Editor's Note: Salary budgeting time is fast approaching (or, in many cases, already upon us); have you got your pay progression planning in order? A good time to bring out Jim Brennan's classic piece on addressing this perennial compensation challenge!
Individual pay must advance towards a moving target that recedes every year. However, failure to plan normal incumbent pay progressions that march from job entry to the target pay rate within the proper period of time is a common problem. Here is a fix.
The issue is simple and clear. Conventional practice is to hire most new people into their jobs at salary levels below their market midpoint or Market Reference Point (MRP) and to move grade structures maybe half as much as the anticipated general market movement each year. Meanwhile, payroll increases are budgeted relative to that market movement rate, to reflect merit or other competitive trend matches to keep pace with the appropriate peer-comparison market. As the external competitive market changes or internal equity rebalances occur, the overall pay structure of the organization is periodically revised and usually increased. But the net increases in personal pay after structure increases rarely permit individual employees to progress to their target market rate within a reasonable period of time. Reasonable, here, is defined as the approximate average number of years that the normal performer or median incumbent spends in that particular job.
The example below, first published in 1980, illustrates how a 3% net growth per year from an entry rate of $20,000 (80% of the $25K midpoint), even after the individual annual progression rate is much higher than the market movement rate, fails to appropriately close the gap between the employee’s pay and the constantly moving MRP. When someone holds a job where the average incumbent (as measured in competitive market pay surveys) goes from initial entry to full journeyman standard-performer rate in a handful of years, it is totally unacceptable to make them wait two or three times as long to reach that central market rate. But that is the statistically inevitable consequence of conventional pay progression practices where new folks are hired at such low levels that their internal salary administration system simply cannot bridge the gaps in a timely manner with sufficient net closure rates.
Entry hiring rates must be linked to pay progression systems that allow realistic attainment of full normal pay within the appropriate time frame. That permits super performers to reach their MRP faster than the norm while consistently deficient workers will lag until they are reassigned to more suitable work or separated.
This graphic both displays the statistical formula involved and illustrates the closure periods determined by various initial pay entry points stated in terms of comp-ratio. Someone hired into a $65,000 job at a starting salary of $58,500 would fall on the 90% line; if the pay structure changes upwards each year by half as much as the general market movement rate and the incumbent receives a personal pay increase 3% greater than the structure change each year, the midpoint or MRP will be reached in just over 3 years.
Compensation administrators merely need to determine how long the average nominal incumbent holds that job title in order to plan their progression schedule to match the mathematical mandate of those parameters. Many salary surveyors (including the U.S. Census) report the typical years of experience for each occupational category, so it is not difficult to learn that receptionists hit their market midpoints faster than accountants. These immutable realities also have profound implications for the design of salary grade ranges: i.e., workers holding simple jobs with short learning curves reach the fully-qualified normal market rate much faster than those who hold complex positions; so range widths and progression paces should expand upwards.
Yes, this is “math stuff,” but compensation professionals should be on top of such things. If you do not properly lead your moving target, you will never hit it.
E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience. After corporate HR jobs in manufacturing, he consulted to various industries throughout North America, became Senior Associate of pay survey software publisher ERI and returned to consulting in 2015. A prolific writer (author of the Performance Management Workbook) and speaker, Jim gave expert witness testimony in many reasonable executive compensation cases and also serves on the Advisory Board of the Compensation and Benefits Review.