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Base Salary, Structures

and Benchmarking

Elements of Reward

Promotion
Opportuni
ties
Work /
Life
Balance

Organizational Level

Career
Developm
ent

Flexible
Work
Environme
nt
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Objectives of a
Base Salary Structure
Before delving into the details of how actually to pay people, there are
many factors that impact a base salary program that an organization
must consider. In general, every organization's base salary program has
certain objectives. The principal ones are as follows:
internal equity
external equity (or competitiveness),
individual equity,
process equity,
performance or productivity incentives,
maximum use of financial resources,
compliance with laws and regulations, and
administrative efficiency.

Objectives of a
Base Salary Structure
Management needs to ask itself:

Is this point
important to
this
organization?
If so, how
important?

What are the


implications
of this point
to the
current or
desired
practices?

Internal & External Equity


Internal equity deals with the perceived worth of a job relative to other jobs in
the organization. All employees compare their jobs to other jobs within the
organization. Generally, they consider skill, effort, responsibility and working
conditions in this comparison in order to determine the value of their jobs
relative to other jobs. Likewise, management must often determine the "worth"
or "value" of one job in relation other jobs for the purpose of salary programs.
Maintaining appropriate salary relative to value or worth is achieving internal
equity.
External equity deals with the issue of market rates for jobs. An employer's
goal should be to pay what is necessary to attract, retain and motivate a
sufficient number of qualified employees. This requires a base salary program
that pays competitively. Among others, internal data such as turnover rates and
exit interviews can be helpful in determining the competitiveness of pay rates.

Individual & Process Equity


Individual equity deals with how individuals perceive how they are being paid
relative to other individuals within the organization and perhaps within the same
position. This focus of individual equity is on the merits of the person filling a job,
as opposed to the job itself. In simple terms, employees want to feel that the
rewards they receive for how they do their work are comparable to the rewards
received by others for the same amount of effort or output, all other factors being
equal. How merit rewards or increases are given strongly impacts perceptions of
individual equity.
Process equity deals with how employees perceive the fairness or equity in the
administration of the compensation system is process equity. Process equity, in the
perceptions of employees, is strongly influenced by the openness of the system,
communication of the system to employees, participation in design or
administration of the system and a grievance appeal procedure.

Performance Incentives &


Use of Resources
Performance Incentives - A significant element of a base pay program
is to encourage higher or increased levels of employee performance. Pay
systems need to be designed to improve organizational performance.
Maximum Use of Financial Resources - Since an organization does not
have unlimited financial resources, the base pay program needs to be
designed to maximize the value to the organization with minimum use of
these limited resources. In order to accomplish this, salary programs have
a variety of tools such as salary range maximums, pay increase budgets,
authorization procedures, compensation committees or various internal
auditing procedures available to help accomplish this objective.

Compliance &
Administration
Compliance with Laws and Regulations - While not the
primary objective of a salary program, one of the objectives
needs to be to keep the organization in compliance with
various state and federal laws and regulations.
Administrative Efficiency - Due to the limited financial
resources in an organization, one of the objectives should be
to have a salary program that is easy to administer, flexible,
and cost-effective.

Developing a Salary
Structure
The basis for most salary programs is a salary structure - a hierarchy of
jobs with salary ranges and/or rates assigned.
Salary structures are designed so that the greater the worth of a job (as
determined by internal or external equity), the higher the salary grade and
range.
Developing a salary structure is a process with a series of steps:
1.
2.
3.
4.

Job analysis and documentation


Development of a job evaluation methodology
Establishment of Salary Ranges
Benchmarking Data Collection

Job Analysis &


Documentation
Job Analysis - This involves collecting and evaluating relevant information about jobs.
Any data collected should clarify the nature of the work being performed (principal or
essential tasks, duties and responsibilities), the level of the work being performed, the
extent and types of knowledge, skill, mental and physical effort and requirements, and
responsibility required for the work being performed.
Job Documentation - There needs to be a formalized way to document job content. In
most organizations, a job description is the means used to accomplish this. Job
documentation is used to evaluate job content, provide objective criteria for making
pay comparisons, ensure that jobs are classified according to content as opposed to
individual personalities, effectively communicate the job duties to both supervisors and
employees, and help the organization defend itself against charges of discrimination.

10

Job Analysis &


Documentation

11

Checklist for
Job Descriptions
Job Title
Based at (Business Unit, Section - if applicable)
Position reports to (Line Manager title, location, and Functional Manager, location
if matrix management structure)
Job Purpose Summary (ideally one sentence)
Key Responsibilities and Accountabilities, (or 'Duties'. 8-15 numbered points)
Dimensions/Territory/Scope/Scale indicators (the areas to which responsibilities
extend and the scale of responsibilities - staff, customers, territory, products,
equipment, premises, etc)
Skills, expertise and experience required for the job

12

Tips and Hints on


Job Descriptions
Think about all aspects of the job: processes, planning, executing, monitoring,
reporting, communicating, managing people, resources, activities, money,
information, inputs, outputs, communications and time.
Combine ideas into a set of key responsibilities and rank them roughly in order of
importance.
Double check that everything on the list is genuinely important and achievable.
Do not put targets into a job description. Targets are a moving output over which
flexible control is needed.
Do not put 'must achieve sales target' into a job description. This is a pure output
and does not describe the job. The job description must describe the activities
required to ensure that target will be met.

13

Creating a Job Description


Create a Job
Description
for the Head
of the
Business
School

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Job Evaluation Methodology


A job architecture is the result of job evaluation, the overall process of
comparing jobs. There are 2 major methods of comparing jobs:
"whole-job" evaluations and are non-quantitative in nature. These
include ranking, classification and slotting.
"factor" evaluation and are quantitative in nature. These include
point factor, factor comparison, and scored questionnaires.

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Job Evaluation Methodology


Approach

Attributes

Job Ranking

The most simple form which orders the jobs


according to perceived seniority. This is
easy to do in a small organization, but gets
more and more difficult as different jobs
exist within the company.

Slotting (or
Benchmarking)

Sets up certain jobs that are analyzed in


detail. These are then used for comparison
to slot jobs against these benchmarks.

Job Matching

Job Matching allocates benchmarks too, but


when a position is matched the elements of
the job that differ are re-evaluated. Usually
this evaluation will be done with a Point
Factor Analysis (PFA) or classification
system.
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Job Evaluation Methodology


Approach

Attributes

Point Factor PFA is the method for determining a score for each
Analysis
job. Jobs are broken down into factors such as
(PFA)
knowledge required. A set of closed questions in
each factor break down to detail such as level of
education. The responses to these questions are
given a score, and totaled for each factor. Each
factor is given a weight, and this effects the
contribution made to the overall total score by that
factor. Factors can be weighted according to their
significance to the organization, and this allows the
pay scheme to be linked to the organizations
strategy.
Job
Job classification can be at the whole job or factor
Classificatio level. Each factor (or the whole job) is a single
n
question that has very clearly defined levels.
Compared to an equivalent PFA scheme

17

Job Evaluation
Consultancy Firms

18

Mercers Internal
Position Evaluation (IPE)

19

IPE Methodology
Less Complexity

Standardized
Point Factor

Customized
Point Factor

Description

Market Pricing
& Slotting

Jobs ranked using


general criteria of worth
to organisation (e.g.,
importance or
complexity)

Classes/grades defined
using aspects of job
content; jobs assigned
to classes/grades

Market rates
established for
benchmark jobs; nonbenchmark jobs slotted
in salary structure

Points assigned to jobs


based on factors,
degrees and points.
Universal factors and
weights

Points assigned to jobs


based on factors, levels
and factor weights
Customized factors and
weights to client

Strengths

Classification
(Roles)

Simple
Easy to maintain

Easy to explain
Easy to modify
Adaptable to job
families

Relationship to market
values
Credible

Can quickly compare


jobs across functions
and organisations.
Common links to
market

Can compare jobs


across functions
Is perceived to be
objective and
consistent

Limitations

Whole Job
Ranking

Greater Complexity

Potential for bias


May over emphasize a
single factor

Unusual jobs may be


forced
Potential for bias

Interpretation needed
to slot jobs
Difficult if poor data or
fast changing market
Volatile

May seem inflexible


Administration may
seem to be a barrier

Effort required to
develop factors
Much effort to
administer and
implement

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The Five Factors


Organisation

1.
Impact

Impact
Contribution

2.
Communication

Position

3.
Innovation

Communication
Frame

Innovation

Assess nature of impact a position has on the organisation.


Assess relative contribution that a position holder makes in the
context of Impact.
Assess the nature of the necessary communication ability required
by a position.
Determine both organisation frame and nature of interests of
communication contacts.
Assess the requirements to identify, make improvements to, or
develop procedures, services or products

Complexity

Assess level of complexity that a position holder must deal with.

Knowledge

Measure the nature of knowledge required in the job to accomplish


objectives and create value.

4.
Knowledge

Team
Breadth

5.
Risk

Organisation size is determined by monetary scale such as sales


and assets, range of activity and number of employees.

Risk
Environment

Assess the way the knowledge is applied.


Assess the breadth (geographic context) in which the knowledge
is to be applied.
Assess the exposure to risk of mental or physical injury in the job.
No points are yielded if work conditions meet international
standards.
Assess level of exposure from the working environment.

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Organisation Sizing

The Organisation Context


include at least one line function and two service functions.
is operational enough to produce added value.
Basi
c
R&D

Applie
d
R&D

Procure
Produc
Engineer
Logistic
e
s

Distri
Apply
Marke Sale
Assemb t
s
le
butio
n

Servic
e

22

Impact
Level of Contribution
NATURE OF
IMPACT
1

Delivery

Operational

Tactical

Strategic

Visionary

Limited

Some

Direct

Significant

Major

Marked contribution to defining the direction for


new products, processes, standards or
operational plans based upon business strategy,
with a significant mid-term impact on business
unit overall results -- 21 to 30%

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Communication
FRAME
1
COMMUNICATION Internal Shared
1

Convey

Adapt & Exchange

Influence

Negotiate

Negotiate
Long term

External Shared

Internal Divergent External Divergent

Convince others within the organisation that


Convince others within the organisation that
are skeptical or unwilling to accept new
are skeptical or unwilling to accept new
concepts, practices, and approaches
concepts, practices, and approaches

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Innovation
COMPLEXITY
INNOVATION
1

Defined

Difficult

Complex

Multi-Dimensional

Follow

Check

Modify

Improve

Create /
Conceptualize

Scientific/Technical
Breakthrough

Analyze
Analyzecomplex
complexissues
issuesand
andsignificantly
significantly
improve,
change
or
adapt
improve, change or adaptexisting
existingmethods
methods
and
andtechniques.
techniques.

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Knowledge
TEAMS
KNOWLEDGE

Team Member

Team Leader

Teams Manager

Limited
1
Job Knowledge
2

Basic
Job Knowledge

3 Broad Job Knowledge

BREADTH
Domestic

Regional

Global

4 Expertise
5

Professional
Standard

Organisational Generalist
6
/ Functional Specialist
7

Broad Practical Experience


/ Functional Preeminence

Broad and Deep


Practical Experience

Lead
Lead aa team
team through
through application
application
of
of broad
broad knowledge
knowledge of
of one
one job
job
area
area or
or basic
basic knowledge
knowledge of
of
several
several related
related job
job areas
areas

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Risk
Environment
Risk
0

Normal

Mental

Injury

Disability

1
Low
Exposure

2
Moderate
Exposure

3
High
Exposure

Normal
Normal working
workingconditions.
conditions.
Physical
Physical and/or
and/ormental
mental work
workin
in an
an
environment
where
international
environment where international
standards
standardsof
of safety
safetyapply.
apply.

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Position Class
Conversion Table
Total point range

Position
Class

Total point range

Position
Class

Total point range

Position
Class

26

50

40

426

450

56

826

850

72

51

75

41

451

475

57

851

875

73

76

100

42

476

500

58

876

900

74

101

125

43

501

525

59

901

925

75

126

150

44

526

550

60

926

950

76

151

175

45

551

575

61

951

975

77

176

200

46

576

600

62

976

1000

78

201

225

47

601

625

63

1001

1025

79

226

250

48

626

650

64

1026

1050

80

251

275

49

651

675

65

1051

1075

81

276

300

50

676

700

66

1076

1100

82

301

325

51

701

725

67

1101

1125

83

326

350

52

726

750

68

1126

1150

84

351

375

53

751

775

69

1151

1175

85

376

400

54

776

800

70

1176

1200

86

401

425

55

801

825

71

1201

1225

87

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Major IPE applications

A clear ranking of positions that is internally consistent


A first analysis of the organisational effectiveness
A global comparison of relations between positions
A starting point to establish position / competency
profiles
A database to support career planning and succession
An objective reference to solve title issues
A reliable base for an equitable salary structure
A tool that facilitates market benchmarking

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Mapping of Position
Evaluation Results
IPE
Class

550

Unit 1

Unit 2

Unit 3

Unit 4

532 PLANT MANAGER


Van Gogh

538 PLANT MANAGER


Rubens

536 DEVELOPMENT MANAGER


Rembrandt

546 QUALITY DIRECTOR


Pinturicchio

522 PLANT MANAGER A


Magritte
517 ADMINISTRATION
MANAGER
512 De Vlaeminck
PLANT MANAGER B
507 Kandinsky
MAINTENANCE MANAGER
Klee

511 LABORATORY MANAGER


Chagall
507 PRODUCTION MANAGER
Matisse
501 TECHNICAL MANAGER
Czanne

516 PERSONNEL MANAGER


Miro
506 SECTION MANAGER
Picasso

516 FINANCE DIRECTOR


Gheduzzi

497 PROJECT MANAGER


Klimt
497 SALES MANAGER
Raffaello
492 PERSONNEL MANAGER
Michelangelo
481 EDP MANAGER
Leonardo

497 SERVICE MANAGER


Schiele
491 PERSONNEL MANAGER
Pozzo
486 SALES MANAGER
Goya
481 ADMINISTRATION
MANAGER
Velasquez

476 FINANCE MANAGER


Borromini

472 PROMOTION MANAGER


Frangelico
461 PRODUCTION MANAGER
Hobbema

465 ORGANISATION MANAGER 466 COORDINATOR


Lippi
Van Eyck
455 MARKETING MANAGER
451 PROMOTION MANAGER
Giotto
Canaletto

60
526
525
59
501

500
58
476

475
57

471 SERVICE MANAGER


Dali

451

30

Purpose of Salary Ranges


To accomplish the organization's objectives with regards to
a salary program,
To reflect the organization's philosophy on how it wishes to
relate its salary program to the market,
To demonstrate the internal job values of positions,
To support how the organization wishes to mix base pay,
benefits and incentives.

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Establishing Salary Ranges


How should the organization's pay level relate to the external market?
Should the organization be a pay leader, match the market or pay less
than market?
What is the organization willing to pay for: job content, seniority,
performance, skills, cost of labor, or some combination of all of these?
How does the organization pay its employees:

based on a single rate structure (all employees in the same job receive the same pay),
based on seniority,
based on merit,
based on productivity (piece work),
based on new skills (skill-based pay),
or based on some combination of these factors?

Are short term or long term incentives provided?

32

Establishing Salary Ranges


Number of Salary Ranges
The number of salary ranges will depend on the number of different levels of relative
job value that are recognized by the organization and the difference in pay between the
highest and lowest paid jobs in the pay structure.
Creating a Range around a mid point
The focal point of a salary range is the mid-point as this is generally the "going" rate for
jobs assigned to that range. The range minimum is the usually the lowest pay rate for
any job in that range and is usually the pay rate given to people hired in that range who
meet minimal qualifications only. The maximum of a range is the highest rate an
employer is willing to pay for jobs in that pay range. Other important range issues
include the range width and the degree of overlap between ranges.

more at
http://www.citehr.com/19824-compensation-management.html#ixzz1VewEHqcY
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Managing Salary Rates


and Increases
An organization must also decide how to administer their salary
structure:
How to pay new employees?
How and when to give employees increases?
How to move existing employees from the minimum to the maximum of
their assigned salary range?
How to determine the pay increase for an employee being promoted
from one job to another?
What influence, if any, cost of labor increases will have on the
determination of pay increases for employees?
In addition, an organization must develop policies and procedures that
will implement the results of these decisions in a consistent manner.

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Managing Salary Rates


and Increases
Starting Pay for New Employees
In order to avoid paying new employees the same as more
experienced employees, most employers choose to start new
employees closer to the minimum of the salary range. In general, an
employee with minimum qualifications should be paid the minimum of
the range. This general rule is not true when a new hire has skills
which are in great demand or has skills or other expertise
substantially above the minimum.
Employee Increases
There are several different types of base pay increases: general
(across-the-board) increases, cost-of-living/labor increases, promotion
increases, step increases (based on longevity), and merit increases.

35

Managing Salary Rates


and Increases
General increases
These are diminishing in popularity because they are not
consistent with the idea of pay for performance. With a general
increase, employees in a certain group based on established
requirements are eligible for a certain monetary or percent
increase to their base salary.
A cost-of-living increase
This is a type of general increase given to all eligible employees.
This type of increase may happen as a result of union contract
negotiation. Some companies choose to track benchmark positions
over a period of time and modify other positions based on changes
in the ranges of benchmark positions.

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Managing Salary Rates


and Increases
Promotion increases
These are given when an employee is moved from one job to another with
a higher pay grade and range. The size of the increase will be influenced
by the difference between the old and new pay ranges, and the pay of the
newly promoted person's peers, superiors and subordinates, if any.
Merit increases
These are also known as pay for performance. To be successful, an
organization must be able to measure differences in job performance and
these differences must be significant enough to merit the time and effort
required to measure them and pay accordingly. Managers require training
in performance planning and appraisal, and control mechanisms must be
in place to successfully administer a merit increase program.

37

Benchmarking - Market
Data Collection
Who are my competitors?
Before an organization begins the process of collecting market data, it must first
define its relevant labor market. This may include similar organizations in the
same labor market, all employers in the local market, similar organizations in the
regional or national market, and/or all employers in the regional or national
market.
The objective of market data collection is to find data from employers with whom
the organization competes for employees. For clerical employees, this may be
all employers in the local labor market. For high level management positions or
certain specialized positions, this may be all employers in the national market.

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Benchmarking - Market
Data Collection
Statistical Analysis
Median
One type of average, found by arranging the values in
numerical order and picking the middle one. Also known as
the 50th percentile.
Percentile The value of a variable below which a certain percent of
observations fall.
25th Percentile
The value (or score) below which 25 percent of the
observations may be found. The 25th percentile is also known as the first quartile
(Q1).
75th Percentile
The value (or score) below which 75 percent of the
observations may be found. The 75th percentile is also known as the third quartile
(Q3).

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Benchmarking Exercise
My Company generates a sales volume of around 71 million CHF.
There are approximately 15000 employees worldwide.
Our job evaluation system has graded the HR Director role as a salary
grade 16.
The role is currently paid a base salary (BS) of CHF 210000 but the
incumbent believes he is underpaid.
The benchmark data has been collected from our defined competitor
group.
How does the salary of this role compare to the defined market?
Which actions should be undertaken regarding the salary?
How would you communicate your findings to the incumbent?

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