To Lag, or Lead, or Lead-Lag: Examining the Question in the Real World

More than a few times I've stood in front of a podium, either discussing 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 Comp could pass a SHRM certification test.

A question that often comes up during such sessions is a matter of strategy; whether a company's pay structure should lead or lag the competitive market.  What do companies do?  That's an interesting question, even from those new to the profession - though often it's asked because someone thinks the question will be on the test.

But now that I've raised the issue here, how would you answer for your organization?  Lead or Lag?  Or is there a strategy at all?

Definitions

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 the competition.  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?  Isn't the market a moving target?  Aren't other variables also at work?

For those with a conscious 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 to either lead or lag the market as of that target date, which means that their competitive situation would fluctuate before and after.

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, 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 the 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) only for one day, 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 first six months and even more so for the second six months.

• 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 July 31st.  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, 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 plus a catch-up adder).  The size of your movement could create potential compa-ratio issues (employees falling much lower in the 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, the choices will be limited because of the costs involved in making a correction.

Sometimes that choice, to Lead or Lag the market, is made for us, 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.  With over 30 years Rewards experience 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 brood of cats. 

Image: Creative Commons photo by Quaziephoto

Comments

[Paul Hebert]

I think we should just pay them fairly.

Hahahahahahahah.... (inside reference to @annbares post today on Comp Force....

But in all seriousness, when I read this kind of discussion I can't help but feel like we're rearranging deckchairs on the Titanic - or any boat - sinking or not. Rearranging the chairs has no effect on the final destination.

Companies should look at the total experience of their employees - across pay, benefits, management style, culture, location, etc, etc, etc.

My pay is less a function of the company down the street than is the type of desk chair (which I'm sure we're rearranging as we speak.)

Unless you specifically know you are not getting and keeping employees BECAUSE of your pay plan relative to those near you - I don't really think it is worth the energy to go through the hoops I see outlined in the post.

Now... full disclosure - I'm just a business guy - and I don't get paid to do comp plans - so I'm sure I'm naive and off base but most companies could save the time and money they spend analyzing numbers - just because they can - and spend that same time and money - just being better companies for their employees.

My rant is done - blame Ann - she started it.

[Paul Weatherhead]

Sorry, but I'm a little cynical about this lag-lead/lead-lag stuff.

If the average pay increases these days is 2%-3%, but companies still use the rule of thumb that anything within 10% of the market is generally "at market," then how precise do you need to be with your annual pay strategy?

The 10% rule of thumb is so much broader than the exactitude required in pursuing a lead-lag/lag-lead strategy involving 2%-3% average pay increases.

Lets not forget that market competitiveness is not the only factor driving a company's pay strategy. Other considerations include profitability, success on a balanced scorecard of performance considerations, internal equity, and whether the company's broader HR strategy requires layoffs or expansion.

[Chuck Csizmar]

Hmmm, I'm thinking that it might be an interesting survey question to ask, how close does your data have to be before you claim you're "at market"? In my career experience (could be different from others) I've used + / - 5%. I always thought that using 10% was too broad a target. It made it too easy to claim that everything was ok - go back to sleep.

Of course, you can always "claim" anything; the trick is whether the employees think that -10% is still paying market rates.

[Paul Weatherhead]

Chuck,

Fortunately, I don't think that companies do, or should, share with the broad employee population how close to the market they target their compensation levels.

Interesting that you should raise the idea of surveying how close companies measure "at market." Here's a discussion I started on that very issue on WorldatWork's Online Community, "How closely do you adhere to the market?" at http://www.worldatwork.org/waw/community/discussions/discuss.jsp?did=16117&tid=16117.

Also check out the discussion, "Lead Lag Compensation Philosophy" at http://www.worldatwork.org/waw/community/discussions/discuss.jsp?did=16951&tid=16951&frm=sr

Thanks for continuing the discussion.

[Alan S. Bacason]

To "lead", "lag" or "lead-lag" are part of the C&B's strategic process; merely theoritical in nature.

Actual application naturally depends on company's pay philosophy, affordability, geographical location, and many other factors.

If your current market is flooded with candidates (from 2008-2009 redundancies), chances are, your own employees will stay put even if you "lag-lag" for a year.

[Richard]

Would have to agree with Paul Hebert on this one, who by the way sounds more like Dan Pink with each passing day. I am an experienced compensation professional and I truly believe that the we have more important things to do, like, as Paul suggests, making the company a better place to work in some meaningful way.

Let us busy ourseleves with the important work of HR, rather than this exercise to demonstrate how sophisticated and intelligent we are, ie, we understand and can use the concept of present value just like the bright people in finance.

[Paul Hebert]

Oh.... Richard, you did not just say that! I just got out of a 2 hour presentation debunking Pink. I'm just saying that your benchmark isn't you competition... Its what the work is worth to you. All benchmarking does is tell you what your competition values it