Radford Compensation 101

Chapter 2: How Much to Pay

Rewards Program Design

 

 

How much to pay is definitely a relative term. What is considered high pay at one company can be on the lower spectrum at another. The first part of understanding how much to pay is to know the philosophy and inner workings of how it's established.

Understanding the "How Much"

As we discussed in the last chapter, the external environment plays a large role when understanding how to pay. But in order to understand how much we should be paying, we also need to focus internally, on the value of individual jobs. Individual job value is based on three pillars starting with job analysis (what is done), job evaluation (how jobs compare), and market pricing (linking company to market).

Job Analysis

What Gets Done

  • Determine what people do by watching, documenting, and understanding the reasons jobs exist.
Job Evaluation

How Jobs Compare

  • Comparing jobs helps us know their relative value within the company.
  • Options include formal evaluation (point factor system) or informal agreements (slotting/ranking systems).
Market Pricing

Linking Company to Market

  • Regardless of relative internal valuations, we need to attach pay to jobs using a sense of the market price.
  • Market rates can be measured for individual jobs or groups of similar jobs with similar value.

How Much Should We Pay?

The simple answer to this question is "enough." You want to be able to pay enough to:

  • Attract new employees to join the company
  • Retain the ones you have, so they don't think there are more or better opportunities elsewhere
  • Engage employees to do their best

The trick to "how much" is to find the right balance between what is motivating and what is affordable. To be motivating, consider setting objectives and targets that aren’t too aggressive or unattainable, but require reasonable effort to attain. Then consider affordability. From employees’ viewpoint, everyone would like more compensation. But from the CFO's view, the objective is to measure costs against return on investment.

As a compensation professional, you will be establishing the rewarding yet affordable ranges of pay and identifying the market value for jobs. These choices that you make will help line managers and business leaders make their hiring decisions with more knowledge, insight, and confidence.


Sources of Market Value of Labor

When you ask a candidate how much they would like to be paid, they have an intuitive sense of their value. That may come from an amount based on what they earned at a previous job, the amount they think others get, what they need to make ends meet, or what they've heard from recruiters and seen on job boards. When a hiring manager is opening a requisition, they too have an idea of knowing how much a job is worth.

Subjective approaches, such as intuition, along with internal and external sources of market value of labor can offer a framework for decision making and may be reasonable to use when hiring temporary help or independent contractors. When hiring an employee however, their pay may become a reference point for future hires so you need an unbiased, accurate, and complete view of the appropriate labor market. That's where an objective benchmark from a compensation survey like Radford comes in to save the day.

Purchasing a large, well-established salary survey may seem like a big expense, but you're likely to see a return on investment within your first few hires. Plus, your team will be able to cut down on research time, have more energy to work on establishing consistent compensation programs, and won't have to scramble for data every time your business enters a new talent market or adds new types of jobs. Between efficiency gains in HR and talent acquisition— and improvements in employee engagement related to fairer and more consistent compensation decisions— great survey data quickly pays for itself.

 

How is an Objective Approach Superior to a Subjective Approach?

Subjective Approaches

  • Intuition: Logical floors and ceilings
  • Internal: Current employee pay, new-hire offers, rejected offers, exit interviews
  • External: Recruiters, media, online data/job postings
  • Concerns: Biased, isolated, incomplete, untested, dated

Objective Approaches

  • Third-party data sources: Compensation surveys such as Radford
  • Confidences: Objective/neutral/unbiased, accurate, employer-related, timely, consistent

 


Benchmark Jobs and Job Matching

When you use a compensation survey, whether it's a Radford survey or another source, the basis of job comparison will be the benchmark job. The benchmark job is exactly what it sounds like, a common job held by many that's consistently defined and relatively stable in design and purpose. Job families like accountant, engineer, and HR rep are common examples of benchmark jobs since they are found in most companies. Not every job is surveyed though since some companies may have unique definitions of roles or jobs that few others have.

The key to successful survey participation is job matching. This is the process of comparing your company's jobs to the ones offered as benchmarks in the survey. There are two basic ways that you can go about matching jobs:

  • The first way is to identify the right job family based on category, function, role and duties. This works best for surveys that offer only a few positions, such as a sales survey or executive survey, where the right job family can be identified fairly easily by the title first and then the description.
  • The second way is to identify the right job based on scope, role, employee qualification and actual duties. Jobs in more comprehensive surveys, like the Radford Global Technology Survey, will include positions that you may have never heard of or even knew existed. This is where it becomes very helpful to read the descriptions carefully and perhaps even share the survey descriptions from a specific functional area with a line manager who knows the difference between different types of engineers, programmers, or consultants. Seek help to match jobs appropriately and learn about the organization.

Job Families and Promotions

Another term that you will see a lot when it comes to surveys is job families. A family is a set of individual jobs that each involves the same basic type of work but at different levels of skill and responsibility. Companies with an accounting team, for example, will typically have a variety of levels within the function. In this case, the job family is divided into different levels, each with a different target rate of pay. As a compensation professional, your task to define job levels is a critical skill; it creates motivation for your employees to learn new skills and helps them identify career paths.

Multiple levels in the job family create promotional opportunities for people who grow their skills in one discipline over time. When an employee assumes greater responsibility while continuing to perform the same basic function, it is recognized as an in-family promotion. An example of this is an accountant being promoted to a senior accountant. These promotions usually happen around the time an employee receives a review or a salary increase. A shift to a job at a higher level in a different job family is referred to as an out-of-family promotion. An example of this is an accountant 1 that becomes a financial analyst 2. These promotions usually happen when a requisition is filled by an internal candidate or some form of department reorganization occurs.

Figure A below shows the promotion path of a junior accountant. If he follows the solid gold line and is promoted in the accountant family, then he has received an in-family promotion. If instead he follows the dotted gold line and becomes a financial analyst, then he receives an out-of-family promotion.

Figure A: Promotion path of a junior accountant.

 

Why don't salaries in the labor market move as fast as the average salary increase for an individual? We hear this question a lot. For example, if every accountant gets a 4% increase, why wouldn’t the average salary increase by 4%? Promotions are one reason. When an employee is promoted, they move from one job level to another. Since it is usually a highly-skilled and well-paid person who gets a promotion, they tend to be paid above the average of their peers. Once promoted, they move to a job where they are no longer the most senior and often receive below-average pay since they are new to that level of responsibility. Moving an above average paid employee into a higher job level lowers the average pay rate in the job they leave. Moving into a new job as a below average paid employee pushes the average pay for that job down, too. Lower starting pay for new hires can also explain why rates move more slowly overall than you might think.

 


Survey Scenario

As previously mentioned, defining job levels within a family is a critical skill of a well-rounded compensation professional. Managing the distribution of employees at different levels is a way to ensure that you are developing new talent and shifting work that requires a lower level of skill to employees at more junior levels and lower levels of pay.

The Radford Global Technology Survey defines six distinct levels of work for most individual contributor job families. The chart below includes a knot tying analogy that may help explain the conceptual framework for job levels and shows the actual distribution of employees in each level in the US, India, and China. In the US, there is a normal distribution, a bell curve that is typical in each job family. The skew is to the left in India and China, where more employees perform lower-level jobs relative to the US.

Incumbent Distribution of Professional Individual Contributor Positions

  Entry Developing Career Advanced Expert Principal
  Learns about rope Can tie basic knots. Shown complex knots Calculates rope strength. Knows a lot about knots Understands
rope making		 Knows more about rope than you ever will Invented Nylon

Defining Competitive Labor Market

Now that we know third-party market data is needed for serious competitive analysis, we need to be sure we’re pulling the numbers we want from the compensation survey. The first thing we need to decide is which employees (or incumbents) working elsewhere are good representatives of our specific labor market. Since the concept of a peer group is a bit more intuitive for executive compensation analysis , let’s use hiring a sales executive as an example. We can agree when hiring executives, you want to compare pay levels with appropriate firms. Pay is generally higher (for the executive level) at larger companies, so a peer group of companies that are in the same general size range or perhaps slightly bigger is appropriate. It is also a good idea to consider using market capitalization, or perhaps level or stage of development, as a way to ensure that comparisons are drawn from companies facing similar challenges and are hiring talent with similar experience. The executive peer list is very important to get right. Public companies often disclose it in their proxy statement and investors will look to see that appropriate companies were selected as peers for setting pay levels.

Sample Peer Group Selection Criteria

  • Revenue/Headcount Size Category
  • Market Capitalization (stock price x shares outstanding)
  • Development Stage (Pre-IPO, Growing/Mature)

Competitors for Talent Vary by Job Category

  • Industry - employees with technical skills
  • Location - admin/production jobs not eligible for relocation
  • Country - peer lists reflect labor competitors in each market

Years ago, companies routinely thought that the same peer list, or even results drawn from all participants in a survey, made for an effective benchmark analysis. But now we know that specificity adds value. The reality is that a large, reputable survey provider will allow you to complete a much more sophisticated analysis today. It will likely be to your advantage to use different peer lists for different kinds of jobs. The sheer size and scope of a large survey database will allow you to customize reports that give you keen insight into your competitive labor market.


A Closer Look at Peer Groups

These days, between governance issues and the reality of firms operating in many locations with different competitors, different lists of peer companies should be used for each of your major international theaters. Here are some detailed considerations worth mentioning to help you in this process:

  • First off, global competitors of similar or larger size chosen for executive analysis may include some companies outside your core industry. Executive recruiting is often focused on bringing talent to an organization that is not tied to specific technology; leadership from another industry may transfer effectively.
  • The list of companies appropriate for executive pay analysis may not be right for the engineers or scientists at the heart of your company’s product development efforts.
  • National competitors, regardless of size, may be home to candidates for future employment or may be keen on poaching your key talent. To help combat this, comparing your salaries for technical jobs to the pay at these companies is critical.
  • In contrast to technical jobs that may require a country-wide recruiting effort and technology-specific companies, administrators may best be sourced from local companies where individual skills and experience are applicable and local recruiting is key to cost-effective hiring. These positions should be analyzed using local data and while the generator may reflect local conditions in some areas, custom analysis may be needed for other markets.

 


Chapter 2: Rewards Program Design Summary

  • How much we need to pay begins with job analysis, job evaluation and market pricing
  • Pay “enough” to attract new employees, retain your current ones, and engage them to do their best
  • When it comes to sources of market value of labor, an objective approach, such as a compensation survey, is always better than a subjective approach, such as your intuition
  • The key to successful survey participation is being able to match your jobs to the survey
  • Know how to group job families and define job levels
  • Use different peer groups depending on the job you’re trying to evaluate

 

Go to Chapter 3

 

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