It’s no secret that getting compensation right gives your business a competitive edge in hiring and retaining top talent. But defining what “right” is requires employers to wrestle with a host of questions.
- “What companies should we be comparing ourselves to?”
- “How often should we look at market data?”
- “Is this comp data reliable?”
- “Is it time to build our own salary ranges?”
Getting stuck trying to answer these questions creates real risk for your business, as you slow down your hiring process and compromise winning top talent, struggle with pay transparency, reduce retention, and possibly even create inequitable pay practices while you try to define and communicate your compensation strategy.
At the core of these queries is a fundamental question: what’s the difference between market data and salary ranges? The first is a source of compensation data. The latter is a compensation decision.
In this blog, we’ll explore the differences between market data and salary ranges, identify which strategy is best for your business, and explain how OpenComp Range Builder (part of our Design Studio solution) can equip your organization with professional-grade salary ranges in just minutes.
The current (broken) state of compensation planning
In recent years, many businesses have looked to annual market surveys to price their jobs. The growth in availability of broad market data has made it the most attractive option for most businesses to quickly make decisions, as benchmarking against a large dataset gives you a north-star to target, making it easy to pinpoint a specific number to offer candidates. However, doing so has some major drawbacks. Broad market data can:
- Over-index towards companies that don’t look like you
- Leave you in the dark about how to adjust compensation across a career path, and, perhaps most importantly
- Lead you to benchmark what businesses were paying in the past, not what they are willing to pay today.
We see how well this approach is working: women still make $0.82 to every dollar that men do. And that difference has not budged in decades. Today, as companies grapple with complying with pay transparency legislation and employee demands, they need a new way of approaching compensation. More specifically, they must stop conflating two critical items: the source of data with how that data is used to drive decisions.
Four potential sources of compensation data
The reality is there are four potential sources of compensation data:
- Market segment compensation data
- Company specific pay data
- Role specific compensation data
- Individual level pay data
When selecting a compensation data source, employers must make a direct tradeoff between “ease of access” and “precision of outcome”. For example, while compensation data is easy to access, it is not very precise. Individual data is difficult to access but is highly precise. The precision of compensation data generally follows this schema: Market segment compensation data > company level compensation data > role specific pay data > individual level compensation data. And when combined, compensation data sources can produce a much deeper level of precision than when they’re used on their own.
While you can use market data to establish pay bands quickly and easily, which is great news for a lot of companies, the pay bands are far less precise than they would be with company level data combined with pay data. By not using company-level compensation data, businesses create potential pay inequities, bias, budget overruns, and unnecessary dilution — all of which have material impacts on company runway. In contrast, developing company-specific pay bands, by using company data AND market data, industry leaders sidestep those negative outcomes and create a much more precise set of compensation guidelines for their company.
OpenComp’s Market Pulse solution avoids many of the pitfalls of traditional market data by delivering data that is relevant to your specific organization, indexed and normalized with artificial intelligence, vetted by compensation experts, and constantly refreshed. But even then, with a hyper-competitive labor market and rapidly fluctuating compensation practices, it’s becoming more and more apparent that businesses should consider switching to pay bands for a strategic boost sooner rather than later. Pay ranges deliver a host of benefits to your business that go beyond simply improving your chances of hiring top talent, delivering stability, pay equity, and flexibility where market data cannot.
Three types of compensation decisions
Regardless of your compensation data source, they can be leveraged to drive three types of compensation decisions:
- Plan design - this includes determining pay bands and is where mistakes are made most often
- Offers and adjustments
Decision-making is where the difference between market data and pay bands becomes apparent. While market data is a compensation source, pay bands are a plan. They are guardrails that establish how you’ll use compensation strategically day-to-day, and nailing your planning is critical for making good decisions.
But planning without compensation tools is tedious and error-prone, as you have to bring together disparate sources of data and manually merge them with siloed spreadsheets. The complexity and steps involved in plan design aren’t suitable for scaling businesses, who need to move quickly in order to grow effectively.
OpenComp Design Studio overcomes the pain points of traditional compensation plan design by automating the unification of market, company, role, and individual level data, and delivering it into AI/ML driven comp planning tools built off of decades of compensation experience. Now, you can quickly and accurately build expert-level compensation plans in a fraction of the time that it used to take.
What is market data and when should employers use it?
Market data is the most straightforward way to report and measure compensation. Compensation data shows the spread of compensation for a given position and level, based on a group of companies who report their employees’ compensation, which allows you to benchmark the compensation for your roles directly to a percentile. When you use market data, you tie the compensation for a given role to a specific cash and equity value.
Within OpenComp, market data can be accessed in the Market Pulse solution. Unlike traditional survey providers, Market Pulse receives compensation information directly from OpenComp’s customers via Human Resource Information System (HRIS) integrations. This offers a number of distinct advantages over traditional market data providers, who often utilize surveys that can be up to a year out-of-date before they’re published.
Market Pulse continuously ingests data from our thousands of customers, which is then indexed and normalized via artificial intelligence, and vetted by compensation experts. The result is market data that is as up-to-date as possible, giving you a clear picture of what today’s compensation looks like. Moreover, your default market data is cut to be representative of companies that are comparable to yours, so you never have to worry if the market data provided is relevant to you.
Utilizing market data is the rawest form of compensation planning, and is suitable for younger businesses that may be making their first hires. When promotions and merit increases aren’t top of mind, and your total employee count is low, utilizing market data can be the fastest way to decide on what compensation to offer a critical first hire.
But as you grow, managing compensation for every single employee using market data becomes laborious. Market fluctuations and ad-hoc deviations away from your benchmarks leave you open to issues such as inconsistent offers and pay, excessive cash burn and over-dilution, and lack of a fair and scalable framework for career progression.
Previously, market data’s popularity was rooted in the fact that it had a distinct advantage in requiring significantly less work to obtain and implement than pay bands. But that’s since changed with the launch of OpenComp Range Builder. Today, salary ranges are more accessible than ever, and they’re likely a better choice for your organization than you realize.
What are pay ranges and when should they be used?
Unlike market data, pay ranges (or salary bands) are a set of boundaries that determine a range of possible compensation options for a given role. Pay ranges are rooted in market data, but represent a more refined strategy, where a minimum, midpoint, and maximum are all articulated for a role and level. And none of those numbers are arbitrary, they’re based squarely in your business’ compensation philosophy, calculated consistently across your business, and represent deliberate choices as to how your company wants to use compensation strategically.
Pay ranges deliver a host of benefits to your business.
- Pay equity. By creating a framework for what you’re willing to compensate for a given role, you can ensure pay equity by creating easy-to-follow guardrails for your minimum and maximum compensation.
- Pay transparency. You can increase your transparency, both to new hires and to current employees, by communicating how their compensation may increase throughout their career progression.
- Simpler compensation administration. And, you simplify administration by eliminating guesswork, increasing the accuracy of financial projections, and avoiding reactions to raw market data jumps.
For most businesses, the benefits of adopting pay ranges can be felt shortly after you’ve made your first hires. Pay ranges will provide you with a solid framework for making pay decisions quickly, keep you aligned to your compensation plan, and avoid inconsistent offers as your scale. But often businesses wait much longer than they should before creating and implementing pay ranges.
To help understand why, it’s important to understand what pay ranges are not. Pay ranges are never a sliding scale, nor are they simply a spread across market percentiles, which is why the biggest barrier to obtaining and implementing pay ranges has been the cost and time barrier needed to construct them. Traditionally, businesses who wanted to implement true pay ranges were required to either be mature enough to hire compensation specialists to build their plan, or hire compensation consultants at a hefty rate. Either way, you were often left waiting for months to obtain a pay range structure that also required constant maintenance.
Today, obtaining and maintaining pay ranges across your entire organization can be completed in minutes, thanks to OpenComp Range Builder.
OpenComp Range Builder: Pay ranges in 3 clicks
Pay ranges are the most important tool you can give your team, but they haven’t always been accessible to every business. Powered by artificial intelligence built from decades of compensation experience, and the most advanced machine learning available in compensation technology, OpenComp Range Builder can produce professional-grade pay ranges for any organization, whether start-up or enterprise, in just three clicks.
Range Builder ingests your compensation plan to automate range creation across job families and levels for your entire organization. Simply connect your HRIS, choose your cash and equity balance, geographic pay policies, and preferred range width, and have ranges built for you in minutes.
Range Builder’s also simplifies the maintenance and administration of pay ranges as your organization scales. Updating your pay ranges for your entire organization takes just the same three clicks as your initial set-up, and tooling for automatic out-of-range identification makes keeping employees on-policy as easy as possible whenever you make changes.
With OpenComp Range Builder, there’s no excuse for businesses to not have pay ranges, regardless of size or maturity.
Pay bands vs. market data: It pays to know the difference
Both pay bands and market data have their uses for your organization, but using them well requires a complete understanding of when they’re appropriate for your organization, and how they can deliver the most value to you.
Market data, in its raw form, provides a simple and quick way for brand new businesses to determine compensation for their first hires. Compensation based directly on market data is easy for employees to understand, easy for businesses to communicate, and appropriate for a business that’s hiring just enough to get their wheels in motion. However, its usefulness fades quickly as your company begins to scale, run merit cycles, and promote high performers, and eventually using market data it may cause more problems than it solves.
For most businesses, pay bands should be adopted shortly after you’ve closed your first hires. Market data will continue to be useful as the resource to power the construction of pay bands, but making decisions off of raw market data quickly becomes tedious and laborious. Pay bands are the key to successfully scaling your business, by delivering benefits such as:
- Pay equity. Pay bands create an easy-to-follow framework for compensation.
- Pay transparency. Pay bands allow you to discuss compensation freely, without divulging individual salaries.
- Clear communication. Pay bands help you articulate career progression to candidates and current employees.
- Simple administration. Pay bands eliminate guesswork, and allow you to make quick and easy decisions.
- Better use of market data. Pay bands make sense of market data, so you act on logic, and not anomalies or raw market data jumps.
Owen Bitas is Manager of Product Marketing at OpenComp and has held roles at Concentrix Catalyst, Honda, and Rover.com. Connect with him on LinkedIn here.