Market PayMarket Pay

Market PricingMarket Pricing

Data Analysis

Job Matching/Survey Selection

Compensation Philosophy

= Analyzing external salary survey data to establish the worth of jobs

= Taking accurate measurements based on the foundation created

= Selecting appropriate resources that are easily recognizable; limit custom design

= Foundation for defining your market and competitive position

TermsTerms

Pay Mix – different methods by which an Pay Mix – different methods by which an organization delivers compensation, base organization delivers compensation, base pay, sales incentive, other incentives, pay, sales incentive, other incentives, stock options, stock, etc.stock options, stock, etc.

Pay level is the average of the array of Pay level is the average of the array of value provided by an organizationvalue provided by an organization

Company’s Compensation Company’s Compensation StrategyStrategy

Example:Example: Base Pay will lag market (25Base Pay will lag market (25thth percentile) percentile) Base + Target Incentive will match market Base + Target Incentive will match market

(50(50thth percentile) percentile) Base + Target Incentive + Stock Options Base + Target Incentive + Stock Options

will lead market (75will lead market (75thth – 90 – 90thth percentile) percentile)

Company’s Compensation Company’s Compensation StrategyStrategy

ExampleExample Need to attract and retain the best talentNeed to attract and retain the best talent Lead the market in base pay, paying Lead the market in base pay, paying

above the market (75above the market (75thth percentile) of the percentile) of the general industrygeneral industry

Share team success with team based Share team success with team based incentive payincentive pay

Support career advancement with key Support career advancement with key management level incentive paymanagement level incentive pay

Company’s Compensation Company’s Compensation StrategyStrategy

ExampleExample We use an external market-referenced We use an external market-referenced

approach to attracting and retaining top approach to attracting and retaining top candidates in Southeast Michigan. We candidates in Southeast Michigan. We pursue all avenues to get what we want; no pursue all avenues to get what we want; no company is safe from our recruiting efforts. company is safe from our recruiting efforts. We strive to lead the market and pay more We strive to lead the market and pay more than the going rate to our employees based than the going rate to our employees based on demonstrated skill and performanceon demonstrated skill and performance

Job-worth and Market-Job-worth and Market-Driven DifferencesDriven Differences

Job- WorthJob- Worth Err on the side of Err on the side of

maintaining internal maintaining internal equityequity

Proponents point to Proponents point to scarcity of appropriate scarcity of appropriate market data and market data and employee’s internal employee’s internal comparisonscomparisons

Work well in seniority-Work well in seniority-driven companies with driven companies with low turnoverlow turnover

Market-DrivenMarket-Driven Err on the side of reflecting Err on the side of reflecting

how the outside world how the outside world pays the positionpays the position

Flexible in recognizing Flexible in recognizing market conditions but also market conditions but also reasonable level of control reasonable level of control over salary costs and over salary costs and internal equityinternal equity

Companies with numerous Companies with numerous external hires and rapid external hires and rapid turnover need more turnover need more market-driven approachmarket-driven approach

Market-PricingMarket-Pricing

Market Pricing – the process of analyzing Market Pricing – the process of analyzing external salary survey data to establish external salary survey data to establish the worth of jobs as represented by the the worth of jobs as represented by the data, based upon the “scope” of the job data, based upon the “scope” of the job (company size, industry type, geography, (company size, industry type, geography, etc.).etc.).

Some form of market pricing is used by Some form of market pricing is used by more than 80 percent of companiesmore than 80 percent of companies

Developing a Pay StructureDeveloping a Pay Structure

Job analysisJob analysis Job documentationJob documentation Job evaluationJob evaluation Collecting and analyzing labor market dataCollecting and analyzing labor market data Establishing pay rates, ranges or bandsEstablishing pay rates, ranges or bands

Collecting and Analyzing Collecting and Analyzing Labor-Market DataLabor-Market Data

Select benchmark jobsSelect benchmark jobs Serves as internal anchor for non-benchmark jobsServes as internal anchor for non-benchmark jobs

Decide on survey source(s)Decide on survey source(s) Published survey versus conduct ownPublished survey versus conduct own Know the marketKnow the market

Gather Valid data Gather Valid data Match jobs in surveyMatch jobs in survey

Complete data analysesComplete data analyses Aging data to common point in timeAging data to common point in time Weighting market data across survey sourcesWeighting market data across survey sources

Select Benchmark JobsSelect Benchmark Jobs

Benchmark jobs should:Benchmark jobs should: Be well-represented positions in the Be well-represented positions in the

marketplacemarketplace Be important in the organization’s internal Be important in the organization’s internal

hierarchyhierarchy Represent many organizational levels or Represent many organizational levels or

grades in the salary structuregrades in the salary structure Be matched to 70% or more of the duties Be matched to 70% or more of the duties

found in the survey jobsfound in the survey jobs Have multiple incumbentsHave multiple incumbents

Job Matching/Survey Selection

Job Matching is the most important component

Decide on Survey Source(s)Decide on Survey Source(s) Decision Factors in Collecting Market DataDecision Factors in Collecting Market Data

Cost Cost TimeTime Reliability/AccuracyReliability/Accuracy AvailabilityAvailability ConfidentialityConfidentiality

Know the marketKnow the market IndustryIndustry Organizational sizeOrganizational size Geographic locationGeographic location

Sample Labor Market – Sample Labor Market – Pharmaceutical FirmPharmaceutical Firm

Decide on Survey Source(s)Decide on Survey Source(s)

Purchase Published Surveys – ExamplesPurchase Published Surveys – Examples Watson Wyatt Data ServicesWatson Wyatt Data Services Economic Research InstituteEconomic Research Institute William M. MercerWilliam M. Mercer ORC WorldwideORC Worldwide

Bureau of Labor StatisticsBureau of Labor Statistics http:/www.bls.govhttp:/www.bls.gov

Conduct own SurveyConduct own Survey

Salary Survey Job Matrix Salary Survey Job Matrix ExampleExample

Survey

Name

Survey Cost

Date Exec Mid Mgm

t

Prof Admin Industry/Function

A $250 June x x Mid mgmt

B $2,500 Jan x x x x General

C $25,000

July x x Executive

D $30,000

March

x x x x Engineering

E $15,000

April x x Regional

Characteristics of Good Characteristics of Good Salary SurveysSalary Surveys

Adhere to antitrust safe harbor guidelinesAdhere to antitrust safe harbor guidelines Have adequate sample sizeHave adequate sample size Contain timely data Contain timely data Have no secretsHave no secrets

Conduct an Ad Hoc or Conduct an Ad Hoc or Special SurveySpecial Survey

Company is relocatingCompany is relocating Short supply of special skillsShort supply of special skills Dramatic shift in economy Dramatic shift in economy Specific industry survey needed for a Specific industry survey needed for a

specific geographical locationspecific geographical location

Safe Harbor GuidelinesSafe Harbor Guidelines

1.1. Survey is managed by a third partySurvey is managed by a third party

2.2. Information provided by participants is at Information provided by participants is at least 3 months oldleast 3 months old

3.3. There are at least 5 providers reporting There are at least 5 providers reporting data and no individual provider data and no individual provider represents more than 25% of the represents more than 25% of the weighted statistic Dissemination does not weighted statistic Dissemination does not allow recipients to identify any particular allow recipients to identify any particular providerprovider

Gather Valid Data Gather Valid Data

Job matching is the most important Job matching is the most important component of a salary survey.component of a salary survey.

Job matched on job content Job matched on job content notnot job titles. job titles. Underlying assumption is the incumbents Underlying assumption is the incumbents

are performing at a solid competent level – are performing at a solid competent level – not beginners or superstars.not beginners or superstars.

One rule of thumb is to consider the match One rule of thumb is to consider the match to be appropriate if to be appropriate if 70% or more 70% or more of the of the job content is similarjob content is similar

How to Handle Incomplete How to Handle Incomplete Job MatchesJob Matches

Let’s say 60% of a job is “chief bottle Let’s say 60% of a job is “chief bottle washer” and 40% of a job is “executive washer” and 40% of a job is “executive chef”. What can you do?chef”. What can you do?

• Pay market rate of similar benchmark jobPay market rate of similar benchmark job• Pay the market rate of the bottle washerPay the market rate of the bottle washer• Pay the “bottle washer” rate + a Pay the “bottle washer” rate + a

premium %premium %• Combine the market data 60%/40%Combine the market data 60%/40%

• Pay the highest market rate of the two jobsPay the highest market rate of the two jobs

Survey Job DescriptionsSurvey Job Descriptions

Vary from short paragraphs to a full pageVary from short paragraphs to a full page Often include organizational chartOften include organizational chart

Data Analysis= Taking accurate measurements based on the foundation created

Complete data analysesComplete data analyses

Survey data analysis considered to be Survey data analysis considered to be more of an art than a science.more of an art than a science.

Options to consider:Options to consider: How to measure central tendencyHow to measure central tendency PercentilesPercentiles Aging dataAging data Weighting market data across survey sourcesWeighting market data across survey sources

Common Measures of Common Measures of Central TendencyCentral Tendency

Median – exact middle point in the dataMedian – exact middle point in the data Mean – averageMean – average Mode – most frequent occurring single point Mode – most frequent occurring single point

In surveys most commonIn surveys most common Unweighted average or Mean – equal weight to Unweighted average or Mean – equal weight to

every organization represented in the dataevery organization represented in the data Weighted average – equal weight to every salary Weighted average – equal weight to every salary

representedrepresented Median middle salary in a set of ranked data – less Median middle salary in a set of ranked data – less

susceptible to data extremessusceptible to data extremes

PercentilesPercentiles

Surveys also may provide information in Surveys also may provide information in the form of a percentilethe form of a percentile

10th10th 25th25th 5050thth median median 75th75th 90th90th

What did we say in our compensation What did we say in our compensation philosophy about:philosophy about:

Our labor market?Our labor market?

Our target competitive pay?Our target competitive pay?

Our market position?Our market position?

• Target - Pay more than the going rateTarget - Pay more than the going rate

The Median or 50The Median or 50thth percentile is generally percentile is generally considered to be the going rate of pay for considered to be the going rate of pay for the positionthe position

• Paying more than the going rate might could Paying more than the going rate might could mean using the 75mean using the 75thth percentile for percentile for competitive positioningcompetitive positioning

• Reacting to trendsReacting to trends

• Data jumping up or down?Data jumping up or down?

• Consider removing data from your study Consider removing data from your study that appears inconsistent based on your that appears inconsistent based on your researchresearch

Aging DataAging Data Published surveys reflect market at different points in Published surveys reflect market at different points in

time.time. Combine data from multiple surveys to reflect a Combine data from multiple surveys to reflect a

common point in time by determining the annual aging common point in time by determining the annual aging factor.factor.

Use annual increase budget data (separate surveys) or Use annual increase budget data (separate surveys) or year-over-year increase within survey to determine year-over-year increase within survey to determine annual aging factor.annual aging factor.

Age across two calendar years need to develop Age across two calendar years need to develop separate aging figure for each year and combine.separate aging figure for each year and combine.

Lead, lag, or lead-lag structure policy will determine the Lead, lag, or lead-lag structure policy will determine the point in time to which you should age your data. point in time to which you should age your data.

Aging Survey DataAging Survey Data

Number of Months to Age Data Number of Months to Age Data x Pay Movement Percent = Survey x Pay Movement Percent = Survey 1212 aging factor aging factor

Survey aging factor x pay rate = change in paySurvey aging factor x pay rate = change in pay

Change in pay +pay rate = aged pay rateChange in pay +pay rate = aged pay rate

EXAMPLEEXAMPLE

Effective date of $50,000 pay rate (survey) is Jan 1 and needs to be 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 aged to Sept 1. Assume annual aging factor 4% based on salary increase trendsincrease trends

8/12 x 4% = 2.7%8/12 x 4% = 2.7%

2.7% x $50,000 = $1,3502.7% x $50,000 = $1,350

$1,350 + $50,000 = $51,350$1,350 + $50,000 = $51,350

SALARY STRUCTURE SALARY STRUCTURE INCREASES, BY EMPLOYEE INCREASES, BY EMPLOYEE

CATEGORYCATEGORY

2002Proj

2002 Act

2003Proj

2003Act

2004Proj

2004Act

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%

North America Salary Increase Survey North America Salary Increase Survey HighlightsHighlights

Average Increase

Top Exe

c

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 Weighting Data Across Survey SourcesSurvey Sources

What do you do with multiple survey sources or What do you do with multiple survey sources or data points?data points?

• Take the average of the data points for each Take the average of the data points for each jobjob

• Weight surveys/data differently based on your Weight surveys/data differently based on your compensation strategycompensation strategy

• Weight surveys/data differently based on the Weight surveys/data differently based on the quality of the survey/dataquality of the survey/data

• Weight surveys/data differently based on the Weight surveys/data differently based on the job matchjob match

Salary Ranges/BandsSalary Ranges/Bands Some BasicsSome Basics

Salary ranges have a minimum, midpoint, and Salary ranges have a minimum, midpoint, and maximum (some companies use quartiles or thirds)maximum (some companies use quartiles or thirds)

Difference between minimum and the maximum is Difference between minimum and the maximum is the “spread”the “spread”

Minimum often reflects starting salaryMinimum often reflects starting salary Reviewed and updated annuallyReviewed and updated annually Typically midpoint is geared to the marketTypically midpoint is geared to the market Employees above maximum “overpaid”, below Employees above maximum “overpaid”, below

minimum “underpaid”minimum “underpaid” Decide on Ranges versus Bands (broader)Decide on Ranges versus Bands (broader)

Pay StructurePay Structure

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

1 2 3 4 5 6 7 8 9 10 11

Grade

Salary

One-Grade One-Grade

Inter-Grade Differential Inter-Grade Differential

FromFrom To To

(Midpoint) (Midpoint)(Midpoint) (Midpoint) PercentPercent

GS-1GS-1 GS-2GS-2 12.4%12.4%

GS-2GS-2 GS-3GS-3 9.1% 9.1%

GS-3GS-3 GS-4GS-4 12.3%12.3%

GS-4 GS-4 GS-5GS-5 11.9%11.9%

GS-5GS-5 GS-6GS-6 11.5%11.5%

GS-6GS-6 GS-7GS-7 11.1%11.1%

GS-7GS-7 GS-8GS-8 10.8%10.8%

GS-8GS-8 GS-9GS-9 10.5%10.5%

GS-9GS-9 GS-10GS-10 10.1%10.1%

GS-10GS-10 GS-11GS-11 9.9% 9.9%

Government Grades: One-Government Grades: One-Grade Interval Work Grade Interval Work

Calculating RangesCalculating Ranges

If you know midpoint and percentage spread If you know midpoint and percentage spread you can obtain the minimum and maximumyou can obtain the minimum and maximum

Minimum CalculationMinimum Calculation

midpointmidpoint

100% + ½ spread100% + ½ spread

Example: Midpoint $40,000 spread is 40%, Example: Midpoint $40,000 spread is 40%, minimum = 40000 divided by 1 +.5 * .40 minimum = 40000 divided by 1 +.5 * .40

= 40000 divided by 1.2 = 33333 = 40000 divided by 1.2 = 33333

Calculating RangesCalculating Ranges

If you know midpoint and percentage If you know midpoint and percentage spread you can obtain the minimum and spread you can obtain the minimum and maximummaximum

Maximum CalculationMaximum Calculation

minimum * 100% + range spreadminimum * 100% + range spread

Example: Midpoint $40,000 spread is Example: Midpoint $40,000 spread is 40%, minimum = 33333 40%, minimum = 33333

33333*1.40 = 46666 Maximum33333*1.40 = 46666 Maximum

Broad BandsBroad Bands

Designed with wide range spreads (some Designed with wide range spreads (some even more than 100%)even more than 100%)

Midpoint differentials of 20-25 percentMidpoint differentials of 20-25 percent Provides flexibility to place group of jobs Provides flexibility to place group of jobs

within same band and eliminate the focus within same band and eliminate the focus of the job grade to promote lateral of the job grade to promote lateral movement – focus of career movement on movement – focus of career movement on development and skill breadth not job development and skill breadth not job gradegrade

Pay Range Theory and PracticePay Range Theory and Practice Range spreads usually vary based on the level and Range spreads usually vary based on the level and

sophistication of skills required for a position. Entry-level sophistication of skills required for a position. Entry-level positions that require skills that are quickly mastered positions that require skills that are quickly mastered usually have narrower pay ranges than supervisory, usually have narrower pay ranges than supervisory, managerial, or high-level technical positions. managerial, or high-level technical positions.

Individuals in lower-level positions not only master the Individuals in lower-level positions not only master the requirements of the job sooner, they also have a greater requirements of the job sooner, they also have a greater number of opportunities over time to be promoted to number of opportunities over time to be promoted to higher-level positions. Senior-level positions require a higher-level positions. Senior-level positions require a longer learning curve and often have limited opportunities longer learning curve and often have limited opportunities for advancement. for advancement. (WorldatWork)(WorldatWork)

Narrow Pay Ranges versus Broader Pay Grades/Bands

Junior

Mid

Journey

Senior

0 20,000 40,000 60,000 80,000 100,000 120,000

Salary

GS-1

GS-2

GS-3

GS-4

Junior

GS-5

GS-6

GS-7

GS-8

Mid

GS-9

GS-10

GS-11

GS12

Journey

GS-13

GS-14

GS-15

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)

Market PricingMarket Pricing = Analyzing external salary survey data to establish the worth of jobs

• Pay rates are set – they are aligned with Pay rates are set – they are aligned with the compensation philosophy……so now the compensation philosophy……so now what?what?

• Compare incumbent pay to the market Compare incumbent pay to the market data and analyze need to adjust paydata and analyze need to adjust pay

Review What You Have Review What You Have DoneDone

• Look at incumbent pay or job family pay Look at incumbent pay or job family pay compared to market rate.compared to market rate.

• Market index – divide the base salary by the Market index – divide the base salary by the market ratemarket rate

• Compa-ratio – divide the base salary by the Compa-ratio – divide the base salary by the midpointmidpoint

• 1.00 or greater – at or above market 1.00 or greater – at or above market rate/midpointrate/midpoint

• Less than 1.00 – below market rate/midpointLess than 1.00 – below market rate/midpoint

Comparative Measures

Midpoint differentials show the difference in midpoints between two grades.

Midpoint differential 10%

20% Range

Grade A

Grade B

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.

The ratio between the employee’s pay and the midpoint is $14,000/$15,000.

The employee’s compa ratio is 93%.

• Midpoint differentials to construct pay ranges and compa ratios to control costs.

Things to consider if it appears you are Things to consider if it appears you are over/underpaying:over/underpaying:

• Match to marketMatch to market• Skill/performanceSkill/performance• Accuracy of survey dataAccuracy of survey data• Labor market conditionsLabor market conditions• Plan to correct issues over timePlan to correct issues over time

Educating staff:Educating staff:

• Communicate, communicate, Communicate, communicate, communicatecommunicate

• TransparencyTransparency

• Support the “right” decisionsSupport the “right” decisions

Implication of Change in Implication of Change in Market StrategyMarket Strategy