Compensation Planning

A Practical Guide to Market Pricing

Compensation planning can be a very time consuming task. It’s vital to attracting and retaining qualified talent, but can be a bit less cumbersome when managed with a practical approach.market price

Management Buy-In

Before you begin a shift from your current pay strategy to market pricing jobs, it’s crucial to get management support, otherwise it could be a wasted effort. Getting management on board, however, isn’t always easy to do. It can be a challenge—for example, if your organization has low turnover, management may have an “if it isn’t broke, don’t fix it” attitude. Getting them onboard, however, is critical to ensuring supervisor and employee acceptance.

Comp Philosophy/Strategy

It’s not enough to have a general idea of your pay practices. You need to have a documented compensation philosophy/strategy to maintain consistent and compliant pay practices.

One of the things to consider is whether to lead, lag, or lead-lag the market. Setting your pay rates at the year-end anticipated market level rather than the current rate, results in leading the market.

Setting your pay rates at the current market level means you will lag the market as the year progresses. Setting your pay rates at a level that is above the current level but below the anticipated year-end level means you will lead the market for a time then lag the market for the rest of the year.

Leading the market allows you to attract more experienced talent by paying higher wages. Lagging the market puts you in the position of recruiting less experienced applicants by paying lower wages, though you may offer training and development opportunities.

Utilizing a lead-lag philosophy allows you to offer the best of both worlds by paying a higher than market rate initially and offer more training and development opportunities as well.

Viable Market Data

You need more than one source for salary data. If you have only one source, you can’t be sure it accurately represents the marketplace. If you have multiple sources and they’re in alignment with one another, you can accept that it’s viable market data. To insure you’re getting the most reliable view of the market, you need at least two, but preferably three to five sources of salary data.

The Internet has made getting salary data very easy and there are lots of online resources, with some more costly than others.  If you work in an industry that has a trade association, you may be able to participate in their salary survey and receive the results of the survey at no cost.

Another source for salary data may be your local chamber of commerce. Many of them conduct salary surveys as part of their business development effort. As with trade associations, participating often gets you survey results at no cost.

Bear in mind that you’re not going to get exactly the same numbers from all sources. That’s OK, but you should get comparable data for the same job from each source. If the data for a particular job is out of alignment with job data from other surveys, consider it an outlier and delete it from your composite rate.

A Practical Approach

Salary surveys primarily contain benchmark jobs, which are common across many industries and locations and are used for either internal or external pay comparison. Salary surveys provide a range of rates that are being paid for a given job at a specific point in time.

If you’re looking for someone to tell you what to pay employees, market pricing can help you make that decision but can’t provide you with a specific amount. Having a comp philosophy/strategy in place, however, provides the guidance you need to determine which elements of the market data to utilize for your positions.

Though there are thousands of job titles in existence, essentially, there are just a few hundred individual job families. For example, accountant is a job family with a hundred or more job titles such as accounting supervisor, budget accountant, cash accountant, etc. When you dig into those jobs, you find that they often share comparable duties and responsibilities, as well as similar education and experience requirements. They’re not all exactly the same job, but they are comparable.

Job titles are not the determining factor when looking for a match for your job but they are a guideline to finding the best match. You have to consider the description of the position provided by the survey, which is sometimes no more than a short summary.

Fortunately, you don’t have to find a survey job that is a 100% match for your position in order to use the data. Finding a job that is at least a 70% match is sufficient. Additionally, you don’t have to find salary data for every job in your organization. Finding data for at least 50% of your jobs is enough. Ranking all of your jobs allows you to slot the rest of your positions in alignment with the benchmark jobs from the salary survey.

It’s important to remember that salary market data is merely a guideline rather than a rule for what to pay for jobs in your organization. You need to consider internal equity as well as market rates when making salary decisions.

Sharon McKnightSharon L. McKnight, CCP, SPHR, draws from more than 20 years of management experience, including 6 years as a director of human resources, to develop compensation administration tools and write about compensation issues. Her experience in both operational and HR management provides her with a practical approach to providing online resources that address the challenges facing compensation and human resource professionals.