Employee compensation is determined by the marketplace

The second biggest predictor of employee compensation is compa ratio. Compa ratio is essentially what are we paying you compared to the marketplace.

What does that mean for employee compensation decisions?
Every job has a market value. The market value is commonly – in compensation terms, talked about in terms of a salary range minimum, the salary range maximum, a midpoint, a first quartile and a third quartile. That is the best way to describe – it’s kind of a universal language for describing what a market – what a job is worth in the marketplace.

A lot of us think that their employee compensation ought to be determined, if it’s a relative thing, relative to their peer next door. After all, we’re all managers. Of course, but you’re a manager of accounting and you’re sitting next to a manager of engineering who’s sitting next to a manager of R&D who’s sitting next to a manager of architecture.

Well, you know what? If we have to replace that manager of architecture, it’s probably with another architect, okay? And if you’re not – if that’s not your background, why are we using you as a reference point? You’re a secondary reference point as a fellow manager. A primary reference point for employee compensation decisions is what do managers of architecture get paid in the external world and for companies in your space.

We’re looking more at the size and complexity of that job and the kind of basic job you’re talking about rather than your specific industry. So, some jobs are tied to industries, others are not. Again – so, this is pretty basic to some of you and others are scratching your head, going, “Damn, I really hadn’t thought of that.”

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