Peer Group ‘Arms Race’
Boyd, a researcher at Boston-based compensation consultant Equilar, says that pay ratcheting is a concern when companies compare themselves to their peer group. “For instance, you decide to set your CEO’s pay above the median of the peer group. Then other companies see that figure and want to set their CEO pay above the median, which has now increased because of your strategy. Then you have to increase yours, and they increase theirs, and so on. It becomes like an arms race.”
Part of the solution lies in how you select your peer group. “There isn’t really a silver bullet approach of exactly how you should build your peer group,” Boyd explains. “Each company really has to examine how they want to set their pay, which companies they feel comfortable comparing themselves to, and how they want to structure it.
“It is very much an individual thing. You don’t want to set your peer group and your pay structure the same as everybody else does, because there are unique challenges to every company. In order to reflect those differences, each company needs to take all these things into consideration when they’re selecting their peer group.”
Have Some of Your Peers Evaporated?
Equilar’s research found that the average peer group consists of 16 to 20 companies. But due to mergers, acquisitions, and outright business failures, you may find that your peer group has shrunk in the last 12 months or so. “If you had a peer group of 20 and now you have 10, you might want to add some more companies,” he recommends.
Pay grade challenges? Good news—Fix that with BLR’s September 19 webinar Compensation: How to Effectively Manage Base Compensation with Pay Grades Click here to find out more about this timely webinar.
Start with a frank discussion with your compensation consultant, Boyd says. “I’m not a consultant, but, anecdotally, from what I’ve seen and from talking with clients, most companies choose peers from among the companies they’re competing with.
“You know which companies you’re competitive with in terms of talent, revenue dollars, and other factors. They might be within your industry, but not necessarily. For example, Wal-Mart uses multiple peer groups. It doesn’t just compare itself against other retailers. It is the largest retailer by far, so to compare itself only to other retailers would be limiting.”
Some companies prefer to benchmark against an index, rather than choosing a group of specific peer companies. “They’ll review their performance relative to the S&P 500, for example. So when they’re figuring out how much they should pay out in a bonus, they’ll be comparing against companies they feel are comparable in terms of performance. Sometimes using an index might be the best strategy, especially if you consider how things went last year,” Boyd says.
He explains that, if bonuses depend upon company performance hitting a particular mark, that mark may have been unattainable in the depressed economy. But if your company’s performance met or exceeded that of the index group, you may actually consider the year successful and pay out the scheduled bonuses.
Two to Two-and-a-Half Times Your Size
“One thing we noticed in our report was the relative size against which companies compare themselves, in terms of revenue, tends to be companies that are ½ to 2 times their own size,” Boyd says. “From there, they may refine their list, bringing in other factors. That way they don’t compare themselves with companies that are too large, or too small.”
Finding peer groups, fighting peer group wars—comp’s just not going to be easy. But it will be manageable with a carefully worked out pay grade system.
Pay grades are a fair, effective way to manage your base compensation rates and keep you competitive within your market. But there can be challenges, including:
- Employees who don’t fit into the standard pay grades for one reason or another
- Employees who have maxed out at their existing pay grade
- Employees who point to online salary information and claim they’re not getting paid enough
Fortunately, there’s a well-timed solution—BLR’s new September 19 webinar, Compensation: How to Effectively Manage Base Compensation with Pay Grades, will get into the real nitty-gritty of making pay systems work.
Plus, if you’re just beginning to implement a pay grades system, you probably have all kinds of questions about how to set things up correctly in the first place.
Join us on September 19 —you’ll get an in-depth webinar on pay grades, and you’ll get all of your particular questions answered by our experts.
You’ll learn:
- The 4 basic objectives of compensation
- The role of your compensation philosophy in driving pay for performance
- Strategies for establishing market competitiveness, without paying too much
- Effective, manageable salary structure design concepts
- How to use your salary structure to maintain competitive compensation rates
- How to apply differentiating pay increases based on performance and range placement
- When and why to update the salary structure to keep it fresh and current
- How to effectively reward your best employees
- Tips for managing the never-ending information flow that can lead employees to complain about their pay relative to what they’re seeing online
Pay Grades that work in the “new normal.” Attend September 19 Compensation: How to Effectively Manage Base Compensation with Pay Grades. Click here to find out more about this timely webinar.
Monday, September 19, 2011
10:30 a.m. to 12:00 p.m. (PST)
11:30 a.m. to 1:00 p.m. (MST)
12:30 to 2:00 p.m. (CST)
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The date is Monday, September 19, from 11 am to 4:45 pm (Eastern Time—adjust for your time zone). As with all BLR webinars, one fee trains all the staff you can fit around a conference phone, you can get your (and their) specific phoned-in or emailed questions answered in Q&A sessions that follow each segment of the presentation, and your satisfaction is assured or you get a full refund.
What if you can’t attend on that date? Pre-order the conference CD. For more information on the conference and the experts presenting it, to register, or to pre-order the CD, click here. We’ll be happy to make the arrangements.
Please join us Monday, September 19 for Compensation: How to Effectively Manage Base Compensation with Pay Grades Bring your whole team along, and get everyone trained at the same time for one low price.. Get more information.