HR435 Unit 4 Pay Structure Design Example

Six Grades From One Line: A Unit 4 Pay Structure Design for a Pest Control Company

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Purdue University Global

HR435: Total Rewards and Compensation Strategy

Unit 4 Pay Structure Design

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[Date]

Ironweed Pest Services and every figure are composite and illustrative, carried from the Unit 2 points and Unit 3 market rates; the sources cited are real.

The Market Line

Points from the Unit 2 job evaluation run along the horizontal axis and the Unit 3 composite market rates up the vertical. A least-squares line through the eight jobs gives a market rate of $1,560 plus $109.74 per point. The line fits closely: every job but one lies within about five percent of it. The exception is the technical director, about 2 percent above, and no job is far enough from the line to suggest the point plan misjudged it.

The Grades

Grades span eighty points each, starting at 330. Each midpoint is what the line gives at the band's middle point score, rounded to the nearest hundred dollars. Grades one to four hold hourly and office jobs and carry 40 percent range spreads. Grades five and six hold the branch service manager and the technical director and carry 50 percent spreads, because those roles take longer to master and need more room for growth.

To get a range floor, take the midpoint and divide it by 1 plus half the spread, so 1.20 for a 40 percent grade; the ceiling is that floor multiplied by 1 plus the full spread.

Grade 1, 330 to 409 points. Midpoint $42,200. Range $35,167 to $49,233. Customer service representative.

Grade 2, 410 to 489. Midpoint $50,900. Range $42,417 to $59,383. Residential pest technician.

Grade 3, 490 to 569. Midpoint $59,700. Range $49,750 to $69,650. Commercial accounts technician and inside sales representative.

Grade 4, 570 to 649. Midpoint $68,500. Range $57,083 to $79,917. Route scheduler and termite and fumigation specialist.

Grade 5, 650 to 729. Midpoint $77,300. Range $61,840 to $92,760. Branch service manager.

Grade 6, 730 to 809. Midpoint $86,100. Range $68,880 to $103,320. Technical director.

Progression and Overlap

Midpoint progression is the percentage step from one grade's midpoint to the next. Overlap is the share of a grade's range that also falls inside the next grade's range.

Grade 1 to 2. Progression 20.6 percent. Overlap 48.5 percent.

Grade 2 to 3. Progression 17.3 percent. Overlap 56.8 percent.

Grade 3 to 4. Progression 14.7 percent. Overlap 63.1 percent.

Grade 4 to 5. Progression 12.8 percent. Overlap 79.2 percent.

Grade 5 to 6. Progression 11.4 percent. Overlap 77.2 percent.

What the Arithmetic Produced

Two patterns follow from fitting a straight line with a fixed intercept. Progression narrows as grades rise, because each eighty-point step adds the same $8,779 to the midpoint while the midpoints themselves grow. And overlap rises, sharply at grade five, where the wider spread pushes the minimum down toward grade four's range.

A promotion from grade four to grade five raises the midpoint by under thirteen percent, and four fifths of grade four's range sits inside grade five, so a promotion could carry little or no raise.

That is a real problem. A route scheduler at the top of grade four would earn more than a newly promoted branch service manager at the bottom of grade five. Milkovich et al. (2020) note that heavy overlap can blur the meaning of promotion, while narrow overlap can force frequent regrading. Two remedies are possible: narrow grade five's spread to 40 percent, which would cut the overlap to about 66 percent, or set a promotion rule guaranteeing at least an 8 percent increase. The design recommends the promotion rule, since the wider spread suits the manager's longer growth period.

Internal Dispersion

Shaw (2014) reviews research showing that the effects of pay dispersion depend on whether employees see the differences as tied to legitimate factors such as skill and responsibility. A structure built from documented points and market rates gives the company an explanation for every range, which supports that perception.

Why the Line Uses Market Rates

The line is fitted to the Unit 3 composite market rates, not to current pay. Fitting it to current pay would have built the specialist's fifteen percent gap into the structure and called it policy. Rynes and Milkovich (1986) warn that survey figures are themselves the product of choices about which employers and jobs count, so the structure inherits those choices too; the matching file from Unit 3 is therefore kept with the design. Because the fit is close, the company can explain each midpoint to an employee in one sentence: the job's points, multiplied through the line, give the rate competitors are expected to pay next July.

Placing the Benchmark Jobs

Each benchmark job falls in the grade its points select. The termite and fumigation specialist, at 620 points, lands in grade four with a midpoint of $68,500, about $11,300 above the current average of $57,200. The route scheduler, at 580 points, shares that grade. The inside sales representative, at 540 points, sits in grade three, so the job that outearned the specialist under the old pay now sits a grade below it, which is the correction the job evaluation pointed to. No benchmark job lands within ten points of a band edge, so no grade assignment depends on a close call.

Next Steps

Place every employee in the new structure, compute compa-ratios and price the cost of moving anyone below minimum, which the next unit does for grade four.

References

Milkovich, G. T., Newman, J. M., & Gerhart, B. (2020). Compensation (13th ed.). McGraw-Hill Education.

Rynes, S. L., & Milkovich, G. T. (1986). Wage surveys: Dispelling some myths about the "market wage." Personnel Psychology, 39(1), 71-90. https://doi.org/10.1111/j.1744-6570.1986.tb00575.x

Shaw, J. D. (2014). Pay dispersion. Annual Review of Organizational Psychology and Organizational Behavior, 1, 521-544. https://doi.org/10.1146/annurev-orgpsych-031413-091253