Determining Appropriate Employee Pay: Best Practices and Pitfalls

April 28, 2021

By Linda VanDeventer, JD, MBA, CCP

There is no one right answer. Establishing the right pay is both an art and science bringing together the best thought leadership and fact-based data analytics available.

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As Leaders, we own the responsibility to provide appropriate compensation to our employees based on each organization’s unique situation.

This article scratches the surface by noting a few best practices and pitfalls when determining appropriate market compensation for all levels of employees from Executives to Entry level workers.

Based on several factors, a company chooses to pay at certain pay levels based on the compensation philosophy established regardless of whether it is formal, written and communicated or informal, not written and not shared as a common methodology. However, there is always some sense of how a company determines pay.

BEST PRACTICES

1. Use high quality third-party published compensation surveys

Before using a compensation survey, find out what the sample size of the survey is. Small numbers of participants will likely result in volatile data sets and may be difficult to generalize because the data does not seem logical. Larger sample sizes are less volatile and the reported data quartiles tend to reflect more accurate results.

For example, you may find in a small sample size when reviewing the total cash compensation (salary plus annual incentive) that the 3rd quartile (or 75th percentile) of the data set is lower than the 2nd quartile, or median. In such a situation, this is a red flag that the sample for the job, or the survey in general is less valid and reliable. In compensation survey “speak”, a survey should be valid, meaning the data reported is accurate, and also reliable, meaning that the data results are repeatable.

Using high quality third-party published compensation surveys is also important because federal guidelines exist to protect the anonymity of the participating companies. A compensation survey must have at least five companies that provide data for a specific job in order for that job to be reported back in the compensation survey. The data must also be at least three months old before it can be reported, and the data can only be reported back in aggregate and not by individual named company.

Publicly traded companies often include comparing the pay of a named limited peer group of companies for their executives, or their “top 5” named officers based on who they have established as their competitors. This data is free to obtain at SEC.GOV and on the company’s website in its annual proxy statement. Because this data is reported to the Securities and Exchange Commission, you can be sure it is accurate as several financial, legal, and HR professionals get involved in developing the required SEC filings. This data is also available for purchase by some compensation vendors.

2. Compare job content and do not rely on job titles

The greatest danger of looking at market pay is by only comparing job titles.  Job titles vary across companies, so it is extremely important to understand the job content. Occasionally (but ideally) job descriptions are written, and even then, the job description may not be up-to-date, or poorly written to begin with. Jobs are living, breathing organisms and change as companies grow and evolve.

For this reason, it is imperative to compare “apples to apples” when reviewing market data. The easy way out is to compare titles, but it will not produce a high-quality result. As a result, you may overspend or underspend and risk either not attracting or retaining top talent.

Companies often review “Benchmark” jobs that are commonly found in companies across industries and various sized organizations. However, even benchmark jobs can have different job responsibilities and it should not be taken for granted that a Chief Financial Officer at one company performs the same or similar jobs as a Chief Financial Officer at another organization even though on the surface that may appear to be true. This is true particularly at smaller organizations where multiple functions and departments may be combined and report into one position.

3. Purchase the compensation data

Highly networked professionals who establish pay for their organizations can easily share pay and pay practices with competitors. Sounds like a great idea? Well, it is illegal to share data based on US Copyright Law. Over the years, the companies that publish compensation surveys have taken actions to ensure that data is not shared.

If you are looking for data on an individual job or small set of jobs, work with the survey publisher. Oftentimes, they will sell data to you on a “one-off” situation at a very reasonable price. Another way to reduce the cost of compensation surveys is to participate in the survey and share your own employee population’s data with the survey company. This reduces or eliminates the purchase price.  Bottom line, be legal and ethical.

PITFALLS

1. Viewing free social media sites

During my career as a Total Rewards Leader in Corporate America, it was not atypical for a manager to approach me for advice after a subordinate found free data on the internet and asked for a raise. The fact of the matter is usually anyone can go to another company and earn more money. Period. The problem with companies using free internet data is that it is subjective. We have no fact-based information about what such data represents.

Free internet data can be self-reported, often falsely inflated, and not checked for quality as compensation survey publishers do. The data is therefore not valid because we have no clue as to the source of the data and we cannot confirm its legitimacy. There is a reason companies purchase compensation surveys, or hire consultants, like The Overture Group, who purchase the data and then provide advice based on valid and reliable data to our clients. As the saying goes, “You Get What You Pay For”.

2. Comparing pay levels with business competitors

Identifying compensation paid in local markets is a common and important step to understand local markets so it is not uncommon to expect the sharing employee pay data and/or salary ranges with direct and indirect competitors. If you do this, please stop! The practice of sharing pay data is illegal under the Sherman Anti-Trust Act. Sharing compensation data is considered a form of price fixing.

Sharing compensation data with competitors is typically intended to be innocent and genuine in an attempt to understand local market pay levels. Even if the data is not used to determine salaries, the practice is considered to be illegal. Being legally compliant is a critical reason to invest in acquiring independent, third-party produced compensation surveys, or hire a consultant to provide compensation advice.

3. Be cautious of free surveys and articles published by recruiting firms

Recruiting firm surveys raise multiple red flags to compensation professionals. Such surveys typically match jobs to job titles and not to job content. Often, recruiting firm surveys provide data based on offers made and do not provide a holistic view of average compensation. Salaries accepted by candidates may be included, but again, only provide a slim snapshot into the holistic view of an average of all job incumbents at an organization and across organizations in general.

In closing, these best practices and pitfalls only scratch the surface regarding how to establish appropriate compensation.  Several other factors are considered when establishing appropriate pay: “aging” or adjusting data, identifying benchmark jobs, and the use of premiums or discounts, to name a few. Also, selecting industry, size, ownership type, or other scope factors need to be taken into consideration.  Each company examines what is right for their situation, and this likely evolves over time as the company grows and changes.


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