Many jobs today – and perhaps some your company has posted – list the pay as "competitive." But what does that mean?
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"Human resource professionals really do have a consistent, conventional idea as to what it means to them when the term 'competitive' is used. You see this referenced frequently, especially in job ads when it says, for example, that the company pays 'competitively' in the marketplace for the job that they are advertising." consultant David Wudyka told us in a recent BLR webinar. Specifically, it means that what they pay, on the whole, is comparable to what they believe the market pays.
What Does it Mean to be Competitive with Employee Pay?
While employers say they're "competitive" and usually mean that the pay is comparable to others in the market, that is still a vague definition. What does it mean to the average HR professional?
HR practitioners would suggest that being competitive means paying, on average, +/- 10 percent from the market average pay for a job or a group of jobs. For those of us who are more conservative, they would say it means within 5 percent of the market average.
Here's a simple example for an organization employing registered nurses (RNs). If the RN's in the organization are paid $30/hour on average, and the market average pay rate is $27/hour, then this organization is paying 10 percent above the market rate.
It is calculated as the amount your pay would have to move to match the market rate – you always want to show what you need to do to your pay rates to equate to the market rate. This is why the pay difference here is noted as 10 percent rather than 11.1 percent (11.1 percent would be the amount $27/hour would have to increase to match your $30/hour).
So, this is a simple example showing that one organization might say they pay competitively for this position, based on being 10 percent above the market rate.
How Does an Employer Determine Market Rates?
The way we can feel confident about making the statement that we pay competitively is to engage in pay surveys or acquire pay surveys and study them. This allows us to analyze our pay structures so we can say with confidence whether we pay competitively or not.
It all comes down to job pricing. Job pricing is "the process of determining what the marketplace pays for jobs that we employ." Wudyka told us. Typically this focuses on benchmark jobs—jobs that are common to our industry or across multiple industries. When making these comparisons across industries or across employers, we have to know what we're comparing to. We need to ensure that we are making "apples to apples" comparisons.
For more information on assessing competitiveness of employee pay, order the webinar recording of "Pay Surveys: How to Price Jobs in the External Marketplace to Best Determine True Worth." To register for a future webinar, visit http://store.blr.com/events/webinars.
David Wudyka, managing principal and founder of Westminster Associates, manages and oversees all company operations, including the design, development, and implementation of all client HR programs. His specialties include human resource analytics, audits of HR operations, employee retention strategies, and group incentive plans.