The end of one calendar year and the beginning of a new year is the time when most companies go through this process of evaluating employee’s performance and determining salary increases, and bonuses in some cases. I spoke with a senior manager recently who said she was about to start 340 performance reviews. Employees complain when they have to sit through just one.
But performance reviews, as much as people dread them, are a time to talk about a topic that’s near to all of our hearts – money. Does anyone think they are paid enough? I haven’t met anyone who said their pay was just fine, or even too much. So what are the factors that companies use to determine the amount of your starting offer, and what, if any, annual increase you receive? You need to also understand that compensation is part science and part judgment. There is a science behind determining market rates and ranges. When determining actual salaries, at one point the manager needs to make a judgment on what they want people to do (goals), the value of what was achieved and to what level of quality (salary increase and other rewards).
I’ve been on both sides of the pay discussion, as an HR director and as an employee myself. In this Insights, I’ll discuss five concepts that typically guide pay decisions.
Compensation and Benefits Philosophy.
- Compensation and Benefits Philosophy
- Market Rates
- Salary Ranges
- Merit Budgets
- Total Compensation
If you are interviewing with a company, asking a question in this area will tell you a lot about a company’s values. Do they have a statement? What does it say? The fact that one exists says the organization cares enough to articulate what it holds to be important. For example, we believe in work/life balance and that is why we want to lead this market in paid time off (PTO).
This is a simple yet often complicated concept for people to understand. Most companies today base their compensation system on market rates. What does that mean? You want to pay people based on what the market pays for that job. Where is gets complicated is in how you define that market in which you compete. Does that market consist of other companies in Wilmington, in the entire state of North Carolina or the whole United States? When I was in St. Louis working for Anheuser-Busch, there were some positions where the market in which we competed for talent was local. There were other positions for which we competed for people regionally. There were other jobs to fill for which we competed with other Fortune 100 consumer-products companies in the United States. These statements were all true, and yet defining the “market” was different based on the job being filled.
A market rate is what the market (companies) pays a person who is 100 percent qualified to perform the requirements of the position. A salary range is just a set of guidelines describing the minimum to the maximum that you might pay someone to do that
job. The market rate is right in the middle of the range and is the 50th percentile of the range. Often when you are hiring someone externally or promoting someone to a position, on the day you hire/promote them the person is not able to perform 100 percent of the job requirements in a fully proficient manner. This is why a company would make a person a salary offer that was below the market rate. You assume that the person will become fully proficient in the job in two years and assuming their performance is good, you would accelerate how you pay them so that in two years they would be paid at market rate. The person in this position would continue to receive salary increases but not as aggressively in subsequent years. Once you are paying above the market rate for a position, in theory you are overpaying for the job. Salary ranges are typically broad enough to be able to increase a person’s pay for many years before the reach the maximum of the pay range.
This is the bucket of money a company sets aside to pay for salary increases and promotions. Most employees just receive a salary increase. Merit budgets for the last 10 years have been in the 3 percent to 5 percent range. If the company’s salary budget is 5 percent, then you take the company’s salary budget and multiply it by 5 percent; that amount of money is the merit budget pool. If everyone got the same increase, then everyone would get 5 percent. Normally you have some people getting more than 5 percent, so that means that other people must get less than 5 percent. How the pool is divided and who makes the decision is different for every company. As an aside, salary costs are typically the single biggest cost for an organization. Typically it is about 50 percent of the total costs.
. My next Insights will be on this subject. What a person brings home in each paycheck is the sum of base salary and all the other things that a company provides. A rule of thumb is that all other benefits add about 30 percent to base pay. Many employees take this part of their compensation for granted. It’s a given until it is not.
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