Once the external market has been surveyed (or the midpoint of the range has been decided upon), the range is structured as follows:

1) Determine how wide the range is to be (called range spread). The width is often determined by the reported minimums and maximums in the market. The range width should be expressed as a percentage, i.e. 40% range means that the maximum is 40% higher than the minimum.

2) Once the range width (spread) is determined, the math formula for arriving at the minimum is the midpoint divided by the number one (1) plus 1/2 of the range width percentage.

Example:	$7.00	midpoint
	40%	range spread
	$7.00 / 1.20 = $5.83     minimum

3) Once the minimum of the range has been calculated, the maximum is computed by multiplying the number one (1) plus the entire range spread.

Example:	$5.83	minimum
	40%	range spread
	$5.83 x 1.40 = $8.16     maximum

The above steps result in a range of:

$5.83 minimum       $7.00 midpoint       $8.16 maximum

The accuracy of the range can be tested by determining if the same value exists between minimum and midpoint as midpoint to maximum, and by dividing the maximum by one (1) plus the whole range spread (40%).

$8.16 / 1.40 = $5.83     minimum

The next step is to build the next range at a specific interval from the first range. This is done by determining how far apart one range is to be from the next. Often this is determined by the market information which indicates where pay level breaks occur. Once a decision has been made (expressed as a percentage), the formula is:

midpoint of 1st range multiplied by one (1) plus the percent determined.

Example:       $7.00       midpoint 1st range
$7.00 x 1.09 (9% interval between ranges) = $7.63 midpoint of new range.

Introduction

All organizations have a compensation plan, written or unwritten, formal or informal. For some organizations, the purpose of that plan may be merely to meet compliance requirements. For other organizations, the goal of the compensation plan may be to attract qualified employees, to retain those employees, and to motivate employees to direct their efforts towards achieving the goals of the organization. Regardless of the goal, size and complexity of a compensation plan, there are generally many easily-identified elements to any compensation plan. This commentary reviews these elements, poses questions management can use to determine the stance it would like to take regarding compensation, and offers some advice and recommendations on implementing these ideas. The topics that will be covered are development of a compensation philosophy, objectives of a base pay program, developing rates of pay for jobs, pay rates and increases, performance appraisal, maintaining and auditing a compensation plan.

Development of a Compensation Philosophy

Before an organization actually develops a compensation plan, there are several questions that need to be answered. Taking the time to consider and answer these questions will make the both the process of developing and administering a compensation plan much easier and will result in the development of a compensation plan that more closely matches the organization's goals and objectives.

What is the goal of the organization's compensation system? In addition to attracting and retaining qualified employees, is there an intent to reward employees for good performance, motivate good performance, and/or create or reinforce a particular type of organizational climate?

What is the communication policy? How is the organization going to communicate the compensation plan to employees once it has been developed? Is the organization prepared to evaluate the effectiveness of any such communication? If so, how?

How will decisions regarding pay be made? Who will be involved in these decisions? What decision guidelines will need to be developed?

What is the organization's desired market position relative to pay? Will the organization choose to pay market rates, above market or below market? How does the desired market position fit with other strategic goals? Are there any competitive factors involved that will determine the pay strategy?

What is the desired mix between benefits and cash? Since benefits are an important form of compensation, how does an organization use them to maximize the effectiveness of the compensation plan?

What does the organization pay for? Does it pay for performance or seniority or some combination of the two?

What is the role of performance appraisal in the organization? How important is performance appraisal and why?

How will the organization manage change to the compensation plan once it has been developed? What systems need to be in place to implement any changes including deciding when change is necessary and who will make these decisions?

How does the compensation philosophy and plan fit with the rest of the organization? How can the compensation practices reinforce other overall management philosophies and objectives?

Before delving into the details of how actually to pay people, there are many factors that impact a base pay program that an organization must consider. In general, every organization's base pay program has certain objectives. The principal ones are as follows:

• internal equity.
• external equity (or competitiveness),
• individual equity,
• process equity,
• performance or productivity incentives,
• maximum use of financial resources,
• compliance with laws and regulations, and
• administrative efficiency.

As will be shown in the following, all of these objectives must be balanced in the development of a sound base pay program. As these points are being reviewed, management should ask the following questions:

Is this point important to this organization? If so, how important?

What are the implications of this point to the current or desired practices?

Internal Equity - Internal equity deals with the perceived worth of a job relative to other jobs in the organization. All employees compare their jobs to other jobs within the organization. Generally, they consider skill, effort, responsibility and working conditions in this comparison in order to determine the value of their jobs relative to other jobs. Likewise, management must often determine the "worth" or "value" of one job in relation other jobs for the purpose of pay programs. Maintaining appropriate pay relative to value or worth is achieving internal equity.

External Equity - External equity deals with the issue of market rates for jobs. An employer's goal should be to pay what is necessary to attract, retain and motivate a sufficient number of qualified employees. This requires a base pay program that pays competitively. Among others, internal data such as turnover rates and exit interviews can be helpful in determining the competitiveness of pay rates.

Employees also compare their jobs and pay to the jobs and pay in other organizations. Generally, employees consider much more than base pay in determining external equity. Depending on the individual employee, serious consideration may be given to employee benefits, job security, physical work environment, commuting distance, opportunity for advancement and the employee relations practices of the employer in determining external equity issues. In the Pacific Northwest, a frequent consideration is also lifestyle and quality of life.

An important issue to employees in determining external equity is the transferability of their skills. If an employee's skills are valued more highly in a different type of job or industry in the area, the employee may believe that s/he is being treated inequitably.

Note: An organization may choose to place the primary emphasis of its base pay program on internal equity, external equity or a blend of the two. There are important ramifications to this decision that should "fit" with other organizational structure issues and overall management objectives.

Individual Equity - Individual equity deals with how individuals perceive how they are being paid relative to other individuals within the organization and perhaps within the same position. This focus of individual equity is on the merits of the person filling a job, as opposed to the job itself. In simple terms, employees want to feel that the rewards they receive for how they do their work are comparable to the rewards received by others for the same amount of effort or output, all other factors being equal. How merit rewards or increases are given strongly impacts perceptions of individual equity.

Process Equity - How employees perceive the fairness or equity in the administration of the compensation system is process equity. Process equity, in the perceptions of employees, is strongly influenced by the openness of the system, communication of the system to employees, participation in design or administration of the system and a grievance appeal procedure.

Performance Incentives - A significant element of a base pay program is to encourage higher or increased levels of employee performance. Pay systems need to be designed to improve organizational performance.

Maximum Use of Financial Resources - Since an organization does not have unlimited financial resources, the base pay program needs to be designed to maximize the value to the organization with minimum use of these limited resources. In order to accomplish this, pay programs have a variety of tools such as pay range maximums, pay increase budgets, authorization procedures, compensation committees or various internal auditing procedures available to help accomplish this objective.

Compliance with Laws and Regulations - While not the primary objective of a pay program, one of the objectives of a pay program needs to be to keep the organization in compliance with various state and federal laws and regulations.

Administrative Efficiency - Due to the limited financial resources in an organization, one of the objectives of a pay program should be to have a pay program that is easy to administer, flexible, and cost-effective. Developing Rates of Pay for Jobs

The basis for most pay programs is a pay structure - a hierarchy of jobs with pay ranges and/or rates assigned. Pay structures are designed so that the greater the worth of a job (as determined by internal or external equity), the higher the pay grade and range. Developing a pay structure is a process with a series of steps:

• job analysis,
• job documentation,
• development of a job worth hierarchy,
• labor market data collection and analysis, and
• establishment of pay rates and/or ranges.

Job Analysis - This involves collecting and evaluating relevant information about jobs. Any data collected should clarify the nature of the work being performed (principal or essential tasks, duties and responsibilities), the level of the work being performed, the extent and types of knowledge, skill, mental and physical effort and requirements, and responsibility required for the work being performed. There are five primary sources of data for collection of job information: questionnaires, interviews, logs or diaries, direct observation and work plans. All of these methods have advantages and disadvantages and the organization must choose the method that will provide comprehensive data with administrative efficiency and cost-effectiveness.

Job Documentation - There needs to be a formalized way to document job content. In most organizations, a job description is the means used to accomplish this. Job documentation is used to evaluate job content, provide objective criteria for making pay comparisons, ensure that jobs are classified according to content as opposed to individual personalities, effectively communicate the job duties to both supervisors and employees, and help the organization defend itself against charges of discrimination. Who should write job descriptions? That will depend on the resources available to the organization, but they should always be reviewed by line management.

Development of a Job Worth Hierarchy - A job worth hierarchy is the result of job evaluation, the overall process of comparing jobs. There are 6 major methods of comparing jobs in order to develop the job worth hierarchy. The first three methods are "whole-job" evaluations and are non-quantitative in nature. These include ranking, classification and slotting. The second three are "factor" evaluation and are quantitative in nature. These include point factor, factor comparison, and scored questionnaires.

Labor Market Data Collection and Analysis - Before an organization begins the process of collecting labor market data, it must first define its relevant labor market. This may include similar organizations in the same labor market, all employers in the local market, similar organizations in the regional or national market, and/or all employers in the regional or national market. The goal of labor market data collection is to find data from employers with whom the organization competes for employees. For clerical employees, this may be all employers in the local labor market. For high level management positions or certain specialized positions, this may be all employers in the national market. Once the data has been collected, it must be analyzed. The simplest analysis involves comparing the going market rate and approximating this rate within the organization's own pay structure. Other methods involve using advanced statistics to study relationships among certain items in a specific job or market group. An organization may find pay range information, as well as weighted average of actual pay, very helpful.

Establishment of Pay Ranges and/or Rates - In order to actually establish a pay structure, an organization needs to set rates of pay for the jobs in the job hierarchy. Before doing this, an organization needs to ask, and answer, the following questions:

How should the organization's pay level relate to the external market? Should the organization be a pay leader, match the market or pay less than market?

What is the organization willing to pay for: job content, seniority, performance, skills, cost of labor, or some combination of all of these?

How does the organization pay its employees: based on a single rate structure (all employees in the same job receive the same pay), based on seniority, based on merit, based on productivity (piece work), based on new skills (skill-based pay), or based on some combination of these factors? Are short term or long term incentives provided?

What steps does the organization need to take to ensure that pay is administered in a manner free of bias and discrimination?

If an organization decides to use pay ranges (or grades), it will have to determine how many ranges to have. This will depend on the number of different levels of relative job value that are recognized by the organization and the difference in pay between the highest and lowest paid jobs in the pay structure. The focal point of a pay range is the mid-point as this is generally the "going" rate for jobs assigned to that range. From the mid-point, an organization can determine the range minimum and maximum. The range minimum is the usually the lowest pay rate for any job in that range and is usually the pay rate given to people hired in that range who meet minimal qualifications only. Occasionally an organization will pay a "training" rate that is below that minimum. The maximum of a range is the highest rate an employer is willing to pay for jobs in that pay range. Other important range issues include the range width and the degree of overlap between ranges.

The end result of all of the above is a pay structure that should accomplish the organization's objectives with regards to a pay program, and should reflect the organization's philosophy on how it wishes to relate its pay program to the market. Also, this pay structure should demonstrate the internal job values of positions, and how the organization wishes to mix base pay, benefits and incentives.

Pay Rates and Pay Increases

Creating a pay structure is not the final step in the creation of a compensation plan. An organization must also decide how to administer this compensation plan. This means deciding how to pay new employees, how and when to give employees increases, including how to move existing employees from the minimum to the maximum of their assigned pay grades, how to determine the pay increase for an employee being promoted from one job to another and what influence, if any, cost of labor increases will have on the determination of pay increases for employees. In addition, an organization must develop policies and procedures that will implement the results of these decisions in a consistent manner.

Starting Pay for New Employees - In order to avoid paying new employees the same as more experienced employees, most employers choose to start new employees closer to the minimum of the pay range. In general, an employee with minimum qualifications should be paid the minimum of the range. This general rule is not true when a new hire has skills which are in great demand or has skills or other expertise substantially above the minimum.

Employee Increases - There are several different types of base pay increases: general (across-the-board) increases, cost-of-living/labor increases, promotion increases, step increases (based on longevity), and merit increases.

General increases are diminishing in popularity because they are not consistent with the idea of pay for performance. With a general increase, employees in a certain group based on established requirements are eligible for a certain monetary or percent increase to their base pay.

A cost-of-living increase is a type of general increase given to all eligible employees. This type of increase may happen as a result of union contract negotiation. Some companies choose to track benchmark positions over a period of time and modify other positions based on changes in the ranges of benchmark positions.

Promotion increases are given when an employee is moved from one job to another with a higher pay grade and range. The size of the increase will be influenced by the difference between the old and new pay ranges, and the pay of the newly promoted person's peers, superiors and subordinates, if any.

Step increases can be based solely on longevity or some combination of longevity and performance. Step increases alone are inconsistent with pay for performance.

Merit increases are also known as pay for performance. To be successful, an organization must be able to measure differences in job performance and these differences must be significant enough to merit the time and effort required to measure them and pay accordingly. Merit increases also affect other components of the compensation plan in that the pay range must be wide enough to allow for significant differences based on performance, supervisors and managers require training in performance planning and appraisal, and control mechanisms must be in place to successfully administer a merit increase program.

If an organization chooses to pay for performance, the compensation plan must include a well-designed and properly administered performance appraisal system in order to be complete. Following are some questions that will help determine if an organization's current performance appraisal system meets this criteria.

Is performance appraised on the direct measurement of an employee's output or results? Does the performance appraisal system consider only job-related behavior rather than personality traits?

Are supervisors and managers trained in the performance appraisal process?

Are the criteria used to measure performance as objective and quantitative as possible? Or are the criteria open to subjective interpretation?

Have objective job standards been developed? Have the employees had input into the development of these standards? Are they communicated to the employees at the beginning of the appraisal period? Are job standards reviewed regularly to ensure relevance and importance to the department and organization?

Is the employee actively involved in the performance appraisal process? Or is a performance appraisal something that is "done" to the employee?

Maintaining and Auditing a Compensation Plan

Changes in the external market or internally within the organization can cause one or more parts of a compensation plan to become outdated. Part of the challenge in creating a compensation plan is to build in mechanisms that facilitate change when necessary, yet maintain control on a regular basis. Some actions an organization can take to maintain an updated compensation plan include regular review of job descriptions, monitoring of compensation levels versus companies with which there is competition for employees, and regular review of the pay structure including pay ranges and pay increase budgets.

An audit is an excellent means to ensure that a compensation plan is being properly administered and maintained. When planning to audit a compensation plan, an organization needs to consider the following:

Process measures - Are procedures and practices in place to ensure the compensation plan is being administered smoothly and efficiently?

Policy compliance - Are there procedures or other mechanisms in place to ensure that the compensation plan is being administered in accordance with policy?

Documentation adequacy - Is there adequate documentation in place to ensure that the administration of the compensation plan and compliance issues can be audited?

Overall results - Are there measures that can assess how well the compensation plan is achieving its goals and objectives?

After reviewing audit results, management can make recommendations on any improvements that may be necessary, allocate the necessary resources and follow-up to make sure the work is completed.

Summary

Success of a compensation plan includes an overall pay philosophy as well as the policies and procedures that govern operation of the compensation plan.

Because organizations have limited resources, excessive time and money should not be expended in pay program administration. The costs of administration should be balanced against achieving the other objectives of the pay plan.

An organization must decide how it will move employees through the pay range once a pay-range structure has been developed. An organization may utilize the following:

• Individual performance as a basis for movement
• Automatic or step progression based on employee tenure
• Cost of living increases

If an organization chooses to implement a performance-based pay program, then compensation professionals must ensure that their merit-pay programs measure performance objectively and management must carefully evaluate performance to make judgments regarding pay differentials.

The act provides for exemptions from some of its provisions. The monetary provisions of the statute were developed as a device to spread employment and establish a floor on wages as a result of the experience of the depression. Thus, exemptions are applied very conservatively: an employer does not get the benefit of a generous interpretation where an exemption is at issue and an employee may not waive entitlement under the statute. Exemptions from some or all of the act's provisions or employment subject to special provisions that impact significant numbers of the workforce include: agricultural workers, employees of hospitals and residential care establishments (nursing homes, group homes), tipped employees, employees of state and local governments, executive, administrative, professional and outside sales employees. These exemptions are defined by statute or regulation very specifically. Assume nothing.

Liability for failure to comply with the act: two year statute of limitations except three years in the case of "willful violation"; back wages plus an equal amount as liquidated damages, attorney's fees and court costs. Civil money penalties for child labor violations.

Hours worked:
all hours "suffered or permitted" to be worked. Travel time in the nature of home-to-work is not hours worked, however, travel time is compensable when it occurs within an employee's duty period. See "Interpretative Bulletin, Part 785: Hours worked under the Fair Labor Standards Act".

Regular rate of pay:
must be drawn from what happens under the employment contract, the rate actually paid the employee for the normal non-overtime workweek. If an employee's salary is subject to deduction on account of hours worked, the employee's regular rate is computed by dividing the salary by the number of hours which the salary is intended to compensate. If the employee's hours fluctuate but the salary does not, the employee's regular rate is calculated by dividing the weekly equivalent of the salary by the hours worked. Supplements to pay such as commission payments, production bonuses, and sums paid for waiting time are included in the regular rate of pay (they increase the rate by dividing the payment by the total hours worked over the period covered by the payment). See "Regulations, Part 778: Interpretative Bulletin on Overtime Compensation".

Record Keeping: employers are required to keep an accurate record of each employees' daily hours worked, total weekly hours, rate of pay, straight time pay, overtime pay, total earnings, date of payment and pay period covered by the payment, employee name, address, social security number, date of birth if under 18, sex, occupation in which employed. The burden of record keeping is on the employer.

The Wage-Hour Division, U.S. Department of Labor, has available a variety of publications that are occupational or industry specific that are free in reasonable quantity. These same publications are available from the Government Printing Office for a fee. The Division has such a small staff and so many responsibilities that they are not looking for employers to investigate, they have all the work they can handle from complaints and investigations directed to address industry specific problems. You are not obligated to identify the firm you are seeking information for or about. The questions asked by staff are designed to assist them in identifying your needs.

We agree. The employee requested it. The employee didn't want overtime.

An employee cannot waive the statute. The employment relationship is a lot like a marriage. When you are together, and all is well, accommodations are made. When you separate, things can get nasty. If the Department of Labor conducts an investigation, it usually examines your employment practices for all employees. A complaint need not have been filed, and if a complaint was filed, you are not entitled to know who filed it or what was alleged. The fact that any employee is alleged to be a liar, a cheat, or a porno movie star is irrelevant if there is evidence that the employee was not paid properly.

There is no exemption from overtime solely on the basis of salaried compensation. There is an exemption from minimum wage and overtime for bona fide Executive, Administrative, and Professional employees who meet very specific duty and salary tests. Reference the nontechnical publication "Executive, Administrative, Professional and Outside Sales Exemptions Under the Fair Labor Standards Act: "or the more detailed, "Regulations Part 541: Defining the Terms "Executive, " and "Administrative," "Professional" and "Outside Salesman"".

The employee volunteered to work the time. The employee did it on his/her own.

All work time "suffered or permitted" must be recorded and paid for. It is the employer's responsibility to control the hours worked by its employees. It is not necessary that the employee receive the employer's permission or approval.

Overtime for Saturday, Sunday or for hours over 8 in a day.

Not required by the Fair Labor Standards Act, or any federal government contract statute. If you have promised, or have had a practice of paying overtime under these circumstances, you may have a contract or other agreement which obligates you to a higher standard.

The salary includes overtime.

As a practical matter a fixed sum cannot include overtime compensation when the weekly hours fluctuate. Editorial note: There is a concept called a "Belo Contract" which has such restrictive provisions that employers attempting to implement such an agreement inevitably fail and find that virtually all of the monies paid are treated as straight time wages. Attorneys who recommend the use of this provision expose their client to grief and unanticipated liabilities.

"Time off plans", "comp time" in lieu of overtime.

Excepting employees of state and local governments, an employee must be paid in full at the conclusion of each pay period. Thus, the records must show the payment of straight time for the actual straight time hours and time and one half for the overtime hours worked. For example, bi-weekly pay period:

Week 1
40 hours X $4.00 = $160.00
2 hours X $6.00 = $12.00

Week 2
37 hours X $4.00 = $148.00
Total: $320.00

An employer cannot "save" an employee's overtime wages for payment in a later pay period.

The employer neglected to keep an accurate record of hours worked for an employee not exempt from minimum wage or overtime.

The obligation to keep an accurate record is the employer's. If the employer neglects to fulfill this responsibility the employer will not prevail in a claim that an accurate determination of liability cannot be ascertained (and therefore no liability exists). We all remember the times we worked when it was burdensome, but do not recall clearly those times when we did not work. Thus, it is to the employer's benefit to maintain an accurate record of hours worked, even when it believes it has no obligation to maintain such a record because of an exemption.

Salary surveys are used by employers to determine the wage levels needed to attract competent employees and to plan a strategy for compensation of their workforce. Firms often conduct or participate in several salary surveys.

This chapter explains how employers use collected data to evaluate their jobs, what steps they need to take to conduct a survey, and what information should be included in designing such surveys. This chapter also includes information on organizations and consultants that provide salary surveys and research.

General Principles:

In General

Salary surveys are tools used by employers to determine the wage levels needed to attract competent employees, and to plan a strategy for compensation of their workforce. Most firms conduct or participate in several salary surveys.

Employers use surveys in different ways when evaluating their compensation systems. Their purposes include:

• Ensuring external equity - Most firms use salary surveys to determine if their current salary rates are sufficient to attract new employees as well as retain incumbent job holders. Firms set their own rates of pay based on market data. If rates are too low, a firm can expect to experience high turnover. If rates are too high, the firm should decide if the quality of the workforce is exceptional enough to justify the salary costs.
• Validating job evaluation systems - Salary surveys can help employers determine if they are providing equal pay for jobs of equal worth and if they have adequate pay differentials for work of unequal worth. Most job evaluation systems determine pay differences among jobs through examination of the positions' skills and abilities. Through salary surveys, which reflect labor market demand, an employer can check the equity of job evaluation methods. For example, a review of salary surveys would call into question the accuracy of a job evaluation system that determines that clerks and computer programmers perform jobs of equal value.
• Defending the employer in EEO litigation - Employers often justify their pay practices by using market data when challenged by lawsuits charging discrimination under Title VII of the Civil Rights Act of 1964.

Evaluating Published Survey Data

Published survey reports, such as those from sources listed at the end of this chapter, can be a valuable and economical resource for comparing salaries. Not only are such surveys relatively inexpensive, they often are based on large numbers of organizations and jobs, contributing to a more accurate analysis. Finally, data are presented in summary form, thereby bypassing the tabulation and manipulation of data processes needed for a custom salary survey. Summarized data allow for simple analysis of salary information. However, the methodology and results of the survey must be examined to determine to what extent the data are relevant to the organization using the information.

Conducting Salary Surveys

While published survey reports can be helpful, they may be insufficient for an employer analyzing a specific labor market. Some employers need to make specific demographic market distinctions and cannot rely on the broad-based coverage found in many published surveys. Other employers seek salary information on positions that are not covered in any published study but are vital to the success of their own salary surveys to obtain relevant salary information. Evaluating Survey Data:

Choosing Benchmark Jobs

When analyzing a job evaluation system or pay structure, employers compare "benchmark" jobs with those outside the organization. Benchmark jobs:

• Are well-known in similar organizations;
• Are relatively stable - not prone to sudden changes in form over a short time period;
• Represent a sizable proportion of the workforce or are vital to the organization's success - for example, pilots for an airline organization; and
• In aggregate, represent the entire job structure - ranging from the lowest-paid positions to executives, if a purpose of the analysis is to verify a job evaluation system.

Job descriptions in the survey should agree with the jobs for which the organization wants survey data. Most survey reports list job descriptions. When comparing positions, employers should consider each job's level of difficulty, skills required, and duties involved. There is no need for specific task matches - matching general aspects of the job is sufficient. As a guideline, the American Compensation Association suggests that if 70 percent or more of the job content is similar, the match is good.

If a match is not reached, a job-specific adjustment might be appropriate. For example, if the degree of difficulty of the job under analysis is less than that of the job description in the report, the summarized salary figures in the report might be reduced by 5 percent to account for the difference in job match.

Considering How Employees Are Compensated

If base salary comprises most of salary compensation received, comparing base salaries is appropriate. If bonuses, stock options, incentive pay, and/or commissions comprise a substantial proportion of total compensation, comparing total compensation is the relevant measurement. Total compensation should be used for most sales and executive positions.

Defining Relevant Labor Market

In addition to the job itself, the organization needs to evaluate itself when analyzing survey results. The organization's region, industry type, and size can account for large fluctuations in salary rates. Therefore, a relevant labor market for each position should be considered. More specialized information usually yields more accurate results. However, increased specialization information also yields a smaller sample size.

The appropriate degree of specialization depends on the occupation examined. Different demographic criteria may be needed for different occupations. For instance, the geographic area is most likely to account for differences in average salary among clerical workers, while industry type and organization size are not likely to be relevant. In contrast, hospitals should examine pay data for nurses who work in hospitals rather than nurses' salaries overall.

With many professional and technical positions, all three factors - region, industry, and organization size - can be relevant. For top management positions, regional differences are least important and organization size may be most critical. For more information about relevant job markets for various occupations, employers can consult professional organizations or examine survey data to determine the extent of differences by geography, industry, and size for benchmark positions.

Using the Proper Statistic

When examining reports, the employer should consider the importance of the following statistics:

• The mean;
• The median; and
• The weighted mean.

The mean, commonly called the average, is the sum of the values (individual salaries) divided by the number of observations. Following are salaries for five accountants at ABC Co.:

John	$20,500
Ada	$25,000
Mary	$30,000
Joanne	$40,000
Robert	$65,000

The mean salary of the five employees is $36,100 - the sum of the salaries ($180,500) divided by five. The median is the middle value when all values are ordered from lowest to highest. In the example, the median salary is $30,000. (If there is an even number of observations, the value halfway between the two center-most numbers is considered the median value.)

When a survey provides both a median and a mean, the median is more likely to provide the "typical" pay for the position. This is because extreme values (very high or very low) have greater impact on the mean than the median. In the above example, Robert's higher salary caused the mean to exceed the median. With larger samples and more accurate surveys, this gap narrows to the point where the mean and median are almost equal. Still, mean values are likely to be higher than median values.

Another value to examine is the weighted mean, an important variation of the mean. Following are salary figures for accountants at XYZ Co., and GHI Co.:

XYZ Co.	Andrew	$20,00
	Terry	$30,000
	Michelle	$40,000
GHI Co.	Timothy	$20,000

One way to examine these sets of numbers is to find the "organization mean" - the mean of the means for each organization. In the example above, the means for the ABC Co. ($36,100), XYZ Co. ($30,000) and the GHI Co. ($20,000) are added and divided by 3 for a mean of $28,700.

The "all-incumbent" mean weights each job incumbent equally. In the example, the salaries for all nine incumbents are added and divided by nine, for an average of $32,278. The weighted mean can be reported as the organization mean in one report and the all-incumbent mean in another. When reviewing survey reports, employers should compare like calculations with each other.

As for which mean is most appropriate, an employer's choice depends on the importance placed on the practices of the surveyed employers. As the example above shows, the organization mean method lessens the impact on organizations with more incumbents. Larger organizations may find the all-incumbent method more appropriate than would smaller firms.

The simplest way to measure dispersion is to subtract the highest from lowest values (the range). However, this measure is based on the most unusual values of the sample. Therefore, even if the range is an accurate representation of the overall population, the information is not very useful when making comparisons with other companies.

Changes Over Time

A major reason surveys are conducted is to measure changes over time. Unfortunately, published salary survey reports become dated shortly after they are released. However, the information can be updated to the present by using simple trending techniques.

First, the rate of increase since the survey was published is determined. Many published surveys report a percent change in salary from year-to-year as well as in actual salaries, medians, and means. However, these changes are historical and do not reflect current trends in compensation increases. Therefore, an adjustment to the salary figures based on recent data is made. The estimate is based on the latest Consumer Price Index, surveys of first-year labor contract salary changes, or some other recent source of information on employees in the jobs under examination.

When trending data, employers should:

• Adjust from the date the survey was conducted, not from the publication date;
• Develop trending figures for each intervening year if the published report is more than one year old (if the average reported in the above example is based on a survey conducted in 1991, the formula would be $20,000 x 1.05 ($21,000) for 1992; $21,000 x 1.03 ($21,630) for 1993); and
• Be aware that year-to-year salary changes differ by job, industry, and location. For example, executives receive higher increases than individuals in lower positions. Therefore, a single rate of increase should not be applied to all workers.

It is important to note that slight inaccuracies in estimated increases are common - only historical data can verify estimated rates. Nevertheless, an estimate, even if inaccurate, is better to use than assuming no increase in salary over a six, nine, or twelve month period.

Using Multiple Sources

Relying on a single survey source can be risky if that source is later found to be unreliable. By analyzing a few survey sources, the possibility of error declines. When comparing multiple surveys, it is appropriate to weight each survey source. To arrive at an estimate, the average salary reported in each survey is multiplied by a fraction of 100 percent, depending on how many sources or number of incumbents are being compared.

Choosing survey weights is a subjective matter. However, when assigning weights to surveys employers should consider the following:

Some employees compare themselves to the shareholders or business owners. If the earnings are increased by 20% per year, and they think they are the ones doing the work, they wonder why they shouldn't get increased earnings as well? The missing element here that employees often don't consider is that shareholders are willing to accept risk. In any given year, the earnings could increase or decrease and shareholders are willing to share in the good times and the bad. Employees may say they are willing to share risk but, as many of us have learned the hard way, pay cuts are very hard to stomach no matter the reason.

We do not recommend tying base salaries to organization performance. Organizations must maintain a competitive level of base pay and a few years of high earnings could shift that pay up significantly. If base salaries are increased beyond the market rate, the organization has operating expenses beyond what their competitors have and the organization could jeopardize its ability to respond to down market cycles. Employee base salary should be aligned with market rates for similar jobs and not corporate financial earnings. That is not to say that employees shouldn't participate in the organizational success. They most definitely should. If your organization is like many with record profits, and yet merit increase levels are in the 3% to 4% range, consider some variable pay alternatives to allow employees to share in the company's success. Gainsharing, profit sharing, stock options, incentive plans or organizational funded 401(k) plans are alternatives which allow employees to share in company success without eroding the integrity of the base pay plan and jeopardizing employees' standard of living in future years.

In the past, when budget dollars became tighter, organizations opted for what appeared to be simple solutions like delayed salary increases, no salary increases, or below market increases. However, with the lowest unemployment rates in decades, these traditional solutions cause as many problems as they solve. In a tight marketplace, employers using this strategy have found it hard to retain their best employees or to recruit qualified new staff.

How can employers use the 3% to 4% merit increase budgets to their maximum advantage? First, consider capping salaries at the market rate and providing a lump sum payment, instead of an increase to base salary for employees already above the market rate. Alternatively, establish a two-teired pay system with an entry-level rate and a senior rate. Increases beyond the senior rate would be lump sum payments. The entry-level and senior rates would be adjusted any time the market moved up.

Small percentage increases seem to disappear by the time it is spread out annually and taxes are taken out. A 4% increase on a $30,000 annual salary comes out to about $25 semi-monthly. However, that same dollar amount would be $800-900 on a one-time lump-sum payment. The same amount of budget dollars seem to have a greater impact in this case. To minimize market position erosion, consider mixing a lump-sum payment with a small increase to base salary.

Consider merit increases with variable timing which increase base salaries every 15 to 18 months rather than every 12 months. This system provides larger and more frequent increases for good performers, with moderate performers receiving smaller, more infrequent increases. Shift the focus from cost-of-living to market competitiveness. In the past employers have talked about cost of living adjustments and pay increases in the same breath. Those of us who have lived through the double-digit inflation years know what a foible this can be. Instead, explain the organization's philosophy in terms of market position. Studies have shown that employees tend to overestimate others' income levels, so be as open as possible with summary data that will not breach individual confidentiality.

Remind employees that responsible organizations must watch for good value in materials and supplies, as well as the workforce. Just as a responsible employer would not pay $3 each for basic ink pens, a responsible employer will not pay significantly above market for the telephone to be answered. That type of action would put everyone out of work very quickly. Employees are savvy consumers and understand that there is a limit to what an employer will pay for an ink pen and there is a limit to what employers can pay for a receptionist.

For an incentive program to be effective, there are several items that need to be in place. First the plan must be strongly tied to the objectives of the organization. If the business strategy or plans are not considered, then it would be very easy to pay for activities that do not actually help the organization be more successful. Secondly, the results being paid for must be within employee's sphere of control. There is no easier way to frustrate employees than to hold them accountable for things they can not achieve or control.

Another aspect of successful plans is that employees are not paid twice for their accomplishments. Employees earn a certain amount because of the job they have, and there are routine responsibilities of that job. Activities or accomplishments that are considered when computing a base pay increase should be clearly different than those things that earn an employee an incentive award. Many plans are poorly designed because they allow the employee to get paid twice for the same accomplishments or performance.

Another difficulty with incentive plants is that employers have not kept the base plant at the appropriate market level. If an employee feels that the base pay is too low, then they think they are being asked to contribute extra effort to earn what they should earn by just doing the regular work. For example, if the base pay is only 90% of what the market usually pays for that type of work, and the employee can earn an additional 10% of pay by accomplishing a specific set of objectives, the employee feels that they have been taken advantage of because they have to commit extra effort to earn what others are paid just for doing the job.