We hear some variation of this statement from clients every day: “We want to make sure we’re offering competitive pay in our market.”
What does being “competitive” actually mean? Many HR and compensation professionals would say that being competitive means paying, on average, plus or minus 10 percent from the market average pay for a job or group of jobs.
Here at PayScale, we’ve found it’s common for organizations to be unsure about how they should define their market or competitive set. To ensure optimal allocation of an organization’s budget, it is crucial to determine the correct comparison group when benchmarking jobs.
In this piece, we hope to provide some clarity around how to define your market and create a competitive set for benchmarking.
The Four Factors of a Competitive Set
There are four factors that determine the composition of your labor market and dictate who you are competing with for talent.
- Location: Where are you located? And where do you need to recruit talent from?
- Industry: What’s your organization’s profile? What industry, facility type or organizational profile are you competing against for talent?
- Organization size: Do you compete with mostly large organizations or smaller organizations? Think in terms of both revenue and employee count.
- Organization type: Are you a for-profit organization or a non-profit organization?
These are the basic questions every organization should consider from an organization-wide perspective. But the important piece to understand is that your competitive set will vary depending on the type of job at hand. For each particular job, one or two of these elements will be more important than the rest. Let’s explore what this means through some examples.
An operations job (also known as a “backoffice” job in certain industries) is a common job that exists in most organizations and performs the same tasks across industries. These are jobs in categories such as human resources, accounting, administrative staff, drivers, customer support/service, hospitality jobs such as waiter/waitress and maintenance crew. For example, a barista does similar work across different organizations.
For operations job, the most important factor in your competitive set is location. Why? Because it is relatively easy to find replacement staff in your local area. So, you would typically compete for talent locally for these jobs.
A niche job is one that requires hard-to-find skills; these jobs are typically crucial to the success of an organization. Examples of niche jobs include:
- Data scientist
- Patent litigator
- Software engineer
- Nuclear scientists
For jobs that require special skills and are considered hard-to-fill, the industry in which the work is done becomes more important than the location. For example, if you are a software engineer, it matters whether you’re working for the Allen Institute or General Mills. Different industries depend on different key jobs. For a place such as the Allen Institute, where the focus is complex scientific research in the healthcare arena, a software engineer is considered a pivotal role. However, a software engineer may not be considered a pivotal role at General Mills.
Location matters less for niche jobs (compared to common operations jobs) because organizations typically search nationally for these candidates. Candidates are often willing to relocate for the right job.
For executives and high level employees, the size of the company and the revenue of the company are by far the most important factors, followed by whether the organization is for profit/nonprofit and the industry the organization is in. Typically, larger organizations tend to have greater purchasing power and this could influence executive compensation as well.
In many cases, the level of job within the organization has an impact on how the talent market is set for each job group. For example, nonexempt employees are typically hired from the local labor market and from a variety of industries (“general industry”). On the other hand, executives are usually drawn from a national labor market that is often (but not always) industry‑specific.
The market for executives will also be defined in terms of organization size, as there is typically a strong correlation between executive pay and organization size.
Definitions of who should be in an executive pay band and who should not are usually determined at the organizational level. Oftentimes the compensation committee within an organization will take over the data analysis and look at the performance records of comparable sized firms.
As you know, executives often have the majority of their total compensation in forms outside of base pay. Although formalized job evaluation plays an occasional role in determining base pay, other sources are often much more important, such as the opinion of the comp committee or board of directors.
Health Care Jobs
For health care jobs (e.g. registered nurses), where the work is performed is a crucial factor for pricing the job. In this case, “where” refers to the geographical location, the type of facility (e.g. doctor’s office vs. hospital), for-profit vs. non-profit and the size of the facility (e.g. number of beds). All factors are very important when pricing a health care job.
Higher Education-specific Jobs
These are jobs such as dean of mathematics, admissions counselor, director of academic affairs.
For education-specific jobs, you want to look at the organization type when determining how to price the jobs. For example, a non-profit university versus a technical school might pay differently. An Ivy League school pays differently than a state university. Geography is also important, because professionals are generally required to work on campus.
For sales jobs, what you sell is by far the most important factor (e.g. toys, pharmaceutical products, software) — so make sure to compare your organization with others in your industry. Additionally, geographic location is an important factor in salary determination for sales jobs.
The truth is, the players you compete with for talent vary from job to job. Thus, it is important to create multiple competitive sets — one for each job type or job family — to ensure accuracy when you benchmark your positions. By creating multiple competitive sets, you can ensure you avoid paying a premium where you don’t need to, and spend your budget where it can make the most impact.
Creating multiple competitive sets doesn’t have to be difficult either. In fact, it’s quick and easy to create a competitive set for a group of jobs in compensation management software like PayScale.
Want to learn more about how to determine salary ranges for your positions? Check out this guide Comp is More Than Data: Why You Need Salary Ranges and How to Create Them