Five mistakes people make when developing pay scales

Image: CC_GlenBowmanDeveloping pay scales is on the face of it a relatively simple process. You acquire some salary surveys, look up the market rates for the jobs you employ, decide whereabouts in the market you want to pay, and create a range around your chosen market position. What could go wrong? Well there are plenty of opportunities to make mistakes and I have set out below some common traps.

1. Choosing your market position

Nearly every company I talk to wants to pay around the median. However, statistically this is nigh on impossible and may not even be the right decision. Let’s start with the basics – if all the pay rates in the market for a given role are put in ascending order the median is the middle value.  

The advantage of the median as a statistic is that it is less influenced by any very high or very low values at the extremes of the market data. The disadvantage is that it has become a simple catch-all policy position that organisations adopt without giving too much thought to the consequences.

Some organisations I work with adopt a market alignment above the median because they want to “attract the best talent”.  However, there is absolutely no evidence I have seen, that the best people earn the highest salaries in the market as a whole. In fact, based on the results of our consulting work the opposite is often true!

At the opposite end of the spectrum, not many organisations set out to have a policy position that is below median. But why not?  Even at the lower quartile you can still by definition attract 25 per cent of the market and in the process save 10 per cent of the pay bill.

Choosing your market position is a strategic decision that determines the relationship between your internal market and the external labour market. It requires thought and can have considerable cost impact.

2. Overreliance on market data

Market benchmarking is about finding the rate for the job, but it is not a precise process and is certainly not a panacea to fix all pay management problems (as some outside the reward profession seem to think). The problem is that market data is at best a guide and is only one input into the decision-making process – particularly when it comes down to deciding the actual salary to pay a particular role holder.

The problem starts with believing all jobs with a similar job title are the same – “matching apples with apples” is how it is often described. But there are different varieties of apple – is a Granny Smith the same as a Cox?  Well the same is true of jobs. In truth, every job is different because it is defined by the organisational context. For example, the structure of the business, and the rules and procedures it adopts, can create the situation where two roles that appear the same are actually quite different in terms of things like their freedom to make decisions (their authority). This will affect the job size, and therefore the pay.

3. Working with salary surveys

I am often asked to help benchmark a particular role and as part of the brief am presented with a batch of job adverts or referenced advice given by a recruitment consultant. The first thing to understand is that recruitment salaries are not the same as those paid to current incumbents. They are pitched to attract the broadest range of people and the actual salary offered is often somewhat less than the advertised rate. Based on some analysis we did, we always reduce recruitment salaries by a set percentage, if we reference them at all.

The best source of market data is published salary surveys from a reputable survey provider. Choosing the right salary means being careful to ensure that the participants are ones that are relevant to your needs and that the survey has a sound job matching methodology. In the course of our work we see lots of salary surveys and there is no doubt that the quality varies greatly. This is almost always down to being able to understand that you are looking at a comparable job.

4. Focussing on the analysis not the results

The people who do the analytical work behind creating pay scales are often reward analysts. For the most part, they like data and they like data analysis. You can be fairly certain that the results created will be accurate and reflect the underlying data. But the secret to designing good pay scales is to harness the quality of this analysis by making sure it is focussed on the outcomes you want to achieve.  

We use a powerful data modelling database to create salary ranges. This enables us to not only make sure we have the right data aligned to the right roles, but to understand how the resulting scales will impact salary management in the business. The secret to making this a smooth process is to be clear at the outset what the deliverables are and to make sure that the underlying data is organised in an appropriate way from the outset. 

5. Failing to consider the impact

I was speaking to a colleague of mine the other day who told me an interesting story. A few years ago, he was working for a major international bank and he and his colleagues were working hard on developing new pay scales for the business. The pressure was on as pay day loomed and everyone had their head down to meet the deadline. Letters were produced and sent out to the business for managers to sign, giving employees their new salary on the scales. On the day these hit the desk his boss was out and he was summoned by a senior director to explain why he was being asked to sign a letter giving a £1.87 per annum increase to an executive earning a six figure salary. As you can imagine, red faces all round and a useful reminder to make sure you consider the impact properly prior to implementation!