V. Global Compensation Issues
Organizations with employees working throughout the world face some special
compensation issues. One significant issue is how to compensate employees from different
countries. Local wage scales vary significantly among countries. Costs of living standards
A. International Assignees
Multinational companies may staff their operations with a mixture of employees from
around the world.
The two primary approaches to international compensation for expatriates are:
Home-country based approach—it is the most commonly used method. The
overall objective is to maintain the expatriate’s standard of living in his or her
home country.
oHousing, taxes, and discretionary spending expenses are calculated based on
those items in the home country. The company pays the expatriate the
oThe home country approach can result in higher employer costs and more
Host-country based approach—it compensates the expatriate at the same level
VI. Developing a Base Pay System
The process incorporates information gathered while valuing jobs and analyzing pay
surveys—activities designed to ensure that the pay system is both internally and externally
equitable and in line with the organizational philosophy. The data compiled in these two
The two general approaches for valuing jobs are job evaluation and market pricing. Job
evaluation looks at pay levels within the company and market pricing looks outside the
company. Both methods use relative comparisons to determine the worth of jobs in an
A. Job Evaluation Methods
Ranking method—it is a simple system that places jobs in order, from highest to
Classification method—it is often used in public sector organizations.
Factor-comparison method—it is a complex quantitative method that combines
Point Factor Method
The most widely used job evaluation method, the point factor method, looks at
compensable factors in a group of similar jobs and assigns weights, or points, to
This method is relatively simple to use and considers the components of a job rather
than the total job. However, point factor systems have been criticized for reinforcing
traditional organizational structures and job rigidity. Although not perfect, the point
B. Market Pricing
While the point factor method has served employers well for many years, the trend is
moving to a more externally focused approach. More companies are moving to market
Key to market pricing is identifying relevant market pay data for jobs that are good
“matches” with the employer’s jobs, geographic considerations, and company strategies
C. Pay Surveys
A pay survey is a report based on research of compensation rates for workers
It is particularly important to identify common benchmark jobs—jobs that are found in
many other organizations. Often these jobs have stable content, are common across
Internet-Based Pay Information
HR professionals can access a wide range of pay data online. Employment-related
website such as salary.com and glassdoor.com provide data gathered from companies
Using Pay Surveys
The proper use of pay surveys involves evaluating many factors to determine if the
data are relevant and valid. The following questions should be answered for each
survey:
Participants—does the survey cover a realistic sample of the employers with
whom the organization competes for employees?
Broad-based—does the survey include data from employers of different sizes,
industries, and locales?
Timeliness—how current are the data (when was the survey conducted)?
Methodology—how established is the survey and how qualified are those who
conducted it?
Job matches—does the survey contain job summaries so that appropriate
matches to job descriptions can be made?
Details provided—does the survey report on base pay, incentive pay, and other
elements of compensation separately for comparison of the reward mix?
Pay Surveys and Legal Issues
One reason for employers to use outside sources for pay surveys is to avoid charges
that they are attempting to “price fix” wages. The concern is that employers might
collude to set wages and restrict employees from earning a true market wage.
Organizations are permitted to participate in surveys but only if they meet the
following conditions:
The survey must be administered by a third party such as a consultant or
The data must be more than three months old.
A minimum of five employers must participate in the survey. No single
All data must be aggregated and stripped of any identifying information.
In addition to antitrust considerations, companies participating in pay surveys must
safeguard employee privacy and provide only de-identified data so that specific
VII. Pay Structures
After job evaluations and pay survey data are gathered, pay structures can be developed.
Pay structures may be created for various categories of jobs such as hourly, salaried,
A. Pay Grades
When establishing a pay structure, organizations use pay grades to group individual
Setting Pay Grades Using Job Evaluation Points
One approach for determining pay grades uses job evaluation points or other data
generated from the traditional job evaluation methods. This process ties pay survey
information to job evaluation data by plotting a market line that shows the
Setting Pay Grades Using Market Banding
Closely linked to the use of market pricing to value jobs, market banding groups
B. Pay Ranges
Once pay grades are determined, the pay range for each pay grade must be established.
Using the market line as a starting point, the employer can determine minimum and
Broadbanding
The practice of using fewer pay grades with much broader ranges than in traditional
compensation systems is called broadbanding. Combining many grades into these
broad bands is designed to encourage horizontal movement and therefore more skill
C. Individual Pay
Once pay grades and pay ranges have been established, pay can be set for each
individual employee. Setting a range for each pay grade gives flexibility by allowing
Red-Circled Employees
A red-circled employee is an employee who is paid above the range for the job.
Several approaches can be used to bring a red-circled employee’s pay into line.
Although the fastest way would be to cut the employee’s pay, that approach is not
Green-Circled Employees
An individual whose pay is below the range for a job is a green-circled employee.
Promotion is a major contributor to this situation. Green-circled problems might also
result from opportunistic hiring when employees are earning below-market pay at
Pay Compression
One major problem many employers face is pay compression, which occurs when
pay differences among individuals with different levels of experience and
performance become small. Pay compression is frequently a result of labor market
VIII. Determining Pay Increases
Decisions about pay increases are important in the relationships between employees, their
managers, and the organization. Individuals express expectations about their pay and about
Pay increases can be determined in several ways, including performance, seniority, cost-of-
A. Performance-Based Increases
Some employers have shifted to more pay-for-performance philosophies and strategies.
Targeting High Performers
This approach focuses on providing the top-performing employees with significantly
higher pay raises. Some organizations target the top 10% of employees for
The primary reason for having such differentials is to reward and retain critical high-
Pay Adjustment Matrix
Integrating performance appraisal ratings with pay changes is done through the
The matrix considers two factors—the employee’s level of performance as rated in
an appraisal and the employee’s position in the pay range, which is often related to
The general objective is for all employees to be paid at approximately the pay-range
midpoint. To determine each individual employee’s standing in relationship to the
All employees whose compa-ratio is below 1.0 are paid below the pay range
midpoint; all employees whose compa-ratio is over 1.0 are paid above the pay range
B. Standardized Pay Adjustments
Companies that have an entitlement philosophy rely more on standardized pay
Seniority
Time spent in an organization or on a particular job, called seniority or tenure, can
be used as the basis for pay increases. Many employers have policies that require an
Cost-of-Living Adjustments
Another pay-raise practice is the use of a cost-of-living adjustment (COLA) whereby
every employee’s pay is increased to compensate for inflation and rising prices.
Often, these adjustments are tied to changes in the Consumer Price Index (CPI) or
Across-the-Board Increases
Some employers give across-the-board raises and call them merit raises, which they
are not. They are usually given as a percentage raise based on a standard market or
determination. If all employees get the same percentage pay increase, it is clearly not
Lump-Sum Increases
Most employees who receive pay increases, either for merit or for seniority, receive
an increase in the amount of their regular monthly or weekly paycheck. In contrast, a
The major advantage of an LSI plan is that it heightens employees’ awareness of
what their performance levels “merited.” Another advantage is that the firm can use
LSIs to slow down the increase of base pay and thus reduce or avoid the
compounding effect on succeeding raises. One disadvantage of LSI plans is that
C. Compensation Challenges
A number of concerns for managers affect compensation planning and administration.
Economic Recessions
During trying economic times, many organizations address shortfalls in revenue by
reducing employment-related expenses. Layoffs and reductions in workforce may be
Two-tier Wage Systems
As global competition has increased and low-skilled jobs have been sent offshore,
some companies have been saddled with high wage costs from decades of generous
Gender Pay Gap
Despite laws prohibiting pay discrimination on the basis of sex, there is a persistent
pay gap between men and women in the workplace. Women have been gaining