A Roundtable Discussion: Market Based Pay Structures for “Reality Based” Pay July 2005

Objectives of Pay Structures

Attract, retain, reward, motivate Benchmark to appropriate/comparable “markets”, i.e., external equity Reconcile internal and external equity for “job slotting” in new pay range Remain legally compliant Be easily communicated and understood Be cost effective Reinforce and reflect the mission and values of ABC Remain unbiased and objective Build trust and buy-in

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Pay Structures in Support of Pay Philosophy

Business Strategy: ABC, Inc. requires and expects the best from its creative, energetic, knowledgeable, and capable people. Our first responsibility is to serve our clients. Pay Philosophy: We have developed a compensation program that creates enthusiasm in those who serve so that we will create enthusiasm in those whom we serve. To succeed in this endeavor, all ABC employees will be results-oriented, quality-focused, team-driven, cost-minded, and fulfillment seeking and be rewarded at or above the median of like positions in similar organizations.

Pay Structure: ABC Institution’s total compensation program (i.e., pay and benefits) supports our mission and strategy. It provides a competitive and affordable level of compensation for each employee in exchange for expected levels of performance and results. Total cash compensation may exceed that offered by comparable organizations provided individual, team, and/or the organization performance and results are exceptional and the organization realizes superior financial performance.

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Purpose of Pay Structures Method to determine fair, equitable and competitive salary levels Demonstrate that work levels and salary levels are established fairly Allow ease of compliance with outside agency requirements – thus helping to reduce financial risk to the organization

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Pay Structures Should Fit Companies in Various Stages in the Business Cycle Company Emphasis Long-term Long-and short-term Short- and long-term Short-term Threshold Growth Maturity Decline Cash Situation Acute Shortage All is reinvested Substantial

A pay structure that promotes stability has no place in an organization on the threshold of fast growth

Varies

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Pay Structure – fitting into compensation strategy

ABC Mission/Vision Performance Management Performance Management Direct Compensation Business Strategy Total Compensation Strategy Indirect Compensation (Benefits) Intrinsic Rewards (Individual Determines) Base Pay Variable Pay Pay Structure Having a compensation strategy is THE FIRST AND MOST CRITICAL step to creating an effective pay structure 6

Pay Structure – fitting into compensation strategy

Base Pay Strategy Job Value Pay “Mix” Pay Delivery External Value Internal Value Strategic Value

Desired Market Position Management Philosophy External Economic Environment Short- vs. Long term Orientation

Salary Structure Policies & Procedures Individual Pay Determination Pay structures shape base compensation Base compensation influences variable incentive pay Base compensation influences cash-based benefits Base compensation is the “new frontier” for reality based pay 7

Variability in use of market data

Job Analysis Market Data Emphasis Labor Market Data Collection and Analysis Job Content Evaluation Position Questionnaire

Job Evaluation

Job Content Emphasis Reconciliation of Internal and External Considerations Job Content Evaluation Labor Market Data Collection and Analysis Job Worth Hierarchy Pay Structure Reality based pay relies on absolute versus relative measures and baselines In adjusting to reality based pay – internal equity trumps external benchmarks 8

Typical Pay Structures Remain the Basis for Reality Based Pay

$40,000 $35,000 Range Spread = max pay - min pay minimum pay Midpoint Differential = ( mid-point of higher pay grade mid-point of lower pay grade -1 ) x 100 Compa-ratio = employee pay range mid-point Range Penetration = pay - range minimum range max - range min $30,000 Range Spread $25,000 Midpoint Differential $20,000 $15,000 1 2 3 Maximum Midpoint Minimum

Grade

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Reality Based Pay Dictate Using Multi-Dimension Based Approach

Many Multi-Dimension Based Approach Number of Job Characteristics Measured Point-Factor Approach Whole Job Market-Based Approach (JVM) One External Equity Internal Equity 10

Market Pricing Requires High Flexibility and Agility

MARKET PRICING ISSUES

Industry-specific for line jobs General industry for staff jobs Local for nonexempt and lower level exempt jobs Regional/national for middle management jobs National for executive jobs

Relevant Markets

• From whom you hire - or would like to hire - employees • To whom you lose - or are likely to lose - employees • Whose pay practices you need to know for competitive business reasons

Market Data Sources Data Validity

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Internal Hierarchies Trump External Hierarchies – New Pay Interdepartment Department A Department B Department C External Hierarchy Based on Market Data Department D Slot Jobs with no Market Data Based on Internal Hierarchy Salary Grades Reconcile Department A Reconcile Department B Reconcile Department C Reconcile Department D Job Value Matrix Intradepartment Reconcile Differences Between Departments Final, Organization- wide Job Hierarchy

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Questions of the Future

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The paradigm (prevailing general theory) shift to “reality based” pay started with –

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Demise of Dotcom – followed by

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Oversized total executive compensation – expressed by

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Overused external compensation surveys

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Reality based pay (the “New Pay”) focuses on internal equity more than on external comparisons

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Internal performance versus external comparison is what drives increases to share/stake holder investments

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Pay structures need to be rethought on the basis of “reality based” pay

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1801 Broadway, Suite 400 Denver, Colorado 80202 www.harlongroup.com

Bill Heck, Managing Principal 303.996.5695

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