8 Steps in a Compensation Project

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Planning to look at compensation in 2011? Compensation initiatives appear to be on many employers’ agendas for 2011, so we’ve summarized eight (8) steps in a basic compensation project.

1. Participate in or purchase salary and wage surveys.

It all starts with having pay data, which is the basis for all compensation systems and projects. Compensation surveys contain information on competitive wages and salaries for various jobs and report data regarding what other employers pay for given positions. Participating in these surveys (which generally requires reporting your employees’ salary and wage information) typically helps organizations save money on receiving the data.  A good rule of thumb is obtaining at least three survey or compensation data sources. Local resources are ideal, especially if your organization recruits locally. For example, ERC’s Salary & Wage Surveys are a common resource used by many Northeast Ohio employers to benchmark local pay rates.

2. Identify matches for your organization’s jobs.

Once you obtain salary survey information, the next step is identifying the positions in the surveys that match the jobs in your organization. This is generally not done by job title alone. Instead, employers look for jobs with position descriptions that match at least 70% of the duties summarized. For some unique positions, it may be difficult to find an exact match. In these cases, organizations typically blend or weight salary data from multiple jobs to create a salary figure that best represents the job.

3. Select and gather data.

After your organization has selected the positions that match, you’ll need to determine what percentile or metric from the survey you would like to use to compare your jobs. Organizations commonly select this based on their pay philosophy for different positions. Employers may wish to pay some positions above market rates (percentiles above the median) because talent is scarce or the job is critical to their organization’s strategy or mission. Other positions may be paid below market rates (percentiles below the median) if they lack importance or are easily recruited. The widespread majority of organizations aim to pay most of their employees at market (the median). You can also use the average; however, the median is less susceptible to higher or lower values, and therefore more reliable.

4. Analyze the data.

In order to analyze the salary information, organizations should age the data to a common point in time by an aging factor – such as an average yearly increase (obtained in a compensation survey).  After aging the data, the percentile information gathered from each of the survey sources can be weighted based on factors such as industry data, local or national information, quality of survey, and strength of job match. Typically, a weighted average is calculated based on these weightings of the survey sources and the percentile information. This weighted average is usually referred to as the “market average.” Although, there are certainly other metrics of market competitiveness your organization could use.

5. Calculate a market average.

For each job you are analyzing, it’s important to determine where the job stands relative to the market. This is easily done by dividing what your organization currently pays for the position (the current salary or wage) by the market average. Figures over 1.0 indicate that the job is paid more than the market average; while figures below 1.0 show that the job is paid less than the market average. While other metrics exist, this tends to be the easiest to calculate for employers.

6. Create a pay structure.

Organizations commonly use the data obtained through its market analysis to create or maintain a formal pay structure with grades and ranges. Ranges specify minimum and maximum pay values and midpoints (which are typically set to the market average) for specific jobs or grades. Range spreads (the difference between the minimum and maximum) can range anywhere from 20-50%, typically dependent on the type of position. For example, entry/lower level positions having narrow pay ranges and managerial/senior level positions having wider pay ranges. Employers can also go a step further in creating a pay structure by developing pay grades. Pay grades group positions by either internal value (determined using a job evaluation procedure) or by market data. Grades are formed based on these groupings and ranges are set for the grades. Grades may vary in terms of width and overlap, depending on an organization’s structure.

7. Address inconsistencies.

After your organization has collected and analyzed the market data and/or developed any pay structures it deems important to its compensation administration, the next step is to address differences or inconsistencies, particularly in terms of differences in market averages/midpoints and rates your organization is paying for positions as well as differences in internal equity (results of job evaluation study) and external market rates. These questions often involve considering organizational culture, structure, what it can afford to pay, and what it wants to pay for certain positions.

8. Make adjustment decisions.

After these questions are addressed, your organization will need to determine whether it wants to adjust salaries and wages to be more in line with the market (if differences exist). These are typically termed “market adjustments.” Other pay adjustments your organization may provide include cost-of-living or across the board adjustments (the same adjustment being provided to all employees), or merit increases, which are commonly based on performance achieved and varied in terms of amount received (typically a percentage of base salary).

There’s no question that compensation initiatives can be very involved and difficult projects, often including even more complexity and analysis than these eight steps suggest. Keep in mind that ERC has many resources, including valid pay data and experienced guidance, available to help you in navigating these projects with ease and success.

Additional Compensation Resources

Compensation surveys
ERC offers numerous sources of compensation data to members. Currently, ERC is conducting its 2011 Salary & Wage Surveys. Members can participate in ERC’s SurveyCenter (note: registration as a first time user is required) and receive the results for no cost. Non-members may participate in these surveys and receive the results at a discount. Members can also participate in our 2011 Executive Compensation Survey. In addition, members can access other compensation data in ERC’s Research Library or by contacting our HR Help Desk (hrhelp@yourerc.com).

Compensation assistance
ERC can assist with compensation projects involving market pricing, compensation system design, job evaluation, and variable pay programs. For more information on the services we offer to help your organization with its compensation projects, please contact consulting@yourerc.com. Or, for additional articles pertaining to compensation system design, please contact hrhelp@yourerc.com.

HR University
Join ERC as it hosts HR University, a comprehensive development course for newer Human Resource professionals, which includes workshops in not only Compensation and Benefit Plan Design Basics, but also Employment Law Fundamentals, Orientation and Performance Management Plan Basics, Staffing & Recruitment Practices, and Communication Skills for HR Professionals.