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How to Conduct a Compensation Analysis and Move Salary Ranges

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?”

At many companies, the 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 changes in the economy. But is it really smart planning to assume that you need to adjust your salary ranges every year – no matter what?

Challenge the Market Status Quo

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

What if the market hasn’t moved? 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 of intense market volatility, some positions’ base salaries will decline, others will stay flat and some may increase dramatically. For example, because of influencing factors, PayScale saw pay for many jobs in the healthcare sector grow at a rate of 8-to-12 percent increases year over year, even during the Great Recession of the late ’00s and early ’10s. More recently, various computer programming jobs have been seeing impressive increases due to the competition for top talent in our digital economy.

The dangers of doing the same thing every year – handing out two to three percent salary increases across the board –is that it sends the message you’re blind to the market is moving. In reality, the market may command that salary ranges move more or less than 3 percent in either direction, and more or less depending on how specific skills or job types are being valued.

How Often Do You Move Salary Ranges?

Even if you’re taking the time to pay attention to market activity – both economic, and to which jobs and skills are in demand – 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?

We 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.

Also, you have to consider the message you’re sending to 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 whole range up, you’re going to need to raise the pay for workers at the bottom of that pay band, too. 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 of rewarding top performers. And top performers won’t want you spending precious funds to move low-performers up to the minimum when they don’t deserve an increase. This hypothetical 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. Recently, there has been a lot of news about companies that have raised pay for all employees to a magic number. 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. Don’t keep up with the market, and you’ll lose out on attracting and retaining the best talent. But start paying new employees a premium in a competitive environment, and you’ll suffer from pay compression and alienate your current employees

[Want to tap into new ideas on what’s possible for your organization’s compensation plan? Come to our annual event – Compference18 – to see how you can turn comp into a competitive advantage for your business.] 

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 lifecycle, 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?

Think carefully, take a look at your compensation metrics, stick to your compensation strategy, and you’ll be more than likely to succeed.

Related Resouces:

Are you paying your best employees enough to retain them after the economy picks back up? Get up-to-date and make sure your external salary market data is specific enough to the education, skills set and experience of employees you want to keep.

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Stacey Carroll
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Annette
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Annette

Executive Director

Nicola A. Rowe
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Nicola A. Rowe

This was very helpful. Thanks

Alreen day alfonso
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Alreen day alfonso

Hi ms. Stacy,

I started my own business and I need to know who I can contact regarding analysis of compensation for a managing partner of the business. We need a third party to analyze if indeed the guaranteed payment for this partner is appropriate based on his current job functions. I hope you can provide your insight on the matter. Thank you so much!

Enzo Carpanetti
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Enzo Carpanetti

Very helpfull

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