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.
What are your thoughts in regards to ‘refreshing’ benchmarks each year? What happens in the case when data for some levels for a job family goes up and the data for other levels go down? What is best practice in regards to communicating to employees that the market has shifted for some roles and not for others?
Great question! The first thing I would say is be sure to differentiate changes in the data from changes in “the market”. The data for a role, is a subset of employees, from a subset of companies of a salary survey which means it is an indicator for the market, but not an absolute truth. With role-based data, the noise (caused by promotions, new companies, re-orgs, natural turnover etc) often outweighs the trend and the role that goes up one year can easily go back down the next. Practically speaking there are a couple of solutions:
1) You can develop structures that group common roles together. This aggregation helps rise up above the noise seen at the job level and normalize for fluctuations in the data – https://rewarding.blog/2023/02/21/job-based-salary-ranges-vs-salary-structures/
2) If you continue with role-based benchmarking, the first step is a review of the data and normalizing for any obvious noise which is a critical step in job-based ranges. Say a family increases, on average, by 5% and the function increases, on average by 4%, you have a good sense of the market movement. But if your level 2 has dropped by -10%, that is probably an outlier. Once the data is cleaned up, you can also put parameters in place to reduce the impact of year-over-year variances. If the average market movement across the board is, say 3%, this might mean restricting the year-over-year variance of any given midpoint to, say, between 1-6%. e.g. if a role goes “up” 10%, you would cap it to 6%
In terms of communication, it is important to communicate that the philosophy is anchored around cost of labor, not cost of living. Cost of labor is driven by market forces which naturally means that some roles in high demand and short supply will increase more than others.
Hope that helps!