It measures the level of competitiveness against the market for the compensation packages received by your employees.

Calculation steps

1. choose the reward element for comparison (Basic, Fixed, Total cash, etc.)
2. sort employees by grade/level/category
3. for each employee find the market value for comparison
4. choose your deviation range for the External Acceptable Pay Range (APR)
5. for each level calculate the minimum and maximum value
6. take the reward element for each employee and compare it (divide it) to the value of comparison. Express the value as a percentage
7. for each employee you will have a Comparison Ratio (CR)
8. sort employees into 3 categories: below APR, within APR, above APR

Example:

Reward element: Basic salary

Employee Basic salary: 13,200

Market value: 10,000

Deviation: +/-20%

Minimum: 8,000

Maximum: 12,000

Competitiveness index = (13,200 / 10,000) x 100 = 132%

The index for this employee is above the maximum so the index is placed in the "above APR" category.

Things to take into consideration when analyzing a CR:

1. employee tenure - a long time within the company can mean that the employee received over the years multiple salary raises; beware that in some cases new employees can have a higher salary due to labor market characteristics
2. employee performance - an employee with a constant high performance in company received higher salary raises in time
3. department - for some departments the internal policy can be different - in some cases certain departments can have a different market benchmark, for example core departments can be payed at the upper quartile (P75) and the other departments at market median (P50). In this cases if the employee compensation package is compared to the overall level internal median the comparison rate will probably be above the APR. In this case it is advised to compare the package to the median for the level of all employees within the same policy
4. qualifications or skill scarcity - if the employee has a set of skills or know how considered strategic in the company he might be treated as an exception to the pay policy

How do I choose the market to compare with?

1. look at the companies where your employees go and see if there is a pattern of industry
2. look at the companies from which you recruit your employees and see if there is a pattern of industry
3. decide if the employees can do a similar work in another or any industry
4. do a cost analysis of comparison with different industries that make sens

Usually companies benchmark their salaries with:

1. their sector
2. general market (salaries from across all sectors)
3. specific sector for different departments/positions/families: IT positions can be compared to the IT industry - this case is due to the fact that the IT sector has higher salaries then others and not to benchmark with it would mean the incapacity to attract talent.

Deciding the market and value of comparison is a business decision. This decision requires maturity, lots of cost analysis impact and should be influenced by the long term objectives of the company. Some managers are tempted to choose benchmark markets depending on the values with the hidden agenda of justifying higher raises, justifying lower raises or not giving raises. It's a counter productive behavior.

What should i take in consideration when choosing my salary survey provider?

1. job evaluation method - look at the methodology and decide if it's a fit for your company
2. data collection methodology - the most accurate surveys are those that collect salary data from the company at employee level. Some providers choose to collect data at job level, method which raises concerns about the values provided by companies for employees that occupy the same job
3. statistical methodology - how are the 5 values (deciles, quartile and median) calculated - some providers will calculate for each participant company the 5 values and afterwards calculate the market values meanwhile other providers take all salaries and calculate the market values. By applying each methodology on the same data set will have different results.
4. participants - verify the list of participants and ask yourself the following questions:
5. are they enough to receive at least one median for every job level that i'm interested? how about to receive all 5 values?
6. from my knowledge the participant companies are the best payers on the market or not?
7. are the participants stable - do they participate yearly or not