Internal AlignmentInternal AlignmentInternal AlignmentInternal AlignmentInternal AlignmentInternal Alignment

External Competitiveness
Lecture 3
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document
may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1

Learning Objectives
 Explain the importance of external competitiveness
 Discuss the factors influencing external competitiveness
 Explain the different pay policy alternatives
 Compute Compa-Ratio
6-2
2

The organization’s pay relative to its competitors.
Pay Level
The average of the pay rates
(Base + Allowances + Incentives + Bonus + Stock Holdings)
number of Employees
Pay Mix
The various types of pay components that make up total compensation.
Fixed : Variable

Compensation Strategy:
External Competiveness
External competitiveness is expressed by:
Pay Level
Set at either Above (Lead) or Below (Lag) or Equal (Match) that of competitors
-- peg to what percentile of market?
Pay Mix
Set the Pay Mix (Fixed : Variable) relative to those of competitors.
Pay Level and Pay Mix decisions focus on 2 objectives:
(a) control cost and increase revenue
(b) attract and retain employees.
5

What Shapes External Competitiveness?
EXTERNAL
COMPETITIVENESS
LABOUR MARKET FACTORS
Nature of Demand
Nature of Supply
PRODUCT MARKET FACTORS
Degree of Competition
Level of Product Demand
ORGANIZATION FACTORS
Industry, Strategy, Size
Individual Manager
Full Employment vs Recession
Companies in the same
industry competing for
the same type of labour
Low-cost strategy/Cost cutter
6

How Labor Markets
work?
4 basic assumptions:
1. Employers always seek to maximize profits.
2. People are homogeneous and therefore interchangeable.
3. Pay rates reflect all costs associated with employment.
4. Markets faced by employers are competitive.
7

Supply and Demand for Business School Graduates in the Short
Run

Competitive Pay Policy Alternatives
Pay equal as
Competition (Match)
Pay
above
(Lead)
Pay
below
(Lag)
Flexible
Policy
9

Relationships Between External Pay Policies and Objectives
10

11
Match Policy:
Average Rate of Pay Is Approximately Equal to
The Average For The Relevant Labor Market.
External Market
Internal Market
Pay with Market (Match)
 Pay Level of Company matches pay
levels of its competitors
 Company’s ability to attract potential
employees will be on par with its
competitors (pay wise only),
Company can compete on other
factors.
Match Pay Policy

Lead Pay Policy
12
Point Value of the Jobs
Pay
Rate
LEAD PAY POLICY
Pay above Market (Lead)
 Maximizes Company’s ability to attract and
retain quality employees
 Minimizes employees’ dissatisfaction with pay
 May also offset less attractive features of work
 If used only to hire new employees, may lead to
dissatisfaction of current employees
 Higher labour cost will likely be passed on to the
consumers (as higher prices for the Company’s
goods & services)

13
Lag Policy:
Average Rate of Pay is Below The Average
For The Relevant Labor Market.
Significant Problems Develop When Pay Lags
or Is Perceived to Lag Market by > 15%
External Market
Internal Market
Pay below Market (Lag)
 May hinder Company’s ability to
attract potential employees
 To mitigate a Lag pay policy, Company
will need to offer its employees other
promises (e.g. better training, broader
exposure, faster promotion, more
meaningful work, etc).
Lag Pay Policy

14
PointValue ofthe Jobs
P ay
Rate
Firm's Pay
Policy Line
Market Pay
Policy Line
Lag-Lead
Pay Policy
Pay is
• higher than market (Lead)
and
• lower than market (Lag)
for different seniority of jobs.

Flexible (Hybrid) Pay Policies
Company has more than one Pay Policy.
Pay Policy may vary
 for different job families
 For different job seniority
(e.g. rank & file jobs vs manager jobs vs senior management jobs)
15

Market Percentile
16
 It measures the location of the company’s salary with respect to market data.
 The percentile rank of a company’s salary position is the percentage of companies
in its frequency distribution that are equal to or lower than it.
 E.g, Netflix pays its employees better than 75% of the companies in the technology
industry, thus it is paid at the 75th percentile, where 75 is the percentile rank.
 E.g, if the 10th percentile wage for a job was $10,000 annually, 10 percent of
the people made $10,000 per year, while the remaining 90 percent made more
than $10,000.

17
Recall Statistics:
Measures of location
P25 = Q1
P50 = Q2 = median
P75 = Q3

Basic Percentile Terms
18
 25th
Percentile or P25
The lowest quarter of salaries for this job fall below the twenty-fifth percentile.The “middle
half” of people in this job have salaries that fall between the 25th and 75th percentile.
 50th
Percentile or P50 or median
The lower half of salaries for this job fall below the fiftieth percentile while the upper half
are above it. The most common percentile of reference is the median average or 50th
percentile.
 75th
Percentile or P75
The highest quarter of salaries for this job are above the seventy-fifth percentile.The
“middle half” of people in this job have salaries that fall between the 25th and 75th
percentile.

Compa-Ratio =
It reflects the employee’s salary compared to the salary range mid-point.
 Compa-ratio of 1 means the employee is paid at Salary Range Mid-Point
 Compa-ratio of <1 means the employee is paid below Salary Range Mid-Point
 Compa-ratio of >1 means the employee is paid above Salary Range Mid-Point
20

Compa-Ratio
Compa-Ratio =
Example
Incumbent salary = $10,800
Salary range mid-point = $12,000
Compa-ratio = = 0.90
This employee is at 90% of salary range mid-
point
21

Exercise
22
If Betty is paid $70,000 for her annual salary.
The total annual salary for a fully competent performer in her job is $80,000
(Mid-Point). Her CR is ______ %.

Question
If your CR is < 1
Should you ask for an increase in pay?
23

Compa-Ratio
As long as the C/R is between 80% to 120%, that is acceptable.
Compa-ratio < 1:
 Majority of employees may be new or recent hires
 Poor performers
 Few employees stay on job, high churn at the entry, many clustering near the minimum of
the salary range.
Compa-ratio > 1:
 Majority of employees may be long serving
 Highly experienced and highly competent performers
 Stable core of employees clustering towards the max of salary range.
24

Competitive Pay Policy Alternatives
25
Most companies
Leading firms like Google, ExxonMobil
Social services, VWOs
Pay equal as
Competition (Match)
Pay
above
(Lead)
Pay
below
(Lag)
Flexible
Policy

Pay Mix
(Fixed : Variable)
Base 50%
Bonus
15%
Incentives
15%
Benefits
20%
Performance-Driven
Base 70%
Bonus 5%
Incentives 5%
Benefits
20%
Market-Match (common Pay Mix)
Base 50%
Bonus
10%
Incentives
10%
Benefits
30%
Work-Life Balance
Base 80%
Benefits
20%
Pay Security

Lecture 6
Designing
• Pay Levels
• Pay Mix
• Pay Structures
28

Learning Objectives
 Salary Surveys
o Purpose
o Design
o Interpretation
 Pay-Policy Line
 Job Grades and Salary Ranges
 Salary Range Spread
 Salary Range Overlap
 Broad Banding
 Adjusting the pay structure and market pricing
 Pay Compression

Lecture 6
Determining Externally Competitive Pay Levels and Structures
8-30
30
1 2 3
4
5
These are the major decisions in setting externally competitive
pay and designing the corresponding pay structures.

Salary survey provides the essential data for the Company to
(a) Set its own Pay Policy Line (Lead or Lag or Match)
(b) Set its own Pay Mix (Fixed : Variable)
(c) Construct its own Job Grades + Salary Ranges
Salary Survey
A systematic process of collecting and making
interpretation about the salaries paid by other employers.

Purpose of Salary Survey
To adjust the pay level
relative to competitors
• how much to pay?
• The overall movement of pay
rates caused by competition.
To set the Pay Mix
relative to competitors
• what forms?
• Base, bonus, stock, benefits.
To establish or price
a pay structure
• Validate job evaluation results.
• Establish internal structures.
To analyze pay-related
problems
• Study special situations
To estimate the labor
cost of competitors
• Competitive intelligence

Selecting Relevant Market Competitors
Identify which other companies compete with your own Company
in these areas:
 the same job families
 the same employees within the same geographic area
Fuzzy markets:
 New companies and unique jobs may fuse diverse factors making
relevant markets fuzzy.

What Salary Information tells you and don’t tell you
Gaps and Pitfalls to avoid

Interpret Survey Results and Construct a Market Line
Verify data for accuracy and anomalies.
 Accuracy of match
 Some use the benchmark conversion/survey leveling approach.
 Anomalies
 Does any one company dominate?
 Do all employers show similar patterns?
 Outliers?
Statistical analysis
 Frequency distribution
 Unusual shapes may reflect problems.
 Central tendency
 Reduces a large amount of data into a single number.
 Variation
 Quartiles and percentiles are a common measure.

Statistical Measures to Analyze Survey Data

Use aging or
trending updates
to forecast rates
for a future date.

Interpret Survey Results and Construct a Market Line
Combine internal structure and
external market rates.
What will emerge?
 Internal Job Grade structure
(horizontal axis)
 external Salary Range data
(vertical axis)
 Pay policy line
 Salary Ranges

The diamonds are
actual salaries from
the salary survey.
The line is the
Regression
Line
(smoothened
average of
Market).
Construct a Market Pay Line
A Market Pay Line links a company’s benchmark jobs (on horizontal axis)
with competitors’ market rates (on vertical axis).

Regression Line
becomes
Market Line

Job Grades and Salary Ranges
A Salary Range exists when the Company pays
different salaries to employees doing the
same job.
Salary Range allows the Company to do these:
• recognize individual performance with differentials
in pay.
• meet employees' expectations that their pay will
progress (increase) over time, even in the same job.
• encourage employees to remain with the company
to earn more in time to come.

Group all the jobs into Job Grades
 Jobs within the same Job Grade will be considered as “equal in value” for pay purposes.
 Jobs within the same Job Grade will have the same Salary Range.
Establish Salary Range Midpoints + Minimums + Maximums.
Length of the Salary Range to be decided, with the goal that salary ranges should
support these Company intentions:
 Hierarchical or Flat structure as preferred by the Company
 Pace of Promotion between Job Grades
(if promotion is slow, salary ranges need to be longer, otherwise employees hit max, stagnate too early)
(if promotion is fast, salary ranges can be shorter)

Salary Range Mid-point
A
B
C
D
E
Minimum
Novice
Mid-Point
Competent
Maximum
Expert
CR = 1
Mid-Point is a “control” or “reference” point.
Employees who satisfy 100% of company’s requirements (that is, Competent) are paid at MP.
MP salary should be reviewed regularly and revised to re-peg to intended % P of market.
Once MP is revised, salary range (Minimum and Maximum) must be revised accordingly.
45

Mid-Point and Minimum and Maximum
Mid-Point =

Mid-point = $ _______
Maximum = $4,000
Minimum = $2,000
Mid-Point and Minimum and Maximum
Mid-Point =

Red Circle and Green Circle jobs
How to reward and retain good employees who hit Max?
 Consider paying discretionary bonus
 Allow incumbent to go beyond Max , but capped at an
amount below the Mid Point of the next higher job grade.
Red Circle Job MP
Max
Green Circle Job
JG1
JG2
JG3
A staff in JG2 is due for promotion to JG3.
But his salary will still be below the
salary minimum of JG3 even after
promotion increment. How?

Mid-Point Progression (MPP)
MPP represents the pay differentials in moving from Job Grade to Job Grade.
The more “different” between the adjacent job grades, the bigger the MPP.
Example
COO and CEO jobs are adjacent job grades.
Technician 2 and Technician 1 are adjacent job grades.
COO job is more different from CEO job than
Technician 2 job is different from Technician 1 job.
MPP between COO-CEO is bigger than MPP between Technician 1-2.
MPP
JG1
JG2
Typical Mid-Point Progression can be:
 Rank-and-File : 5% to 10%
 Executives and Professionals : 8% to 15%
 Managers and Directors: 10 to 15%
 Senior Management: 15% to 20%

Range Spread
50
Range Spread is also known as range width or full range spread.
Range Spread = =
= 0.666…
= 66%
$5000
$3000
a

Determine the Range Spread
51
Range Spread
Range Spread =
=

Constructing Salary Ranges:
Setting the Mid-Point, Minimum, Maximum
How long should the Salary Range be?
 Range Spread is based on judgment about how the ranges support promotions
and other organization systems.
 Typical Range Spread
• Top-level management positions: 30% to 60%
• Mid-level professional and managerial positions: 15% to 30%
• Office and Production positions: 5% to 15%
 The more job grades a company has, the shorter the Salary Ranges.
52

Range Spread
53
Junior jobs
Professional jobs
Managerial jobs
30%-40%
Min Max
50%-60%
Min Max
70%-100%
Min Max
• Narrower Range Spread
Used for lower job grades where employee will progress rapidly, learning curve is short.
Example Operator  Senior Operator Technician 2  Technician 1
• Wider Range Spread
Used when 2 or more job grades are combined together into a single job grade
(that is, Broad Banding).

Range Spread (RS) and Max-Min Ratio (MMR)
54
Maximum = $3,054
Minimum = $2,545
Mid-Point = $2,800
Maximum = $3,360
Minimum = $2,240
Range Spread = 50%
Max-Min Ratio = 1.5
Max = 1.5 x Min
Range Spread = 20%
Max-Min Ratio = 1.2
Max = 1.2 x Min
Maximum = $3,733
Maximum = $1,866
Range Spread = 100%
Max-Min Ratio = 2
Max = 2 x Min

Mathematics only …
55
Mid-Point = $2,800
Maximum $_______
Minimum $_______
Range Spread = 40%
Max-Min Ratio = 1.4
Mid-Point = Maximum + Minimum
2

Let’s Practice …
Jonathan is working part-time as a cleaner in NYP.
Information about his salary range is as follows:
 Mid Point = $1000
 Range Spread = 100%
Calculate Jonathan’s Minimum and Maximum salary range.
Draw Jonathan’s salary range in graphical format.
57
Mid-Point = Maximum + Minimum
2

Range
Overlap
Big Overlap and Small Mid-Point Progression means the 2 adjacent jobs are quite close.
Being promoted from one grade to another may carry a title change, but not much change in salary.
Small Overlap and Big Mid-Point Progression means the 2 adjacent jobs are quite different, big jump.
Being promoted from one grade to another will deserve a big salary increase.
59

Range Overlap
60
Range Overlap =
= = 73 %
1200
800
1320
880
1100

From Job Grades  Job Bands
Broad Banding collapses salary grades into only a few broad bands.
Each broad band will end up with a long salary range.
Lateral moves within bands are more common than between bands.
Take advantage of the flexibility without increasing labor cost.

Salary Compression
Salary Compression is felt when salary offered to externally-hired candidates
becomes significantly higher than the internal incumbent employees.
Example
When newly hired graduates command salaries almost equal to existing
employees with 3-5 years’ experience.
When salary compression is felt, it is time to do salary adjustments for internal
incumbent employees.
64

Salary Compression Example
In 2003, Employee A joins company as a fresh graduate at entry salary of $1800 per month.
He gets an average of 2%-3% increase per year, and by 2006 his salary has reached $1948.
The market has pushed the entry salary for graduates to $1900.
A new fresh graduate, Employee B with no experience will be paid $1900 while Employee A with 3
years’ of experience is drawing only $198.
65

Practice: Salary Compression
Denise graduated from NYP and joins MacDonald in January 2019 as HR Officer.
Her starting salary is $2000.
The Service Increment at MacDonald for the next 3 years are as follows:
 2020 – 5%
 2021 – 6%
 2022 – 4%
Assuming she maintains her role as HR Officer at MacDonald, calculate Denise’s salary at the end
of 2022.
Suggest the starting salary for Ryan who will join MacDonald as HR Officer in January 2021 after
serving NS.

Summary
Purpose, design, and interpretation of salary surveys
Pay Policy Line
Pay Mix
Mid-Point
Range Spread
Range Overlap
Broad Banding
Pay Compression

Internal AlignmentInternal AlignmentInternal AlignmentInternal AlignmentInternal AlignmentInternal Alignment

More Related Content

Similar to Internal AlignmentInternal AlignmentInternal AlignmentInternal AlignmentInternal AlignmentInternal Alignment (20)

Recently uploaded (20)

Internal AlignmentInternal AlignmentInternal AlignmentInternal AlignmentInternal AlignmentInternal Alignment

Editor's Notes