Understanding The Magic of Market Pricing: The Quantitative Art

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Understanding The Magic of Market Pricing The
Quantitative Art!

• John Kosky, SPHR, CCP, CEBSCompensation
  ManagerEmory University

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Todays Agenda

• Purpose of Market Pricing
• Challenges of Market Pricing as a Compensation
  Strategy
• Common Pitfalls
• Compensation Strategy
• Selecting Benchmark Jobs
• Assessing Labor Market
• Market Analysis
• Matching and Slotting Jobs
• The Compensation Recipe

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How Does Marketing Pricing Help Your Institution?

• Effective market pricing supports
• Recruitment
• Retention
• Morale
• Productivity
• Fiscal Responsibility
• Market pricing, done properly, enhances
  organizational success with a competitively paid
  and motivated workforce

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Challenges of Market Pricing

• Managing Expectations
• Organizational Culture
• Administrative Complexity
• Existing Policies Practices
• Cost (market adjustments, survey process, etc.)
• Turnover due to a higher salary offer is
  particularly destructive.
• Compensation plan design / structure

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Common Market Pricing Pitfalls

• Failing to identify a market pricing strategy
• Using incorrect salary data sources
• Matching salary data to job titles rather than
  job content
• Making methodological errors
• Using stale compensation data

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Nuggets from University Web Sites

• Maintain a compensation program that will attract
  and retain qualified employees at all levels of
  responsibility who perform in a manner
• Be externally competitive
• Attract and retain qualified employees at all
  levels of responsibility
• Recruit, retain, and reward talented staff.
• Attract, retain and motivate employees.

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Compensation Strategy

• Measurable Components of Compensation
• Base salary, total cash, total remuneration
• Determine Pay Philosophy
• Select Benchmark Jobs
• Define, Assess and Understand YOUR Labor Market
• Remember the forces of supply and demand and the
  subsequent impact of wage levels

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Determining YourCompensation Philosophy

• State your target market position
• 25th percentile lagging the market
• 50th percentile match the market
• 75th percentile leading the market

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Select Benchmark Jobs

• Has a definition and scope of work that is
  readily understood among several organizations
• Horizontal and vertical mix of job groups
• Provide relative comparisons for making pay
  decisions of other non-benchmark jobs in the same
  family
• Example Chief Financial Officer, Senior
  Accountant, Accounting Clerk

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Benchmark Jobs

• Benchmarking simplifies market pricing analysis
• Makes it affordable
• Provides easy framework for relative comparisons
• Market data will never cover all jobs
• Salary data readily available
• Data is fresh typically less than 6 months old

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Sample Benchmark Jobs
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Sample Market Analysis Worksheet for Benchmark
Jobs

• Analysis at job-level benchmark jobs
• Can analyze by job family, by employee, by
  department
• Easily compile data in MS Excel or Access
• Ratio is Average Pay divided by the Market Rate
• Identify danger zones
• Calculate weighted average market position

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Assessing the Labor Market

• Geography
• What are your targeted recruitment areas?
• Industry
• What are your targeted industries?
• Health care, higher education, pharmaceutical
  sector
• Size (variety of measures)
• Hybrid

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Local Labor Market

• Benchmark positions
• Functional Professionals, Skilled, semi-skilled
  or unskilled positions

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Regional Labor Market

• Director/Manager level positions
• Specialized

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National / International Labor Market

• Executive/Senior Level positions
• Highly Specialized positions

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Survey Data Sources

• Towers Perrin
• Watson Wyatt
• Finance Accounting
• Human Resources
• Middle Management
• IT
• Mercer
• HayGroup
• Association of Academic Health Centers (AHC)

• Western Management
• Educomp
• CUPA
• Sullivan Cotter
• Omni Watch
• Professional Associations
• American Payroll Association
• AACSB
• Ad Hoc/Custom Surveys(Very expensive)

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Validity and ReliabilityDetermining Quality
Data Sources

• List of Participants
• Degree of match (80 rule)
• Avoid data points where 20 indicate less than or
  more than the survey job
• Survey age
• Sample size
• Relevancy
• Job Descriptions
• Job Coverage Breadth

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What Your Employees See?
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Our Market Analysis Process

• Routinely participate in surveys
• Conduct annual University-wide market analysis at
  the employee level
• Collect average pay, total cash, STI/LTI and
  salary range data
• Maintain data from over 100 surveys
• Market data covers 80 of employees

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The Matching Process

• Match to job content or function
• Job Documentation
• Job Descriptions
• Position Descriptions
• Know the jobs
• Many organizations use the same title for very
  different job functions
• Controller
• Admin Assistant
• Mistakes can be very expensive

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Dealing With Hybrid Jobs

• More than one major functional area
• Director, Marketing Publications
• Assistant Manager, Finance Facilities
• Two approaches
• Majority rules approach (15-20)
• Weighted combination approach
• Remember
• Consider your hybrid market rate in context -
  does the figure make sense?
• Not every job can be matched

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Job Hierarchy

• Integral part of compensation program
• Slotting of a job based on relative worth, as
  compared to benchmark jobs
• Compensation consults with divisional leadership
  when finalizing slotting decisions

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Sample Job Hierarchy
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The Compensation Recipe

• - Job Content
• - Target Philosophy
• - Relevant Labor Market
• 4 - Valid and reliable survey source
• Result Market Composite Rate
• Lets walk through an example

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SECRETARY
Labor Market Atlanta Target 50th Percentile
(Median)
Handles general secretarial duties including
basic correspondence, filing, and inputting data
for reports on the basis of instructions from
various members of the department or company.
Schedules appointments, gives information to
callers, takes notes, and otherwise relieves
officials of clerical work and minor
administrative and business detail.
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SECRETARY
Labor Market Atlanta Target 50th Percentile
(Median)
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Market-Based ApproachTo Job Evaluation

• If market rate is available, slot market rate to
  the nearest midpoint
• Secretary Market Composite 30,670 (Aged)
• Grade Midpoint
• 224 28,073
• 225 29,617
• 226 31,839 Slot to Grade 226
• 227 34,227

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Slotting Without Market Data

• Review job documentation
• Conduct formal job evaluation, if appropriate
• Initial slotting into Job Hierarchy
• Consultation with department
• Answers the question, Is Job A less than, equal
  to, or greater than Job B?
• Assign grade and appropriate salary plan

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Aging

• When published, survey data is at least 4-8
  months old
• Aged to a common point in time, such as the start
  of a fiscal year or effective date of salary
  increases
• Keep the methodology simple

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Example - Aging Market Data

• Assume CPI-U rate of 3.2
• Effective date of survey 03/01/2005
• Select target date 05/01/2006
• 3.2 divided by 12 month 0.00267 per month
• months between survey and target 14
• 14 months x 0.00267 3.73
• 31,000 1.0373 32,157

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Supplemental Materials

• Salary Budget Surveys
• World at Work (Annual)
• Mercer HR Consulting
• IOMA
• Hewitt
• Watson Wyatt

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YOUR TURN!