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The myth of market rate

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Do you pay the market rate for your jobs? Chances are you think you do, but how do you know?

Salary surveys are used to benchmark pay, establish what is being paid in the market, and help set your employees’ salaries. But (whisper it):

ʻSalary survey data is not the true market rate for your job’

The issue here is that ‘market rate’ is not really defined. In our heads, it is essentially ‘what everyone else is paying people doing the same job’, but how do we find this out?

What’s the best place to find salary data? 

Every data source is really a limited number of participants. Sources like Glassdoor.com or Payscale.com represent the salaries of individuals who voluntarily submit them. Many recruitment agencies also offer insight into ‘market rates’, but these are typically based on the advertised salaries for roles they have been given to work on, which is again a limited selection of companies.

Professional survey providers do use robust matching methodologies to help ensure the comparison is truly of similar roles. But again you are talking about a limited snapshot of companies, which could be anything from ten to a few hundred. With over 7,000 organisations in the UK with 250 or more employees, this is not really a majority of firms.

So benchmarking is pointless?

Benchmarking is a vital part of the Reward Management toolbox, but it is important that we understand its limitations, especially when putting the findings to use in the business. If we accept that the survey data is only a snapshot of a limited part of the total jobs market, it helps us understand this is information we can use to shape and guide our pay policy; not take it as the gospel truth.

One of the strangest conversations I have had was with a manager, who felt they should pay employees in a certain role £25,376, as “that was the median rate for the job in the survey and we should pay the market rate”. This manager had placed too much faith in the survey as literal truth, when instead you should look at it as a guideline. In that case I coached the manager to instead look at the survey range of £22,000 to £28,000 for this role, aiming to pay within this range.

How do I establish a fair rate for my jobs?

Fairness is a phrase, along with market rate, that everyone knows what it means, yet it’s hard to define. Fairness is ultimately in the eye of the beholder. Your employees will tell you if they think they are not getting the going rate, but here are a few ways you can check if your pay is fair:

  • Salary surveys: do use surveys, as they are often the only way to get any kind of insight into the salaries actually being paid by other companies; just remember that they aren’t necessarily the whole story and shouldn’t be treated as definitive when setting pay.
  • Labour turnover: employees will vote with their feet if pay is too low; are you continually losing employees from a particular department or role?
  • Ease of recruitment: if you’re not offering the going rate, you will find it hard to attract quality talent; do you struggle to get offers accepted or attract top people?
  • Internal equity: how do the salaries of employees in the same roles compare? People usually find out if colleagues are earning substantially more than they are, and if there isn’t a clear rationale for this they will consider it unfair; especially important in light of Gender Pay reporting.
  • Draw on experience: you’ve worked for other companies and so have your managers; there is a wide range of experience out in your business. Don’t be afraid to ask your managers how they feel the pay of their team compares to previous companies.

If you need help benchmarking pay and ensuring that you are giving employees a fair deal, email me at sarah.nash@innecto.com or call us on 020 3457 0894. 

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