Salaries are a business investment, and setting compensation levels requires a fact based, structured methodology centered on external marketplace and internal organizational factors.
Sue Bailey, ERC’s Senior consultant for compensation, benefits and everything in between, talks about what should go into consideration when deciding an employee’s salary.
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.
A job title alone doesn’t describe or define a job, and many organizations use job titles differently. It’s therefore important that the job description clearly document the core responsibilities of the position.
2. Price the job
Market pricing a job is the process of gathering relevant, external market pay information for a position. To price a job, gather market data from reputable, respected salary survey sources. Utilize multiple survey sources—three is ideal. Select data that best represents the labor market where you compete for talent based on factors such as industry, organizational size and/or geography.
Match the content of your job description to the jobs within your salary surveys—an ideal match will contain at least 70% to 80% of the job content. If a good match doesn’t exist, it may be possible to price multiple jobs in the survey and blend the data.
Surveys generally provide compensation data for the 50th percentile (median) as well as the 25th and 75th percentiles. Use or compute the percentile that aligns with your compensation philosophy, and modify as required to reflect any unique needs. It’s also important to gather target bonus information so that total target compensation can be determined. Gather the data from all survey sources and average the results, or create a weighted average if desired.
3. Determine the job’s internal value to your organization
A job’s internal value is typically based on skills or competencies, and the overall perceived value of contribution the job provides to an organization. Jobs with greater or direct internal impact and contribution to your organization’s strategy and business objectives are more valuable and generally paid more than jobs without the same business impact and contribution to organizational goals and objectives.
Several methods can be used to slot jobs into career levels or bands that represent internal value. Positions with similar internal value are generally, but not always, aligned from a competitive external pay standpoint. It’s important to analyze the relationships and make certain that where alignment does not exist it is explainable, legal and defensible.
4. Place the job in your salary structure
A salary structure typically consists of multiple levels (job grades) with overlapping salary ranges. Most structures utilize salary ranges with a midpoint that represents the 50th percentile of market for jobs that are placed into that grade. Generally, the market pay for the job is compared to the range midpoints, and the job is placed in the grade that best aligns market compensation and the midpoint.
You will want to consider other jobs that have been placed in the same grade and compare internal job value, as well as other relationships between peer jobs, supervisory relationships and logical career path progressions to ensure the grade is appropriate for the job.
5. Consider organizational factors, including budget
Evaluate your budget considerations or constraints and what you paid the last incumbent. Determine the pay mix (proportion of compensation delivered in base salary versus bonus versus other forms of pay) and adjust the base salary as required to reflect a pay mix that differs from the market or that is reflective of your compensation strategy. Be certain to consider individual job experience or any other unique factors when finalizing the compensation package.
Recognize that pay is only part of the total reward package. Don’t forget to factor into your pay decision other attractive benefits you provide such as flexible work schedules, engaging career opportunities, fulfilling work, recognition programs, generous time off or health insurance, and retirement benefits.
There is no magic formula or scientific method for setting pay; it’s a matter of combining science (market data) and art, which is determining how to align that data with your compensation philosophy and business goals and objectives.