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Tuesday, September 26, 2006

Base Pay I: Resources We Use

As promised, we'll now turn our attention to how we calculate the fair market value of a position's base pay. To revisit our earlier post on terminology, base pay is the wage you receive every two weeks and does not include commissions, spiffs, or bonus. These are variable compensation pieces, and the value at targeted performance is usually calculated or expressed as some percentage of base pay. The base pay calculation, therefore, is very important in accurate and fair compensation as it impacts variable pay calculations.

The first important consideration in knowing how job prices are calculated is to know what we use to calculate them. This is the subject of today's post.

Job Descriptions - Specifically, we focus on the section in the JD template that addresses skills, duties and resopnsibilities, and specifically not the sections on education, reports to, or title. Job value is all about the duties of the position and the scope of responsibility (people supervised, level of direct customer or author contact, cost of mistakes, etc...). It is not about the qualifications of the individual who holds the job past consideration of the minimum qualifications to hold the job. In other words, you must meet the minimum standards to hold the job; past that what those qualifications happen to be do not directly influence pay. For instance, some jobs may not be available to high school graduates (such as the job of Accountant), but in jobs where there are no special education requirements high school graduates and MBAs doing the same exact job have the same pay range.

Salary Surveys - You may or may not know that there's an entire industry out there built around providing market information for various jobs. While the government tries to provide this information free for anyone who wants it through the Department of Labor, their surveys are done about every three years and take about a year to calculate and publish. As such, its out of date before it hits the public's eye. The most reliable and current data therefore comes from salary surveys published through for-profit compensation consultants, industry associations, chambers of commerce, etc... For Nashville operations we use the following outside resources:

Nashville Area Compensation Survey

Evangelical Christian Publishers Association Salary Survey

Comp Data Tennessee/Kentucky

Robert Half Accounting and Finance Survey

State of Tennessee Survey

Watson Wyatt Survey of Middle Management Compensation

Business and Legal Reports Survey of Exempt and Non-Exempt Compensation

Salary.com (we have a subscription to their data for employers that the public can't access)

We are currently beginning the task of refreshing the data and calculations for all Live Events jobs based in Plano, TX. As part of that process, we are looking for events industry and Texas data to add to our national salary.com data to assist us in that process. Let us know if you know a good source.
"Real World" Information- Salary Surveys and calculated prices are fine, but its also wise to compare the academic and mathematical to the real world. We maintain a recruiting database of applicants for all our positions, since all applications for non-warehouse jobs come through our on-line application process. Seeing the salary history of applicants who are qualified for the job and/or who are doing the same job elsewhere gives us a good reality check for our calculations. In addtion, turnover data and exit interviews from employees who leave the company provide us information on where people go and occasionally provide us salary information on what our competitors' pay when they hire our people.

That's all for now; next time we'll look at the calculation process of how we turn salary survey data into a job price. Until then your comments, as always, are welcome.

Jim

Thursday, September 07, 2006

Second Compensation Topic: Basic Terminology

When we talk about compensation to each other we often get tangled in our terminology. What's the difference between a salary and being on salary? If the market pays "x" for my job, is that before or after bonus or commission? How does the cost of benefits figure into my compensation? What is equity, and how do I get some of it? What's the difference between an ESOP and a stock option? All these are fair questions aimed at answering the big question: when it all adds up, do the numbers add up to fair treatment? We'll get into some of these questions later on, but for now let's start with identifying the basic elements of typical employee compensation and what we call it.

The wages that you bring home every two weeks, whether earned by the hour or by the pay period, comprise your base pay. If you punch a time card, this is your hourly rate multiplied by the number of hours you work. If you work over 40 hours in a pay week, that rate is (1.5 x hourly rate) x hours worked over 40. If you want to annualize your hourly rate, multiply it by 2080, which is 40 hours per week x 52 weeks per year.

If you are a salaried employee, your base pay is your annualized salary ÷ 26 (the number of bi-weekly pay periods in a year). Salaried employees are not paid by the hour; neither do they receive overtime.

Bonuses, commissions, or spot awards (sometimes called "spiffs") make up your variable pay. The amount of variable compensation that a position is paid (notice I didn't say a person, but a position as jobs are priced based upon duties and not who performs them) is usually expressed as a percentage of base pay, with simpler jobs typically earning 5% or less in some form of group incentive like a bonus pool or profit sharing plan, and more difficult staff and low-to-mid-level managerial positions earning up to 30% of base in potential bonus. Typically 5% -20% of base pay is indicative of almost all bonus plans in most companies.

The sum of your base pay + variable pay = your Total Cash Compensation or TCC for short. This is the number we use when pricing jobs on the market and comparing individual employees' compensation to the market. TCC does not include any of the forms of compensation listed below.

Your group benefits are an important part of your total package. Typically, our company pays 70% of the cost of your benefits, and that cost is approximately 28% of our total payroll. So, if you're considering leaving the company for, say, life as an independent contractor or consultant, take your total W-2 wages from last year x 140% (your TCC plus the total cost of your benefits) and that's what you'll need to earn to be able to support yourself with the same standard of living after buying your own benefits.

Another fairly common form of compensation is equity in the company. This is an ownership stake in your employer and is most commonly granted to employees in a group plan such as an ESOP. Management employees may also receive stock options or stock grants as their decisions guide the health of the business and the theory is that you want them to treat the business as if it were their own.

When you total all forms of compensation together, TCC + benefits + equity (if applicable) = Total Rewards. This, other than job satisfaction or the occasional headache, is everything you get in return for working for someone else.

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I hope you find this helpful, and as always please feel free to post questions for everyone's benefit. Remember, we want this to be a community conversation and disagreement is okay, although lavish praise is always appreciated. :-) Our next topic will be in the next week or so on the subject of Determining Base Pay. In that, we'll discuss how jobs are priced and what elements of a job make it more or less valuable on the market.

Jim