How to Set Compensation
Salaries are a business investment, and in order to make sure that you set fair and competitive compensation for jobs it’s important to use a structured method for setting compensation as opposed to choosing a random salary or simply using one salary survey or compensation source.
Employers generally determine salaries based on five (5) types of information: the job’s responsibilities, what their competitors are paying, how valuable the job is to their organization, how they pay people in similar roles based on their pay structure, and their budget/organizational needs. With this in mind, here are five (5) easy steps for setting compensation.
1. Define the job.
Define the job’s purpose, essential duties and responsibilities, required skills and knowledge, experience, and educational level. This involves creating a job description or updating an existing one. When done right, defining a job accurately requires a comprehensive job analysis. A job title alone will not adequately define a job. You must fully understand and document its responsibilities.
2. Price the job.
Particularly in the case of a new job, use salary survey information (typically three sources) to price the job. Match the job description to the jobs within your salary surveys – ideally it should match 60-70% of the job duties. If a direct match doesn’t exist, price multiple jobs in the survey and blend the data. In addition, match the breakouts to the demographics of your organization to make sure you are comparing the data against your competitors – such as number of employees and industry type. Once matched, select a percentile based on your compensation philosophy. If you are trying to pay competitively at market for a given position, based on your compensation philosophy, you will want to choose the median or 50th percentile. Once data from all three sources is collected, a market average should be calculated. This is typically the “going rate” (otherwise known as the market rate) for the position.
3. Determine the job’s value to your organization.
Evaluating the job’s worth and value not only in the market, but also to your organization, is an important step in setting compensation for this reason: a job with greater internal impact and contribution to your organization’s strategy and business objectives will be more valuable, and therefore should be paid more, than a job with less of a direct impact. Knowing the job’s value also helps you determine whether or not compensation is worth negotiating. When evaluating a job’s worth, several different methods can be used. Jobs can be slotted into a class or grade that matches their class description on job skill and complexity. Also, jobs can be assigned points based on certain factors such as mental and/or physical effort, supervisory responsibility, and accountability/responsibility.
4. Review where a job fits within a grade/range.
Depending on the value of the job and what it is priced at, the job (if it is a new job) is then allocated to the pay structure in a given grade. Existing jobs will already be assigned to a grade and have a range if you have a pay structure in place. Reviewing the compensation of other jobs within the grade, pay rates of similar jobs and peers, and the range of pay for those jobs will help you set appropriate compensation. You’ll also want to consider experience level in the range. Typically new-hires with no to little experience earn closer to the minimum, and highly experienced employees earn closer to the maximum.
5. Consider organizational factors, including budget.
Evaluate what is in your budget and what you paid the last incumbent, if it is not a new role. You should also factor in projected cost-of living adjustments, bonuses, and other increases. In addition, consider the mix of pay. Pay can include various forms (variable pay, base pay, skill-based pay, etc.), depending on the position. For example, sales and executive employees may have a much different mix of pay forms than an administrative employee. When setting compensation, it’s important to evaluate what that mix should be based on market data and organizational needs.
Also, recognize that pay is only part of the total rewards package. If your organization offers many other attractive benefits like flexible schedules, engaging career opportunities, fulfilling work, rewards and recognition programs, and generous time off and benefits, these can all factor into your pay decisions. There is no magic formula or scientific method for setting pay, and it’s more of an “art” if anything in which these factors should be taken into consideration when making the final decision about a job’s salary. All jobs carry a price tag, and making sure that price tag makes sense, is fair and competitive, and supports your business strategy is the key to setting compensation in the right way.
ERC’s Senior Consultant Sue Bailey assists organizations with a range of compensation projects including compensation strategy development, solution design and implementation; total rewards strategy, gap analysis, prioritization, solution design and implementation; sales and management incentive plan design that drives business plan objectives; and more. For more information, contact Sue at sbailey@yourERC.com.
ERC publishes the most comprehensive, reliable, and timely regional compensation, benefits, and workplace practices surveys in Northeast Ohio. Area organizations depend on ERC for this critical data for their business planning, competitive analysis and as a tool to enhance their workplace compensation practices and employee benefits. ERC’s 2013 compensation surveys provide a great deal of salary and wage data to help your organization make important pay decisions.
This article was published by ERC, a company that helps employers build better workplaces.