Compensation that makes sense, Part 1…

CompensationPay is such a headache. Why won’t employees simply work for what you’re willing to offer? Why all the drama? Most of the challenge comes from making this subject too complicated: grades, ranges, bands, midpoints, Compa-ratios (what?!?)…

Our HR friends just make this far more complex than it needs to be.

Most companies I work with want to accomplish four things:

  1. Pay a competitive wage that provides fair value;
  2. Reward and retain the right people for their contribution to the company’s success;
  3. Pay people equitably; and
  4. Stay within what you can afford, your budget.

To accomplish these goals, I like a direct approach: simply look at what “the market” pays for each job. Using salary surveys covering comparable jobs, match each job to the survey data. The survey data is an external measure of both competitive pay and what an employee might expect to earn at another company doing substantially the same job. It sets the external estimated market value (EMV) of that job.

Market Based PricingWait, you say you already do this? You get salary surveys each year to compare? Great! But, tell me… do you assign jobs into grades? Do you assign mid-points by grade? Do you have several jobs assigned to each grade or pay band? If you do, you’re making the pay discussion more complex than it needs to be. And, for each two jobs assigned into the same grade, the spread of pay assigned to that grade is likely not to match the actual market data for one or both of those jobs.

By working from the actual market data for a specific job, you can begin making some informed decisions about pay. And, you have information for an open discussion with your employees about the external estimated market value of the job, where the employee’s pay falls along the spread of pay in the external market, and how the employee’s performance and contribution matches against that spread of pay.

This market pricing approach to pay has advantages and disadvantages, among which are:


  • Decisions are based on external data; jobs are compared to same or substantially similar jobs in the external market
  • Steps around the “internal equity” comparison among jobs to look directly at how the market values those jobs and skills
  • Provides managers with information on which to make pay decisions
  • Improves the transparency of the conversation about pay and improves managers’ ability to talk with employees about pay (with some training)
  • Facilitates discussions with those employees already highly paid for their jobs
  • Gives managers a clearer understanding of retention risk relative to market compensation
  • Reduces “promotion pressure” to get to next higher band or grade


  • If current salaries are low compared to the market data, one needs to be prepared on how the company plans to be addressing that and prepared to discuss the non-cash components of compensation that offset the differential
  • Accurate and reliable market survey data becomes very important
  • Position descriptions and titles need to be easily benchmarked against the market; companies using very unusual position descriptions and combinations of duties not regularly seen in the market will be challenged in job matching
  • Companies must be prepared to have candid compensation conversations

Using a market pricing approach to compensation, managers have a valuable tool for meeting their responsibility to be candid, fair, equitable and objective.  Managers can be expected to consider: (1) performance as the primary driver of pay decisions (not longevity with the company or tenure); (2) current pay competitiveness relative to the market and relative to the employee’s demonstrated and sustained performance; and (3) available budget.  Managers can then review proposed pay decisions to ensure that the decisions are equitable and do not have adverse impact across race, gender and other identity groups.

Contact me to discuss implementing the compensation program that will make a positive difference for your organization. I will help you make compensation make sense. In our work together, we will establish the right customized compensation program for your organization that

  • employees can understand;
  • managers can communicate;
  • gets managers to the right decisions;
  • rewards the right people for the right reasons; and
  • improves your ability to manage your available budget.

I look forward to our conversation.

Also seeCompensation that makes sense, Part 2

When employees drive your business success…
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