Compensation professionals love to cite “the open market,” while being less eager to admit that every market is different. Despite continual references to reliance on the free labor market, the competitive pay values established between and among employers almost never match. The reasons may be seem obscure to outsiders, but they are clear to those who follow the arcane practices of the wage and salary management field. There is no one single competitive market for pay, even though that phrase is frequently used justify recommendations that are almost always unique.
Organizations follow the competitive market the same the way people heed the outside weather. After considering the weather, you dress as you please. What is considered proper, comfortable and affordable by one is not the same for another. A glance at any sample of people walking by shows how others are dressed, allowing you to adjust accordingly. Examination of the official weather report offers more refined data with greater credibility. Once you check the more precise meteorological details, then you still get to decide what you want to wear. Of course, if you are running a marathon race, you will dress differently than a scuba driver, despite identical conditions of ambient temperature, wind speeds, amount and type of cloud cover, etc., in the area.
The behaviors are parallel: reference information supplies guidance for your informed decision in each situation. But your final decision on how to dress is not based on just “the weather” any more than how you pay people is based on “the market.” There is no one weather report that applies equally well to all employers in all locations in all circumstances. In the same way, there is no one absolutely open competitive market for pay, just as there is not one single street address for “the competition.”
Even when peer organizations share details about their wages and salaries, each enterprise ends up applying the information differently. Each employer using an identical survey published by a reputable professional analytical organization ends up with its own unique number as the appropriate target. One would think that open market exchange of wage and salary information would produce fairly identical equilibrium points … but it doesn't.
Identical pay is highly unlikely. No two enterprises have exactly the same pay rates for any two jobs. Each firm has different reasons for its totally unique value systems. Steel mills don’t place a particularly high value on a mail room supervisor job, for example, while that position can be a critical profit contributor in a direct mail distribution center. Even if the pay planners at the steel mill and the mailing center referenced the exact same pay survey, they would probably draw different inferences from the reported figures and select different market reference points for internal use.
In addition, an employer may select different peer comparison groups for each work group and address them differently. Some set a policy line vector: to lead, lag or match their peers, frequently with refined definitions like “above average” or targeting the 70th percentile. Human organizations also have their own personal internal value structures. Job evaluation can then be applied for discounts or premium variances structured to reflect special priorities set by top management, created by historical precedent or required for internal equity.
Cash compensation supplies a number for comparison but it is still only part of the employee value proposition. Non-cash reward elements can't be reduced to simple numbers. Peer relationships, fringe benefits, perquisites, career progression prospects, working conditions and other circumstances like location also complicate the “total rewards” picture.
Starting with the same input information, each user can and will still come up with a different conclusion about what is right, proper, affordable and persuasive for their organization. The more we try to imitate each other, the more we vary in actual practice. No matter how identical the world we inhabit, we all live it differently. Vive la difference!
Don't hesitate to share this with someone who needs to know the reality.
E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. After corporate HR jobs in chemical and pharmaceutical manufacturing, he consulted at retail, government, energy, IT, tax-exempt and other industries throughout North America before becoming Senior Associate of pay survey software publisher ERI until returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook) and speaker, Jim gave expert witness testimony in many reasonable executive compensation cases both for and against the Internal Revenue Service and also serves on the Advisory Board of the Compensation and Benefits Review.
Image "Colourful Shopping Bags" courtesy of Hywards at FreeDigitalPhotos.net