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Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac
HUMAN RESOURCES
Topic 6
Compensation
Tomislav Rimac – Spring 2014
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 1 This presentation draws on ideas from Gómez-Mejía, Balkin, Cardy’s book Managing Human Resources (Pearson, 2011, 7th^ edition), chapters 10, 11, and 12 and various chapters form Milkovich, Newman, and Gerhart’s book Compensation (McGraw-Hill, 2011, 10th^ edition)
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 2 Base salary Merit pay Nonmonetary awards Variable pay Incentive pay Benefit programs Strategy, HR management, and compensation - Example OBJECTIVE Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 3 It is strongly recommended that you read and become familiar with concept covered in the article “Incentive Strategy Within Organization” SUGGESTION
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 6 THE SALARY STRUCTURE Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 7 THE SALARY STRUCTURE
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 8 THE PRIMARY PURPOSE OF A SALARY STRUCTURE Jobs are positioned properly within the organization and within the context of marketplace Individuals are paid fairly, competitively, and consistently with the goals of the organization People managers and human resources business partners have the tools and the information they need to make effective pay decisions Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 9 THINGS TO CONSIDER WHEN DESIGNING A SALARY STRUCTURE How much flexibility is needed for managers to be successful at managing, developing and rewarding their key people? The need for flexibility needs to be balanced by how much variations the organizations can tolerate and/or support in a salary structure Should the organization plan to target pay for each job, job level, and/or employee at the same market level (e.g., average or median)? Companies have to consider a variety of factors such as job families, location, skills demand, etc. How many salary structures are needed to accommodate the dynamics of the labor markets and the organization’s staffing and career management plans? This is particularly important in global enterprises (e.g., Mondragon salary ratio rules)
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 12 SALARY RANGES Salary range – describes the minimum and maximum an organization will pay for a particular job or job grouping, based upon the organization’s compensation philosophy Provides flexibility for managers to pay in a manner consistent with an individual’s experience, competency and business impact, as well as with market pressures connected to a particular job or job family Often greater reward opportunities are given to individuals in higher salary levels that have greater impact on the success or failure of the organization
- Danger of seeing “rich” reward opportunities as entitlements
- Push for promotions in order to gain reward opportunities Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 13 FOUR BASIC TYPES OF SALARY STRUCTURE Traditional Flexible Career based Global
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 14 TRADITIONAL SALARY STRUCTURE Highly layered – use many grades with relatively small distances between neighboring grades/ranges Technically driven – grades are defined primarily by compensation levels (market based or internally focused) rather than career or organizational levels described in terms of job content Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 15 REASONS FOR ADOPTING TRADITIONAL SALARY STRUCTURE Places emphasis on promotion/career advancement though a hierarchical system – individuals can “see” their promotions in the form of moving from grade to grade These structures are predictable and easy to administer – reason and timing for pay movement are clearly defined by the structure and associated pay delivery policies Has a strong technical, mathematically derived foundation, which may be viewed as more objective than a less constrained broadband structure recognizing, however, that in reality it may not actually be more objective The tried-and-true approach to building compensation programs, and hence are relatively easy to explain and justify
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 18 SALARY STRUCTURE ELEMENTS Midpoint – the pay level associated with fully compensated performance in a job Typically it is the middle of each salary range and is tied to the market target consistent with the company’s compensation strategy Two common methods for determining how midpoints will be used to develop salary ranges:
- Line of best fit
- Cluster analysis Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 19 SALARY STRUCTURE ELEMENTS (Cont.) The “80-120” format – a method for establishing a salary ranges in which the minimum of each range is set at 80% of the midpoint, while the maximum is set at 120% of the midpoint Easy to understand but it does not necessarily reflect the realities of the recruiting market The formula may be too rigid for some companies
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 20 SALARY STRUCTURE ELEMENTS (Cont.) Closely nestled ranges – ensure that the promotions from one grade to the next will not be associated with huge salary increases Promotions are viewed more as incremental progressions than significant leaps in responsibility Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 21 EXAMPLE 2 Much greater inter-range distances (19-22%) Progressively greater distances at higher grades Ranges that are about the same overall size (about 50% from minimum to maximum), but that are asymmetrical in design
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 24 SALARY STRUCTURE ELEMENTS (Cont.) What should be done when an individual reaches or exceeds the range maximum?
- Communicate your rationales for range caps
- Provide alternative means of recognition Greater distance between ranges more expansive clustering of jobs
- Fewer job grades (getting close to broadband - employees are likely to spend more time in each grade in the structure
- Less overlap between ranges promotional increases are more significant and Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 25 FLEXIBLE SALARY STRUCTURE Broadbands – clusters of jobs with broadly similar characteristics (e.g., impact, scope, career stage, function, level, etc.) that create a sense of group belonging and career opportunity Primary benefit - provides a “meta-structure” containing jobs with similar organizational impact or broad career levels Often causes cynicism and hostility – salary structure is viewed as endlessly flexible (e.g., 100-200 width), giving managers freedom to make the desired pay decisions Will not work unless managers have direct and ongoing access to robust external data on market levels by job and individual, as well as valid internal data on performance, experience, dates of hire/promotion, etc.
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 26 FLEXIBLE SALARY STRUCTURE Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 27 REASONS FOR ADOPTING BROADBANDS Reducing the emphasis on promotions and grades Providing the organization with the flexibility to respond to changing business needs Breaking down the barriers to teamwork and cooperation Providing employees with the opportunity for personal growth and extensive performance recognition Placing more HR decisions in the hand of managers Facilitating (and encouraging) lateral job moves Reducing the administrative burden of job evaluation
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 30 CAREER-BASED SALARY STRUCTURE Creation steps:
- Define job families (roles) and elements of accountability (compensable factors)
- Create and validate job family frameworks using content experts form each job family
- Define each level of work in each job family described in terms of the compensable factors, again using content expert
- Evaluate each level within each job family to identify the relative hierarchy of work levels
- Map all jobs to the appropriate job family and defined level within the job family (using input from content experts)
- Conduct competitive analysis on benchmark jobs
- Establish salary structure by aligning levels and market values Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 31 DUAL CAREER LADDER A twist on career structures – popular in scientific, research, and technically oriented organizations A way to recognize and reward individuals who make increasingly significant scientific contributions without requiring them to move into management roles, this avoiding the downsides of the Peter Principle Facilitates the recruitment and retention of the best technical experts Reinforces organization’s commitment to research and engineering excellence through consistent recognition, reward and communication
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 32 DUAL CAREER LADDER (Cont.) Titles – important in technical organizations both as internally and externally discernible indications of achievement and recognition, and as a way of comparing status across the dual ladder (perception of unequal valuation of management and scientific jobs) Key determinants typically include:
- The entry level (grade) for Ph.D. positions
- How layered the organization is and how many viable and necessary levels of work can be identified on the technical and/or management side Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 33 GLOBAL STRUCTURE Consideration – whether or not structure should be singular/centralized or decentralized/localized Factors:
- Are different lines of business in separate industries, and/or different functions require different skills
- Do various employee groups represent different labor markets and total compensation profiles
- Are there divergent cultures or work environments
- To what extent does the organization want to create a seamless, “one-for-all” organization (single structure) vs. decentralized, entrepreneurial operations (multiple structures)
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 36 APPLICATION There is no point to having a salary structure if it does not facilitate pay decision making and job or pay advancement Pay zones within salary range – not rigidly defined nor mutually exclusive, but they divided the range into practical segments that are tied to approximate levels of experience, performance, and promotability A more flexible framework – allows companies to take into account market and individual factors (e.g., tight labor markets, “star” new hires – so long as the new pay for these individuals does not unduly disrupt internal equity, these higher rates may be justified) Performance-based pay – “merit matrix” and “target pay“ for determining annual salary adjustments Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 37 SALARY RANGE WITH PAY ZONES - EXAMPLE Grade Minimum Zone I Zone II Zone III Grade Maximum Learning the job, moving up the learning curve Contributing at fully competent level Mastery of position Newly promoted Fully functioning Performance^ exceeds expectations Has basic qualifications Performance meets expectations Considered for promotion
Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – Tomislav Rimac Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 38 MERIT MATRIX – EXAMPLE Position in Range Performance Rating (^4) th (^) Quartile 3 rd (^) Quartile 2 nd (^) Quartile 1 st (^) Quartile Exceeds (^3) - 5% 5 - 7% 7 - 9% 9 - 12% Fully meets (^) 0% 3 - 5% 5 - 7% 7 - 9% Needs improvement (^) 0% 0% 0% 0% Universitat Autònoma de Barcelona - Departament d’Economia de l’Empresa – ADE - Human Resources Tomislav Rimac - Spring 2014 39 TARGET PAY - EXAMPLE Minimum $25, $27, Jane’s Current Pay Market Reference Point $30, $32,250 – 34, Jane’s Target Pay Region Maximum $34,
