3 Tips for Updating Your Compensation Program

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Updating your salary structure? Market data discrepancies, pay compression, and alignment with the compensation philosophy are all problems employers experience when updating their compensation programs. Here are some tips to deal with these problems:

Problem 1: Market data shows discrepancies

You’ve established pay rates for your organization’s positions based on a salary survey, but the next year the same survey shows that a given job encountered a moderate salary decrease or large increase. Market data discrepancies are a common problem many employers face when updating their compensation programs.

Salary surveys sometimes show discrepancies annually. These discrepancies occur mainly from differences in participation from year to year (different or new employers submitting data for the job). Other reasons for discrepancies may include organizational factors, such as pay decreases or large merit increases and higher or lower demand for certain skills or jobs in the labor market. To cope with market discrepancies...

  • Use multiple sources of market data (salary survey information) to establish market averages to benchmark your positions versus just using one source. By taking more data into account when benchmarking, you dilute the impact of these market differences on your pay decisions.
  • Although it may be tempting to use the most specific and targeted breakouts available to make pay decisions, these are often more susceptible to variance and discrepancies because they have lower participation. As a general rule, it’s important to use breakouts of data that have the most participation from employers (such as “all employers”). These are the most reliable figures and are unlikely to experience major differences year over year. 
  • Be cautious in making pay decisions annually. Continue to benchmark pay on an annual basis, but only make pay decisions based on distinct trends. Market data is highly susceptible to variance and trends are more likely to become evident over multiple years.

Problem 2: Jobs show pay compression

Pay compression is a common problem organizations experience when revising their pay structures. It results when there is a pay difference between positions requiring different skills and responsibilities – when lower-level jobs are paid as much or more than higher-level jobs. It often occurs when typical adjustments or increases have not been given and instead pay raises are only given to a select few employees (such as top performers). It may also occur when a salary structure is not used. To resolve the issue of pay compression…

  • Determine which positions show pay compression. Is it a job-specific issue, affecting only one or a few employees? Or is it a widespread problem?
  • Create a salary structure with formal pay ranges. This will set the upper and lower limits of pay that employees can earn for a given job or job family. Keep pay ranges updated once they are established.
  • Consider coupling your market analysis with a job evaluation. Job evaluation is often an under-used method of determine pay rates, however, establishes which jobs are most and least valuable to the organization and thereby encourages internal equity. It involves assigning points or ranking jobs according to their value to the organization.
  • If ranges are established, adjust pay ranges by the same figure each year – such as a cost of living or across-the-board increase to ensure that pay keeps in line with the market.
  • Consider using lump sum bonuses instead of merit increases to reward employees who have hit the maximum in their pay range. Similarly, for new-hires with special skill-sets, you may consider offering a lump-sum sign-on bonus.
  • Establish career paths. Pay compression is more likely to occur in organizations that do not have clear advancement opportunities and upward mobility. Such paths provide more opportunities to earn more pay and reward performance. 

Problem 3: Pay not aligned with compensation philosophy

Let’s say that your organization’s compensation philosophy is to pay all of your organization’s jobs at market, which means at the 50th percentile or median pay rate. Perhaps this philosophy has been newly developed or changed since the creation of your current pay structure. After analyzing the market, you find that you are actually paying above or below market for some positions. This is your organization’s position to market.

Your organization’s position to market should not necessarily determine its compensation philosophy. For example, if your philosophy is to pay “at market” and your organization pays “below market” for some positions, this should not lead you to change your compensation philosophy, unless it feels that this is best for the organization’s attraction and retention of talent. To address this problem...

  • Determine whether the philosophy applies to all positions. It’s important to be aware that a compensation philosophy does not need to apply for all positions.
  • Keep pay where it is and “red line” the employees paid above market until the market catches up to their pay rates.
  • Make pay adjustments to employees paid below market, unless reasons for this discrepancy are justifiable.
  • Hire new employees at the “at market” rate.

Updating a compensation structure presents its challenges for many employers, and can be one of the more complex tasks HR encounters. Should your organization need additional assistance with updating its compensation system, be sure to check out the resources ERC offers to support your compensation programs below.

Additional Resources

HR Consulting
Our compensation consulting services cover a broad range of assistance on the total rewards spectrum; from basic job description updates to the complete design of organization-wide base salary compensation systems and variable pay programs. For more information, please contact consulting@yourerc.com.

EAA Reports Northeast Ohio Sales Manager Pay

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According to the 2010-2011 EAA National Sales Compensation & Practices Survey, Northeast Ohio employers report paying higher median total compensation for some sales managers. Specifically, Northeast Ohio employers report higher median total compensation for General Sales Managers and District Sales Managers than other U.S. employers.

 

ERC Surveys Northeast Ohio Pay Rates

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In 2011, ERC launched it's ERC Salary Survey and ERC Wage Survey. These surveys collected pay rate information from Northeast Ohio employers on over 350 jobs in accounting, administration, customer service, sales, engineering, human resources, IT, maintenance, marketing, production, purchasing, distribution, transportation, safety, science, and research and development functions.

With over 90 years of experience in conducting compensation surveys, ERC is known for providing the most comprehensive, reliable, timely, and local market data for Northeast Ohio businesses.  ERC’s data is collected from actual Northeast Ohio employers.

View ERC's Wage & Salary Adjustment Survey Results

The survey reports data from Northeast Ohio organizations regarding their actual and projected wage and salary adjustments.

View the Results

8 Steps in a Compensation Project

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Compensation initiatives are often on many employers’ agendas, 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.

 

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 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 challenging projects and typically include more complexity and analysis than these eight steps suggest. Keep in mind that ERC has many resources, including valid local and national pay data and experienced guidance, available to help you in navigating these projects with ease and success.

Compensation & Benefits Consulting

Compensation & Benefits Consulting

ERC offers a variety of compensation and benefits consulting services including competitive market pay analysis, salary structure design, total rewards strategy, variable pay design, and more!

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