Competitive Pay Is Not Enough

You’ve seen your company’s want ads and heard the pitch from your recruiters; you provide competitive wages.  That’s got to be a strong hook for attracting talent. 

Big deal.

Pay structures are based on market trends, so the opportunities offered employees support your retention and motivation strategies.

Not enough.

Companies routinely tout the practice (“we offer competitive wages”) and candidates in return expect this of potential employers.  But what happens when your goal of offering competitive pay is finally achieved?  Can companies rest in their efforts to attract, motivate and retain? 

I’m afraid not.

What happens when you offer competitive pay is that your recruitment problems don't suddenly disappear, your employees aren't satisfied and your compensation programs have achieved little more than being . . . average?  Is that where you want to be, the middle-of-the-road? 

If your company does pay “the going rate,” that means that approximately 50% of the companies out there pay more than you.  That’s what average gets you, with half doing more than you.  Is that what your company aspires to?

No one leaves your company for less money – so what you’ll hear from employees is how so-and-so is making more somewhere else.  And as most only hear what supports their own notions, they won’t pay attention to the broader rewards package - just the elements that confirm their opinion that your company isn’t paying enough.

The only way to avoid this scenario is being the premier paying company in your market  – and can you afford the cost?

Lest we forget, it’s important to differentiate between having a salary structure (grades, salary ranges and midpoints) that provides competitive rate “opportunity” and actually paying employees at those rates.  Some describe this as whether the company is “walking the talk.” 

For their part, employees relate to what they're being paid, not the midpoint of a salary range or other such declared “opportunity.”  To them the company’s “competitiveness” is more illusion than fact; especially if they’re experienced and have been with you for awhile.  Thus the company needs to keep its focus on actual vs. opportunity pay.

Why don’t employers pay the “going rate”?  Typically it's often not a strategy, but a series of practices that have evolved.

• During difficult economic times some candidates will accept a lower rate than should normally be paid for their knowledge and experience - and managers tend to view this as a cost savings.

• Once you’ve started down the slippery slope of paying below market rates the practice can be compounded by internal equity.  Managers don’t want to pay similarly qualified new people more than existing employees, so new hires may be offered less pay.

• Pay-for-performance systems have a hard time keeping up with the increased marketability of employees.  A minimally qualified employee hired at the minimum rate will gain knowledge and experience (marketability) faster than a company’s annual merit system can recognize. 

So, what’s the answer?  Management won’t agree to become a premier payer, so you should consider instilling flexibility into your pay practices.  Consider targeting key jobs (highly skilled, difficult to replace, etc.) and make sure those jobholders are well paid for the market.

Other positions less skilled and more easily replaceable could continue with your “competitive opportunity” strategy.  Such a dual approach is akin to ring-fencing key talent, protecting them against poaching while recognizing / rewarding those with the most potential impact on your business.

Bottom line?  Be careful when you claim how your company provides competitive wages.  You may not be correct, but even if you are – big deal.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats.

Creative Commons image courtesy of borman818

Comments

[John A Bushfield]

Chuck - What you are advocating for is a pay philosophy which drives the compensation practices followed by an organization. And, in a perfect world, that philosophy is tied into and clearly supports the value system by which the company operates.

What influences employee behavior is not necessarily their pay itself, but the perception of their pay relative to competitive factors. What you pay matters less than how you pay, which many organizations tend to forget.

[Jeffrey Haynes]

Chuck - all great points.... workforce segmentation with clear, purposefully distinct pay philosophies that differentiates pay for critical skills and high performers is paramount.

Also, I have run into "translation" issues when companies say "we are competitive in our pay". Many US managers assume that means you can go into a game and expect to win... afterall, you are "competitive". But 50/50 isn't want most American's would want out of their favorite Football team to be be "competitive.... Not to mention Asia, where the literal translation of the word "competitive" often implies "better" or "stonger"....

So - segmentation, and clear descriptions of pay strategy are very important to remain, errrr.... competitve.

[E. James (Jim) Brennan]

Even the bottom-payer is "competing"; just not very successfully although quite economicially. Sometimes that is enough, if the low pay is for nonessential work with ample qualified replacement candidates more drawn by perks or the benefit package than the hourly rate. Other jobs require very different treatments and their identities (and needs) change over time.

Since the lazy gutless peanut-butter approach to increase budgeting only ducks responsibility for intelligent pay planning, it frequently takes articles like this to change things. Keep it up!