More than a few times I've stood in front of a podium, either ruminating over the intricacies of Compensation Management with practitioners and business leaders, or trying to instruct HR Generalists so that those who didn't give a hoot about Compensation could pass a SHRM certification test.
During these sessions a strategic question is often posed; whether I advise a company's pay structure to be ahead of (lead) the competitive market, or is it permissible to actually follow behind (lag) the market? What do companies do, and why? It's a core question of strategy vs. practicality, even from those new to the profession - though I suspect that the frequency of the issue being raised is likely because someone thinks the question will be on the test.
How would you advise the audience for your own organization? Lead or lag? Or is there a strategy in place at all?
At first blush the concept is straightforward; if you Lead the market your pay structure (salary range midpoints) are targeted to be better / higher than what you consider the competitive marketplace. Conversely, to Lag the market is to provide less in midpoints than the proverbial going rate.
But is the decision that simple, that black-and-white? Because isn't the market a moving target? Aren't other variables also at work here?
For those with a conscious reward strategy, many choose to pin their market competitiveness to a certain calendar date, either the first of the year, midway or the end. Their goal is to position themselves (structure) to either lead or lag the market as of that target date, which means that their competitive situation would fluctuate before and after that date.
Let's take a closer look.
- Lead-Lead: If you want your pay structure to remain ahead of the market for the entire year (i.e., certain industries, skilled workforce, limited labor pool, etc.), you peg your midpoints to be competitive throughout. By targeting the end date, say December 31st you will stay ahead of the game even as the market slowly catches up. You will lead the market for both the first and second six months of the year.
- Lag-Lag: On the opposite scale, if you're satisfied to remain behind the market for the complete fiscal year (i.e., certain industries, less skilled workforce, abundant labor pool, affordability issues, etc.), you peg your pay structure to be competitive (matched) for only the first of the year. From January 2nd onward your structure then slips behind the market, falling ever further all the way through to December 31st. You will lag the market for the entire year.
- Lead-Lag: A common practice is to split the difference, because you're not too worried over six months of slippage. So you peg your structure to the middle of your year, say July 1st. You will then lead the market for the first six months, then lag the market by an acceptable amount for the second six months.
So now you can answer that test question.
The Real World
Often times though, you won't have much of a choice at all, no matter what strategy you aspire to implement. Because where you stand today versus the competitive market may limit your options to take corrective action. For example, if your midpoints are 10% behind as you plan forward into the next year, trying to move toward a lead-lead approach would be a herculean task indeed. You would have to advance your midpoints beyond normal annual progression to shorten the gap (normal structure movement percentage plus a catch-up adder). The size of your movement could create potential compa-ratio issues (employees falling much lower in their salary range) that you might not have the budget - or management will - to correct.
And explaining to an experienced employee why they have suddenly fallen low in their salary range is always an awkward affair. Thus you will likely be stuck with a variation of the status quo for awhile, on account of the difficulty you'll experience trying to make improvements (increasing competitiveness). It can be done, but to avoid disruption it would take a phased approach over several years.
Conversely, in our example you could let your structure remain behind the market, because that would require little in terms of painful action. You simply make a smaller annual adjustment, or none at all. Though how you would handle the employee relations fallout is a different matter.
So going back to the answer from the podium, companies usually strategize and implement an approach if they already have a pay structure close to the market. If not, their choices will be limited because of the financial and human capital costs involved in making a correction.
Sometimes that choice, to lead or lag the competitive market, is made for us by circumstances that have us trapped, and we're left to make the best of it.
Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations. He is also associated with several HR Consulting firms as a contributing consultant. Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation. He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.
Creative Commons image,"Dice," by Anders Eriksson