Compensation Chapter 8

Assign different pay rates for jobs of unequal worth and provide the framework for recognizing differences in individual employee contributions

• Should define the boundaries for recognizing employee contributions (longevity, seniority, merit, incentive, person-based pay)
• Strategic Value: well-designed structures promote retention of valued employees

1. Decide how many pay structures to construct
2. Determine a Market Pay Line
3. Define Pay Grades
4. Calculate Pay Ranges for each pay grade
5. Evaluate Results

• Exempt & Non-Exempt: companies establish these pay structures for administrative ease; exempt not subject to overtime pay & salary expressed in annual terms, non-exempt are subject to overtime & salary expressed in hourly terms
• Based on Job Family: executive, managerial, professional, technical, clerical, and craft represent distinct job families
• Based on Geography: companies with multiple, geographically dispersed locations such as sales offices, manufacturing plants, service centers, and corporate offices establish pay structures based on going rates in the region (cost of living issues)

Market Pay Line: market pay rates relative to company's job structure

* pay rates corresponding with pay line are market competitive & these rates promote internal consistency b/c they increase with the value of the job

Pay Grades: represent the horizontal dimension of pay structures (on graph) i.e. job evaluation points

*Jobs are grouped for pay grades based on compensable factors, values, and management philosophy

*Wider or Narrower Pay Grades
-Wider pay grades (i.e grades that include a relatively large # of jobs) minimize hierarchy & social distance
-Narrower pay grades tend to promote hierarchy & social distance

*Grades can be developed as either absolute or percentage-based job evaluation point spreads
-Absolute: grades based on a set # of job evaluation points for each grade

Build upon pay grades--> they represent the vertical dimension (pay rates) of pay grades
Includes Midpoint, Minimum & Maximum pay rates
*Min & Max represent acceptable lower & upper bounds of pay for jobs within particular pay grades

*Midpoint--the halfway mark between range min & max; Where, as a company, do you want your average for this pay grade to be; if you want market lead strategy your midpoint will be higher than avg. for similar jobs at other companies, etc

Range Spread--> the difference between the maximum & minimum pay rates of a given pay grade (height); expressed as a percentage of the difference between the minimum & maximum divided by the minimum
*the greater the spread, the larger the range; there tends to be a larger spread with higher value jobs b/c there is room for promotion, specialized skills,etc.

FORMULA:
Minimum= Midpoint / 100% + (Spread/2)
FORMULA
Maximum= minimum + (spread x minimum)

Example: Midpoint-$60,000, Spread 40% Minimum? Maximum?
Minimum= 60,000/ 1.0 + (.4 / 2) = 60,000/ 1.2 = 50,000
Maximum= 50,000 + (.4 x 50,000) = 50,000 +20,000 = 70,000

Pay compression--when the pay spread betwen new or less qualified employees and more qualified job incumbents is small (new employees are being paid as much, or similarly to employees who have been in the job previously)

*threatens competitive advantage b/c it may cause dysfunctional turnover; company not keeping up with market

*Caused by: Failure to raise pay limits & High demand for qualified applicants

Green Circle Rates--> below minimum pay range rates
Red Circle Rates --> above maximum pay range rates

Specifically analyze significant differences between the company's internal values for jobs & market's value for the same jobs

Compa-Ratios--> indexes the competitiveness of internal pay rates based on midpoints; shows competitivness of their companies' pay rates

FORMULA
Compa-Ratio= Employee Pay Rate (Salary) / Pay Range Midpoint

Compa-Ratio Meanings:
1= market match
Less than (<) 1= market lag rate
Greater than (>) 1= market lead rate
*if company wants market lag policy compa-ratio should be less than 1; if company wants market lead policy compa-ratio should be greater than 1

EXAMPLE
Salary 60,000 Midpoint 60,000
Compa-Ratio = 60,000/60,000 = 1

Base Pay must be within the limits of the pay grade

Increases should be consistent with new employees at similar jobs with similar qualifications

Increases should reflect prior job performance levels

Increases should be meaningful & motivate employees to perform their best

2 Approaches to Timing:

*Common Review Date or Common Review Period--> all employees reviewed in a similar window of time
-better for knowing the budget & being able to determine % of increase; most companies transitioning to this

*Employee Anniversary Date

In grid: amounts are determined by
*Performance Ratings
*Position of employees' present base salary within the pay range (what quartile do they fall into)

Increases are within the budget; your % increase will depend on the total budget for the term
* pay raise amounts are expressed as percentages of base pay

Salary-only plans: receive fixed base compensation, doesn’t vary with any indicator of performance
--Risk to sales employee is low b/c they receive fixed amount no matter performance; Burden to company is high b/c they have to pay fixed amount even if performance is poor

Salary + Bonus: offers a set salary coupled with a bonus; bonus usually single payments reward for achievement of specific goal

Salary + Commission: commission is a form of comp incentive based on a percentage of the selling price of a product/service
--this plan spreads the risk of selling between the company and the sales professional
--salary part attracts good employees and allows company to direct employees in non-selling tasks
--commission part is employees’ share in gains generated for company

Commission + Draw: Draw is $ upfront to cover basic living expenses as an advance charged against the commission you earn; as you make your commission you pay the draw back

Commision-only: salespeople get entire income from commissions
3 types commission only:
*Straight Commission-->based on a fixed percentage of sales price; whatever you sell, you get a specific % of (i.e. 5% of every $10 sold)

*Graduated Commission--> increase percentage pay rates for progressively higher sales volume; get more for selling more (i.e. get 5% per unit up to 100 units sold; but get 7% of 300-500 units sold)

*Multi-Tiered Commission-->similar to graduated except each unit is worth more after you hit a pre-determined level (i.e. earn 8% for each item if total sales is short of 1,000 units but if total sales is over 1,000 units then up to 12% for those items sold)

Risk to employee v. Burden to company--> salary only puts all burden on company/no risk to employee; commission only puts all risk on employee & no cost burden on company

Spread of the risk-->links to being able to focus on tasks other than sales; Salary +commission

Subsistence--> employees concerned with paying bills may not be as good a worker so giving them a “safety net” (draw) may be a good thing

Attraction & Retention

Other tasks besides "sales"-->sales jobs makes more sense to be commission based than other types of jobs

Consolidates pay grades & ranges into fewer wider pay grades and broader pay ranges
--Uses a few large salary ranges to span levels within the organization

*Flattens corporate hierarchy
*Emphasizes teamwork
*Broadens job duties & responsibilities
*Promotes quicker decision making
*Allows for more latitude in pay rate decisions
---gives managers more latitude to provide higher salaries to employees without actually promoting them (allows them to give raises more easily)

Broadbanding goes with the trend of reducing middle managment & empowering employees

Different pay structures based on seniority; recently hired employees rewarded les than established employees

Enables companies to reward long-service employees while maintaining a lower-cost strategy by paying newer employers lower rates

Temporary Two Tiered: employees have opportunity to progress from lower-entry level pay rates to the higher rates received by more senior employees

Permanent Two Tiered: reinforces the pay-rate distinction by retaining separate pay scales (lower pay scale for newly hired, higher scale for current/senior employees)
--pay progresses within each scale, but maximum rates to which newly hired can progress are always lower than more senior employees

Two Tiered Pay
-is mainly in Unionized companies
-may hinder recruitment & retention
-may lower employee morale & cause resentment amongst employees