Building Market Competitive Compensation System
By Dr. G C Mohanta, BE, MSc (Engg.), MBA, PhD (Mgt.), Professor, Al-Qurmoshi
Institute of Business Management, Hyderabad, India
In compensation surveys salary and market data are collected. These may include average
salaries, inflation indicators, cost of living indicators, salary budget averages. Companies
may purchase results of surveys conducted by survey vendors or may conduct their own
salary surveys. When purchasing the results of compensation surveys conducted by other
vendors, it should be noted that surveys have been conducted within a specific industry or
across industries as well as within one geographical region or across different geographical
regions. One should know which industry or geographic location - the salary results pertain to
before comparing the results to one’s company.
It is extremely useful to refer compensation surveys when determining salaries. The surveys
lend tremendous credibility and fairness to the process of determining compensation. The
surveys should be current. Reference should be made to them to find the salaries for the job
roles that are the closest match to the roles one is deciding the compensation for. The closer
one can match the role to the type of services, locale and job title of the role one is deciding
compensation for, the more useful the survey is likely to be.
Compensation surveys are carried out:
- To gather and summarize information to monitor movement and developments in the labour
– To provide a means for comparison of salaries at the institution.
Types of data gathered in a salary survey include:
- Base salaries
- Salary Ranges
- Starting Salary
- Allowances and Benefits
- Working Hours
- Working Conditions
Choosing Compensation Survey Conducted by Third Parties
The results of compensation surveys conducted by third parties (e.g., associations,
consultants, survey vendors) can be relatively inexpensive compared to the cost of
developing the same results. Surveys conducted by associations and vendors are often have a
large number of participants which results in a more accurate analysis. Before purchasing
survey results, one should make sure the results contain:
(i) Appropriate Job Titles
- Industry-specific occupational titles,
- Little overlap in job titles,
- Use of titles that don't differentiate/specify the duties performed
(iii) Methodology: Is there a minimum number of responses needed before reporting
results? Data should not be reported for too few incumbents. Need to report
median salary as well as averages. The mean is the average of all numbers divided
by the number of responses. The 'mean' can be affected by extreme values. The
median is the mid-point with half of the responses are above that number and half
fall below. Please note that in salary data, the median tends to be lower than the
mean due to the fact that there is no upper limit to the rates that can be paid for a
job. However, the lower limit is zero. Therefore, the distribution of salaries tends
to be skewed with a few salaries at the extreme high end of the range. Fact: In
salary data, the median will almost always be lower than the mean. Explanation.
(iv) Tabulation of results by Job Title, public/private, industry, geographic region
(v) Breakdowns by size/location/industry
(vi) Data from comparable institutions (size/location/industry)
One should use survey results that will match jobs at one’s organization within the same
industry and/or geographic location.
Integrating Internal Job Structure with External Market Pay Rates
The job evaluation establishes the relative worth of all the jobs in an organization or group
from which a hierarchy of jobs is produced.
The pay structure (salary structure) that follows - sets out the pay grades (or levels) and the
pay ranges, along with the criteria for salary movement within the pay structure. There are
two basic approaches to constructing a pay structure. In the first, every job that has a different
total of job evaluation points will be treated separately and will, in effect, become a particular
pay grade. The other approach is to group jobs that have similar value in the organization
(certain range of point values) into pay grades.
Many employers use market surveys to validate their own job evaluation results. For
example, job evaluation may place purchasing assistant jobs at the same level in the job
structure as some secretarial jobs. But if the market shows vastly different pay rates for the
two types of work, most employers will recheck their evaluation process to see whether the
jobs have been properly evaluated. Some may even establish a separate structure for different
types of work (finance, engineering, law).
For an organization to be able to recruit and retain employees who have the skills required
and who perform well, compensation levels need to be competitive with those in the broader
marketplace. An effective pay structure will reflect the values of the organization as
expressed in the job hierarchy and the market rates of comparable jobs. It is important that
companies set pay rates by using market pay rates as reference points, as paying well below
or well above the typical market rates can create competitive disadvantage for companies.