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STRATEGIC COMPENSATION

A Human Resource Management Approach

Chapter 9

Building Pay Structures That Recognize Individual Contributions

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Prentice Hall, Inc. 2006 Prepared by David Oakes

Constructing A Pay Structure


5 Steps  Decide how many  Determine market pay line  Define pay grades  Calculate pay ranges  Evaluate results
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Common Pay Structures


 Exempt & nonexempt  Based on job families  Based on geography
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Exempt & Nonexempt Pay Structures


 Exempt
Not subject to overtime provisions Salaried supervisors, managers, professionals, & executives

 Nonexempt
Subject to overtime provisions Hourly, non-supervisory
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Market Pay Lines


 Market pay rates relative to companys job structure  Pay levels corresponding with pay line are market-competitive  Rates promote internal consistency
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Pay Grades
 Based on compensable factors, values, management philosophy  Widths
Narrow or wide Affects hierarchy & social distance Absolute or percentage-based job evaluation points
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Pay Compression
 When pay spread is small  Threatens competitive advantages  Caused by
Failure to raise pay range limits Scarcity of qualified applicants

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CompaCompa-Ratios
 Evaluates pay structures  Index competitiveness of internal pay rates based on midpoints  Divide pay rates by midpoint  Compa-ratio meanings
1 = Market match rate < 1 = Market lag rate > 1 = Market lead rate
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Merit Pay Systems


Considerations  Communicate link between pay and performance  Use effective appraisal methods  Establish increase amounts & types  Settle on base pay level
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Merit Increase Amounts


 Reflects prior job performance levels  Needs to motivate  Needs to be meaningful  Influenced by the cost-of-living  Indexed as a % of budget
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Present Level of Base Pay


 Needs to be within limits of pay grade  Consistent with new employees at similar
jobs

 Needs to abide by mandates of


Title VII, 1964 Civil Rights Act Equal Pay Act of 1963 ADEA of 1967
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Increases Within Budget


 Determine performance categories and % of employees in each  Place % in quartiles  Put % and quartiles into cells  Estimate performance distribution  Distribute Increase to Each Cell  Ensure total is within budget
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Sales Objectives
 Sales volume
Sales within a time period

 New business
Sales to new customers

 Retaining sales
Higher sales to existing customers

 Product mix rewards sales


Sales of various products/services
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Sales Compensation Plans


 Sales-only  Salary-plus-bonus  Salary-plus-commission  Commission-plus-draw  Commission-only
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Salary-PlusSalary-Plus-Commission Plans

   

Commissions based on % of price Spreads risks Designed to attract quality sellers Allows employees to do other tasks

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CommissionCommission-Plus Draw Plans


 Draw
Advance pay for living expenses Charged against future commissions Recoverable or non-recoverable

 Provides strong incentive to excel

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CommissionCommission-Only
 Straight
Based on fixed % of sales price

 Graduated
Increased percentage rates for higher sales volume

 Multi-tiered
Increased percentage rates for meeting & exceeding sales goal
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Fixed Pay & Compensation Mix


3 Main Factors  Salespersons influence on decision  Competitive pay standards within industry  Amount of non-sales duties
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Skill Blocks
 Include job descriptions
Skills needed Training required Accurate evaluation process

 Organize jobs into family/group


List similar skills & tasks per job

 Group skills into blocks


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Transition Matters
Job-based pay to pay-for-knowledge

 Assessment of skills
Who assesses On what How often

 Align pay with knowledge structure  Access to training


Equal access to all
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In-House vs. Outsourced Training In Expertise


Needed & available

 Timeliness
How soon & how often?

 Number of trainees  Proprietary nature of topic


Too sensitive to share?
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Broadbanding
      Consolidates pay grades & ranges Flattens corporate hierarchies Emphasizes teamwork Broadens job duties & responsibilities Promotes quicker decision making More latitude in pay rate decisions

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TwoTwo-Tiered Pay
 New employees paid less  Temporary or permanent rewards  Mainly in unionized companies  May hinder recruiting  Can lower employees morale

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Pay Ranges
 Build upon pay grades  Represent vertical dimension  Include midpoint, minimum & maximum pay rates  Midpoints (market median rates)
Set by competitive pay policy Market lead - midpoint higher Market lag - midpoint lower

 Green & red circle pay rates


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