Search This Blog

Tuesday, November 07, 2006

Base Pay II: Calculating Base Pay Targets

In our last post we discussed the resources we use to gather data. Today we'll review what companies do with that data in the calculation of base pay.

There's an old saying in building spreadsheets that says, "first, turn off your PC"; in other words, design first and enter numbers afterward. In base pay, the process is similar. First, companies have to put the data aside and look at their organization and make several decisions about culture, industry, strategy, desired market position, and what jobs you employ. While this is usually done the first time you price jobs, it has to be done periodically as new companies are acquired or as business units change significantly in the number and nature of their positions.

Culture is our first consideration; is the company more conservative than entrepreneurial, or the opposite? Is it focused on keeping cash for a rainy day, or more concerned about taking advantage of every opportunity. Does it value high-fliers; those employees who can make it rain money, or does it value steady performance? All these considerations play into how a company sets its target compensation for its jobs.

Next is Strategy. How does the company go to market, and where is it in its life cycle? If the company is young and needs to grow with very little capital, it is more likely to take more risk in its investments in people and fixed assets. If later in life, it may value preservation of its assets and approach investments, including those in people, cautiously.

Market Position impacts salaries as it matters greatly if a company is a weak player in its industry, is a moderate competitor, or dominates the industry. Do potential employees see the company as an employer of choice, and thus it can have its choice of people, or does it have to scramble to find talent?

Once you understand the company, the next critical issue is understanding the jobs. What types of jobs are you going to utilize in order for the company to do what it does. Are you employing nuclear physicists that will have to be imported from India, or are we employing school teachers with a ready supply of people who will do the job for low pay? Once you know the jobs, what is the scope of responsibility for each job? In terms of scope, things to consider are the number of people supervised, the equipment utilized, the cost of mistakes, the nature of contact with customers and vendors (anywhere from "none" to "final decisionmaking authority"), the level of supervision needed, and the spending authority we're willing to give the position. This gives a company some measure of how it ranks its jobs internally.

Once you know your culture, you're ready to price the jobs. Here you take the resources listed in the last post and match the company's jobs to similar jobs in the labor market. Once the company knows what outside jobs compare to its own, you take the data from those and begin your analysis. The data provided from published surveys usually gives a targeted base pay, targeted bonus or commission, and a total cash compensation (base + bonus or commission) at the 25th, 50th, and 75th percentiles. Remember, a percentile is not a percentage; it is the percentage of all companies surveyed that pay the same or less for this job. Thus, the 50th percentile means that, for every 100 companies surveyed, 50 will pay more and 50 will pay less. The 50th percentile is the most common target that companies use as targeted compensation for its positions.

In rare cases a company may have to conduct its own survey. When we've had to do that, we plot the data using linear regression analysis and calculate the statistical median of all data points. Then, plotting a bell curve, throw out the high and low outliers to establish the data set that we'll use to re-calculate the median and average. Thankfully, this is rare but sometimes it has to be done when no outside data is available.

So what does this mean? While this may be way more information than the average person wants, the takeaway is that there is process and statistical analysis behind the pricing of jobs. Its not a gut feeling, a guess, or a conspiracy.

Next time: placing priced jobs into a compensation structure.



Anonymous said...

Using a "process and statistical analysis" to place a "fair" price on a job is indeed a reasonable practice. However, only if the employee is expected to perform the duties of that one specific position or reasonably close to it. But how many people actually fit that description?

For example, the company hires a "chief cook" and pays her "fair market" for that position. Then, in the real world, she is expected to be "chief cook AND bottle washer AND etc."? How does OUR company compensate individuals in positions required to do the work of 2, 3 or 4 "logical" positions? How is this taken into consideration? My observation is that there is a great opportunity for improvement in this area.

I present this scenario because a truly "World Class Organization" would seek to avoid placing ee's in an atmosphere that produces and accepts mediocre performance across 2 or 3 job descriptions for the sake of...what, frugality? An outward appearance of controlling costs?

Fact: An individual can only do so much. When the workload becomes overwhelming, performance across ALL areas of responsibility either degrade or get ignored. It is simply inevitible. Additionally, the ill effects of feeling overwhelemed at work often manifest as bad work attitude or personal life/health issues, thus costing the CO MORE money and time to deal with it.

Thanks for the forum and I look forward to your response.

Jim Thomason said...

I hope you're not disappointed with my response, but I really don't take issue with any part of your comment. American business is more competitive in this day and age than at any time in our country's past. Globalization, inexpensive foreign labor (both within our borders and outside of it), the instantaneous flow of information, and the impact that these things have on business cycles (shorter than ever!) and response time to changes in the business make the demands on all of us greater than our grandfathers could have imagined in the workplaces of their generation. Companies have to balance the need for efficiency with the needs of its people. Sometimes those things get out of balance and it sounds like that's where you feel you are. If so, you need to speak to your supervisor; if that doens't work then speak to THEIR supervisor, and if that doesn't work then we should talk. I know the heart of this senior leadership team is not to burn people out, and if that's happening somewhere then it ceases to be a compensation matter and instead becomes one where open communication and candor are required. Thanks for the comment.