Why is PayScale’s salary for my job low?

People often complain that our salary survey results are too low. Strangely, very few people complain our salary survey results are too high :-)

People object to our salary survey results even when the difference between our salary survey result and their expectations is less than 10%. It seems that Zillow has the same problem with house appraisals as we have for salaries. This got me wondering to what extent our problems are similar.

Both markets are very personal. People are often emotionally invested the jobs they do and the houses in which they live. The dollar value assigned to each of these can strike very close to the heart, because, at least in America, the price of something is often confused with its worth.

None the less, employees need to get paid, and houses need to be bought and sold. What makes it so hard to accurately predict the dollar amounts for each of these?

At PayScale, we often use the analogy of the housing market when describing how our site works. In much the same way as housing appraisals, we look for "comps" - people with similar jobs, skills, experience, industry, and location - and use these to make our best estimate of the "market price" for a person doing a particular job.

The analogy between the house and employee markets runs deep:

Unlike the market for most goods, houses and people are custom. PayScale has 6000 different job titles, hundreds of different possibilities for each in experience, skills, industry, etc. Similarly, even "identical" tract houses are different because they are on different lots and people customize their houses as soon as they move in.

Contrast this with, e.g., the new car market. Toyota offered only about 50 models of new cars/trucks/SUVs, and perhaps a 20 sets of options for each, for the 2 million vehicles they sold in the US last year. Within each model and option set, the 1000’s of cars are exactly the same (or are supposed to be). If you know what a Camry sold for last week, you know exactly how much you should pay this week.

Until a person tries to get a new job, there is no market price for their exact set of skills. Until a house is actually put up for sale, there is no market price for exactly that house. This is a consequence of the “custom” nature of people and houses.

Bidding makes a big difference in market price. As anyone who has ever had two employment offers at the same time knows, it is pretty easy to get an extra 10% in pay when you have another offer. When there is more than one person bidding on a house, the price also goes up.

For example, my wife and I paid 10% more than we intended for our current house, as did our in-laws, and the people who bought our last house, all because of multiple simultaneous offers. In contrast, my in-laws received 10% less for the house they sold, because they had only one offer and didn't want to wait any longer to sell.

The markets are local: While people in principle can move, in practice they can be as immobile as houses: people often value living near to their families, near to where their spouse works, where the weather is “good”, etc. Similarly, employers are in particular locations, and so are the jobs.

For example, a top software developer can make $200,000 per year in Redmond, Washington (home of Microsoft), and a few other places around the country. However, that same developer would be hard pressed to earn more than $50,000/year in Billings, Montana. There are just no employers in Billings that would value her unique skills.

The "purchaser" is making a bet on intangibles. You cannot get much more intangible than whether a person will be an effective employee. Similarly, house purchases are often about intangibles like: the neighborhood is safe, the neighbors are friendly, and the schools are good. Intangibles make determining market price more difficult.

The cost of making a "purchase" mistake is big. Typically, it costs 10% of the purchase price to sell and buy another home. Similarly, it costs at least several months of salary for an employee who "doesn’t work out." Both an employer and house buyer will pay extra for perceived quality to avoid these costs.

There is no perfect answer. Even if PayScale knew absolutely everything about what everybody in the country is paid, what jobs they do, and what skills and experiences they have, we still would not be able to predict exactly what someone will be offered if they look for a new job. The same holds for Zillow and what the actual market sales price for house will be.

However, we can get closer. At PayScale, we will continue to improve our salary survey system to get at more of what determines an employee's pay.

By the way, we have one big advantage over Zillow. Unlike government annual tax assessments, which are a mixture of law and bureaucratic convenience, the amount someone is currently being paid represents an on-going negotiation between the employee and employer.

While the rise and fall of wages for existing employees will generally lag behind the changes in market price for those employees, what someone is paid is a reasonable estimate of what they should be paid.


Dr. Al Lee

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