- Blog post
Market based compensation management philosophy
Corporate philosophy and market conditions dictate your compensation management strategy
The premier topic is market-based compensation management. And why would we do this? Why have a compensation program? Why does any of this matter?
First and foremost, we want to implement the compensation management philosophy. Some organizations say, “We wanted to recruit the top talent available.” I just had a call with a client this morning. They’re a $300 million organization on the West Coast. But when they recruit talent, they are looking to hire people from $2 billion and $3 billion organizations, top executives from those organizations. They are a high-flying organization, a top performing organization. They want the cream of the crop and they’re willing to pay for it.
So their compensation management philosophy is to target the 90th percentile of the market. That’s where they want their average employee to be paid, at the 90th percentile because that’s what they feel they need to do in order to attract that caliber of employee.
Paying the 50th percentile
At the same time, I worked with a large securities industry firm, regularly voted one of the best places in America to work. Their compensation philosophy is slightly different. They not only say, “We want to look at the middle of the market or the 50th percentile of the market.” That’s the point at which half of organizations pay more and half pay less. Their compensation management philosophy is to pay 10% less than that middle of the market.
Their rationale for doing that is, “We’re not going to put a whole amount of money in base salary. I think we’ve established the reputation as a good place to work so we don’t have a problem attracting a high caliber of employee. But we’re also going to make sure that we’re going to pay per performance. So if we have a good year, we’re going to pay out bonuses that are far in excess of market competitive bonuses. So we’re going to make up for our lack of market competitiveness in base salary. At the same time if we have a bad year, we aren’t going to pay out those bonuses and we’re going to be financially a little bit more stable as a result of that.”
Ninety-nine percent of the time, organizations target the 50th percentile of the market as the basis for their compensation management strategy. Again, that’s the point where half of organizations pay more and half pay less.
From the Rapid Learning Institute webinar: “How to Set Pay Ranges That Are Fair and Effective” by Ed Rataj