How to Conduct a Compensation Analysis

How to Conduct Compensation Analysis How to Conduct a Compensation Analysis and Move Salary Ranges

In a previous post we reviewed why performing compensation analytics can provide value to an organization. In this next post on compensation analytics, we’ll look at how it is used to review salary ranges.

At many companies, the assumed answer to the question, “Do our compensation ranges need adjustment?” is usually, “Yes.” Compensation ranges are often adjusted every year to match industry trends and economic ups and downs.  But, is it really smart planning to assume that you need to adjust your salary ranges every year – no matter what? I suggest that a key to long-term success is stepping back and having a conversation as a company about, “Do we need to move our salary ranges this year?”

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Typically, moving salary ranges occurs in response to changes in the external market and doesn’t always take into account internal goals, like improving employee longevity or performance. Many companies will simply move their ranges if the market moves.

What if the market hasn’t moved? Or, even if the market has shifted, it doesn’t always do so at exactly two to three percent a year, as compensation changes often do. PayScale’s salary data collection shows that, in a year with a lot of market volatility, some positions’ base salaries will decline, others will stay flat, and, meanwhile, other positions may increase dramatically. For example, PayScale has seen pay for many jobs in the healthcare sector grow at a rate of eight to 12 percent increases year over year, even in our recent recession.

One of the dangers of doing the same thing every year, namely handing out two to three percent salary increases across the board, is that it sends a message that that is how we think the market is moving. But, in reality, the market salary ranges may be moving more or less than that across positions.

How Often Do You Move Salary Ranges?

If you’re taking the time to pay attention to market activity and customize your ranges to it, how do you know when it is a good time to take action? Markets change daily, even hourly. When is it smart to actually adjust your salary ranges in response to these shifts?

I recommend that you look for trends that are long-lasting. Most any HR professional has, at one time or another, responded too quickly to market trends when adjusting whole salary ranges, not just an individual’s compensation. And, they’ve seen that the effects were ultimately negative.  Think about how quickly everyone responded to dramatic increases in software developer salaries immediately prior to Y2K.  Just a few short years later, the bust had many companies overpaying for developers because they responded strongly to the market in late 1999.

Also, you have to consider the message you’re sending employees when you move a range, particularly in a pay-for-performance culture. If you have employees at the bottom of the salary range and you move the range up, you’re going to need to raise the pay for workers at the bottom of that pay band. What does that say to those low performing workers and your top performers about how you reward your employees? Giving a raise to poor performers may not be in line with the compensation philosophy you’ve set out of rewarding top performers to encourage them to stay at your company. Top performers won’t want you spending precious funds to move low-performers up to the minimum. This situation is just one example of why it’s important to move carefully, and analyze compensation data when adjusting ranges.

Another factor to keep in mind is that moving salary ranges is completely different from moving individual pay. One of the hardest things to watch during the recent recession was institutions enacting across-the-board salary freezes to save funds. The problem with making any compensation changes over an entire department or company is that you’re almost certainly not staying up-to-date with the market. Even though times have been tough over the last year or so, the positions PayScale watched grow over the last year would not have been wise to freeze pay on. You’d risk losing the talent you have and that talent is going to be the hardest to replace because it’s, by definition, in high demand.

Do You Have Positions in the Right Pay Grade?

As you analyze your salary ranges and consider changing them, you also must decide how you want to balance internal pay equity and external pay equity.

The central questions regarding equity break down to the following:

  • Should you move to a straight market pricing model (external equity)?
  • Should you create a wider pay range and keep everyone in the same pay grade (internal equity)?
  • Should you use a market premium on top of the pay range (combo)?

When it comes to aligning with the market or aligning within a group of employees, such as managers or line workers, there’s no right or wrong answer. You may value keeping your marketing manager and your IT manager in the same pay grade, though the market dictates that their base salaries have a wide gap between them. See the example salaries below.

Managers in Same Pay Grade Base Salaries
Account Manager $80,467
Human Resource Manager $82,549
IT Manager $109,832
Marketing Manger $71,670

Factors affecting this decision can include where you are in your organization’s life cycle, your location, the health of your industry and many other influences.

Each year, as you analyze compensation data and adjust your ranges, think about the message you’re sending to current and potential employees and what the data about your compensation plan is telling you. Are you aligning enough with your stated compensation philosophy? Would it be smarter to move people’s salaries within a range rather than moving the entire range?
Regards and best wishes,

Stacey Carroll
Director of Customer Service and Education
PayScale, Inc.

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