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Pay Decisions Overly Focused on External Benchmarks
Shift from ‘what’s the market pay’ to ‘what’s the impact on the business?’

By Stephen Miller, CEBS  7/3/2012

Many organizations’ pay decisions may be  unbalanced because they are too focused on external comparisons. Instead, they should spend more time looking internally to measure the actual business impact of their pay practices, according to compensation specialists who analyzed the results of the 2012 Metrics and Analytics: Patterns and Use of Value survey.

Conducted in March 2012 by WorldatWork, an association of total rewards professionals, and Mercer, a consulting firm, the survey included responses from compensation professionals at 560 organizations in North America.

Among the key findings: most respondents use less sophisticated techniques such as benchmarking among internal and external peer groups (95 percent and 90 percent, respectively) and ongoing reporting (87 percent) to make pay decisions in their organizations. Using more sophisticated analytical techniques such as projections, simulations and predictive modeling are significantly lower at 80 percent, 64 percent and 43 percent, respectively. 

Basic Analytics Remain Most Common
Within the compensation function, organizations are more likely to use ongoing reports and internal and external benchmarking to guide their decisions, as opposed to more sophisticated techniques such as projections, simulations and predictive modeling.

Type of analytics

% that use this method

Internal benchmarks

95%

External benchmarks

90%

Ongoing reporting

87%

Projections

80%

Simulations

64%

Predictive modeling

43%

Source: WorldatWork and Mercer's 2012 Metrics and Analytics Survey.

Notably, this sizeable difference between external benchmarks and internal measures exists even though compensation professionals believe they have the ability and expertise to effectively use high-end analytics. More than two-thirds (67 percent) of respondents indicated that they possess the skills to perform sophisticated analytical techniques.

“The folks who determine how a company’s employees should be paid have always existed in a data-rich environment. But what we’re seeing now is the emergence of a whole new level of data and analytics around pay, and it’s happening very quickly,” said Ryan Johnson, vice president of publishing and community at WorldatWork. “The key question is shifting from ‘what does the market say we should pay this individual?’ to ‘what is the impact of this pay decision on the business?’” Johnson noted.

“A disconnect exists between the abilities and outcomes of the comp function—comp professionals are relying heavily on less sophisticated techniques for pay decisions, yet clearly have the know-how to use more involved methods,” added Wendy Hirsch, a principal at Mercer. “More sophisticated analytics allow organizations to make better, more fact-based decisions. It’s ironic that a data-rich function like compensation would risk being ‘left behind’ as internal labor market analyses and fact-based decision-making become the norm in other areas of HR,” she commented.

Metrics and Analytics

While 47 percent of respondents have one to two full-time employees responsible for HR-related analytics and three-fourths (76 percent) said their top executives and HR leaders have requested workforce projections, approximately half of compensation professionals say they lack confidence in data regarding education, competencies and investments in training. (An online chart shows survey results relating to Data Relevant for Workplace Analytics.)

Driving Business Performance                                                

“In a true total rewards environment, key variables reflecting and affecting workforce capabilities like education levels, competencies, and training and development are absolutely necessary to determine the efficacy of rewards,” said Haig Nalbantian, a senior partner at Mercer. “Organizations focusing only on the motivational aspect of rewards and neglecting the broader effect rewards have on securing the right workforce—what economists refer to as the ‘selection effect’—are being short-sighted about the role of rewards in driving talent development and business performance. They’re missing half of the equation, sometimes the most important half.”

Going forward, compensation professionals recognize that more sophisticated analytics can provide them with greater insights into the effectiveness of their overall rewards strategy. According to the survey findings, compensation professionals would like to be able to:

Assess whether their rewards strategy effectively motivates and engages top-performing employees and to determine which elements of their rewards strategy effectively motivates top-performing employees (cited by 57 percent of respondents).

Assess critical drivers of employee retention (46 percent).

Determine whether current sources of talent will fulfill future business needs (40 percent).

“To effectively implement a total rewards philosophy, compensation practitioners must embrace a real culture of measurement—one that drives them to work with a broader set of data and utilize causal modeling methods powerful enough to address the complexity of the reward decisions with which they are charged,” said Nalbantian.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Articles:

Maximize Performance Pay, Comp Surveys, HR News, June 2012

Make Way for Variable Pay, SHRM Online Compensation Discipline, June 2012

Analyze Compensation Programs to Reveal Business Risks, SHRM Online Compensation Discipline, April 2012

Building a Market-Based Pay Structure from Scratch, SHRM Templates and Tools, April 2012

Align Pay with Business Priorities to Reap Rewards, SHRM Online Compensation Discipline, June 2011

How to Use 'Carve-Outs' to Truly Pay for Performance, SHRM Online Compensation Discipline, June 2011

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