Ecobat

Introduction

“What is the market?” This question has become entrenched in HR and is a common inquiry when determining a job’s value. But is the reliance on “market pricing” a best practice, or has it become a misguided exercise?

The Paradox of Market Pay

Early in my career as a compensation analyst for an independent oil and gas company, I encountered a situation that illustrated the potential pitfalls of mindlessly following market trends. At the time, two key compensation surveys existed, one for significant oil and gas companies and another for independents, each with exclusive participation rules. The company for which I worked, through legacy exceptions, participated in both.

My task was to analyze and compare survey results for benchmark positions like petroleum engineers, geologists and geophysicists. One year, a survey of significant oil and gas companies showed higher pay for these roles. Leadership promptly decided the company was “more like a major” and should use that data to set pay policy. The following year, the independent survey showed higher results and the company just as quickly decided it was “more like an independent.”

This experience highlights how easily companies can manipulate market data to justify a desired outcome. More importantly, it reveals the inherent instability of market trends. Over-reliance on tracking market pay practices can lead to misalignment with a company’s actual business needs and realities.

The Illusion of Precision

Market pricing, while a good starting point, is ultimately an estimate. How often have you been asked, “What does the market survey say?” My response, frequently delivered with humor, is, “What do you want the market survey to say?”

Market pricing relies heavily on compensation surveys, but this data is unlike other statistical analyses. Salary survey data reflects the pay of people, influenced by age, tenure, experience and performance. Participating companies have varying pay philosophies and the timing of data collection matters. Furthermore, decisions must be made about which surveys to use – industry-specific, peer-based, regional, national, or global – and how to weight them.

“Market pricing is a valuable tool, but it should not be the sole driver of compensation decisions. Understanding its limitations and embracing transparency, you can establish effective, equitable and sustainable pay strategies.”

Market pricing involves numerous variables and its results should not replace leadership judgment. It merely defines a reliable baseline. Remember, market pricing is descriptive, not prescriptive. Averages and medians are reference points, not definitive pay levels.

Bridging The Gap: Market Data And Individual Value

Imagine this: you’ve diligently priced a position and the market value aligns with your expectations. You present this to a hiring manager, only to hear, “I can’t hire someone at that rate!” This highlights a crucial point: market pricing sets a hypothetical rate, but the actual cost of hiring – especially for top talent – may be higher.

It is common to see wide pay disparities between individuals in identical roles at different companies. HR uses market pricing to ensure positions of similar scope and complexities are valued similarly. Leaders, on the other hand, focus on how individuals are paid, factoring in their unique contributions and performance.

The Subjectivity Behind The Numbers

Compensation work appeals to the love of math with a sense of precision and pleasure in balancing figures. However, compensation is more subjective than many realize. Altering a few assumptions can lead two compensation professionals to different conclusions, even with the same data. This inexactitude is often hidden, leaving the impression of a precise market value.

Many leaders believe HR drives pay directly to this supposed “market value,” leading to a “march to the middle” attitude when constructing pay ranges. However, paying competitively does not mean paying at the midpoint. Market values and salary range midpoints represent a company’s intended pay management strategy, not where all employees should be paid. Experience, capability and performance should all factor in making individual pay decisions.

Navigating The Era Of Pay Transparency

We live in an era of increasing pay transparency. Union contracts, civil servant salaries and executive compensation for public companies are all publicly available. Now, pay transparency is expanding beyond these groups, driven by statutory requirements.

While compliance is essential, the real opportunity lies in communicating expectations to employees. As transparency grows, there will be an adjustment period, but most employees will be able to handle it. Individuals will begin to see how companies value various positions, but this isn’t entirely new. What will be new is insight into the degree of difference between positions.

Resistance is more likely to come from people leaders. They may resist the exposure of their decisions, forcing them to defend pay choices based on factors beyond performance or experience. HR can proactively address this by discussing potential issues and helping leaders adjust their approaches. The key is equipping managers to discuss compensation openly, explain their decisions and instill confidence in the fairness and competitiveness of pay.

Transparency as an Opportunity

Transparency strengthens culture and enhances engagement. It fosters openness with employees and job seekers, which is positive if pay is administered fairly. Ultimately, pay transparency is a means to an end: pay equity and the reduction of biases based on gender or race. Moreover, individuals are already researching job worth, aided by online resources and AI. It is crucial to listen to and respect these insights, rather than dismissing them.

Market pricing is a valuable tool, but it should not be the sole driver of compensation decisions. By understanding its limitations and embracing transparency, you can establish effective, equitable and sustainable pay strategies.