Tag Archives: salary surveys

Ten Steps For Building A Salary Structure

Warren Heaps – Birches Group LLC

A salary structure is commonly used by employers to set out the range of pay, from minimum to maximum, associated with each salary grade or band. By associating each position with a grade or band, employers can use a salary structure to help manage compensation in an optimal way.

Here are ten steps to develop a salary structure for your organization, with some special considerations for international developing markets:

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Transitioning Compensation from Classroom to Reality


Chuck Csizmar –
CMC Compensation Group

I once supervised a Compensation Analyst who had learned her craft through professional seminars and workshops.  One result of that education was her favored response when faced with a challenge at work:  “the greatest minds in Compensation say that . . . ”   It took patience to educate this budding practitioner about the difference between classroom / textbook answers and workplace reality.

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The Challenge of International Market Pricing


Chuck Csizmar – CMC Compensation Group

“What is the competitive market price for a particular position?”

It’s a simple question.  If you work in Compensation, this is what you do.  And if you’re in the US, the survey sources you can call upon are numerous and well-stocked with participating companies and benchmark matches – the blessings of a large country.  In fact, it is a common practice to segment the data (report separately) on the basis of industry, revenue size, or geographic region.  In some instances you can further refine your analysis by operating budget, staff size or even years of experience.

For those accustomed to such robust analysis it can be a real wake-up call when asked to conduct a similar analysis for operations in another country.  Suddenly your content-rich environment has disappeared, and in its place you find that the availability of good information can no longer be taken for granted.  Now what do you do?

Your large country database is gone.  Instead, you face a limited selection of survey sources and each offers only a fraction of your normal participant count – a far cry from business as usual.

Such is the key challenge when pricing international jobs – the limited number of companies included in surveys, even by the major vendors.  For example, Mercer Netherlands has 81 participating companies.  So it is not unusual for a market pricing analysis to include only 4 – 5 “matches” – but is that representative of common practice?

If you’re the one on the asking end of the original question, let me share the challenges your analyst is likely to encounter.

Impact of Reduced Participation

  • Limited industry segmentation:  Reported data will likely cover multiple industries, with limited or no segmentation.  If you’re in either a high or low paying industry, surveys will provide inflated or discounted  information.
  • Hard to segment by revenue size:  To the extent that larger companies pay more than smaller you lose that distinction as well.  This can be especially problematic if you’re a small company.
  • Global responsibilities vs. strictly national:  The distinction is often blurred between national, regional and global responsibilities.
  • Combination jobs not well represented:  You will find yourself matching against jobs “close to” your own, just to gain a “feel” for pay levels.  If your job content varies from benchmark descriptions, reported data might not capture such idiosyncrasies.
  • Poor matches and / or no data when less than 5 respondents:  Surveys tend to provide an “n/a” when they do not have enough participants.  When you start with limited companies it’s not unusual to find unreported jobs.
  • Forget Regional variations:  While it is often the case that certain geographic regions have higher pay levels, the reported data is usually national.  You may assume that participants are in the higher paid region, at your risk.

What to do?

Frustrating, isn’t it?  You can’t very well throw your hands into the air, complain about poor survey quality and move on to something else.  The limitations are there and you have to play with the cards you’ve been dealt. Management is waiting, wondering what is taking you so long.

Working with limited resources is a test.  Your challenge is to balance an understanding of the subject position, the industry and the vagaries of limited data points in order to determine which figure best represents your position’s competitive value.

To succeed you must utilize subjectivity and your professional judgment to consider the available data and gauge which figures best reflect the job under review.  The correct answer will no longer jump off the page at you.  Compensation has become an art, not a science.

  • To improve your matching, consider either the 25th or the 75th percentiles instead of the median or 50th percentile to reflect your position: this can be effective with poor matches, or concerns that the reported job is either larger or smaller than your own.
  • You may have to add or subtract from a benchmark job to gain a more appropriate figure for your position.  For example, if your job is a VP but the survey matches stop at the Director level (or converse), you may have to adjust up or down to create a better “guesstimate.”  Note: in such a case don’t forget that the incentive percentages will likely differ as well.
  • There is no formula in making adjustments, but changes in organizational level are usually around 15% – 20%.  Within-level description changes are usually around 5% – 15%.
  • If dealing with only a few positions you might have greater success by individually pricing jobs through a vendor’s database of multiple surveys, government sources and local surveys.  Vendors like ORC, Birches Group and a few others offer this select service.
  • Be careful of the arithmetic exercise (averaging averages, inappropriate matches, assuming numbers, etc.) that delivers a figure you cannot validate later.  Caution: a number is remembered, while often the qualifiers that follow are forgotten.  Make sure that you document such concerns before providing specific data.

All this subjectivity means that your judgment might suffer from more skepticism, even criticism, as you cannot simply point to a survey page and say, “there it is.”

Does all this subjectivity ruin the value of your analysis?  Not at all, as long as you inform management about how limited survey resources have impacted your analysis.  They expect an answer to their question (market value?) and you need do the best that you can with the resources you have available.

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Sometimes You Have to Spend

Chuck Csizmar – CMC Compensation Group

Many companies with international operations are reluctant to purchase compensation surveys covering their multiple countries, on account of the cost.  To them it’s like having to survey multiple USAs, no matter the headcount involved.  As discussed in an earlier post, Shock and Awe, the cost of these international surveys can be prohibitive.

For example, if the US-based Acme Manufacturing Company has operations in Germany, India and Argentina, survey costs for these three countries would be 2-3 times the cost of comparable US surveys.  As most compensation experts recommend using multiple sources to better gauge market trends, the cost factor very quickly becomes an eye opener.  The more countries you operate in – well, you get the point.

Hence the hesitation.

However, is putting off a competitive pay analysis a good business decision?   What is gained by keeping ignorant of whether your compensation packages are competitive or not?  Of course, by happenstance you may be lucky and are already providing compliant and competitive rewards.  More likely though, the odds favor that you’re either overpaying or underpaying your employees.

Long term Impact of the Status Quo

Let’s look at the scenarios that can be playing out while you remain unaware.

Over Payments:

  • Where local compensation costs are higher than the competitive market, without a corresponding ROI in productivity or performance (more pay is not a 1:1 correlation).  You are wasting money.
  • Most employees will not recognize that they’re being paid above average, so any presumed positive perception is only an illusion.

If you’re overpaying, but don’t realize it because you haven’t obtained credible survey data, you will likely presume that everything is okay.  In other words, you’ll think that your pay is on par with the market, when in fact you are paying at above market rates.  How much money (the differential) will you be needlessly paying out on account of this presumption?  Chances are, the cost of finding out – of potentially identifying a key problem – would be a small fraction of the money being misspent.  Is this an efficient use of your reward dollars?  I don’t think so.


  • Employees feel that they are not being compensated fairly
  • Your ability to attract the right caliber of employee for your operations will be weakened by low compensation rates
  • Employee engagement, productivity, morale, attendance etc. will be less than what they should be, feeding off negative employee perceptions

If you’re underpaying, but don’t realize it because you failed to obtain credible survey data, you may also blindly consider that everything is okay.  After all, anyone who leaves does so for more money, right?  But doesn’t everyone?  So you may not learn much through staff defections.  Have you considered the annualized cost of losing just one experienced staff member?  And should you lose more?

Choosing instead a course of hesitation and delay will not rectify any festering issues; they don’t go away or fix themselves.  Instead, your inaction will worsen the situation and make eventual corrections more painful.

Cost of doing business

Do you remember that ad line, “you can pay me now, or pay me a lot more later”?

While squirming to avoid costs the company might try to obtain free data off the internet.  Good luck there.  Pundits will tell you that the value of free data, even if available is usually less than what you paid for it.

Instead, ask yourself if you would spend a dollar today to save three tomorrow?  That’s the question you must answer, to gauge the economic value of knowing the competitive position of your international employees.

Your financial folks might see it another way.  They might see only a finite dollar amount being spent, against a “maybe” savings estimate.  They will ask you for guarantees you cannot give.  It’s not like buying a machine that will increase productivity, lower production costs, raise profit margins and lower the cost of sales – all measurable.

Would you pay to learn how competitive are your services and product lines?

To make informed and effective business decisions, management requires knowledge of present circumstances, the challenges being faced, the import of the status quo and the implications of change.   When dealing with the single greatest cost to your organization, employee pay, it would be well worth your effort to spend what is necessary to give senior management the proper ammunition for decisions that could drive the business forward.

Yes, it would be well worth the cost.

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“Think Globally, Act Locally” for Compensation Design

Warren Heaps – Birches Group LLC

A recent post by Chuck Csizmar focused on the “Easy Road to Global Compensation Success.” In his post, Chuck emphasized that taking a headquarters-country approach to managing compensation systems around the world might not be best, despite some perceived administrative advantages.

“Think Globally, Act Locally”
To steal the popular phrase used to describe environmental strategies, it’s really important to recognize that markets are different around the world, and company compensation programs should reflect a balance between global corporate philosophy and local practice and culture.  Successful companies already recognize this when deciding which products to make and sell, how to market and promote them, pricing strategies, etc.  So, it should not be surprising to find out that local reward practices differ from country to country.

Salary Scales – A Simple Example
Let’s look specifically at salary scale design to illustrate why local practice matters.  Employers use salary scales to define the range of pay that is associated with particular grades or bands within their organization.  The definition of the grading scheme should be global; there should be consistent measures of contribution used to determine job level, regardless of market, and they should reflect the corporate culture as well.  But should there be one universal salary scale across multiple countries?  I believe the answer is no.

The basic approach to designing a salary scale is defined by the span (difference between minimum and maximum) and the inter-grade differential, or IGD (increase from one grade to the next, usually measured at the midpoint).  The table that follows shows two typical salary scale designs, for the United States and Kenya:

Grade US Kenya
Span IGD Span IGD
Support (4-7) 50% 15% 400% 27%
Professional (8-10) 50% 14% 400% 27%
Manager (11-12) 50% 15% 250% 54%

You will notice several differences, including:

  • Spans in Kenya are much wider than in the US
  • Spans in the US are consistent between employee groups (although in some models there can be slight variations, usually wider for higher levels)
  • There is a much higher IGD between Professional and Manager in Kenya, than between Support and Professional; in the US, however, the IGDs are consistent

You can see the differences more dramatically when looking at a graphical representation of the scales in the two figures that follow (click the graphs to open full-sized views in a new window):

US Salary Scale Example

Kenya Salary Scale Exampe

One of the most dramatic differences is the big jump in Kenya between grades 10 and 11, and 11 and 12.  In fact, we see this pattern in many developing countries around the world.  The shape of the scale midpoints (the pink line) looks like a hockey stick, with the Managers grades (11 and 12) forming the head, while the other grades form the handle of the stick.  Contrast this to the shape of the line in the US, which illustrates a more even rate of increases across all levels.

If you dig a little deeper into the numbers, you can identify some reasons why the scale designs in these two countries differ.  For example, the market movement for salaries in the US averages around 3.5% (maybe even less last year).  In Kenya, market movement in 2009 was over 20%.

With market movement over 20%, if the spans were like the ones in the US, employees would move through the band too fast, and quickly reach the maximum.  The wider spans in Kenya also indicate there is great variation in pay levels in the market for the same positions.  The Kenyan scale also illustrates that there is a much higher level of difference between the higher paid and lower paid staff, compared to the typical US scale (note:  The US scale in this example excludes Senior Executives and CEOs).

There are many other examples of differences in how compensation is defined in a country, which elements are included, and how companies choose to adapt their rewards policy to reflect local culture and practice.  Compensation and human resources practitioners are well-advised to become knowledgeable about each market and adapt their company practices accordingly.

What experiences have you had managing compensation in different markets? Share some by adding your comments.

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Three Rules for Compensation Surveys in Smaller Developing Markets

Warren Heaps – Birches Group LLC

Almost every day, I hear from a client or prospect looking for reliable market data in some small developing market, usually located in a part of the world that the big consultants have not yet discovered.  After all, our company focuses on those places!

One of the most common discussion points is about the difficulty the client is having in finding a survey which meets their needs in these markets.  You see, most clients have a very “developed world” view of what makes a good survey. But in smaller markets, you need to look at surveys through a different lens.

What Makes A Good Survey?
The exchange is typically something like this:

Client asks, “Do you have a survey for Gabon, in West Africa?”

I say, “Yes, we have a survey there, and for all of the countries in Africa.”

“Wow,” says the client, “that’s impressive.   How many bio-tech companies are in your survey?”

“Bio-tech?  None, I’m afraid.  We have a pharma company, but their office is very small.  Are there even any bio-techs in Gabon?”

“Well we are looking to open an office there, so we need to be competitive in our sector.  Do you know any other surveys I could look at?”

And so it goes.  This client, like many others, is looking for a survey in Gabon, a relatively small market, with the same parameters as they would apply in Germany.  Sector based surveys are very popular in developed countries, but in many small, developing markets, sector surveys just don’t work.

Rule #1 – Think Outside Your Sector

Why?  Simple.  The sector just isn’t big enough.  There might only be two or three similar companies, or like in our Gabon example, none at all.  To get a good sector survey together you would need at least eight to ten companies with a workforce of at least 20 to 25 staff.  But sometimes that’s not even enough.

I remember reviewing a survey once in a Central American country when I was a corporate compensation executive.  I was excited that the survey included 12 consumer goods companies (including my former employer).  We thought that with 12 companies, there would be enough data for some robust statistics.  It turns out there wasn’t.   Only 4 of the employers in the survey had a large presence in the country; the rest had small sales offices, and some had less than 10 staff in total.  Our company had staff over 150, including a regional headquarters and a factory.

So you see, a sector-based survey with 12 employers yielded good data for only a handful of positions.  My company, along with the others that had larger operations, were unable to use most of the sector data due to lack of matches.

Okay, so now you’re just looking for a survey – any survey.  Which employers make the most sense in order to get the market intelligence you need to make the right pay decisions?

Rule #2 – Look at the Leaders

Leading employers in all sectors usually have a full range of positions, from support to professional to executive.  These employers also have a strong employer brand, making them the preferred employers in the market.  The best talent naturally gravitate to these companies, as they are the ones reputed to be the best places to work.  More often than not, the leaders are multi-national companies or international organizations.

The multi-nationals are known to have disciplined approaches to reward, governed by global principles set down from headquarters.  They view compensation and benefits in a strategic way, and know the importance of using market data to determine rates of pay and benefits.

International organizations include employers such as the World Bank, various Embassies, the United Nations, the European Union, and so on.  These organizations are usually well-established in smaller developing markets, and attract the top echelon of the workforce.  Surprised?  One of the reasons is that many international organizations have very competitive pay programs which are benchmarked not only against each other, but with the private sector as well.

Together, a combination of leading private sector employers and leading international organizations captures the top of the market in many small countries.  So it’s a good place to start.

But wait a second.  You’re thinking “How will I compare my mobile telecom company to the World Bank?  They are not comparable to my company!”

Rule #3 – Use Cross-Occupational Job Matching

First of all, there are common occupations in all employers that are easily comparable.  For example, positions from accounting, finance, human resources, procurement and IT; plus secretaries, administrative assistants and less skilled support roles common in developing countries, such as drivers, security guards and messengers.

For professional and managerial positions, the real challenge is finding enough matches for a particular occupation to be able to report the data separately.  In order to ensure that there is data available for each professional level in our surveys, we often double-match positions to both a specific occupational benchmark (e.g., Brand Manager) as well as a generic professional position (e.g., Working Level Professional).  In case there are insufficient matches for Brand Manager, we can still report the aggregated data for all positions matched to Working Level Professional.  In this way, clients are assured to get a comprehensive picture of the market, even if the specific occupational matches fall short in the survey.

Is this good enough?  How many organizations use a different salary structure for each occupational group?  There are some, but not too many.   Using cross-occupational data is not really such a stretch, is it?

In Summary
There are other factors to consider when evaluating a compensation survey in small developing countries, but these three rules will help get you started.
I will write another post in the future discussing some of the other challenges. In the meantime, please share your experiences working with surveys in these countries.

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Warren Heaps

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Shock and Awe

Chuck Csizmar – CMC Compensation Group

When you first look to purchase compensation surveys for your international population, it’s going to be a real wake-up call.  For those accustomed to only US surveys you will find that the available data in many countries is more limited than what you’re accustomed to seeing, as are the number of companies involved.  What won’t be reduced though is the expense.  Quite the opposite.  If you have multiple countries to deal with, your budget for credible compensation data will likely become a multiple of your US experience.

When I worked overseas my budget for compensation surveys was 3-4 times my previous US budget – and I only had to worry about Europe.  What a shock that was – spending much more and arguably receiving less.

Think on it, though: each country is a separate USA, a unique national entity having country-specific labor laws, employment regulations, tax structure, competitiveness challenges and variations of economic strength.  For each you will need a country-specific survey to assess the local competitiveness of your employees.

International HR practitioners will need to adjust their thinking to react effectively in smaller countries, where the working population is limited and so is the number of survey participants.  It will be difficult to slice surveys by geography, industry or employee segment, as the data points grow smaller and smaller with each criteria.  For example, a well-regarded Mercer survey for Sweden showed 202 participating companies, while the Netherlands counted 81.  Meanwhile the US survey totaled 500 companies.

To compound this dilemma of accessing credible data you will typically be required to pay “list” costs for each survey, as compared to the US where I was able to gain lower 2nd copy costs and often times managed to wheedle discounts or “anticipated” participation rates.  Such tactics are not as readily available overseas.

Availability of locally-grown survey data is another challenge.  I have tried to locate such sources, even those provided in the local language, in order to create a greater “buy-in” sense from management, but with very limited success.   Even global companies with non-US headquarters tend to use the multi-national consulting firms.

Accessing International Resources

Should you require information for international compensation practices, below are a number of useful sources, each of which can be tapped via a Google search.  Note: many of the non-US sources focus on limited employee segments or functional areas, which may limit their usefulness during a general search.

Towers Perrin Mercer Culpepper
Hewitt Associates PwC CSi Remuneration
AON Hay Group VenCon Int’l
Reseach (GER)
Radford McLagen Economic Research
IPAS TymWork (SWE) Western Management
Taylor Root (UK) CFA Institute EuroComp
(Western Mgmt)
Federation of
European Employers
Executive Resources
Watson Wyatt
Birches Group LLC Euro Remuneration
Network (GER)
Organization Resources
Counselors (ORC)
Ernst & Young Croner Reward (UK) Robert Walters (UK)
Baumgartner & Partner
Interconsult Ltd
Australian Institute of

Should you only have a few positions (2-3) in a given country you can reduce costs through individual job pricing, vs. the purchase of an entire survey.  More than a few positions though, would render this tactic economically unfeasible.  A few notable sources (though others from the above list may also be able to help):

  • ER Limited
  • ORC
  • Birches Group

Note that I have not included sources from the current vogue of online surveys, like PayScale and Salary.com.  To my mind these sources still have credibility problems to overcome before they would be accepted by senior management as a viable resource.

Another effective strategy for reducing costs is to age current data forward, coupled with the use of biennial purchasing.  However, if utilizing this strategy have a care to limit its use to countries with stable economies.  Using such standard growth figures would miss the mark in countries showing greater volatility.

The Cost of International Operations

Too many HR practitioners and their Managers fail to take into account the expenses involved in keeping their international compensation programs competitive, especially where the organization has a small footprint in a given country.  For companies new to the international scene, and for those with small populations in several countries, the shock of survey costs could be daunting.  Many times the result is a reluctance to purchase the data, in some cases letting matters on the ground continue to fester – potentially overspending and / or creating debilitating equity problems for themselves.

Call it the cost of doing business, but if you’re going to maintain effective operations overseas, and you want to provide a competitive reward package (of course you do!), it would be unwise to shortchange the process by guesstimating or otherwise trying to make-do without credible information.

The cost of surveys is a fraction of the possible financial impact that could result from retaining non-competitive reward programs.

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Base Salary – Not So Basic!

Chuck Csizmar – CMC Compensation Group

Ever find yourself confused when asked to provide an international employee’s annual rate of pay?   Compared to the US, you will find scant uniformity between countries as to when and how monies are paid to employees, and this diversity can lead to confusion, misreporting of data and the potential for internal equity squabbles.  It is especially a concern when a US Manager attempts to hire a foreign local national without being certain of country-specific pay practices.

To a US employer, the term “annual base wage” or “annual salary” is simply the cumulative amount of payroll dollars (regular paychecks) dispensed over a twelve month cycle.  However, in many parts of the international community, it’s a bit more complicated.

Numerous countries consider statutorily required or common practice holiday (vacation) pay and Christmas (December) payments as part of what they term “basic salary” – which they report as a monthly calculation.  So what is the annual salary?

Defining Your Terms

In the US, annual salary is a common reporting term, an identifier to the company and the employee of the value paid to each position. To quote an annual salary is common practice.

The trick when considering global practices is to remember the distinction between the two annual terms:

  • Base pay – the amount of non-incentive wages or salary paid out over a twelve month period for work performed
  • Basic pay – the amount of non-incentive wages or salary paid out over a twelve month period for work performed, but including additional payments (usually in monthly increments) not directly related to the work effort

Some US companies prefer not to deal with the issue, relying instead on the US model of quoting an annual salary – then dividing by the total number of monthly payments due in order to calculate the monthly gross paycheck.

A client of mine once insisted on offering a candidate 75,000 euro, but no more for a key position.  When informed that in Belgium an extra month (13th) is common, and in fact mandated in many collective agreements, the response was “fine, as long as the total base pay isn’t higher than 75,000 euro.”

That candidate did not accept the position.

Here are a few representative examples to illustrate the diversity of practices across the globe.

  • Singapore:  While a 13th month payment (Annual Wage Supplement) is not mandated, it is common practice.  Executives typically receive 1 to 2 months pay as an additional bonus.
  • Mexico:  Companies are mandated to give employees a Christmas bonus equal to 15 days pay.  Common practice is to grant 30 days.
  • Peru:  Employees are entitled to a 13th and 14th month bonus; the 1st extra month is paid in July and the 2nd in December
  • Italy:  In December, employees are paid a Christmas bonus equal to a month’s salary.  In many contracts a 14th month’s salary is included and is paid in June.

The extra payments are not rewarding work performance, but typically provide extra monies for either vacation time or Christmas.  These practices are not commonly followed in the US.

What to do

To avoid confusion when dealing with local national employees it is helpful to talk in terms of monthly pay, the term commonly used by the employees.  No matter how many monthly payments are made, for whatever reason, simply multiply the payments to reach the annual figure.  To your international employee that is considered an annual pay entitlement, though not an annual salary as practiced in the US.

When reading compensation surveys make sure to check the definitions used; oftentimes the survey will report both an annual salary and a “guaranteed annual cash” – the latter inclusive of holiday bonuses and extra month’s pay.

Avoid setting a US-style annual salary and then dividing by the number of required payments to derive a monthly pay.  Instead, determine what you will pay on a monthly basis and multiply those payments by country-specific statutory requirements and common practice to derive (build-up) the annual salary.  It’s a bit more confusing for US companies, but it will be more meaningful for your international employees and likely save you employee relations issues down the road.

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Global Salary Budgeting – Smart Approach or Misguided Shortcut?

Warren Heaps – Birches Group LLC

It’s getting near to the time of year when companies start to draw up budgets for next year.  One of the most important numbers in the exercise is how much to budget for growth on the salary line.  Some organizations assume that making an assumption for salary growth globally based on the figures used in the headquarters country is a good solution.  After all, it’s easy to just take one number and apply it around the world.  Such an approach, however, is flawed.

Just as Chuck Csizmar explained in his recent post about comparing salaries across different countries by converting currencies, global salary budgeting needs to be done country-by-country, and taking a shortcut like the one described above is a recipe for disaster.   Here’s why.

Market Movement Varies by Country
The primary information used by HR and finance to determine salary budgets is market movement (this is a measure of how much salaries increase from one year to the next, usually from surveys) and internal economic assumptions (basically, how much can the company afford?).

Suppose your US-headquartered company decided to apply the US salary increase percentage to all of your markets overseas for a five-year period.  The graph below compares the average increases over the five-year period ending in 2008 for selected markets.

Average Pay Increases

As you can see, the average increase amounts vary a lot by market.  The difference compared to the US ranges from 7.1% (India) to almost 20% (Nigeria).  At the same time, the average in Europe is below that of the US. And that’s just comparing the averages for one year.  If you looked at the cumulative effects with compounding over the five-year period, the differences grow dramatically.

OK, I get it.  I need data for each market.   I’ll just use inflation.
Inflation data is fairly easy to get on a global basis.   You can usually find it for free on various websites, and your local finance folks will certainly have some figures for you to use as well.   They use inflation to budget price increases for your products and to anticipate the impact of price increases in raw materials and other costs of doing business for the upcoming year.   And of course, official inflation figures are produced by the government of each country in an unbiased and apolitical fashion, right?   But what does inflation, or cost-of-living, have to do with salaries?

Cost of Labor is What Matters!
Setting salaries is affected by many factors.  The absolute level of pay is certainly influenced by cost of living – countries with higher costs tend to have correspondingly higher salary levels.  But the main factor affecting salary increases – the one that drives the market movement each year – is an old rule from Economics 101. Three words.  Supply and Demand.   If you are recruiting for positions with hot skills, for example, and there is a shortage of these skills in the market, don’t you end up paying more for these recruits?  If there is high unemployment or an excess of qualified candidates, and positions are easy to fill, isn’t there considerably less pressure to raise salary levels?

Can I just use devaluation instead?
Short answer?  Nope.  Local employees are paid salaries set in local currency, and obtain their everyday good and services in the local market, in local currency.   Devaluation (or revaluation) defines the relationships between the currencies of different countries, usually with a reference to a “strong” currency such as US Dollars, Euros, Pounds Sterling or Yen.   Exchange rate changes do affect the price of goods, for example, especially imports or imported raw materials.   But these fluctuations do not fundamentally affect the cost of labor in a country.  Remember, also, exchange rates are sometimes controlled by governments to achieve other objectives.   Hardly a reliable measure of anything, really.

The Best Approach
To estimate your salary budget properly, you need to obtain data for market movement in each country, and analyze it in the context of your own organization’s situation (market position, health of the business, funds available for increases, etc.).   There are many sources for market data – everyone has their favorites (hopefully some of you are using Birches Group data).  And then you have to apply something no statistic or consultant can provide – your own judgment – to determine the right figure to use in your company.  Interpretation and analysis of the data and applying it to your company’s situation is the art of compensation rather than the science.

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But . . . We Already Pay Competitive Wages!

Chuck Csizmar – CMC Compensation Group

What doesn’t happen when your company pays competitive wages?

You’ve read your company’s want ads and heard the pitch from your recruiters; you offer competitive wages to qualified candidates.  That’s got to be a strong hook for attracting talent, right?

Big deal.

You regularly update your country-specific pay structures based on market trends, so the opportunities you offer your employees should support your retention and motivation strategies, right?

Not enough.

Most employees presume that your company is already doing or aspiring to meet the goal of competitive pay.  After all, companies routinely advertise the practice (“we offer competitive wages”) and candidates in return expect this of potential employers.  But what happens when your goal of offering competitive pay is finally achieved?  Are employees pleased and content?  Can companies rest in their efforts to attract, motivate and retain?

I’m afraid not.

When in a situation where they’re not paying the “going rate”, management fervently hopes that employee challenges and criticisms will disappear once they reach that difficult-to-achieve target.  I say difficult because it’s not only an illusion but an expensive problem if you have a large body of underpaid employees.  And once you climb that mountain, well . . . so what?

What doesn’t happen when you offer competitive pay is that your recruitment problems have not magically disappeared, your employees won’t be satisfied and your compensation program has achieved nothing more than being average – and isn’t that a “C” grade in school?  Is that where you want to be?  Is that a practice that ensures your employees will be content to stay with you?  As far as aspirations go, it’s only middle-of-the-road.  You will find that it is not an advantage to pay the going rate, but it is definitely a disadvantage if you don’t.

Even if your company does pay “the going rate” or the norm or the competitive average (what the survey data shows), that means that approx. 50% of the companies out there are paying *more* than you.  That’s what average gets you, with half doing more and half doing less.  Is that what your company aspires to achieve?

Remember, no one leaves your company for less money – so all you’ll hear from your employees is about how so-and-so is making more money somewhere else.  And of course, employees only hear what supports their own notions – so they wouldn’t pay attention to the whole rewards package, just the specific components that confirm their opinion that your company isn’t paying enough.

The only way to avoid this scenario is if you become the premier paying company in your market / industry – and can you afford that cost?

Lest we forget, it is important to differentiate between having a salary structure (grades, salary ranges and midpoint) that provides competitive rate “opportunity” and actually paying employees at those rates.  Some may describe this as whether the company is “walking the talk”.  I recall a client who boasted that their salary range midpoints were continually adjusted to mirror market rates, but later was embarrassed to discover that their actual pay practices delivered pay levels well below their own published midpoints.  However, it did help explain the high turnover and low morale.

For their part, employees will relate to what they are being paid, not the midpoint of a salary range or other such declared “opportunity”.  To them the company’s supposed “competitiveness” is more illusion than fact; especially if they’re experienced and have been with you for awhile.  Thus the company needs to keep its focus on actual pay vs. opportunity pay.

Why do employers fail to pay the “going rate”?  Typically it is not a strategy, but a series of practices that have evolved over time.

  • For various reasons some candidates will accept a lower rate than should normally be paid for their knowledge and experience, and managers tend to view this as good news and a cost savings.  In fact it is more like putting a skeleton in the closet and hoping it doesn’t haunt you later on.  One day these same employees will change their minds.
  • Once you’ve started down the slippery slope of paying some employees below market rates the practice is soon compounded by the well-intentioned practice of internal equity.  Managers don’t want to pay similarly qualified new people more than existing employees, so the new hires are offered either below market pay or placed inappropriately in higher value jobs to get them more money (a different problem for another article).
  • Pay-for-performance systems have a hard time keeping up with the increased marketability of employees.  A minimally qualified employee hired at the minimum rate will gain knowledge and experience (and thus marketability) faster than a company’s annual merit system can recognize.  This is compounded when you have to hire a qualified worker and discover that the market requires you to pay more than what you’re paying your more experienced employees.

So, what’s the answer?  You likely won’t find management agreement to become the premier payer in your area, so you should consider instilling some flexibility into your pay practices.  You should consider targeting certain key jobs in your organization (highly skilled, difficult to replace, etc.) and make sure those jobholders are well paid for the market.

Other positions that are not as skilled and more easily replaceable you could continue with your “competitive opportunity” strategy.  Any losses would be more easily absorbed.  This approach is somewhat akin to ring-fencing your key talent, protecting them against poaching while recognizing / rewarding those with the most potential impact on your business.

So be careful when you proudly claim how your company provides competitive wages.  You may not be correct, and if so – big deal.

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