The Employment Experience

Developing a Compensation Philosophy and Determining Market Rate - With Andrew Bartlow

September 15, 2022 Karly Wannos Season 2 Episode 34
The Employment Experience
Developing a Compensation Philosophy and Determining Market Rate - With Andrew Bartlow
Show Notes Transcript

Check out my Free Legal Workshop: 4 Mistakes You Are Making That Lead to Employee Lawsuits -   (Sign up HERE).

The war for talent is more competitive than ever before. How do you determine the “market rate” for workers, and how do you attract and retain a team without burning more cash than necessary? Most organizations just guess, or use a limited set of data points. Others ask their HR leaders to benchmark compensation. However, many HR professionals don’t have expertise in this area, and may not even know where to get started. 

In this episode, my guest, Andrew Bartlow and I are talking about how HR and businesses can develop a compensation philosophy, understand pay transparency tradeoffs, determining market rate and accelerate their efforts in this critical area to support your business.

Here are the timestamps for this episode:

[6:40]: Finding the “Goldilocks zone” and why pay transparency can be a double edge sword.

[10:40] What should employers share with employees to create pay transparency

[13:00] what is distracting to employees when disclosing benchmarking data

[17:05] How companies can begin the benchmarking process

[21:05]: How to match your organization’s jobs with benchmarking data 

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The war for talent is more competitive than ever before. How do you determine the market rate for workers? How do you attract and retain a team without burning through more cash than necessary? Most organizations just guess, or use a limited set of data points. Others ask their HR leaders. To benchmark compensation.

However many HR professionals don't have the expertise in this area and might not even know where to get started today. My guest and I are going to talk about how HR and businesses can develop a compensation, philosophy, understand pay transparency, trade offs, and how to determine market rate and accelerate their efforts in this critical area.

My guest is Andrew Barlow and he has 25 years of human resources and talent management experience at organizations across a wide spectrum of sizes and industries. Andrew is the CEO of people, leader accelerator, which helps human resources, professionals be more strategic and more successful. He is also the founder and managing partner at series B consulting, where he works with companies like master.

And many more. This is the very first time that we have had this type of conversation on pay transparency and benchmarking. So I'm so excited to speak to Andrew about it and see what he has to say. So let's get into it. You are listening to the employment experience podcast. I am your host employment attorney Carly wonks.

This podcast is focused on providing valuable educational inform. Best practices and actionable tips. So your workplace can better work for you. Each employment experience episode is a mini educational training or informative interview designed to help businesses learn about important employment related strategies.

If you are a business owner or human resources, professional, who wants to stay on top of issues affecting your business and employees, then you are in the right place. Let's get to work. The information in this episode is for educational purposes only. Please be sure to consult with legal counsel before making important employment related decisions.

Andrew, thank you so much for being here and welcome to the show. Karly, thank you for having absolutely. So today we were talking all about employee pay compensation philosophy. Pay transparency, all of the important things, how to determine market rate. And I am so excited to speak with you and learn more about this.

 This is actually the first time that we, that I've talked about this on the podcast, and I know that so many of my listeners and HR professionals-  there's, there's a huge misunderstanding around this, right? So they either, they know that they need to do it, but they're not sure how to go about doing it.

And then for those that know how to go about doing it, what do I do with the information once. I receive it. Right. So I'm really excited to get into this topic with you, but I really wanna start at the top, um, for those who don't know. So if you could answer for me, what is a compensation philosophy?

Exactly. And why is it so important for businesses to have one? Sure, sure. Well, again, great topic, pay. Incredibly important to the attraction and retention of workers. And so organizations should have a perspective on how you want to position your company regarding pay. And, and so that's what a compensation philosophy is.

It is your org's positioning regarding- do you wanna be ahead of the market? Do you wanna be on the market? Do you wanna be behind the market? How do you define the market? Um, but at its most general level, it's how you want to position your org regarding pay. Okay. And there are a lot of things that go into that determination.

What is your budget? You obviously don't want to be on the lowest end of the spectrum because that's going to, um, you know, you're, you're only going to get a certain talent pool if that's who, who you're trying to attract. Yeah. That's great. Well,  different organizations will have different pushes and pulls.

If you think. Investment banking, which is well known for paying, paying very, very, very well. Um, but having terrible working conditions, work 24 24 7 really intense environment, highly selective, but the pay reflects that, versus, let's say a nonprofit where there may be more of a.

 Sense and, and, or teaching where people may be drawn to a certain type of profession, even if the pay isn't really strong, they're there for other reasons. And so that's one of the reasons why., You want to first determine what your competitive set is? Who are you competing for talent with, and then decide where to be on the scale, the high end, low end.

And what are some of the other, the, other factors you consider? Okay. So when we're talking about the compensation philosophy, is this something that's in internal,  philosophy that you only share internally? Or is this something that you put on the, on the job post and the job description to let the candidates know what your philosophy is?

Yeah, I think I I've, I've seen it done both ways.  I would generally encourage companies to make sure that you get it right, internally facing first.  Because it may not be something that you wanna publish externally. it, it might not help you, depending what your philosophy is to attract candidates.

So, you know, generally get it right first internally and getting it right. Means it's simple. It's clear and your organization can use this compensation philosophy as think of it like a set of operating instructions where we wanna be at the 40th percentile of the market for companies of our size and our industry.

Do you wanna put that on an external facing job description? Probably not. You know, not, not unless you're on the high end of the range. And if you are on the high end of the range, then you, you might, you might wanna trumpet that from the rooftops.  So it kind of depends whether you wanna take it externally, but really be sure that you're getting it clear.

And a big part of that is ensuring that it's simple. Right. Okay. And so this kind of leads into making sure that you have pay transparency. And this is really important, I think, to the employees that you already have working at your company. Right? I mean, I think that that's one of the reasons why employees get frustrated and they might end up leaving and you might have retention issues because they don't, they feel that they're underpaid or they feel that, you know, what they're being paid is, is not the same of what someone.

Their same level as being paid. And so I, I think it's important to also develop some sort of policy or philosophy on pay transparency as well. And, and when you're doing that, I know that you have something that's called the Goldilocks zone. So tell me a little bit about that. If you would. Sure. Sure. Well,  if you think about the, the fable of Goldilocks and the three bears and, you know, a bed was too hard or too soft, and then there's one that's just right.

Or the porridge was too hot or too cold. And then in the middle, it's just, right. So, you know, it's, it's kind of a tongue in cheek way of, of describing,  each organization should find out what's just right for you. And so, you know, I I'd love to provide the checklist or the cookbook playbook of exactly how every org should do it, but really it depends, depends on your environment.

Depends on your current capability of attracting and retaining workers  in that, um, pay transparency can really be a double edged sword. Everybody asks for it. Everybody wants to know, but then once they know they wanna know more or they wanna fight about it or they wanna argue about it or they, they have perceptions that then need to be further informed with additional data.

So I, I encourage organizations to think about what is just enough transparency for your organization, and really putting that through a filter of.  Here, I'll give you the question. What information is likely to drive retention and discretionary effort. So what's the good, what information would actually help people feel good about stuff that that's the truth.

On the other hand, what information is likely to be distracting? And unhelpful for your workforce. So that's going too far. So that's the two that's the, you know, just right versus too hot or too cold.  And it's, and it's worth putting some thought into, in that full transparency is usually distracting.

And so you wanna be thoughtful before you open up Pandora's box. Right. You wanna provide enough information, but not go overboard. And when you're providing that information, when you are, are disclosing. You know the pay. And instead of saying this, this always drives me crazy.  We offer competitive pay or pay is de dependent upon experience.

What does that mean? Competitive, competitive with who? Right. I mean, my idea of being competitive is probably different than. The employer's idea if I'm the, if I'm the job candidate. So you'll want to determine also what you want to include include in that, because you have the base salary, right. But your company might also have benefits that you wanna include in there as well.

And so you can include all that in order to be transparent, because a lot of people that's important to them. They, the, you know, insurance benefits, the other benefits that are offered, but not every little. Minute detail, right? Because that's going to potentially end up backfiring.  Some people might not use the benefit.

They might not want that included. They might not agree with it. Right. So kind of like what you were saying, big picture, what's going to drive retention. What's going to be that Goldilocks zone of being just right. I, I love that you're getting specific for your listeners, right? Talking in generalities.

Isn't very helpful. And, and your listeners probably wanna know, okay, what should I. My workers or my candidates mm-hmm , and, and, and just saying competitive benefits or competitive pay, that that actually means nothing that that's background noise,  likewise listing 27 different perks and programs that your company offers becomes background noise as well.

If those are small ticket items that don't really make a difference on whether somebody decides to join your company or stay. So, you know, at, at risk. Of being too specific. I'm gonna go out on, on a limb here and I'll make a couple suggestions, likely it would be helpful for most organizations,  to share the earnings opportunity.

So maybe it's a base pay range. Maybe it's a bonus target. Maybe it's an on target earnings range for the next level. Or next promotional opportunity at their company that gives people an idea of what they're playing for, of what they're striving for.  Maybe you're in a job family that has five different levels.

It might be helpful to know what the ranges are at each of those five.  so that instead of leaving your company for the next promotion, you see, Hey, if I could get that promotion here and that's what it would be worth to me. So think about sharing ranges for your job families, right? That's a really good point.

And also let's say that you are willing to potentially take a job for a lower salary, but for maybe a year or two, but in the long term, you don't wanna be at number. So disclosing the information that you just mentioned is going to show like, look, there's a potential that you could be there for one year or two years, which is, which is fine.

We have room for you to grow within this company. Yep. Which is particularly true in incentive or commission driven jobs. Like sales positions maybe start out low, but you can ramp up quickly.  So helping people understand what that brass ring could look like or what the progression could look like.  Maybe not so much for candidates.

But certainly for existing employees, letting them know what the path could look like,  can, can be pretty helpful. Now on, on the, on the other side of that coin, what can be distracting would be publishing everybody's actual pay. Right. Do, do, do you really need to know that's not necessary? Right. Right.

Well, and, and, you know, some organizations do it anyway,  with the idea that they'll have, you know, radical transparency. But  many organizations, you know, there, there are lots of reasons why people have different pay.  Maybe they have more years of work experience, maybe their prior job. They came in at a certain amount and it just leads to lots of discussions and lots of perception.

It's that Pandora's box again. Where do you really wanna be? Spending most of your time talking about why I make $500 more or less than the person next to me? Or do you wanna talk about how someone can grow and progress?  I I'd also add, I have a, I have a professional acquaintance at a, at a fortune 500 organization, head of HR.

 I'll name the company, but not the person. Zillow group really well known, big employer, thousands of, of employees. They have led the charge. Around pay transparency and have calculated, pay equity,  for different segments of the population. Now that's wonderful in many ways. However, it's never enough.

So first you do this pay equity analysis of male versus female, and then people wanna see it by ethnicity, and then you do it by six different ethnicities, and then people wanna see it cut 11 different ways instead of the six. And then,  there's another employee group that wants it cut by another type of segmentation.

Maybe it's, you know, sexual orient. And, and the analyses, I guess my point is it's never enough. So you wanna, before you, you open it up and you wanna be fair as an employer and, and pay should be driving productivity and retention and performance, but if pay becomes a distraction of its own, it's UN helpful.

Right. And, you know, if you're getting into such minute details or listing every single person, then it's going to potentially create tensions and animosity amongst coworkers. And, um, that's never a good thing, so really going back to that gold Naloxone, I mean, you really it's so individualized to the company, you need to take a look at the type of employees that you have, the type of job that they're doing, the type of departments that you have.

 And, and just really figure it. As an individualized approach for the company. Yep. Yep. And that's, that's what,  my partners and I with,  people leader, accelerator, try to do is instead of giving you the cookbook or the checklist of here's exactly what you should do for every company, we're trying to provide you with the frameworks to consider what's right for you.

And so what are the right questions to ask? And that is what will drive retention and discretionary effort versus what would be distracting at my company.

If you are in the HR field or want to learn more about employment law, then I am officially inviting you to my free legal workshop for mistakes you are making that will expose the company to employee lawsuit. In this one hour free workshop, I'll show you the step by step strategy to making sure you have the proper procedures in place to best protect your company from lawsuits relating to your employees.

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Okay. So let's say that a company wants to start with benchmarking. They want to see what the market rate is for various positions and departments within their company. Where, where would they, how would they start with that? Sure.  Well, benchmarking by itself, boy is a dangerous activity. It's like running with scissors and boy, there, there are a number of different.

Benchmarking resources that circulate the internet or will pop themselves into your Facebook or LinkedIn feed.  And, and I'd say just beware, you know, be, be cautioned. And that most data is not high quality data.  I would strongly encourage organizations to work with a very large reputable.  Established compensation survey provider like Mercer or Aon or,  towers Watson, um, any sort of self-reporting data that you might get from salary.com or pay scale, you know, think about the many different inputs, the individuals putting their own pay in,  that may or may not understand the instructions or may or may not enter the data accurate.

 You wanna have a professional organization that knows how to do this, to have a higher degree of confidence in the data. So like number one, don't go with what's easy that just shows up in your inbox, you know, find a reputable provider,  to source the data for you. Okay. So you, you contact a, a reputable provider and.

Present this information to you, and then it's yours to figure out what you wanna do with it. Or does the company walk you through the remainder of the process if you know? Yeah. Well, each, each organization, you know, has its own set of instructions and, you know, consulting is usually available for most of the big ones.

 Different types of industries, different sectors may have different specialty compensation providers. The, the organizations that I just named.  Mercer Aon towers, Watson provide, you know, a cross industry information, cross geography,  and, and they have data cuts where you can filter and segment your data based upon whatever factor is important to you.

 And, and so once you get access to the data and, and one of the hitches that you'll find is to get the data. You normally need to provide your own data. So, you know, that's another, another good reason to work with a reputable provider because garbage in garbage out. And if you're providing data and being thoughtful about it, more likely,  the other respondents are providing good data.

So find a good reputable data provider that has information that's relevant to the types of jobs that you care about. Usually go to one of the big ones and I would usually encourage, Companies that have fewer resources, you know, one, one person HR shops to work with a data provider that doesn't require you to share your data.

Cause it can be, it can be a lot of work.  A again, you'll balance that with cost and with quality of data,  it's usually more expensive if you're not providing your own.  But you don't want your team to spend their very limited time and resources. Providing compensation data out. You want the data that, that you can work with with as little overhead as.

Right. And then once you receive that data, you do something that's called job matching, right. Which is where you match the data to the positions within your new company. Right. And there's kind of a, a few recommendations and, and steps dos. And don'ts when you, when you go about doing that. Yeah, that's right.

I, I love that. We're getting to this level of detail. So yeah, if you're, if you're an HR generalist HR manager, like where do you even. Go find a reputable provider. That's a Google search. Um, I, I provide a guide on my website that lists about 20 different high quality providers and the pricing as of, you know, over the past few months, um, get their data.

And then the challenge is matching that data to your jobs. And there's some science to that and there's some art to that. So it's, it's important to know that a title at one organization is rarely the exact same job of the same title at another organization, right? It, that that's, that's a real trap that many people fall into is, oh, I'll just match the it manager with an it manager.

But that manager at one organization may have 19 direct reports and multiple layers of staff, an it manager at another organization may be a standalone individual contributor. That's you wanna, what I was gonna say? The, the designation manager is not always the same across the board. Actually, they can be very, very different in terms of job duties and responsibilities.

That's right. That's right. Yeah. So, so any of these big reputable providers will give you a framework within their data that helps you do the matching, but, but generally you're just trying to filter and narrow. And like, let's say that you're looking at a you know, trying to benchmark a finance job.

You would only look at the finance.  Filter in that particular data and then, okay. What, what type of finance job is it? Is it accounting or,  accounts payable or is it treasury? So you can narrow by specialty.  And then, you know, category, is this an executive level position? Is it an hourly level position?

 Are there direct reports or not that that'll help you group it based onto a career track? And then there are additional indicators that many of these, uh, comp survey providers will give you, you know, kind of the Rosetta stone, you know, Keystone to, to decode whether someone is a manager, two or a manager four or an IC five versus an IC six.

Um, usually that has to do with some different different levels of job complexity, different levels of experience or. For example. 

Okay. And that that's interesting. And then you can take the information that you receive and use that to adjust your, um, compensation strategy,  your philosophy as needed, right?

So based upon the needs of the company, um, if it's for a new position, how quickly you need to fill that position if you are getting a lot of making a lot of offers and you're getting a lot of. Right. Like job offer declines back. So that's kind of an example of how you can use the information. Did I miss any well, I think what we're talking about now is even going a little bit upstream.

It's like, why do compensation benchmarking at all? Why would you do it? And I, I think again, in its simplest form, the reason you do compensation benchmarking is to understand where you stand today. It's to understand how you're positioned today. So if competitively you wanna pay at the middle of the market, well, what are you paying at the middle of the market right now or not?

Or maybe you have some jobs that are on the high end and some jobs at the low end. So it, it really, you know, this, this gives you a foundation to understand where you're at today and then you can make some choices as an employer. Um, do I want to adjust some ranges? Do I wanna make some market adjustments, uh, to certain individuals.

Um, do I want to take another look at my compensation philosophy? And you know, maybe I said I wanted to be at the middle of the market, but it's really, really hard to recruit a certain job type like software engineers, for example lots, you know, the, the pay is escalating in certain job types because they're hard to recruit.

And so you might choose to. Have a differing philosophy based on your experience in how easy it is to recruit and retain certain workers. So it all starts with benchmarking figuring out where you stand. Okay. How dangerous is it for companies? Let's say there's a, there's a company who thinks that they're on the higher end.

Of the, of the market rate of the spectrum. Yeah. And they get their benchmarking data and they see that they're not on the higher end. They're actually on the lower end. And they just, now that they have this information, they just wanna disregard it. I mean, how, how dangerous is that for our company to do for the reputation?

I mean, yeah, well, There, these are business decisions. So if you think you're on the higher end of the range and you find out that you're not and you've been internally or externally publicizing that you pay on the high end of the range. Well, now, you know, that's not true. So, um, I I'd suggest you, you wanna be factual and accurate with anything that you're telling,  your, your internal team or externally.

So be. Don't lie to people.  Now if you found that you've been able to be successful,  retaining a sufficient number of skilled workers, hiring a sufficient number of skilled workers, and it turns out that you're paying on the low end of market. You might not need to pay on the high. So that will help you think through what's that overall employment experience.

Maybe there's something else that you're offering. That's valuable to workers, whether it be benefits or work life balance, or a lot of growth opportunity. So I'd just encourage employers to be truthful. Don't misrepresent anything and make good business decisions along the way. So, you know, you certainly, as an employer, you don't want to pay more than you have to.

Um, because those are dollars that, you know, could, could go to grow in your business. Other. Right. So that's what I was thinking kind of along the lines of it. It might backfire if your employees, if you're making some sort of representation to them that you're on this percentage of the market rate when you're really not, if they find out about it, which they probably will, you know, you, if you're dishonest, or you're not being truthful with your, their employees. They're not going to trust you anymore also,  with regard to the information that you might receive, as to protected classes, right? So that could be, could become a discrimination issue. If you become aware that a certain protected class is underpaid,  versus others too.

So I guess if you decide to engage in these types of studies and do the benchmarking, you really need to address  or properly respond to the information that's provided to you? Yeah, again, it's a little bit like a Pandora's box where once you open it up,  I hope I'm not making too,  you know, deep of an analogy once you open it up, all sorts of things come out of that box.

And,  generally for employers, I would say it's worth knowing where you stand it's, it's better for you to have some data. About where you stand and then you can make some choices about what to do with that. But if you are,  intentionally ignorant about where you stand, that takes the choices away from you.

Because if you have any concerns with regard to hiring or retention or attrition, and you're not sure what's causing it, you don't know why people are leaving. This might be a good place to start. So like you said, you, you know, where you stand,  you could, you could see either way if you're on the high end, the low end, whether or not this.

Is an issue, a potential issue or not. So I like that. Yeah. I generally encourage leaders and managers and you know, people in the HR profession to try to make database decisions. And this is valuable data, you know, rather than anecdotal information where you may hear a one off story about, you know, XYZ, , worker left for a big pay raise.

Or they received a big pay raise to come to your organization. Those, those one off anecdotes are not good data.  You, you probably,  want to know where you stand. If you're an employer of any size and scale, like call it a hundred plus, and you're not doing compensation benchmarking, then, you know, chances are you're missing out on the opportunity to make valuable.

right. How you might not have this information, but approximately what percentage of, of companies the mid to large size companies out there do this,  compensation benchmarking, do you find,  this would be a little bit of a finger in the wind around like my, my guesstimate.  I'd say it's a fairly high percentage.

Once you get to mid-market, you know, call it 500 plus,  employees.  I I'd say three quarters or more are obtaining benchmarking information in some way now, what do they do with it? That's kind of all over the map. Okay. What about the smaller ones under 500? What would you say? Yeah, it's,  fewer, fewer of those smaller organizations,  capture data and, and maybe the cutoff is.

Um, you know, there may be a meaningful cutoff around a hundred employees. So between one and 100 employees, I'd say it's a relatively low percentage are doing benchmarking. Um, you know, call it 25%,  are doing benchmarking or less. And,  it may or may not make sense. Like if you have a bunch of one off jobs, if you have 87 employees and they're in 65 different job titles, Which is not uncommon, right.

And smaller organizations. You, you find a lot of,  very specific roles, very few multi incumbent positions. That means a lot of people in the same job doing the same thing.  It may be less valuable for you to do benchmarking, but once you start to see 5, 10, 20 people.  in a similar job doing similar things, it becomes, you know, more, you get more leverage, you get more value out of understanding the, the market data.

So in that 100 to 500 employees, I'd, I'd guesstimate that 50% or more,  are using some form of benchmarking. I'd be interested to see some of the statistics. If they're out there on,  companies who they, they begin to, to use the benchmarking data and how that impacts, you know, their retention or the number of employees they can hire quickly within so many days or that kind of information.

I mean, you familiar with any of that? Yeah, well, I, I may actually, I'm, I'm maybe backtracking on some of the guesstimate percentages that I was just talking about when, when you talk about executive level positions and I work with a lot of startups, a lot of venture back startups, and a lot of private equity,  controlled companies that are often quite small, even for tiny companies, you're trying to get a sense of what it costs to bring in.

A senior leader. And even if you have 50 people at your company, if you're hiring a chief marketing officer or a VP of engineering or a senior level role, you, you chances are, will try to get some sense of the market.  Often that's informal, often that's asking your investors or asking other C-suite members, what the role should be paid, but you're, you're doing benchmarking whether you realize it or not.

And so it, you know, that's, that's an example of using,  just a few data points, just a few anecdotal data points to make big decisions. And when you consider that it could cost $10,000 or less to get benchmarking data for your entire organization.  Boy, if you have any number of employees, it's probably worth it for you to understand just what, what the ballpark is that you wanna.

Right. Okay. And then I know you recently published a book or was it just, was it last year scaling for success? Yeah, that's that's right. I, I don't think we're on video, but it's right. It's just over my shoulder here.  Columbia university,  published, scaling for success. I'm, I'm really pleased that finally came out in print.

Okay. And the full title is scaling for success. People priorities for high growth organizations. So tell me a little bit about. Sure.  Well that was my attempt to help HR leaders and really any, any leader at a small growing organization, figure out the management basics. So it's not just HR, but it's.

Talking about concepts, like organizational structure. Like when, when do you add to your team? Do you hire a leader first? Do you, or do you hire the team stands and layers?  Total rewards, talent acquisition, you know, all the traditional elements of human resources, you know, culture and engagement and communications. 

There's been a lot of work published. About these management practices at giant companies like good to great, or here's what Google does.  And you, you get academic research that tends to be focused on these very large established, mature organizations.  And you hear about the really interesting tech startups, but you don't get that messy middle.

You don't get that organization. That's had some success, but they're not a unicorn. They're not the next Google.  But what, what can and should they do to operate effectively? And so that, that was my attempt to be helpful to those small and mid-size businesses that are trying to figure it out, that that don't have the financial resources maturity or, or brand.

Of a giant enterprise company.  And don't have the cache of the, you know, sexy tech venture back unicorn. I'm sure there are a lot of businesses that fall within that category. Yeah. Yeah. In fact, I, I think it's most,  so I I'm hoping that work will be helpful to a lot of different organiz. It really sounds like it would, I will leave a link to the book in the show notes of this episode.

So if anyone's looking for it, they can find it. And Andrew, I wanted to thank you so much for being here. I really appreciate you taking the time to speak with me. I know I learned a lot about, uh, compensation and pay equity and compensation philosophy. Um, and I know that my listen. Will too. So thank you.

I appreciate it, Karly. Thank you. Really appreciate. Absolutely take care.

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Thanks so much for listening and I will see you in the next episode.