Compensation professionals concerns with market pricing

MARKET PRICING

Compensation professionals’ concerns with market pricing

Market pricing is a practice that most companies engage in at some time or another, but details of the specific methods used by individual companies and the problems they face represents something of a “black box”. To help shed light on the area, academics from Rutgers University have examined the concerns and issues resulting from US compensation professionals’ experience of the practice.

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Among the conclusions of the study, published in a recent edition of WorldatWork Journal, were that market pricing is a critical element of most US organisation’s remuneration practices but many professionals feel there is a lack of guidance on best practice in the area.

Further, those surveyed felt that the salary surveys available to them are not satisfactory, especially in terms of coverage, validity and reliability.

Definitions of market pricing

When conducting the research, the initial starting point was to determine what was meant by the term “market pricing” as it seemed to mean different things to different people.

Traditionally, for example, “pure market pricing” has focused on external rather than internal equity, with specialist organisations engaged in the practice first acquiring relevant market-wage data for as many jobs as possible and then carrying out an internal equity check to make sure jobs are placed correctly within an agreed hierarchy.

In contrast, individual organisations themselves are often more concerned with internal equity often using job evaluation to rank jobs internally first and then market price them externally afterwards.

Market pricing skills more widespread

As market pricing skills have spread further than the confines of specialist consultancies, these two approaches have come into starker contrast prompting questions from in-house compensation professionals that simply did not concern them in the past.

Methodology

To understand these types of questions more fully and the issues faced as a result of carrying out market pricing, the Rutgers’ team first talked to consultancies specialising in market pricing to ensure they were examining all the important areas.

Following this, 227 individuals were identified by a request on the WorldatWork web site and were then emailed a questionnaire to enable them to be divided between pure market pricers and those with a broader interpretation of the term.

Three initial questions asked were:

• Whether an internal hierarchy of value (such as a salary structure) was used.
• Whether a job-evaluation system was the basis for building the structure.
• Whether a statistical model was used in market pricing.

Responses from the questions illustrated that a minority of respondents (approximately a third) practised pure market pricing which meant the focus of the project was changed slightly to take into account those with a broader definition, particularly those concerned with pricing salary structures as a whole.

Following this, selected respondents received follow-up calls to question them in more detail, while all 227 individuals were sent an email asking three questions:

• What are the two or three aspects of market pricing that you would most like to have as “best practices” you could use as yardsticks for your own practices or as suggestions for changes in practice?
• What are the major problems you face in carrying out your market-pricing processes? What are your major concerns in market pricing?
• What aspects of market pricing do you think you do extremely well, and that might serve as a “best practice” for others?

The goal of these three questions was to obtain a fuller idea of the issues pertinent to those involved in market-pricing. As a result a list covering five areas of concern emerged with seemingly more questions than answers resulting.

Compensation strategy and market rates

Among the main concerns in the area of compensation strategy and market rates were:

• Most commonly, the question of how to decide whether internal or external equity should take precedence and then whether this might differ by job family.
• A desire for guidelines helping determine what a market-pricing policy should look like.
• Which market should be priced against?

Market pricing sources the main problem

Market-pricing sources elicited the largest set of concerns from respondents including:

• That the reliability, quality and breadth of data from market pricing surveys are major areas of concern for compensation professionals, while the perception exists that survey costs are very high.
• The number of useful surveys is smaller and the quality of data is dropping as fewer firms participate.
• A desire for some agreed quality measure for survey sample sizes and a need for industry standards for survey companies.

Problems in analysing survey data

Analysing survey data posed problems too, in particular, the questions of how close the survey job description should be to the organisational job description arose while difficulties of hybrid and outlier jobs were revealed.

Salary structures

With regard to salary structures, reconciling market rates with different internal equity matches remains a major area of concern for compensation professionals, while a lack of appreciation of the work required in building and maintaining a salary structure from respondents’ own management teams was also mentioned.

Statistical modeling

A variety of computer programmes and approaches were used to statistically model data with varying degrees of complexity. Often, computer programmes produced results but, in some cases, the data were the result of a “black box” process supplied by vendors with users having little knowledge about how the answers were reached. Because of this, some respondents desired guidelines to help in evaluating the results of their modelling.

Next steps

Having conducted this initial study, the Rutgers’ academics intend to follow it up with another one focusing on actual practice and what compensation professionals perceive to be ideal practice. 

A final word

The study nicely summaries the main problem faced by compensation professionals when it comes to market pricing by stating: “There is clear recognition that the proper use of market data is a critical issue for organisations that are trying to stay competitive in attracting and retaining human capital while staying competitive in product and service markets. Most respondents note that no ‘one best strategy’ exists, while at the same time there is a perceived need for best practices in market-pricing strategies taking into account industry, organisational and business-strategy characteristics.”

Want to know more?

Title: "Market Pricing Concerns”, by Charles H. Ray and Madhura Tare. WorldatWork Journal, second quarter 2007, volume 16, number 2.

Availability: Contact WorldatWork, 14040 N. Northsight Blvd, Scottsdale, Arizona, USA AZ 85260, tel: 001 480 951 9191 or email: worldatworkjournal@worldatwork.org.

WorldatWork, formerly the American Compensation Association, is one of the HR professions oldest and most distinguished bodies. Founded in 1955, it "provides practitioners with knowledge leadership to effectively implement total rewards – compensation, benefits, work-life, performance and recognition, development and career opportunities – by connecting employee engagement to business performance”. WorldatWork is a not-for-profit association with a membership of more than 30,000 human resource professionals, consultants, educators and others, in 30 countries.

For further details about WorldatWork visit www.worldatwork.org.