SALARY ADMINISTRATION COMPENSATION EXERCISE
Introduction
Students in human resource management programs receive a great deal of training in the design of
various salary compensation programs. However, comparatively little direction has been provided
students as to the proper administration of the day to day or year to year administration of individual
salaries under such programs and the attendant salary administration problems that more often than not
arise.
This salary administration exercise is intended to provide students with just such experience in
conducting a fair and motivational salary administrative system. This exercise will include both a
discussion of salary administration theory and its application in common salary administration situations
salary administrators will encounter in industry within the confines of a traditional compensation program
(all cases are based on actual industry situations). Students should have had prior instruction in designing a
conventional compensation program to include job evaluation, designing salary ranges, policy lines,
external/internal competitiveness issues, etc.
Review of Salary Administration Theory
The basic philosophy of salary administration is to motivate, prevent or correct salary inequities
and control costs by not over paying for the value of individual employee contribution to firm performance.
To that end, conventional salary administration as practiced in industry has a variety of principles and
directives:
General Merit Raises Guidelines
•
Where there is no change in a person’s performance from one budget year to the next, then
the person in question should under normal conditions receive the same % merit raise from
one year to the next.
•
When there is a performance increase from one performance level to another, then the person
in question should normally receive a higher % merit raise in order to recognize and reward
the increased contribution by the employee to the company. This % raise should be
sustainable for the foreseeable future at the higher level of performance.
•
Likewise when there is a performance drop from one performance level to another, then the
person in question should normally receive a lower % merit raise in order reflect the lower
contribution to firm by the individual and to call attention to the drop in performance. This
lower % raise should also be a sustainable amount for the foreseeable future.
•
The % merit raise given to a particular employee should be sustainable (that is the same %
given from year to year in relation to the range maximum or when there is no range maximum
in relation to external competition based on a professional conducted salary survey; this
assumes no change in performance) for the foreseeable future (approximately five years).
•
In those situations where the % merit raise contemplated is not sustainable for a given
performance level, then the % merit raise must be reduced to a level that is sustainable for
given % merit raise. Situations that are not sustainable include those that take a person’s
salary to one that is at or above his or her performance band or classification maximum in the
near term (usually less than five years).
•
Merit raises are usually provided on an annual basis. However, many firms stagger the date
of the merit raise based on performance. Top performers usually receive their raises the
quickest (12 months or less) with average performers taking the longest to obtain their merit
raise (usually 15-18 months). In is important to note that this latter practice allows firms to
better sustain merit raises as in some years a person will receive no raise but due to the cost of
living and competitive adjustments salary range bands will usually have been adjusted upward
by so some %, thereby allowing additional room for a merit raise for a particular individual.
Salary Band Issues Guidelines
•
From time to time certain individual salaries may be above their allowable salary range
maximum. This often occurs due to several factors. First, a person’s performance level will
commonly decline for various reason. As a result their corresponding performance maximum
salary range band falls as well. Sometimes, supervision grant raises that bring a person’s
salary above its range maximum without the proper authorities noticing or preventing the
action. At other times, the company’s compensation scheme may be above competitive levels
or the pay policy is changed to one that is lower than the previous policy. Consequently, a
number of individual salaries will fall above their revised range maximums.
•
Nevertheless, once a person’s salary is above it’s range maximum, it is normally frozen or
“red circled” until the person’s salary falls below the range maximum. Management could
choose to lower the individual’s salary. However, this should not be done except in extreme
circumstances due to the adverse affects on motivation and morale. Other viable options,
depending upon the circumstances, that may help resolve the problem are promotion, an
increase in performance, or waiting until the range maximum rises above the person’s salary
due to cost of living and/or competitive adjustments.
•
Salary bands/ranges are often adjusted on a periodic basis (usually annually). In order to hold
the purchasing power of a given salary level constant salary bands must be adjusted upward or
lower based on the annual change in the CPI. Salary bands/ranges may also be adjusted
upward or downward based on the company’s salary levels (policy line) as compared to
relavent competitive salary levels.
Promotional Guidelines
•
Promotions may be made to recognize experience and contribution in the current position by a
promotion in the current job. Promotions may also entail a physical move/promotion to some
higher-level vacant position.
•
Normally promotions are linked in some manner to current performance levels and a person’s
capacity to handle higher levels or responsibility. This is often affected by shortages in talent
(in which case people are promoted faster than normal), by a surplus in personnel (in which
case people are promoted less often than normal), compensation levels are lower than
competition (in which case workers are promoted faster), or when compensation levels are
above competitive levels (in which case promotions are often slowed).
•
Absent the above exception individuals should be promoted at a rate to where they are at their
highest level of potential(so as to obtain their best work at their highest level of ability) fiveten years before normal retirement age. Rules of thumb based on performance levels at large
firms are as follows:
Average performance-about three promotions in a career- about one every 8-10 years
Above average performance-about five promotions in a career- about one every 5-7 years
Excellent performance-about eight promotions in a career-about once every 3-4 years
Outstanding performance-unlimited but about once every 1 ½ to two years.
•
Promotional raises normally vary from zero to 5% per promotion level. Industry practice is to
grant a 5% raise (to maxinimize motivation/recgonition) unless it would mean raising an
individual’s salary so high in his or her salary band that normal merit raises would not be
sustainable and/or they would be so small as not to motivate.
•
Promotions should not be allowed for individuals experiencing a drop in performance.
Retirement Issues
•
Those individuals nearing retirement should be brought to their highest level of potential and
salary band at least three years before retirement. This is done for several reasons. One, to
recognize their many years of dedication and commitment to the company. Two, many
retirement plans base their benefits and pension calculations on employee salaries. Third, it
should enhance retention levels since the remaining workforce observes that someone staying
a career with the company is treated well.
Special Adjustments
Special adjustments are granted when normal salary treatment (merit and promotional raises will
not rectify any particular salary problem). Normally, salary adjustments above 10% are not allowed except
in extreme circumstances. When there is a rather large salary discrepancy, the individual involved may
receive (up to 10%) special adjustments for several years before the problem is corrected. There are
several common situations in which special adjustments are used to correct salary problems:
•
For whatever reason, sometimes some employee salaries will be below the classification
range minimum. In effect the company is paying the person below what the company itself
says the job is worth. In such cases the individual’s salary should be raised to at or above the
classification range minimum not only for motivational reasons but for legal ones as well. It
is important to note that in such cases the individual involved could receive a special
adjustment in excess of 10%. Due to the seriousness of the problem, it is not spread over
several years as previously discussed.
•
In some situations, usually industry boom periods, external salaries rise at a rapid rate. As a
result some employees (often-short service employees) are paid a lower salary than those paid
new hires). This is an obvious inequity (salary compression) that must be corrected. If normal
salary treatment does not correct the problem then a salary adjustment is warranted. The
normal rule of thumb is to have current employees at least $100 a month above new hire
salaries.
•
Under other conditions, particularly in firms with no set salary structure (as in the this
compensation case) salary administrators must closely monitor relevant salary surveys to
ensue that their employee salaries stay in line with competition and the company pay policy.
Hence salary adjustments may be necessary to bring an individual up to comptitive levels.
•
It is important to ensure internal equity as well. In general, a person with higher performance
and/or experience(and education) should be making more than someone with lower
performance and or experience.
Raise Communication
•
When communicating raises to employees it is important to explain what portion is merit,
promotional, and/or adjustment. Otherwise, employees will usually assume they will continue
to receive the % raise in the future(assuming no change in performance). When an equity
adjustment as been included in the raise this could mistakingly result in a demotivated
employees. For this reason, many companies actually grant equity adjustment at times other
than when the merit raise is awarded. However, for case purpose they will all be awarded at
the same time.
IT TAKES A SHARP PENCIL
Montgomery Sharp Pencil Accountants Anonymous is a regional accounting firm that has offices in Troy,
Mobile, Montgomery, and Dothan. Montgomery Pencil employees 125 workers in total. It has been in
business 30 years and over the last five years has experienced an annual growth in business of 25%. The
industry average is only 10%.
Sharon Walls has been budgeted $25000 to allocate among her nine subordinates as pay raises (high level
company management rarely grant proposals above the amounts allocated). Cost of living for 2003 is
expected to rise at an annual 4.0%. There have been some ugly grievances at this branch over pay raises in
the past, so Sharon has been strictly advised to base all of her allocations on purely objective reasons. No
increase recommendation will be granted without an appropriate justification.
Your Salary recommendation should show the total amount proposed and its % of the salary. Salary
increases must be distinguished based on merit adjustments (coded M), promotional adjustments (coded P),
increases for promotion may be up to 5%. Equity adjustments (coded A) while all equity adjustments must
be justified (this includes any communications that you would also provide the employee when giving the
increase)any equity adjustment over 10% must carry additional extraordinary justifications. Round salary
adjustments for CL 20 and above to the nearest $100 and round salary adjustments for the levels below CL
20 to the nearest $50.
Name
EEO Stat Cur Sal Last Inc%
Ratings
Paul
H
E
Crystal
W
58,800 7%, 2/01
71,400
2002
W
36400 7%
27 Sr
AA 2001
26 Acct
A 2000
25 Adsv
BA 1999
25
2% A 2002
Mar-01 AA 2001
Tonya
PT Job Title CL Serv Hi Ed Exp Personal Data in file
27 Acct
30 MA
Acct
42 Nearing Retirement;has be
a real help in the
reorganization/transition of
mgt.
24
11 PHD
Acct.
28 Single, no child, married,
expecting first child,
male clients love her.
22
2 BA
30 Advs
O 2000
30
O 1999
30
A 2002
26 ACCT
Jun-01 AA 2001
26
26
Acct.
8 Pro Union, 2 yrs
related experience; party’s
a lot; no OT
NR
NR
Scott
W
37600
9% E 2002
28 ACCT
Apr-01 E 2001
27
E 2000
26
23
5 BA
Acct.
10 Works the most overtime,
2 yrs related exp; looking
for another job; say his
salary is too low
AA 1999
Joe
B
18200
NA 2002
21 Sr ACCT
CLERK
16
1 BAMGT.
12 7 years experienced highly
recommended very highly;
very knowlegable but does
not have a high energy
level; his been in twice
asking about getting a
raise; has a Lexis car
payment to cover; also
wants to know when you
are going to promote him
to an exempt accounting
position
K
t
.
Stacy
W
386000
7% E 2002
Jun-01 AA 2001
Heath
Max
W
W
460000
27 Spec
A A1999
27
9% E
2002
29 Acct
Advisor
Feb-01 E
17000
2001
29
AA 2000
28
AA 1999
28
9% AA 2002
17100
18
E
2000
18
E
1999
18
0% A 2002
AA 2000
16 MA
Eng.
24
6 MA
16
6 NA
% Raise Given
7.0
8.0
Not an acct, real help in
automating the office
continues to save $
with program. Skills
24 Transfered in from another
company location to help
MGR with recent business
increases
8 Married hard worker
4 yrs related exp; upset
that new worker makes
more than her; she has let
this affect her performance
21 Sr Acct
16
4 BA
21 Clerk
Hist.
21
9 Not out going, but
very precise; never
makes an error;
AA 1999
Best Relevant Salary Data:
2002 Regional Accounting Salary Survey
Salary
Accountants
All companies
By experience
Avg
Top Qtl
New Hire
35000 37000
2-4 YRS
38000 44000
5-9 YRS
35000 47000
10-15 YRS
49500 56000
16-20 YRS
56000 59000
20 + YRS
64000 75000
19 Loyal, hard working
Acct.
18 Acct Clk
2001
May-01 AA 2001
24
27 Comp
A 2000
Jun-01 E
Warren W
27 Admin &
5 yr related exp; goes out
of his way for a for a beer
on way home form work;
son recently maimed in a
tragic car wreck; quantity of
work is way down
Salary
Accountants
Big six Firms
By Experience
Avg
38500
47000
48000
65500
70200
83000
5.5
l
1999 Administrative Assistants
Salary Survey
5-10 yr
11-15 yr
16-20 yr
20 + yr
Avg
23000
26000
29000
30000
1999 Computer Specialists Salary Survey
Top Qtl
25000
29000
35000
38000
Avg
1-3 yr 50000
4-6 yr 65000
7-10 yr 85000
11-15 yr 100000
Over 15 120000
2001 Accounting Clerk Salary
Survey Troy
Salary all Companies
Avg
Avg top 3 Co.
Accounting Clerk
Senior Acct Clerk
16000
18000
18000
25000
Top Qtl
60000
80000
95000
110000
130000
QUALITY IN SALARY ADMINISTRATION: A COMPENSATION EXERCISE
Introduction
Students in human resource management programs receive a great deal of training in the design of
various salary compensation programs. However, comparatively little direction has been provided students
as to the proper administration of the day to day or year to year administration of individual salaries under
such programs and the attendant salary administration problems that often arise.
This salary administration exercise is intended to provide students with just such experience in
conducting a fair and motivational salary system. This exercise will include both a discussion of salary
administration theory and its application to common salary problems salary administrators will encounter in
industry within the confines of a traditional compensation program (all cases are based on actual industry
situations). Students should have had prior instruction in designing a conventional compensation program
to include job evaluation, designing salary ranges, policy lines, external/internal competitiveness issues,
etc.
Review of Salary Administration Theory
The basic philosophy of salary administration is to motivate, enhance perceptions of fairness by
preventing or correcting salary inequities, and controlling compensation costs by not over paying for the
value of individual employee contribution to firm performance. To that end, conventional salary
administration as practiced in industry has a variety of principles and directives:
General Merit Raises Guidelines
•
Where there is no change in a person’s performance from one budget year to the next, then
the person in question should under normal conditions receive the same % merit raise from
one year to the next.
•
When there is a performance increase from one performance level to another, then the person
in question should normally receive a higher % merit raise in order to recognize and reward
the increased contribution by the employee to the company. This % raise should be
sustainable for the foreseeable future at the higher level of performance.
•
Likewise when there is a performance drop from one performance level to another, then the
person in question should normally receive a lower % merit raise in order reflect the lower
contribution to the firm by the individual and to call attention to the drop in performance. This
lower % raise should also be a sustainable amount for the foreseeable future.
•
The % merit raise given to a particular employee should be sustainable (that is the same %
given from year to year in relation to the range maximum or when there is no range maximum
in relation to external competition based on a professionally conducted salary survey; this
assumes no change in performance) for the foreseeable future (approximately five years).
•
In those situations where the % merit raise contemplated is not sustainable for a given
performance level, then the % merit raise must be reduced to a level that is sustainable for the
given % merit raise. Situations that are not sustainable include those that take a person’s
salary to one that is at or above his or her performance band or classification maximum in the
near term (usually less than five years).
•
Merit raises are usually provided on an annual basis. However, many firms stagger the date
of the merit raise based on performance. Top performers usually receive their raises the
quickest (12 months or less) with average performers taking the longest to obtain their merit
raise (usually 15-18 months). In is important to note that this latter practice allows firms to
better sustain merit raises as in some years a person will receive no raise but due to the cost of
living and competitive adjustments salary range bands will usually have been adjusted upward
by so some %, thereby allowing additional room for a merit raise for a such an individual.
Salary Band Issues Guidelines
•
From time to time certain individual salaries may be above their allowable salary range
maximum. This often occurs due to several factors. First, a person’s performance level will
commonly decline for various reasons. As a result their corresponding performance maximum
salary range band falls as well. Sometimes, supervision grants raises that bring a person’s
salary above its range maximum without the proper authorities noticing or preventing the
action. At other times, the company’s compensation scheme may be above competitive levels
or the pay policy is changed to one that is lower than the previous policy. Consequently, a
number of individual salaries will fall above their revised range maximums.
•
Nevertheless, once a person’s salary is above it’s range maximum, it is normally frozen or
“red circled” until the person’s salary somehow falls below the range maximum. There are
several ways this could occur. Management could choose to lower the individual’s salary.
However, this should not be done except in extreme circumstances due to the adverse affects
on motivation and morale. Other viable options, depending upon the circumstances, which
may help resolve the problem, are promotion, an increase in performance, or waiting until the
range maximum rises above the person’s salary due to cost of living and/or competitive
adjustments.
•
Salary bands/ranges are often adjusted on a periodic basis (usually annually). In order to hold
the purchasing power of a given salary level constant salary bands must be adjusted upward or
lower based on the annual change in the CPI. Salary bands/ranges may also be adjusted
upward or downward based on the company’s salary levels (policy line) as compared to
relevant competitive salary levels.
Promotional Guidelines
•
Promotions may be made to recognize experience and contribution in the current position by a
promotion in the current job (sometimes called a step or recognition promotion). Promotions
may also entail a physical move/promotion to some higher-level vacant position.
•
Normally promotions are linked in some manner to current performance levels and a person’s
capacity to handle higher levels or responsibility. This is often affected by shortages in talent
(in which case people are promoted faster than normal), by a surplus in personnel (in which
case workers are promoted less often), compensation levels are lower than competition (in
which case workers are promoted faster), or when compensation levels are above competitive
levels (in which case promotions are often slowed).
•
Absent the above exception individuals should be promoted at a rate to where they are at their
highest level of potential (so as to obtain their best work at their highest level of ability) about
ten years before normal retirement age. Rules of thumb based on performance levels at large
firms during normal economic times are as follows:
Average performance-about three promotions in a career- about one every 7-8 years
Above average performance-about five promotions in a career- about one every 5-6 years
Excellent performance-about eight promotions in a career-about once every 3-4 years
Outstanding performance-unlimited but about once every 1-2 years.
•
Promotional raises normally vary from zero to 5% per promotion level. Industry practice is to
grant a 5% raise (to maximize motivation/recognition) unless it would mean raising an
individual’s salary so high in his or her salary band that normal merit raises would not be
sustainable and/or they would be so small as not to motivate.
•
Promotions should not be allowed for individuals experiencing a drop in performance.
•
Above entry levels many firms require that performance be sustained for at least two years
before being eligible for promotion.
•
Related experience outside company service may be counted toward promotion on the same
basis as company service. Related degrees above bachelor’s may also be counted as
experience on a year for year basis, with a master’s counting no more than two year’s related
experience and a PhD. counting as no more than four year’s experience.
Retirement Issues
•
Those individuals nearing retirement should be brought to their highest level of potential and
salary band at least three years before retirement. This is done for several reasons. One, to
recognize their many years of dedication and commitment to the company. Two, many
retirement plans base their benefits and pension calculations on employee salaries. Third, it
should enhance retention levels since the remaining workforce observes that someone staying
a career with the company is treated well.
Special Adjustments
Special adjustments are granted when normal salary treatment (merit and promotional raises will
not rectify a particular salary problem). Normally, salary adjustments above 10% are not allowed except in
extreme circumstances. When there is a rather large salary equity discrepancy, the individual involved may
receive (up to 10%) special adjustments for several years before the problem is corrected. There are
several common situations in which special adjustments are used to correct salary problems:
•
For whatever reason, sometimes some employee salaries will be below the classification
range minimum. In effect, the company is paying the person below the amount the company
itself says the job is worth. In such cases the individual’s salary should be raised to or above
the classification range minimum not only for motivational reasons but for legal ones as well.
It is important to note that in such cases the individual involved could receive a special
adjustment in excess of 10%. Due to the seriousness of the problem, it is not spread over
several years as previously discussed.
•
In some situations, usually industry boom periods, external salaries rise at a rapid rate. As a
result some employees (often-short service employees) are paid a lower salary than those paid
new hires). This is an obvious inequity (salary compression) that must be corrected. If normal
salary treatment does not correct the problem then a salary adjustment is warranted. The
normal rule of thumb is to have current employees at least $100 a month above new hire or
potential new hire salaries.
•
Under other conditions, particularly in most firms with no set salary structure (as in the this
compensation case) salary administrators must closely monitor relevant salary surveys to
ensue that their employee salaries stay in line with competition based on the company’s pay
policy. Hence salary adjustments may be necessary to bring an individual up to competitive
levels.
•
It is important to ensure internal equity as well. In general, a person with higher performance
and/or experience (and education) should be making more than someone with lower
performance and or experience.
Raise Communication
•
When communicating raises to employees it is important to explain what portion of the total
increase is merit, promotional, and/or adjustment. Otherwise, employees will usually assume
they will continue to receive the same total % raise in the future (assuming no change in
performance). When an equity adjustment as been included in the raise this could mistakenly
result in a demotivated employees. For this reason, many companies actually grant equity
adjustment at times other than when the merit raise is awarded. However, for case purpose
they will all be awarded at the same time.
Exceptions to policy
•
Exceptions to company compensation policy and guidelines may be allowed under extreme
circumstances. However, these should be rather rare events and must be approved by the
highest levels of company management.
IT TAKES A SHARP PENCIL
Montgomery Sharp Pencil Accountants Anonymous is a regional accounting firm that has offices in Troy,
Mobile, Montgomery, Huntsville, Athens, Auburn, Decatur, and Dothan. It’s headquarters is located in
Montgomery, Alabama. Montgomery Pencil employees a total of 125 employees. It has been in business
30 years and over the last five years has experienced an annual growth rate 25% as compared to an industry
average of only 10%.
Sharon Walls has just been transferred to the Troy division replacing Joe Cool (encouraged resignation),
who had been the branch accounting manager. Sharon currently earns an annual salary of $75000 and the
last raise that she received amounted to 15% of her salary. Sharon was given the job due to the company
losing several major accounts in the area. In fact, in the year 2000 this division lost $50000. In recent
years this division has been plagued by high turnover. HQ human resources was able to get the last top
three performers who resigned to provide a confidential exit interview. These interviews revealed that
three top employees who recently resigned did so because of poor/unfair management and below market
compensation as their primary reasons for leaving (they would not provide any further details) Sharon has
been in the job now for 8 months. During this time Sharon has not only recouped the lost business, she has
also had time to reorganize the office to make it more efficient. This reorganization included laying 7
marginal employees after the company’s annual appraisal evaluation and making better use of relevant
computer technology. Ms. Hudson has been budgeted $33000 to allocate among her nine subordinates as
pay raises (high level company management rarely grant proposals above the amounts allocated). This
amount includes money for promotions and any equity adjustments that are needed to rectify any internal
or external inequities that might exist (particularly in view of the evidence gained from the recent exit
interviews). Cost of living for 2002 is expected to rise at an annual 2.0%. There have been some ugly
grievances at this branch over pay raises in the past, so Sharon has been strictly advised to base all of her
allocations on purely objective reasons. No increase recommendation will be granted without an
appropriate justification.
Salary recommendation should show the total amount proposed and its % of the salary. Salary increases
must be distinguished based on merit adjustments (coded M), promotional adjustments (coded P), increases
for promotion may be up to 5%. Equity adjustments (coded A) while all equity adjustments must be
justified (this includes any communications that you would also provide the employee when giving the
increase) any equity adjustment over 10% must carry additional extraordinary justifications. Round salary
adjustments for CL 20 and above to the nearest $100 and round salary adjustments for the levels below CL
20 to the nearest $50.
1
2
3
4
5
6
7
Name*
EEO Stat Cur Sal Last Inc%
Ratings
Paul
H
AA 2001
26 Sr
NI 2000
25 Acct
NI 1999
25 Adsv
E 1998
26
Crystal
W
52500 4%, 2/01
70000
12% AA 2001
Mar-01 O 2000
Tonya
W
34000 NA
8
9
10
11
12
PT Job Title CL Serv Hi Ed Exp Personal Data in file
27 Acct
25
29 MA
Acct
41 Nearing Retirement, wife
died six months ago.
CPA
24
30 Advs
10 PHD
Acct
27 Single, no child, engaged
4 mo ago, male clients
O 1999
30
Love her.
O 1998
30
CPA
AA 2001
26 ACCT
22
Jun-01 NR
1 BA
Acct
7 Pro Union, 2 yrs
related experience
NR
NR
Scott
W
31500
7% E 2001
Apr-01 E 2000
AA 1999
28 ACCT
22
27
4 BA
Acct
26
9 Works the most overtime,
2 yrs related exp
Working on
MA-acct
NA 1998
Tim
B
44000
5% A 2001
25 Sr ACCT
23
May-01 A 2000
15 MA
Acct
A 1999
22 Has six dependents,
None of his kids over 14
CPA
A 1998
Stacy
W
33000
3% AA 2001
Jun-01 A 2000
Rodney W
Max
B
Warren W
36000
14000
16000
27 Admin &
AA 1999
27 Spec
A 1998
27
5% O 2001
29 Sr Acct
Feb-01 AA 2000
25
AA 1999
25
AA 1998
25
3% E 2001
18 Acct Clk
Jun-01 E 2000
18
E 1999
18
E 1998
18
1% AA 2001
May-01 AA 2000
NA
24
27 Comp
21 Sr Acct
21 Clerk
21
16 MA
Eng
18 Loyal, hard working
Not an acct, saves $
With programming skills
23
17 MA
Acct
24 Working on PHD
part time, clients like to
Work with him and think he
is top notch
CPA
15
5 NA
7 Married hard worker
4 yrs related exp
16
2 BA
Hist
8 Not out going, but
very precise; never
makes an error; work
volume could be better
7 yr related exp
* columns reading left to right-column 1-employee name; column 2-Equal Employment Opportunity
Status: W=white, B=black, H=Hispanic; column 3-current salary; column 4-% and date of last merit
increase; column 5-perforamnce rating last four years: O=outstanding, E=excellent, AA=above average,
A=average, NI=needs improvement, I=inadequate; column 6-highest level person is seen attaining in the
firm or potential (PT); column 7-current job title, column 8-numerial job classification (CL), column 9company service, column 10-highest level of education attained, acct=accounting, eng=English,
hist=history; column 11-number of years of experience since age 18 (Exp plus 18 gives one a person’s
age), and column 12-additional information about the person.
Best Relevant Salary Data:
2001 Regional Accounting Salary Survey
Salary
Accountants
All companies
By experience
Salary
Accountants
Big Six Firms
By Experience
New Hire
2-4 YRS
5-9 YRS
10-15 YRS
16-20 YRS
20 + YRS
Avg
32000
37000
28500
47500
54000
60000
Top Qtl
36000
42000
45000
55000
62500
70000
Avg
36500
44000
51000
62000
68200
80000
% Raise Given
6.5
7.5
8.0
1999 Administrative Assistants
Salary Survey
5-10 yr
11-15 yr
16-20 yr
20 + yr
Avg
23000
26000
29000
30000
1999 Computer Specialists (degreed)
Salary Survey
Top Qtl
25000
29000
35000
38000
Avg
1-3 yr 50000
4-6 yr 65000
7-10 yr 85000
11-15 yr 100000
Over 15 120000
1998 Accounting Clerk Salary
Survey Troy
Salary all Companies
Avg
Avg top 3 Co.
Accounting Clerk
Senior Acct Clerk
14000
16000
16000
22000
Top Qtl
60000
80000
95000
110000
130000
INSTRUCTOR’S GUIDE
The first issue that students must address in this exercise is to decide on the maximum amount of a
merit raise for each performance level and the timing of each raise. For the sake of simplicity raises in the
case should be awarded on a 12-month basis. As can be seen from a review of last year’s salary merit
increases there is no consistency across individuals with the same performance in terms of merit raises.
Based on judgment, experience, budget limitations, accounting for inflation, and some attempt to be
consistent with previous year the following merit guide is a good starting point (instructor may want to
provide this to the students):
MAXINUM MERIT RAISE GUIDE
O - Outstanding
E - Excellent
AA- Above Average
A - Average
NI - Needs Improvement
I
- Inadequate
12%
9
7
5
0
0
A pay policy must be chosen as well. This is not a major accounting firm, however, it is a rising regional
star. A good choice in this case would be to choose a pay policy that puts accountants at or near the top
quartile of all companies and below but not too far below the average (within 5-7 %) for the big six firms.
Salary case one-Paul
Background
Paul is loyal career employee and has been with the firm nearly his entire career. Apparently, his wife had
a terminal illness and as a result his performance suffered in recent years due to caring for her. The
instructor should note that Paul was not let go, as were other marginal performers. In other words the
company “carried” him during his wife’s illness. It should also be noted that his performance before the
illness was likely to have been excellent (was excellent in 1998) and it appears to be returning to that level
now. Most employees consider it fair and motivational for an employer to take care of a good worker
during times of personal crisis.
While Crystal is above him salary wise with less experience, there is no internal equity problem, since
Crystal had a history of being an outstanding performer (and his performance had been sub-par for several
years).
While there are no salary bands for the salary administrator by which to compare his salary, there are
external surveys that may be used to determine if his compensation is in line with competition. Based on
the surveys, He is way below competition, in part due to his recent poor performance and in part due to
poor salary administration.
Paul is also approaching normal retirement age. He is 59.
Merit (M) 7% 3700
Equity (A) 5% 2600
Resulting Salary
$56,200
58,800
Justification
He is way below competition but there are other severe equity
problems that need addressing. Performance likely to rise
again next year. Will promote next year and give needed
equity adjustments. Don’t forget part of his low salary was
due to his performance being down due to wife’s illness.
Also, being a loyal company employee he is not likely to quit.
In fact he is likely to be very grateful for the company carrying
him during his time of family crisis. However, he is nearing
retirement and the company will need to get his salary as
high as it can prior to normal retirement age (65). May even
tell him that the company knows he is low and will rectify this
problem (this depends on the individual personality involved)
and get his salary up for retirement. Assuming his
performance stays constant or rises, he will be the first
person the you “take care of” next year.
Salary case two-Crystal
Background
Crystal has been an outstanding performer in the past but her performance has dropped dramatically this
year. Often when there is such a change in performance levels it is due to a new supervisor. It may also be
due in part to her romance. In this particular case, you also suspect that it is due to poor management
(favoritism) by the pervious unit manager. Particularly, since she is way over paid relative to competition.
Merit (M) 2% 1400
Resulting Salary
$71,400
Justification
Technically she should receive no raise. However, since the
average raise is 7.5 % for all firms. The average salary for all
firms should rise by a like amount minimizing the difference.
Additionally, by giving her at least cost of living, perhaps she
will get her performance back up. Due to many customers
liking her it could adversely affect your business if she were
to leave. However, given that she is so overpaid, this is
unlikely. Providing at least cost of living and telling her where
she is relative to competition should soften the blow and
hopefully prevent her from becoming too demotivated.
Salary case three-Tonya
Background
Tonya is a new hire. She is a little below the top quartile of all companies but not enough to worry about at
this point. If she had received a higher performance rating there might be more cause for worry. Besides
her salary after her merit raise brings her above the average for the top quartile of all companies for
accountants with less than two year’s experience. The fact that Tonya is pro union is an irrelevant
comment. It is Illegal to use this information to adversely affect a person’s employment in any way.
Merit (M) 7% 2400
Resulting Salary
$36400
Justification
Normal merit raise. No significant equity problems with
external competition.
Salary case four-Scott
Background
Scott is clearly an excellent performer both under the new manager and the old supervision. He is
maintaining his performance while working on a master’s degree so he can sit for the CPA exam. However,
due to the rapid rise in staring salaries he is way under paid relative to those just being hired such as Tonya.
This not an employee that the company would want to lose.
Merit
(M) 9% 2800
Promotion (P) 5% 1600
Equity
(A) 5.5% 1700
Resulting Salary
$34300
35900
37600
Justification
Normal merit raise. Promote in recognition of his
good performance and experience in current job.
Equity adjustment so that he is at least $1200 above
Tonya. Will want closely monitor over next several
years. Likely provide another adjustment next year
assuming significant difference in his and her
performance.
Case five-Tim
Background
Scott is an average performer. This likely due to having such a large family. He also is likely to be very
interested in making much more money. He should be told that if he raises his performance that will
happen. It is important to note that he is now the lowest performer in the unit. Should the firm/unit be on a
force distribution rating system, and then he will be rated needs improvement next year and be on the verge
of termination. He is underpaid relative to the top quartile of all companies but not that far below the
average of all firms. Given that he is an average (and lowest performer as well) performer, he is not that far
out of line.
Merit 5% (M) 2200
Resulting Salary
46200
Justification
Normal merit raise. Given his performance level not
much out of line with competition. Besides there are
budget constraints and other more serious equity
problems to deal with. Must raise performance. If he
leaves for other employment will allow firm
opportunity to recruit a better worker (non-regretted
resignation).
Case six-Stacy
Stacy illustrates a situation not uncommon in many businesses. Her job does not really fit any job listed in a
salary survey. She was an administrative assistant who with the advent of the PC, quickly embraced the
new technology and became proficient through self-instruction (programming using software but not in
cobalt, C, etc), etc. As a result, she is more than an administrative assistant but not a “true” computer
programmer (no degree in field). However, her major contribution to the unit derives from her PC/Tech
skills. Students should inquire if the degree is related and how long she has been PC proficient? Degree
related to administrative work and she has been PC proficient for four years. She is somewhat under paid
relative to the administrative assistant survey (looking at the top quartile), however, she is only above
average performer, so this not too much of a concern. However, relative to computer specialists (degreed)
she is way under paid. Given that she has no degree in the area, no need to bring her up that level,
however, an equity adjustment is warranted due to her skill and contribution based on the related expertise.
Merit (M) 7% 2300
Equity (A) 10% 3300
Resulting Salary
35300
38600
Justification
Normal merit. While does not posses a computer degree
has many of the skills of a degreed professional. Could not
afford to lose said individual. Based on four years experience
in area the survey average for professionals is $65000.
Clearly, she should not be brought to this level but conversely
for her skill she is well underpaid. Should recommend to
Headquarters (or do on own) that PC proficient employees
(nondegreed) be included in next salary survey so that
management can get a better fix on their appropriate salary
level.
Case seven-Rodney
Rodney has the most severe salary inequity. First, it can be inferred from his 2001 rating and the client
comments he has been doing well for quite while and hence was unfairly rated down in the past. This is
sure to be a sore spot with Rodney(it is also likely that he feels that Crystal was overrated in the past). It is
likely that he is looking for other employment or will leave as soon as he finishes his PhD.
Merit
(M) 12% 4300
Promotion (P) 5% 1800
Adjustment (A) 15% 5400
Resulting Salary
40300
42100
47500
Justification
The industry average for all companies is $54000
(19 years related experience) and the top quartile
for all companies is 62500. So Rodney is grossly
underpaid. Students need to request an exception
to policy in this case. First, for the promotion
(performance is not sustained for two or more
consecutive years) and for the equity adjustment
is 5% above policy. Justification is that he has
been unfairly rated in the past (can provide
evidence of his excellent performance from
clients) and he is likely to leave unless the
problem is addressed. Besides he will need
another 15% equity adjustment in addition to his
normal merit next year to get him even near
competitive levels. In this situation assuming your
salary recommendation is approved, you might
consider informing him in advance of his likely
total raise to prevent him from resigning,
particularly in a hot job market.
Case eight-Max
Background
Max’s problem is not external equity but a perceived inequity between him and Warren. Max is a better
performer (and likely to realize it) than Warren but is being paid less. While it may appear that there is a
potential race discrimination case, there is none since Warren had a degree. The difference in their salaries
is the money the company paid for degree and experience at the time of hire. It is not uncommon in
industry to hire someone with experience and a degree at the clerk level and then have him or her turn out
to be not as good as performer as the company had originally hoped. When this occurs it can cause
motivational problems with other lower level employees who are better performers but do not possess a
degree.
Merit
(M) 9% 1250
Promotion (P) 5% 750
Resulting Salary
16250
17000
Justification
Normal merit raise. Not out of line with competition. Should
encourage him to go back to school and work on his degree
(hopefully company has some form of tuition reimbursement
program) should he complain about the difference in his
salary and Warren’s. However, a step promotion should
solve most of the problem and over time assuming no
change in performance by either employee the remaining
difference will disappear.
Case nine-Warren
Background
Good worker but volume of work suffers. Should continue to counsel him on this.
Merit (M) 7% 1100
Resulting Salary
17100
Justification
Normal merit raise. No external or internal equity problems.
Budget
The budget amount for raises, promotions, and equity adjustments is $33,000.
Recommendation increases total $38,600. Must request an exception to policy. Remember if unit manager
doesn’t request it and good workers leave upper management is likely to say that they might have granted
the raise if it had been requested.
Assuming the over budget amount is not allowed then recommend scaling back Rodney’s Adjustment by
$2700(cut in half), Stacy’s adjustment by $1500 (nearly half), and eliminating Crystal’s raise of $1400
which eliminates the difference of $5600.
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