Designing a Pay Structure: Case Study and Integrated

Application Exercises

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Author: Lisa A. Burke

Pub. Date: 2016
Product: Sage Business Cases
DOI: https://doi.org/10.4135/9781473956384
Keywords: job evaluation, pay, job grading, job description, regression, job analysis, receptionists
Disciplines: Business & Management, Human Resource Management, Compensation Management, Human
Resource Strategy & Planning
Access Date: October 29, 2024
Publisher: Society for Human Resource Management (SHRM)
Online ISBN: 9781473956384

© 2016 Society for Human Resource Management (SHRM) All Rights Reserved.
Sage Sage Business Cases
© 2008 SHRM Lisa Burke, Ph.D., SPHR

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Abstract

Compensation is a critical area of human resource (HR) management, and one that can greatly affect
employee behavior. To be effective, compensation must be perceived by employees as fair, competi-
tive in the market, accurately based, motivating and easy to understand. This case is rated as slightly
challenging and requires familiarity with and use of the Internet and Microsoft Excel. Instructors can
make the case and associated exercises less challenging by eliminating certain tasks assigned in the
case, or may increase the difficulty by adding other relevant tasks and questions. Teaching notes ac-
company the case. Instructors who have previously taught compensation courses, are familiar with the
Internet and Excel, have work experience with pay systems, or who conduct research in compensation
area may find the case easier to facilitate.

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Case

Introduction to Compensation and Designing a Pay Struc-

ture

Compensation is a critical area of human resource (HR) management, and one that can greatly affect em-
ployee behavior. To be effective, compensation must be perceived by employees as fair, competitive in the
market, accurately based, motivating and easy to understand.

HR professionals might create the pay structure for their organization, or they might work with an external
compensation consultant. There are several steps to designing a pay structure: job analysis; job evaluation;
pay survey analysis; pay policy development; and pay structure formation. Each step is briefly explained be-
low. For a more extensive discussion, please review Milkovich & Newman, 2008.

Step 1: Job Analysis

Job analysis is the process of studying jobs in an organization. The outcome of this process is a job descrip-
tion that includes the job title, a summary of the job tasks, a list of essential tasks and responsibilities, and
a description of the work context. Also included are the knowledge, skills and abilities needed to perform the
job.

Step 2: Job Evaluation

Job evaluation is the process of judging the relative worth of jobs in an organization. The outcome of job eval-
uation is the development of an internal structure or hierarchical ranking of jobs. Job-based evaluation is used
more often than person-based evaluation, and so the former will be the focus in this case. There are three
methods of job-based evaluation: the point method (which is the most commonly used); ranking; and classifi-
cation. Job evaluation helps to ensure that pay is internally aligned and perceived to be fair by employees.

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Step 3: Pay Policy Identification

Pay policy identification is the process of determining whether the organization wants to lead, lag or meet the
market in compensation. The pay policy or strategy will likely influence employee attraction and retention. Pay
policies can vary across job families (i.e., groups of similar jobs) and job levels if the top management feels
that different strategies can be effective in different areas of the organization.

Step 4: Pay Survey Analysis

Pay survey analysis is the process of analyzing compensation data gathered from other employers in a survey
of the relevant labor market. Gathering external pay data (e.g., base pay, bonuses, stock options and bene-
fits) is essential to keep the organization's compensation externally competitive within its industry. Employee
attraction and retention can be improved by maintaining externally aligned pay structures.

Step 5: Pay Structure Creation

Pay structure creation is the final step, in which the internal structure (Step 2) is merged with the external
market pay rates (Step 4) in a simple regression to develop a market pay line. Depending on whether the
organization wants to lead, lag or meet the market, the market pay line can be adjusted up or down. To com-
plete the pay structure, pay grades and pay ranges are developed.

In this case, you will design a pay structure using a case scenario and integrated application.

Learning Objectives

In this case you will learn to design a pay structure. To do so, you will

• Write a job description, using the O*NET website.

• Use the point method to conduct a job evaluation.
• Create a market pay line using Excel.
• Establish a pay policy line based on a pay level strategy.
• Establish pay ranges.
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Recommended Reading

Milkovich, G., and Newman, J. (2008). Compensation. McGraw-Hill Irwin. Chapters 1–8.

Case

You are the newly hired human resource (HR) director for an engineering consulting firm that is expanding
its operations to Chattanooga, Tenn. The organization is headquartered in Indianapolis, Ind. Based on the
organization's mission statement, you know the firm strives to create customized and technically proficient
electrical engineering plans for regional clients. The following personnel are required to start the Chattanooga
operation (the numbers in parentheses indicate the number of positions):

• Director of regional operations

• Assistant to the director of operations
• Operations analyst (2)
• Operations trainee
• HR director (this is you)
• Administrative assistant in HR
• Benefits manager
• Benefits counselor
• Payroll assistant
• Lead engineer (3)
• Engineer (6)
• Engineering associate for special projects
• Manager of information systems
• Senior information systems analyst
• Information systems analyst
• Security guard
• Front desk receptionist

You can see from the list that there are several job families, including operations, HR, engineering, information
systems and office support. You can now begin the process of designing a pay structure for the organization.

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Job analysis is central to many HR functions, including compensation, recruiting and training. You need to
understand what tasks, duties and responsibilities various jobs will entail before you can assign fair and com-
petitive pay rates.

Begin the process by gathering the needed job description information. To do so, combine information from
O*NET (http://online.onetcenter.org), an online job analysis resource developed by the Department of Labor,
and existing internal corporate HR documents (such as previous job descriptions). Each job description in-
cludes the job title; a job summary; essential job tasks; the job's work context; and job-relevant knowledge
and skills that an incumbent must possess.

Benchmark jobs (jobs that are common and consistent across a wide range of employers) will be the focus of
this exercise, because they will be used to design the pay structure. Appendix A contains the job descriptions
of the benchmark jobs. You have one description left to complete; your first task is to create a job description
for the benefits manager position.

Task A

Create a complete job description for the Benefits Manager position using O*NET

To design a pay structure, there must be a formal way to value the work inside the organization so that pay is
awarded fairly. The job evaluation process will help develop this internal work hierarchy.

Different evaluation methods, pay strategies, and pay structures will be used for different job families in the
organization. You decide to use a job-based evaluation approach for the operations, office support, and HR
job families. A skills-based approach will be used for information systems and engineering job families, al-
though it is not included as a task in this case. The security guard and director of regional operations jobs will
be assigned pay rates primarily using market pricing and slotted later into the pay structure.

Company representatives from various job levels and families will periodically provide you with input during
the job evaluation process. This will help you gain acceptance of the established job structure. You ask this
job evaluation committee whether they agree with the specific benchmark jobs identified in the job analysis
step (see below).

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Office Support Operations HR

HR Director

Assistant to the director of operations Director of regional operations *Benefits manager

*Admin assistant (HR) *Operations analyst Benefits counselor

*Front desk receptionist Operations trainee *Payroll assistant

* Benchmark job.

The committee studies the various job titles and asks why the administrative assistant in HR is not included
in the HR job family. You explain that administrative assistants perform similar tasks across departments and
do not handle functional-specific tasks (e.g., HR). You suggest grouping the front-line administrative jobs in a
separate job family called office support. The other job families that will be evaluated are operations and HR.

You decide to use the point method for job evaluation for operations, HR, and office support job families be-
cause it is the most commonly used job evaluation method. Next, the compensable factors, degrees and
weights of each factor must be determined. With input from the job evaluation committee and your knowl-
edge of the organization's mission and work content, three common compensable factors are selected: skill,
responsibility and effort, each having two specific sub-factors. For example, the compensable factor of skill is
comprised of education level and the degree of technical skills.

You recommend weighting the skill compensable factor at 50 percent because the organization is very knowl-
edge-intensive and depends heavily on its human capital. Responsibility is weighted 30 percent because each
job has the potential to affect other jobs; and effort is assigned 20 percent because problem solving and task
complexity are integral across jobs in the organization.

Four degrees should be sufficient for rating the various jobs. For example, the four degrees for education
level are identified as:

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1=High School/GED
2=Associates
3=Bachelors
4=Masters/Graduate

Points are then calculated by multiplying the degrees by the weights.

You present an example of how this point scheme is applied to the front desk receptionist benchmark job (see
below). The committee agrees with the approach.

Compensable Factor Job evaluation for front desk receptionist

Degree (1, 2, 3, 4) Weight Points

Skill (50%)

-Education Level 1 25% 25

-Degree of Technical Skills 1 25% 25

Responsibility (30%)

-Scope of Control 1 10% 10

-Impact of Job 2 20% 40

Effort (20%)

-Degree of Problem Solving 1 10% 10

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-Task Complexity 1 10% 10

120 points

The next task is to calculate the job evaluation points for the remaining benchmark jobs using the established
compensable factors and specified weights above. In other words, the degrees of each remaining benchmark
job must be determined based on a logical rationale, and then the total job evaluation points for each bench-
mark job can be calculated. To do so, consult the job descriptions in Appendix A.

Task B

Calculate the job evaluation points for the administrative assistant, payroll assistant, operational analyst, and
benefits manager jobs. Provide a rationale for assigning specific degrees to the various jobs

After determining the job evaluation points for the remaining benchmark positions, you meet with the presi-
dent, the head of corporate HR in Indianapolis and the director of regional operations in Chattanooga to dis-
cuss a pay level strategy for each job family. One decision resulting from these meetings is that your organi-
zation will pay 3 percent above the market in base pay for the HR, operations and office support job families.
The group realizes that this lead pay policy will help meet the firm's customer-focus business strategy by at-
tracting and retaining high-potential employees without incurring labor costs too far above their competitors.

Top management also decides to match the market in benefits to contain benefit costs (e.g., health care
costs). After analyzing web-based data about benefits offered in your industry by smaller organizations (re-
trieved from BenefitsLink, SHRM, and Employee Benefits Research Institute) you discern that on average,
employee benefits costs are approximately 25 percent of total compensation. Once the pay structure is final-
ized, you will set benefits at a similar ratio of total compensation to achieve a matching benefits policy.

To ensure that the pay structure is externally competitive, a pay survey will be conducted. For the results of a
survey to be valid, the market pay data must be from the relevant labor market for each benchmark job. That
is, regional pay data should be gathered because most of the office support, HR and operations jobs will be

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filled by regional candidates (i.e., within a 90-mile radius of Chattanooga).

You develop a streamlined pay survey and administer it to industry competitors. Descriptive organization data
(e.g., size, industry, annual revenue) is gathered as well as compensation data for each of the benchmark
jobs, including base pay, bonuses, stock options and benefits. [Note: All participating organizations will re-
ceive the survey results.]

Surveys are completed and returned by six organizations (referred to as companies A, B, C, D, E, and F) who
recruit and hire similar benchmark jobs in the surrounding region. Base pay salary data from the responding
organizations are reflected in the following table. You have already checked to ensure that summary job de-
scriptions for the benchmark jobs (in the sample data) are appropriately similar to those in your organization
(to ensure you are comparing “apples to apples”). The next step is to analyze the pay data and generate
weighted means for each benchmark job to use in future parts of the case.

Task C

If there were any outliers (i.e., extreme data points) in these data, what would you recommend doing with them?
[From this point forward, assume no extreme data points exist in the dataset]

Second, calculate the weighted means (for base pay) for each benchmark job.

Company # of Job Incumbents Base Pay

Front Desk Receptionist 1 Average $21,000

Minimum

Maximum

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Front Desk Receptionist 2 Average $22,000

Minimum $21,000

Maximum $23,000

Front Desk Receptionist 1 Average $18,000

Minimum

Maximum

Front Desk Receptionist 2 Average $21,000

Minimum $20,000

Maximum $22,000

Front Desk Receptionist 2 Average $18,500

Minimum $18,000

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Maximum $19,000

Front Desk Receptionist 1 Average $17,500

Minimum

Maximum

Administrative Assistant 4 Average $25,000

Minimum $21,000

Maximum $28,000

Administrative Assistant 4 Average $31,000

Minimum $27,000

Maximum $34,500

Administrative Assistant 3 Average $30,000

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Minimum $29,000

Maximum $32,000

Administrative Assistant 5 Average $33,000

Minimum $28,000

Maximum $34,000

Administrative Assistant 4 Average $29,000

Minimum $27,000

Maximum $30,000

Administrative Assistant 4 Average $28,000

Minimum $27,000

Maximum $30,000

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Operations Analyst 2 Average $55,000

Minimum $50,000

Maximum $60,000

Operations Analyst 4 Average $57,000

Minimum $54,000

Maximum $59,000

Operations Analyst 3 Average $56,000

Minimum $54,000

Maximum $58,000

Operations Analyst 5 Average $58,500

Minimum $52,000

Maximum $61,000

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Operations Analyst 3 Average $59,000

Minimum $57,000

Maximum $61,000

Operations Analyst 3 Average $54,000

Minimum $53,000

Maximum $55,000

Payroll Assistant 2 Average $35,000

Minimum $34,000

Maximum $36,000

Payroll Assistant 3 Average $34,000

Minimum $32,000

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Maximum $35,000

Payroll Assistant 1 Average $35,000

Minimum

Maximum

Payroll Assistant 3 Average $35,000

Minimum $33,000

Maximum $37,000

Payroll Assistant 2 Average $36,000

Minimum $35,000

Maximum $37,000

Payroll Assistant 2 Average $29,000

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Minimum $27,000

Maximum $31,000

Benefits Manager 1 Average $62,000

Minimum

Maximum

Benefits Manager 2 Average $61,500

Minimum $61,000

Maximum $62,000

Benefits Manager 1 Average $60,000

Minimum

Maximum

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Benefits Manager 3 Average $64,000

Minimum $62,000

Maximum $65,000

Benefits Manager 2 Average $63,000

Minimum $62,000

Maximum $64,000

Benefits Manager 1 Average $66,000

Minimum

Maximum

The next task is to conduct a simple regression using Microsoft Excel to create a market pay line. Enter the
job evaluation points (as X) and weighted average base pay rates (as Y) for each benchmark job and gener-
ate the regression results.

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Task D

Conduct a simple regression in Excel to create a market pay line by entering the job evaluation points (on the X
axis) and the respective weighted average market base pay (on the Y axis) for each benchmark job

Identify the slope and y-intercept and write the equation for the market pay line.

The regression output will also show information about how good the regression line fits the data. Specifically,
look at the “R squared” in the regression output. Generally, the R squared, referred to as variance explained,
should be .95 or higher.

If R squared is significantly lower than this, there may be problems stemming from the job evaluation step.
For example, the points assigned to certain benchmark jobs may be off – i.e., not make sense given the level
of tasks, duties and responsibilities required for the job and the knowledge, skills and abilities needed by the
job incumbent. If this is the case, re-examine the job descriptions and reconsider the points assigned to the
benchmark jobs. Alternatively, there may be errors in the weighted average calculations. After conducting the
regression again, examine the new R squared.

Task E

What is your R squared (variance explained)? Is it sufficient to proceed?

Using the regression output (the slope and y-intercept), calculate the predicted market pay rate (using Excel)
for each benchmark job.

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Task F

Calculate the predicted base pay for each benchmark job

Next, adjust the market pay line based on the organization's lead pay level strategy; this will create the pay
policy line. Since the organization wants to lead the market by 3 percent across the operations, office support
and HR job families, adjust the market pay line accordingly (by 3 percent). In other words, each predicted pay
rate can be multiplied by 1.03 to get a new base pay rate that is 3 percent above market.

Task G

Because your company wants to lead in base pay by 3 percent, adjust the predicted pay rates to determine the
base pay rate you will offer for each benchmark job

Next, create pay grades for the pay structure. Pay grades represent groupings of jobs that are similar for pay
purposes (i.e., of similar value to the organization). All the jobs in a pay grade share the same pay range
(minimum and maximum pay rates).

Examine the benchmark jobs in this case again and determine which ones are sufficiently similar for compen-
sation purposes. Do this by revisiting the job evaluation results.

Task H

Create pay grades by combining any benchmark jobs that are substantially comparable for pay purposes.
Clearly label your pay grades and explain why you combined any benchmark jobs to form a grade

The final step to designing the pay structure is to set the pay ranges for each pay grade. Pay ranges create
upper and lower pay rates (on the Y axis) for each job in the pay grade. Each pay grade will have a minimum
and maximum pay rate. It is important to remember that all jobs in a pay grade will have the same minimum
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and maximum pay rates.

Percent guidelines are used to determine how far above and below the midpoint the pay range will reach. For
example, the maximum might be 10 percent above the midpoint and the minimum might be 10 percent below
the midpoint.

The percent guidelines, based on input from the job evaluation committee, are:

• Clerical and office positions: 10 percent above and below the midpoint.
• Entry to mid-level professional and management positions: 30 percent above and below the
midpoint.

Task I

Use your answer to Task H to determine the pay range (i.e., minimum and maximum) for each pay grade

Task J

Given the pay structure you have generated, consider the following:

• Does this pay structure make good business sense? Do you think it is consistent with the organiza-
tion's business strategy?
• What are the implications of this pay structure for other HR systems, such as retention and recruit-
ing?

References

Milkovich, G. , and Newman, J. (2008). Compensation.McGraw-Hill Irwin.

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O*NET. Available at http://online.onetcenter.org.

Other Compensation Texts

Bergmann, T. , and Scarpello, V. (2002). Compensation decision making. Southwestern.

Martocchio, J. (2006). Strategic Compensation. Pearson/Prentice Hall.

Relevant Websites

WorldAtWork:www.worldatwork.org.

Society for Human Resource Management:www.shrm.org.

Economic Research Institute:www.eridlc.com.

https://doi.org/10.4135/9781473956384

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