Implement an Efficient Salary Compensation Philosophy

Allocate limited salary compensation resources efficiently

Some organizations take a plain vanilla approach to salary compensation plans. For example, they say, “We want to pay at the 50th percentile of the market.” That would be the plan in which half of employers pay more and half pay less.

Historically, there have been a number of organizations whose salary compensation plan was actually part of their core business strategy. They were voted repeatedly not to be on the top 100 lists of Employers to Work For, but consistently made the top five list nationwide of Employers to Work For despite the fact that their salary compensation philosophy was to pay below the market median for base pay. Specifically, they said, “We want to pay 90% of the median.” So, we’re going to take the plan that half have been flourished pay more and have to pay less. And we’re going to discount that by 10% for base pay.

However, they made up for that on the incentive plan design by allowing employees in a particularly good year to earn exceptional short-term incentives that will put them above market for total cash compensation which is simply defined as base salary plus bonus or plus commissions.

Low end salary compensation philosophy
So, most organizations will choose that 50th percentile. Some say, “You know what? We want to hire the best of the best.” Others – and so, they’ll target the 75th percentile for example. There’s a classic example of a company differentiating compensation philosophy based on job or based on area: What they do, is they say, “When we’re looking at an accountant, an HR person, or IT staff, some of those broader positions, sure, we’re going to take that plain vanilla approach. And we’re going to target the 50th percentile of the market.”

However, when they’re dealing with a PhD research scientist, we’re literally talking about somebody where a cutting edge discovery could translate into $4 billion to $10 billion in revenue for our company. The 50th percentile is just not going to cut it. They want not just the cream of the crop, but they want literally the skim off the cream. They want the best person on the planet. So they’ll target the 99th percentile, the 95th percentile. That company wants to be the highest payer and wants to attract literally the best and the brightest that the company has to offer.

Along those same lines for the purposes of a salary compensation plan, you want to allocate limited resources efficiently. This is becoming more and more of a topic as people start to tighten their belts as the economy has been heading south.
Edited Remarks from the Rapid Learning Institute webinar “How to Set Pay Ranges That Are Fair and Effective” by Ed Rataj