Market Pay

Company’s Compensation Strategy Example: Base Pay will lag market (25 th percentile) Base Pay will lag market (25 th percentile) Base + Target Incentive will match market (50 th percentile) Base + Target Incentive will match market (50 th percentile) Base + Target Incentive + Stock Options will lead market (75 th – 90 th percentile) Base + Target Incentive + Stock Options will lead market (75 th – 90 th percentile)

Company’s Compensation Strategy Example Need to attract and retain the best talent Need to attract and retain the best talent Lead the market in base pay, paying above the market (75 th percentile) of the general industry Lead the market in base pay, paying above the market (75 th percentile) of the general industry Share team success with team based incentive pay Share team success with team based incentive pay Support career advancement with key management level incentive pay Support career advancement with key management level incentive pay

Job-worth and Market-Driven Differences Job- Worth Err on the side of maintaining internal equity Err on the side of maintaining internal equity Proponents point to scarcity of appropriate market data and employee’s internal comparisons Proponents point to scarcity of appropriate market data and employee’s internal comparisons Work well in seniority- driven companies with low turnover Work well in seniority- driven companies with low turnover Market-Driven Err on the side of reflecting how the outside world pays the position Err on the side of reflecting how the outside world pays the position Flexible in recognizing market conditions but also reasonable level of control over salary costs and internal equity Flexible in recognizing market conditions but also reasonable level of control over salary costs and internal equity Companies with numerous external hires and rapid turnover need more market-driven approach Companies with numerous external hires and rapid turnover need more market-driven approach

Job-worth and Market-Driven Approaches Many organizations use a hybrid of a job–worth hierarchy with market-driven benchmarks to balance both internal equity and market demands. Many organizations use a hybrid of a job–worth hierarchy with market-driven benchmarks to balance both internal equity and market demands.

Market-Pricing Market Pricing – the process of analyzing external salary survey data to establish the worth of jobs as represented by the data, based upon the “scope” of the job (company size, industry type, geography, etc.). Market Pricing – the process of analyzing external salary survey data to establish the worth of jobs as represented by the data, based upon the “scope” of the job (company size, industry type, geography, etc.). Some form of market pricing is used by more than 80 percent of companies Some form of market pricing is used by more than 80 percent of companies

Job Process Job Analysis Job Documentation Job Evaluation Job worth hierarchy

Job Process Job AnalysisJob DocumentationJob Evaluation Job worth hierarchy Market DataPay Structure

Collecting and Analyzing Labor- Market Data Select benchmark jobs Select benchmark jobs Serves as internal anchor for non-benchmark jobs Serves as internal anchor for non-benchmark jobs Decide on survey source(s) Decide on survey source(s) Published survey versus conduct own Published survey versus conduct own Know the market Know the market Gather Valid data Gather Valid data Match jobs in survey Match jobs in survey Complete data analyses Complete data analyses Aging data to common point in time Aging data to common point in time Weighting market data across survey sources Weighting market data across survey sources

Select Benchmark Jobs Benchmark jobs should: Benchmark jobs should: Be well-represented positions in the marketplace Be well-represented positions in the marketplace Be important in the organization’s internal hierarchy Be important in the organization’s internal hierarchy Represent many organizational levels or grades in the salary structure Represent many organizational levels or grades in the salary structure Be matched to 70% or more of the duties found in the survey jobs Be matched to 70% or more of the duties found in the survey jobs Have multiple incumbents Have multiple incumbents

Collecting and Analyzing Labor- Market Data Select benchmark jobs Select benchmark jobs Serves as internal anchor for non-benchmark jobs Serves as internal anchor for non-benchmark jobs Decide on survey source(s) Decide on survey source(s) Published survey versus conduct own Published survey versus conduct own Know the market Know the market Gather Valid data Gather Valid data Match jobs in survey Match jobs in survey Complete data analyses Complete data analyses Aging data to common point in time Aging data to common point in time Weighting market data across survey sources Weighting market data across survey sources

Decide on Survey Source(s) Decision Factors in Collecting Market Data Decision Factors in Collecting Market Data Cost Cost Time Time Reliability/Accuracy Reliability/Accuracy Availability Availability Confidentiality Confidentiality Know the market Know the market Industry Industry Organizational size Organizational size Geographic location Geographic location

Sample Labor Market – Pharmaceutical Firm Industry Organization Size Geography Top Management General Pharmaceutical $1-4 billionNational Administrative/ Professional General Pharmaceutical All sizes Regional Local Clerical GeneralAll sizesLocal

Decide on Survey Source(s) Purchase Published Surveys – Examples Purchase Published Surveys – Examples Watson Wyatt Data Services Watson Wyatt Data Services Economic Research Institute Economic Research Institute William M. Mercer William M. Mercer ORC Worldwide ORC Worldwide Bureau of Labor Statistics Bureau of Labor Statistics Conduct own Survey Conduct own Survey

Characteristics of Good Salary Surveys Adhere to antitrust safe harbor guidelines Adhere to antitrust safe harbor guidelines Have adequate sample size Have adequate sample size Contain timely data Contain timely data Clearly communicate survey process and procedures Clearly communicate survey process and procedures

Safe Harbor Guidelines 1. Survey is managed by a third party 2. Information provided by participants is at least 3 months old 3. There are at least 5 providers reporting data and no individual provider represents more than 25% of the weighted statistic Dissemination does not allow recipients to identify any particular provider

Collecting and Analyzing Labor- Market Data Select benchmark jobs Select benchmark jobs Serves as internal anchor for non-benchmark jobs Serves as internal anchor for non-benchmark jobs Decide on survey source(s) Decide on survey source(s) Published survey versus conduct own Published survey versus conduct own Know the market Know the market Gather Valid data Gather Valid data Match jobs in survey Match jobs in survey Complete data analyses Complete data analyses Aging data to common point in time Aging data to common point in time Weighting market data across survey sources Weighting market data across survey sources

Gather Valid Data Job matching is the most important component of a salary survey. Job matching is the most important component of a salary survey. Job matched on job content not job titles. Job matched on job content not job titles. Underlying assumption is the incumbents are performing at a solid competent level – not beginners or superstars. Underlying assumption is the incumbents are performing at a solid competent level – not beginners or superstars. One rule of thumb is to consider the match to be appropriate if 70% or more of the job content is similar One rule of thumb is to consider the match to be appropriate if 70% or more of the job content is similar

How to Handle Incomplete Job Matches Let’s say 60% of a job is “chief bottle washer” and 40% of a job is “executive chef”. What can you do? Let’s say 60% of a job is “chief bottle washer” and 40% of a job is “executive chef”. What can you do? Pay market rate of a similar benchmark job Pay market rate of a similar benchmark job Pay the market rate of the bottle washer Pay the market rate of the bottle washer Pay the “bottle washer” rate + a premium % Pay the “bottle washer” rate + a premium % Combine the market data 60%/40% Combine the market data 60%/40% Pay the highest market rate of the two jobs Pay the highest market rate of the two jobs

Survey Job Descriptions Vary from short paragraphs to a full page Vary from short paragraphs to a full page Often include organizational chart Often include organizational chart

Collecting and Analyzing Labor- Market Data Select benchmark jobs Select benchmark jobs Serves as internal anchor for non-benchmark jobs Serves as internal anchor for non-benchmark jobs Decide on survey source(s) Decide on survey source(s) Published survey versus conduct own Published survey versus conduct own Know the market Know the market Gather Valid data Gather Valid data Match jobs in survey Match jobs in survey Complete data analyses Complete data analyses Aging data to common point in time Aging data to common point in time Weighting market data across survey sources Weighting market data across survey sources

Complete data analyses Survey data analysis considered to be more of an art than a science. Survey data analysis considered to be more of an art than a science. Options to consider: Options to consider: How to measure central tendency How to measure central tendency Percentiles Percentiles Aging data Aging data Weighting market data across survey sources Weighting market data across survey sources

Common Measures of Central Tendency Median – exact middle point in the data Median – exact middle point in the data Mean – average Mean – average Mode – most frequent occurring single point Mode – most frequent occurring single point In surveys most common Unweighted average or Mean – equal weight to every organization represented in the data Unweighted average or Mean – equal weight to every organization represented in the data Weighted average – equal weight to every salary represented Weighted average – equal weight to every salary represented Median middle salary in a set of ranked data – less susceptible to data extremes Median middle salary in a set of ranked data – less susceptible to data extremes

Percentiles Surveys also may provide information in the form of a percentile Surveys also may provide information in the form of a percentile 10th 10th 25th 25th 50 th median 50 th median 75th 75th 90th 90th

What did we say in our compensation philosophy about: What did we say in our compensation philosophy about: Our labor market? Our labor market? Our target competitive pay? Our target competitive pay? Our market position? Our market position?

Target - Pay more than the going rate Target - Pay more than the going rate The Median or 50 th percentile is generally considered to be the going rate of pay for the position The Median or 50 th percentile is generally considered to be the going rate of pay for the position Paying more than the going rate might could mean using the 75 th percentile for competitive positioning Paying more than the going rate might could mean using the 75 th percentile for competitive positioning

Reacting to trends Reacting to trends Data jumping up or down? Data jumping up or down? Consider removing data from your study that appears inconsistent based on your research for example, watch for outliers Consider removing data from your study that appears inconsistent based on your research for example, watch for outliers

Aging Data Published surveys reflect market at different points in time based on when survey was conducted Published surveys reflect market at different points in time based on when survey was conducted Combine data from multiple surveys to reflect a common point in time by determining the annual aging factor Combine data from multiple surveys to reflect a common point in time by determining the annual aging factor Use annual increase budget data (separate surveys) or year-over-year increase within survey to determine annual aging factor Use annual increase budget data (separate surveys) or year-over-year increase within survey to determine annual aging factor Age across two calendar years need to develop separate aging figure for each year and combine. Age across two calendar years need to develop separate aging figure for each year and combine. Lead, lag, or lead-lag structure policy will determine the point in time to which you should age your data. Lead, lag, or lead-lag structure policy will determine the point in time to which you should age your data.

Aging Survey Data Number of Months to Age Data x Pay Movement Percent = Survey 12 aging factor Survey aging factor x pay rate = change in pay Change in pay +pay rate = aged pay rate EXAMPLE Effective date of $50,000 pay rate (survey) is Jan 1 and needs to be aged to Sept 1. Assume annual aging factor 4% (pay movement percent) based on salary increase trends 8/12 x 4% = 2.7% 2.7% x $50,000 = $1,350 $1,350 + $50,000 = $51,350

Weighting Data Across Survey Sources  What do you do with multiple survey sources or data points? Take the average of the data points for each job Take the average of the data points for each job Weight surveys/data differently based on your compensation strategy Weight surveys/data differently based on your compensation strategy Weight surveys/data differently based on the quality of the survey/data Weight surveys/data differently based on the quality of the survey/data Weight surveys/data differently based on the job match Weight surveys/data differently based on the job match

Weighting Data Across Survey Sources Three surveys for the same position may decide: Three surveys for the same position may decide: to average the 3 medians for salary amount to average the 3 medians for salary amount to weight one survey’s median 60% and other 2 surveys 20% each since one survey contained more of competitors or had better job matches or …. to weight one survey’s median 60% and other 2 surveys 20% each since one survey contained more of competitors or had better job matches or ….

Collecting and Analyzing Labor- Market Data Select benchmark jobs Select benchmark jobs Serves as internal anchor for non-benchmark jobs Serves as internal anchor for non-benchmark jobs Decide on survey source(s) Decide on survey source(s) Published survey versus conduct own Published survey versus conduct own Know the market Know the market Gather Valid data Gather Valid data Match jobs in survey Match jobs in survey Complete data analyses Complete data analyses Aging data to common point in time Aging data to common point in time Weighting market data across survey sources Weighting market data across survey sources

Salary Ranges/Bands Some Basics Some Basics Salary ranges have a minimum, midpoint, and maximum (some companies use quartiles or thirds) Salary ranges have a minimum, midpoint, and maximum (some companies use quartiles or thirds) Difference between minimum and the maximum is the “spread” Difference between minimum and the maximum is the “spread” Minimum often reflects starting salary Minimum often reflects starting salary Reviewed and updated annually Reviewed and updated annually Typically midpoint is geared to the market Typically midpoint is geared to the market Employees above maximum “overpaid”, below minimum “underpaid” Employees above maximum “overpaid”, below minimum “underpaid” Decide on Ranges versus Bands (broader) Decide on Ranges versus Bands (broader)

Pay Structure

Calculating Ranges If you know midpoint and percentage spread you can obtain the minimum and maximum If you know midpoint and percentage spread you can obtain the minimum and maximum Minimum Calculation Minimum Calculation midpoint midpoint 100% + ½ spread 100% + ½ spread Example: Midpoint $40,000 spread is 40%, minimum = divided by *.40 Example: Midpoint $40,000 spread is 40%, minimum = divided by *.40 = divided by 1.2 = = divided by 1.2 = 33333

Calculating Ranges If you know midpoint and percentage spread you can obtain the minimum and maximum If you know midpoint and percentage spread you can obtain the minimum and maximum Maximum Calculation Maximum Calculation minimum * 100% + range spread minimum * 100% + range spread Example: Midpoint $40,000 spread is 40%, minimum = Example: Midpoint $40,000 spread is 40%, minimum = *1.40 = Maximum 33333*1.40 = Maximum

Broad Bands Designed with wide range spreads (some even more than 100%) Designed with wide range spreads (some even more than 100%) Midpoint differentials of percent Midpoint differentials of percent Provides flexibility to place group of jobs within same band and eliminate the focus of the job grade to promote lateral movement – focus of career movement on development and skill breadth not job grade Provides flexibility to place group of jobs within same band and eliminate the focus of the job grade to promote lateral movement – focus of career movement on development and skill breadth not job grade

Pay Range Theory and Practice Range spreads usually vary based on the level and sophistication of skills required for a position. Entry- level positions that require skills that are quickly mastered usually have narrower pay ranges than supervisory, managerial, or high-level technical positions. Range spreads usually vary based on the level and sophistication of skills required for a position. Entry- level positions that require skills that are quickly mastered usually have narrower pay ranges than supervisory, managerial, or high-level technical positions.

Pay rates are set – they are aligned with the compensation philosophy……so now what? Pay rates are set – they are aligned with the compensation philosophy……so now what? Compare incumbent pay to the market data and analyze need to adjust pay Compare incumbent pay to the market data and analyze need to adjust pay

Review What You Have Done Look at incumbent pay or job family pay compared to market rate. Look at incumbent pay or job family pay compared to market rate. Market index – divide the base salary by the market rate Market index – divide the base salary by the market rate Compa-ratio – divide the base salary by the midpoint Compa-ratio – divide the base salary by the midpoint 1.00 or greater – at or above market rate/midpoint 1.00 or greater – at or above market rate/midpoint Less than 1.00 – below market rate/midpoint Less than 1.00 – below market rate/midpoint

Comparative Measures Midpoint differentials show the difference in midpoints between two grades. Midpoint differential 10% 20% Range Grade A Grade B Compa ratios compare individual employee pay to the pay range midpoint. Example: An employee’s pay is $14,000. The pay range midpoint is $15,000. The ratio between the employee’s pay and the midpoint is $14,000/$15,000. The employee’s compa ratio is 93%. Midpoint differentials to construct pay ranges and compa ratios to control costs.

Things to consider if it appears you are over/underpaying: Things to consider if it appears you are over/underpaying: Match to market Match to market Skill/performance Skill/performance Accuracy of survey data Accuracy of survey data Labor market conditions Labor market conditions Plan to correct issues over time Plan to correct issues over time

Educating staff: Educating staff: Communicate, communicate, communicate Communicate, communicate, communicate Transparency Transparency Support the “right” decisions Support the “right” decisions

Implication of Change in Market Strategy

North America Salary Increase Survey Highlights North America Salary Increase Survey Highlights Average Increase Top Exec Mid Mgmt Prof/ Sup Admin United States %1.8% 1.9% United States 2010 proj.2.6%2.7% 2.6% Hewitt and Associates