3 Employee Remuneration Factors & Example Calculation
By Brendan Lys ·
Remuneration very much has its own language, so as we work through this topic I’ll introduce and outline a number of different key terms – understanding these terms is critical to your understanding of this area of HR.
The short version
Remuneration is essentially determining how much you as an employee get paid – the salary or wage you receive in return for your time/skills/experience. Often HR Professionals within this function will also monitor/develop and deliver the benefit packages that employees receive, these can include issuing of company shares, health and/or life insurance, discounts on products which are sold or manufactured by your employer.
The long version
I worked in remuneration for a good number of years, and while I have experience across a wide range of generalist and specialist HR areas (including recruitment & selection, change management, workforce planning and a few more for good measure), without doubt remuneration is one of the most fascinating and interesting areas I’ve worked in yet.
Remuneration starts outside of HR, it actually starts with the owners of the business or with the Board of Directors (often a subcommittee of the board of directors – typically called the Remuneration Board/Committee).
It starts at this senior most level because it is so central to the organization, both in terms of viability of the business (payroll costs are for most organisations the single largest cost), and where the organisation positions itself in the employment market – which segway’s nicely into the first key term we’ll look at.
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1. Market lines (position in the market)
I think most of us will be aware that some employers pay well, some pay poorly, and some are okay, in regards to remunerating jobs in comparison to their competition/sector. This is not done in error by organisations, organisations don’t simply pay more or less because they don’t know what their competitors are paying, this is about positioning themselves in the market. In remuneration there are three pay or market lines, they are:
• Trailing the market (alternatively called the ‘lower quartile’) • Meeting the market (alternatively called the ‘medium’) • Leading the market (alternatively called the ‘upper quartile’)
What these terms refer to is where in the market the organization will pay.
An organization which is trailing the market is paying less than the going rate for its employees, while an organization which is meeting the market is paying the going rate for its employees, and finally an organization which is leading the market will pay more than the going rate for its employees.
So let’s look at three examples of where organisations might choose to pay at these different market lines – and remember in all these examples the key components are affordability for the organization, and the organisations ability to attract talent:
Trailing the market
When organisations trail the market they’re essentially saying to employees “give us your services now at a discounted rate, and we’ll deliver you greater value at a point in the future”.
It’s quite common for tech start-ups to pay below the going rate, and this works well in terms of affordability for the business, with the potential for employee’s through share options etc. to enjoy greater financial reward later on should the start-up be wildly successful and/or be either bought out or become a listed company with publicly trade-able stock.
At the other end of the spectrum, often very well-known companies will trail the market, with the payoff to employee’s being greater career opportunities leveraged from working at that particular company.
We can all probably reel off about a dozen well known and respected companies that we would work for at a reduced rate, in the belief that gaining experience with that company will enhance our career later on. In both examples, the employee is trading their time/skills/experience for a greater reward at a later date – however it is relatively high risk for both employers and employees. The risk for employers is that they are paying too low and failing to attract the talent they need, while the risk for employees is that the reward never comes.
Meeting the market
Organizations that pay at the market rate – or meet the market, do simply that, they pay the going rate within their sector and/or part of the country for the roles they employ to.
This is where the majority of employers pay, it carries the lowest risk for both employers and employees, and it’s easy to manage in terms of a remuneration strategy.
Leading the market
This is a really interesting one. Not that many organisations lead the market – often it’s unnecessary and also unaffordable to do so.
There are however some instances where it is attractive for an organisation to lead the market. I’ll talk about the two most common, one is for a new company to attract talent very quickly, while the other to assist a company in gaining a reputation as an employer of choice – that is somewhere where people want to work.
So a company which is new to that geographical territory will often lead the market to gain the talent it needs very quickly (often in tandem with headhunting of identified talent , an example might be a multinational company starting a new subsidiary in a new country or territory – it makes financial sense to lead the market in order to attract talent quickly and establish themselves in that new market.
The second example is around reputation building – particularly in a tight labor market where unemployment is low, organisations will lead the market in order to establish themselves as an employer of choice, which then assists them in gaining the talent they require. The risks for this one are all on the employer, leading the market is a high stakes gamble.
Changes in both the employment market and in the company’s market (that is where it delivers or sells its services/goods) can leave a company paying far more than it needs to for talent, alternatively it can work extremely well in terms of attracting talent and reputation in the market.
I should at this point mention market position isn’t one or the other, most organisations will pay at two market levels dependent upon the employment market for the particular skills the organization requires.
As an example most employees will be paid at the market rate (the employer will meet the market), with a very few roles being paid above the market (or leading the market).
We’ll cover role sizing next, but it has relevance here with leading the market for some roles. So roles are sized via a points system, with roles of similar size being paid at a similar remuneration level, however in some circumstances this doesn’t work with some roles.
Let’s take two roles that have both been sized at 608 points, one of these roles has a shortage of talent while the other role doesn’t – however both roles are sized the same.
For the role that has plenty of available talent the organisation would meet the market, while for the other role which has a shortage of talent, the organization might select to lead the market – both in order to retain current employees and to attract future employees.
I should also mention that as market or affordability conditions change, some roles will move from being paid above the market to being paid at the market – and of course the same applies with some roles moving from being paid at the market to being paid above the market.
In practice this is achieved through remuneration reviews, those who formerly where paid above the market will see a reduction or slowdown of pay increases, as the market catches up to their current remuneration (with inflation and other factors it typically takes a couple of years for the market to catch up with the pay rate of someone who is being paid above the market).
2. Role sizing
Role sizing is about translating a job description into a numerical value, for the purpose of identifying a remuneration level for that role.
Essentially an organisation will have a list of roles with a numerical size allocated to each role, these roles will have a corresponding remuneration value.
So this list of roles starts from the lowest sized role right up to executive level (often it excludes the CEO role as this will be addressed separately by the owners or board of directors, with advice often gained from remuneration specialists who specialize in executive remuneration), and next to each and every role size will be the remuneration level the organisation is prepared to pay for each – here’s a factious example of one:
Hay points (role size)
Remuneration (mid point)
*You’ll notice with the General Manager role in this example is being paid at the upper quartile (UQ) or is leading the market. And often it is expressed as simply as this, with the exceptions being marked – in this example most roles are paid at the medium level (or meet the market) so only those who are paid at a level different to this are identified.
There are a number of different sizing methodologies, the Hay method was developed by Ned Hay, and is the one which most others take their lead from. As it’s both the original and I think the best method (although some sizing methods suit some industries better than others), I’ll outline sizing using the Hay methodology.
The sizing is carried out across three areas, these are:
Each of these assists in determining the next, for example a role which has low know-how requirements, can’t by definition then have a high problem solving requirement – this would require the individual(s) within the role to have less knowledge that the problem solving component of their role requires.
3. Position in Range
You’ll notice in the table above that I made the notation ‘mid point’ in the remuneration column, this is because positions have salary ranges attached to them.
In our main remuneration spreadsheet or record that holds all the role titles, their size, and the remuneration amount, the remuneration amount is always quoted as the midpoint or 100%.
Stay with me this will make sense very shortly.
Roles have a remuneration range – that is to say a salary range that the organization is happy to pay, the purpose of this range is to take into account having people of different abilities or performance levels within the same position.
The remuneration range is typically 80% to 120%, this provides hiring managers some room to move both when making an offer to an applicant, and also when giving a pay increase.
So as an example, the Team Leader role in the table above, while the mid point is $100,000, individuals within this position will range in remuneration from $80,000 (80%), through to $120,000 (120%).
Position in range is a great tool for people working in remuneration, it can act as an indicator of where the organization may be out of step in the market for that position.
As an example lets say we have a team of five Financial Analysts, all of whom are paid between 112% and 120% of range, on further investigation we see from their performance ratings (most remuneration people have access to both remuneration and performance details of employees) we can see that they are all good or average performers.
As a remuneration person this will raise a red flag for us, it indicates that potentially we’re paying up into the higher remuneration ranges for average employees – potentially the market for Financial Analysts has moved from the medium pay line to the upper quartile pay line, so we would investigate this further.
Organizations don’t really want to see people being paid at 120% of range or over, this isn’t because organizations are cheap, but rather the ability to reward high performers with salary increases diminishes and the potential is that high performer paid at 120% of range will start to look for another job. Regardless of how fantastic of a performer a person is, their position is only worth a certain amount.
Lets use Steve Wozniak (co-founder of Apple, technology guru etc) as an example, as fantastic an engineer and technology guru Woz (as he is known) is, if we put him into a low level IT help desk role he’s only worth so much to the organization in that role, we simply can’t pay him the many millions of dollars a year he is worth, because he isn’t in a position to return that value to the organization.
And this sometimes is something that people struggle with, the organization is paying you for the value you can provide them in your current role.
Good remuneration people will keep an eye on position in range, and will often have conversations with managers regarding promotions and moving high performers who are paid high in range across to other roles that will allow them to deliver further value – and also enjoy additional salary increases.
So those are the fundamentals of remuneration, identifying where in the market the organization is going to pay, and having a method of aligning the many roles of the organization to that market positioning and sizing the roles.