How to Know if You Are Paying Competitively
What Does Competitive Pay Mean?
Competitive pay refers to offering employees (and potential employees) a salary or hourly rate that is equal to or greater than what other organizations within your industry or geographical area are offering. The goal of competitive pay is to ensure fair compensation while providing a strategic advantage in attracting and retaining top talent.
Understanding the concept of competitive pay is just the beginning. The next step is determining whether your compensation offerings are truly competitive. This involves comparing your compensation package to that of your competitors in the labor market. While this sounds straightforward, there are several factors to consider, starting with your compensation strategy.
Defining Competitiveness for Your Organization
Now that we understand what competitive pay means, the next step is determining what it looks like for your organization. To assess whether your pay is competitive, you must first define what “competitive” means within your specific context. Once you have a clear definition, you can compare your pay data to the market to determine your competitive position.
1. Establishing the Ideal Future State
As an employer, you need to decide how you want to approach compensation and how your pay compares to your market competitors. The first step is developing a compensation philosophy, followed by a more detailed plan, known as a compensation strategy.
What Is a Compensation Philosophy?
A compensation philosophy explains why your organization approaches compensation in a particular way. Typically, it includes key elements such as hiring goals, cultural priorities, and market positioning. For example:
At XYZ Company, our compensation philosophy is to provide rewards that are:
- Fair and equitable
- Able to attract, retain, and motivate employees to support business objectives
- Easily communicated to and by managers and employees
- Aligned with labor market competitors
Some compensation philosophies may include additional details, such as specific market positioning targets for different job families or pay elements.
Compensation Philosophy vs. Compensation Strategy
A compensation strategy builds upon the philosophy by outlining specific actions to achieve its goals. This strategy typically includes:
- Segmentation: Determining how compensation should vary by job function, geography, or other factors.
- Role of Each Element: Defining the purpose of base pay, short-term incentives, and long-term incentives.
- Comparator Group: Identifying competitors for talent in different business units or functions.
- Internal Equity: Ensuring fairness in pay distribution across departments and locations.
- Competitive Positioning: Establishing market targets (e.g., 50th or 60th percentile) for various roles.
- Governance: Defining decision-making structures and responsibilities for pay adjustments.
- Communication: Establishing transparency guidelines for salary discussions with employees.
Many organizations default to targeting the market median (50th percentile) as a safe choice. However, a more differentiated or segmented approach can be beneficial in attracting and retaining key employee groups.
Since “competitive” is a flexible concept, it’s essential to define it for your organization. Your competitiveness is determined by how your pay compares to this target.
Once a strong compensation strategy is in place, the next step is identifying gaps in the strategy by selecting market data to price your positions.
2. Choosing the Right Market Pricing Data
To assess how your pay compares to market targets (e.g., 50th percentile), you need reliable compensation data. Salary surveys provide this data, but choosing the right data can be challenging and very expensive. Your goal is to select data that accurately reflects your labor market, often referred to as your market comparators—the organizations competing for the same talent pool.
General Industry Data
Survey data, like the Comp Consultant’s The Comp Tool, give you on-demand access to a wide range of market data that you can customize to suit your needs at an affordable price.
Industry-Specific Data
For roles requiring industry-specific expertise, you can also find specialized salary surveys that provide benchmarks based on specific industries. For example, compensation for Registered Nurses can be assessed using healthcare-specific surveys.
Once you have the specific data sources to create a comprehensive market analysis, you can document these decisions in a benchmark methodology.
3. Market Pricing Your Positions
Market pricing involves comparing your compensation to market data to assess competitiveness. Using your compensation philosophy, strategy, and selected survey data, you can determine how your pay compares to your desired market position.
Calculating Your Competitive Position
There are two primary ways to analyze your pay against the market:
- Market Ratio (Market Index)
- Formula: (Your Average Pay / Market Data at Target Position) = Market Ratio
- Example: If your average pay is $52,000 and the market 50th percentile is $50,000:
- $52,000 / $50,000 = 104%
- Market Variance
- Formula: ((Your Pay / Market Data) − 1) × 100 = Market Variance
- Example:
- ($52,000 / $50,000) − 1 = 4%
Typically, organizations consider anything within ±10% of the market as competitive. However, some may define a wider range, such as ±20%, depending on business needs.
Moving Forward with Competitive Positioning
Once you have a clear picture of how competitive your pay is relative to your strategy, you can make informed decisions about adjustments to your total rewards package. Base pay is just one element; benefits, incentives, and career development opportunities also contribute to a competitive compensation package.
For a more in-depth analysis or third-party perspective, compensation consulting firms like The Comp Consultants provide extensive salary data and strategic guidance. We help businesses forecast talent needs, engage employees, reward performance, and develop workforce skills.
To explore our complete database or learn more, contact us at hello@the compconsultants.com.