Defining Value – Part 1

Payscale.com recently published their “Fortune 50: Ratio of Pay, CEO to Worker”.  As you might imagine the numbers are interesting, staggering, amazing, or awesome; and I expect your exact adjective of choice will no doubt be determined by your perspective. By the way, to save you a click, the average ratio is 213:1 with the lowest 10:1, and the highest 1737:1

My intent isn’t to pour gasoline on any particular fire, but to ask ourselves; what is the best way to ascertain the value of any position to a company?  I am a great believer in the old adage; there are three kinds of lies; lies, damn lies and statistics.  So just examining a single ratio is fraught with peril, albeit amusing conversation.

Value can be defined as the relative worth or importance of something.  Pretty simple and straightforward, but often confused.  The key term may be ‘relative’ which ultimately determines our perspective.  The CEO of WalMart (ratio of 717:1) is not the same job or situation as the CEO of Ford Motor (ratio of 53:1), and neither are the numbers in their respective calculations.

This kind of comparison strikes me as similar to using only market studies to determine compensation structure.  It seems to me that defining a comprehensive structure that is fair, consistent and readily communicated is the foundation for any reasonable compensation strategy.  Using market data alone, it is difficult to know when you are comparing apples to apples.

How best to determine relative value then? Develop a solid internal frame of reference first.  This frame of reference is developed using tools and methodologies designed to determine the internal worth of a job using standard rating factors. The internal component of your firm’s salary structure is developed around a system of points that quantify the requirements of each position.

The result is a value spectrum that is internally equitable, and more importantly defensible to a court, the board and employees.  But that is only a sound starting point as it reflects a single internal company viewpoint.  In part 2, we’ll examine adding the external constituent to complete the picture and hopefully give us total perspective.