Market Pricing is the process used to determine the external value of a job. The approach typically uses brief job descriptions and/or general knowledge of the work to benchmark jobs found in the organization’s competitive marketplace. Information regarding the compensation practices of competitor organizations is collected from published sources and sponsored salary surveys. Jobs are matched based on what appear to be the best comparators, and then compensation ranges are structured around these market prices based on the organizations’ compensation philosophy i.e., where they want to position themselves vis-à-vis the market.
Why Organizations Like Market Pricing
It can certainly appear to be an attractive approach to salary administration for several reasons, including;
- Eliminating Job descriptions or keeping them brief requires less time of staff, management and HR;
- Market pricing directly addresses an organization’s goal of having competitive compensation;
- Paying market rates is a significant driver for successful recruitment and retention of staff;
- The approach makes it easy to explain compensation administration to key stakeholders. It also enables the organization to easily position its compensation philosophy vis-à-vis the market;
- Less time is required to explain salary relativities to staff;
- It takes up less resources – time and money – to evaluate jobs, and to develop Job Bands and salary ranges;
- Using a Job evaluation approach to establish job compensation (i.e., point factor methodologies) can seem time-exhaustive and yield results that are difficult to explain and defend to stakeholders;
- Having external consultants provide informed market analyses regarding job compensation maximizes the time available for HR resources to be engaged in their other areas of responsibility.
While market pricing is a prevalent practice in North America, there are a few things worth contemplating before your organization adopts this approach.
What Market Pricing Doesn’t Do
Improve Your Organizations Administrative Efficiencies by Informing Related HR Processes – Job Descriptions, where they exist, written for the purpose of market pricing, need only outline what the job accountabilities are to facilitate external comparisons. They are simplistic and often generic. They don’t typically or consistently describe any unique characteristics of how the job specific accountabilities are expected to be achieved – the information that’s critically important to making the best recruiting, performance management, training, and succession planning decisions. Administrative inefficiencies occur when each of these other activities require repeated engagement with operational management to secure their required input – precisely because job descriptions are simple, generic, or non-existent.
Satisfy Perceptions of Compensation Fairness – Pay can be one of the most significant employee demoralizers, and people view pay from two different angles. Market pricing addresses the issue of how their pay compares to their neighbours (external equity), but it does not speak to how their pay compares to their peers (internal equity). Further, when a job’s compensation is negatively impacted by the natural supply and demand dynamics of the marketplace, it may be difficult to explain the impact on job incumbent salaries when their duties and responsibilities have not changed.
Enable Matching Every Job – Not every job in an organization is going to find a market-match in a survey. In fact, there will be many that don’t because of unique combinations of responsibilities and skills brought on for multiple reasons by organizational need and opportunity. Still more will be slotted for compensation level based on subjective matches to others that were market priced. For every subjectively market priced job, it becomes difficult down the road to find a compelling reason for HR to hold the line on compensation levels when job content has clearly been added or enhanced. Depending on their number, ongoing subjective salary administration adjustments become the steady and silent credibility killer of an organizations’ compensation practices – and their bottom line.
Reflect Organizational Culture and Values – Market pricing assumes an organizations culture and values are much the same as other organizations included in survey analyses and developed job compensation recommendations. Either that is true, or the process makes it extremely difficult to consistently recognize and apply those differences in the tweaking of what the market pricing information is otherwise telling them.
Address Pay Equity – Some organizations are legally obliged to prove their compensation practices are based on pay equity principles – equal pay for work of equal value. Market pricing perpetuates existing market disparities that pay equity attempts to rectify. It should be noted that the resulting administrative and financial costs to an organization found to be in non-compliance of pay equity legislation can be very significant. And even if proving equal pay for work of equal value is not a requirement for an organization, they still need to be concerned that their most valued employees will be attracted to organizations that do operate by those principles, and their numbers are growing*.
Engage Employees – Employee engagement represents the emotional commitment an employee has to an organization, and at its most basic level engagement is influenced by whether employees feel they are valued and rewarded fairly. When a job’s base compensation and pay scale is based on market research, there is little opportunity to effectively recognize, explain and address concerns about fairness and objectivity within the organizations’ compensation practices. When there is no consistent, objective and transparent linkage between what people are paid to do and what their performance, training, and career opportunities are based on, then the opportunities for them to be further disengaged increase**.
Where Encompassing Visions Comes In
Basic information about job accountabilities can still be used by Encompassing Visions (ENCV), but that information can now be supported with a completed competency based multiple-choice questionnaire that is anchored to the organizations culture and values. The internationally copyrighted questionnaire takes less than 45 minutes to capture every compensable detail in every unique job in the organization. Software filters and numerous reports enable questionnaire responses to be reviewed and compared with other jobs efficiently, objectively and consistently. The process establishes a relative ‘score’ for every job in the organization in a manner that supports pay equity principles. Jobs are placed in pay grades where specific roles (i.e., benchmarks) can then be market priced. ENCV generates job descriptions that not only describe what the job is expected to do, but evaluation rationale and the competencies (i.e., behaviours and technical skills) required to do it well. That same competency information is auto populated into other job and performance related reports and functions including job postings, candidate interview questionnaires, employee performance reviews, training need assessments, and succession planning.
Build Competitive Advantage – There are real and calculable financial savings for organizations recognizing that Job Descriptions combined with a competency-based Job Evaluation methodology can be the launch pad for much more than market pricing jobs. Leveraging time investments wisely will not only enable your organization to consistently evaluate job worth with greater objectivity, consistency and thoroughness, but at the same time positively impact –
- operational and administrative efficiencies;
- compensation control;
- recruiting decisions that benefit both the organization and the candidate;
- the consistency, objectivity and quality of employee performance reviews by helping ensure measurement standards are always based on what job incumbents are specifically paid to do;
- investments in staff development, when identified competency training needs are always ranked according to their relative importance in the incumbent’s job;
- the number of engaged employees in the organization – people who are 21% more productive than their disengaged employees**.
Think strategically. Think integrated. Then give us a call or drop us a note. We’d be happy to show you where significant immediate and long-term operational savings are waiting to be discovered. We’ll even help you calculate how much.
Douglas A.W. Chapman
Founder and Managing Director
*Government of Canada, Pay Equity, October 29th, 2018
**The Gallup Q12 Employee Engagement Survey