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I. INTRODUCTION
The design and development of salary administration
programs have become increasingly complex over the last several
years. A well administered, formally designed up-to-date compensation
program will provide the organization with the tools to achieve
the following objectives:
• To attract and retain competent and effective personnel.
• To provide a systematic means for budgeting and controlling
salary expenditures.
• To establish a fair relationship between salary ranges
and payment practices in the appropriate geographic and industry
markets—to be realistically competitive.
• To comply with Affirmative Action Programs, Americans
with Disabilities Act (ADA), and other various laws, regulations
and executive orders—in other words, to show a “good
faith effort”.
• To effectively deal with employees’ expectations
and concerns for equity.
• To maintain effective communication of compensation policy
throughout the organization. Employees should understand the compensation
practices and accept specific actions as being reasonable and
impartially administered.
Finally, from both the employee’s perspective and that of
the employer, an effective salary administration program must be
responsive: salaries should relate
to performance, so those individuals who make substantial contributions
to the organization’s progress are rewarded for their performance.
The program must be
fair: each employee’s pay should
be related to the value of the position he or she fills, and as
the level of responsibility increases, so should salary opportunity.
The program must be simple:
the program should be easy to administer and easy for all employees
to understand. When employees understand how pay is determined in
the organization, a salary program has far greater effectiveness
and integrity.
The program must be competitive:
salary levels in the organization should be competitive with pay
for similar jobs in the relevant labor markets. Pay levels in the
market are the best indicators of the supply of and demand for employee
skills and thus represent the market value of these services; paying
employees on this basis will provide reasonable assurance that your
salary structure will attract and retain qualified employees and
that your salary costs will not get too far out of line with those
of your competitors.
II. JOB PRICING
Job pricing involves conducting wage and benefit surveys in relevant
labor markets. Survey data can then be used to achieve external
equity within the organization's ability to pay constraint.
III. ORGANIZATIONS INCLUDED IN THE SURVEY
The question of which organizations should be included in a labor
market survey is best answered by considering the nature of labor
markets and the purpose of conducting such a survey in the first
place. The purpose is to assure that the organization is paying
a competitive wage so that there are not perceptions of pay or benefit
inequity. In other words, the objective is to pay a wage that is
competitive in the labor market, thereby allowing the organization
to successfully attract and retain labor. Organizations from the
relevant labor market should be included in the survey.
IV. GEOGRAPHIC SCOPE OF LABOR MARKETS
Labor markets have a definable geographic scope. That is any given
organization is considered to be located at the center of a specific
labor market. If an employer were to analyze the percentage of people
who work as office and clerical employees, it might discover that
50 percent of those employees come from a 10 mile radius of the
office complex, that 75 percent come from 20 mile radius, and that
fully 95 percent come from a 30 mile radius. In this case the geographic
scope of the relevant labor market for office and clerical employees
would be 30 miles or less.
Actually, it is a misconception to think of your organization as
located at the geometric center of the labor area, since most employees,
may come from only one direction - from the north, south or so on.
V. OCCUPATIONAL LEVEL AND LABOR MARKETS
Geographic area is one dimension of a relevant labor market. Another
dimension of the relevant labor market is occupation. Different
occupational groups have different labor markets. As a general rule,
the geographic area for the relevant labor market varies directly
with the skill level of the occupation. For example, the relevant
labor area for unskilled laborers may be a 20-mile radius; the relevant
labor area for highly skilled employees, such as middle managers,
may be regional, or even national. It can vary from organization
to organization, and compensation decision-makers should study the
labor areas for occupational groups for their organizations. In
general, it is worth asking if the organization’s present
human resource policies and programs (pay levels, recruiting efforts,
training and development, and so on) allow the organization to attract
an adequate quantity and quality of applicants. What geographic
areas do these employees come from?
The fact that labor markets have geographic dimension and an occupation
dimension suggests that it is inappropriate to think of the labor
market survey just as “a” survey. The labor market survey
is really a series of surveys.
VI. SELECTING THE ORGANIZATIONS TO SURVEY
You must decide which organizations to include in the labor market
survey. Probably the simplest approach uses a labor markets analysis
to identify all of the organizations in each of the relevant labor
markets. The number of employers in the relevant labor markets may
be so large, however, that it is not practical to survey all of
them.
VII. WAGE AND BENEFIT SURVEY DATA AND
ANTITRUST LAW
One potentially serious concern with compiling and using wage and
benefit data is whether or not the data lead to setting wages at
a specified level. If organizations act in a way that could be regarded
as a conspiracy to restrain the free pricing of labor, this behavior
would likely be looked at as a violation of antitrust law.
Employers can probably best protect themselves
from such charges by not collectively agreeing to set wages at a
particular level; doing so would almost certainly be considered
a violation of antitrust law. On the other hand, the employer is
perfectly free to collect and use wage and benefit data from other
employers so long as the collecting organization makes independent
judgments in using the data. In other words, to collect such data
and to make decisions on such data is legal as long as the organization
does not act in concert with other organizations. An
independent third party should administer the survey.
VIII. WHO CONDUCTS WAGE AND BENEFITS SURVEYS?
Wage and benefit survey data are available from numerous sources.
A distinction is made here between third-party data and custom-designed
data. Third party data may be provided by three sources: government
agencies, professional associations, and consultants. Custom-designed
surveys are developed by the surveying organization.
A. Third-Party Surveys
- Area Wage Surveys
- Industry Wage Surveys
- Professional, Administrative, Technical and Clerical Surveys
- Federal Reserve System
B. Professional Association Surveys
Numerous professional associations at both local and national
level conduct one or more wage and benefit surveys of their membership.
C. Consultants
Another major source of data for compensation decision-makers
is consulting firms. A number of consulting firms conduct wage
and benefit surveys that are made available to clients, and others
wishing to purchase the data. They are often a rich source of
information for the compensation decision-maker.
IX. CUSTOM-DESIGNED SURVEYS
If custom-designed surveys are designed properly, the compensation
decision-maker can articulate the relevant organizations for inclusion
in the labor and product market surveys and can also control the
types of data, which are collected.
X. SUMMARIZING SURVEY DATA
There are almost as many ways to summarize wage data, as there are
people who summarize the data. The general rule to use in summarizing
the survey data is to use a format that is useful for the surveying
organization. This issue, of course, is a moot one for those organizations
that rely on third-party data. Those organizations will find that
they must use the data as it is summarized for them.
-Benefits Data
There are numerous ways to summarize benefits data from the survey.
The data itself should be summarized in a way that is consistent
with the questions to be answered.
-Wage Data
It is easier to be more precise about how to summarize wage data.
Since the purpose of this data is to find out going rates in the
labor or product market, data should be summarized in terms of minimum
maximum, mean, and median actual pay rates. An employer may also
be interested in the averages of these pay rates. By examining the
average of the minimum rates, maximum rates, mean and median rates,
the compensation decision maker can identify the parameters surrounding
the organization’s own pay practice to make decisions about
changes in current pay rates.
XI. REPORTING DATA TO PARTICIPANTS
It is easy to overkill with numbers and to confuse rather than clarify.
A good way to report data to management is by job. If the data are
well collected from the appropriate organizations, they can be used
for fine tuning the pay system. Results that can be used to fine
tune wages can generally be obtained only from custom-designed surveys.
Gary R. Thornton, MBA, SPHR, CEBS, RPA, GBA is the Principal of Thornton & Associates, a human resources management consulting firm located in Scarborough, ME. He has more than 25 years’ experience in human resource management for both private and nonprofit organizations. He holds credentials as a Senior Professional in Human Resources (SPHR), Certified Employee Benefits Specialist (CEBS), Retirement Plan Associate (RPA) and Group Benefit Associate (GBA). He currently serves as a Special Expertise Panel Member - Total Rewards, Compensation & Benefits for the Society for Human Resource Management (SHRM). He has also held leadership roles in the Maine Employee Benefits Council and the Human Resources Association of Southern Maine. For more information about the information contained in this article, you may contact him at 207-885-9333 or email gthorn@ThorntonAndAssociates.net
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