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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

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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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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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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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NCS Worker CharacteristicsNCS Worker Characteristics

Occupation

Employment status

Union status

Company size

Base pay / incentive pay

Job level

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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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ECEC Compensation Costs ECEC Compensation Costs CategoriesCategories

Major occupation

Industry type & size

Region

Union status

Employment status

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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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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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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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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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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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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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QuartileQuartile

Dispersion by % below a set value

Quartile 1 = 25 %

Quartile 2 = 50 %

Quartile 3 = 75 %

Quartile 4 = 100 %

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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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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

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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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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