Comp budgeting: How to identify compensation inequities

Tessara Smith, PayScale

In this first part of our three part email series on Compensation Budgeting, we take a look at compensation inequities. Compensation inequities can occur at an organizational, departmental, positional, or even individual level. To run a successful business and maintain employee satisfaction you have to know how to identify and resolve these inequities. To follow are some things you should be aware of at each level

Organizational level inequities

Is your company paying employees fairly based on the market? Are your pay ranges competitive in comparison with the market? When determining if inequities are problematic for your company you should answer these two questions to know if the pay for your organization matches up with the markets targeted percentiles. One tool that can be useful in this case, is a market ratio, which compares employee pay to the market values for the position to which they are assigned at the targeted percentile. In addition to this, you should determine how your range midpoints align to the market values for your positions. The market value is a representation of the proficiency point for a role and a range midpoint also reflects that proficiency point. If your range midpoints are more that 3% of from the market values for your positions, your organization may have a problem with inequities.

Departmental level inequities

To figure the pay inequities out, you simply need to compare the pay rates of your different departments against each other to determine if you are paying fairly across the board. It is important to note that paying fairly does not necessarily mean paying equally. Even though you may be paying some department in the 75th percentile and others in the 50th, if this strategy is in alignment with your business goals then no adjustments need to be made.

Positional level inequities

To determine if you’re paying fairly across different positions, you first need to hone in on whether the positions in your company have moved faster in the market than others. On a year to year basis, some positions may move as much as 10% or more however others may do the opposite. Your top positions in particular may move much faster in the market compared to others. The best way to calculate inequities here is to compare the range midpoints to the market values for each position. Compensation management systems, such as PayScale, can provide a market trend analysis which maps out how much each of your positions moved each quarter over the past year. When identifying inequities at a positional level, you may find it necessary to adjust pay on a quarterly basis.

Individual pay inequities

This set of challenges usually involves problems with employee’s equal opportunity status but can also be the result of a breakdown in pay strategies. It is important to examine your compa-ratios, which are a comparison of employee pay and the range midpoint. Ideally, these should fall between 0.8 and 1.2, but a large number of outliers may reflect a problem with inequities. Other issues that may arise in this category have to do with compliance and discrimination. Examine the disparity in pay between the lowest and highest paid incumbents in regards to gender, race, and ethnicity. Checking the disparity between the average pay for incumbents in each of the protected classes will insure that you are compliant with EEO regulations.

Each level of inequity you encounter, requires a feasible solution. The primary concerns here are cost, attracting and retaining top talent. Work to develop multiple strategies for resolving each inequity that arises, and communicate these new changes to your team members.

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