- Blog post
Market pricing is the foundation for market-based compensation systems.
“What are other organizations paying?” is the key question in compensation systems
The term market pricing is a valuation for compensation systems. It is defined as what the external labor market-other organizations-pay for similar job to yours. So I know in our organization we have – and I keep using an accountant, that’s just kind of a generic job as an example. We may have an accountant and we pay them $45,000 let’s say. That’s one piece of information.
The most important question in compensation systems design
When designing compensation systems, the more important question than, “What are we paying?” is, “What are other organizations paying?” if other organizations are only paying $30,000 or above market. If they’re at $60,000, we’re way below market, we maybe at risk for losing this person due to pay. So market pricing is looking at what do other organizations pay.
Key considerations for your compensation systems when going through the market pricing process need to include the geographic scope of the job. Where do we lose employees to? Where will we recruit them from geographically? If we lost an employee in this role, again, to use the accountant, would we conduct a national search for this job? Will we look in a local labor market? Will we look statewide? Regionally? How would we define the scope of that search?
At the same time, when we look at the typical employee in that job, where would they typically leave to? Would they conduct a national search? Would they be willing to relocate across the country solely to accept the job or they typically be tied to the local market?
Generally speaking, what you find when you look at most organizations is that the higher up the organization chart, the greater the width of that net. In other words, if we’re looking at a CEO or senior executive, more often than not an organization will conduct a national search. They’re looking for the best CEO they can find and if they can find them from halfway across the country, they want to bring that person to their location.
At the other end of the spectrum, if we’re looking for a clerical position, more often than not, we’re going to be looking in a local labor market. A, it’s not really worth it for us to pay relocation and worry about moving somebody across the country. B – the chance of that employee, being that career-oriented that they would choose to move across the country is very low. So typically, we would look at the local labor market. And then certainly there are variations in the middle.
Industry outlook is key in your compensation systems design
Industry is another consideration. Should we look industry-specific or should we look at a broad spectrum of employers? I would pose the same question, where would we lose employees to? And where would we recruit them from?
Some jobs such as a registered nurse are almost only found within the healthcare industry. So our market pricing data is going to be very healthcare-specific. However, for looking at an accounting job, an HR job, an IT support job, those can typically be found across a broad spectrum of employers.
So even if we’re a healthcare organization, we may hire an HR person from banking, from IT, from manufacturing. So we’re going to look at that broad spectrum of employers. The key point in compensation systems design here is that we need to match our market data to the markets in which we would recruit employees from and that we would lose some to.
From the Rapid Learning Institute webinar: “How to Set Pay Ranges That Are Fair and Effective” by Ed Rataj