Compensation surveys provide “snap-shots” of competitors’ pay practices. Survey information provides the reference points for establishing pay level policies. In this chapter we also learn statistical analysis of compensation surveys, integrating the internal job structure with external market pay rates, compensation policies and strategic mandates. These practices require compensation professionals’ sound judgments for making recommendations that fit well with competitive strategies.
Careful thought about the meaning underlying the facts and statistics is the key to successfully building market-competitive pay systems. Introduction Market competitive pay systems play an important part in attracting and keeping the most qualified employees. Based on market and compensation surveys, compensation professionals build a market competitive compensation system. Strategic analysis is used which is an examination of the external market context and internal factors of a company. External market context is the “industry profile, information about competitors, and long-term growth prospects”.
Internal factors consist of the “company’s financial condition, their functional capabilities”. A strategic analysis lets professionals see where they stand against other professionals. Compensation surveys collect and analyze competitor’s information, mainly focused on wages and salary practices. Benefits are also surveyed because a company’s benefit package is a key part of an employee’s salary package. Compensation surveys play an important part because they are used to get a good view of competitions wage practices which can help a company attract and keep an employee.
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Pay rate differences for jobs and the differences in employee contributions are represented by pay structures. An existing analysis of your current compensation system should be a starting point and balancing internal equity to the external market considered, if appropriate. Determining what your compensation philosophy and how to align with your business strategy and goals will guide the type of compensation design such as a pure market approach, a blended approach or perhaps a broad banding approach to enhance or totally update your current compensation system.
The Basics of Market competitive pay system Market-competitive pay systems represent companies compensation policy should be developed to fit in with the competitive advantage of a company. It has a role in attracting and retaining the most qualified employees. A well designed pay system should promote the attainment of competitive strategies. But paying more than necessary can undermine low cost strategies as it is an undue burden. It also restricts the company’s ability to invest in other strategic activities.
Hence companies that pursue differentiation strategy must strike a balance between offering sufficiently high salaries to attract and retain talented people and providing sufficient resources to enable them to be productively creative. Major activities for market competitive pay system Compensation professionals create market competitive pay system based on four activities those are as follows: ? Conducting strategic system. ? Assessing competitors’ pay practices with compensation surveys ?
Integrating the internal job structure with external market pay rates and ? Determining compensation policies. Strategic analysis: Strategic analysis entails an examination of a company’s external market context and internal factors. External factors could include industry profile, information about competitors, growth prospects (short and long-term).
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Internal factors encompass financial conditions, marketing capabilities, available human resources etc. Compensation surveys: Entails collection and subsequent analysis of competitors’ compensation data.
Compensation surveys traditionally focused on wage and salary practices. These days all benefits, allowances, perks etc. are collected and analyzed as these are key elements in market competitive pay systems. Surveys enable companies to obtain realistic view of competitors’ pay practices. In the absence of surveys professionals would have to use guess work to build market competitive pay systems leading to wrong guesses resulting in noncompetitive pay. Data is usually collected on base pay levels, incentive award structures and mix and levels of discretionary benefits.
Integrating the internal job structure with external market pay rate: Compensation professionals integrate the internal job structural with the external market pay rates identified through compensation surveys. This integration result in pay rates that reflect both the company’s and the external market’s valuations of job. Most often compensation professionals rely on regression analysis, a statistical method, to achieve this integration. Compensation policies: Compensation professionals recommend pay policies that fit with their companies standing a competitive strategy.
Compensation professionals must strike a balance between managing costs and attracting and retaining the best qualified employees. Top management ultimately makes compensation policy decisions after careful consideration of compensation professional’s interpretation of the data. Compensation surveys: Preliminary Consideration There are two important preliminary consideration compensation professionals take under advisement before investing time and money into compensation surveys: ? What companies hope to gain from compensation surveys ?
Custom development versus use of an existing compensation surveys. Compensation surveys: Strategic Consideration Defining the relevant labor market: The relevant labor market represents the fields of potentially qualified candidates for particular jobs. Relevant markets are defined on the basis of occupational classification, geography and product or service market competitors. Companies collect compensation survey data from the appropriate relevant labor market. Choosing Benchmark Jobs: Benchmark jobs are key to conducting effective job evaluation as they play an important role in compensation surveys.
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HR professional determine pay levels for jobs based on typical market pay rates for similar jobs. Benchmark jobs have four characteristics those are: ? The contents are well known, stable over time, and agreed upon by employees involved. ? The jobs are common across different employers. ? The jobs represent the entire range of jobs that are being evaluated within a company. ? These jobs are generally accepted in the labor market for the purpose of setting pay levels. Integrating internal job structures with external market pay rates
The compensation professionals use job evaluation methods to establish internally consistent job structure. Companies value jobs that possess higher degrees of compensable factors (10 years of experience) than jobs with fewer degrees of compensable factors (1 year of experience).
These valuation differences ultimately should correspond to pay differences based on compensation survey data. It is important that companies set pay rates by using market pay rates as reference points as paying well below or well above the typical market rates can create competitive disadvantage for companies.
Determination of compensation policy Normally companies can choose from three pay level policies: Market lead: The market lead policy distinguishes a company from the competitors by compensating employees more highly than most competitors. Pay levels are above market pay lines. It is clearly most appropriate for company that pursue differentiation strategies. Market lag: This also distinguishes a company but by compensating employees less than competitors. Pay levels fall below the market pay line.
This policy appears to fit well with lowest-cost strategies because companies realize cost saving by paying lower than the market pay line. Market match policy: The market match policy most closely follows the typical market pay rates as companies pay as per the market pay. Pay rates fall along the market pay lines. The market match policy represent a safe approach for companies because they generally are spending no more or less on compensation than competitors. This policy does not fit with the lowest-cost strategy for obvious reasons. It does fit better with differentiation strategies.
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