Compensation Benchmarking

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2 Compensation Benchmarking In our current market, potential hires are more informed than ever about the market rate of their position s salary. They weigh their decision based on salary, benefits, location, commute time, education programs and opportunities for advancement through easily accessible online data sources. To compete for talent, your organization must also know what the market is paying for certain skills and develop fair and reasonable salary ranges for the positions in your company. This combination of compensation benchmarking followed by setting or updating salary ranges helps you attract and retain top talent. Sources for Compensation Benchmarking Data The first step to compensation benchmarking and building up-to-date salary ranges is selecting your sources for current, market salary information. You want the data to be specific to your industry, geography and type of organization. And, your goal is to benchmark percent of your positions so the data must also cover a variety of skill sets, experience levels and educational backgrounds. For data sources, you have three basic options: Published, Traditional Surveys - These come from the government, associations or consulting firms and offer a broad perspective, though they may not be entirely up-to-date or match your organization s structure, location or size. Online Data and Software - There are now online resources that offer self-reported salary data from employees. These sources are very timely, easy-to-use and more cost effective than traditional sources. PayScale is an example of a provider of online data and software. Custom Surveys - Several firms are available to custom design a survey just for your business. These types of surveys are often very accurate and very expensive. It is recommended that you use at least two to three different salary data sources when setting salary ranges to ensure accurate results, unless using an online data source like PayScale.

3 How to Select Your Salary Data Sources There are important guidelines to keep in mind as you choose between the many traditional, custom and online sources. First, you must understand the methodology of the survey that you are using. This means knowing how the data is collected, if aging or geographic differentials are used and what the effective date of the data is. This information helps you assess the quality of the data and know A smart alternative to the expense of traditional or custom survey sources is to use a data source that has good comprehensive coverage. PayScale is a good single source option. We never limit the types of positions, industry or the geography you have access to. This means that you ll have access to a broad cut of information for one simple price. whether it will truly offer your company a competitive market advantage. Next, no matter how enticing a premium, custom salary survey sounds, you must keep your budget in mind. Price is important so you want to make sure you re getting a good value. High cost does not always equal high value. Beyond just what you are directly paying the survey company, you must consider indirect costs, such as the time for your own company s participation in a traditional survey. One way to break down the numbers is to estimate and compare the cost of the survey per positions matched in your company. Applying Your Compensation Strategy to the Data Once you select sources for your data that you believe will give your organization the best quality and value, your next step is to apply your organization s compensation strategy to the data. Your compensation strategy defines your plan for compensation and links your total rewards strategy to the organization s business strategy. Your compensation strategy will answer important questions for your salary benchmarking projects, such as: How do we define our competitive set? Where do we want to be relative to our competition, namely lead, meet or lag? What are the goals of our compensation program, such as drive performance or reward longevity? It s not enough to just define the strategy, but to earn employees trust you must be transparent about it.

4 How to Select Jobs to Benchmark After setting up your survey parameters based upon your compensation strategy, select the positions within your organization that you wish to benchmark against. When selecting your benchmark jobs, you can start with those positions that are standard across different industries, such as HR generalist, accountant and administrative assistant. Next, choose industry-specific positions that are standard at your company compared to positions in other organizations within your industry, such as civil engineer, registered nurse and assembly line worker. Avoid using positions that are a blend of two or more jobs. For example, if you have a position that is a receptionist 40 percent of the day and a project coordinator the other 60 percent, this would not be a job to benchmark. You will have remaining positions in your company that will not be benchmarked externally. What should you do with non-benchmark positions? Don t force matches to market data for nonbenchmark positions. Instead, use your job evaluation tool to slot the position within a pay grade, or use your own internal assessment of comparable positions within your organization with similar skill, scope, decision making and responsibility. Refining and Correcting the Data After specifying how you want to gather the external salary survey data, but before its used for benchmarking, you will still need to make some adjustments. The main concern is the age of the data when you receive it. You will need to age data from the effective date in the survey to the effective date for your organization. You do so by choosing a multiplier from a source such as and following the steps below: Aging Data 2.9% Effective Date Target Date Source 1 Source 1 aged Source 2 Source 2 aged Source 3 Source 3 aged Buyer II 12/2/12 6/2/ % $38,500 $39,064 $41,000 $41,601 $43,000 $43,630 Marketing Coordinator 12/2/12 6/2/ % $31,000 $31,454 $32,000 $32,469 $33,000 $33,484 Accountant 2 12/2/12 6/2/ % $54,000 $54,792 $56,500 $57,328

5 1. Find the effective date of the survey data and decide on the target date for the data. 2. Decide on an annual adjustment factor. 3. Calculate the portion of the factor to use based on the effective date. 4. Apply the aging factor to the market data. Another calculation to include is weighting your sources. If certain sources are likely more accurate, you want to make their data have more influence over the final salary ranges you come up with. You can weight different sources more or less than other sources on a position-by-position basis. For example, if you have an industry specific salary source, you may weight your data more heavily for that survey for positions that are highly influenced by industry. You can weight your sources with the following steps: Weighting Your Sources Position Source 1 Weight Source 2 Weight Source 3 Weight Weighted Average Buyer II $39, $41, $43, $41,474 Marketing Coordinator $31, $32, $33, $32,469 Accountant 2 $54, $57, $56, Choose the weight you will assign to each source. 2. Use the aged data from that source. 3. Multiply the source data by the weight assigned to that source. 4. Come up with your weighted average. How to Match Your Internal Jobs to Your Survey Data No matter how specifically the data matches your organization s positions, you re still going to need to review your internal job positions requirements for knowledge, skills and abilities (KSA), as well as experience level and education, then apply the external data to develop your salary ranges. Here are some basic guidelines for matching the survey data to your organization:

6 Don t match on title alone. The external sources of data may use a title similar to one in your organization for a fairly different job position. Take a careful look at the requirements of the job rather than just matching the titles. PayScale matches based on over 250 compensable factors, giving you more indepth insight than any other source. Look at the scope. When looking at the requirements of the job position you re matching, some specific factors to consider are who the position reports to, education and experience level needed and decision making required. Decide how to handle leveling within your organization. Are you going to benchmark one job within the job family to external market data and then build an internal range for the additional levels, or will you price each level of the positions against market data? You ll want to choose based on whether you want to put more emphasis on maintaining external equity or more emphasis on internal equity. Determining Your Pay Grades Pay grades are used to group jobs that have approximately the same relative internal worth; in other words, all jobs within a particular grade are paid the same rate or within the same pay range. The number of pay grades varies according to the following factors: The size of the organization. Generally, the larger your organization the more pay grades you may need. The vertical distance between the highest and lowest level job. For example, do you have positions that range from minimum wage to $500,000 a year, or is the distribution of pay across your positions more homogeneous? How finely the organization defines jobs and differentiates between them. If you don t have your jobs specifically defined, you may want to have fewer, broader ranges instead of many narrower ranges. The pay increase and promotion policy of the organization. If there are many opportunities for employees to be promoted to different levels, then you will need more pay grades, but if your organization has employees with longer tenure in their positions, then you want to have fewer pay grades.

7 The bottom line is that the number of pay grades should be large enough to permit you to distinguish between difficulty levels but not so great as to cause the distinction between two adjoining grades to be insignificant Determining Your Pay Ranges - Finding the Midpoint Pay ranges set the upper and lower bounds of possible compensation for individuals whose jobs fall in a pay grade. A pay range is created for each grade. The first step to creating a pay range is finding its midpoint. The market midpoint is the median value of the aged, weighted market data for the position or positions. It is useful to find because it will eventually help you set your minimum and maximum salaries for a particular pay range. To find the market midpoint you average the market data for all the positions within the pay range. Be mindful of any data points that would be considered an outlier. This would be a data point that significantly changes the value of the mean. Determining Your Pay Ranges - Range Spread The spread between the minimum and maximum salaries in a pay range will depend on many variables within your organization and your compensation policy and practices. Generally, pay spreads are narrower for lower-level jobs, and wider for higher-level jobs. There are a couple of factors affecting the range spread for a job position. First, the number of years a person typically spends in a position can affect how wide the range needs to be. After a number of cost of living and merit increases they will be over the top of the range if the range is too narrow. Second, you want to consider how long it takes the typical person who is new to the position to reach full proficiency. Reaching full proficiency, or what is called job rate, can vary from position to position, but the range should be wide enough that someone does not reach the midpoint until they can be characterized as fully proficient. Keep in mind that there should be overlap between pay ranges, which makes it possible for an experienced person in a job in a lower grade to be paid more than an inexperienced person in a higher job.

8 The following are typical range spreads for common pay grades: Hourly positions 30-40% Salaried positions 40-50% Executive positions 50-60% Calculating the Minimum and Maximum The final step to creating a salary range is determining the minimum and maximum for the range. After you calculate the midpoint for the salary range you ll be able to complete this final step. Calculating the Minimum Divide your range spread percentage in half. Then, take your midpoint and divide it by 1.xx (xx = half of your range spread). For example, if your midpoint is $30,000 and you want your width to be 40%, then you would divide $30,000 by This equals $25,000. $25,000 is your minimum for the range. Calculating the Maximum Take your minimum and multiply it by 1.xx (xx = your range spread). For example, if your minimum is $25,000 and your width is 40%, then you would multiply $25,000 by This equals $35,000. $35,000 is your maximum for your salary range. For the examples above, your full salary range would be $25,000 - $35,000 with a midpoint of $30,000. How to Handle Hot Jobs or Range-Busters There will come times when meeting the company s goals will require paying people with highly specialized skills or people working in hot jobs, where the market pay has been increasing due to higher demand above the maximum for their pay grade s salary range. Typical approaches to salary benchmarking will not apply to these positions. When this happens, here are some things to keep in mind. First, double-check that the job position is assigned to the right pay grade. Second, do not include market data in the calculation of the market midpoint. Third, assign employees in this hot job to the appropriate pay grade, but develop a special market premium range for these employees. For example, if the average of the market data for the hot job is 20 percent above the market rate for

9 the rest of the position in the same pay grade, apply a market premium for people in this job. The best rule of thumb is to make this market premium as transparent as possible to the employee, so that if it needs to be taken away, it can be explained clearly to employees. Save Time and Money on Compensation Benchmarking and Make Setting Salary Ranges Easy Eliminate compensation guesswork. Stop overpaying employees. Reduce the risk of losing your top performers. To cut HR costs and save significant time and money in 2013, you must have accurate compensation data that reflects real-time market rates and truly matches your organization and your employees. PayScale administers the largest, ongoing online salary survey in the world. PayScale s unique search technology enables you to instantly find salary data that matches your company and your positions. With access to 36 million current salary profiles, it has never been easier to find accurate information to help you reduce HR costs. Sample Report Excerpts Detailed Market Data Report (Employee) PayScale Job Title: Software Engineer / Developer / Programmer Seattle, Washington, United States Cash Compensation, Salaried Reporting Average 10% 25% 50% 75% 90% Total Cash Compensation 95% $95,517 $73,289 $84,459 $95,355 $106,898 $120,803 Base Salary 95% $89,779 $69,453 $79,902 $89,785 $99,644 $110,748 Bonus 68% $5,664 $1,557 $2,998 $5,342 $8,973 $14,470 Currency: U.S. Dollar (USD)

10 Salary by Product Activity Average 10% 25% 50% 75% 90% Base Salary - Your Search $89,779 $69,453 $79,902 $89,785 $99,644 $110,748 Software Development $89,779 $69,453 $79,902 $89,785 $99,644 $110,748 Software Applications $91,716 $72,785 $82,329 $91,616 $101,302 $112,517 Computer Hardware/Software $92,233 $73,615 $82,910 $92,080 $101,860 $113,425 Software $92,076 $73,631 $82,988 $92,035 $101,247 $111,470 Retail $87,139 $65,860 $76,638 $87,065 $97,787 $110,229 Aerospace and Defense $91,004 $67,300 $79,434 $90,922 $102,739 $117,360 E-Commerce, Business to Consumer (B2C) $90,518 $70,286 $80,598 $90,452 $100,572 $112,409 Internet Software $87,462 $68,815 $78,399 $87,482 $96,485 $106,344 Internet and New Media $91,374 $72,862 $82,277 $91,344 $100,533 $110,708 Travel and Hospitality Services $82,605 $62,891 $73,129 $82,686 $91,919 $102,057 Currency: U.S. Dollar (USD) Would you like to see how PayScale s Cloud Compensation Software can automate the process of compensation benchmarking? Get a demonstration of PayScale Insight Expert to see why 2,500 companies like you choose PayScale to get pay right. GET A DEMO