Assessment of Current
Compensation Rates
Potential Cost Savings Opportunities
XYZ Manufacturing Company
Quick Review: The Numbers that Matter
Analysis begins with an assessment of internal compensation rates to identify any aberration
(via the compa-ratio) and external equity (via the market-ratio)
Annualized Base Compensation
Incumbent Job Title
Machine Tool Builder III
Machine Tool Builder III
Machinist II
Facilities Technician
Applications Engineer III
Programmer/Analyst II
Director of Sales, SBU
Repairs Technician III
Director of Sales, SBU
Administrative Assistant I
Machine Tool Builder II
Grade Base Pay
4
4
3
2
5
6
6
6
1
3
63,170
64,792
51,397
38,626
76,482
78,374
82,056
65,229
72,550
10,400
37,440
Min
Mid
Max
Annual Base Compensation - Market
Compa-ratio
41,207
41,207
37,200
31,000
53,569
74,996
74,996
53,569
53,569
44,640
37,200
64,282
89,995
89,995
62,634
62,634
52,081
43,400
74,996
104,994
104,994
1.179
1.21
1.151
1.038
1.19
0.871
0.912
74,996
18,980
37,200
89,995
26,572
44,640
104,994
32,266
52,081
0.806
0.391
0.839
The Min, Mid and Max refer to the
company-determined salary ranges for
each position
Min represents the lowest base
compensation rate for a given position;
Mid is the mid-point within a
compensation range;
Max is the top of the base compensation
rate for that position
25th
50th
31,283
31,283
34,021
27,310
48,453
60,334
73,218
29,471
73,218
28,093
28,851
35,881
35,881
38,121
31,572
62,057
68,986
89,294
33,767
89,294
31,090
33,218
75th
40,757
40,757
42,534
36,747
76,550
78,003
106,826
39,056
106,826
34,411
37,733
Market-ratio
1.761
1.806
1.348
1.223
1.232
1.136
0.919
1.932
0.812
0.335
1.127
A compa-ratio is the ratio of an individual’s
compensation relative to the mid-point of
base compensation within the company’s
determined salary range.
A market-ratio is the ratio of an individual’s
compensation relative to the 50th
percentile for the market compensation
rate.
A compa-ratio of 1 or more indicates that
the person is paid more than the midpoint; a compa-ratio below 1 indicates that
compensation falls below the mid-point of
the range
A market-ratio of 1 or more indicates that
the person is over- paid relative to the
market; a Market-ratio below 1 indicates
that the person is underpaid relative to the
market
External Compensation Review: Market-Ratios
Nearly 70% of XYZs’ employees earn more than the current market rate (at the 50th percentile) for
their positions, as defined by the market-ratio
Position Category
Number of
Incumbents
Positions with a Market Ratio less than 0.8
19
Positions with a Market Ratio greater than 0.8
and less than 1.0
29
Positions with a Market Ratio greater than 1.0
and less than 1.2
43
Positions with a Market Ratio greater than 1.2
59
68% of XYZ’s workforce
earns base salaries above
the 50th percentile of the
market
Key Questions for Consideration:
• Have we defined the positions correctly, such that the market rate – and therefore the
market-ratio – is accurate?
•Where, relative to the market, does XYZ aim to pay?
• Would it make sense for XYZ to consider different target pay rates, relative to market, for
different positions?
Market-Ratio Assessment: By Grade
Across the workforce, incumbents at two grade levels – three and seven – disproportionately earn
high base salaries relative to the market (with grade two also somewhat skewed in favor of marketratios greater than 1)
Position Grade
Incumbents
Market Ratio > 1.0
% with MR > 1.0
1
17
7
41%
2
23
19
83%
3
28
27
96%
4
19
13
68%
5
16
10
63%
6
9
5
56%
7
8
7
88%
Overall workforce
% with MR > 1.0
68%
68%
68%
68%
68%
68%
68%
Internal Compensation Review: Compa-Ratios
Approximately half of XYZ Manufacturing Company’s employees have a compa-ratio of 1+;
18 individuals earn more than the stated maximum for a given position
Annualized Base Compensation
Incumbent Job Title
Grade Base Pay
Team Leader-Administration
7
Team Leader-Operations
7
Sales Leader
7
Team Leader-Operations
7
Team Leader-Operations
7
Team Leader-Operations
7
CFO
6
Applications Engineer III
5
Machine Tool Builder III
4
Machine Tool Builder III
4
Machinist II
3
Machinist II - Department Shift Lead 3
Customer account manager
2
Machine Tool Builder I
2
Marketing Assistant
1
Marketing Assistant
1
Administrative Assistant I
1
Driver
1
95,000
91,000
90,002
83,200
81,120
79,997
130,000
76,482
64,792
63,170
55,411
53,560
54,000
46,509
41,600
41,600
35,963
35,360
Min
Mid
Max
54,136
54,136
54,136
54,136
54,136
54,136
74,996
53,569
41,207
41,207
37,200
37,200
31,000
31,000
18,980
18,980
18,980
18,980
64,579
64,579
64,579
64,579
64,579
64,579
89,995
64,282
53,569
53,569
44,640
44,640
37,200
37,200
26,572
26,572
26,572
26,572
76,109
76,109
76,109
76,109
76,109
76,109
104,994
74,996
62,634
62,634
52,081
52,081
43,400
43,400
32,266
32,266
32,266
32,266
Annual Base Compensation - Mar
Compa-ratio Base Salary > Max?
1.471
1.409
1.394
1.288
1.256
1.239
1.445
1.19
1.21
1.179
1.241
1.2
1.452
1.25
1.566
1.566
1.353
1.331
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
Key Questions for Consideration:
* Has XYZ properly defined ranges for all positions?
* Does compensation for individuals who earn more than the stated maximum for their roles
warrant further scrutiny – is there a “red circle” opportunity here?
* Does compensation for specific grade levels warrant further scrutiny?
6 individuals at
Grade 7 (out of a
total of 8 at that
level) earn more
than the
maximum rate for
their range
4 individuals at
Grade 1 - entry
level roles - earn
more than the
maximum rate for
their range
Potential Cost Savings Ideas
1.
Re-evaluate the current market rates for all new hires (replacement and new
positions) to avoid the “overpayment” tax in current and future years
2. Implement a “red circle” policy to freeze the salaries of all – or a subset – of employees
that are over current market rates, eliminating costs associated with performance
management and salary reviews
3. Institute/reinforce a pay-for-performance approach to salary reviews, increasing
salaries only for individuals with stellar performance, thus reducing annual
performance increase costs
4. Create rigorous salary limits for certain positions/grades (entry level positions may be
a place to start)
5. Refresh data on current market rates at least every 6 months to ensure that XYZ’s pay
ranges are not inconsistent with current market rates
6. Others?