When Market Rates Change Unevenly

How to respond when things change unevenly is a particularly thorny issue in the compensation arena.  It’s always WHEN things change, rather than IF, because change is constant even though the rate and type of change varies all the time.  Just as the wind always blows although the velocity and direction is variable, so pay also continually changes up and down over time.  Pay gusts can create quite a storm.

So how do you adjust a living human organization when parts of it change at different rates?  Any change in compensation always attracts a lot of critical attention, so caution is particularly important when market rate changes are not uniform. 

Let’s look at the typical example of a pay program review that shows the external competitive market rates of a few jobs changing at different rates than the vast majority.  Assume that perhaps 85% of all your benchmark positions show a rate of change that falls within plus or minus one-tenth of a percent (+/- 0.1%) from a central standard level like 2.9%, with most falling between 2.8% and 3.0%.  That example might also show 10% increasing faster than 3.0% and 5% changing at a rate slower than a positive 2.8%.  A really small portion like 1% might be running in reverse, with their current competitive market rates actually lower than last reported. 

The general rule of thumb is to wait a few survey cycles before adjusting downwards for outliers moving far beneath the modal central norm rate.  Patience is typically recommended because changes in reported compensation levels can be highly unreliable due to a wide variety of reasons; for example:

• The information came from a statistically insignicant and non-representative sample of the relevant universe.
• Initial preliminary survey reports could be incorrect or improperly summarized.
• The survey sample population was unique and exhibited weird behavior unlike the rest of the peer comparables who did not participate in that survey.
• Different competitive market sources used different collection, analysis and presentation methods.
• Pay movement as measured reflects the practices at employers with normal numbers of job incumbents, while your outfit has abnormal headcounts (either a lot more or a lot less of those particular creatures than at peer enterprises of comparable size, industry, etc.).
• The change was valid but temporary, reflecting a seasonal blip or abnormal circumstance outside the norm:  i.e., like a clock pendulum, today’s sudden movement will oscillate back to a different position the next time you look at it but the norm hasn’t really changed permanently.
• The result was accurate but localized or otherwise relatively irrelevant to your situation.

Let’s say that none of those excuses fit; the findings are real and demand action.  Once you determine that a change outside the norm is required, prepare to defend the decision. 

Moving pay up is popular, but reducing pay creates upset and requires very careful handling.  Say that you have undeniable proof that some jobs are now worth less than before.  A prudent reaction would be to wait until the same backwards-moving outliers like door to door sales jobs drop two years in a row before reclassifying them properly for the new verified lower status.  There also probably will be an equally tiny statistical sample of high-end outliers such as particularly rare STEM jobs where urgent supply/demand realities may require swifter response than biannually.  No rush if you slightly overpay a few jobs for a short while, but it can be fatal to underpay and lose key super-keepers who then in turn can't be effectively replaced at your current entry rate.

All things don't grow at the same pace, so sooner or later you will need to revise and reshuffle, reclassify and restructure for both proper external market matches and new internal equity parity relationships.  If the interal/external relationships move in opposite directions, you will have different and greater problems.

What do you think?

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.

Creative Commons image "Wipeout, Pleasurewood Hills" by spencer77

Comments

[Patty Tanji]

This is great JIm. Thanks for your insights. In Minnesota we are about to pass a law that would enforce equal pay for equal work laws such as the Equal Pay Act, Title VII of the Civil Rights Act, Minnesota Dept. of Human Rights Act and Minnesota's Equal Pay for Equal Work Act. Its important to understand and document how the fluctuations in market rates affect internal equity. Are the wage gaps widening as a result? Are wages for women and employees of color consistently below those of white men? If so, document why and be prepared to defend your reasons. You mentioned high demand STEM jobs. These are white male dominated fields that are also high wage, high demand. Again, document, document, document and be prepared to defend your reasons to authorities should the need arise....which, hopefully it never will. And, if you think the gender/race wage gap is widening internally be proactive about hiring qualified women and people of color into these high demand jobs.

[Patty Tanji]

I should mention the new law, should it be enacted (we'll know very shortly) would only affect Minnesota state contractors.

[E. James (Jim) Brennan]

Patty: Yes, Minnesota has always been a leader in pay equity initiatives. I conducted a seminar in St. Paul on comparable worth job evaluation for judges and arbitrators on the State Board of Mediation when the first such legislation was enacted.

Without a comprehensive "re-set," the effects of historical pay bias continue to accumulate and are perpetuated via systemic discrimination through the years. Jobs dominated by protected classes that have been devalued for generations will not suddenly be paid "properly" higher without dramatic changes in valuation protocols. Secretaries never received any special general adjustment. Nurses are in high demand, too, but you don't see disproportionate pay increases for such "women's work." Things WILL change, because we continue to live in interesting times.

[Tony Bergmann-Porter]

Ah yes. If only we could get The Government to dictate the worth of jobs, heaven on earth would be imminent.

[E. James (Jim) Brennan]

Naw; in that way lies madness, Tony. THEIR concept of value would be neither yours nor mine. Besides, that implies that there is one single "perfect" price for every job, but that's not true. We all know that every employer imposes its own unique value system upon its relevant MRP choice. No two use the exact same numbers and each incumbent has a different value, too. Yet all survive...