By Sharon McKnight, CCP, SPHR
One of the primary elements of any compensation philosophy is the company’s stance on employee pay relative to the market. Essentially, there are three options: lead, lag, and lead-lag.
A company that leads the market seeks experienced talent and pays higher than market wages to attract and retain fully qualified employees. It sets pay at a rate anticipated for the end of the year. For example, the market rate for a position in January may be $30,000 but, to lead the market, they will “age” the salary to the start of the next year, paying ahead of the market (leading the market) until it catches up the following year.
A company that lags the market sets a pay rate at the current market level, perhaps limiting their recruiting effort. They may, however, offer training and development opportunities to help attract employees. Using our above example, an employer paying the current rate is behind the market (lags the market) for the remainder of the year.
A company that ages January market data to the middle of the year lead-lags the market. In other words, it leads the market for the first half of the year and lags the market during the second half. They may offer expanded benefits to attract employees but may not be able to attract the most qualified individuals in their labor market.
Aging salary data is not a complicated process and can be accomplished using a standard formula. The challenge is determining the aging factor to use in the formula. Some employers use their annual increase rate, while others may use the annual CPI as the aging factor.
Subscribers to Compensation.BLR.com, have access to our Salary Aging Calculator, which makes aging market data a simple process.