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Tuesday, January 23, 2007

Compensation III and IV: Building and Moving Within a Salary Structure

In our first two posts on Compensation we discussed what resources we have and use to price jobs. We also discussed how we calculate base pay. Here we combine the third and fourth of our projected 10 posts on how priced jobs are built into a compensation structure, why a structure is needed, what it does, and how it's administered.

What and Why?
In any mid-sized or larger company you'll have several different job families. These are groupings of jobs more or less defined by similar competencies or purposes to their work. Within Nelson, we have Publishing, Marketing, Sales, HR, Facilities, Production, Distribution, Customer Service, Accounting/Credit/Collections, Tax, Information Systems, and Conferences. Every job that serves in one of these functional areas is part of that job family. Support positions such as Administrative Assistant are more generic core competencies and exist in all of these families. However, they share the same purpose as do the jobs they support, so they are grouped in accordingly. The jobs within a Family are then ranked by pay grade, using the base pay calculations we discussed in an earlier post. The combination of grouping and ranking gives us our first look at the career ladder for each department or division.

Spacing and Movement Up the Structure
Within the job ladder or Family we then establish a reasonable progression between levels. Promotional steps should be available at intervals that allow for moderate and periodic promotions as the individual climbs the learning curve for each job. Sometimes we add steps into the program to insure that an opportunity exists for 8 - 15% promotional increases every 2-4 years. This is vastly preferable to 20 - 40% increases every 5-8 years that occurs in some companies. I say preferable, because a person who waits a long time for a "big win" promotion is a greater risk to leave the company. Also, the job value in the market of one step in the promotional ladder over the other (think Marketing Coordinator up to Marketing Specialist as an example) is generally 8 - 15% and has been for years. Now here's where I get in trouble, as doubtless someone will chime in with an anecdote about someone who left our company for a huge promotional increase. Yes, that happens but remember that we've set our base pay at the 50th percentile of the market. Exactly half of the companies where you apply for your same job duties will pay you more, and approximately half will pay less. Imagine a bell curve, and note that about 20% of those companies will pay substantially more and roughly the same proportion will pay substantially less. Its just that hardly anybody ever leaves a company for less money, and when they do you don't hear from them.

Demotions and Lateral Moves
Another purpose of the structure is to determine what adjustments need to be made when people move in ways other than up through promotion. Sometimes people either don't like their role, fail in their role, or their position is eliminated and they have to find another role. When that happens, we try to keep the employee at their current salary provided that it is within the acceptable market range for their job. We then consider, in calculating future raises, how high the person is paid compared to their peers. Often, slower or suspended increases bring the demoted person back into line within 2-3 years. In some cases the change is too dramatic and we offer the individual an internally fair rate based upon their peers in the new job. Lateral moves are the easiest; no change in pay just to get a change in scenery.

Updating
The Salary Structure is moved for cost of living about every 18 - 30 months. We get information from salary survey publishing houses or similar resources each year on how much and how often salary structures are being moved in the market. Those moves tend to be 3 - 3.5%, but can be much more for "hot" jobs. Sometimes the decision to move the entire structure is more art than science; when we reprice our jobs, if the majority of our market targets are above our 50th percentile line then we know intuitively that the 50th percentile has moved.

As always, your comments are welcome and encouraged; even those of you who disagree. I encourage you to post your comments and include your name; but you are also free to post anonymously or to email me directly for private discussion at jthomason@thomasnelson.com or send an IM at jthom140 on AIM.

4 comments:

Anonymous said...

I would like to comment on the statement, "We’ve set our base pay at the 50th percentile of the market. Exactly half of the companies where you apply for your same job duties will pay you more, and approximately half will pay less."

It seems disconcerting to me that at a company that strives to hire "world-class talent" Thomas Nelson is satisfied with being in the 50% percentile of base pay. This seems pretty average. If hiring and retaining talented employees is a priority, why isn’t there a move to say that we want to be in the top 25-40% of like companies in base pay?

Thomas Nelson is one of the top 10 extraordinary publishing houses, why is administration satisfied on being middle-of-the-road when it comes to base pay?

Jim Thomason said...

Fair question, and thanks for the comment.

I probably should have mentioned that the 50th percentile is a target in the middle of a 50% range. That means that the acceptable pay for any position is anywhere from 80% to 120% of the 50th percentile target. This gives the compensation system flexibility to pay entry-level or training wages for people new to any given position (newly hired or newly promoted), while having enough room top-end to reward high performers and long service employees. The goal is overall competitiveness, and the alternative is loss of jobs in tight years due to escalating overhead.

Also, I would challenge your premise that World Class Talent (WCT) requires top-of-the-scale wages. The WCT concept was introduced into our corporate language through the book Good to Great. Its authors, specifically in their sections on Level 5 Leaders discuss that the best talent is not money motivated. Similarly, employee motivation surveys from the 1950's forward to October 2006 bear out that money ranks anywhere from 3rd to 5th behind such considerations and purpose, social connections with others in the workforce, and respect from the supervisor. That's not some lame excuse not to pay more, but it does point out that great talent comes for what we do and why we do it, not for 20% more than their current employer.

Finally, there's simply the financial reality of Thomas Nelson. Throughout recent history every time we have enough people to do the work we don't have enough sales to support the overhead. Now we're heavily leveraged as part of the go-private transaction. Top of the scale is a great long-term goal, but competitive with secure jobs is a more realistic one.

Again, fair question and thanks.

Jared said...

About the price of living increase -- are salaries increased above one's annual raises for this -- I've worked for companies that have insurance premiums that raise more than yearly raises allowing one to never get ahead. I applaud companies who take this into consideration and give a price of living raise annually along with a perfromance raise. Curious to how Thomas Nelson handles this. And I applaud you for writing about these seemingly "sensitive" topics.

Jim Thomason said...

Thanks for the question Jared. Another very fair question with loaded meaning.

Most companies that I know and track give an "annual" increase. That amount is set based upon nothing more scientific than (1) what can they afford to pay, and (2) what are other companies in our industry or geographic labor market doing. This "annual" increase generally goes to cover both the increased cost of living and what the market is giving for, basically, having another year's experience doing the same job. In an average 4% increase year, the actual cost of living component is usually not more than 1.2 - 1.5%, with the remainder going for what you might call an "experience" premium.

Now, in some companies you can have, especially at the lower wage levels, a real sense that you're making no progress. I had dinner with an HR VP at another Nashville company tonight whose insurance renewal is 16%. Please don't fall into the statistical trap that many do, i.e. "my insurance went up 10% and my wages went up 4% so I'm losing ground". With the full price of your insurance being probably $4,500 -$6,000 per year, of which you're probably paying about 30% (your company probably pays the rest),your 10% increase on 30% of $6,000 is about $200 a year. Assuming you make only $25,000 per year, your 4% increase is $1,000 per year. Remember to do the math before you think you're losing ground.

At Nelson we've been very fortunate. Our insurance renewals are flat to 5% up per year for the last few years, and our 4% salary increase pool is about .5% higher than many in the Nashville labor market. We're more than covering the cost of living increase, including insurance, for our people. However, there are companies where that's not the case. Your options at that point are to grow your career through promotion (and thus higher pay), or change jobs.

I hope this covers your question adequately, and thanks again for taking the time to write.