When a firm becomes large it needs to rationalise its salary structures. It no longer pays salaries on an ad hoc basis. People at a certain parity as far as responsibilities and authority go need to be paid similar salaries.
Salaries also need to be maintained with external competition.
So when an organization looks at salary levels there are two reasons - for maintaining internal equity and for external equity. Setting a salary level also means consciously looking at two things- financial budgets and corporate strategy and taking a decision on where to peg one's organization in relation to the market.
Salaries are usually reported by compensation consultants in percentiles. So if one draws a graph of the 1st percentile to the 100th percentile at any time for a particular role one gets a graph of how the salary changes across organizations. Averages are not used to track salaries across organizations or industries, as any outlier in the data can skew the whole data. Outliers are much better tracked on a percentile graph.
Typically organizations look at certain key numbers for deciding their salary philosophy.
What is the median of the distribution?
What is the budget for salaries as a percentage of turnover?
Typically an organization that starts off in an industry to attract talented people pays a very high percentile, in the range of 85-99 percentile. They define the higher levels of the distribution. Typically these organizations are cash rich or have investments from VCs who earmark a proportionately large part of the budget for attracting talent.
At the lower end are organizations for whom the role is not core to the business. Typically the support functions roles are pegged at lower percentiles like the median or even lower.
The organization therefore has to look at how it will peg itself against the market and therefore what are the trade-offs it has to make. For example, if an organization pegs itself at the 65th or 75th percentile in comparison to the industry it is effectively ruling out the candidates in the higher 35 to 25 percentile range. While this seems a good trade-off the thinking is usually jettisoned when business pressures force organizations to overshoot their pay ranges and offer higher salaries than the norm internally.
While throwing money seems to be the only option when candidates are not willing to join, organizations need to keep in mind that there is an option. Building a great employment brand using learning opportunities and other benefits like organizational culture and nature of work as an attraction basis rather then just numbers.
All this assumes a totally open organization. Most leading players will train internally, so they only need to benchmark at the entry points - typically unskilled, skilled, and graduate entry. They will watch the markets, as pro's, but if they are out of line, they will not react immediately. They will think out their long term strategy.
ReplyDeleteBecause these firms rely on their own training and promotion from within, they will want to ensure fairness, and interest, from level to level within the organization. The exact ratio is important - too flat and no one is interested in promotion; too steep and the higher paid seem over paid.
They will often have a steeper curve than the market. The cross over point in the two curves is where the leaders have stopped training for the industry and they start retaining staff whom they are unable to obtain outside.
Equally, an industry like hotels have a steep curve because their bottom point is very low. IT has a flatter curve because its entry point is relatively high!
If you are paying above the median, it can be worthwhile looking at your job definition. If you are paying more, you should be extracting more value. It is important to pay for the work you get, not for the work a person did elsewhere.
When your human resources are so rare that one person can throw your business model off its tracks, it is time to go back to the drawing board.
This is a good thing to remember. At the median point, you have a 50% chance of hiring. If you have two candidates, you should be able to hire. If you have three, you will most certainly be able to hire.
If you have one candidate only, you possibly have misunderstood the labor supply and you can start asking questions!
There is a parallel in sport. We can win a gold medal on the back of one exceptional person, but to be leaders in a sport we must have depth. Ultimately we can pay more money because we win more money. Our capacity to win though, depends upon depth.
The strategic choice can be hiring one superstar and burning out in a year or two, or building depth and a business that is sustainable for a longer time.
I think there is an inordinate preoccupation with "pure" compensation as a competitive benchmark in an absolute sense.
ReplyDeleteFor a more real business perspective we ought be able to "deduct" or discount from the compensation paid the amount a firm ends up paying to set-off the lack of other factors like learning and growth opportunities.
A more useful percentile would either be one that adjusts for these factors on a multi-dimensional one that takes into account several factors.
Each employer must evaluate their total employee cost mix and see how competition in their business is stacked up on different heads. It must take a decision to alter the mix based on what they see.
Old established companies with large spends on employee development may find themselves ranked lower on pure compensation from younger competitors who spend little on training and development. The former has the choice to use aggressive branding building to show themselves as a place to learn and grow or alter their spend mix and raise compensation levels.