Jenni Marquez, CCP, PayScale Compensation ProfessionalPayScale’s Comp Glossary returns! Consider the comp pros at PayScale to be an extension of your team! We’ve compiled a list of fundamental compensation terms and why they’re important to know. Think of it as your comp cheat sheet – jargon you need to put you on the fast track to becoming that cool comp kid we know you can be! In Part One, we brought you Comp 101. Today, let’s step it up a bit. But don’t worry, we’re not conjugating verbs quite yet. Today’s lesson: Market Pricing.In Part One, we brought you Comp 101. Today, let’s step it up a bit. But don’t worry, we’re not conjugating verbs quite yet. Today’s lesson: Market Pricing.”>
1) MARKET STUDY
Definition: The process by which you compare the pay for your jobs against what other companies with similar jobs are paying.
Why it matters: How do you know if your pay is competitive? One of the most tried and true methods is by conducting a market study. Gather external data and evaluate that information against how you are paying internally. The study can be done through your own research or in partnership with a consultant or salary survey provider. Survey providers vary so it’s important to research your selected data source and their data collection methodology before using that information to guide your decisions on pay.
Definition: A job commonly found in the market.
Why it matters: Often misunderstood but a very critical part of evaluating compensation is the benchmark job. A benchmark job is what you use to compare pay at your company with pay in the market. Commonly found means the job exists across a variety of companies and in a variety of industries. The reason the benchmark job is so important is it allows you to evaluate your pay against other companies with a shared point of comparison – for example, most companies, regardless of their line of business, employ an Accounts Payable person. At least 50% of the jobs in a business should be benchmarked in order to get an accurate idea of how the company pays to the market. Most traditional salary survey providers have a limited number of jobs titles to choose from when benchmarking. Other data providers, like PayScale, offer over 14,000 job titles so the percentage of jobs benchmarked will likely exceed 50%, offering an even more precise picture of your pay to market.
3) COMPENSABLE FACTORS
Definition: The details about a job that influence how the job is paid.
Why it matters: When comparing your pay to the market, it’s important to outline the factors that influence how jobs are paid and making sure those factors are consistent between your job and the benchmark. The most common compensable factors include years of experience and education, though other equally important factors include skills, certification requirements, management responsibilities, travel percentage, and so forth. Don’t forget the details about the market, like industry and company size, as they will also influence how a job is paid. Before completing a market study, it is important to identify the compensable factors for your benchmark jobs and your market.
4) (LABOR) MARKET
Definition: The market is the industry, company size, and location where you compete to hire employees. Often called the Labor Market or Talent Market.
Why it matters: Companies often talk about paying fairly to “market” but neglect the step of defining what “market” actually means. Avoid the common mistake of defining your market based on your business competitors – while sometimes true, more often than not, companies compete for employees with organizations outside of their industry, size, and even location.
Definition: A point on a rank-ordered scale, found by arranging a group of data points in order of magnitude from lowest to highest. The first percentile approximates the very lowest number found, while the 100th percentile is the very highest.
Why it matters: Your target percentile is the exact point in the market where you intend to pay proficient employees. When evaluating your pay ranges to market data, the target percentile is what you will compare your midpoints against to determine if your pay ranges are competitive.
A good way to think about percentiles is to harken back to your high school days and your SAT score. A score at the 90th percentile means 10% of the country scored higher than you and 90% scored lower. The 50th percentile – a favorite among comp professionals – is the exact middle (or median) of the market. Half of companies pay more and half pay less. When someone says they want to “meet the market” they are usually referring to the 50th percentile. It is important to note that there cannot be a percentile greater than 100 – so if your executives say they want to pay at 105% of market, that doesn’t mean the 105th percentile. Instead, what they likely mean is they want to pay 5% above meeting the market (assuming that 100% is meeting the market).
Definition: The comparison of internal pay to the market pay rate for a job. Calculated as Pay Rate ÷ Target Market Percentile.
Why it matters: Market ratio is often used to evaluate how closely a company is paying to where it is targeting to pay in the market. Companies usually strive to have a majority of their employees paid within close proximity to their target percentile, though there are cases where it makes sense that employee pay may be higher or lower than your target (in the case of newer employees still in training or more tenured employees performing above proficiency). A ratio of 1.00 means that the employee is paid at the target percentile. Ratios above 1.00 indicate employee pay exceeds the market value for their job and ratios below indicate employee pay is below the market value for their job. For example, a ratio of 1.07 means employee pay is 7% above the target and a ratio of .93 means employee pay is 7% below the target.