Module 8

Question 1

The major decisions in setting externally competitive pay and designing the corresponding pay structures include:

Answer 1

1. Specifying the employer’s external pay policy
2. Defining the purpose of the survey
3. Choosing relevant market competitors
4. Designing the survey
5. Interpreting survey results and constructing the market line
6. Constructing a pay policy that reflects external pay policy
7. Balancing external equity with internal equity through the use of ranges

Question 2

Specifying Competitive Pay Policy - what do employers do?

Answer 2

> Employers decide if they want to be a market leader, match the average pay of competitors or lag behind the average market rates.

> To translate any external pay policy into practice requires information on pay rates in the external market.

Question 3

Purpose of a Competitive Survey - what data should be obtained?

Answer 3

> Obtain the data necessary to set an organization’s pay policy relative to its competition. Also allows the organization to adjust its pay level, pay structure, analyze pay problems and estimate competitors labour costs.

Question 4

What should be adjusted in regards to the Purpose of a Competitive Survey?

Answer 4

> Adjust Pay Levels, relative to competition
Adjust Pay Mix: base, bonus, stock options
Adjust Pay Structure: determine is market rates vary greatly from those obtained in the organization’s job evaluation

Question 5

What are special studies?

Answer 5

> special studies are required for targeted groups such as patent lawyers, retail sales managers or software engineers; examine turnover rates to determine if changes are occurring

Question 6

Why do employers estimate competitors labour cost?

Answer 6

> Employers constantly look for ways to decrease costs and increase productivity; salary survey data helps to benchmark against the competition

Question 7

The relevant labour market is defined by one or more of the following:

Answer 7

The same occupation or skills required;
The same geographical area;
The same products and services.

Question 8

New organizations fuse diverse knowledge and experience for what?

Answer 8

> New organizations fuse diverse knowledge and experience so relevant markets look more like fuzzy markets (for example: Yahoo uses a mix of teachers, software engineers and sales reps on a single team)

Question 9

Questions to be asked when designing a compensation survey include:

Answer 9

1. Who should be involved in the design? Options include the Compensation Manager or an outside consultant.
2. How many employers should be included? It depends on the circumstances. Statistics Canada is a major source of publicly available data; computer research is also a relevant source.
3. Which jobs are included? Benchmark jobs have stable content and are common among employers so are often used for comparison. A low/high approach can be used by comparing lowest paid and highest paid benchmark jobs and then use the wages of those jobs to anchor the structures.
4. What information is collected?
   a) Information about the nature of the organization;
   b) The total compensation system: base pay, total cash (base, profit sharing, bonus) and total compensation (total cash, plus benefits and perquisites) are three alternative measures; and
   c) Specific pay data on each incumbent in the jobs under study.

Question 10

Interpreting Survey Results and Constructing a Market Line - why do we verify data?

Answer 10

> Verify Data: Check for quality and accuracy of survey data and correct matches. Data can be examined for patterns. Jobs can be matched based on job descriptions.

Question 11

Interpreting Survey Results and Constructing a Market Line - what is the accuracy of a match?

Answer 11

> If a job is similar but not identical levelling can be used to weigh the data according to the closeness of the match (multiply by a numerical factor)

Question 12

Interpreting Survey Results and Constructing a Market Line - what are anomalies?

Answer 12

Anomalies are an atypical data point.
1. Does the company dominate?
2. Do all employers have similar patterns? What are outliers? (Outliers fall outside the majority of the data points)

Question 13

Interpreting Survey Results and Constructing a Market Line - statistical Analysis includes:

Answer 13

> Frequency distribution (organizes data into intervals);

> central tendency (averages or means and medians); and

> Variation (distribution of rates around central tendency and standard deviation, quartiles and percentiles).

Question 14

Interpreting Survey Results and Constructing a Market Line - why do we update survey data?

Answer 14

> for comparisons for future time periods and to forecast pay rates when a pay will be implemented. Called aging or trending.

Question 15

Interpreting Survey Results and Constructing a Market Line - what is regression analysis for?

Answer 15

is used to derive a Market Pay Line and links the company’s benchmark jobs on the horizontal axis (Internal structure) with the market rates paid by competitors (market survey) on the vertical axis.

Question 16

The Policy Pay Line adjusts the Market Pay Line to construct what? How is this done?

Answer 16

> The Policy Pay Line adjusts the Market Pay Line to construct a pay policy to reflect lead, match or lag policy.

> This is done by drawing a line at the match level first and then determining a new line based on the lead or lag levels chosen.

Question 17

Grades and Ranges impact what?

Answer 17

> Grades and Ranges impact on both internal and external equity and add flexibility to the system and allow managers to recognize differences in quality (skills, abilities, experience) between applicants; differences in productivity or value of these quality variations and differences in Pay Mix.

Question 18

Externally, quality variation may translate into:

Answer 18

> Externally, quality variation may translate into difference in productivity; internally employers may want to recognize differences in performance related to pay.

Question 19

The first step in creating flexibility in the pay structure begins with:

Answer 19

> The first step in creating flexibility in the pay structure begins with grouping different jobs that are substantially equal for pay purposes into pay grades.

Question 20

What are ranges used for?

Answer 20

> Ranges set an upper and lower limit between which wages for all jobs in that particular grade are expected to fall.

> The size of a range is a senior management decision based on the judgement about how the ranges support career paths, promotions and other organizational systems.

Question 21

What does an overlap among ranges mean?

Answer 21

> The degree of overlap among ranges is the third step in setting ranges.

> A large degree of overlap suggests jobs are similarly valued between grades and small differentials in pay between grades; a small degree in overlap allows for larger pay increases.

> The overlap between grades should be large enough to encourage employees to seek promotion into a higher grade.

Question 22

The size of the differentials need to support what?

Answer 22

> The size of the differentials need to support career moves through the structure.

Question 23

Grades and Ranges provide flexibility for managers/decision makers - Differences can be recognized such as:

Answer 23

1. Differences in quality (skills, abilities, experience) in individuals applying for work.
2. Differences in productivity or value of these quality variations (performance evaluations)
3. Differences in pay forms; some companies use more stock options than others.

Question 24

Managers can do what with pay?

Answer 24

> Managers can recognize individual performance differences with pay;

> meet employee expectations that their pay will increase over time even while holding the same job;

> and encourage long-term commitment to the organization.

Question 25

What is broad banding and what does it do?

Answer 25

> Broadbanding is a large band of jobs containing several pay grades. - Reduces grades to a few and creates wider ranges. - Work is consolidated into a few levels using this technique. - Provides more flexibility in moving people among jobs.

Question 26

What are the steps of broad banding?

Answer 26

1. Set the number of bands (usually 3 to 8) 2. Price the bands using reference market rates as guides.

Question 27

Broadbanding encourages employees to:

Answer 27

> Broadbanding encourages employees to move horizontally to increase cross-functional fertilization of ideas. A career move is usually within a band and less frequently between bands.

Question 28

Internal job evaluation (internal equity) and external market survey results (external equity) may not do what?

Answer 28

> Internal job evaluation (internal equity) and external market survey results (external equity) may not agree and produce two different structures. > In that instance, a review of the job analysis and job evaluation may be necessary to determine if a job was accurately evaluated vs the market rate and internal rate.

Question 29

Determining Externally Competitive Pay Levels and Structures - Major Decisions:

Answer 29

 Specify the employer’s competitive pay policy  Define the purpose of the survey  Select relevant market competitors  Design the survey  Interpret survey results and construct the market line  Construct a pay policy line that reflects the external pay policy  Balance competitiveness with internal alignment through the use of pay ranges, flat rates and, or bands

Question 30

Translating an external pay policy into practice requires information on the external market. How do we get this information?

Answer 30

 Surveys provide the data for translating that policy into pay levels, pay mix, and structures.  A survey is the systematic process of collecting and making judgments about the compensation paid by other employers

Question 31

The Purpose of a Survey:

Answer 31

 Adjust pay level—how much to pay? > Based on the changing rates paid by competitors  Adjust pay mix—what forms? > Base, bonus, stock, benefits relative to that offered by competitors  Adjust pay structure? > validate job evaluation results; establish internal structures  Study special situations > To analyze specific pay-related problems  Estimate competitors’ labour costs > “competitive intelligence”

Question 32

Relevant labor markets include employers who compete in one or more areas - what are those areas?

Answer 32

 the same occupations or skills,  hiring employees within the same geographic area, or  the same products and services

Question 33

What are fuzzy markets?

Answer 33

> new organizations and/or organizations with unique jobs may fuse diverse factors making relevant markets fuzzy.

Question 34

Which jobs do we include in a survey (aka what approaches do we use?)

Answer 34

> benchmark job approach, low-high approach, benchmark conversion/survey leveling

Question 35

What information to collect on surveys?

Answer 35

> organization data, total compensation data, information about incumbent and job and HR outcomes

Question 36

Possible Survey Data Elements – Total Compensation - cash and non-cash forms used are:

Answer 36

> Cash forms used: base pay, pay increase schedules, long- and short-term incentives, bonuses, cost of living adjustments, overtime and shift differentials > Non-cash forms used: composition of benefits and services, particularly the degree of coverage and contributions to medical and health insurance and pension

Question 37

What are advantages and disadvantages of base pay?

Answer 37

A: Tells how competitors are valuing the work in similar jobs. D: Fails to include performance incentives and other forms, so will not give true picture if competitors offer low base but high incentives.

Question 38

What are advantages and disadvantages of total cash?

Answer 38

A: Tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job. D: Not all employees may receive incentives, so it may overstate the competitors’ pay; plus, it does Not include long-term incentives.

Question 39

What are advantages and disadvantages of total compensation (base + bonus + stock options + benefits)

Answer 39

A: Tells the total value competitors place on this work D: All employees may not receive all the forms - don't set base pay equal to competitors' total compensation

Question 40

Interpret Survey Results - verifying the accuracy of match means you should:

Answer 40

 If a company job is similar, but not identical, use the benchmark conversion / survey leveling approach.  Multiply the survey data by some factor judges to be the difference between the company job and the survey job

Question 41

Interpret Survey Results - verifying anomalies means you should consider:

Answer 41

 Does any one company dominate?  Do all employers show similar patterns?  Are there outliers?

Question 42

Frequency distribution – unusual shapes may reflect:

Answer 42

 Employers with widely divergent pay rates  Anomalies or outliers

Question 43

What are central tendencies?

Answer 43

Central tendency – measure to describe a set of date  mode, mean, median and weighted mean

Question 44

What is variation?

Answer 44

Variation – degree of dispersion of data  standard deviation, quartiles and percentiles

Question 45

Are survey's outdated?

Answer 45

 Wages paid by competitors is constantly changing, so a survey is outdated before it is available.  Aging or trending refers to the process of updating pay data to forecast the competitive rates for the future when pay decisions are implemented

Question 46

A market pay line links what?

Answer 46

> A market pay line links a company’s benchmark jobs on the horizontal axis with market rates paid by competitors on the vertical axis

Question 47

Approaches to constructing a market pay line: (what are 2)

Answer 47

 Free hand approach  Regression Analysis

Question 48

Merging the two components on a graph:

Answer 48

 Internally aligned structure - Horizontal axis  External competitive data - Vertical axis

Question 49

What are the two aspects of pay structure?

Answer 49

 Pay-policy line  Pay ranges

Question 50

What are some ways to translate external competitiveness policy into practice?

Answer 50

 Choice of measure: a company can use a specific percentile for base pay and another percentile for total compensation.  Specify a percent above or below market line an employer intends to “lead” or “lag”, or simply “match”

Question 51

Develop Grades - what are the steps?

Answer 51

 The first step is to group different jobs considered substantially equal for pay purposes into grades. The objective is for all jobs similar for pay purposes to be in one grade.  Grades enhance an organization's ability to move people among jobs with no change in pay  All the jobs within a single grade will have the same pay range.  If evaluation points are close and fall on either side of grade boundaries, the difference in salary may be out of proportion to the difference in the value of the job content

Question 52

A range has three features:

Answer 52

 A midpoint where the pay-policy line crosses the center of the grade, a minimum and a maximum

Question 53

The size of the range is a judgment about:

Answer 53

The size of the range is a judgment about how the range supports career paths, promotions, etc.  Larger ranges in the managerial jobs reflect the greater opportunity for performance variations in the work.  Some firms use percentiles as maximums and minimums while other establish them separately.

Question 54

Pay Ranges provides managers with the opportunity to deal with:

Answer 54

Internal pressures  Recognize individual performance differences with pay,  Meet employees' expectations that their pay will increase over time, even in the same job, and  Encourage employees to remain with the organization. External pressures  Differences in quality among individuals applying for work,  Differences in the productivity or value of these quality variations, and  Differences in the mix of pay forms competitors use.

Question 55

Range Overlap - what should be considered?

Answer 55

 High grade overlap and low midpoint differentials indicate small differences in the value of jobs in adjoining grades.  The size of differentials between grades should support career movement through the structure.  Overlap ought to be large enough to induce employees to seek promotions.  Not all employers use grades and ranges.  Skill-based plans establish a single flat rate for each skill level, regardless of performance or seniority.  Many collective bargaining contracts establish flat rates per job.  Increasingly, broad bands are being adopted for greater flexibility

Question 56

Broadbanding Involves:

Answer 56

 Involves collapsing salary grades into a few broad bands, each with a minimum and a maximum

Question 57

What are advantages of broad banding?

Answer 57

 Provide flexibility to manage career growth and administer pay – broad banding encourages employees to seek growth by moving cross- functionally;  Support organizations that have eliminated layers of managerial jobs;  They foster cross-functional growth and development; and  Helps manage the reality of fewer promotions in flat organizations.

Question 58

Broad bands may be combined with:

Answer 58

> may be combined with traditional practices by using midpoints, zones, or other control points.

Question 59

Adjusting the Pay Structure

Answer 59

 A job structure orders jobs on the basis of internal factors  Reflected in job evaluation or skill certification  Pay structure is anchored by the organization’s external competitive position  Reflected in its pay-policy line

Question 60

How do we reconcile differences in a pay structure?

Answer 60

 May entail a review of : job analysis, job evaluation and market data  Differences may arise due to shortage of a particular skill, driving up market rate.

Question 61

Market pricing considerations:

Answer 61

 Market pricing emphasizes external competitiveness and deemphasize internal alignment.  Sets pay structures almost exclusively on external market rates. Pure market pricing at its extreme ignores internal alignment  Pay structure aligned with competitors’.  Unique or difficult-to-imitate aspects of the pay structure are deemphasized.  Fairness is presumed to be reflected by market rates.