Looking to Benchmark Pay?
SALARY STRUCTURE FORMATION
Now that we've reviewed the basic tools for analyzing salary survey data, we'll teach you quantitative methods useful in establishing a salary structure.
We'll look at the following tools used in salary structure analysis:
- market index
- compa-ratios
- grades and ranges
- salary increase matrix formation
Market Index
| Market Index | A company's current pay rate for a job compared to the market rate for the job expressed as a ratio. |
A market index is determined by dividing actual pay by the market rate for a job.
MARKET INDEX = Actual Pay Level / Market Rate
If a chemist is being paid $97,000 for a job and the market rate is $95,000 then the market index is given as 1.02. A number greater than one indicates pay above market, one indicates at market, and less than one indicates pay below market.
A market index can also be applied to a department.
In order to determine the market index, you need to benchmark jobs to determine the competitive market data for the position in question.
Example: ERI's Salary Assessor(SA) and database provides detailed median and mean salary range information for over 17,000 jobs in 9,000 U.S., Canadian, and International areas.
| How to Retrieve Salary Data | |
|---|---|
| Step 1: | Go to ERI's Salary Assessor demo to see how market rate salaries can be retrieved. |
| Step 2: | Select the Browse button below Job Title. |
| Step 3: | This will open the Browse Jobs box. In the Search field, begin typing the name of the job you are researching. As an example, look up "Call Center Supervisor." (You can also scroll through the position list and select the position title.) Once the position appears highlighted in the list, select OK |
| Step 4: | The Salaries by Experience/Size module now displays data for this position. Adjust the data by company size, area, industry, and salary planning date |
| Step 5: | You may also adjust the data to price jobs based on performance percentiles. Select the Percentiles link and you can adjust the percentiles and also select between mean and median salary data. |
| Step 6: | To add more years to the Years of Experience column, select the Years of Experience link and add more years in the Change Years of Experience box. |
Once you have labor market data for your company's jobs (provided below), it can be compared with what your company pays.
| Position in Department A | Actual Salary Paid ($) | Market Rate ($) | Market Index |
|---|---|---|---|
| 1 | 25,000 | 26,000 | .96 |
| 2 | 40,000 | 30,000 | 1.33 |
| 3 | 35,000 | 35,000 | 1.00 |
| 4 | 50,000 | 39,000 | 1.28 |
| 5 | 45,000 | 45,000 | 1.00 |
| Total | 195,000 | 175,000 | 1.11 |
The overall department's market index is determined by dividing $175,000 into $195,000:
($195,000 / $175,000) = 1.11
This means Department A may be overpaying its employees.
Compa-ratio
| Compa-ratio | A company's current pay rate for a job compared to the range midpoint for the job expressed as a percentage. |
A compa-ratio is determined by dividing actual pay by the range midpoint for a job.
COMPA-RATIO = Actual Pay Rate / Range Midpoint
If entry-level full-time developers were paid $85,000 for a job that has a range midpoint of $98,000, the compa-ratio would be 85/98 X 100, or 87%.
Example of compa-ratio
The competitive median salary for the position of Librarian in your city is $65,000. (The city targets a market position of 90% of the market rate.) Sue Lee, a Librarian at your library currently earns $53,000. What is the compa-ratio for her position?
The competitive salary for this position is $65,000.
Your library targets 10% below the market rate for the range midpoint:
$65,000 x 0.10 = $6,500
$65,000 - $6,500 = $58,500
So, the range midpoint for the Librarian position at your library is $58,500.
Sue Lee earns $53,000. Therefore, the compa-ratio is:
$53,000 / $58,500 = 91%
Based on Sue Lee’s compa-ratio, there needs to be further analysis as to why she is paid at 91% of the range midpoint. Is it a performance issue, time in service, or discrimination?
Compa-ratios can also be appropriately applied to departments and other comparison situations.
Memory Jogger
The median pay in your town for a Sales Clerk with five years of experience is $30,000. In order to recruit talent, your company's policy is to have a range midpoint at 15% above market rates. Andy Smith, a Sales Clerk with five years of experience earns $25,000. What is this employee's compa-ratio?