By Susan M. Heathfield

Why conduct market pay studies?

Seventy-five percent of all employees are looking for new jobs, according to the 2004 U.S. Job Recovery and Retention Survey released by the Society for Human Resource Management (SHRM) (www.shrm.org) and CareerJournal.com. These survey results also reveal that 43% of employees who are job searching seek better compensation.

Market pay is the compensation paid for a specific job, including information about bonuses and benefits, that is determined by a continual analysis of the competitive job market. Increasingly, with data so readily available, your candidates and internal employees are negotiating their salaries armed with knowledge of market pay data. As an employer, you should be prepared to respond. Market pay data should be a part of your organization's overall strategy to determine equitable compensation. Otherwise, you might not remain competitive.

Recently, a CFO job candidate negotiated his salary with a small company. His potential salary, from legitimate market pay studies, ranged from $120,000 to $210,000. The potential employer, because of its size, needed to settle at the low end; the candidate, of course, sought the higher end.

During the negotiations, the candidate cited six market pay studies, which added to the complexity of the discussions. Market pay studies identified by the potential employer, however, convinced the candidate that the company's offer was worthy, though not necessarily what the candidate desired. The company and candidate settled at $170,000.

How market pay studies help your organization

A recent study by WorldatWork (www.worldatwork.org), an association for compensation and benefits professionals, found a correlation between an employee's satisfaction with pay and an understanding of how the employee's organization determined pay.

Although many organizations use salary surveys and other market data to determine pay ranges, only 36% of the people responding to 2004 U.S. Job Recovery and Retention Survey knew how their pay rate compares with market rates. A similar percentage of survey respondents were unclear about how pay ranges and rates were determined in their organizations.

Because a key factor in employee retention is satisfaction with pay, this figure should serve as a signal to employers that they need to conduct market pay studies and communicate the results to their employees.

In addition to retention, effective market pay studies also help your organization:

• Carry out your compensation philosophy (above market, below market, and at market).
• Attract talented employees.
• Negotiate fair compensation with candidates.
• Control compensation costs.
• Communicate the rationale for salary grades and ranges.
• Improve employee satisfaction through fair compensation practices.
• Improve interaction with and trust in management.

To accomplish these results, you should create and maintain an effective market pay measurement system, and you should be knowledgeable about how to integrate salary surveys into your company's compensation philosophy and practices.

How to conduct an effective market pay study

In an ideal world, you'd develop a list of companies that have positions similar to your company's positions, and then you'd communicate job descriptions and pay ranges for each position. You would then have the market pay information needed to establish and communicate employee compensation.

In reality, collecting data that accurately reflects the market rates for jobs in your organization is more difficult. Because your organization's best comparable jobs are likely to be those of your main competitors, information-sharing is unlikely. As you conduct a market pay study, keep in mind that you should use market pay data as part of the overall strategy — not as the sole strategy — to determine equitable compensation within your organization.

Traditional job evaluations, reporting relationships, and comparable jobs in similar pay ranges should all help drive your compensation. Your organization's compensation philosophy and commitment to fair, equitable, and nondiscriminatory pay practices must also play a role, in addition to conducting market pay studies.

Conduct an effective market pay study

1. Assess all jobs within your organization by using job analysis to produce detailed job descriptions. This step is critical. Employees who know that their compensation is partially determined through market analysis of comparable jobs are more likely to object to their compensation if the job descriptions that are used for comparison do not accurately reflect the content of their jobs.
2. Identify salary surveys that most accurately match your organization's types of jobs in your geographic region. Geography is a critical factor because it includes variables such as the local cost of living, the availability of needed talent in the region, and the condition of the local economy. The most valuable data also factors in the size of a company, the number of employees, and the size of a community. In addition, you can glean more information from surveys that show the number of jobs that were averaged to determine the salary range for each type of job.

Obtain salary surveys that best reflect your jobs

1. Obtain salary surveys through your national professional organizations, local companies, and community groups such as the Chamber of Commerce, local IT groups, and local professional associations. Keep in mind that smaller groups, especially those that generate market data through member surveys, have fewer points of data comparison and have many jobs with no relevant data for a company of your size.
2. Look into national organizations that produce market pay studies. The information from Compdata Surveys (compdatasurvey.com), for example, provides real data collected from thousands of companies across the United States. Other sources for market pay data include Salary.com and the WorldatWork vendor directory.
3. Benchmark or match each of your jobs to comparable jobs in the salary surveys that you selected. To perform the benchmarking, use a cross-functional team or work with employees across departments. Make sure that you:
• Match jobs to job content, not to job title. As examples, a human resources (HR) generalist in your company might perform all of the responsibilities carried out by an HR manager in a larger company.
• Match jobs to the job content, not to the person currently filling the role.
• Match jobs as closely as possible. In smaller companies, employees tend to have many diverse roles. When matching comparable jobs in larger companies with a similar job in your smaller company, be mindful of these role differences. For example, in a smaller company, a marketing manager might also be responsible for selling products in the field. The market data for this kind of position should analyze both job types.
• Match jobs by using your company's compensation philosophy. If your company pays above-market wages to attract superior candidates, benchmark your jobs above the 50th or 75th percentile. If your company practices variable compensation, benchmark those jobs with bonus potential figures.

You might find that some market pay surveys are more useful to your organization than others. Some surveys more accurately reflect your jobs and the salary levels with which you attract superior candidates. These surveys allow for more equitable division of the pay in your budget by the positions in your organization.

Market pay studies are critical for establishing equitable and fair compensation within your organization. Attracting and retaining superior employees for your jobs is critical to your success as a business, particularly as demographic changes (such as population aging) create a more competitive job market because there are fewer candidates. You can't afford to let the market pass you by. An effective market pay study is your answer.

About the author   Susan M. Heathfield is a management and organization development consultant who helps organizations strategically value and utilize people. Her company promotes business success and profitability through consultation, executive and management coaching, organization development strategies, human resources system and policy development, team building, customized training, and writing.