The Simplicity of 3%

“When people complain of your complexity, they fail to remember that they made fun of your simplicity.”
― Michael Bassey Johnson

Compensation is hard enough to understand without debating fractions, isn’t it? As if making something that is already so misunderstood, debated and difficult more complex would be a good thing! But a little complexity may just be needed as a check and validation that you are paying as you are intending to.

Every year various surveys are taken that ask companies what their intentions are for the coming year for pay adjustments of all types – pay ranges, merit, promotions, special adjustments, etc. And if the coming year is anything like the last few here in the US, the answer is likely “3- point-something-percent.” That’s probably enough for most people to determine that moving your pay ranges by 3% or so will keep you competitive with your intended pay strategy. But does it?

If you have a pay structure in place, chances are your intention is to align the midpoints, or at least the middle portion of the pay range with your intended market position, i.e., 50th percentile, market average, etc. This is called your pay policy. It isn’t how you actually pay people, but it’s how you intend to pay people overall. This is different than your pay practice, which is how you actually pay people. For example, if your average compa ratio for a job family is 95%, you are paying 95% of your policy, or roughly 5% behind your intended position to market.

Here is where a little complexity can be a good thing. Periodically market pricing your benchmark jobs (whether you use market pricing or job content as your job evaluation method) will ensure your pay practice (how you pay) remains aligned to your pay policy (your intent). Take for example a common situation where you have most of your professional and managerial jobs sharing a pay structure and pay grades and ranges. Let’s say IT, Marketing, Finance, Customer Service and Engineering jobs all occupy the same grades over the span of their job families. It wouldn’t be a stretch to imagine that at some point in time the market for engineering or IT jobs heats up – some new technology is invented, a new aggressive competitor comes to town, you get the picture. So over a relatively short time span the demand for those skills increases, driving up the price as reflected in actual pay rates. Some of that comes as you compete against others for those skills, some comes as companies react and create retention programs; nonetheless, the rate for those particular jobs is probably moving faster than the overall “3-point-something-percent” that your survey said.

Rather than simply applying the survey percent to your structure it may be worth it to revise the overall relationships of jobs to better align to the actual market data. This can be done a few ways:

You can pull out the outlier jobs – like IT – and re-slot them into your existing structure in the grade that most closely matches the market data point. You are changing the internal equity relationships, but you are remaining true to your intent, or policy.

You can reevaluate the whole structure while leaving the internal grade relationships as-is. Keeps the internal relationships intact, but may create some over- and under-paid job cases relative to your policy. This is essentially changing the slope of the line of your pay structure (and yes, there is math involved!).

And this doesn’t even begin to touch on just how any market changes are actually reflected in your comparator group of companies, assuming you’ve identified that already. It is usually a part of your pay policy to specify not only where you want to compete in the market, but with whom. Does “3-point-something-percent” reflect your target group of competitors, or has that point been ceded as well?

Regular exercise of discretion on how to use a simple compensation data point (or not to use as the case may be) will keep you true to your philosophy, strategy and principles, and help to avoid those surprise endings where you say out loud to yourself, “How did this happen?” It may increase the overall complexity of managing compensation, but having the confidence that you are paying as intended is a good tradeoff in this case.

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