Compensation is the largest cost for nearly any organization and having top talent is critical to achieving revenue or other organizational goals. But knowing the level of compensation you need to attract and retain talent can be challenging. That’s where market pricing comes in.
At its most fundamental level, market pricing in compensation is a method of determining fair market value of a job or a group of jobs. The process aggregates data from other companies with similar positions to give you an idea of how much the going rate is for, say, a Software Engineer in New York City or an HR Manager in Chicago.
There’s obviously more to it than that; there’s significant complexity to market pricing, including aligning with your organization’s compensation philosophy, identifying and using salary surveys, and determining your compensation operations toolkit. Fortunately, this guide will give you a starting point for understanding how to use market pricing in compensation and where to begin.
In any business, understanding the market is crucial to success. Knowing the market helps companies determine what to charge for their products or services, the locations and segments where they should sell, and much more. Likewise, market pricing in compensation is a way of understanding the market for talent, to effectively attract and retain employees while managing costs.
That market understanding becomes increasingly complex as companies grow. A local retail store with just one or two locations probably has a pretty solid handle on their market. The HR team and/or hiring managers know what makes sense to pay different employees, they likely have very few types of jobs, and they have intimate familiarity with cost of living and other market shifts in the city or town where they’re based. Compare that to a large, multinational organization with numerous divisions across multiple countries. There’s just no way for even a team of comp professionals to understand the disparate markets and jobs well enough to make good compensation decisions.
Market pricing takes away the guesswork by providing validated, statistically significant data for HR and comp teams to use when determining compensation.
Market pricing is becoming increasingly important to organizations due to several key trends: rapidly evolving pay levels, the push to remote work, and pay transparency legislation.
The talent market is both similar and different from other markets. Macroeconomic principles like supply and demand definitely come into play, but your current and prospective employees also have needs and expectations that factor in, as well. Alongside market factors including skills shortages, economic factors like surging inflation and statutory changes to minimum wage are contributing to rising wages.
One output of the COVID 19 pandemic is the evidence that, for many companies and roles, remote work is just as productive as working in the office. And for many employees, it has enormous upside, including lack of commute and improved work/life balance. Paired with the incredibly tight post-pandemic labor market, companies began embracing the option to broaden their talent pool by bringing in people across the country - or even the globe.
While great for recruiting the very best talent, this shift rapidly made for a more challenging compensation landscape. All of a sudden, teams were trying to understand what to pay people in markets they’d never even considered. For example, what should we pay our Software Engineer who just moved to upstate Vermont? Or our two marketing associates, one Philadelphia and the other in Oklahoma?
The growth in pay transparency legislation that requires upfront disclosure of the compensation range (usually just salary) for a listed position is also driving a need for market pricing so companies can post accurate information. Companies that are hiring in any of the states or municipalities with one of these laws need to have a plan for what to put in that all-important space. And winging it could translate to few or low-quality applicants (if the salary listed is too low) or overwhelm hiring managers and produce a major hit to the bottom line (if the salary is above market rates).
The purpose of market pricing is to ensure an organization is paying its employees competitively so that it can attract and retain talent. To do this, jobs must be priced relative to the market, which involves benchmarking internal jobs to external data. So obviously, you’ll need data to make that happen. But where can you find good compensation market data?
There are a number of options for obtaining market salary information. Typically, these are split out into two camps: compensation surveys and “other” data sources.. Each has benefits and drawbacks. To start off with market pricing, you’ll need to determine which source - or combination of sources - is the best fit for your organization.
Compensation surveys are the gold standard for obtaining reliable market data. They provide structured, clear methodologies, and are built upon validated data collected from thousands of companies with tens of millions of employee data points. Some surveys are broad benchmark surveys that cover a wide variety of jobs. (E.g., Aon, Culpepper, Korn Ferry, Mercer MBD, TRS, and WTW MMPS). Other surveys are specific to certain industries or specialized jobs. (E.g., Aon’s McLagan and Radford surveys, Gallagher, Pearl Meyer, WMG, Croner, & Empsight. Compensation surveys are also helpful for people starting out with market pricing because they typically have a well defined job structure HR and comp teams can use as a foundation to build their internal job architecture.
If the benefit of salary surveys is the rigor and structure of the data, the downside is that using compensation surveys can be a painful manual process. Survey providers either require participation in order to buy their data or offer discounts for participants, and participating can be a long, involved process.
For smaller companies, crowdsourced data can be appealing due to its typically low (to no) cost. Crowdsourced data is also the source your current and prospective employees turn to for salary information. Sites like PayScale, LinkedIn, Glassdoor, or Levels.fyi provide estimates for different jobs based on location, company size, and role. Some companies will also provide crowdsourced data as a subscription. Levels.fyi is particularly interesting in that they provide a huge amount of transparency to the data and it's validated by individuals' loading a W-2 or paycheck.
While the low cost and accessibility of crowdsourced data can be appealing, it’s important to remember that you get what you pay for. That doesn’t mean crowdsourced data is bad. In fact, it can be a truly valuable supplemental source of information. But it’s also typically opaque when it comes to the companies and locations represented, methodology, the statistical significance of the data, and the time period over which it was collected. That’s why many compensation professionals are skeptical about the validity of crowdsourced data.
Get more info about crowdsourced data
ERC: Is Your Compensation Data Reliable?
Cascade Employers: Is Your Salary Market Data Accurate and Valid?
Akron Incorporated: The Surprising Risks Associated With Crowdsourced Salary Data
WTW: A Fresh Perspective on Crowdsourced Pay Data
Job posting can be intriguing as a source of market data, as they can provide some insight into what a job might be paying in the future. That said, they’re not actual wage rates and should not be relied on as a primary source. Most companies post overly broad ranges for roles and may end up hiring at a different rate than “somewhere in the middle”. In addition, there are thousands of employees whose actual pay data should be included in the market but wouldn’t ever be reflected in a job posting.
Data isn’t the only critical element for your company’s market pricing process. While data informs the pay range for a given job, things like organizational priorities, company culture and values, and company structure are also crucial inputs. Having a clear understanding of your jobs and hierarchy alongside a defined pay philosophy provides much-needed context for market data.
One of the most important pieces to the comp puzzle is the jobs in your organization. Whether you just have a list of jobs or a more formal job architecture, this is a critical input in your market pricing process.
Your jobs list is, simply put, the high-level list of all the jobs in your organization. Not all the individuals (though if your company is small enough, you may only have one person in each job), but the actual jobs. If your organization is relatively large - or growing rapidly - a job architecture with a leveling convention may be in order.
Compensation philosophy may sound esoteric, but it’s not. Your compensation philosophy is just defining how you want to pay in relation to the market. It also encompasses the relative importance of pay in your organization and weighs the components of total compensation.
Do you want to pay the high end of market wage? Meet the average? Lag the market and save money? Are there particular jobs or job families that need exceptions? Or locations that require specific tactics?
Answering these questions will help you use your market data more effectively by aligning it with your internal talent strategy.
Now that you have data, a handle on your jobs / job architecture, and a clear vision of what your job pricing philosophy is, you can actually get down to the work of market pricing.1. Determine Benchmark Jobs
Your first market pricing step is to look at your jobs list and decide on benchmark jobs. These are the jobs that are easiest to align with the broader market. Benchmark jobs will have similar functions, responsibilities, and possibly even titles across industries. As such, they’ll be the ones that you can best match with jobs from your data set.2. Job Matching
Once you’ve identified your benchmark jobs, you can begin matching them to jobs from your salary data. If you have a more formalized job architecture with leveling convention, you’ll also want to align your levels with any included in your data source. (Here’s where salary surveys really start to shine.) After your benchmark jobs are matched up, you can slot in your non-benchmark jobs based on experience level, value creation, etc.3. Data Alignment
Here is where you start to think about how you want to slice and dice your data. Do you need location-based cuts or should you go with regional or national averages and adjust by a differential? Do you want to just look at your specific industry or are there several in which you compete for talent? The cuts are crucial to effectively pricing jobs for your specific pay market.4. Price & Evaluate
Once you have all your data cuts determined and your jobs matched and slotted, it’s time to market price! Use the information you gathered while defining your compensation philosophy to price your jobs relative to the data. As with any new process, you’ll want to double check and make sure what you’ve done makes sense. You’ll also want to look at your employee data to see how your current employees are being paid relative to how the data says they should be paid. Are you underpaying and risking employee attrition as a result? Or are you overpaying, thereby taking on a higher cost than you need to get the jobs done?Make tweaks and changes as appropriate while taking your overall budget into consideration.
A successful market pricing program involves regular, clear communication. Current and prospective employees have a very valid reason to want information on why and how your organization arrived at their salary numbers. Moreover, with more jurisdictions enacting pay transparency laws that mandate up-front sharing of salary ranges for open positions, sharing the reasoning behind salary decisions is increasingly important.
You’ll also need to make sure you’re communicating with hiring managers and executives about the results of your market pricing. Your compensation program and job pricing will only work for your organization if it’s applied consistently. For that to happen, everyone needs to know where to go or who to ask to get the appropriate information.
Market pricing isn’t a set-it-and-forget-it practice, primarily because the market is always changing. That means your data needs to change along with it. As you’re looking at your market pricing, consider the age of the data you’re using - is it fairly recent or is it a 3 year-old survey you found on a shared drive when you started?
Likewise, survey vendors release data on a set schedule, typically annual, semi-annual, or quarterly. When that data gets updated, consider how and whether you’re going to update market pricing. If you’re using surveys, building participation into your schedule and plan is also important.
Finally, how will you use the market pricing data and who will have access to it? Think about all the ways that salary data could be used in your organization. What reporting will you need and who should receive it?
One thing people just starting out with market pricing can be thankful for is the days of physical binders filled with tiny type covering reams of paper are behind us. Unfortunately, most market pricing systems are still designed around the idea of job-by-job market pricing, forcing comp pros to take on a lot of manual tasks. The good news is comp pros and others responsible for market pricing have alternatives. Modern market pricing technologies like BetterComp are specifically designed for the needs of today's comp teams.
The best tools or technology for your market pricing process is going to depend a lot on what your needs are. For example, if you’re part of a comp team at a large, complex organization, you will need more advanced tooling than if you’re running compensation for a small business.
Ready to dive into market pricing for your organization? Get in touch and we'll provide a personalized demo to show you how BetterComp makes market pricing simple.