3P Pay for Position – Fixed Pay

29 – 30 October 2014

Satya Radjasa
Talent Consulting, Mercer
29-30 October 2014
x

Section 1

Introduction

MERCER 27 October 2014 2

Agenda

Day 1 Day 2
• Introduction • External Analysis
• The Business Case of Rewards • Determining Pay Policy
• ASEAN and Indonesian Reward Trends • Salary Structure Concepts and
Principles
• Salary Survey and Market Data Selection
• Development of Salary
• Fixed Pay Strategy
Structure
• Internal Analysis
• Transition processes and
communications
• Annual increment matrix
• Pay review process

MERCER
Getting To Know Each Other
Exercise/Activity

Introduce yourself by telling us . . .

• Your name
• Your company’s name and a little about your company
• A little about your job and experience
• Your personal learning objective from this workshop

MERCER
Ground Rules

• Feel free to ask questions at any point during the session

• Be inclusive and get others involved in discussion.

• Treat each other with respect and listen with an open mind

• Turn mobile phones / blackberry off or to silent

• No side conversations during the session

MERCER
Course objectives

At the end of this course, you will build your understanding about:
• Fixed pay strategy
• The basic terminology used in compensation management
• Internal pay analysis and pay benchmarking
• What are fundamentals of a good base pay structure
• Transitioning to new structures
• Conducting pay reviews and the business case for change

MERCER
x

Section 2

The Business Case of Rewards

MERCER 27 October 2014 7

 Reward is becoming one of the
top HR issues in Indonesia

Why is that happening?..

MERCER
 Evolution of Employee Turnover in Indonesia

• Consistent year on year upward trends

• Hot Jobs are significantly outpacing other jobs in employee turnover

• Paradigm shift, reward is shifting its strategic nature

Industry 2011 2012 2013 2014 *
All Industries 8.5% 8.8% 9.8% 5.2%
Consumer Goods 9.6% 9.5% 9.1% 4.6%
Automotive 6.4% 5.5% 5.4% 2.3% What is the
Chemical 6.3% 6.6% 6.2% 1.9% “hidden”
Mining 6.0% 5.2% 6.1% 1.8% cost for
this?
Pharmaceutical 14.0% 12.4% 12.2% 5.6%
Banking 16.2% 17.1% 17.9% 9.4%
Oil and Gas 7.0% 7.2% 7.1% 3.8%
Source: 2011 - 2013 Indonesia TRS All Industries
*) 2014 H1 Market Pulse Survey
**) Mining and Mining Service is represented by Energy Industry on Market Pulse

MERCER 27 October 2014 9

 The “Hidden” Cost of Employee Turnovers
Understand the “WHY” reason of employees leaving your organization

Are you aware of the cost of employee

turnover

Financial Knowledge
cost loss

And why they

Recruitment Morale
cost Hidden Impact LEAVE your organization
Cost of
2012 Market Pulse Survey
Employee
Turnover

MERCER 27 October 2014 10

 The KPI Evolution…

Shifting the strategic focus of

reward…

MERCER
 The Case of Reward Strategy
And how it affects the way organization is behaving

Affecting Profitability of Organization

• Can go up to 80% of company’s cost
• Take it as a given cost, often properly ill managed

Reward has a
Drives Behaviors, Culture and Productivity
direct,
• Poorly design rewards will drives the wrong behaviors
tangible and • Drives productivity, turnover and intent to stay
measurable • Very difficult to change in Indonesian context
impact
Driver of Growth if Align to Business Strategy
• Drives people to work to common objectives

MERCER 27 October 2014 12

 Section 3

ASEAN and Indonesian Reward Trends

MERCER 27 October 2014 13

 Indonesia is becoming more important within ASEAN Market

• Indonesia rises from

28% of ASEAN 6 to
39% by 2012 (and
2020).
• Vietnam rises from
5% in 2000 to 7% in
2012 and 10% by
2020.
• Thailand is No.2 but
drops from 21% in
2000 to 16% in 2012
and 17% in 2020.

ASEAN due for

realignment by 2020

Indonesia’s stable economic growth impacted to the growing number of MACs

(Middle Class & Affluent Consumers) where it’s number is projected to double
between 2012 and 2020, from 74 million to 141 million.
MERCER 27 October 2014 14
APAC Turnover Comparison
Voluntary Turnover Rate
Voluntary Turnover Rate
ID 17.0%
9.8%
14.8% 14.8%
13.6% 13.2%
12.3% 12.3% 12.6%
11.3% 11.0% 11.4%
10.5%
9.5%
8.8%

5.8%

Pakistan
Japan

South Korea
Malaysia

Singapore
Bangladesh

New Zealand

Vietnam
India
China

Taiwan
Hong Kong

Philippines

Thailand
Australia

Mercer Workforce Metrics : Executive Summary Report 2013 and 2014 H1

Market Pulse Survey
MERCER 27 October 2014 15
 Asia Pay Differential
Base Salary & Guaranteed Cash Differential Comparison
100%
Indonesia 100%
100%
95%
Vietnam 96%
89%
173%
Singapore 156%
350%
136%
China 130%
126%
98%
Malaysia 110%
135%
Thailand 124%
138% Base Salary
128%
78%
India 75%
73%
0% 50% 100% 150% 200% 250% 300% 350% 400%

Sr Management Middle Management Jr Professional

100%
Indonesia 100%
100%
86%
Vietnam 93%
90%
150%
Singapore 145%
235%
Allowance driven reward 120%
China 115%
for Indonesia 120%
Malaysia
99%
118%
121%
Guaranteed
127% Cash
Thailand 134%
128%
92%
India 85%
86%
0% 50% 100% 150% 200% 250%

Sr Management Middle Management Jr Professional

MERCER 27 October 2014 16
Indonesia Reward Market
Wide pay differential from one industry sector to the other

Know who you are competing with

135%
Oil and Gas 145%

152%
Banking
142%
145%
Mining 137%
119%
Hi-Tech 117%

126%
Telecom
114%
107%
Mining Services 112%

100%
All Industries 100%
86%
Consumer Goods 98%
85%
Total Cash
Manufacturing 90%
74% Base Salary
Shipping and Logistics 82%

0% 20% 40% 60% 80% 100% 120% 140% 160%

MERCER 27 October 2014 17

Variable Pay Trends
Indonesia’s Performance Culture is better than ASEAN?

• Does this means that Indonesia has higher performance culture compare to other ASEAN
countries?
• Knowing this fact, are we differentiating variable payout significantly different between
average and top performers?

MERCER
Average Variable Bonus by Employee Level

MERCER Source: 2013 ID TRS All Industry

Average Variable Bonus by Industry

MERCER Source: 2013 ID TRS All Industry

Compensation Mix by Employee Level – All Industries

MERCER Source: 2013 ID TRS All Industry

Remuneration Mix by management level – All organizations

MERCER Source: 2013 Indonesia TRS All Industries

 Other trends…

MERCER
Other Reward Trends
Prevalent Trends in Indonesia

Several rewards trend that are available in the market are as follows:

Sign on Bonus: Bonus that are given upon employee joining and function as
sweetener. Typically up to 20% of annual base pay.

Retention Bonus: Special bonus that are given to selected target of

population (high performers, scarce talent in the market) with multiple
mechanism from deferred cash scheme and/or additional stock grant.

Spot Bonus: Discretion bonus that are given upon achievement of

projects or initiatives.

Club Membership: Benefits that are given to typically mid management and
up. Can be in the form of club health membership or golf membership.

MERCER Source: Mercer Indonesia

Other Reward Trends
Prevalent Trends in Indonesia

Indonesian reward market is relatively balanced in terms of reward mix with

various “unique” benefits that might not be popular in other markets
What is the type
of Indonesia
reward market?
From Mercer Indonesia salary survey database, it is identified that some
popular benefits that appeal to employees in Indonesia are:
 Flexible Benefits
 Car Benefits
 Housing Benefits
What does Mercer  Insurance Benefits (on top of regulated statutory benefits)
Indonesia salary  Health Care Benefits
survey say?  Soft Loan Benefits
 Pension Benefits (on top of regulated statutory benefits)
 Paid Vacation Benefits
 Club Membership Benefits

What does
differentiate the Some of the benefits above are not available for all levels of employees with
benefit some differentiating factors for eligibility are:
eligibility?
 Job Levels (Car Benefits, Paid Vacation & Club Memberships)
 Years of Service (Housing Benefits, Soft Loan Benefits)

MERCER Source: Mercer Indonesia

Life span
Employees have different needs during different life stages

Below 30 years old 30 – <40 years old 40 – <50 years old Above 50 years old

20 25 30 35 40 45 50 55 60 AGE

Start Family Parenthood Retirement

Enter Workforce - Flex working - Flex working - Life/personal
- Allowances arrangements arrangements accident insurance
- Training -Supplementary - Supplementary - Supplementary
housing benefits medical benefits* retirement benefits

MERCER 27 October 2014 26

Attract & retain key talents are priorities
The development of career paths is crucial

Career &
Benefit Younger employees rank career paths
Development
as among the top 3 Total Rewards
elements that would matter the most to
Compensation Total Work Lifestyle them
Rewards
Element

Generation Y Generation X Baby Boomers Traditionalist

Element of Total Rewards (18 to 29) (30 to 42) (43 to 60) s (60+)
Base Pay 2 1 2 3
Short-Term Incentives 4 2 1 4
Compensation Long-Term Incentives & Deferred
9 5 5 5
Comp
Recognition 3 7 7 8

Retirement 12 12 3 1

Benefits Health & Welfare 10 4 4 2

Perquisites 13 13 12 9

Performance Management 5 8 6 10

Careers & Career Pathing 1 3 8 12

Development Training Programs 6 6 10 11
Global Mobility 7 10 11 13

Time-off 11 11 13 7
Work Lifestyle
MERCER Alternative Work Arrangements 8
27 October 2014 9 9 6 27
 Executive Rewards Trend in
Indonesia

MERCER
Executive Compensation
The emerging trends of Long Term Incentive Plans

…but the condition will

Shifted in coming
years

% of organizations

MERCER
Executive Compensation
Practices in Indonesia

Restricted stock and performance shares However, the award of long term incentives
plan are the most widely used LTIP vehicles is primarily a practice among multinationals.
in Indonesia

Restricted Stock 42% BUMN

and Local
20%

Stock Options 27%

MNC 80%

Performance Shares 31%

Typical vesting period for LTIP in Indonesia

ranging from 2-5 years with 3 years of
vesting is the most commonly found plan

MERCER
 Section 4

Salary Survey 101

MERCER 27 October 2014 31

 What is market data? What
insights that it could give
organization?

How does it work?

… Is a set of collected data that provides insights on trends, values and policies which helps
organization makes strategic reward intervention
MERCER
 Salary Surveys 101
The basic concepts of where and how you should benchmark your
organization

What is the
What is Salary Why do you Which one is
valid source of
Surveys? need it? the best?
data?

MERCER 27 October 2014 33

 Salary Surveys 101
The basic concepts of where and how you should benchmark your
organization

What is the
What is Salary Why do you Which one is
valid source of
Surveys? need it? the best?
data?

 A composite of data that consist

of pay practice (cash & non-
cash) for multiple industries
 Analysis on current market rate
pay for specific jobs, grades
and levels

MERCER 27 October 2014 34

 Salary Surveys 101
The basic concepts of where and how you should benchmark your
organization

What is the
What is Salary Why do you Which one is
valid source of
Surveys? need it? the best?
data?

 Apple to apple job comparison

 Determine market
competitiveness
 Provide statistics and key
market trends
 Provide information for salary
budgeting purposes

MERCER 27 October 2014 35

 Salary Surveys 101
The basic concepts of where and how you should benchmark your
organization

What is the
What is Salary Why do you Which one is
valid source of
Surveys? need it? the best?
data?

Informal
 Grapevine gossips Formal
 Media (newspaper, social media, etc) Comprehensive providers
 Recruitment agencies (e.g. leading consulting firms)
 Official government release data

MERCER 27 October 2014 36

 Salary Surveys 101
The basic concepts of where and how you should benchmark your
organization

What is the
What is Salary Why do you Which one is
valid source of
Surveys? need it? the best?
data?

MERCER 27 October 2014 37

 Salary Surveys 101
Features of a reliable salary survey

Participant profile Data collection & processing

 Status of participant list in database  Comprehensive data collection
 Consistency of database process
 Global reach of database  Roles coverage
 Up to date data
 Quality control
 Data confidentiality

MERCER 27 October 2014 38

Components of compensation
Scope of compensation components
Mercer’s Context Mercer’s Definitions
• Annual Base Salary (COMP1)
covers basic salary, THR and fixed
annual bonus. Annual Base Salary
12 months base salary, COMP1
• Annual Guaranteed Cash THR, and other fixed bonus
(COMP2) covers COMP1 plus
guaranteed allowances.
Compensation components that
Guaranteed Allowances
fall into the category of e.g. Phone, House, Site,
“Allowances” is more fixed in Education, Competency COMP2
nature, and does not require an and Uniform Allowances
annual increase.

• Annual Total Cash (COMP3) Variable Pay:

covers COMP2 plus variable pay Variable Bonus COMP3
or Short-Term Incentives Sales Incentives

• Annual Total Cash + LTI (COMP

4) covers COMP3 plus Long-term Long-Term Incentives COMP4
Incentives (LTI)
Benefits
• Annual Total Employment Cost
Medical, Car Benefit, Loan
(COMP 5) covers COMP4 plus COMP5
LI & AD&D, Retirement
non-cash benefits.

MERCER 27 October 2014 39

The Mercer Advantage: Total Remuneration Survey

423 PARTICIPATING COMPANIES

Our number of participants keep on increasing every year and we maintain 90% renewal rate

Other
Industries
34% Automotive
5%
Pharmaceutical
9%
Chemical
13% 2013 Remuneration Survey
Mining Services
2%
participant composition

Mining
5% Consumer
Goods
High Tech 15%
17%

*preliminary number
MERCER 27 October 2014 40
 Section 5

Fixed Pay Strategy

MERCER 27 October 2014 41

Three Systems of Evaluation – 3P

Role Analysis / Performance

Position Clarification
Evaluation Evaluation
Objective
Setting
Position
Evaluation Performance
Review

Compensation

Person Development

Person Evaluation

MERCER
Components of compensation

Annual Base Salary =

Comp 1
monthly base x number of months guaranteed

Annual Guaranteed Cash =

Comp 2
Comp 1 + Allowances

Annual Total Cash =

Comp 3
Comp 2 + variable cash

Annual Total Cash + LTI =

Comp 4
Comp 3 + Long-term Incentives

Annual Total Remuneration =

Comp 5
Comp 4 + Benefits and Perquisites

MERCER
 Good compensation design considers four equally important
perspectives

COST PERSPECTIVE EMPLOYER PERSPECTIVE

How can compensation What are the workforce needs?
programs be designed to be
affordable and sustainable?

EXTERNAL PERSPECTIVE EMPLOYEE PERSPECTIVE

What are the labor and related How to create a compelling
rewards environments in which value proposition?
the company competes?

MERCER
Objectives of Compensation

• Talent attraction – To be able to attract, retain and motivate

individuals to achieve organisation’s objectives

• Cost efficiency – To provide a cost effective total rewards program

that is responsive to organisational and employee needs

• Performance – to recognise individual and group performance and

contributions meeting short and long term organisational objectives

• Equity – to provide equitable and fair pay opportunity and pay levels

• Compliance – to comply with legal / regulatory requirements

• Flexible – to be able to adapt to organisational changes

Are there any other compensation objectives an

organisation should have ??

MERCER
Total Rewards framework
Holistic: Determining the right mix

Employer perspective …
Money Careers Work/Life
Compensation Benefits
Time off
Performance and
Base pay Retirement accountability Wellness programs
Guaranteed “bonuses” Savings Career opportunity and Dependent care
Short-term incentives Medical / Dental / Vision pathing Workplace flexibility
/ Prescription Drug, etc. Mobility
Long-term incentives Non-financial and status
Life insurance Leadership recognition
Financial allowances
Short- and long-term Experiential rewards Commuter programs
Financial recognition
disability
programs Talent development Workplace facilities and
Accident coverage perquisites
Deferred compensation

Employee perspective …
Fixed pay Secure retirement Learning Leave practices
Variable compensation Protection Opportunities Flexibility

MERCER
Review your Total Rewards strategy
Sample blueprint
You cannot look at Fixed Pay in isolation

Compensation Benefits

Annual Long-term Group

Base Pay Retirement Perquisites
incentives incentives benefits

Reward
Attract and individual, Link to
Role of Personal risk Wealth Tax
reward element
retain; reward business unit shareholder
management accumulation efficiency
building skills and corporate value creation
performance
Base + STI + Leading edge
Competitive 25th Base + STI = Market
positioning
LTI = 90th design; 50th 50th percentile
percentile 75th percentile practices
percentile percentile

Rewards Facilitate
Impact of Risk Performance Desirable Employment
positioning
long-term orderly
tolerance orientation employer brand
growth retirement
Retirement
Acceptance
Cost and income Cost;
rate turnover; Business Stock price
Metrics value adequacy; commitment
appropriate results growth
delivered financial index
skills
management
MERCER
Business Alignment Measurement
Consequences of Misalignment

Consequences of Consequences of
Strategic Business Misalignment Competitive Positioning Misalignment

• Reward structure influences composition of • Attraction

workforce - capabilities and attitudes, – Difficulty securing the quality of
through attraction and retention patterns. leadership or talents to drive strategic
initiatives
• Jeopardize accomplishment of strategic - Reflects corporate strategy, leadership,
goals (i.e. paying for the wrong objective, or and risk sharing with executives
interest) - Internal & external branding
• Paying strictly for productivity (e.g., piece - Stall recruitment and lead to understaffing
rates), other factors need to be considered problems
– Negligence in maintenance of high-cost • Motivation & morale
capital equipment / safety – Potential unexpected turnover and errors
– Quality of products in work / omissions etc

• Nature of pay-performance links • Retention

– Reinforcement of behaviors. – Affects ability to retain required
(e.g., teamwork vs individualism) workforce: pull factors
– Loss of key employees in whom critical
– Sharing of information
organizational knowledge and experience
resides

MERCER
Conducting a pay review
Understand What’s Working & What’s Not

Analyze effectiveness of current compensation programs:

• Review issues and difficulties from the current year
• Consider employee focus groups
• Interview key stakeholders
• Interview the Senior Management Team
• Review employee opinion surveys

Determine the enhancements and changes required:

• Interview key stakeholders
• Interview the Senior Management

For any change to be made, ENSURE the commitment of the senior

management & relevant stakeholders are obtained!
MERCER
Conducting a pay review
Objectives

Compensation Management is • Appropriate reallocation of total reward mix

all about providing: • Calculation and allocation of reward increases
• Effectiveness and efficiency of current program

the right rewards

• Critical employees for organizational success
• Employees with hot skills in the market
to the right people • High performers who are succeeding

for the right reasons • Motivating performance and achieving results

• Developing skills and competencies
• Retaining talent
at the right time
• Aligning to corporate culture / climate

• Facilitating movements within the organization

MERCER
Potential grading structures

Spot Salaries Broad Bands Multiple Grades

x x x
x x
x x
x
x
$ x $ $

Jobs Jobs Jobs

 Individual pay levels  Gives some broad job  “Traditional” system

 Can be market classification  Often underpinned by
 Reduced emphasis on JE
related status  Can give high control
 Flexible but may lead  Reduced emphasis on  Issues of flexibility and
to issues of internal job weight - more on of hierarchy / status
relativities, cost competencies/market  Pay progression only
rates possible through job
control  Potential internal promotion
relativity problems

MERCER
The Right Grading Structure Depends on a Number of Factors

Traditional Grades Broadbanding

People Risk averse Flexible/mobile work-force
Tolerance for ambiguity
High trust level
Strong management communication/decision-making
skills
Processes Well-defined policies and procedures Employee-driven career development processes
Management monitoring Process for collecting and distributing market data
Structure Well-defined/stable job/role structure Flat, responsive organization
Hierarchical Volatile organizational structure
Title emphasis Broad role/responsibility view
Narrow role/responsibility view High teamwork/collaboration
Lateral/cross functional movement
Information/ Top-down Open/candid communication
Knowledge Limited need-to-know Systematic tracking/monitoring
Flows
Little institutional knowledge need Little institutional knowledge need
Decision-Making Central Decentralized
HR review and/or accountability Employee empowerment supported

MERCER
 Section 6

Internal Analysis

MERCER 27 October 2014 53

Internal Equity Analysis Tells Us…

• Our real pay practices from:

– Organisational Perspective
– Employee Perspective
– Job Value Perspective
• How our decisions for the future if made, will affect the ‘equity’ and ‘fairness’ of
pay between individuals with a similar job value?
• A basis for assessing actual pay practices to the pay policy

MERCER
Internal Equity Analysis (COMP1)
Distribution of incumbent data against Position Class (PC)

1,200,000 Legend:

Actual Incumbent
Data
Median Incumbent
1,000,000
Data
Company Regressed
Trendline

800,000

600,000
y = 156.1e0.1419x

400,000

200,000

-
40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

Compa-ratio distribution <70% 70% - 100% 100% - 130% 130%

Proportion
MERCER of total employee 27% 39% 26% 8%
Case Exercise 2 : Internal equity analysis

MERCER
 Section 7

External Analysis

MERCER 27 October 2014 57

External Analysis Tells Us…

• How our pay practices stack up against our market comparator group?
– Company vs. Market
– Function vs. Market
– Position vs. Market
• Allows us to decide pay practices
– Across the Organisation
– Premiums or Discounts allowable for specific Functions
– Premiums or Discounts allowable for specific Positions
• Where the competitiveness is for each compensation component?
– Annual Base Salaries
– Variable Pay
– Annual Total Cash

MERCER
External Competitiveness Measurement
Company vs Market

COMP 1 Annual Base Salary

250,000
Coy A

75P

200,000
MD

25P

150,000

100,000

50,000

0
MERCER 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61
Case Exercise 2 : External Analysis

MERCER
 Section 8

Salary Structure Development

MERCER 27 October 2014 61

What is Salary Structure?

• Salary Structure is the 200

Currency USD 000's
series of pay ranges Maximum
180
which determine a
minimum and a maximum 160

of pay rate of each grade. Midpoint

140

• Jobs grouped in the same 120

grade should have the Minimum

100
same earning opportunity.
80

60

40

20
Grade
0
1 2 3 4 5 6 7 8

MERCER
What is Pay Policy Line?

Pay Policy Line is the “target pay positioning” that the organization
determines based on comparing with market data. It’s essentially the
organization’s reward philosophy.

Competitive Pay Objectives:

• P40th or 45th - aim pay ranges below the average competitive market.
• P50th (market median) - set the target pay position to reflect the mid-range of
the competitive marketplace.
• P60th or 75th - aim pay ranges above the average of the competitive market.
• P90th - aim the target pay position as a leader in the competitive market.
Set structural policy
• lead, lag or lead/lag  This will help you determine if you need to age the data

MERCER
Comparison Ratio Analysis
(also known as Compa Ratio)

Compa Ratio = Actual Salary

Reference Salary

The Reference Salary is set based on the policy positioning

adopted by the organization
Reference
Example : Salary = $13,500 Salary
Reference Salary = $15,000

13,500 Actual
Compa Ratio = 15,000 Salary
= 0.90 or 90%
or 90
MERCER
 What is the purpose of a salary structure?

The salary structure underpins many HR structures...

Sales Call Centre HR Finance

Senior
What benefits to
How to give each level?
encourage x x Reward - benefits
mobility?
x

What title?
Entry x How to progress?
Level Promotion
Recruitment and careers
and selection What is important?
What is expected? How to Reward each employee group?
Performance, targets Base salary, variable pay
and appraisal

MERCER
Single or Multiple Salary Structure?

To have a single set of ranges or multiple structures is prompted by the

organization's culture, communication needs and market competitiveness.
• Some organizations distinguish segments of the job population and
communicate and administer pay quite differently.
• Other organizations are more comfortable with the administrative advantages
of a single structure.

This must be established early during the structure design.

A quick analysis of a scatter diagram may provide a first indicator. If there are
disjointed groupings or distinct breaks in the actual pay rate of various positions, the
salary structure designer may consider having more than one salary structure.

MERCER
Salary Structure Design
Key Steps

Do we need a formal structure, and if so, what type of

base pay structure do we want ?
Pay Structure

What should the pay levels be within the structure. How

should they link to external relativities?

How should individual pay level progression be Pay Progression

managed?

How should the system be managed / costs controlled? Salary Administration

MERCER
Set Reference Salaries

• Analyse desired position vs. capacity to pay

• Determine reference salaries
– within capacity to pay
– in line with desired market position
– addressing issues of recruitment and retention

MERCER
What is Pay Range?

Pay range is a full range of pay opportunity for a job and provides enough flexibility for
job holders to grow within each grade/level.

Maximum  Maximum is a maximum value of a pay range

(i.e. more senior or experienced employees)

 Mid point is a middle pay value of a pay range -

Pay represents the market competitiveness for a job
Midpoint
Range or grade/level (i.e. fully qualified employee)

 Minimum is a minimum value of a pay range

(i.e. new or developing employee)
Minimum

MERCER
What is Pay Range?
How it works...

Remember…

A “JOB” is assigned to a grade/ level:

 Minimum and maximum pay range is established for each job or grade

An “EMPLOYEE” is paid within the grade/ level based on sustained level of:
 Individual performance
 Experience
 Competency growth & potential

MERCER
What is Range Spread?

Range Spread is the distance between minimum and maximum expressed by %

• Narrower Range Spread – used for lower grade jobs which individuals will
progress rapidly through a development
• Wider Range Spread – used when combining jobs with widely varying
market values into a single grade and pay range (e.g. broadband)

MERCER
Salary Range Spread Issues
($ pa)

120% MAXIMUM 120,000

• Does it cover all staff?

• Are the grades consistent?
110% 110,000

• One or more sites?

• Are there skill shortages?
100% MIDPOINT 100,000
• Are there particular TARGET
MARKET
attraction/retention risks? POSITIONING

• What is the culture or level of trust? 90% 90,000

• What does base salary reward?

80% MINIMUM 80,000

MERCER
What is Midpoint Progression?

Midpoint Progression represents pay differences in moving through a salary structure.

Midpoint Progression Rate (MPR) is the percentage change in midpoint value from
one adjacent pay grade to the next.

% Midpoint Progression = (Midpoint Grade 2 – Midpoint Grade 1)

Midpoint Grade 1

Pay Grade 2

Pay Grade 1
Maximum

Midpoint
Progression
Midpoint

MERCER
Minimum
Final Salary Structure and Ranges - example

Company XYZ Pay Structure

Grade Midpoint PC Min Mid Max Range Spread
1 41 28,016 32,960 37,904 -15% to +15%
2 44 34,238 40,280 46,322 -15% to +15%
3 47 39,000 48,750 58,500 -20% to +20%
4 50 47,488 59,360 71,232 -20% to +20%
5 53 58,712 73,390 88,068 -20% to +20%
6 56 73,960 92,450 110,940 -20% to +20%

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Case Exercise 3 Salary Structure & Cost Implication

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 Section 9

Transition Process and Communications

MERCER 27 October 2014 76

Transitioning Employees

The process for moving employees in the organization to the new salary
structure.
During the planning stages, these are some questions that need to be
answered:

 How openly will the compensation system and each of its components be
communicated?
 What information will be shared?

 Who are the various audiences?

 When should communication occur? To whom?

 How should communication occur---newsletters, through managers, via large or

small group meetings, by video, etc.?
 Who will prepare the communications?

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Consideration Factors

• Current employees’ pay position vs the new job grade/level & pay
range
• Performance rating and salary increase of the individual (e.g.
recent performance or average for the past 3 years)
• Potential of the individual
• Overall affordability by the organization (budget)
• Managing outliers
• It is important to have CEO and Senior Management involved in
the exercise

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Transition Approaches

Possible approaches depending on cost:

 Transit all employees to new salary structure at once

 Transit employees to new salary structure into phases:

– By type of employees’ performance: High performer first, average

performer later

– By budget: 50% adjustment in the 1st year, 30% adjustment in the 2nd year
and remaining 20% in the 3rd year

– By department: most critical department first, less critical department later

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Transitioning Guidelines

“Red dots” - current salary falls

above maximum of the new
range
 Those who are paid more than their salary range maximums should be “red
circled’ for special treatment. There are three common pay treatment
Max approaches for those who are paid above their respective salary range
Q3 maximum
– Freeze the salary
– Consider on a case-by-case basis
Q2
– Give a very small salary increase until the range maximum “catches up”
 Those who are paid less than their salary range minimums should be “green
circled’ for special treatment. There are two common pay treatment approaches
Q1 for those who are paid below their respective salary range minimum
– Bring their pay to the minimum of the new salary range all at once
– Develop a special increase plan to bring the salary into the range in a
defined period of time, often increasing the frequency of increases compared
“Green dots” - current to others
salary falls below minimum
of the new range

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Pay Management Guidelines

Pay Administrative Policies and Procedures provide answers to specific

questions related to making pay decisions.
These guidelines may be communicated in varying ways. Guidelines should
define the forms, processes, information flow, and approvals required. Some
typical topics include:

1. Developing salary offers for new hires

2. Salary adjustment policy
3. Periodic updates

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Starting Rate

• Starting rate will not be set below the Pay Zone

minimum of salary range
• External candidate’s rate will be reviewed in Employees
consistently
Mature
consideration of: exceeding
Zone expectations
— Prevailing market rate (actual pay of
candidate vs positioning in target pay Experienced
grade) Pay
employees
Competent meeting
— Job design policy
Zone
expectations will
be paid at
line
TARGET
— Personal experience position

— Comparison with similarly-situated Learning Inexperienced

hires or
peers Zone employees not
meeting
• Ideally positioned in the “learning zone”. expectations
Discuss experience and practicality

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Salary Adjustment Policy

The questions that should be answered include:

• How frequently will salaries be reviewed for adjustment?
• Under what circumstances can adjustments be made to salaries?
• Under what circumstances would salary be decreased?
• Who can recommend salary changes?
• Who can approve salary changes?
• What forms are used to initiate the process?

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Regular Updates

The questions that should be answered include:

• How will job documentation be maintained and kept up-to-date?
• How will job grade be maintained/changed?
• What is the process for evaluating new/changed jobs and for reviewing
of existing evaluations?
• What will be the process and timing for reviewing market data?
• What should be the process for updating the salary structure on a
routine basis?
• What will be the process for determining the appropriate salary
adjustments?

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 Section 9

Annual Increment

MERCER 27 October 2014 85

Merit Increase Mechanisms

Annual Review – merit increase may recognize what gets done

(performance) and/or how work gets done (competencies)
Common methods of conducting an annual review:

1. Budget
— “Pool” of budget is allocated to managers (e.g., 10% of salaries).
— Managers distribute pay increases based on judgments of individual and
relative performance.
— Prone to internal inequity and subjectivity since salary increases are
subject to individual judgment of the managers – an excellent performer
could get a lesser increase than another excellent performer.

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Merit Increase Mechanisms

2. Guidelines
— Best performers receive the largest salary increase.
— “Suggested” increase percentages are provided by HR.
— Managers decide actual percentages increases within budget based on
various factors such as inflation rate, market movement, company
performance, historical data or a combination.
— Lessens bias and subjectivity since there is a corresponding percent
increase set for every performance level. Does not distinguishes a
person’s position in the range.

Performance Level Range of Suggested Increases

Excellent 10%
Very Good 7%
Good 3%
Unsatisfactory 0%

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Merit Increase Mechanisms

3. Matrix (also known as salary increase guide)

— Recognizes both individual performances and position in salary range.
— Least bias and subjectivity and can distinguish a person’s position in the
range.
— Least ownership by line managers

Other things being equal Performance

higher performance calls Rating/
<80% 80-93% 94-107%
108-
>120%
Internal Equity 120%
for a high percentage
Ratio
increase to base pay.
Outstanding 18% 16% 14% 12% 4%

Similarly, at the same Exceeds

16% 14% 12% 10% 4%
performance level, Requirements

employees with lower Meets

14% 12% 10% 8% 4%
Requirements
compa-ratios earn a
higher percentage Needs
10% 8% 6% 4% 0%
Improvement
increase
Unsatisfactory 0% 0% 0% 0% 0%

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Annual Increment Matrix – Alternative approach

Green
Q1 Q2 Q3 Q4 Red Zone
Zone

1. General Increase 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

2. Performance-based Increase

A Excellent 4.5% 4.0% 3.5% 3.5% 2.5% 2.0%

B Exceed Expectation 3.5% 3.0% 2.5% 2.5% 1.5% 1.0%

C Meet Expectation 2.5% 1.0% 1.0% 0.0% 0.0% 0.0%

D Partly Meet Expectation 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

3. Market Adjustment 4.0% 2.0% 0.0% 0.0% -2.0% -4.0%

Consider cost implications and employee expectations

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Merit Increase Mechanisms

4. Combination ( Budget + Guideline and Matrix)

Step 1 Salary budgets are allocated to managers using a cascading process:

Total Business Department Team

Company Group Head Leader
Budget Budget Budget Budget

Step 2 Team leaders given guideline and matrix for increases:

Position in Range
Performance Level Lower Third Middle Third Upper Third
Excellent 12 - 14% 11 - 13% 10 - 12%
Very good 8 - 9% 7 - 8% 6 - 7%
Good 4 - 5% 3 - 4% 2 - 3%
Unsatisfactory 0% 0% 0%

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Merit Increase Mechanisms

Remember…
• The Matrix is only a guide
• Don’t let this merit increase mechanism dictate what does not make sense,
especially when managing “high performers”

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 Section 10

Pay Review Process

MERCER 27 October 2014 92

Key factors for computation of pay review cost

Consider analysis of the following:

1. Market adjustment
2. Range adjustment
3. Promotion adjustment
4. Equity adjustment
5. Compa-ratio adjustment
6. Calculating recovery
7. Pay treatment for “overs” and “unders”
8. Performance distribution and the merit matrix

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1. Analysis of pay review cost

Market Movement
• The market movement is the expected change in base salary in the company’s target
markets (industry and geography). The market data incorporates all the adjustments made
by survey participants – there is no separate analysis
• Estimates of compensation markets movement in the coming year, say 8%.
Range Adjustment
• The amount of change applied to salary ranges
– Current salary ranges are based on market data for past year, with an aged factor
applied
– A need for recalibration annually, especially in a volatile labor market. E.g. high technology
environment, etc..
– Assume salary range midpoints are calculated using the aged actual market data. Using
the current market data, apply to the midpoints for each job grade
– Change the salary ranges to achieve agreed positioning for the year

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2. Analysis of pay review cost

Promotion Increases
• Each year promotions are planned – assess if this is likely to be a significant cost for the year
– Consider using time in job and performance ratings to predict
– Use the average pay (midpoint) for reference if you do not know who will be promoted

Equity Adjustment
• Made to bring incumbents who are below the new salary range minimum into the range
• May also be made to correct undesirable pay relationships within the salary range
• Is the sum of these two actions

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3. Analysis of pay review cost

Compa-Ratio Adjustment

• Once the other factors have been applied will the salary increase budget achieve our
objectives?
• If we wish to change the company’s compa-ratio to bring salary policy and practice
into closer alignment, then we must calculate a compa-ratio adjustment factor.
• Can be positive or negative.
– If your compa-ratio is higher than your new salary policy (>1.00), then a negative
adjustment may be indicated
– If compa-ratio improvement is needed you must consider ability to pay. Some
companies will make adjustment over time
New Hires
• To keep matters simple we recommend that new hires be budgeted in a separate
category

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4. Analysis of pay review cost

Recovery
• Recovery is the amount of money budgeted for salary adjustments each year that is not
spent due to turnover.
• It is the sum of salaries planned minus the sum of salaries actually
paid to the same population plus replacement hires.
• The purpose of calculating recovery is to reallocate it to the merit increase budget
Salary Increase Budget
• The salary increase budget is the incremental amount to be added to your current salary
budget
= Range adjustment + Promotion increases + Equity Adjustment +/- Compa Ratio
Adjustment + New positions
Merit Increase Budget
• The merit increase budget is the amount available for merit-based increases
= Range adjustment +/- Compa Ratio Adjustment RAF + Recovery

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Annual Compensation Update Report
Required Components within Report

• Introduction
– Describes what the report is and that it is part of an annual process
• Objectives
– Principle of paying the right people, the right amount for the right reasons with the desired
effect
– You would need to tailor to your organization specific needs, e.g. retain engineers, drive margin
improvements, encourage development, etc.
• Methodology
– Describe your process
– Who was involved?
– What did you measure? And How did you measure it?
• Findings
– You probably have many charts and graphs. General Managers don’t want to see all of them, pick
the ones that tell the story you need to tell
– Consider developing summary charts or tables
– Make all the charts, graphs, interview findings, etc in the appendix

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Annual Compensation Update Report
Required Components within Report

• Recommendations
– What needs to be changed? Not just fixed pay
– What changes do you recommend? Include standard update changes as well as design
changes, if any.
– How much will it cost?
– How will it be distributed? Include a copy of the merit matrix guide, etc

• Management approval
– This is a section that is added after you meet with management and gain their approval.
– It details what was approved, what wasn’t, the changes that management directed you to make.
– This is an important section because you will use it throughout the year as a guide to
implementation and next year as your starting point for next year

• Appendix
– Here is the place to add all the detail - be thorough because next year you (or your replacement)
will have many questions

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Program finish

• Feedback
• Certificates

MERCER
 Copyright 2013 Mercer. All rights reserved. This contains confidential and proprietary information of Mercer and is intended for
the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise
provided, in whole or in part, to any other person or entity, without Mercer’s permission.
The findings and / or opinions expressed herein are the intellectual property of Mercer and are subject to change without
notice.

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