Does Competitive Pay Equal Being Competitive?
On LinkedIn, Kory-Oren Eden posted the following question: “When I see a company advertise “competitive pay” I wonder what they mean. If I were to say that about a job, I would mean that after looking at the prevailing market data, I would place the salary above the 75th percentile. What does ‘competitive pay’ mean to you?”
A handful of answers addressed the specific question around the percentile of market data that is used, but being competitive is so much more than aligning to a point in the market data. Competitive pay is one of many elements of a total rewards package that enables an organization to actively attract and retain and engage employees. If we simply focused our efforts on aligning to a market data point that was at, or exceeded the market median, we would probably be able to attract and retain a lot of employees – but we’d probably miss a lot of great employees too.
Compensation is both art and science and the market data is the science and it has to be considered. A *good* Compensation Practitioner always reviews market data from as many sources as possible and assesses the validity of that data before setting the target pay rate or range for a particular job. This is the science. A *great* Compensation Practitioner also reviews the market data, but understands that the market data is only able to tell us part of the story and that market data inherently flawed. This is the art. Being able to blend the two is what can make a good compensation practitioner into a great one.
I won’t dive into all of the aspects of the market data in this article, but here’s a quick run-down about some issues with market data that must be considered before placing all of your confidence in the data:
- it’s often a year in arrears
- services that offer “live data” are often crowd sourced and not considered high-quality by most practitioners
- market data often underrepresents small companies, which account for almost 50% of employment in the labor force
- local data may be the most relevant, but often times the sample sizes are too small to get meaningful data
- market data fluctuates significantly every year, not based on the actual market, but due to the participants
These points, above, as well as many others are why market data is only a sliver of what it takes to be competitive. A competitive compensation philosophy is part of a Total Rewards Strategy that considers ALL of what makes an organization a destination for prospective candidates. Take the market data into account, certainly, but don’t forget that the market data is not the sole driver of competitiveness, but rather there is a comprehensive list, that includes the Total Rewards Package.
Other Compensation Practitioners had this to say about being competitive:
“Competitive pay” does not mean the company pays above market, it generally means they pay at market. In other words, they are saying “we pay pretty much in the range of what everyone else would pay for this job and your skills”. Because it would be hard to hire anyone if the pay is not competitive, this is stating the obvious. It’s like advertising that a car comes with 4 tires. What you should put in an ad is what makes the job or company stand out above your labor market competitors. For example, many people want to work for a company that is socially or environmentally conscious. If this is who you are, state it. If you have great work/life balance, offer telecommuting, time off for volunteer work, or anything else that really matters to job candidates, use the ad space for this and leave out the line about “competitive pay”.
– Robin Roberts
“Advertising and hiring at or above the 75th percentile is way more than “competitive”. Offers at the 75th percentile should be reserved for candidates that are at the top in terms of qualifications, skills and experience. If a company pays everyone at the 75th percentile, they’ll win every recruiting battle….as they go out of business. My opinion…”competitive” is the median rate (not the mean rate) for the occupation in the geographic region where the job exists. The employers I’ve worked for use those words because there is a rate range and they don’t know what they’ll pay a candidate until they’ve decided on the winner and can weigh the winners qualifications against those that are currently in the job family.”
– Michael Gentry
“Maybe I have a different take on this. For me competitive doesn’t mean more. Competitive to means that is another company has the same role and job scope and that you’re paid close to what they are paying/offering (within 10%) and the employee isn’t being underpaid/undervalued. If being recruited it’s good for employees to know that, so if it’s worth leaving a company for a 10-12% increase in pay, to re-establish themselves, invest time ramping up with a new company, etc. it likely wasn’t the pay that drove them to look.”
– Felicia Graves
Director of Compensation