Implementing a Market Pricing Methodology

Risk. Reinsurance. Human Resources.

Aon Hewitt

Talent, Rewards & Performance

Implementing a Market

Pricing Methodology

A Strategic Guide to Effective Compensation

Aon Hewitt Implementing a Market Pricing Methodology 1

Market pricing is the most common methodology used by organizations to

evaluate jobs. But as a compensation leader, you know market pricing can be

much more than that. You design compensation plans and pay structures based

on market pricing, make pay recommendations and even guide employee career

choices based on market pricing. Your use of market pricing inﬂuences the single

largest operating expense for any organization. You also drive the organization’s

ability to meet its long-term human capital strategy by ensuring your organization

can attract and retain the talent needed

When done well, market pricing can be a distinct competitive advantage to your

organization’s human capital strategy.

If you’re like most compensation professionals, you’ve racked up plenty of practical

experience with market pricing compensation, but the degree to which there has

been a thoughtful, well-documented approach to the choices being made varies.

The purpose of this report is to provide a strategic guide for when you are

implementing a market pricing methodology or just looking to enhance your

existing programs.

About is Report

Aon Hewitt Implementing a Market Pricing Methodology 2

The most basic deﬁnition for market pricing is that it is simply a method for valuing jobs. We look to

the external labor market and use salary surveys as a way to make sure we are paying our employees

competitively. But there is a more strategic role that market pricing can have that goes far beyond

that simple deﬁnition.

To lay the foundation for how market pricing can be more strategic, it is important to understand

the context in which market pricing has evolved. Over the last 15–20 years, there have been several

transformations related to human capital, but three in particular have helped set the stage for the

surge in the signiﬁcance of market pricing.

• The war for talent

• The changing social contract, and

• Availability of data

The War for Talent

The term ‘war for talent’ describes challenges organizations increasingly face because of shortages

in the availability of workers having the needed skills. Shifting demographics and the aging

workforce have changed the supply side of the labor market equation. At the same time, technology

and our relentless push for productivity improvements have driven changes on the demand side of

that equation.

Employers are now more creative and aggressive in attracting in new talent with needed skills.

Assessing talent and managing the existing workforce has also taken on new meaning.

Engaging in this war for talent means organizations want more ﬂexibility to make the business

decisions about new hire salaries or top pay for existing talent. Business leaders argue that the

economics of paying the salaries needed to attract and retain the top talent osets the business

risk of lost business opportunities caused by talent shortages.

Strategic Context for Market Pricing

Aon Hewitt Implementing a Market Pricing Methodology 3

The Changing Social Contract

The notion of ‘employment for life’ is long gone. No longer do workers start and end their careers at

the same company. In some respects, our labor market now operates much like a free agency labor

market like the one we see in professional sports.

Employees are much more likely to change companies and maximize their own career opportunities,

and pay. No longer can an organization rely on company loyalty for its workers to stay even when

wages are less than competitive. Workers will seek to maximize their career and earnings potential

and jump ship if they perceive disparities in their pay.

Availability of Data

Not long ago, salary surveys were published annually in hard copy only. Access to the data

was limited to just the company and even within the company, only a handful of compensation

professionals would ever see the survey results.

Advancements in technology make it easier for companies to both participate in salary surveys and

analyze published survey results. Survey sources are more plentiful. Companies now have many

more choices on data sources.

But this availability of data can be a double-edged sword. Not only do organizations have easier

access to survey data, but also employees themselves can now freely access a variety of data sources

all from the convenience of a mobile phone. The accuracy and validity of free data sources is always

subject to debate, but the point is that now employees have access to data like never before.

Employers now face increasing pressure to be more transparent in their communications about

pay. Getting in front of conversations about the pay data in a more transparent way creates a more

trusting and engaged workforce.

We believe that these transformative changes are here to stay and will continue to evolve.

Organizations will continue to have even greater market data needs and will continually reﬁne

the alignment of their market pricing methodology with their human capital strategies.

Aon Hewitt Implementing a Market Pricing Methodology 4

The range of decisions you’ll need to make when deﬁning your market pricing methodology

all stem from your organization’s strategic planning process. You should ensure there is a clear

connection between your market pricing initiatives and your overall human capital strategy,

as well as the strategic objectives for the business.

There’s no single right answer for whether or how to implement market pricing. Instead, you’ll need

to carefully consider the range of options and decide what ﬁts best for the strategic business

scenario. To illustrate this point, here are three hypothetical organizations in dierent industries

and facing dierent types of business and HR challenges.

Market pricing in the established manufacturing ﬁrm above is most eective if you recognize that

an organization with low turnover, modest growth and long tenured sta most likely just needs to

validate that their overall pay structure is competitive. Applying a pure market priced approach

and removing ranges/bands all together is not a good ﬁt with the business needs in that scenario.

Company / Industry HR Challenges

Typical Market

Pricing Implications

• Established

manufacturing company

in a stable industry.

Modest growth

• Low turnover

• Long tenured sta

• Increasing globalization

to oshore production

• Uses traditional grades / bands

• Evaluates jobs using both internal

evaluation and market pricing

• Uses market data to ensure overall

structure is competitive

• Needs to establish global job

leveling framework

• Young high growth

services business in an

expanding market.

• Moderate turnover

• Jobs & career paths

evolve rapidly

• Acquisition of industry

competitor

• Relies exclusively on market

pricing for job leveling and pay

recommendations

• Large employer in

service industry (retail,

hospitality, call center,

restaurant, etc.)

• High turnover

• Geographically dispersed

• Labor intensive business

• High percentage of low

wage workers

• Market priced pay structures

• Highly focused on start rates

• Geographic dierentiation

Market Pricing and Your Business Strategy

Aon Hewitt Implementing a Market Pricing Methodology 5

Understanding Labor Markets

Labor markets represent the sources for where you compete for talent. Since you are using a market

priced approach to attract and retain talent, it makes sense to understand “Where do candidates

come from?” and “Where do people go when they leave?” The most common way to deﬁne a

relevant labor market is to answer those questions along three dimensions:

• Industry

• Geography, and

• Size

While using those high-level dimensions works ﬁne for most jobs, deﬁning the labor market for the

most senior level executive positions involves naming speciﬁc peer groups of named competitor

companies. Still, the rationale for picking the set of named peer companies uses those same three

dimensions.

Labor markets will vary inside an organization based on groups of jobs, such as by job level or

functional area. For example, the following illustration shows an example used at large

manufacturing company located in a city in the southeast United States.

As shown in this illustration, the speciﬁc industry matters most for senior level jobs in the organization.

This is particularly true for the line operations types of senior leaders such as Engineering, Operations

and Supply Chain. Senior leaders of sta support functions (eg., Finance, HR, IT, etc.) may also be

industry speciﬁc, but it’s common to ﬁnd the labor market for those executives to be linked to the

other dimensions, such as size.

Geography may come into play at the senior executive level as we start to see more companies

expanding globally. The talent market for senior level executives has been expanding beyond just

a nationwide perspective.

Geography is much more important at the lower levels of the organization when thinking about the

labor market for production workers and support sta. At these lower levels, the rationale for the labor

market deﬁnition revolves around the distances we expect workers would likely travel to get back and

forth to work.

Industry

Executive

Manufacturing

Nationwide

Global

Revenue $10B –$40B

Management Manufacturing Nationwide

Revenue $10B –$40B

All Companies

Professional

All Industries

Manufacturing

Southeast US Region

Nationwide

All Companies

Nonexempt

All Industries Metropolitan All Companies

Geography Size

For more information

on executive level

peer groups, see our

PeerBuilder tool

inside CG Pro.

Aon Hewitt Implementing a Market Pricing Methodology 6

Size of the organizations in the labor market is the third common dimension used to deﬁne labor

markets. In the illustration provided, the labor market for the management and executive level jobs

is between $10 billion and $40 billion in revenue. Developing a range of revenue size is a common

way to think about the size of the relevant peer companies. When developing a range of size that is

reasonable, many organizations will look at other ﬁrms that are at least half their own size and no

more than twice their own size. In the example of the manufacturing company above, we can

assume that they are approximately $20 billion in revenue based on the range used of $10B–$40B.

Keep in mind that the matrix that you put together is general grouping. There will be functions or

even individual jobs where the relevant labor market needs to be dierent in order to be able to

attract and retain the talent you need.

Aon Hewitt Implementing a Market Pricing Methodology 7

Once you have mastery of the relevant labor markets, it’s time to think about the best sources of

survey data. The market for survey data is mature and there are many well-established survey

vendors. When selecting survey data sources, you should consider multiple criteria factors.

Participants

How well does the participant proﬁle from the survey vendor match up

with your industry peers where you compete for talent?

Jobs

Does the survey have the breadth of benchmark jobs? Is there a good

hierarchy of jobs?

Quality

What is the experience level and reputation of the survey vendor? Can

you trust that your data will be safe? Do you know the data auditing

process the vendor will follow to ensure high quality results?

Service

Will the survey vendor help you with questions you may have on job

matching or interpreting the results? Will they provide insights and

observations that help you use the results more eectively?

Compensation

components

What components of pay are included in the survey? With the trend of

incentive pay going deeper in the organization, it is critical to get a

clear picture of the total compensation package when evaluating

market data.

Geographies

covered

Whether you need global data or micro markets within the U.S., you

should ensure the survey has the geographical representation of your

relevant labor market.

Reporting

options

How much ﬂexibility will you have to slice and dice the published

survey results?

Cost

Think about the amount of your payroll budget that is inﬂuenced by

the insights the survey provides; does the cost of the survey deliver

good business value?

Survey Data Sources

Aon Hewitt provides

a broad collection

of compensation

surveys to serve

your relevant labor

markets

Aon Hewitt Implementing a Market Pricing Methodology 8

Survey Job Matching

The process of matching your jobs to the benchmark salary surveys serves as the foundation for

getting the pay recommendations right. Job matching can even have a direct impact on your

success in getting buy-in from both frontline managers and their employees. Because of this, you

should carefully decide the roles that various stakeholders will have in the job matching process.

It is important to decide on who will be involved in the job matching process, i.e.,

• compensation only,

• include HR generalists,

• include line management

There is no single, “right” way for you to address who should be involved. The challenge is to pick

the approach that ﬁts best with the HR and business strategy. Here are some likely trade-os of the

pro’s and con’s at either end of the spectrum of involvement.

An organization that strategically intends to push towards greater pay transparency should plan to

engage line management in the job matching process. This is a far more time consuming way to go,

but this approach pays dividends down the road as their participation in the job matching process

becomes the ﬁrst wave of communication / education about market pricing.

On the other hand, an organization that is using market pricing to validate the overall

competitiveness of the pay structure can be better served by a more expeditious route of simply

having compensation make all the necessary job matches.

Regardless of the approach you take and who you involve, there are some job matching guiding

principles you should articulate before you head down the patch of job matching. The table below

lists some of the guiding principles along with thoughts to consider for how you might address.

Compensation only

Pros Fast implementation Highest degree of buy-in

Cons Lack of buy-in Costly to train and implement

Compensation + HR Generalists

+ Line Managers

Aon Hewitt Implementing a Market Pricing Methodology 9

How many

survey job

matches are

needed?

The advice from most consultants is that you should always try to

have two or three job matches. Having multiple sources does

provide a larger sample and should give you more conﬁdence in

the outcome. Multiple sources will also smooth out anomalies that

may exist in the data.

Conversely, some ﬁrms are adopting the approach of only a single

job match. They align the job match to the best available survey

and then spend their energy on recommendations of how to ‘ﬁt’

against that single data source. The belief is that a single match is

easier to communicate as it eliminates the need to do any

manipulation to the data.

One of the dangers of setting a standard of always using multiple

matches is that you may ﬁnd yourself having one good match

identiﬁed, but then you are compelled to attach a second match,

regardless of its quality, in order to satisfy the objective of having

multiple matches.

How accurate

does a survey

job match need

to be?

The general rule of thumb is to look for at least a 70% match. This is

consistent with the guidance from most salary survey vendors during

survey participation. This way, the survey jobs is describing the vast

majority of your internal benchmark job.

An alternative point of view on this question though is to think about

the quality of the job match in terms of how well it describes the labor

market in which you are competing for talent. Is the survey job

summary reasonably similar to an advertisement that one of your

staers would apply to? Does it describe a candidate that you would

consider for an interview?

How do you

match hybrid

jobs?

Organizations are increasingly combining traditional benchmark jobs

and creating hybrid jobs. While this may be good for streamlining and

organizational productivity, it makes survey job matching of hybrid

jobs dicult.

All the more reason to consider the approach described above. Think

less about how closely the words of the survey describe what your

person actually does. Think instead of what jobs in the external labor

market best reﬂect the talent pool in which you compete.

Aon Hewitt Implementing a Market Pricing Methodology 10

If more than one

match is used,

how should you

handle the issue

of weighting?

The most common practice of weighting surveys is to simply have them

all weighted equally. Equal weighting makes sense when the various

surveys are relatively equal to one another in terms of the overall

quality of the survey, i.e., job match, participants, data scrubbing, etc.

There are times when it makes sense to place a heavier weighting on

one survey over the others. For example, one survey used may have all

of your direct industry competitors whereas the other two sources

provide a broader collection of general industry participants. You want

to consider a 50% weighting on the one with the greatest industry

representation and then 25% on the two remaining.

Dealing with

your jobs being

bigger / smaller

than what the

benchmark job

summary?

The words of the survey job summary seem to describe your

benchmark job, but the scope of the role either seems too big

or too small.

The more common approach to dealing with this scenario is to attach

either a premium or discount to adjust the survey data up or down.

An alternative approach is to not adjust the data, but rather have a

point of view about how your incumbents should be positioned

relative to the data.

Coming up with the best answer for your situation requires you to

consider which alternative is going to ﬁt best with your strategic

objective of the market pricing approach. If you need to create market

composites and validate the competitiveness of the pay structure, the

premium / discount approach is best. If you’re more concerned with

employee communications of the details of market pricing, then fewer

calculations to adjust the data may be easier to communicate.

Aon Hewitt Implementing a Market Pricing Methodology 11

Handling jobs

where there

just isn’t a

good survey

job match?

If the organization is implementing market pricing on top of a graded

or banded structure that already has established pay ranges, then the

answer is much easier. In those structures, you simply need to ﬁnd the

range where this job in question best ﬁts. Organizations using a

job leveling methodology are able to place jobs in the competitive

pay range without having to attach a survey job match to every job.

Organizations that are adopting pure market pricing will address this

from the perspective of the labor market and ask again, where are the

candidates coming from? And where are they going when they leave?

You can then look for a benchmark job that reasonably describes the

relevant labor pool instead of trying to match to the job duties.

How often

should survey

job matches be

re-validated?

Survey job matches should reassess anytime there is a signiﬁcant

change to the job. Other indicators that it might be time for a

reassessment is if turnover spikes higher than normal and/or

attracting new qualiﬁed candidates is unusually dicult.

Aside from those event-driven reasons, you should establish a set

schedule for job match validation, every 3–4 years. One way to

handle this is to conduct job match annual reviews for portions

of the organization. For example, if you complete one-third of the

organization every year, you would be reassessing the survey job

matches every three years.

Aon Hewitt Implementing a Market Pricing Methodology 12

While the use of salary survey data may seem tactical, there are strategic choices you should make

to not only ensure consistency but also to ensure the best alignment with the objectives of your

market pricing program. Market pricing, as we have seen thus far, allows you to be ﬂexible and

creative in your approach. You just need to be aware of the trade-os along the way and decide

what will provide you with the competitive advantage in the war for talent.

Using Survey Data

What are the

objectives of the

use of salary

survey data?

Organizations that want competitive salary ranges for their job grade

structures will have dierent objectives than those companies who

plan to adopt a pure market-priced approach to job evaluation.

When you are building a competitive salary structure, you will tend to

focus more on having precision in the calculated market composites.

Pure market priced organizations that also push for full pay

transparency place a higher value on being able to communicate

about the data.

Aging of data? The aging of the market data is necessary in order for you to project

forward the survey results from its eective date in the past to some

point in the future. The question of how far forward you should be

projecting this data depends on the pay philosophy of your company.

Which

components of

pay are most

important?

This largely depends on the level of job being market priced. Executive

level positions are heavily leveraged with both short- and long-term

incentives that you really must evaluate their competitiveness across all

components of pay.

The remaining broad-based jobs should also be evaluated across all

pay components, but we commonly see the focus on base pay for the

speciﬁc job analysis and then using short- and long-term incentive

data to analyze competitiveness by job level and functional grouping.

Deciding on

the pay statistics

to use?

Historically, this decision would depend mostly on the pay philosophy

of the organization. You would pick the statistic that aligns to stated

compensation philosophy of where you are trying to position the

company in the marketplace.

An alternative approach is to include an array of the pay statistics,

such as the 25th – 50th – 75th percentile values. While you may have

a single objective of where the company should be paying overall,

you may also look at the individuals’ pay relative to the array of market

statistics to determine what’s appropriate.

Watch for the annual

salary increase

surveys to get the

insight needed for

your aging factors

Aon Hewitt Implementing a Market Pricing Methodology 13

What survey

scope cuts are

the best?

The right answer typically is to ﬁnd the scope cut that most closely

resembles the relevant labor market you’ve deﬁned.

You should however also be cautious of not slicing the market data

up so ﬁnely that the sample size gets so small that the results are

less reliable.

Dealing with

year over year

trending of

results?

Salary survey vendors are mindful of the year over year trending of pay

data and use that as one of the quality auditing factors. Still, there are

times when the survey results will rise or fall signiﬁcantly from one year

to the next. This is one key reason why consistent participation and

annual analysis is so important for your success with market pricing.

You should have a plan on how you will address big swings up or down.

Some alternatives you could consider include:

• Setting caps for how much single year movement you’ll recognize

• Using multi-year trend data

• Setting aside a current year result and using the prior year’s data, or

• Do nothing to adjust, but monitor the results over time.

Who will have

access to the

survey results

and how will

they access it?

Depending on how far you plan to go with communicating salary

survey data, one other factor to consider is what level of understanding

will managers and employees have with not just the compensation

terminology, but also the compensation data statistics.

Be prepared to invest in communication on the use of survey data if you

have plans to go deep with pay transparency.

Aon Hewitt Implementing a Market Pricing Methodology 14

Eective communications about the market pricing program can greatly impact the likelihood of

success. The ‘best’ compensation program design can fail miserably if employees don’t understand

it. Conversely, you can be highly successful with a modest compensation program by ensuring a

common understanding throughout the organization through a strong communication plan.

You should create your communications plan at the time of developing the market pricing strategy.

Don’t wait until all the job matching and analysis work is done to start thinking about how this will

be communicated. What and how you plan to communicate your market pricing approach can

indeed inﬂuence the market pricing plan design choices.

Communications

Audience Start by knowing what both your management teams and employees want

and need to understand about market pricing. Does your organizational

culture expect a more open dialogue about sensitive issues like pay? Or does

a more top-down approach ﬁt better with your culture?

Message The depth of content you plan to communicate to various stakeholders can

directly aect how you go about implementing your market pricing approach.

A culture that supports the concept of full pay transparency will expect more

message details compared to organizations whose culture is more closed. For

example, in a highly transparent culture, you might include information about

survey selection, job matching, pay analysis, etc. in your messaging.

By knowing this up front, you can establish ‘simplicity of communication’

as one of your guiding principles in the design stage.

Messenger Deﬁne the communications delivery roles for key stakeholder groups up front.

What role do you expect from each of these groups?

Executives · Front line managers · Human resource generalists

Here again, overlay the realities of your organizational culture and assess the

readiness of each group to be able to carry out your plan. Is there work to be

done to improve their readiness? Or, would changes to your market pricing

implementation plan allow for a better ﬁt with your culture?

Media What methods of communication do you need to use to implement and

sustain your market pricing implementation? To increase the organizational

awareness of market pricing, avoid the tendency of treating compensation

communications as a once a year event that gets packaged up in a slide deck

presentation to management.

To make market pricing a more integral part of your management and

employee communications, you should plan for messaging that uses a variety

of media channels on an on-going basis.

Aon Hewitt Implementing a Market Pricing Methodology 15

Using market pricing as a strategic lever in your human capital strategy has the power to drive

growth and talent outcomes within your organization. Getting the most beneﬁt though from

your market pricing implementation requires careful consideration of the process and choices

that will best align with your business objectives.

Aon Hewitt partners with clients to provide leading compensation data and the strategic insight

needed to make the data actionable. Our clients look to us to provide them with the survey data

they need, but also to help with the insights needed to make the data actionable. We work with

organizations around the world and across industry sectors to be their preferred source of

market intelligence.

Reach out to your Account Executive to learn more about how our market pricing data and

insights can help you improve the eectiveness of your compensation strategies.

Conclusion

Risk. Reinsurance. Human Resources.

About Aon

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solutions and outsourcing services. Through its

more than 72,000 colleagues worldwide, Aon unites

to empower results for clients in over 120 countries

via innovative risk and people solutions. For further

information on our capabilities and to learn how

we empower results for clients, please visit:

http://aon.mediaroom.com.

The information contained herein and the statements expressed are of

a general nature and are not intended to address the circumstances of

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accurate and timely information and use sources we consider reliable,

there can be no guarantee that such information is accurate as of the

date it is received or that it will continue to be accurate in the future.

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