Page 209 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 5. Salary 195

take a more aggressive posture, such as in the 75th or 90th percentile. The importance of the
salary element should be factored in as outlined at the introduction of this chapter when
determining position in regard to the community. For example, if the importance relative to
the other four elements is “high,” then one would expect to have a higher community
position than for those who ranked it “low” or “moderate.” Conversely, if the community is
made up of companies with similar importance ratings, then one would expect the commu-
nity position to be about the 50th percentile, unless the company deliberately sought a
premium position.
The impact of the timing reference can be illustrated with a brief example. Assume that
the company is 7 percent behind at all pay levels in its defined survey community. Further,
assume that all indicators are that competitive pay at all levels will increase by 8 percent over
the next 12 months. If the company wishes to be about equal to the survey community, how
much should it increase its salary ranges? The obvious answers are 8 percent or 15 percent,
depending on whether the company is satisfied with its current market position (i.e., a 7 per-
cent discount) or wishes to equal the market. If the latter, one choice is to increase the ranges
now by 7 percent, and then by 0.67 percent every month for the next year. However, this does
not seem realistic since the community average is probably not increasing in a straight-line
progression during the coming year.
Increasingly, companies are answering the timing issue by compromising between
adjusting only for the immediate lag and including the full year’s growth. In our example,
this would mean an 11 percent adjustment. The large jump vs. market data occurs only the
first time this action is taken. to illustrate, assume that one year later we found our foresight
was 20-20 and pay did increase by 8 percent—thus placing us currently about 4 percent
behind the market. Assuming pay is estimated to increase at the rate of 8 percent during the
coming year, we should increase the schedule by 8 percent to retain the same relationship.
In other words, after the first adjustment for projecting pay for the community, the sched-
ule is subsequently adjusted simply by the full amount of the estimated future community
growth, plus or minus adjustments to the extent the previous estimate was less or more than
actually occurred. This is illustrated in Table 5-17, using index numbers for comparative
purposes.

Next Year 1 Year Later
Current Est. Actual New Survey Est. New Survey
Increase Rate vs. Co. Increase Rate vs. Co.
Survey 107 8% 8% 115.6 8% 124.9
} 4.1% } 4.1%
Company 100 11 11 111.0 8% 119.9
Table 5-17. Structural change, company vs. survey community

If the first year’s actual increase for the survey community were 9 percent instead of the
estimated 8 percent, then the company would adjust the ranges by 9 percent the following
year (8 percent for the estimated future growth and 1 percent for the adjustment to last year’s
estimate). If the actual proved to be 7 percent, then the new adjustment would be 7 percent
using the same logic.