Employee Compensation Depends on Knowing the Market

by on June 26, 2009 · 0 Comment POSTED IN: HR Info Center

Failure to Accurately Define the Competitive Labor Market has an Impact on Employee Compensation

Failure to accurately define the competitive labor market has an impact on employee compensation. And the real labor market for most jobs is probably broader than you realize. And you can actually do this analysis yourself. You may have to redefine exactly what your labor market is. And it isn’t necessarily the labor market that you compete in for products. It’s the labor market that you compete in for people.

Geography is important when you’re trying to define exactly what your labor market is. The pay differentials around the country will vary but they may vary somewhat differently depending on the levels of employee compensation that you’re looking at. In fact, the pay rates for lower level people are differentiated more greatly across the country than they are for higher paid people. There tends to be a narrowing of the pay differences for those making more money.

Biloxi, Mississippi pays literally 30% less than the San Francisco area, which happens to be one of the highest paid if not the highest paid areas in the country. You may even find that geography makes a difference between a metro area and a suburban area. To give you an example, a job in Concord, 30 miles east of San Francisco, pays probably about 6% less than what you would pay for the same job in San Francisco. Go a little bit further east to Sacramento and the pay rates are about 10% less. So, even close to a metropolitan area depending on where your work location is, you may actually find a differential in employee compensation.

Size does matter. Size matters more for managers and above than it does for other types of positions. In fact, it is the number one correlating factor with employee compensation in the marketplace even more than geography and industry is size. You need to be somewhat careful about the survey data that you use. If you’re looking at a job where size really does matter, there are surveys out there who actually do regression lines that will tell you given the exact size of your company what the market pay rate would be. And they would even give you a correlation coefficient so you can tell how reliable that data is.

Industry also makes a difference. And it makes a difference in employee compensation for certain types of jobs and not as much for other types of jobs. The reason is that certain jobs are able to cross industry lines fairly easily, HR executives. An HR executive who works at a hospital can probably do the same – be the top HR person in a software company or consulting company.

And again, as you move down within the organization, if you’re talking about an HR generalist type position, the true differences in the marketplace may be very small between each of these industries. The point is that if you want your employee compensation to be competitive, you need to choose the right numbers in the right survey for the right job. And every survey has weaknesses. Just be aware of how relevant the data is for your particular situation. And certain jobs can cross industry lines fairly easily. And if you handle like not only HR but IT or the finance area – and if that’s the case, you can use actually more general survey data for those types of jobs.

Edited Remarks from “The Seven Deadly Sins of Employee Compensation Plans (and How to Fix Them)” by Rick Olivieri

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