A Case of Over Analysis?

I don't get it.  Can someone help me understand?  Why are some companies interested in what other organizations are planning to do next year with their midpoints?  I presume that's the case because compensation planning surveys compile and report such data.  But who really cares?  Aside from anecdotal information (presenting multiple data points) I have never understood the importance of this reporting.

To be fair, perhaps my career experience is the exception, as I've never used that data in program analysis, or even reported it.  Or even been asked about it.  But somebody must be using it.  Somebody.

Say what?

I can only guess that I've missed something ; maybe I should have taken another WorldatWork class, because the issue has never arisen from any employer I've dealt with, either as  an inside Compensation practitioner or as an outside consultant.  Which leads me to wonder, do some companies actually recommend raising their midpoints on the basis of a survey that projects what other companies might do?  Is that metric as important as what is being paid for particular positions, or what the average merit spend might be next year?  How does an average projected average salary structure movement relate to any company's particular situation?

Can you envision recommending to senior management that midpoints be raised by X% simply because a survey said that’s the projected average midpoint increase of other companies?  Surely there should be more to the decision.

For me the focal point of survey analysis has always been to determine the competitiveness of current pay practices and established midpoints.  In planning for next year we would adjust those midpoints to either remain competitive (midpoints are already there), to improve our standing (midpoints lag the market), or freeze them (midpoints already pegged above market rates), no matter what a survey reported as projected common practice.  Am I wrong here?  I’ve always thought that my company's salary structure should move in relation to our own competitive positioning, regardless of what anyone else is doing.  Otherwise we could be making improper adjustments - either too much or too little.

And what about the expense involved?  Contrary to what some pundits have assured me from time to time, midpoint growth can create costs.  There’s no free ride.

• When an employee's base pay drops below salary range minimum at the start of the fiscal year, do you cover that amount - or wait until the next scheduled employee review?  The fair thing to do would be to immediately raise the employee to minimum and then (or later) grant a merit increase on top of that.  There’s your extra cost.

• Higher midpoints push experienced employees further away from the internal "going rate" - creating pressure to restore the balance.  Have you ever explained to a long service employee why they weren't being paid at least the midpoint?  Awkward.

Practitioner consideration

When are the estimates for these midpoint movements made, and how accurate are they?  They're really only guesstimates, and many times the survey questionnaire is filled out without due consideration, just to get the form completed and submitted.  After all, most companies won't confirm their new structure commitment until about November (senior management signoff), while the structure movement questionnaires are completed in mid-summer.  How good a guess can you make in August?

Btw, a company's salary structure (grades and salary ranges) is usually segmented along the lines of hourly, non-exempt, exempt professional, and management employees.  To gain a clear picture of your competitive marketplace you should consider that each segment is moving at a different rate.  For example, it's likely that management pay is growing at a different rate than that for hourly employees.  Suggesting that only a single number would reflect your entire population would distort the reality of your multiple markets.

Now I suppose there may well be organizations out there that have changes to their reward programs contractually tied to "market movement" or even structure (midpoint) growth, but do you think there are that many so governed?  And is it a process that helps the organization?

Bottom line, can someone tell me why tracking other organization's guesstimated midpoint movement is a valuable analysis?  I'd really like to know.

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 brood of cats.

Creative Commons image courtesy of William Whitehurst Corbis

Comments

[E. James (Jim) Brennan]

Although I love to see Escher graphics, I fear that the answer to your question is as distorted as his imaginatively deceptive images. It is CYA. Management committees and other groups with multiple limbs but no brains require defensible excuses for their actions and thus belabor the hapless HR/comp people for THE one metric as guidance.

You are preaching to the choir, here, Chuck, because probably half of my posts pound on that exact same point. Unlike the graphic atop your article, many of those who would advise the leaders of their enterprises exhibit total failures of imagination and ever greater shortages of courage to speak the truth and "tell it as it is." Complexity and lack of simple definition creates challenges not easily overcome by those who lack power and authority.

[Jacque Vilet]

Great post Chuck. It's also true of merit forecasts. Sometimes there is a lot of difference in what is projected versus what is actual --- one year later.

[Dan Walter]

How can you possibly be wrong if everyone else is doing the same thing...

The psychology of crowds.

[Warren Heaps]

Chuck - Well stated. We often characterize salary increase surveys as averages of guesstimates. They work a lot like mutual fund returns -- we can't really tell you what the increase will be but the most likely one will be what we did last year.

Birches Group has a program called Trends™ which calculates a best-fit regression of historical survey data and extends the line as a projection to estimate market movement. It works as well as any of the salary increase surveys available, and it's a lot less work for clients (read: none).

Warren

[John Nichols]

I agree with the thrust of the article and woud never advocate any reported figures to be used as gospel. So many factors to take into account with internal/external relaitivities.
Obviously there are restrictions on reporting forecasts under Anti Trust rules anyway but we are asked by companies to provide an idea if possible. Partly to enable the company to answer questions from the workforce in negotiations. Unions always seem to "know" what's going on.

[Drew Brown]

This is one of the best articles written on the waste of time it is to track midpoints. Thank you, Chuck! Whenever I've seen midpoint data reported in salary surveys, I've ignored it or at most, I've briefly scanned the data out of curiosity, but I've NEVER used it. I would hazard a guess that anyone who actually uses this data in any of their calculations probably doesn't really an understanding of the link between external markets and internal pay practice. I've always considered a pay structure and it's accompanying midpoints and ranges to be a function of company pay policy which is uniquely company specific. We need more common sense to comp management like this article.