How well someone is compensated for the work they do can often be a touchy subject. Employers usually want to pay employees at reasonable rates and in accordance with any governing laws and regulations. Employees usually want to be paid fairly compared to their peers and often as much as, or more than, others who are doing what they do.

Both employers and employees are seeking the same answer – competitive compensation. But how does an employer know if the compensation rates offered to employees are competitive in the market?

How to Assess Competitive Compensation

There are three major factors involved in assessing competitive compensation:

1. A company’s compensation philosophy
2. The labor market where the employer draws its talent
3. Differences in capabilities, qualifications, and delivered results among employees doing similar work in a similar environment

Compensation Philisophy

An organization’s compensation philosophy provides guidance on whether it wants to compensate its employees to lead, meet, or lag the market. What is your company’s compensation philosophy? The answer will influence how your company wants to be perceived in the market and the level of talent it will attract and retain.

Labor Market

Information on the competitive labor market can be obtained from relevant compensation market surveys, databases from government or private sources, or special customized surveys. Remember that there are restrictions imposed by the US Department of Justice and the Federal Trade Commission on how an employer can obtain and use such data – you should use a third party or third-party supplied data. The focus in getting competitive market data should be on the position, not the person, and matching to the elements of a job as closely as possible in similar industries, against similar sized organizations, and corrected for demographic differences such as geographic location and age of the data, rather than just a job title. A market average and a percentile distribution of compensation data for a position can usually be derived from the gathered information.

Competitive to the Market?

Comparing what an organization pays its people in each position to the market data can highlight how well a company is holding to its compensation philosophy. Normally, an employee’s compensation may be considered market competitive if it is +/- 5% of the market average. If there are differences, can these be explained by differences in the capabilities of the people in a position, longevity in a role, legacy issues, or other factors? It is important that the employer identify and address any issues of paying individuals well above or well below the market average, and that any internal equity issues are identified and addressed (e.g., for compliance with the Equal Pay Act and other regulations).

The overall results present a picture of how competitively employees are compensated, and it gives organizations a way to defend/validate their pay practices. If you need any help in assessing how competitively you compensate your employees, or if you just have some questions, KardasLarson is ready to assist.