Common Philosophy but Varied Practice
Whether you choose to use salary grades or market reference points, you need to decide which market data to use for your analysis. The numbers you decide to use are dictated by your company’s pay philosophy.
The chart below shows results from three separate surveys highlighting how consistently companies report targeting their base salaries in the United States at the 50th percentile or “market median” of their specific labor market. The left side of this chart shows executive targets. In 2015, 67% of companies targeted the executive salary position at the 50th percentile. That figure increased to 78% of companies in 2017. The 75th percentile was sought by 10% of companies in 2015 and fell to just 6% in 2017. Below the executive ranks, shown on the right half of the chart, 85% of companies reported following the median pay target in the trend survey conducted in 2017. Only 2% of companies say they aim to pay at the 75th percentile.
Percent of Companies Targeting Selected Salary Positions
Target Market
Percentile |
2017 |
2016 |
2015 |
2017 |
2016 |
2015 |
Executive |
Non-Executive |
75th/plus |
6% |
7% |
10% |
2% |
2% |
4% |
65th |
3% |
4% |
4% |
3% |
3% |
3% |
60th |
10% |
9% |
14% |
7% |
8% |
10% |
50th |
78% |
77% |
67% |
85% |
82% |
76% |
Other |
3% |
4% |
5% |
3% |
5% |
7% |
How is it that 75% to 80% of companies target the median of the market and yet we see pay vary widely within the published results? One reason is that each company defines the market differently. One company may aim to pay at market, but uses high paying companies as their benchmark. Another company may aim to pay at market, but actually pays less because they compare themselves against lower paying firms. Since the average rates change when people enter or exit the job market or receive salary increases, the market really is a moving target. Philosophically, some companies target higher or lower market position for salaries based on their needs, their ability to pay, as well as their use of other forms of compensation.
The trend in this data shows an increasing number of companies targeting the 50th percentile of their market. This may be an outcome of companies realizing just how expensive leading the market in pay really is. Using the whole US market as a source, it costs about 5% more on a job-weighted basis to pay at the 60th percentile. Those aspiring to pay at the 75th percentile must make a significant investment in labor cost. One analysis showed this pay level would require 12% higher salaries. When operating margins are slim, those funds may simply not be available.
In summary, while it sounds great to say we want to pay at market, we must recognize that pay can mean many different things and is not limited to salary alone. Enough is a relative term too, both in terms of amount and timing. You may need to pay more for some jobs than others. You can have a competitive program and still be behind the market at the end of your plan year. Where you set your targets and how you measure them needs regular calibration too. All in all, having a competitive compensation program takes a lot careful planning and effort.