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Compensation Models: Picking Your Method of Choice

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Determining the right pay range for each position in your organization is critical to ensuring your business remains competitive and successful. However, with so much variation from industry to industry and even company to company, many business owners struggle to determine where that pay range should fall. Yet, it is possible to access the knowledge and numbers to make pay decisions with confidence.

Over several decades, a handful of compensation models have become widely adopted. These models are a combination of art and science that allow employers to make informed decisions regarding compensation, and to ensure their pay rates are based on underlying information about the company, industry, geography, and individual roles within it. Your Honiva HR Services Consultant can walk you through the various compensation models and help you determine which is best for your organization, and how to go about implementing it.

The Tried-and-True Methods

Each of the following methods has pros and cons; which method is right for you will depend on a variety of factors including industry, type of positions, and stage of growth for the company. In addition, many companies will find one method is applicable to some roles, and another method is better suited to other roles. When it comes to compensation models, there is no one-size-fits-all solution.

Method 1: Ranking

This method simply involves ranking the jobs in your organization in order of their seniority based on an Organizational Chart or other objective criteria. To use this approach, it is important for companies to spend time on Organizational Design activities. That way, business owners can clearly see how various jobs relate to each other ¬– it becomes easy to tell at a glance if a particular role is more junior/senior than another. This method is ideal for small businesses that use a traditional/functional organizational structure.

Method 2: Market Pricing

Medium to large businesses that operate in a highly competitive labour market often use Marketing Pricing (also known as the Classification Method). Essentially, several companies participate in salary surveys sent out by compensation consulting companies. These consulting firms collect, analyze, and aggregate the data to publish salary survey reports. These reports usually have some commentary on any trends in pay rates and feature very large spreadsheets, which can be filtered and sorted to drill down to specific industry, geography, and peer group data cuts. Employers can also take these numbers and adjust them to align with inflation, or attach weightings to them. The most common salary numbers used are 25th Percentile, 50th Percentile (Market Median), 75th Percentile, 90th Percentile, and Average. This method originates from the economic idea of supply/demand, where the market will naturally value each job to find a fair rate.

It is important to note that for this method to be applied, your company must have updated position descriptions for each role. This method relies on looking at a particular position and cross-referencing it with positions found in the job catalogue for each salary survey. Current position descriptions allow you to match your company’s jobs with market data, ensuring an apples-to-apples comparison. It is not recommended to attempt to match based solely on job title; the best matches are made when a Job Analyst/Compensation Specialist focuses on the content of the job (duties, qualifications, working conditions). With a wealth of expertise in this area, your Honiva HR Services Consultant can help to ensure the correct position matches are made.

Method 3: Point Factor System

For very large companies, a Point Factor System may be the right choice. This is a very resource intensive approach, which contributes to this method being somewhat less popular than the other two outlined above. This method involves looking at individual job elements and assigning each skill/qualification a weighting or score. These are then added up to get a total number of points that are attached to pay data. Employees are paid based on the pay range where their total points land. Given the level of human judgment involved, this can be a very subjective method. That said, smaller companies or ones with very unique positions may prefer to use this methodology, as they may be unable to find market data/comparable job matches from salary surveys to build a Compensation Structure using Market Pricing.

Here to Help

Want to ensure your compensation methodology is right for your company? Need help implementing it? We can be reached for a free confidential consultation at +1-403-470-5350 or [email protected] For further details on additional HR service offerings, please visit our website at https://www.honiva.com or follow along for more informative tips by joining us on LinkedIn, Facebook, Twitter, or Instagram. We also run a complementary LinkedIn and Facebook group called “Insights by HonivaHR” where you can access free information on how to become an effective and legally compliant employer. Or you can sign-up for our quarterly newsletter to have help sent straight to your inbox from our company homepage.

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