Best Practices for Designing Salary Structures www kenexa

Best Practices for Designing Salary Structures www. kenexa. com/compensation 1

Andrew Miller, CCP, GRP Andrew Miller has 15 years of compensation experience in consulting and corporate environments, and currently manages projects on for Kenexa’s Comp. Analyst Market Data team. Prior to joining that team, Andrew was a Survey Manager, overseeing some of the company’s more complex compensation surveys. Andrew has extensive experience in market-pricing all levels of employees designing market-based salary structures. Before joining Kenexa, Andrew served in various compensation roles at organizations like Wachovia, Prudential Securities and Mellon Investor Services. He has extensive experience administering employee base pay programs and guiding the shift from a traditional salary structures to market-based pay ranges. Earlier in his career, he managed the custom survey group at Watson Wyatt, where he designed and conducted client-sponsored compensation surveys in a number of industries, including financial services, healthcare, and manufacturing. Andrew started his career as a compensation analyst for the Albert Einstein College of Medicine where he administered point-factor job evaluation and provided compensation analysis in support of labor negotiations. Andrew holds a B. A. from Vassar College, an M. A. in organizational psychology from Columbia University and an M. B. A. from Vanderbilt University. He is a Certified Compensation Professional, a Global Remuneration Professional and a member of Worldat. Work. www. kenexa. com/compensation 2

Mark Szypko, CCP, GRP Mark has over 30 years experience as a compensation practitioner, and has held compensation, benefits and HR systems leadership roles for a number of organizations including Honeywell, Digital Equipment Corporation, Wang Laboratories, Kronos, Comcast, Progress Software and Lightbridge. Mark has extensive experience in all aspects of compensation, including the design, development, implementation and ongoing administration of compensation systems and programs including base pay, variable compensation, sales and executive compensation. Additionally, he has experience in international benefits, mergers and acquisitions and HR systems selection and implementation. In his role here at Kenexa Mark drives research on trends in compensation practice and spends most of his time meeting with our customers and other compensation professionals to understand the challenges that HR professionals face in today’s market. He tours the country speaking on compensation and HR-related topics, and in addition to his role at Kenexa he is a member of the Worldat. Work faculty. Mark holds a B. S. in Business Administration from Suffolk University and an MBA from Western New England College with a concentration in Management Information Systems. Mark is also a Certified Compensation Professional (CCP), a recipient of Worldat. Work’s Lifetime Achievement Award, and a member of the Worldat. Work faculty. www. kenexa. com/compensation 3

Agenda 1. 2. 3. 4. 5. Are you ready? Introduction to Salary Structures Issues in Salary Structure Design Building the Structure Modeling and Refining the Structure 6. Costing and Maintaining the Structure 7. Questions www. kenexa. com/compensation 4

Are You Ready? Before creating salary structures, compensation staff should: • Know their organization’s compensation philosophy • Have an established method for evaluating jobs and placing them on a Job Worth Hierarchy • Understand how to interpret and use salary survey data • Be familiar with basic marketpricing concepts and have marketpriced as many jobs as possible www. kenexa. com/compensation 5

Introduction to Salary Structures Definition and Purpose • A series of pay ranges (traditional grades or broadbands) that represent jobs of similar internal and/or external worth • Organizations use salary structures as a tool for aligning the internal values of jobs with their external market values • A structure provides a systematic approach to defining job worth, thereby helping to ensure consistency and fairness in pay delivery www. kenexa. com/compensation 6

Introduction to Salary Structures Terms • Pay range – a range of pay rates denoted by a maximum, midpoint, and minimum 54, 000 Ø Maximum - Upper boundary for salaries in the pay range • In some organizations, employees with salaries at the maximum may not be eligible for a pay increase Ø Midpoint – The salary that represents the point halfway between the minimum and the maximum 45, 000 • In many organizations it represents the approximation of market Ø Minimum - Lower boundary for salaries in the pay range 36, 000 • Organizations need to determine strategy for employees with salaries below the minimum www. kenexa. com/compensation 7

Introduction to Salary Structures Terms (continued) • Range Spread – the width of a pay range measured by the ratio of maximum pay to minimum pay (Range Maximum – Range Minimum) Range Minimum (25, 000 – 20, 000) = 25. 0% 20, 000 www. kenexa. com/compensation 8

Introduction to Salary Structures Terms (continued) • Midpoint Differential – the difference between midpoints of two adjacent grades expressed as a percent (Higher Midpoint – Lower Midpoint) Lower Midpoint (45, 000 – 40, 000) = 12. 5% 40, 000 www. kenexa. com/compensation 9

Introduction to Salary Structures Components Illustrated 1 Max Mid Min 3 Midpoint Differential 2 Range Spread www. kenexa. com/compensation 10

Introduction to Salary Structures Market Data vs. Job Content Approach Job Analysis Job Documentation Job Evaluation Job Content Emphasis Market Data Emphasis Data Collection and Analysis Job Content Evaluation Reconciliation of Internal and External Considerations Data Collection and Analysis Job Worth Hierarchy Base Pay Structure Source: Worldat. Work www. kenexa. com/compensation 11

Issues in Salary Structure Design How many structures do you need? • How complex is your organization? Ø Organizations that are more complex (decentralized/multiple levels of management, highly-varied work, differing pay philosophies) will likely need more structures to align with the market • How diverse are the labor markets in which you compete? Ø Organizations that compete in a wide variety of labor markets will likely need more structures to align with the market www. kenexa. com/compensation 12

Issues in Salary Structure Design How many grades should you have in a structure? • Depends on degree to which organization structure is flat or hierarchical Ø Flatter organizations will need fewer grades, while hierarchical organizations will need more grades • How many skill and/or responsibility distinctions are evident? • How many levels of supervision? • How many grades between supervisor and subordinate at each level? • How does the organization view career progression? (More grades = more advancement opportunities, but also more administration) www. kenexa. com/compensation 13

Issues in Salary Structure Design How do I size my midpoint differentials? • Midpoint Differentials should increase as the job hierarchy is ascended Ø Avoids compression Ø Significant enough to allow growth with a ladder Ø Recommended Guidelines Between Grades: • 5% to 12% clericals/production • 10% to 15% paraprofessional, management • 15% to 25% total midpoint differential between supervisor / subordinates • 20% to 35% executive levels www. kenexa. com/compensation 14

Issues in Salary Structure Design How do I size my range spreads? • Range Spreads should increase as the job hierarchy is ascended Ø Lower-level jobs have clear performance indicators; smaller spreads allow for advancement is same job family Ø Managerial/Executive jobs have more ambiguous performance indicators; lack of opportunity for advancement Ø Increasing spreads allow for tenure in career level positions Ø Recommended Guidelines by Job Family: • • Service, Production, and Maintenance Clerical, Technical, and Administrative Professional and Supervisory Managerial and Executive 20% - 30% - 40% - 50% + www. kenexa. com/compensation 15

Building the Structure Steps • Identify lowest and highest market reference points to be included in structure Ø Janitor - $20, 000 Ø Controller - $125, 000 • Identify appropriate starting Midpoint Differential Ø 5% to 12% clericals/production • Multiply lowest Midpoint by appropriate Midpoint Differential to calculate midpoint for next grade • Repeat process, appropriately increasing midpoint differential until there a sufficient number of grades to accommodate highest Market Reference Point www. kenexa. com/compensation 16

Building the Structure Example Janitor (MRP = $20, 000) Controller (MRP = $125, 000) www. kenexa. com/compensation 17

Building the Structure Steps (continued) • Calculate Range Minimums and Maximums for lowest grade using appropriate Range Spread Ø Grade 1 Range Spread = 20% Ø To calculate the Range Minimum: Range Midpoint 1+ (Spread/2) 20, 000 1+ (0. 2 / 2) 20, 000 = 18, 182 1 + 0. 1 Range Minimum www. kenexa. com/compensation 18

Building the Structure Steps (continued) • Calculate Range Minimums and Maximums for lowest grade using appropriate Range Spread Ø Grade 1 Range Spread = 20% Ø To calculate the Range Maximum: Range Minimum X (1 + Range Spread %) 18, 182 X (1 + 0. 2) 18, 182 X 1. 2 = 21, 818 Range Maximum Repeat process, appropriately increasing range spread until Range Mins and Maxs are calculated for all grades www. kenexa. com/compensation 19

Building the Structure Example www. kenexa. com/compensation 20

Modeling and Refining the Structure Steps • Assign benchmark jobs to the grade with the closest Midpoint • Compare Market Reference Points to Range Midpoints Ø Big discrepancies between Midpoints and Market Reference Points may indicate that more grades are needed • Review Job Families for appropriateness and validity Ø Jobs in the same level should be roughly in the same grade Ø Jobs at different levels should be in different grades • • Validate grade assignments of reporting relationships Slot jobs that could not be market-priced into appropriate grades based on the grades of similar jobs www. kenexa. com/compensation 21

Modeling and Refining the Structure Steps (continued) • Distribution should mirror organization structure Ø Review the distribution of jobs by grade Ø Review the distribution of employees by grade • Review overlap between grades Ø There should be enough overlap to give the organization flexibility in promoting, while ensuring grade changes are seen as legitimate promotions Minimal Overlap Moderate Overlap Significant Overlap www. kenexa. com/compensation 22

Modeling and Refining the Structure Example www. kenexa. com/compensation 23

Modeling and Refining the Structure Final Review • Salary structure design is an iterative process • Structure should be modeled and tested after each design change Ø Do midpoint differentials and range spreads increase by grade? Ø Are market reference points close to range midpoints? Ø Are there enough grades to accommodate career pathing, yet not too many as to devalue promotions? Ø Does the structure mirror the org’s reporting relationships? Ø Is there an appropriate amount of overlap between grades? Ø Are there few empty grades or overpopulated grades? www. kenexa. com/compensation 24

Costing and Maintaining the Structure Costing the Structure • Calculation of the cost to bring base salaries for satisfactorily performing employees up to the minimums of their new grades • More competitive organizations may also want to review costs of bringing base salaries to grade midpoints or quartiles • Understanding the gap of where the organization is versus where it wants to be will guide management’s approach to adjusting pay www. kenexa. com/compensation 25

Costing and Maintaining the Structure Example – Costing the Structure Employee Current Salary Performance Rating Grade Minimum Grade Midpoint Cost to Bring to Minimum Cost to Bring to Midpoint Angela $17, 500 Satisfactory 2 $18, 182 $20, 000 $682 $2, 500 Brad $22, 000 Unsatisfactory 4 $23, 569 $27, 104 -- -- Carmen $34, 000 Satisfactory 6 $29, 565 $33, 999 -- -- Daniel $38, 000 Very Good 8 $37, 470 $44, 964 -- $6, 964 Ethan $45, 000 Satisfactory 10 $49, 554 $59, 465 $4, 554 $14, 465 Frank $66, 500 Satisfactory 12 $69, 902 $85, 629 $3, 402 $19, 129 Total Cost $8, 638 $43, 058 www. kenexa. com/compensation 26

Costing and Maintaining the Structure Maintaining The Structure • Salary Structures need to be updated periodically to keep pace with the market • Participate in annual Benchmark and Merit Budget Surveys and use results to adjust salary structures accordingly • Individual jobs should be repriced and regraded as necessary; at least once every 2 – 3 yrs. • Consider various technology solutions to design, model, and cost the structure www. kenexa. com/compensation 27

Questions? Mark Szypko mark. szypko@kenexa. com Andy Miller andy. miller@kenexa. com www. kenexa. com/compensation 28

HRCI & IHR Credits This program has approved for 1 recertification credit hour towards PHR, SPHR and GPHR recertification through the HRCI. The use of this seal is not an endorsement by the HR Certification Institute of the quality of the activity. It means that this activity has met the HR Certification Institute's criteria to be pre-approved for recertification credit. This webcast has been reviewed and has been pre-approved for 1 credit hour to be applied to the IHR Online Certification Program Please contact Lauren Valk for additional instructions on receiving credit for this webinar. Lauren. Valk@kenexa. com 781 -8544 www. kenexa. com/compensation 29