Compensation Budgeting How-To: Identify Inequities at the Org, Design or Department Level

This is an excerpt from our budgeting how-to whitepaper. Download the full version here.

There are a few different ways in which compensation inequities can exist in a company, from the organizational to the individual level. Today we’re covering inequities at the organizational, design and department level.

Organizational- or Design-Level Inequities

At the organizational level, there are essentially two key questions:

  1. Are we paying fairly to market?
  2. Are our ranges competitive with the market?

Your analysis should then begin by comparing your pay for your full organization to the market (at the targeted percentiles). The typical measure used is a market ratio, which compares employee pay to the market values for the position to which they’re assigned, at the targeted percentile. A market ratio of 1 says that you’re paying at market values. A market ratio greater than 1.2 says that you’re paying high to market, and below .8 says that you’re paying low to market.

Next check how your current structure is holding up relative to the market. How do your range midpoints align to the market values for your positions? The market value represents the proficiency point for a role. A range midpoint typically also reflects that proficiency point, where incumbents would come in at, or toward, the minimum of the range. Then as they gain in skill sets, performance, experience, tenure — whatever matters to your organization — they would progress through that proficiency point toward the max of the range.

If your range midpoints are, on the whole, more than 3 percent different from the average market values for your jobs, you may be out of alignment with the market. It bears further review at the job level, however, as it could also be true that you have some jobs that have shifted significantly, but most have stayed relatively consistent year over year.

To stay competitive in your market, you’ll want to examine your ranges on an annual basis to confirm that they remain relative to market values on the whole. Create a report that shows the difference between your range midpoints and the market. Look through your positions. Have most gone up? Most gone down? Is there a mix? If most positions have moved up, you’ll want to consider moving your ranges by 1-3 percentage points. One thing to keep in mind: Just because you’re moving ranges doesn’t necessarily require you to adjust pay. More on this subject in an upcoming post.

Often folks wonder how often they should be examining and adjusting their ranges. For the most part, this will depend on your organizational size, industry and compensation strategy. That said, you’ll want to check your ranges at least on an annual basis. Typically ranges move every 2-3 years; however, your organization may exist in a context that requires more rapid change.

Department-Level Inequities

At the department level, there is one primary question: Are we paying fairly across departments?

Ultimately, paying fairly across all departments does not necessarily mean paying equally across all departments. It may be true that you’re targeting some departments at the 75th percentile, while others are at the 55th or 50th percentile. As long as the strategy aligns with business goals, you’re in good shape. Make sure that you are in fact aligning your compensation design, pay strategies, targets,and talent markets with your business goals, and communicate that clearly.

Want all the steps and details for the full budgeting process? Grab our budgeting whitepaper today!

Tell Us What You Think

How does your org’s compensation compare to the market? We want to hear from you. Share your story in the comments.

Image: JD Hancock/Flickr


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