVEL

Level ILevel IILevel IIILevel IVLevel VLevel VI

NUMBER OFWORKERSSURVEYED MEAN MEDIAN MIDDLE RANGE

Source: US Bureau of Labor Statistics, Occupational compensation survey: Pay only. Cleveland, Ohio, Metropolitan Area, August 1995 (Washington, DC: US Government Printing Office, 1996).

AVERAGEWEEKLYHOURS

WORKED

232753

1,5591,332

479188

40.040.040.039.939.940.0

$ 649$ 752$ 924$1,077$1,257$1,479

$626$741$930

$1,080$1,254$1,478

$ 598 - $ 712$ 667 - $ 827$ 827 - $1,020$ 989 - $1,165$1,156 - $1,337$1,377 - $1,569

WEEKLY PAY


Summary: Participation in Selected Employee Benefits Programs Summary: Participation in Selected Employee Benefits Programs for Full-Time Employees by Geographic Regionfor Full-Time Employees by Geographic Region

BENEFIT

Paid time off:HolidaysVacationsPersonal leave

Survivor benefits:Life insuranceSurvivor income

Health care benefits:Medical careDental careVision care

NORTHEAST SOUTH NORTH-CENTRAL

94%98%40%

93%5%

83%62%31%

92%96%16%

88%4%

80%52%17%

93%98%18%

95%7%

84%65%24%

WEST

87%96%13%

88%5%

79%72%40%

Source: US Bureau of Labor Statistics, Employee benefits in medium and large private establishments, 1993 (Washington, DC: US Government Printing Office, 1994).

1996 Salary Offers to Bachelor’s 1996 Salary Offers to Bachelor’s Degree Candidates by DegreeDegree Candidates by Degree

AccountingAccounting 29,47629,476 Business Admin (& MS)Business Admin (& MS) 27,25527,255 DistributionDistribution 27,65527,655 Econ & Finance (&Bank)Econ & Finance (&Bank) 29,78329,783 Hotel/RestaurantHotel/Restaurant 24,08424,084 Human Resources (& LR)Human Resources (& LR) 25,42625,426 MISMIS 33,76933,769 MarketingMarketing 26,55126,551 Real EstateReal Estate 27,34027,340

Source: National Association of Colleges and Employers

1996 Salary Offers to Masters’ 1996 Salary Offers to Masters’ Degree Candidates by DegreeDegree Candidates by Degree

MBA -Non-tech undergrad < 1 yr exp 40,731 1-2 yrs exp 46,394 2-4 yrs exp 54,999 > 4 yrs exp 67,209

MBA -Tech undergrad < 1 yr exp 39,146 1-2 yrs exp 43,000 2-4 yrs exp 51,600 > 4 yrs exp 70,339

Accounting32,537

Econ/Finance (Banking)42,650

HR (inc LR)39,870

MIS 38,400 Marketing

41,547 MS - Business

37,237


1996 Salary Offers to Doctoral 1996 Salary Offers to Doctoral Degree Candidates by DegreeDegree Candidates by Degree

Bus AdmBus Adm& Mgt& Mgt 56,66756,667

Computer & Computer & Info SciencesInfo Sciences 63,55563,555

EconomicsEconomics 54,33354,333 Educ AdminEduc Admin43,39943,399 EnglishEnglish 33,37533,375 PsychologyPsychology 31,94931,949 Social SciencesSocial Sciences 30,66830,668

Aerospace 55,547

Chemical Eng60,161

Computer Eng65,050

Elec Eng61,180

Mech Eng52,184

Agriculture48,399

Bilogical Sci37,661

Chemistry54,693

Math 54,125


Average Salaries of MBA Average Salaries of MBA Graduates by Function (1992)Graduates by Function (1992)

Acct/AuditAcct/Audit 44,47944,479 ConsultingConsulting 61,73961,739 EngineeringEngineering 47,09647,096 FinanceFinance 57,72957,729 Gen MgtGen Mgt 70,59370,593 H RH R 59,36459,364

Info Syst47,890

Marketing53,208

Ops/Prod48,492

Project Mgt52,713

Plan/Corp51,127

Sales51,644

Source: Association of MBA Executives, Inc.

Human Resources Salaries 1991Human Resources Salaries 1991

E Benefits MgrE Benefits Mgr 59,50059,500 Comp MgrComp Mgr 58,20058,200 EEO MgrEEO Mgr 57,90057,900 Plant HR MgrPlant HR Mgr 57,40057,400 Grp Ins MgrGrp Ins Mgr 55,40055,400 Mgt Dev MgrMgt Dev Mgr 54,10054,100 HRIS MgrHRIS Mgr 51,80051,800 EAP ManagerEAP Manager 51,80051,800 Emp&Recr MgrEmp&Recr Mgr 51,70051,700 Plant P MgrPlant P Mgr 50,00050,000 Emp Tng MgrEmp Tng Mgr 48,40048,400

VP, Admin 143,300 ... Top Comp & Ben 75,600 Exec Comp Mgr 73,700 Top E Relation 67,900 HR Director 64,800 Tng & OD Mgr 63,100 Int’l Comp Mgr 63,100 HR Planning 62,400 LR Supervisor 61,300 Top Safety Mgr 60,400

Source: Society for Human Resource Management

Human Resources Avg SalariesHuman Resources Avg Salaries LR GeneralistLR Generalist 47,10047,100 Exec RecruitExec Recruit 44,50044,500 Safety SupervSafety Superv 44,40044,400 Safety SpecialistSafety Specialist 42,70042,700 GeneralistGeneralist 41,00041,000 Benefits Pln An.Benefits Pln An. 41,00041,000 Sr Comp AnSr Comp An 40,30040,300 EEO SpecialistEEO Specialist 39,90039,900 Security SpecSecurity Spec 39,40039,400 Sr Tng SpecSr Tng Spec 39,30039,300 Prof RecruitProf Recruit 37,70037,700

Comp&Ben Ad37,600

EAP Counselor37,000

Plant P Admin36,400

HRIS Specialist35,200

Benefits Admin33,800

Comp Analyst31,900

Jr. Training31,500

Entry Generalist30,600

Recruiter30,500

Pers Asst23,100

Benefits Clerk23,000

Internet SourcesInternet Sources

Variety of voluntary informationVariety of voluntary information Variety of purchasable informationVariety of purchasable information

Example sitea: see my webpageExample sitea: see my webpage http://wvnvm.wvnet.edu/~mrenard/http://wvnvm.wvnet.edu/~mrenard/

websiteswebsites

Avg Faculty Salaries - 1993-94Avg Faculty Salaries - 1993-94

0

10000

20000

30000

40000

50000

60000

70000

Prof Assoc Asst Inst Lect

MenWomen

All Universities (public and private) 1993-94. American Assoc. of Univ. Professors; The Chronicle of Higher Ed., April 20, 1994

Salary Survey StepsSalary Survey Steps

Define the relevant marketDefine the relevant market Include jobs--Benchmark approachInclude jobs--Benchmark approach Collect informationCollect information Interpret & apply survey resultsInterpret & apply survey results

– Job matchesJob matches Build grades and ranges withBuild grades and ranges with

minimums, maximums andminimums, maximums andmidpoints.midpoints.– Regression lineRegression line– Apply competitive pay policyApply competitive pay policy– Design pay grades and rangesDesign pay grades and ranges

Interpret & Apply Survey ResultsInterpret & Apply Survey Results

Survey JobAcctg Clerk AAcctg Clerk BAcctg Clerk CPg. 56-58

FastCat JobIntermediate Acctg ClerkAcctg ClerkSr. Acctg Clerk BPg. 19-44

Verify data - Job Matches

Not Job Title only, use job descriptions, duties, etcNot Job Title only, use job descriptions, duties, etc Compare survey jobs with MedTech’sCompare survey jobs with MedTech’s Choose closest match, use as benchmarkChoose closest match, use as benchmark

Interpret & Apply Survey ResultsInterpret & Apply Survey Results

Matched jobs can be used as benchmarksMatched jobs can be used as benchmarks Leveling - if nec. for unmatched jobsLeveling - if nec. for unmatched jobs Update salary informationUpdate salary information Central tendencyCentral tendency

– Mean, Mean, weighted meanweighted mean, median, , median, modemode DispersionDispersion

– Correlation ( -1.00 > r > 1.00)Correlation ( -1.00 > r > 1.00)– r should be > .90r should be > .90

Build Pay Structure - OverviewBuild Pay Structure - Overview

Once you have survey informationOnce you have survey information:: Combine internal structure and external Combine internal structure and external

wage rates - regression linewage rates - regression line Apply pay policyApply pay policy Design pay ranges Design pay ranges Balance internal and Balance internal and

external pressuresexternal pressures

An

nu

al S

ala

ry (

$)

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


Regression Analysis Results for the Regression Analysis Results for the Engineer Survey DataEngineer Survey Data

Apply Pay PolicyApply Pay Policy


B

F IL

O

**

**

800

1000

1200

13001450

1800 *Lead

Lag

Match

Design Pay Grades and Ranges Design Pay Grades and Ranges

Allow for quality, productivity, performance Allow for quality, productivity, performance differences, employee expectationsdifferences, employee expectations

Develop grades - similar jobs paid the sameDevelop grades - similar jobs paid the same Develop ranges - wages vary from midpointDevelop ranges - wages vary from midpoint Establish min, mid, maxEstablish min, mid, max Determine overlap -Determine overlap -

mid near min of mid near min of next gradenext grade

Build Pay GradesBuild Pay Grades


B

F IL

O

**

**

800

1000

1200

13001450

1800 *

Midpoints

Build Pay RangesBuild Pay Ranges


B

F*

*800

1000

1200

13001450

1800

Maximum

Midpoint

Minimum

Salary StructureSalary Structure

Considers relative internal job valuesConsiders relative internal job values Establishes grades containing like-valued jobsEstablishes grades containing like-valued jobs Reflects prevailing salary levels in the relevant Reflects prevailing salary levels in the relevant

market placemarket place Establishes salary ranges for each job--minimum, Establishes salary ranges for each job--minimum,

midpoint, maximummidpoint, maximum Responds to changes in competitive levelsResponds to changes in competitive levels Communicates earnings potentials to employees Communicates earnings potentials to employees

for current job and jobs to which they aspirefor current job and jobs to which they aspire

Chapter EightChapter Eight

Building Market-Competitive Building Market-Competitive Compensation SystemsCompensation Systems


Economic Activities Indexed by the Federal Government’s Economic Activities Indexed by the Federal Government’s Standard Industrial Classification ManualStandard Industrial Classification Manual

Agriculture, forestry, fishing, hunting, and trappingAgriculture, forestry, fishing, hunting, and trapping MiningMining ConstructionConstruction ManufacturingManufacturing Transportation, communications, electric, gas, and sanitary servicesTransportation, communications, electric, gas, and sanitary services Wholesale tradeWholesale trade Retail tradeRetail trade Finance, insurance, and real estateFinance, insurance, and real estate Personal, business, professional, repair, recreation, and other servicesPersonal, business, professional, repair, recreation, and other services Public administrationPublic administration Nonclassifiable establishmentsNonclassifiable establishments

Source: US Office of Mgmt. and Budget, Standard industrial classification manual (Wash.DC: US Office of Mgmt. and Budget, 1987).


Standard Industrial Classification Code ElementsStandard Industrial Classification Code Elements

Industry Number:Business and Secretarial Schools

8

Industry Group Number:Vocational Schools

Major Group:Educational Services

2 4 4

SIC Code 8244


Sources of Compensation Survey Information Sources of Compensation Survey Information (1 of 3)(1 of 3)

Professional AssociationsProfessional Associations

– The American Compensation Association publishes the Salary The American Compensation Association publishes the Salary Budget Survey, reported by region and industry.Budget Survey, reported by region and industry.

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



Industry AssociationsIndustry Associations– Administration Management SocietyAdministration Management Society– American Association of University ProfessorsAmerican Association of University Professors– American Banker’s AssociationAmerican Banker’s Association– American Bar AssociationAmerican Bar Association– American Electronics AssociationAmerican Electronics Association– American Mathematical SocietyAmerican Mathematical Society– American Society of Association ExecutivesAmerican Society of Association Executives– Association of General ContractorsAssociation of General Contractors– National Institute of Business ManagementNational Institute of Business Management– National Restaurant AssociationNational Restaurant Association– National Retail FederationNational Retail Federation– National Society of EngineersNational Society of Engineers



Consulting FirmsConsulting Firms

– Abbott, Langer & AssociatesAbbott, Langer & Associates

– Coopers & LybrandCoopers & Lybrand

– Dietrich Associates Inc.Dietrich Associates Inc.

– Executive Compensation ServiceExecutive Compensation Service

– Hay Management ConsultantsHay Management Consultants

– Hewitt AssociatesHewitt Associates

– Mercer-Meidinger-HansonMercer-Meidinger-Hanson

– Robert Half AssociatesRobert Half Associates

– Towers & PerrinTowers & Perrin

– Wyatt Co.Wyatt Co.


Engineers’ Pay for Cleveland, Ohio, Engineers’ Pay for Cleveland, Ohio, Metropolitan AreaMetropolitan Area

LEVEL

Level ILevel IILevel IIILevel IVLevel VLevel VI

NUMBER OFWORKERSSURVEYED MEAN MEDIAN MIDDLE RANGE

Source: US Bureau of Labor Statistics, Occupational compensation survey: Pay only. Cleveland, Ohio, Metropolitan Area, August 1995 (Washington, DC: US Government Printing Office, 1996).

AVERAGEWEEKLYHOURS

WORKED

232753

1,5591,332

479188

40.040.040.039.939.940.0

$ 649$ 752$ 924$1,077$1,257$1,479

$626$741$930

$1,080$1,254$1,478

$ 598 - $ 712$ 667 - $ 827$ 827 - $1,020$ 989 - $1,165$1,156 - $1,337$1,377 - $1,569

WEEKLY PAY


Summary: Participation in Selected Employee Benefits Programs Summary: Participation in Selected Employee Benefits Programs for Full-Time Employees by Geographic Regionfor Full-Time Employees by Geographic Region

BENEFIT

Paid time off:HolidaysVacationsPersonal leave

Survivor benefits:Life insuranceSurvivor income

Health care benefits:Medical careDental careVision care

NORTHEAST SOUTH NORTH-CENTRAL

94%98%40%

93%5%

83%62%31%

92%96%16%

88%4%

80%52%17%

93%98%18%

95%7%

84%65%24%

WEST

87%96%13%

88%5%

79%72%40%

Source: US Bureau of Labor Statistics, Employee benefits in medium and large private establishments, 1993 (Washington, DC: US Government Printing Office, 1994).

0

2

4

6

8

10

12

14

$30,000-$35,000

$35,001-$40,000

$40,001-$45,000

$45,001 &above


Histogram of Survey Data for EngineersHistogram of Survey Data for Engineers

Annual Salary

Fre

qu

en

cy (

no

. of

inc

um

be

nts

)

An

nu

al S

ala

ry (

$)

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


Regression Analysis Results for the Regression Analysis Results for the Engineer Survey DataEngineer Survey Data

Documents

External Equity: Building Market-Competitive Compensation Systems