A Roundtable Discussion:Market Based Pay Structures for “Reality Based” Pay

July 2005

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Objectives of Pay Structures

Attract, retain, reward, motivate

Benchmark to appropriate/comparable “markets”, i.e., external equity

Reconcile internal and external equity for “job slotting” in new pay range

Remain legally compliant

Be easily communicated and understood

Be cost effective

Reinforce and reflect the mission and values of ABC

Remain unbiased and objective

Build trust and buy-in

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Pay Structures in Support of Pay Philosophy

Business Strategy:

ABC, Inc. requires and expects the best from its creative, energetic, knowledgeable, and capable people. Our first responsibility is to serve our clients.

Pay Philosophy:

We have developed a compensation program that creates enthusiasm in those who serve so that we will create enthusiasm in those whom we serve. To succeed in this endeavor, all ABC employees will be results-oriented, quality-focused, team-driven, cost-minded, and fulfillment seeking and be rewarded at or above the median of like positions in similar organizations.

Pay Structure:

ABC Institution’s total compensation program (i.e., pay and benefits) supports our mission and strategy. It provides a competitive and affordable level of compensation for each employee in exchange for expected levels of performance and results. Total cash compensation may exceed that offered by comparable organizations provided individual, team, and/or the organization performance and results are exceptional and the organization realizes superior financial performance.

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Purpose of Pay Structures

Method to determine fair, equitable and competitive salary levels

Demonstrate that work levels and salary levels are established fairly

Allow ease of compliance with outside agency requirements – thus helping to reduce financial risk to the organization

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Pay Structures Should Fit Companies in Various Stages in the Business Cycle

Company Emphasis

Long-term Long-andshort-term

Short- andlong-term

Short-term

Threshold Growth Maturity Decline

Cash Situation

AcuteShortage

All isreinvested

Substantial Varies

A pay structure that promotes stability hasno place in an organization on the thresholdof fast growth

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Pay Structure – fitting into compensation strategy

ABC Mission/Vision

Business Strategy

Total CompensationStrategy

Direct CompensationIndirect Compensation

(Benefits)Intrinsic Rewards

(Individual Determines)

Base Pay Variable Pay

PerformanceManagement

PerformanceManagement

Pay StructureHaving a compensation strategy is THE FIRST AND MOST CRITICAL step to creating an effective pay structure

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Pay Structure – fitting into compensation strategy

Base Pay Strategy

Pay “Mix” Pay DeliveryJob Value

ExternalValue

InternalValue

Strategic ValueIndividual PayDetermination

SalaryStructure

Policies &Procedures

Desired Market Position

Management Philosophy

External Economic Environment

Short- vs. Long-term Orientation

Pay structures shape base compensationBase compensation influences variable incentive payBase compensation influences cash-based benefitsBase compensation is the “new frontier” for reality based pay

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Variability in use of market data

Job Analysis

Position Questionnaire

Job Evaluation

JobContent Emphasis

Job ContentEvaluation

Labor Market DataCollection and Analysis

MarketData Emphasis

Labor Market DataCollection and Analysis

Job ContentEvaluation

Reconciliation of Internaland External Considerations

Pay Structure

Job Worth Hierarchy

Reality based pay relies on absolute versus relative measures and baselines

In adjusting to reality based pay – internal equity trumps external benchmarks

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Typical Pay Structures Remain the Basis for Reality Based Pay

Grade

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

MidpointDifferential

RangeSpread

1 2 3 4

Midpoint

Range Spread =

Midpoint Differential =

Compa-ratio =

Range Penetration =

max pay - min payminimum pay

mid-point of higher pay grademid-point of lower pay grade

employee payrange mid-point

pay - range minimumrange max - range min

-1 ) x 100(

Maximum

Minimum

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Reality Based Pay Dictate Using Multi-Dimension Based Approach

Whole JobMarket-Based Approach

(JVM)

Point-Factor Approach

Multi-DimensionBased Approach

External Equity Internal Equity

One

Many

Numberof JobCharacteristicsMeasured

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Market Pricing Requires High Flexibility and Agility

MARKET PRICING ISSUES

RelevantMarkets

MarketData

Sources

DataValidity

Industry-specific for line jobs

General industry for staff jobs

Local for nonexempt and lower level exempt jobs

Regional/national for middle-management jobs

National for executive jobs

• From whom you hire - or would

like to hire - employees

• To whom you lose - or are likely

to lose - employees

• Whose pay practices you need

to know for competitive

business reasons

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Internal Hierarchies Trump External Hierarchies – New Pay

Salary

Grades

Job Value

Matrix

Slot Jobs

with no

Market Data

Based on

Internal

Hierarchy

External

Hierarchy

Based on

Market Data

ReconcileDepartment A

ReconcileDepartment D

ReconcileDepartment C

ReconcileDepartment B

Reconcile

Differences

Between

Departments

Final,

Organization- wide

Job Hierarchy

Department A

Department B

Department C

Department D

Interdepartment Intradepartment

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Questions of the Future

The paradigm (prevailing general theory) shift to “reality based” pay started with –

Demise of Dotcom – followed by

Oversized total executive compensation – expressed by

Overused external compensation surveys

Reality based pay (the “New Pay”) focuses on internal equity more than on external comparisons Internal performance versus external comparison is what drives increases to

share/stake holder investments

Pay structures need to be rethought on the basis of “reality based” pay

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1801 Broadway, Suite 400

Denver, Colorado

80202

www.harlongroup.com

Bill Heck, Managing Principal303.996.5695