Chapter 8 Building Pay Structures that Recognize Employee

Chapter 8: Building Pay Structures that Recognize Employee Contributions MGT 4534 – Compensation Management

Questions on Steps for Constructing a Pay Structure q What is a pay structure?

Steps in constructing a pay structure • Step 1: Deciding on how many pay structures to construct • Step 2: Determining a market pay line • Step 3: Defining pay grades • Step 4: Calculating pay ranges for each pay grade • Step 5: Evaluating the results

Questions on Steps for Constructing a Pay Structure Step 1: Deciding on how many pay structures to construct • Describe three common pay structures. • Exempt & Non-Exempt • Structure based on job family • Structure based on geography

Questions on Steps on Constructing a Pay Structure Step 2: Determining a market pay line • What is a market pay line?

Questions on Steps on Constructing a Pay Structure Step 3: Defining pay grades • What are pay grades? • How are jobs grouped into pay grades?

Questions on Steps on Constructing a Pay Structure Step 4: Calculating pay ranges for each pay grade • What are pay ranges? • What is the midpoint pay value? • What is the range spread?

Questions on Steps on Constructing a Pay Structure Step 4: Calculating pay ranges for each pay grade (continued) • What is pay compression? • What situations lead to pay compression? • What are its possible effects? • How might a company prevent pay compression?

Questions on Steps on Constructing a Pay Structure Step 4: Calculating pay ranges for each pay grade (continued) • What are green circle pay rates? • Why might we see these in an organization? • What are red circle pay rates? • Why might we see these in an organization?

Questions on Steps on Constructing a Pay Structure Step 5: Evaluating the results • What is a compa-ratio? • How is it calculated? • What does a compa-ratio of 1 mean? • What does a compa-ratio of less than 1 mean? • What does a compa-ratio of more than 1 mean?

Questions on Designing Merit Pay Systems • Explain merit pay • How can equity theory explain how people react to certain levels of merit pay? • What are compensation budgets? • Describe the two different ways to time merit pay.

Questions on Sales Incentive Compensation Plans • How do pay structures based on merit differ from sales compensation? (page 185) • How do sales compensation programs help organizations meet their objectives?

Questions on Alternative Sales Compensation Plans Describe each of the following, as well as the situations in which each should be used: • Salary-only plans • Salary-plus-bonus plans • Salary-plus-commission plans

Questions on Alternative Sales Compensation Plans Describe each of the following, as well as the situations in which each should be used: (Continued) • Commission-plus-draw plans • What is a draw? • What does it mean for a draw to be recoverable vs. nonrecoverable? • Commission-only plans • Straight • Graduated commissions • Multiple-tiered commissions

Example of Tiered Commission Sales Commission Rate Over $250, 000 5% $150, 000 - 249, 999 3% $75, 000 - 149, 000 1% under $75, 000 0% Salesperson Sales Rate Joe $ 361, 298. 00 Emmie $ 60, 551. 00 Michael $ 80, 832. 00 Sandra $ 156, 026. 00

Examples of Graduated Commission Sales Rate Over $20, 000 3% $15, 000 2% $5, 000 1% under $5, 000 0% Elvin sells $25, 000. What is his gross pay if he sells $25, 000 and his company uses the graduated commission structure to the left? $5, 000 x . 01 = $15, 000 x . 02 = $5, 000 x . 03 = Total Commission = (25, 00020, 000) (20, 00015, 000)

Questions on Competitive Strategy • What type of sales incentive plan fits best with differentiation? Explain why. • What type of sales incentive plan fits best with lowest-cost strategies? Explain why.

Traditional pay grades vs. broadbanding

Questions on Pay Structure Variations • What is broadbanding? • What is the major advantage? • What is the major limitation? • What is a two-tier pay structure?

Chapter 8 – Identifying Sales Incentives • Directions: • Print the worksheet which is posted in misweb. • Identify the type of sales incentive being used in each scenario.