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PAY PROBLEMS:

KTVX BROADCAST

COMPANY

12/24/97

In 1998, the management of KTVX decided to implement a job evaluation program for nonexempt employees in its news, production and video units. The purpose of the job evaluation program was to update the company's wage structure and to check for any internal and external equity wage inconsistencies. There were also concerns that the company was losing too many broadcast engineers to other stations. The market for these employees was particularly fierce. Since KTVX spent a great deal on job training for these technicians, this presented a problem. They did not wish to lose these employees – even if it meant paying more than the internal pay structure would suggest.

Job descriptions were carefully prepared, reviewed and evaluated by incumbents and their supervisor prior to the implementation of the study. A point evaluation system was developed, pilot tested and utilized to determine the point value of the jobs. Jobs were evaluated by job incumbents and their supervisors. If supervisors and incumbents disagreed on the value of the job, a meeting was held until consensus was attained on job value.

Out of the 90 jobs in the company, 17 were selected as benchmark jobs because the job content was stable, there was no evidence of gender bias and pay rates in the external market were consistent. For purposes of this exercise, consider these 17 jobs as a representative sample from which to compare current rates of pay to rates of pay in the external market. Normally you would calculate the internal pay line using data from ALL jobs and for all incumbents.

External Competitiveness

To determine external competitiveness, a wage and salary survey was undertaken based on the appropriate labor market for each job. Using these jobs, a pay line can be established. Using the equation, the rates of pay for the other jobs could be determined from the various point values.

Table 1 lists the 17 jobs, the point ratings for each job and current monthly rate of pay for each job. Table 2 lists the same 17 jobs, the point ratings for each job as determined by KTVX and the external weighted average pay rate.

Steps to developing a wage curve.

1. First, you will calculate the internal wage line. You may use Excel or your calculator but I want to see some form of output to demonstrate that you actually "ran the numbers." The formula for a straight line is:

Y = a + bX

where Y equals the monthly rate of pay and X is the corresponding point value of the job. To determine a and b, the method of Least Squares regression can be used. To do this, complete the remaining portions of Exhibit 1.

Using those numbers, use one of the following two methods to calculate a and b.

Method 1

Plug the numbers into the following equation

a = ( Y - b (( x) b = N (( XY) - ((X (Y)

N N (( X2) - ((X)2

Method 2

An alternative approach is to use simultaneous equations to solve for a and b.

Equation 1: (Y = aN + b ((X)

Equation 2: ((XY) = a((X) + b ((X2)

Calculate the equations both ways and see if you get the same numbers for a and b

Using the values of (a) and (b), write the equation for the straight line

Equation 3: Monthly Pay = a + b · Point Value

where a equals the intercept of the line and b equals the slope. The intercept is where a straight line crosses the Y-axis when X is "0".

2. Now you will plug some numbers into the internal wage line equation so you may draw the current internal pay policy line. Plug in the point values of 200, 400, 600, 800, and 1000. Plot each point value against the rate of pay you just calculated. Since it is the line of best fit, it will go through the cluster of points. Draw a straight line through these points and label the line, on the internal scatter diagram you prepared earlier. Label this line, the Internal Wage Line.

3. External Pay Policy Line. Using the numbers in Exhibit 2, now calculate the External Pay line. What equation did you get? Plug in various values (e.g. 100, 200, 300 etc.). Since it is the line of best fit, it will go through the cluster of points. Draw a straight line through these points and label the line on the external pay graph you developed earlier. Label this line as the External Wage Line. What does the line look like? What is the intercept? The slope?

4. Internal Versus External Equity. Compare the two pay lines using a scatter diagram. Using graph paper or a computer plotting program plot job point ratings against current rates of pay for each job. The X-axis should be labeled points and the Y-axis as monthly salary. Start both scales at 0 in the lower left-hand corner and allow an inch for each 100 points and $200 in salary. Label each axis accordingly. In practice you would have one point on the scatter diagram for each job incumbent, not each job. We have taken some liberties to simplify this exercise. If this wage curve represented the entire range of wages from the lowest valued to job to the top executive, the wage line often takes the form of an upward curve with a gradually increasing slope as the point values increased. However, for the nonexempt jobs examined here, a linear or straight line is satisfactory.

What is the difference in the slope? In the intercept? Does one line cross the other? Based on your analysis, what do you now know about internal pay relative to market rates of pay?

5. Pay Grade Widths. Now you will calculate pay grades. Assume there are 1000 points in the entire plan. You wish to have five pay grades. Since no job can receive fewer than 100 points, the first pay grade will begin at 100 points and cover jobs worth between 100 and 300 points; the second pay grade will cover 301 to 500 points; the third pay grade will cover 501 to 700, 701 to 900; 901 to 1100; 1101 to 1300. These pay grade widths are listed in Exhibit 3a.

You now need to calculate the rate of pay that a fully competent employee would earn for each pay grade or pay grade midpoints, calculate the pay grade midpoint value for each pay grade. Use this formula:

Pay Grade Midpoint = ½ · (Minimum Point Value + Maximum Point Value)

For the first pay grade, the midpoint is 200 points.

To determine the pay grade midpoint, plug this point value into the equation you calculated earlier for the external market. Do this for each of the five pay grades. Record your calculations and the pay grade values on Exhibit 3.

6. Pay Grade Ranges. Pay ranges (e.g., $1000 to 1500) represent the minimum and maximum amount of pay to be earned by job incumbents performing jobs within a specific point value range (e.g. 100 to 200 points) The spread of pay range may vary from 10 percent to 50 percent on either side of the midpoint of a pay scale. Normally, a range of 10 to 20 percent on either side of the midpoint is common.

In this company you decide to have equal interval pay ranges of 50% (25% above and 25% below each pay grade midpoint. Since we already know the pay grade midpoint, it is a simple matter to determine the minimum rate and the maximum rates of rates of pay. The formulas would be

Maximum Pay = Pay grade midpoint · (100 percent + 25%)

Minimum Pay = Pay grade midpoint · (100 percent – 25%).

Calculate the pay grade minimums and maximums for the five pay grades.

7. Compa-Ratios. A compa ratio is an index that helps managers determine how close actual pay is to the midpoint of the pay range established for jobs of that value. It estimates how well actual practices correspond to intended policy. It is calculated by the formula:

Compa-Ratio = Average Rate Paid Jobs / Range Midpoint

If the compa ratio is below 1.00, then the company is paying below the competitive market rate for those jobs in that pay grade. If the compa-ratio is greater than 1.00, they are paying too much.

8. Scatter Diagram. Include on the graph that includes the following:

• External Pay Line

• Current Internal Pay Line

• Pay grades as specified with minimums and maximums.

Prepare a scatter diagram. Using graph paper or a computer plotting program plot job point ratings against current rates of pay for each job. The X-axis should be labeled points and the Y-axis as monthly salary. Start both scales at 0 in the lower left-hand corner and allow an inch for each 100 points and $200 in salary. Label each axis accordingly. In practice you would have one point on the scatter diagram for each job incumbent, not each job. We have taken some liberties to simplify this exercise. If this wage curve represented the entire range of wages from the lowest valued to job to the top executive, the wage line often takes the form of an upward curve with a gradually increasing slope as the point values increased. However, for the nonexempt jobs examined here, a linear or straight line is satisfactory.

Now draw a straight line based on the internal pay policy line and a second line for the external pay policy line. What can you deduce from the two graphs? How are the graphs similar? Different?

9. Pay Grade Diagram. Prepare a graph showing the pay grades using the matching policy as the midpoint. What is the degree of overlap between each pay grade? Is the overlap sufficient to motivate employee? Why or why not? What, if any, recommendations would you make?

10. Lead the Market Midpoints and Ranges. If you wanted to lead the market, you would determine the percentage by which you wanted to lead (e.g. 15%) and multiple the External Pay line equation by that percentage (e.g. 1.15%). If you lead the market by 115%, what would be a market competitive rate of pay for jobs that are valued at 200, 400, 600 and 800 points respectively?

Assume that KTVX wants to be a pay leader and pay (on average) 15% more than the external market demands. Calculate the new midpoints for each pay grade. This is quite simple (Midpoint * 1.15%). You could then calculate new pay ranges using the formula specified above. Report your new pay grades in Exhibit 3b

What effect does this new pay policy have on compa-ratios for each pay grade?

11. Red Circle and Blue Circle Pay Rates. In Exhibit 4, for each job, check whether the present rate is inside or outside the established rate range as indicated by the rectangles for matching the market. Calculate the theoretically correct hourly rate for each job by substituting the job point rating into the hourly rate equation (3). Next determine whether the rate of pay is within or exceeds the minimum and maximum rates of pay for the appropriate pay grade (use the matching market pay grade minimums and maximums.

If the current rate of pay for a job is too low, the job is said to be blue circled. A permanent adjustment to base pay is needed to bring the rate of pay up to the pay grade minimum. Conversely, if the current rate of pay for a job is higher than the pay grade maximum, the job is said to be red circled. Theoretically, you would want to lower the rate of pay to be consistent with your pay grades. Because this can be demotivating, pay rates for these jobs are typically frozen until the external market catches up to the higher internal rate of pay.

12. Broad Bands. With broadening banding a number of salary grades are collapsed into a smaller number of broad grades with wide ranges. Collapse pay grades 1 and 2; 3 and 4; and 4 and 5. Record your new Broad Bands in Exhibit 5.

13. Overall Recommendations. In Exhibit 6, complete the analyses for Red Circle and Blue Circle jobs relative to the broader bands. What effect has broad banding had on the pay structure? Which do you prefer (traditional or broad) for this organization? Why?

Exhibit 1

Job Ratings and Internal Rates of Pay

|JOB |TITLE |X (Job) POINTS |Y (Pay) POINTS |(X · Y) |X2 |

|1 |Video Editor |779 |2210 | | |

|2 |Maintenance Tech 11 |505 |1958 | | |

|3 |Studio Tech |536 |2141 | | |

|4 |Tech Operator II |603 |2052 | | |

|5 |Producer I |906 |3000 | | |

|6 |Associate Producer |634 |2004 | | |

|7 |Photographer 1 |611 |2472 | | |

|8 |Receptionist |305 |1296 | | |

|9 |News Secretary |491 |1788 | | |

|10 |Mail Clerk |246 |1260 | | |

|11 |Shipping Clerk |270 |1608 | | |

|12 |Sr. Engineer II |849 |3732 | | |

|13 |Accounts Payable |526 |1620 | | |

|14 |Engineering Tech |493 |2460 | | |

|15 |Assignment Assistant |472 |1572 | | |

|16 |Computer Operator |548 |1872 | | |

|17 |Camera Operator |548 |1884 | | |

| |Totals |( X |( Y |( XY |( X2 |

| | |( 9342 ) |( 27538) | | |

Internal Pay Line = a + b(points) = $

Where a is the intercept and b is the slope

The Internal Equation is:

Multiple R: R squared:

F Ratio: p (significance):

Exhibit 2

Job Ratings and External Rates of Pay

|Job |Title |Labor |X Job Points |External Pay (Y)|XY |X 2 |

| | |Market | | | | |

|1 |Video Editor |National |779 |2412 | | |

|2 |Maintenance Tech 11 |Local |505 |2130 | | |

|3 |Studio Tech |National |536 |2220 | | |

|4 |Tech Operator II |National |603 |2340 | | |

|5 |Producer I |National |906 |2790 | | |

|6 |Associate Producer |National |634 |2520 | | |

|7 |Photographer 1 |National |611 |2460 | | |

|8 |Receptionist |Local |305 |1380 | | |

|9 |News Secretary |local |491 |1860 | | |

|10 |Mail Clerk |Local |246 |1290 | | |

|11 |Shipping Clerk |Local |270 |1680 | | |

|12 |Sr. Engineer II |National |849 |3960 | | |

|13 |Accounts Payable |Local |526 |1710 | | |

|14 |Engineering Tech |Local |493 |2610 | | |

|15 |Assignment Assistant |Local |472 |1680 | | |

|16 |Computer Operator |Local |548 |1920 | | |

|17 |Camera Operator |National |548 |1950 | | |

| | | |( X |( Y |( XY |( X2 |

| | | | | | | |

Internal Pay Line = a + b(points) = $

Where a is the intercept and b is the slope

The Internal Equation is:

Multiple R: R squared:

F Ratio: p (significance):

Exhibit 3a

Pay Grade Ranges for Matching Policy

| |Points |Monthly Salary |Compa-ratio |

|Grade |Minimum |Maximum |Minimum |Midpoint |Maximum | |

|1. |100 |300 | | | | |

|2. |301 |500 | | | | |

|3. |501 |700 | | | | |

|4. |701 |900 | | | | |

|5. |901 |1100 | | | | |

|6. |1101 |1300 | | | | |

Exhibit 3b

Pay Grade Ranges for Leading Policy

| |Points |Monthly Salary |Compa-ratio |

|Grade |Minimum |Maximum |Minimum |Midpoint |Maximum | |

|1. |100 |300 | | | | |

|2. |301 |500 | | | | |

|3. |501 |700 | | | | |

|4. |701 |900 | | | | |

|5. |901 |1100 | | | | |

|6. |1101 |1300 | | | | |

Exhibit 4

Red Circle and Blue Circle Jobs

| | | | |Theoretically Correct Pay| |Amount Needed (+ or -) |

| | | | |From External Equation | |to Bring Within Pay |

| | |Job | | |In Pay Grade |Grade |

|Job |Title |Points |Pay | |(Yes or No) | |

|1 |Video Editor |779 |2210 | | | |

|2 |Maintenance Tech 11 |505 |1958 | | | |

|3 |Studio Tech |536 |2141 | | | |

|4 |Tech Operator II |603 |2052 | | | |

|5 |Producer I |906 |3000 | | | |

|6 |Associate Producer |634 |2004 | | | |

|7 |Photographer 1 |611 |2472 | | | |

|8 |Receptionist |305 |1296 | | | |

|9 |News Secretary |491 |1788 | | | |

|10 |Mail Clerk |246 |1260 | | | |

|11 |Shipping Clerk |270 |1608 | | | |

|12 |Sr. Engineer II |849 |3732 | | | |

|13 |Accounts Payable |526 |1620 | | | |

|14 |Engineering Tech |493 |2460 | | | |

|15 |Assignment Assistant |472 |1572 | | | |

|16 |Computer Operator |548 |1872 | | | |

|17 |Camera Operator |548 |1884 | | | |

| |Total $$$ Needed to Bring Blue Circle Jobs Salary Within Pay Grade Minimum | |

| |Total $$$ of Over Payment for Red Circle Jobs | |

Exhibit 5

Broad Band Pay Grades

| |Points |Monthly Salary |Compa-ratio |

|Grade |Minimum |Maximum |Minimum |Midpoint |Maximum | |

|1. |100 |500 | | | | |

|2. |501 |900 | | | | |

|3. |901 |1300 | | | | |

Exhibit 6

Broad Bands and

Red Circle and Blue Circle Jobs

| | | | |Theoretically Correct Pay| |Amount Needed (+ or -) |

| | | | |From External Equation | |to Bring Within Pay |

| | |Job | | |In Pay Grade |Grade |

|Job |Title |Points |Pay | |(Yes or No) | |

|1 |Video Editor |779 |2210 | | | |

|2 |Maintenance Tech 11 |505 |1958 | | | |

|3 |Studio Tech |536 |2141 | | | |

|4 |Tech Operator II |603 |2052 | | | |

|5 |Producer I |906 |3000 | | | |

|6 |Associate Producer |634 |2004 | | | |

|7 |Photographer 1 |611 |2472 | | | |

|8 |Receptionist |305 |1296 | | | |

|9 |News Secretary |491 |1788 | | | |

|10 |Mail Clerk |246 |1260 | | | |

|11 |Shipping Clerk |270 |1608 | | | |

|12 |Sr. Engineer II |849 |3732 | | | |

|13 |Accounts Payable |526 |1620 | | | |

|14 |Engineering Tech |493 |2460 | | | |

|15 |Assignment Assistant |472 |1572 | | | |

|16 |Computer Operator |548 |1872 | | | |

|17 |Camera Operator |548 |1884 | | | |

| |Total $$$ Needed to Bring Blue Circle Jobs Salary Within Pay Grade Minimum | |

| |Total $$$ of Over Payment for Red Circle Jobs | |

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