Editor's Note: Confused by the different figures coming out of salary budget surveys every year? We bring you this Classic primer on some eternal salary management questions, via Jim Brennan.
It is important to know why salaries paid to individuals should increase at a different rate than overall competitive salary structures. What current incumbent employees on a payroll receive normally changes at a faster pace than the external outside competitive market prices for jobs. The values of all jobs elsewhere usually don't grow as fast as the values of the people holding them in a particular organization; so it makes no sense to apply the same percentage used for individual pay increases to market structure changes.
Someone asked in an online discussion how you could justify moving a salary structure by less than the market rates. That incorrectly assumes that the salary structure supplying the context to internal employee pay progressions should change at exactly the same pace that their standard worker’s pay changes. Nope. What the vast outside competitive market does reflects a different population than your (supposedly) hand-picked valuable experienced employees. The structure affects the pay range for all jobs in a grade, while individual workers enter, penetrate and eventually leave that grade at different salary levels.
Personal pay progression trajectories separate over time due to variable individual merit increases. Churn occurs among grade peers due to new hires, promotions, quits, retirements and reclassifications. Constant intra-grade movement means that, in each grade, even as merit increases make most salaries grow, other peer salaries are falling. New hires enter at lower rates. Promoting senior personnel removes a high salary from that grade and creates a relatively low one in their new higher grade. The changing identities of the people in a particular grade produce lower overall competitive job grade market ratio movement rates than individual merit increase rates. Personal incumbent incomes typically rise faster than external market rates change. Thus, typical annual structure movements are less than the normal merit increase percentage. In today's economy, some find it practical to skip structure changes for a year or longer due to lack of external competitive market pressure and tiny internal pay increases.
Veteran incumbents with proven competence must progress faster than their salary structure. Otherwise, they will never advance from minimum entry rate to full nominal target pay.
If you boost the structure by the normal good merit increase percentage rate granted each year, you will have terrible compression problems. All unproven new hires will immediately earn about the same as the veteran incumbents already there for years, despite no assurance of immediate equal productivity from the fresh faces. Such ill-advised paired ratcheting allows hardly any room at all for above-minimum starting rates due to superior entry credentials. Blocking senior workers from making deeper range penetration makes it probable that new people with impressive credentials but no proof of output capability will be hired at salaries well above senior incumbents with well-established abilities. That’s so much worse than pay compression that it might be called it “pay oppression!”
A gap between structure changes and personal pay increases is required for range penetration. Employees are not expected to languish within the same "pay grade" for their entire careers but are encouraged to progress through, out and upwards. You don't want folks stuck at the entry compa-ratio forever! When the structure movement matches as their income growth, they will never reach 100% of their job value and will eventually become demotivated due to "unfairness."
A differential is required to permit range penetration. That's why you don’t want to tie your structure change rate to your standard incumbent increase rate. Just like walking up a downward moving escalator, matching movement speeds leaves you stuck in the same space despite all the apparent action. Keep those distinctions in mind and be prepared to explain them to critics.
We already have enough problems to solve without inviting trouble unnecessarily.
E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience in most industries. After corporate HR posts and consulting CEO roles, he was Senior Associate of pay surveyor ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness in reasonable executive compensation court cases, Jim also serves on the Advisory Board of the Compensation and Benefits Review.
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