Having spent many years in compensation, one consistent pattern we continue to see is the prevalence of 3% as the annual aging factor in the United States (US). This raises the question: What factors influence this number, and is 3% still relevant in today’s market?
Because compensation survey data provides a snapshot of a specific point in time, surveys conducted at different times of the year will have different effective dates. This raises two potential concerns for comp pros:
Aging data is the process of aligning survey results collected at different times to a common reference point. This is done by adjusting the market data using an estimated percentage that reflects how much you expect the salary to change over time. By aging the data, comp pros can get a more accurate reflection of the current or future market conditions and help their companies be more competitive.
Let’s walk through an example. You have 2 different surveys: Survey A has an effective date of January 1, 20XX and Survey B has an effective date of March 1, 20XX. You want to “age” these data sets to the new date of November 1, 20XX.
Table A below shows the calculations and steps needed to appropriately age the data from both surveys.
TABLE A. Formulas and Example Calculation of Aging Data
When discussing the aging factor, you will likely encounter the terms “survey aging factor” and “annual aging factor”. Both are integral components of the same formula:
Figure 1. Aging Factor Formula
The annual aging factor (also known as annual market movement) is the percentage used to age the data. It represents an estimate the company makes about how much wage movement is happening in the given period of time. It is highly subjective and is influenced by internal variables, such as budget, and external variables, such as inflation.
The survey aging factor is directly impacted by both the annual aging factor and the specific target date to which the data is adjusted. This factor reflects your decision on how you want to align with current market trends.
The ASEAN Total Rewards Institute shares 2 ways to calculate this:
1. Determine the average year-over-year change in market salaries of all the jobs you’ve matched to, as in Table B below.
Table B. Example Calculation of Annual Market Movement
2. Calculate for 60-70% of the merit or salary budget trend.
For example, if the report states companies in the US are budgeting for a 5% merit increase, your annual market movement will be around 60-70% of that or 3-3.5%.
Once you’ve landed on a number using one of the methods above, your work is not done! Especially in a market that moves as rapidly as today, you will need to consider the external and internal factors that can influence your organization’s specific aging factor. And this is where the art comes into play.
Leading the market may make you more competitive, but at the same time, put you at a greater financial risk. Lagging the market may make hiring more challenging and increase turnover risk. It’s not very common for companies to lag the market for the majority of the year. However, it may be a feasible strategy for some companies looking to supplement with other motivators like excellent benefits. Mercer explains that many companies will use a lead-lag strategy and age the data towards the middle of the year as a compromise.
Figure 3. Impact of the Chosen Date on Your Lead/Lag Strategy
Finding that balance will depend on the stage of your company’s financial health, growth potential, company culture, and employer brand. Having a compensation philosophy in place can be the grounding force that guides you and helps you stay aligned with organizational goals, even in rapidly shifting markets.
Learn about creating a competitive compensation strategy that moves past lead/lag/match on the BetterComp Blog!