Salary Structure Formulas Part 2

Key Design Issues

  • The top design issue is perhaps whether the structure covers the market rates for the positions in the band or grade.
  • The next design issue is whether there enough of a range within the broad band/grade to make a meaningful distinction between new people assigned to the position versus people with extensive expertise and excellent performance.
  • Another design issue might be is there enough of a differential between the broad bands/grades to encourage employees to improve their skills/qualifications to take on higher levels of responsibilities in higher bands/grades.
  • If an outstanding performer, who is high in one band, is promoted to the next band, is there enough room in the new band to give them a decent increase? If an employee is moving to the minimum of new band, will the pay increase be so large that the company’s pay increase policies are violated?

The Market Line

The market line is a regression line that relates job evaluation points to market pay (in dollars) for benchmark jobs.

A benchmark job is a job in the firm’s job evaluation system for which there is a good match in the labor market.

A market comparator job is a job in the market data that matches a benchmark job within the firm’s job evaluation system.

Salary Formula 2F

Salary Formula 2G

Source: Strategic Compensation in Canada written by Richard J. Long

No Single Going Rate

There is no single “ going rate” for a job exists in the market. Instead an array of rates exists. We can see indirectly this in terms of the diagram below where an employee’s placement in a salary range is reflective of their experience and performance levels:

  • Less experienced or developing – lower end of the range
  • Experienced or fully competent – middle of the range
  • Highly experienced or high performer – upper end of the range

Salary Formula 2I

Source: Competitive Pay Policy written by Bottos and Fusco

Here is another perspective

Salary Formula 2A

Here is a further perspective.

Salary Formula 2B

The Policy Line

Salary Formula 2C

 

The pay policy line is a result of management’s decision to lead, lag or match the market pay. This policy decision may be different for different business units or ven for different job groups within a single organization.

The policy line serves as reference points around which pay grades and ranges or bands are designed.

The midpoint of each salary range is based on the pay policy line. The range spread of each salary range is based on judgement. The minimum and the maximum of each salary range is calculated.

This the pay policy line can be regarded as the intended pay policy for the organization, generated by adjusting the market line for the intended pay level strategy of the organization.

The following is the INCORRECT way of plotting the ranges.

Salary Formula 2K

Lead Lag or Match

Salary Formula 2D

Salary Formula 2E

Source: Compensation (8th Edition) Written by Milkovich and Newman

Here is another perspective:

Salary Formula 2H

Source: ERI Learning Center: Wage Structure Design

  • Lag the market. In this strategy, the organization updates the wage survey data to the current date and then installs the new wage structure. If a change in the labor market of 5 percent is assumed for the next year, then the only time the organization will be competitive with the market is at the beginning of the year. By the end of the year any decisions based upon the wage structure will be 5 percent behind the market.
  • Lead-lag. Here the organization takes account of the 5 percent estimated change in the market but wishes to be on average with the market. It does this by starting the year at 2.5 percent above the market rate. Provided the increase is steady over the year, this strategy will place the organization ahead of the market the first half of the year and behind it the second half. At the end of the year the organization will be paying 2.5 percent under the market.
  • Lead the market. In this strategy the organization wishes to pay above the market rate and does so by starting the year at 10 percent above the wage survey data. By the end of the year the organization will be paying the market rate.

Quartile Salary Policy

Salary Formula 2L

Source: HRWorks Handbook: Salary Administration written by Rebecca A. Richards (CCH Canadian Ltd)

You decide where you want your salary (pay) policy line relative to the market pay line:

Option 1: Be the same as the market pay line. In this case use the market median salaries as the midpoint of your new salary ranges. This is a market median salary policy.

Option 2: Exceed the market pay line. In this case use for example the market 75th quartile (3rd quartile) salaries as the midpoint of your new salary ranges. In this case, only one quarter of the salaries surveyed in the market would be above the amount you eventually would pay your employees at the midpoint of their new salary ranges. It represents a company policy of relatively high pay. This is a 3rd quartile salary policy.

Option 3: Fall below the market pay line. In this case use for example the market 25th quartile (1st quartile) salaries as the midpoint of your new salary ranges. In this case, three quarters of the salaries surveyed in the market would be above the amount you eventually would pay your employees at the midpoint of their new salary ranges. It represents a company policy of relatively low pay. This is a 1st quartile salary policy.

Considerations for the Business Cycle

Salary Formula 2J

Pay Mix Policy

Salary Formula 2M

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