Topic 6Developing Pay Structures

Pay Level Strategies: 1This decision involves determining how competitive the organization wishes

to be while the wage structure remains in effect. There are three basic strategies:

Lag the Market:The organization updates the wage survey data to the current date and then

installs the new wage structure. If a change in the labor market of 10 percent is assumed for the next year, then the only time the organization will be competitive with the market is at the beginning of the year. By the end of the year any decisions based upon the wage structure will be 10

percent behind the market.

Pay Level Strategies: 2

Lead-LagHere the organization takes account of the 10 percent estimated change in

the market but wishes to be on average with the market. It does this by starting the year at 5 percent above the market rate. Provided the increase

is steady over the year, this strategy will place the organization ahead of the market the first half of the year and behind it the second half.

Pay Level Strategies: 3

Lead-the MarketIn this strategy the organization wishes to pay above the market rate and does so by starting the year at 10 percent above the wage survey data. By

the end of the year the organization will be paying the market rate.

Developing a Pay Structure • Pay structures result from pricing job structures. • Job structures, in turn, result from the application

of formal or informal job evaluation to an organization's jobs

• In order to price a job structure, it is necessary to use rupee amounts from either current pay rates or the market data collected from compensation surveys

• A pay structure, then, is a combination of the job structure, the labor market, and the organization's decisions regarding the wage level

Common Pay Structures

–Hourly and salaried

–Office, plant, technical, professional,

managerial

–Clerical, information technology, professional,

supervisory, management, and executive

• Should there be a difference in changes in base pay progression opportunities among jobs of varying worth ?

• Do employees have a significant opportunity to progress to higher level jobs ? If so, what should be the relationship between promotion to a higher job and changes in base pay

• Does the organization wish to recognize dangerous working conditions in its base pay schedule ?

• Will policies and regulations permit incumbents to earn rates of pay higher than established maximums and lower than established minimums ? What should be the reasons for allowing such deviations ?

Pay Structure Design: Questions & Issues

Pay Structure Design: Questions & Issues

• What is the lowest rate of pay that can be offered and still hire desirable employees ?

• What is the rate of pay necessary to retain employees ?• Is it wise or necessary to offer more than one rate

of pay to employees performing either identical orsimilar kinds of work ?

• What is considered to be a sufficient difference in base rates of pay among jobs in a class-series that requires varying levels of knowledge, skills, responsibilities, and duties.

• How will the pay structure accommodate across-the-board, cost-of-living, or other adjustments not related to employee tenure, performance, or responsibility and duty changes ?

Pricing Job Structures• The job structure presents

the compensation decision maker with a hierarchy of the jobs in the organization.

• A rupee value now needs to be placed on this hierarchy.

• This rupee value is available in the current pay rates paid for the jobs and in the compensation survey data representing the labor market.

• These two sets of data are combined into a matrix that is used to create a scatter diagram

Thus, pricing a job structure involves a series of techniques and decisions regarding the vertical, horizontal, and regression-line dimensions of the scatter diagram.

Scatter Diagram: The Vertical Dimension• The vertical axis of the scatter diagram is a set of rupee figures from

low to high. This amount may come from either the current pay rate or range for the job within the organization or the value placed upon the job in the market survey. When current pay rates are used, an initial concern is the exact pay rate to assign to each-job.

– If there is a single job incumbent and/or a single pay rate for the job, then the particular rupee amount paid could be used, although this person could be paid high in the pay range.

– But if there is a pay range and a number of incumbents, then the exact figure to use must be determined.

– If the average pay is used, the pay for the job may be overstated or understated depending on how long the incumbents have been on the job or what their performance has been.

– The alternative is to use the midpoint of the pay range. This gives a good indication of the relative value of the job and not the incumbents.

Scatter Diagram: The Vertical Dimension• When survey data are used, the figures need to be

adjusted in a number of ways. Since the wage data does not provide a single rate but a range of figures, therefore the best single figure to use, such as the mean or median, needs to be determined.

• Second, any data collected in the wage survey predate the effective date of the wage structure presently being built. Thus, the data needs to be updated to the effective date of the new wage structure.

Scatter Diagram: Horizontal Dimension

• The horizontal axis is the hierarchical ranking of all the organization's jobs. The pricing process may work with either individual jobs or pay grades

• The major question involving the horizontal dimension is how the hierarchy of jobs was arrived at.

Scatter Diagram: Horizontal DimensionMarket Rates-The organization may assume that it wishes to pay strictly market rates for its jobs and may therefore place rupee values on both axes, making a totally consistent structure. Clearly this assumes that there is a market rate for all of the organization's jobs and that this rate is satisfactory.Job Evaluation Rates-Depending upon the method of job evaluation used, these ratings may consist of a ranking of jobs from low to high, a series of classification levels, or a range of points. Negotiated Rates-Where there is a union, the hierarchy of jobs may be a negotiated ranking based upon custom or the relative power of a group of unions.

Determining A Pay Policy LineIt is the line on a graph showing the relationship

between the job value, as determined by job

evaluation points, and pay survey rates

Each organization must develop its own pay policy line, the trend line

or line of best fit that best represents the middle value of jobs that

have been evaluated or classified to have particular worth.

Many organizations use the pay policy line to set midpoint values for all their jobs.

Pay policy lines are useful when plotting survey data and comparing them with the internal pay structure.

From the pay policy line, organizations establish the minimum and maximum pay levels, the relationship between pay grades, and the range of a pay grade.

Determining A Pay Policy Line• The procedure most

organizations follow is to identify the market rates for various benchmark jobs that cover the entire spectrum from lowest to highest rates of pay.

• By plotting on a chart the pay-rate information obtained through surveys, a scatter diagram or scatter plot can be developed.

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Developing the Pay Policy Line

• Once the horizontal and vertical dimensions of the scatter diagram have been settled upon, all the jobs or the key jobs can be plotted by their values on both axes.

• To create a smooth progression between pay grades, a pay-policy line is fitted to the plotted points.

• The line may be straight or curved and may be fitted by a number of different methods.

• When plotting job structures of single job clusters, a straight line is usually employed. The most frequently used types of lines are the low-high line and the freehand line.

Examples of Pay Policy Line

• Low – high Line: This is a straight line connecting the highest and the lowest of the plotted points (these are often called anchor points).

• The rates of all intervening jobs are made to fall on the line.

• The low-high line appears especially useful in union bargaining of the wage structure because of its flexibility. When a final bargain is reached, it may be implemented by raising either end or both ends in such a way as to reflect the contract.

Examples of Pay Policy Line

• Freehand line. After the points have been plotted the trend of the data can often be easily visualized.

• In this case it is possible to draw a freehand line that best describes the plotted points. In drawing such a line, vertical deviations from the line are minimized if the line follows the obvious slope of the data. Although the line may be straight or curved, its advantages are greatest when it is straight. The obvious advantages of using a freehand line are that it is easy to plot and simple to explain.

Multiple Structures• While we have considered only a single wage structure,

an organization may have several wage structures – one for each broad job cluster.

• It is not unusual for large organizations to have at least three pay structure lines:

–Blue collar manual labor, craft, and trade workers.

–White collar salaried workers.

–Managerial, administrative, and professional exempt employees

• Some organizations have a fourth pay structure for their highly paid executives.

Reasons for multiple pay structures could be:

It may be difficult to compare these different types of jobs, in which case the horizontal axis of the scatter diagram is not useful

The slope of the pay-policy line for these groups may be very different. At opposite extremes would be the blue-collar workers, with a very flat slope, and the managerial group, with a very steep slope. Further, the pay-policy lines will start and stop at different places, so that there will be little overlap between them.

A major reason for using multiple pay structures is that rates of pay for more advanced jobs increase geometrically rather than linearly.

The Need For Multiple Pay Structures

Next session

Completing the Wage Structure: Pay Grades• At this point, the wage structure consists of a horizontal dimension

and a vertical dimension with a pay-policy line derived from the plotting of jobs on them

• On the horizontal dimension, jobs are grouped into pay grades; on the vertical dimension, money is grouped into rate ranges.

A pay grade is defined as a group of jobs that have been determined by job evaluation to be approximately equal in difficulty or importance.

• If a point plan is employed in job evaluation, a pay grade consists of jobs falling within a range of points;

• if factor comparison is used, a range of evaluated rates;• if ranking is used, a number of ranks. • In the classification method of job evaluation, a pay grade consists of all jobs

that are comparable to the level description.

Pay grades are nothing more than convenient groupings of a wide variety of jobs or classes similar in work difficulty and complexity requirements but possibly having nothing else in common.

Pay Grades• There appears to be no optimum number of pay grades

for a particular wage structure. In practice, pay grades vary from as few as 4 to as many as 60.

• If there are few grades, the number of jobs in each will be relatively large, as will the increments from one grade to another.

• If, on the other hand, there are many pay grades, the number of jobs in each grade and the increments between grades will be relatively small.

• Although organization practice varies greatly, there has been a tendency to reduce the number of pay grades.

Pay Grades (contd.)• The actual establishment of pay grades is a decision-making

process designed to – place jobs of the same general value in the same pay grade– ensure that jobs of significantly different value are in different

pay grades– Provide a smooth progression, and– ensure that the grades fit the organization and the labor market.

• Because jobs in a pay grade are treated as identical for pay purposes, it is extremely important that grade boundaries be accepted. For this reason, it is often useful to move jobs that are very close to the maximum cutoff point into the next higher grade

• There are a number of ways of grouping jobs into a limited number of grades. Let's examine four of them -

Developing Pay Grades• It may provide for a single rate, or it may allow

for a range of pay within a certain grade.• The top or maximum rate of pay of a pay

grade states that this is the most that work produced by a job in this grade is worth to the organization.

• The bottom places a minimal value on the contributions of the assigned job.

• The distance between minimum and maximum recognizes the range of performance and experience of incumbents in the assigned job(s).

General Characteristics Of Pay Grade Systems

• Each grade provides for a range of pay.• Within a pay grade range there is a minimum,

a midpoint, and a maximum pay.• The range from the minimum to the maximum

within a single pay grade may vary from 20 to 100 percent. The most common range is from 30 to 50 percent.

• The number of steps within a grade may also vary. Grades having steps will normally have from 3 to 10 steps, with 6 to 7 in-grade steps most common.

• There is a direct relationship between the rate of increase per step and the number of steps within a grade.

General Characteristics Of Pay Grade Systems

The requirements of the organization will provide answers to the correct number of grades, the number of steps within grades, and their rates of progression within and between grades.

The number of pay grades to be included within a pay structure varies with the circumstances--there is no right number.

Pay Grades (contd.)

Grouping jobs into a limited number of grades-4 methods:

1. Cluster Approach

2. Division Approach

3. Mid point Progression Approach

4. Continuum Approach

1: Cluster Approach to Pay Grades• The simplest approach is to make a

scatter diagram of the organization's jobs, as is done in establishing the pay-policy line.

• When this is done it can often be observed that the jobs tend to cluster rather than scattering evenly.

• This effect can be taken advantage of by encasing the clusters horizontally and vertically, as illustrated

• This provides all three dimensions, but none of them is arrived at consistently, nor are they likely to be symmetrical. It may have a negative impact on salary and career progression in the organization.

• This has the advantages of simplicity and flexibility; small organizations are most likely to use this

2: Division Approach• Use the horizontal dimension of the

wage structure – the job evaluation points – to determine the number of pay grades.

• This is done by determining a set number of points for each pay grade and, starting with the least number of points, marking off the lines between adjacent grades. In the figure, each pay grade is 40 points "wide."

• The job rate for each grade should be set by placing the range midpoint at the point where a vertical line from the point value in the middle of the grade, say 200 points for level 3 in the figure meets the pay-policy line.

4: Continuum Approach• Each job evaluation point on

the horizontal axis has its own rate range; there is no grouping of jobs.

• The pay-policy line constitutes the midpoints. A standard maximum and minimum which are a set percentage above and below the midpoint are defined.

• These lines widen as the wage level rises, making the range broader at the top than at the bottom.

• A system like this requires a lot of confidence in the job evaluation system; it has gained popularity with the Hay’s plan

Pay Ranges• A range of pay allows an

organization to move beyond pay for the job to pay for the person.

• Since a pay grade incorporates a range of job evaluation points, it is useful to have some range of pay for the grade.

Pay Ranges

• Ordinarily, the midpoint of the range will be the job rate, the mean or median of the compensation survey data.

• The other points to define are the minimum and maximum of the range. The range spread (the distance from minimum to maximum) varies greatly but is usually within a 25 to 60 percent range.

• Many large wage structures with a variety of jobs are narrow at the bottom and spread out at the higher levels.

• Once pay grades and rate ranges are designed, the wage structure is complete (see figure)

Broad banding• The practice of using fewer pay grades having broader pay ranges that in traditional systems.

• Benefits– Encourages horizontal movement of employees

– Is consistent with trend towards flatter organizations

– Creates a more flexible organization

– Encourages competency development

– Emphasizes career development

Traditional Pay Structure vs. Broadbanding

Figure 12–13

Rs. 30,000

Rs. 56,000

Rs. 40,000

Rs. 35,000

Rs. 49,000

Rs. 43,000

Rs. 56,000

Rs. 30,000

Narrow Vs Broad Bands

Pay Rate

Pay Grade

= narrow

= broad

Typical Pay Range Widths

Figure 12–15

Issues Involving Pay Increases• Seniority

–Time spent in an organization or on a particular job.

–Used to determine eligibility for organizational rewards and benefits.

• Maturity Curve–A curve that depicts the relationship between

experience and pay rates.–Assumption is that as experience increases,

proficiency and performance increase.

Issues Involving Pay Increases• Cost-of-Living Adjustments (COLA)

–A percentage increase in wages that allows employees to maintain the same real wages in a period of economic inflation.

–Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index).

–Lump-Sum Increases (LSI)–A one-time payment of all or part of a yearly pay

increase.–Lump-sum payments do not increase base wages

Pay plan characteristics that differentiate pay plans between more

and less uncertain environmentsFirms in less uncertain environments

show:• Greater use of market- lag pay-level policy

• Greater emphasis on seniority awards• Greater use of lump-sum pay adjustments

• Greater use of cash bonus awards• Greater emphasis on creating competition

among individuals • Greater use of internal standards for

evaluating pay plan for effectiveness

Pay plan characteristics that differentiate pay plans between more

and less uncertain environmentsFirms in more uncertain environments

show:• Greater use of market-match pay-level policy• Greater emphasis on performance awards• Greater use of distributive pay adjustments• Greater emphasis of stock bonus awards• Greater emphasis on creating cooperation

with team of employees• Greater use of external comparisons for

evaluating pay plan effectiveness