Ever wonder how organizations develop systems to evaluate positions within their hierarchy?
Many adopt one of three systems—ranking, classification, or point factor. Any one of them can help ensure internal equity but, to ensure external equity, market-based compensation should be used.
Market-based compensation utilizes salary survey data to evaluate an organization’s pay levels and can make them more, or less, competitive depending on the organization’s compensation philosophy—a framework within which compensation decisions are made.
In conducting a market-based pay study, you’ll need to make decisions that directly reflect the organization’s compensation philosophy. For example, whether the organization will pay at, above, or below the market.
As a general rule, the market rate is the median rate (the 50th percentile in salary survey data) derived from the key characteristics of the organization: budget size, number of employees, organization type, and location. As an example, let’s identify the market rate as the average of the organizational and demographic characteristics (budget, staff size, type org, location) at $61,400.
If your philosophy is to pay at market, then $61,400 is the midpoint of the grade/range for the position. If your philosophy is to pay above market, the 75th percentile of $70,900 could be the midpoint of your grade/range for the position. Alternatively, a rate between $61,400 and $70,900 could be used as the midpoint of the salary range. If you want to pay below market, then a rate below $61,400 may be selected as the new midpoint. (A rate below 10% under market is not usually recommended. Unless, of course, your goal is a high turnover rate.) If your philosophy is to “pay at market,” the rate of $61,400 is the midpoint of the grade/range for the position.
The goal is to figure out where the organization needs to be in relation to the mid-point of the market and consistently apply that “philosophy” to all positions in the organization.
Tune in next week for part 2 …