ABC, Easy as 1, 2, 3

Today's post comes to us courtesy of guest contributor Kent Oldham.

“ABC, easy as one, two, three or as simple as do, re, mi”

The Jackson Five sang this number one song way back in 1970.  Today, however, it’s not only still a catchy and popular song but I believe it’s also one way to apply more rigor to your market-pricing decisions.

I first helped develop this “market data adjustment strategy” several years ago while working on a Broad Banding and Market-Pricing project at a large public company. 

The question about when and how to apply premiums and discounts to market data seems to be one that is continually discussed and written about, and it invariably comes up when Compensation professionals need to justify their pricing decisions to management.  Most times these conversations center on “best-practice” but still seem to leave the specific rule or formula for determining the “correct percent of adjustment” somewhat arbitrary.

The simple process I am advocating will provide (or result in) a reliable and easily understood practice that will also aid Compensation professionals in explaining the adjustments made to market data.  This process does allow for flexibility to suit a particular company, industry or situation and should be tailored to your company’s unique culture and competencies.

Many jobs that must be market priced are not one hundred percent clean, benchmark jobs that have perfect external market matches.  Many jobs end up being a 75%-80% match to the market data.  Compensation professionals price jobs through a combination of job and company knowledge with that “artful” aspect of applying a percent adjustment that “feels right.”  This is usually done informally by the practitioner comparing scope and responsibility of the position as it compares to the survey description.  Here is where the approach I’m advocating comes in. 

It works like this.  For each match you assign the letter A, B or C to it based upon if it has greater (A), the same (B) or less (C) Scope in comparison to your job.  For Responsibility you assign 1, 2 or 3 the same way.  You could use “Breadth and Depth” in place of “Scope and Responsibility” or any other qualifiers that make sense and that your organization values.

Here are a few examples of how you could use this method to adjust market data for a job.  In these examples, we are using a standard 5% adjustment up and down for each qualifier.

1. Your position is greater in scope and greater responsibility than the survey job

--Label the match as “A1” and add 5% to the market data for the “A” and 5% for the “1”.  Thus, you add 10% to the market data to come up with your true market-value for the position.

2. Your position has less scope and less responsibility than the survey job.

--Label the match as “C3” and subtract 5% from the market data for the “C” and 5% for the “3”.  Thus, you subtract 10% from the market data to come up with your true market-value for the position.

3. Your position has the same scope and responsibility as the survey job.

--Label the match as “B2” and use the data as is without any adjustments

The percent amounts that you choose (i.e. 5 %, 7.5% or 10%), and whether you apply a standard adjustment or add variations, is where you can build flexibility to meet the needs of your organization and also to account for minor or more significant differences between the jobs.  The point here is to build the method based upon what aligns with your organization’s values and your overall compensation philosophy, and then apply it consistently.  This should provide the Compensation practitioner with an additional way to build rigor and a clearer understanding into an aspect of market-pricing that has tended to be more artistic than analytical.

Kent Oldham, CCP is a Compensation Consultant with HealthPartners. He has over 20 years of experience in a wide variety of industries and companies from both an internal practitioner and external consultant perspective. He has authored two books (find them on Amazon) but they have nothing to do with Compensation, he just needs to increase their sales a bit. Connect with Kent on LinkedIn but don’t follow him on Twitter because he isn’t on it.  

Image courtesy of Wikipedia

Comments

[Howard Nizewitz]

How do you account for other firms matches being either greater or less than in scope than the survey job description? For example, let's say you feel your position is greater than the survey description, if many participants' roles were also actually broader in scope you would be applying a top up to what may have already been captured in the data. There is no easy answer here without having more insight into the quality of the matches provided by firms. Survey firms should try to capture from participants a sense of whether their roles or bigger or less than the survey description.

[Kent Oldham]

Agreed. I have noticed a few surveys collecting and reporting on the "quality" of the match but most do not. I'm not sure what the answer is other than we need to make the assumption that some matches will be less, some will be more and the majority will be about equal; and thus, on the whole it "nets" out to an equal match. As you know, even with the rigor and discipline I have advocated -- market-pricing is still an estimate of value and there is judgment involved when we perform this function