Market Pricing

We would conduct a market study which will provide competitive data for identified benchmark positions. To establish the competitive market levels, we would expect to use data from a variety of resources including information on position's among comparable organizations, information available to the "Company," published surveys and Compensation Resources' network of contacts and confidential data sources. We will conduct a detailed analysis of the compensation currently paid to your employees. This would compare the market information we obtained, and would identify the relationship the "Company's" jobs to compensation levels paid by its competitors.

How to Conduct a Market Study

Purpose:

A major goal of the compensation program is to provide compensation which is consistent with the Company's external labor market. In other words, to maintain external equity. This means paying employees salaries and benefits at pre-established levels in relationship to salaries paid to similar employees in competitor organizations.

Wage and salary surveys provide the primary data for use in pricing jobs. Therefore, it is necessary to identify as many reasonable surveys as possible which will provide data to accurately price the benchmark jobs, and ensure that jobs being priced are a valid comparison to the survey position.

This section outlines the proper method of market pricing jobs, analyzing trends among the job categories (i.e., Management, Exempt, Non-Exempt and Hourly), and for determining the appropriate market positions.

Procedure:

1. Obtain Wage and Salary Surveys: There are four (4) primary sources of salary data: (1) The Bureau of Labor Statistics (BLS) and other federal government organizations, (2) Professional associations, industry associations, and private groups, (3) Local and regional associations, chambers of commerce, etc. and, (4) Private consulting and survey organizations.
   
   Government data can be very accurate, however, it is usually more limited in scope and typically concentrates on larger organizations. Professional associations are often strong sources of data and should be contacted to determine if they conduct wage & salary surveys. The associations may also know of other groups to contact which may conduct specific surveys appropriate to the Company. As with any survey, however, caution should be exercised to make sure that the data collection techniques were valid and not "self-serving." A large number of private firms also provide salary data: however, finding the right sources can be very difficult.
   
   A listing of consulting firms and other sources of wage and salary data can be found in many different Survey Source Guides as well as the internet. A word of caution is advised, however, since these compendiums and links to web pages may not include up-to-date information and do not list all possible sources; plus, many of the sources indicated may only be available to participants of those specific surveys.
   
   It is important to obtain as many surveys as possible in order to develop a valid picture and reasonable cross section of the competitive marketplace. The more survey data that is used, the more accurate the job pricing will be. In selecting surveys to be used in determining market value, the surveys must be specific to the Company's industry and geographic locations.
   
   
2. Ensure Job Comparability: There may be a number of jobs at the Company that are unique, in which case there is no market data available. Rather than spending a lot of time trying to collect information on jobs where information is not readily available, it is better to concentrate on obtaining good market data for benchmark jobs. Determine which jobs can be market priced (benchmark jobs), and compare the job description or summary provided in the survey to the duties and responsibilities of the Company's job to ensure comparability. The relative worth of the non-benchmark jobs is determined by using a job comparison worksheet. Factors that should be considered include: responsibilities, job scope, reporting level and organization title.
   
   
3. Ensure Company Factors Match Survey: data is typically presented in a number of categories. Theses include Company Size (Revenue, Operating expenses, Number Employees, etc.), Specific Industry and Geographic Location. It is important to select the information that is most representative of the Company. Since exact matches are not always be possible, it may be appropriate to interpolate the data or to use averages.
   
   
4. Price the Job: Use a Job Pricing Worksheet for each job to be priced. This ensures that all relevant data will be captured in one place and in a constant manner. It is important to write in all necessary information, in case any questions arise at a later date. Fill in the job title and attach a brief job description . Identify each survey sources, including year of study and determine the "data date." Based on the data date, which is the effective date of the salary data, calculate the "adjustment factor." The adjustment factor will update or index the salary data to the current date.
   
   Adjustment Factor Calculation: Determine the average annual salary increase for the job you are pricing (i.e. 6.0%). This number is typically found in relevant surveys. The amount of the adjustment may vary by job family (i.e., Management = 5.6%, Exempt = 4%, etc.). If today's date is 11/1/99 and the survey's effective date is 2/1/99, there is a 9 month difference which must be accounted for. Adjust the survey salary data to account for the time difference by adding (9/12 x 6.0%) or 4.5%. This can be accomplished by multiplying the raw survey data by 1.045. Under this scenario, a raw market salary of $20,000 would be indexed to $20,900.
   
   It is extremely important to ensure job comparability and match company factors when selecting salary data on the worksheet, list unadjusted base salary compensation, and make comments where appropriate. Adjust the salary data as shown above. Collect as much relevant survey data from as many sources as possible. After all your relevant salary data and sources have been listed and total adjusted, calculate the Mean, Median, Malcolm, and Marvin.
   
   

   Mean: Add salary figures in the column, and divide by the total number of salary figures in the column. Medium: The salary figure "in the middle"; above which 50% of all salary data collected lies, and below which 50% of data lies. Malcolm ©: Add all salary figures in the column, excluding the highest and the lowest values list, and divide by the number of figures added. This calculation will eliminate the "extremes." Marvin © The average of the Mean, Median, and Malcolm; this indicates the market values for the job you are pricing.

   
   It is important to note that the end job price is the best estimate available to you as to the market value of that job. Because there is a margin of error involved, it is advisable to compare relative position to other jobs priced, and to determine intuitively if the market value "makes sense."
   
   
5. Unique Jobs: As mentioned earlier, for some jobs there is no survey data available. These positions are considered "non-benchmark" jobs. In this case, it is possible to determine its relative position to other jobs based on job evaluation techniques - ranking the jobs, or assigning points based on job content and responsibilities. Whatever method of job evaluation is used, be sure to later compare unique jobs with similar jobs that you were able to price to make sure that they make sense.
   
   
6. Job Evaluation by Ranking: Jobs are ranked against each other without assigning point values. The evaluator simply compares two jobs and judges which is the more difficult. This may consider the job in its entirety or consider certain aspects such as job responsibilities, complexity, and skills required. Once this determination has been made, a third job is compare with the first two and a similar decision is made. The process is repeated until all jobs have been ranked, from the most difficult to the least. The three elements and the factors that comprise them , which the evaluator uses to compare jobs are:

   Knowledge -

   • Education required
   • Experience required
   • Length of time to learn

Responsibility - Complexity of Job

• Supervisory role/leadership
• Variety of tasks/functions

Impact -

• Potential liability
• Customer contact
• Positive aspects of job

The advantages of this type of job evaluation are that it is the simplest approach , is quick and inexpensive to administer, and duties job-to-job comparisons.

Interpreting Market Data

Purpose:

This section refers to the review and analysis of the collected survey data for the purposes of determining what changes have occurred in the market place, individual job movement, etc. After having priced jobs, a number of comparisons can be made that will help you make salary program decisions. Salary ranges will typically be adjusted to reflect changes in labor markets. Certain jobs may need to be moved to different grades because of significant changes reflected by market behavior. The market data together with the calculated position-in-range of employees will help you to determine salary program changes.

Procedure:

1. After the market study has been conducted and the value of the benchmark jobs has been established, calculate the dollar amount as a percentage difference between the current salary paid and the survey data for that position (actual salary / survey data).
   
   
2. Determine the average percentage difference between the actual salaries and market data for the three groups of employees (Management, Exempt, Non-Exempt, Hourly).
   
   
3. Calculate the employee's position in range (PIR) for their assigned grades.:
   
   PIR Calculation
   

   Subtract the grade maximum from the grade minimum to determine the "range" of salary. Subtract the grade minimum from the employee's current salary, and divide by the "range" to give you the PIR.

   
   Example: Grade 7 (Greenwich) has a maximum =$27,145, Minimum = $18,097, and calculated spread = $9,048. For an example: Grade 7 with an annual salary of $20,000, PIR = ($20,000-$18,097)/$9,048 =0.2103 or 21%.
   
   
4. Determine the average PIR for the four groups of employees. Also determine how many employees in each group are in the low band (PIR below 30%), middle band (PIR between 30% and 70%), and high band (PIR above 70%).
   
   
5. If the average percentage difference between the actual salaries for the group and the market data is a positive amount (above the market), it is not necessary to change the range. The range should be adjusted when your average salary for a group is below the market. The amount of adjustment is determined by the average PIR.
   If the group has a majority of employee PIR's below 50%, no adjustment or only a slight adjustment of the range should be made.
   If the group has a majority of employee PIR's above 50%, the range should be adjusted to reflect the full amount of market difference.
   
   
6. Follow the above procedures for your different geographical locations. Determine the appropriate amount of range adjustment.

Determining Salary Increase Budget

Purpose:

Before adjusting salary schedules, determine the cost of adjusting various salary schedules.

Procedures:

1. Determine the current annual cost of salaries for the four or however many groups of employees.
   
   
2. Using for market findings and current salary expenses, determine the increased cost of planned adjustments to the two salary schedules.
   Example: If current annual salaries for Non-Exempt employees is $250,000, a 5.0% adjustment to the schedule will cost an additional $12,500.
   
   
3. Determine what increase best meets your budget and cash-flow forecasts, while providing the desired level of competitiveness.

Adjust the Salary Ranges

Purpose:

After you have determined the appropriate range adjustment upon reviewing the competitive market, PIR's, and salary budgets, the range itself should be adjusted.

Procedure:

Using salary administration software, update each of the salary schedules by adjusting the middle value or midpoint of the highest grade in each schedule and calculating the midpoints and ranges of all other grades.

Example: You determine that you Management, Exempt, Non-Exempt, and Hourly are currently 6.5% below the market, with an average PIR of 40%. You have decided that this justifies a 5.0% increase to their salary schedule. The highest grade is a grad 23, which when adjusted using a spreadsheet, will adjust the entire salary schedule. All values will increase by 5%.

To find out more on how Compensation Resources, Inc. can help your company with Market Pricing, please contact us or call us directly to speak with our compensation consultants at 877-934-0505.