Looking to Benchmark Pay?
Setting Base Salaries
Traditionally, base salaries for managers have been set by 1 of 3 methods:
- Job evaluation
- Market pricing
- Hybrid (combination of job evaluation and market pricing)
Job evaluation. The process of job evaluation relies on job analysis where information is collected on each job in order to find out what the job incumbent must do to perform the work successfully. Through competency-based evaluation, managerial jobs have become easier to define, evaluate, and value, particularly if one focuses on a Job Description. At the top management level, organizations often have one job incumbent in most functions, and the impact of the executive on the organization can be great.
| Management Job Descriptions | Non-Management Job Descriptions |
|---|---|
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Managerial job descriptions are typically written in terms of:
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In contrast, standard job descriptions focus on:
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(See DLC Course 33: Job Analysis and Job Descriptions.)
Market pricing. Today, most organizations utilize market pricing. Jobs within the organization are compared with one or more compensation surveys to determine if there is a good match. It is the marketplace that is the main determinant of pay received as compared to an internally equitable job evaluation approach. Salaries or compensation will be described in terms of "ranges" and the individual's pay will be discussed in terms of its relationship to the mid-point of that range, referred to as the compa-ratio. An individual’s pay compared to the market value of the job is referred to as the market index. Executive positions are described in terms of their competitive market price found in peer organizations.
Hybrid. Setting base salaries can also be done using a hybrid method of combining internal job evaluation and market pricing. Companies may define the salary structures by distinct grades and then market price the benchmark jobs to set the pay ranges. The non-benchmark jobs may then be slotted or ranked based on internal equity into the salary structure by assigning them to the grade containing other jobs that are internally equitable within the organization.
Understanding the different management role levels in an organization helps compensation practitioners or consultants effectively design and propose a viable compensation solution to address the business’ objectives. Many cultural, industry, legal, taxation, and economic factors of an organization need to be considered when aligning compensation programs to business strategies. The first step to align a compensation program with the business strategy is to establish a compensation strategy. The second is to understand the advantages and disadvantages of the types of salary structures the organization could use. The third is to select the structure that best supports the business needs. The fourth is to determine if job evaluation, market pricing, or hybrid methods will be used to design salary structures. Finally, it is important to work closely with the Board of Directors to review and approve compensation plans for top management.
Memory Jogger
Most organizations use what approach to set executive pay?