Compensation Budgeting Part 1: Managing Internal Pay Inequities
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This document discusses managing pay inequities as part of a three-part series on compensation budgeting. It recommends starting with a clear compensation plan and using accurate market data to identify inequities at the organizational, department, position, and individual levels. Potential solutions are identified along with their costs to resolve inequities over multiple years. Communicating solutions to executives, managers, and staff is also discussed.
Compensation Budgeting Part 1: Managing Internal Pay Inequities
- 1. Compensation Budgeting Part I: Managing Pay Inequities Mykkah Herner, MA, CCP Manager of Professional Services PayScale, Inc. www.payscale.com
- 2. www.payscale.com 14,000 Positions 2500 Customers 11 Countries 250 Compensable Factors 40 Million Salary Profiles
- 3. www.payscale.com Three-part Series on Compensation Budgeting Part I: Managing Pay Inequities Part II: Determining Raises Part III: Putting it all together with PayScale Insight
- 4. www.payscale.com Agenda o Start with a Plan o Do you have a clear pay philosophy, strategy, structure, policy? o Are you using accurate and current Market Data? o Identify Compensation Inequities o Organizational Level o Department Level o Position Level o Individual Level o Develop solutions o Next month: determining increases & putting it all together
- 5. www.payscale.com Start with a (comp) plan
- 6. www.payscale.com Comp Plan Elements o Philosophy - high-level view on the aims of the organization with regard to compensation o Strategy – o Define your Labor Market(s) o Determine level of competitiveness o What do you want to reward? o Structure - Mathematically sound way of aligning your positions to market and internally o Policy – ensures that the comp plan is carried out
- 7. www.payscale.com Getting Reliable Market Data Critical factors for benchmarking jobs o Know your positions, go beyond titles o What are the top 3 functions of the role o What’s the level of responsibility o What kind of decision-making authority o What typical tenures do you seek for your roles (newer, more tenured, etc) o Are there required degrees or certifications Defining your competitive set Accurate and current market data
- 9. www.payscale.com Types of Pay Inequities At the Plan Level o Are you paying fairly to market? o Are your ranges competitive with the market? At the Department level o Are you paying fairly across departments? At the Position level o Have some of your positions moved faster? At the Employee level o Are you paying fairly across employees based on • Your comp policy (what do you reward)? • EEO status?
- 10. www.payscale.com Plan-wide Pay Inequities Paying Fairly to Market o Determining your target market percentile o Budget o Competitiveness and impact on retention/attraction Staying competitive relative to market o Annually, examine your ranges to see if they’re current relative to market values
- 11. www.payscale.com Analyzing Ranges to Market Create a report showing your range midpoints relative to the market, and the difference between the two o Look through your positions- do most go up? Most go down? A mix? o If most positions moved up, you may want to consider adjusting your ranges by 1-3 percentage points. o Determine the cost impact of the shift prior to making the change.
- 12. www.payscale.com Cross-Department Pay Inequities Targeting Determine the appropriate targets for your departments Build ranges around the appropriate targets Execution Ensure that you are paying according to strategy by looking at department-level compa-ratios and market-ratios
- 13. www.payscale.com Position-specific Pay Inequities Identifying inequities at the position level o Critical positions may move faster in the market than others o Review these positions on a quarterly basis o Listen to your employees – flight risk o Consider adjusting the grade level and perhaps employee pay o Be prepared to adjust pay between cycles for your critical roles
- 14. www.payscale.com Employee-specific Pay Inequities Identifying Employee-specific pay inequities o Are you paying according to your comp plan? o Do you have compression issues? o Examine your compa-ratios (.8-1.2) o Look at your outliers (green and red) o Determine your plan to bring people in range, or have a clear policy for why it’s ok to not be in range.
- 15. www.payscale.com Disparate Pay and EEO Concerns Create a Disparate Pay Report o Examine when % difference is high and low o A good guideline is a % difference greater than your range widths o A high difference is a flag for potential litigation o A low difference may not be an EEO concern, but is a concern that you may not be rewarding according to your comp philosophy
- 17. www.payscale.com Identifying Solutions o What are the options for remedying the inequities identified? o How much will it cost? o Can we absorb that cost in this year’s increases or are we talking about a larger amount? o Do we need to resolve over multiple years? o How critical is it that we resolve the inequities? o Legal considerations o Attraction/retention issues o Morale o Develop multiple scenarios o How will we communicate: o To Execs o To Managers o To Staff
- 18. www.payscale.com Identifying Options & How much it will cost: Plan Level Plan Level Options o Do nothing o Make small incremental change o Update your comp strategy o Adjust all the ranges at once Plan Level Costing o How do you plan to do increases? Do you want to maintain the compa- ratio (across the board market-based increase) or do increases by position in range? o What is the $ impact of employees falling out of range in the green? o Former red-outliers may again be eligible for increases.
- 19. www.payscale.com Identifying Options & How much it will cost: Position Level Position Level Options o Keep the position where it is – may have high compa-ratios o Move the position to a new grade o Keep the position where it is but offer a “market premium” Position Level Costing o Calculate the cost of moving position to a new grade o Calculate costs of your market premium – advantage year over year
- 20. www.payscale.com Identifying Options & How much it will cost: Employee Level Employee Level Options o Identify any critical issues o Determine the cost of non-critical issues and priority to organization o How will you handle compression issues? o What about disparate pay (non-EEO)? o Are there any concerns amongst your green outliers that won’t be remedied with a regular increase? Employee Level Costing o Determine the amount to resolve critical issues o Calculate amount to resolve compression issues – increases to existing? o Any necessary market adjustments for individuals?
- 21. www.payscale.com Communicating about Pay Inequities Ask for what the organization needs o Provide solutions o Share the big picture – with only the detail needed to make your case o Make your recommendations concise and easy to understand o Explain the why o Communicate what the impact/cost will be to the organization Help the organization manage the budget once approved
- 22. www.payscale.com Next Month: • Determining Increases • Putting it all together
- 23. PayScale Delivers Where Other Compensation Providers Fall Short PayScale leads the world in compensation knowledge with the freshest and most detailed data from over 40 million salary profiles. More than 2500 organizations use PayScale’s software and intelligence to get the greatest return on their talent. Smart businesses use PayScale Insight to recruit, retain and motivate their people. Visit our blog: www.payscale.com/compensation-today Join our Group on LinkedIn: Compensation Today: HR Best Practices Mykkah Herner, MA, CCP Manager of Professional Services, PayScale, Inc. www.payscale.com
Editor's Notes
- #3: Creator of the largest database of individual compensation profiles in the world, PayScale, Inc. provides an immediate and precise snapshot of current market salaries to employees and employers through its online tools and software. PayScale’s products are powered by innovative search and query algorithms that dynamically acquire, analyze and aggregate compensation information for millions of individuals in real time. Publisher of the quarterly PayScale IndexTM, PayScale's subscription software products for employers include PayScale MarketRateTMand PayScale InsightTM. Among PayScale's 2,500 corporate customers are organizations small and large across industries including Mozilla, Tully’s Coffee, Clemson University and the United States Postal Service.
- #9: Mykkah
- #10: Philosophy: Employee-facing document that gives a high-level view on the aims of the organization with regard to compensationStrategy: Management-facing (typically) and answers critical comp questions of – labor market, competitiveness, and what to rewardPolicy: how are comp decisions carried out – more tactical documentStructure: the bones – how is the comp program laid out – how are positions aligned.
- #13: Paying fairly cross-department doesn’t necessarily mean paying equally across departments.
- #19: Do nothing: If your strategy is high, and compa-ratios and morale are good, you may get by another year without movementMake small incremental change: The market may suggest moving 3%, but you can decide instead to do 1% a year over the next few years.Update your comp strategy; shift ranges for just your critical departments Adjust all the ranges at once