In strategizing salary budgets, employers often have to decide whether they want to lead, lag, or lead/lag the market rate. What factors play into aging market data to suit your employment needs? And when is it time to retire your current market data?
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Best Strategy Depends on Your Organization’s Goals and Priorities
If your organization is looking to attract and retain highly talented individuals, setting the rate to lead the market may make sense. Organizations typically set pay rates at a specific time in the year, and ensuring you develop your “market leading” approach is pivotal to attracting talent in demand of higher pay.
But if your organization is not focused on attracting exceptional new talent and is looking to limit recruiting, your best plan may be to lag the market rate. And the company that “lead/lags” the market rate may start out the plan year at a higher rate but then age the rate only to the middle of the year—so by the end of the year it lags the market rate.
Which of these three options will best suit your organization’s needs, and how do you determine the formula to set salary rates? Amy Letke, SPHR, GPHR of Integrity HR, Inc., explains the process for us. “You need to have a documented compensation plan/strategy to protect you from compliance headaches, keep your current employees happy, and support your recruiting efforts,” Letke says.
Overview of Market Pricing
The external market is the key determinant of job value that influences pay philosophy, Letke notes.
- Job rates are set based on the organization’s best estimate of the typical wage rates in the external marketplace for each job.
- Job descriptions are used to match appropriate jobs.
- Market data from at least two sources are analyzed, and benchmark jobs are arranged into a job‐worth hierarchy.
- Jobs with no market data are slotted using relative worth.
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Goals of Your Compensation Philosophy
Your compensation philosophy, Letke says, should:
- Reinforce company culture and goals.
- Communicate how success will be rewarded.
- Communicate commitment from key decision makers in the business.
When developing the compensation philosophy, she advises asking broad questions, such as:
- What is the company culture and environment?
- What are the cost constraints?
- What is the company’s business model?
- What is the competitive environment?
- What needs to be done to attract, motivate, retain, and engage employees?
3 Approaches
So, how do you competitively position your salary structure? Letke says there are three approaches to setting pay strategy, all of which involve aging factors. (An aging factor takes into account the market movement that occurs during the lag time.)
1. Lead Approach
Age the data that are underlying your salary structure to a point ahead of its effective date, typically a full year out, so that the structure leads the market for an entire year.
This can be useful if your goal is to be the leader in your industry and you want to attract the best talent by paying slightly above market, Letke says.
Pro: Can be beneficial in attracting talent
Con: Can be costly to recruiting budgets to set pay above market for entire year
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2. Lag Approach
Age the data that are underlying your salary structure to the date it is effective so it will effectively lag the market for a year.
Letke says this can be useful if salary projections are negligible and you want to capture “savings” on employee costs through the year.
Pro: Cost-effective, especially in light of very small market fluctuations experienced in recent years
Con: Could be detrimental to attracting talent
3. Lead/Lag Approach
Age the data that are underlying your salary structure to a date halfway through the plan year so the structure effectively leads the market for the first 6 months and lags it for the second 6.
This is, Letke notes, a balanced approach to cost, attraction, and retention that can be tailored to your business.
Pro: Mitigates recruiting risks while still setting a single market rate for the year (Don’t fall too far behind!)
Con: Lagging the market for second half of the year
Tomorrow, we’ll look at other considerations Letke advises keeping in mind when setting up your pay structure, plus we introduce the timely webinar, Sales Compensation: Plan Design and Management for Small to Mid-Size Businesses.