Establishing Competitive Pay Rates

September 1, 2009

Here at PayScale, the HR professionals that we work with often ask us, “What method should we use for targeting pay rates for a position?” While the compensation planning tool that we offer our customers gives them plenty of numbers and calculations, it does not provide a pay strategy for a particular job position. That’s up to you to develop based on company goals. So, how do you narrow down all of your salary data strategically?

4 Tips for Targeting Pay Rates

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To help simplify the process of establishing pay rates for positions in your organization, the following lists some the many factors to consider when determining what your target pay is going to be:

1. Define your competitive set. We previously wrote a blog post on correctly defining your competitive set and I suggest you check it out. Defining your critical set is critical to targeting pay rates that are appropriate for where you will draw your talent from.

2. Pick your approach. You’ll want to think about how competitive you want to be relative to the typical salary ranges for today’s market. When targeting pay rates you need to decide if you want to be meeting the market, lagging the marketing or leading the market. Each choice can be an appropriate strategy depending on your company’s goals and objectives. A critical step in targeting pay rates is understanding what percentile you want to use for comparison. It may be the 50th percentile, but it doesn’t have to be.

3. Look ahead. Take time to think about the changes that your organization may be facing over the next few years, and forecast your workforce appropriately. In addition to pricing according to who you are now, you may want to think about defining how your organization may change over the next 2-5 years. This information could help determine how you define your competitive set or what competitive strategy you choose when targeting your pay rates.

4. Understand the job. If you haven’t yet, correctly define the job for market pricing. When you are targeting pay rates for positions, you’ll want to correctly define the full proficient employee who has average performance. This centers your market data at the midpoint on the typical employees. Those that are new to the position or have less than acceptable performance will be below your target pay rates, and those with more experience, education or certifications than required, or those with outstanding performance, should be above your target pay rates.

It is important when you establish a compensation program that you appropriately target pay rates that can accomplish the stated goals of your compensation program. This goal can best be achieved by creating a compensation philosophy, correctly defining your competitive set, and appropriately pricing your jobs against the market.

Additional Resources:

Get a free PayScale compensation report and see salary range for position of your choice.
Attend one of our Free Compensation Webinars.
Download our free whitepaper, 5 Easy Steps to a Smart Compensation Plan.
Download a free comprehensive eBook, The Definitive Guide to Creating a Comp Plan.