Comp 101 (#1) – How do companies know how much to pay you?

Have you ever wondered how companies figure out how much to pay you? Or how managers determine how much of an increase to give you during pay review time? Over the years I’ve gotten quite a few questions from friends about this and I’m hoping that through a series of blog posts that it won’t be as elusive of a black box as it may be at the moment.

First off, a bit about me.  Most people who know me know I work in “HR”. Human Resources doesn’t always have the best reputation in businesses because they are the “police” of the company and blamed for pretty much anything that happens. The performance management system doesn’t work? It’s HR’s fault. You can’t find a good candidate for the open position? It’s HR’s fault because they didn’t let you offer enough on base salary. You don’t get as good of benefits as your friend in another company? It’s HR’s fault for not getting better benefits for the company. As a career, it can also be seen as more of the “soft” option. Don’t know what you want to do with your life? Try HR!. I have to admit, I got into HR because I thought I was “good with people”. The longer I work in HR, I realise that whilst I’m thankful it got me into my career, it probably wasn’t a very valid reason. I’ve come to appreciate how much of a strategic partner HR can be in a company, and through the course of what others see as “policing”, it’s important to recognise that they have more information than the average employee does, and there are reasons for doing what they’re doing. Are all company HR’s like this? Not necessarily, but in my experience, it has been.

There are many types of roles in HR and mine in particular is Compensation/Benefits, or Reward (I lean more towards the compensation side). I started out doing a recruitment coordinator role. Setting up interviews, scheduling them, assisting with the screen of candidates, etc. I then moved into a more analytical role within recruitment. It was in this role that I realised I had an affinity for numbers, systems and analytics. I’m thankful for a coworker in compensation who recognised this and really encouraged me to improve my Excel skills and explore the world of compensation. When we moved to London, I got a job as a compensation consultant, and currently work as an in-house reward professional. My experience has been entirely in the tech world. I was a consultant to tech companies and all my in-house experience has been in tech. What I’m sharing with you is from my own experience in the professional world, I’m not an expert but I’m hoping these insights will help. Non-profits/charities, government and other sectors may operate differently, but there is an underlying methodology that will be the same.

So let’s get started.

How do companies determine how much to pay you? Most companies will participate in a salary survey, or purchase data from a survey provider. There are different surveys for different sectors. For example, in the tech world, a company would want to use tech specific data, to make sure that they are paying their employees in line with what competitors would be. In oil & gas, there would likely be an oil & gas specific survey. Why is this important? Because certain sectors pay a premium. Technology should pay more than general industry, as should oil & gas. Charities / non-profits may not pay as much as private sector but there will be survey data specific to that sector. It’s about comparing like-for-like companies and like-for-like roles. All jobs, whether corporate, or technical will be in the survey. Different salary surveys use different methodologies, but each will have a way of categorising which discipline the role is in (whether it’s as a HR Manager, Software Engineer, Systems Engineer etc) and the level. Level usually denotes seniority, experience and the scope of the role.

You may notice I’ve been using the word “role” a lot. That’s because when benchmarking, it’s about the role, and not the person. Benchmarking (i.e. matching a job) is supposed to be as objective as possible. Does the person who is filling the role play a part in it? Absolutely, but it won’t be the key determining factor. I think we tend to take a very personal view on pay. When we’re lowballed, it feels like an insult, or that a company doesn’t want to pay what we think we’re worth, when really, it can be more about the role than about you as an individual.

Possible applications here: Ask your manager if you can see your benchmark data. If you’re high in your range, ask what you need to do in order to get to the next level. Think about how you can expand your role to warrant a raise or a promotion.

A company’s pay philosophy will also have an effect. The market data isn’t the end-all-be-all. It is a guide, and it is up to the company to determine how to use it. For example, a company may target median, to be exactly in line with market, they could take lower quartile (25th percentile) because they’re a smaller company and may be competing for talent with smaller companies, or they could take upper quartile (75th percentile) to be more competitive with large companies. Company A might place more value on their base pay and have give their employees a lower bonus target percentage, and Company B might place more value on the variable piece and offer employees a higher bonus target percentage.

I’ll get working on some other topics related to this, but if you have specific questions, let me know.


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