Compensation that makes sense, Part 2…

Compensation“Dad, I just don’t get what you’re saying.”

Having a daughter who’s willing to pull your chain when you’re not making sense is an interesting phenomenon. My chain gets pulled regularly. The most recent tug came in an email the other night after my post about making compensation make sense.

“OK, Dad, I read your last blog post and I don’t get what you’re saying. It sounds like you’re saying that using the “market value” is separate and distinct from having pay grades, ranges, bands etc. I think of a company using the market value to set the pay grades, ranges, etc. You seem to be saying the two concepts are mutually exclusive, and I think I’m seeing them as one in the same.”

Got me! No, they are not at all mutually exclusive. Most companies do use market data/market value to set their pay grades. The question I’d ask is, why use pay grades at all if you have the market data? If you’ve done the market research on each job, why not disclose and use the actual data for each job? Keep it simple and transparent. My daughter, an engineer for a large technology company, goes on to explain:

“My company uses market data to benchmark their salaries, but then they have pay ranges for each level of engineer, and you get a substantial salary boost when you jump to a new level as opposed to just yearly cost of living type increases within the level.  But they didn’t just pull the ranges out of thin air, they base them on what is “typical” engineering pay in the geographic area… See, in my view from engineering, the company isn’t putting more than one job in a band/grade.  We have “Systems Engineers, levels 1-5,” and “Electrical Engineers, levels 1-5,” etc.  The levels are based on job responsibilities and years of experience (which correlate)”

Bravo! This company “gets it.” While they are using pay grades, the company puts each job in its own pay grade with its own salary spread based on the market data they’ve researched. Systems Engineers have their own band/grade that is distinct from Electrical Engineers, etc. I love it! In fact, the only item I’m not that wild about is the progression based on years of experience. If it is truly just years of experience, and doesn’t include a major dollop of performance and contribution in the mix, I think they’re really missing an important component to good performance management.

Here’s an example of why I don’t like putting multiple jobs in the same salary band/grade. Assume Job A has an estimated market value salary spread (EMV) of from $38,500 to $55,500 between the 25th percentile and the 75th percentile.  Assume Job B has the same market salary spread. An initial assumption might be to put them in the same salary band/grade, like this:

But now let’s add some information about how individual salaries for people in those jobs are actually distributed throughout that same market salary spread. Let’s look at where the 50th percentile falls, which is that point where 50% are paid more and 50% are paid less than that salary:

The 50th percentile salaries of these two jobs are very different even if the total spread from the 25th to the 75th percentile is the same. To be market competitive, you need to be aware that Job A really does pay $9,000 per year more than Job B at the 50th percentile. If your band/grade system has both jobs in the same band, you will be underpaying some job holders and overpaying others.

Consider the further confusion when jobs with very different 75th percentile salaries are put into the same band/grade because the 50th percentile salaries are close. Look at Job X and Job Y below:

This is an example of the percentiles not being linear. The market skews the top end of the estimated market value.

If you put BOTH jobs into the band/grade that matches Job Y (75th percentile at $55,500), how do you explain to the top performing Job X employee that she can’t make the $62,000 her friend at another company is making? How do you retain her when she knows the market will pay materially more for her skills?

If you put BOTH jobs into the band/grade that matches Job X, how do you justify the additional budget impact of paying the Job Y employee materially more than the market? And if you pay only what the market really values the job, how do you explain that the band exceeds $62,000 but you’re flattening out her pay opportunity $9,000 lower than that?

Does this happen in the real world? Absolutely.

It is much more helpful to a manager setting compensation, and to an employee trying to understand his or her compensation opportunity, to see the actual 25th, 50th and 75th percentiles for their individual jobs, as valued by the marketplace. My suggestion is to make the conversation about the actual data, not some bands/grades you’ve pushed everything into.

I know that I would much rather discuss compensation relative to the specific market value for that particular job. How about you?

Contact me to discuss how I can help you make compensation make sense.

Also see: Compensation that makes sense, Part 1

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