Building a Compensation Plan Part 2: Develop a Market-Based Pay Structure


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HR leaders aiming to develop and maintain pay ranges within their organizations face a Goldilocks problem. If too narrow, the pay ranges won’t allow an organization to reward long-tenured staff or high performers. Too broad, and the pay ranges won’t provide practical support for your compensation philosophy. But, worst of all, having no ranges at all can lead to a failure to attract top talent, or dramatically overpaying employees.

So, how can you get pay ranges just right?

Join us as Stacey Carroll, CCP, SPHR, reveals how to develop ranges from a market-centered midpoint.

You’ll learn:

How to use market data to update or create competitive pay ranges.
How to select a competitive market set for benchmarking against.
How to choose benchmark positions and slot non-benchmark positions into your structure.
This practical webinar will give you the information necessary to update or create market ranges in your organization.

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Building a Compensation Plan Part 2: Develop a Market-Based Pay Structure

  1. 1. Building aCompensation PlanPart 2:Developing a Market-Based Pay StructureStacey Carroll, SPHR, CCPPrincipal ConsultantPayScale, Inc.
  2. 2. PayScale is a market leader in global online compensationdata. With the worlds largest database of individualemployee compensation profiles, PayScale provides animmediate and precise snapshot of the job market.Our patent-pending, real-time profiling system indexescustom employee attributes (such as industry-specificcertifications) and specific job titles for every industry.Our secure, on-demand business solutions, PayScaleMarketRate and PayScale Insight, provide employers withaccurate, reliable compensation detail never beforeavailable. 13,000 Positions. 50 Major Industries. 11 Countries
  3. 3. Why External Market Analysis is Important“The war for talent and proliferation of pay information, especially freeand low-cost data online, are increasing pressure on HR offices to haveand use accurate, up-to-date market pay information, to share it withmanagers and employees and, at times, to defend its use while refutingincorrect or inferior data. Knowledge of and skill in selecting and usingcompensation surveys are required”- Kenneth H. Pritchard, Selecting and Using Compensation Surveys:Critical Issues for Today’s HR Professionals
  4. 4. Creating Market Centered Ranges - Steps Market Pricing vs. Point Factoring Selecting survey data Applying your compensation philosophy to the data Choosing benchmark jobs Getting the data right • Aging data • Weighting your sources Determining your pay grades Building your ranges Hot jobs
  5. 5. Market Pricing vs. Point Factoring Market Pricing is an approach to establish a compensation structure to be competitive externally. Point Factoring is an approach to establish a compensation structure to rely on internal alignment. Creating pay grades from market data is the in-between approach (using market data but adjusting for internal alignment.) The advantages of using market data include:  There is an objective standard (market data) to establish jobs within ranges.  Allows you to establish pay ranges (minimum to maximum) that are competitive with the local market and retain employees.  It takes less time to maintain.  It’s harder to manipulate the results.
  6. 6. Selecting Survey DataBest practice is to choose 3 salary sources• You want surveys with good coverage for your industry/geography/type of organization• The goal is to be able to benchmark 75-80% of the positions within your organization. This is best accomplished with multiple sources, or a single source which provides good coverage (such as PayScale)Understand the methodology of the survey that you are using• How do they collect data?• Do they use aging or geographic differentials?• What is the effective date of the dataPrice is important – make sure you are getting good value• Participation may be required for traditional surveys (indirect costs)• High cost does not always equal high value• Which surveys are going to give the most value for the price (cost vs. number of positions matched)
  7. 7. Applying Your • Who/What is your market? • What industry are you going to use forCompensation comparison?Philosophy to • What size organization are you going to usethe Data for comparison? • What geography are you going to use for comparison? • What “target” are you going to use from the survey data? • There is a difference between the average and the median • If you choose a percentile, make sure you can get that number from every source • Will you be looking at base salary or Total Cash Compensation (TCC) • Will you use the same target for all jobs?
  8. 8. Choosing Benchmark Jobs When selecting your benchmark jobs you want to… • Focus on those positions that are standard across different industries. For example: HR Generalist, Accountant, Administrative Assistant • Choose industry specific positions that are standard at your company compared to positions within other organizations within your industry. For example: Civil Engineer, RN, assembly line worker • Avoid hybrid positions What should you do with non-benchmark positions? • Don’t force matches to market data for non-benchmark positions • Instead, use your job evaluation tool to slot the position within a pay grade, or use your own internal assessment of comparable positions within your organization with similar skill, scope, decision making and responsibility
  9. 9. Getting the data right Aging data from an effective date in the survey to the effective date for your organization • Choosing a multiplier ( • Finding the effective date of the survey data • This is not necessary if you use PayScale data Geographic differential if expanding your search to capture more data • Choosing a cost of labor/living multiplier Matching the job • Don’t match on title alone • Look at the scope: who the job reports to, education, experience, decision making • Decide how to handle hybrid jobs • Decide how to handle leveling within your organization
  10. 10. Aging Data Aging data Adjustment Factor: 2.9% Effective Target Source 1 Source 2 Source 3 Date Date Source 1 aged Source 2 aged Source 3 aged Buyer II 12/1/2008 6/1/2009 1.47% $38,500 $39,064 $41,000 $41,601 $43,000 $43,630 Marketing Coordinator 12/1/2008 6/1/2009 1.47% $31,000 $31,454 $32,000 $32,469 $33,000 $33,484 Accountant 2 12/1/2008 6/1/2009 1.47% $54,000 $54,792 $56,500 $57,3281. Step one – find the effective date of the survey data and decide on the target date for the data2. Decide on an annual adjustment factor3. Calculate the portion of the factor to use based on the effective date4. Apply the aging factor to the market data
  11. 11. Weighting Your Sources Position Source 1 Weight Source 2 Weight Source 3 Weight Weighted Average Buyer II $39,064 0.25 $41,601 0.5 $43,630 0.25 $41,474 Marketing Coordinator $31,454 0.25 $32,469 0.5 $33,484 0.25 $32,469 Accountant 2 $54,792 0.5 $57,328 0.5 $56,0601. Choose the weight you will assign to each source2. Use the aged data from that source3. Multiple the source data by the weight assigned to that source4. Come up with your weighted average
  12. 12. Why build pay grades Why we build grades  Easier to administer than individual ranges  Allows for decisions about internal alignment  Allows placement for jobs that don’t have a market benchmark How we build pay grades  Choose a midpoint start based on minimum salaries and build midpoints from a midpoint differential.  Build minimums and maximums for the ranges based on an expanding range spread.  Let the market data for the position guide us to the right midpoint of the pay range.  Verify grade placement against internal alignment and hierarchy Employee Placement within the range  Employee’s placement within the range can be measured by compa-ratio.  Compa-ratio is the employee’s pay divided by the range midpoint.  Employees who are fully proficient should be at midpoint (market).  Employees at the midpoint have a comp-ratio of 1.0.
  13. 13. Pay grades are used to group jobs that haveDetermining approximately the same relative worth; all jobsYour Pay Grades within a particular grade are paid the same rate or within the same pay range.The bottom line: thenumber of pay gradesshould be sufficient to The number of pay grades varies in response to:permit the • The size of the organizationdistinguishing of • The vertical distance between the highestdifficulty levels but notso great as to make the and lowest level jobdistinction between the • How finely the organization defines jobstwo adjoining grades and differentiates between theminsignificant. • The pay increase and promotion policy of the organization Choose a midpoint differential based on the factors above. Typically this will be a number between 10-18%.
  14. 14. Calculating Ranges (Midpoints) Calculating Midpoints Starting Point: $32,000 Midpoint Differential: 15% Grade Rounding 1 $32,000 $32,000 2 $36,800 $37,000 3 $42,320 $42,000 4 $48,668 $49,000 5 $55,968 $56,000 6 $64,363 $64,000 7 $74,018 $74,000 8 $85,121 $85,000 9 $97,889 $98,000 10 $112,572 $113,000 1. Choose starting midpoint 2. Choose midpoint differential 3. Choose rounding (optional)
  15. 15.  Pay ranges set the upper and lower bounds ofBuilding Your PayRanges possible compensation for individuals whose jobs fall in a pay grade; pay ranges are createdFinding the for each grade.Midpoint  The value of the aged, weighted market data at the target for the position is matched to the range midpoint that is closest.  Verify the internal alignment of positions within a pay grade, by evaluating the scope, responsibility and decision-making of each job assigned to the pay grade.  At times, it becomes necessary to build different range structures. Common examples include: exempt vs. non-exempt jobs or technical jobs.
  16. 16. The spread between the minimum and maximum willBuilding Your Pay depend on many variables within your organization andRanges based on your compensation policy and practices, but someDetermining general guidance is provided below:the Range Generally, pay spreads are narrower for lower-level job, andSpread wider for higher level jobs • Tenure in position • Learning time necessary to achieve “job rate” (midpoint) There should be overlap between pay ranges, which makes it possible for an experienced person in a job in a lower grade to be paid more than an inexperienced person in a higher job. Typical range spreads: • Hourly positions – 40% • Salaried positions – 50% • Executive positions – 60%
  17. 17.  Once you have calculated your midpoint, and youBuilding Your Pay Ranges have determined the range that is most appropriate,Determining you will calculate the minimum by dividing your range spread percentage in half. Then, you will takethe Minimum your midpoint and divide it by 1.xx half of your rangeand Maximum spread. For example: • If your midpoint is: $30,000 and you want your width to be 40%, then you would divide $30,000 by 1.20. This equals $25,000. $25,000 is your minimum for the range  To find your maximum, take your minimum and multiply it by 1.xx your range spread. For example: • If your minimum is: $25,000 and your width is 40%, then you would multiple $25,000 by 1.40. This equals $35,000. $35,000 is your maximum for your salary range  In this example, your full salary range would be $25,000 - $35,000 with a midpoint of $30,000
  18. 18. How to Handle “Hot Jobs” or Range Busters First, double check that this position is appropriate assigned to the right pay grade and that the market data is accurate. If this is true of more than a few jobs, build a separate pay grade structure (i.e. technical career ladder) If this is true of a few jobs, assign employees in this “hot job” to the appropriate pay grade, but develop a special market premium range for these employees. • For example – if the average of the market data for the “hot job” is 20% above the market rate for the rest of the position in the same pay grade, apply a market premium for people in this job. • Best rule of thumb is to make this market premium as transparent as possible to the employee, so that if it needs to be taken away, it can be explained clearly to employees.
  19. 19. Save Time and Money on Your Compensation InitiativesPayScale is your key to saving money, recruiting talent at the right price, and retaining top performers with accurate, real-time compensation data matched to your workplace and workforce. Visit our blog: Connect with me on LinkedIN: Join us for another webinar: