Deep Dive into the Corporate Salary

I wrote this post because I thought it would be beneficial to show a glimpse of what happens behind the scenes when it comes to corporate salary.  If you’re new to the corporate world then the makeup of the corporate salary may be mysterious. Hopefully this post will help open your eyes to how salaries are determined, budgeted, and what considerations go into giving you your salary, and raise. I found that by knowing how pay is determined helped me to understand how to ask the right questions, thereby maximize my chances of getting what I want.

There is good chance that your company has different terms or phrases for similar aspects to salary. The point here is to not get hung up on semantics but rather acknowledge that your company likely has a system.  If you learn anything from this post, it is to approach your salary in a systematic way and learn how to ask the right questions, at the right times.

This post will provide the basics for raises, promotions, off cycle pay increases and variable pay. Each of these topics will be expanded in other posts.

Post Breakdown…

• Components of pay
• Base Pay
• Market Data
• Compa-ratios (this is probably the most important section of this post)
• Variable Pay
• How to use this post

Components of Pay

In a multidiscipline firm with lots of job titles over multiple geographies, the company probably has a pretty detailed process for breaking down salary. The companies I worked for had salary codes. The codes themselves appear to be a jumbling of alpha-numeric text, the trick is to learn what your salary code is, then enquire what the individual components mean.

Here is an example of how human resources (HR) would view a junior engineer: EN09P1C

The ECS pay grade is a 6 to 7-character code and provides 4 key data elements of a position.

Each of these components plays a separate role in the makeup of your salary. Because pay grade and pay line are pretty self-explanatory, I’ll focus on the two main factors, professional category/job family and geographic code. You can likely find your salary code in your company virtual office, perhaps on your paystub, or even on your offer letter.    

Professional Category or Job Family

In my example, the professional category or job family is the first part of the salary code. The job family is where the company houses a subset of other disciplines.

The graphic below shows a very general comparison to the various job families.  Corporate or management folks have the biggest range with the highest salary ceiling, followed by professional staff (staff with speciality degrees or advanced degrees), all the way down to administrative staff.

Understanding where you fit in this hierarchy is the first step to understanding your pay and your potential for how much more you can make.

Where you live and its effect on your pay

If the company spans the country or globe, then chances are they adjust salary based on the cost of living for a given area. They do this by purchasing market data (more on that below).

Here’s a table that shows ranges of salaries for the same exact position but in different geographies across the US.

Professional Pay grade
Grade Code	City Code	Structure code	Min Annual	Mid Annual	Max Annual	Pay Line
PR.06	A (Fort Campbell)	PR.06.P1	$51,550	$70,875	$90,200	P1
PR.06	B (Savannah)	PR.06.P1	$55,050	$75,700	$96,350	P1
PR.06	C (Salt Lake City)	PR.06.P1	$58,600	$80,550	$102,500	P1
PR.06	D (Denver)	PR.06.P1	$62,100	$85,375	$108,650	P1
PR.06	E (Washington D.C.)	PR.06.P1	$65,000	$89,400	$113,800	P1
PR.06	F (San Francisco)	PR.06.P1	$69,700	$95,850	$122,000	P1

As you can see, everything else being equal, someone living an “A” city like Fort Campbell, Kentucky not only likely makes less than someone in an “F” city like San Francisco, but they are also bracketed in a lower range.

Types of Compensation

The HR departments I have worked with generally divide compensation into: base pay and variable pay.

Base pay

Think about base pay as what you see in your paycheck week in and week out. Base pay is further determined by your position in the company, that is whether you are junior, senior, technical or managerial and so on.

As you’ll see further down in this post, a company will administer base pay using a pay structure comprised of a series of salary structures, pay levels, and salary ranges. The salary ranges used by large companies are often based on independent market data. Companies that are serious about hiring and retaining the best talent will review their salary data at least annually to make sure they are competitive.

Another significant factor that affects base pay is location. Salaries of the same position can vary greatly between countries and within distinct geographies within a country.

The key take away here is “competitive range”.  I’ll dive in to that further.

Base Pay increases

Increases in base pay are typically seen as needed to attract, reward, and retain people. Base pay increases typically come during an annual review process, but also come about during promotions or off-cycle increases.

The basis for handing out base pay increases are primarily based on individual performance results compared to goals during the company’s annual review process. It can also be adjusted based on position within the employee’s assigned salary range (compa-ratio) or peer comparison.

Annual salary planning budgets – funding

So how does the company budget for any given years’ salary increases?

In my experience, the company pays for market surveys to determine a competitive annual “merit increase” budget. Keep in mind that merit is not cost of living it’s a raise based on the merits of your work.

Companies will also account for an equity budget. The equity raise is used to cover base pay adjustments throughout the year for promotions, equity, market conditions, or at risk employees. I have also used equity increases to get someone closer to the salary range for the next position, thereby setting them up for promotion.

Annual Salary Planning Budgets – Distribution

How do managers allocate salary, specifically base pay?

If a year’s budget is 3% of all salaries, the 3% does not equate to an average increase. That percentage has to be adjusted based on a merit matrix that takes into consideration: annual review, compa-ratio, peer equity, experience level, available funding, etc. are all critical factors managers consider in determining your increase.

Market competitiveness

One of the ways companies determine salary ranges is by paying for market data. By assessing what pay ranges are generally accepted for a given market and geography, the company can design and modify salary structures, figure out an acceptable rate of salary progression within a pay structure, determine the types and levels of benefits to be provided, and identify special cases where a market premium may be needed for specific roles. Lastly, market data can be used to measure salary movement, incentives, bonuses and other forms of performance related pay.

Where does this market data come from?

I’m sure this post falls short of all the various sources, but in my world here are sources of market data I have used:

• Compensation surveys (annually) from reputable market data providers e.g. Mercer, Hewitt, Hay Group, Towers Watson, etc.
• Club surveys – these are closed group of organizations that exchange information
• Government data
• Some additional sources may include anecdotal information e.g. Network of Professional, Compensation contacts, etc.

….But beware

Market data from recruitment agencies and self-reported websites

Although market data can sometimes provide a good ‘feel’ of the market, there are severe drawbacks to it. The data is often not collected in a professional manner (no real job matching, no quality assurance, no way of ensuring the participant is reporting accurate information); data is sometimes provided on ad-hoc basis resulting in a less than consistent database.  The data may not be based on statistically significant samples; data reporting and analysis limited.

The data may rely on employee self-reported data (as opposed to genuine data reported by neutral and skilled HR Professionals used to survey participation and job matching methodologies). There is no thorough database cleaning (as opposed to robust job matching processes and methodologies used by professional survey providers).  Data can generally be inflated (e.g. conflict of interest with recruitment agencies).

These same issues are present for websites that report salary data. In my experience these sites are typically skewed high.

So what is a better way to gauge your compensation? The compa-ratio.

Compa-Ratio Equation

So how do companies determine if your pay is within a competitive zone?  The compare ratio or compa-ratio.

The compa-ratio is a simple calculation that tells HR where an employee’s salary is relative to a mean for a salary range.

For a salary range of $30,000 to $60,000 the median salary is $45,000.  So, if you make $48,000 then the compa-ratio calculation goes like this:

$48,000 (your salary) ÷ $45,000 (median for your range) = 1.07.  Your compa-ratio is 1.07. In the span of competitiveness, you have the competitive zone, target zone and highly competitive zone.  So a compa of 1.07 would put you in the target zone.

The companies I worked for typically liked to keep people in the middle zone, close to the median salary for a given range.  Let’s say you have a compa-ratio of 1.07, meaning you were near the top of your competitive range. In this case you may need a promotion if you are looking for a meaningful raise.

Increases

Annual Review

The annual review is probably the most common time to get a pay increase. The companies I worked for had a structured process for not only the annual review but also the salary increase associated with ones review. For HR, the process started in September, for supervisors October, for employees November. By mid-December the annual review and salary increase had been determined, reviewed by HR and senior management, and ready to be communicated to the employee.  In other words, by the time you are communicated your raise at the end of year review, it was too late to go back and ask for more money or complain that your raise isn’t big enough. If you are in a place where you suspect you will get a 3 percent raise and you want something more, it’s best to start as early as possible. Make your intentions clear and set the stage for what you want.

Off cycle increases

An off-cycle pay increase is when more pay is given at some random point during the year, outside of the usual annual review process. The off-cycle increase often comes about as a knee-jerk reaction to retain an employee, but sometimes can come when HR determines someone is too far below the competitive range for their salary.  Sometimes an equitable increase is needed. Sometimes specialized, unique skills as required for the position.

Here’s a tip. If you are a solid performer and have been given what you perceive to be a pretty low or average raise for the past few years, then there could be a chance you are paid low relative to your peers who are doing the same or close to the same job.  I stress here, solid performer, if you are having any performance issues or not seen favorably by your management, then you’re better off finding a new job (if you want a meaningful raise). Back to the solid performer, if you’ve had these average increases, ask your manager for a salary review. If they are smart and know they want to keep you on board, then they’ll do or request HR to do the salary review.

Promotion Increases

Promotions are given when someone moves to a position considered to have a greater level of responsibility, impact or scope, as defined by their job description. The promotion justification should clearly outline the business need, as well as how the position has increased in complexity, scope of responsibility, and accountability.  Once the business case for a position with increased responsibilities has been established, an employee may be eligible to receive a promotional pay increase, which is determined by the employee’s manager and HR.

Sometimes an equity increase along with the promotion increase is needed. The equity increase may be needed to get the persons salary into the new competitive zone for the level to which they have been promoted. Typically, pay should not be below the minimum or above the maximum of the appropriate salary range.

Where promotions go wrong is when someone wants a promotion, is not deserving of a promotion, but gets the promotion because management does not want them to leave. Sometimes it’s best just to let people go.

Variable pay

Think about variable pay as incentive pay. Below are examples on how or why a company uses variable pay:

Create and enforce a pay-for-performance culture

• Example: you get a bonus if you are a high performer.
• Create incentives for people that advance the company’s business strategy
• Example: you get a bonus if you meet a goal tied to performance of the company’s business.
• Align with the competitive market
• Example: pay out bonuses to attract and retain the best talent.

Variable pay, in essence, is used to motivate, reward, and retain employees to achieve business results.

Types of Variable Pay

While base pay is pretty universal across many industries, variable pay can take on lots of forms. I am in no way the variable pay expert, but I can write about what I know.

Variable pay can take the form of annual or long-term incentive plan or it can be a short term incentive. Here are some of what I would consider annual or long-term variable pay.

• Annual bonuses (based on business performance)
• Performance bonuses (based on someone’s personal performance or achievement)
• Company stock  (either business or personal performance)
• Percent equity (typically for executives and more typically for

Here are some short term examples:

• Spot awards
• Milestone awards

Of course the possibilities are many with variable pay. Some people may consider non-qualified deferred compensation (NQDC) to be variable pay. I think NQDC is worth of its own post though so I’ll hold off on getting into that here.

Each of these types of variable pay will have their own set of rules or qualifications. Chances are that if you are junior or mid-level in your career or you are not in a management or professional/technical career path you may never even know about your company’s variable pay program. The more senior or key you are to your company, the more interesting variable pay can get.

Here is an example of how one of the companies I worked for determined annual bonuses for mid-level and senior managers.

• Eligibility Requirements
• Salary level 8 and above
• Role: Management (MG) or Professional (PR)
• Target population: up to 40%
• Overtime taken into consideration

So this is just saying that people in a high salary code (8 out of 12) that are in either the management or professional career tracks are eligible for a bonus. Then there’s the target population of 40 percent, so of all the people meeting this requirement, only 40 percent can get a bonus.

This 40 percent can be problematic in some ways. An issue I have come across on more than one occasion is if you are one level below the requirement for this style of bonus, there may be others already at that level trying to keep you from moving up.  Especially if they know you and your performance may be responsible for eliminating their bonus potential. Just be mindful of this when you start to make it known you want that promotion.

How to use this information

Often when someone wants a raise, the first place they go is one of the job searching websites to determine what they think to be a more appropriate salary, and often times these salaries are overstated. The bigger the company, the higher the chance that company has paid for market research and used this research in conjunction with internal data and statistics to derive its salaries.

If you ask for a raise, and your manager agrees to “look into it”, then they will likely turn to these internal data and statistics to determine where you fit in the overall spectrum.

Knowing your salary range in advance, and your compa-ratio, is probably the most powerful tool you have for pointing out a salary imbalance.  If you only take away one thing from this post, its: know the salary range for the position you are in and the next level up.

Here are just a couple of situations and how I have dealt with them.

Parting Thoughts

My intent here is to break down the various components of pay, show how a company derives its pay and provide some insight into a structured system for determining pay. There are many companies with many systems. I would bet they have different terminologies and procedures, but the point is they have a procedure.

If your company has a system like the one I’ve drawn out and if you wait until your company’s end of year process to air your grievances or displeasure at the size raise given, then you are doing yourself a disservice.  Learn the system and ask the right questions at the right time. So, if you are approaching a milestone or wanting to ask for a raise. Ask at het beginning of the year, when you establish goals. Try to negotiate a scenario with your manager where if you accomplish certain goals, you will be considered for higher compensation.  Keep in mind there is a good chance you will not get a 100 percent certain “yes”. In other words, if you establish that if you sell 100 units by November, then you get a big raise. Likely your boss or manager can agree in principle, for consideration, but not given an absolute “yes”. Don’t be too surprised by this, if it is a good company and you enjoy the work, just stick it out. A good manager will do their best to take care of you if you show that you are willing to take your career in your own hands and meet your goals.

One of the biggest take aways here is that the large corporations out there have a process and once that pay is established in that process, your changes of influencing the change you want significantly decreases.