A Roundtable Discussion:Market Based Pay Structures for “Reality Based” Pay
July 2005
2
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
3
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
5
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
14
1801 Broadway, Suite 400
Denver, Colorado
80202
www.harlongroup.com
Bill Heck, Managing Principal303.996.5695
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