Compensation Management Questions & Answers

Three key factors affect the external wage market.

1. The first factor is the demand for labor. At HR Service Team, we help our clients recognize current and emerging market trends so they neither underpay nor overpay their workers.
   • HR Service Team's Practical Example
     • In the mid-1990s, there was a huge push for software employers to hire people with database skills – particular those with hands-on experience using Oracle. In 1999, there was a demand for COBAL programmers. What happened during these peak demands? People with Oracle and COBAL experience could jump jobs and receive a significant increase in salary.
2. The second factor is marginal revenue. Simply put, marginal revenue is the company’s capacity to continue hiring resources without the cost of hiring impinging on its profit margins.
3. The last is supply of labor. This is the number of employees available at the different pay rates.

The first half of 2009 has definitely been an employer’s market. HR Service Team predicts the market will start to equalize in the second half of 2010, as economic recovery proceeds.

There are four key elements to developing a pay rate structure. They are:

1. Internal Equity – is the pay relationships among jobs or skill levels. It involves establishing equal pay for jobs of equal worth and acceptable pay differentials for jobs of unequal worth.
2. External Equity – fairness in relation to the amount paid in the relevant external market
3. Company’s Ability to Pay – how much can the company afford to pay?
4. Other Benefits– how rich are the other benefits (benefit plans, stock plans, bonus plans)?

When you build a pay rate structure, all four elements must be reviewed. They are not mutually exclusive. Building out a compensation award strategy is like building a house. The foundation of the house contains all the information about the positions (e.g., job description, job level). The walls are the pay rate structure. The roof is the reward strategy – it shelters and holds the house together. HR Service Team walks clients through each step: building the foundation, putting up the walls, and finally attaching the roof.

The median is the middle number in a range of numbers arranged from ascending or descending order. The market median of a job is determined by collecting survey data from many companies. The median pay for each job is then determined. Employees paid around the middle of the distribution (50th percentile) are employees who are fully skilled in that position. The median pay is what most companies use in determining the midpoint for a pay structure. The market mean (also called average) can be used but with some caution. The market mean can have outlying numbers that can skew the results up or down; where the market median is the middle number in a distribution.

Job competition theory says that workers do not compete for pay in the market. Workers compete based on their qualifications – the pay level is set. The more a company hires less qualified workers, the more the hiring costs will increase since the company now has to spend additional funds training the workers.