By Jenny Sherman, SPHR CCP, Trupp HR.
In the feature article of our June newsletter, we outlined the role of a compensation strategy for forecasting and budgeting, attracting and retaining employees, and maintaining a fair pay practice. One of the foundational structures of an effective compensation strategy is to establish the appropriate base pay for each of the positions within an organization. In fact, according to a Towers and Watson Study conducted in 2012, base pay ranks number one among the top five expectations a recruit has of a prospective employer. In other words, competitive base pay gets an employer to first base in the game of building a top-performing workforce.
Although figuring out base pay may seem straightforward on the surface, when you dig a little deeper you’ll find a network of interrelated strategic and tactical variables that come into play. Successfully balancing each contributing factor is a combination of art and science. To establish a defensible compensation practice that effectively maintains your workforce while optimizing your bottom line, you’ll need to gather data and carefully consider each of the following:
Where does your organization fit into the competitive landscape? Is your organization a compensation leader, a follower, or do you find yourself leading and lagging at different times of the year? It is important to figure out where you’re organization fits into the ecosystem and establish base pay accordingly.
2. Compensation Model
Offering variable pay incentives that are tied to organizational or individual goals will have an effect on where base pay levels fall compared with market standards. Ensure that your compensation structure aligns with organizations that have a similar compensation model.
3. Recruitment Pool
The applicant market for a position can influence base pay. For instance, an entry-level position recruited from the local market will reflect pay rates within that specific area. For a professional or mid-manager role, employers may need to consider regional pay data in order to create a base pay structure that attracts and retains candidates from the surrounding region. While an executive level role often requires considering national data or key industry regions where potential candidates are more likely to be found.
Distinct industries and market segments pay differently for similar positions. For-profit versus non-profit, for example may have significant disparity. Industrial, healthcare, hospitality, etc., each have their own ranges for jobs with nearly identical responsibilities.
5. Company Size and Maturity
The size of an organization has a substantial influence on base pay; influencing job scope and expertise requirements for the same or similar positions. The level of business maturity, such as start-up, growth, expansion, maturity or transition will also have an affect on pay rate considerations.
Supply and demand economics will have considerable influence on base pay. Labor shortages in professions such as nursing, engineering and computer science create pay differentials such that a supervisor or manager role for these positions can have a base pay at or near the same base pay offered to the individual contributor.
7. Skill Level
Education and certification credentials can also affect base pay. Ensure that the salary range you are offering for a position fits the experience and degree requirements listed in the job description.
8. National Standards
When it comes to updating base pay ranges year-over-year, resources such as the Employment Cost Index (ECI) or Consumer Price Index (CPI-U) aid in setting base pay range increases. Employers with pay ranges should at a minimum look to increase ranges every 18-24 months and the standard frequency is annually.
A single set of data won’t provide the whole picture. While it requires a lot of effort, it is important to get complete and accurate information when establishing salary range decisions. To ensure an efficient process and reliable data, contract with a professional organization that offers compensation services. Compensation professionals are skilled at blending statistical data with the other considerations to craft a valid pay range. With accurate salary ranges established, you’ll have a foundation in place to contain your compensation budget, attract and retain appropriate talent and communicate with internal and external equity about your monetary reward practices.