Why Are An Increasing Number of Employers Moving to Market-Based Salary Structures?

Friday, November 23, 2012

An October 2012 joint report by WorldatWork and Deloitte Consulting LLP identified that market based pay systems now make up to 64% of all salary structure practices worldwide. Compared to other systems such as traditional and broadband, the prevalence of market-based salary structures is now 3 and 5 times greater than traditional and broadband systems respectively.

I cut my compensation teeth on writing job descriptions, conducting salary surveys, evaluating jobs, and building merit matrixes and pay structures. As a cornerstone for an organization’s total-rewards strategy and philosophy, employee compensation is an essential component in attracting, retaining, and motivating a talented, effective, and efficient workforce. So, why are more employers moving from traditional job pricing methods to market based salary structures?

• Organizations must react with a sense of haste in response to changes in

  competitor practices and market segment pressures if they wish to avoid

  market share erosion.
• Employers need a system which is scalable, tunable, adaptable, responsive,

  and aligns the organization to local, regional, national, and global talent demands.

• Companies want a system which directly relates job knowledge, skills,

  abilities, and performance to their current and immediate needs.

• Entrepreneurial enterprises want to reward value added results to the 
  organization, and not just check off another step increase within a pay range.
• Market based salary structures are creditable with employees as opposed

  to a point-factor and other systems which may often be perceived as rigid and

  out-of-date.

• Organizations want a process which relates ever changing “project” based

  jobs to the market place.

• Employers want a practice which provides for external and internal equity that
  moves towards gender neutrality.
• Market based salary structures addresses the four P's of marketing:

     o Price the job according its external market value to the organization,

     o Promotion of the employer brand in attracting, retaining, and motivating talent,

     o Place the job relative to its internal organizational value,

     And

     o Product, define the “job” as a commodity in the delivery of goods and services.

It should not go without saying, market based salary structures do require human and informational technology resources. Certainly in these times of minimum HR staffs, many organizations rely on an alphabet of small to large consulting firms to perform job pricing tasks. Most enterprise and cloud based HR payroll and information systems are capable of supporting both employee and job level market based pay data.

The selection of job evaluation and pricing practice methods is a function of the organization’s overall business nature, needs, strategy, and philosophy. Small local employers may already be practicing market based pay; they just do not call it that. Large international organizations may have little choice but to move to market based pay practices, if they have not already done so. It clearly says something, with over 60% of employers worldwide having moved to market based salary structures.