Pinpoint Compensation Problems Before They Turn into Lawsuits

Check compa-ratios, check external equity, see who’s over the maximum—it’s not rocket science, but it’s necessary, says Carroll, who is Director of Professional Services & Education at PayScale, Inc.

Quick Review: The Numbers that Matter

Analysis begins with an assessment of internal compensation rates to identify any aberrations (via the compa-ratio), and external equity (via the market-ratio), says Carrol.

Especially important is that you don’t go throwing around terms like compa-ratio when you talk to executives, says Carroll. You don’t want to make executives feel dumb, so when you show them a chart like this, explain carefully what all the numbers and terms mean.
 

		Annualized Base Compensation				Annual Base Comp–Market
Incumbent Job Title	Base Pay	Min	Mid	Max	Compa-ratio	25th	50th	75th	Market-ratio
Machine Tool Builder III	63.2	41.2	53.6	62.6	1.2	31.2	35.9	40.8	1.76
Machine Tool Builder III	64.8	41.2	53.6	62.6	1.2	31.3	35.9	40.8	1.81
Machinist II	51.3	37.2	44.6	52.1	1.2	34.0	38.1	42.5	1.35
Facilities Technician	38.6	31.0	37.2	43.4	1.0	27.3	31.6	36.7	1.22
Applications Engineer III	76.5	53.6	64.3	75.0	1.2	48.5	62.1	76.6	1.22
Programmer/Analyst II	78.4	75.0	90.0	105.	0.9	60.3	69.0	78.0	1.14
Director of Sales, SBU	82.1	75.0	90.0	105.	0.9	73.3	89.3	106.8	0.92
Repairs Technician III	65.2					29.4	33.8	3931	1.93
Director of Sales, SBU	72.6	75.0	90.0	105.	0.8	73.2	89.3	106.8	0.81
Administrative Assistant I	10.4	19.0	26.6	32.3	0.4	28.1	31.1	34.4	0.34
Machine Tool Builder II	37.4	37.2	44.6	52.1	0.8	28.9	33.2	37.7	1.13

In these two charts, you see who’s well over the midpoint, who’s over max, and how it all compares to external pay rates.

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External Compensation Review: Market-Ratios

Here’s an example of a simplified summary of the data that would be found in charts like those above:

Position Category	Number of Incumbents
Positions with a Market Ratio less than 0.8	19
Positions with a Market Ratio greater than 0.8 and less than 1.0	29
Positions with a Market Ratio greater than 1.0 and less than 1.2	43
Positions with a Market Ratio greater than 1.2	59

Key questions to ask after doing this investigation:

1. Have we defined the positions correctly, such that the market rate—and therefore the market-ratio—is accurate?
2. Where, relative to the market, does XYZ aim to pay?
3. Would it make sense for XYZ to consider different target pay rates, relative to market, for different positions?

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Market-Ratio Assessment: By Grade

Here’s a breakout of similar data by grade that is very revealing, says Carroll:

Position Grade	1	2	3	4	5	6	7
Incumbents	17	23	28	19	16	9	8
Market Ratio > 1.0	7	19	27	13	10	5	7
% with MR > 1.0	41%	83%	96%	68%	63%	56%	88%
Overall workforce
% with MR > 1.0	68%	68%	68%	68%	68%	68%	68%

Here we can see that across the workforce, incumbents at two grade levels—three and seven—disproportionately earn high base salaries relative to the market (with grade two not far behind).

In tomorrow’s Advisor, more of Carroll’s analysis charts, plus an introduction to the program that help you spot problems before the feds and the lawyers do.