Building an Effective Organizational Pay Structure A Step by Step Guide
About Jennifer Loftus Jennifer C. Loftus, MBA, SPHR-CA, GPHR, CCP, CBP, GRP, is a National Director for Astron Solutions. Her primary areas of expertise are total rewards, customized market surveys, employee opinion surveys, and technology-based HR solutions. Jennifer has fourteen years of experience garnered at organizations including the Hay Group, Parsons Brinckerhoff, Eagle Electric Manufacturing Company, and Harcourt General. A member of SHRM s Total Rewards Special Expertise Panel, Jennifer is President-Elect of HR/NY and a volunteer article reviewer for WorldatWork and SHRM. She is a subject matter expert to the SHRM Learning System. Jennifer is a sought-after HR speaker, appearing on local and national television, radio, and conferences. She has also been published in local and national periodicals. Jennifer has an MBA in Human Resource Management from Pace University and a BS in Accounting from Rutgers University. Jennifer is an Adjunct Professor in Human Resources at Pace University.
Today s Agenda Establish the Foundation Execute Preparatory Activities Benchmark Key Positions Develop the Pay Structure Conduct a Reality Check Avoid These Pitfalls I J if L ft id I m Jennifer Loftus, your guide for today s journey.
Establish the Foundation: The Five Elements of Total Rewards Cash Compensation Work / Life Balance Benefits Performance Management and Recognition Career Advancement and Development
Establish the Foundation: Compensation System Goals Sensitive to the external market Reflective of internal equity Motivating to employees Supportive of recruitment t and retention ti activities iti Effectively and easily administered in a timely fashion Flexible Logical Easily explained Supportive of organizational mission and strategy Legally defensible Fiscally sound
Execute Preparatory Activities: The Compensation Philosophy A statement of an organization s beliefs and practices regarding compensation, benefit, and other total t rewards programs. Serves as the blueprint for all rewards-related decisions. Tailored according to employee group or key positions. > Addresses rewards for mission critical positions / employees. Impacted by organizational mission, culture, location, and growth. Revisited and refreshed as needed or as the organizational strategic plan changes to ensure positive organizational contribution and support.
Execute Preparatory Activities: The Compensation Philosophy (2) Total Rewards elements roles Internal job equity External market competitiveness Specific peer organizations and geographic locations Human Resource constraints Employee morale Fiscal sensitivity Organizational values Entitlement
Execute Preparatory Activities: Park Engineering 228 employee firm 26 job titles Headquartered in New York City Founded in 1974 $50 million in annual revenue Wants a market driven pay system Will use job ranking for job evaluation Has a compensation philosophy of Matching the New York City engineering i market for technical positions Matching the broad New York City market for non-technical positions
Execute Preparatory Activities: Determine Survey Sources When choosing the salary surveys for your market analysis, utilize A variety of survey sources Published survey data processed by a neutral third party Data no more than two years old Surveys that are reflective of your organization s compensation philosophy h Remember market pricing is both an art and a science.
Benchmark Key Positions Select benchmark positions that Have relatively stable job content Represent the entire range of jobs to be evaluated Cover a sizable portion of the organization s workforce Have readily available market data Are sensitive to external market trends Strive to benchmark at least 50% of your total job titles. Gather accurate, current job descriptions for the benchmark positions. Remember market pricing is both an art and a science.
Benchmark Key Positions (2) Match your benchmark positions to the job descriptions provided in the survey. Look for at least an 80% match of your benchmark s essential functions to the survey job description s essential functions. For positions with greater or lesser responsibilities, consider leveling the market data. Your position does more than the survey description? Consider increasing the market data 10 20%. Your position does less than the survey description? Consider decreasing the market data 10 20%. Remember market pricing is both an art and a science.
Benchmark Key Positions: Ties to The Compensation Philosophy Philosophy What Does Pxx Mean for Salary Survey Data? P50 Middle of the Half the respondents pay More statistically accurate May lose talent if total road position below the P50 rate. compensation value, as it tends to reduce the influence of extreme values. rewards program is not robust. Half the respondents pay above the P50 rate. Should position the organization sufficiently to recruit and retain most staff. Pros Cons P25 Market lag position 25% of the respondents pay below the P25 rate. 75% of the respondents pay above the P25 rate. Selected by organizations with strong variable compensation and / or benefits programs. A safe position for organizations encountering financial difficulties. Will lose talent if total rewards program is not robust. Relatively low cost to support. P75 Market leader position 75% of the respondents pay below the P75 rate. Good when competing for employees with specialized skill sets. Costly to develop and maintain. 25% of the respondents pay above the P75 rate. Good when competing for employees in a tight labor market. Beneficial if offering less robust variable compensation and / or benefits programs.
Benchmark Key Positions: Engineer II Sample Base Pay Market Data Survey 1 Survey 2 Survey 3 Survey 4 New York City Effective 1/1/10 SIC Code 8711 New York City Effective 3/1/09 All US Effective 2/1/09 Engineering Services All US Effective 1/1/09 Small Engineering Firms P25 P50 P75 P25 P50 P75 P25 P50 P75 P25 P50 P75 $65.9 $71.0 $78.4 $75.6 $80.6 $94.6 $57.1 $64.4 $71.1 1 $56.3 $62.4 $68.88 A variety of recent, third party produced survey sources Reflective of the compensation philosophy But we re not done yet!
Benchmark Key Positions: Engineer II Sample Base Pay Market Data (2) Survey 1 Survey 2 Survey 3 Survey 4 New York City New York City All US All US Effective 1/1/10 SIC Code 8711 Effective 3/1/09 Effective 2/1/09 Engineering Services Effective 1/1/09 Small Engineering Firms P25 P50 P75 P25 P50 P75 P25 P50 P75 P25 P50 P75 $65.9 $71.0 $78.4 $75.6 $80.6 $94.6 $57.1 $64.4 $71.1 $56.3 $62.4 $68.8 Adjusted Market Data: Aged to 7/1/10, geographic factored for New York City (US data only) $66.9 $72.1 $79.6 $78.6 $83.8 $98.4 $73.2 $82.6 $91.2 $75.1 $83.2 $91.7 Then Review market data for skew. Average P50 data points to determine the blended market rate (Mean = $80.4)
Develop the Pay Structure There s no one right way. Factors to consider include the following: The influence of external and internal equity Organizational size Number of organizational levels Distinctions between job content Pay increase and promotion policy Administrative efficiency First set the grades, then develop the ranges. Remember pay structure development is both an art and a science.
Develop the Pay Structure: Park Engineering Base Pay Market Data Position P50 Market Data Position P50 Market Data Engineer I $61.2 Recruiter $62.9 Engineer II $80.4 HR Generalist $62.2 Engineer III $95.7 HR Manager $106.1 Engineering Manager $128.3 Receptionist $33.2 Architect $68.1 Office Clerk $38.3 Drafter $57.5 Executive Secretary to the CEO $72.4 Accounting Clerk $39.2 Chief Operating Officer $296.0 Accounting Manager $103.2 Chief Executive Officer $414.8
Develop the Pay Structure: Determine Natural Breaks for Grades Sort the target market data from high to low. Group positions with similar target market data into a grade. 15% breakpoint approach as a start. (Target market data *.85) Use the average target market data for each grade as the range midpoint.
Develop the Pay Structure: Park Engineering Grades Title P50 Market Potential New Grade Breakpoint Chief Executive Officer $414.8 Chief Operating Officer $296.0 Engineering Manager $128.3 $109.1 ($128.3 *.85) HR Manager $106.1 1 $90.2 Accounting Manager $103.2 Engineer III $95.7 Engineer II $80.4 $68.3 Executive Secretary to the CEO $72.4 Architect $68.1 $57.9 Recruiter $62.9 HR Generalist $62.22 Engineer I $61.2 Drafter $57.5 $48.9 Accounting Clerk $39.2 $33.33 Office Clerk $38.3 Receptionist $33.2
Develop the Pay Structure: Range Elements to Consider Pay range spreads [(maximum minimum) / minimum] Non-exempt = 40% Exempt = 50% Executive = 60% Midpoint progressions [(midpoint 2 midpoint 1) / midpoint 1] Consistent or varying? Phantom grades if consistent midpoint progressions Amount of range overlap Consider compression Consider promotional policy Internal equity Reslot positions to reflect internal value of job Slot positions not benchmarked into the system
Develop the Pay Structure: Park Engineering Ranges Title P50 Market Data Grade Range Minimum P50 Range Midpoint Range Maximum Chief Executive Officer $414.8 50 $319.1 $414.8 $510.6 Chief Operating Officer $296.0 45 $227.7 $296.0 $364.3 Engineering Manager $128.3 40 $102.6 $128.3 $153.9 HR Manager $106.11 35 $83.8 8 $104.7 $125.6 Accounting Manager $103.2 35 Engineer III $95.7 30 $76.6 $95.7 $114.9 Engineer II $80.4 25 $61.1 1 $76.4 $91.7 Executive Secretary to the CEO $72.4 25 Architect $68.1 20 $50.9 $63.6 $76.4 Recruiter $62.9 20 HR Generalist $62.2 20 Engineer I $61.2 20 Planner N/A 20 Drafter $57.5 15 $47.9 $57.5 $67.1 Accounting Clerk $39.2 10 $32.3 $38.8 $45.2 Office Clerk $38.3 10 Receptionist $33.2 5 $27.7 $33.2 $38.8
Conduct a Reality Check Green Circle Rates Bring to minimum adjustments Isolated or consistent? Red Circle Rates Freeze pay rates Grandfather Promote Reduce pay Isolated or consistent? Compa Ratios [Employee Pay / Range Midpoint] Look for overall compa ratio less than or equal to 1.00 at system launch
Conduct a Reality Check: Park Engineering Ranges Title Grade Range Minimum P50 Range Midpoint Range Maximum Architect 20 $50.9 $63.6 $76.4 Recruiter 20 HR Generalist 20 Engineer I 20 Planner 20 Drafter 15 $47.9 $57.5 5 $67.1 Accounting Clerk 10 $32.3 $38.8 $45.2 Office Clerk 10 Receptionist 5 $27.7 7 $33.2 $38.88 Consider The HR Generalist earning $47,000 a year. Compa ratio of 0.74. The Drafter earning $72,000 a year. Compa ratio of 1.25. Average organizational compa ratio of 1.08.
Conduct a Reality Check (2) Pay Compression Pay rates for new vs. long-service employees Pay rates for union employees vs. non-union supervisor Pay rates for non-exempt employees vs. supervisor Can you hire with these pay rates? Are your pay ranges above the federal and state minimum wage rates?
Avoid These Pitfalls Assuming what the compensation philosophy is. Using free survey data. Free Good Internet True Using only one survey source. Calling competitors for market data. Working with old job descriptions. Matching to surveys based on job title. Slotting titles into the system based on incumbents.
Questions
Jennifer Loftus Contact Information Questions? You can reach me at Email: jcloftus@astronsolutions.com Facebook User ID: 1050838080 Twitter Feed: @AstronSolutions Connect with me on LinkedIn