The Data Doktor
Volume 1, Number 2
september, 2004

Market Pricing’s Unconscious Decisions

In issue #2 we explore the differences between company-weighted and incumbent-weighted market distributions. Okay, this may not be Spielberg material, but if you’re market pricing jobs, your choice of distribution type is going to impact your pay recommendations, with implications for labor cost and competitiveness.

But first…

Self-promotion department

On Sept. 20 and 21 I will be at the IOMA Setting and Managing 2005 Compensation Conference in New York City. If you are going, please look me up. I’ll be in the NPKtools booth showing off the new Pricing Module for our CompXpert compensation analysis solution.

(By the way, if you’re still doing market pricing with spreadsheets and printouts, you’re inflicting needless pain on yourself. I’ll be doing online demos of the Pricing Module in the near future, so check in with the web site on occasion.)

Ask the Data Doktor

Company Weighted vs. Incumbent Weighted Salary Distributions

The answer to this month’s Ask the Data Doktor is again too long to put in this email. So I got inspired and wrote a short white paper, which you can get for free at the NPKtools web site. Here’s the condensed version.

Question: Can you settle a dispute? One of our surveys provides both incumbent and company weighted market distributions. My colleague says we should use the incumbent distribution because it is a better representation of the “market”. I think the company weighted distribution is better. Who is right & what’s the difference between the two?

The Data Doktor: Normally these types of disputes are best solved by flinging surveys at 25 paces, but in the spirit of cooperation let me weigh in.

You probably have a basic understanding of the difference between company-weighted and incumbent-weighted distributions, but let’s review:

An incumbent-weighted job market distribution is computed using individual employee (incumbent) pay data regardless of affiliation with a company. While each employee is weighted equally, firms with a large share of the employee sample may influence the distribution statistics.

A company-weighted job market distribution is computed using the averaged employee (incumbent) pay for each company. Each firm is weighted equally so no firm can influence the distribution statistics based on a large share of the employee sample.

So, what’s the answer? To get the best understanding, you should go through the example with real survey data in the free white paper “Unconscious Decisions in Market Pricing 1: Company Data vs. Incumbent Data.”

But the short answer is: It depends….

What’s your company pay philosophy? If your focus is on company to company competition, use a company-weighted market distribution so you can compare average pay for your company against the average company pay for other firms. If you’re just interested in the market for individual workers, use incumbent-weighted data.

What’s your pay strategy? An incumbent weighted distribution will generally have a wider range between P25 and P75. Therefore, if you’re paying at anything other than the median, using this kind of distribution is likely to position your offers farther from the market median in whichever direction. In other words, paying at P75 is going to be more expensive.

What’s the purpose of your pricing exercise? A Company-weighted distribution is best for situations where you are comparing pay for all employees with a job rather than individuals or sub-groups. Annual market planning for multiple incumbent jobs is a good example where company-weighted is probably more appropriate. The incumbent-weighted distribution is best in situations where you are competing in the market for individuals. In the case of dynamic or hot skill markets, individuals rather than companies create the market churn that that raises market price levels. Since the churn impacts price levels at the margin, the extremities in the incumbent-weighted market distribution provide a better indicator of where prices at the margin may be heading and the price level that must be offered to retain your hot-market specialists.

There, I’ve ruined the suspense in my white paper by revealing the ending. However, if you want to understand this better, read “Unconscious Decisions in Market Pricing 1: Company Data vs. Incumbent Data.” There’s a pdf version you can print and pass on to others who might be interested.

Now as fodder for your next spirited discussion with your colleague, I will challenge you to ponder the following question: “When is a company-weighted market distribution NOT a company-weighted market distribution?” We’ll tackle that question in a future issue.

Till then, keep compensating.

Lindsay

About the Data Doktor

Hi, I am Lindsay Scott, managing partner of NPKtools, a compensation analysis software, consulting, and outsourcing firm. I am a former Hay consultant, where I focused on software development, information analysis, and information delivery. I have an MBA from Duke University, and before joining Hay, I consulted on energy, economic and regulatory issues as a senior management consultant for EDS, Energy Management Associates, and DRI/McGraw Hill.

I like to believe that my background as a market analyst in broader industry settings gives me a unique perspective on compensation markets. I definitely believe that understanding pay markets can be an important ingredient in company competitiveness. I hope that the Data Doktor will help compensation professionals bring better information to bear on company decision-making—and thereby raise their profile as organizational contributors.

What you can do now:

for issues to tackle in future issues. All questions about the management, analysis, and presentation of compensation data are welcome. (or call me at 770-740-8660).

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