Market data is great – I love it, you love it, everyone loves it. We love it because it informs us about the market and allows us to be more confident in making decisions.
If we have 50th percentile base salary data for a given job, that is all it is. In technical terms it is the base salary for an individual in a given sample below which fifty percent of the population lies. It isn’t a recommendation; it is simply a reference point based on a given data sample.
If we take the 50th percentile market data for a given job and a given peer group, then look at that same data point a year later, at first glance it may seem confusing that the data doesn’t move up by 2-5% in line with merit budgets. Those with more familiarity know that it can move up, down, or sideways. This isn’t “good” or “bad” data, it is just data – it is what it does.
One company in the sample altering their leveling structure, or promoting some of their highest paid individuals, or experiencing turnover, or relocating a division, can easily outweigh the expected upward movement of the data and, as a result, the noise outweighs the trend.
“The noise outweighs the trend”
This is one of the reasons why we see ranges of pay – it allows for that “noise” in market data and reinforces that competitive pay is not a number; it is a range. Salary structures that combine multiple roles onto a grade go further to smoothing out some of the noise in the market data. Companies that opt for role-by-role benchmarking, however, are more exposed to these issues as the smaller the sample, the louder the noise.
In addition to challenges with interpreting market data, over-reliance on the market means that less attention is paid to other drivers of pay, namely performance, skills, experience, product knowledge etc. While these factors are more difficult to quantify than a percentile of market data, most agree that we want to reward our highest value employees. Final pay decisions, whether they be, merit, promotional, or new hire, should be a function of both internal and external factors.
So remember – “data is as data does”. Don’t allow market data to be the boss of you.