Market Pay
Market Pricing
= Analyzing external salary survey data to
establish the worth of jobs
Data Analysis
= Taking accurate measurements based on
the foundation created
Job Matching/Survey
Selection
Compensation
Philosophy
= Selecting appropriate resources that are
easily recognizable; limit custom design
= Foundation for defining your market and
competitive position
Terms
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Pay Mix – different methods by which an
organization delivers compensation, base pay,
sales incentive, other incentives, stock options,
stock, etc.
Pay level is the average of the array of value
provided by an organization
Company’s Compensation
Strategy
Example:
Base Pay will lag market (25th percentile)
Base + Target Incentive will match market (50th
percentile)
Base + Target Incentive + Stock Options will
lead market (75th – 90th percentile)
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Company’s Compensation
Strategy
Example
Need to attract and retain the best talent
Lead the market in base pay, paying above the
market (75th percentile) of the general industry
Share team success with team based incentive
pay
Support career advancement with key
management level incentive pay
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Company’s Compensation
Strategy
Example
We use an external market-referenced approach
to attracting and retaining top candidates in
Southeast Michigan. We pursue all avenues to
get what we want; no company is safe from our
recruiting efforts. We strive to lead the market
and pay more than the going rate to our
employees based on demonstrated skill and
performance
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Job-worth and Market-Driven
Differences
Job- Worth
Err on the side of
maintaining internal equity
Proponents point to
scarcity of appropriate
market data and
employee’s internal
comparisons
Work well in senioritydriven companies with low
turnover
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Market-Driven
Err on the side of
reflecting how the outside
world pays the position
Flexible in recognizing
market conditions but also
reasonable level of control
over salary costs and
internal equity
Companies with numerous
external hires and rapid
turnover need more
market-driven approach
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Market-Pricing
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Market Pricing – the process of analyzing
external salary survey data to establish the
worth of jobs as represented by the data, based
upon the “scope” of the job (company size,
industry type, geography, etc.).
Some form of market pricing is used by more
than 80 percent of companies
Developing a Pay Structure
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Job analysis
Job documentation
Job evaluation
Collecting and analyzing labor market data
Establishing pay rates, ranges or bands
Collecting and Analyzing LaborMarket Data
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Select benchmark jobs
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Decide on survey source(s)
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Published survey versus conduct own
Know the market
Gather Valid data
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Serves as internal anchor for non-benchmark jobs
Match jobs in survey
Complete data analyses
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Aging data to common point in time
Weighting market data across survey sources
Select Benchmark Jobs
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Benchmark jobs should:
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Be well-represented positions in the marketplace
Be important in the organization’s internal hierarchy
Represent many organizational levels or grades in the
salary structure
Be matched to 70% or more of the duties found in
the survey jobs
Have multiple incumbents
Job Matching/Survey
Selection
Job Matching is the most important component
Decide on Survey Source(s)
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Decision Factors in Collecting Market Data
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Cost
Time
Reliability/Accuracy
Availability
Confidentiality
Know the market
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Industry
Organizational size
Geographic location
Sample Labor Market –
Pharmaceutical Firm
Top
Management
Administrative/
Professional
Clerical
Industry
General
Pharmaceutical
General
Pharmaceutical
General
Organization
Size
$1-4 billion
All sizes
All sizes
Geography
National
Regional
Local
Local
Decide on Survey Source(s)
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Purchase Published Surveys – Examples
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Bureau of Labor Statistics
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Watson Wyatt Data Services
Economic Research Institute
William M. Mercer
ORC Worldwide
http:/www.bls.gov
Conduct own Survey
Salary Survey Job Matrix
Example
Survey
Name
Survey
Cost
Date
A
$250
June
B
$2,500
Jan
x
x
C
$25,000
July
x
x
D
$30,000 March
x
x
E
$15,000
April
Exec
Mid
Mgmt
Prof
x
x
Admin
Industry/
Function
x
Mid mgmt
x
General
Executive
x
x
Engineering
x
x
Regional
Characteristics of Good Salary
Surveys
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Adhere to antitrust safe harbor guidelines
Have adequate sample size
Contain timely data
Have no secrets
Conduct an Ad Hoc or Special
Survey
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Company is relocating
Short supply of special skills
Dramatic shift in economy
Specific industry survey needed for a specific
geographical location
Safe Harbor Guidelines
1. Survey is managed by a third party
2. Information provided by participants is at least
3 months old
3. There are at least 5 providers reporting data
and no individual provider represents more
than 25% of the weighted statistic
Dissemination does not allow recipients to
identify any particular provider
Gather Valid Data
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Job matching is the most important component
of a salary survey.
Job matched on job content not job titles.
Underlying assumption is the incumbents are
performing at a solid competent level – not
beginners or superstars.
One rule of thumb is to consider the match to be
appropriate if 70% or more of the job
content is similar
How to Handle Incomplete Job
Matches
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Let’s say 60% of a job is “chief bottle washer”
and 40% of a job is “executive chef”. What can
you do?
•
Pay market rate of similar benchmark job
Pay the market rate of the bottle washer
Pay the “bottle washer” rate + a premium %
Combine the market data 60%/40%
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Pay the highest market rate of the two jobs
Survey Job Descriptions
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Vary from short paragraphs to a full page
Often include organizational chart
Data Analysis
= Taking accurate measurements based on
the foundation created
Complete data analyses
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Survey data analysis considered to be more of
an art than a science.
Options to consider:
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How to measure central tendency
Percentiles
Aging data
Weighting market data across survey sources
Common Measures of Central
Tendency
Median – exact middle point in the data
Mean – average
Mode – most frequent occurring single point
In surveys most common
Unweighted average or Mean – equal weight to
every organization represented in the data
Weighted average – equal weight to every salary
represented
Median middle salary in a set of ranked data –
less susceptible to data extremes
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Percentiles
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Surveys also may provide information in the
form of a percentile
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10th
25th
50th median
75th
90th
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What did we say in our compensation
philosophy about:
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Our labor market?
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Our target competitive pay?
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Our market position?
•
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Target - Pay more than the going rate
The Median or 50th percentile is generally
considered to be the going rate of pay for the
position
Paying more than the going rate might could
mean using the 75th percentile for competitive
positioning
•
Reacting to trends
•
Data jumping up or down?
•
Consider removing data from your study that
appears inconsistent based on your research
Aging Data
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Published surveys reflect market at different points in
time.
Combine data from multiple surveys to reflect a common
point in time by determining the annual aging factor.
Use annual increase budget data (separate surveys) or
year-over-year increase within survey to determine
annual aging factor.
Age across two calendar years need to develop separate
aging figure for each year and combine.
Lead, lag, or lead-lag structure policy will determine the
point in time to which you should age your data.
Aging Survey Data
Number of Months to Age Data x Pay Movement Percent = Survey
12
aging factor
Survey aging factor x pay rate = change in pay
Change in pay +pay rate = aged pay rate
EXAMPLE
Effective date of $50,000 pay rate (survey) is Jan 1 and needs to be
aged to Sept 1. Assume annual aging factor 4% based on salary
increase trends
8/12 x 4% = 2.7%
2.7% x $50,000 = $1,350
$1,350 + $50,000 = $51,350
SALARY STRUCTURE
INCREASES, BY EMPLOYEE
CATEGORY
2002
Proj
2002
Act
2003
Proj
2003
Act
2004
Proj
2004
Act
2005
Proj
Non exempt Hourly
Nonunion
3.0%
2.4%
2.6%
2.9%
2.2%
1.9%
2.3%
Nonexempt salaried
3.9%
2.4%
2.6%
2.3%
2.4%
2.0%
2.4%
Exempt Salaried
3.1%
2.5%
2.8%
2.1%
2.4%
2.0%
2.4%
Officers/ Executive
3.1%
2.4%
2.7%
2.2%
2.3%
2.0%
2.4%
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North America Salary Increase Survey Highlights
Average
Increase
Top
Exec
Mid
Mgmt
Prof/
Sup
Admin
United
States
2009
1.4%
1.8%
1.8%
1.9%
United
States
2010 proj.
2.6%
2.7%
2.7%
2.6%
Hewitt and Associates
Weighting Data Across Survey
Sources
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•
•
What do you do with multiple survey sources or
data points?
Take the average of the data points for each job
Weight surveys/data differently based on your
compensation strategy
Weight surveys/data differently based on the
quality of the survey/data
Weight surveys/data differently based on the job
match
Salary Ranges/Bands
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Some Basics
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Salary ranges have a minimum, midpoint, and
maximum (some companies use quartiles or thirds)
Difference between minimum and the maximum is
the “spread”
Minimum often reflects starting salary
Reviewed and updated annually
Typically midpoint is geared to the market
Employees above maximum “overpaid”, below
minimum “underpaid”
Decide on Ranges versus Bands (broader)
Pay Structure
Government Grades: OneGrade Interval Work
$60,000
One-Grade
Inter-Grade Differential
$50,000
Salary
$40,000
$30,000
$20,000
$10,000
$0
1
2
3
4
5
6
Grade
7
8
9 10 11
From
(Midpoint)
GS-1
GS-2
GS-3
GS-4
GS-5
GS-6
GS-7
GS-8
GS-9
GS-10
To
(Midpoint)
GS-2
GS-3
GS-4
GS-5
GS-6
GS-7
GS-8
GS-9
GS-10
GS-11
Percent
12.4%
9.1%
12.3%
11.9%
11.5%
11.1%
10.8%
10.5%
10.1%
9.9%
Calculating Ranges
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If you know midpoint and percentage spread
you can obtain the minimum and maximum
Minimum Calculation
midpoint
100% + ½ spread
Example: Midpoint $40,000 spread is 40%,
minimum = 40000 divided by 1 +.5 * .40
= 40000 divided by 1.2 = 33333
Calculating Ranges
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If you know midpoint and percentage spread
you can obtain the minimum and maximum
Maximum Calculation
minimum * 100% + range spread
Example: Midpoint $40,000 spread is 40%,
minimum = 33333
33333*1.40 = 46666 Maximum
Broad Bands
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Designed with wide range spreads (some even
more than 100%)
Midpoint differentials of 20-25 percent
Provides flexibility to place group of jobs within
same band and eliminate the focus of the job
grade to promote lateral movement – focus of
career movement on development and skill
breadth not job grade
Pay Range Theory and Practice
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Range spreads usually vary based on the level and
sophistication of skills required for a position. Entrylevel positions that require skills that are quickly
mastered usually have narrower pay ranges than
supervisory, managerial, or high-level technical
positions.
Individuals in lower-level positions not only master the
requirements of the job sooner, they also have a
greater number of opportunities over time to be
promoted to higher-level positions. Senior-level
positions require a longer learning curve and often
have limited opportunities for advancement.
(WorldatWork)
Narrow Pay Ranges versus
Broader Pay Grades/Bands
Senior
Senior
• Narrow pay ranges
and more grades
allow for more
frequent
promotions-and a
greater perception
of growth and
advancement-than
wider ranges and
fewer grades.
(WorldatWork)
GS-15
GS-14
GS-13
Journey
Journey
GS12
GS-11
GS-10
GS-9
Mid
Mid
GS-8
GS-7
GS-6
GS-5
Junior
Junior
GS-4
GS-3
GS-2
GS-1
0
20,000
40,000
60,000
Salary
80,000
100,000
120,000
Market Pricing
= Analyzing external salary survey data to
establish the worth of jobs
•
•
Pay rates are set – they are aligned with the
compensation philosophy……so now what?
Compare incumbent pay to the market data and
analyze need to adjust pay
Review What You Have Done
•
•
•
•
•
Look at incumbent pay or job family pay
compared to market rate.
Market index – divide the base salary by the
market rate
Compa-ratio – divide the base salary by the
midpoint
1.00 or greater – at or above market
rate/midpoint
Less than 1.00 – below market rate/midpoint
Comparative Measures
•
Midpoint differentials to construct pay ranges and compa ratios to
control costs.
Midpoint differentials show the
difference in midpoints between two
grades.
Compa ratios compare individual
employee pay to the pay range
midpoint.
Example: An employee’s pay is
$14,000.
The pay range midpoint is $15,000.
Grade A
Midpoint differential 10%
Grade B
20% Range
The ratio between the employee’s pay
and the midpoint is $14,000/$15,000.
The employee’s compa ratio is 93%.
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Things to consider if it appears you are
over/underpaying:
Match to market
Skill/performance
Accuracy of survey data
Labor market conditions
Plan to correct issues over time
•
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Educating staff:
•
Communicate, communicate, communicate
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Transparency
•
Support the “right” decisions
Implication of Change in Market
Strategy