Market pricing – What challenges need to be overcome?

According to the latest CIPD Reward Management survey report, external market rates are the most important factor used to determine salary by over half of organisations surveyed for 2007. While other factors play their part, the growing importance of market pricing is demonstrated by the growth of salary surveys today.

Most surveys provide cash comparisons such as base pay and total cash which takes account of ‘at risk’ pay for performance based bonuses. Market pricing of benefits such as cars, insurances and share-based incentives is becoming commonplace. However how can you make meaningful market comparisons on complex share plans and other ‘organisation specific’ benefits? Since complexity depends on the range of reward elements being compared, striking the right balance is an important factor to produce reliable market pricing.

As organisations use market pricing in the pay decision making process, what is the impact on internal pay? Since the labour market is open to bias and possible discrimination that may affect gender, age etc. this needs to be recognised and managed.

Take a look at the Tips section below on which factors you need to consider when market pricing.

Tips: What Factors Affect your choice of Market pricing?**

• Establish a clear pay policy.  Having a clear policy on your pay position relative to the external market is a fundamental starting point for market pricing. A predominant approach in the private sector is to provide base pay in line with the external market, usually the median. This means being clear about the target market which may vary depending on the job roles. Paying above the market median on ‘total cash’, where total cash includes pay based on performance achievements, is becoming a common approach.

• Decide what reward elements are ‘in scope’. Making this decision is relevant to the results you are looking to achieve. For example, comparing cash elements such as base pay and total cash will be simpler. However if benefits account for over 30% of the total reward package, a decision to exclude them will impact the market pricing.

Where possible, include benefit elements where these can be compared to provide a representative market pricing.

• Select relevant market pricing sources.  While it is common to use a range of sources for different job roles, set clear selection criteria. For example, accurate and quality data should be the minimum requirement. Ensure that you can match external data to yours to provide robust analysis, though it may be more difficult to achieve for some specialist roles.

Take account of geography, where it may be appropriate to consider national and regional data for management roles where mobility is required. By contrast non management roles usually require local market comparisons that take account of differentials between say London and other locations.

• Measuring up. Although market pricing sets out to achieve pay and benefit comparisons for like jobs, it is not an exact science. There are many variables including, for example, the impact that performance related pay has in rewarding superior performance. As a rule of thumb, using at least one market pricing source which includes an industry specific survey will give a better result.

Website of the Month

Each month, we’ll give a quick round up of a website and this month we take a look at the Office of Manpower Economics (OME).  The OME is a UK government based body which provides support for 6 Independent Review Bodies and the two Police Boards with a total pay bill of over £50 billion. The recent controversy over pay levels of Doctors makes interesting reading in light of the 2007 Report on Doctors & Dentists.

What works well – in depth reports and pay analysis relevant to HR and reward professionals within public sector bodies and allied professions. On the topic of market pricing, recent pay review reports such as the Armed Forces report tackle the impact of the external market in recruiting and retaining talent - a shift away from internal equity and inflation.

What could be improved – the use of summaries to highlight key issues contained in those lengthy reports – to make quality content accessible to a wider group.

Just News

Slow down in growth of managers’ earnings

The average managerial salary rose by 4.6% in the year to January 2007, down from 4.7% in the previous year according to the 34th annual survey from Remuneration Economics, in conjunction with the Chartered Management Institute. The slow down for total earnings (basic salary plus bonus) dropped to 5.3% for 2007 compared to 5.7% in 2006. The survey which covers over 42,500 directors, managers and professional staff showed that salary growth for directors at 4.8% was ahead of managers at 4.3%. In line with other surveys, most employers (80%) experienced recruitment difficulties affecting managers and this coincided with an increase in referral payments and ‘golden hellos’ compared to 2006.

Nurses’ pay levels under the spotlight in Finland.

As the collective bargaining season gets underway in Finland, the trades union representing nurses is looking for significant pay rises which has caused controversy among other public sector workers. Low pay amongst nurses has been a cause for concern and the government elected in March this year supported the concept of an ‘equality based’ incomes policy where higher rates go to healthcare workers and nurses in particular. While the Union of Health & Social Care Services has supported this case, it has generated criticism from the Finnish Education Union (OAJ) representing teachers who believe such a move will give nurses precedence over other municipal employees.

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** Please note that this advice is provided as guidance only. If you need specific advice relating to your requirements, please call Reward First on + 44 (0) 1367 710 618. 

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