Did you know only 40% of employees perceive they are paid fairly? That’s a staggering number, considering that staying competitive in any market disproportionately aligns with the ability to acquire and retain the right talent. Keeping existing employee pay competitive over time requires organizations to make market adjustments at regular intervals to ensure that employee pay continues to align with your company's compensation philosophy. Even more importantly, incorporating market-based salary increases during compensation reviews ensures employees’ compensation stays fair. 

Where to Start

Before budgeting for market adjustments and running compensation reviews, confirm employees’ market job matches. Knowing where each employee’s pay falls within the competitive range is also critical to accurately budget for market compensation adjustments. This can be accomplished by deploying three essential initiatives: 

1. Job leveling and matching each employee's role to the most accurate market job/job level
2. Performing a market compensation analysis using reliable market data that reflects the pool of talent in which you’d recruit from (e.g., tech industry)
3. Establishing and consistently applying a compensation philosophy that fits your unique business needs

By initiating job leveling, market compensation analysis, and following a comp philosophy, you'll be able to evaluate each employee's pay compared against the market (i.e., determine their compa-ratio). These steps set the foundation for calculating the budget for market adjustments and performance-based salary increases. 

Compa-ratio is a percentage that indicates if the employee is paid fairly or not, and the competitive range is typically 85% to 115% of the market midpoint. To find each employee's compa-ratio, divide the base salary by the market midpoint for the job an employee is matched with. If the employee's compa-ratio is 100%, their base salary is exactly at the market midpoint for their job/job level in their work location. Using compa-ratios provides a consistent way to review individual employee pay.

Once you have visibility to employee compa-ratios based on your established compensation philosophy, HR/People leaders can work with Finance to plan an effective budget for market adjustments. Establishing a budget will help companies prioritize their market-based compensation adjustment strategy most effectively.

Budgeting for Market Compensation Adjustments

To calculate the budget for market adjustments, start by evaluating how much it would cost to get everyone up to 85% compa-ratio (if they are below 85% compa-ratio), the minimum of the competitive compensation range. 

Some companies won't be able to bring everyone up to an 85% compa-ratio right away, so a phased approach and incorporating a maximum percentage increase per employee can be helpful to move the employee up while being fiscally responsible. For example, if an employee’s compa-ratio is 70%, and there is not enough budget to bring them up to 85% compa-ratio, then capping their increase by 10% of salary may be the best approach. Then, over time, continue with this strategy to shift all employees within the competitive range.

Once the employees are within the competitive range (e.g., at least at 85% of the midpoint for their jobs’ salary range), you’ll be able to use your established compensation structure in future compensation reviews to ensure you’re paying existing employees and new hires fairly…easy, peasy!

About Kamsa

Kamsa's compensation management platform empowers HR/People and Finance teams to effectively budget for salary and equity reviews, including market adjustments. Our hybrid (technology + consultative) approach to providing reliable, global market data equips leaders to make holistic + informed compensation decisions.