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Market Pay

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Market Pay Unweighted answers question ON average what are companies paying for this job Weighted average answers question on average what are incumbents in this job ... – PowerPoint PPT presentation

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Title: Market Pay


1
Market Pay
2
Companys 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)

3
Companys 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

4
Job-worth and Market-Driven Differences
  • Job- Worth
  • Market-Driven
  • Err on the side of maintaining internal equity
  • Proponents point to scarcity of appropriate
    market data and employees internal comparisons
  • Work well in seniority-driven companies with low
    turnover
  • 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

5
Job-worth and Market-Driven Approaches
  • Many organizations use a hybrid of a jobworth
    hierarchy with market-driven benchmarks to
    balance both internal equity and market demands.

6
Market-Pricing
  • 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

7
Job Process
8
Job Process
9
Collecting and Analyzing Labor-Market Data
  • Select benchmark jobs
  • Serves as internal anchor for non-benchmark jobs
  • Decide on survey source(s)
  • Published survey versus conduct own
  • Know the market
  • Gather Valid data
  • Match jobs in survey
  • Complete data analyses
  • Aging data to common point in time
  • Weighting market data across survey sources

10
Select Benchmark Jobs
  • Benchmark jobs should
  • Be well-represented positions in the marketplace
  • Be important in the organizations 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

11
Collecting and Analyzing Labor-Market Data
  • Select benchmark jobs
  • Serves as internal anchor for non-benchmark jobs
  • Decide on survey source(s)
  • Published survey versus conduct own
  • Know the market
  • Gather Valid data
  • Match jobs in survey
  • Complete data analyses
  • Aging data to common point in time
  • Weighting market data across survey sources

12
Decide on Survey Source(s)
  • Decision Factors in Collecting Market Data
  • Cost
  • Time
  • Reliability/Accuracy
  • Availability
  • Confidentiality
  • Know the market
  • Industry
  • Organizational size
  • Geographic location

13
Sample Labor Market Pharmaceutical Firm
14
Decide on Survey Source(s)
  • Purchase Published Surveys Examples
  • Watson Wyatt Data Services
  • Economic Research Institute
  • William M. Mercer
  • ORC Worldwide
  • Bureau of Labor Statistics
  • http/www.bls.gov
  • Conduct own Survey

15
Characteristics of Good Salary Surveys
  • Adhere to antitrust safe harbor guidelines
  • Have adequate sample size
  • Contain timely data
  • Clearly communicate survey process and procedures

16
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

17
Collecting and Analyzing Labor-Market Data
  • Select benchmark jobs
  • Serves as internal anchor for non-benchmark jobs
  • Decide on survey source(s)
  • Published survey versus conduct own
  • Know the market
  • Gather Valid data
  • Match jobs in survey
  • Complete data analyses
  • Aging data to common point in time
  • Weighting market data across survey sources

18
Gather Valid Data
  • 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

19
How to Handle Incomplete Job Matches
  • Lets 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 a similar benchmark job
  • Pay the market rate of the bottle washer
  • Pay the bottle washer rate a premium
  • Combine the market data 60/40
  • Pay the highest market rate of the two jobs

20
Survey Job Descriptions
  • Vary from short paragraphs to a full page
  • Often include organizational chart

21
Collecting and Analyzing Labor-Market Data
  • Select benchmark jobs
  • Serves as internal anchor for non-benchmark jobs
  • Decide on survey source(s)
  • Published survey versus conduct own
  • Know the market
  • Gather Valid data
  • Match jobs in survey
  • Complete data analyses
  • Aging data to common point in time
  • Weighting market data across survey sources

22
Complete data analyses
  • Survey data analysis considered to be more of an
    art than a science.
  • Options to consider
  • How to measure central tendency
  • Percentiles
  • Aging data
  • Weighting market data across survey sources

23
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

24
Percentiles
  • Surveys also may provide information in the form
    of a percentile
  • 10th
  • 25th
  • 50th median
  • 75th
  • 90th

25
  • What did we say in our compensation philosophy
    about
  • Our labor market?
  • Our target competitive pay?
  • Our market position?

26
  • 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

27
  • Reacting to trends
  • Data jumping up or down?
  • Consider removing data from your study that
    appears inconsistent based on your research for
    example, watch for outliers

28
Aging Data
  • Published surveys reflect market at different
    points in time based on when survey was conducted
  • 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.

29
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 (pay movement percent)
    based on salary increase trends
  • 8/12 x 4 2.7
  • 2.7 x 50,000 1,350
  • 1,350 50,000 51,350

30
Weighting Data Across Survey Sources
  • 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

31
Weighting Data Across Survey Sources
  • Three surveys for the same position may decide
  • to average the 3 medians for salary amount
  • to weight one surveys median 60 and other 2
    surveys 20 each since one survey contained more
    of competitors or had better job matches or .

32
Collecting and Analyzing Labor-Market Data
  • Select benchmark jobs
  • Serves as internal anchor for non-benchmark jobs
  • Decide on survey source(s)
  • Published survey versus conduct own
  • Know the market
  • Gather Valid data
  • Match jobs in survey
  • Complete data analyses
  • Aging data to common point in time
  • Weighting market data across survey sources

33
Salary Ranges/Bands
  • Some Basics
  • 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)

34
Pay Structure
35
Calculating Ranges
  • 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

36
Calculating Ranges
  • 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
  • 333331.40 46666 Maximum

37
Broad Bands
  • 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

38
Pay Range Theory and Practice
  • Range spreads usually vary based on the level and
    sophistication of skills required for a position.
    Entry-level positions that require skills that
    are quickly mastered usually have narrower pay
    ranges than supervisory, managerial, or
    high-level technical positions.

39
  • Pay rates are set they are aligned with the
    compensation philosophyso now what?
  • Compare incumbent pay to the market data and
    analyze need to adjust pay

40
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

41
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 employees pay is 14,000. The pay
range midpoint is 15,000. The ratio between the
employees pay and the midpoint is
14,000/15,000. The employees compa ratio is
93.
42
  • 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

43
  • Educating staff
  • Communicate, communicate, communicate
  • Transparency
  • Support the right decisions

44
Implication of Change in Market Strategy
45
  • 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
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