Once you completed some initial compensation analyses, like looking at how your salary ranges compare to the market compensation data and, if applicable, ensuring that your company follows through and creates a history of pay for performance, you can then move on to doing an analysis of how your employees align within their pay grades. This information can highlight unusually high or low base salaries and give you the opportunity to correct them or adjust your ranges.
Alignment of Employees within a Pay Grade
In this analysis, we’ll seek to answer the question, “What is the alignment of incumbents within their pay grades?” There are three analyses that need to be completed to answer this question.
1. Analysis of all positions in the organization compared to the market midpoint.
2. Analysis of positions within each pay grade compared to the market midpoint.
3. Analysis of incumbents within each pay grade compared to the market midpoint.
By completing these three reviews, you’re taking a big picture, a smaller picture and then an even smaller picture to see how your compensation plan is working at your company.
An Example of Studying Market Ratios
As a way of explaining these market ratio analyses, I will use the example of a company PayScale worked with. We helped them look at what their benchmarking project had told them about their company, beyond just setting salary ranges.
Analysis 1: External Compensation Review of Market Ratios
The company found that they had 19 incumbents (employees) at a 0.8 percent market ratio for their position. So, these people were under what the company thought they ought to be paid according to the market. Next, there were 29 incumbents at market ratios of 0.8 and 1.0, so still under market. There were 43 positions with 1.0-1.2 market ratios which meant they were over the market. Finally, the number of positions with a market ratio over 1.2 was 59. That meant than 68 percent of the employees at this company earned base salaries above the 50th percentile of the market.
Before the company could come to any conclusions about this information, there were some questions to ask:
1. Have we defined the positions correctly, such that the market rate – and, therefore, the market ratio – is accurate?
2. Where, relative to the market, does this company aim to pay? Do they want to be the market leader in their industry? If so, they are achieving that goal. If not, then there’s a problem.
3. Would it make sense for the company to consider different target pay rates, relative to the market, for different positions?
Analysis 2: Market Ratio Assessment by Grade
The company in this example had seven pay grades. This next analysis looked at the how the grades’ market ratio’s compared. Not surprisingly, considering the number of employees with base salaries with over a 1.0 market ratio, there were some entire pay grades that were predominately over the market. Grade three had 96 percent of its members over a market ratio of 1.0 and grade seven had 88 percent.
The results of this analysis don’t give the reason why certain pay grades showed dramatically high market ratios. But, the information does give us questions to ask. In the case of this company, it turned out that the high salaries in grade three were there for a reason. They were able to answer the questions raised after further research.
Analysis 3: Internal Compensation Review with Compa–Ratios
Finally, PayScale helped this company drill down to look at the incumbents within a pay grade to see how their market ratios compared individually. In pay grade 7, it was discovered that six of the eight individuals in that pay grade earned more than the maximum allowed for their salary range. Also, four people at pay grade 1, the entry level grade, earn more than the maximum for their salary range. Once again, some questions were brought up, like:
1. Has the company properly defined ranges for all positions?
2. Should a red circle policy be instituted for the individuals who earn more than the maximum for their range? (Red circling means that you freeze an individual’s salary from any future increases until the market catches up to their salary rate. See a blog post on implementing a red circle policy.)
3. Does the compensation for specific grade levels warrant further scrutiny?
Overall, these three analyses paint a picture and allow you to see what you are accomplishing with your compensation plan. By comparison, only looking at an individual case wouldn’t give you the same perspective about what’s going on.
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