Should You Meet, Lead, or Lag the Market?

Strand, owner of consultancy HR Dynamics Inc., offered his seven steps to successful market pricing at a recent webinar hosted by BLR/HRhero.

[Go here for steps 1 to 4]

5. Choose Your Rate

Let’s say that in analyzing market data, you come up with a market rate of $61,400 for an Office Manager position, and a 75th percentile of $70,900. Now you have another compensation philosophy decision:

• To meet the market, make the market midpoint of $61,400 the midpoint of your position’s range
• To lead the market, set your midpoint between the market’s midpoint of $61,400 and the market’s 75th percentile of $70,900
• To lag the market, set your midpoint below the market’s midpoint of $61,400

Lagging more than 10% below the market is not recommended, says Strand. He also suggests being wary of bringing a new hire at the 75th percentile. However, he notes, you may have a “mission critical” position or a position in which you have a lot of turnover, and maybe that suggests hiring at the 75th percentile.

If you do start a new employee at that high level, be sure you have good business reasons for doing it, he cautions.

6. Calculate Your Range

Now say you decide to select the “meet-the-market” rate of $61,400 as the midpoint for the Office Manager position. Then you have to select the range; that is, determine how far the minimum and maximum will be from the midpoint.

There are conventions/practices regarding ranges. Typically the entry positions have a smaller range (35% to 40%). And executive positions have a larger range (65% to 75%) because of the learning curve. More specifically:

• CEO—80%+
• Executive/VP—65% to 75%
• Managerial—55% to 65%
• Supervisory—45% to 55%
• Technical/Skilled—40% to 50%
• General Clerical/Entry—35% to 40%

Following are the multiplication factors that will easily identify the range minimum and maximum from the midpoint and desired range:

35% = 0.8511/1.1489
40% = 0.8333/1.1667
45% = 0.8163/1.1837
50% = 0.8000/1.2000
55% = 0.7844/1.2156
60% = 0.7692/1.2308
65% = 0.7547/1.2453
70% = 0.7407/1.2593
75% = 0.7273/1.2727
80% = 0.7143/1.2857

For the Office Manager position, a range of 50% is selected yielding the following range minimum and maximum:

Minimum	1st Quartile	Midpoint	3rd Quartile	Maximum
$49,120	$55,260	$61,400	$67,540	$73,680

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7. Consider the Incumbent

Finally, you consider the incumbent. Let’s say survey data indicate the average time in position for the Office Manager is 9.2 years. The 9.2 years is a benchmark that should align with the range midpoint.

Say the incumbent Mary Smith is making $59,800.

• If she has significantly more than 9.2 years in position (12+ years), she is underpaid … and a pay increase is indicated.
• If she has significantly less than 9.2 years in position (4 to 5 years), she is overpaid … but no pay reduction should take place.
• If she has about 8 to 10 years of time in position, her pay is appropriate.

Note, says Strand, that this analysis doesn’t reflect job performance, which typically also has an effect on pay levels.

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