Solving the Dilemma of Pay Progression Over Time

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 Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Image courtesy of news.com.au

Comments

[Joe]

Love these wonkish posts!

[E. James (Jim) Brennan]

I resemble that remark! ;-) Well, where else will you find such a steady public display of esoteric compensation tradecraft know-how? Blame Ann for setting us free to openly share with like-minded readers. When you visit here, you ask for it.

[William Blagmon]

I LOVE this! The challenge is that this represents increased complexity in a time when so many organizations are driving simplification and efficiency gains (i.e., cost-cutting). Differentiated salary progression slopes based on functional area still makes a lot of "sense". The challenges are applying this tenure-based approach in a way that does not wreack of age-disparate treatment in global contexts; measuring time-in-job tenure across organizations (e.g., experienced hires) - not to mention having meaningful merit budgets to work with in the first place. I do like the idea of a trigger though (that this inspires): 80-90% MRP initially; 100% MRP at industry average tenure. Of course, having survey providers report on average tenure would likely make the calculations much easier. *thinking ALOT out loud*

[E. James (Jim) Brennan]

Average tenure is reported by many survey providers. For example, it is the center-point of the standard Salary Assessor table of pay by years of experience. The secret to avoiding age discrimination charges is to avoid any SandiaLabs-style maturity curves with downward curves tied to incumbent age. In reality, most long-tenured individuals in sci/eng positions see their same-job increase rates slow as they progress beyond normative market-clearing levels. As their specific peers peel off into management, hybrid roles and consulting, denuding their same-job of the more talented highly-paid outlier observations, surveyed rates tied to maturity tend to drop.

Today, the issue is critical due to the restrictions of typical merit budgets. Little money exists for catch-up progressions from net entry to median levels in reasonable time frames. So, it's all the more important to know the right starting point, when it's so hard to catch up later if you begin too low.

[E. James (Jim) Brennan]

P.S. to William... this table summarizes the graph above:

If expected time to full competency is...

Entry/starting rate should be...

under six months
98% of the job value

1 year
96% of the job value

2 years
94% of the job value

3 years
91% of the job value

4 years
88% of the job value

[William Blagmon]

Definitely agree with this:

Little money exists for catch-up progressions from net entry to median levels in reasonable time frames. So, it's all the more important to know the right starting point, when it's so hard to catch up later if you begin too low.

However, playing devil's advocate, sometimes paying a little on the front end hedges the bet on performance/expectation realization inherent within the risks of recruiting. We should perhaps be a bit more intentional in this regard though (and in an ideal world) set the money aside in a pool for later - maybe even communicate that upfront as a means to incent expected performance. But then again that presupposes that we have mastered performance measurement and differentiation, doesn't it? :)

[E. James (Jim) Brennan]

People are better at measuring than at predicting, so I favor rationally conservative hiring offers coupled with "early increases" contingent on observation of clearly stated output outcomes. Considering the relative motivational strength of alternate strategies, however, perhaps an even better idea is to do it backwards: expect them to walk on water and competently complete every expected task but make that handsome initial offer contingent on those actual results in the first year, so that failure to meet all the objectives means their first annual increase will have been included in their starting pay. Research indicates that people work harder to keep what they have than to win a raise.