This document discusses developing a market-based pay structure. It covers selecting market salary survey data, applying compensation philosophy to the data, choosing benchmark jobs, aging and weighting data sources, determining pay grades, and building salary ranges with minimums and maximums. The goal is to establish competitive pay ranges using objective market data.

1. Building a
Compensation Plan
Part 2:
Developing a Market-
Based Pay Structure
Stacey Carroll, SPHR, CCP
Principal Consultant
PayScale, Inc.

2. PayScale is a market leader in global online compensation
data. With the world's largest database of individual
employee compensation profiles, PayScale provides an
immediate and precise snapshot of the job market.
Our patent-pending, real-time profiling system indexes
custom employee attributes (such as industry-specific
certifications) and specific job titles for every industry.
Our secure, on-demand business solutions, PayScale
MarketRate and PayScale Insight, provide employers with
accurate, reliable compensation detail never before
available.
13,000 Positions. 50 Major Industries. 11 Countries

3. Why External Market Analysis is Important
“The war for talent and proliferation of pay information, especially free
and low-cost data online, are increasing pressure on HR offices to have
and use accurate, up-to-date market pay information, to share it with
managers and employees and, at times, to defend its use while refuting
incorrect or inferior data. Knowledge of and skill in selecting and using
compensation surveys are required”
- Kenneth H. Pritchard, Selecting and Using Compensation Surveys:
Critical Issues for Today’s HR Professionals

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. 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. Selecting Survey Data
Best 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 data
Price 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. Applying Your • Who/What is your market?
• What industry are you going to use for
Compensation
comparison?
Philosophy to • What size organization are you going to use
the 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. 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. Getting the data right
 Aging data from an effective date in the survey
to the effective date for your organization
• Choosing a multiplier
(www.worldatwork.com)
• 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. 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 $57,328
1. Step one – find the effective date of the survey data and decide on the
target date for the data
2. Decide on an annual adjustment factor
3. Calculate the portion of the factor to use based on the effective date
4. Apply the aging factor to the market data

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 $56,060
1. Choose the weight you will assign to each source
2. Use the aged data from that source
3. Multiple the source data by the weight assigned to that source
4. Come up with your weighted average

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. Pay grades are used to group jobs that have
Determining approximately the same relative worth; all jobs
Your Pay Grades within a particular grade are paid the same rate
or within the same pay range.
The bottom line: the
number of pay grades
should be sufficient to The number of pay grades varies in response to:
permit the • The size of the organization
distinguishing of • The vertical distance between the highest
difficulty levels but not
so great as to make the
and lowest level job
distinction between the • How finely the organization defines jobs
two adjoining grades and differentiates between them
insignificant. • 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. 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.  Pay ranges set the upper and lower bounds of
Building Your Pay
Ranges
possible compensation for individuals whose
jobs fall in a pay grade; pay ranges are created
Finding 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. The spread between the minimum and maximum will
Building Your Pay depend on many variables within your organization and
Ranges based on your compensation policy and practices, but some
Determining general guidance is provided below:
the Range Generally, pay spreads are narrower for lower-level job, and
Spread 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.  Once you have calculated your midpoint, and you
Building 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 take
the Minimum your midpoint and divide it by 1.xx half of your range
and 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. 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. Save Time and Money on Your
Compensation Initiatives
PayScale 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.
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