chapter 8 part 2

Question 1

how to develop salary structures

Answer 1

job analysis/documentation -> job evaluation/worth hierarcy -> gather survey data -> develop pay structures

internal alignment + external competitveness (survey data) = pay structures.

Question 2

pay structures

Answer 2

a set of pay ranges and associated with a set of specific jobs

Question 3

some critical aspect to remember about pay grades

Answer 3

The first step is to group different jobs that are considered
substantially equal for pay purposes into a grade (similar job
value based on your job evaluation process)

Each grade will have its own pay range, and all the jobs
within a single grade will have the same pay range

The pay range sets the upper and lower pay limits for all jobs
in a grade (the minimum, midpoint and maximum)

The number of pay or salary ranges a company has varies, but
is generally between 11-17; the larger the company, the more

Designing pay grades and pay ranges is usually done with
base pay data (versus total pay), because base pay reflects
the basic value of the work

Question 4

lets design pay structures

Answer 4

1. Start with your Job Worth Hierarchy: Using the job
   analysis, job documentation, and job evaluation process,
   determine the relative ranking of jobs according to the
   organization’s internal value
2. Collect Market Data: Incorporate external market values
   from salary surveys
3. Create Salary/Pay Grades: Cluster/group jobs that
   have similar internal value and external value (internal
   ranking and market pay levels into salary/pay grades or
   levels)
4. Create Pay Ranges: Determine midpoint, then overlay
   the range width, then calculate the minimum and maximum

Question 5

step 1: job worth hierarchy

Answer 5

The first step is to cluster/group different jobs considered
substantially equal for pay purposes into grades

Remember: all the jobs within a single grade will have the
same pay range

These are different jobs but considered equal for pay purposes

All jobs within a single grade will have the same pay range

Use Job Worth Hierarchy

Evaluating company jobs to create a job-worth hierarchy based on external
and internal factors as a means of arranging the jobs from highest to
lowest value; this is the first step for a company to develop its salary
structure once the job-worth hierarchy has been completed

Reconsider the original job evaluation results (internal value)
if external data (market data) is significantly different when
determining which grade a job should be slotted into

Question 6

job worth hierarchy

Answer 6

Company Jobs to Be Evaluated
– Evaluating company jobs to create a job-worth hierarchy based
on external and internal factors as a means of arranging the jobs
from highest to lowest value; this is the first step for a company
to develop its salary structure once the job-worth hierarchy has
been completed

Evaluated Jobs Arrange in YOUR company’s Job-Worth Hierarchy
– Building the salary structure is a process of
identifying groups of jobs that are clustered
together by virtue of having similar values

Question 7

3 create job grades by clustering

Answer 7

Building a salary structure is a process of
identifying groups of jobs that cluster together by
virtue of their similar values:

Similar internal job value and similar external value,
based on mapping internal job descriptions to the survey
job descriptions

Positions with similar levels of responsibility
(points if using point factor method) and value
in the organization will be in the same grade

Adjust for internal equity if external market data
significantly different, e.g., my example of the
production planner versus buyer

Question 8

3 create job grades by clustering

Answer 8

Cluster/group jobs that have similar internal value and external value/
market pay levels into salary/pay grades or levels

grade 1, 2, 3

Question 9

3. Create Job Grades by Clustering –

Breaking It Down Into Steps

Answer 9

Identifying groups of jobs that cluster together by virtue of
their similar values – similar internal job value and similar
external value

Start with your job worth hierarchy (list of your company jobs in order of
internal value)

Next, collect market data for each position - mapping internal job
descriptions to the survey job descriptions; you will only need the midpoint
of the market data

Next, look for “clustering” of similar internal & external values (Jobs 1-3,
Jobs 4-6 Jobs 7-10); there may be few or many jobs in each grade
(there is no “correct” number of jobs in a grade)

Next you will calculate midpoint of first job grade (see next slide)

Question 10

4. Create Pay Ranges:

Determining Range Spread/Width

Answer 10

Range spreads or range widths vary based on the
level and the sophistication of the knowledge/skills
required in a particular position

They are narrower for lower level positions and broader
for more senior positions. Why?

KSAs (knowledge, skills and abilities) are acquired faster in lower
level positions so you move through them to the next level faster

In managerial or senior positions there is greater variation and the
skill acquisition takes longer so you stay in those positions (grades)
longer

Other factors influencing range spread/widths:

Number of years incumbents typically stay in the job

How long it takes for new incumbents to reach proficiency in
the position

Question 11

4. Create Pay Ranges:

Determining Range Spread/Width

Answer 11

Typical Range Spreads:

Lower level service/production:
20%-25%

Professional, technical:
30%-40%

Managerial/executive:
40%-100%

Broadband:
up to 300%

Question 12

4. Create Pay Ranges

Calculating the Minimum & Maximum

Answer 12

With our midpoint ($32,000 for Grade 1), we now can complete
our pay/salary range by calculating the minimum and maximum
of the pay range by overlaying proper range width and the
formulas below

Minimum (relative to Midpoint) =

Midpoint/(1+(Range Spread/2))

Maximum (relative to Midpoint) =

Minimum *(1+Range Spread)

Calculating the Minimum: if midpoint $32,000, and you want a 25%
range spread

divide $32,000 by 1.xx where xx is range spread/2

$32,000/1.125 = $28,444

Calculating the Maximum: if minimum is $28,444 and you want a 25%
range spread

multiply $28,444 by 1.xx where xx is 1+ the range spread
$28,444 * 1.25 = $35,555

Question 13

Yay! We have a job grade and
associated pay range!!!

Answer 13

We averaged the
aged midpoints of
the market data
for jobs 1-3 =
$32,000

We determined the
correct range width
based on the jobs
in the range (25%)

We calculated the
minimum and
maximum

Question 14

calculation examples

Answer 14

What’s the midpoint?

(Max + Min)/2 =

($35,555 + $28,444)/2 = $32,000

What’s the range width/spread?

(Max-Min)/Min =

($35,555-$28,444/$28,444 = 25%

Question 15

broad banding

Answer 15

Involves collapsing several (3-5) salary grades
into a single band with a minimum and maximum,
and the range is very wide

Advantages over traditional salary range structure

Provide flexibility to broadly define job responsibilities

Support organizations that have eliminated layers of
managerial jobs

Helps manage the reality of fewer promotions in flat
organizations

Question 16

other key concepts and definitions in developing pay structures

Answer 16

Determining the # of Pay Grades: No fixed rule
for the number of grades/ranges

How to decide how many grades? Consider

Size of organization (generally larger, more grades)

How finely can you define or differentiate skills/
responsibilities between job levels; less specificity, fewer
ranges

Degree of emphasis on career development and
promotions (more emphasis, more levels)

Generally 10 -15 is the right # (larger companies may
have more)

Question 17

other key concepts and definitions in developing pay structures 2

Answer 17

Definitions or the Anatomy of Pay Structures

Pay/Salary Grades: a label for jobs with similar relative
value within an organization (internal value) and part of a pay
range

Pay/Salary Structure: a series of pay grades which cover a
specific job family or all the jobs in an organization reflecting
jobs having similar internal or external (market) value

Pay/Salary Range: the minimum and a maximum level of
pay

Range “spread” or range “width”: distance from the
salary range minimum to the salary range maximum,
typically expressed as %; (Max-Min/Min)

Range Midpoint: the salary level that is midway between
the minimum and maximum of the salary range; also known
as the market value of the jobs in the grade and considered
pay level associated with fully competent performance in
a job

Question 18

other key concepts and definitions in developing pay structures 3

Answer 18

2. Definitions or the Anatomy of Pay Structures

Mid-point progression: the % increase in the midpoints
from one salary grade to the next, expressed as a % of the
lower midpoint; greater distance means employees stay in
grades longer, but less overlap means promotional
increases greater; smaller progression tends to have
promotions feel more incremental than significant leaps
(Mid B-Mid A/Mid A)

Range overlap: degree to which adjacent salary ranges or
grades in a given salary structure include the same pay;
smaller overlaps means promotional increases greater

Question 19

market pricing

Answer 19

Market pricing is a pay strategy emphasizing external
competitiveness, deemphasizing internal alignment

Sets pay structures almost exclusively on external market rates

Pure market pricing at its extreme ignores internal alignment

How much or what mix of forms a company pays is no longer a potential
source of competitive advantage

In pure market pricing there are no pay grades - each job is
individually market priced

This is a “core change” in comp in recent years - less concern
about internal alignment (the internal value of how a job impacts
the overall mission and goals of the organization)

Why would organizations do this?

Assumption is there is little value in internal alignment; de-emphasizes
internal value

Time and expense of internal alignment process

Takes pay off the table, not a competitive advantage or disadvantage

Fairness presumed to be reflected by market rates

Defensibility if applied properly

Question 20

how to use pay ranges

Answer 20

Minimum = new in job,
inexperienced/developing skills,
under-performing or just
underpaid

Midpoint = proficient and
meeting performance
expectations, fully skilled and
competent in all aspects of the
job

Above midpoint = high
performer, long tenure, unique
skills, broader job requirements
than typical for the job, or just
overpaid

Red Circle paid above the maximum of range

Green Circle paid below the minimum of the range

Question 21

how to use pay ranges - metrics for managing pay ranges

Answer 21

Compa-Ratio: relationship of base
salary to the midpoint

Base salary $75,000

Midpoint $73,500

Compa ratio and range penetration
are indicators of how employees are
performing relative to the ranges and
reflect experience and performance

Companies generally strive to have
compa-ratios between~90%-110%
(~100% is “at market”) and range
penetration close to 50%

Another way to reflect Compa Ratio is:

Range Penetration: how far into
the range the employees pay is:

employee pay-minimum

maximum-minimum