How Do Employers and Agencies Set Salary

Salaries are calculated using job analysis, evaluation, market data, salary ranges and compa ratios.

Employers and agencies use salaries to attract, reward and keep employees. Salary and wages are known as base pay or compensation. It is a combination of what the local labor market is paying for a similar position and what the job is worth to the employer or agency. Effective salary systems are fair to employees, competitive in the marketplace, cost effective and legal – they comply with federal and state employment laws.

Pay System

Pay systems are built on a basic pay policy that describes how the organization pays its employees. According to the Society of Human Resources Management (SHRM), a typical pay policy sets the target pay for a job at the 50th percentile of the local labor market rate and includes incentives for employees who meet performance goals that can increase their base pay to the 75th percentile of the market pay for the position.

Job Analysis

Accurate, up-to-date job descriptions are the result of the job analysis process. In this process, human resources specialists study each job to determine its responsibilities and activities; the education, skills and experience a person must have to successfully do the job; and the conditions under which the work is done. The analysis defines performance standards along with training needs for the job. Although the analysis may include observations of and interviews with employees doing a job, the analysis is about the job and not the people.

Job Evaluation

Using the job analysis information and job descriptions, all jobs in the organization are ranked in order of importance, and job factors are compared to determine their worth. The Equal Pay Act of 1963 established four categories for evaluating jobs and setting salaries: skills, work effort, working conditions and job responsibilities. Typical job factors include work experience, education, decision-making authority, task complexity and customer relationships.

Labor Market Equity

To attract and keep the best workers, salaries must be competitive compared to the local labor market. Market equity is determined by surveying the local labor market or industry. Salary surveys collect information on base pay, recent pay adjustments and commission or bonuses eligibility by job category, industry and geographic region. To avoid antitrust claims of “price fixing,” employers and agencies do not conduct surveys but acquire survey results from professional or industry organizations or third-party human resources consulting firms.

Setting Salary

Using the job analysis, evaluation and salary survey, employers and agencies set a target salary for each job, which typically reflects the midpoint of the local market pay for the job. With this target set, a range is established with minimum and maximum salaries for a job or a group of similar jobs. Employers and agencies often use a compa ratio to determine the starting pay for a new employee. The compa ratio compares an employee's salary to the mid-point (50th percentile) of the salary range and is expressed as 1.0. For example, the midpoint of the local pay range for an experienced medical assistant is $16.81 per hour, so the compa ratio is 1.0. An employer uses a 95 percent compa ratio for new hires and offers a job applicant a starting pay rate of $15.96 per hour.

References

• Society for Human Resources Management; Introduction to the Human Resources Discipline of Compensation; T. Allender; 2010
• PAQ Services: Job Analysis
• HRvillage.com; HRFAQ – What is a Compensable Factor? 2007
• Society for Human Resources Management; The Antitrust Implications of Comp; J. Treece, et al.; 2006
• HRPeople.com: Compa Ratio

Resources

• Society for Human Resources Management (SHRM)