Designing Pay Levels,

Mix and Pay Structures

STRATEGI
C
POLICIES

ALIGNMENT

COMPETITIVENES
S

CONTRIBUTORS

STRATEGI
C
OBJECTIV
ES

TECHNI
QUES
Work
Descriptions
Evaluation/
INTERNAL Analysis
Certification
STRUCTURE

Market
Surveys
Definitions
STRUCTURE

Policy
Lines

Seniority
Performance
Merit
INCENTIVE Based
Based
Guidelines PROGRAMS

PAY

EFFICIENCY

Performance
Quality

Customers

Stockholders
Costs
FAIRNESS

ADMINISTRATION

Planning Budgeting Communication

EVALUATION

COMPLIANC
E

Determining Externally
Competitive Pay Levels and
Structures
External
competitive
ness: Pay
relationship
s among
organizatio
ns

Merge
Internal
&
External
Pressure
Some Major Decisions in Pay Level
s

Set
Policy

Define
Market

Conduc
t
Survey

Draw
Policy
Lines

Determination

Determine pay level policy

Define purpose of survey

Define relevant labor market

Design and conduct survey

Interpret and apply results

Design grades and ranges or bands

Competitiv
e Pay
Levels,
Mix and
Structures

Pre Survey - Compensation versus Total

Rewards
.
Common Examples
Reward Elements
Definition
Intrinsic

Extrinsic:
All things onto
which we can
assign a rupee
value

Quality-of-Work &
-Life
Affiliation
Development
Security of
Employment

Other Non-Cash
Rewards

Cars
Clubs
Company Housing

Perquisites

Retirement
Health & Welfare
Time off w/Pay
Statutory Programs

Stock
Stock
Cash

AnnualIncentive
Basic Salary
Reimbursement +
Allow.
Insurance premiums

T O T A L

T O T A L
Benefits

LTA

Annual Variable

Base Cash

TOTAL

T
O
T
A
L

C
A
S
H

D
I
R
E
C
T

PA
Y

R
E
M
U
N
E
R
A
T
I
O
N

E
W
A
R
D

Salary Survey
A

survey is the systematic process of

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

Surveys

provide the data for setting the

pay policy relative to competition and
translating that policy into pay levels
and structures.

Set Competitive Pay Policy

Adjust

Pay Level How Much to Pay?

Adjust

Pay Mix What Forms?

Adjust

Pay Structure?

Special

Situations

Estimate

Competitors Labour Costs

Define Relevant Market

Competitors
Employers

who compete for the same

occupations or skills required.

Employers

who compete for

employees within the same
geographic area.

Employers

who compete with the

same products and services.

Advantages and Disadvantages of

Measures of Compensation
Base Pay

Tells how competitors

are valuing the work
in similar jobs

Total Cash
(base +
bonus)

Tells how competitors

are valuing work; also
tells the cash pay for
performance
opportunity in the job.
Tells the total value
competitors place on
this work

Total
Compensatio
n
(base +
bonus +
stock options
+ benefits)

Fails to include performance

incentives and other forms, so
will not give true picture if
competitors offer low base but
high
incentivesmay not receive
All employees
incentives, so it may overstate
the competitors pay; plus, it does
not include long-term incentives.
All employees may not receive all
the forms. Be careful; dont set
base equal to competitors total
compensation. Risks high fixed
costs.

Combine Job Evaluation and

Market Survey Data (1 of 2)
Scatterplots:

for each benchmark job

there is a distribution of salaries paid
by survey companies.
Scatterplots are useful to see what the
data look like.

Scatterplot
7
survey
6
monthly
salary
5
(Rs.0000)
4

PAY

3
2
1

80

120

160

200

240

280

320

Our Job Evaluation Points

360

Scatterplot with Linear

Curve
survey 7
monthly
6
salary
(Rs. 0000)
5
4

PAY

3
2

Line of Best Fit

80

120

160

200

240

280

320

Our Job Evaluation Points

360

Adjust The Data to Reflect

Organizations Pay Policy
Lead the Market:
pay level should be above the market
for the year and equal at year end
update factor will be equal to the
projected market increase

Adjust The Data to Reflect

Organizations Pay Policy (2 of 3)
Match the Market:
pay level will be above the market for
the first half of the year and below for
the second half
update factor will be half of the
projected market increase

Adjust The Data to Reflect

Organizations Pay Policy (3 of 3)
Lag the Market:
pay level should be below the market
for the entire year
no adjustment will be made to account
for the projected market increase

Developing a Pay Policy

Line
survey
monthly 7
salary
6
(Rs. 0000)
5
4

PAY

Line of Best Fit :

using market-survey data
(updated and aged to reflect
pay policy)

3
2
1

80

120

160

200

240

280

320

Our Job Evaluation Points

360

Why Bother with Ranges?

External Pressures:
a.
b.

Quality variations (KRAs) among individuals in

the external market
Recognition of differences in the productivityrelated value to employers of these quality
variations

Internal Pressures:
a.
b.

The intention to recognize individual

performance variations with pay
Employees expectations that their pay will
increase over time

Constructing Ranges:
Develop Grades
A

grade is a horizontal grouping of

different jobs that are considered
substantially equal for pay purposes.
Grades enhance an organizations
ability to move people among jobs
within a grade with no change in pay.

Constructing Ranges:
Develop Grades
The

objective is for all the jobs that

are similar for pay purposes to be
placed within the same grade.
How many pay grades?
a. number of jobs
b. organization hierarchy
c. reporting relationships

 Pay

Constructing Ranges:
Establishing Midpoint,
Minimum, and Maximum

ranges refer to the vertical

dimension of the pay structure.
Each pay grade will have associated
with it a pay range consisting of a
midpoint and a specified minimum and
maximum.

Constructing Ranges:
Establishing Midpoint,
Minimum, and Maximum

Midpoints

correspond to the
competitive pay policy
The point where the pay policy line
crosses each grade becomes the
midpoint of the pay range for that
grade
Midpoints are the control point of the
range

PAY GRADE STRUCTURE

8
our
7
monthly
6
salary
(0000)
5

PAY

IV

III

Pay Policy Line

II

100

150

200

250

300

Our Job Evaluation Points

350

DIFFERENT PAY
STRUCTURE
Spot Salaries
x

x
R
s

x
x
x

Broad Bands

Multiple Grades

x
x
R

Rs

Jobs

Jobs

Jobs

Number Bands

4-5 Bands

6 or more Grades

Range Width

100%

30%-50%

Overlap

50%

20% - 40%

Market Anchors
Pay Zones

Midpoints based on
market rates
Job Evaluation

Control

Market Anchors
Pay Zones

DIFFERENT PAY
STRUCTURE
Flexibility
Market Sensitive

Spot Salaries

R
s

xx x
x
x xxx

Broad Bands

Flexible
Responsive to the
market

Could lead to issues with

internal relativities
Less control over cost
Requires accurate
benchmarking and data
management

s
Jobs

Risks

Multiple Grades

x
x

Jobs

Advantages

Control
Internal Equity

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
Could lead to issues with
internal relativities
Employees may perceive lack
of promotional opportunities

Jobs

Clearly indicates internal

relativities
Control pay policy and
budgets
Can be used to determine
benefits eligibility

Issues with flexibility

Pay progression only
possible through job
promotion
Promotion culture

Pay level and mix focus

attention on two objectives:

Control Labour
Costs

Attract and
Retain
Employees

Pay Mix Policy Alternatives

Performance - Driven
Benefit
s 17%
Option
s 16%

Market Match
Benefit
s 20%

Base
50%

Options
4%
Bonus
6%

Base
70%

Bonus
17%
Work - Life Balance

Benefit
s 30%
Base
50%
Options
10%
Bonus
10%

Security
(Commitment)
Benefit
s 20%

Base
80%